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Chapter # 03 Problems

The document provides tutorial notes for solving problems related to accounting ratios and financial statement analysis. It includes 5 points on how to approach such problems, including identifying the type of problem, remembering key accounting equations, making appropriate assumptions, and including as many detailed line items as possible from the given information. It then provides 2 sample problems showing the calculation of capital employed from financial information provided, including setting up statements to classify figures as proprietary funds, long term loans, fixed assets, working capital and its components.

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Chapter # 03 Problems

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Project: Management Accounting_Debarshi Bhattacharyya ACE Pro India Pvt. Ltd.

File: X:\Pearson\Management Accounting_Debarshi Bhattacharyya\MAIN\M03\LAYOUT_M03\M03_DEBA_ISBN_EN_SE_C03_Part-1.indd

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 79

Tutorial Notes to Students for Solving Problems

i. Problems from this chapter may be of two types: (i) Computation of different Ratios and interpretations of
results from the given Profit & Loss A/c and Balance Sheet; (ii) Preparation of Profit & Loss A/c and Balance
Sheet from the given Ratios. Students should identify first their target on the basis of the given information
in the problem.
ii. For solving problems from this chapter, students should specially remember the following:
a. In any Balance Sheet, the Total of the Asset side = Total of the Liability side
b. Gist of a company Balance Sheet or ultimate Balance Sheet equation is:
Net Worth + Long-term Loans = Fixed Assets + Working Capital
iii. If not otherwise stated in the problem, it must be assumed that there is no deferred expense or Fictitious
Asset (i.e., losses under the head ‘Miscellaneous Expenditure’).
iv. Difference between the GP and NP in a Profit & Loss A/c represents the ‘Indirect Operating Expenses’ charged
to Profit & Loss A/c.
v. As many detailed items as practicable of the Profit & Loss A/c and Balance Sheet are to be computed out of the
given information in the problem, for the purpose of preparation of the Profit & Loss A/c and the Balance Sheet.

3.18 WORKED-OUT PROBLEMS

Problem 1
From the following information as extracted from the books of P Ltd, ascertain the amount of Capital
Employed in the business:
Rs.
Equity Share Capital 5,00,000
Preference Share Capital 3,00,000
Securities Premium 40,000
General Reserve 1,30,000
Profit & Loss A/c (Cr) 90,000
Capital Reserve 30,000
10% Debentures 2,00,000
12% Bank Loan 1,00,000
Sundry Creditors 55,000
Bills Payable 25,000
Preliminary Expenses 30,000
Discount on Issue of Shares 20,000

Solution
Books of P Ltd
Statement showing ascertainment of Capital Employed
Rs. Rs.
Share Capital:
Equity Share Capital 5,00,000
Preference Share Capital 3,00,000 8,00,000
Add: Reserves Surplus:
Securities Premium 40,000
General Reserve 1,30,000
Profit & Loss A/c (Cr) 90,000
Capital Reserve 30,000 2,90,000
10,90,000
(Continued)

Modified Date: Tue, Jul 06, 2010 11:23:17 AM Output Date: Tue, Jul 06, 2010 11:24:06 AM Rev II
Project: Management Accounting_Debarshi Bhattacharyya ACE Pro India Pvt. Ltd.
File: X:\Pearson\Management Accounting_Debarshi Bhattacharyya\MAIN\M03\LAYOUT_M03\M03_DEBA_ISBN_EN_SE_C03_Part-1.indd

80 MANAGEMENT ACCOUNTING

Rs. Rs.
Less: Miscellaneous Expenditure:
Preliminary Expenses 30,000
Discount on Issue of Shares 20,000 50,000
Proprietors’ Fund 10,40,000
Add: Long-term Loans:
10% Debentures 2,00,000
12% Bank Loan 1,00,000 3,00,000
Capital Employed 13,40,000

Problem 2
From the following information, ascertain the amount of Capital Employed in the business:
Rs.
Goodwill 1,20,000
Land & Building 3,00,000
Plant & Machinery 1,80,000
Furniture & Fixtures 90,000
10% Investment [Long Term] 80,000
Stock in Trade 72,000
Sundry Debtors 57,000
Cash at Bank 43,000
Cash in Hand 14,000
Bills Receivable 18,000
Prepaid Expenses 6,000
Sundry Creditors 47,000
Bills Payable 12,000
Outstanding Expenses 11,000
Bank Overdraft 30,000

Solution
Books of S Ltd
Statement showing ascertainment of Capital Employed
Rs. Rs. Rs.
Fixed Assets:
Goodwill 1,20,000
Land & Building 3,00,000
Plant & Machinery 1,80,000
Furniture & Fixture 90,000
10% Investment [Long Term] 80,000
7,70,000
Add: Working Capital:
Current Assets:
Stock in Trade 72,000
Sundry Debtors 57,000
Cash at Bank 43,000
Cash in Hand 14,000
Bills Receivable 18,000
Prepaid Expenses 6,000
2,10,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 81

Rs. Rs. Rs.

Less: Current Liabilities:
Sundry Creditors 47,000
Bank Overdraft 30,000
Bills Payable 12,000
Outstanding Expenses 11,000
1,00,000 1,10,000
Capital Employed 8,80,000

Problem 3
Following is the Balance Sheet of Hum Ltd as on 31 March 2006:
Liabilities Rs. Assets Rs.
Equity Share Capital 2,00,000 Goodwill 50,000
Preference Share Capital 1,00,000 Land & Building 2,00,000
Reserves & Surplus 1,50,000 Plant & Machinery 1,50,000
12% Mortgage Loan 80,000 Furniture & Fittings 30,000
10% Debentures 1,20,000 Investment [Long-term] 70,000
Sundry Creditors 85,000 Stock in Trade 80,000
Bills Payable 10,000 Short-term Investment 40,000
Bank Overdraft 75,000 Sundry Debtors 90,000
Prereceived Incomes 5,000 Cash at Bank 40,000
Outstanding Expenses 25,000 Cash in Hand 25,000
Bills Receivable 15,000
Accrued Incomes 4,000
Prepaid Expenses 6,000
Discount on Issue of Shares 20,000
Preliminary Expenses 30,000
8,50,000 8,50,000

Compute:
(a) Working Capital; (b) Proprietors’ Fund; (c) Capital Employed; (d) Current Ratio; (e) Acid Test Ratio;
(f) Proprietary Ratio; (g) Fixed Asset Proprietorship Ratio; (h) Debt-Equity Ratio; (i) Capital Gearing Ratio
and (j) Fixed Asset Ratio.

Solution
i. Statement showing computation of Working Capital
Rs. Rs.
Total Current Assets:
Stock in Trade 80,000
Short-term Investment 40,000
Sundry Debtors 90,000
Cash at Bank 40,000
Cash in Hand 25,000
Bills Receivable 15,000
Accrued Incomes 4,000
Prepaid Expenses 6,000
3,00,000
Less: Total Current Liabilities:
Sundry Creditors 85,000
Bills Payable 10,000
(Continued)

82 MANAGEMENT ACCOUNTING

Rs. Rs.
Bank Overdraft 75,000
Prereceived Incomes 5,000
Outstanding Expenses 25,000 2,00,000
Working Capital 1,00,000

ii. Statement showing computation of Proprietors’ Fund

Rs. Rs.
Equity Share Capital 2,00,000
Preference Share Capital 1,00,000
Add: Reserves & Surplus 1,50,000
4,50,000
Less: Miscellaneous Expenditure:
Discount on Issue of Shares 20,000
Preliminary Expenses 30,000 50,000
Proprietors’ Fund 4,00,000

iii. Statement showing computation of Capital Employed

Rs. Rs.
Proprietors’ Fund as computed in (b) above 4,00,000
Add: Long-term Loans:
12% Mortgage Loan 80,000
10% Debentures 1,20,000 2,00,000
Capital Employed 6,00,000
Note: Alternatively, Capital Employed may also be computed following a different approach as computed in the following:

Statement showing computation of Capital Employed

Rs.
Fixed Assets:
Goodwill 50,000
Land & Building 2,00,000
Plant & Machinery 1,50,000
Furniture & Fitting 30,000
Investment [Long Term] 70,000
5,00,000
Add: Working Capital [as computed in (a) above] 1,00,000
Capital Employed 6,00,000

iv. Computation of Current Ratio

Current Assets
Current Ratio =
Current Liabilities
Here, Current Assets = Rs. 3,00,000 [as ascertained in (a) above]
Current Liabilities = Rs. 2,00,000 [as ascertained in (a) above]
Rs. 3,00,000 3
∴Current Ratio = = = 1.5
Rs. 2,00,000 2
Current Assets − Stock
v. Acid Test Ratio =
Current Liabilities − Bank Overdraft

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 83

Rs.3,00,000 − Rs.80,000 Rs.2,20,000

= = = 1.76
Rs.2,00,000 − Rs.75,000 Rs.1,25,000

Proprietors’ Fund
vi. Proprietary Ratio =
Total Assets
Here, Proprietors’ Fund = Rs. 4,00,000 [as ascertained in (b) above]
Total Assets = FAs + CAs
= Rs. 5,00,000 [as ascertained in (c) above] + Rs. 3,00,000
= Rs. 8,00,000
Rs. 4,00,000 1
∴ Proprietary Ratio= = = 0.5
Rs. 8,00,000 2

Fixed Assets
vii. Fixed Asset Proprietorship Ratio =
Proprietors’ Fund
Here, FAs = Rs. 5,00,000 [as ascertained in (c) above]
Proprietors’ Fund = Rs. 4,00,000 [as ascertained in (b) above]
Rs. 5,00,000 5
∴ Fixed Asset Proprietorship Ratio = = = 1.25
Rs. 4,00,000 4
Debt Long-term Loan
viii. Debt-Equity Ratio = =
Equity Proprietors’ Fund
Here, Long-term Loan = Rs. 2,00,000 [as ascertained in (h) above]
Proprietors’ Fund = Rs. 4,00,000 [as ascertained in (b) above]
Rs. 2,00,000 1
Debt-Equity Ratio = = = 0.5
Rs. 4,00,000 2
Fixed Interest Bearing Securities
ix. Capital Gearing Ratio =
Ordinary Securities
Preference Share Capital + Long-term Loan
=
Equity Shareholders’ Fund
Here, Fixed Interest Bearing securities = Preference Share Capital + 10% Debentures
+ 12% Mortgage loan
= Rs. 1,00,000 + Rs. 1,20,000 + Rs. 80,000 = Rs. 3,00,000
Ordinary securities = Equity Shareholders’ Fund = Proprietors’ Fund – Preference
Share Capital
= Rs. 4,00,000 [as computed in (b) above] – Rs. 1,00,000
= 3,00,000
Rs. 3,00,000
∴ Capital Gearing Ratio = =1
Rs. 3,00,000
Fixed Assets
x. Fixed Asset Ratio =
Capital Employed
Here, FAs = Rs. 5,00,000 [as computed in (c) above]
Capital Employed = Rs. 6,00,000 [as computed in (c) above]
5,00,000
∴ Fixed Asset Ratio = = 5:6
6,00,000

84 MANAGEMENT ACCOUNTING

Problem 4
Following are the Profit & Loss A/c for the year that ended on 31 March 2008 and a Balance Sheet as on that
date of company:
Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Rs. Rs.
To Opening Stock 70,000 By Sales 15,00,000
To Purchases 8,00,000 By Closing Stock 80,000
To Carriage Inward 1,20,000
To Wages 2,90,000
To Gross Profit c/d 3,00,000
15,80,000 15,80,000
To Establishment Charges 25,000 By Gross Profit b/d 3,00,000
To Salaries 70,000
To Rent & Rates 15,000
To General Expenses 15,000
To Depreciation 25,000
To Selling Expanses 30,000
To Interest on Debentures 10,000
To Provision for Taxation 10,000
To Net Profit c/d 1,00,000
3,00,000 3,00,000
To General Reserve 40,000 By Balance b/d 1,10,000
To Proposed Dividend 20,000 By Net Profit b/d 1,00,000
To Balance c/f 1,50,000
2,10,000 2,10,000

Balance Sheet as on 31 March 2006

Liabilities Rs. Assets Rs.
Equity Share Capital 4,00,000 Fixed Assets 7,00,000
Preference Share Capital 1,00,000 Stock in Trade 80,000
General Reserve 40,000 Sundry Debtors 90,000
Profit & Loss A/c 1,50,000 Cash & Bank 40,000
10% Debentures 1,00,000 Bills Receivable 10,000
Sundry Creditors 60,000 Discount on Issue of Shares 20,000
Bank Overdraft 50,000
Bills Payable 10,000
Provision for Taxation 10,000
Proposed Dividend 20,000
9,40,000 9,40,000

From the above information, calculate:

(a) GP Ratio; (b) NP Ratio; (c) Operating Ratio; (d) Return on Net Worth; (e) Return on Capital Employed;
(f) Capital Turnover Ratio; (g) Fixed Asset Turnover Ratio; (h) Working Capital Turnover Ratio; (i) Stock Turn-
over Ratio; (j) Debtors’ Velocity Ratio; (k) Creditors’ Velocity Ratio.

Solution
Gross Profit 3,00,000
i. Gross Profit Ratio = × 100 = × 100 = 20%
Sales 15,00,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 85

Net Profit after Tax 1,00,000

ii. Net Profit Ratio = × 100 = × 100 = 6.67%
Sales 15,00,000
(Cost of Goods Sold + Other Operating Expenses)
iii. Operating Ratio = × 100
Sales
12,00,0001 + 1,80,0002
= × 100 = 92%
15,00,000
Net Profit after Tax 1,00,000
iv. Return on Net Worth = × 100 = × 100 = 14.92%
Net Worth 6,70,000 4

Net Profit before interest & Tax

v. Return of Capital Employed = × 100
Capital Employed
1,20,0003
= × 100 = 15.58%
7,70,0005

Turnover 15,00,000
vi. Capital Turnover Ratio = = = 1.95
Capital Employed 7,70,000

Turnover 15,00,000
vii. Fixed Asset Turnover Ratio = = = 2.14
Fixed Assets 7,00,000

Turnover 15,00,000
viii. Working Capital Turnover Ratio = = = 21,4285
Working Capital 70,00011

Cost of Goods Sold 12,00,0001

ix. Stock Turnover Ratio = = = 16
Average Stock 75,0006

Credit Sales 15,00,0007

x. Debtors’ Velocity Ratio = = = 15
Receivables 1,00,0008
365 days 365
∴ Average Collection Period = = = 24 days (approx.)
Debtors’ Velocity Ratio 15

Credit Purchases 8,00,00010

xi. Creditors’ Velocity Ratio = = = 11.4285
Payables 70,0009
365 days 365
∴ Average Payment Period = = = 32 days (approx.)
Creditors’ Velocity Ratio 11.4285

Working Notes
1. Calculation of Cost of Goods Sold (CGS)
Rs.
Opening Stock 70,000
Add: Purchases 8,00,000
8,70,000
Less: Closing Stock 80,000

(Continued)

86 MANAGEMENT ACCOUNTING

Rs.
Materials Consumed 7,90,000
Add: Carriage Inward 1,20,000
Add: Wages 2,90,000
Cost of Goods Sold 12,00,000

2. Calculation of other Operating Expenses

Rs.
Establishment Charges 25,000
Salaries 70,000
Rent & Rates 15,000
General Expenses 15,000
Depreciation 25,000
Selling Expenses 30,000
Total other Operating Expenses 1,80,000

3. Calculation of Net Profit before Interest and Tax (Net PBIT)

Rs.
Net Profit after Interest & Tax 1,00,000
Add: Interest on Debentures 10,000
Add: Provision for Taxation 10,000
Net Profit before Interest and Tax 1,20,000

4. Calculation of Net Worth

Rs.
Equity Share Capital 4,00,000
Preference Share Capital 1,00,000
Total Share Capital 5,00,000
Add: Reserves & Surplus:
General Reserve 40,000
Profit & Loss A/c 1,50,000
6,90,000
Less: Miscellaneous Expenditure:
Discount on Issue of Shares 20,000
Net Worth or Proprietors’ Fund 6,70,000

5. Calculation of Capital Employed

Rs.
Net Worth as calculated in (4) above 6,70,000
Add: Long-term Loans:
10% Debentures 1,00,000
Capital Employed 7,70,000

6. Calculation of Average Stock

Opening Stock + Closing Stock Rs. 70,000 + Rs. 80,000
Average Stock = = = Rs. 75.000
2 2

7. Calculation of Credit Sales

In the absence of adequate information, it is assumed that the entire sales have been made on credit.
Total Sales = Credit Sales = Rs. 15,00,000

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 87

8. Calculation of Receivables
Rs.
Sundry Debtors 90,000
Bills Receivable 10,000
Receivables 1,00,000

9. Calculation of Payables
Rs.
Sundry Creditors 60,000
Bills Payable 10,000
Payables 70,000

10. Calculation of Credit Purchases

In the absence of adequate information, it is assumed that the entire purchases have been made on credit.
Total Purchases = Credit Purchases = Rs. 8,00,000

11. Calculation of Working Capital

Rs. Rs.
Total Current Assets:
Stock in Trade 80,000
Sundry Debtors 90,000
Cash & Bank 40,000
Bills Receivable 10,000
2,20,000
Less: Total Current Liabilities:
Sundry Creditors 60,000
Bank Overdraft 50,000
Bills Payable 10,000
Provision for Taxation 10,000
Proposed Dividend 20,000 1,50,000
Working Capital 70,000

Problem 5
From the following Balance Sheet of Y Ltd, calculate the different turnover Ratios:
Liabilities Rs. Assets Rs.
Equity Share Capital 6,00,000 Fixed Assets 6,50,000
General Reserve 2,50,000 Stock 2,25,000
8% Debentures 1,50,000 Debtors 2,75,000
Creditors 2,00,000 Cash at Bank 50,000
12,00,000 12,00,000
Given Capital Turnover Ratio is 1.5 times.
[B.Com. (Hons), Calcutta University—2008]

Solution
Here, Capital Employed = Equity Share Capital + General Reserve + 8% Debentures
= Rs. 6,00,000 + Rs. 2,50,000 + Rs. 1,50,000 = Rs. 10,00,000
Turnover
Again, Capital Turnover Ratio = = 1.5
Capital Employed

88 MANAGEMENT ACCOUNTING

Turnover
or = 1.5
10,00,000
∴ Turnover = Rs. 15,00,000
Turnover 15,00,000
Total Asset Turnover Ratio = = = 1.25 times
Total Assets 12,00,000
Turnover 15,00,000
Inventory Turnover Ratio = = = 6.67 times
Closing Inventory 2,25,000
Turnover 15,00,000
Fixed Asset Turnover Ratio = = = 2.31 times
Fixed Assets 6,50,000
Turnover 15,00,000
Debtors’ Turnover Ratio = = = 5.4545 times
Debtors 2,75,000
Turnover 15,00,000
Creditors’ Turnover Ratio = = = 7.5 times
Creditors 2,00,000

Problem 6
From the following details, calculate the average collection period:
Sundry Debtors Rs. 2,10,000
Bills Receivable Rs. 30,000
Average Stock Rs. 3,60,000
Inventory Turnover Ratio 6
GP Ratio 10%
Credit Sales to Total Sales 80%
Assume, 1 year = 360 days

Solution
Credit Sales 19,20,0002
Debtors’ Turnover Ratio = = =8
Receivables 2,40,0001
360 days 360 days
∴ Average Collection Period = = = 45 days
Debtors’ Turnover Ratio 8

Working Notes
1. Calculation of Receivables
Rs.
Sundry Debtors 2,10,000
Bills Receivable 30,000
Receivables 2,40,000
2. Calculation of Credit Sales
Cost of Goods Sold (CGS)
Inventory Turnover Ratio =
Average Stock

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 89

Cost of Goods Sold

Here, 6 =
3,60,000
CGS = 3,60,000 × 6 = Rs. 21,60,000
Gross Profit
Again, GP Ratio = × 100 = 10%
Sales
∴ GP rate = 10% on sales = 1/10 on sales
i.e., If sales = 10
then, GP = 1
CGS = 9
Gross Profit
∴Rate of GP on Cost = = 1/9 (on cost)
Cost of Goods Sold

∴ Total Sales = CGS + GP

or Total Sales = CGS + 1/9 on CGS
Total Sales = Rs. 21,60,000 + 1/9 on Rs. 21,60,000 = Rs. 24,00,000
Again, Credit Sales to Total Sales = 80%
Credit Sales 80
or =
Total Sales 100
Credit Sales 4
or =
24,00,000 5
24,00,000
∴ Credit Sales = × 4 = Rs.19,20,000
5

Problem 7
i. Cost of Goods Sold of a company was Rs. 1,00,000 in 2005. Inventory Turnover was 4 times. Inventory
at the end was 1.5 times of that at the beginning. Calculate the Closing Inventory.

ii. From the information given, calculate the average collection period:
Total Sales (including cash sales – Rs. 20,000)—Rs. 1,00,000; Sales Return—Rs. 7,000; Debtors—Rs. 9,000;
Bills Receivable—Rs. 2,000; Creditors—Rs. 10,000.
[B.Com. (Hons), Kalyani University—2006]

Solution

Cost of Goods Sold

i. Inventory Turnover =
Average Stock
1,00,000
Here, 4 =
Average Stock

∴ Average Stock = Rs. 25,000

Let the Opening Stock be x.
∴ Closing Stock = 1.5 x
Opening Stock + Closing Stock
∴ Average Stock =
2

90 MANAGEMENT ACCOUNTING

x + 1.5x
or 25,000 =
2
or 2.5x = 50,000
∴ x = Rs. 20,000
∴ Closing Inventory = 1.5x = 1.5 × 20,000 = Rs. 30,000

Receivables
ii. Average Collection Period = × 365 days
Net Credit Sales
Debtors + Bills Receivable
= × 365
Credit Sales − Sales Return
9,000 + 2,000
= × 365 = 55days
80,000 − 7,000

Problem 8
Given: Current Assets = Rs. 1,50,000
Current Liabilities = Rs. 1,29,000
Fixed Assets/Net Worth = 0.70
No Debt Capital.
Calculate: Value of Fixed Assets.
[B.Com. (Hons), Calcutta University—2006]

Solution
List of a company Balance Sheet is as follows:
Net Worth + Long-term Loan = Fixed Assets + Working Capital
Here, NW + Nil = FAs + (1,50,000 − 1,29,000) [As Working Capital = CAs − CLs]
∴ Net Worth = FAs + 21,000
FAs
Again, = 0.70
NW
FAs
or = 0.70
FAs+21,000
or FAs = 0.7 FAs + 14,700
or 0.3 FAs = 14,700
∴ Fixed Assets = Rs. 49,000

Problem 9
The following data have been extracted from the Financial Statements of a company:
Rs.
Equity Share Capital 4,00,000
12% Preference Share Capital 1,00,000
General Reserve 1,20,000
Profit & Loss A/c (Cr) 1,30,000
Securities Premium 40,000
Capital Reserve 30,000
15% Debentures 2,00,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 91

Rs.
Net Profit before Tax 2,70,000
Provision for Taxation 25,000
Tax actually Paid during the year 32,000
Discount on Issue of Shares 20,000
From the above information, calculate:
(a) Return on Equity Shareholders’ Fund.
(b) Return on Net Worth.
(c) Return on Capital Employed.

Solution
i. Return on Equity Shareholders’ Fund
Net Profit after Tax & Preference Dividend
= × 100
Equity Shareholders’ Fund

2,33,0006
= × 100 = 33.2857%
7,00,000
ii. Return on Net Worth
Net Profit after Tax
= × 100
Net Worth

2,45,0005
= × 100 = 30.625%
8,00,0002
iii. Return on Capital Employed
Net Profit before Interest & Tax
= × 100
Capital Employed

3,00,0004
= × 100 = 30%
10,00,0003

Working Notes
1. Calculation of Equity Shareholders’ Fund
Rs. Rs.
Equity Share Capital 4,00,000
Add: Reserves & Surplus:
General Reserve 1,20,000
Securities Premium 40,000
Capital Reserve 30,000
Profit & Loss A/c (Cr) 1,30,000 3,20,000
7,20,000
Less: Miscellaneous Expenditure:
Discount on Issue of Shares 20,000
Equity Shareholders’ Fund 7,00,000

(Continued)

92 MANAGEMENT ACCOUNTING

2. Calculation of Net Worth

Rs.
Equity Shareholders’ Fund as Calculated in (1) above 7,00,000
Add: 12% Preference Share Capital 1,00,000
Net Worth 8,00,000

3. Calculation of Capital Employed

Rs.
Net worth as Calculated in (2) above 8,00,000
Add: Long-term Loans:
15% Debentures 2,00,000
Capital Employed 10,00,000

4. Calculation of Net PBIT

Rs.
Net Profit before Tax as given 2,70,000
Add: Interest on Debentures already charged [15% on Rs. 2,00,000] 30,000
Net PBIT 3,00,000

5. Calculation of Net Profit after tax

Rs.
Net Profit before Tax as given 2,70,000
Less: Provision for Taxation 25,000
Net Profit after Tax 2,45,000

6. Calculation of Net Profit after tax and preference dividend

Rs.
Net Profit after Tax as Calculated in (5) above 2,45,000
Less: Preference Dividend [12% on Rs. 1,00,000] 12,000
Net Profit after Tax & Preference Dividend 2,33,000

Problem 10
A company has a profit margin of 20% and asset turnover of 3 times. What is the company’s ROI? How will
this ROI vary if:
i. Profit Margin is increased by 5%?
ii. Asset Turnover is decreased to 2 times?
iii. Profit Margin is decreased by 5% and Asset Turnover is increased to 4 times?
[B.Com. (Hons), Calcutta University—2008]

Solution
Here, Profit Margin = 20%.
i.e., if Sales = 100, then Profit = 20
Sales
Again, Asset Turnover = =3
Total Assets

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 93

100
or = 3 ∴ Total Assets = 33.33
Total Assets

Profit 20
∴ Return on Investment (ROI) = × 100 = × 100 = 60%
Total Assets 33.33

i. New Profit Margin = 20% + 5% = 25%.

i.e., if Sales = 100, then Profit = 25
Profit 25
∴ New ROI = × 100 = × 100 = 75%
Total Assets 33.33

Sales
ii. New Asset Turnover = =2
Total Assets
100
or = 2. ∴ Total Assets = 50. And, Profit Margin = 20%
Total Assets
Profit 25
∴ New ROI = × 100 = × 100 = 75%
Total Assets 33.33

iii. New Profit Margin = 20% − 5% = 15%

i.e., if Sales = 100, then Profit = 15
Sales
New Asset Turnover = =4
Total Assets
100
or = 4. ∴ Total Assets = 25
Total Assets
Profit 15
New ROI = × 100 = × 100 = 60%
Total Assets 25

Problem 11
JKL Ltd has the following Balance Sheets as on 31 March 2006 and 31 March 2005:
Rs. in lakhs
31 March 31 March
2006 2005
Sources of Funds:
Shareholders’ Funds 2,377 1,472
Loan Funds 3,570 3,083
5,947 4,555
Applications of Funds:
Fixed Assets 3,466 2,900
Cash & Bank 489 470
Debtors 1,495 1,168
Stock 2,867 2,407
Other Current Assets 1,567 1,404
Less: Current Liabilities (3,937) (3,794)
5,947 4,555

94 MANAGEMENT ACCOUNTING

The Income Statement of the JKL Ltd for the year that ended is as follows:
Rs. in lakhs
31 March 31 March
2006 2005
Sales 22,165 13,882
Less: CGS 20,860 12,544
GP 1,305 1,338
Less: Selling, General & Administrative Expenses 1,135 752
Earnings before Interest and Tax (EBIT) 170 586
Less: Interest Expense 113 105
Profit before Tax 57 481
Less: Tax 23 192
Profit after Tax 34 289

Required:
i. Calculate for the year 2005–06:
a. Inventory Turnover Ratio.
b. Financial Leverage.
c. ROI.
d. ROE.
e. Average Collection Period.
ii. Give a brief comment on the financial position of JKL Ltd.
[C.A. (PE II)—May 2006]
Solution
i.
Cost of Goods Sold 20,860
a. Inventory Turnover Ratio (for the year 2005 − 06) = = = 7.91
Average Inventory 2,637

EBIT
b. Financial Leverage =
EBT
586
For the year 2004 −05, Financial Leverage = = 1.22
481
170
For the year 2005−06, Financial Leverage = = 2.98
57

Net Profit before Interest but after Tax

c. ROI (for the year 2005− 06) = × 100
Average Capital Employed
102
= × 100 = 1.94%
5,251
Net Profit available to Equity Shareholders
d. ROE (for the year 2005−06) = × 100
Average Equity Shareholders’ Fund
34
= × 100 = 1.77%
1,924.50
Average Debtors 1,331.50
e. Inventory Turnover Ratio (for the year 2005−06) = = = 22 days
Average Sales per day 60.73

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 95

ii. Profitability of operation of the company remarkably declines from 586 (Rs. in lakhs) to 170 (Rs. in
lakhs), due to a huge increase in the operating expenses during the year 2005–06. NP of the company
also reduces due to an increase in the interest expenses. During the year 2005–06, both Fixed Operat-
ing Expense as well as fixed financial expense have increased, as a consequence of which the NP of the
company radically reduced. During 2005–06, both operating and Financial Leverages have become
adverse, as a result of which the company has been crucially suffering from a liquidity crisis during the
year 2005–06.

Working Notes
1. Calculation of Average Inventory
Opening Inventory + Closing Inventory 2,407 + 2,867
Average Inventory = = = 2,637 (Rs. in lakhs)
2 2
2. Calculation of Average Equity Shareholders’ Fund

Opening Equity Shareholder’s Fund + Closing Equity Shareholder’s Fund

Average Equity Shareholder’s Fund =
2
1,472 + 2,377
= = 1,924.5 (Rs. in lakhs)
2
3. Calculation of Average Capital Employed

Opening Capital Employed + Closing Capital Employed

Average Capital Employed =
2
(1,472 + 3,083) + (2,377 + 3,570)
= = 5,251 (Rs. in lakhs)
2
4. NP available to Equity Shareholders
Rs. in lakhs
Profit after Tax 34
Less: Preference Dividend Nil
NP Available to Equity Shareholders 34

5. Calculation of Average Debtors

Opening Debtors + Closing Debtors 1,168 + 1,495

Average Debtors = = = 1,331.5 (Rs. in lakhs)
2 2
6. Calculation of Average Sales per day

22,165
Average Sales per day for the year 2005−06 = = 60.73 (Rs. in lakhs)
365
7. Net Profit before interest but after tax
Rs. in lakhs
EBIT for the year 2005–06 170
Less: Tax @ 40% 68
Net Profit before Interest but after Tax 102

Note:
Tax Amount 23
Tax Rate = × 100 = × 100 = 40% (approx.)
EBT 57

96 MANAGEMENT ACCOUNTING

Problem 12
Following information is available from the Financial Statements of K Ltd for the year that ended on 31 March
2006:
i. Inventory Turnover Ratio is 6 times, Closing Debtors are outstanding for 2 months and Closing Credi-
tors are outstanding for 73 days.
ii. Ratio of CGS to:
Proprietors’ Fund is 2 : 1.
Fixed Asset is 4 : 1.
iii. GP Ratio is 20%.
iv. Closing Stock is greater than the opening stock by Rs. 10,000.
v. GP for the year that ended on 31 March 2006 is Rs. 1,20,000.
vi. Reserves and surplus appearing in the Balance Sheet as on 31 March 2006 is Rs. 40,000.
You are asked to calclaute the following:
(i) Proprietors’ Fund; (ii) Fixed Asset; (iii) Closing Debtors; (iv) Closing Creditors; (v) Closing Stock;
(vi) Share Capital.

Solution
i. Ratio of CGS to Proprietors’ Fund = 2:1
Cost of Goods Sold 2
or =
Proprietors’ Fund 1
4,80,0001 2
or =
Proprietors’ Fund 1
4,80,000
∴ Proprietors’ Fund = = Rs. 2,40,000
4
ii. Ratio of CGS to Fixed Asset = 4:1
Cost of Goods Sold 4
or =
Fixed Asset 1
4,80,0001 4
or =
Fixed Asset 1
4,80,000
∴ Fixed Asset = = Rs. 1,20,000
4
iii. Debt Collection Period = 2 months.
12 months
∴ Debtors’ Turnover Ratio =
Debt Collection Period
Credit Sales 12 months
or =
Receivables 2 months
6,00,000
or =6
Rs. 1,00,000
∴ Receivables = Rs. 1,00,000
Again, Receivables = Debtors + Bills Receivable

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 97

In the absence of adequate information, it is assumed that Bills Receivable = Nil

∴ Receivables = Debtors + Nil
or 1,00,000 = Debtors
∴ Closing Debtors = Rs. 1,00,000
iv. Average Payment Period = 73 days
365 Days 365 Days
∴ Creditors’ Turnover Ratio = = =5
Average Payment Period 73 Days
Credit Purchases
or =5
Payables
4,90,000
or =5
Payables
4,90,0001
∴ Payables = = Rs.98,000
5
Again, Payables = Creditors + Bills payable
Here, it is assumed that Bills payable = Nil
∴ Payables = Creditors + Nil
or 98,000 = Creditors
∴ Closing Creditors = Rs. 98,000

Cost of Goods Sold

v. Inventory Turnover Ratio =
Average Stock
4,80,0001
or 6 = =9
Average Stock

4,80,000
∴ Average Stock = = Rs. 80,000
6
Opening Stock + Closing Stock
But, Average Stock =
2
Again, according to the question, Closing stock − Opening stock = 10,000
∴ Opening stock = Closing stock – 10,000
(Closing Stock − 10,000) + Closing Stock
∴ Average Stock =
2
2 Closing Stock − 10,000
or 80,000 =
2
or 2 Closing Stock – 10,000 = 1,60,000
or 2 Closing Stock = 1,60,000 + 10,000
1,70,000
∴ Closing Stock = = Rs. 85,000
2
vi. Proprietors’ Fund = Share Capital + Reserves & Surplus – Miscellaneous Expenditure
Here, 2,40,000 = Share Capital + 40,000 – Nil [Assumed that Miscellaneous expenditure = Nil]
∴ Share Capital = 2,40,000 – 40,000 = Rs. 2,00,000

98 MANAGEMENT ACCOUNTING

Working Notes
1. Calculation of CGS
Gross Profit
GP ratio = × 100 = 20%
Sales
∴ GP rate = 20% or = 1÷ 5 on Sales
i.e., If Sales = 5,
then GP = 1
CGS = 4
∴ Rate of GP on CGS
Gross Profit 1
= =
Cost of Goods Sold 4
1,20,000 1
or =
Cost of Goods Sold 4
∴ CGS = Rs. 4,80,000
2. Calculation of Credit Sales
Gross Profit
GP ratio = × 100
Sales
1,20,000
or 20 = × 100
Sales
1,20,000
∴ Sales = × 100 = Rs. 6,00,000
20
In the absence of adequate information, it is assumed that the entire sales have been made on credit.
∴ Total Sales = Credit Sales = Rs. 6,00,000
3. Calculation of Credit Purchases
We know that Opening Stock + Purchases = Materials Consumed + Closing Stock
∴ Purchases = Materials Consumed + Closing Stock − Opening Stock
In the absence of adequate information regarding seggragation of the CGS, it is assumed that the CGS
includes materials consumed only.
∴ Materials Consumed = CGS = Rs. 4,80,000
Again, Closing Stock is greater than the Opening Stock by Rs. 10,000
∴ Closing Stock − Opening Stock = Rs. 10,000
∴ Purchases = 4,80,0000 + 10,000 = Rs. 4,90,000
In the absence of adequate information, it is assumed that the entire purchases have been made on credit.
∴ Total Purchases = Credit Purchases = Rs. 4,90,000

Problem 13
From the following information, prepare a Balance Sheet:
Current Ratio 1.5
Quick Ratio 1.25
GP Ratio 25%
Stock Turnover Ratio 9 times
Debtor's Turnover 1.5 months
Turnover of Fixed Assets 1.2
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 99

Capital Gearing Ratio 0.375

Reserves to Share Capital 0.25
Fixed Asset to Net Worth 1.25
Sales Rs. 24,00,000

[C.S. (Inter)—Adapted]

Solution
Balance Sheet of as on
Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital2 12,80,000 Fixed Assets1 20,00,000
Reserves & Surplus2 3,20,000 Current Assets:
Long-term Loans3 6,00,000 Stock5 2,00,000
Current Liabilities: Debtors6 3,00,000
Crediltors 3,20,0007 Cash & Bank 1,00,000
Bank Overdraft 80,0007
26,00,000 26,00,000

Working Notes
1. Turnover of Fixed Assets = 1.2
Turnover
or = 1.2
Fixed Assets
24,00,000
or = 1.2
Fixed Assets
24,00,000
∴ Fixed Assets = = Rs. 20,00,000
1.2
2. Fixed Assets to net worth = 1.25
Fixed Assets
or = 1.25
Net Worth
20,00,000
or = 1.25
Net Worth
20,00,000
∴ Net Worth = = Rs. 16, 00, 000
1.25
Again, Reserves to Share Capital = 0.25
Reserves
or = 0.25
Share Capital
∴ Reserves = 0.25 × Share Capital
Again, Net Worth = Share Capital + Reserves & Surplus – Miscellaneous Expenditure
Here, 16,00,000 = Share Capital + 0.25 × Share Capital – Nil [assumed as Miscellaneous Expenditure = Nil] or
1.25 × Share Capital = 16,00,000
16,00,000
∴ Share Capital = = Rs.12,80,000
1.25
∴ Reserves & Surplus = 0.25 × Rs. 12,80,000 = Rs. 3,20,000

(Continued)

100 MANAGEMENT ACCOUNTING

Fixed Interest Bearing Securities

3. Capital Gearing Ratio =
Ordinary Securities
Long-term Loan + Preference Share Capital
or 0.375 =
Equity Shareholders ’ Fund
In the absence of adequate information, it is assumed that there is no Preference Share Capital.
In such a condition, Equity Shareholders’ Fund = Net Worth = Rs. 16,00,000
Long-term Loans + Nil
∴ = 0.375
16,00,000
∴ Long-term loan = 0.375 × 16,00,000 = Rs. 6,00,000
4. In a company Balance Sheet, we know that
Net Worth + Long-term Loans = Fixed Assets + Working Capital
Here, 16,00,000 + 6,00,000 = 20,00,000 + Working Capital
∴ Working Capital = Rs. 2,00,000
CA
Again, Current Ratio =
CL
CA
or 1.5 =
CL
∴ CA = 1.5 CL.
Again, Working Capital = CAs − CLs
Here, 2,00,000 = 1.5 CLs − CLs = 0.5 CL
∴ Current Liabilities (CLs) = 2,00,000/0.5 = Rs. 4,00,000

∴ Current Assets (CAs) = 1.5×4,00,000 = Rs. 6,00,000

Gross Profit
5. GP Ratio = × 100
Sales
Gross Profit
Here, 25 = × 100
24,00,000
24,00,000 × 25
∴ GP = = Rs. 6,00,000
100
Again, CGS = Sales – GP
Here, CGS = 24,00,000 – 6,00,000 = Rs. 18,00,000
Now, Stock Turnover Ratio = 9
Cost of Goods Sold
or =9
Average Stock
18,00,000
or =9
Average Stock
18,00,000
∴ Average Stock = = Rs. 2,00,000
9
Opening Stock + Closing Stock
Again, Average Stock =
2
In the absence of adequate information as regards to the Opening Stock, it is assumed that Opening Stock
= Closing Stock.
Closing Stock + Closing Stock 2 Closing Stocks
∴ Average Stock = =
2 2
= Closing Stock = Rs. 2,00,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 101

6. Debtors’ Turnover = 1.5 months

12 months
or Debtors’ Turnover Ratio = =8
1.5 months
or Credit Sales = 8
Receivables

or, 24,00,000
= 8 [Assumed that entire sales have been made on credit]
Receivables
24,00,000
∴ Receivables (i.e., Debtors) = = Rs. 3,00,000
8
Again, Current Assets = Stock + Debtors + Cash & Bank
Here, 6,00,0004 = 2,00,0005 + 3,00,0006 + Cash & Bank
∴ Cash & Bank = 6,00,000 − 5,00,000 = Rs. 1,00,000
7. Quick Ratio = CA − Stock
CL − Bank O/D
6,00,000 − 2,00,000
Here, 1.25 =
4,00,000 − Bank O/D
or 4,00,000 = 5,00,000 – 1.25 Bank Overdraft
or 1.25 Bank Overdraft = 5,00,000 – 4,00,000
1,00,000
or Bank Overdraft = = Rs. 80,000
1.25
Again, Current Liabilities = Payables (i.e., Creditors) + Bank overdraft
Here, 4,00,0004 = Creditors + 80,000
∴ Creditors = 4,00,000 – 80,000 = Rs. 3,20,000

Problem 14
From the following Financial Data, make out a statement of Proprietors’ Fund with as many details as possible:
(i) Proprietary Ratio [FA to Proprietors’ Equity] 0.75
(ii) Current Ratio 2.5
(iii) Liquid Ratio 1.5
(iv) Capital Gearing [Equity Capital to Preference Capital] 2:1
(v) Reserves & Surplus to Equity Capital 0.30
(vi) Working Capital Rs. 90,000
(vii) Bank Overdraft Rs. 20,000
There is no Long-term Loan or Fictitious Assets.
[B.Com. (Hons), Calcutta University—2007]

Solution
Statement of Proprietors’ Fund
Rs. Rs. Rs.
Sources of Fund:
Equity Share Capital 2,00,000
Preference Share Capital 1,00,000
3,00,000
Add: Reserves & Surplus 60,000
3,60,000
Less: Miscellaneous Expenditure Nil
3,60,000
(Continued)

102 MANAGEMENT ACCOUNTING

Rs. Rs. Rs.

Applications of Fund:
Fixed Assets 2,70,000
Add: Working Capital:
Current Assets:
Stock 90,000
Liquid Assets 60,000
1,50,000
Current Liabilities:
Less: Bank Overdraft 20,000
Liquid Liabilities 40,000
60,000
90,000
3,60,000
Less: Long-term Loan Nil
3,60,000

Working Notes

Current Assets 5
1. Current Ratio = = 2.5 =
Current Liabilities 2
∴ Working Capital = CAs − CLs = 5 − 2 = 3
Again, given Working Capital = Rs. 90,000
∴ Current Liabilities (CLs) = Rs. 90,000 × 2 ÷ 3 = Rs. 60,000
∴ Current Assets (CAs) = Rs. 90,000 × 5 ÷ 3 = Rs. 1,50,000
Liquid Assets CA − Stock
Again, Liquid Ratio = = = 1.5
Liquid Liabilities CL − Bank Overdraft
1,50,000 − Stock
or = 1.5
60,000 − 20,000
or 60,000 = 1,50,000 − Stock
∴ Stock = Rs. 90,000
∴ Liquid Assets = CAs − Stock = 1,50,000 − 90,000 = Rs. 60,000
∴Liquid Liabilities = CLs − Bank O/D = 60,000 − 20,000 = Rs. 40,000
2. Again, as per the company Balance Sheet, we know,
Proprietors’ Fund + Long-term Loan = Fixed Asset + Working Capital
Here, Proprietors Fund (PF) + Nil = Fixed Asset (FA) + 90,000
∴PF = FAs + 90,000
Fixed Assets
Again, given Proprietary Ratio = = 0.75
Proprietor’s Fund
FA
or = 0.75
FA + 90,000
or FAs = 0.75 FAs + 67,500
or 0.25 FAs = 67,500
∴Fixed Asset = Rs. 2,70,000
∴Proprietors’ Fund = FAs + 90,000 = 2,70,000 + 90,000 = Rs. 3,60,000
Equity Capital 2
3. Capital Gearing = =
Preference Capital 1
∴ Equity Share Capital : Preference Share Capital = 2 : 1 = 10 : 5
Again, Reserves & Surplus : Equity Share Capital = 0.30 = 3:10
∴Equity Share Capital: Preference Share Capital: Reserves & Surplus = 10 : 5 : 3

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 103

Again, Proprietors’ Fund = Equity Share Capital + Preference Share Capital + Reserves & Surplus
= 10 + 5 + 3 = 18
Again, Proprietors’ Fund = Rs. 3,60,000
∴Equity Share Capital = 10/18 × Rs. 3,60,000 = Rs. 2,00,000
∴Preference Share Capital = 5/18 × Rs. 3,60,000 = Rs. 1,00,000
∴Reserves & Surplus = 3/18 × Rs. 3,60,000 = Rs. 60,000

Problem 15
From the following information of X Engineering Co., complete the proforma Balance Sheet, if its 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 times
Sales to Closing Inventory 4.5 times
Average Collection Period 64 days
Proforma Balance Sheet
Liabilities Rs. Assets Rs.
Net Worth ? Fixed Assets ?
Long-term Liabilities ? Stock ?
Current Liabilities ? Debtors ?
Cash ?
[C.A. (Inter)—Adapted]
Solution
Balance Sheet of X Engineering Co. as on
Amount Amount
Liabilities Assets
Rs. Rs.
Net Worth1 6,40,000 Fixed Assets7 3,40,480
Long-term Liabilities3 2,11,200 Current Assets:
Current Liabilities2 2,68,800 Stock4 3,55,555
Debtors5 3,20,000
Cash & Bank6 1,03,965
11,20,000 11,20,000

Working Notes
1. Given Sales = Rs. 16,00,000
Again, Sales to Net worth (NW) = 2.5
Sales
or = 2.5
NW
16,00,000
or = 2.5
NW
∴Net Worth = Rs. 6,40,000

(Continued)

104 MANAGEMENT ACCOUNTING

2. Current Liabilities to Net Worth = 42%

CL
or = 42%
NW
CL
or = 42%
6, 40,000
∴ Current Liabilities = Rs. 2,68,800
3. Total Liabilities (TL) to Net Worth (NW) = 75%
TL
or = 75%
NW
TL
or = 75%
6, 40,000
∴ Total Liabilities = Rs. 4,80,000
Again, Total Liabilities = Long-term Liabilities + Current Liabilities
Here, 4,80,000 = Long-term Liabilities + 2,68,800
∴ Long-term Liabilities = Rs. 2,11,200
4. Sales to Closing Inventory = 4.5 times
Sales
or = 4.5
Closing Inventory
16,00,000
or = 4.5
Closing Inventory
∴ Closing Inventory = Rs. 3,55,555
5. Average Collection Period = 73 days
∴ Debtors’ Turnover Ratio = 365 days = 5
73 days
Credit Sales
or =5
Receivables
16,00,000
or = 5 [ assumed that entire sales were made on credit ]
Receivables
16,00,000
∴Receivables = = Rs. 3,20,000
5
Again, Receivables = Debtors + Bills Receivable
Here, 3,20,000 = Debtors + Nil
∴ Debtors = Rs. 3,20,000
Current Assets ( CAs)
6. Current Ratio = = 2.9
Current Liabilities ( CLs)
CAs
or = 2.9
2,68,800
∴Current Assets = 2,68,800 × 2.9 = Rs. 7,79,520
Here, CAs = Stock + Debtors + Cash
or 7,79,520 = 3,55,555 + 3,20,000 + Cash
∴ Cash = Rs. 1,03,965
7. In every Balance Sheet, Total Assets = Total Liabilities
Here, Total Liabilities = Net Worth + Long-term Liabilities + Current Liabilities
or TL = 6,40,0001 + 2,11,2003 + 2,68,8002
∴ Total Assets = Rs. 11,20,000
Again, Total Assets = Fixed Assets + Current Assets

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 105

Here, 11,20,000 = FAs + 7,79,5206

∴ Fixed Assets = Rs. 3,40,480

Problem 16
Assume that firm has an Owners’ Equity of Rs. 1,00,000. The Ratio for the firm are:
Short-term Debts to Total Debts 0.40
Total Debt to Owners’ Equity 0.60
Fixed Assets to Owners’ Equity 0.60
Total Asset Turnover 2 Times
Inventory Turnover 8 Times
Complete the following Balance Sheet from the information given above:
Capital & Liabilities Rs. Assets Rs.
Short-term Debt – Cash –
Long-term Debt – Inventory –
Total Debt – Total Current Assets –
Owners’ Equity – Fixed Assets –
Total Capital and Liabilities – Total Assets –

[C.A. (Inter)—Adapted]
Solution
Balance Sheet of as on
Capital & Liabilities Rs. Assets Rs.
Short-term Debt2 24,000 Cash4 60,000
Long-term Debt2 36,000 Inventory3 40,000
Total Debt 60,000 Total Current Assets 1,00,000
Owners’ Equity 1,00,000 Fixed Assets1 60,000
Total Capital and Liabilities 1,60,000 Total Assets 1,60,000

Working Notes
1. Fixed Assets (FA) to Owners’ Equity (OE) = 0.60
FAs
or = 0.60
OE
FAs
or = 0.60
1,00,000
∴ Fixed Assets = Rs. 60,000
2. Total Debt (TD) to Owners’ Equity (OE) = 0.60
TD
or = 0.60
OE
TD
or = 0.60
1,00,000
∴Total Debt = Rs. 60,000
Again, Short-term Debt (STD) to Total Debt (TD) = 0.40
STD
or = 0.40
TD

106 MANAGEMENT ACCOUNTING

STD
or = 0.40
60,000
∴ Short-term Debt = Rs. 24,000
∴ Long-term Debt (LTD) = TD − STD = 60,000 − 24,000 = Rs. 36,000
3. In every Balance Sheet, Total Assets = Total Liabilities
Here, Total Liabilities (TL) = STD + LTD + OE
or TL = 24,0002 + 36,0002 + 1,00,000
∴ Total Liabilities = Rs. 1,60,000
∴ Total Assets = Rs. 1,60,000
Turnover
Again, Total Asset Turnover Ratio = =2
Total Assets

or Turnover
=2
1,60,000
∴ Turnover = Rs. 3,20,000
CGS
Again, Inventory turnover = =8
Average Stock
In the absence of adequate information, in the given problem, as regards to Opening Stock and GP Ratio, it is
assumed that,
Turnover
Inventory Turnover = =8
Closing Stock
3,20,000
or =8
Closing Stock
3,20,000
∴ Closing Stock = = Rs. 40,000
8
4. Here, Total Assets = Fixed Assets + Inventory + Cash
or 1,60,000 = 60,0001 + 40,0003 + Cash
∴ Cash = Rs. 60,000

Problem 17
Following are the Ratios relating to the trading activities of an organization:
Debtors’ Velocity 3 months
Stock Velocity 4 months
Creditors’ Velocity 2 months
GP Ratio 25%
Capital Turnover Ratio 3
Fixed Asset Turnover Ratio 4
GP for the year that ended on 31 March 2007 was Rs. 7,50,000. Stock as on 31 March 2007 was Rs. 30,000
more than it was on 1 April 2006. At the end of the year, Bills Payable and Bills Receivable were Rs. 45,000 and
Rs. 50,000, respectively, and Bank Overdraft was Rs. 1,10,000.
Prepare the Statement of Proprietors’ Fund as on 31 March 2007. (Make necessary assumptions that you
think fit.)
[B.Com. (Hons), Calcutta University—Adapted]

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 107

Solution
Statement of Proprietors’ Fund of an Organization as on 31 March 2007
Rs. Rs. Rs.
Sources of Fund:
Proprietors’ Fund5 10,00,000
10,00,000
Applications of Fund:
Fixed Assets1 7,50,000
Add: Working Capital:
Current Assets:
Stock3 7,65,000
Debtors2 7,00,000
Bills Receivable 50,000
15,15,000
Less: Current Liabilities:
Creditors4 3,35,000
Bills Payable 45,000
Bank Overdraft 1,10,000 4,90,000
10,25,000
17,25,000
Less: Long-term Loan6 7,75,000
10,00,000

Working Notes
1. GP Ratio = 25%
GP
or = 25%
Sales
7,50,000
or = 25%
Sales
7,50,000
∴ Sales = = Rs. 30,00,000
25%
Again, Fixed Asset Turnover Ratio = 4
Sales
or = 4
Fixed Assets (FA )
30,00,000
or =4
FAs
30,00,000
∴Fixed Assets = = Rs. 7,50,000
4
2. Debtors’ Velocity = 3 months
12 months
∴ Debtors’ Velocity Ratio = =4
3 months
Credit Sales
or =4
Receivables
30,00,000
or = 4 [ assumed that entire sales were made on credit ]
Receivables
∴ Receivables = 30,00,000 = Rs. 7,50,000
4

(Continued)

108 MANAGEMENT ACCOUNTING

Again, Receivables = Debtors + Bills Receivable

Here, 7,50,000 = Debtors + 50,000
∴Debtors = Rs. 7,00,000
3. Let the value of Stock as on 01 April 2006 (i.e., Opening Stock) be x.
∴Value of Stock as on 31 March 2007 (i.e., Closing stock) = x + 30,000

∴ Average Stock = ( Opening Stock + Closing Stock ) =  x + ( x + 30,000 ) = x + 15,000

2 2
Again, CGS = Sales − GP = 30,00,000 – 7,50,000 = Rs. 22,50,000
Here, Stock Velocity = 4 months
∴ Stock − Velocity Ratio = 12 months = 3
4 months
CGS
or =3
Average Stock
22,50,000
or =3
( + 15,000)
x
or 3x + 45,000 = 22,50,000
or 3x = 22,50,000 − 45,000

∴ x = 22,05,000 = 7,35,000
3
∴ Opening Stock = x = Rs. 7,35,000
∴ Closing Stock = x + 30,000 = Rs. 7,65,000
4. We know, in case of a trading concern,
Opening Stock + Purchases = CGS + Closing Stock
Here, 7,35,000 + Purchases = 22,50,000 + 7,65,000
∴ Purchases = Rs. 22,80,000
Again, Creditors’ Velocity = 2 months
12 months Credit Purchases
∴ Creditors’ Velocity Ratio = = 6‚ or =6
2 months Payables
22,80,000
or = 6 [ assumed that the entire purchases were made on credit ]
Payables
∴ Payables = 22,80,000 = Rs. 3,80,000
6
Again, Payables = Creditors + Bills Payable
Here, 3,80,000 = Creditors + 45,000
∴ Creditors = Rs. 3,35,000
Turnover
5. Generally,Capital Turnover Ratio =
Capital Employed
As in the given problem, no relationship between the Proprietors’ Fund and the Long-term Loan is given, we
should assume that (in such a situation only),
Turnover
Capital Turnover Ratio =
Proprietor’s Fund (PF)
Here, 3 = 30,00,000
PF
∴ Proprietor’s Fund = 30,00,000 = Rs. 10,00,000
3
(Continued)

Modified Date: Tue, Jul 06, 2010 11:27:29 AM Output Date: Tue, Jul 06, 2010 01:33:40 PM Rev II
Project: Management Accounting_Debarshi Bhattacharyya ACE Pro India Pvt. Ltd.
File: X:\Pearson\Management Accounting_Debarshi Bhattacharyya\MAIN\M03\LAYOUT_M03\M03_DEBA_ISBN_EN_SE_C03_Part-1.indd

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 109

6. Working Capital = Current Assets − Current Liabilities

Here, Working Capital = (Stock + Debtors + Bills Receivable) − (Creditors + Bills Payable + Bank Overdraft)
or Working Capital = (7,65,000 + 7,00,000 + 50,000) − (3,35,000 + 45,000 + 1,10,000) = Rs. 10,25,000
Again, as per company Balance Sheet, we know that
Proprietors’ Fund + Long-term Loan = Fixed Asset + Working Capital
Here, 10,00,000 + Long-term Loan = 7,50,000 + 10,25,000
∴ Long-term Loan = Rs. 7,75,000

Problem 18
From the following information relating to Moonlight Ltd, prepare a Balance Sheet as on 31 December 1997.
Current Ratio 2:5
Liquid Ratio 1:5
Net Working Capital Rs. 3,00,000
Cost of Sales/Closing Stock 8 times
GP Ratio 25%
Average Debt Collection Period 1.5 months
Fixed Assets /Shareholders’ Net Worth 0.75
Reserves & Surplus/Share Capital 0.50
[B.Com. (Hons), Calcutta University—1998]

Solution
Balance Sheet of Moonlight Ltd as on 31 December 1997
Liabilities Amount Rs. Assets Amount Rs.
Share Capital5 8,00,000 Fixed Assets4 9,00,000
Reserves & Surplus5 4,00,000 Current Assets:
Current Liabilities1 2,00,000 Stock1 2,00,000
Debtors2 2,66,667
Cash & Bank3 33,333
14,00,000 14,00,000

Working Notes

Current Assets ( CAs) 5

1. Current Ratio = = 2.5 =
Current Liabilities ( CLs) 2
∴Net Working Capital = CAs − CLs = 5 − 2 = 3
Again, given Working Capital = Rs. 3,00,000
∴ Current Assets = 3,00,000 × 5 ÷ 3 = Rs. 5,00,000
∴ Current Liabilities = 3,00,000 × 2 ÷ 3 = Rs. 2,00,000

(Continued)

110 MANAGEMENT ACCOUNTING

Now, Liquid Ratio =

(Current Assets − Stock )
(Current Liabilities − Bank Overdraft )
If it is assumed that Bank Overdraft = Nil, then
Liquid Ratio =
(Current Assets − Stock )
CL
Here, 1.5 =
( 5,00,000 − Stock )
2,00,000
or 3,00,000 = 5,00,000 − Stock
∴ Stock = Rs. 2,00,000

Cost of Sales
2. =8
Closing Stock
Cost of Sales
or =8
2,00,000
∴ Cost of Sales = Rs. 16,00,000
Now, GP Ratio = 25% (on Sales)
∴ GP = 1/4 on Sales = 1/3 on Cost of Sales = 1/3 on 16,00,000 = Rs. 5,33,333
∴ Sales = Cost of Sales + GP = 16,00,000 + 5,33,333 = Rs. 21,33,333
Again, Average Collection Period = 1.5 months
12 months
∴ Debtors’ Velocity Ratio = =8
1.5 months
Credit Sales
or =8
Receivables
21,33,333
or = 8 [ assumed that the entire sales were made on credit ]
Receivables
∴ Receivables = 21,33,333 = Rs. 2,66,667
8
As there is no Bills Receivable, then here
Receivables = Debtors = Rs. 2,66,667
3. Normally, Current Assets = Stock + Debtors + Cash
Here, 5,00,000 = 2,00,000 + 2,66,667 + Cash
∴ Cash = Rs. 33,333.
4. Fixed Assets (FA) to Net Worth (NW) = 0.75
FAs
or = 0.75
NW
∴FA = 0.75 NW
Again, as per company Balance Sheet, we know that
Net Worth (NW) + Long-term Loan (LTL) = Fixed Asset (FA) + Working Capital (WC)
Here, NW + Nil = 0.75 NW + 3,00,000 [assumed that there is no Long-term Loan]
or NW − 0.75 NW = 3,00,000
or NW = 3,00,000 ÷ 0.25
∴ Net worth = Rs. 12,00,000
∴Fixed Assets = 0.75 × 12,00,000 = Rs. 9,00,000
5. Reserves & Surplus (RS) to Share Capital (Sh. Cap.) = 0.50
RS
or = 0.50
Sh.Cap.
∴ RS = 0.50 Sh. Cap.
Again, Net Worth = Share Capital + Reserves & Surplus − Miscellaneous Expenditure

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 111

Here, 12,00,000 = Sh. Cap. + 0.5 Sh. Cap. − Nil [assumed that Miscellaneous expenditure = Nil]
or 1.5 Sh. Cap. = 12,00,000
∴ Share Capital = 12,00,000÷1.5 = Rs. 8,00,000
∴ Reserves & Surplus = 0.5 × 8,00,000 = Rs. 4

Problem 19
From the following data, complete the following Balance Sheet:
GP Rs. 54,000
Shareholders’ Fund Rs. 6,00,000
GP Margin 20%
Credit Sales to Total Sales 80%
Total Asset Turnover 0.3 times
Inventory Turnover 4 times
Average Collection Period 20 days
[a 360-day year]
Current Ratio 1.8
Long-term Debt to Equity 40%
Balance Sheet
Liabilities Rs. Assets Rs.
Creditors – Cash –
Long-term Debt – Debtors –
Shareholders’ Fund – Inventory –
Fixed Assets –
– –
[C.A. (PE II)—November 2005]
Solution
Balance Sheet as on
Liabilities Rs. Assets Rs.
Creditors 60,000 Cash 42,000
Long-term Debt 2,40,000 Debtors 12,000
Shareholders’ Fund 6,00,000 Inventory 54,000
Fixed Assets 7,92,000
9,00,000 9,00,000

Working Notes
1. GP = Rs. 54,000
GP
Again, GP Margin = × 100 = 20
Sales
54,000
or × 100 = 20
Sales
∴ Sales = 54,000 × 100 ÷ 20 = Rs. 2,70,000
Again, Credit Sales to Total Sales = 80% = 80 ÷ 100 = 4/5
Credit Sales 4
or =
Total Sales 5
Credit Sales 4
or =
2,70,000 5
(Continued)

112 MANAGEMENT ACCOUNTING

∴Credit Sales = 2,70,000 × 4 ÷ 5 = Rs. 2,16,000

Again, Average Collection Period = 20 days
360 days
∴ Debtors’ Velocity Ratio = = 18
20 days
Credit sales
or = 18
Receivables
2,16,000
or = 18
Receivables
2,16,000
∴ Receivables = = Rs. 12,000
18
As there is no bills receivable, then here
Receivables = Debtors = Rs. 12,000
2. CGS = Sales − GP
Here, CGS = 2,70,000 – 54,000 = Rs. 2,16,000
CGS
Again, Inventory Turnover Ratio =
Average Stock
2,16,000
Here, 4 =
Average Stock
2,16,000
∴ Average Stock = = Rs. 54,000
4
In the absence of adequate information, in the given problem, as regards to Opening stock, it is assumed that
Opening stock = Closing stock
Then, Closing Stock = Average Stock = Rs. 54,000
3. Given, Shareholders’ Fund (i.e., here, Equity) = Rs. 6,00,000
Again, Long-term Debt (LTD) to Equity = 40%
LTD
or = 40%
6,00,000
∴Long-term Debt = 40% of 6,00,000 = Rs. 2,40,000
4. Total Asset Turnover = 0.3
Turnover
or = 0.3
Total Assets

2,70,0001
or = 0.3
Total Assets
2,70,000
∴ Total Assets = = Rs. 9,00,000
0.3
Again, in every Balance Sheet, Total Assets = Total Liabilities
∴Total Liabilities = Rs. 9,00,000
Here, Total Liabilities = Creditors + Long-term Loan + Shareholders’ Fund
or 9,00,000 = Creditors + 2,40,0003 + 6,00,000
∴Creditors = Rs. 60,000
Current Assets (CAs) CAs
5. Current Ratio = = 1.8 or = 1.8
Current Liabilities (CLs) 60,000
∴Current Assets = 60,000 × 1.8 = Rs. 1,08,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 113

Here, Current Assets = Inventory + Debtors + Cash

or 1,08,000 = 54,0002 + 12,0001 + Cash
∴Cash = Rs. 42,000
6. Here, Total Assets = Fixed Assets + Inventory + Debtors + Cash
or 9,00,0004 = Fixed Assets + 54,0002 + 12,0001 + 42,0005
∴Fixed Assets = Rs. 7,92,000

Problem 20
Prepare a Profit & Loss A/c and a Balance Sheet (with as many details as possible) from the following
information for the year that ended on 31 December 2006:
GP Ratio 25%
NP Ratio 15%
Stock Turnover 10 times
NP to Proprietary Fund 1:1
Total Outside Liability to Proprietary Fund 2:1
Total Assets Rs. 12,00,000
Closing Stock Rs. 1,00,000
[B.B.A. (Hons), Calcutta University—2007]

Solution
Profit & Loss A/c of for the year that ended on 31 December 2006
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Opening Stock3 3,00,000 By Sales2 26,66,667
To Purchases (Bal. fig.) 18,00,000 By Closing Stock 1,00,000
To GP c/d2 6,66,667
27,66,667 27,66,667
To Other Operating Expenses (Bal. fig.) 2,66,667 By GP b/d 6,66,667
To NP1 4,00,000
6,66,667 6,66,667

Balance Sheet of as on 31 December 2006

Amount Amount
Liabilities Assets
Rs. Rs.
Proprietors’ Fund1 4,00,000 Total Assets 12,00,000
Total Outside Liabilities1 8,00,000
12,00,000 12,00,000

Working Notes
1. Total Assets = Total Liabilities = Rs. 12,00,000
Again, Total Liabilities = Total Outside Liabilities + Proprietors’ Fund
Total Outside Liabilities 2
Here, =
Proprietors’ Fund 1

(Continued)

114 MANAGEMENT ACCOUNTING

∴ Total Liabilities = 2 + 1 = 3
2
∴ Total Outside Liabilities = × 12,00,000 = Rs. 8,00,000
3
1
∴Proprietors’ Fund = × 12,00,000 = Rs. 4,00,000
3
1
Again, Net Profit to Proprietor’s Fund =
1
NP 1
or =
4,00,000 1
∴NP = Rs. 4,00,000

2. NP Ratio = NP = 15%
Sales

4,00,000
or = 15%
Sales

4,00,000
∴ Sales = = Rs. 26,66,667
15%
GP
Again, GP Ratio = = 25%
Sales
GP
or = 25%
26,66,667
∴ GP = 26,66,667 × 25% = Rs. 6,66,667

3. CGS = Sales − GP = 26,66,667 − 6,66,667 = Rs. 20,00,000

CGS
∴ Stock Turnover Ratio = = 10
Average Stock
20,00,000
or = 10
Average Stock
20,00,000
∴ Average Stock = = Rs. 2,00,000
10

Again, Average Stock =

(Opening Stock + Closing Stock )
2

or 2,00,000 =
(Opening Stock + 1,00,000)
2
or 2,00,000 = (Opening Stock + 1,00,000) = 4,00,000
∴ Opening Stock = 3,00,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 115

Problem 21
From the following Ratios and further information given below, prepare a trading and Profit & Loss A/c and
a Balance Sheet of Mr Green:

Fixed Assets/Capital 5/4

Fixed Assets Rs. 5,00,000
Capital/Liabilities 1/2
NP/Capital 1/5
GP Ratio 25%
Stock Turnover Ratio 10
Fixed Assets/Total Current Assets 5/7
NP to Sales 20%
Closing Stock Rs. 50,000

Out of the Current Assets, Sundry Debtors are Rs. 6,00,000, and the balance represents Cash and Closing Stock.
[C.A. (Inter)—May 1992]

Solution
Books of Mr Green
Trading and Profit & Loss A/c for the year that ended on

Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Opening Stock6 10,000 By Sales4 4,00,000
To Purchases7 3,40,000 By Closing Stock 50,000
To Gross Profit c/d5 1,00,000
4,50,000 4,50,000
To Other Operating Expenses8 20,000 By Gross Profit b/d 1,00,000
To Net Profit3 80,000
1,00,000 1,00,000

Balance Sheet as on
Amount Amount
Liabilities Assets
Rs. Rs.
Capital1 4,00,000 Fixed Assets 5,00,000
Total Outside Liabilities2 8,00,000 Current Assets:
Stock 50,000
Debtors 6,00,000
Cash9 50,000
12,00,000 12,00,000

Modified Date: Sat, Jul 03, 2010 12:42:12 PM Output Date: Tue, Jul 06, 2010 11:40:08 AM Rev II
Project: Management Accounting_Debarshi Bhattacharyya ACE Pro India Pvt. Ltd.
File: X:\Pearson\Management Accounting_Debarshi Bhattacharyya\MAIN\M03\LAYOUT_M03\M03_DEBA_ISBN_EN_SE_C03_Part-2.indd

116 MANAGEMENT ACCOUNTING

Working Notes

Fixed Assets 5
1. =
Capital 4
5,00,000 5
or =
Capital 4

Capital = Rs. 4,00,000

Capital 1
2. =
Liabilities 2

or 4,00,000 1
=
Liabilities 2
∴ Total Outside Liabilities = Rs. 8,00,000
NP 1
3. =
Capital 5
NP 1
or =
4,00,000 5
∴ NP = Rs. 80,000
NP
4. = 20%
Sales
80,000
or = 20%
Sales
∴ Sales = Rs. 4,00,000
GP
5. GP ratio = = 25%
Sales
GP
or = 25%
4,00,000
∴ GP = 4,00,000 × 25% = Rs. 1,00,000
6. In a trading concern,
CGS = Sales − GP
Here, CGS = 4,00,000 − 1,00,000 = Rs. 3,00,000
CGS
Again, Stock Turnover Ratio = = 10
Average stock
3,00,000
or = 10
Average stock
3,00,000
∴ Average Stock = = Rs. 30,000
10

(Opening Stock + Closing Stock)

Again, Average Stock =
2

(Opening Stock + 50,000)

or 30,000 =
2

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 117

or Opening Stock + 50,000 = 60,000

∴Opening Stock = Rs. 10,000
7. In a trading concern,
Opening Stock + Purchases = CGS + Closing stock
Here, 10,000 + Purchases = 3,00,000 + 50,000
∴ Purchases = Rs. 3,40,000
8. Other operating expenses debited to Profit & Loss A/c = GP − NP = 1,00,000 − 80,000 = Rs. 20,000

Fixed Assets 5
9. =
Total Current Assets 7
5,00,000 5
or =
Total Current Assets 7
∴ Total Current Assets = 5,00,000 × 7 ÷ 5 = Rs. 7,00,000
Again, Total Current Assets = Stock + Debtors + Cash
Here, 7,00,000 = 50,000 + 6,00,000 + Cash
∴ Cash = Rs. 50,000

Problem 22
From the following information, prepare the trading and Profit & Loss A/c for the year that ended on 31
March 2008 and a Balance Sheet as on that date of Mr Teem:
Gross Profit Ratio 40%
Net Profit Ratio 25%
Net Profit to Capital 1:5
Capital to Outside Liabilities 3:2
Long Term Debt to Short-term Debt 1:1
Fixed Assets to Capital 2:3
Fixed Assets to Current Assets 2:3
Stock Turnover Ratio 1:5
Closing Stock Rs. 6,00,000
Fixed Assets Rs. 10,00,000
Debtors Rs. 7,00,000

Solution
Books of Mr Teem
Trading and Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Opening Stock 8
3,60,000 By Sales 5
12,00,000
To Purchases (Bal. fig.) 9,60,000 By Closing Stock 6,00,000
To Gross Profit c/d6 4,80,000
18,00,000 18,00,000
To Other Operating Expenses7 (Bal. fig.) 1,80,000 By Gross Profit b/d 4,80,000
To Net Profit4 3,00,000
4,80,000 4,80,000

118 MANAGEMENT ACCOUNTING

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. Rs.
Capital2 15,00,000 Fixed Assets 10,00,000
Long-term Debt3 5,00,000 Current Assets:
Short-term Debt3 5,00,000 Stock 6,00,000
Debtors 7,00,000
Cash & Bank1 2,00,000
25,00,000 25,00,000

Working Notes
1. Fixed Assets to Current Assets = 2/3
FA 2
or =
CA 3
10,00,000 2
or =
CA 3
or 2 CAs = 30,00,000
30,00,000
∴ Current Assets (CAs) = = Rs. 15,00,000
2
Again, Current Assets = Stock + Debtors + Cash & Bank
Here, 15,00,000 = 6,00,000 +7,00,000 + Cash & Bank
∴Cash & Bank = 15,00,000 – 13,00,000 = Rs. 2,00,000

2. Fixed Assets to Capital = 2/3

FA 2
or =
Capital 3

10,00,000 2
or =
Capital 3
or 2 Capital = 30,00,000
30,00,000
∴ Capital = = Rs. 15,00,000
2

3. Capital to Outside Liabilities = 3/2

Capital 3
or =
Outside Liabilities 2
15,00,000 3
or =
Outside Liabilities 2
2 × 15,00,000
or Outside Liabilities = = Rs. 10,00,000
3
Again, Long-term Debt to Short-term Debt = 1:1

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 119

Long-term Debt 1
or =
Short-term Debt 1
∴Long-term Debt = Short-term Debt

Again, Total Outside Liabilities (i.e., Debt) = Long-term Debt + Short-term Debt
Here, 10,00,000 = Short-term Debt + Long-term Debt
or 2 Short-term debts = 10,00,000

10,00,000
∴Short-term Debt = = Rs. 5,00,000
2
∴Long-term Debt = Short-term Debt = Rs. 5,00,000

4. NP to Capital = 1/5

Net Profit 1
or =
Capital 5
Net Profit 1
or =
15,00,000 5
1
∴NP = × 15,00,000 = Rs. 3,00,000
5

5. NP Ratio = 25%
Net Profit
or = 25%
Sales
3,00,000 25 1
or = =
Sales 100 4
∴ Sales = 4 × 3,00,000 = Rs. 12,00,000

6. GP Ratio = 40%
Gross Profit
or × 100 = 40
Sales
Gross Profit 40 2
or = =
12,00,000 100 5
12,00,000 × 2
∴ Gross Profit = = Rs. 4,80,000
5

7. Other operating expenses charged to Profit & Loss A/c

= GP – NP = Rs. 4,80,000 – Rs. 3,00,000 = Rs. 1,80,000

8. Stock Turnover Ratio = 1.5

or Cost of Goods Sold

= 1.5
Average Stock

(Continued)

120 MANAGEMENT ACCOUNTING

Sales – Gross Profit

or = 1.5
Average Stock
12,00,000 – 4,80,000
or = 1.5
Average Stock

or 1.5 Average Stock = 7,20,000

7,20,000
∴ Average Stock = = Rs. 4,80,000
1.5
Opening Stock + Closing Stock
Again, Average Stock =
2
Opening Stock + 6,00,000
Here, 4,80,000 =
2
or Opening Stock + 6,00,000 = 9,60,000
∴Opening Stock = 9,60,000 − 6,00,000 = Rs. 3,60,000

Problem 23
From the following Ratios and further information given below, prepare a Balance Sheet as on 31 March 2009:
Liquid Ratio 1.2
Return on Capital employed 10%
Fixed Asset Turnover Ratio 8:5
Closing Stock 12.5% on Sales
Owner’s Equity to Fixed Asset 8:15
Debtors’ Turnover 1 month
Debt-Equity Ratio 5:4

For the year that ended on 31 March 2009, the company made a profit of Rs. 1,00,000 after paying an interest
of Rs. 1,20,000 on term loan, but before tax. Tax paid for the year was Rs. 40,000. Bank balance stood at
Rs. 1,00,000, besides stock and debtors of the concern.
[C.A. (Inter)—Adapted]

Solution
Books of a concern
Balance Sheet as on 31 March 2009

Amount Amount
Liabilities Assets
Rs. Rs.
Owner’s Equity1 8,00,000 Fixed Assets2 15,00,000
Term Loan1 10,00,000 Current Assets:
Current Liabilities: Stock3 3,00,000
Bank Overdraft5 50,000 Debtors4 2,00,000
Liquid Liabilities5 2,50,000 Bank 1,00,000
21,00,000 21,00,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 121

Working Notes
1.
Rs.
Net Profit after Interest but before Tax 1,00,000
Add: Interest on Term Loan 1,20,000
Net PBIT 2,20,000
Less: Tax 40,000
Net Profit before Interest but after Tax 1,80,000

Net Profit before Interest but after Tax

Now, Return on Capital Employed = × 100
Capital Employed
1,80,000
or 10 = × 100
Capital Employed

∴ Capital Employed = Rs. 18,00,000

Debt 5
Again, Debt-Equity Ratio = =
Equity 4

∴ Capital Employed = Equity + Debt = 5 + 4 = 9

∴Equity = 4/9 × 18,00,000 = Rs. 8,00,000
∴ Debt (i.e., Term Loan) = 5/9 × 18,00,000 = Rs. 10,00,000

2. Owner’s Equity to Fixed Asset = 8:15

Owner’s Equity 8
or =
Fixed Asset 15
8,00,000 8
or =
Fixed Asset 15

∴ Fixed Asset = 8,00,000 × 15 ÷ 8 = Rs. 15,00,000

Turnover
3. Fixed Asset Turnover Ratio =
Fixed Asset
Turnover 8
or =
15,00,000 5
∴ Turnover = 15,00,000 × 8 ÷ 5 = Rs. 24,00,000

∴ Closing stock = 12.5% of sales = 12.5% of 24,00,000 = Rs. 3,00,000

4. Debtors’ Turnover = 1 month

12 months
∴ Debtors’ Turnover Ratio = = 12
1 month
Credit Sales
or = 12
Debtors
24,00,000
or = 12 [ assumed that all sales were made on credit ]
Debtors
∴ Debtors = Rs. 2,00,000

(Continued)

122 MANAGEMENT ACCOUNTING

5. In a Balance Sheet,
Owner’s Equity + Long-term Loan = Fixed Asset + Working Capital

Here, 8,00,000 + 10,00,000 = 15,00,000 + Working Capital

∴Working Capital = Rs. 3,00,000

Again, in the given problem,

Current Assets = Stock + Debtors + Bank = 3,00,000 + 2,00,000 + 1,00,000 + Rs. 6,00,000

Now, Working Capital = Current Assets (CAs) − Current Liabilities (CLs)

or 3,00,000 = 6,00,000 − CL

∴Current Liabilities = Rs. 3,00,000

CAs − Stock
Again, Liquid Ratio =
CLs − Bank Overdraft

(6,00,000 – 3,00,000)
Here, 1.2 =
(3,00,000 − Bank overdraft)

or 3,00,000 = 3,60,000 − 1.2 Bank Overdraft

∴ Bank overdraft = 60,000 ÷ 1.2 = Rs. 50,000

Again, CLs = Liquid Liabilities + Bank Overdraft

Here, 3,00,000 = Liquid Liabilities + 50,000

∴ Liquid Liabilities = Rs. 2,50,000

Problem 24
A company gives you the following information in respect of the year 2008–09:

Gross Profit Ratio 20%

Net Profit Ratio 15%
Stock Turnover Ratio 10
Average Debt Collection Period 2 months
Credit Period Allowed by Suppliers 1 month
Current Ratio 4
Depreciation on Fixed Asset @ 10% Rs. 20,000
Long-term Loan Rs. 1,00,000
Opening Stock Rs. 90,000
Closing Stock Rs. 1,02,000

On 31 March 2009, Current Asset consisted of Stock, Debtors and cash only. There was no Bank Overdraft.
All purchases were made on credit. Cash sales were 25% of the total sales.
Prepare a Profit & Loss A/c of the company for the year that ended on 31 March 2009 and a Balance Sheet
as on that date.

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 123

Solution
Books of a Company
Profit & Loss A/c for the year that ended on 31 March 2009
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Cost of Goods Sold1 9,60,000 By Sales1 12,00,000
To Gross Profit c/d1 2,40,000
12,00,000 12,00,000
To Other Operating Expenses (Bal. fig.) 40,000 By Gross Profit b/d 2,40,000
To Depreciation on Fixed Asset 20,000
To Net Profit2 1,80,000
2,40,000 2,40,000
Balance Sheet as on 31 March 2009
Amount Amount
Liabilities Assets
Rs. Rs.
Net Worth7 3,23,000 Fixed Assets3 1,80,000
Long-term Debt 1,00,000 Current Assets:
Current Liabilities: 50,000 Stock4 1,02,000
Bank Overdraft Nil Debtors4 1,50,000
Payables5 81,000 Cash6 72,000
4,04,000 4,04,000

Working Notes

(Opening Stock + Closing Stock) (90,000 + 1,02,000)

1. Average Stock = = = Rs. 96,000
2 2
CGS
Now, Stock Turnover Ratio =
Average Stock
CGS
or 10 =
96,000
∴ CGS = 96,000 × 10 = Rs. 9,60,000
∴ GP = 20% on Sales = 1/5 on Sales = 1/4 on CGS = 1/4 on 9,60,000 = Rs. 2,40,000
∴ Sales = CGS + GP = 9,60,000 + 2,40,000 = Rs. 12,00,000
NP
2. NP Ratio = × 100
Sales
NP
or 15% =
12,00,000
∴ Net Profit after Tax = 15% × 12,00,000 = Rs. 1,80,000
3. Depreciation on Fixed Asset @ 10% = Rs. 20,000
∴ Net Fixed Asset = 20,000 × 90 ÷ 10 = Rs. 1,80,000
4. Total Sales = Rs. 12,00,000
Cash Sales = 25% of Total Sales
∴ Credit Sales = 75% of Total Sales = 75% of 12,00,000 = Rs. 9,00,000
Average Debt Collection Period = 2 months
12 months
∴ Debtors’ Turnover Ratio = =6
2 months
(Continued)

124 MANAGEMENT ACCOUNTING

Credit Sales
or =6
Debtors
9,00,000
or =6
Debtors
9,00,000
∴ Debtors = = Rs. 1,50,000
6
5. Generally, CGS = Materials Consumed + Wages & Manufacturing Overheads
In the absence of adequate information regarding wages and manufacturing overheads, it may be assumed that
CGS = Materials Consumed = Rs. 9,60,000
Now, Opening Stock + Purchases = Materials Consumed + Closing Stock
∴ Purchases = Materials Consumed + Closing Stock − Opening Stock = 9,60,000 + 1,02,000 – 90,000
∴ Purchases = Rs. 9,72,000
Now, Credit period allowed by suppliers = 1 month
12 months
∴ Creditors’ Turnover Ratio = = 12
1 month
Credit Purchases
or = 12
Payables
9,72,000
or = 12
Payables
9,72,000
∴ Payables = = Rs. 81,000
12
6. Here, Current Liabilities (CLs) = Payables + Bank Overdraft = 81,000 + Nil = Rs. 81,000
Current Asset (CAs)
Again, Current ratio = =4
Current Liability (CLs)
CAs
or =4
81,000
∴ Current Asset = 81,000 × 4 = Rs. 3,24,000
Here, Current Asset = Stock + Debtors + Cash
or 3,24,000 = 1,02,000 + 1,50,000 + Cash
∴ Cash = Rs. 72,000
7. Working Capital = Current Assets (CAs) − Current Liabilities (CLs) = 3,24,000 − 81,000 = Rs. 2,43,000
In a Balance Sheet,
Net Worth + Long-term Loan = Fixed Asset + Working Capital
Here, Net worth + 1,00,000 = 1,80,000 + 2,43,000
∴Net Worth = Rs. 3,23,000

Problem 25
From the following information of S Ltd, prepare its trading, Profit & Loss A/c and Balance Sheet:
Sales Rs. 7,30,000 Quick Ratio 1.3
Working Capital Rs. 1,20,000 Current Ratio 2.5
Bank Overdraft Rs. 15,000 Proprietary Ratio 0.6
Share Capital Rs. 2,50,000 Fixed Assets/Proprietary Fund
GP Ratio 10%

Net Profit is 10% of Proprietary fund. There are no long-term liabilities and fictitious assets. Closing stock is
10% more than the opening stock.
[B.Com. (Hons), Calcutta University—2008]

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 125

Solution
Books of S Ltd
Trading and Profit & Loss A/c for the year that ended on
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Opening Stock 2
1,05,000 By Sales 7,30,000
To Purchases (Bal. fig.) 6,67,500 By Closing Stock 1,15,500
To Gross Profit c/d1 73,000
8,45,500 8,45,500
To Indirect Expenses7 43,000 By Gross Profit b/d 73,000
To Net Profit6 30,000
73,000 73,000
Balance Sheet as on
Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital 2,50,000 Fixed Assets4 1,80,000
Reserves & Surplus5 50,000 Current Assets:
Current Liabilities: Stock2 1,15,500
Bank Overdraft 15,000 Quick Assets3 84,500
Quick Liabilities3 65,000
3,80,000 3,80,000

Working Notes

GP
1. GP Ratio =
Sales
G.P
Here, 10% =
7,30,000
∴ GP = Rs. 73,000

Current Assets (CAs) 2.5

2. Current Ratio = = 2.5 =
Current Liabilities (CLs) 1
∴ Working Capital = CAs − CLs = 2.5 − 1 = 1.5
Again, given Working Capital = Rs. 1,20,000
∴ Current Assets (CAs) = 2.5 / 1.5 × 1,20,000 = Rs. 2,00,000
∴ Current Liabilities (CLs) = 1/1.5 × 1,20,000 = Rs. 80,000
(CAs − Stock)
Again, Quick Ratio =
(CLs − Bank Overdraft)
(2,00,000 − Stock)
or 1.3 =
(80,000 –15,000)
or 84,500 = 2,00,000 − Stock
∴ Closing Stock = Rs. 1,15,500
Again, Closing Stock = 10% more than Opening Stock
∴Opening Stock = 100/110 × 1,15,500 = Rs. 1,15,500
3. Total Current Assets = Quick Assets + Stock
Here, 2,00,000 = Quick Assets + 1,15,500
∴ Quick Assets = Rs. 84,500

(Continued)

126 MANAGEMENT ACCOUNTING

Again, Total Current Liabilities = Quick Liabilities + Bank Overdraft

Here, 80,000 = Quick Liabilities + 15,000
∴Quick Liabilities = Rs. 65,000
Fixed Assets (FA)
4. Proprietary Ratio = = 0.6
Proprietors’ Fund (PF)
∴FA = 0.6 PF
Again, as per company Balance Sheet, we know that
Proprietors’ Fund (PF) + Long-term Loan (LTL) = Fixed Asset (FA) + Working Capital (WC)
Here, PF = FAs + WC [as here, LT Loans = Nil]
or PF = 0.6 PF + 1,20,000
or 0.4 PF = 1,20,000
∴ Proprietors’ Fund (PF) = Rs. 3,00,000
∴ Fixed Asset (FA) = 0.6 × 3,00,000 = Rs. 1,80,000
5. Proprietors’ Fund (PF) = Share Capital (SC) + Reserves & Surplus (RS) − Miscellaneous Expenditure (ME)
Here, 3,00,0004 = 2,50,000 + RS – Nil [as here, Miscellaneous expenditure = Nil]
∴Reserves & Surplus (RS) = Rs. 50,000
6. NP = 10% of PF = 10% of 3,00,000 = Rs. 30,000
7. Indirect Expenses Debited to Profit & Loss A/c = GP − NP= 73,000 – 30,000 = Rs. 43,000

Problem 26
From the following information, prepare a trading and Profit & Loss A/c for the year that ended on 31 March
2009 and a Balance Sheet as on that date:
Gross Profit Margin 25%
Net Profit Margin 5%
Return on Investment 5%
Rate of Tax 50%
Interest on Debt Rs. 5,000
Fixed Asset Turnover Ratio 0.80
Debtors’ Turnover 6 months
Inventory Turnover Ratio 1.25
Current Ratio 2.5
Debt Asset Ratio 0.60
Short-term Debt Rs. 50,000
Net Sales Rs. 1,00,000

Solution
Books of _______________
Trading and Profit & Loss A/c for the year that ended on 31 March 2009
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Cost of Goods Sold1 75,000 By Sales 1,00,000
To Gross Profit c/d1 25,000
1,00,000 1,00,000
To Other Operating Expenses (Bal. fig.) 10,000 By Gross Profit b/d 25,000
To Interest on Debt 5,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 127

Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Tax2 5,000
To Net Profit after Tax2 5,000
25,000 25,000
Balance Sheet of as on 31 March 2009
Amount Amount
Liabilities Assets
Rs. Rs.
Net Worth8 1,00,000 Fixed Assets3 1,25,000
Long-term Debt7 1,00,000 Current Assets:
Short-term Debt 50,000 Stock4 60,000
Debtors5 50,000
Cash & Bank6 15,000
2,50,000 2,50,000

Working Notes

GP
1. GP Margin =
Sales
GP
or 25% =
1,00,000
∴GP = Rs. 25,000
∴CGS = Sales – GP = 1,00,000 – 25,000 = Rs. 75,000

Net PAT
2. NP Margin =
Sales
Net PAT
or 5% =
1,00,000
∴ Net Profit after tax = Rs. 5,000
As the Rate of Tax = 50%
∴Tax = 50/50 × 5,000 = Rs. 5,000
Sales
3. Fixed Asset Turnover ratio =
Fixed Asset
1,00,000
or 0.8 =
Fixed Asset
1,00,000
∴ Fixed Asset = = Rs. 1,25,000
0.8
CGS
4. Inventory Turnover Ratio =
Average Stock
75,000
or 1.25 =
Average Stock
75,000
∴ Average Stock = = Rs. 60,000
1.25
In the absence of adequate information regarding opening stock, it may be assumed that
Opening Stock = Closing Stock
Then, Closing Stock = Average Stock = Rs. 60,000

(Continued)

128 MANAGEMENT ACCOUNTING

Credit Sales
5. Debtors’ Turnover Ratio =
Debtors
1,00,000
or 2=
Debtors
[Assumed all sales were made on credit]
1,00,000
∴ Debtors = = Rs. 50,000
2

Current Asset (CAs)

6. Current Ratio =
Current Liability [i.e., Short-term Debt ]
CAs
or 2.5 =
50,000
∴Current Asset = 50,000 × 2.5 = Rs. 1,25,000
Again, Current Asset = Stock + Debtors + Cash & Bank
or 1,25,000 = 60,000 + 50,000 + Cash & Bank
∴Cash & Bank = Rs. 15,000

7. Here, Total Asset = Fixed Asset + Current Asset = 1,25,000 + 1,25,000 = Rs. 2,50,000
Total Debt
Now, Debt Asset Ratio =
Total Asset
Total Debt
or 0.6 =
2,50,000
2,50,000
∴ Total Debt = = Rs. 1,50,000
0.6
Again, Total Debt = Long-term Debt + Short-term Debt
or 1,50,000 = Long-term Debt + 50,000
∴Long-term Debt = Rs. 1,00,000
8.

Rs.
Net Profit after Tax2 5,000
Add: Interest on Debt 5,000
Net Profit before Interest but after Tax 10,000

Net Profit before Interest but after Tax

Now, ROI = × 100
Capital Employed
10,000
or 5% =
Capital Employed
10,000
∴ Capital Employed = = Rs. 2,00,000
5%

Again, Capital Employed = Net Worth + Long-term Debt

or 2,00,000 = Net Worth + 1,00,000
∴Net Worth = Rs. 1,00,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 129

Problem 27
A & Co. started its business on 1 April 2004. The following information was received from the company for
the year 2004–05:
Capital Introduced on 1 April 2004 Rs. 5,00,000
Drawings during the year Rs. 50,000
Depreciation @ 20% on Fixed Assets Rs. 25,000
General Expenses [Excluding Depreciation] Rs. 68,000
Other Figures at the year-end:
Net Working Capital Rs. 50,000
Current Ratio 2:1
Acid Test Ratio 1.5:1
[Cash & Debtors to Current Liabilities]
Capital Employed Turnover 2:1
[Sales to Net Assets]
Prepare an Income Statement for the year 2004–05 and a Balance Sheet as on 31 March 2005, with as many
details as possible.
[B.B.A. (Hons), Calcutta University—2005]

Solution
Income Statement of A & Co. for the year that ended on 31 March 2005
Rs. Rs.
Sales5 3,00,000
Less: Cost of Goods Sold (Bal. fig.) 5,07,000
Gross Loss 2,07,000
Less: General Expenses 68,000
Depreciation 25,000 93,000
Net Loss for the year4 3,00,000
Balance Sheet of A & Co. as on 31 March 2005
Liabilities Rs. Rs. Assets Rs. Rs.
Capital: Fixed Assets3 1,25,000
Opening Balance 5,00,000 Less: Depreciation 25,000 1,00,000
Less: Drawings 50,000 Current Assets:
4,50,000 Stock2 25,000
Less: Net Loss 3,00,000 1,50,000 Cash & Debtors2 75,000
Current Liabilities1 50,000
2,00,000 2,00,000

Working Notes
1. Net Working Capital = Current Assets (CAs) − Current Liabilities (CLs) = Rs. 50,000
CAs 2
Again, Current Ratio = =
CLs 1
∴Net Working Capital = 2 − 1 = 1
∴Current Assets = 2/1 × Rs. 50,000 = Rs. 1,00,000
∴ Current Liabilities = 1/1 × Rs. 50,000 = Rs. 50,000

Cash & Debtors 1.5

2. Here, Acid Test Ratio = =
CLs 1

(Continued)

130 MANAGEMENT ACCOUNTING

or (CAs − Stock)
= 1.5
CLs
or (1,00,000 − Stock) = 1.5
50,000
∴Stock = 1,00,000 − 75,000 = Rs. 25,000
∴Cash & Debtors = 1,00,000 − 25,000 = Rs. 75,000
3. Depreciation on Fixed Assets @ 20% = Rs. 25,000
∴Value of Fixed Assets before Charging Depreciation = 100/20 × 25,000 = Rs. 1,25,000
4. Here, the Balance Sheet equation is
Capital + CLs = FAs + CA
∴ Closing Capital = FAs + CAs − CLs = (1,25,000 − 25,000) + 1,00,000 − 50,000 = Rs. 1,50,000
∴Net Loss for the year = Opening capital – Closing capital − Drawings
= 5,00,000 − 1,50,000 − 50,000 = Rs. 3,00,000
Sales 2
5. Capital Turnover Ratio = =
Closing Capital 1
or Sales
=2
1,50,000
∴ Sales = Rs. 3,00,000

Problem 28
From the following information, prepare a trading and Profit & Loss A/c for the year that ended on 31 March
2008 and a Balance Sheet as on that date of K Ltd:
Gross Profit Ratio 25%
Current Ratio 2
Net Profit to Equity Capital 10%
Stock Turnover Ratio 5 times
Average Debt Collection Period 2 months
Creditors’ Velocity 3 months
Proprietary Ratio [Fixed Assets to Capital Employed] 80%
Capital Gearing Ratio [Preference Shares & Debentures to Equity) 25%
General Reserves and Profit & Loss A/c to Issued Equity Capital 25%
Preference Share Capital to Debentures 3
Cost of sales consists of 40% for materials, and balance for wages and overheads. GP is Rs. 6,00,000.
Solution
Books of _______________
Trading and Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Materials Consumed2 7,20,000 By Sales1 24,00,000
To Wages & Overheads2 10,80,000
To Gross Profit c/d 6,00,000
24,00,000 24,00,000
To Other Operating Expenses & Interest 4,78,400 By Gross Profit b/d 6,00,000
on Debentures (Bal. fig.)
To Net Profit 1,21,600
6,00,000 6,00,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 131

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. Rs.
Equity Share Capital8 12,16,000 Fixed Assets7 15,20,000
Preference Share Capital8 2,85,000 Current Assets:
General Reserve9 1,82,400 Stock3 3,60,000
Profit & Loss A/c9 1,21,600 Receivables5 4,00,000
Debentures8 95,000
Current Liabilities:
Payables4 1,80,000
Bank Overdraft6 2,00,000
2,32,300 2,32,300

Working Notes

1. Gross Profit Ratio = Gross Profit = 25%

Sales
6,00,000
or = 25%
Sales
∴Sales = 6,00,000 × 25% = Rs. 24,00,000
2. Cost of Sales = Sales − Gross Profit = 24,00,000 – 6,00,000 = Rs. 18,00,000
∴Materials Consumed = 40% of Cost of Sales = 40% of 18,00,000 = Rs. 7,20,000
∴Wages & Overheads = 60% of Cost of Sales = 60% of 18,00,000 = Rs. 10,80,000
Cost of Goods Sold
3. Stock Turnover Ratio = =5
Average Stock
18,00,000
or = 5
Average Stock
18,00,000
∴ Average Stock = = Rs. 3,60,000
5
Here, in the absence of adequate information, it is considered that
Opening Stock = Closing Stock
∴Average Stock = Closing Stock = Rs. 3,60,000
∴Opening Stock = Closing Stock = Average Stock = Rs. 3,60,000
4. Materials Consumed = Rs. 7,20,000
We know, Opening Stock + Purchases + Wages & Overheads = Cost of Sales + Closing Stock
Here, 3,60,000 + Purchases + 10,80,000 = 18,00,000 + 3,60,000
∴ Purchases = Rs. 7,20,000
Again, Creditors’ Velocity = 3 months
12 months
∴ Creditors’ Velocity Ratio = =4
3 months
Credit Purchases
or =4
Payables

7,20,000
or = 4 [ assumed that the entire purchases were made on credit ]
Payables
∴Payables = 7,20,000 ÷ 4 = Rs. 1,80,000

(Continued)

132 MANAGEMENT ACCOUNTING

5. Average Collection Period = 2 months

12 months
∴ Debtors’ Velocity Ratio = =6
2 months
or Credit Sales
=6
Receivables
24,00 ,000
or = 6 [ assuming that the total sales were made on credit ]
Receivables
∴Receivables = Rs. 4,00,000.

Current Assets (CAs)

6. Current Ratio = =2
Current Liabilities (CLs)
Here, it is assumed that there is no cash or bank balance or prepaid expense.
Then, CAs = Stock + Receivables = 3,60,000 + 4,00,000 = Rs. 7,60,000
7,60,000
∴ =2
CLs
∴Current Liabilities = Rs. 3,80,000
Again, Current Liabilities = Payables + Bank Overdraft
Here, 3,80,000 = 1,80,000 + Bank Overdraft
∴Bank Overdraft = Rs. 2,00,000
∴Working Capital = CAs − CLs = 7,60,000 – 3,80,000 = Rs. 3,80,000

Fixed Assets (FA)

7. Here, Proprietary Ratio = = 80%
Capital Employed
∴ FA = 0.8 Capital Employed
Again, Capital Employed = Fixed Asset + Working Capital
Here, Capital Employed = 0.8 Capital Employed + 3,80,000
or 0.2 Capital Employed = 3,80,000
∴ Capital Employed = 3,80,000 ÷ 0.2 = Rs. 19,00,00
∴Fixed Asset = 0.8 × 19,00,000 = Rs. 15,20,00
Preference Share Capital & debentures
8. Capital Gearing Ratio =
Equity (i.e., Equity Shareholders’ Fund)
Preference Share Capital & Debentures
or 25% =
Equity
∴ Preference Share Capital & Debentures = 0.25 Equity
Again, Capital Employed = Equity Share Capital + Reserves & Surplus + Preference Share Capital
+ Debentures
Again, Equity (i.e., Equity Shareholders’ Fund) = Equity Share Capital + Reserves & Surplus
∴Capital Employed = Equity + (Preference Share Capital + Debentures)
or 19,00,000 = Equity + 0.25 Equity
or 1.25 Equity = 19,00,000
∴Equity = 19,00,000 ÷ 1.25 = Rs. 15,20,000
∴Preference Share Capital + Debentures = 0.25 × 15,20,000 = Rs. 3,80,000
Preference Share Capital 3
Again, =
Debentures 1
∴Preference Share Capital + Debentures = 3 + 1 = 4
∴Preference Share Capital = 3/4 × 3,80,000 = Rs. 2,85,000
∴ Debentures = 1/4 × 3,80,000 = Rs. 95,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 133

Here, Equity (i.e., Equity Shareholders’ Fund) = Equity Share Capital + General Reserves + Profit & Loss A/c =
15,20,000
(General Reserves + Profit & Loss A/c) 25 1
Again, = 25% = =
Equity Share Capital 100 4
∴Equity Shareholders’ Fund = Equity Share Capital + General Reserves + Profit & Loss A/c = 4 + 1 = 5
∴Equity Share Capital = 4/5 × 15,20,000 = Rs. 12,16,000
∴General Reserves × Profit & Loss A/c = 1/5 × 15,20,000 = Rs. 3,04,000
9. NP to Equity capital = 10%
NP
or = 10%
Equity Capital
NP
or = 10%
12,16,000
∴NP (i.e., Profit & Loss A/c) = 10% × 12,16,000 = Rs. 1,21,600
Again, General Reserves + Profit & Loss A/c = 3,04,000
or General Reserve + 1,21,600 = 3,04,000
∴General Reserve = Rs. 1,82,400

Problem 29
Construct trading and Profit & Loss A/c for the year that ended on 31 March 2006 from the following details:
Stock Velocity 1.2 months
Debtors’ Velocity 73 days
Operating Ratio 0.85
Creditors’ Velocity 3 months
Office Overhead to Selling & Distribution Overhead 1÷2
Depreciation on Fixed Assets Rs. 15,000
Goods are Sold at Cost Plus 33 13 %
Dividend Received on Investments Rs. 15,000
Loss on Sale of Machinery Rs. 7,000
Bank Interest Accrued Rs. 3,000
Interest on Loan Taken for Investment Rs. 4,500
CGS includes ‘Chargeable Expenses’
Debtors Rs. 1,44,000
Creditors Rs. 1,12,000
Stock in Trade [31 March 2006] Rs. 58,000
Cash Purchase Rs. 70,000

[B.Com. (Hons), Calcutta University—2007]

Solution
Trading and Profit & Loss A/c of _______________ for the year that ended on 31 March 2006
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock3 50,000 By Sales:
To Purchases: Cash Nil
Cash 70,000 Credit2 7,20,000 7,20,000
Credit1 4,48,000 5,18,000 By Closing Stock 58,000
(Continued)

134 MANAGEMENT ACCOUNTING

Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Wages (Bal. fig.) 30,000
To Gross Profit c/d 1,80,000
7,78,000 7,78,000
To Depreciation on Fixed 15,000 By Gross Profit b/d 1,80,000
To Office Overheads4 19,000 By Dividend Received on 15,000
Investments
To Selling & Distribution 38,000 By Accrued Bank Interest 3,000
Overheads4
To Interest on Loan Taken
for Investments 4,500
To Loss on sale of Machinery 7,000
To NP4 1,14,500
1,98,000 1,98,000

Working Notes
1. Given, Creditors’ Velocity = 3 months
12 months
∴ Creditors’ Velocity Ratio = =4
3 months
or Credit Purchases = 4
Payables
Here, Payables = Creditors = Rs. 1,12,000 [as there is no bills payable]
Credit Purchases
or =4
1,12,000
∴ Credit Purchases = Rs. 4,48,000
2. Debtors’ Velocity = 73 days
365 days
∴ Debtors’ Velocity Ratio = =5
73 days
Credit Sales
or =5
Receivables
Here, Receivables = Debtors = Rs. 1,44,000 [as there is no bills receivable]
Credit Sales
or =5
1, 44,000
∴Credit Sales = Rs. 7,20,000
3. Goods Sold at Cost Plus 33 13 %.
i.e., GP = 33 13 % on Cost = 1/3 on Cost = 1/4 on Sales = 1/4 on Rs. 7,20,000 = Rs. 1,80,000 [assumed that there
is no cash sales]
∴CGS = Sales − GP = 7,20,000 – 1,80,000 = Rs. 5,40,000
12 months
Again, Stock Velocity = 1.2 months = = 10
1.2 months
CGS
or = 10
Average Stock
5, 40,000
or = 10
Average Stock
∴ Average stock = Rs. 54,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 135

(Opening Stock + Closing Stock)

Again, Average Stock =
2
(Opening Stock + 58,000)
or 54,000 =
2
or Opening Stock + 58,000 = 1,08,000
∴Opening Stock = Rs. 10,000
(Cost of Goods Sold + Other Operating Expenses)
4. Operating Ratio =
Sales
(5, 40,000 + Other Operating Expenses)
or 0.85 =
7,20,000
or 5,40,000 + Other Operating Expenses = 6,12,000
∴Other Operating Expenses = Rs. 72,000
Here, Other Operating Expenses = Depreciation on Fixed Assets + Office Overheads
+ Selling & Distribution Overheads
or 72,000 = 15,000 + Office Overheads + Selling & Distribution Overheads
∴Office Overheads + Selling & Distribution Overheads = Rs. 57,000
Office Overheads 1
Given, =
Selling & Distribution Overheads 2
∴ Office overheads + Selling & Distribution Overheads = 1 + 2 = 3
∴ Office Overheads = 1/3 × 57,000 = Rs. 19,000
∴Selling & Distribution Overheads = 2/3 × 57,000 = Rs. 38,000

Problem 30
From the following particulars, prepare a statement showing Proprietors’ Fund as on 31 March 2009:
Gross Profit Rs. 7,50,000
Gross Profit Ratio 25%
Capital Turnover Ratio 1.6901408
Fixed Asset Turnover Ratio 4
Long-term Loan Rs. 7,75,000
Reserves & Surplus Rs. 2,00,000
Gearing Ratio [Preference Capital to Equity Capital] 1: 3
Stock Velocity 4 months
Debtors’ Velocity 3 months
Creditors’ Velocity 6 times
Bank Overdraft Rs. 1,10,000
Bills Receivable Rs. 50,000
Bills Payable Rs. 45,000
Miscellaneous Expenditure Nil
Closing Stock Rs. 30,000 more than the
Opening Stock

Solution
Statement of Proprietors’ Fund of an organization as on 31 March 2009
Rs. Rs. Rs.
Sources of Fund:
Equity Share Capital2 6,00,000
Preference Share Capital2 2,00,000
(Continued)

136 MANAGEMENT ACCOUNTING

Rs. Rs. Rs.

Total Share Capital 8,00,000
Add: Reserves & Surplus 2,00,000
10,00,000
Less: Miscellaneous Expenditure Nil
10,00,000
Applications of Fund:
Fixed Assets1 7,50,000
Add: Working Capital:
Current Assets:
Stock4 7,65,000
Debtors3 7,00,000
Bills Receivable 50,000
15,15,000
Less: Current Liabilities:
Creditors5 3,35,000
Bills Payable 45,000
Bank Overdraft 1,10,000
4,90,000
10,25,000
17,25,000
Less: Long-term Loan6 7,75,000
10,00,000

Working Notes

GP
1. GP Ratio = × 100
Sales
7,50,000
or 25% =
Sales
∴Sales = 7,50,000 ÷ 25% = Rs. 30,00,000
Sales
Again, Fixed Asset Turnover Ratio =
Fixed Asset
30,00,000
or 4 =
Fixed Asset
∴Fixed asset = 30,00,000 ÷ 4 = Rs. 7,50,000
Sales
2. Capital Turnover Ratio =
Capital Employed
30,00,000
or 1.6901408 =
Capital Employed
30,00,000
∴ Capital Employed = = Rs. 17,75,000
1.6901408
Again, Capital Employed = Proprietors’ Fund + Long-term Loan
or 17,75,000 = Proprietors’ Fund + 7,75,000
∴Proprietors' Fund = Rs. 10,00,000
Preference Share Capital
Again, Gearing Ratio =
Equity Share Capital

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 137

1 Preference Share Capital

or =
3 Equity Share Capital

∴Equity Share Capital = 3 × Preference Share Capital

Now, Proprietors’ Fund = Equity Share Capital + Preference Share Capital + Reserves & Surplus
− Miscellaneous Expenditure
Here, 10,00,000 = 3 × Preference Share Capital + Preference Share Capital + 2,00,000 − Nil
or 4 × Preference Share Capital = 8,00,000
∴Preference Share Capital = 8,00,000 ÷ 4 = Rs. 2,00,000
∴Equity Share Capital = 3 × 2,00,000 = Rs. 6,00,000
12 months
3. Debtors’ Velocity = 3 months = =4
3 months

or Credit Sales
=4
Receivables
30,00,000
or = 4 [assumed that all sales were made on credit]
Receivables
30,00,000
∴ Receivables = = Rs. 7,50,000
4
Again, Receivables = Debtors + Bills Receivable
or 7,50,000 = Debtors + 50,000
∴Debtors = Rs. 7,00,000
4. CGS = Sales – GP = 30,00,000 – 7,50,000 = Rs. 22,50,000
12 months
Now, Stock Velocity = 4 months = =3
4 months
CGS
or =3
Average Stock

or 22,50,000
=3
Average Stock
22,50,000
∴ Average Stock = = Rs. 7,50,000
3
Now, let the Opening Stock be x.
Closing Stock = x + 30,000
(Opening Stock + Closing Stock) x + (x + 30,000)
∴ Average Stock = = = x + 15,000
2 2
or 7,50,000 = x + 15,000
∴x = Opening Stock = Rs. 7,35,000
∴Closing Stock = 7,35,000 + 30,000 = Rs. 7,65,000
5. We know that CGS = Materials Consumed + Wages & Manufacturing Overheads
In the absence of adequate information regarding Wages & Manufacturing overheads, here it may be
assumed that
Materials consumed = CGS = 22,50,0004
Now, Opening Stock + Purchases = Materials Consumed + Closing Stock
∴Purchases = Materials Consumed + Closing Stock − Opening Stock = 22,50,000 + 7,65,000 – 7,35,000
∴Purchases = Rs. 22,80,000

(Continued)

138 MANAGEMENT ACCOUNTING

Now, Creditors’ Velocity = 6

Credit Purchases
or =6
Payables
22,80,000
or = 6 [ assumed that all purchases were made on credit ]
Payables

22,80,000
∴ Payables = = Rs. 3,80,000
6
Again, Payables = Creditors + Bills Payable
or 3,80,000 = Creditors + 45,000
∴Creditors = Rs. 3,35,000
6. In a Balance Sheet,
Proprietors’ Fund + Long-term Loan = Fixed Asset + Working Capital
Here, 10,00,000 + 7,75,000 = 7,50,000 + Working Capital
∴Working Capital = Rs. 10,25,000
Again, in the given problem,

Rs. Rs.
Current Assets:
Stock 7,65,000
Debtors 7,00,000
Bills Receivable 50,000
Bank (Bal. fig.) Nil
15,15,000
Less: Current Liabilities:
Bank Overdraft 1,10,000
Creditors 3,35,000
Bills Payable 45,000
4,90,000
Working Capital 10,25,000

Problem 31
From the following information, prepare a Trading and Profit & Loss A/c for the year that ended on 31 March
2009 and a Balance Sheet as on that date of Arzoo Ltd:
Gross Profit Ratio 20%
Net Profit Ratio [to Average Capital Employed] 10%
Stock velocity 4
Debtors’ velocity 36.5 days
Current Ratio 2.5
Quick Ratio 1.5
Proprietary Ratio [Fixed Assets to Proprietors’ Fund] 7
Share Capital Rs. 1,80,000
Working Capital Rs. 63,000
Bank Overdraft Rs. 10,000

There is no fictitious asset. In the current asset, there is no asset other than stock, debtors and cash. Closing
Stock is 20% higher than the Opening Stock.
[M.Com. Calcutta University—Adapted]

Modified Date: Tue, Jul 06, 2010 11:42:59 AM Output Date: Tue, Jul 06, 2010 01:35:12 PM Rev II
Project: Management Accounting_Debarshi Bhattacharyya ACE Pro India Pvt. Ltd.
File: X:\Pearson\Management Accounting_Debarshi Bhattacharyya\MAIN\M03\LAYOUT_M03\M03_DEBA_ISBN_EN_SE_C03_Part-2.indd

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 139

Solution
Books of Arzoo Ltd
Trading and Profit & Loss A/c for the year that ended on 31 March 2009
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Opening Stock 1
47,500 By Sales 2
2,61,250
To Purchases2 2,18,500 By Closing Stock1 57,000
To Gross Profit c/d2 52,250
3,18,250 3,18,250
To Other Operating Expenses (Bal. fig.) 32,250 By Gross Profit b/d 52,250
To Net Profit5 20,000
52,250 52,250
Balance Sheet as on 31 March 2009
Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital 1,80,000 Fixed Assets3 1,47,000
Reserves & Surplus4 30,000
Long-term Loan3 Nil Current Assets:
Current Liabilities: Stock1 57,000
Bank Overdraft 10,000 Debtors7 26,125
Liquid Liabilities6 32,000 Cash8 21,875
2,52,000 2,52,000

Working Notes

Current Assets (CAs) 5

1. Current Ratio = = 2.5 =
Current Liabilities (CLs) 2
∴ Working Capital = CAs – CLs = 5 – 2 = 3
Again, given Working Capital = Rs. 63,000
∴Current Liabilities (CLs) = 2/3 × Rs. 63,000= Rs. 42,000
∴Current Assets (CAs) = 5/3 × Rs. 63,000 = Rs. 1,05,000
Liquid Assets (CAs – Stock)
Again, Quick Ratio = = = 1.5
Liquid Liabilities (CLs – Bank Overdraft)
(1,05,000 – Stock)
Here, = 1.5
(42,000 –10,000)
or 48,000 = 1,05,000 – Stock
∴Stock (i.e., Closing Stock) = Rs. 57,000
Now, let Opening Stock = 100
Then, Closing Stock = 100 + 20% of 100 = 120
∴Opening Stock = 100/120 × 57,000 = Rs. 47,500
(Opening Stock + Closing Stock) (47,500 + 57,000)
∴ Average Stock = = = Rs. 52,250
2 2
CGS
2. Stock Velocity =
Average Stock
CGS
or 4 =
52,250

(Continued)

140 MANAGEMENT ACCOUNTING

∴CGS = 52,250 × 4 = Rs. 2,09,000

∴GP = 20% on Sales = 1
5 on Sales = 1
4 on CGS = 1
4 on 2,09,000 = Rs. 52,250
∴Sales = CGS + GP = 2,09,000 + 52,250 = Rs. 2,61,250
We know, CGS = Materials Consumed + Wages & Overheads
In the absence of adequate information regarding wages and overheads, here it may be assumed that
Materials Consumed = CGS = 2,09,000
Now, Opening Stock + Purchases = Materials Consumed + Closing Stock
∴Purchases = Materials Consumed + Closing Stock – Opening Stock = 2,09,000 + 57,000 – 47,500
∴Purchases = Rs. 2,18,500
Fixed Assets (FA)
3. Proprietary Ratio = = 0.7
Proprietors’ Fund (PF)
∴FA = 0.7 PF
Again, as per company Balance Sheet, we know that
Proprietors’ Fund (PF) + Long-term Loan (LTL) = Fixed Asset (FA) + Working Capital (WC)
Here, PF = FAs + WC [assuming that LT Loans = Nil]
or PF = 0.7 PF + 63,000
or 0.3 PF = 63,000
∴Proprietors’ Fund (PF) = 63,000 ÷ 0.3 = Rs. 2,10,000
∴Fixed Asset (FA) = 0.7 × 2,10,000 = Rs. 1,47,000
4. Proprietors’ Fund = Share Capital + Reserves & Surplus − Miscellaneous Expenditure
Here, 2,10,000 = 1,80,000 + Reserves & Surplus − Nil
∴Reserves & Surplus = Rs. 30,000
5. Closing Capital Employed = Closing Proprietors’ Fund + Closing Long-term Loan
= 2,10,000 + Nil = Rs. 2,10,000
Opening Capital Employed = Closing Capital Employed – NP for the year
[assuming that neither shares were issued nor long-term loan was repaid during the year]
Let NP for the year = x
∴Opening Capital Employed = 2,10,000 − x
(Opening Capital Employed + Closing Capital Employed)
∴ Average Capital Employed =
2
(2,10,000 − x ) + 2,10,000 
or Average Capital Employed =
2
∴ Average Capital Employed =
( 4,20,000 − x ) 2,10,000 − x
= = 2,10,000 − 0.5x
2 2
NP
Now, NP Ratio = × 100
Average Capital Employed
x
or 10% =
(2,10,000 − 0.5x )
x
or 0.1 =
(2,10,000 − 0.5x )
or x = 21,000 − 0.05x
or 1.05x = 21,000
21,000
∴ x= = 20,000
1.05
∴NP for the year = Rs. 20,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 141

6. Current Liabilities = Liquid Liabilities + Bank Overdraft

Here, 42,000 = Liquid Liabilities + 10,000
∴Liquid Liabilities = Rs. 32,000
365 days
7. Debtors’ velocity = 36.5 days = = 10
36.5 days
Credit Sales
or = 10
Debtors
2,61,250
or = 10 [ assumed that all sales were made on credit ]
Debtors
2,61,250
∴ Debtors = = Rs. 26,125
10
8. Current Asset = Stock + Debtors + Cash
or 1,05,000 = 57,000 + 26,125 + Cash
∴Cash = Rs. 21,875

Problem 32
From the following information, prepare a Profit & Loss A/c for the year that ended on 31 March 2008 and a
Balance Sheet as on that date of K Ltd:
Current Asset to Stock 3:2
Current Ratio 3
Acid Test Ratio 1
Financial Leverage 2.2
Earning per Share Rs. 40
Book Value per Share Rs. 100
Average Collection Period [Assume 360 days in a year] 30 days
Stock Turnover Ratio 5
Fixed Asset Turnover Ratio 5:6
Total Liabilities to Net Worth 3.75
Net Working Capital Rs. 10,00,000
Net Profit to Sales 10%
Variable Cost 60%
Interest on Long-term Loan @ 12%
Tax Nil
[C.A. (Inter)—Adapted]
Solution
Books of K Ltd
Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Variable Cost5 23,40,000 By Sales2 50,00,000
To Fixed Cost5 15,60,000
To EBIT c/d4 11,00,000
50,00,000 50,00,000
To Interest on Loan 6,00,000 By EBIT b/d 11,00,000
To Tax Nil
(Continued)

142 MANAGEMENT ACCOUNTING

Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To EAT 5,00,000
11,00,000 11,00,000

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital9 [of Rs. 100] 12,50,000 Fixed Assets7 60,00,000
Reserves & Surplus9 7,50,000 Current Assets:
Long-term Loan6 50,00,000 Stock11 10,00,000
Current Liabilities1 5,00,000 Liquid Assets1 5,00,000
75,00,000 75,00,000

Working Notes

Current Assets ( CAs) 3

1. Current Ratio = =3=
Current Liabilities ( CLs) 1
∴Net Working Capital = CAs − CLs = 3 − 1 = 2
Again, given Net Working Capital = Rs. 10,00,000
∴ Current Assets (CAs) = 3/2 × 10,00,000 = Rs. 2,00,000
∴Current Liabilities (CLs) = 1/2 × 10,00,000 = Rs. 5,00,000
CAs 3
Again, =
Stock 2
15,00,000 3
or =
Stock 2
∴Stock = Rs. 10,00,000
Now, Liquid Assets = CAs − Stock = 15,00,000 – 10,00,000 = Rs. 5,00,000
CGS
2. Stock Turnover Ratio =
Average Stock
Here, in the absence of adequate information, it is considered that
Turnover
Stock Turnover Ratio =
Closing Stock
Turnover
or 5 =
10,00,000
∴Turnover (i.e., Sales) = Rs. 50,00,000
NP
3. = 10%
Sales
NP
or = 10%
50,00,000
∴NP (i.e., EAT) = Rs. 5,00,000
4. As Tax = Nil, EBT = EAT = Rs. 5,00,000
EBIT
Now, Financial Leverage =
EBT

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 143

EBIT
or 2.2 =
5,00,000
∴EBIT = Rs. 11,00,000
5. CGS = Sales – EBIT = 50,00,000 – 11,00,000 = Rs. 39,00,000
∴Variable Cost = 60% of 39,00,000 = Rs. 23,40,000
∴Fixed Cost = 40% of 39,00,000 = Rs. 15,60,000
6. Interest on Loan = EBIT − EBT = 11,00,000 – 5,00,000 = Rs. 6,00,000
Again, Rate of Interest on Long-term Loan = 12%
∴Long-term Loan = 100/12 × 6,00,000 = Rs. 50,00,000
Turnover
7. Fixed Asset Turnover Ratio =
Fixed Assets
5 50,00,000
or =
6 Fixed Assets
∴Fixed Assets = Rs. 60,00,000
8. Here, Total outside Liabilities = Long-term Loan + Current Liabilities = 50,00,000 + 5,00,000 = Rs. 55,00,000
And, Total Liabilities = Total Outside Liabilities + Net Worth (NW)
Total Liabilities
Now, = 3.75
Net Worth (NW )

or
( Total Outside Liabilities + NW ) = 3.75
NW

or
(55,00,000 + NW ) = 3.75
NW
or 3.75 NW = 55,00,000 + NW
or 2.75 NW = 55,00,000
∴ Net worth = 55,00,000 ÷ 2.75 = Rs. 20,00,000
EAT
9. EPS =
No. of Shares
5,00,000
Here, 40 =
No. of shares
∴No. of shares = 5,00,000 ÷ 40 = 12,500
∴Share Capital = 12,500 shares @ Rs. 100 each = Rs. 12,50,000
Now, Net Worth = Share Capital + Reserves & Surplus (RS) – Miscellaneous Expenditure
Here, 20,00,000 = 12,50,000 + RS – Nil [assumed that Miscellaneous Expenditure = Nil]
∴Reserves & Surplus (RS) = Rs. 7,50,000

Problem 33
From the following information, prepare the Profit & Loss A/c for the year that ended on 31 March 2009 and
a Balance Sheet as on that date:
Fixed Asset [Net after writing off 12.5%] Rs. 10,50,000
Fixed Asset Turnover Ratio 2
Gross Profit Ratio 25%
Net Profit [before Interest] to Sales 8%
Fixed Charges Cover [Debenture Interest @ 7%] 8
(Continued)

144 MANAGEMENT ACCOUNTING

Finished Goods Turnover Ratio 5

Current Ratio 2.5
Quick Ratio 1.5
Reserve to Capital 0.20
Working Capital Rs. 9,00,000
Debt Collection Period 2 months
Materials Consumed to Sales 30%
Stock of Raw Materials 8 months’ consumption

Solution
Books of _____________
Profit & Loss A/c for the year that ended on 31 March 2009
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Opening Stock of Finished Goods2 3,15,000 By Sales1 21,00,000
To Materials Consumed1 6,30,000 By Closing Stock of Finished Goods2 3,15,000
To Wages & Manufacturing Overheads1 9,45,000
To Gross Profit c/d1 5,25,000
24,15,000
To Other Operating Expenses (Bal. fig.) 2,07,000 24,15,000
To Depreciation on Fixed Asset3 1,50,000 By Gross Profit b/d 5,25,000
To Debenture Interest5 21,000
To Net Profit5 1,47,000
5,25,000 5,25,000

Balance Sheet as on 31 March 2009

Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital6 13,75,000 Fixed Assets 10,50,000
Reserves & Surplus6 2,75,000 Current Assets:
7% Debenture5 3,00,000 Stock of Finished Goods2 3,15,000
Current Liabilities: Stock of Raw Materials2 4,20,000
Bank Overdraft7 90,000 Receivables8 3,50,000
Quick Liabilities7 5,10,000 Cash & Bank9 4,15,000
25,50,000 25,50,000

Working Notes

Turnover
1. Fixed Asset Turnover Ratio =
Fixed Asset
Turnover
or =2
10,50,000
∴Turnover = 10,50,000 × 2 = Rs. 21,00,000
∴GP Ratio = 25% on Sales = ¼ on Sales = ¼ on 21,00,000 = Rs. 5,25,000
∴CGS = Sales − GP = 21,00,000 – 5,25,000 = Rs. 15,75,000

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 145

Now, Materials Consumed to Sales = 30%

Materials Consumed
or = 30%
21,00,000

∴Materials Consumed = 21,00,000 × 30% = Rs. 6,30,000

Again, CGS = Materials Consumed + Wages & Manufacturing Overheads
or 15,75,000 = 6,30,000 + Wages & Manufacturing Overheads
∴Wages & Manufacturing Overheads = Rs. 9,45,000
CGS
2. Finished Goods Turnover Ratio = =5
Stock of Finished Goods

15,75,000
or =5
Stock of Finished Goods

∴Closing Stock of Finished Goods = 15,75,000 ÷ 5 = Rs. 3,15,000

In the absence of adequate information, it may be assumed that
Opening Stock of Finished Goods = Closing Stock of Finished Goods = Rs. 3,15,000
∴Closing Stock of Raw Materials = 8 months’ Consumption = 6,30,000 × 8 ÷ 12 = Rs. 4,20,000

3. Fixed Asset after the writing off depreciation @ 12.5% = Rs. 10,50,000
∴Depreciation on Fixed Asset = 10,50,000 × 12.5 ÷ 87.5 = Rs. 1,50,000

Net Profit before interest

4. Net Profit before Interest to Sales = = 8%
Sales
Net Profit before interest
or = 8%
21,00,000
∴Net Profit before interest = 8% × 21,00,000 = Rs. 1,68,000

Net PBIT
5. Fixed Interest Cover = =8
Annual Interest Charges

1,68,000
or = 8 [ assuming that Tax = Nil]
Annual Interest Charges
∴Annual Interest Charges = 1,68,000 ÷ 8 = Rs. 21,000
Here, Debentures are already issued as fixed interest charges. As the debenture interest rate is 7%,
Value of 7% Debentures = 21,000 × 100 ÷ 7 = Rs. 3,00,000
∴Net Profit after interest & tax = Net Profit before Interest – Interest – Tax
= 1,68,0004 – 21,000 – Nil = Rs. 1,47,000

6. In a Balance Sheet,
Proprietors’ Fund + Long-term Loan = Fixed Asset + Working Capital
Here, Proprietors’ Fund + 3,00,000 = 10,50,000 + 9,00,000
∴Proprietors’ Fund = Rs. 16,50,000
Now, Reserve to Capital = 0.20

146 MANAGEMENT ACCOUNTING

Reserves & Surplus 1

or =
Share Capital 5

∴Share Capital = 5 × Reserves & Surplus

Again, Proprietors’ Fund = Share Capital + Reserves & Surplus – Miscellaneous Expenditure
or 16,50,000 = 5 × Reserves & Surplus + Reserves & Surplus – Nil [assuming that Miscellaneous
Expenditure = Nil]
∴Reserves & Surplus = 16,50,000 ÷ 6 = Rs. 2,75,000
∴ Share Capital = 5 × 2,75,000 = Rs. 13,75,000

Current Assets (CAs) 5

7. Current Ratio = = 2.5 =
Current Liabilities (CLs) 2

∴ Working Capital = CAs − CLs = 5 − 2 = 3

Again, given Working Capital = Rs. 9,00,000
∴Current Liabilities (CLs) = 2/3 × Rs. 9,00,000 = Rs. 6,00,000
∴ Current Assets (CAs) = 5/3 × Rs. 9,00,000 = Rs. 15,00,000

Again, Quick Ratio =

Liquid Assets
=
(CAs – Stock ) = 1.5
Liquid Liabilities ( CLs – Bank Overdraft )

Here, 15,00,000 – (3,15,000 + 4,20,000 ) = 1.5

(6,00,000 − Bank Overdraft )
or 7,65,000 = 9,00,000 − 1.5 × Bank Overdraft
∴Bank Overdraft = 1,35,000 ÷ 1.5 = Rs. 90,000
Here, Current Liabilities (CLs) = Quick Liabilities + Bank Overdraft
or 6,00,000 = Quick Liabilities + 90,000
∴Quick Liabilities = Rs. 5,10,000

8. Debt Collection Period = 2 months

12 months
∴ Debtors’ Turnover Ratio = =6
2 months
Credit Sales
or = 6 [ assumed that all sales were made on credit ]
Receivables

21,00,000
or =6
Receivables
∴Receivables = 21,00,000 ÷ 6 = Rs. 3,50,000

9. Current Asset = Stock of Finished Goods + Stock of Raw Materials + Receivables + Cash & Bank
or 15,00,000 = 3,15,000 + 4,20,000 + 3,50,000 + Cash & Bank
∴Cash & Bank = Rs. 4,15,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 147

Problem 34
The financial information of Good Luck Ltd for the year 2000 are given as follows:
Ratio of Current Asset to Current Liabilities 1.75:1
Liquidity Ratio 1.25:1
[Debtors & Bank Balance to Current Liabilities]
Issued Capital [Equity Shares of Rs. 10 each] Rs. 1,20,000
Net Current Asset [As over Current Liabilities] Rs. 60,600
Fixed Assets [Net Block] percentage of Shareholders’ Equity as on Closing Date 60%
Gross Profit [% of Turnover] 20%
Annual Rate of Turnover of Stock [Based on the Cost on 31 December 2000] 5.26 times
Average Age of Outstanding Debtors for the year 2000 2 months
Net Profit [% on Issued Share Capital] 16%

On 31 December, Current Assets consisted of stock, debtors and bank balances.

You are required to prepare trading and Profit & Loss A/c and Balance Sheet for the year that ended on
31 December 2000.
[B.Com. (Hons), Calcutta University Part II—2002]
Solution
Books of Good Luck Ltd
Trading and Profit & Loss A/c for the year that ended on 31 December 2000
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Cost of goods sold 2
2,12,504 By Sales 2
2,65,630
To Gross Profit c/d2 53,126
2,65,630 2,65,630
To Other Operating Expenses3 33,926 By Gross Profit b/d 53,126
To Net Profit3 19,200
53,126 53,126

Balance Sheet as on 31 December 2000

Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital [of Rs. 10 Each] 1,20,000 Fixed Assets5 90,900
Reserves & Surplus5 31,500 Current Assets:
Long-term Loans Nil Stock1 40,400
Current Liabilities1 80,800 Debtors4 44,272
Bank4 56,728
2,32,300 2,32,300

Working Notes
1. Ratio of Current Assets to Current Liabilities = 1.75:1
Current Assets (CAs) 1.75
∴ =
Current Liabilities (CLs) 1
∴Net Current Assets [over CLs, i.e., Working Capital] = CAs – CLs = 1.75 − 1 = 0.75
Again, given Net Current Assets [over CLs, i.e., Working Capital] = Rs. 60,600
(Continued)

Modified Date: Sat, Jul 03, 2010 12:42:06 PM Output Date: Tue, Jul 06, 2010 11:43:37 AM Rev II
Project: Management Accounting_Debarshi Bhattacharyya ACE Pro India Pvt. Ltd.
File: X:\Pearson\Management Accounting_Debarshi Bhattacharyya\MAIN\M03\LAYOUT_M03\M03_DEBA_ISBN_EN_SE_C03_Part-3.indd

148 MANAGEMENT ACCOUNTING

∴Current Assets (CAs) = 1.75/0.75 × 60,600 = Rs. 1,41,400

∴Current Liabilities (CLs) = 1/0.75 × 60,600 = Rs. 80,800

Now, Liquidity Aatio =

(Debtors + Bank ) = 1.25
CLs 1
Here, CAs = Stock + Debtors + Bank
∴Debtors + Bank = CAs − Stock
(CAs − Stock)
∴ = 1.25
CLs
or (1,41,400 − Stock) ÷ 80,800 = 1.25
or 1,01,000 = 1,41,400 − Stock
∴ Stock = Rs. 40,400
2. Average Rate of turnover of Stock [based on cost] = 5.26
Cost of Goods Sold
or = 5.26
Average Stock
Here, in the absence of adequate information, it is considered that
Opening Stock = Closing Stock
∴ Average Stock = Closing Stock = Rs. 40,400
Cost of Goods Sold
or = 5.26
Closing Stock
Cost of Goods Sold
or = 5.26
40,400
∴ Cost of Goods Sold = Rs. 2,12,504
Again, Gross Profit = 20% on Sales = 1/5 on Sales = 1/4 on Cost of Goods Sold = 1/4 on 2,12,504 = Rs. 53,126
∴ Sales (i.e., Turnover) = Cost of Goods Sold + Gross Profit = 2,12,504 + 53,126 = Rs. 2,65,630
3. Net Profit = 16% on Share Capital = 16% on 1,20,000 = Rs. 19,200
∴ Other Operating Expenses Debited to Profit & Loss A/c = Gross Profit − Net Profit = 53,126 – 19,200 = Rs. 33,926
4. Average Collection Period = 2 months
12 months
Debtors’ Velocity Ratio = =6
2 months

Credit Sales
or =6
Debtors

2,65,630
or = 6 [ assuming that the total sales were made on credit ]
Debtors
∴ Debtors = Rs. 44,272
Here, CAs = Stock + Debtors + Bank
or 1,41,400 = 40,400 + 44,272 + Bank
∴ Bank = Rs. 56,728
5. Fixed Asset (FA)% of Shareholders’ Equity (i.e., Net Worth or NW) = 60%
FAs
or = 60%
NW
FAs
or = 0.60
NW

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 149

∴ Fixed Asset = 0.60 NW

Again, as per company Balance Sheet, we know
Net Worth (NW) + Long-term Loan (LTL) = Fixed Asset (FA) + Working Capital (WC)
Here, NW + Nil = 0.60 NW + 60,600 [assumed that there is no Long-term loan]
or NW − 0.60 NW = 60,600
or NW = 60,600 ÷ 0.40
∴ Net Worth = Rs. 1,51,500
∴ Fixed Assets = 0.60 × 1,51,500 = Rs. 90,900
Again, Net Worth = Equity Share Capital + Reserves & Surplus [as there is no Preference Capital or Miscellaneous
Expenditure]
or 1,51,500 = 1,20,000 + Reserves & Surplus
∴ Reserves & Surplus = Rs. 31,500

Problem 35
From the following information, prepare Profit & Loss A/c for the year that ended on 31 March 2008 and
Balance Sheet as on that date of Nimbus Ltd:
Quick Ratio 1.4
Current Ratio 2.5
Gross Profit Ratio 40%
Stock Turnover Ratio 5 times
Debtors’ Turnover 36 days
Creditors’ Velocity 54 days
Operating Ratio 90%
Fixed Asset Proprietorship Ratio 70%
Earning per Share Re. 1
Earnings for the year as a Perentage of Share Capital 25%
Nominal Value Per Share Rs. 5
No. of Shares Allotted 25,000
No. of Working Days in a year 360
Working Capital Rs. 45,000

Opening Stock was Rs. 4,000 less than the Closing Stock. There were no long-term loans, deferred expenses
and prepaid expenses. All sales and purchases were made on credit.

Solution
Books of Nimbus Ltd
Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Materials Consumed1 29,000 By Sales2 2,58,333
To Purchases3 1,59,000 By Closing Stock1 33,000
To Gross Profit c/d 1,03,333
2,91,333 2,91,333
To Indirect Operating Expenses5 77,500 By Gross Profit b/d 1,03,333
To Non-operating Expenses (Bal. fig.) 833
To Net Profit6 25,000
1,03,333 1,03,333

150 MANAGEMENT ACCOUNTING

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital: Fixed Assets7 1,05,000
25,000 Shares of Rs. 5 Each, Paid up to Current Assets:
Rs. 4 Per Share6 1,00,000 Stock1
Reserves & Surplus: Receivables4 33,000
Reserve7 25,000 Cash & Bank4 25,833
Profit & Loss A/c7 25,000 16,167
Current Liabilities:
Payables3 23,850
Other Current Liabilities3 6,150
1,80,000 1,80,000

Working Notes

Current Assets (CAs) 5

1. Current ratio = = 2.5 =
Current Liabilities (CLs) 2
∴ Working Capital = CAs − CLs = 5 − 2 = 3
Again, given Working Capital = Rs. 45,000
∴ Current Liabilities (CLs) = 2/3 × Rs. 45,000 = Rs. 30,000
∴ Current Assets (CAs) = 5/3 × Rs. 45,000 = Rs. 75,000
Liquid Assets (CAs − Stock)
Again, Quick Ratio = = = 1.4
Liquid Liabilities (CLs − Bank Overdraft)
(75,000 − Stock)
Here, = 1.4 [ assuming that Bank Overdraft = Nil]
(30,000 − Nil)
or 42,000 = 75,000 – Stock
∴ Stock (i.e., Closing Stock) = Rs. 33,000
∴ Opening Stock = 33,000 – 4,000 = Rs. 29,000
(Opening Stock + Closing Stock) (29,000 + 33,000)
2. Average Stock = = = Rs. 31,000
2 2
Cost of Goods Sold
Now, Stock Turnover Ratio =
Average Stock
Cost of Goods Sold
Here, 5 =
31,000
∴ Cost of Goods Sold = Rs. 1,55,000.
∴ Sales = Cost of Goods Sold + Gross Profit = Cost of Goods Sold + (40% on Sales) = Cost of Goods Sold +
(2/5 on Sales) = Cost of Goods Sold + (2/3 on CGS)
= 1,55,000 + (2/3 of 1,55,000) = Rs. 2,58,333
3. We know, Opening Stock + Purchases = CGS + Closing Stock
Here, 29,000 + Purchases = 1,55,000 + 33,000
∴ Purchases = Rs. 1,59,000
Again, Creditors’ Velocity = 54 days
360 days 20
∴ Creditors’ Velocity Ratio = =
54 days 3
Credit Purchases 20
or =
Payables 3

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 151

1,59,000 20
or =
Payables 3
[as here, Total Purchases = Credit Purchases]
∴ Payables = 1,59,000 ÷ 20 × 3 = Rs. 23,850
Here, Current Liabilities = Payables + Other Current Liabilities
or 30,000 = 23,850 + Other Current Liabilities
∴ Other Current Liabilities = Rs. 6,150
4. Debtors’ Turnover = 36 days
360 days
∴Debtors’ Velocity Ratio = = 10
36 days
Credit Sales
or = 10
Receivables
2,58,333
or = 4 [ as here, Total Sales = Credit Sales]
Receivables
∴ Receivables = 2,58,333 ÷ 10 = Rs. 25,833
Here, Current Assets = Stock + Receivables + Cash & Bank
or 75,000 = 33,000 + 25,833 + Cash & Bank
∴ Cash & Bank = Rs. 16,167
(CGS + Indirect operating Expenses)
5. Operating Ratio = × 100
Sales
(1,55,000 + Indirect Operating Expenses)
Here, 90 = × 100
2,58,333
or Indirect Operating Expenses + 1,55,000 = 2,58,333 × 90 ÷ 100
∴ Indirect Operating Expenses = 2,32,500 – 1,55,000 = Rs. 77,500
6. No. of Shares Allotted = 25,000
NP ( i.e., Earnings) for the year
Again, EPS (EPS) =
No. of Shares
Net Profit for the year
Here, 1=
25,000
∴ Net Profit (i.e., Earnings) for the year = Rs. 25,000
Again, Earnings for the year = 25% of Share Capital
or 25,000 = 25/100 × Share Capital
∴ (Paid up) Share Capital = 25,000 × 100 ÷ 25 = Rs. 1,00,000
Paid up Share Capital Rs. 1,00,000
Paid up Value per Share = = = Rs. 4
No. of Shares 25,000
Fixed Assets (FA)
7. Fixed Asset Proprietorship Ratio =
Proprietors’ Fund (PF)
FAs
Here, 70% =
PF
∴ FA = 0.70 PF
Again, as per company Balance Sheet, we know
Proprietors’ Fund (PF) + Long-term Loan (LTL) = Fixed Asset (FA) + Working Capital (WC)
Here, PF + Nil = 0.7 PF + 45,000 [as there is no Long-term Loan]
or 0.30 PF = 45,000
(Continued)

152 MANAGEMENT ACCOUNTING

∴ Proprietors’ Fund = 45,000 ÷ 0.30 = Rs. 1,50,000

∴ Fixed Assets = 0.70 × 1,50,000 = Rs. 1,05,000
Again, Proprietors’ Fund = Paid-up Share Capital + Reserves & Surplus [as there is no miscellaneous
expenditure]
or 1,50,000 = 1,00,000 + Reserves & Surplus
∴ Reserves & Surplus = Rs. 50,000
Here, Reserves & Surplus = Reserves + Profit & Loss A/c
or 50,000 = Reserves + 25,0006
Reserves = Rs. 25,000

Problem 36
Akash Ltd commenced the manufacture of personal computers on 1 April 2007, with an equity capital of
Rs. 5,00,000 in shares of Rs. 10 each. The following details are gathered from the accounting records of the
company for the year that ended on 31 March 2008:
Gross Profit Ratio 30%
Current Ratio 2
Net Profit Ratio 10%
Stock Turnover Ratio [Based on Closing Stock] 7 times
Debtors’ Turnover Ratio 6 times
Interest Coverage Ratio 5 times
Sales to Working Capital 8 times
Sales to Net Fixed Assets 4 times
Credit Sales 75%
Long-term Debt/Equity Ratio 1:2
1
Provision for Income Tax 33 %
3
Proposed Dividend [Assume that it is not taxable] 20%
Investments as on 31 March 2008 Rs. 1,50,000
Selling & Distribution Expenses Rs. 1,00,000
[50% was Outstanding on 31 March 2008]
Depreciation Rate 20%
[Depreciation was not part of the CGS]

You are required to prepare:

(a) Profit & Loss A/c for the year that ended on 31 March 2008.
(b) Balance Sheet of the company as on that date.
[C.A. (Final)—Adapted]

Solution
Books of Akash Ltd
Profit & Loss A/c for the year that ended on 31 March 2008
Rs. Rs.
Sales1 20,00,000
Less: Cost of Goods Sold3 14,00,000
Gross Profit3 6,00,000
Less: Selling & Distribution Expenses 1,00,000
Depreciation 1,25,000 2,25,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 153

Rs. Rs.
Profit before Interest & Tax 3,75,000
Less: Interest on Loan4 75,000
Profit before Tax 3,00,000
Less: Provision for Tax [33 13 % on Rs. 3,00,000] 1,00,000
Profit after Tax 2,00,000
Less: Proposed Dividend [20% on Share Capital] 1,00,000
Balance of Profit carried over to Balance Sheet 1,00,000

Balance Sheet as on 31 March 2008

Liabilities Rs. Assets Rs. Rs.
Equity Share Capital 5,00,000 Fixed Assets2 6,25,000
[50,000 Shares of Rs. 10 each] Less: Depreciation 1,25,000 5,00,000
Reserves & Surplus: Investment 1,50,000
Profit & Loss A/c 9 1,00,000 Current Assets:
Long-term Debt9 3,00,000 Stock7 2,00,000
Current Liabilities & Provisions: Receivables6 2,50,000
Outstanding Selling & Cash & Bank8 50,000
Distribution Overheads 50,000
Provision for Tax 1,00,000
Proposed Dividend 1,00,000
11,50,000 11,50,000

Working Notes
1. Let the Sales be 100x.
Again, Sales to Net Fixed Assets = 4
Sales
or =4
Net FAs
100x
or =4
Net FAs
100x
∴ Net FAs = = 25x
4
Again, Depreciation = 20% on Fixed Assets
∴Depreciation = 20/80 on Net FAs = 20 ÷ 80 × 25x = 6.25
Rs.
Now, GP [30% of x] 30x
Less: Selling & Distribution Expenses 1,00,000
30x − 1,00,000
Less: Depreciation 6.25x
PBIT 23.75x − 1,00,000
PBIT
Again, Interest Coverage Ratio =
Interest on Debt(I)
(23.75x –1,00,000)
Here, 5 =
I
(23.75x –1,00,000)
Interest on Debt (I) = = 4.75x − 20,000
5

(Continued)

154 MANAGEMENT ACCOUNTING

Rs.
Now, PBIT 23.75x – 1,00,000
Less: Interest on Debt 4.75x − 20,000
Profit before Tax 19x − 80,000
1  1
Less: Tax @ 33 13 % on PBT  % on (1x − 80, 000) (19x − 80,000)
 3  3
2
(19x − 80,000)
Profit after Tax 3

PAT
Again, NP Ratio =
Sales
2 
 3 (19x − 80,000)
or 10% =
100x
or 10x = 2 / 3 (19x − 80,000)
or 38x − 1,60,000 = 30x
or 8x = 1,60,000
∴ x = 1,60,000 ÷ 8 = 20,000
∴ Sales = 100x = 100 × 20,000 = Rs. 20,00,000
2.
Rs.
Net Fixed Assets [25x = 25 × 20,000] 5,00,000
Add: Depreciation [6.25x = 6.25 × 20,000] 1,25,000
Fixed Assets before Depreciation 6,25,000
3. GP = 30% of Sales = 30% of 20,00,000 = Rs. 6,00,000
∴ CGS = Sales − GP = 20,00,000 − 6,00,000 = Rs. 14,00,000
4. Interest on debt = 4.75x − 20,000 = (4.75 × 20,000) − 20,000 = Rs. 75,000
5. Sales to Working Capital (WC) = 8
Sales
or =8
WC
20,00,000
or =8
WC
∴ WC = 20,00,000 ÷ 8 = Rs. 2,50,000
CAs 2
Again, Current Ratio = =2=
CLs 1
∴ WC = CAs − CLs = 2 − 1 = 1
∴ CAs = 2/1 × 2,50,000 = Rs. 5,00,000
∴ CLs = 1/1 × 2,50,000 = Rs. 2,50,000
6. Credit Sales = 75% [of Total Sales] = 75% of 20,00,000 = Rs. 15,00,000
Credit Sales
Now, Debtors’ Turnover Ratio =
Receivables
15,00,000
Here, 6 =
Receivables
∴Receivables = 15,00,000 ÷ 6 = Rs. 2,50,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 155

CGS
7. Stock Turnover Ratio [based on Closing Stock ] = Closing Stock

14,00,000
or 7=
Closing Stock
∴ Closing Stock = 14,00,000 ÷ 7 = Rs. 2,00,000
8. Current Assets5 = Closing Stock + Receivables + Cash & Bank
or 5,00,000 = 2,00,000 + 2,50,000 + Cash & Bank
∴ Cash & Bank = Rs. 50,000
9. Here, Reserves & Surplus = Balance of Profit & Loss A/c = Rs. 1,00,000
Long-term Debt 1
Again, =
Equity Ratio 2
Long-term Debt 1
or =
(Equity Share Capital + Reserves & Surplus) 2
Long-term Debt 1
or =
(5,00,000 + 1,00,000) 2
∴ Long-term Debt = 6,00,000 ÷ 2 = Rs. 3,00,000

Problem 37
Compute the following annual Financial Statements on the basis of the Ratios given as follows:
Trading and Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Cost of Goods Sold 6,00,000 By Sales 20,00,000
To Operating Expenses ?
To Earnings before Interest & Tax ?
To Debenture Interest 10,000 By Earnings before Interest & Tax ?
To Income Tax ?
To Earnings after Tax ?

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. Rs.
Net Worth: Fixed Assets ?
Share Capital ? Current Assets:
Reserves & Surplus ? Stock ?
10% Debentures ? Debtors 35,000
Sundry Creditors 60,000 Cash ?

i. Net Profit to Sales—5%.

ii. Current Ratio—1.5.
iii. Return on Net Worth—20%.
iv. Inventory turnover—15 times.
v. Share Capital to Reserves 4:1.
vi. Rate of Income Tax—50%.

156 MANAGEMENT ACCOUNTING

Solution
Trading and Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Cost of Goods Sold 6,00,000 By Sales 20,00,000
To Operating Expenses2 11,90,000
To Earnings before Interest & Tax1 2,10,000
20,00,000 20,00,000
To Debenture Interest 10,000 By Earnings before Interest & Tax 2,10,000
To Income Tax1 1,00,000
To Earnings after Tax1 1,00,000
2,10,000 2,10,000

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. Rs.
Net Worth: Fixed Assets7 6,20,000
Share Capital4 4,40,000 Current Assets:
Reserves & Surplus4 1,10,000 Stock5 40,000
10% Debentures3 1,00,000 Debtors 35,000
Sundry Creditors 60,000 Cash6 15,000
7,10,000 7,10,000

Working Notes
1. NP to Sales = 5%
NP
or = 5%
Sales
NP
or = 5%
20,00,000
∴ NP (i.e., EAT) = 5% of 20,00,000 = Rs. 1,00,000
Here, Rate of Income Tax = 50% [of Earnings before Tax]
∴ Income Tax = 50/50 × EAT = 50/50 × 1,00,000 = Rs. 1,00,000
∴ Earnings before Interest & Tax (EBIT) = EAT + Income Tax + Debenture Interest
= 1,00,000 + 1,00,000 + 10,000 = Rs. 2,10,000
2. Operating Expenses = Sales − (CGS + EBIT)
= 20,00,000 − (6,00,000 + 2,10,000) = Rs. 11,90,000
3. Debenture Interest @ 10% = Rs. 10,000
∴ 10% Debentures = 100/10 × 10,000 = Rs. 1,00,000

(EBIT − Tax)
4. Return on Net Worth = × 100
Net Worth
(2,10,000 –1,00,000)
Here, 20 = × 100
NW
∴ Net Worth = 1,10,000 ÷ 20 × 100 = Rs. 5,50,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 157

Again, Share Capital to Reserves = 4:1

Share Capital 4
or =
Reserves & Surplus 1
∴ Share Capital = 4 × Reserves & Surplus
Here, Net Worth = Share Capital + Reserves & Surplus
or 5,50,000 = 4 × Reserves & Surplus + Reserves & Surplus
or 5 × Reserves & Surplus = 5,50,000
∴ Reserves & Surplus = Rs. 1,10,000
∴ Share Capital = 4 × 1,10,000 = Rs. 4,40,000
5. Inventory Turnover = 15 times
CGS
or = 15
Average Stock

6,00,000
or = 15
Average Stock
∴ Average Stock = 6,00,000 ÷ 15 = Rs. 40,000
Here, in the absence of adequate information, it is assumed that, Opening Stock = Closing Stock
∴ Closing Stock = Average Stock = Rs. 40,000
CAs
6. Current Ratio = = 1.5
CLs
CAs
or = 1.5 [Here, CLs = Sundry Creditors only ]
60,000
∴ CA = 60,000 × 1.5 = Rs. 90,000
Here, CAs = Stock + Debtors + Cash
or 90,000 = 40,000 + 35,000 + Cash
∴Cash = Rs. 15,000
7. In every Balance Sheet,
Total Liabilities = Total Assets
Here, Total Liabilities = Rs. 7,10,000
∴ Total Assets = Rs. 7,10,000
Again, Total Assets = Fixed Assets + Current Assets
or 7,10,000 = FAs + 90,000
∴ Fixed Assets = Rs. 6,20,000

Problem 38
Given below are Cash Position Ratios of X Ltd and the industry average. Industry average is arrived at by
taking the average position of 25 companies of the similar trade:
Cash Position to
Absolute Liquid Ratios Cash Interval
Total Asset Ratio
X Ltd 0.36 12.5% 25 days
Industry Average 0.30 15% 33 days
How do you feel about the cash position of X Ltd?

[B.Com. (Hons), Calcutta University—2008]

158 MANAGEMENT ACCOUNTING

Solution
Cash in hand & at bank + Short-termInvestment
Absolute Liquid Ratio =
Liquid Liabilities
This Ratio indicates the position of cash and cash equivalents of a concern to pay off its liquid liabilities.
Cash in hand & at bank + Short-term Investments
Cash Position to Total Asset Ratio =
Total Assets
This Ratio indicates the proportion of Liquid Assets out of the Total Assets deployed by a concern.
Cash interval expresses an idea about the time length that can be covered by the available cash and cash
equivalents for meeting its operating expenses.
After analysing the above comparative data of X Ltd and the industry average, the following observations
can be identified:
i. Absolute Liquid Ratio of X Ltd is better than the industry average.
ii. Cash position to Total Asset Ratio of X Ltd is lower than the industry average.
iii. Cash interval of X Ltd is also lower than that of the industry average.
Hence, it can be concluded by an overall analysis of the above comparative data that X Ltd maintains a com-
paratively lower cash position than the industry average. Therefore, it is advised to increase the cash position
of X Ltd.

Problem 39
The operating performance of three divisions of a company for the year that ended on 31 March 2006 is given
as follows:
Division I Division II Division III
Rs. Rs. Rs.
Sales 2,00,000 2,50,000 3,00,000
Operating Profit 25,000 25,000 27,000
Investment 2,50,000 2,00,000 2,00,000

i. Identify the most profitable division on the basis of: (a) Operating Profit Margin; and (b) ROI.
ii. Explain with reasons which of the above two measures provides a better indication of the overall
operating performance of all the divisions.
[B.B.A. (Hons), Calcutta University—2007]

Solution
Division I Division II Division III
Rs. Rs. Rs.
Sales 2,00,000 2,50,000 3,00,000
Operating Profit 25,000 25,000 27,000
Investment 2,50,000 2,00,000 2,00,000
(a) Operating Profit Margin
 Operating Profit  25,000 25,000 27,000
 × 100  × 100 =12.50% × 100 =10% × 100 = 9%
 Sales  2,00,000 2,50,000 3,00,000

 Operating Profit  25,000 25,000 27,000

(b) ROI  × 100  × 100 =10% × 100 = 12.50% × 100 = 13.50%
 Sales  2,50,000 2,00,000 2,00,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 159

i. a. On the basis of Operating Profit Margin, Division I is the most profitable division as it gives the
highest profit margin on sales.
b. On the basis of ROI, Division III is the most profitable division as it gives the highest return on the
total investment.
ii. Success of a concern is measured by the return to its owner from the business at the end of an account-
ing period. Although the operating success of the concern is reflected through its Operating Profit
Margin, but its overall operating performance is evaluated by the return that it has been earning from
its total Capital Employed in the business and return to the owner of the business. Accordingly, ROI
(i.e., Return on the Total Capital Employed) provides a better indication of the overall operating per-
formance of a concern, as it reflects the return against the total long-term fund invested into the busi-
ness. In spite of earning a good Operating Profit Margin, a concern cannot sustain in the long run if it
does not get a return on its total investment.

Problem 40
From the following information of Sunshine Ltd, for the year that ended on 31 March 2009, examine the
details from the point of view of: (i) Solvency position; (ii) Profitability position; and (iii) Activity position of
the company. Also comment on the condition of the business.

Profit & Loss A/c for the year that ended on 31 March 2009
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Opening Stock 4,00,000 By Sales 21,00,000
To Purchases 16,00,000 By Closing Stock 6,00,000
To Gross Profit c/d 7,00,000
27,00,000 27,00,000
To Trade Expenses 3,35,000 By Gross Profit b/d 7,00,000
To Interest on debenture 25,000 By Interest 10,000
To Provision for Tax 50,000
To Net Profit 3,00,000
7,10,000 7,10,000

Balance Sheet as on 31 March 2009

Amount Amount
Liabilities Assets
Rs. Rs.
Equity Share Capital 12,00,000 Plant & Machinery 10,00,000
8% Preference Share Capital 8,00,000 Land & Building 10,00,000
General Reserve 1,00,000 Furniture & Fixture 6,00,000
Profit & Loss A/c 2,00,000 Stock in Trade 6,00,000
5% Debenture 5,00,000 Debtors 3,80,000
Sundry Creditors 9,00,000 Bills Receivable 2,00,000
Bank Overdraft 50,000 Cash 20,000
Provision for Taxation 50,000
38,00,000 38,00,000

[B.Com. (Hons), Calcutta University—Adapted]

160 MANAGEMENT ACCOUNTING

Solution
A. Test of Solvency Positions:
I. Short-term solvency position:
CAs 12,00,0001
i. Current Ratio = = = 1.2:1
CLs 10,00,0002

ii. Liquid Ratio =

Liquid Assets
=
(CAs − Stock ) =
6,00,0001
= 0.63 :1
Liquid Liabilities (CLs – Bank Overdraft ) 9,50,0002

Comment

Both Current Ratio and Liquid Ratio of the company are lower than the Ideal Ratios of 2:1 and at least 1:1, respec-
tively. Here, the company does not have sufficient Liquid Assets to pay off its liquid liabilities (as the Liquid Ratio is
less than 1). On the other hand, the Current Assets of the company are marginally exceeding its Current Liabilities,
not the the double as it should be. Hence, the short-term solvency position of the company is well below the ideal
level and the company should try to improve its short-term solvency position.

II. Long-term solvency position:

Proprietors’ Fund 23,00,0003
i. Proprietary Ratio = = = 0.6053 :1
Total Assets 38,00,000

Debt Long-term Debt

ii. Debt-Equity Ratio = =
Equity Proprietors’ Fund
= 5,00,000 ÷ 23,00,0003 = 0.2174 : 1

iii. Capital Gearing Ratio = Fixed Interest Bearing Securities

Ordinary Securities

=
(Debenture + Preference Share Capital )
Equity Shareholders’ Fund
= (5,00,000 + 8,00,000) ÷ 15,00,0003 = 0.87 : 1

Net PBIT 3,75,0004

iv. Interest Coverage Ratio = = = 15
Interest 25,000

Comment

Proprietary Ratio of the company shows that more than 60% of its assets are funded by its own capital.
Debt-Equity Ratio expresses that the own capital invested in the business is almost 5 times of the debt capital. The
Capital Gearing Ratio exhibits that it is a low-geared company, as the said Ratio is just below 1. The Interest Coverage
Ratio shows that the annual interest of the company is covered by its profit by as high as 15 times. Therefore, as far
as the long-term solvency is concerned, it can be concluded that all the above Ratios indicate the sound solvency
position of the company, even though the company is unable to reap the benefit of trading on equity through
more long-term borrowings.

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 161

B. Test of Profitability Positions:

GP 7,00,000
1. GP Ratio = × 100 = × 100 = 33 1 3 %
Sales 21,00,000

Net PAT 3,00,000 4

2. NP Ratio = × 100 = × 100 = 14.29%
Sales 21,00,000
Operating Profit before Interest & Tax ( EBIT)
3. Operating Profit Ratio = × 100
Sales
= 3,65,0004 ÷ 21,00,000 × 100 = 17.38%
Net PAT 3,00,0004
4. Return on Net Worth = × 100 = × 100 = 13.04%
Net Worth 23,00,0003

Net Profit before Interest but after Tax 3,25,0004

5. ROI = × 100 = × 100 = 11.61%
Capital Employed 28,00,0003

Net PAT − Preference Dividend 2,36,0005

6. ROE Shareholders’ Fund = × 100 = × 100 = 15.73%
Equity Shareholders’ Fund 15,00,0003

PBIT 3,65,0004
7. Financial Leverage = = = 1.0735
PBT 3,40,0004

Comment

Gross Profit Ratio shows a high rate of Gross Profit earned on sales, but the rates of Net Profit and operating
profit are considerably lower than the Gross Profit rate. This is because of the huge amount of indirect operating
expenses that the company has incurred during the year. Due to a similar reason, Return on Investment is also
lower. Return on Net Worth is higher than the Return on Investment due to a negligible amount of interest on the
borrowed capital. Return on Equity Shareholders’ Fund is also higher than the Return on Net Worth due to the
low rate of preference dividend. Financial leverage equal to almost 1 indicates a negligible amount of interest on
the borrowed capital. Hence, the overall profitability of the company is satisfactory with the exception of the fact
that it has currently incurred a huge amount of indirect operating expenses. The company should try to reduce its
indirect operating expenses so as to increase its overall return.

C. Test of Activity Positions:

CGS 14,00,0006
1. Stock Turnover Ratio = = = 2.80 times
Average Stock 5,00,0007

Credit Sales 21,00,000

2. Debtors’ Turnover Ratio = = = 3.62 times
Receivables 5,80,0008

Credit Purchases 16,00,000

3. Creditors’ Turnover Ratio = = = 1.77 times
Payables 9,00,0009

Sales 21,00,000
4. Capital Turnover Ratio = = = 0.75
Capital Employed 28,00,0003

162 MANAGEMENT ACCOUNTING

Sales 21,00,000
5. Fixed Asset Turnover Ratio = = = 0.81
Fixed Asset 26,00,00011

Sales 21,00,000
6. Working Capital Turnover Ratio = = = 10.50
WC 2,00,00010

Comment

Stock Turnover Ratio of 2.80 indicates that the company’s stock-holding period is too long. Debtors’ Turnover
Ratio of 3.62 also indicates the company’s longer Debt Collection Period. Accordingly, a substantial amount of WC
is being blocked for a prolonged period in stock and debtors. On the other hand, the Creditors’ Turnover Ratio of
1.77 indicates that the company’s creditors’ payment period is abnormally long, which may cast a stigma on its
reputation in the market. As a combination of all the above facts, the company is having a very little amount of net
WC in its hand. High Working Capital Turnover Ratio indicates that the company has the ability to generate sales
in the market using a lower amount of net WC. Capital Turnover Ratio and Fixed Asset Turnover Ratio, both are
near to 1, and thus support in favour of the company’s sales generating capacity with respect to the total capital
invested into the business and to the amount invested into its Fixed Assets, respectively. Hence, the company has
been facing with a longer-period stock-holding problem, longer-period debt-collection problem and also, abnor-
mally longer-period creditors’ payment period, in spite of having a very satisfactory sales-generating capacity.
Comment on the overall condition of the business:
1. Short-term solvency position is not satisfactory at all.
2. Long-term solvency position is quite sound.
3. Profitability position is satisfactory.
4. As far as the sales-generating capacity is concerned, the company is performing at a highly satisfactory
level, but its stock-holding period, Debt Collection Period and creditors’ payment period are too long.

Working Notes
1. Calculation of Current Assets and Liquid Assets
Rs.
Stock in Trade 6,00,000
Debtors 3,80,000
Bills Receivable 2,00,000
Cash 20,000
Current Assets 12,00,000
Less: Stock in Trade 6,00,000
Liquid Assets 6,00,000

2. Calculation of Current Liabilities and Liquid Liabilities

Rs.
Sundry Creditors 9,00,000
Bank Overdraft 50,000
Provision for Taxation 50,000
Current Liabilities 10,00,000
Less: Bank Overdraft 50,000
Liquid Liabilities 9,50,000

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 163

3. Calculation of Equity Shareholders’ Fund, Proprietors’ Fund and Capital Employed

Rs.
Equity Share Capital 12,00,000
Reserves & Surplus:
General Reserve 1,00,000
Profit & Loss A/c 2,00,000
Equity Shareholders' Fund 15,00,000
8% Preference Share Capital 8,00,000
Proprietors' Fund/Net Worth 23,00,000
Long-term Loan:
5% Debenture 5,00,000
Capital Employed 28,00,000
4. Calculation of Operating Profit
Rs.
Net Profit after Tax as per Profit & Loss A/c [EAT] 3,00,000
Add: Interest on Debenture 25,000
Net Profit before Interest but after Tax 3,25,000
Add: Provision for Tax 50,000
Net PBIT 3,75,000
Less: Interest Earned [Being Non-operating Income] 10,000
Operating PBIT 3,65,000
Less: Interest on Debenture 25,000
Operating Profit before Tax (PBT) 3,40,000
5. Calculation of Profit available to Equity Shareholders
Rs.
Net Profit after Tax as per Profit & Loss A/c [EAT] 3,00,000
Less: Preference Dividend [8% on Rs. 8,00,000] 64,000
Profit Available to Equity Shareholders 2,36,000

6. CGS = Sales − GP = 21,00,000 − 7,00,000 = Rs. 14,00,000

(Opening Stock + Closing Stock) (4,00,000 + 6,00,000)
7. Average Stock = = = Rs. 5,00,000
2 2
8. Receivables = Debtors + Bills Receivable = 3,80,000 + 2,00,000 = Rs. 5,80,000
9. Payables = Creditors + Bills Payable = 9,00,000 + Nil = Rs. 9,00,000
10. WC = CAs − CLs = 12,00,0001 − 10,00,0002 = Rs. 2,00,000
11. Fixed Assets = Plant & Machinery + Land & Building + Furniture & Fixture
= 10,00,000 + 10,00,000 + 6,00,000 = Rs. 26,00,000

Problem 41
Calculate liquidity and WC Ratios from the following accounts of a manufacturer of products for the
construction industry, and comment on the Ratios.
2008 2007
Rs. in ’000 Rs. in ’000
Turnover 2,065.00 1,788.70
Cost of Sales 1,478.60 1,304.00
Gross Profit 586.40 484.70
(Continued)

164 MANAGEMENT ACCOUNTING

2008 2007
Rs. in ’000 Rs. in ’000
Current Assets:
Stocks 119.00 109.00
Debtors [Note 1] 400.90 347.40
Short-term Investments 4.20 18.80
Cash at Bank and in Hand 48.20 48.00
572.30 523.20

Creditors: Amounts falling due within one year:

Loans and Overdrafts 49.10 35.30
Provision for Taxation 62.00 46.70
Dividend Payable 19.20 14.30
Creditors [Note 2] 370.70 324.00
501.00 420.30
Net Current Assets 71.30 102.90

Notes: 2008 2007

Rs. in ’000 Rs. in ’000
1. Trade Debtors 329.80 285.40
2. Trade Creditors 236.20 210.80
Note: Industry average: Current Ratio – 1.5 and Quick Ratio – 1.0.

Solution
Calculation of Liquidity and Working Capital Ratios
2008 2007
 CAs 
Current Ratio   572.30 ÷ 501.00 = 1.14 523.20 ÷ 420.30 = 1.24
 CLs 

 Quick Assets 
Quick Ratio   453.30 ÷ 501.00 = 0.90 414.20 ÷ 420.30 = 0.99
 Quick Liabilities 

 Receivables  329.80 ÷ 2,065.00 × 365 285.40 ÷ 1,788.70 × 365

Average Collection Period  × 365 days 
 Credit Sales  = 58 days = 58 days

 Payables 
Average Payment Period  × 365 days 236.20 ÷ 1,478.60 × 365 210.80 ÷ 1,304.00 × 365
 Credit Purchases  = 58 days = 59 days

 Average Stock  119.00 ÷ 1,478.60 × 365 109.00 ÷ 1,304.00 × 365

Stock Turnover Period  × 365 days
 CGS  = 29 days = 31 days

Comment

After a close comparative scrutiny of the Ratios as computed earlier, it has been observed that the company’s
both Current Ratio as well as Quick Ratio for both the years are a little lower than the industry average, but they
are close to each other. This indicates that the company does not hold a huge stock in its hand, which is also duly
supported by its low Stock Turnover Period. The given company is a manufacturing company that is engaged
in the construction industry, and, therefore, it is generally expected to have a comparatively longer Debtors’
Turnover Period due to a relatively poor cash flow in the construction industry. Under such a circumstance, such
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 165

company should strictly control its stock level, as the stock level of the given company is strictly controlled. On
the other hand, the longer creditors’ turnover period of the company shows that it pays for raw materials only
after collecting the dues from the credit sales. Reviewing the overall condition, it seems that the Working Capi-
tal of the company is strongly managed to avoid a poor liquidity condition, which could be caused due to the
longer Debtors’ Turnover Period.

Problem 42
The Balance Sheets of Sandakfu Ltd for the last 3 years read as follows:
Rs. in Lakhs
As on As on As on
31 March 2007 31 March 2008 31 March 2009
Sources of Fund:
Share Capital [Share of Rs. 10 each] 2,000 2,000 3,000
Securities Premium 1,500 1,500 500
Reserves [After 10% Dividend] 1,500 1,700 1,800
Long-term Loan 1,000 800 800
Total Funds 6,000 6,000 6,100
Represented by:
Fixed Assets 2,000 2,500 3,000
Less: Depreciation 700 950 1,250
1,300 1,550 1,750
Capital WIP [work-in-progress] 800 900 700
Investment 200 200 200
A. 2,300 2,650 2,650
Net Current Assets:
Current Assets:
Debtors 1,700 1,800 1,850
Stock 1,800 1,900 2,400
Cash & Bank 500 500 500
Others 400 600 1,400
4,400 4,800 6,150
Less: Current Liabilities 700 1,450 2,700
B. 3,700 3,350 3,450
Total Assets [A + B] 6,000 6,000 6,100
Sales [excluding Excise Duty and Sales Tax @ 20%] 3,900 4,000 5,000

Calculate for the year 2007–08 and 2008–09:

i. Fixed Asset Turnover Ratio.
ii. Stock Turnover Ratio.
iii. Debtors’ Turnover Ratio in terms of number of days’ sales.
iv. EPS.
Briefly comment on the performance of the company.
[C.A. (Inter)—Adapted]
Solution
Calculation of Ratios for the year 2007–08 and 2008–09
2007–08 2008–09
(a) Fixed Asset Turnover Ratio
4, 000 5, 000
 Net Sales Excluding Excise Duty & Sales Tax  = 2.80 times = 3.03 times
  1, 425 1, 650
 Average Fixed Asset 

(Continued)

166 MANAGEMENT ACCOUNTING

2007–08 2008–09
(b) Stock Turnover Ratio
 Net sales Excluding Excise Duty & Sales Tax  4, 000 5, 000
  = 2.16 times = 2.33 times
 Average Fixed Asset  1, 850 2,150

(c) Debtors’ Turnover Ratio [in terms of no. of days’ sales]

 Average Receivables  1,750 1, 825
 × No. of days in the year  × 366 = 133 days × 365 = 111days
 Credit Sales Including Excise  4, 800 6, 000
Duty & Equity Shares

 Earning available to Equity Shareholders  400 400

(d) EPS   = Rs. 2 per share = Rs. 1.33 per share
 No. of Equity Shares  200 300

Comments on the performance of the company:

Fixed Asset Turnover Ratio indicates the level of efficiency of uses or utilizations of Fixed Assets. Here, this
Ratio has increased in the year 2008–09 as compared to that of in 2007–08, and, thus, shows a better efficient
use or utilization in Fixed Assets in the year 2008–09.
Stock Turnover Ratio is an indicator of the movement of stock. Higher Ratio indicates a faster movement
of stock. Here, this Ratio has increased in 2008–09 as compared to that of in 2007–08, and, thus, shows a faster
movement of stock in 2008–09 than in 2007–08. Yet, the inventory-holding period of the company is still
high. Therefore, this Ratio should be compared with the industry average to draw a final conclusion about the
efficiency of the inventory management of the company.
Debt Collection Period indicates the efficiency of the collection department as regards to the collection of
credit sales. Here, the Debt Collection Period in 2008–09 is shorter that of in 2007–08, and, thus, reflects a
more efficient collection process in 2008–09 than in 2007–08. But, to draw a final conclusion about the effi-
ciency of debtors’ management of the company, this Ratio should be compared with the industry average and
the credit period received by the company from its creditors.
In spite of an increase in the Reserve balance in the year 2008–09, the EPS has decreased in 2008–09 from
Rs. 2 to Rs. 1.33. This happens, perhaps, due to the increase in the number of equity shares in the year 2008–09
on account of the issue of fully paid bonus shares out of Securities premium.

Working Notes
1. Calculation of Sales Including Excise Duty and Sales Tax
2007–08 2008–09
Rs. in Lakhs Rs. in Lakhs
Sales Excluding Excise Duty & Sales Tax 4,000 5,000
Add: 20% Excise Duty & Sales Tax 800 1,000
Sales Including Excise Duty & Sales Tax 4,800 6,00
Note: While calculating the Fixed Asset Turnover Ratio and Stock Turnover Ratio, ‘sales excluding excise duty & sales tax’
is considered. But, while calculating Debtors’ Turnover Ratio, ‘sales including excise duty & sales tax’ is considered
as sales to debtors include excise duty and sales tax.
2. Calculation of Average Fixed Assets (Net)
In 2007–08:
1,300 + 1,550
Average Fixed Assets (Net) = = 1, 425(Rs. in Lakhs)
2

(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 167

In 2008–09:
1,550 + 1,750
Average Fixed Assets (Net) = = 1,650(Rs. in Lakhs)
2
3. Calculation of Average Stock
In 2007–08:
1,800 + 1,900
Average Stock = = 1,850(Rs. in Lakhs)
2
In 2008–09:
1,900 + 2, 400
Average Stock = = 2,150(Rs. in Lakhs)
2
4. Calculation of Average Receivables
In 2007–08:
1,700 + 1,800
Average Receivables = = 1,750(Rs. in Lakhs)
2
In 2008–09:
1,800 + 1,850
Average Receivables = = 1,825(Rs. in Lakhs)
2
5. Calculation of earnings available to Equity Shareholders
2007–08 2008–09
Rs. in Lakhs Rs. in Lakhs
Increase in Reserves 200 100
Dividend @ 10% 200 300
Earnings Available to Equity Shareholders 400 400

6. Debtors’ Turnover Ratio in terms of number of days

Credit Sales
We know, Debtors’ Turnover Ratio =
Average Receivables
Here, Debtors’ Turnover Ratio in terms of number of days = Average Collection Period
No. of days in a year No. of days in a year
= =
Debtors turnover Ratio Credit Sales ÷ Average Receivables
Average Receivables
= × No. of days in a year
Credit Sales

Note: Being 2008 a leap year, the number of days in 2007–08 is taken at 366.

Problem 43
Following are the summarized accounts of Bee Ltd and Zee Ltd for the 2 years 2007 and 2008:
Rs. in Lakhs
Particulars Bee Ltd Zee Ltd
2007 2008 2007 2008
Sales 54.12 45.75 17.52 14.47
Manufacturing & Other Expenses 51.04 43.56 14.96 11.82
Depreciation 0.56 0.51 0.60 0.35
Profit before Tax 2.52 1.68 1.96 2.30
54.12 45.75 17.52 14.47
(Continued)

168 MANAGEMENT ACCOUNTING

Rs. in Lakhs
Particulars Bee Ltd Zee Ltd
2007 2008 2007 2008
Miscellaneous Expenditure 1.65 1.69 – –
Fixed Assets 8.36 9.41 3.51 2.75
Stock 11.24 12.19 1.77 2.26
Debtors 7.28 8.24 5.82 4.02
Bank 0.93 0.33 4.64 2.46
29.46 31.86 15.74 11.49
Creditors 9.47 9.26 2.33 1.75
Taxation [Less Advance Tax] 0.56 0.68 0.87 0.58
Short-term Borrowings 4.24 8.00 4.64 2.16
Long-term Borrowings 2.54 2.10 0.10 –
Capital & Reserves 12.65 11.82 7.80 7.00
29.46 31.86 15.74 11.49

You are required to:

i. Indicate and calculate five Ratios which in your opinion are relevant in determining the stability of
the two companies.
ii. Compare the Ratios so determined for the two companies. Indicate what conclusions can be drawn
therefrom?
[C.S. (Inter)—Adapted]

Solution
i. In my opinion, the following five Ratios are very much relevant in determining the stability of the
given two companies as growing concerns:
Computation of five Relevant Ratios in determining the stability of two companies
Bee Ltd Zee Ltd
2007 2008 2007 2008
 CAs 
(i) Current Ratio   19.45 ÷ 14.27 20.76 ÷ 17.94 12.23 ÷ 7.84 8.74 ÷ 4.49
 CLs  = 1.36 = 1.16 = 1.56 = 1.95
 Total Outside Liabilities 
(ii) Total Debts to Net Worth 
Net Worth  16.81 ÷ 11.00 20.04 ÷ 10.13 7.94 ÷ 7.80 4.49 ÷ 7.00
  = 1.582 = 1.978 = 1.017 = 0.641
 Turnover 
(iii) Total Asset Turnover Ratio   54.12 ÷ 27.81 45.75 ÷ 30.17 17.52 ÷ 15.74 14.47 ÷ 11.49
 Total Assets 
= 1.946 = 1.516 = 1.113 = 1.259
 PBT 
(iv) ROI  × 100  2.52 ÷ 27.81 1.68 ÷ 30.17 1.96 ÷ 15.74 2.30 ÷ 11.49
 Total Assets  = 0.090 = 0.055 = 0.124 = 0.20

(v) Liquid Assets to Operating Expenses [excluding 8.21 ÷ 0.1398 8.57 ÷ 0.1190 10.46 ÷ 0.0409 6.48 ÷ 0.0323
Depreciation] per day = 59 = 72 = 256 = 201

ii. From the different Ratios as calculated in (i) above, it has been observed that the results of Zee Ltd for
the year 2008 were better than that of for 2007. On the other hand, the results of Bee Ltd for the year
2008 were weaker than that of for 2007. Short-term liquidity or solvency Ratios (i.e., Current Ratio
and Liquid Assets to Operating-expenses Ratio) of Zee Ltd were improved in 2008 than 2007, whereas
these Ratios of Bee Ltd were deteriorated in 2008 than it was in 2007. Zee Ltd had improved its long-
term solvency Ratios (i.e., Total debts to Net Worth and Total Asset Turnover Ratio) in 2008 than in

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 169

2007, whereas these Ratios were also deteriorated in 2008 than in 2007 in the case of Bee Ltd. As far
as profitability was concerned, Zee Ltd had remarkably increased its ROI in 2008 than it was in 2007,
whereas ROI of B Ltd was remarkably declined in 2008 than 2007.
Therefore, Ratios as computed in the above are showing a stronger position in 2008 as compared
to 2007 in the case of Zee Ltd, whereas they are showing a deteriorating position in 2008 as compared
to 2007 in the case of Bee Ltd.

Working Notes

Rs. in Lakhs
1. Net Worth Bee Ltd Zee Ltd
2007 2008 2007 2008
Capital & Reserves 12.65 11.82 7.80 7.00
Less: Miscellaneous Expenditure 1.65 1.69  
Net Worth 11.00 10.13 7.80 7.00

2. Total Outside Liabilities Rs. in Lakhs

Bee Ltd Zee Ltd
2007 2008 2007 2008
Long-term Borrowings 2.54 2.10 0.10 
Short-term Borrowings 4.24 8.00 4.64 2.16
Creditors 9.47 9.26 2.33 1.75
Taxation [less Advance Tax] 0.56 0.68 0.87 0.58
Total outside Liabilities 16.81 20.04 7.94 4.49

3. Current Assets
Stock 11.24 12.19 1.77 2.26
Debtors 7.28 8.24 5.82 4.02
Bank 0.93 0.33 4.64 2.46
Current Assets 19.45 20.76 12.23 8.74

4. Current Liabilities
Creditors 9.47 9.26 2.33 1.75
Taxation [less Advance Tax] 0.56 0.68 0.87 0.58
Short-term Borrowings 4.24 8.00 4.64 2.16
Current Liabilities 14.27 17.94 7.84 4.49

5. Total Assets
Fixed Assets 8.36 9.41 3.51 2.75
Current Assets [as computed in (3) above] 19.45 20.76 12.23 8.74
Total Assets 27.81 30.17 15.74 11.49

6. Liquid Assets
Current Assets [as computed in (3) above] 19.45 20.76 12.23 8.74
Less: Stock 11.24 12.19 1.77 2.26
Liquid Assets 8.21 8.57 10.46 6.48

7. Operating Expenses (excluding Depreciation) per day

51.04 /365 43.56 /366 14.96 /365 11.82 /365
= 0.1398 = 0.1190 = 0.0409 = 0.0323

170 MANAGEMENT ACCOUNTING

Problem 44
The following accounting information and Financial Ratios have been obtained in respect of Meghna Ltd,
relating to the year that ended on 31 March 2009:
A. Accounting information:
Gross Profit 15% of sales
Net Profit 8% of sales
Raw Materials Consumed 20% of work’s cost
Direct Wages 10% of work’s cost
Stock of Raw Materials 3 months’ usage
Stock of Finished Goods 6% of work’s cost
Debt Collection Period 60 days
All sales are Made on Credit
B. Financial Ratios:
Fixed Assets to Sales 1:3
Fixed Assets to Current Assets 13:11
Current Ratio 2:1
Long-term Loans to Current Liabilities 2:1
Capital to Reserves & Surplus 1:4
If the value of the Fixed Assets as on 31 March 2009 amounted to Rs. 26 lakhs, prepare a summarized Profit
& Loss A/c of the company for the year that ended on 31 March 2009 and a Balance Sheet as on that date.

Solution

Books of Meghna Ltd

Profit & Loss A/c for the year that ended on 31 March 2009
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Raw Materials Consumed 7
13,26,000 By Sales 1
78,00,000
To Direct Wages7 6,63,000
To Works Overheads (Bal. fig.) 46,41,000
To Gross Profit c/d4 11,70,000
78,00,000 78,00,000
To Indirect Operating Expenses (Bal. fig.) 5,46,000 By Gross Profit b/d 11,70,000
To Net Profit5 6,24,000
11,70,000 11,70,000

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital11 3,00,000 Fixed Assets1 26,00,000
Reserves & Surplus11 12,00,000 Current Assets:
Long-term Loan6 22,00,000 Stock of Raw Materials8 3,31,500
Current Liabilities3 11,00,000 Stock of Finished Goods8 3,97,800
Debtors9 12,82,192
Cash10 1,88,508
48,00,000 48,00,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 171

Working Notes
1. Fixed Assets (FA) to Sales = 1:3
Fixed Assets 1
or =
Sales 3
26,00,000 1
or =
Sales 3
∴ Sales = 26,00,000 × 3 = Rs. 78,00,000
2. Fixed Assets (FA) to Current Assets (CAs) = 13:11
FAs 13
or =
CAs 11

or 26,00,000 13
=
CAs 11
∴CA = 26,00,000 × 11 ÷ 13 = Rs. 22,00,000

Current Assets ( CAs) 2

3. Current Ratio = =
Current Liabilities ( CLs) 1

or 22,00,000
=2
CLs
∴ CL = 22,00,000 ÷ 2 = Rs. 11,00,000
4. GP = 15% of Sales = 15% of 78,00,000 = Rs. 11,70,000
5. NP = 8% of Sales = 8% of 78,00,000 = Rs. 6,24,000
6. Long-term Loan to CLs = 2/1
Long-term Loan
or =2
11,00,000
∴ Long-term Loan = 11,00,000 × 2 = Rs. 22,00,000
7. Work’s Cost = Sales − GP = 78,00,000 – 11,70,000 = Rs. 66,30,000
∴ Direct Wages = 10% of Work’s Cost = 10% of 66,30,000 = Rs. 6,63,000
8. Stock of Raw Materials = 3 months’ usage = 3/12 × 13,26,000 = Rs. 3,31,500
Stock of Finished Goods = 6% of Work’s Cost = 6% of 66,30,000 = Rs. 3,97,800
9. Debt Collection Period = 60 days
Debtors
or × 365 = 60
78,00,000
∴ Debtors = 78,00,000 × 60 ÷ 365 = Rs. 12,82,192
10. Here, Current Assets = Stock of Raw Materials + Stock of Finished Goods + Debtors + Cash
or 22,00,000 = 3,31,500 + 3,97,800 + 12,82,192 + Cash
∴ Cash = Rs. 1,88,508
11. In a Balance Sheet,
Net Worth (NW) + Long-term loans = FAs + WC
Here, NW + 22,00,000 = 26,00,000 + (22,00,000 – 11,00,000)
∴ NW = Rs. 15,00,000
Now given, Share Capital to Reserves & Surplus (R&S) = 1: 4
(Continued)

172 MANAGEMENT ACCOUNTING

Share Capital 1
or =
R&S 4
∴ Reserves & Surplus = 4 × Share Capital
Again, Net Worth = Share Capital + Reserves & Surplus [assuming no Miscellaneous expenditure]
or 15,00,000 = Share Capital + 4 × Share Capital
or 5 × Share Capital = 15,00,000
∴ Share Capital = Rs. 3,00,000
∴ Reserves & Surplus = 4 × 3,00,000 = Rs. 12,00,000

Problem 45
Following is the incomplete information of X Ltd:
Trading and Profit & Loss A/c for the year that ended on 31 March 2008
Rs. in ’000 Rs. in ’000
To Opening Stock 700 By Sales ?
To Purchases ? By Closing Stock ?
To Direct Expenses 175
To GP c/d ?
? ?
To Establishment Expenses 740 By Gross Profit b/d ?
To Interest on Loan 60 By Commission 100
To Provision for Taxation ?
To Net Profit c/d ?
? ?
To Proposed Dividends ? By Balance b/f 140
To Transfer to General Reserve ? By Net Profit b/d ?
To Balance Transferred to Balance Sheet ?
? ?

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. in ’000 Rs. in ’000
Paid-up Capital 1,000 Fixed Assets:
General Reserve: Plant & Machinery 1,400
Balance at the Beginning of the Year ? Other Fixed Assets ?
Proposed Addition ? Current Assets:
Profit & Loss A/c ? Stock ?
10% Loan A/c ? Sundry Debtors ?
Current Liabilities ? Cash at Bank 125
? ?

Other information:
i. Current Ratio is 2:1.
ii. Closing Stock is 25% of sales.
iii. Proposed dividends to paid up capital Ratio is 2:3.
iv. GP Ratio is 60% of turnover.
v. Loan is half of the Current Liabilities.
vi. Transfer to general reserves to proposed dividends Ratio is 1:1.
vii. Profit carried forward is 10% of the proposed dividends.

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 173

viii. Provision for taxation is equal to the amount of Net Profit of the year.
ix. Balance to credit of the general reserve at the beginning of the year is twice the amount transferred to
that account from the current year’s profits.
All working notes should be part of your answer.
You are required to complete:
x. (i) Trading and Profit & Loss A/c for the year that ended on 31 March 2008.
xi. (ii) A Balance Sheet as on that date.
[C.A. (PE—II)—May 2008]

Solution
Books of X Ltd
Trading and Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Rs. in ’000 Rs. in ’000
To Opening Stock 700.00 By Sales5 5,366.66
To Purchases (Bal. fig.) 2,613.33 By Closing Stock6 1,341.67
To Direct Expenses 175.00
To Gross Profit c/d 3,220.00
6,708.33 6,708.33
To Establishment Expenses 740.00 By Gross Profit b/d (Bal. fig.) 3,220.00
To Interest on Loan 60.00 By Commission 100.00
To Provision for Taxation4 1,260.00
To Net Profit c/d 1,260.00
3,320.00 3,320.00
To Proposed Dividends1 666.67 By Balance b/f 140.00
To Transfer to General Reserve2 666.67 By Net Profit b/d 1,260.00
To Balance Transferred to Balance Sheet3 66.66
1,400.00 1,400.00

Balance Sheet as on 31 March 2008

Amount Amount Amount
Liabilities Assets
Rs. in '000 Rs. in ’000 Rs. in ’000
Paid-up Capital 1,000.00 Fixed Assets:
General Reserve: Plant & Machinery 1,400.00
Balance at the beginning of the year 1,333.34 Other Fixed Assets (bal. fig.) 1,066.67
Add: Addition during the year 666.67 2,000.01 Current Assets:
Profit & Loss A/c 66.66 Stock6 1,347.67
10% Loan A/c7 600.00 Sundry Debtors9 933.33
Current Liabilities8 1,200.00 Cash at Bank 125.00
4,866.67 4,866.67

Working Notes
1. Paid-up Capital = 1,000 [Rs. in ’000].
Again, Proposed Dividend to Paid-up Capital = 2:3
Proposed Dividend 2
or =
1,000 3
(Continued)

174 MANAGEMENT ACCOUNTING

(1,000 × 2) = 666.67
Proposed Dividend =
3
[Rs.in ’000]
2. Transfer to general reserve to Proposed Dividend = 1:1
Transfer to General Reserve
or, =1
666.67
∴ Transfer to General Reserve = 666.67 [Rs. in ’000]
Again, the Balance of general Reserve at the beginning of the year = Twice the amount transferred to general
reserve from the current years’ profit = 2 × 666.67 = 1,333.34 [Rs. in ’000]
3. Profit carried forward = 10% of Proposed Dividend = 10% of 666.67 = 66.66 [Rs. in ’000]
4. Provision for tax = Amount of NP for the year = 1,260 [Rs. in ’000]
5. GP Ratio = 60% (of Turnover)
GP
or = 60%
Sales
3,220
or = 60%
Sales
∴ Sales = 3,220 ÷ 60% = 5,366.66 [Rs. in ’000]
6. Closing Stock = 25% of Sales = 25% of 5,366.66 = 1,341.67 [Rs. in ’000]
7. Interest on Loan = 60 (Rs. ’000) at an interest @ 10%
∴ 10% Loan = 100 ÷ 10 × 60 = 600 [Rs. in ’000]
8. Loan = 1/2 of CL
or 600 = 1/2 × CL
∴ CL = 1,200 [Rs. in ’000]
CAs 2
9. Current Ratio = =
CLs 1
CAs
or =2
1,200
∴ CA = 2,400 [Rs. in ’000]
Again, CAs = Stock + Debtors + Bank
or 2,400 = 1,341.67 + Debtors + 125
∴ Debtors = 933.33 [Rs. in ’000]

Problem 46
Following is the abridged Balance Sheet of Xenos Ltd as on 31 March 2008:
Balance Sheet as on 31 March 2008
Amount Amount
Liabilities Assets
Rs. Rs.
Paid-up Share Capital 5,00,000 Freehold property 4,00,000
Profit & Loss A/c 85,000 Plant & Machinery 2,50,000
Current Liabilities 2,00,000 Less: Depreciation 75,000 1,75,000
Stock 1,05,000
Debtors 1,00,000
Cash 5,000
7,85,000 7,85,000

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 175

From the following information, you are required to prepare a Profit & Loss A/c for the year that ended on 31
March 2009 and a Balance Sheet as on that date:
i. The composition of the total of the ‘liability side’ of the Balance Sheet as on 31 March 2009 (the Paid-
up Share Capital remains the same as on 31 March 2008) was as follows:
Share Capital—50%; Profit & Loss A/c—15%; 10% Debentures—10%; Creditors—25%.
Debentures were issued on 1 April 2008, interest of which was being paid on 30 September 2008 and
31 March 2009.
ii. During the year that ended on 31 March 2009, additional Plant & Machinery had been bought and a
further Rs. 25,000 depreciation was written off. Freehold property remained unchanged. Total Fixed
Assets then consisted 60% of the total Fixed and Current Assets.
iii. The current Ratio was 1.6:1. The quick Ratio was 1:1.
iv. Debtors (4/5th of the Quick assets) to Sales Ratio revealed a credit period of 2 months.
v. Gross Profit was @ 15% of the selling price and Return on Net Worth as on 31 March 2009 was 10%.
Ignore taxation.
[C.A. (Inter)—Adapted]
Solution
Books of Xenos Ltd
Profit & Loss A/c for the year that ended on 31 March 2008
Dr. Cr.
Amount Amount
Particulars Particulars
Rs. Rs.
To Opening Stock 1,05,000 By Sales 5
12,00,000
To Purchases (Bal. fig.) 10,65,000 By Closing Stock 1,50,000
To Gross Profit c/d6 1,80,000
13,50,000 13,50,000
To Depreciation on Machinery 25,000 By Gross Profit b/d 1,80,000
To Other operating Expenses (Bal. fig.) 80,000
To Debenture Interest7 10,000
To Net Profit 65,000
1,80,000 1,80,000

Balance Sheet as on 31 March 2008

Amount Amount
Liabilities Assets
Rs. Rs.
Paid-up Share Capital1 5,00,000 Fixed Assets
Reserves & Surplus Freehold Property 4,00,000
Profit & Loss A/c8 1,50,000 Plant & Machinery2 2,00,000
Secured Loan Current Assets:
10% Debentures1 1,00,000 Stock3 1,50,000
Current Liabilities: Debtors4 2,00,000
Creditors1 2,50,000 Bank4 50,000
10,00,000 10,00,000

Working Notes
1. The Paid-up Share Capital as on 31 March 2008 remains the same as it was on 31 March 2007 (i.e., Rs. 5,00,000).
Again, Share Capital (i.e., Rs. 5,00,000) = 50% of the total of the ‘liability side’ of the Balance Sheet.
∴ Profit & Loss A/c = 15% of the total of liability side = 15/50 × 5,00,000 = Rs. 1,50,000
(Continued)

176 MANAGEMENT ACCOUNTING

∴ 10% Debentures = 10% of the total of liability side = 10/50 × 5,00,000 = Rs. 1,00,000
∴ Creditors = 25% of the total of liability side = 25 ÷ 50 × 5,00,000 = Rs. 2,50,000
2. Here, Current Liability = Creditors = Rs. 2,50,000
Current Asset ( CAs) 1.6
Again, Current Ratio = =
Current Liability ( CLs) 1
1.6
or Current Asset = × 2,50,000 = Rs. 4,00,000
1
Again, Total Fixed Asset (FA) = 60% of [Total FAs + Total CA]
or FAs = 60/100 × (FA + 4,00,000)
or 10 × FAs = 6 × FAs + 24,00,000
or 4 × FAs = 24,00,000
∴ Total FAs = 24,00,000 ÷ 4 = Rs. 6,00,000
Again, Total FAs = Freehold Property + Plant & Machinery (P&M)
or, 6,00,000 = 4,00,000 + P&M [as Freehold property remains unchanged]
∴ Plant & Machinery (Closing Balance) = Rs. 2,00,000
Now, in case of Plant & Machinery,
Opening Balance + Addition during the year − Depreciation for the year = Closing Balance
or 1,75,000 + Addition during the year – 25,000 = 2,00,000
∴ Addition of Plant & Machinery during the year = Rs. 50,000

3. Quick Ratio =
Quick Assets
=
(CAs − Stock ) = 1: 1
Quick Liabilities ( CLs − Bank O/D)

( 4,00,000 − Stock ) = 1 assumed that there is no Bank overdraft

or [ ]
(2,50,000 − Nil)
or 2,50,000 = 4,00,000 − Stock
∴ Stock = Rs. 1,50,000
4. Quick Assets = CAs − Stock = 4,00,000 – 1,50,000 = Rs. 2,50,000
∴Debtors = 4/5 of Quick assets = 4/5 × 2,50,000 = Rs. 2,00,000
Here, CAs = Stock + Debtors + Bank
or, 4,00,000 = 1,50,000 + 2,00,000 + Bank
∴ Bank = Rs. 50,000
5. Debtors to Sales Ratio = 2 months
Debtors
or × 12 months = 2 months
Sales
Debtors 2 months 1
or = =
Sales 12 months 6
2,00,000 1
or =
Sales 6
∴ Sales = Rs. 12,00,000
6. GP = 15% of Sales = 15% of 12,00,000 = Rs. 1,80,000
7. Annual Debenture Interest = (10% on Rs. 1,00,000 for 1 year) × 2 = Rs. 10,000
2
NP
8. Return on Net Worth (NW ) = = 10%
NW
Here, NW = Share Capital + Profit & Loss A/c = 5,00,000 + 1,50,000 = Rs. 6,50,000
(Continued)

ACCOUNTING RATIOS FOR FINANCIAL STATEMENT ANALYSIS 177

NP
∴ = 10%
6,50,000
∴ NP = Rs. 65,000
Rs.
Balance of Profit & Loss A/c as on 31 March 2007 85,000
Add: NP for the year 65,000
Balance of Profit & Loss A/c as on 31 March 2008 carried over to Balance Sheet 1,50,000

CHAPTER REVIEW SUMMARY

 Financial Statements are a compilation of financial data, arranged and organized in a systematic and summa-
rized manner, according to the accounting principles, to assess the financial position of an enterprise as regards
to its profitability, operational efficiency, long- and short-term solvency, and growth potential. A number of
statements prepared at the end of every Accounting Period are collectively called ‘Financial Statements,’ for
example, Balance Sheet, Profit & Loss A/c, Cash Flow Statement and Fund Flow Statement.
 A Ratio is a relationship between two or more items expressed in mathematical terms. It is an expression of
quantitative relationship between two amounts or items which is/are expressed in numbers or percentage.
 Ratio calculated from different Accounting Data for exhibiting a meaningful and useful relationship between
them is called Accounting Ratio.
 Ratio Analysis is a tool for identifying financial strength, weakness and growth potentiality of an enterprise by
means of determination, analysis and interpretation of relevant various accounting Ratios.
 Ratio Analysis, as an analytical tool of Financial Statement Analysis, performs important functions: (a) mea-
sures and evaluates the financial condition of an enterprise; (b) measures and evaluates the liquidity, solvency,
profitability, managerial efficiency, Capital Structure and activity of an enterprise; (c) measures and evaluates
the operating effectiveness of an enterprise; (d) identifies the functional areas within the business where the
adoption of remedial measures are needed; (e) helps the management in the course of Decision Making pro-
cess; and (f) serves as a management control system.
 It is very much useful to all the interested parties for improvement of their needs according to their respec-
tive interest in the enterprise, such as: (a) useful for identification of financial strengths and weaknesses of an
enterprise; (b) useful to measure the liquidity, solvency, profitability, managerial efficiency and activity of an
enterprise; (c) useful for inter- and intra-firm comparison of performance; and (d) useful to determine the
corporate sickness.
 It has many advantages, such as: (a) most powerful tool for measuring the short- and long-term solvency,
profitability, operating activity, Capital Structure Analysis and the managerial efficiency of a concern; (b) sum-
marizes a large number of quantitative Accounting Data by calculating the different Ratios; (c) helps the man-
agement to prepare the necessary budget and to formulate future policies; (d) relates the present accounting
information with the past and (e) formulates an effective inter- and intra-firm comparison of accounting data.
 In spite of immense advantages and usefulness of Ratio Analysis, it suffers from some limitations, such as:
(a) it may tend to interpret a wrong direction if it is based on unauthenticated data; (b) as the Ratios are cal-
culated on the basis of the past results, proper prediction for future may not always be dependable; (c) a single
Ratio calculated for any functional area of a business does not convey its conclusive state; (d) it is formulated
on the basis of historical figures as obtained from the Financial Statements. Performance of a concern based
on the historical data does not always indicate its present real condition; (e) the price level changes very often
distort the trend analysis process which is done with the help of various Ratios calculated in the process of
Ratio Analysis.
 Shareholders, moneylenders, creditors, government, bankers, management and so on are the different inter-
ested parties in Ratio Analysis.
 Accounting Ratios may be broadly classified into three categories: (i) Balance Sheet Ratio; (ii) Revenue State-
ment Ratio; and (iii) Mixed or Composite Ratio.
 A Standard or Ideal Ratio is a predetermined calculated Ratio, which is considered to be normal or standard,
or which is the most meaningful or significant, or which is most effectively applicable universally to different
industries under different times.

Modified Date: Sat, Jul 03, 2010 12:42:06 PM Output Date: Tue, Jul 06, 2010 11:43:37 AM Rev II

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