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# SOLUTIONS

## 1. ON STOCK TUROVER RATIO:

A trader carries an average stock of Rs 75000. His stock turnover ratio is 12 times. Find out his profit, if
he sells at a profit of 20% on sales. (ANSWER: profit = 225000)

Stock turnover ratio = COGS / average stock
COGS= stock turnover ratio * average stock = 12 * 75000 = 900,000
Profit = 20% on turnover or 25% of COGS = 25% of 900,000 = 225000

2. ON STOCK TURNOVER RATIO AND QUICK RATIO/ CURRENT ASSETS:

Calculate current assets of a company from the following information:
Stock turnover ratio= 4 times
Stock in the end is Rs 20000 more than stock in the beginning
Sales = Rs 300000
Gross profit ratio 25%
Current liabilities = Rs 40000
Quick ratio 0.75

Quick ratio = quick assets / current liabilities
0.75 = quick assets/ 40,000
Quick assets = 30,000
Current assets = quick assets + inventory
Stock turnover ratio = COGS/ inventory
4 = 225000 / x + 10,000
x + 10000 = 56250
x = 46250 (opening stock)
closing stock = 46250 + 20,000 = 66250

current assets = quick assets + inventory (always closing is taken because closing stock is present at the
end of the accounting period) = 30,000 + 66250 = 96250

3. Calculate Gross profit ratio, current ratio and debt-equity ratio from the following information:
Net sales = 30,000
Cost of sales= 20,000
Net profit= 3000
Current assets= 6000
Current liabilities= 2000
Paid up share capital= 5000
Debentures= 2500 (Answer: gross profit ratio= 33.33%; current ratio = 3:1; debt equity ratio= 5:16)

GP ratio = gross profit *100/ net sales
Gross profit = net sales COGS = 30000 20,000 = 10,000
GP ratio = 10,000 *100/ 30000 = 33.33%

Current ratio = current assets/ current liabilities = 6000/2000 = 3:1

Debt-equity ratio = debentures (long term debt) / share capital + profit = 2500/ 5000 +3000 = 5:16

4. ON LIQUIDITY RATIOS:
The current assets of a company are Rs 900000. Its current ratio is 3 and liquid ratio is 1.20
Calculate the current liabilities, liquid assets and inventory (Answer: current liability= 300000, liquid
assets= 360000; inventory= 540,000)

Current liability = current assets / current ratio = 900000/ 3 = 300,000
Liquid assets = current assets inventory / current liability
1.2 = liquid assets / 300,000
liquid assets = 3,60,000

Inventory= current assets liquid assets = 900,000 360,000 = 540,000

5. ON DEBT EQUITY RATIO AND WORKING CAPITAL TURNOVER RATIO:
Loan is 87000
8% debentures= 125000
Equity share capital= 375000
Cost of goods sold= 395600
Current assets= 399000
Current liability= 237000
Calculate debt equity ratio and working capital turnover ratio (ANSWER: Debt equity= .57:1; working
capital T R= 2.44 times)

Debt equity ratio = debt (long term)/ equity
Long term debt = debentures + loan = 125000 + 87000 = 212000
Equity = equity share capital = 375000
Debt equity ratio = 212000/ 375000 = 0.57:1

Working capital turnover ratio = COGS/ working capital (CA- CL)
395600/ (399000- 237000) = 2.44 times

6. Calculate quick ratio and stock turnover ratio from the following:

(Answer: quick ratio = 0.39:1; stock turnover ratio= 3.09 times)

Quick ratio = current assets inventory / current liability
Current assets = stock + debtors + cash
Quick assets = stock + debtors + cash stock = 21000 + 30,000 = 51000
Current liability = creditors + outstanding expenses = 115000 + 15000 = 130000
Quick ratio = 51000/ 130,000 = 0.39:1

Stock turnover ratio = COGS/ average stock
COGS = sales gross profit = 800,000 340,000 = 460,000
Average stock = opening + closing / 2 = 99000 + 199000 /2 = 149000
ST ratio = 460000/ 149000 = 3.09 times

7. Calculate return on capital employed (ROCE) from the following Information:

Liabilities Rs Assets Rs
Share capital 20,00,000 Fixed assets 29,00,000
Reserves 500,000 Current assets 2500,000
10% loan 10,00,000 Underwriting 100,000
commission
Current liability 15,00,000
Profit 500,000

ROCE = profit before interest *100/ capital employed

Profit before interest = profit after interest + interest = 500000 + 100000 = 600000
Capital employed = fixed assets + net working capital = 2900000 + (2500000 1500000) = 3900000
OR
Capital employed = share capital + reserves + loan + profit fictitious expenses = 3900000

ROCE = 600000 *100 / 39,00,000 = 15.38%

8. CURRENT RATIO:

Compute current ratio from the following-
Sundry debtors are given as Rs. 100,000. Prepaid expenses of the enterprise are Rs. 10,000. The
enterprise has cash at bank of Rs 30,000. Short term investments have been made amounting to Rs.
20,000 and long-term investments of Rs. 50,000. Machinery of Rs. 7000 was purchased by the
enterprise last year. Bills payable are pending to the value of Rs. 20,000. Sundry creditors are Rs.
40,000. The enterprise has invested in Debentures of Rs. 200,000. There is inventory of Rs. 40,000.
Outstanding expenses are valued at Rs. 40,000.

Current assets = sundry debtors + prepaid expenses + cash + short tern inv + inventory
Current assets = 100,000 + 10,000 + 30000 + 20000 + 40000 = 200000
Current liability = BP + creditors + outstanding expenses
CL = 20,000 + 40000 + 40000 = 100,000
Current ratio = 2:1

9. CURRENT RATIO:

The total assets are given as Rs. 300,000. Out of this, fixed assets are Rs. 1,60,000 and Investments are
Rs. 100,000. On the liabilities side, shareholders funds are 200,000 and long term liabilities are Rs.
80,000. Find out CURRENT RATIO

Current assets = total assets fixed assets investments = 40,000
Current liability = total assets shareholders funds long term liability = 20,000
Current ratio = current assets / current liability = 2:1

10. CURRENT RATIO:
Net Working Capital is given as Rs. 7,20,000. Creditors of the company are Rs. 40,000 and other current
liabilities are Rs. 200,000. Calculate the current ratio.

Current assets current liability = 720,000
Current liability = 240,000
Current assets = 960,000
Current ratio = 960,000/ 2,40,000 = 4:1

11. CURRENT RATIO:
Gross working capital of a company is Rs. 15000. Total debt is of Rs. 32500 and out of total debt, long
term debt stands at Rs. 25,000. Find out the current ratio.

Current assets = 15000
Current liability = 7500
Current ratio = 2:1 (15000/ 7500)

12. CURRENT RATIO:
Net working capital of a company is Rs. 15000. Total debt is of Rs. 32500 and out of total debt, long
term debt stands at Rs. 25,000. Find out the current ratio.

Current assets current liability = 15000
Current liability = 7500
Current assets = 22500

Current ratio = 22500/ 7500 = 3:1

13. CURRENT RATIO:

Total assets of a company are given as Rs. 1,10,000 and fixed assets are Rs. 50,000. Capital employed is
Rs. 1,00,000. There have been no long term investments. Calculate current ratio.

Current assets = total assets fixed assets = 60,000
Current liability = total assets capital employed = 110,000 100,000 = 10,000
Current ratio = 6:1

## 14. CURRENT RATIO:

A Company had current assets of Rs. 300,000 and current liabilities of Rs. 1,40,000. It then purchased
goods worth Rs. 60,000 on credit. Calculate current ratio after the purchase.

## 15. CURRENT RATIO:

Current liabilities of a company were Rs. 100,000 and its current ratio was 2.5:1. After this, it paid Rs.
25,000 to a creditor. Calculate the current ratio after the payment.

## 16. CURRENT RATIO:

The ratio of current assets to current liabilities is 1.5:1. Current assets are Rs. 600,000 and current
liabilities are Rs. 400,000. The firm is interested in maintaining a current ratio of 2:1 by paying off a
part of current liabilities. Compute the amount of current liabilities that should be paid, so that current
ratio of 2:1 can be maintained.

Self explanatory

17. Share capital of a company is Rs. 21000. Reserves are for Rs. 1500. The profit and loss account shows a
positive balance of Rs. 2500. Bank overdraft is for Rs. 2000 and sundry creditors are Rs. 6000. On the
assets side, fixed assets of the company are at Rs. 17000. The company has stock of Rs. 6200, debtors
of Rs. 3200 and Cash of Rs. 6600. Calculate Current Ratio.

Current assets = 6200 + 3200 + 6600 = 16000

## From the following, calculate current ratio:

Liquid assets are Rs. 37500. Stock is valued at Rs. 10,000. Prepaid expenses are Rs. 2500 and working
capital is of Rs. 30,000. Find out current ratio.

## Current assets = 37500 + 10000 + 2500 = 50,000

Working capital = current assets current liability (technically, net working capital has the above
mentioned formula and gross working capital is equal to current assets. However, there is often a mix
up and examiners assume certain things in questions and mention only working capital, which can be
assumed to be either gross or net. It is important that you use your acumen to identify what it should
mean)

## Current ratio = 2.5:1

19.

Calculate current ratio and quick ratio from the above balance sheet.

## (Answer: Current ratio = 1:1; Liquid Ratio = 0.47:1)

Current assets = inventory + debtors + cash + prepaid expenses = 12000 + 9000 + 2280 + 720 = 24000

## Current ratio = 1:1

Liquid assets = 24000 inventory prepaid expenses = 24000 12000 720 = 11280

## Quick ratio = 11280/24000 = 0.47 :1

20. Current liabilities of a company are Rs. 300,000. Its current ratio is 3:1 and liquid ratio is 1:1. Calculate
the value of stock.

## 22. DEBT TO EQUITY RATIO:

Total assets of a company are Rs. 1,25,000. Total debt of the company is Rs. 100,000 and current
liabilities are Rs. 50,000. Find out debt to equity ratio.

## Long term debt = total debt current liability = 50,000

Since assets = liabilities in balance sheet, total assets = 125000 should be equal to total liability

## 23. DEBT TO EQUITY RATIO:

Equity share capital of a company is Rs. 2,00,000. Current liabilities are Rs. 1,00,000. Preliminary
expenses are for Rs. 10,000. Reserves and surplus are of Rs. 1,60,000 and 10% debentures are of Rs.
1,50,000. Interest on debentures is Rs. 15,000. Find out debt to equity ratio.

## Total long term debt = debentures = 150,000

Shareholders funds = share capital + reserves preliminary expenses = 200000 + 160000 10000 =
350000

Debt to equity ratio = 150000/350000 = 3:7

## 24. DEBT TO EQUITY RATIO:

A company has applied for a loan. The lender of the loan requests you to compute the debt to equity
ratio to find out long term solvency of the company.

liabilities Rupees

## Short term notes payable 5000

6% debentures 7250

Reserves 4000

## Long term debt = debentures = 7250

Shareholders funds = equity + preferred stock + reserves + additional paid in capital = 8500

## 25. INTEREST COVERAGE RATIO:

Profit after interest but before tax is Rs. 6,25,000 (PAT should have been 375000). Interest expense for
the company is Rs. 1,25,000. Calculate Interest coverage ratio.

## 26. INTEREST COVERAGE RATIO:

A company has residual profits after interest, tax and dividends as Rs. 5000. Dividends amount to Rs.
500, Tax is Rs. 1000 and interests are paid as follows:

PAT = 5000

Dividend = 500

Tax = 1000

EBIT= 7350

Capital

## Proprietary ratio = shareholders funds/ total assets

Shareholders funds = equity + preference + reserves preliminary exp = 150000

## 28. PROPRIETARY RATIO:

The equity share capital of a company stands at Rs. 200,000. The company has issued 10% preference
share capital of Rs. 300,000. Reserves are held to the level of Rs. 2,50,000. Balance in P & L account is
Rs. 1,50,000. The company has also issued 10% debentures of Rs. 16,00,0000. Current liabilities are Rs.
6,80,000. Net fixed assets are Rs 21,00,000. Long term investments made by the company are Rs.
200,000. The company has current assets of Rs. 880,000. Earning before interest and taxes is Rs.
500,0000. Calculate Proprietary ratio and Interest coverage ratio of the company.

## Shareholders funds = equity + preference + reserves + P L account = 900000

Total assets = fixed assets + long term investments + current assets = 3180000

## Interest coverage ratio = EBIT/ interest on long term loans

EBIT = 5000000

Interest = 1600000

ICR = 3.125

29. Calculate debt equity ratio and proprietary ratio:

Equity = 2100000

## Shareholders funds = equity + reserves = 2100000

Total assets = fixed assets + long term investments + current assets = 4000000

Credit- 60,000

Salaries 25000

Wages 5000

## Compute gross profit ratio for the above.

What is GP ratio if sales are Rs 600,000 and Gross profit is 25% on cost.

(Answer: 10%; 20%; HINT- use techniques learnt in Quantitative Aptitude in Profit and loss)

## Gross profit ratio = gross profit *100/ net sales

Gross profit = Gross profit is calculated by reducing operating/ factory expenses from sales

Here, operating expenses/ cost of sales are = purchases return outwards + opening stock closing
stock + direct expenses

= 75000 2000 + 10000 (decrease in stock = opening stock closing stock) + 2000 (carriage inward) +
wages (salaries are indirect but wages are direct)

= 90000

## Sales = cash sales + credit sales = 100000

Gross profit = 100000- 90000 = 10,000

## Gross profit ratio = 10,000/ 100,000 *100 = 10%

When sales are 600,000 and GP ratio is 25% on cost, it means that GP ratio is 20% on sales

## 31. GROSS PROFIT RATIO:

Cash sales are 25% of total sales, purchases are Rs.690,000, credit sales are Rs. 600,000; excess of
closing stock over opening stock is Rs 50,000. Calculate gross profit ratio.

## Total sales = 800000

Direct expenses + cost on sales = purchases + (-increase in stock) = 690000 50000 = 640000

## Gross profit ratio = 160,000 *100/ 800000 = 20%

33. GROSS PROFIT RATIO: (THIS QUESTION REQUIRES UNDERSTANDING OF INVENTORY TURNOVER
RATIO)

Average stock Rs. 1,60,000. Stock turnover ratio is 8 times. Average debtors are Rs. 200,000. Debtors
turnover ratio is 6 times. Cash sales are 25% of net sales.

Hint- stock turnover ratio = COGS/ average stock; Debtor turnover ratio = net credit sales/ average
debtors)

COGS = 1280000

## Net credit sales = 1200,000

Since credit sales are 75% of total sales, total sales = 1200000 *100/75 = 1600000

## 34. OPERATING RATIO:

Sales of the enterprise are Rs. 400,000. Gross profit is Rs. 1,84,000. Administrative expenses incurred
by the company of Rs. 10,000. Selling and distribution expenses are Rs. 14000. Loss on sale of
machinery is Rs. 10,000. Net profit is Rs. 1,50,000. Find out operating ratio.

## COGS = sales gross profit = 400000 184000 = 216000

Operating expenses = administrative expenses + selling distribution expenses = 24000

## Opening stock = 50,000

Purchases = 500,000

Sales = 7,50,000

## Operating expenses = administrative + selling = 85000

Net operating profit = net sales COGS operating expenses = 735000 475000 85000 = 175000

Operating profit ratio = 175000 *100/ 735000 = 23.8%

## 37. OPERATING RATIO:

Sales is given as Rs. 50,20,000. Sales return are Rs. 2,20,000. Cost of goods sold is Rs. 24,40,200. Office
and administrative expenses are given as Rs. 251200. Selling and distribution expenses are Rs.

4,50,400. Interest paid on loan is Rs. 50,000. Income from Investment is Rs. 60,000. Loss by theft is Rs.
30,000. Calculate Operating Ratio.

COGS = 2440200

## 38. RETURN ON CAPITAL EMPLOYED:

The balance in profit and loss account of a company is Rs 500,000 (net profit). Long term borrowings @
10% are 10,00,000. Current liabilities are Rs. 15,00,000. Fixed assets of the company are 29,00,000.
Current assets of the company are 25,00,000. Find out return on capital employed.

## EBIT = PAT + interest on long term borrowing = 500000 + 100000 = 600000

Capital employed = total assets current liabilities = 2900000 + 2500000 1500000 = 3900000

## 39. RETURN ON CAPITAL EMPLOYED (IMP):

A company has equity share capital of Rs. 500,000 and 8% preference share capital of Rs. 200,000.
Reserves and surplus are valued at Rs. 2,50,000. Long term borrowings are for Rs. 300,000 and interest
on these borrowings is Rs. 40,000. Profit after interest on borrowings but before dividend is Rs.

200,000. Current liabilities stand at Rs. 8,20,000. On the assets side, fixed assets are for Rs. 8,80,000.
Non current investments stand at Rs. 2,50,000. Current assets are valued at Rs. 9,40,000. Find out
return on capital employed for the company.

## Profit before interest (EBIT) = 200000 + 40000 = 240,000

Capital employed = fixed assets + current assets current liability = 880,000 + 940000 820,000 =
10,00,000

## 40. RETURN ON CAPITAL EMPLOYED:

Equity share capital of a company is Rs. 50,000. 10% preference share capital stands at Rs. 50,000.
Reserves and surplus are for Rs. 100,000. Current liabilities are Rs. 1,70,000. 12% debentures are
issued for Rs. 400,000. Current assets are for Rs. 2,20,000. Net profit for the company after interest
and tax is Rs. 1,20,000. Tax paid for the year of Rs. 1,20,000. Find out return on capital employed for
the company.

EBIT = profit after interest and tax + tax + interest = 120,000 + 120,000 + 48000 = 288000

Capital employed = equity share capital + reserves + preference share capital + long term loans =

## 41. INVENTORY TURNOVER RATIO: (IMP)

Sales of a company stand at Rs. 200,000. Direct expenses are Rs. 10,000 and Indirect expenses are Rs.
20,000. Profit before tax but after direct and indirect expenses is Rs. 30,000. Opening stock stood at Rs.
40,000 and closing stock stands at Rs. 20,000. Find out inventory turnover ratio.

## Gross profit = PBT + indirect expenses = 30,000 + 20,000

(Gross profit is found out after reducing direct expenses from sales)

## 42. INVENTORY TURNOVER RATIO:

Cost of goods sold is given as Rs. 300,000. Purchases made in the year are Rs. 3,30,000 and Opening
stock is given as Rs. 60,000. Find out inventory turnover ratio

COGS = 300,000

## Opening stock 29000

Purchases 2,42,000

Sales 3,20,000

## COGS = sales GP = 320,000 25% on 320,000 = 240,000

Closing stock = opening stock + purchase COGS = 29000 + 242000 240000 = 31000

## 44. INVENTORY TURNOVER RATIO:

Opening stock is given as Rs. 20,000 and closing stock is given as Rs. 40,000. Sales are given as Rs.
300,000. Gross Profit on cost is 25%. Calculate inventory turnover ratio.

(Answer: 8 times; hint- use technique learnt in profit and loss to measure gross profit on sales)

## 45. DEBTORS TURNOVER RATIO:

Calculate opening and closing debtors from the following information:

## Let credit sale be X, cash sale will be X/3

X + X/3 = 800,000

## Now, let opening debtor be Y. closing debtor will be Y + 20,000

Y + Y + 20,000 = 150000 *2

2Y = 280,000

Y = 140,000

## Total purchases = Rs. 850,000

Cash purchases = Rs. 80,000

## Average creditor = creditor at the end + BP at the end = 140,000

(when beginning creditor is not given, the end creditor is assumed to be average)

## 47. WORKING CAPITAL TURNOVER RATIO:

Current assets are Rs. 9,00,000. Current liabilities are Rs. 3,00,000. Total sales Rs. 30,50,000. Sales
return are Rs. 50,000.

## 48. WORKING CAPITAL TURNOVER RATIO:

Working capital is given as Rs. 250,000. Cost of goods sold is Rs. 10,00,000 and gross profit on sales is
20%. Calculate working capital turnover ratio.

## GP on sale = 20% or GP on cost = 25%

COGS = 10,00,000

GP on cost = 2,50,000

## 49. WORKING CAPITAL TURNOVER RATIO:

Current liabilities of a company include trade payables and short term provisions of Rs. 2,50,000 and
50,000 respectively. Credit purchase made during the year is for Rs. 7,50,000. Sales during the year
stand at Rs. 32,00,000 and sales return are for Rs. 200,000. Current assets are a total of Rs. 600,000.
Find out working capital turnover ratio and payable turnover ratio

WCTR = 10 times

## 50. WORKING CAPITAL TURNOVER RATIO AND GROSS PROFIT RATIO:

Net sales is given as Rs. 30,00,000. Cost of sales is Rs. 20,00,000. Current assets stand at Rs. 600,000
and current liabilities are Rs. 2,00,000. Paid up share capital of the company is Rs. 500,000. Find out
Gross profit ratio and WC turnover ratio.

## Net sale = 30,00,000

WC = CA CL = 400,000