CA INTER FINANCIAL MANAGEMENT

1 RATIO ANALYSIS

Question 1
Based on the following particulars, PREPARE a balance sheet showing various assets and
liabilities of T Ltd.

Fixed assets turnover ratio 8 times

Capital turnover ratio 2 times
Inventory Turnover 8 times
Receivable turnover 4 times
Payable turnover 6 times
GP Ratio 25%
Gross profit during the year amounts to ` 8,00,000. There is no long-term loan or
overdraft. Reserve and surplus amount to ` 2,00,000. Ending inventory of the year is
` 20,000 above the beginning inventory.

Answer:
Gross Profit
(a) G.P. ratio =
Sales

Gross Profit
Sales = × 100
25

8,00,000
× 100 = 32,00,000
25

(b) Cost of Sales = Sales – Gross profit

= ` 32,00,000 - ` 8,00,000
= ` 24,00,000

Sales
(c) Receivable turnover r =
Receivables
=4

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= Receivables = Sales
4

` 32,00,000
= 4 = ` 8,00,000

(d) Fixed assets turnover = Cost of Sales = 8

Fixed Assets

Cost of Sales ` 24,00,000

= Fixed assets = = = ` 3,00,000
Fixed Assets 8

Cost of Sales
(e) Inventory turnover = =8
Average Stock

Average Stock = Cost of Sales = ` 24,00,000 = ` 3,00,000

Average Stock 8

Opening Stock + Closing Stock

Average Stock =
2

Opening Stock + Closing Stock + 20,000

Average Stock =
2
Average Stock = Opening Stock + ` 10,000
Opening Stock = Average Stock - ` 10,000
= ` 3,00,000 - ` 10,000
= ` 2,90,000
Closing Stock = Opening Stock + ` 20,000
= ` 2,90,000 + ` 20,000
= ` 3,10,000

Purchase
(f) Payable turnover = =2
Capital Emploayed
Purchases = Cost of Sales + Increase in Stock
= ` 24,00,000 + ` 20,000 = ` 24,20,000
Purchase
Payables =
6

24,20.000
=
2
= 12,00,000

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Cost of Sales
(g) Capital turnover = =2
Capital Emploayed

Cost of Sales 24,20.000

Capital Employed = =2= = 12,00,000
Capital Emploayed 2

(h) Capital = Capital Employed – Reserves & Surplus

= ` 12,00,000 – ` 2,00,000 = ` 10,00,000

Baance Sheet of T Ltd as on.............

Liabilities Amount (`) Assets Amount (`)
Capital 10,00,000 Fixed Assets 3,00,000
Reserve & Surplus 2,00,000 Inventories 3,10,000
Payables 4,03,333 Receivables 8,00,000
Other Current Assets 1,93,333
16,03,333 16,03,333

Question 2
Following information relate to a concern:

Debtors Velocity 3 months

Credits Velocity 2 months
Stock Turnover Ratio 1.5
Gross Profit Ratio 25%
Bills Receivables ` 25,000
Bills Payables ` 10,000
Gross Profit ` 4,00,000
Fixed Assets to turnover Ratio 4

Closing stock of the period is ` 10,000 above the opening stock. CALCULATE
(i) Sales and cost of goods sold
(ii) Sundry Debtors
(iii) Sundry Creditors
(iv) Closing Stock
(v) Fixed Assets

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Answer:
(i) Determination of Sales and Cost of goods sold:
Gross Profit
Gross Profit Ratio = × 100
Sales
Or
25 4,00,000
100 = Sales

4,00,000
Sales = = ` 16,00,000
25

Cost of Goods Sold = Sales – Gross Profit

= ` 16,00,000 - ` 4,00,000
= ` 12,00,000

(ii) Determination of Sundry Debtors:

Debtors velocity is 3 months or Debtors’ collection period is 3 months,
12 month
So, Debtors’ turnover ratio = =4
3 month
Debtors’ turnover ratio = Credits Sales
Average Accounts Receivable

` 16,00,000
= =4
Bills Receivable + Sundry Debtors

Or,
Sundry Debtors + Bills Receivable = ` 4,00,000
Sundry Debtors = ` 4,00,000 – ` 25,000
= ` 3,75,000

(iii) Determination of Sundry Creditors:

Creditors velocity of 2 months or credit payment period is 2 months
12 month
So, Creditors’ turnover ratio = 3 month = 6

Credits Sales
Creditors turnover ratio =
Average Accounts Receivable

` 12,10,000
= =6
Sundry Creditors + Bills Payables
So, Sundry Creditors + Bills Payable = ` 2,01,667

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Or,
Sundry Creditors + ` 10,000 = ` 2,01,667
Or, Sundry Creditors = ` 2,01,667 – ` 10,000
= ` 1,91,667

(iv) Closing Stock

Stock Turnover Ratio
Cost of Goods Sold ` 12,00,000
= = = 1.5
Average Stock Average Stock

So, Average Stock = ` 8,00,000

Opening Stock + Closing Stock
Now Average Stock =
2

Opening Stock + ` 10,000

= = ` 8,00,000
2
Or, Opening Stock = ` 7,95,000
So, Closing Stock = ` 7,95,000 + ` 10,000 = ` 8,05,000

(v) Calculation of Fixed Assets

Cost of Goods Sold
Fixed Assets Turnover Ratio = =4
Fixed Assets

` 12,00,000
Or = = 4 Or, Fixed Asset = ` 3,00,000
Fixed Assets

Workings:
*Calculation of Credit purchases:
Cost of goods sold = Opening stock + Purchases – Closing stock ` 12,00,000
= ` 7,95,000 + Purchases – ` 8,05,000
` 12,00,000 + ` 10,000 = Purchases ` 12,10,000 = Purchases (credit).

Assumption:
(i) All sales are credit sales
(ii) All purchases are credit purchase
(iii) Stock Turnover Ratio and Fixed Asset Turnover Ratio may be calculated either on
Sales or on Cost of Goods Sold.

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Question 3
Using the following information, PREPARE and complete the Balance Sheet given below:
(i) Total debt to net worth 1:2
(ii) Total assets turnover 2
(iii) Gross profit on sales 30%
(iv) Average collection period (Assume 360 days in a year) 40 days
(v) Inventory turnover ratio based on cost of goods sold & year-end inventory 3
(vi) Acid test ratio 0.75

Balance Sheet as on
Liabilities ` Assets `
Equity Shares Capital 4,00,000 Plant & Machinery & other Fixed Assets 4,25,000
Reserves and Surplus 6,00,000 Current Assets:
Total Debt: Inventory 7,00,000
Current Liabilities 5,00,000 Debtors 3,33,333
Cash 41,667
15,00,000 15,00,000

Answer:
Net worth = Capital + Reserves and surplus
= 4,00,000 + 6,00,000
= ` 10,00,000
∴ Total debt = ` 5,00,000
Total Liability side = ` 4,00,000 + ` 6,00,000 + ` 5,00,000
= ` 15,00,000
Total Debit
Total Assets =
Networth

` Total debt = ` 5,00,000

Total Liability side = ` 4,00,000 + ` 6,00,000 + ` 5,00,000
= ` 15,00,000
= Total Assets

Sales
Total Assets Turnover =
Total assets

Sales
2 =
` 1,50,00,000
∴ Sales = ` 30,00,000 Gross Profit on Sales: 30% i.e. ` 9,00,000

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∴ Cost of Goods Sold (COGS) = ` 30,00,000 – ` 9,00,000

= ` 21,00,000

COGS ` 21,00,000
Inventory turnover = =3=
Inventory Inventory
∴ Inventory = ` 7,00,000

Avrage debtors
Average collection period = Salse /day

Debtors
40 =
` 30,00,000/360
Debtors = ` 3,33,333.

Current Assets – Stock (Quick Assett)

Acid test ratio =
Current liabilitis

Current Assets – ` 7,00,000

0.70 =
` 5,00,000

∴ Current Assets = ` 10,75,000.

∴ Fixed Assets = Total Assets – Current Assets
= ` 15,00,000 – ` 10,75,000
= ` 4,25,000

Cash and Bank Balance = Current Assets – Inventory – Debtors

= ` 10,75,000 – ` 7,00,000 – ` 3,33,333
= ` 41,667

Balance Sheet as on March 31, 20X8

Liabilities ` Assets `
Equity Share Capital 4,00,000 Plant and Machinery and other
Fixed Assets 4,25,000
Reserves & Surplus 6,00,000 Current Assets:
Total Debt: Inventory 7,00,000
Current liabilities 5,00,000 Debtors 3,33,333
Cash 41,667
15,00,000 15,00,000

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Question 4
The following accounting information and financial ratios of A & R Limited relate to the
year ended 31st March, 2020:
Inventory Turnover Ratio 6 Times
Creditors Turnover Ratio 10 Times
Debtors Turnover Ratio 8 Times
Current Ratio 2.4
Gross Profit Ratio 25%
Total sales ` 6,00,00,000; cash sales 25% of credit sales; cash purchases ` 46,00,000;
working capital ` 56,00,000; closing inventory is ` 16,00,000 more than opening inventory.

You are required to CALCULATE:

(i) Average Inventory
(ii) Purchases
(iii) Average Debtors
(iv) Average Creditors
(v) Average Payment Period
(vi) Average Collection Period
(vii) Current Assets
(viii) Current Liabilities.
Take 365 days a year

Answer:
(i) Computation of Average Inventory
Gross Profit = 25% of ` 6,00,00,000
= ` 1,50,00,000

Cost of goods sold (COGS) = Sales - Gross Profit

= ` 6,00,00,000 – ` 1,50,00,000
= ` 4,50,00,000

CPGS
Inventory Turnover Ratio =
Average inventory

` 4,50,000,000
6 =
Average inventory
Average inventory = ` 75,00,000

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Computation of Purchases
Purchases = COGS + (Closing Stock – Opening Stock)
= ` 4,50,00,000 + 16,00,000*
Purchases = ` 4,66,00,000

* Increase in Stock = Closing Stock – Opening Stock

= ` 16,00,000

Computation of Average Debtors

25
Let Credit Sales be ` 100, Cash sales = × 100 = ` 25
100
Total Sales = 100 + 25 = ` 125

Total sales are ` 125 credit sales is ` 100

` 6,00,00,000
If total sales is ` 6,00,00,000, then credit sales is = × 100
125
Credit Sales = ` 4,80,00,000
Cash Sales = (` 6,00,00,000 – ` 4,80,00,000)
= ` 1,20,00,000

Net credit sales

Debtors Turnover Ratio = =8
Average Debtors

` 4,80,00,000
= =8
Average Debtors

` 4,80,00,000
Average Debtors = 8
Average Debtors = ` 60,00,000

(ii) Computation of Average Creditors

Credit Purchases = Purchases – Cash Purchases
= ` 4,66,00,000 – ` 46,00,000
= ` 4,20,00,000

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Credit Purcheses
Creditors Turnover Ratio =
Average Creditors

` 4,20,00,000
10 =
Average Creditors

Average Creditors = ` 42,00,000

(iii) Computation of Average Payment Period

Average Payment Period = Average creditors

Average Daily Credit Purchases
` 42,00,000 ` 42,00,000
= Credit Purchases = ` 4,20,00,0000
365 365
` 42,00,0000
= × 365 = 36.5 days
` 4,20,00,000
Alternatively,
365
Average Payment Period = Creditors Turnover Ratio
365
= = 36.5 days
10

(iv) Computation of Average Collection Period

Average Debtors
Average Collection Period= × 365
Net Credit Sales

` 60,00,000
= × 365 = 45.625 days
` 4,80,00,000

Alternatively,

Average collection period = 365

Debtors Turnover Ratio

= 365 = 45.625 days

8

(v) Computation of Current Assets

Current Assets (CA)=

Current Ratio =
CurrentLiabilities (CL)
2.4 Current Liabilities = Current Assets

CA
Or CL =
2.4

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Further, Working Capital = Current Assets – Current Liabilities

CA
So, ` 56,00,000 = CA –
2.4

1.4 CA
` 56,00,000 = = Or, 1.4 CA = ` 1,34,40,000
2.4
CA = ` 96,00,000

(vi) Computation of Current Liabilities

Current liabilities
` 96,00,000
= = ` 40,00,000
2.4

Question 5
Using the information given below, PREPARE the Balance Sheet of SKY Private Limited:
(i) Current ratio 1.6 :1
(ii) Cash and Bank balance 15% of total current assets
(iii) Debtors turnover ratio 12 times
(iv) Stock turnover (cost of goods sold) ratio 16 times
(v) Creditors turnover (cost of goods sold) ratio 10 times
(vi) Gross profit ratio 20%
(vii) Capital gearing ratio 0.6
(viii) Depreciation rate 15% on W.D.V.
(ix) Net fixed Assets 20% of total assets
(Assume all purchase and sales are on credit)
Balance Sheet of SKY Private Limited as at 31.03.2020
Liabilities Amount in ` Assets Amount in `
Share Capital 25,00,000 Fixed assets
Reserve & surplus ? Opening WDV ?
12% Long term debt ? Less: Depreciation ? ?

Current liabilities Current Assets

Creditors ? Stock ?
Provisions expenses outstanding Debtors ?

? 68,50,000
Cash & bank balance ? ?
Total ? Total ?

(Detailed working notes are not required to be shown)

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Answer:
Working Notes:
1. Computation of Current Assets and Cash & Bank Balance
Current Assets(CA)
Current Ratio =
Current Lia bilities (CL)

Current Assets = 1.6 Current Liabilities

= 1.6 × ` 68,50,000
= ` 1,09,60,000/-
So, Cash and Bank
Balance = 15% of Current Assets = ` 16,44,000
2. Computation of Total Assets, Fixed assets and Depreciation
Total Assets = Net Fixed assets + Current Asset
Or,
Total Assets = 20% of Total Asset + ` 1,09,60,000
Or,
Total Assets = ` 1,37,00,000
So, Net Fixed assets = 20% of Total Asset = ` 27,40,000

Depreciation = 27,40,000 x 15% = ` 4,83,529

Fixed Assets = ` 27,40,000 + ` 4,83,529
= ` 32,23,529

3. Calculation of stock, Debtors and Creditors

Stock + Debtors = Current Assets – Cash & Bank
= ` 1,09,60,000 – ` 16,44,000
= ` 93,16,000

Now, let Sales be x

Cresdit Sales X
So, Debtors (Credit Sales) = =
Debit turnover ratio 12

Sales – 20% of Sales

= Further, Stock (on Cost of Goods Sold) =
16

X – 220% of X
=
16

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X 4X
X– 5 X
= 5 = = 20
16 16

X X
So = +
12 20

Or = 10X + 6X = ` 93,16,000
120

Or = 16X = ` 93,16,000
120

Or, x = ` 6,98,70,000 So, Sales = ` 6,98,70,000

Cash of Goods Sold (COGS) = ` 5,58,96,000 Stock (COGS/16)
= ` 34,93,500
Debtors (Sales/12) = ` 58,22,500
Creditors (COGS/10) = ` 55,89,600

4. Calculation of Provision of outstanding Expenses

= ` 68,50,000 – ` 55,89,600
= ` 12,60,400

5. Share Capital + Reserve of surplus + long term debt

= Total Asset Or total liability – Current liability
Or,
Reserve & surplus + long term debt
= ` 1,37,00,000 – 68,50,000 – 25,00,000
= ` 43,50,000

Calculation of long term Debt and Reserve & Surplus Now, Capital Earning ratio = 0.6
12% long term Debt
So, = = 0.6
Equity Share Capital + Reserve & Surplus

43,50,000 – Reserve & Surplus

Or = 25,00,000 + Reserve & Surplus = 8

Or, Reserve & Surplus = ` 17,81,250

So, 12% long term debt = ` 25,68,750

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Balance Sheet of SKY Private Limited as at 31.03.2020

Liabilities ` Assets `
Share Capital 25,00,000 Fixed assets
Reserve & Surplus 17,81,250 Opening WDV 32,23,529
12% Long term debt 25,68,750 Less: Depreciation 4,83,529 27,40,000

Current Liabilities

Creditors 55,89,600 Current Assets

Provisions & outstanding Stock 34,93,500

expenses 12,60,400 68,50,000

Debtors 58,22,500
Cash and bank balance 16,44,000 1,09,60,000

Total 1,37,00,000 1,37,00,000

Question 6
XYZ Ltd. has Owner’s equity of ` 2,00,000 and the ratios of the company are as follows:
Current debt to total debt 0.3
Total debt to Owner's equity 0.5

Fixed assets to Owner’s equity 0.6

Total assets turnover Inventory 2 times
Inventory turnover 10 times

COMPLETE the following Balance Sheet from the information given above:
Liabilities (`) Assets (`)
Current Debt - Cash -
Long-term Debt - Inventory -
Total Debt - Total Current Assets -
Owner’s Equity - Fixed Assets -

Answer:
Balance Sheet
Liabilities (`) Assets (`)
Current debt 30,000 Cash (balancing figure) 1,20,000
Long term debt 70,000 Inventory 60,000
Total Debt 1,00,000 Total Current Assets 1,80,000
Owner’s Equity 2,00,000 Fixed Assets 1,20,000
Total liabilities 3,00,000 Total Assets 3,00,000

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Workings:
Total debt = 0.50 x Owner’s Equity
= 0.50 x ` 2,00,000
= ` 1,00,000
Further, Current debt to Total debt = 0.30
So, Current debt = 0.30 × ` 1,00,000
= ` 30,000 Long term debt
= ` 1,00,000 - ` 30,000
= ` 70,000

2. Fixed assets = 0.60 × Owner’s Equity

= 0.60 × ` 2,00,000
= ` 1,20,000

3. Total Liabilities = Total Debt + Owner’s Equity

= ` 1,00,000 + ` 2,00,000
= ` 3,00,000

Total Assets = Total Liabilities = ` 3,00,000

Total assets to turnover = 2 Times; Inventory turnover = 10 Times

Inventory 2 1
Hence, = =
Total assets 10 5

` 3,00,000
Therefore, Inventory = = ` 60,000
5

Question 7
(a) ABC Ltd. has total sales of 10,00,000 all of which are credit sales. It has a gross
profit ratio of 25% and a current ratio of 2. The company’s current liabilities are
` 2,00,000. Further, it has inventories of ` 80,000, marketable securities of
` 50,000 and cash of ` 30,000. From the above information:
(b) CALCULATE the average inventory, if the expected inventory turnover ratio is three
times?
(c) Also CALCULATE the average collection period if the opening balance of debtors is
expected to be ` 1,50,000.
(d) Assume 360 days a year.

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Answer :
I. Calculation of Average Inventory
Since gross profit is 25% of sales, the cost of goods sold should be 75% of the sales.
75
Cost of goods sold = 10,00,000 × = 75,00,000
100

Cost of goods sold

Inventory Turnover =
Average Iventory

7,50,000
3 =
Average Iventory

7,50,000
Average Inventory= = 2,50,000
3

II. Calculation of Average Collection Period

Average debetors
Average Collection Period= × 360
Credits Sales

Opening Debtors + Closing Debtors

Where, Average Debtors =
2

Calculation of Closing balance of debtors

` `
Current Assets (2 x 2,00,000) 4,00,000
Less: Inventories 80,000

Marketable Securities 50,000

Cash 30,000 1,60,000

Debtors Closing Balance 2,40,000

1,50,00,00 + 2,40,000
Now, Average Debtors = = 1,95,000
2

1,95,000
So, Average Collection Period= = x 360 = 70.2 Or 70 days
10,00,000

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Question 8
Jensen and spencer pharmaceutical is in the business of manufacturing pharmaceutical
drugs including the newly invented Coved vaccine. Due to increase in demand of Coved
vaccines, the production had increased at all-time high level and the company urgently
needs a loan to meet the cash and investment requirements. It had already submitted
a detailed loan proposal and project report to Expo-Imp bank, along with the financial
statements of previous three years as follows:
Statement of Profit and Loss (In ` ‘000)
2018-19 2019-20 2020-21
Sales
Cash 400 960 1,600
Credit 3,600 8,640 14,400
Total sales 4,000 9,600 16,000
Cost of goods sold 2,480 5,664 9,600
Gross profit 1,520 3,936 6,400
Operating expenses:
General, administration, and selling expenses 160 900 2,000
Depreciation 200 800 1,320
Interest expenses (on borrowings) 120 316 680
Profit before tax (PBT) 1,040 1,920 2,400
Tax @ 30% 312 576 720
Profit after tax (PAT) 728 1,344 1,680
BALANCE SHEET
2018-19 2019-20 2020-21
Assets
Non-Current Assets
Fixed assets (net of depreciation) 3,800 5,000 9,400
Current Assets
Cash and cash equivalents 80 200 212
Accounts receivable 600 3,000 4,200
Inventories 640 3,000 4,500
Total 5,120 11,200 18,312
Equity & Liabilities
Equity share capital (shares of ` 10 each) 2,400 3,200 4,000
Other Equity 728 2,072 3,752
Non-Current borrowings 1,472 2,472 5,000
Current liabilities 520 3,456 5,560
Total 5,120 11,200 18,312

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INDUSTRY AVERAGE OF KEY RATIOS

Ratio Sector Average
Current ratio 2.30:1
Acid test ratio (quick ratio) 1.20:1
Receivable turnover ratio 7 times
Inventory turnover ratio 4.85 times
Long-term debt to total debt 24%
Debt-to-equity ratio 35%
Net profit ratio 18%
Return on total assets 10%
Interest coverage ratio (times interest earned) 10

As a loan officer of Expo-Imp Bank, you are REQUIRED to apprise the loan proposal on
the basis of comparison with industry average of key ratios considering closing balance
for accounts receivable of ` 6,00,000 and inventories of ` 6,40,000 respectively as on
31st March, 2018.

Answer:
(In ` ‘000)
Industry
Ratio Formula 2018-19 2019-20 2020-21
Average
Current Current Assets 1,320 6,200 8,912
2.30:1
ratio Current Liabilities 520 3,456 5,560

= 2.54 = 1.80 = 1.60

Acid test Quick Assets 680 3,200 4,412

ratio (quick 520 3,456 5,560 1.20:1
Current Liabilities
ratio) = 1.31 = 0.93 = 0.79
Receivable Credit Sales 3,600 8,640 14,400
turnover Average Accounts Receivable (600+600) (600+3000) (3000+4,200)/2 7 times
ratio =6 = 4.80 =4
Inventory COGS 2,480 5,664 9,600
4.85
turnover (640+640)/2 (640+3000)/2 (3000+4,500)/2
Average Inventory times
ratio = 3.88 = 3.11 = 2.56
1472 2472 5,000
Long Term Debt ×100 ×100 ×100
Long Term × 100 1992 5,948 10,560 24%
Total Debt
= 73.90% = 41.70% = 47.35%
debt to
total debt

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Debt-to- 1472 2472 5,000

Long Term Debt ×100 ×100 ×100
equity × 100 3,128 5272 7,752 35%
Shareholders’ Equuity
ratio = 73.90% = 4689% = 64.50%
= 47.07%
728 1344 1680
Net profit Net Profit ×100 ×100 ×100
× 100 5,120 9,600 16,000 18%
ratio Sales
= 14.22% = 14% = 10.5%

Return 728 1344 1680

Net Profit after taxes ×100 ×100 ×100
on total × 100 5,120 11,200 18,312 10%
Total asset
assets = 14.22% = 12% = 9.17%

Interest
coverage EBIT 1160 2236 3080
ratio ×100
Interest 120 316 680 10
(times
interest = 9.67% = 7.08 = 4.53
earned)

Conclusion:
In the last two years, the current ratio and quick ratio are less than the ideal ratio (2:1 and
1:1 recpectively) indicating that the company is not having enough resources to meet its
current obligations. Receivables are growing slower. Inventory turnover is slowing down
as well, indicating a relative build-up in inventories or increased investment in stock. High
Long-term debt to total debt ratio and Debt to equity ratio compared to that of industry
average indicates high dependency on long term debt by the company. The net profit ratio
is declining substantially and is much lower than the industry norm. Additionally, though
the Return on Total Asset (ROTA) is near to industry average, it is declining as well.
The interest coverage ratio measures how many times a company can cover its current
interest payment with its available earnings. A high interest coverage ratio means that
an enterprise can easily meet its interest obligations, however, it is declining in the case
of Jensen & Spencer and is also below the industry average indicating excessive use of
debt or inefficient operations.
On overall comparison of the industry average of key ratios than that of Jensen & Spencer,
the company is in deterioration position. The company9s profitability has declined
steadily over the period. However, before jumping to the conclusion relying only on the
key ratios, it is pertinent to keep in mind the industry, the company dealing in with i.e.
manufacturing of pharmaceutical drugs. The pharmaceutical industry is one of the major
contributors to the economy and is expected to grow further. After the coved situation,
people are more cautious towards their health and are going to spend relatively more on
health medicines. Thus, while analyzing the loan proposal, both the factors, financial and
non-financial, needs to be kept in mind.

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Question 9
From the following information, you are required to PREPARE a summarised Balance
Sheet for Rudra Ltd. for the year ended 31st March, 2022
Debt Equity Ratio 1:1
Current Ratio 3:1
Acid Test Ratio 8:3
Fixed Asset Turnover (on the basis of sales) 4
Stock Turnover (on the basis of sales) 6
Cash in hand 5,00,000
Stock to Debtor 1:1
Sales to Net Worth 4
Capital to Reserve 1:2
Gross Profit 20% of Cost
COGS to Creditor 10:1
Interest for entire year is yet to be paid on Long Term loan @ 10%.

Answer:
Balance Sheet of Rudra Ltd.
Liabilities Amount (`) Assets Amount (`)
Capital 10,00,000 Fixed Assets 30,00,000
Reserves 20,00,000 Current Assets:
Long Term Loan @ 10% 30,00,000 Stock in Trade 20,00,000
Current Liabilities: Debtors 20,00,000
Creditors 10,00,000 Cash 5,00,000
Other Short-term Current
2,00,000
Liability (Other STCL)
Outstanding Interest 3,00,000
75,00,000 75,00,000

Working Notes:
Let sales be ` x
Balance Sheet of Rudra Ltd.
Liabilities Amount (`) Assets Amount (`)
x
Capital Fixed Assets
4
Reserves Current Assets:
x x
Net Worth Stock in Trade
4 6

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x x
Long Term Loan @ 10% Debtors
4 6
Cash 5,00,000
Current Liabilities:
x
Creditors
12
Other Short-term
Current Liability
Outstanding Interest
x 5,00,000
Total Current Liabilities +
9 3

TOTAL TOTAL
X
1. Fixed Asset Turnover = 4 =
Fixed Assets

X
Fixed Asset =
4
X
2. Stock Turnover = 6=
Stock

X
Stock =
6

X
3. Sales to net worth = 4=
net worth

X
Net worth =
4

4. Debt : Equity = 1:1

Long term loan 1
=
Net worth 1
x
Long term loan = Net worth =
4

5. Gross Profit to cost = 20%

GP
= 20%
Sales–GP

GP
= 20%
X–GP
GP = 0.2 × –0.2 GP

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1.2 GP = 0.2X
0.2X
GP =
1.2

GP = X
6

x-x
Cost of Goods sold =
6

5
=
6x

6. COGS to creditors = 10:1

CoGs 10
=
Creditors 1
5
X
6 10
=
Creditors 1
5x x
Creditors = =
60 12

Stock
7. =1
Dector
x
Debtor = Stock =
6

8. Current Ratio = 3:1

Stock+Debtors+Cash 3
=
Current Liabilities 1

X X
+ + 5,00,000
6 6
=3
Current Liabilities
X
+5,00,000
3
= CL
3

X 5,00,000
CL = +
9 3

9. CA = 3CL
X 5,00,000
= 3 (= + )
9 3

X
CA = + 5,00,000
3

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10. Net worth + Long Term Loan + Current Liability = Fixed Asset + Current Assets
X X X 5,00,000 X X
+ + = + + 5,00,000
4 4 9 + 3 4 3

X X X 5,00,000
+ – = 5,00,000 –
4 9 3 3
9x+4x–12X 15,00,000 – 5,00,000
=
36 3

X 10,00,000
=
36 3

X = 1,20,00,000

11. Now, from above calculations, we get,

X 1,20,00,000
Fixed Asset = = = 30,00,000
4 4

x 1,20,00,000
Stock = = = 20,00,000
6 6

x 1,20,00,000
Debtor = = = 20,00,000
6 6

x
Net worth = = 30,00,000
4

Now, Capital to Reserve is 1 : 2

Capital = ` 10,00,000
and, Reserve = ` 20,00,000

X
Long Term Loan = = 30,00,000
4

Outstanding Interest = 30,00,000 × 10% = 3,00,000

Creditors = X = 1,20,00,000 = 10,00,000

12 12

Current Liabilities = Creditors + Other STCL + Outstanding Interest

X × 5,00,000 = 10,00,000 + Other STCL + 3,00,000

9 3

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1,20,00,000 + 5,00,000 = 13,00,000 + Other STCL

6 3

15,00,000 = Other STCL + 13,00,000

Other STCL = 2,00,000

Question 10
PI Limited has the following Balance Sheet as on March 31, 2020 and March 31, 2021:
Balance Sheet
Particulars March 31, 2020 March 31, 2021
Sources of Funds:
Shareholders’ Funds 87,500 87,500
Loan Funds 1,22,500 1,05,000
2,10,000 1,92,500
Applications of Funds:
Fixed Assets 87,500 1,05,000
Cash and bank 15,750 14,000
Receivables 49,000 38,500
Inventories 87,500 70,000
Other Current Assets 35,000 35,000
Less: Current Liabilities (64,750) (70,000)
2,10,000 1,92,500

The Income Statement of the PI Ltd. for the year ended is as follows:
Particulars March 31, 2020 March 31, 2021
Sales 7,87,500 8,33,000
Less: Cost of Goods sold (7,30,100) (7,38,500)
Gross Profit 57,400 94,500
Less: Selling, General and Administrative expenses (38,500) (61,250)
Earnings before Interest and Tax (EBIT) 18,900 33,250
Less: Interest Expense (12,250) (10,500)
Earnings before Tax (EBT) 6,650 22,750
Less: Tax (1,995) (6,825)
Profits after Tax (PAT) 4,655 15,925

You are required to CALCULATE for the year 2020-21:

(i) Inventory turnover ratio
(ii) Financial Leverage
(iii) Return on Capital Employed (after tax)

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Answer:
Ratios for the year 2020-21
(i) Inventory turnover ratio

COGS ` 7,38,500
= = = 9.4
Average Inventory ` (87,500+70,00)
2
(ii) Financial leverage
= EBIT ` 33,250
=
EBT ` 22,750 = 1.46

(iii) ROCE
EBIT (1–t) ` 33,250 (1–0.3) ` 23,275
= = = × 100 = 11.56%
Average Capital Employed
` ( 2,10,000+1,92,500
2
( ` 201,250

Question 11
From the following information and ratios, PREPARE the Balance sheet as at 31st March
2022 and lncome statement for the year ended on that date for M/s Ganguly & Co -
Average Stock ` 10 lakh
Current Ratio 3:1
Acid Test Ratio 1:1
PBIT to PBT 2.2:1
Average Collection period (Assume 360 days in a year) 30 days
Stock Turnover Ratio (Use sales as turnover) 5 times
Fixed assets turnover ratio 0.8 times
Working Capital ` 10 lakh
Net profit Ratio 10%
Gross profit Ratio 40%
Operating expenses (excluding interest) ` 9 lakh
Long term loan interest 12%
Tax Nil

Answer:
1. Current Ratio = 3:1

Current Assets (CA)

= 3:1 CA = 3CL
Current Liability (CL)

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WC = 10,00,000
CA – CL = 10,00,000 3CL – CL = 10,00,000
2CL = 10,00,000
10,00,000
CL =
2
CL = ` 5,00,000 CA = 3 x 5,00,000 CA = ` 15,00,000

2. Acid Test Ratio = CA – Stock / CL = 1:1

15,00,000 – Stock
= 5,00,000 =1

15,00,000 – stock = 5,00,000

Stock = ` 10,00,000

3. Stock Turnover ratio (on sales) = 5

Sales
= =5
Avg. Stock

Sales
= = 5 Sales = ` 50,00,000
10,00,000

4. Gross Profit = 50,00,000 x 40% = ` 20,00,000

Net profit (PBT)
= 50,00,000 x 10% = ` 5,00,000

5. PBIT/PBT = 2.2
PBIT = 2.2 x 5,00,000
PBIT = 11,00,000
Interest = 11,00,000 – 5,00,000 = ` 6,00,000

6,00,000
Long term loan = × 50,00,000
0.12

6. Average collection period = 30 days

30
Receivables = × 50,00,000 = 4,16,667
360

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7. Fixed Assets Turnover Ratio = 0.8

50,00,000
= 0.8
Fixed Assets
Fixed Assets = ` 62,50,000
Income Statement
Amount (`)
Sales 50,00,000
Less: Cost of Goods Sold 30,00,000
Gross Profit 20,00,000
Less: Operating Expenses 9,00,000
Less: Interest. 6,00,000
Net Profit 5,00,000
Balance Sheet
Liabilities Amount (`) Assets Amount (`)
Equity share capital 22,50,000 Fixed asset 62,50,000
Long term debt 50,00,000 Current assets:
Current liability 5,00,000 Stock 10,00,000
Receivables 4,16,667
Other 83,333 15,00,000
77,50,000 77,50,000

Question 12
Using the following information, PREPARE the balance sheet:
Long-term debt to net worth 0.25
Total asset turnover 3
Average collection period 9 days
Inventory turnover 13
Gross profit margin 20%
Acid-test ratio 1.5

*Assume a 360-day year and all sales on credit.

Liabilities ` Assets `
Notes and payables 2,50,000 Cash ?
Long-term debt ? Accounts receivable ?
Common stock 8,00,000 Inventory ?
Retained earnings 16,00,000 Plant and equipment ?
Total liabilities and equity ? Total assets ?

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Answer:
Working Notes:
(i) Long term Debt
Long Term Debt
= 0.25
Net worth

Long Term Debt

= 0.25
(8,00,000+16,00,000)
Long term debt = 6,00,000

(ii) Total assets

Total liabilities and Equity = Notes and payables + Long-term debt + Common stock
+ Retained earnings
= 2,50,000 + 6,00,000 + 8,00,000 + 16,00,000
Total assets = Total liabilities and Equity = 32,50,000

(iii) Sales and Cost of Goods sold

Sales Sales
Total asset turnover = 3 = =
Total Assets 32,50,000 Sales

= 97,50,000
Cost of goods sold = (100% - Gross Profit margin) x Sales
= (100% - 20%) x 97,50,000
= 78,00,000.

(iv) Current Assets

COGS 78,00,000
Inventory turnover = 13 = =
Inventory Inventory
Inventory = ` 6,00,000

Receivables Receivables
Average collection period = 9 = × 360 = × 360
Sales 97,50,000
Accounts receivables = 2,43,750

(Cash + Accounts Receivables) (Cash + 2,43,750)

Acid-test ratio = 1.5 = Notes and Payables = 2,50,000 = 1.5
Cash = 1,31,250

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(v) Plant and equipment

= Total Assets - Current Assets
= 32,50,000 - (1,31,250 + 2,43,750 + 6,00,000) = 22,75,000
Balance Sheet
Liabilities ` Assets `
Notes and payables 2,50,000 Cash 1,31,250
Long-term debt 6,00,000 Accounts receivable 2,43,750
Common stock 8,00,000 Inventory 6,00,000
Retained earnings 16,00,000 Plant and equipment 22,75,000
Total liabilities and equity 32,50,000 Total assets 32,50,000

Question 13
Assuming the current ratio of a Company is 2, STATE in each of the following cases whether
the ratio will improve or decline or will have no change:
(i) Payment of current liability
(ii) Purchase of fixed assets by cash
(iii) Cash collected from Customers
(iv) Bills receivable dishonored
(v) Issue of new shares
Answer:
Current Assets (CA)
Current Ratio = = 2 i.e. 2:1
Current Liabilities (CL)
S. Improve / Decline /
Situation Reason
No. No Change
Let us assume CA is ` 2 lakhs & CL is ` 1 lakh.
If payment of Current Liability
= ` 10,000 then, CA = 1,90,000 CL
= 90,000.
Payment of Current Ratio will
(i) Current Ratio = 1,90,000 / 90,000
Current liability improve
= 2.11:1. When Current Ratio is 2:1 Payment of Current
liability will reduce the same amount in the numerator
and denominator.
Hence, the ratio will improve.
Since the cash being a current asset converted into
Purchase of Fixed Current Ratio will
(ii) fixed asset, current assets reduced, thus current ratio
Assets by cash decline
will fall.
Cash collected Current Ratio will Cash will increase and Debtors will reduce.
(iii)
from Customers not change Hence No Change in Current Asset.
Bills Receivable Current Ratio will Bills Receivable will come down and debtors will
(iv)
dishonored not change increase. Hence no change in Current Assets.
Issue of New Current Ratio will As Cash will increase, Current Assets will increase and
(v)
Shares improve current ratio will increase.

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Question 14
From the following table of financial ratios of Prabhu Chemicals Limited, comment on
various ratios given at the end:
Average of
Ratios 2021 2022
Chemical Industry
Liquidity Ratios
Current ratio 2.1 2.3 2.4
Quick ratio 1.4 1.8 1.4
Receivable turnover ratio 8 9 8
Inventory turnover 8 9 5
Receivables collection period 46 days 41 days 46 days
Operating profitability
Operating income – ROI 24% 21% 18%
Operating profit margin 18% 18% 12%
Financing decisions
Debt ratio 45% 44% 60%
Return
Return on equity 26% 28% 18%

COMMENT on the following aspect of Prabhu Chemicals Limited

(i) Liquidity
(ii) Operating profits
(iii) Financing
(iv) Return to the shareholders

Answer:
Ratios Comment
Current ratio has improved from last year and matching the
industry average.
Quick ratio also improved than last year and above the
industry average.
The reduced inventory levels (evidenced by higher inventory
Liquidity
turnover ratio) have led to better quick ratio in FY 2022
compared to FY 2021.
Further the decrease in current liabilities is greater than the
collective decrease in inventory and debtors as the current
ratio have increase from FY2021 to FY 2022.

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Operating Income-ROI reduced from last year, but Operating

Profit Margin has been maintained. This may happen due to
Operating Profits
decrease in operating cost. However, both the ratios are still
higher than the industry average.

The company has reduced its debt capital by 1% and saved

earnings for equity shareholders. It also signifies that
Financing
dependency on debt compared to other industry players
(60%) is low.

Prabhu’s ROE is 26 per cent in 2021 and 28 per cent in 2022

Return to the
compared to an industry average of 18 per cent. The ROE is
shareholders
stable and improved over the last year.

Question 15
MT Limited has the following Balance Sheet as on March 31, 2019 and March 31, 2020:
Balance Sheet
` in lakhs
March 31, 2019 March 31, 2020
Sources of Funds:
Shareholders’ Funds 2,500 2,500
Loan Funds 3,500 3,000
6,000 5,500
Applications of Funds:
Fixed Assets 3,500 3,000
Cash and bank 450 400
Receivables 1,400 1,100
Inventories 2,500 2,000
Other Current Assets 1,500 1,000
Less: Current Liabilities (1,850) (2,000)
6,000 5,500

The Income Statement of the MT Ltd. for the year ended is as follows:
` in lakhs
March 31, 2019 March 31, 2020
Sales 22,500 23,800
Less: Cost of Goods sold (20,860) (21,100)
Gross Profit 1,640 2,700
Less: Selling, General and Administrative expenses (1,100) (1,750)

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Earnings before Interest and Tax (EBIT) 540 950

Less: Interest Expense (350) (300)
Earnings before Tax (EBT) 190 650
Less: Tax (57) (195)
Profits after Tax (PAT) 133 455

Required:
CALCULATE for the year 2019-20
(a) Financial Leverage
(b) Return on Capital Employed (ROCE)
(c) Return on Equity (ROE)
(d) Average Collection period. [Take 1 year = 365 days]

Answer:
Ratios for the year 2019-2020
(a) Inventory turnover ratio

COGS
=
Average Inventory
` 21,100
= = 9.4
`(2,500 + 2,000)
2

(b) Financial Leverage

EBIT `950
= = = 1.46
EBT `650

(c) ROCE
EBIT(1 - t)
=
Average Capital Employed
` 950(1 – 0.3)
=
( 6,000 + 5,500
2
(
`665
= x100 = 11.56%
`5,750

[Here Return on Capital Employed (ROCE) is calculated after Tax]

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(d) ROE
Profits after tax
=
Average Shareholders/funds

`455
= `2,500 x 100 = 18.2%

(e) Average Collection Period

`23,800
Average Sales per day = = ` 65.20 Lakhs
365
Average Receivables
Average Collection Period = Average Sales per day

`(1,400 + 1,100)
2 `1,250
= = `65.2 = 19.17 days
`65.2

Question 16
Given below are the estimations for the next year by Niti Ltd.:
Particulars (` in crores)
Fixed Assets 5.20
Current Liabilities 4.68
Current Assets 7.80
Sales 23.00
EBIT 2.30

The company will issue equity funds of ` 5 crores in the next year. It is also considering
the debt alternatives of ` 3.32 crores for financing the assets. The company wants to
adopt one of the policies given below:

(` in crores)
Financing Policy Short term debt @ 12% Long term debt @ 16% Total
Conservative 1.08 2.24 3.32
Moderate 2.00 1.32 3.32
Aggressive 3.00 0.32 3.32

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Assuming corporate tax rate at 30%, CALCULATE the following for each of the financing policy:
(i) Return on total assets
(ii) Return on owner’s equity
(iii) Net Working capital
(iv) Current Ratio
Also advise which Financing policy should be adopted if the company wants high returns.

Answer:
(i) Return on total assets
EBIT(1 –T)
Return on total assets = Total assets (FA + CA)

`2.30 Crores(1–0.3) `1.61 Crores

= = = 0.1238 or 12.38%
`5.20 Crores + ` 7.80 Crores ` 13 Crores

(ii) Return on owner’s equity

(Amount in `)
Financing policy (`)
Conservative Moderate Aggressive
Expected EBIT 2,30,00,000 2,30,00,000 2,30,00,000
Less: Interest
Short term Debt @ 12% 12,96,000 24,00,000 36,00,000
Long term Debt @ 16% 35,84,000 21,12,000 5,12,000
Earnings before tax (EBT) 1,81,20,000 1,84,88,000 1,88,88,000
Less: Tax @ 30% 54,36,000 55,46,400 56,66,400
Earnings after Tax (EAT) 1,26,84,000 1,29,41,600 1,32,21,600
Owner’s Equity 5,00,00,000 5,00,00,000 5,00,00,000
Return on owner’s equity
Net Profit after taxes (EAT) 1,26,84,000 1,29,41,600 1,32,21,600
= = = =
Owner’s equity 5,00,00,000 5,00,00,000 5,00,00,000

= 0.2537 Or = 0.2588 Or = 0.2644 Or

25.37% 25.88% 26.44%

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(iii) Net Working capital

(` in crores)
Financing Policy
Conservative Moderate Aggressive
Current Liabilities
(Excluding Short Term Debt) 4.68 4.68 4.68
Short term Debt 1.08 2.00 3.00
Total Current Liabilities 5.76 6.68 7.68
Current Assets 7.80 7.80 7.80
Net Working capital 7.80-5.76 7.80-6.68 7.80-7.68
= Current Assets - Current Liabilities = 2.04 = 1.12 = 0.12

(iv) Current ratio

(` in crores)
Financing Policy
Conservative Moderate Aggressive
Current Ratio 7.80 7.80 7.80
= = =
Current Assets 5.76 6.68 7.68
= Current liabilites = 1.35 = 1.17 = 1.02

Advise: It is advisable to adopt aggressive financial policy, if the company wants high
return as the return on owner’s equity is maximum in this policy i.e. 26.44%.

Question 17
From the following information, find out missing figures and REWRITE the balance sheet
of Mukesh Enterprise.
Current Ratio = 2:1
Acid Test ratio = 3:2
Reserves and surplus = 20% of equity share capital
Long term debt = 45% of net worth
Stock turnover velocity = 1.5 months
Receivables turnover velocity = 2 months
You may assume closing Receivables as average Receivables.
Gross profit ratio = 20%
Sales is ` 21,00,000 (25% sales are on cash basis and balance on credit basis)
Closing stock is ` 40,000 more than opening stock.

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Accumulated depreciation is 1/6 of original cost of fixed assets. Balance sheet of the
company is as follows:
Liabilities (`) Assets (`)
Equity Share Capital ? Fixed Assets (Cost) ?
Reserves & Surplus ? Less: Accumulated Depreciation ?
Long Term Loans 6,75,000 Fixed Assets (WDV) ?
Bank Overdraft 60,000 Stock ?
Creditors ? Debtors ?
Cash ?
Total ? Total ?

Answer:
Liabilities (`) Assets (`)
Equity Share Capital 12,50,000 Fixed Assets (Cost) 20,58,000
Reserves & Surplus 2,50,000 Less: Acc. Depreciation (3,43,000)
Long Term Loans 6,75,000 Fixed Assets (WDV) 17,15,000
Bank Overdraft 60,000 Stock 2,30,000
Payables 4,00,000 Receivables 2,62,500
Cash 4,27,500
Total 26,35,000 Total 26,35,000

Working Notes:
(i) Sales ` 21,00,000
Less: Gross Profit (20%) ` 4,20,000
Cost of Goods Sold (COGS) ` 16,80,000

Average Receivables
(ii) Receivables Turnover Velocity = x 12
Credit Sales
Average Receivables
2 = x 12
`21,00,000 x 75%
` 21,00,000 x 75% x 2
Average Receivables =
Credit Sales
Average Receivables = `2,62,500 Closing
Receivables = `2,62,500

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Average Stock
(iii) Stock Turnover Velocity = x 12
COGS
Average Stock
Or 1.5 = x 12
`16,80,000
Or Average Stock = `2,10,000

Opening Stock x Closing Stock

= ` 2,10,000
2

Opening Stock + Closing Stock = ` 4,20,000 ................................ (1)

Also, Closing Stock-Opening Stock = ` 40,000 ................................ (2)
Solving (1) and (2), we get closing stock = ` 2,30,000

Current Assets Stock + Receivables + Cash

(iv) Current Ratio = =
Current Liabililities Bank Overdraft + Creditors
`2,30,000 + `2,62,500 + Cash
Or 2=
`60,000 + Creditors

Or ` 1,20,000 + 2 Payables= 4,92,500 + Cash

Or 2 Payables – Cash = ` 3,72,500
Or Cash = 2 Payables – ` 3,72,500 ................................ (3)

Current Assets – Stock Debtor + Cash

Acid Test Ratio = =
Current Liabililities Current Liabililities

3 ` 2,62,500 + Cash
Or =
2 60,000 + Creditors

Or ` 1,80,000 + 3 Payables = ` 5,25,000 + 2 Cash

Or 3 Payables – 2 Cash = ` 3,45,000 ................................ (4)

Substitute (3) in (4)

Or 3 Payables – 2(2 Payables – ` 3,72,500) = ` 3,45,000
Or 3 Payables – 4 Payables + ` 7,45,000 = ` 3,45,000
(Payables) = ` 3,45,000 - ` 7,45,000
Payables = ` 4,00,000
So, Cash = 2 x ` 4,00,000 – ` 3,72,5000
Cash = ` 4,27,500

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(ii) Long term Debt = 45% of Net Worth

Or ` 6,75,000 = 45% of Net Worth
Net Worth = `15,00,000

(iii) Equity Share Capital (ESC) + Reserves = ` 15,00,000

Or ESC + 0.2ESC = ` 15,00,000 Or 1.2 ESC
= ` 15,00,000
Equity Share Capital (ESC) = ` 12,50,000

(iv) Reserves = 0.2 x ` 12,50,000

Reserves = ` 2,50,000

(v) Total of Liabilities = Total of Assets

Or `12,50,000 + ` 2,50,000 + ` 6,75,000 + ` 60,000 + ` 4,00,000 + Fixes Assets(FA)
(WDV) + ` 2,30,000 + ` 2,62,000 + ` 4,27,500

Or ` 26,35,000 = ` 9,20,000 + FA(WDV)

FA (WDV) = ` 17,15,000

Now FA(Cost) – Depreciation = FA(WDV)

FA(Cost)
Or FA(Cost) – 6 = ` 17,15,000

FA(Cost)
Or 5 6 = ` 17,15,000

6
Or FA(Cost) = ` 17,15,000 x
5

So, FA(Cost) = ` 20,58,000

` 20,58,000
Depreciation = 6
= ` 3,43,000

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Question 18
Following information has been gathered from the books of Tram Ltd. the equity shares of
which is trading in the stock market at `14.
Particulars Amount (`)
Equity Share Capital (face value `10) 10,00,000
10% Preference Shares 2,00,000
Reserves 8,00,000
10% Debentures 6,00,000
Profit before Interest and Tax for the year 4,00,000
Interest 60,000
Profit after Tax for the year 2,40,000

Calculate the following:

(i) Return on Capital Employed
(ii) Earnings per share
(iii) PE ratio.

Answer:
(i) Calculation of Return on capital employed (ROCE)
Capital employed = Equity Shareholders’ funds + Debenture + Preference shares
= ` (10,00,000 + 8,00,000 + 6,00,000 + 2,00,000)
= ` 26,00,000
Return on capital employed [ROCE-(Pre-tax)]

PBIT
= × 100
Capital Employed
` 4,00,000
= ` 26,00,000 × 100 = 15.38% (approx.)

Return on capital employed [ROCE-(Post-tax)]

Profit After tax
= × 100
Capital Employed

` 240,000
= ` 26,00,000 × 100 = 9.23% (approx.)

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(iii) Calculation of Earnings per share

Earnings per share = Earnings available to equity shareholders

No of equity shares

= Profit after tax - preference Dividend

No of equity shares

= ` (2,4000 -20,000)
` 1,00,000
= ` 2.20

(iv) Calculation of PE ratio

Market Price per Share (MPS)
PE =
Earning per Shares (EPS)

` 14
= = 6.364 (approx.)
` 2.20

Question 19
The following is the information of XML Ltd. relate to the year ended 31-03-2018:
Gross Profit 20% of Sales
Net Profit 10% of Sales
Inventory Holding period 3 months
Receivable collection period 3 months
Non-Current Assets to Sales 1:4
Non-Current Assets to Current Assets 1:2
Current Ratio 2:1
Non-Current Liabilities to Current Liabilities 1:1
Share Capital to Reserve and Surplus 4:1
Non-current Assets as on 31st March, 2017 `50,00,000
Assume that:
(i) No change in Non-Current Assets during the year 2017-18
(ii) No depreciation charged on Non-Current Assets during the year 2017-18.
(iii) Ignoring Tax
You are required to Calculate cost of goods sold, Net profit, Inventory, Receivables
and Cash for the year ended on 31st March, 2018

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Answer:
Workings :
Non Current Assets 1
=
Currents Assets 2

50,00,000 1
Or =
Currents Assets 2

So, Current Assets = ` 1,00,00,000 Now further

Non Current Assets 1
=
Sales 4

50,00,000 1
Or =
Currents Assets 4

So, Sales = ` 2,00,00,000

Calculation of Cost of Goods sold, Net profit, Inventory, Receivables and Cash:
Cost of Goods Sold (COGS):
Cost of Goods Sold = Sales - Gross Profit
= ` 2,00,00,000 – 20% of ` 2,00,00,000
= ` 1,60,00,000
Net Profit = 10% of Sales = 10% of ` 2,00,00,000
= ` 20,00,000

Inventory:
12 month
Inventory Holding Period =
Inventory Turnover Ratio

COGC
4 =
Average Inventory

1,60,00,000
4 =
Average Inventory

Average or Closing Inventory = ` 40,00,000

Receivables:
12 month
Receivable Collection Period=
Receivables Turnover Ratio

12 Credit Sales
Or ReceivablesTurnover Ratio = =4=
3 Average Accounts Receivable
2,00,00,000
Or 4=
Average Accounts Receivable

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So, Average Accounts Receivable/Receivables = ` 50,00,000/-

Cash:
Cash* = Current Assets* – Inventory - Receivables Cash
= ` 1,00,00,000 - ` 40,00,000 - ` 50,00,000
= ` 10,00,000
(it is assumed that no other current assets are included in the Current Asset)

Question 20
The accountant of Moon Ltd. has reported the following data:
Gross profit `60,000
Gross Profit Margin 20 per cent
Total Assets Turnover 0.30:1
Net Worth to Total Assets 0.90:1
Current Ratio 1.5:1
Liquid Assets to Current Liability 1:1
Credit Sales to Total Sales 0.80:1
Average Collection Period 60 days

Assume 360 days in a year You are required to complete the following:
Balance Sheet of Moon Ltd.
Liabilities ` Assets `
Net Worth Fixed Assets
Current Liabilities Stock
Debtors
Cash
Total Liabilities Total Assets

Answer:
Preparation of Balance Sheet Working Notes:
Gross Profit
Sales = Gross Profit Margin

60,000
=
0.2
= ` 3,00,000

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Sales
Total Assets =
Total Asset Turnover
3,00,000
= 0.3 = ` 10,00,000

Net Worth = 0.9 x Total Assets

= 0.9 x ` 10,00,000 = ` 9,00,000

Current Liability = Total Assets – Net Worth

= ` 10,00,000 – ` 9,00,000 = ` 1,00,000

Current Assets = 1.5 x Current Liability

= 1.5 x ` 1,00,000 = ` 1,50,000

Stock = Current Assets – Liquid Assets

= Current Assets - ( Liquid Assets

Current Liabilities
(
=1

= 1,50,000 -
( LA
1,00,000 (
=1 = ` 50,000

Credit Sales
Debtors = Average Collection Period x
360
= 60 x 0.8 x 3,00,000 = ` 40,000
360

Cash = Current Assets – Debtors – Stock

= ` 1,50,000 – ` 40,000 – ` 50,000
= ` 60,000

Fixed Assets = Total Assets – Current Assets

= ` 10,00,000 - ` 1,50,000
= ` 8,50,000

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Balance Sheet
Liabilities ` Assets `
Net Worth 9,00,000 Fixed Assets 8,50,000
Current Liabilities 1,00,000 Stock 50,000
Debtors 40,000
Cash 60,000
Total liabilities 10,00,000 Total Assets 10,00,000

Question 21
Following are the data in respect of ABC Industries for the year ended 31 st March, 2021:
Debt to Total assets ratio : 0.40
Long-term debts to equity ratio : 30%
Gross profit margin on sales : 20%
Accounts receivables period : 36 days
Quick ratio : 0.9
Inventory holding period : 55 days
Cost of goods sold : ` 64,00,000
Liabilities ` Assets `
Equity Share Capital 20,00,000 Fixed assets
Reserves & surplus Inventories
Long-term debts Accounts receivable
Accounts payable Cash
Total 50,00,000 Total

Required:
Complete the Balance Sheet of ABC Industries as on 31st March, 2021. All calculations
should be in nearest Rupee. Assume 360 days in a year.

Answer:
(1) Total liability = Total Assets = ` 50,00,000 Debt to Total Asset Ratio = 0.40

Debt
= 0.40
Total Assets
Debt
Or, = 0.40
50,00,000

So, Debt = 20,00,000

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(2) Total Liabilities = ` 50,00,000

Equity share Capital + Reserves + Debt = `50,00,000
So, Reserves = ` 50,00,000 - ` 20,00,000 - ` 20,00,000
So, Reserves & Surplus = ` 10,00,000

Long Term Debt

(3) = 30%*
Equity Shareholders Fund
Long Term Debt
= = 30%
(20,00,000 + 10,00,000)

Long Term Debt = ` 9,00,000

(4) So, Accounts Payable = ` 20,00,000 - ` 9,00,000

Accounts Payable = ` 11,00,000

(5) Gross Profit to sales = 20%

Cost of Goods Sold = 80% of Sales
= ` 64,00,000
100
Sales = x 64,00,000
80
= 80,00,000

360
(6) Inventory Turnover =
55
COGS 360
=
Closing Inventory 55

64,00,000 360
=
Closing Inventory 55

Closing inventory = 9,77,778

(7) Accounts Receivable period = 36 days

Accounts Receivable
Credit Sales × 360 = 36
36
Accounts Receivable = × credit sales
360
36
= × 80,00,000
360
(assumed all sales are on credit)
Accounts Receivable = ` 8,00,000

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(8) Quick Ratio = 0.9

Quick Assets
Crureent liabilities = 0.9

Cash + Debtors
11,00,0000 = 0.9

Cash + 8,00,000 = ` 9,90,000

Cash = ` 1,90,000

(9) Fixed Assets

= Total Assets - Current Assets
= 50,00,000 – (9,77,778 + 8,00,000 + 1,90,000)
= 30,32,222

Balance Sheet of ABC Industries as on 31st March 2021

Liabilities (`) Assets (`)
Share Capital 20,00,000 Fixed Assets 30,32,222
Reserved surplus 10,00,000 Current Assets:
Long Tem Debt 9,00,000 Inventory 9,77,778
Accounts Payable 11,00,000 Accounts Receivables 8,00,000
Cash 1,90,000
Total 50,00,000 Total 50,00,000

(*Note: Equity shareholders9 fund represent equity in 8Long term debts to equity ratio9.
The question can be solved assuming only share capital as ‘equity’)

Question 22
Following information and ratios are given for W Limited for the year ended 31st March, 2022:
Equity Share Capital of ` 10 each ` 10 lakhs
Reserves & Surplus to Shareholders’ Fund 0.50
Sales / Shareholders` Fund 1.50
Current Ratio 2.50
Debtors Turnover Ratio 6.00
Stock Velocity 2 Months
Gross Profit Ratio 20%
Net Working Capital Turnover Ratio 2.50

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You are required to calculate:

(i) Shareholders’ Fund
(ii) Stock
(iii) Debtors
(iv) Current liabilities
(v) Cash Balance.

Answer:
(i) Calculation of Shareholders’ Fund:
Reserve & Surplus = 0.5
Shareholders’ Funds
Reserve & Surplus
= 0.5
Equity Share Capital + Reserve & Surplus
Reserve & Surplus
= 0.5
10,00,000 + Reserve & Surplus

Reserve & Surplus = 5,00,000 + 0.5 Reserve & Surplus

0.5 Reserve & Surplus = 5,00,000
Reserve & Surplus = 10,00,000
Shareholders’ funds = 10,00,000 +10,00,000
Shareholders’ funds = ` 20,00,000

(ii) Calculation of Value of Stock:

Sales
Shareholders’ Funds
Sales = 1.5 × 20,00,000
Sales = 30,00,000
Gross Profit = 30,00,000 × 20%
= 6,00,000

Cost of Goods Sold = 30,00,000 – 6,00,000

= ` 24,00,000

Stock velocity = 2 months

Average Stock
= x 12 = 2
Cost of Goods Sold

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Average Stock
= x 12 = 2
24,00,000
2
Average Stock = 24,00,000 ×
12
Average stock = ` 4,00,000

(iii) Calculation of Debtors: Debtors Turnover Ratio = 6

Sales
∴ =6
Average Debtors
30,000
∴ =6
Average Debtors
Average Debtors = ` 5,00,000

(iv) Calculation of Current Liabilities:

Net Working Capital Turnover ratio = 2.5
Sales
Current Assets - Current Liabilites = 2.5

30,000
Current Assets - Current Liabilites = 2.5

Current Assets – Current Liabilities = 12,00,000 ......................... (1)

Current Ratio = 2.5
Current Assets
= 2.5
Current Liabilites

Current Assets = 2.5 Current Liabilities .............................. (2)

From (1) & (2),
2.5 Current Liabilities - Current Liabilities = 12,00,000
1.5 Current Liabilities = 12,00,000
Current Liabilities = ` 8,00,000

(v) Calculation of Cash Balance:

Current Assets = 2.5 Current Liabilities
Current Assets = 2.5 (8,00,000) 20,00,000
(-) Debtors (5,00,000)
(-) Stock (4,00,000)
Cash Balance ` 11,00,000

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Question 23
Following information and ratios are given in respect of AQUA Ltd. for the year ended 31st
March, 2023:
Current ratio 4.0
Acid test ratio 2.5
Inventory turnover ratio (based on sales) 6
Average collection period (days) 70
Earnings per share ` 3.5
Current liabilities ` 3,10,000
Total assets turnover ratio (based on sales) 0.96
Cash ratio 0.43
Proprietary ratio 0.48
Total equity dividend ` 1,75,000
Equity dividend coverage ratio 1.60

Assume 360 days in a year.

You are required to complete Balance Sheet as on 31stMarch, 2023.
Balance Sheet as on 31stMarch, 2023.
Liabilities ` Assets `
Equity share capital (`10 per share) XXX Fixed assets XXX
Reserves & surplus XXX Inventory XXX
Long-term debt XXX Debtors XXX
Current liabilities 3,10,000 Loans & advances XXX
XXX Cash & bank XXX
Total XXX Total XXX

Answer:
(i) Current Ratio = 4
Current Assets
= 4
Current Liabilities

Current Assets
∴ = 4
3,10,000
∴ Current Assets = ` 12,40,000

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(ii) Acid Test Ratio = 2.5

Current Assets – Inventory
= 2.5
Current Liabilities

12,40,000 – Inventory
∴ = 2.5
3,10,000

∴ 12,40,000 – Inventory = ` 7,75,000

Inventory = ` 4,65,000

(iii) Inventory Turnover Ratio (on Sales) = 6

Sales
= 6
Inventory

Sales
= 6
4,65,000

∴ Sales = ` 27,90,000

(iv) Debtors Collection Peiod = 70 days

∴ ( Debtors
Sales
( x 360 = 70

∴ ( 27,90,000
Debtors
( x 360 = 70

Debtors = ` 5,42,500

(v) Total Assets Turnover Ratio (on Sales) = 0.96

Sales
∴ = 0.96
Total Assets

27,90,000
∴ = 0.96
Total Assets

Total Assets = ` 29,06,250

(vi) Fixed Assets (FA) = Total Assets – Current Assets

= 29,06,250 – 12,40,000
Fixed Assets = ` 16,66,250

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(vii) Cash Ratio

Cash
= 0.43
Current Liabilities

Cash
∴ = 0.43
3,10,000
∴ Cash = ` 1,33,300

(viii) Proprietary Ratio

Proprietary Fund
= 0.48
Total Assets

Proprietary Fund
∴ = 0.48
29,06,250
∴ Proprietary Fund = ` 13,95,000

(ix) Equity Dividend Coverage Ratio = 1.6

Or EPS = 3.5
DPS DPS

∴ DPS = 2.1875

DPS = Total Dividend

Number of Equity Shares

∴ 2.1875 = 1,75,000
Number of Equity Shares

∴ Number of Equity Shares = 80,000

∴ Equity Share Capital = 80,000 x 10
= ` 8,00,000

∴ Reserves &Surplus = 13,95,000 - 8,00,000

= ` 5,95,000

(x) Loans and Advances

= Current Assets - (Inventory + Receivables + Cash & Bank)
= ` 12,40,000 - (` 4,65,000 + 5,42,500 + 1,33,300)
= ` 99,200

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Balance Sheet as on 31st March 2023

Liabilities ` Assets `
Equity Share Capital 8,00,000 Fixed Assets 16,66,250
(`10 per share) Inventory 4,65,000
Reserves & Surplus 5,95,000 Receivables 5,42,500
Long-term debt *(B/F) 12,01,250 Loans & Advances 99,200
Current Liabilities 3,10,000 Cash & Bank 1,33,300
Total 29,06,250 Total 29,06,250

Question 24
ANVY Ltd. has furnished the following ratios and information for the year end 31st March,
2023:
Equity share capital ` 2,00,000
The relevant ratios of the company are as follows:
Current debt to total debt 0.50
Total debt to Equity share capital 0.60
Fixed assets to Equity share capital 0.70
Total assets turnover 2.5 Times
Inventory turnover 10 Times
You are required to PREPARE the Balance Sheet of ANVY Ltd. as on 31st March, 2023.

Answer: ANVY Ltd

Balance Sheet as on 31st March, 2023
Liabilities ` Assets `
Equity share capital 2,00,000 Fixed assets 1,40,000
Current debt 60,000 Cash (balancing figure) 1,00,000
Long term debt 60,000 Inventory 80,000
3,20,000 3,20,000

Working Notes
1. Total debt = 0.60 x Equity share capital = 0.60 × ` 2,00,000 = ` 1,20,000
Further, Current debt to total debt = 0.50. So, current debt = 0.50 x ` 1,20,000 =
` 60,000,
Long term debt = ` 1,20,000 - ` 60,000 = ` 60,000
2. Fixed assets = 0.70 × Equity share Capital = 0.70 × ` 2,00,000 = ` 1,40,000
3. Total assets to turnover = 2.5 Times: Inventory turnover = 10 Times

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Inventory 2.5 1
Hence, = = , Total assets = ` 3,20,000
Total assets 10 4

` 3,20,000
Therefore Inventory = = ` 80,000
4

Question 25
EOC Ltd is a listed company and has presented the below abridged financial statements
below.
Statement of Profit and Loss ` `
Sales 1,25,00,000
Cost of goods sold (76,40,000)
Gross Profit 48,60,000
Less: Operating Expenses
Administrative Expenses 13,20,000
Selling and Distribution Expenses 15,90,000 (29,10,000)
Operating Profit 19,50,000
Add: Non Operating Income 3,28,000
Less: Non Operating Expenses (1,27,000)
Profit before Interest and taxes 21,51,000
Less: Interest (4,39,000)
Profit before tax 17,12,000
Less: Taxes (4,28,000)
Profit after Tax 12,84,000
Balance Sheet
Sources of Funds ` `
Owned Funds
Equity Share Capital 30,00,000
Reserves and Surplus 18,00,000 48,00,000
Borrowed Funds
Secured Loan 10,00,000
Unsecured Loan 4,30,000 14,30,000
Total Funds Raised 62,30,000
Application of Funds
Non-Current Assets
Building 7,50,000
Machinery 2,30,000

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Furniture 7,60,000
Intangible Assets 50,000 17,90,000
Current Assets
Inventory 38,60,000
Receivables 39,97,000
ST investments 3,00,000
Cash and Bank 2,30,000 83,87,000
Less: Current Liabilities
Creditors 25,67,000
ST loans 13,80,000 (39,47,000)
Total Funds Employed 62,30,000
The company has set certain standards for the upcoming year financial status.
All the ratios are based on closing figures in financial statements.
Equity SC to Reserves = 1
Net Profit Ratio = 15%
Gross Profit Ratio = 50%
Long Term Debt to Equity = 0.5
Debtor Turnover = 100 Days
Creditor Turnover (based on COGS) = 100 Days

Inventory = 70% of Opening inventory

Cash Balance is assumed to remain same for next year

You are required to -
(1) CALCULATE inventory turnover ratio in days for current year
(2) CALCULATE receivables turnover ratio in days for current year
(3) CALCULATE the projected receivables, inventory, payables and long term debt

Answer:
Inventory 38,60,000 × 365
(a) Inventory Turnover = × 365 = = 184.41 days
COGS 76,40,000
= 185 days (apx)

Receivables 39,97,000 × 365

Receivables Turnover = ×365 = 1,25,00,000 = 116.71
Sales
= 117 days (apx)
Equity to Reserves = 1
Reserves = 1 x 30,00,000 = 30,00,000

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Projected profit = 30,00,000 – 18,00,000 = 12,00,000

Net Profit Margin = 15%

12,00,000
= 0.15
Sales

Sales = 80,00,000
Gross Profit = 80,00,000 x 50% = 40,00,000
COGS = 80,00,000 – 40,00,000 = 40,00,000

Closing Receivables
Projected Debtors Turnover = 100 days = x 365
Sales

Closing Receivables
100 = x 365
80,00,000

80,00,000 x 100
Closing Receivables = = 21,91,781
365

Projected Closing Inventory = 70% of opening inventory = 70% of 38,60,000

= 27,02,000

Closing Creditors
Projected Creditor Turnover = 100 days = x 365
COGS

COGS
Closing Creditors = x 100
365

40,00,000
Closing Creditor = x 100 = 10,95,890
365

Equity Share Capital + Reserves = 30,00,000 + 30,00,000

= 60,00,000
Long Term Debt to Equity = 0.5

LTD
= 0.5
60,00,000

Long Term Debt = 0.5 x 60,00,000

Long Term Debt = 30,00,000

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Question 26
You are required to CALCULATE the Total Current Assets of Ananya Limited from the given
information:
Stock Turnover = 5 times
Sales (All credit) = ` 7,20,000
Gross Profit Ratio = 25%
Current Liabilities = 2,40,000
Liquidity Ratio = 1.25
Stock at the end is ` 30,000 more than stock in the beginning.

Answer:
1. Cost of Goods Sold = Sales – Gross Profit
= ` 7,20,000 – 25% x ` 7,20,000 = ` 5,40,000

Cost of Goods Sold ` 5,40,000

2. Stock Turnover = = = 5 times.
Average Stock Average Stock

` 5,40,000
Average Stock = = ` 1,08,000
5

3. Let Opening Stock be x.

Closing Stock is ` 30,000 more than Opening Stock.
Closing Stock = (x + 30,000)

x + x + 30,000
Average Stock = = 1,08,000.
2
2x = 2,16,000 – 30,000

1,86,000
x = = 93,000 = Opening Stock.
2

Closing Stock = x + 30,000

= 93,000 + 30,000 = ` 1,23,000

Liquid Assets Liquid Assets

4. Liquid Ratio = = = 1.25.
Current Liabilities 2,40,000

Liquid Assets = ` 3,00,000

5. Current Assets = Liquid Assets + Closing Stock

= ` 3,00,000 + ` 1,23,000 = ` 4,23,000

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Question 27
From the following information pertaining to M/s Anya Co. Ltd.,
PREPARE its trading, Profit & Loss Account for the year ended on 31 March, 2024 and a

summarized Balance Sheet as at that date:

Amt in `
Current Ratio 2.5
Quick Ratio 1.3
Proprietary Ratio (Fixed Assets/ Proprietary Fund) 0.6
Gross Profit to Sale Ratio 10%
Debtors Velocity 40 days
Sales 7,30,000
Working Capital 1,20,000
Bank Overdraft 15,000
Share Capital 2,50,000

Closing Stock is 10% more than opening Stock.

Net Profit is 10% of Proprietary Funds.

Answer:
Working Note:
1. Current Liabilities and Current Assets:
Let Current Liabilities be x
Given Current ratio = 2.5
Current Assets = 2.5x
Working Capital = 2.5x – x = 1.5x
1,20,000
or x = = 80,000
1.5

So Current Liabilities = 80,000

And Current Assets = 80,000 x 2.5 = 2,00,000

2. Closing Stock
Given, Quick Ratio = 1.3

Current Assets – Closing Stock

= 1.3
Current Liabilities - Bank Overdraft

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2,00,000 – Closing Stock

= 1.3
80,000 - 15,000
or Closing Stock = 2,00,000 – 84,500 = 1,15,500

100
Opening Stock = 1,15,000 x = 1,05,000
110

3. Debtors
Given Debtors Velocity = 40 days

Debtors
x 365 = 40
Sales

7,30,000 x 40
Debtors = = 80,000
365

7,30,000 x 10
4. Gross Profit = = 73,000
100

5. Proprietary Fund:
Proprietary Ratio = 0.6

Fixed Assets
= 0.6
Proprietary Fund

Working Capital
= 0.4
Proprietary Fund
1,20,000
Proprietary Fund = = 3,00,000
0.4
Fixed Assets = 3,00,000 x 0.6 = 1,80,000
Net Profit = 10% of Proprietary Fund = 30,000

M/s Anya Co Ltd.

Trading and Profit and loss Account for the year ended 31 March 2024
Particulars Amount in ` Particulars Amount in `
To Opening Stock 1,05,000 By Sales 7,30,000
To Purchase (Balancing Fig.) 6,67,500 By Closing Stock 1,15,500
To Gross Profit 73,000
8,45,500 8,45,500
To Operating Expenses By Gross Profit 73,000
(Balancing Figure) 43,000
To Net Profit 30,000
73,000 73,000

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Balance Sheet as on 31 March 2024

Liabilities Amount in ` Assets Amount in `
Share Capital 2,50,000 Fixed Assets 1,80,000
Reserves & Surplus
(Opening bal. + current profit) 50,000
Current Liabilities Current Assets
Bank Overdraft 15,000 Stock 1,15,500
Other Current Liabilities 65,000 Debtors 80,000
Other Current Assets 4,500
3,80,000 3,80,000

Question 28
The financial statement and operating results of Alpha Limited revealed the following
position as on 31st March, 2023:
— Equity share capital (` 10 fully paid share) ` 20,00,000
— Working capital ` 6,00,000
— Bank overdraft ` 1,00,000
— Current ratio 2.5 : 1
— Liquidity ratio 1.5 : 1
— Proprietary ratio (Net fixed assets/Proprietary fund) 75 : 1
— Cost of sales ` 14,40,000
— Debtors velocity 2 months
— Stock turnover based on cost of sales 4 times
— Gross profit ratio 20% of sales
— Net profit ratio 15% of sales
Closing stock was 25% higher than the opening stock. There were also free reserves
brought forward from earlier years. Current assets include stock, debtors and cash only.
The current liabilities expect bank overdraft treated as creditors.
Expenses include depreciation of ` 90,000.
The following information was collected from the records for the year ended 31st
March, 2024:
— Total sales for the year were 20% higher as compared to previous year.
— Balances as on 31st March, 2024 were : Stock ` 5,20,000, Creditors ` 4,15,000,
Debtors ` 4,95,000 and Cash balance ` 3,10,000.
— Percentage of Gross profit on turnover has gone up from 20% to 25% and ratio of
net profit to sales from 15% to 16%.

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— A portion of Fixed assets was very old (book values ` 1,80,000) disposed for
` 90,000. (No depreciations to be provided on this item).
— Long-term investments were purchased for ` 2,96,600.
— Bank overdraft fully discharged.
— Percentage of depreciation to Fixed assets to be provided at the rate in the
previous year.
PREPARE Balance Sheet as on 31st March, 2023 and 31st March, 2024.

Answer:
Balance Sheets of Alpha Limited

` `
Liabilities 31 March 31 March Assets 31 March 31 March
2023 2024 2023 2024
Equity share 20,00,000 20,00,000 Fixed Assets
capital (` 10 each (`18,90,000 –` 90,000) 18,00,000 15,39,000
fully paid)
Reserve and 1,30,000 1,30,000 Long term investment – 2,96,600
Surplus
(balancing)
Profit & Loss A/c 2,70,000 6,15,600 Current Assets
(15% of sales) (` 10,00,000)
Current Stock 4,00,000 5,20,000
Liabilities
Bank Overdraft 1,00,000 – Sundry Debtors 3,00,000 4,95,000
Creditors 3,00,000 4,15,000 Cash at Bank 3,00,000 3,10,000
(Balancing)

Total 28,00,000 31,60,600 Total 28,00,000 31,60,600

Calculation for 31st March, 2023

(i) Calculation of Current Liabilities
Suppose that Current Liabilities = x, then current assets will be 2.5 x Working
capital = Current Assets – Current Liabilities
6,00,000 = 2.5x – x

6,00,000
x= = ` 4,00,000 (C.L.)
1.5

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Other Current Liabilities = Current Liabilities – Bank Overdraft

(Creditors) = 4,00,000 – 1,00,000 = ` 3,00,000
Current Assets = 2.5 x 4,00,000 = ` 10,00,000

Liquid Assets
(ii) Liquid Ratio =
Current Liabilities

Liquid Assets
1.5 =
4,00,000

Liquid assets = ` 6,00,000

Liquid assets = Current Assets – Stock
6,00,000 = 10,00,000 – Stock
So, Stock = ` 4,00,000

(iii) Calculation of fixed assets: Fixed assets to proprietary fund is 0.75, working capital
is therefore 0.25 of proprietary fund. So,

6,00,000
Fixed Assets = x 0.75 = ` 18,00,000
0.25

14,40,000
(iv) Sales = × 100 = ` 18,00,000
80

2
(v) Debtors = x Sales
12

2
x 18,00,000 = ` 3,00,000
12

(vi) Net profit = 15% of ` 18,00,000 = ` 2,70,000

Calculation for the year 31st March, 2024

(vii) Sales = 18,00,000 + (18,00,000 × 0.2) = 21,60,000

(viii) Calculation of fixed assets

` `
To Opening balance 18,00,000 By Banks (Sale) 90,000
By Loss on sales of Fixed asset 90,000
By P & L (Dep.) (5% as in previous year) 81,000
________ By Balance b/d 15,39,000
Total 18,00,000 18,00,000
(ix) Net profit for the year 2011, 16% × 21,60,000 = ` 3,45,600
Total Profit = 2,70,000 + 3,45,600 = ` 6,15,600

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Question 29
From the following information and ratios, PREPARE the Balance Sheet as on 31st March
2023 and Income Statement for the year ended on that date for Limelite & Co.

Gross Profit ` 1,20,000

Shareholders’ Funds ` 5,00,000
Gross Profit margin 40%
Net Profit Margin 10%
PBIT to PBT 2:1
Credit sales to Total sales 80%
Total Assets turnover 0.4 times
Inventory turnover (Use sales as turnover) 5 times
Average collection period (a 360 days year) 30 days
Current ratio 2
Operating expenses (excluding interest) ` 60,000
Long-term Debt to Equity 40%
Tax Nil

Answer:
Gross Profit = ` 1,20,000
Gross Profit Margin = 40%

∴ Sales = Gross Profit = ` 1,20,000 / 0.40 = ` 3,00,000

Gross Profit Margin

Net profit (PBT) = 3,00,000 x 10% = ` 30,000

PBIT/PBT = 2
PBIT = 2 x 30,000
PBIT = 60,000
Interest = 60,000 – 30,000 = ` 30,000
Credit Sales to Total Sales = 80%
∴ Credit Sales = ` 3,00,000 × 0.80 = ` 2,40,000
Total Assets Turnover = 0.4 times
∴ Total Assets = Sales
Total Assets Turnover

= ` 3,00,000 = ` 7,50,000
0.4
Inventory turnover = 5 times

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Inventory = Sales = 3,00,000 = ` 60,000

Inventory turnover 5

Average Collection Period = 30 days

∴ Debtors turnover = 360 = 360/30 = 12

Average Collection Period

∴ Debtors = Credit Sales = ` 2,40,000 = ` 20,000

Debtors turnover 12

Current ratio = 2
2 = Debtors + Inventory + Cash (Current Assets)
Creditors (Current Liabilities)

2 Creditors = (` 20,000 + ` 60,000 + Cash)

2 Creditors = ` 80,000 + Cash ------------- (i)
Long-term Debt to Equity = 40%
Shareholders’ Funds (Equity) = ` 5,00,000
∴ Long-term Debt = ` 5,00,000 × 40% = ` 2,00,000
Creditors = Total Assets – (Shareholder’s fund + Long term debt)
= ` 7,50,000 – (5,00,000 + 2,00,000) = ` 50,000
∴ Cash = (` 50,000 × 2) – ` 80,000 = ` 20,000 [From equation (i)]
Income Statement
(`)
Sales 3,00,000
Less: Cost of Goods Sold 1,80,000
Gross Profit 1,20,000
Less: Operating Expenses 60,000
PBIT 60,000
Less: Interest 30,000
Net Profit 30,000
Balance Sheet
Liabilities ` Assets `
Equity share capital 5,00,000 Fixed asset (bal. fig.) 6,50,000
Long term debt 2,00,000 Current assets:
Current liability 50,000 Stock 60,000
Receivables 20,000
Cash 20,000 1,00,000
7,50,000 7,50,000

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Question 30
Following are the data in respect of LP enterprises for the year ended 31st March, 2024:
Debt to Total assets ratio : 0.40
Long-term debts to equity ratio : 30%
Gross profit margin on sales : 20%
Accounts receivables period : 36 days
Quick ratio : 0.9
Inventory holding period : 60 days
Cost of goods sold : ` 64,00,000
Liabilities ` Assets `
Equity Share Capital 20,00,000 Fixed assets
Reserves & surplus Inventories
Long-term debts Accounts receivable
Accounts payable Cash
Total 50,00,000 Total
Required:
COMPLETE the Balance Sheet of LP enterprises as on 31st March, 2024.
All calculations should be in nearest Rupee. Assume 360 days in a year.

Answer:
Working Notes:
(1) Total liability = Total Assets = ` 50,00,000
Debt to Total Asset Ratio = 0.40
Debt = 0.40
Total Assets
Debt = 0.40
50,00,000

So, Debt = 20,00,000

(2) Total Liabilities = ` 50,00,000

Equity share Capital + Reserves + Debt = ` 50,00,000
So, Reserves = ` 50,00,000 - ` 20,00,000 - ` 20,00,000
So, Reserves & Surplus = ` 10,00,000

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(3) Long term Debt = 30%

Equity Shareholders’ Funds

Long term Debt = 30%

(20,00,000 + 10,00,000)

Long Term Debt = ` 9,00,000

(4) So, Accounts Payable = ` 20,00,000 – ` 9,00,000

Accounts Payable = ` 11,00,000

(5) Gross Profit to sales = 20%

Cost of Goods Sold = 80% of Sales = ` 64,00,000

Sales = 100 × 64,00,000 = 80,00,000

80

(6) Inventory Turnover = 360

60
COGS = 360
Closing inventory 60
64,00,000 = 360
Closing inventory 60

Closing inventory = 10,66,667

(7) Accounts Receivable period = 36 days

Accounts Receivable
× 360 = 36
Credit sales
36
Accounts Receivable = × credit sales
360

36
= × 80,00,000
360
(assumed all sales are on credit)
Accounts Receivable = ` 8,00,000

(8) Quick Ratio = 0.9

Quick Assets
= 0.9
Current liabilities

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Cash + Debtors
= 0.9
11,00,000

Cash + 8,00,000 = ` 9,90,000

Cash = ` 1,90,000

(9) Fixed Assets = Total Assets - Current Assets

= 50,00,000 – (10,66,667 + 8,00,000 +
1,90,000)

(10) = 29,43,333

Balance Sheet of LP enterprises as on 31st March 2024

Liabilities (`) Assets (`)

Share Capital 20,00,000 Fixed Assets 29,43,333
Reserved surplus 10,00,000 Current Assets:
Long Term Debt 9,00,000 Inventory 10,66,667
Accounts Payable 11,00,000 Accounts Receivables 8,00,000
Cash 1,90,000
Total 50,00,000 Total 50,00,000

(*Note: Equity shareholders’ fund represent equity in ‘Long term debts to equity ratio’. The
question can be solved assuming only share capital as ‘equity’)

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Question 31
Vardhaman Limited gives you the following information related for the year ending 31st
March, 2024:
Particulars Amount (`)
Current Ratio 3:1
Loan funds to Owned Funds Ratio 1:3
Gross Profit Ratio 25%
Stock Turnover Ratio 10
Net Working Capital ` 5,00,000
Return on Total Assets (pre-tax) 15%
MPS ` 20
Total Assets Turnover Ratio 2.5
Opening stock ` 6,50,500
Fixed Assets ` 15,00,000
75,000 equity shares of ` 10 each
25,000, 12% Pref. Shares of ` 10 each
Depreciation ` 50,000
Interest on Debt 9%
Future Instalments ` 2,00,000

Tax rate applicable to the company is 25%

You are required to CALCULATE:
(i) Quick Ratio
(ii) Fixed Assets Turnover Ratio
(iii) Debt Service Coverage
(iv) Earnings per Share
(v) Price Earnings Ratio

Answer:
WN 1: Calculation of Current Assets & Current Liabilities
Current Ratio = CA = 3:1
CL

Therefore, CA = 3CL
Net Working Capital = CA - CL = 5,00,000
= 3CL (-) CL = 5,00,000
Therefore, CL = 2,50,000,
CA = 7,50,000

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WN 2: Calculation of Average Stock Value & Closing Stock

Total Assets = Fixed Assets + Current Assets
= 15 L + 7.5 L = 22.50 lakhs
Total Assets Turnover Ratio = Sales = 2.5 (given)
Total Assets

Therefore Sales = 22.5 lakhs × 2.5

Sales = 56,25,000
GP Margin = 25%, therefore COGS = 75% of Sales
COGS = 56.25 × 75%
= 42,18,750

Stock Turnover Ratio = COGS = 10 (given)

Average Stock

Average Stock = 42,18,750 = 4,21,875

10

Average Stock = Op. Stock + Cl. Stock

2

4,21,875 = 6,50,500 + Cl. Stock

2
Cl Stock = 1,93,250

WN 3: Calculation of Cash Profit before Interest & Tax

Return on Total Assets (pre-tax) = EBIT
Total Assets

0.15 = EBIT
22.50 lakhs

Therefore, EBIT = 3,37,500

Cash Profit before Int & Tax = EBIT + Depreciation
= 337500 + 50000
Cash Profit before Int & Tax = 3,87,500

WN 4 : Calculation of Loan Funds (Debt) & Owned Funds (Equity)

Debt to Equity = 1 : 3, which means 3 times Debt = Equity (Owned Funds)
As per the Accounting equation,
Equity + Debt + Current Liab. = Fixed Assets + Current Assets
3 Debt + Debt + 2,50,000 = 15,00,000 + 7,50,000

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4 Debt = 20,00,000
Therefor Debt (Loan Funds) = 5,00,000
Equity (Owned Funds) = 15,00,000

WN 5: Calculation of Earnings Available to Eq. Share holders

Particulars Amount (`)
EBIT 3,37,500
(-) Int (5 lakhs x 9%) (45,000)
EBT 2,92,500
(-) Tax @ 0.25 (73,125)
EAT 2,19,375
(-) Pref Div. (250000 x 12%) (30,000)
Earnings For Eq. Sh Holders 1,89,375

1. Quick Ratio = {CA - Cl Stock}

CL

= 7,50,000 – 1,93,250
2,50,000

Quick Ratio = 2.23 : 1

2. Fixed Assets Turnover Ratio = Sales

Total Fixed Assets

= 56,25,000
15,00,000

Fixed Assets Turnover Ratio = 3.75 times

3. Debt Service Coverage Ratio = Cash profit before Int & Tax
Int + Instalments

= 3,87,500
(45,000 + 2,00,000)

Debt Service Coverage Ratio = 1.58 times.

4. EPS = Earnings for Eq. Shareholders

No of Eq. Shareholders

= 1,89,375
75,000
EPS = ` 2.53

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5. Price to Earnings Ratio = MPS

EPS

= 20
2.53

Price to Earnings Ratio = 7.91 times

Question 32
Theme Ltd provides you the following information:
12.5 % Debt ` 45,00,000
Debt to Equity ratio 1.5 : 1
Return on Shareholder’s fund 54%
Operating Ratio 85%
Ratio of operating expenses to Cost of Goods sold 2:6
Tax rate 25%
Fixed Assets ` 39,00,000
Current Ratio 1.8 : 1
You are required to calculate:
(i) Interest Coverage Ratio
(ii) Gross Profit Ratio
(iii) Current Assets

Answer:
Working Notes:
Debt = ` 45,00,000
Interest = ` 45,00,000 x 12.5% = 5,62,500

Debt to Equity = 1.5:1 = Total Debt

Shareholders’Equity

Equity = ` 30,00,000

Return of Shareholder’s funds = 54% = Net Profit after taxes ×100

Equity shareholders’ fund

Profit after tax (PAT) = 54% x Equity = ` 16,20,000

Profit before tax (PBT)(1-25%) = Profit after tax
= ` 16,20,000/75% = ` 21,60,000

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Earning before interest and tax (EBIT) = PBT + Interest

= `21,60,000 + ` 5,62,500
= `27,22,500
(i) Interest Coverage Ratio = EBIT
Interest

= `27,22,500/`5,62,500
= 4.84 Times
(ii) Operating Profit Ratio = 1 – Operating Ratio
= 1 – 0.85 = 0.15 or 15%

0.15 = Operating Profit × 100

Sales

Sales = EBIT or Operating Profit

0.15

= ` 27,22,500
0.15

= ` 1,81,50,000

Operating ratio = Operating expenses =2:6=1:3

Cost of goods sold COGS

Operating expenses = 1/3COGS

Operating cost = Sales – Operating profit
= ` 1,81,50,000 – ` 27,22,500
= ` 1,54,27,500
` 1,54,27,500 = COGS + Operating expenses
` 1,54,27,500 = COGS + 1/3COGS
COGS = ` 1,15,70,625
Gross profit = Sales – COGS
= 1,81,50,000 – 1,15,70,625
= ` 65,79,375

Gross Profit ratio = Gross Profit × 100

Sales

= 65,79,375
1,81,50,000

= 0.3625 or 36.25%

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Gross profit and sales can be calculated in alternative way also.

However, there will be no change in GP ratio i.e 36.25%

(iii) Current Ratio = Current Assets

Current Liabilities

= 1.8
Current Assets = 1.8 Current Liabilities
Total of Balance sheet liability = Equity + Debt + Current Liabilities
= 30,00,000 + 45,00,000 + CL .........(2)
Total Balance sheet asset = Fixed Assets + Current Assets
= 39 lakhs + CA = 39 + 1.8CL .........(3)

Equating 2 and 3,
75,00,000 + CL = 39,00,000 + 1.8CL
0.8CL = 36,00,000
CL = ` 45,00,000
Current Assets = 1.8 CL = 1.8 x 45 lakhs = ` 81,00,000

Question 33
Following information relates to MNP Limited for the year ended on 31st March, 2024:

Inventory turnover ratio (based on cost of goods sold) 7.5 times

Total assets turnover ratio 2.5 times
Long term debt to Shareholders’ fund 0.6:1
Debtors collection period 30 days
Gross profit ratio 25% on sales
Current Ratio 2.9:1
Balance Sheet as on 31st March, 2024
Liabilities ` Assets `
Equity share capital 6,00,000 Fixed Assets ?
Reserves & Surplus 3,00,000 Inventories ?
Long term debt ? Debtors ?
Creditors 3,00,000 Cash ?
Total Total
You are required to complete the Balance Sheet of MNP Limited as on 31st March,2024.
Assume a 360 days year and all sales are credit sales.

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Answer:
Working Notes:
Long term debt to Shareholder’s fund = 0.6:1
Long term debt = 0.6 x ` 9,00,000 = ` 5,40,000
Total Assets = ` 17,40,000
Total Asset turnover ratio = Sales = 2.5 times
Total Assets

Sales = 2.5 x ` 17,40,000 = ` 43,50,000

Current ratio = Current Assets = 2.9:1

Current Liabilities

Current Assets = 2.9 x ` 3,00,000 = ` 8,70,000

Fixed Assets = Total Assets – Current Assets

= ` 17,40,000 – ` 8,70,000
= ` 8,70,000

Gross profit ratio = 25% on sales

Gross Profit (GP) = ` 43,50,000 x 0.25
= ` 10,87,500

Cost of Good Sold (COGS) = Sales – GP

= ` 43,50,000 - ` 10,87,500
= ` 32,62,500

Inventory Turnover Ratio = Cost of Goods Sold = 7.5 times

Average Inventory

Inventory = ` 32,62,500 = ` 4,35,000

7.5

Debtor Collection Period = Average Accounts Receivables = 30 days

Average Daily Credit Sales

Receivables = 30 days x ` 43,50,000 = ` 3,62,500

360 days

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Balance Sheet as on 31st March 2024

Liabilities (`) Assets (`)

Share Capital 6,00,000 Fixed Assets 8,70,000
Reserve and Surplus 3,00,000 Inventories 4,35,000
Long-term loan 5,40,000 Debtors 3,62,500
Creditors 3,00,000 Cash (Balancing Figure) 72,500
17,40,000 17,40,000

Question 34
Using the information given below, PREPARE the Balance Sheet of Nevy Private Limited –
Particulars Details
Stock turnover Ratio 15 times
Cash and Bank balance 10% of Current Assets (net off prepaid exp)
GP Ratio 20%
Creditors turnover (cost of goods sold) ratio 10 times
Debtors turnover ratio 12 times
Net Fixed Assets 25% of Total Liabilities
Depreciation 15% on Opening WDV
Current Ratio 1.6 : 1
Capital Gearing Ratio 0.6 : 1
All Purchases and Sales are assumed to be on credit basis.

Balance Sheet of Nevy Private Limited as of 31.03.2025

Amount Amount
Particulars
(`) (`)
A] Equities and Long Term Liabilities
Share Capital 36,00,000
Reserves and Surplus ??
14% Bonds ?? ???
B] Current Liabilities
Trade Payables ??
Outstanding expenses and provisions ??
(*Net of Prepaid expenses of ` 7,50,000) 45,00,000
TOTAL ?????

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C] Fixed Assets
Opening WDV ??
(-) Depreciation ?? ???
D] Current Assets
Inventory ??
Trade Receivables ??
Cash and Bank Balance ??
???
TOTAL ?????

(All the working notes should form part of your answer)

Answer:
Balance Sheet of Nevy Private Limited as of 31.03.2025
Amount Amount
Particulars Notes
(`) (`)
A] Equities and Long Term Liabilities
Share Capital 36,00,000
Reserves and Surplus WN-7 1,18,750
14% Bonds Bal. Fig. 22,31,250 59,50,000
B] Current Liabilities
Trade Payables WN-6 40,30,244
Outstanding expenses and provisions Bal. Fig. 4,69,756 45,00,000
(*Net of Prepaid expenses of ` 7,50,000)
TOTAL 1,04,50,000
C] Fixed Assets
Opening WDV WN-3 32,94,118
(-) Depreciation WN-3 (4,94,118) 28,00,000
(WN-2)
D] Current Assets
Inventory WN-5 26,86,829
Trade Receivables WN-5 41,98,170
Cash and Bank Balance WN-4 7,65,000 76,50,000
(WN 1)
TOTAL 1,04,50,000

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WN 1 – Calculation of Current Assets using Current Ratio

CA
Current Ratio =
CL
CL = 45,00,000 + 7,50,000
= 52,50,000

1.6 = CA
52,50,000
Therefore CA = 84,00,000

CA = Inventory + Trade Receivables + Cash Bank Balance + Prepaid Exp

84,00,000 = Inventory + Trade Receivables + Cash Bank Balance + 7,50,000
Therefore, total of Inventory + Trade Receivables + Cash Bank Balance = 76,50,000
WN 2 – Calculation of Fixed Assets & Total Assets
Fixed Assets = 25% of Total liabilities or 25% of Total Assets which means
Current Assets = 75% of Total liabilities or 75% of Total Assets
Total Assets
Fixed Assets + Current Assets =
Total Liabilities
25 + 75 = 100

25
Fixed Assets = 84,00,000 x = 28,00,000
75
Total Assets = 1,12,00,000

WN 3 – Calculation of Depreciation and Opening WDV of Fixed Assets

Opening WDV - Depreciation = Closing WDV
100 - 15 = 85
Therefore, Depreciation = 28,00,000 x 15/85 = 4,94,118
Opening WDV = 32,94,118

WN 4 – Calculation of Cash & Bank Balance

Cash & Bank Balance = 10% of (CA – Prepaid Exp)
Cash & Bank balance = 10% of (84,00,000 – 7,50,000)
Therefore, cash and bank balance = 7,65,000

WN 5 – Calculation of Inventory & Trade receivables

Total CA = Inventory + Trade Receivables + Cash Bank Balance + Prepaid Exp
84,00,000 = Inventory + Trade Receivables + 7,65,000 + 7,50,000

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Inventory + Trade Receivables = 68,85,000

Now, Let Sales be X
GP Ratio = 20% = 0.2X
COGS = 80% = 0.8X
Net Credit Sales
Debtors T/O Ratio = Debtors
X
12 =
Debtors

x
Debtors =
12

COGS
Inventory T/O Ratio = Inventory

0.8X
15 = Inventory

Inventory = 0.8X
15

Inventory + Trade Receivables = 68,85,000

0.8x X
15 + = 68,85,000
12

Therefore X = Sales = 5,03,78,050

COGS = 4,03,02,440
Trade Receivables = 41,98,170
Inventory = 26,86,829

WN 6 – Calculation of Trade Payables using Creditors Turnover Ratio

COGS
Creditors T/O Ratio =
Trade Payables

4,03,02,440
10 =
Trade Payables
Trade Payables = 40,30,244

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WN 7 – Calculation of Reserves and Surplus & 14% Bonds

Total Capital Employed = Share Cap + R&S + Bonds

Capital bearing Fixed %

Capital Gearing Ratio = Capital not bearing fixed %

Bonds
0.6 = Share Capital + R&S

Therefore, Bonds = 21,60,000 + 0.6 R&S

Substituting the value of bonds in the above equation,
Total Capital Employed = Share Cap + R&S + (21,60,000 + 0.6 R&S)
59,50,000 = 36,00,000 + 1.6 R&S + 21,60,000
Therefore R&S = 1,18,750

Question 35
EPL Ltd. has furnished the following information relating to the year ended 31st March
2023 and 31st March, 2024:
31st March, 2023 31st March, 2024
Share Capital 50,00,000 50,00,000
Reserve and Surplus 20,00,000 25,00,000
Long term loan 30,00,000 30,00,000

• Net profit ratio: 8%

• Gross profit ratio: 20%
• Long-term loan has been used to finance 40% of the fixed assets.
• Stock turnover with respect to cost of goods sold is 4.
• Debtors represent 90 days sales.
• The company holds cash equivalent to 1½ months cost of goods sold.
• Ignore taxation and assume 360 days in a year.

You are required to PREPARE Balance Sheet as on 31st March 2024 in following format:
Liabilities (`) Assets (`)
Share Capital - Fixed Assets -
Reserve and Surplus - Sundry Debtors -
Long-term loan - Closing Stock -
Sundry Creditors - Cash in hand -

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Answer:
Change in Reserve & Surplus = ` 25,00,000 – ` 20,00,000 = ` 5,00,000
So, Net profit = ` 5,00,000
(i) Net Profit Ratio = 8%

∴ Sales = 5,00,000 = ` 62,50,000

8%

(ii) Cost of Goods sold

= Sales – Gross profit Margin
= ` 62,50,000 – 20% of ` 62,50,000
= ` 50,00,000

(iii) Fixed Assets = ` 30,00,000

40%

= ` 75,00,000

(iv) Stock = Cost of Goods Sold = 50,00,000 = ` 12,50,000

STR 4

(v) Debtors = 62,50,000 × 90 = ` 15,62,500

360

(vi) Cash Equivalent = 50,00,000 × 1.5 = ` 6,25,000

12

Balance Sheet as on 31st March 2024

Liabilities (`) Assets (`)
Share Capital 50,00,000 Fixed Assets 75,00,000
Reserve and Surplus 25,00,000 Sundry Debtors 15,62,500
Long-term loan 30,00,000 Closing Stock 12,50,000
Sundry Creditors 4,37,500 Cash in hand 6,25,000
(Balancing Figure)
1,09,37,500 1,09,37,500

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Question 36
The total sales (all credit) of a firm are ` 6,40,000. It has a gross profit margin of 15
per cent and a current ratio of 2.5. The firm’s current liabilities are ` 96,000; inventories
` 48,000 and cash ` 16,000.
(a) DETERMINE the average inventory to be carried by the firm, if an inventory turnover
of 5 times is expected? (Assume 360 days a year).
(b) DETERMINE the average collection period if the opening balance of debtors is
intended to be of ` 80,000? (Assume 360 days a year).

Answer:
Cost of goods sold
(a) Inventory turnover =
Average inventory

Since gross profit margin is 15 per cent, the cost of goods sold should be 85 per cent
of the sales.
Cost of goods sold = 0.85 × ` 6,40,000 = ` 5,44,000.

Thus, ` 5,44,000 =5
Average inventory

Average inventory = ` 5,44,000 = ` 1,08,800

5 Average Receivables
(b) Average collection period = × 360days
Credit Sales

(Opening Receivables + Closing Receivables)

Average Receivables =
2

Closing balance of receivables is found as follows:

` `
Current assets (2.5 of current liabilities) 2,40,000
Less: Inventories 48,000
Cash 16,000 64,000
∴ Receivables 1,76,000

(` 1,76,000 + ` 80,000)
Average Receivables = = ` 1,28,000
2
` 1,28,000
So, Average collection period = × 360 = 72 days
` 6,40,000

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Question 37
Following information has been provided from the books of Laxmi Pvt. Ltd. for the year
ending on 31st March, 2023:

Net Working Capital ` 4,80,000

Bank overdraft ` 80,000
Fixed Assets to Proprietary ratio 0.75
Reserves and Surplus ` 3,20,000
Current ratio 2.5
Liquid ratio (Quick Ratio) 1.5
You are required to PREPARE a summarised Balance Sheet as at 31st March, 2023
assuming that there is no long term debt.

Answer:
Working notes:
(i) Computation of Current Assets and Current Liabilities
Current assets = 2.5
Current liabilities

Current assets = 2.5 Current liabilities

Now, Working capital = Current assets – Current liabilities
` 4,80,000 = 2.5 Current liability – Current liability
Or, 1.5 Current liability = ` 4,80,000
∴ Current Liabilities = ` 3,20,000
So, Current Assets = ` 3,20,000 × 2.5 = ` 8,00,000

(ii) Computation of Inventories

Liquid ratio = Liquid assets
Current liabilities

1.5 = Current assets - Inventories

` 3,20,000

1.5 × ` 3, 20,000 = ` 8,00,000 – Inventories

Inventories = ` 8,00,000 – ` 4,80,000 = ` 3,20,000

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(iii) Computation of Proprietary fund; Fixed assets; Capital and Sundry creditors
Fixed Assets
Fixed Asset to Proprietary ratio = = 0.75
Proprietary fund

∴ Fixed Assets = 0.75 Proprietary fund

Proprietary fund = Fixed Assets + Net Working Capital –
Long Term Debt
= 0.75 Proprietary fund + ` 4,80,000 – 0
∴ Proprietary fund = ` 19,20,000
and Fixed Assets = 0.75 proprietary fund
= 0.75 × ` 19,20,000 = ` 14,40,000
Capital = Proprietary fund – Reserves & Surplus
= ` 19,20,000 – ` 3,20,000 = ` 16,00,000
Sundry Creditors = Current liabilities – Bank overdraft
= ` 3,20,000 – ` 80,000 = ` 2,40,000

Balance Sheet as on 31st March, 2023

Liabilities ` Assets `
Capital 16,00,000 Fixed Assets 14,40,000
Reserves & Surplus 3,20,000 Inventories 3,20,000
Bank overdraft 80,000 Other Current Assets 4,80,000
Sundry creditors 2,40,000 (Balancing figure)
22,40,000 22,40,000

Question 38
Using the following information, PREPARE the balance sheet:
Long-term debt to net worth 0.5
Total asset turnover 2.5
Average collection period* 18 days
Inventory turnover 9
Gross profit margin 10%
Acid-test ratio 1

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*Assume a 360-day year and all sales on credit.

` `
Cash ? Notes and payables 1,00,000
Accounts receivable ? Long-term debt ?
Inventory ? Common stock 1,00,000
Plant and equipment ? Retained earnings 1,00,000

Total assets ? Total liabilities and equity ?

Answer:
Working Notes:
(i) Long term Debt

Long-term debt Long-term debt

0.5 = =
Net worth ` 1,00,000 + ` 1,00,000

∴ Long term debt = ` 1,00,000

(ii) Total assets

Total liabilities and Equity = Notes and payables + Long-term debt + Common stock
+ Retained earnings
= ` 1,00,000 + ` 1,00,000 + ` 1,00,000 + ` 1,00,000 = ` 4,00,000
∴ Total assets = Total liabilities and Equity = ` 4,00,000

(iii) Sales and Cost of Goods sold

Sales Sales
Total asset turnover = 2.5 = =
Total assets ` 4,00,000

∴ Sales = ` 10,00,000
Cost of goods sold = (100% – Gross Profit margin) × Sales
= (100% – 10%) × ` 10,00,000 = ` 9,00,000.
(iv) Current Assets
Cost of goods sold ` 9,00,000
Inventory turnover = 9 = =
Inventory Inventory

∴ Inventory = ` 1,00,000
Receivables × 360 Receivables × 360
Average collection period = 18 = =
Sales ` 10,00,000

∴ Accounts receivables = ` 50,000

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Cash + Accounts Receivable Cash + ` 50,000

Acid-test ratio = 1 = =
Notes and Payables ` 1,00,000

∴ Cash = ` 50,000

(v) Plant and equipment

= Total Assets – Current Assets
= ` 4,00,000 – (` 1,00,000 + ` 50,000 + ` 50,000) = ` 2,00,000

Balance Sheet
` `
Cash 50,000 Notes and payables 1,00,000
Accounts receivable 50,000 Long-term debt 1,00,000
Inventory 1,00,000 Common stock 1,00,000
Plant and equipment 2,00,000 Retained earnings 1,00,000
Total assets 4,00,000 Total liabilities and equity 4,00,000

Question 39
Gig Ltd. has furnished the following information relating to the year ended 31st March,
2022 and 31st March, 2023:

31st March, 2022 31st March, 2023

(`) (`)
Share Capital 40,00,000 40,00,000
Reserve and Surplus 20,00,000 25,00,000
Long term loan 30,00,000 30,00,000

• Net profit ratio: 8%

• Gross profit ratio: 20%
• Long-term loan has been used to finance 40% of the fixed assets.
• Stock turnover with respect to cost of goods sold is 4.
• Debtors represent 90 days sales.
• The company holds cash equivalent to 1½ months cost of goods sold.
• Ignore taxation and assume 360 days in a year.

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You are required to PREPARE Balance Sheet as on 31st March, 2023 in the following
format:
Liabilities (`) Assets (`)
Share Capital - Fixed Assets -
Reserve and Surplus - Sundry Debtors -
Long-term loan - Closing Stock -
Sundry Creditors - Cash in hand -

Answer:
(i) Change in Reserve & Surplus = ` 25,00,000 – ` 20,00,000 = ` 5,00,000
So, Net profit = ` 5,00,000
Net Profit Ratio = 8%

5,00,000
∴ Sales = = ` 62,50,000
8%

(ii) Cost of Goods sold

= Sales – Gross profit Margin
= ` 62,50,000 – 20% of ` 62,50,000
= ` 50,00,000

` 30,00,000
(iii) Fixed Assets = = ` 75,00,000
40%

Cost of Goods Sold 50,00,000

(iv) Stock = = = ` 12,50,000
Stock Turnover ratio 4

62,50,000
(v) Debtors = × 90 = ` 15,62,500
360

50,00,000
(vi) Cash Equivalent = × 1.5 = ` 6,25,000
12

Balance Sheet as on 31st March 2023

Liabilities (`) Assets (`)
Share Capital 40,00,000 Fixed Assets 75,00,000
Reserve and Surplus 25,00,000 Sundry Debtors 15,62,500
Long-term loan 30,00,000 Closing Stock 12,50,000
Sundry Creditors 14,37,500 Cash in hand 6,25,000
(Balancing Figure)
1,09,37,500 1,09,37,500

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Question 40
Following information relates to Temer Ltd.:
Debtors Velocity 3 months
Creditors Velocity 2 months
Stock Turnover Ratio 1.5
Gross Profit Ratio 25%
Bills Receivables ` 25,000
Bills Payables ` 10,000
Gross Profit ` 4,00,000
Fixed Assets turnover Ratio 4

Closing stock of the period is ` 10,000 above the opening stock.

DETERMINE:
(i) Sales and cost of goods sold
(ii) Sundry Debtors
(iii) Sundry Creditors
(iv) Closing Stock
(v) Fixed Assets

Answer:
(i) Determination of Sales and Cost of goods sold:

Gross Profit
Gross Profit Ratio = × 100
Sales

25 ` 4,00,000
Or, =
100 Sales

4,00,00,000
Or, Sales = 25 = ` 16,00,000

Cost of Goods Sold = Sales – Gross Profit

= ` 16,00,000 - ` 4,00,000 = ` 12,00,000

(ii) Determination of Sundry Debtors:

Debtors’ velocity is 3 months or Debtors’ collection period is 3 months,

12 months
So, Debtors’ turnover ratio = =4
3 months

Credit Sales
Debtors’ turnover ratio =
Average Accounts Receivable

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` 16,00,000
= Bills Receivable + Sundry Debtors = 4

Or, Sundry Debtors + Bills receivable = ` 4,00,000

Sundry Debtors = ` 4,00,000 – ` 25,000 = ` 3,75,000

(iii) Determination of Sundry Creditors:

Creditors’ velocity of 2 months or credit payment period is 2 months.

12 months
So, Creditors’ turnover ratio = =6
2 months

Credit Purchases*
Creditors turnover ratio =
Average Accounts Payables
` 12,10,000
= Sundry Creditors + Bills Payables = 6

So, Sundry Creditors + Bills Payable = ` 2,01,667

Or, Sundry Creditors + ` 10,000 = ` 2,01,667
Or, Sundry Creditors = ` 2,01,667 – ` 10,000 = ` 1,91,667

(iv) Determination of Closing Stock

Cost of Goods Sold
Stock Turnover Ratio =
Average Stock

` 12,00,000
= = 1.5
Average Stock

So, Average Stock = ` 8,00,000

Opening Stock + Closing Stock

Now Average Stock =
2

Opening Stock+(Opening Stock+ `10,000)

Or 2 = ` 8,00,000
Or, Opening Stock = ` 7,95,000
So, Closing Stock = ` 7,95,000 + ` 10,000 = ` 8,05,000

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(v) Determination of Fixed Assets

Cost of Goods Sold
Fixed Assets Turnover Ratio = =4
Fixed Assets

` 12,00,000
Or, = =4
Fixed Assets

Or, Fixed Asset = ` 3,00,000

Workings:
*Calculation of Credit purchases:
Cost of goods sold = Opening stock + Purchases – Closing stock
` 12,00,000 = ` 7,95,000 + Purchases – ` 8,05,000
` 12,00,000 + ` 10,000 = Purchases
` 12,10,000 = Purchases (credit)
Assumption:
(i) All sales are credit sales
(ii) All purchases are credit purchase
(iii) Stock Turnover Ratio and Fixed Asset Turnover Ratio may be calculated either
on Sales or on Cost of Goods Sold.

Question 41
From the following information and ratios, PREPARE the Balance sheet as at 31st March,
2023 and lncome Statement for the year ended on that date for M/s Ganguly & Co.
Average Stock ` 10 lakh
Current Ratio 3:1
Acid Test Ratio 1:1
PBIT to PBT 2.2:1
Average Collection period (Assume 360 days in a year) 30 days
Stock Turnover Ratio (Use sales as turnover) 5 times
Fixed assets turnover ratio 0.8 times
Working Capital ` 10 lakh
Net profit Ratio 10%
Gross profit Ratio 40%
Operating expenses (excluding interest) ` 9 lakh
Long term loan interest 12%
Tax Nil

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Answer:
1. Current Ratio = 3:1

Current Assets (CA)

Current Liability (CL) = 3:1

CA = 3CL
WC = 10,00,000
CA – CL = 10,00,000
3CL – CL = 10,00,000
2CL = 10,00,000

10,00,000
CL =
2

CL = ` 5,00,000
CA = 3 x 5,00,000
CA = ` 15,00,000

CA – Stock
2. Acid Test Ratio = = 1:1
CL

15,00,000 – Stock
= =1
5,00,000

15,00,000 – Stock = 5,00,000

Stock = ` 10,00,000

3. Stock Turnover ratio (on sales) = 5

Sales
=5
Avg stock
Sales
10,00,000 =5

Sales = ` 50,00,000

4. Gross Profit = 50,00,000 x 40% = ` 20,00,000

Net profit (PBT) = 50,00,000 x 10% = ` 5,00,000

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5. PBIT/PBT = 2.2
PBIT = 2.2 x 5,00,000
PBIT = 11,00,000
Interest = 11,00,000 – 5,00,000 = ` 6,00,000

6,00,000
Long term loan =
0.12

= ` 50,00,000

6. Average collection period = 30 days

30
Receivables = x 50,00,000
360

= 4,16,667

7. Fixed Assets Turnover Ratio = 0.8

50,00,000
= 0.8
Fixed Assets

Fixed Assets = ` 62,50,000

Income Statement
(`)
Sales 50,00,000
Less: Cost of Goods Sold 30,00,000
Gross Profit 20,00,000
Less: Operating Expenses 9,00,000
Less: Interest 6,00,000
Net Profit 5,00,000
Balance sheet
Liabilities (`) Assets (`)
Equity share capital 22,50,000 Fixed asset 62,50,000
Long term debt 50,00,000 Current assets:
Current liability 5,00,000 Stock 10,00,000
Receivables 4,16,667
Other 83,333 15,00,000
77,50,000 77,50,000

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Question 42
From the following information, you are required to PREPARE a summarised Balance
Sheet for Rudra Ltd. for the year ended 31st March, 2023:

Debt Equity Ratio 1:1

Current Ratio 3:1
Fixed Asset Turnover (on the basis of sales) 4
Stock Turnover (on the basis of sales) 6
Cash in hand ` 5,00,000
Stock to Debtor 1:1
Sales to Net Worth 4
Capital to Reserve 1:2
Gross Profit 20% of Cost
COGS to Creditor 10:1

Interest for entire year is yet to be paid on Long Term loan @ 10%.

Answer:
Balance Sheet of Rudra Ltd.
Liabilities (`) Assets (`)
Capital 10,00,000 Fixed Assets 30,00,000
Reserves 20,00,000 Current Assets:
Long Term Loan @ 10% 30,00,000 Stock in Trade 20,00,000
Current Liabilities: Debtors 20,00,000
Creditors 10,00,000 Cash 5,00,000
Other Short-term 2,00,000
Current Liability (Other STCL)
Outstanding Interest 3,00,000
75,00,000 75,00,000

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Working Notes:
Let sales be ` x
Balance Sheet of Rudra Ltd.
Liabilities (`) Assets (`)
Capital Fixed Assets x/4
Reserves Current Assets:
Net Worth x/4 Stock in Trade x/6
Long Term Loan @ 10% x/4 Debtors x/6
Cash 5,00,000
Current liabilities:
Creditors x/12
Other Short-term
Current Liability
Outstanding Interest
Total Current Liabilities x/9+5,00,000/3
Total Total

x
1. Fixed Asset Turnover = 4 =
Fixed Assets

x
Fixed Assets =
4

x
2. Stock Turnover = 6 =
Stock

x
Stock =
6

x
3. Sales to net worth = 4 =
net worth

x
Net worth =
4

4. Debt: Equity = 1:1

Long Term Loan 1

=
Net worth 1

x
Long term loan = Net worth =
4

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5. Gross Profit to Cost = 20%

GP
= 20%
Sales – GP

GP
= 20%
x – GP

GP = 0.2 x – 0.2 GP
1.2 GP = 0.2 x

0.2x
GP =
1.2

x
GP =
6

x 5
Cost of Goods Sold = x– = x
6 6

6. COGS to creditors = 10:1

COGS 10
=
Creditors 1
5 10
x =
6
1
Creditors
5x x
Creditors = =
60 12

Stock
7. = 1
Debtor

x
Debtor = Stock =
6

8. Current Ratio = 3:1

Stock+Debtors+Cash 3
=
Current Liabilities 1

x x
+ + 5,00,000
6 6 = 3
Current Liabilities
x
+ 5,00,000 = CL
3
3

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X ` 5,00,000
CL = +
9 3

9. CA = 3CL

=
3 ( X ` 5,00,000
9
+
3
(
X
CA = + 5,00,000
3

10. Net worth + Long Term Loan + Current Liability = Fixed Asset + Current Assets

X X X ` 5,00,000 X X
+ + + = + + ` 5,00,000
4 4 9 3 4 3

X X X ` 5,00,000
+ + = ` 5,00,000 –
4 9 3 3

9x + 4x – 12x = ` 15,00,000 – ` 5,00,000

36 3
X ` 10,00,000
=
36 3

x = ` 1,20,00,000

11. Now, from above calculations, we get,

X ` 1,20,00,000
Fixed Asset = = = ` 30,00,000
4 4

X ` 1,20,00,000
Stock = = = ` 20,00,000
6 6

X ` 1,20,00,000
Debtor = = = ` 20,00,000
6 6

X
Net Worth = = ` 30,00,000
4

Now, Capital to Reserve is 1 : 2

Capital = ` 10,00,000
and, Reserve = ` 20,00,000

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X
Long Term Loan = = ` 30,00,000
4

Outstanding Interest = 30,00,000 × 10%

= 3,00,000

X ` 1,20,00,000
Creditors = = = ` 10,00,000
12 12

Current Liabilities = Creditors + Other STCL + Outstanding Interest

X ` 5,00,000
= = ` 10,00,000 + Other STCL + ` 3,00,000
9 3

` 1,20,00,000 ` 5,00,000
+ = ` 13,00,000 + Other STCL
9 3

` 15,00,000 = Other STCL + ` 13,00,000

Other STCL = ` 2,00,000

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