CLASS XII ACCOUNTANCY

RATIO
ANALYSIS
1
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

RATIO ANALYSIS
POINT 1: RATIO
Ratio is the relationship between two figures expressed in arithmetic terms.
Ratio may be expressed in following ways
1) Simple ratio
2) ‘Rate’ or ‘So many times’
3) Percentage
4) Fraction.

POINT 2: ADVANTAGES OF ACCOUNTING RATIOS

1) Helpful in analysis of financial statements.
2) Simplification of accounting data.
3) Helpful in comparative study.
4) Helpful in locating the weak spots of the business.
5) Helpful in forecasting.
6) Estimate about the Trend of the business.
7) Fixation of ideal standards

POINT 3: LIMITATIONS OF ACCOUNTING RATIOS

1) False accounting data gives false ratios.
2) Comparison not possible if different firms adopt different accounting policies.
3) Ratio analysis becomes less effectives due to price level changes.
4) Lack of proper Standards.
5) Window Dressing.
6) Ignores Qualitative factors.

POINT 4: CLASSIFICATION OF RATIOS

Ratios may be classified in several ways.
I) ON THE BASIS FROM WHERE THE FIGURES ARE DRAWN (TRADITIONAL
CLASSIFICATION)
A) BALANCE SHEET RATIO
i) Current Ratio
ii) Quick Ratio
iii) Debt-Equity Ratio
iv) Total Assets to Debt Ratio
v) Proprietary Ratio

B) STATEMENT OF PROFIT & LOSS RATIOS

i) Gross Profit Ratio
ii) Net Profit Ratio
iii) Operating Ratio
iv) Operating Profit Ratio
v) Earning Per Share
vi) Interest Coverage Ratio

C) COMPOSITE RATIO
i) Trade Receivables Turnover Ratio
ii) Trade Payables Turnover Ratio
iii) Working Capital Turnover Ratio
iv) Inventory Turnover Ratio.
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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
2
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

II) ON THE BASIS OF LIQUIDITY, PROFITABILITY AND ACTIVITY

(FUNCTIONAL CLASSIFICATION)

(A) LIQUIDITY RATIOS (SHORT-TERM SOLVENCY RATIO)

a) Current Ratio or Working Capital Ratio. (Ideal Ratio = 2:1)

 Current Ratio = Current Asset

Current liabilities
Where,
Current assets = which can be converted into cash within one year.
Current liabilities = which is to be paid within one year.

CA = Current investments + Inventories + Trade Receivables (Less Provisions) + Cash and Cash
Equivalents + Short Term Loans and Advances + Other Current Assets (Prepaid Expenses +
Accrued Interest + Advance Tax)

CL = Short Term Borrowings + Trade Payables + Other Current Liabilities + Short-Term Provision

b) Quick Ratio or Acid Test Ratio or Liquid Ratio (Ideal Ratio 1:1)

 Quick ratio = Quick Assets

Current Liabilities
= Current Assets – Stock – Prepaid Expenses
Current Liabilities

Self-Note 1:
If we are asked to find liquidity ratio we will find both current ratio and liquid ratio, but
if the question will ask to find liquid ratio we will only find liquid ratio.

Self-Note 2:
Working Capital = Current Assets – Current Liabilities

Self-Note 3:
BALANCE SHEET FORMAT
LIABILITIES AMT (Rs) ASSETS AMT (Rs)
1)SHAREHOLDERS FUND XX 1)NON-CURRENT ASSETS
a)Share Capital XX a) Tangible assets XX
b)Reserves & Surplus b) Intangible Assets XX XX
XX
2)NON-CURRENT LIABILITIES 2)CURRENT ASSETS XX

3)CURRENT LIABILITIES XX

TOTAL TOTAL

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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
3
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

(B) SOLVENCY RATIOS

a) Debt Equity Ratio (Ideal Ratio = 2:1)

 Debt Equity Ratio = Long Term Debts

Shareholder’s Fund
Where,
Long Term Debt = Long Term Borrowings + Long Term Provision + Debentures +
Mortgage Loan + Bank Loan + Loan from Financial Institutions + Public Deposits.

Shareholder’s Fund = Share Capital + Reserves and Surplus.

Share Capital = Equity & Preference (Both)
Reserves and Surplus = General Reserves+ Capital Reserves + Securities Premium
+Balance in P/L A/C

b) Total Asset to Debt Ratio (Ideal Ratio = Higher is Considered better)

 Total Asset to Debt Ratio = Total Asset
Long Term Debt
Where,
Total Assets = See B/S Format

c) Proprietary Ratio (Ideal Ratio = Higher is Consider better)

 Proprietary Ratio = Shareholder’s Fund X 100%

Total Asset
d) Interest Coverage Ratio (Ideal Ratio = Higher is Consider Better)

 Interest Coverage Ratio = Earnings Before Interest and Tax (EBIT)

Fixed Interest Charge

(C) ACTIVITY OR TURNOVER RATIOS

a) Inventory/Stock Turnover Ratios (Ideal Ratio = Higher is Consider better)

 Inventory Turnover Ratio = Cost Of Revenue From Operations

Average Inventory
Where,
Average Inventory = Opening Stock + Closing Stock
2
Cost of Revenue from Operations = Net Revenue From Operations – Gross Profit
OR
= Opening Stock + Purchases + Carriage Inwards + Wages + Other Direct Expenses –
Closing stock

NOTE: Inventory Holding Period Or Average Age Of Inventory = Days in a year

Inventory Turnover Ratio
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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
4
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

b) Trade Receivable/Debtors Turnover Ratio (Ideal Ratio = Higher is Consider Better)

 Trade Receivable Turnover Ratio = Net Credit Revenue From Operations

Average Trade Receivable
Where,
Trade Receivables = Debtors and B/R both
Average Trade Receivables = Opening Trade Receivables + Closing Trade Receivables
2
Note: Average Collection Period = Days in a Year
Trade Receivable Turnover Ratio

C) Trade Payables Turnover Ratio (Ideal Ratio= Higher is considered Better)

 Trade Payables Turnover Ratio = Net Credit Purchases

Average Trade Payables
Where.
Trade Payables = Creditor & B/P both

Note: Average Payment Period = Days in a year

Trade payables turnover ratio

d) Working Capital Turnover Ratio (Ideal Ratio= Higher is considered Better)

 Working Capital Turnover Ratio = Net Revenue from Operations

Working Capital
Where,
Working Capital = Current Assets-Current Liabilities

(D) PROFITABILITY RATIOS

a) Gross Profit Ratio (Ideal Ratio = Higher is Consider Better)

 Gross Profit Ratio = Gross Profit X100%

Revenue from Operations
Where,
Gross Profit = Revenue from Operation – Cost of Revenue From Operations

b) Operating Ratio (Ideal Ratio= Lower is considered Better)

 Operating Ratio = Cost of Rev from Operations + Operating Expenses X 100%

Revenue from Operations
Where,
Operating Expenses = Employee Benefit Expenses + Depreciation + Other Expenses (i.e.
Office and Administration Expenses + Selling and Distribution Expenses + Discounts + Bad Debts +
Interest on Short Term Loan)

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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
5
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

c) Net Profit Ratio (Ideal Ratio= Higher is considered Better)

 Net Profit Ratio = Net Profit X 100%

Revenue from Operations
Where,
Net profit = Gross Profit –Indirect Expenses and Losses + Other Incomes – Tax

d) Operating Profit Ratio (Ideal Ratio = Higher is Consider Better)

 Operating Profit Ratio = Operating Profit X 100%

Revenue from Operation
Where,
Operating Profit = Gross Profit – Operating Expenses + Other Operating Incomes
Operating Income = Commission Received + Discount Received
Also, Operating Profit Ratio= 100%- Operating Ratio

Self-Note 4: TRADING AND PROFIT & LOSS ACCOUNT

To Opening Stock XX By Direct Income XX
To Purchases XX
To Direct Expenses XX By Closing stock XX
To Gross Profit c/d XX
XXX XXX

To Operating Expenses XX By Gross Profit b/d XX

To Operating Profit c/d XX By Other Operating Incomes XX
XXX XXX

To Non-Operating Expenses XX By Operating Profit b/d XX

To Income Tax XX By Other Incomes XX
To Net Profit c/d XX
XXX XXX

e) Return On Investment (Ideal Ratio= Higher is considered Better)

 Return On Investment = Net Profit Before Interest, Tax and Dividends X100%
Capital Employed
Where,
Capital Employed =Total Assets - Current Liabilities
OR
=Shareholder’s Fund + Non Current Liabilities
ONLY FOR ISC
f) Earning Per Share
 Earnings Per Share = Profit Available for Equity Shareholders (PAFESH)
Number of Equity Shares
Where,
PAFESH = Net profit (After interest, Tax and Dividends on Preference Shares)

g) Price Earning Ratio

 Price Earning Ratio = Market Value of an Equity Share
Earning Per Share
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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
6
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

QUESTION BANK
ON LIQUIDITY RATIOS
Question: 1
From the following particulars you are required to compute the Current Ratio and Quick Ratio and
make a comment on the answer ascertained:
PARTICULARS AMOUNT (RS)
Goodwill 1,00,000
Inventories (Including Loose Tools of Rs40,000) 2,90,000
Trade Receivables 1,35,000
Less: Provision 5,000 1,30,000
Investments (Short Term) 30,000
Payment In Advance 20,000
Cash And Cash Equivalents 40,000
Accrued Income 10,000
Short Term Provision (Provision for Taxation) 20,000
Short Term Borrowings (Bank Overdraft) 30,000
Trade Payables 95,000
Expenses Payable 5,000
Profit & Loss Balance 80,000
Ans: Current Ratio 3.2:1; Quick Ratio 1.4:1

Question: 2
From the following compute Current Ratio:
PARTICULARS AMOUNT (RS)
Total Assets 40,00,000
Land & Building 6,00,000
Machinery 11,00,000
Non-Current Investments 5,00,000
Shareholder’s Funds:
Share Capital 24,00,000
Reserves & Surplus 3,00,000
Non Current Liabilities 8,00,000
Ans: Current Ratio 3.6:1

Question: 3
Calculate Current Ratio from the following:
a)Working Capita Rs1,92,000; Long Term Debt Rs80,000 and Total Debt Rs2,00,000.
b)Working Capital Rs4,80,000; Current Assets Rs6,00,000: Inventory Rs4,00,000 and Trade
Receivables Rs1,50,000.
Ans: Current Ratio a) 2.6:1 b)5:1

Question: 4
A firm had a Current Assets of Rs7,20,000. It then purchased goods for Rs30,000 on credit. After
this purchase, the Current Ratio was 3:1. Ascertain the amount of Current Liabilities and Working
Capital after the purchase.
Ans: Current Liabilities Rs2,50,000;Working Capital Rs5,00,000

Question: 5
Current Ratio 2.5:1, Quick Ratio 0.95:1, Current Assets Rs17,00,000. Calculate Current Liabilities,
Quick Assets and Inventory.
Ans: Current Liabilities Rs6,80,000; Quick Assets Rs6,46,000; Inventories Rs10,54,000

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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
7
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

Question: 6
a) A business has a Current Ratio of 4:1 and a Quick Ratio of 1.2:1. If the Working Capital is
Rs1,80,000, calculate the total current assets and Inventory.
b) A firm has a Current Ratio of 4.5:1 and Quick Ratio of 3:1. If its inventory is Rs72,000, find out its
total current assets and total current liabilities.
Ans: a)Current Assets Rs2,40,000; Inventory Rs1,68,000 b) Current Assets Rs2,16,000;Current Liabilities Rs48,000

Question: 7
Working Capital Rs4,80,000; Total Debt Rs16,00,000; Long Term Debt Rs10,00,000; Inventory
Rs3,40,000; Prepaid Insurance Rs20,000. Calculate Liquid Ratio.
Ans: Liquid Ratio 1.2:1

Question: 8
The ratio of Current Assets (Rs32,00,000) to Current Liabilities (Rs20,00,000) is 1.6:1. The
accountant of the firm is interested in maintaining a Current Ratio of 2:1, by paying off a part of the
Current Liabilities. Compute the amount of the Current Liabilities that should be paid, so that the
Current Ratio at the level 2:1 may be maintained.
Ans: CL of Rs8,00,000 is to be paid.

Question: 9
State giving reasons whether the Current Ratio will improve or decline or will have no effect in each
one of the following transaction if Current Ratio is (I) 2.5:1; (II) 1:1 and (III) 0.75:1.
i)Paid Rs50,000 to a creditor.
ii)Sale of goods at a loss of 10%
iii)Sale of fixed assets for Rs1,00,000 (Book Value Rs1,20,000).
iv)Payment of outstanding liabilities.
v)Received Rs25,000from a debtor of Rs30,000 in full settlement of his account.
vi)Bills Payable discharged on Maturity.
vii)Bills Receivable drawn on Debtor.
viii)Purchased goods on credit.
ix)Issued debentures to the vendors of Machinery.
x)Debentures of Rs2,00,000 converted into Equity shares.
xi)Bills Receivable endorsed to a creditor.
xii)Paid Rent in Advance.
xiii)Issue of Shares.
xiv)B/R dishonoured.
xv)Redemption of Debentures.
Ans: (I) Improve 1,3,4,6,11,13, Decline 2,5,8,15 No effect 7,9,10,12,14
(II) Improve 3,11, Decline 2,5,15 No effect 1,4,6,7,8,,10,11,12,14,
(III) Improve 3,8,11, Decline 1,2,4,5,6,11,15 No effect 7,9,11,12,14

ON SOLVENCY RATIOS
Question: 10
Calculate i)Debt Equity Ratio, ii)Proprietary Ratio and iii)Total Assets to Debt Ratio from the
following information:
PARTICULARS AMOUNT (RS)
5% Debentures 15,00,000
Loan from SBI 10,00,000
Trade Payables 11,00,000
Equity Share Capital 28,00,000
Reserves & Surplus 16,00,000
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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
8
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

Profit & Loss Balance 4,00,000

Goodwill 6,00,000
Other Non-Current Assets 46,00,000
Current Assets 28,00,000
Ans: i) 0.57:1 ii)55% and iii)3.2:1

Question: 11
Calculate the value of Current Assets of X Ltd. from the following information:
PARTICULARS AMOUNT (RS)
Equity Share Capital 25,00,000
6% Preference share Capital 5,00,000
General Reserve 8,00,000
Profit & Loss balance (2,00,000)
Fixed Assets 30,00,000
Proprietary Ratio 0.75:1
Ans: Current Assets Rs18,00,000

Question: 12
The following particulars are given to you:
PARTICULARS AMOUNT (RS)
Share Capital 1,00,000
Reserves & Surplus 1,50,000
Current Liabilities 4,00,000
Current Assets 5,50,000
Tangible fixed Assets 7,00,000
Loan @10% 4,00,000
12%Debentures 2,00,000
The Net Profit for the year after interest and tax was Rs96,000. Rate of Income Tax was 50%.
Calculate i)Debt Equity Ratio; ii) Proprietary Ratio; iii)Current Ratio and iv) Interest Coverage Ratio.
Also make necessary comments.
Ans: i) 2.4:1 ii)20% iii)1.375:1 iv)4times

ON ACTIVITY RATIOS
Question: 13
Calculate Inventory Turnover Ratio from the following:
PARTICULARS AMOUNT (RS)
Purchases 3,46,000
Returns Outwards 10,000
Carriage Inwards 15,000
Carriage Outwards 20,000
Wages 25,000
Salaries 40,000
Rent 36,000
Opening inventory 72,000
Closing Inventory 88,000
Ans: 4.5 times

Question: 14
From the following data, calculate ‘Inventory turnover Ratio’ when Gross Profit is given 20%, Cash
Sales Rs1,50,000;Credit Sales Rs2,50,000; Return Inward Rs25,000; Opening Inventory Rs25,000
Closing Inventory Rs35,000. Ans: 10 times
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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
9
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

Question: 15
From the following, calculate Inventory Turnover Ratio: Revenue from Operation Rs4,00,000;
Average Inventory Rs55,000. The rate of Gross Loss on Revenue from Operations was 10%.
Ans: 8 times

Question: 16
Calculate Inventory Turnover Ratio and Average Age of Inventory from the following:
PARTICULARS AMOUNT (RS)
Cash Revenue From operations 6,00,000
Credit Revenue From Operations 4,00,000
Gross Profit 25% on Cost
Closing Inventory (3times of Opening Inventory)
Opening Inventory (10% of Cost of Revenue from operations)
Ans: 5 times and 73days

Question: 17
PARTICULARS AMOUNT (RS)
Cash Revenue from Operations (Cash Sales) 1,00,000
Credit Revenue from Operations (Credit Sales) 5,00,000
Gross Profit 1,20,000
Inventory Turnover Ratio 4 times
Calculate the value of Opening and Closing Inventory in each of the following cases :
CASE I: If Closing Inventory was Rs1,00,000 in excess of opening Inventory.
CASE II: If closing Inventory was 2 times that in the beginning.
CASE III: If closing Inventory was 2 times more that in the beginning.
Ans: (I)Rs70,000 & Rs1,70,000 (II)Rs80,000 & Rs1,60,000 (III)Rs60,000 & Rs1,80,000)

Question: 18
Calculate the Trade Receivables Turnover Ratio and Average Collection Period from the following
figures:-
PARTICULARS AMOUNT (RS)
Total Revenue from Operations for the year 4,80,000
Cash revenue from Operations: being 20% of Credit revenue from Operations
Opening Trade Receivables 60,000
Excess of Closing Trade Receivables over Opening Trade Receivables 30,000
Ans: 5.33 times and 68.48days

Question: 19
Calculate closing Trade Receivables from the following information:
PARTICULARS AMOUNT (RS)
Cost of Revenue from Operations 9,00,000
Gross Profit on Revenue from Operations 25%
Cash Revenue from operations: 20% of Credit Revenue from Operations
Trade Receivables Turnover Ratio 5 times
Closing Trade Receivables were 3 times than that in the beginning
Ans: R3,00,000

Question: 20
What would be your answer in the above question if the Gross Profit be 25% on Cost of Revenue
from operations?
Ans: R2,81,250

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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
10
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

Question: 21
Calculate Trade Payables Turnover Ratio and Average Payment Period from the following:
PARTICULARS AMOUNT (RS)
Total Purchases 24,00,000
Cash Purchases 6,40,000
Purchases returns (out of Credit Purchases) 60,000
Opening Balance of Creditors 3,00,000
Opening Balance of Bills Payables 20,000
Closing Balance of Creditors 3,50,000
Closing Balance of Bills Payables 10,000
Ans: 5 times and 73 days

Question: 22
Calculate Working Capital Turnover Ratio from the following information:
PARTICULARS AMOUNT (RS)
Inventory 3,10,000
Trade Receivables 1,30,000
Cash 20,000
Trade Payables 60,000
Cost of Revenue from Operations 30,40,000
Gross Profit 24% of Sales
Ans: 10 times

Question: 23
Following information is given to you:
PARTICULARS AMOUNT (RS)
Trade Receivables on 1st April, 2019 6,80,000
Trade Receivables on 31st March,2020 8,20,000
Trade Receivables Turnover Ratio 6 times
Credit revenue from operations : 80% of Revenue from Operations
Working Capital turnover Ratio 9 times
Current Ratio 2.25
Calculate i) Revenue from Operations ii) Working Capital and iii) Current Assets
Ans: i) Rs56,25,000 ii)Rs6,25,000 iii)Rs11,25,000

ON PROFITABILITY RATIOS
Question: 24
Calculate Gross Profit Ratio in the following cases:
a)Opening Inventory Rs40,000; Closing Inventory Rs60,000; Purchases Rs7,10,000;Return
Outwards Rs10,000; Wages Rs80,000; Cash Revenue from Operations Rs3,45,000; Credit
Revenue form Operations Rs6,30,000; Return Inward Rs25,000.
b)Net Profit Rs40,000; Office Expenses Rs20,000; Selling Expenses Rs36,000; Revenue from
OperationsRs6,00,000.
c)Credit Revenue from Operations Rs2,40,000; Cash revenue from operations are 20% of total
Revenue from Operations; Purchases Rs2,20,000 Excess of opening inventory over closing
inventory R14,000.
Ans: i) 20% ii)16% iii)22%

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 CLASS XII ACCOUNTANCY
RATIO
ANALYSIS
11
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

Question: 25
Calculate i)GP Ratio, ii) Operating Ratio, iii)Operating Profit Ratio, iv) Inventory Turnover Ratio and
v) Working Capital Turnover Ratio from the following figures:
PARTICULARS AMOUNT (RS)
Purchases 18,30,000
Direct Expenses 4,10,000
Opening Inventory 3,60,000
Closing inventory 4,40,000
Operating Expenses 5% of Sales
Revenue from operations 30,00,000
Current Assets (including Inventory) 7,00,000
Current Liabilities 2,00,000
Ans: i) 28% ii)77% iii)23% iv)5.4times v) 6times

Question: 26
Calculate i)Operating Profit Ratio and ii) Net Profit Ratio from the following:
PARTICULARS AMOUNT (RS)
Revenue from Operations 8,30,000
Return Inwards 30,000
Cost of Revenue from Operation 5,00,000
Office Expenses 40,000
Selling Expenses 18,000
Interest on Debentures 12,000
Loss by Accident 24,000
Interest received on Investments 10,000
Ans: i) 30.25% ii)27%

Question: 27
Calculate Return on Capital Employed from the following:
PARTICULARS AMOUNT (RS)
Share Capital 7,20,000
Reserves & Surplus 6,50,000
Current Liabilities 7,50,000
Non-Current Assets 15,00,000
Inventory 5,00,000
Trade Receivables 6,00,000
Cash & Cash Equivalents 1,00,000
10% Long Term Borrowings 5,00,000
Long term Provisions 80,000
Net Profit before Tax Rs2,50,000.
Ans: 15.38%

Question: 28
Calculate Return On Investment:
PARTICULARS AMOUNT (RS)
Equity Share Capital 2,30,000
10% Preference Share Capital 2,00,000
Reserves & Surplus 1,70,000
15% Long Term Loans 80,000
Current Liabilities 3,60,00
Net Profit After Interest and Tax: 30%; Tax Rate 40%. Ans: 45.88%

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