RATIO ANALYSIS

What is Ratio Analysis?

Ratio Analysis is one of the most important tools of financial management. Ratio analysis means the process of
computing, determining and presenting the relationships between items and/or groups of items in the financial
statements through accounting ratios. Since the analysis is normally undertaken for the purpose of projecting financial
position or profitability, knowledge of trends is usually more significant than knowledge of present status only. An
analysis of trends through ratio analysis helps in appraisal of financial conditions, efficiency and profitability of a
business. An analyst of ratios studies the results of business operations as reflected in the relationships among the
items of balance sheet and operating statement. He asks the following questions and tries to get the answer from the
financial statements on -

1. The extent and character of the liabilities of the business.

2. The “net worth” of the business.
3. The ability of the business to meet its obligations as and when they arise.
4. The ability of the business to earn a “fair” return on its investments in the business.
5. The ability of the business to withstand possible setbacks from external and internal forces.
6. The resourcefulness and the ability of the business to raise new funds as and when required.

What is Ratio?

Ratio is an arithmetical or numerical relating one number to another. For example, if the relationship between two
numbers say, 8 and 4 is to be expressed, it will be expressed in the form of a ratio 2:1

Different modes of expressing accounting ratios –

1. Pure ratio (3:2, 2:5)

2. Percentage (25%, 20%)

3. Rate (10 times)

Classification of accounting ratios –

1. Balance sheet ratios, also known as Static Ratios or Financial ratios

.
2. Income statement ratios are also known as Dynamic Ratios or Operational Ratios.

3. Inter statement ratios are also known as Inter-related ratios or Combined Ratios.

Ratios Expressed Formula Std. Used for measuring

as Ratio
(if any)

A. FINANCIAL STABILITY, SOLVENCY, LIQUIDITY, BALANCE SHEET RATIOS

(1) Current Ratios Pure Ratio Current Assets 2:1 - Short term stability
Current Liabilities - Capitalisation
- Over/Under Trading

(2) Liquid Ratio Pure Ratio Quick Assets 1:1 - Immediate solvency
(Quick Ratio) Quick Liabilities
- Long term stability
(3) Proprietary Ratio Percentage Proprietors Funds . 60% to - Capitalisation
(Asset Backing Ratio) Fixed Assets + Current Assets 75% - Over/Under trading
- Overall efficiency

(4) Capital Gearing Pure Ratio Pref.Share Cap+Debenture+loan

Ratio Or Equity Share Cap+Res None - Trading on equity
Percentage

(5) Stock Working Pure Ratio Closing Stock 1:1 - Investments in stocks
Capital Ratio Or Working Capital
Percentage
(6) Debt Equity Ratio Pure Ratio Long Term Debts Depends - Long term stability
Shareholders Funds on
industry
OR
Long Term Debts .
Shareholder Funds + Long Term Debts

B. MANAGEMENT EFFICIENCY RATIOS, REVENUE STATEMENT RATIOS:

(7) Gross Profit Ratio Percentage Gross Profit X 100 Depends - Profitability vis-à-vis
Net Sales on industry Sales

(8) Operating Ratio Cost of Goods Sold + Operating Exp. X 100 - Operating Efficiency
“ Net Sales None

(9) Operating
Expenses Ratios “ Operating Expenses X 100 “
Net Sales
(10) Group of
Expenses Ratio “ Relevant Group of Expenses X 100 “
Net Sales
(11) Net Operating
Expenses Ratio “ Operating Profit X 100 “
Net Sales

(12) Net Profit Ratio “ Operating Net Profit X 100 Depends - Profitability vis-à-vis
Net Sales on industry sales

OR
Net Profit (before tax) X 100
Net Sales

(13) Stock Turnover No. of times Cost of goods sold Higher the - Over/Under Trading
Ratio or days Average Stock better

(Op. Stock + Cl. Stock / 2)

C. OVERALL PROFITABILITY RATIOS, COMBINED RATIOS

(14) Return on Percentage Net Profit (before int & tax) X 100 Depends on - Profitability vis-à-vis
Capital employed Capital Employed industry Investments

(15) Return on Net Profit (after int & tax) X 100 Depends on - Profitability vis-à-vis
Proprietors funds “ Proprietors funds industry Investments
- Over/Under Trading
(16) Return on Net Profit after tax & Pref Div X 100 None - Profitability vis-à-vis
Equity Capital “ Paid Up Equity share capital Investments
- Capitalisation
- Overall Efficiency

(17) Earning per share Rupees Net Profit (after tax) – Pref. Div. None - Profitability vis-à-vis
No. of equity shares Investments

(18) Dividend pay out Percentage Div. per Equity share None
Ratio Earning per Equity Share Depends on - Funds ploughed back
industry into business

(19) Price Earning No. of times Market price of share - Market perception of
Ratio Earning per share equity shares

(20) Debt Service No. of times Net Profit (before tax) & int on Loan At least 1
Ratio Interest on loans + Preference Dividend + - Capacity of business
Annual debt installment due to service loans
 No. of days
(21) Debtors turnover Sundry Debtors + A/c. Receivable Credit - Over/Under
Ratio Average net credit sales X No. of days in period Investments in debtors
the year granted to
customers
Credit - Promptness of
(22) Creditors No. of days Sundry Creditors + Bills Payable period payment to creditors
turnover Ratio Average net credit purchases X granted to
No. of days in the year suppliers

(23) Debt collection “ No. of days in a year - - Indicates promptness

Period Debtors turnover in recovery of debts
from debtors

(24) Collection period Average Debtors X Given Days

Credit Sales

USES OF ACCOUNTING RATIOS IN A SUMMARISED FORM:

FOR MEASURING RATIOS TO BE USED

I. Profitability
(a) Vis-à-vis sales (i) Gross Profit Ratio
(ii) Net Profit Ratio
(b) Vis-à-vis investments (i) Return on capital employed
(ii) Return on proprietors funds
(iii) Return on equity capital
(iv) Earning per share
II. Financial Stability
(a) Long term stability (i) Proprietory Ratio
(ii) Debt Equity Ratio

(b) Short term stability (i) Current Ratio

(c) Immediate solvency (i) Liquid Ratio

III. Financial Management
(a) Over capitalisation or Under capitalisation (i) Proprietory Ratio
(ii) Return on proprietors equity
(iii) Current Ratio

(b) Over Trading or Under Trading (i) Proprietory Ratio

(ii) Current Ratio
(iii) Liquid Ratio
(iv) Stock Turnover Ratio
(v) Return on Proprietors funds

(c) Investments in Stocks (i) Stock Turnover Ratio

(ii) Liquid Ratio
(iii) Stock Working Capital Ratio

(d) Over Investments in receivables (i) Debtors Turnover Ratio

(e) Prompt payment of creditors (i) Creditors Turnover Ratio

(f) Trading on Equity (i) Capital Gearing Ratio

(ii) Debt Equity Ratio

(g) Operating Efficiency (i) Operating Ratio

(ii) Expenses Ratio

(h) Capacity to service loans (i) Debt Service Ratio

IV. Overall Efficiency (i) Stock Turnover Ratio
(ii) Proprietory and Current Ratio
(iii) .Return on proprietors equity
Preparation Of Financial Statements from Accounting Ratios
In order to prepare Profit & Loss A/c and Balance Sheet from the given ratios, it is necessary to have an idea of
relationship which exists between different terms used to compute ratios. The following equations may be used to
prepare final accounts:

Trading and Profit & Loss A/c.

Gross Profit = Sales – Cost of goods sold (1)
Hence Cost of goods sold = Sales – Gross Profit
Sales = Cost of goods sold + Gross Profit
Cost of Goods sold = Opening Stock + Materials consumed + Manufacturing Expenses – Closing Stock
Operating Profit = Gross Profit – Operating Expenses
Operating Expenses = Administrative Expenses + Selling and Distribution Expenses + Finance Expenses
Operating Profit = Sales – Operating Cost (2)
Operating Cost = Sales – Opening Profit
Sales = Operating Cost + Operating Profit
Operating Cost = Cost of goods sold + Operating Expenses
Net Profit after Interest but
before Tax = Operating Profit + Non- Operating Income – Non - Operating Expenses
Net Profit after Interest
and Tax = N.P.BIT – I
Net Profit after Interest
and Tax = NPBT – T

Balance Sheet
Capital Employed = Fixed Assets + Working Capital (1)
Fixed Assets = Capital Employed – Working Capital
Working Capital = Capital Employed – Fixed Assets
Working Capital = Current Assets – Current Liabilities (2)
Current Assets = Working Capital – Current Liabilities
OR
Current Liabilities = Current Assets – Working Capital
Current Assets = Liquid Assets + Stock
Liquid Assets = Current Assets – Stock
Stock = Current Assets – Liquid Assets
Liquid Assets = Debtors + Cash and Bank
Debtors = Liquid Assets – Debtors

Capital Employed (Liability Side)

Capital Employed = Net Worth + Long Term Loans
Net Worth/
Proprietors Fund = Capital Employed – Long Term
Long Term Loans = Capital Employed – Net Worth
Net Worth = Share Capital + Reserves and Surplus
Equity Share Capital = Equity Net Worth – Reserves and Surplus
Reserves and Surplus = Equity Net Worth – Equity Share Capital
Stock Turnover Ratio Connects
Sales, Cost of Sales, Operating Profits and Stock.

Debtors Turnover Ratio Connects

Sales, Cost of Sales, Operating Profits and Debtors.

Stock to working Capital Ratio helps to ascertain composition of Working Capital or between Current and Quick
Assets.

Que. 1: From the following balance sheet of Sachin, Calculate current ratio, Liquid or Quick Ratios, proprietary ratio
and comment on the same.
Balance Sheet as at March 31, 2014
Liabilities Rs. Assets Rs.
Share Capital 5,00,000 Fixed Assets 5,45,000
Reserves 2,50,000 Investments 50,000
Term loan from Bank 1,60,000 Stock-in-trade 3,45,000
Bank Overdraft 75,000 Debtors 1,50,000
Creditors: Bills Receivable 70,000
 For goods 1,60,000 Cheques in hand 25,000
 For expenses 15,000 Bank Balance 15,000
Bills Payable 45,000 Cash in hand 5,000
Total  12,05,000 Total  12,05,000
 Quick assets = Current Assets – Inventories, prepaid expenses, deposits with customs, ports, trust, excise, etc.
Therefore, Quick assets include Cash & Bank balances, Marketable investments, Debtors and Bills Receivable.
Quick Liabilities = Current Liabilities minus Bank Overdraft

Que. 2: “Cosmos India Ltd.”

Balance Sheet as on 31st December 2014
Liabilities Rs. Assets Rs.
Capital Reserve 1,26,000 Copyright 1,00,000
General Reserve 1,20,000 Cash 21,000
Provision for Tax 50,000 Calls in Arrears 9,575
Commission received in Adv. 10,875 Plant & Machinery 4,20,000
15% Debentures 1,60,000 Debtors 3,00,425
12% Bank Loan 40,000 Prepaid Insurance 15,375
6% Pref. Share Capital 2,00,000 Land & Building 5,00,000
Equity Share Capital 10,00,000 Fixtures 25,000
Bills Payable 49,125 Furniture 75,000
Profit and Loss A/c. 9,000 Preliminary Expenses 18,625
Bank Overdraft 10,740 Goodwill 1,00,000
Share Premium 15,000 Investment (Long Term) 1,75,000
Sundry Creditors 1,89,260 Stock 2,00,700
Marketable Investments 19,300
19,80,000 19,80,000
You are requested to rearrange above Balance Sheet in vertical form and compute the following ratios.
a) Current Ratio. b) Proprietory Ratio. c) Capital Gearing Ratio.

Que. 3: Following is the balance sheet of Cricket limited as on 31st March 2014 –
Liabilities Rs. Assets Rs.
Equity share capital 2,00,000 Goodwill 1,20,000
Capital reserves 40,000 Fixed assets 2,80,000
8% Mortgage loan 1,60,000 Stock 60,000
Trade creditors 80,000 Debtors 60,000
Bank overdraft 20,000 Investments (short term) 20,000
Provision for taxation 40,000 Cash in hand 60,000
Profit and loss account 60,000
TOTAL 6,00,000 T O T A L  6,00,000
Calculate ratios for testing –
A. Immediate solvency B. Short-term financial strength C. Long term financial strength.

Que. 4: The following is the balance sheet of Pataudi limited as on 31st March 2014 –
Liabilities Rs. Assets Rs.
Share capital: Land and buildings 1,20,000
- 1,000 equity shares of Rs. 100/- each 1,00,000 Plant and machinery 1,60,000
- 1,000 9% pref.shares of Rs. 100/- each 1,00,000 Goodwill 1,20,000
General reserve 40,000 Investments (marketable) 20,000
Profit and loss account 60,000 Debtors 60,000
8% Mortgage loan 1,60,000 Stock 60,000
Sundry creditors 80,000 Cash on hand 60,000
Bank overdraft 20,000
Provision for taxation 40,000
Total  6,00,000 Total  6,00,000
Compute the balance sheet ratios and comment on the liquidity, solvency and capital structure of the company.

Que. 5: Shown below are the comparative balance sheets and operating data of Topa International for the years
ended on 31st December 2013, 2014 and 2015.
2013 (Rs.) 2014 (Rs.) 2015 (Rs.)
Current assets:
- Cash 1,200 1,900 400
- Debtors 14,800 12,400 10,400
- Stock 14,800 16,200 19,800
30,800 30,500 30,600
Fixed assets (net):
- Equipments 9,800 12,000 12,800
- Buildings 15,700 16,300 18,000
- Land 5,000 5,000 5,000
30,500 33,300 35,800
Total Assets 61,300 63,800 66,400
 Current liabilities:
- Bills payable 7,500 3,000 5,000
- Creditors 6,300 11,200 13,400
- Accrued liabilities 1,200 1,600 2,900
15,000 15,800 21,300
Long term loans: debentures (6%) - - 5,500
Owners equity:
Equity capital (Rs. 100/- each) 30,000 30,000 30,000
Retained earnings 16,300 18,000 9,600
46,300 48,000 39,600
Total liabilities 61,300 63,800 66,400

Additional information –
2013 (Rs.) 2014 (Rs.) 2015 (Rs.)
Total sales 1,00,000 1,05,000 93,000
Net profit after tax 5,000 5,700 2,400
Dividend paid 3,000 3,000 1,000
You are required to –
1. Compute the following for each of the three years –
a) Current ratio b) Acid test ratio c) Proprietary ratio d) Return on proprietary fund
e) Return on equity capital.
2. Discuss the financial condition of the company as on 31st December 2013 to 15 and the trends shown by the
comparative data and the ratios.

Que.6: M/s. Sushant Ltd. presents the following Trading and Profit & Loss A/c for the year ended 31st March, 2012
and Balance Sheet as on that date.

Trading and Profit & Loss Account for the year ended 31st March, 2012
Particulars Rs. Particulars Rs.
To opening Stock 2,00,000 By Sales 12,00,000
To Purchases 5,00,000 By Closing Stock 4,00,000
To Wages 3,00,000
To Gross Profit c/d 6,00,000
16,00,000 16,00,000
To Salaries 1,50,000 By Gross Profit b/d 6,00,000
To Rent 60,000 By Profit on Sale of Investment 5,000
To Commission 12,000 By Interest 15,000
To Advertising Expenses 20,000
To Interest 83,000
To Depreciation 30,000
To Provision for Tax 50,000
To Net Profit c/d 2,15,000
6,20,000 6,20,000
To Proposed Dividend 80,000 By Balance b/f 1,85,000
To Preference Dividend 16,000 By Net Profit b/d 2,15,000
To Balance c/d 3,04,000
4,00,000 4,00,000

Balance Sheet as on 31st March, 2012

Liabilities Rs. Assets Rs.
Equity Share Capital (Rs. 100) 8,00,000 Land & Building 6,00,000
8% Preference Share Capital 2,00,000 Plant & Machinery 5,50,000
Reserve and Surplus 3,04,000 Furniture 4,00,000
7% Debentures 5,00,000 Investments 2,70,000
Loan from IDBI 6,00,000 Stock 4,00,000
Creditors 1,50,000 Debtors 2,00,000
Bills Payable 50,000 Bills Receivable 1,60,000
Provision for Tax 50,000 Advance Tax 30,000
Dividend Payable 96,000 Prepaid Expenses 40,000
Cash in Hand 20,000
Bank Balance 60,000
Discounts on Issue of Debentures 20,000
27,50,000 27,50,000
Additional Information:-
1. The market price of equity share as on 31st March, 2012 was Rs. 90/-.
2. Out of total sales, 30% are cash sales and out of total purchases, 50% are credit purchases. You are required to
calculate the following Ratios.
i. Return on Capital Employed
ii. Creditors Turnover Ratio
iii. Price Earnings Ratio
iv. Return on Equity Capital
v. Debt Services Ratio
vi. Debtors Turnover Ratio.
Vertical final accounts not expected.

Que.7:
The following is the summarized Profit & Loss A/c of M/s Hanuman Product Ltd. for the year ending 31 st March, 2014.

Profit & Loss Account

Particulars Rs. Particulars Rs.
To Opening Stock 5,00,000 By Sales 50,00,000
To Purchases 25,00,000 By Profit on sale of Asset 50,000
To Wages 25,000 By Interest 25,000
To Freight and Octroi 80,000 By Dividend 10,000
To Direct Expenses 75,000 By Closing Stock 7,50,000
To Office Insurance 80,000
To Office Staff Salary 2,00,000
To General Managers Salary 50,000
To Staff Welfare Expenses 40,000
To Printing and Stationery 5,000
To Interest 50,000
To Audit Fees 15,000
To Office Rent 2,00,000
To Computer Repairs 75,000
To Advertising 2,50,000
To Bad Debts 5,000
To Travelling 20,000
To Commission 75,000
To Depreciation on Furniture 30,000
To Depreciation on Building 40,000
To depreciation on Vehicles 20,000
To Interim Dividend 50,000
To Loss on Sale of Asset 1,00,000
To Income Tax 50,000
To Net Profit 13,00,000
Total 58,35,000 Total 58,35,000

Calculate the following Ratios:

1. Gross Profit Ratio 2. Operating Ratio 3. Office Expenses Ratio.
Vertical statement of accounts not expected.

Que.8: Following is the Balance Sheet of Bliss and Happiness Ltd., as at 31st March, 2013.
Balance Sheet as on 31st March 2013
Liabilities Rs. Assets Rs.
Equity Share Capital 1,00,000 Machinery 2,96,000
General Reserve 70,000 Investments 1,12,000
10% Preference Capital 1,80,000 Stock in Trade 1,01,000
15% Debentures 1,20,000 Bills receivable 20,000
Trade Payables 1,22,000 Trade Receivables 49,000
Banks Overdraft 20,000 Cash and Bank 38,000
Provision for Tax 18,000 Profit and Loss A/c 14,000
Total 6,30,000 Total 6,30,000

Sales for the year Rs. 7,00,000; Gross Profit Rate – 25% and opening stock is Rs. 1,09,000. Profit Before Tax for the
year ending 31.03.2013 is Rs. 2,10,000. You are required to compute the following ratios and comment on Current
Ratio.
i. Current Ratio
ii. Acid Test Ratio
iii. Stock Turnover Ratio
iv. Capital Gearing Ratio
v. Proprietary Ratio
vi. Debt Equity Ratio (Debt / Net worth)
vii. Return on Capital Employed
Redrafting the given Balance Sheet in vertical format is not expected.

Que. 9: From the following particulars calculate:

(a) Debt Equity Ratio
(b) Capital Gearing Ratio
Rs.
Equity Share Capital 5,00,000
Preference Share Capital 2,00,000
Reserves 6,00,000
Term loan from Bank 5,00,000
Debentures 6,00,000

Que. 10: From the following details calculate –

1. Earning per share.
2. Dividend pay out ratio.
3. Price earnings ratio.
- Equity share capital (of Rs. 10/- each) Rs. 5,00,000.
- 10% Preference share capital Rs. 2,00,000.
- Profits before tax Rs. 6,00,000.
- Tax Rate – 40% + surcharge of 15% of tax.
- Dividend on equity shares 40%.
- Price of equity share on Bombay Stock Exchange Rs. 120.

Que. 11: From the following financial data compute capital gearing ratio –
5% Debentures – Rs. 24,000; Credit balance in profit and loss account – Rs. 5,000;
General reserve – Rs. 8,000; Equity capital – Rs. 1,52,000;
Total funds employed – Rs. 1,89,000.

Que. 12: From the following details of Mr. Ajay, calculate debtors turnover ratio and credit turnover ratio and comment
thereon. The normal period of credit given to customers is 60 days and recd from suppliers is 45 days.
Rs.
Debtors 45,000
Bills Receivable 36,000
Creditors 27,000
Bills Payable 18,000
Sales during the year 4,50,000
Purchases during the year 3,25,000
10% of sales and purchases are for cash.

Que. 13: Calculate from the following details furnished by Pardeshi Ltd.
(a) Current Ratio
(b) Liquid Ratio
(c) Credit Turnover Ratio and Average Credit Period
(d) Debtors Turnover Ratio and Average Credit Period
(e) Stock Turnover Ratio
Rs.
Stock 1,00,000
Debtors 1,40,000
Cash 60,000
Creditors 1,60,000
Bank Overdraft 30,000
Outstanding Expenses 10,000
Total Purchases 6,60,000
Cash Purchases 20,000
Gross Profit Ratio 33 1/3 %
Offer your comments on short-term credit position of the company; comment on individual ratio is not desirable.

Que. 14:
The profit of a company is Rs. 50,000 after charging interest of Rs. 6,000 on debentures and providing Rs. 24,000 on
taxes; the assets of the company consist of fixed assets – Rs. 2,00,000; current assets – Rs. 6,00,000 and preliminary
expenses – Rs. 30,000. Discount on issue of debentures is Rs. 10,000. Compute the return on capital employed.
Que. 15:
From the following information calculate Current Ratio, Liquid Ratio, Creditor’s Turnover ratio and Average
Credit Sales of Surya Ltd. and Chandra Ltd.

Particulars Surya Ltd. Chandra Ltd.

Credit to Debtors 3 months 3 months
Rs. Rs.
Stock 8,00,000 1,00,000
Debtors 1,70,000 1,40,000
Cash 30,000 60,000
Trade Creditors 2,80,000 1,50,000
Bills Payable 20,000 10,000
Bank Overdraft 40,000 30,000
Creditors for expenses 60,000 10,000
Total Purchases 9,30,000 6,60,000
Cash Purchases 30,000 20,000
Que. 16:
1) The current ratio of Bobby limited is 4.5:1 and the liquid ratio is 3:1; inventory is Rs. 6,00,000. Calculate the
current liabilities.
2) Total current liabilities of Rocky limited are Rs. 10,00,000 and the acid test ratio is 3:1. Inventory is Rs. 5,00,000.
Find out the current assets and compute the current ratio.
3) Inventory of Minky limited is Rs. 6,00,000. Total liquid assets are Rs. 24,00,000 and liquid ratio is 2:1. Work out
the current ratio.
4) Liquid ratio of Pinky limited is 2.5:1. Inventory is Rs. 12,00,000. Current ratio is 4:1. Assume there is no bank
overdraft. Find out the current liabilities.

Que. 17:
A company’s stock turnover was 5 times. Stock at close was Rs. 10,000 more than that at the beginning of the year.
The company’s practice is to value the stock at cost. Sales during the year were Rs. 10,00,000 and gross profit margin
was 25%. Ascertain the closing stock.

Que. 18: A Company’s shareholders equity is Rs. 1 Lac. Following are the ratios relating to the balance sheet:
1. Current debts to total debts = 0.40
2. Total debts to owners equity = 0.60
3. Fixed assets to owners equity = 0.60
4. Total assets to turnover = 2 times
5. Inventory Ratio to sales = 8 times
From the following information prepare the balance sheet of the company.

Que. 19:
Debtors Velocity = 3 months
Stock Velocity = 8 times
G.P. Ratio = 25%
Gross Profit for the year is Rs.1,60,000. There are no long-term loans or overdraft. Reserves and surplus amounted to
Rs.56,000 and liquid assets are Rs.2,00,000. Closing stock is Rs.4,000 more than the opening stock. Bills Receivable
is Rs.10,000 and Bills Payable Rs.4,000.
Compute: (i) Sales (ii) Sundry Debtors (iii) Closing Stock (iv) Bank Balance.

Que. 20: Gross Profit Ratio of Jyoti Ltd. for the year 2014 was 25% and in the year 2015 it came down to 15%. What
could be the reasons for decrease in Gross Profit Ratio of the Company. (Give only Four Reasons)

Que.21: From the following information, you are required to prepare a Balance Sheet in Horizontal form:
Current Ratio 1.75
Liquid Ratio 1.25
Stock Turnover Ratio 9 times (Based on closing stock)
Gross Profit Ratio 25%
Debtors collection period 1.5 months
Reserves and surplus to share capital 0.2
Cost of Goods sold to Fixed Assets 1.2
Capital Gearing (Long term Loans to share capital) 0.6
Fixed Assets to shareholders Funds 1.25
Sales for the year (All are no credit basis) Rs. 12,00,000
Current Assets consisted on Cash, Stock & Debtors only. The company has not issued pref. shares. There is
no Bank overdraft and Fictitious Assets.
Que. 22: Complete the following Sheet from the information given below:

Balance sheet as on 31st December 2015

Liabilities Rs. Assets Rs.
Equity Share Capital (of Rs. 100 each) ? Fixed Assets ?
Reserve & Surplus ? Current Assets
10% Debentures 4,00,000 Stock ?
Current Liabilities Debtors ?
Sundry Creditors ? Other Current Assets ?
Other Current Liabilities 2,00,000
? ?

Following information is available:

1) Sales for the year Rs. 48 lakhs.
2) Gross Profit Ratio 25%.
3) Net profit after tax Rs. 2,00,000.
4) Purchases and sales on credit basis.
5) Debtors Turnover Ratio 12 times (Sales/Debtors).
6) Creditors Turnover Ratio 12 times (Cost of Sales/Creditors).
7) E.P.S. Rs. 20 per share.
8) Stock Turnover Ratio 10 times.
9) Debt Equity Ratio 0.25:1.
10) Current Ratio 1.6:1.

Que.23: Calculate Return on Capital employed and Return on properties fund from following information.
Rs.
Equity Capital 3,00,000
General Reserves 4,00,000
Profit & Loss A/c 1,50,000
Sundry Creditors 2,00,000
Operating profit 3,50,000 (Before Interest & Tax)
Long Term Loan 2,00,000 (at 12% p.a. Interest)
Tax rate is 30%.

Que.24: From the following information for the year ended 31st March, 2014 of M/s. NITIN LTD.
Prepare Balance- Sheet with as many details as possible.
Current Ratio 2
Gross profit Ratio 25 %
Debtors Turnover 4 times
Cost of goods sold to creditors [COGS/ creditors] 6
Stock Turnover [Cost of goods sold/ Closing stock] 6 times
Cash Balance is 10 % of Total Current Assets [Including Cash] Rs. 6,00,000
Fixed Assets at cost 1/4th of cost.
Accumulated Depreciation on fixed assets Rs. 1,25,000
Current Liabilities 2:3
Reserve and surplus is 25 % of Equity shares Capital
Debt Equity Ratio [Debt/Equity]
All purchase and sales are on credit basis.
Current Liability includes only Creditors and bills payable.

Que.25: M/s. Rajesh & Co. gives you the following information. Prepare trading and profit and loss account for the
year ended 31st March, 2014 and balance sheet as on that date in as much detail as is possible.
Opening Stock Rs. 90,000
Stock Turnover Ratio 10 times
Net Profit Ratio on turnover 15%
Gross Profit Ratio on turnover 20%
Current Ratio 4:1
Long Term Loan Rs. 2,00,000
Depreciation on Fixed Assets @ 10% Rs. 20,000
Closing Stock Rs. 1,02,000
Credit allowed by suppliers One month
Average Debt collection period two months
On 31st March, 2014 current Assets consisted of stock, debtors and cash only. There was no bank overdraft. All
purchases were made on credit. Cash sales were 1/3 rd of credit sales.
Que.26: Certain items of the annual accounts of AB Ltd. are missing as shown below :-
Dr. Trading and Profit & Loss Account for the year ending on 31st March, 2014 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 4,37,500 By Sales ?
To Purchases ? By Closing Stock ?
To Direct Expenses 1,09,375
To Gross Profit ?
Total ? Total ?
To Administrative Expenses 2,66,000 By Gross Profit ?
To Interest on Debentures 37,500 By Commission 62,500
To Provision for Taxes ?
To Net Profit After Tax 3,30,000
Total ? Total ?
st
Balance Sheet as on 31 March, 2014
Liabilities Rs. Assets Rs.
Share Capital 6,25,000 Plant and Machinery 7,75,000
General Reserve ? Long Term Investment ?
Profit and Loss Account 1,34,375 Stock ?
(Including Opening Balance) Debtors ?
10% Debentures ? Bank Balance 78,000
Creditors ?
Proposed Dividend (C.Y.) ?
Provision for Taxes (C.Y.) ?
Total ? Total ?
You are required to complete the Financial Statements with the help of the following information:-
1) Current ratio is 2:1.
2) Stock turn over ratio is 1.60.
3) Proposed dividends are 25% of share capital.
4) Gross profit ratio is 50%.
5) Transfer to General Reserves is 70% of proposed dividends.
6) Provision for Taxes is 50% of profit after tax.
7) There is no opening balance in General Reserve Account.
8) Creditors’ turn over ratio (on purchases and closing creditors) is 10:2.
Que.27: Profit & Loss A/c and Balance Sheet of SIDHARTH LTD. for the year ended 31st March 31, 2014:-
Dr. Trading, Profit & Loss Account for the year ended 31st March 2014 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 70,000 By Sales 9,00,000
To Purchases 5,40,000 By Closing Stock 80,000
To Wages 2,14,000
To Gross Profit c/d 1,56,000
9,80,000 9,80,000
To Salaries 26,000 By Gross Profit b/d 1,56,000
To Rent 5,000 By Interest on Investment 5,000
To Miscellaneous Expenses 15,000
To Selling Expenses 10,000
To Depreciation 30,000
To Interest 5,000
To Provision for Tax 20,000
To Net Profit c/d 50,000
1,61,000 1,61,000
Balance Sheet as on 31st March, 2014
Liabilities Rs. Assets Rs.
Equity Share Capital (Rs. 10) 1,50,000 Fixed Assets 1,60,000
8% Preference Share Capital (Rs. 100) 1,00,000 (-) Depreciation 30,000 1,30,000

Reserve & Surplus 62,000 Investment 1,00,000

10% Debenture 50,000 Stock 80,000
Bank Loan (Payable after 5 years) 40,000 Debtors 60,000
Creditors 60,000 Bills Receivable 50,000
Provision for Tax (C.Y.) 20,000 Cash 85,000
Bank Overdraft 20,000 Preliminary Expenses 5,000
Proposed Pref. Dividend 8,000
5,10,000 5,10,000
Note: Market value of Equity share is Rs. 12 and Dividend paid per Equity share is Rs. 2.

Calculate the following ratio:-

(a) Acid Test Ratio (b) Capital Gearing Ratio
(c) Operating Ratio (d) Dividend Payout Ratio
(e) Debt Service Ratio (f) Creditors Turnover Ratio
(g) Earning Per Share (h) Stock Turnover Ratio
Note: Vertical Final Account need not be prepared.

Que.28: Following is the profit and loss Account of Moon Enterprises LTD. for the year ended 31.03.2014
Particulars Rs. Particular Rs.
To Opening Stock 4,00,000 By Sales
To Purchases 9,80,000 Credit - 18,00,000
Cash - 7,00,000 25,00,000
To Wages 2,90,000 By Closing stock 6,00,000
To factory Expenses 1,90,000 By Sale of Scrap 10,000
To office Salaries 1,20,000 By Dividend Received 1,000
To General Administrative Exps. 1,30,000
To Selling Expenses 1,12,500
To Depreciation on Machinery 2,50,000
To Provision for Tax 1,40,500
To Trf .To Gen. Reserve 2,00,000
To Net Profit 2,98,000
31,11,000 31,11,000
You are required to compute the following ratio--
[1] Gross Profit Ratio
[2] Stock –Turnover Ratio
[3] Administrative Expenses Ratio
[4] Net Profit Before Tax ratio
Preparing Revenue Statement In Vertical Form is not required.

Que. 29: From the following information of X Engineering Co. completes the Proforma Balance Sheet if sales are Rs.
16,00,000.
Sales to Net Worth 2.3 times
Current Liabilities to Net Worth 42 %
Total Liabilities to Net Worth 75 %
Current Ratio 2.9
Sales to Closing Inventory 4.5
Average Collection Period 64 days
Proforma Balance Sheet
Liabilities Rs. Assets Rs.
Net Worth ? Fixed Assets ?
Long term Liabilities ? Cash ?
Current Liabilities ? Stock in Trade ?
? Debtors ?

Calculations are to be made to the nearest rupee.

Que.30:
Following is trading and Profit & Loss Account for the year ended 31st March, 2014 and Balance Sheet as on
that date of Sudrshan Ltd.

Trading and Profit and Loss Account for the year ended 31st March 2014
Particulars ` Particulars `
To Opening stock 2,50,000 By Sales (Credit) 37,00,000
To Purchases 26,00,000 By closing stock 5,00,000
To Gross Profit c/d 13,50,000
Total 42,00,000 Total 42,00,000
To Administrative Expenses 2,70,000 By Gross Profit b/d 13,50,000
To Interest 72,000 By Profit on sales of Assets 50,000
To Rent 60,000
To Selling Expenses 1,00,000
To depreciation 1,20,000
 To provision for Income Tax 2,78,000
To Proposed Dividend 1,00,000
To Net Profit c/f 4,00,000

Total 14,00,000 Total 14,00,000

Balance sheet As on 31st March, 2014

Liabilities ` Assets `
Equity Share Capital (` 10 each) 5,00,000 Fixed Assets (at cost) 12,00,000
11% Preference share capital 3,00,000 Short term investments 1,00,000
General Reserve 4,00,000 Trade Receivables
12% Debentures 6,00,000 (last year ` 9,00,000) 9,50,000
Trade Payables 3,00,000 Inventories 5,00,000
Proposed Dividend 1,00,000 Cash and Bank Balance 1,50,000
Bank Overdraft 2,00,000 Discount on Issue of Debentures 60,000
Provisions for Depreciation 4,00,000
Provisions for income Tax 2,00,000
Total 30,00,000 Total 30,00,000

From the above information calculate following ratios and comment on current ratio.
1) Current Ratio
2) Inventory Turnover Ratio
3) Return on Proprietors Funds
4) Operating Ratio
5) Capital Gearing Ratio
6) Dividend Payout Ratio
7) Debtors Turnover Ratio

Assume 360 days in a year.

Note :- Drafting of Vertical Financial Statement is not expected.