RATIO ANALYSIS

A. LIQUIDITY RATIOS - Short Term Solvency

Ratio	Formula	Numerator	Denominator	Significance/Indicator
1. Current Ratio	Current Assets Current Liabilities	Inventories + Debtors + Cash & Bank + Receivables / Accruals + Short terms Loans + Marketable Investments	Sundry Creditors (for goods) + Outstanding Expenses (for services) + Short Term Loans &Advances (Cr.) + Bank Overdraft / Cash Credit + Provision for taxation + Proposed or Unclaimed Dividend	Ability to repay short-term commitments promptly_. (Short-term Solvency) Ideal Ratio is 2:1.High Ratio indicates existence of idle current assets.
2. Quick Ratio or Acid test ratio	Quick Assets Quick Liabilities	Current Assets Less : Inventories Less : Prepaid Expenses	Current Liabilities Less : Bank Overdraft Less : Cash Credit	Ability to meet immediate liabilities. Ideal Ratio is 1.33:1
3. Absolute Cash Ratio ,	(Casb+Marketable Securities) Current Liabilities	Cash in Hand + Balance at Bank (Dr.) + Marketable Securities & short term investments	Sundry Creditors (for goods) + Outstanding Expenses (for services) + Short Term Loans &Advances (Cr.) + Bank Overdraft / Cash Credit + Provision for taxation + Proposed or Unclaimed Dividend	Availability of cash to meet short‑ term commitments.
4. Interval Measure	Quick Assets Cash Expenses Per Day	Current Assets Less : Inventories Less : Prepaid Expenses	AaattalCashExpenses 365 Cash Expenses = Total Expenses less Depreciation and write offs.	Ability to meet regular cash expenses.

P. CAPITAL STRUCTURE RATIOS - Indicator of Financing Techniques & long-term solvency

1. Equity to Total Funds Ratio	Shareholder's Funds Total Funds	Equity Share Capital +Preference Share Capital + Reserves & Surplus Less : Accumulated Losses	Total Long Term funds employed in business = Debt+Equity.	Indicates Long Term Solvency; mode of financing; extent of own funds used in operations.
2. Debt Equity Ratio	Debt Equity	Long Term Borrowed Funds, i.e. Debentures, Long Term Loans from institutions	Equity Share Capital +Preference Share Capital + Reserves & Surplus Less : Accumulated losses,if any	Indicates the relationship between debt & equity; Ideal ratio is 2:1.

CAPITAL STRUCTURE RATIOS - Indicator of Financing Techniques & long-term solvency — Contd...

3. Capital Gearing Ratio	Fixed Charge Bearing Capital Equity Shareholder's Funds	Preference Share Capital + Debentures + Long Term Loans	Equity Share Capital + Reserves & Surplus Less: Accumulated Losses	Shows proportion of fixed charge (dividend or interest) bearing capital to equity funds; the extent of advantage or leverage enjoyed by equity shareholders.
4. Fixed Asset to Long Term Fund Ratio	Fixed Assets Long Term Funds	Net Fixed Assets i.e. Gross Block Less: Depreciation	Long Term Funds = Shareholder's funds (as in B1) + Debt funds (as in B2) _	Shows proportion of fixed assets (long-termassets) financedbylong‑ term funds. Indicates the financing approach followed by the firm i.e. conservative, matching or aggre‑ ssive; Ideal Ratio is less than one.
5. Proprietary Ratio (See Note below)	Proprietary Funds Total Assets	Equity Share Capital + Preference Share Capital +Reserves &Surplus Less: Accumulated losses	Net Fixed Assets + Total Current Assets (Only tangible assets will be included.)	Shows extent of owner's funds utilised in financing assets.

Note : Proprietary Funds for B-5 can be computed through two ways from the Balance Sheet:

· Liability Route : [Equity Share Capital + Preference Share Capital + Reserves & Surplus] Less: Accumulated losses

· Assets Route : [Net Fixed Assets + Net Working Capital] Less: Long Term Liabilities.

C. COVERAGE RATIOS - Ability to Serve Fixed Liabilities

Debt Service Ratio Coverage	Earnings for Debt Service (Interest+Instalment)	Net Profit after taxation Add: Taxation Add : Interest on Debt Funds Add : Non-cash operating expenses(e.g. depreciation and amortizations) Add : Non-operating adjust‑ ments (e.g. loss on sale of fixed assets)	Interest on Debt Add:InstalmentofDebt (principal repaid)	Indicates extent of current earnings available for meeting commitments and outflow towards interest and instalment; Ideal ratio must be between 2 to 3 times.
2. Interest Coverage Ratio	Earnings before Interest & Tax Interest	Earnings before Interest and Taxes =Sales Less Variable and Fixed Costs (excluding interest) (or) EAT + Taxation + Interest	Interest on Debt Fund	Indicates ability to meet interest obligations of the current year. Should generally be greater than I.
3. Preference Dividend Coverage Ratio	Earnings after Tax Preference Dividend	Earnings after Tax = EAT	Dividend on Preference Share Capital	Indicates ability to pay dividend on preference share capital.

D. TURNOVER / ACTIVITY / PERFORMANCE RATIOS

i. Capital Turnover Ratioz	Sales Capital Employed	Sales net of returns	See Note 1 below:	Ability to generate sales per rupee of long-term investment. The higher the turnover ratio, the better it is.
2. Fixed Asset Turnover Ratio	Turnover Fixed Assets	Sales net of returns	Net Fixed Assets	Ability to generate sales per rupee^y of Fixed Asset
3. Working Capital Turnover Ratio	Turnover Net Working Capital	Sales net of returns	Current Assets Less Current Liabilities	Ability to generate sales per rupee of Working Capital.
Q. Finished Goods or Stock Turnover Ratio	Cost of Goods Sold Average Stock	For Manufacturers: Opening Stock + Cost of Production Less: Closing Stock For Traders: Opening Stock + Purchases Less: Closing Stock	(Opening Stock + Closing Stock) 2 or Maximum Stock + Minimum Stock 2	Indicates how fast inventory is used / sold. A high turnover ratio generally indicates fast moving material while low ratio may mean dead or excessive stock.
5. WIP Turnover Ratio	Factory Cost Average Stock of WIP	Materials + Wages + Production Overheads	Opening WIP + Closing WIP 2	Indicates the WIP movement / production cycle.
6. Raw Material Turnover Ratio	Cost of Material Consumed Average StockofRM	Opening Stock of RM +Purchases Less: Closing Stock	Openin^g Stock + Closing Stock 2	Indicates how fast raw materials are used in production.
7. Debtors Turnover Ratio	Credit Sales Average Accounts Receivable	Credit Sales net of returns	Accounts Receivable= Debtors +B/R Average Accounts Receivable = Opening bal. + Closing bal. 2	Indicates speed of collection of credit sales.
8. Credito,sTurnover Ratio	Credit Purchases Average Accounts Payable	Credit Purchases net of returns, if any	Accounts'Payable=Creditors+B/P Average Accounts Payable = Opening bal. + Closing bal. 2	Indicates velocity of debt payment.

Note 1 : Assets Route : Net Fixed Assets -t Net working Capital

Liability Rowe : Equity Share Capital + Preference Share Capital + Reserves & Surplus + Debentures and Long Term Loans Less Accumulated Losses Less Non-Trade Investments

Note 2 : Turnover ratios can also be computed in terms of days as 365 / TO Ratio, e.g. No. of days average stock is held = 365 / Stock Turnover Ratio.

E. PROFITABILITY RATIOS BASED ON SALES

I. Gross Profit Ratio	Gross Profit Sales	Gross Profit as per Trading Account	Sales net of returns	Indicator of Basic Profitability.
2. Operating'^profit ratio	Operating Profit Sales	Sales Less cost ^ofsa^les (or) Net Profit Add: Non-operating expenses Less : Non-operating incomes	Sales net of returns	Indicator of Operating Performance of business.
3. Net Profit Ratio	Net Profit Sales	Net Profit	Sales net of returns	Indicator of overall profitability.
4. Contribution Sales Ratio	Contribution Sales	Sales Less Variable Costs	Sales net of returns	Indicator of profitability in Marginal Costing (also called PV Ratio)

F. PROFITABILITY RATIOS - OWNER'S VIEW POINT

1. Return on Investment (ROI) or Return on Capital Employed (ROCE)	Total Earnings Total Capital Employed	Profits after taxes Add: Taxation Add: Interest Add : Non-trading expenses Less : Non-operating incomes like rents, interest and dividends	Assets Route: Net Fixed Assets (including intangible assets like patents, but not fictitious assets like miscella- neous expenditure not w/of) +Net working Capital Liability Route : Equity Share Capital + Preference Share Capital + Reserves R Surplus +Debentures and Long Term Loans Less: Accumulated Losses Less: Non-Trade Investments	Overall profitability of the business for the capital employed; indicates the return on the total capital employed.Comparison of ROCE with rate of interest of debt leads to financial leverage. If ROCE > Interest Rate, use of debt funds is justified.
2. Return on Equity ROE	Earnings after Taxes Net Worth	Profit After Taxes	Net Fixed Assets + Net Working Capital Less: External Liabilities (long term)	Profitability of Equity Funds invested in the business.
3. Earnings Per Share EPS	[PAT - Preference Dividend] Number of Equity Shares	Profit After Taxes Lest Preference Dividend	Equity Share Capital Face Value per share	Return or income per share, whether or not distributed as dividends.
4. Dividend Per Share DPS	Dividends Number of Equity Shares	Profits distributed to Equity Shareholders	Equity Share Capital Face Value per share	Amount of Profits distributed per share
5. Return on Assets (ROA)	Net Profit after taxes Average Total Assets	Net Profit after taxes	Average Total Assets or Tangible Assets or Fixed Assets, i.e. ^IA of Opening and Closing Balance	Net Income per rupee of average fixed assets.

Ilustration 1 : Ratio Computation from Financial Statements

From the following annual statements of Sudharshan Ltd, calculate the following ratios : (a) GP Ratio : b) Operating Profit Ratio ; (c) Net Profit Ratio ; (d) Current Ratio ; (e) Liquid Ratio (f) Debt Equity Ratio ; g) Return on Investment Ratio ; (h) Debtors Turnover Ratio ; (i) Fixed Assets Turnover Ratio.

Trading and Profit and Loss Account for the year ended 31st March

Particulars	Amt.	Particulars	Amt.
To Materials Consumed:		By Sales	85,000
Opening Stock - 9,050		By Profit on Sale of Investments	600
Purchases - 54,525 63,575		By Interest on Investments	300
Closing Stock - (14,000) To Carriage Inwards	49,575
Closing Stock - (14,000) To Carriage Inwards	1,425
To Office Expenses	15,000
To Sales Expenses	3,000
To Financial Expenses	1,500
To Loss on Sale of Assets	400
To Net Profit	15,000
Total	85,900	Total	85,900

Balance Sheet as at 31st March

Liabilities	Amt.	Assets	Amt.
Share Capital: 2000 equity shares of		Fixed Assets :
Rs.10 each fully paid up	20,000	Buildings	15,000
Reserves	3,000	Plant	8,000
Profit & Loss Account	6,000	Current Assets:
Secured Loans	6,000	Stock in Trade	14,000
Bank Overdraft	3,000	Debtors	7,000
Sundry Creditors:		Bills Receivable	1,000
For Expenses	2,000	Bank Balances	3,000
For Others	8,000
Total	48,000	Total	48,000

illustration 2 : Computing ACP

Calculate the Average Collection Period from the following details by adopting a 360-day year.

(a) Average Inventory - Rs.360000

(b) Debtors - Rs.240000

(d) GP Ratio - 10%

(e) Credit Sales to Total Sales - 20%

Illustration 3 : PE Ratio Computation -

Calculate P/E Ratio from the following information :

Equity Share Capital (of Rs.20 each) - Rs.50 lakhs

Fixed Assets - Rs.30 lakhs

Reserves and Surplus - Rs.5 lakhs

Investments - Rs.5 labs

Secured Loans at 15% - Rs.25 lakhs

Operating Profit (subject to Tax of 50%) - Rs.25 lakhs

Unsecured Loans at 12.5% - Rs.10 lakhs

Market Price per share - Rs.50

Illustration 4 : Statement of Proprietary Funds

Working Capital - Rs.75,000 Reserves and Surplus - Rs.50,000 Bank Overdraft - Rs.10,000

From the following information relating to a Limited Company, prepare a Statement of Proprietors' Funds.

Current Ratio - 2

Liquid Ratio - 1.5

Fixed Assets / Proprietary Funds - 314

There are no long-term loans or fictitious assets.

Illustration 5 : Statement of Proprietary Funds

Working capital of a company is Rs. 1,35,000 and current ratio is 2.5. Liquid ratio is 1.5 and the proprietary ratio 0.75. Bank Overdraft is Rs.30,000 there are no long term loans and fictitious assets. Reserves and surplus amount to Rs. 90,000 and the gearing ratio [Equity Capital/Preference Capital] is 2.

From the above, ascertain :

(i) Current assets

(ii) Current liabilities

(iii) Net block

(iv) Proprietary fund

(v) Quick liabilities

(vi) Quick assets

(vii) Stock and

(viii) Preference and equity capital

Also draw the statement of property Fund

Illustration 6 : Balance Sheet Preparation

Based on the following information, prepare the Balance Sheet of Star Enterprises as at 31st December

Current Ratio - 2.5 Cost of Goods Sold to Net Fixed Assets - 2

Liquidity Ratio - 1.5 Average Debt Collection Period - 2.4 months

Net Working Capital - Rs.6 lakhs Stock Turnover Ratio – 5 Fixed Assets to Net Worth - 0.80

Gross Profit to Sales - 20% Long Term Debt to Capital and Reserves - 7/25

Illustration 7: Balance Sheet Preparation

From the following information relating to Wise Ltd., prepare its summarized Balance Sheet.

Current Ratio – 2.5 Sales / Debtors Ratio – 6.0

Acid Test Ratio – 1.5 Reserves / Capital Ratio – 1.0

Gross Profile to Sales Ratio – 0.2 Net Worth / Long Term Loan Ratio – 20.0

Net Working capital to Net Worth Ratio – 0.3 Stock Velocity – 2 months

Sales / Net Fixed Assets Ratio – 2.0 Paid up share Capital – Rs. 10 lakhs

Sales / Net Worth Ratio – 1.5

Illustration 8 : Balance Sheet Preparation

From the following information of Wiser Ltd, prepare its proforma Balance Sheet if its sales are Rs.l6 lakhs.

Sales to Net Worth - 2.3 Current Ratio - 2.9 times*

fitnes^s Current Liabilities to Net Worth - 42% Sales to Closing Inventory - 4.5 times*

Total Liabilities to Net Worth - 75% Average Collection Period - 64 days

[*- Ratio figures are recast in a more understandable way)

Illustration 9: Balance Sheet Preparation

From the following information and ratios, prepare the profit and Loss Account and Balance Sheet of M/s. Sivaprakasam & co., an export Company [Take 1 year = 360 days]

Current Assets to Stock - 3:2 Fixed Asset Turnover Ratio - 1.20

Current Ratio - 3.00 Total Liabilities to Net Worth - 2.75

Acid Test Ratio = 1.00 Net Working Capital - Rs.10 lakhs

Financial Leverage - 2.20 Net Profit to Sales - 10%

Earnings Per Share (each of Rs.10) - Rs.10.00 Variable Cost - 60%

Book Value per share - Rs.40.00 Long Term Loan Interest - 12%

Average Collection Period - 30 days Taxation – NIL

Stock Turnover Ratio - 5.00

Illustration 10 : Financial Statements Preparation

From the following information of Sukanya & Co. Ltd, prepare its financial statements for the year just ended.

Current Ratio - 2.5 Working Capital - Rs.1,20,000

Quick Ratio - 1.3 Bank Overdraft - Rs.15,000

Proprietary Ratio [Fixed Assets/Proprietary Fund] - 0.6 Share Capital - Rs.2,50,000

Gross Profit - 10% of Sales Closing Stock - 10% more than Opening Stock

Debtors Velocity - 40 days Net Profit - 10% of Proprietary Funds

Sales - Rs.7,30,000

Illustration 11 : Financial Statements Preparation

Below is given the Balance Sheet of Sunrise Ltd., as on 31st March, 20X1:

Liabilities	Rs.	Assets	Rs.
Share Capital:		Fixed Assets
14% Preference Shares	1,00,000	At Cost 5,00,000
Equity Shares	2,00,000	Less : Depreciation 1,60,000 Stock in trade	3,40,000
General Reserves	40,000	Less : Depreciation 1,60,000 Stock in trade	60,000
12% Debentures	60,000	Sundry Debtors	80,000
Current Liabilities	1,00,000	Cash	20,000
Total	5,00,000	Total_,	5,00,000

The following information is available :

1. Fixed assets costing Rs.1,00,000 to be installed on 1st April, 20X1 and would become operative on that date, payment is required to be made on 31st March, 20X2.

2. The Fixed Assets-Turnover Ratio would be 1.5 (on the basis of cost of Fixed Assets).

3. The Stock-Turnover Ratio would be 14.4 (on the basis of the average of the opening and closing stock).

4. The break-up of cost and profit would be as follows :

Materials - 40%; Labour - 25%; Manufacturing Expenses - 10%; Office and Selling Expenses - 10%: Depreciation - 5%; Profit - 10% and Sales - 100% The profit is subject to interest and taxation @ 50%.

5. Debtors would be 1/9th of sales.

6. Creditors would be 1/5th of materials cost.

7. A dividend @ 10% would be paid on equity shares in March 20X2.

8. Rs. 50,000, 12% debentures have been issued on April 1, 20X1.

Prepare the forecast Balance Sheet as on 31st March 20X2.

Illustration 12 : Use of Ratios and Ratios as Indicators.

(A) Indicate the accounting ratios that will be used by each of the following:

a) A Long Term Creditor interested in determining whether his claim is adequately secured.

b) A Bank which has been approached by the Company for Short Term Loan / Overdraft

c) A Shareholder who is examining his portfolio and who is to decide whether he should hold or sell hi: shares in a Company.

(B) Which accounting ratio will be useful in indicating the following sym^ptoms ? May 1993 (F)

(i) Low capacity utilisation

(ii) Falling demand for the product in the market

(iii) Inability to pay interest

(iv) Borrowing for short term and investing in long-term assets

(v) Large inventory accumulation in anticipation of price rise in future

(vi) Inefficient collection of debtors

(vii) Inability to pay dues to financial institutions

(viii) Return of shareholder's funds being much higher than the overall return of investment

(ix) Liquidity crisis

(x) Increase in average credit period to maintain sales in view of falling demand

Illustration 13 : Comprehensive ROI Analysis - Dupont Chart -

The Financial Statements of Excel AMP Graphics Limited are as under :

Balance Sheet as at December 31, 2001

-
Particulars	2001 (Rs. in Crores)		2000 (Rs. in Crores)
Sources of Funds Shareholders Funds	1,121 8,950 - 74 171	10,071 245	93I 7,999	8,930 374
Equity Capital Reserves and Surplus Loan Funds
			259 - 115

Secured Loans Finance Lease obligations Unsecured Loans
Total		10,316		9,304
Application of Funds : Fixed Assets	6,667 3, 150 3,517 27 2,709 9,468 3,206 2, 043 17_,426 10,109 513 10,622 (320)	3,544 288 6,804 (320)	5,747 2, 56 3,186 28 2,540 9,428 662 1 ,712 14,342 7,902 572 8, 474	3,214 222 5,868 -
Gross Block Less : Depreciation Net Block Capital Work in progress Investments


Current Assets, Loans & Advances
Inventories Sundry Debtors Cash and Bank Balances Loans and Advances Less : Current Liabilities Provisions Net Current Assets Net Deferred Tax Liability




			-

Total		10,316		9,304

Profit and Loss Account for the year ended December 31, 2001 December 31, 2000

Income : Sales and Services Other Income		23,436 320		23,756		17,849 306		18,155
Expenses : Cost of Materials Personnel Expenses Other Expenses Depreciation Less : Th^. from Revaln. Res. Interest	419	15,179 2,543 3,546		21,844	383	10,996 2,293 2,815		16,569
		- (7) =	412 164			- (6) =	377 88
Profit Before Tax				1,912				1,586
Provision for Tax : Current Tax			450 (6)	444			371 -	371
Deferred Tax
Profit After Tax				1,468				1,215

i. Compute and analyse the Return on Capital Employed (ROCE) in a Du-pont Control Chart Framework.

ii. Compute and analyse the average inventory holding period and average collection period.

iii. Compute and analyse the Return on Equity (ROE) by brining ourclearly the impact of financial leverage

SOLUTION: I

Sudharshan Limited (Rs.)

(a) Gross Profit Ratio = Gross Profit / Sales = 40%

(b) Operating Profit Ratio = Operating Profit / Sales= [15,000+400 – 600 – 300] / 85,000 = 17.06%

(d) Current Ratio = Current Assets / Current Liabilities = 25,000 / 13,000 = 1.92

Current Assets = Stock Debtors Bills receivable + Bank

= 14,000+7,000+1,000+3,000 =25,000

Current Liabilities = Sunday Creditors for expenses & Others + Bank overdraft

= 2,000+8,000+3,000 =13,000

(e) Liquid Ratio = Quick Assets / Quick Liabilities = 11,000/ 10,000 = 1.1 times

Quick Assets = Current assets – Stock= 25,000 – 14,000= 11,000

Quick Liabilities = Current Liabilities – Bank overdraft = 13,000 – 3,000= 10,000

(t) Debt Equity Ratio = 6,000 / 29,000=0.21 times

Debt = Secured loans = 6,000

Equity = Equity share capital + Reserves + P & L account

20,000 + 3,000 + 6,000= 29,000

(g) Return on Investment = Return / Capital Employed= 14,500 / 35,000 = 41.43%

Return = Net profit + Loss on sale of assets -

Profit on sale of investments - Interest on investments

= 15,000 + 400 - 600 - 300= 14,500

Capital employed = Debt + Equity = 6,000 + 29,000 =35,000

(h) Debtors Turnover = Sales / Average Receivables

= 85,000 / [7,000 + 1,000] =10.625 times

(i) Fixed Assets Turnover = Turnover / Fixed Assets = 85,000 / [15,000 + 8,000] =3.69 times

II. SOLUTION : (Rs.)

(a) Inventory Turnover = Cost of goods sold / Average inventory= 6 times

Average inventory (given) = 3,60,000

Therefore Cost of goods sold = 3,60,000 X 6 = 21,60,000

(b) Gross profit ratio = 10%

Therefore cost of goods sold = 90%

Hence sales = 21,60,000 / 90% = 24,00,000

(d) Debtors Turnover = Credit sales / Average debtors = 4,80,000 / 2,40,000

Average Collection period = 360 / Debtors turnover

III. Solution

		Particulars	(Rs. in lakhs)
Operating profit			25.00
Less :	Interest on loans	25 lakhs x 15 %	3.75
		10 lakhs x 12.5%	1.25
	Profit before tax		20.00
Less :	Tax @ 50%		10.00
	Profit after tax		10.00
	Number of equity shares	= (50 lakhs / Rs.20)	250000
	Earnings per share	= PAT / Number of shares	Rs.4.00
	Price Earnings Ratio	= Market price / EPS (50/4)	12.5%

IV. SOLUTION

(a)

Text Box: = Current assets / Current liabilities
Current assets = 2 Current liabilities = 2 Times
Current assets - Current liabilities
=2 Current liabilities - Current liabilities=75,000

Current ratio

(b) Working_, capital

Therefore current liabilities =75,000

Current assets =2*75, 000=1,50000

Current Assets – Stock / Current Liabilities – Overdraft = 1.5 Times

=1,50,000-Stock / 75000 – 10000=1.5

Therefore stock 1,50,000 - (1.5 x 65,000)

Since there are no loans or fictitious assets,

Capital employed = Proprietary fund = Fixed Assets +Working Capital

Proprietary Fund= Fixed Assets +75000

Proprietary Fund = 3/4^th of Proprietary Funds + 75000

1/4^th Proprietary Fund = 75000

Therefore Proprietary Fund = 75000 * 4 = 3,00,000

Reserves and Surplus = 50000

Therefore Share Capital = 3,00,000 – 50,000 = 2,50,000

Fixed Assets = 3,00,000 X ¾ = 2,25,000

Statement of Proprietary Fund

Sources Share Capital 2,50,000

Reservres and Surplus 50,000

3,00,000

Application Fixed Assets 2,25,000

Current Assets - Stock 52,500

- Others 97,500 1,50,000

Less: current Liabilities - Bank Overdraft 10,000

- Others 65,000 (75000) 3,00,000

SOLUTION : V			= = = = =	(Rs.) 1,35,000 2.5 times 1,35,000 90,000 2,25,000 1.5 times 1.5 1,35,000 0.75 times
(a) (h) (el	Working Capital = Current ratio = =	Current assets - Current liabilities Current assets / Current liabilities
		Current assets = 2.5 Current liabilities
	= 2.5 Current liabilities - Current liabilities
	Therefore Current liabilities = Current assets = Quick ratio Therefore Stock Proprietary ratio	1,35,000 / 1.5 90,000 X 2.5 Current assets - Stock / Current liabilities - Bank OD 2,25,000 - Stock / 90,000 - 30,000 2,25,000 -(1.5 X 60,000) Proprietary funds / Total Assets
Since there are no loans and fictitious assets,
Capital employed = 0.75 (Fixed assets + current assets) 0.75 (Fixed assets + 225000) 0.75 Fixed assets + 168750 0.25 Fixed assets		Proprietary funds = Fixed assets + Working Capital = Fixed assets + Working Capital = Fixed assets + 1,35,000 = Fixed assets+ 1,35,000	=	33,750
		= 1,68,750 - 1,35,000
Therefore fixed assets		= 33,750 X 0.25	=	1,35,000
Therefore total assets		Fixed Assets + Current assets 1,35,000 + 2,25,000		3,60,000
Proprietary fund		0.75 X 3,60,000		2,70,000
Proprietary fund		Capital + Reserves		2,70,000
Therefore Capital		Capital + 90,000 2,70,000 - 90,000		1,80,000
Ratio of Equity: Preference				2:1
Equity Capital =		2 / 3 X 1,80,000		1,20,000
Preference Capital =		1 / 3 X 1,80,000		60,000

Statement of proprietary Funds

Sources	Equity Capital			1,20,000
	Preference Capital			60,000
	Reserves & Surplus			90,000
					2,70.000
Application	Net Fixed Assets			1,35,000
	Current Assets	- Stock	1,35,000
		- Others	90,000	2,25,000
	Less : Current Liabilities - Bank overdraft `		30,000
		- Others	60,000	(90,000)	2,70,000

SOLUTION: VI

Liabilities	Amt.	Assets		Amt.
Share Capital & Reserves (h) Long term debt (i) Current Liabilities (b)	12.50 3.50 4.00	Fixed Assets (f) Current Assets Stock (c) Debtors (g) Bank (10.00 - 9.00) (b/f)	4.00 5.00 1.00	10.00 10.00
Total	20.00	Total		20.00

Workings

a. Current ratio : Current Assets / Current Liabilities

Therefore Current Assets = 2.5 Current Liabilities = 2.5 Times

b. Net Working capital = current Assets – Current Liabilities

= 2.5 Times Current Liabilities – Current Liabilities

Current Liabilities = 6.00 / 1.5 = 4.00

Therefore Current Assets = 4.00 X 2.5 = 10.00

c. Quick Ratio = Current Assets - Stock / Current Liabilities =10.00-(1.5X4.00)

Therefore Stock= 4.00

d. Stock turnover ratio = Cost of goods sold / average stock = 5 Times

Cost of goods sold = 4.00 X 5 = 20.00

e. Gross profit = 20% of sales = Cost of goods sold = 80% of sales = 20.00

Therefore Sales = 20.00 / 80% = 25.00

f. Cost of goods sold / net fixed assets = 2 Times

Net Fixed Assets= 20.00 / 2 = 10.00

g. Average Collection Period = 2.4 months

Therefore Debtors = 25.00 X 2.4 /12 = 5.00

h. Fixed Assets / Net worth = 0.80 Times

Therefore Net worth = 10.00 / 0.80 = 12.50

i. Long term Debt / capital & reserves = 7 / 25

Therefore Long term Debt = 12.50 X 7 / 25 = 3.50

Solution VII

Wise Limited

Balance Sheet (Amounts in Rs. lakhs)

Liabilities	Amt.	Assets		Ann.
Share Capital (given)	10.00	Fixed Assets (1)		15.00
Reserves (a)	10.00	Current Assets
Long term loans (c)	1.00	Stock (h)	4.00
Current Liabilities (j)	4.00	Debtors (e)	5.00
		Bank (10.00 - 9.00) (b/f)	1.00	10.00
Total	25.00	Total		25.00

(Rs. in lakhs)

Workings

(a) Reserves / Capital = 1 Time

Capital = 10 lakhs Therefore Reserves = 10.00

(b) Net worth = Capital + Reserves = 20.00

Therefore Long term Loan = 20.00/20 = 1.00

Sales / Net worth = 1.5 times

Therefore Sales = 1.5 X 20.00 = 30.00

Sales / Debtors = 6 times

Therefore Debtors = 30.00 / 6 = 5.00

Gross Profit Ratio = 20% of Sales = 20% X 30.00 = 6.00

Cost of goods Sold = 30.00 – 6.00 (Sales – GP) = 24.00

Stock Velocity = Cost of Goods Sold / Average Stock =6 Times

Therefore Average Stock = 24.00/6.00 = 4.00

Net working capital / Net worth = 0.3 Times

Net working capital = 20.00 X 0.3 = 6.00

Net working capital = Current Assets – Current Liabilities = 6.00

Current Ratio = Current Assets / Current Liabilities = 2.5 times

Current Assets = 2.5 Current Liabilities

Net working capital = 2.5 Current Liabilities - Current Liabilities = 6.00

Current Liabilities = 6.00 / 1.5

Hence Current Assets = 4.00 X 2.5 = 10.00

Acid Test Ratio = Current Assets – Stocks

-------------------------------------------- = 1.5 Times

Current Liabilities – Bank Overdraft

= (10.00 – 4.00) / (4.00 – Bank Overdraft) = 1.5

Therefore Bank overdraft = (1.5 X 4.00) – 6.00 = Nil

Sales / Net fixed assets = 2 Times

Therefore Net fixed assets = 30.00 / 2 = 15.00

SOLUTION. VIII

Wiser Limited

Balance Sheet

Liabilities			Amt	Assets	Amt
Net worth (a)			6,95,652	Fixed Assets (bal.fig)	3,70,086
Term liabilities (d)			2,29,565	Current Assets
Current liabilities (b)			2,92,174	Stock (f)	3,55,556
				Debtors (g)	2,80,548
				Bank (h)	2,11,201
Total			12,17,391	Total	12,17,391
Workings :						(Rs)
(a)	Sales / Net worth = 2.3 times Sales = 16,00,000 Therefore Net worth 16,00,000 / 2.3					6,95,652
(b)	Current Liabilities = 42 % of Net worth = 42% X 6,95,652					2,92,174
(c)	Total Liabilities = 75% of Net worth = 75% X 6,95,652					5,21,739
(d)	Therefore Term Liabilities-Debt = (c) - (b)					2,29,565
(e)	Current Ratio Current Assets / Current Liabilities					2.9 times
	Current Assets 2.9 X 2,92,174					8,47,305
(f)	Sales / Inventory = 4.5 times Sales = 16,00,000 Therefore Inventory 16,00,000 / 4.5 =					3,55,556
(g)	Average Collection period =					64 days
	Therefore Debtors = 16,00,000 X 64 / 365 =					2,80,548
(^h)	Cash and Bank = Current Assets - Stock - Debtors					2,11,201
	=	8,47,305 - 3,55,556 - 2,80.548 =

SOLUTION. IX

Sivaprakasam and Co.
Balance Sheet

Liabilities	Amt.	Assets	Amt.
Share Capital (I)	5.00	Fixed Assets (f)	41.67
Reserves & Surplus (m)	15.00	Current Assets
12 % Term loan (i)	50.00	Stock (c)	10.00
Current Liabilities (b)	5.00	Debtors (g)	4.17
		Others (15.00 - 14.17)	0.83
		Other Assets (bal.fig)	18.33
Total	75.00	Total	75.00

Workings

(a) Current Ratio Hence = Current Assets / Current Liabilities = 3 Times

= Current Liabilities= 3 Current Liabilities

Net Working Capital = Current Assets – Current Liabilities = 10.00

= 3 Current Liabilities – Curretn Liabilitites = 10.00

Current Liabilitites =10.00 / 2 = 5.00

Therefore Current Assets = 5 X 3 = 15.00

(b) Current Assets / Stock = 3/2

Therefore Stock = 15.00 X 2/3 = 10.00

Therefore Bank overdraft = Nil

(d) Stock Turnover Ratio = Current Assets – Stock / Current Liabilities = I Time

Therefore Sales = 5 X 10.00 = 50.00

Fixed Assets Turnover Ratio = Turnover / Fixed Assets = 1.2 times
Therefore Fixed Assets = 50.00 / 1.2 = 41.67

Average Collection Period = 30 days

Therefore Debtors = Sales X 30 / 360 = 50.00 X 30 / 360 = 4.17

Profit and Loss Account

	Sales			50.00
	Less Variable Costs @ 60 %			30.00
	Contribution			20.00
	Less : Fixed Costs	(bal. fig)		9.00
	EBIT	(h)		1 l .00
	Less: Interest			6.00
	EBT (10% of sates) Less : Tax	10% X 50.00		5.00 Nil
	EAT			5.00
(h)	Financial Leverage	EBIT / EBT		2.2
	EBIT	2.2 x 5.00		11.00
(^r) u)	Long term loan Total Liabilities	Interest / Interest Rate= 6.00 /12%		50.00
(^r) u)	Long term loan Total Liabilities	= Term liabilities + Current Liabilities		50.00
		= 50.00 + 5.00	=	55.00
	Total Liabilities / Net worth		=	2.75 times
	Therefore Net worth	= 55.00 / 2.75	=	20.00
(k)	Number of Equity Shares	= Net worth / Book value per share	= 20.00 / 40 50000 shares
(I)	Share Capital	= 50000 shares x Rs.l0	=	5.00
(m)	Therefore Retained earnings	= 20.00 - 5.00	=	15.00

SOLUTION. X

Sukanya & Co.
Profit and Loss Account

Particulars	Amt.	Particulars	Amt.
To Opening Stock (d)	1,05,000	By Sales (given)	7,30,000
To Purchases (bal.fig)	6,67,500	By Closing Stock (c)	1,15,500
To Gross Profit (10 %)	73.000
	8,45,500		8,45,50Q
To Expenses (Bal. fig.)	43,000	By Gross Profit b/d	73,000
To Net profit (h)	30,000
Total	73,000	Total	73,000

Balance Sheet

Liabilities

Amt

Assets

Amt

Share Capital (given)

2,50,000

Fixed Assets (g)

1,80,000

Reserves & Surplus (3,00,000 – 2,50,000)

50,000

(Total Proprietary Funds = 3,00,000)

Current Assets

Current liabilities

Stock (c)

1,15,500

Bank overdraft (given)

15,000

Debtors (e)

80,000

Others (80,000 - 15,000)

65,000

Bank (2,00,000 - 1,95,500)

4,500

Total

3,80,000

Total

3,80,000

Workings :			(Rs.)
(a)	Working Capital	Current Assets - Current Liabilities =	1,20,000
(b)	Current Ratio Therefore	Current Assets / Current Liabilities = Current Assets = 2.5 Current Liabilities	2.5 times
	Hence	2.5 Current Liabilities - Current Liabilities	1,20,000
	Current Liabilities	1,20,000 / 1.5	80,000
	Current Assets	80,000 X 2.5	2,00,000
(c)	Quick Ratio	Quick Assets / Quick Liabilities Current Assets - Closing Stock Current Liabilities - Bank overdraft 2,00,000 - Closing Stock 80,000 - 15,000	1.3 times

			1.3 times
	Therefore Closing Stock	2,00,000 - (1.3 X 65,000)	1,15,500
(d)	Closing Stock	Opening Stock + 10 %	1,15,500
	Therefore Opening stock	1,15,500/ 110%	1.05,000
(e)	Debtors Velocity		40 days
	Therefore Closing Debtors =	7,30,000 X 40 / 360	80,000
(1)			0.60
(1)	Fixed Assets / Proprietary Fund		0.60
	Therefore = Working Capital / Proprietary Fund		0.40
	Therefore Proprietary Fund = Working Capital / 0.4 = 1,20,000 / 0.4		3,00,000
(g)	Fixed Assets = Proprietary Fund X 0.6 = 3,00,000 X 0.6		1,80,000
(h)	Net Profit 10% of Proprietary Funds = 3,00,000 X 10%		30,000

SOLUTION XI

	Sunrise Limited Profit & Loss Appropriation Account
	PBIT (10% of 9,00,000)		90,000
Less :	Debenture Interest	(i)	13,200
	PBT		76,800
Less :	Tax Provision @ 50%		38,400
	PAT		38,400
Less:	Preference & Equity Dividend	j)	34,000
	Transferred to Balance Sheet		4,400

Balance Sheet

Liabilities	Amt.	Assets	Amt.
Share Capital		Fixed Assets - Gross 6,00,000
Equity Capital	2,00,000	Less: Depreciation 2,05,000	3,95,000
14% Preference Capital	1,00,000	Current Assets
Reserves & Surplus		Stock (f)	33,750
P & L appropriation account	4,400	Debtors (g)	1,00,000
General Reserve	40,000	Cash & Bank (bal. fig)	36,050
Secured loans - 12% Debentures	1,10,000
Current Liabilities
Creditors (h)	72,000
Tax provision	38,400
Total	5,64,800	Total	5,64,800

Workings :

(a) Cost of fixed assets = Opening Balance + Purchases

= 5,00,000 +1,00,000 = 6,00,000

Fixed Assets Turnover = Sales / Gross Fixed Assets = 1.5 Times

Sales = 1.5 X 6,00,000 = 9,00,000

Percentage Analysis of sales

Particulars	Materials	Labour	Manufacturing Overheads	Office Overheads	Depreciation	PBIT
Percentage	40%	25%	10%	10%	5%	10%
Amount in Lakhs	3.6	2.25	0.90	0.90	0.45	0.90

	(d)		Net block of Fixed Assets	Gross Block - Depreciation 6,00,000 - (1,60,000 + 45,000) =		3,95,000
	(e)		Cost of Goods Sold	Material + Labour + Manufacturing Overheads 3,60,000 + 2,25,000 + 90,000 =		6,75,000
	(f)		Stock Turnover	Cost of goods sold Average Stock = 6,75,000/14.4 =
			Average Stock			14.4 times 46,875
			Average Stock	[Opening Stock + Closing Stock] / 2 =		46,875
			Opening Stock	60,000
			Closing Stock	(2 X 46,875 ) - 60,000 =		33,750
(g)		Debtors = 1/9th of sales = 1/9 X 9,00,000 =			1,00,000
(h)		Creditors = 1/5th of Material cost = 1/5 X 3,60,000 =			72.000
(i)		Debenture Interest = (12% X 60,000) + (12% X 50,000) =			13.200
(j)		Dividend paid -Pref & Equity = (14% X 1,00,000) + (10% X 2,00,000)			34,000

sreddy

Balance Sheet Preparation

Based on the following information, prepare the Balance Sheet of Star Enterprises as at 31st December

Current Ratio - 2.5 Turn over ratio to Net Fixed Assets - 2

Liquidity Ratio - 1.5 Average Debt Collection Period - 2.4 months

Net Working Capital - Rs.6 lakhs Stock Turnover Ratio – 5 Fixed Assets to Net Worth - 0.80

Gross Profit to Sales - 20% Long Term Debt to Capital and Reserves - 7/25

Liabilities	Amt.	Assets		Amt.
Share Capital & Reserves (H) Long term debt (i) Current Liabilities (b)	12.50 3.50 4.00	Fixed Assets (f) Current Assets Stock (c) Debtors (g) Bank (10.00 - 9.00) (b/f)	4.00 5.00 1.00	10.00 10.00
Total	20.00	Total		20.00

SOLUTION:

Workings

a. Current ratio : Current Assets / Current Liabilities

Therefore Current Assets = 2.5 Current Liabilities = 2.5 Times

b. Net Working capital = current Assets – Current Liabilities

= 2.5 Times Current Liabilities – Current Liabilities

Current Liabilities = 6.00 / 1.5 = 4.00

Therefore Current Assets = 4.00 X 2.5 = 10.00

c. Quick Ratio = Current Assets - Stock / Current Liabilities =10.00-(1.5X4.00)

Therefore Stock= 4.00

d. Stock turnover ratio = Cost of goods sold / average stock = 5 Times

Cost of goods sold = 4.00 X 5 = 20.00

e. Gross profit = 20% of sales = Cost of goods sold = 80% of sales = 20.00

Therefore Sales = 20.00 / 80% = 25.00

f. Cost of goods sold / net fixed assets = 2 Times

Net Fixed Assets= 20.00 / 2 = 10.00

g. Average Collection Period = 2.4 months

Therefore Debtors = 25.00 X 2.4 /12 = 5.00

h. Fixed Assets / Net worth = 0.80 Times

Therefore Net worth = 10.00 / 0.80 = 12.50

i. Long term Debt / capital & reserves = 7 / 25

Therefore Long term Debt = 12.50 X 7 / 25 = 3.50

http://recallindia.blogspot.com

NARAYANA ENGG COLLEGE ,NELLORE

RATIO ANALYSIS

Current Assets

Quick Assets

Shareholder's Funds

Debt

Fixed Charge Bearing Capital

Fixed Assets

Proprietary Funds

C. COVERAGE RATIOS - Ability to Serve Fixed Liabilities

Earnings for Debt Service

Earnings before Interest & Tax

Earnings after Tax

Sales

Turnover

Turnover

Cost of Goods Sold

Factory Cost

Credit Sales

Gross Profit

Operating Profit

Net Profit

Earnings after Taxes

Net Profit after taxes

Illustration 6 : Balance Sheet Preparation

Balance Sheet Preparation

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