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5
times, debt to total assets ratio is 0.6. What is the return on equity for Premier?
Solution:
Net profit
Return on equity =
Equity
= Net profit Net sales Total assets
x x
Net sales Total assets Equity
1
= 0.08 x 2.5 x = 0.5 or 50 per cent
0.4
Debt Equity
Note : = 0.6 So = 1- 0.6 = 0.4
Total assets Total assets
Inventories = 300
3500
Inventory turnover ratio = = 11.7
300
Solution:
Inventory = 5000/5 = 1000
Current assets
Current ratio = = 1.4
Current liabilities
CA 1000
- = 1.0
CL CL
1000
1.4 - = 1.0
CL
1000
0.4 = CL = 2500
CL
8. Safari Inc. has profit before tax of Rs.90 million. If the company's times interest
covered ratio is 4, what is the total interest charge?
Solution:
So PBIT = 4 x Interest
9. A has profit before tax of Rs.40 million. If its times interest covered ratio is 6, what
is the total interest charge?
Solution:
PBIT
Times interest covered = = 6
Interest
So PBIT = 6 x Interest
PBIT – Interest = PBT = Rs.40 million
10. McGill Inc. has profit before tax of Rs.63 million. If the company's times interest
covered ratio is 8, what is the total interest charge?
Solution:
So PBIT = 8 x Interest
PBIT – Interest = PBT = Rs.63 million
8 x Interest – Interest = 7 x Interest = Rs.63 million
Hence Interest = Rs.9 million
Solution:
Sales = Rs.6,000,000
Net profit margin = 5 per cent
Net profit = Rs.6,000,000 x 0.05 = 300,000
Tax rate = 40 per cent
300,000
So, Profit before tax = = Rs.500,000
(1-.4)
Hence 700,000
Times interest covered ratio = = 3.5
200,000
Sales = Rs.300,000
Net profit margin = 3 per cent
Net profit = Rs.300,000 x 0.03 = 9,000
Tax rate = 25 per cent
9,000
So, Profit before tax = = Rs.12,000
(1-.25)
Interest charge = Rs.50,000
So Profit before interest and taxes = Rs.62,000
Hence 62,000
Times interest covered ratio = = 1.24
50,000
Sales = Rs.80,000,000
14. A firm's current assets and current liabilities are 25,000 and 18,000 respectively.
How much additional funds can it borrow from banks for short term, without
reducing the current ratio below 1.35?
Solution:
CA = 25,000 CL = 18,000
CA+BB
= 1.35
CL+BB
25,000+BB
= 1.35
18,000+BB
1.35x 18,000 + 1.35 BB = 25,000 + BB
BB = 700/0.35 = 2,000
15. LNG’s current assets and current liabilities are 200,000 and 140,000 respectively.
How much additional funds can it borrow from banks for short term, without
reducing the current ratio below 1.33?
Solution:
CA = 200,000 CL = 140,000
Let BB stand for bank borrowing
CA+BB
= 1.33
CL+BB
200,000+BB
= 1.33
140,000+BB
BB =13,800/0.33 = 41,818
16. Navneet’s current assets and current liabilities are 10,000,000 and 7,000,000
respectively. How much additional funds can it borrow from banks for short term,
without reducing the current ratio below 1.4?
Solution:
CA = 10,000,000 CL = 7,000,,000
Let BB stand for bank borrowing
CA+BB
= 1.4
CL+BB
10,000,000+BB
= 1.4
7,000,000+BB
BB = 200,000/0.40 = 500,000
17. A firm has total annual sales (all credit) of 25,000,000 and accounts receivable of
8,000,000. How rapidly (in how many days) must accounts receivable be collected
if management wants to reduce the accounts receivable to 6,000,000?
Solution:
25,000,000
Average daily credit sales = = 68,493
365
If the accounts receivable has to be reduced to 6,000,000 the ACP must be:
6,000,000
= 87.6 days
68,493
18. A firm has total annual sales (all credit) of 1,200,000 and accounts receivable of
500,000. How rapidly (in how many days) must accounts receivable be collected if
management wants to reduce the accounts receivable to 300,000?
Solution:
1,200,000
Average daily credit sales = = 3287.67
365
If the accounts receivable has to be reduced to 300,000 the ACP must be:
300,000
= 91.3 days
3287.67
19. A firm has total annual sales (all credit) of 100,000,000 and accounts receivable of
20,000,000. How rapidly (in how many days) must accounts receivable be
collected if management wants to reduce the accounts receivable to 15,000,000?
Solution:
100,000,000
Average daily credit sales = = 273,972.6
365
If the accounts receivable has to be reduced to 15,000,000 the ACP must be:
15,000,000
= 54.8 days
273,972.6
Solution:
Solution:
Inventories = 800,000
= 800,000 x 5 = 4,000,000
23. Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Balance sheet
Solution:
Debt/equity = 0.80
Equity = 80,000 + 50,000 = 130,000
So Debt = Short-term bank borrowings = 0.8 x 130,000 = 104,000
Hence Total assets = 130,000+104,000 = 234,000
Total assets turnover ratio = 2
So Sales = 2 x 234,000 = 468,000
Gross profit margin = 30 per cent
So Cost of goods sold = 0.7 x 468,000 = 327,600
Day’s sales outstanding in accounts receivable = 30 days
Sales
So Accounts receivable = x 30
360
468,000
= x 30 = 39,000
360
Cost of goods sold 327,600
Inventory turnover ratio = = = 6
Inventory Inventory
So Inventory = 54,600
As short-term bank borrowing is a current liability,
Cash + Accounts receivable
Acid-test ratio =
Current liabilities
Cash + 39,000
= = 1.1
104 ,000
So Cash = 75,400
Plant and equipment = Total assets - Inventories – Accounts receivable – Cash
= 65,000
Balance Sheet
Sales 468,000
Cost of goods sold 327,600
24. Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Balance sheet
Solution:
Debt/equity = 0.40
Equity = 160,000,000 + 30,000,000 = 190,000,000
So Debt = Short-term bank borrowings = 0.4 x 190,000,000 = 76,000,000
Hence Total assets = 190,000,000+ 76,000,000 = 266,000,000
Total assets turnover ratio = 2.5
So Sales = 2.5 x 266,000,000 = 665,000,000
Gross profit margin = 25 per cent
So Cost of goods sold = 0.75 x 665,000,000 = 498,750,000
Day’s sales outstanding in accounts receivable = 25 days
Sales
So Accounts receivable = x 25
360
665,000,000
= x 25 = 46,180,556
360
Cost of goods sold 498,750,000
Inventory turnover ratio = = = 8
Inventory Inventory
So Inventory = 62,343,750
As short-term bank borrowings is a current liability,
Cash + Accounts receivable
Acid-test ratio =
Current liability
Cash + 46,180,556
= = 0.9
76,000 ,000
So Cash = 22,219,444
= 135,256,250
25. Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Debt/equity ratio = 1.5
Acid-test ratio = 0.3
Total assets turnover ratio = 1.9
Days' sales outstanding in
Accounts receivable = 25 days
Gross profit margin = 28 percent
Inventory turnover ratio = 7
Balance sheet
Debt/equity = 1.5
Equity = 600,000 + 100,000 = 700,000
So Debt = Short-term bank borrowings =1.5 x 700,000 = 1050,000
Hence Total assets = 700,000+1050,000 = 1,750,000
Total assets turnover ratio = 1.9
So Sales = 1.9 x 1,750,000 = 3,325,000
Gross profit margin = 28 per cent
So Cost of goods sold = 0.72 x 3,325,000 = 2,394,000
Day’s sales outstanding in accounts receivable = 25 days
Sales
So Accounts receivable = x 25
360
3,325,000
= x 25 = 230,903
360
Cost of goods sold 2,394,000
Inventory turnover ratio = = = 7
Inventory Inventory
So Inventory = 342,000
As short-term bank borrowings is a current liability,
Cash + Accounts receivable
Acid-test ratio =
Current liabilities
Cash + 230,903
= = 0.3
1050 ,000
So Cash = 84,097
Plant and equipment = Total assets - Inventories – Accounts receivable – Cash
= 1,093,000
1,750,000
1,750,000
Sales 3,325,000
Cost of goods sold 2,394,000
Acme Limited Profit and Loss Account for the Year Ended March 31, 20X7
Acme Standard
Solution:
a.
For purposes of ratio analysis, we may recast the balance sheet as under.
Let assume that ‘Others’in the balance sheet represents other current assets.
152,000,000
= = 1.8
85,000,000
(Current liabilities here includes short-term bank borrowing also)
72,000,000 + 40,000,000
= = 1.1
60,000,000 + 45,000,000
70,000,000
= = 5.83
12,000,000
PBIT 70,000,000
(x) Earning power = = = 32.3 %
Total assets 217,000,000
The comparison of the Acme’s ratios with the standard is given below
Acme Standard
Current ratio 1.8 1.3
Acid-test ratio 1.1 0.7
Debt-equity ratio 1.1 2.0
Times interest covered ratio 5.8 4.5
Inventory turnover ratio 3.3 5.0
Average collection period 51.3 days 45 days
Total assets turnover ratio 1.5 1.5
Net profit margin ratio 11.9 % 8%
Earning power 32.3 % 20 %
Return on equity 36.2 % 18 %
Nainar Limited Profit and Loss Account for the Year Ended March 31, 20X7
For purposes of ratio analysis, we may recast the balance sheet as under.
Let assume that ‘Others’ in the balance sheet represents other current assets.
Total 375,000,000
Assets
Fixed assets (net) 206,000,000
Current assets
Cash and bank 25,000,000
Receivables 70,000,000
Inventories 85,000,000
Pre-paid expenses 20,000,000
Others 12,000,000 212,000,000
Less:
Current liabilities
Trade creditors 24,000,000
Provisions 19,000,000 43,000,000
Net current assets 169,000,000
Total 375,000,000
Current assets
(i) Current ratio =
Current liabilities
212,000,000
= = 1.9
113,000,000
(Current liabilities here includes short-term bank borrowing also)
130,000,000
= = 5.9
22,000,000
PBIT 130,000,000
(x) Earning power = = = 34.7 %
Total assets 375,000,000
The comparison of the Nainar’s ratios with the standard is given below
Nainar Standard
28. The comparative balance sheets and comparative Profit and Loss accounts for
Nalvar Limited, are given below:
Required: Compute the important ratios for Nalvar Limited for the years 20X3- 20X7.
You may assume that other assets in the balance sheet represent other current
assets.
• Current ratio
• Debt-equity ratio
• Total assets turnover ratio
• Net profit margin
• Earning power
• Return on equity
Solution
We will rearrange the balance sheets as under for ratio analysis. It is assumed that
‘Other assets’ are other current assets
29. The comparative balance sheets and comparative Profit and Loss accounts for
Somani Limited, a machine tool manufacturer, are given below:
20X 20X
20X3 4 5 20X6 20X7
Share capital 41 50 50 50 55
Reserves and surplus 16 36 72 118 150
Long-term debt 28 25 30 29 22
Short-term bank borrowing 35 30 36 38 38
Current liabilities 24 28 30 30 25
Total 144 169 218 265 290
Assets
Net fixed assets 72 80 75 102 103
Current assets
Cash and bank 8 9 15 12 11
Receivables 24 30 59 62 85
Inventories 35 42 55 75 79
Other Assets 5 8 14 14 12
Total 144 169 218 265 290
Comparative Profit & Loss Account of Somani Ltd
(Rs. in million)
20X 20X
20X3 4 5 20X6 20X7
Net sales 285 320 360 350 355
Cost of goods sold 164 150 170 175 174
Gross profit 121 170 190 175 181
Operating expenses 64 66 68 68 64
Operating profit 57 104 122 107 117
Non-operating surplus deficit 3 4 4 3 3
Profit before interest and tax 60 108 126 110 120
Interest 8 6 10 12 12
Profit before tax 52 102 116 98 108
Tax 15 26 30 26 29
Profit after tax 37 76 86 72 79
For ratio analysis purpose, we will rearrange the balance sheet as under. It is
assumed that ‘Other assets’ are other current assets
29. The Balance sheets and Profit and Loss accounts of LKG Corporation are given
below.
Regular ( in
Rs. million) Common Size(%)
20x6 20x7 20x6 20x7
Net sales 623 701 100 100
Cost of goods sold 475 552 76 79
Gross profit 148 149 24 21
PBIT 105 89 17 13
Interest 22 21 4 3
PBT 83 68 13 10
Tax 41 34 7 5
PAT 42 34 7 5
Balance Sheet
Regular ( in
million) Common Size (%)
20x6 20x7 20x6 20x7
Shareholders' funds 256 262 62 55
Loan funds 156 212 38 45
Total 412 474 100 100
Fixed assets 322 330 78 70
Investments 15 15 4 3
Net current assets 75 129 18 27
Total 412 474 100 100
30. The Balance sheets and Profit and Loss accounts of Grand Limited are given below.
Prepare the common size and common base financial statements
Rs. in million
Balance Sheet
20x6 20x7
Shareholders’ fund 85 85
Loan funds 125 180
Total 210 265
Fixed assets 127 170
Investments 8 10
Net current assets 75 85
Total 210 265
Profit & Loss Account (Rs. in million)
20x6 20x7
Net sales 450 560
Cost of goods sold 320 410
Gross profit 130 150
PBIT 85 98
Interest 12 17
PBT 73 81
Tax 22 38
PAT 51 43
Solution: