UNIT 1 RATIO ANALYSIS SKM PDF

FACULTY OF COMMERCE 2024– 25 SEMESTER 3 SUBJECT: ADVANCED CORPORATE ACCOUNTING - 1 UNIT : 1 [A] FINANCIAL STATEMENTS ANALYSIS AND INTERPRETATION UNIT : 1 [B] RATIO ANALYSIS COMPILED BY : CA Dr. SNEHA MASTER...

FACULTY OF COMMERCE 2024– 25 SEMESTER 3 SUBJECT: ADVANCED CORPORATE ACCOUNTING - 1 UNIT : 1 [A] FINANCIAL STATEMENTS ANALYSIS AND INTERPRETATION UNIT : 1 [B] RATIO ANALYSIS COMPILED BY : CA Dr. SNEHA MASTER Dr. DHARINI PATEL STUDY MATERIAL FOR REFERENCE ONLY  GLS UNIVERSITY FACULTY OF COMMERCE SEMESTER 3 ADVANCED CORPORATE ACCOUNTING -1 UNIT 1 [A] FINANCIAL STATEMENTS ANALYSIS & INTERPRETATION UNIT 1 [B] RATIO ANALYSIS INDEX SR. No. TOPICS COVERED UNIT 1 [A] FINANCIAL STATEMENTS ANALYSIS & INTERPRETATION 1 Meaning & Definition of Financial Statements 2 Purpose of Financial Statements 3 Characteristics of Financial Statements 4 Limitations of Financial Statements 5 Methods of Financial Statement Analysis UNIT 1 [B] RATIO ANALYSIS 6 Meaning of Ratio Analysis 7 Classification of Ratios 8 Advantages & Limitations of Ratio Analysis 9 Formulae of Various Ratios 10 Section A – Theory Questions 11 Section B – Multiple Choice Questions 12 Section C – Short Questions 13 Section D – Long Questions 14 Section E – Home Work 1  UNIT 1 [A] FINANCIAL STATEMENTS ANALYSIS & INTERPRETATION MEANING : Financial statements are formal records of the financial activities and position of a business, person. They are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Relevant financial information is presented in a structured manner and in a form which is easy to understand and legally required. Financial Statements reflect the financial effects of business transactions and events on the entity. Financial statements include: Balance sheet Income statement Cash flow statement. (A Balance Sheet represents a single point in time, where the Income Statement and the Cash Flow Statement each represent activities over a stated period of time. An extensive set of Footnotes to the Financial Statements are considered an integral part of the financial statements.) FINANCIAL STATEMENTS ANALYSIS : Financial Statement Analysis is the process of reviewing a company's financial statements for decision- making purposes. External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business worth. Internal constituents use it as a monitoring tool for managing the affairs and taking strategic decisions.. PURPOSE OF FINANCIAL STATEMENTS Purpose of Financial Statements is to provide useful information to a wide range of users: Managers require Financial Statements to manage the affairs of the company by assessing its financial performance and position and taking important business decisions. Shareholders use Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their analysis. Prospective Investors need Financial Statements to assess the viability of investing in a company. Investors may predict future dividends based on the profits disclosed in the Financial Statements. Furthermore, risks associated with the investment may be gauged from the Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore, Financial Statements provide a basis for the investment decisions of potential investors. 2  Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a loan or credit to a business. Financial institutions assess the financial health of a business to determine the probability of a bad loan. Any decision to lend must be supported by a sufficient asset base and liquidity. Suppliers need Financial Statements to assess the credit worthiness of a business and ascertain whether to supply goods on credit. Suppliers need to know if they will be repaid. Terms of credit are set according to the assessment of their customers' financial health. Customers use Financial Statements to assess whether a supplier has the resources to ensure the steady supply of goods in the future. This is especially vital where a customer is dependent on a supplier for a specialized component. Employees use Financial Statements for assessing the company's profitability and its consequence on their future remuneration and job security. Competitors compare their performance with rival companies to learn and develop strategies to improve their competitiveness. General Public may be interested in the effects of a company on the economy, environment and the local community. Governments require Financial Statements to determine the correctness of tax declared in the tax returns. Government also keeps track of economic progress through analysis of Financial Statements of businesses from different sectors of the economy. CHARACTERISTICS OF FINANCIAL STATEMENTS : Understandability : The financial statements are published to address the shareholders of the company. So it is important that these statements must be prepared in such a way that is easy to understand and interpret for the shareholders. The information provided in these statements must be clear and legible. For the sake of understandability, the management must consider not only the statutory data and information but also the voluntary information disclosures which would make financial statements easier to understand. The directors must elaborate the information provided in the statements where necessary. Relevance : The information provided in the financial statements must be relevant to the needs of its users. Although the main statutory recipients of these statements are ‘shareholders’, but there are many other stakeholders that rely on these statements during their decision making process e.g. Fund 3 Providing Institutions (Banks, Insurance Companies, Assets Funding Firms etc.), potential investors (for making investments in prospective companies), suppliers (for the assessment of credit rating) etc. So the information provided in these financial statements must be relevant to the ‘information needs’ of all these stakeholders, which could affect their economic decisions. Reliability : The information provided in the financial statements must be reliable and true. The information extracted to prepare these financial statements must be from reliable and trustworthy sources. The financial statements must depict the true and fair picture of the status of the company affairs. This means that the information provided must not have any significant errors or material misstatements. The transactions shown must be based on the concepts of prudence and must represent the true nature of company’s transactions and operations. The areas that are judgmental and subjective in nature must be presented with due care and keen competence. Comparability : The financial statements must be prepared in such a way that they are comparable with prior year financial statements. This characteristic of financial statements is very important to maintain, as it makes sure that the performance of the company could be monitored and compared. This characteristic is maintained by adopting accounting policies and standards that are applied are consistent from period to period and between different jurisdictions. This enables the users of the financial statements to identify and plot trends and patterns in the data provided, which makes their decision making easier. Timeliness : All the information in the financial statements must be provided within a relevant span of time. The disclosures must not be excessively late or delayed so that while making their economic decisions the users of these statements possess all the relevant and up-to-date knowledge. Although this characteristic may take more resources but still it is a vital characteristic as delayed information makes any corrective reactions irrelevant. LIMITATIONS OF FINANCIAL STATEMENTS Historical Costs : Financial reports depend on historical costs. All the transactions record at historical costs; The value of the assets purchased by the Company and the liabilities it owes changes with time and depends on market factors; The financial statements do not provide the current value of such assets and liabilities. Thus, if a large number of items available in the financial statements based on historical costs and the Company has not revalued them, the statements can be misleading. 4  Inflation Adjustments : The assets and liabilities of the Company are not inflation-adjusted. If the inflation is very high, the items in the reports will be recorded at lower costs and hence, not giving much information to the readers. Personal Judgments : The financial statements are based on personal judgments. The value of assets and liabilities depends on the accounting standard used by the person or group of persons preparing them. The depreciation methods, amortization of assets, etc. are prone to the personal judgment of the person using those assets. All such methods cannot be stated in the financial reports and are, therefore, a limitation. Specific Time Period Reporting : The financial statements based on a specific time period; they can have an effect of seasonality or sudden spike/dull in the sales of the Company. One period cannot be compared to other periods very easily as many parameters affect the performance of the Company, and that reported in the financial reports. A reader of the reports can make mistakes while analyzing based on only one period of reporting. Looking at reports from various periods and analyzing them prudently can give a better view of the performance of the Company. Comparability : While it is a common practice for analysts and investors to compare the performance of the Company with other companies in the same sector, but they are not usually comparable. Due to various factors like the accounting practices used, valuation, personal judgments made by the different people in different Companies, comparability can be a difficult task. Fraudulent Practices : The financial statements are subject to fraud. There are many motives behind having fraudulent practices and thereby skewing the financial results of the Company. If the management is to receive a bonus or the promoters would like to raise the price of the share, they tend to show good results of the Company’s performance by using fraudulent accounting practices, creating fraud sales, etc. The analysts can catch these if the Company’s performance exceeds the industry norms. No Discussion on Non-Financial Issues : Financial statements do not discuss non-financial issues like the environment, social and governance concerns, and the steps taken by the Company to improve the same. These issues are becoming more relevant in the current generation, and there is an increased awareness amongst the Companies and the government. However, the financial reports do not provide such information/discussion. 5  Future Prediction : Financial Statements are believed to be forward-looking statement, however, no prediction about the business could be made using these statements. The financial statements provide the historical performance of the Company; many analysts use this information and predict the sales and profit of the Company in future quarters. However, it is prone to many assumptions. Thus, financial statements as a standalone cannot provide any prediction on the future performance of the Company. METHODS OF FINANCIAL STATEMENTS ANALYSIS Comparative statements This method is used to indicate the changes in the Current year’s figures as compared to past Years’ figures. Preparing Comparative Financial Statements is the most commonly used technique for analyzing financial statements. This technique determines the profitability and financial position of a business by comparing financial statements for two or more time periods. Hence, this technique is also termed as Horizontal Analysis. Typically, the income statements and balance sheets are prepared in a comparative form to undertake such an analysis. Trend Percentage The financial statements may be analyzed by computing trends of series of information. This method determines the direction upwards or downwards and involves the computation of the percentage relationship that each statement item bears to the same item in base year. The information for a number of years is taken up and one year, generally the first year, is taken as a base year. The figures of the base year are taken as 100 and trend ratios for other years are calculated on the basis of base year. Common sized Statements The common-size statements, balance sheet and income statement are shown in analytical percentages. The figures are shown as percentages of total assets, total liabilities and total sales. The total assets are taken as 100 and different assets are expressed as a percentage of the total. Similarly, various liabilities are taken as a part of total liabilities. These statements are also known as component percentage or 100 per cent statements because every individual item is stated as a percentage of the total 100. Cash Flow/ Fund Flow Statement A cash flow statement shows the inflows and outflows of cash and cash equivalents. It explains the changes in the cash in hand and cash at bank at the beginning and the end of the accounting period. Funds refer to the working capital of the company. It shows the additions in the working capital through various sources like issuing shares, debentures or raising loans, etc. and reduction in it 6 through different applications like the redemption of shares or debentures, repayment of loans, purchase of fixed assets, etc. Ratio Analysis Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements. A ratio is a statistical yardstick that provides a measure of the relationship between two variables or figures. Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by studying its financial statements such as the balance sheet and income statement. UNIT 1[B] RATIO ANALYSIS MEANING Absolute figure shown in Financial Statement may not be able to give perfect picture of Business’s performance. In order to get better understanding its comparison with other related values of Financial Statements is must. Ratio analysis is a Tool to interpret the Financial Health of a concern. Financial Ratios are a correlation between two inter connected values derived from Financial Statements expressed either in Percentage , Proportion or Times. CLASSIFICATION OF RATIOS Traditional Classification - On the Basis of Financial Statement Balance Sheet Ratios Ratios calculated from taking various data from the balance sheet are called balance sheet ratio. For example, current ratio, liquid ratio, capital gearing ratio, debt equity ratio, and proprietary ratio, etc. Revenue Statement Ratio Ratios calculated on the basis of data appearing in the trading account or the profit and loss account are called revenue statement ratios. For example, operating ratio, net profit ratio, gross profit ratio, stock turnover ratio. Mixed or Composite Ratio When the data from both balance sheet and revenue statements are used, it is called mixed or composite ratio. For example, working capital turnover ratio, inventory turnover ratio, accounts payable turnover ratio, fixed assets turnover ratio, return of net worth ratio, return on investment ratio. 7 Functional Classification – On the basis of Utility Aspects Profitability Ratios The results of business operations can be calculated through profitability ratios. These ratios can also be used to know the overall performance and effectiveness of a firm. Two types of profitability ratios are calculated in relation to sales and investments. Liquidity Ratios Liquidity ratios are used to find out the short-term paying capacity of a firm, to comment short term solvency of the firm, or to meet its current liabilities. Similarly, Leverage / Capital Structure Ratios Debt equity ratio and interest coverage ratio are calculated to know the efficiency of a firm to pay long-term debts and to meet interest costs. Leverage ratios are calculated to know the proportion of debt and equity in the financing of a firm. Activity Ratios Activity ratios are also called turnover ratios. Activity ratios measure the efficiency with which the resources of a firm are employed. Turnover ratios are calculated to know the efficiency of resources of the firm, Accounts Receivable (Debtors) Turnover Ratio and Accounts Payable (Creditors). ADVANTAGES OF RATIO ANALYSIS 1. Forecasting and Planning: The trend in costs, sales, profits and other facts can be known by computing ratios of relevant accounting figures of last few years. This trend analysis with the help of ratios may be useful for forecasting and planning future business activities. 2. Budgeting: Budget is an estimate of future activities on the basis of past experience. Accounting ratios help to estimate budgeted figures. For example, sales budget may be prepared with the help of analysis of past sales. 3. Measurement of Operating Efficiency: Ratio analysis indicates the degree of efficiency in the management and utilisation of its assets. Different activity ratios indicate the operational efficiency. In fact, solvency of a firm depends upon the sales revenues generated by utilizing its assets. 8 4. Communication: Ratios are effective means of communication and play a vital role in informing the position of and progress made by the business concern to the owners or other parties. 5. Control of Performance and Cost: Ratios may also be used for control of performances of the different divisions or departments of an undertaking as well as control of costs. 6. Inter-firm Comparison: Comparison of performance of two or more firms reveals efficient and inefficient firms, thereby enabling the inefficient firms to adopt suitable measures for improving their efficiency. The best way of inter-firm comparison is to compare the relevant ratios of the organization with the average ratios of the industry. 7. Indication of Liquidity Position: Ratio analysis helps to assess the liquidity position i.e., short-term debt paying ability of a firm. Liquidity ratios indicate the ability of the firm to pay and help in credit analysis by banks, creditors and other suppliers of short-term loans. 8. Indication of Long-term Solvency Position: Ratio analysis is also used to assess the long-term debt-paying capacity of a firm. Long-term solvency position of a borrower is a prime concern to the long-term creditors, security analysts and the present and potential owners of a business. It is measured by the leverage/capital structure and profitability ratios which indicate the earning power and operating efficiency. Ratio analysis shows the strength and weakness of a firm in this respect. 9. Indication of Overall Profitability: The management is always concerned with the overall profitability of the firm. They want to know whether the firm has the ability to meet its short-term as well as long-term obligations to its creditors, to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm. This is possible if all the ratios are considered together. 10. Signal of Corporate Sickness: A company is sick when it fails to generate profit on a continuous basis and suffers a severe liquidity crisis. Proper ratio analysis can give signal of corporate sickness in advance so that timely measures can be taken to prevent the occurrence of such sickness. 9 11. Aid to Decision-making: Ratio analysis helps to take decisions like whether to supply goods on credit to a firm, whether bank loans will be made available etc. 12. Simplification of Financial Statements: Ratio analysis makes it easy to grasp the relationship between various items and helps in understanding the financial statements. LIMITATIONS OF RATIO ANALYSIS: 1. Limitations of Financial Statements: Ratios are calculated from the information recorded in the financial statements. But financial statements suffer from a number of limitations and may, therefore, affect the quality of ratio analysis. 2. Historical Information: Financial statements provide historical information. They do not reflect current conditions. Hence, it is not useful in predicting the future. 3. Different Accounting Policies: Different accounting policies regarding valuation of inventories, charging depreciation etc. make the accounting data and accounting ratios of two firms non-comparable. 4. Lack of Standard of Comparison: No fixed standards can be laid down for ideal ratios. For example, current ratio is said to be ideal if current assets are twice the current liabilities. But this conclusion may not be justifiable in case of those concerns which have adequate arrangements with their bankers for providing funds when they require, it may be perfectly ideal if current assets are equal to or slightly more than current liabilities. 5. Quantitative Analysis only , Individual ratios have limited utility : Ratios are tools of quantitative analysis only and qualitative factors are ignored while computing the ratios. For example, a high current ratio may not necessarily mean sound liquid position when current assets include a large inventory consisting of mostly obsolete items. Individual Ratio cannot be used for analysis purpose. One ratio used without reference to other ratios may be misleading. Similarly the utility of ratios computed from the financial statements of one year only is obviously limited. They must be compared with the past results of the company itself and also with the results of other business firms of the same industry. 10 6. Window-Dressing: The term ‘window-dressing’ means presenting the financial statements in such a way to show a better position than what it actually is. If, for instance, low rate of depreciation is charged, an item of revenue expense is treated as capital expenditure etc. the position of the concern may be made to appear in the balance sheet much better than what it is. Ratios computed from such balance sheet cannot be used for scanning the financial position of the business. 7. Changes in Price Level: Fixed assets show the position statement at cost only. Hence, it does not reflect the changes in price level. Thus, it makes comparison difficult. 8. Ratios of two irrelevant figures : Ratios must be established between related matters. It is of no use if the ratios are found between two figures which have no relation with each other 9. Ratios Account for one Variable further supportive Investigation necessary: Since ratios account for only one variable, they cannot always give correct picture since several other variables such Government policy, economic conditions, availability of resources etc. should be kept in mind while interpreting ratios. It must be remembered that accounting ratios only a preliminary step in investigation. For drawing final conclusion on any analysis and interpretation of financial Statement rigorous investigation must be made. 10. Dependability on other factors : Financial results of the business depend upon a number of factors. External factors sometimes make the results of financial statements incomparable. Accounting ratios calculated for seasonal business may have biased pictures due to its nature. Hence, before giving any opinion on the basis of accounting ratios all such factors must be kept in mind. 11 FORMULAE OF VARIOUS RATIOS PROFITABILITY RATIOS Sr. No. RATIOS FORMULAE 1 Gross Profit Ratio Gross Profit/Net Sales [Sales – Returns] X 100 2 Operating Ratio COGS + Operating Expenses[including interest] X 100 Net Sales 3 Expense Ratio Operating Expenses/ Net Sales X 100 4 Net Profit Ratio Net Profit After Interest And Taxes [PAT] X 100 Net Sales 5 Return on Capital Net Profit [Before Interest after Taxes] X 100 Employed Ratio Capital Employed [SC + Reserves + Long term Loans - Fictitious Assets] 6 Return on Shareholders’ Net profit [Profit after Tax] X 100 Fund Share holders’ fund [Share Capital + Reserves - Fictitious Assets ] 7 Return on Equity share Net Profit [After Tax] – Pref. Dividend X 100 Capital Equity Share Capital 8 Earnings Per Share Ratio Net Profit [After Tax] - Preference Dividend No of Equity Shares LIQUIDITY RATIOS Sr. No. RATIOS FORMULAE 9 Current Ratio Current Assets Current Liabilities 10 Liquid Ratio Liquid Assets [Current Assets – Stock] Liquid Liabilities [current Liabilities – BOD] 11 Acid Test Ratio Quick Assets [Cash + Cash Equivalents + Readily Marketable Securities] Liquid Liabilities [Current Liabilities –BOD] 12 CAPITAL STRUCTURE/ GEARING RATIOS Sr. No. RATIOS FORMULAE 12 Proprietary Ratio Proprietors’ Fund [Shareholders’ Fund] X 100 Total Real Assets 13 Debt Equity Ratio Total Long Term liabilities Owners’ Fund 14 Gearing Ratio Pref. share Capital + Long terms loans Debentures Equity share Capital 15 Long Term Funds to Long Term Funds X 100 Fixed Assets Ratio Fixed Assets 16 Interest Coverage Net profit Before Interest & Taxes Ratio Fixed Interest Charges 17 Debt Service Profit [ Available for Debt Payment] Coverage Ratio Installment of principal + Interest TURNOVER / ACTIVITY RATIOS Sr. No. RATIOS FORMULAE 18 Stock Turnover Cost of Sales[Sales – Gross Profit] Ratio Average Stock 19 Debtors’ Ratio Debtors + Bills Receivables X Days of the year Credit Sales 20 Creditors Ratio Creditors + Bills Payables X Days of the year Credit Purchases 21 Total Assets Sales / Total Assets Turnover Ratio 22 Fixed Assets Sales/ Fixed Assets Turnover Ratio 13 ILLUSTRATIONS QUE 1 The Balance sheet of ABC Ltd as on 31-3-2023 is as under; Liabilities ₹ Assets ₹ Equity share capital 8,00,000 Land Building 6,00,000 8% Pref Share Capital 3,00,000 Plant & Machinery 6,00,000 Reserve & Surplus 1,00,000 Debtors 3,60,000 9% Debentures 3,00,000 Stock 2,40,000 Creditors 3,00,000 Bills receivables 40,000 Bills payable 80,000 Bank balance 1,60,000 O/s expenses 60,000 Workmen Profit fund 60,000 20,00,000 20,00,000 Additional information: 1. Sales (Cash sales is 25% of credit sales) 60,00,000 2. Gross Profit 15,00,000 3. Net Profit (Before Debenture Interest & 50% tax) 8,67,000 Calculate following Ratios: Gross Profit Ratio Net Profit Ratio Current Ratio Liquid Ratio Debtors Ratio (300 days) Proprietary Ratio SOLUTION : [a] Gross Profit Ratio = Gross Profit / Total Sales x 100 = 15,00,000 / 60,00,000 x 100 = 25% [b] Net Profit Ratio = Net Profit = 8,67,000 (-)Deb Int = 27,000 ( 3,00,000 @9%) 8,40,000 (-) 50% Tax 4,20,000 Net Profit 4,20,000 = Net Profit / Sales = 4,20,000 / 60,00,000 x 100 = 7% [c] Current Ratio = Current Assets / Current Liabilities Current Assets = Debtors + Stock + BR + Bank 3,60,000 + 2,40,000 + 40,000 + 1,60,000 = 8,00,000 Current Liabilities = Creditors + BP + O/s expenses + Workmen profit fund 3,00,000 + 80,000 + 60,000 + 60,000 = 5,00,000 = 8,00,000 / 5,00,000 = 1.6 : 1 14 [d] Liquid Ratio = Liquid Assets / Liquid Liabilities = Current assets – Stock = 8,00,000 – 2,40,000 = 5,60,000 = Liquid liabilities = Current liabilities – Bank o/d = 5,00,000 = 5,60,000 / 5,00,000 = 1.12 : 1 [e] Debtors Ratio = Debtors + BR / Credit Sales x Days of the year Suppose credit sales is Rs 100 then cash sales is Rs 25 Therefore total sales = Rs 125 so 100/ 125 = 4/5 credit sales Credit sales = 60,00,000 x 4/5 = 48,00,000 =3,60,000 + 40,000 / 48,00,000 x 300 = 25 days [f] Proprietary Ratio = Proprietary funds / Total Real Assets x 100 Proprietary funds = Eq share capital + Pref share capital + Res & Surplus 8,00,000 + 3,00,000 + 1,00,000 = 12,00,000 Total Real assets = Rs 20,00,000 = 12,00,000 / 20,00,000 x 100 = 60% QUE 2 From the following statement of XYZ Company ltd for the year ended 31 st March 2023 you are required to calculate following ratios (300 days for the year) Current ratio Liquid ratio Operating ratio Stock turnover ratio Debtors ratio Gross profit ratio Net Profit ratio Proprietary ratio Liabilities ₹ Assets ₹ Equity share capital 1,00,000 sh @ ₹ 1/- 1,00,000 Land & Building 1,00,000 General reserve 80,000 Plant & Machinery 1,20,000 Profit & Loss a/c 30,000 Stock 30,000 % Debentures 1,00,000 Debtors 50,000 Creditors 40,000 Cash 30,000 O/s expenses 30,000 BR 30,000 Preliminary exp 20,000 3,80,000 3,80,000 Profit and Loss Account for the year ending 31-3-2023 Opening stock 50,000 Sales 3,60,000 Purchases 2,10,000 Closing stock 30,000 Gross profit c/d 1,30,000 3,90,000 3,90,000 Administrative exps 46,000 Gross profit b/d 1,30,000 Selling exps 20,000 Profit on sale of assets 10,000 Loss by fire 4,000 Net Profit 70,000 1,40,000 1,40,000 15  SOLUTION : 1) Current Ratio = Current assets / current liabilities = 1,40,000 / 70,000 = 2:1 Current assets = Stock + Debtors + Cash + BR = 30,000+50,000+30,000+30,000 Current liabilities = Creditors + O/s exps = 40,000 + 30,000 = 70,000 2) Liquid Ratio = Liquid assets / Liquid liabilities = 1,10,000 / 70,000 = 1.57 : 1 Liquid assets = Current asset – stock = 1,40,000 – 30,000 = 1,10,000 3) Operating Ratio = Cost of Goods sold + Operating expenses / Sales x 100 2,30,000 + 66,000 / 3,60,000 x 100 = 82.22 Cost of goods sold = Sales – Gross profit = 3,60,000 – 66,000 = 2,30,000 4) Stock Ratio = Cost of goods sold / Average stock = 2,30,000 / 40,000 = 5.75 times Average stock = 50,000 + 30,000 / 2 = 40,000 5) Debtors Ratio = Debtors + BR / Credit sales x Days = 50,000 + 30,000 / 3,60,000 x 100 = 67 days 6) Gross profit ratio = Gross profit / Sales x 100 = 1,30,000 / 3,60,000 x 100 = 36.11% 7) Net Profit ratio = Net profit / Sales x 100 = 64,000 / 3,60,000 x 100 = 17.78% Net profit – loss by fire + profit on sale of asset = 64,000 8) Proprietary ratio = Proprietor fund / Total real assets x 100 = 1,90,000 / 3,60,000 x 100 = 52.78% Proprietary funds = Share capital + Gen Res + P & L – Fictitious assets = 1,90,000 Total real assets = Total assets – fictitious assets = 3,60,000 QUE 3 The Trading and Profit and loss account of A ltd is given below Trading and Profit and loss account for year ending 31-3-2023 Net Sales(all credit sales) 14,40,000 Less: Cost of sales : Opening stock 2,00,000 + credit purchase 11,52,000 13,52,000 Less: Closing stock 2,72,000 10,80,000 Gross Profit 3,60,000 Less: Administrative exp 80,000 Selling exp 84,000 Interest on bank loan 16,000 1,80,000 Net Profit before tax 50% 1,80,000 16  Balance sheet as on 31st March 2023 Sources of Funds 1)Proprietary funds: Equity share capital 4,00,000 Preference share capital 2,00,000 6,00,000 Reserve fund 2,40,000 Workmen compensation fund 40,000 Proprietary funds: 8,80,000 2)Long term funds 16% Bank loan 1,00,000 Capital employed 5,80,000 Application of Funds 1)Fixed assets less depreciation 6,20,000 2)Investments --- 3)Current assets loans and advances: Stock 2,72,000 Debtors 2,48,000 Cash 90,000 BR 20,000 6,30,000 Less : Current liabilities Creditors 2,04,000 Bank overdraft 46,000 Provident fund 20,000 2,70,000 Net current assets: 3,60,000 Capital Employed 9,80,000 Calculate the following ratios: Gross profit ratio Net Profit ratio Operating ratio Stock turnover ratio Debtors ratio Creditors velocity Current ratio Liquid ratio Proprietary ratio Debt – equity ratio Working capital Turnover ( 360 days ) SOLUTION : 1) Gross Profit Ratio = Gross profit / sales x 100 = 3,60,000 / 14,40,000 x 100= 25% 2) Net Profit ratio = Net Profit / sales x 100 = 90,000 / 14,40,000 x 100 = 6.25% 3) Operating ratio = Cost of sales + Operating exp / Net sales x 100 10,80,000 + 1,64,000 / 14,40,000 x 100 = 86.38% 4) Stock turnover = Cost of goods sold /Average stock = 10,80,000 / 2,36,000 = 4.58 times 5) Debtors ratio = Debtors + BR / Credit sales x 360 17  = 2,48,000 + 20,000 / 14,40,000 x 360 = 67 days 6) Creditors velocity = Creditors + BP / Credit purchase x Days of year = 2,04,000 / 11,52,000 x 360 = 63.75 i.e. 64 days 7) Current ratio = Current assets / current liabilities = 6,30,000 / 2,70,000 = 2.33 : 1 8) Liquid ratio = Liquid assets / Liquid liabilities = CA – stock / CL – Bank o/d = 3,58,000 / 2,24,000 = 1.6 : 1 9) Proprietary ratio = Proprietary funds / Total real assets x 100 = 8,80,000 / 12,50,000 x 100 = 70.4% 10) Debt – equity ratio = Total long term liabilities / Proprietary funds x 100 = 1,00,000 / 8,80,000 x 100 = 11.36% 11) Working capital turnover = Sales / Net working capital = 14,40,000 / 3,60,000 = 4 times SECTION A THEORY QUESTIONS : UNIT 1 [A] FINANCIAL STATEMENTS - ANALYSIS & INTERPRETATION What is Financial Statements analysis ? Discuss its purpose , characteristics and limitations. Explain various methods of Financial Statement Analysis. UNIT 1 [B] RATIO ANALYSIS Meaning of Ratio Analysis. Discuss its utility and limitations. Discuss classification of Ratios along with examples. SECTION B MULTIPLE CHOICE QUESTIONS UNIT 1[A] FINANCIAL STATEMENT ANALYSIS & INTERPRETATION 1] The basis for Financial Analysis , Planning & Decision making of any business enterprise is it’s Financial Statements, which mainly include [A] Balance Sheet [B] Profit & Loss a/c [C] Both [A] &[B] [D] Statement of Director 2] Purposes of Financial Statements preparation are [A] To follow Provisions of Companies Act [B] For Income Tax Purpose [C] To provide necessary information to Shareholders , Lenders, other interested parties [D] All of the above 3] Breaking complex set of facts & figures into simple elements is known as ___________ of Financial Statements. [A] Analysis [B] Interpretation [C] Presentation [D] Arrangement 18 4] Analysis of Financial Statements to be followed by its ________________ so the real significance of information is derived. [A] Analysis [B] Interpretation [C] Presentation [D] Arrangement 5] Financial Analysis & Interpretation helps ______________ to take policy decisions in case of business enterprises. [A] Management [B] Investors [C] Government [D] Tax Authorities 6] Methods of Financial Statement Analysis include [A] Comparative Statements [B] Trend Percentages [C] Common Size Statements [D] All of the Above 7] Methods of Financial Statement Analysis include [A] Cash /Fund Flow analysis [B] Ratio Analysis [C] Value Added Statement [D] All of the Above 8] The method of presenting both Financial Statements into columnar form and judging the trend of increase & decrease in profitability & financial position of business is known as___________ Method. [A] Comparative Statements [B] Trend Percentages [C] Common Size Statements [D] All of the Above 9] The method of comparing figures of past few years of Financial Statements into columnar form and judging the trend percentage in profitability & financial position of business is known as___________ Method. [A] Comparative Statements [B] Trend Percentages or Trend Ratios [C] Common Size Statements [D] All of the Above 10] The method of taking some significant item of financial statement as Base and all others items are compared with this common base it is known as ________________Method. [A] Comparative Statements [B] Trend Percentages or Trend Ratios [C] Common Size Statements [D] All of the Above 11] The statement prepared to show the inflow and outflow of funds, excess of current assets over current liabilities is known as _______________ Method [A] Fund Flow Analysis [B] Cash Flow Analysis [C] Value Added Statement [D] All of the Above 12] The statement prepared to show the inflow and outflow of Cash during the year, from it’s Financial Statements is known as _______________ Method [A] Fund Flow Analysis [B] Cash Flow Analysis [C] Value Added Statement [D] All of the Above 19 13] The system of evaluating business performance by means of Value Added by various parties connected with Business is known as _______________ Method. [A] Fund Flow Analysis [B] Ratio Analysis [C] Value Added Statement [D] All of the Above 14] A mathematical expression derived to establish logical relationship of two related items of Financial Statements is known _________________ Method. [A] Cash /Fund Flow analysis [B] Ratio Analysis [C] Value Added Statement [D] All of the Above UNIT 1[B] RATIO ANALYSIS 15] Ratio can be best described as – [A] Relation between two terms [B] Relation between two nonrelated financial items [C] Relation between two related items from financial records [D] Relation between two random figures 16] Ratios can be expressed in following terms – [A] Simple Figures/Proportion [B] Percentage [C] Rate or Times [D] All of the above 17] Interpretation of Ratios can be useful through – [A] Comparison with Ideal Ratios [B] Comparison with Past Ratios [C] Intra & Inter firm comparison [D] All of the Above 18] ‘Lack of standard ratio’ is one of the major _______ of Ratio Analysis [A] Limitations [B] Advantages [C] Classification [D] Importance 19] Classification of Ratios can be done on the basis of – [A] Traditional classification [B] Functional classification [C] [A] & [B] Both [D] Random Classification 20] As per traditional Classification Ratios can be – [A] Revenue Statement Ratios [B] Balance Sheet Ratios [C] Composite Ratios [D] all of the above 21] In case of Revenue Statement Ratios or Balance Sheet Ratios , Both the Values are taken from [A] Same financial statement [C] Both [A] & [B] [B] One from Revenue Statement & One from Balance sheet [D] Any Statement 22] In case of Composite Ratios , Both the values are taken from : [A] Same financial statement [C] Both [A] & [B] [B] One from Revenue Statement & One from Balance sheet [D] Any Statement 20 23] As per Functional Classification Ratios can be – [A] Profitability & Liquidity Ratios [B] Leverage/ Capital Structure Ratios [C] Activity/Efficiency/ Turnover Ratio [D] All of the Above 24] If Net Sales is ₹ 5,00,000 & Gross profit ₹ 1,00,000 then Gross profit ratio is ? [A] 50% [B] 20% [C] 10% [D] 25% 25] If Sales is ₹ 1,00,000 & Cost of Goods [COGS] sold is ₹ 70,000 ,then Gross profit Ratio is ? [A] 30% [B] 70% [C] 100% [D] 25% 26] If Cost of Goods Sold [COGS] is ₹ 7,50,000 & Gross profit is ₹ 2,50,000 , find Gross Profit Ratio- [A] 33.33% [B] 20% [C] 25% [D] 50% 27] If Gross Profit Ratio is 25% & Gross Profit is ₹ 4,00,000 ,find amount of sales ? [A] ₹ 10,00,000 [B] ₹ 16,00,000 [C] ₹ 12,00,000 [D] ₹ 20,00,000 28] If Gross Profit Rate is 25% on Cost , What’s the rate of Gross profit on Sale ? [A] 20% [B] 33.33% [C] 40% [D] 50% 29] Calculate Net profit Ratio from below given information – Gross Profit ₹ 1,35,000 ,Cost of Goods Sold 2,02,500 , Net Profit [Subject to 50% Tax] ₹ 67,500 [A] 50% [B] 20% [C] 10% [D] 25% 30] If Net Profit Ratio is 20% ,Sales is ₹ 3,00,000 ,find Operating Ratio ? [A] 100% [B] 80% [C] 60% [D] 15% 31] Which ratios are included in Liquidity ratios ? [A] Current Ratio [B] Liquid Ratio [C] Acid test/Quick Ratio [D] All of the Above 32] Which of the following is the general ideal measurement for current ratio? [A] 2:1 [B]1:2 [C]1:1 [D] 4:5 33] While calculating Liquid ratio, which liability will be excluded from current liabilities [A]Bills payable [B]Creditors [C]Bank overdraft [D] Debtors 34] While calculating liquid ratio, which assets will be excluded from current assets? [A]Bank overdraft [B]Debtors [C]Stock in trade [D] Creditors 21 35] Current ratio of a firm is 2:1, while the current assets including stock are ₹ 48,00,000. At that time its liquid ratio is 3:1, while current liabilities except bank overdraft are ₹ 12,00,000. Find the value of stock [A]₹ 12,00,000 [B]₹ 10,00,000 [C]₹ 11,00,000 [D] ₹ 24,00,000 36] The company has cash on hand ₹ 10,000, bank balance ₹45,000 and readily marketable securities ₹ 25,000 and liquid liabilities are ₹ 1,20,000. Find Acid Test Ratio [A] 0.67:1 [B] 0.45:1 [C] 0.35:1 [D] 0.5:1 37] Capital structure or Leverage Ratios include – [A] Proprietary Ratio [B] Debt – Equity ratio [C] Capital Gearing Ratio [D] All of the Above 38] Interest Coverage Ratio is covered by – [A] profitability Ratios [B] Liquidity Ratios [C] leverage Ratios [D] All of the above 39] Total Coverage Ratio includes coverage of fixed charges like [A] Interest [B]Installments [C] Both [A] & [B] [D] All of the Above 40] For calculating Interest Coverage Ratio ____________________ is used. [A] Profits/ Earnings After Tax [B] Profits/Earnings Before Interest & Tax [C] Profits/Earnings before Depreciation [D] Sales after returns 41] The Ratio that shows the proportion of proprietor’s Funds to the Total Assets employed in the business is known as- [A] Proprietary Ratio [B] Debt – Equity ratio [C] Capital Gearing Ratio [D] Liquid Ratio 42] The Ratio that expresses the relationship between Long term liabilities to Shareholders’ /Owners’ Fund is known as – [A] Proprietary Ratio [B] Debt – Equity ratio [C] Capital Gearing Ratio [D] Liquid Ratio 43] The Ratio that expresses relation between Proportion of fixed Interest & Dividend bearing Capital to Ordinary Capital is known as – [A] Proprietary Ratio [B] Debt – Equity ratio [C] Capital Gearing Ratio [D] Liquid Ratio 44] A Company’s Gearing Ratio is 30% , Debentures are of ₹ 10,000 , Equity Share Capital is ₹ 3,00,000 , find Value of Preference share capital ? [A] ₹ 80,000 [B] ₹ 10,000 [C] ₹ 40,000 [D] ₹ 20,000 22 45] Stock Turn over Ratio , Debtors’ Ratio , Creditors’ Ratio ,Fixed Assets Turn over Ratio ,Total Assets Turn over Ratio are included in [A] Activity/ Turn over/ Efficiency Ratios [B] Profitability Ratios [C] Liquidity Ratios [D] Leverage Ratios 46] Earning per share is an accounting ratio based on ? [A] Profitability ratio based on investment [B] Liquidity ratio [C] Turnover ratio [D] Turnover Ratio 47] Profitability Ratios Based on Investment includes – [A] Return on Capital employed [B] Return on share holders’ Fund [C] Return on Equity share capital [D] All of the Above 48] Quick assets include- [A] Cash [B] Bank [C] readily Marketable securities [D] All of the Above 49] Adjusted Purchase [COGS] means : [A] Opening Stock + Purchases – Closing Stock [B] Closing Stock + Purchases – Opening Stock [C] Opening Stock + Purchases + Closing Stock [D] Purchases – Opening Stock – Closing Stock 50] Choose the correct formula for Gross Profit Ratio : [A] Gross Profit/ Net Sales * 100 [B] Net profit/ Net Sales *100 [C] Goss profit / Total Assets * 100 [D] Sales/Gross Profit *100 51] Cost of Goods Sold + Operating Expenses * 100 is a formula of which Ratio ? Sales [A] Operating Ratio [B] COGS Ratio [C] Expense Ratio [D] GP ratio 52] Operating Expenses / Sales * 100 is a formula of which Ratio ? [A] Operating Ratio [B] COGS Ratio [C] Expense Ratio [D] NP Ratio 53] Choose the formula for Net profit Ratio ? [A] Net Profit [After Interest & Tax] / Sales *100 [B] Net Profit [Before Interest & Tax] / Sales *100 [C] Net Profit [Before Depreciation ] / Sales *100 [D] Sales/ Net Profit [After Interest & Tax]*100 54] Formula for Rate of Return on Capital Employed is ? [A] Net profit/Earnings Before Interest & Tax * 100 Capital Employed [SC + Reserves + Long Term loans – Fictitious Assets] [B] Net profit/Earnings after Interest & Tax * 100 Capital Employed [SC + Reserves + Long Term loans – Fictitious Assets] 23 [C] Net profit/Earnings Before Depreciation * 100 Capital Employed [SC + Reserves + Long Term loans – Fictitious Assets] [D] Any of above 55] Formula for Rate of Return on Shareholders’ Fund is ? [A] Net Profit/ Share holders’ Fund [SC + Reserves]* 100 [B] Net Profit/Total Assets * 100 [B] Net Profit / Share Capital * 100 [D] Share holders’ Fund/ Total assets *100 56] Formula for Rate of Return on Equity Share Capital is ? [A] Net profit – Preference Dividend * 100 Equity Share Capital [B] Net Profit – Equity Dividend * 100 Equity Share Capital [C] Gross profit – Preference Dividend * 100 Equity Share Capital [D] any of the above 57] For Calculating Earnings Per share Net profit – Preference dividend to be divided by [A] No. of Equity shares [B] No. of Preference shares [C] No. of Total shares [D] Total Liabilities 58] Formula for calculation of Current Ratio is : [A] Current Assets / Current Liabilities [B] Current Assets- BOD/ Current Liabilities-Stock [C] Current Liabilities / Current Assets [D] Current Assets – Stock / Current Liabilities – BOD 59] Formula for Liquid Ratio is : [A] Liquid Assets [Curr. Assets – Stock ] / Liquid Liabilities [Curr. Liabilities – BOD] [B] Current Assets / Current Liabilities [C] Current Liabilities / Current Assets [D] Cash /Total Assets 60] Formula for Acid Test Ratio/ Cash Ratio is : [A] Cash + Bank + Readily Marketable Securities / Current Liabilities - BOD [B] Current Liabilities / Current Assets [C] Current Assets – Stock / Current Liabilities – BOD [D] Cash/ Total Liabilities 61] Proprietors’ / Owners’ Funds / Total Real Assets is a formula for which Ratio ? [A] Proprietary Ratio [B] Debt – Equity Ratio [C] Capital Gearing Ratio [D] Liquid Ratio 62] Long Term Liabilities / Owners’ Funds is a formula for which Ratio ? [A] Proprietary Ratio [B] Debt – Equity Ratio [C] Capital Gearing Ratio [D] Liquid Ratio 24 63] Preference Share Capital + Long Term Loans + Debentures is a formula for ? Equity Share Capital [A] Proprietary Ratio [B] Debt – Equity Ratio [C] Capital Gearing Ratio [D] Current capital ratio 64] Long Term Funds / Fixed Assets * 100 is a formula for which Ratio ? [A] Long Term Funds to Fixed Assets Ratio [B] long Term Funds to Total Assets ratio [C] Total assets Turn over Ratio [D] Current capital ratio 65] Formula for Stock Turn Over Ratio is : [A] Cost of Goods Sold/ Average Stock [B] Average Stock / Cost of Goods Sold [C] Average Stock / Sales [D] Average Stock/Purchases 66] Formula for Debtors’ Ratio is : [A] Debtors + Bills Receivables * Days/Months of the year Credit Sales [B] Debtors + Bills Payables * Days/Months of the year Credit Sales [C] Creditors + Bills Payables * Days/Months of the year [D] Any of Above Credit Purchases 67] Formula for Creditors’ Ratio is : [A] Debtors + Bills Receivables * Days/Months of the year Credit Sales [B] Debtors + Bills Payables * Days/Months of the year Credit Sales [C] Creditors + Bills Payables * Days/Months of the year [D] Any of above Credit Purchases 68] Sales / Total Assets is a formula for which Ratio ? [A] Long Term Funds to Fixed Assets Ratio [B] long Term Funds to Total Assets ratio [C] Total Assets Turnover Ratio [D] sales Turnover Ratio 69] formula for Interest Service Coverage Ratio is : [A] Earnings / Profits Before Interest & Tax / Interest [B] Earnings / Profits After Interest & Tax / Interest [C] Earnings available for Debt Services/ Interest + Installments [D] Any of the above 25 70] formula for Debt Service Coverage Ratio is : [A] Earnings / Profits Before Interest & Tax / Interest [A] Earnings / Profits After Interest & Tax / Interest [C] Earnings available for Debt Services/ Interest + Installments [D] Any of the above SECTION C SHORT SUMS SUM 1 If Gross Profit Ratio is 25%, Gross Profit is ₹ 4,00,000,find amount of Cost of Goods sold ? SUM 2 Operating ratio of a company is 80%. Its sale is ₹ 20,00,000. Sales return is ₹ 2,00,000. If operating expenses are ₹ 1,00,000, find out gross profit SUM 3 If Gross profit is 33.33%, Operating ratio is 80% and Sales=₹15,00,000, then Cost of Sales =____ SUM 4 Profit before interest and tax is ₹ 6,50,000. Corporate tax is 40%, 10% Debentures ₹ 5,00,000. Net Profit ratio 18%, find sales ? SUM 5 The Operating Ratio of a company is 80%, Gross Profit ratio is 33.33% and the Sales are ₹ 15,00,000. Find out the Operating expenses of the company SUM 6 If current ratio =1.5, Liquid ratio = 1.2, Current assets = ₹ 1,95,000, Bank overdraft = ₹ 10,000, then Current Liabilities = _________ SUM 7 Current ratio of a firm is 2:1, while the current assets including stock are ₹ 48,00,000. At that time its liquid ratio is 3:1, while current liabilities except bank overdraft are ₹ 12,00,000. Find the value of Bank over draft SUM 8 From below given details find Stock turnover Ratio – Sales ₹ 9,00,000 , Gross profit ₹ 2,25,000 , Net profit [Subject to 50% Tax] ₹ 1,44,000, Op. Stock ₹ 70,000 & Clo. Stock ₹ 65,000. SUM 9 In a Company Current Assets are ₹ 15,00,000 & Debtors & Bills receivables are 33.33% of Current Assets. Credit sales are 3/5 of the total sales of ₹ 50,00,000. Find Debtors’ Ratio [360 Days in a year] ? SUM 10 If stock turnover is 5 times, opening stock is ₹ 5,000 less than the closing stock and average stock is ₹ 20,000. Find Purchases 26 SUM 11 A company has issued Debentures of ₹20,000, its Preference Share Capital is ₹ 30,000 and Equity share capital is ₹ 2,00,000, then the capital Gearing ratio will be as under SUM 12 Find Debtors’ Ratio [ 300 Day to be taken for a year] from following details : Debtors ₹ 60,000 , Bill receivable ₹ 10,000 , Total sales ₹ 9,00,000 [ where Cash sales is 4/5 of Credit Sales] SUM 13 From the following information Calculate various Ratios – Particulars Details/Amount Stock turnover Ratio 1.5 Times Gross profit Ratio 25% Gross profit ₹ 8,00,000 Fixed Assets to Turnover Ratio 4 Times Closing stock is more than Opening Stock by ₹ 20,000 [A] From the above information Calculate value of Sales & Cost of Goods Sold ? SUM 14 From the following details of X Ltd. calculate : Current Assets Current Liabilities Cost of Goods Sold Gross Profit Debtors Fixed Assets Reserves & Surplus Current Ratio 2.5 : 1 Liquid Ratio [Bank Overdraft is NIL] 1.5 : 1 Working Capital [Current Assets – Current Liabilities] 6,00,000 Stock Turnover Ratio [ Cost of Goods Sold / Closing Stock] 6 times Gross Profit Ratio 20% Average Debt Collection Period [Only credit sales ] 2 months Fixed assets Turnover Ratio 1.25 Reserves & Surplus/ Capital 0.5 : 1 SUM 15 Calculate Net Profit Ratio and Return on Capital Employed from given information of Y Ltd.: Net profit before Interest & Tax 24,00,000 Sales 27,50,000 10% Debentures 20,00,000 Equity Share Capital 40,00,000 12% Preference Share Capital 20,00,000 Tax Rate 50% 27 SECTION D LONG QUESTIONS SUM 1 The following are the summarized balance sheets of ABC Co. Ltd. : Balance Sheets Liabilities 31-3-22 31-3-23 Assets 31-3-22 31-3-23 Share Capital 1,00,000 1,00,000 Fixed Assets Reserves 90,000 1,00,000 Land & Building 50,000 50,000 9% Debentures 1,00,000 1,00,000 Plant & Machinery 2,00,000 1,80,000 Current Liabilities Current Assets Sunday Creditors 40,000 60,000 Stock 55,000 65,000 Provision for Sundry Debtors 30,000 40,000 Taxation 20,000 10,000 Cash 15,000 35,000 3,50,000 3,70,000 3,50,000 3,70,000 Additional information : 2021-22 2022-23 Sales 3,65,000 2,92,000 Gross Profit 90,000 52,000 Net Profit (before interest and tax) 58,000 30,000 The stock on 1-4-2022was valued at ₹ 45,000. Calculated the following accounting ratios and comment in brief on each of them. (1) Current Ratio (2) Stock Turnover (3) Debtor’s Ratio and Debtors Turnover (4) Return on Capital Employed SUM 2 : The following is the Balance Sheet of ABC Ltd. as at 31-3-2023 : Liabilities ₹ Assets ₹ Equity Share Capital 60,000 Plant and Machinery 1,20,000 Reserves 41,400 Stock of Goods 30,000 Debentures 60,000 Debtors 7,000 Creditors 10,000 Bills Receivable 3,000 Bills Payable 4,000 Cash 15,400 1,75,400 1,75,400 Total Sales ₹ 1,20,000; Net Profit ₹ 24,000. From the above information, calculate the following ratios Current Ratio Liquidity Ratio Debtors Ratio Net Profit Ratio. SUM 3 : Following accounting information is obtained relating to DLF Ltd. Particulars Amount Sales 60,00,000 28 Less : Cost of goods sold 30,00,000 Gross Profit 30,00,000 Less : Administrative, selling and financial expenses 10,00,000 Profit Before Tax 20,00,000 Less : Taxes 10,00,000 Net Profit 10,00,000 Balance Sheet Liabilities ₹ Assets ₹ ₹ 10% Preference shares Capital 40,00,000 Fixed Assets 1,10,00,000 Equity Share Capital 40,00,000 Stock 4,00,000 Reserves 20,00,000 Debtors 6,00,000 10% Debentures 22,00,000 Bills Receivable 2,00,000 Creditors 3,00,000 Cash 4,00,000 Bank Overdraft 2,00,000 Fictitious Assets 2,00,000 Bills Payable 80,000 Outstanding Expenses 20,000 1,28,00,000 1,28,00,000 Opening stock was ₹ 6,00,000. Assume 360 days in a year. Compute the following ratios and give a brief statement on financial position. Gross profit ratio Debtor’s ratio Operating ratio Proprietary ratio Stock turnover rate Rate of return on net capital employed Current ratio Rate of return of equity share capital. Liquid ratio SUM 4 : The following is the summarized Balance Sheets of MNO Ltd. As on 31-3-2023 : Liabilities ₹ Assets ₹ Equity Share Capital 5,00,000 Fixed Assets 9,60,000 10% Pref. Share Capital 2,00,000 Stock 2,25,000 General Reserve 2,25,000 Debtors 1,75,000 12% Debentures 3,00,000 Bills Receivable 50,000 Bank Overdraft 50,000 Cash balance 90,000 Creditors 2,00,000 Bills Payable 50,000 Preliminary Expenses 25,000 15,25,000 15,25,000 Additional information : ₹ 29 Total Sales (Cash sales are 1/5th of credit sales) 18,00,000 Cost of goods sold 10,80,000 Net Profit (Before Interest and Tax) Rate of tax is 50% 4,86,000 Stock on 1-4-2022 2,07,000 From the above information, calculated the following accounting ratios for the year and make brief comment on each of them. In bracket, standard ratios are shown (300 days to be taken for the year). Current Ratio (2 : 1) Liquid Ratio (1 : 25 : 1) Return on Capital employed (25%) Capital Gearing Ratio (0.75) Debtors Ratio (45 days) Stock Turnover (5 times) SUM 5 Balance sheet on 31-3-2023 of RST Ltd. : Liabilities ₹ Assets ₹ Equity Share Capital 10,00,000 Fixed Assets 7,60,000 Reserves and Surplus 5,40,000 Investments (Temporary) 5,00,000 10% Debentures 5,00,000 Stock 3,75,000 Creditors 2,25,000 Debtors 4,12,500 Bills payable 75,000 Prepaid Expenses 50,000 Outstanding expenses 50,000 Prepaid Income-tax 5,000 Provident fund 90,000 Bills receivable 1,87,500 Provision for Bank balance 2,00,000 Taxation 20,000 Underwriting Commission 10,000 25,00,000 25,00,000 Additional information : Gross profit is 40% of the sales. Net profit is ₹ 5,00,000 (Before Interest and tax), Taxation rate is 50%. Cash sales is 25% of the credit sales. On 1-4-2022, the stock is worth ₹ 2,25,000. The collections are received in 108 days from the debtors (360 days of the year to be considered). Calculate the following ratios : (1) Rate of return on capital employed, (2) Stock turnover, (3) Proprietary ratio, (4) Current ratio, (5) Net profit ratio, (6) Operating ratio. SUM 6 The following information is taken from the financial records of JKP Ltd. : Particulars ₹ Total sales (of which 25% is cash sales) 18,00,000 Cost of goods sold 11,60,000 Net Profit (after 50% taxes) 1,20,000 Equity Share Capital 6,00,000 30  Retained earning 1,08,000 10% Debentures 3,60,000 Fixed assets 8,00,000 Stock 1,60,000 Debtors 1,92,000 Cash 64,000 Creditors 96,000 Bills payable 24,000 Bank overdraft 60,000 Preliminary expenses 10,000 From the above information, calculate the following Ratios : Current Ratio Debtors Ratio (360 days in a year) Operating Ratio Stock Turnover Ratio Return on total capital employed Return on shareholders’ funds Interest Coverage Ratio SUM 7 LMN Co. Ltd. gives you the following information for the year 2023 : Particulars ₹ Adjusted purchase is 67% of the Sales Net Profit (after 60% taxation) 10,00,000 Opening stock 7,40,000 Closing stock 6,00,000 Equity Share Capital 40,00,000 10% Preference Share Capital 20,00,000 10% Debentures 6,00,000 10% Long term loan 4,00,000 Retained earnings 10,00,000 Current Assets 30,00,000 Fixed Assets 70,00,000 Fictitious Assets 2,00,000 Additional information : Credit sales are 3/5 of the total sales. Debtors and Bills receivable are 33 1/3% of current assets. Stock Turnover ratio is 10 times. Calculate the following ratios : (1) Net Profit Ratio. (2) Operating Ratio. (3) Rate of return on capital employed. (4) Rate of return on shareholders’ funds. (5) Rate of return on equity shareholders’ funds. (6) Debtors ratio (360 days of the year to be considered). 31 SUM 8 Balance-Sheets of OPQ Ltd. on 31-3-2023. Liabilities ₹ Assets ₹ Equity Share capital 10,00,000 Fixed Assets 7,00,000 Reserves and surplus 5,00,000 Investments (Temporary) 8,00,000 12% Debentures 10,00,000 Stock 5,00,000 Creditors 6,00,000 Debtors 5,00,000 Bills Payable 1,00,000 Prepaid Income tax 50,000 Bank overdraft 50,000 Bills Receivable 1,00,000 Provident Fund 50,000 Bank balance 4,00,000 Provision for taxation 1,00,000 Underwriting Commission 40,000 31,00,000 31,00,000 Additional Information : (1)Gross profit is 50% of the sales. (2)Net profit is ₹ 5,00,000 (After interest and tax). Tax rate is 50%. (3)Cash sales are 1/5th of credit sales. (4)On 1-4-2022 the stock is worth ₹ 3,00,000 (5) The collections are received in 45 days from the debtors (300 days of the year to be considered.) Calculate the following ratios : Rate of return on capital employed. Stock turnover. Current ratio. Operating ratio. Proprietary ratio. Rate of return on equity share capital. SUM 9 On the basis of following data of UVW Ltd. , prepare common size percentage table : Particulars 2021-22 ₹ 2022-23 ₹ [I] Equity & Liabilities 1]- Shareholders’ Fund [a] Equity Share Capital 14,40,000 22,50,000 [b] Reserves & Surplus 9,00,000 9,00,000 2] Non Current Liabilities 3] Current Liabilities [a] Trade Payables Creditors 7,92,000 4,50,000 Bills Payables 2,88,000 4,05,000 [b] Tax provisions 1,80,000 4,95,000 TOTAL 36,00,000 45,00,000 [II] Assets 1] Non current Assets Fixed Assets [a] Tangible Assets Machinery 10,80,000 22,05,000 32  Vehicles 9,00,000 9,45,000 2] Current Assets [a] Inventories 7,20,000 6,75,000 [b] Trade Receivables 5,40,000 4,50,000 [c] Cash & cash equivalents 3,60,000 2,25,000 TOTAL 36,00,000 45,00,000 SUM 10 Find Trend Percentage table of MNO Ltd. : Particulars 2020-21 ₹ 2021-22 ₹ 2022-23 ₹ [I] Equity & Liabilities 1] Shareholders’ Fund [a] Share Capital Equity share Capital 12,80,000 12,80,000 16,00,000 Pref. Share Capital 3,20,000 3,20,000 3,20,000 16,00,000 16,00,000 19,20,000 [b] Reserves & Surplus General Reserve 48,000 64,000 80,000 Profit & Loss a/c 2,88,000 2,56,000 1,34,400 3,36,000 3,20,000 2,14,400 2] Non Current Liabilities Debentures 2,40,000 2,40,000 7,20,000 3] Current Liabilities [a] Trade Payables Creditors 5,12,000 3,20,000 2,24,000 Bills Payables 3,10,400 4,41,600 32,000 [b] Tax provisions 48,000 32,000 86,400 [c] Pre –received Income 9,600 6,400 9,600 [d] Other Current Liabilities 32,000 19,200 22,400 9,12,000 8,19,200 3,74,400 TOTAL 30,88,000 29,79,200 32,28,800 [II] Assets 1] Non current Assets [i] Fixed Assets [a] Tangible Assets Land & Buildings 2,17,600 2,01,600 3,42,400 Machinery 10,30,400 9,40,800 16,03,200 Furniture & Fixtures 99,200 83,200 1,31,200 13,47,200 12,25,600 20,76,800 33  [ii] Non Current Investments 2,56,000 80,000 16,000 2] Current Assets [a] Inventories 3,68,000 5,12,000 4,16,000 [b] Cash & cash equivalents 70,400 3,77,600 32,000 [c] Trade Receivables Debtors 6,65,600 5,44,000 4,80,000 Bills Receivables 1,02,400 1,28,000 1,44,000 3] Other Current Asset 2,78,400 1,12,000 64,000 TOTAL 30,88,000 29,79,200 32,28,800 SECTION E HOMEWORK QUESTIONS SUM 1 From the below given information of a company Calculate various Ratios : Particulars Details/Amount Total sales [ out of which Cash sales is 20%] 8,00,000 Equity Share Capital 2,50,000 15% Debentures 2,00,000 Cost of Goods Sold 6,50,000 Debenture discount 5,000 Net profit [ after 50% tax] 40,000 Retained Earnings 52,000 Sundry Debtors 85,000 Preliminary expenses 20,000 [A] From above information find Operating ratio ? [B] From above information find Debtors’ ratio [360 days of the year] ? [C] From the above information find Rate of Return on Total Capital Employed ? [D] From the above information find Rate of Return on Shareholders’ Fund ? SUM 2 Operating ratio of a company is 80%. Its sale is ₹ 20,00,000. Sales return is ₹ 2,00,000. If operating expenses are ₹ 1,00,000, find out cost of goods sold SUM 3 If Sales is ₹ 5,00,000 ,Gross profit Ratio is 30% & Net Profit Ratio is 20% , find Operating Expenses ? SUM 4 Debtors of Amar Ltd. are of ₹ 60,000 and Bills receivables are of ₹ 4,000. If total sales is ₹ 7,30,000 in which 4/5th is credit sales. Find out the Debtors’ ratio(Working days 365) 34 SUM 5 Sales of A Ltd. during the year is ₹ 8,50,000, Gross Profit is ₹ 40,000, Closing stock is ₹ 2,10,000, Opening stock is ₹1,30,000. Calculate Stock turnover SUM 6 If Stock Turnover Ratio is 10 Times , Opening Stock is ₹ 3,70,000 , Closing Stock is ₹ 3,00,000 & Adjusted Purchase is 67% of Sales , Find Cost of Goods Sold ? SUM 7 If Stock Turnover Ratio is 10 Times , Opening Stock is ₹ 3,70,000 , Closing Stock is ₹ 3,00,000 & Adjusted Purchase is 67% of Sales , Find Sales ? SUM 8 Stock turnover is 4 times, Opening stock is ₹ 2,500 less than closing stock. Average stock is ₹ 11,250. Find Purchase SUM 9 From below given details calculate stock turnover Ratio : Opening stock 58,000 Purchase 4,84,000 Sales 6,40,000 Gross Profit 33 1/3% on cost SUM 10 The Balance sheet of PQR Ltd. as on 31-3-2023 is as follows : Liabilities ₹ Assets ₹ Equity share capital 30,00,000 Fixed assets 39,02,000 8% Pref. share capital 10,00,000 Stock of finished goods 2,00,000 12% Debentures 2,00,000 Stock of raw materials 1,20,000 Retained earnings 5,00,000 Marketable investments 26,000 Bank overdraft 20,000 Debtors 8,30,000 Other current Advance to staff 8,000 Liabilities 4,80,000 Cash on hand 8,000 Cash at bank 6,000 Underwriting commission 1,00,000 52,00,000 52,00,000 Additional information : (1) Total credit sales (83% of the total sales) ₹ 49,80,000 (2) Rate of gross profit is 32% (3) Net profit (Before interest and 35% taxes) ₹ 10,12,000 (4) Opening stock (Finished and raw materials) ₹ 12,80,000 (5) Total working days are 300 35  Calculate the following ratio : Liquid ratio Interest coverage ratio Debtors ratio Stock turnover ratio Proprietary ratio Net profit ratio Long term funds and fixed assets ratio Return on equity share capital SUM 11 Following are the Balance Sheet and Profit & Loss a/c summary of IPL Ltd. for the year 2017-18. Calculate below asked various ratios assuming year consist of 300 days. Current Ratio Liquid Ratio Debtors’ Ratio Stock Turnover Ratio Gross Profit Ratio Net Profit Ratio Operating Ratio Proprietary Ratio Balance Sheet of IPL Ltd as on 31-3-2023 Liabilities Amount ₹ Assets Amount ₹ Equity Share Capital 1,50,000 Plant & Machinery 1,80,000 General Reserve 1,20,000 Land & Building 1,50,000 Profit & Loss a/c 45,000 Inventories 45,000 10% Debentures 1,50,000 Debtors 75,000 Creditors 60,000 Cash 45,000 Outstanding Expenses 45,000 Bills Receivables 45,000 Preliminary Expenses 30,000 5,70,000 5,70,000 Summarized Profit & Loss a/c Particulars Amount ₹ Sales [All Credit] 5,40,000 Less : Cost of goods sold Opening Stock 75,000 Purchases 3,15,000 (-) Closing Stock (45,000) (3,45,000) Gross Profit 1,95,000 Administration Expenses 69,000 Selling Expenses 30,000 (99,000) Add : Profit on sale of Fixed Assets 9,000 Net Profit 1,05,000 36 SUM 12 The Following is the Balance Sheet of ABC Ltd. As on 31-3-2023 Liabilities ₹ Assets ₹ Equity Share Capital 5,00,000 Fixed Assets 10,80,000 10% Preference Share Capital 2,00,000 Stock 1,85,000 Reserves 2,40,000 Debtors 1,00,000 10% Debentures 3,00,000 Cash Balance 15,000 Bank Overdraft 60,000 Prepaid Balance 20,000 Creditors 90,000 Bills Payable 10,000 14,00,000 14,00,000 Additional Information Total Sales ( Cash Sales are 4/5th of Credit Sales) ₹ 27,00,000 Gross Profit ₹ 8,10,000 Net Profit(Before interest and Tax, Tax rate 50%) ₹5,70,000 Stock as on 1-4-2022 ₹ 1,30,000 From the above information calculate (1) Current Ratio (2) Stock Turnover Ratio (3) Debtors Ratio (300 Days) SUM 13 The information given below is taken from the financial records of RDX Company Ltd. Particulars ₹ Total Sales (out of which 20% are cash sales) 12,80,000 Cost of Goods sold 8,96,000 Net profit after 50% tax 64,000 Equity Share Capital 4,00,000 Retained Earnings 99,200 15% Debentures 3,20,000 Sundry Creditors 1,40,000 Bank Overdraft 36,000 Fixed Assets 6,40,000 Stock 1,28,000 Debtors 1,60,000 Cash 64,000 Preliminary expenses 3,200 From the above information, Calculate the following ratios Current Ratio Debtor’s ratio (360 Days) Operating Ratio Rate of return on shareholders’ fund 37 SUM 14 The following is the Balance sheet of OMR Limited Liabilities ₹ Assets ₹ Equity share capital of ₹ 100each 2,00,000 Fixed Assets 7,00,000 Less : Depreciation 10% Pref. shares of ₹ 100 each 1,00,000 Stock 3,00,000 Reserves 4,00,000 Debtors 80,000 6% Debentures 2,00,000 Cash 20,000 Current Liabilities 1,60,000 Unpaid Expenses 40,000 11,00,000 11,00,000 Net Profit I ₹ 600,0000. From the above information calculate Acid – Test Ratio Proprietary Ratio Long term funds to Fixed Assets Ratio Earnings per share SUM 15 : On the basis of following data of XYZ Ltd. ,Prepare Common size table of the Company: Particulars 2021-22 ₹ 2022-23 ₹ [I] Equity & Liabilities 1] Shareholders’ Fund [a] Share Capital Equity share Capital 6,40,000 8,00,000 Pref. Share Capital 1,60,000 1,60,000 8,00,000 9,60,000 [b] Reserves & Surplus General Reserve 32,000 40,000 Profit & Loss a/c 1,28,000 60,000 1,60,000 1,00,000 2] Non Current Liabilities Debentures 2,00,000 4,00,000 3] Current Liabilities [a] Trade Payables Creditors 1,60,000 80,000 Bills Payables 2,40,000 20,000 [b] Tax provisions 16,000 22,000 [c] Other Current Liabilities 24,000 18,000 4,40,000 1,40,000 TOTAL 16,00,000 16,00,000 [II] Assets 38  1] Non current Assets [i] Fixed Assets [a] Tangible Assets Land & Buildings 1,60,000 3,00,000 Machinery 4,00,000 6,00,000 Furniture & Fixtures 40,000 1,00,000 6,00,000 10,00,000 [ii] Non Current Investments 40,000 80,000 2] Current Assets [a] Inventories 2,60000 2,20,000 [b] Trade Receivables Debtors 4,00,000 2,40,000 Bills Receivables 60,000 12,000 3] Other Current Asset 80,000 32,000 [c] Cash & cash equivalents 1,60,000 16,000 TOTAL 16,00,000 16,00,000 39 Above work is a compilation form various Reference Books on Management Accounting , Online sources/Websites and Study Materials prepared by Professional Exam conducting Institutes. List of References : Author/ Study Material Source Publication N. S. Zad Taxman Ravi M. Kishore Taxman M. Y. KHAN & P. K. JAIN Mcg raw Hills Education Study Material of ICAI ICAI Study Material of ICSI ICSI 40