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Ratio Analysis

Illustration 1
The following is the Balance sheet of a company as on 31-3-06
Liabilities
Rs.
Assets
Rs.
E. Shares
Reserves & Surplus

40,00,000 Land & building


20,00,000 Plant &
machinery

40,00,000
40,00,000

Debentures
Long term loans
Creditors
Other current
liabilities

30,00,000 Investments
50,00,000 Stock
8,00,000 Debtors
12,00,000 Other current
assets

30,00,000
25,00,000
15,00,000
10,00,000

1,60,00000

1,60,00000

Calculate
(1) Current ratio
(2) Stock to working capital ratio
(3) Debt-Equity ratio
(4) Net-worth ratio / proprietor/ ratio
(5) Fixed assets to net worth ratio
(6) Current assets to net worth ratio
(7) Solvency ratio
(8) Capital gearing ratio.
Solution:
(1) Current ratio = Current Asset / Current Liabilities
= 50,00,000 / 20,00,000 = 2.5
(2) Stock to working capital ratio = Stock / Inventory / Working capital x 100
Working capital
= Current Assets - Current Liabilities
= 50,00,000 - 20,00,000 = 30,00,000
= 25,00,000 / 30,00,000 x 100 = 83.33%
(3) Debt-Equity ratio = Debt / Equity
Debt = Long term loans 30,00,000+50,00,000=80,00,000 Equity = Share capital + Reserves + Surplus
= 40,00,000 + 20,00,000 = 60,00,000
= 80,00,000 / 60,00,000 = 1.33

(4) Net worth or Proprietary ratio = Net worth (Equity) / Total assets
(Net worth = Share capital + Reserves & Surplus)
= 60,00,000 / 1,60,00,000 = 0.375
(5) Fixed Assets to net worth ratio = Net fixed assets
= 80,00,000 / 60,00,000 = 1.33
(6) Current assets to net worth ratio = Current assets / Net worth
= 50,00,000 / 60,00,000 = 0.833
(7) Solvency ratio = Total assets / Total liabilities
Total assets
= Total of asset side of balance sheet.
Total liabilities = Both long-term and current liabilities.
= 1,60,00,000 / 1,00,00,000 = 1.6
8.

Capital gearing ratio = Fixed dividend bearing lonas debentures + fixed dividend bearing preference shares / Eq
= Debentures 30,00,000 + long term loan 50,00,000 / E.Sahre capital 40,00,000
= 80,00,000 / 40,00,000 = 2

rves + Surplus

ng preference shares / Equity share capital

Yahoo Ltd. has the following Profit and Loss Account for the year ended 31st March, 2007 and the Balance Sheet as
Profit and Loss Account for the year ended 31st March, 2007
Particulars
Rs. Lakhs
Particulars Rs. Lakhs
Openings stock
Add: Manufacturing cost
Less: Closing stock
Cost of goods sold
Gross Profit
Administrative expenses
Selling expenses
Depreciation
Interest
Incom-tax
Net profit

1.75
10.75
12.5
1.5
11
4
15
0.35
0.25
0.5
0.47
1.26
1.26
4.09

Balance Sheet as on 31st March, 2007


Liabilities
Rs. Lakhs
Equity shares of Rs. 10 each
10% Preference shares
Reserves and surplus
Long-term loan (12%)
Debentures (14%)
Creditors
Bills Payable
Accured expenses
Provision for tax

3.5
2
2
1
2.5
0.6
0.2
0.2
0.65
12.65

Sales : Credit
Cash

12
3

Gross profit
Other income

15
4
0.09

4.09
Assets

Rs. Lakhs

Plant and machinery


Less : Depreciation
Net plant and machinery
Goodwill
Stock Debtors
Pre-paid expenses
Marketable securities 0.75
Cash
0.25
12.65

The market price of the share of Yahoo Ltd. on 31st March, 2007 is Rs. 45
(Rs. Lakhs)
Reserves at the beginning
1.47
Net profit during the year
1.26
2.73

10
2.5
7.5
1.4
1.5
1
0.25

Preference dividends
Equity dividends
Reserves at the close of year

0.2
0.53
2

Calculate the following ratios (1) Current ratio (2) Quick ratio (30 Debt-equity ratio (4) Interest coverage
(5) Fixed charge coverage (6) Stock turnover (7) Debtors turnover (8) Average collection period (9) Gross
profit margin (10) Net profit margin (11) Operating ratio (12) Return on capital employed (ROCE) (13)
Earning per share (14) Return on shareholders equity (15) P/E ratio and (16) Earning yield
Solutions:
(1) Current Ratio
Current assets
3,75,000 = 2.27:1
--------------------

------------

Current liabilities
(2) Quick Ratio
Current assets Inventories
---------------------------------------- =
Current liabilities Bank overdraft

1.65.000

2,00,000
----------1,65,000

= 1.21:1

(3) Debt-Equity Ratio


Long-term debt
------------------------ =
Shareholders funds

3,50,000
---------7,50,000

PBIDT
-------------Interest

1,26,000 + 47,000 + 1,26,000


-----------------------------------47,000

= 0.467:1

(4) Interest Coverage


=

(5) Fixed Charge Coverage


PBIDT
----------------------------=
Interest + Preference dividend

2,99,000
----------------------47,000 + 20,000

(6) Stock Turnover


Cost of goods sold
---------------------- =
Average inventory

11,00,000
---------------------------(1,75,000 + 1,50,000) / 2

(7) Debtors Turnover


Credit sales
--------------

12,00,000
----------------

Debtors

1,00,000

(8) Average Collection Period


360 days
---------------------------Debtors turnover

360
----12

= 30 days

(9) G.P Margin


Sales Cost of goods sold
15,00,000 11,00,000
------------------------------=
X 100 --------------------------- X 100 = 26.67%
Sales
15,00,000
(10) N.P. Margin
PBIT
------ X 100
Sales

1,26,000 + 1,26,000 + 47,000


----------------------------------- X 100
15,00,000

(11) Operating Ratio


Operating expenses
11,00,000 + 35,000 + 25,000 + 50,000
----------------------- X 100 = ----------------------------------------------- X 100 =
Sales
15,00,000
(12) Return on Capital Employed (ROCE)

Equity share capital


Preference share capital
Reserves and surplus
Long-term loan (12%)
Debentures 914%)
Capital employed

Net Profit
------------------ X 100
Capital employed
OR

(Rs.)
3,50,000
2,00,000
2,00,000
1,00,000
2,50,000
11,00,000

1,26,000
-------------- X 100
11,00,000

Net profit before interest and tax


2,99,000
--------------------------------------- X 100 = -------------- X 100
Capital employed
11,00,000

= 11.45%

= 27.18%

(13) Return on Shareholders Equity


Net profit
----------------------=X 100
Share holders funds

1,26,000
------------ X 100 16.80%
7,50,000

(14) EPS
Net profit Preference dividend
--------------------------------------No. of equity shares

1,26,000 20,000
--------------------=
35,000

(15) Price / Earning Ratio


Market price
--------------EPS

45
=

------3.03

= 14.85 times

(16) Earning Yield


EPS
--------------------X 100
Market price

3.03
------ X 100
45

07 and the Balance Sheet as on that date:

) Interest coverage
n period (9) Gross
d (ROCE) (13)
eld

= 6.36 times

= 4,46 times

= 6.8 times

= 12 times

X 100 = 26.67%

------ X 100

= 19.93%

5,000 + 50,000
------------ X 100 = 80.67%

-----

= Rs. 3.03

= 14.85 times

6.73%

Following is the balance sheet and income statement of Jaynagara Ltd. for the year ended 31st march, 2007 are as un
Statement for the year ended 31st March, 2007
(Rs. '000)
Sales
1,600
Less: Cost of Goods sold
1,310
Gross margin
290
Less: Selling and administrative expenses
40
EBIT
250
less: interest expenses
45
Earnings before tax
205
Les: Tax
82
Net profit
123
Balance Sheet as on 31st March, 2007
(Rs. '000)
Liabilities
Paid-up capital (40,000 equity shares of Rs. 10 each. Fully paid-up
400
Retained earnings
120
Debentures
700
Creditors
180
Bills payable
20
Other current liabilities
80
1,500
Assets
Net fixed assets
inventory
Debtors
Marketable securities
Cash

800
400
175
75
50
1,500

Price per share : RS. 15 industrys average ratios are:


Current ratio
2.4
Quick ratio
1.5
Sales to inventory
8.0 times
Average collection period
36 days
Debt to assets
40%

Debt equity ratio2:01


Times interest earned
6
Net profit margin7%
Price to earnings ratio
15
Return to total assets
11%

From the above facts and figures, you are required to (i) Calculate the relevant ratios and
interpret them to identify the problems areas. (ii) Based on the ratio analysis, as a Company
Secretary, prepare a report for consideration of your Board of Directors clearly bringing out the
reason in respect of identified problem areas and giving suggestions to solve them.
Solutions:
(Rs. '000)
Current
Inventory
Debtors
Marketable securities
Cash

400
175
75
50
700

Current Liabilities
Creditors
Bills payable
Other Current liabilities

(1) Current Ratio =

180
20
80
280

Current assets
---------------------Current liabilities

700
=

------

2.5
280

Liquid assets
----------------------Current liabilities

(3) Sales to Inventory

Sales
-------------Inventory

(4) Average collection Period =

Debtors
175
-------------------------Average daily sales4.4

= 40 days

(5) Debts to Assets

Debts
= ------------------- X=100
Total assets

700
------- X 100
1500

(2) Quick Ratio =

300
-----

1.07
280

Debts
---------------------=
Shareholders funds

700
------

(7) Times Interest Earned

EBIT
-------------------Interest charges

250
-------------------=
45

(8) Net Profit Margin

Net Profit
= ------------------- X 100
Sales

(9) Price to Earnings Ratio =

Price per share


--------------E.P.S

(10) Return to Total Assets =

Net Profit
---------------- X 100
Total Assets

123
--------- X 1008.20%
1500

(6) Debt-Equity Ratio =

=
520

123
-------- X 100
1600

15
--------- 4.88
3.08

ended 31st march, 2007 are as under: Income

1600
-----400

46.70%

= 4 times

1.35

5.56

7.70%

From the following details prepare Statement of Proprietary funds with as many
details as possible:
(i)
Stock velocity: 6
(ii)
Capital turnover ratio (on cost of sales) : 2
(iii)
Fixed assets turnover ratio (on cost of sales) : 4
(iv)
Gross profit turnover ratio: 20 per cent.
(v)
Debtors' velocity: 2 months
(vi)
Creditors' velocity: 73 days
The gross profit was Rs. 60,000. Reserves and Surplus amount Rs. 20,000. Closing stock was Rs. 5,000 in excess o
Solution :
-1 Sales
Gross profit
Gross profit ratio = -------------------- x 100
Sales
If Gross profit is Rs. 20, Sales = Rs. 100
If Gross profit is Rs. 60,000, Sales = 60,000 x 100/20 = Rs. 3,00,000
-2 Stock:
Stock velocity
=

Cost of goods sold


--------------------------- = 6
Average stock

Cost of goods
Err:508
sold
= Rs. 3,00,000 - Rs. 60,000
= Rs. 2,40,000
2,40,000
= ----------------------- = 6
Average stock
6 x Average
= stock2,40,000
Average stock
=
2,40,000 + 6 = Rs. 40,000
Opening stock + Closing stock
Average stock =
------------------------------------------ = Rs. 40,000
2
Total of stocks
= (40,000
Rs.x80,000
2)
Less: Excess
=
Rs. 5,000
----------------Rs. 75,000
----------------###
Opening stock
=
------------ = Rs. 37,500

2
Closing stock
=

37,500 + 5,000 = Rs.42,500

(3) Debtors
Debtors velocity
Debtors + Bills receivable
----------------------------------- x No. of working days = 2 months
Credit sales
There are no bills receivable. Hence,
Debtors
Debtors velocity ------------ x 12 =2
3,00,000
Adopting cross multiplication,
3,00,000 x 2
Debtors = -------------------- = Rs. 50,000
12
(4) Creditors:
Creditors velocity =
Creditors + Bills payable
---------------------------------- x No.of working days = 73
Credit purchases
Calculation of Purchases:
Purchases = Cost of goods sold + Closing stock - Opening stock
= Rs. 2,40,000 + Rs. 42,500 - Rs. 37,500
= Rs. 2,45,000

There are no bills payable. Hence, Creditors velocity


Creditors
-------------- x 365 = 73
2,45,000
Adopting cross multiplication,
73 x 2,45,000
Creditors =---------------------- = Rs.49,000
365
(5)Fixed assets:

Fixed assets turnover ratio (based on cost of sales)


=

Cost of sales
---------------------- = 4

Fixed assets
2,40,000
=

------------------------ = 4
Fixed assets
4 x Fixed assets
=
Rs. 2,40,000
2,40,000
Fixed assets
=
------------------= Rs.60,OOO
###
(6) Share Capital:
Capital turnover ratio (based on cost of sales)
Cost of sales
= ------------------------------------------=2
Total capital (or) Proprietary fund
2,40,000
= -----------------------=2
Proprietary fund
2 x Proprietary fund
=
Rs. 2,40,000
2,40,000
Proprietary
=
-----------------fund
=
Rs. 1,20,000
2
Proprietary fund
= Rs. 1,20,000
Less: Reserves and Surplus
= Rs. 20,000
-----------Share capital
Rs. 1,00,000
(7) Cash:
Balance Sheet
---------------------------------------------------------------------------------------LiabilitiesRs.
Assets
Rs.
---------------------------------------------------------------------------------------Share capital
1,00,000 Cash (ha1.fig.)
16,500
Reserves & Surplus
20,000 Debtors
50,000
Creditors
49,000 Stock
42,500
60,000
Fixed assets

----------------------------1,69,000 1,69,000
---------------------------------------------------------------------------------------Statement of Proprietory Funds
---------------------------------------------------------------------------------------Rs.
Fixed assets
60,000
Current assets: Rs.
Cash
16,500
Debtors
50,000
Stock
42,500
-------------1,09,000
Less: Current liability:
Creditors
49,000
-------------60,000
--------------1,20,000
---------------Represented by:
Share capital
1,00,000
Reserves and 20,000
Surplus
------------------------------------------------------------------------------------------

was Rs. 5,000 in excess of opening stock.

Illustration 26: With the help of the following ratios regarding Dr. Raj Films draw the Balance Sheet of the Compan
Current ratio
2.5
Liquidity ratio 1.5
Net working
Rs.capital
3,00,000
Stock turnover ratio (cost pf sales/
6 times closing stock)
Gross profit ratio
20%
Debt collection
2 months
period
Fixed assets turnover ratio, (on cost of sales) 2 times
Fixed assets to shareholders'
0.8
net worth
Reserve and Surplus
0.5 to Capital
Solutions:
(a) Current assets:
Current assets
Current ratio
=
------------------------ = 2.5 : 1
Current liabilities
Working capital
=
Current assets - Current liabilities
=
2.5 - 1 = 1.5
If working capital is 1.5, current assets = 2.5
[f working capital is Rs. 3,00,000, current assets
3,00,000
1.5
(b) Current Liabilities:
If working capital is 1.5, current liabilities = 1
If working capital is Rs. 3,00,000, current liabilities
3,00,000
=--------------------- =Rs. 2,00,000
15

(3)Stock :
Quick assets
Quick ratio=
----------------------- =1.5
Quick liabilities
As there is no bank overdraft, Quick liabilities = Current liabilities
Quick assets

= ---------

Quick ratio=

-------------------- = 1.5
2,00,000
Quick assets
= 2,00,000 x 1.5 = Rs. 3,00,000
Stock
=
Current assets - Quick assets
= Rs. 5,00,000 - Rs. 3,00,000
= Rs. 2,00,000
(4) Cost of goods sold:
Cost of goods sold
Stock turnover
= ratio ---------------------------- = 6
Closing stock
Cost of goods sold
=
--------------------------- = 6
2,00,000
Cost of goods
= 2,00,000
sold x 6 = Rs. 12,00,000
(5) Sales:
Gross profit ratio 20% on sales
Sales - Gross profit
=
Cost of goods sold
Rs. 100 -Rs. 20 = Rs. 80
If cost of goods sold is Rs. 80, sales = Rs. 100
If cost of goods sold is Rs. 12,00,000, sales
12 00 000
= ------------------- x 100 Rs. 15,00,000
80

(6) Debtors:

Debtors turnover ratio =

Debtors + Bills receivable


----------------------------------Credit sales

x 12 =2

There are no bills receivable. Hence, Debtors turnover ratio:


Debtors
= ---------------------- x 12 =2 months
15,00,000
By cross multiplication,
2 x 15,00,000
Debtors = ---------------------= Rs. 2,50,000
12

(7) Fixed assets:


Fixed assets turnover ratio (on cost of sales)
Cost of sales
= ------------------------ =2
Fixed assets
12,00,000
= ------------------------ =2
Fixed assets
2 x Fixed assets
=
Rs. 12,00,000
12,00,000
Fixed assets
= -------------------- = Rs. 6,00,000
2
(8) Shareholders' Net worth (or Proprietory fund):
Fixed assets to Shareholders' Net worth
Fixed assets
=---------------------------------- = 0.80
Shareholders' Net worth
6,00,000
= ------------------------ = 0.80
Net worth
0.80 x Net=worth
6,00,000
6,00,000
Net worth
= ---------------- = Rs. 7,50,000
0.8
Reserves
and
-9
Surplus:
Net Worth = Share Capital + Reserves and Surplus
Reserves and Surplus to Capital = 0.50 : 1
Net worth = 1 + 0.50 = 1.50
If Net worth is 1.5, reserves and surplus = 0.50
If Net worth is Rs. 7,50,000, reserves and surplus
7,50,000
= ------------------ x 0.5
1.5
= Rs. 2,50,000
(10) Share Capital:
Net worth i.e. Share capital +

Reserves and
= Rs.
Surplus
7,50,000
Less: Reserves
= Rs.and
2,50,000
Surplus
------------Share capital
= Rs. 5,00,000
------------(11) Bank Balance:
Rs.
Total Current assets 5,00,000
Less: Stock2,00,000
Debtors
2,50,000
4,50,000
------------Bank 50,000
-------------

Balance Sheet as on 31-12-2006


------------------------------------------------------------------------------------------------------LiabilitiesRs.
Assets
Rs.
------------------------------------------------------------------------------------------------------Share capital
5,00,000 Fixed assets
6,00,000
Reserves and
2,50,000
SurplusStock
2,00,000
Long-term loan.
Debtors 2,50,000
(balancing
1,50,000
figure)Bank
50,000
Current liabilities
2,00,000
--------------------------11,00,000
11,00,000

nce Sheet of the Company for the year 1999.

= ---------------------------2.5 = Rs. 5,00,000

Problem 27: From the following information of a textile company complete proform balance sheet, if its sales are R
Sales to Net
2.3worth
times
Current debt to Net
42%worth
Total debt to Net75%
worth
Current ratio
2.9 times
Net sales to4.6
inventory
times
Average collection
90 days period
Fixed assets 53.20%
to Net worth
Proforma Balance Sheet
Net worth ?
Fixed assets
?
Long-term?debt
Cash
?
Current debt
?
Sundry debtors
?
------------Solution:
-1 Net worth:
Sales
Sales to Net
= -----------------worth
= 2.3 times
Net worth
23,00,000
= -------------------- = 2.3 times
Net worth
2.3 x Net worth
= 23,00,000
23,00,000
Net worth
= --------------= Rs. 10,00,000
2.3
(2) Current Debt:
Current debt
Current debt to Net worth = ----------------- = 42%
Net worth
i.e. Current debt is 42% of net worth
Current debt = 42% of 10,00,000 = Rs. 4,20,000
(3) Total Debt:
Total debt
Total Debt to Net worth = ----------------- = 75%
Net worth

i.e. Total debt is 75% of net worth


Total debt is = 75% of 10,00,000 = Rs, 7,50,000
(4) Long-term debt:
Long-termErr:508
debt
= 7,50,000 - 4,20,000 =Rs. 3,30,000
(5) Current assets:
Current assets
Current ratio
= ----------------------- = 2.9
Current liabilities
Current assets
= ------------------------- = 2.9
4,20,00
Current assets
= 2.9 X 4,20,000 = Rs, 12,18,000

(6) Inventory:
Sales
Net Sales to
= inventory
-------------- = 4.6 times
inventory
23,00,000
= ------------------------- = 4.6 times
Inventory
4.6 x Inventory

Inventory

23,00,000
23,00,000
= ----------------- = Rs. 5,00,000
4.6

(7) Debtors:
Average collection period (or) Debtors velocity
Debtors + Bills receivable
= ----------------------------------- X 360 = 90
Credit sales
Note : Number of working days in a year is assumed to be 360. There are no bills receivable. Hence,
Debtors
Debtors velocity
= -------------- x 360 = 90
23,00,000
90 X 23,00,000
Debtors
= --------------------= Rs. 5,75,000

360
(8) Fixed assets:
Fixed assets
Fixed assets to Net worth
= ------------------ = 53.2%
Net worth
i.e. Fixed assets
= 53.2% of Net worth
Fixed assets = 53.2% of Rs. 10,00,000 = Rs. 5,32,000
(9) Cash:
Rs.
Total current assets 12,18,000
Less: StockRs. 5,00,000
Debtors Rs. 5,75,000
10,75,000
-------------Cash
1,43,000
--------------Balance Sheet
------------------------------------------------------------------------------------------------------Rs.
Rs.
Net worth 10,00,000 Fixed assets
5,32,000
Long-term3,30,000
debt
Cash
1,43,000
Current debt
4,20,000 Stock
5,00,000
Debtors 5,75,000
---------------------------17,50,000
17,50,000
-------------------------------------------------------------------------------------------------------

e sheet, if its sales are Rs. 23,00,000.

Problem
28: From
the
following
particular
s, prepare
the
balance
sheet of
KSBS
Ltd.,
which
has only
one class
of share
capital:

(i)

Sales for
the year Rs.
20,00,000

(ii)

Gross
profit
ratio
25%

(iii)

Current
ratio
1.50

(iv)

Quick
assets
(cash and
debtors)
ratio
1.25

(v)

Stock
turnover
ratio - 15

(vi)

Debts
collection
period 1
months

(vii)

Turnover
to fixed
assets 1.5

(viii)

Ratio of
reserves
to share
capital 0.33 (i.e.,
1/3)

(ix)

Fixed
assets to
net worth
0.83
(i.e.,5/6)

(The term
"turnover
" refers to
cost
of
sales and
the term
"stock" to
closing
stock)
(
Solution :
(1) Gross profit:
Gross profit
Gross profit ratio = ------------------- x 100 = 25%
Sales
i.e, Gross profit is 25% of sales
Gross profit = 25% of Rs. 20,00,000 = Rs. 5,00,000
(2) Cost of goods sold:
Cost of goods
Err:508
sold
= Rs. 20,00,000 - Rs. 5,00,000
= Rs. 15,00,000
(3) Stock:
Stock turnover ratio (based on closing stock)
Cost of goods sold
= --------------------------- = 15
Closing stock
15,00,000
= --------------------------- = 15
Closing stock
15 x Closing
= 15,00,000
stock

Closing stock

15,00,000
= ----------------

= Rs. 1,00,000
15

(4) Current assets:


Current assets
Current ratio
= ----------------------- = 1.5 : 1
Current liabilities
Quick assets
Quick ratio
= ----------------------- = 1.25: 1
Quick liabilities
As there is no bank overdraft, Quick liabilities = Current liabilities
The difference in ratios therefore represents only stock.
Current assets
Err:508
- Quick assets
1.5
1.25
0.25
If stock is Rs. 0.25, current assets are 1.5
If stock is Rs. 1,00,000, current assets are
1,00,000
=
-------------- x 1.5 = Rs. 6,00,000
0.25
(5) Current liabilities:
Current ratio

Current assets
= ----------------------- = 1.5 : 1
Current liabilities
6,00,000
= ---------------------- = 1.5 : 1
Current liabilities

1.5 x Current
= Rs.
liabilities
6,00,000
Current liabilities

6,00,000
= --------------- x 1 = Rs. 4,00,000
1.5

(6) Debtors:
Debt Collection Period
Debtors + Bills receivable
= ------------------------------------- x 12 = 1
Credit sales
There are no bills receivable. Hence,
Debtors
Debtors velocity
= ------------------ x 12 = 1.5
20,00,000
20,00,000
Debtors
= ------------------ x 1.5 = Rs. 2,50,000
12

(7) Quick assets:


If the stock is 0.25, quick assets are 1.25
If the stock is Rs. 1,00,000, quick assets are
1 00 000
= ------------- x 1.25 = Rs. 5,00,000
0.25
(8) Cash:
Quick assets
= (DebtorsRs.
+ Cash)
5,00,000
Less: Debtors
=
Rs. 2,50,000
------------------Cash
Rs. 2,50,000
------------------(9) Fixed assets:
Turnover to fixed assets (based on cost sales)
Cost of goods sold
= -------------------------- = 1.5
Fixed assets
15,00,000
= ------------------------ = .1.5
Fixed assets
1.5 x Fixed assets = Rs. 15,00,000
15,00,000
Fixed assets
= ---------------- = Rs. 10,00,000
1.5
(10 ) Net worth:
Fixed assets
Fixed assets
= ----------------------to net worth
= 0.83 (i.e. 5/6)
Net worth
If fixed assets, are Rs. 5, net worth = Rs. 6
If fixed assets are Rs. 10,00,000, net worth
10,00,000
= ------------- x 6 = Rs. 12,00,000
5
(11) Share capital:
Net worth or Proprietary fund = Share capital + Reserves and Surplus
Ratio of Reserves to Share capital = 1 : 3
Net worth = 1 + 3 = 4
If net worth is 4, share capital = 3

If net worth is Rs. 12,00,000, share capital


12 00 000
= ---------------- x 3 == Rs. 9,00,000
4
(12) Reserves and Surplus:
Share capital
= Rs.
+ Reserves
12,00,000and Surplus
Less: Share capital
Err:508 9,00,000
--------------------Reserves and Surplus

Err:508

3,00,000
---------------------

Balance Sheet of KSBS Ltd.


-----------------------------------------------------------------------------------------------------Rs.
Rs.
Share capital
9,00,000 Fixed assets
10,00,000
Reserves and
3,00,000
SurplusStock
1,60,000
Creditors
Debtors 2,50,000
(balancing
4,00,000
figure)Cash
2,50,000
------------------------------16,00,000
16,00,000
-------------------------------------------------------------------------------------------------------

The following abridged report related to KSBS. Ltd.

ment for the year ended 31st December, 2006.


Sales
(Rs
(all
. in
credit)
lak
hs)
(-)
Cost of
goods
sold

600

O
p
e
n
i
n
g
st
o
c
k

2
0
0

P
u
r
c
h
a
s
e
s

4
1
0

C
l
o
si
n
g
S
t
o
c
k

1
6
0

450

Gross
Margin

150

Operati
ng
expens
es

114

Profit
before
taxatio
n

36

Provisi
on for
tax

16

Profit
after
tax

20

Balance Sheet as at 31st December, 2006


Accounts
174 Cash
60
payable
Provision
for tax

16 Accounts
receivabl
e

120

Accrued
expenses

10 Inventory

160

Mortgage
loan
Paid up
capital

50 Land &
Building
160 Plant

Reserves

60

Un
appropria
ted
profits

30

500

130
30

500

Calculate the ratios which indicate


(i)
the rapidity with which accounts receivable are collected
(ii)
the ability of the co. to met its current obligations
(iii) what mark-up has been attained.
(iv)
the efficiency with which funds represented by inventories are being utilized and managed;
(v)
the ability of the co. to meet quickly demands for payment amounts due; and
(vi)
the relative importance of proprietorship and liabilities as sources of funds.
Solution:
(i) Accounts receivable turnover
= Sales /Accounts receivable = 660/120 = 5 times
Average collection
Err:508 period
= 365/5 = 73 days
(ii) Ability of meet current obligations
= Current ratio = current assets / Current liabilities = 340/200 = 1.7:1
= Quick ratio = Liquid assets / Current liabilities = 180/200 = 0.9 : 1
(iii) Mark-up
Err:508
(iv) Inventory turnover = Cost of goods sold / Average stock = 450/180 = 2.5 times.
(v) Quick ratio = Liquidity assets / Current liabilities = 180/200 = 0.9
(vi) Equity to the total liabilities
= Shareholders funds / total liabilities = 250/500 = 0.5 or 50%

utilized and managed;