CA INTER FINANCIAL MANAGEMENT Answers · So, Sales = `75,00,000 × 1.2 = `90,00,000 Closing Stock =...

7

CA INTERFINANCIAL MANAGEMENT

Answers

1. 0 5Long- term debt Long- term debt.

Net worth 2,00,000

Long- term debt = ` 1,00,000Total liabilities and net worth = ` 4,00,000Total assets = ` 4,00,000

2 5Sales Sales. = Sales = 10,00,000Total assets 4, 00, 000

`

Cost of goods sold = (0.9) (` 10,00,000) = ` 9,00,000.Cost of goods sold 9, 00, 000 = 9= Inventory = 1,00,000

Inventory Inventory `

18Receivables × 360 days10,00,000

Receivables = ` 50,000

1Cash + 50,0001,00,000

Cash = `50,000Plant and equipment = ` 2,00,000.

Balance Sheet` `

Cash 50,000 Notes and payables 1,00,000Accounts receivable 50,000 Long-term debt 1,00,000Inventory 1,00,000 Common stock 1,00,000Plant and equipment 2,00,000 Retained earnings 1,00,000Total assets 4,00,000 Total liabilities and equity 4,00,000

2. 1. (d) 2. (a) 3. (c) 4. (b) 5. (d)

3.

(i) 25Gross ProfitG.P. ratio %Sales

100 10025 25

Gross Profit 8,00,000Sales 32,00,000 `

`

(ii) Cost of Sales = Sales – Gross profit= ` 32,00,000 - ` 8,00,000= ` 24,00,000

8

(iii) Receivable turnover = 4SalesReceivables

4 4Sales 32,00,000Receivables = 8,00,000

``

(iv) Fixed assets turnover = 8Cost of SalesFixed Assets

Fixed assets =8 8

Cost of Sales 24,00,000 3,00,000 `

`

(v) Inventory turnover = 8Cost of SalesAverage Stock

Average Stock =8 8

Cost of Sales 24,00,000 3,00,000 `

`

Average Stock =2

Opening Stock + Closing Stock

Average Stock =2

Opening Stock + Opening Stock + 20,000

Average Stock = Opening Stock + ` 10,000Opening Stock = Average Stock - ` 10,000

= ` 3,00,000 - `10,000= ` 2,90,000

Closing Stock = Opening Stock + ` 20,000= ` 2,90,000 + ` 20,000= ` 3,10,000

(vi) Payable turnover = 6PurchasesPayables

Purchases = Cost of Sales + Increase in Stock= ` 24,00,000 + ` 20,000= ` 24,20,000

Payables =6 6

Purchase 24,20,000 4,03,333 `

`

(vii) Capital turnover = 2Cost of SalesCapital Employed

Capital Employed =2 2

Cost of Sales 24,00,000 12,00,000 `

`

(viii) Share Capital = Capital Employed – Reserves & Surplus= ` 12,00,000 – ` 2,00,000 = ` 10,00,000

Balance Sheet of Tirupati Ltd as on……………Liabilities Amount (`) Assets Amount (`)

Share Capital 10,00,000 Fixed Assets 3,00,000Reserve & Surplus 2,00,000 Closing Inventories 3,10,000Payables 4,03,333 Receivables 8,00,000

Other Current Assets 1,93,33316,03,333 16,03,333

(Fixed Asset turnover, inventory turnover capital turnover is calculated on cost ofsales)

9

4. Current Assets (CA)Current Ratio = = 2 i.e. 2 : 1Current Liabilities (CL)

S.No.

Situation Improve/ Decline/No Change

Reason

(i) Payment ofCurrent liability

Current Ratio willimprove

Let us assume CA is ` 2 lakhs & CL is ` 1 lakh.If payment of Current Liability = `10,000then, CA = 1, 90,000 CL = 90,000.

Current Ratio = 1,90,00090,000

= 2.11 : 1. When Current Ratio is 2:1Payment of Current liability will reduce thesame amount in the numerator anddenominator. Hence, the ratio will improve.

(ii) Purchase ofFixed Assetsby cash

Current Ratio willdecline

Since the cash being a current assetconverted into fixed asset, current assetsreduced, thus current ratio will fall.

(iii) Cash collectedfrom Customers

Current Ratio willnot change

Cash will increase and Debtors will reduce.Hence No Change in Current Asset.

(iv) Bills Receivabledishonoured

Current Ratio willnot change

Bills Receivable will come down anddebtors will increase. Hence no change inCurrent Assets.

(v) Issue of NewShares

Current Ratio willimprove

As Cash will increase, Current Assets willincrease and current ratio will increase.

5. Working notes:(i) Current assets and Current liabilities computation:

2 51

Current assets .Current liabilities

Or,2 5 1

Current Assets Current Liabilities.

= k (say)

Or, Current Assets = 2.5 k and Current Liabilities = kOr, Working capital = (Current Assets - Current Liabilities)Or, Rs.2,40,000 = k (2.5 - 1) = 1.5 kOr, k = Rs.1,60,000∴ Current Liabilities = Rs. 1,60,000Current Assets = Rs.1,60,000 × 2.5 = Rs.4,00,000

(ii) Computation of stock

Liquid ratio = Liquid assetsCurrent liabilities

Or,1.5 = Current Assets - StockRs.1,60,000

Or, 1.5 Rs.1,60,000 = Rs.4,00,000 - StockOr, Stock = Rs.1,60,000

10

(iii) Computation of Proprietary fund; Fixed assets; Capital and Sundry payables (creditors)

Proprietary ratio = 0 75Fixed assets .Proprietary fund

∴ Fixed assets = 0.75 Proprietary fundand Net working capital = 0.25 Proprietary fundOr, Rs.2,40,000/0.25 = Proprietary fundOr, Proprietary fund = Rs.9,60,000and Fixed assets = 0.75 proprietary fund

= 0.75 Rs.9,60,000= Rs.7,20,000

Equity Capital = Proprietary fund - Reserves & Surplus= Rs.9,60,000 - Rs.1,60,000= Rs.8,00,000

Sundry payables (creditors) = (Current liabilities - Bank overdraft)= (Rs.1,60,000 - Rs.40,000) = Rs.1,20,000

Balance SheetLiabilities (Rs.) Assets (Rs.)

Equity Capital 8,00,000 Fixed assets 7,20,000Reserves & Surplus 1,60,000 Stock 1,60,000Bank overdraft 40,000 Current assets 2,40,000Sundry payables 1,20,000

11,20,000 11,20,000

6. On one hand when cost of ‘fixed cost fund’ is less than the return on investmentfinancial leverage will help to increase return on equity and EPS. The firm will also benefit fromthe saving of tax on interest on debts etc. However, when cost of debt will be more than thereturn it will affect return of equity and EPS unfavourably and as a result firm can be underfinancial distress. This is why financial leverage is known as “double edged sword”.Effect on EPS and ROE:When, ROI > Interest – Favourable – AdvantageWhen, ROI < Interest – Unfavourable – DisadvantageWhen, ROI = Interest – Neutral – Neither advantage nor disadvantage.

7. Change in Reserve & Surplus = ` 25, 00,000 – ` 20,00,000 = ` 5,00,000So, Net profit = ` 5, 00,000(i) Net Profit Ratio = 8%∴ Sales =

85,00,000 62,50,000

%`

(ii) Cost of Goods sold= Sales – Gross profit Margin= ` 62, 50,000 – 20% of ` 62, 50,000= ` 50, 00,000

(iii) Fixed Assets =40

30,00,000 75,00,000%

`

`

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(iv) Stock =4

Cost of Goods Sold 50,00,000 12,50,000STR

`

(v) Debtors = 90360

62,50,000 15,62,500 `

(vi) Cash Equivalent = 1 512

50,00,000 . 6,25,000 `

Balance Sheet as on 31st March 2018Liabilities (`) Assets (`)

Share Capital 40,00,000 Fixed Assets 75,00,000Reserve and Surplus 25,00,000 Sundry Debtors 15,62,500Long-term loan 30,00,000 Closing Stock 12,50,000Sundry Creditors(Balancing Figure)

14,37,500 Cash in hand 6,25,000

1,09,37,500 1,09,37,500

8. Preparation of Balance SheetWorking Notes:Sales = Gross Profit / Gross Profit Margin

= 60,000 / 0.2= ` 3,00,000

Total Assets = Sales / Total Asset Turnover= 3,00,000 / 0.3= ` 10,00,000

Net Worth = 0.9 X Total Assets= 0.9 X ` 10,00,000 = ` 9,00,000

Current Liability = Total Assets – Net Worth= ` 10,00,000 – ` 9,00,000= ` 1,00,000

Current Assets = 1.5 x Current Liability= 1.5 x ` 1,00,000 = ` 1,50,000

Stock = Current Assets – Liquid Assets= Current Assets – (Liquid Assets / Current Liabilities =1)= 1,50,000 – (LA / 1,00,000 = 1) = ` 50,000

Debtors = Average Collection Period X Credit Sales / 360= 60 x 0.8 x 3,00,000 / 360 = ` 40,000

Cash = Current Assets – Debtors – Stock= ` 1,50,000 – ` 40,000 – ` 50,000=` 60,000

Fixed Assets = Total Assets – Current Assets= ` 10,00,000 – ` 1,50,000= ` 8,50,000

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Balance SheetLiabilities ` Liabilities `

Net Worth 9,00,000 Fixed Assets 8,50,000Current Liabilities 1,00,000 Stock 50,000

Debtors 40,000Cash 60,000

Total Liabilities 10,00,000 Total Assets 10,00,000

9. (i) Current Ratio = Current assets Stock +Receivables +CashCurrent liablities S. Payables + Provision for taxation

= 700 1 4 1400 100 500

250 + 300 + 150 . :

(ii) Liquidity Ratio = Liquid assets Current assets - StockCurrent liablities Current liabilities

= 700 250 450 0 9 1500 500

. :

(iii) Profitability Ratio = 300 100 251 200

EBIT %Sales ,

(iv) Profitability on Funds Employed

300 300100 100 14 632 050

. %1,400 + 450 + 200 ,

(v) Receivables’ (Debtors’) turnover ratio= 1 200300

Sales , 4 timesAverage receivables

(vi) Average Receivables’ (Debtors’) Collection Period30012 121 200

Average Receivables months= 3 monthsCredit sales ,

(vii) Stock turnover ratio = 1 200 4 8250

Sales , . timesAverage Stock

(viii) Return on Equity = 100Profit after taxShareholders' funds

= 200 200100 100 9 762 050

. %1,400 + 450 + 200 ,

10. Working Notes:(i) Cost of Goods Sold = Sales – Gross Profit (28% of Sales)

= ` 50,00,000 – ` 14,00,000= ` 36,00,000

(ii) Closing Stock = Cost of Goods Sold / Stock Turnover= ` 36,00,000/6 = ` 6,00,000

12






= 700 1 4 1400 100 500

250 + 300 + 150 . :


= 700 250 450 0 9 1500 500

. :


EBIT %Sales ,


300 300100 100 14 632 050

. %1,400 + 450 + 200 ,








= 200 200100 100 9 762 050

. %1,400 + 450 + 200 ,


= ` 50,00,000 – ` 14,00,000= ` 36,00,000


12






= 700 1 4 1400 100 500

250 + 300 + 150 . :


= 700 250 450 0 9 1500 500

. :


EBIT %Sales ,


300 300100 100 14 632 050

. %1,400 + 450 + 200 ,








= 200 200100 100 9 762 050

. %1,400 + 450 + 200 ,


= ` 50,00,000 – ` 14,00,000= ` 36,00,000


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(iii) Fixed Assets = Cost of Goods Sold / Fixed Assets Turnover= ` 36,00,000/1.5= ` 24,00,000

(iv) Current Assets : Current Ratio= 1.5 and Liquid Ratio = 1

Stock = 1.5 – 1 = 0.5Current Assets = Amount of Stock × 1.5/0.5

= ` 6,00,000 × 1.5/ 0.5 = ` 18,00,000(v) Liquid Assets (Debtors and Cash & Cash equivalents)

= Current Assets – Stock= `18,00,000 – ` 6,00,000= `12,00,000

(vi) Debtors = Sales × Debtors Collection Period(days) /360 days

= 45 6 25 000360

50,00,000 × , ,` `

(vii) Cash & Cash equivalents= Liquid Assets – Debtors= `12,00,000 – ` 6,25,000 = ` 5,75,000

(viii) Net worth = Fixed Assets / 1.2= ` 24,00,000/1.2 = ` 20,00,000

(ix) Reserves and SurplusReserves & Surplus and Share Capital = 0.6 + 1 = 1.6Reserves and Surplus = ` 20,00,000 × 0.6/1.6 = ` 7,50,000

(x) Share Capital = Net worth – Reserves and Surplus= ` 20,00,000 – ` 7,50,000= `12,50,000

(xi) Current Liabilities = Current Assets / Current Ratio= `18,00,000/1.5 = `12,00,000

(xii) Long- term DebtsCapital Gearing Ratio = Long-term Debts / Equity Shareholders’ Fund (Net worth)Or, Long-term Debts = ` 20,00,000 × 0.5 = `10,00,000

Balance Sheet as at 31st March, 2016

13







= 45 6 25 000360

50,00,000 × , ,` `








13







= 45 6 25 000360

50,00,000 × , ,` `








14

11. Workings:

(i) 57

Fixed AssetsTotalCurrent Assets

Or, Total Current Assets =5

40,00,000×7 56,00,000`

`

(ii) 54 5

Fixed Assets 40,00,000×4Or, Capital = 32,00,000Capital

`

`

(iii) 12

CapitalTotalLiabilities *

Or, Total liabilities = ` 32,00,000 × 2 = ` 64,00,000

*It is assumed that Total liabilities does not include capital.

(iv) 15

Net ProfitCapital

Or, Net Profit = ` 32,00,000 × 1/5 = ` 6,40,000

(v) 15

Net ProfitSales

Or, Sales = ` 6,40,000 × 5 = ` 32,00,000

(vi) Gross Profit = 25% of ` 32,00,000 = ` 8,00,000

(vii) Stock Turnover = Cost of Goods Sold(i.e.Sales - Grossprofit)Average Stock

=10

= 32 00 000 8 00 000, , , ,Average Stock

` ` =10

Or, Average Stock = ` 2,40,000 Or,2

Opening Stock + 4,00,000 2,40,000`

`

Or, Opening Stock = ` 80,000

Trading Account

Profit and Loss Account

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11. Workings:

(i) 57



40,00,000×7 56,00,000`

`

(ii) 54 5


`

`

(iii) 12




(iv) 15

Net ProfitCapital

Or, Net Profit = ` 32,00,000 × 1/5 = ` 6,40,000

(v) 15

Net ProfitSales

Or, Sales = ` 6,40,000 × 5 = ` 32,00,000



=10

= 32 00 000 8 00 000, , , ,Average Stock

` ` =10


Opening Stock + 4,00,000 2,40,000`

`


Trading Account


14

11. Workings:

(i) 57



40,00,000×7 56,00,000`

`

(ii) 54 5


`

`

(iii) 12




(iv) 15

Net ProfitCapital

Or, Net Profit = ` 32,00,000 × 1/5 = ` 6,40,000

(v) 15

Net ProfitSales

Or, Sales = ` 6,40,000 × 5 = ` 32,00,000



=10

= 32 00 000 8 00 000, , , ,Average Stock

` ` =10


Opening Stock + 4,00,000 2,40,000`

`


Trading Account


15

Balance Sheet

12. Debt Equity Ratio = 2 :1; 21

DebtEquity

Equity = 25 00 0002

50,00,000 , ,`

`

Return on Equity = 50Net Profit after tax (PAT) %Equity

Or, Net Profit after tax (PAT) = ` 25,00,000 × 50% = ` 12,50,000

Net Profit before tax = 10065

12,50,000 19,23,077 ` `

Tax = ` 19,23,077 – `12,50,000 = ` 6,73,077

Capital Turnover Ratio =

1 2 1 225 00 000 50 00 000

Sales Sales. or, .Capital , , , ,

` `

So, Sales = ` 75,00,000 × 1.2 = ` 90,00,000Closing Stock = ` 90,00,000 × 8% = ` 7,20,000Gross Profit = ` 90,00,000 × 30% = ` 27,00,000

Trading A/c for the year ending 31st March, 2015

Profit & Loss A/c for the year ending 31st March, 2015

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Balance Sheet


DebtEquity

Equity = 25 00 0002

50,00,000 , ,`

`




12,50,000 19,23,077 ` `

Tax = ` 19,23,077 – `12,50,000 = ` 6,73,077


1 2 1 225 00 000 50 00 000


` `




15

Balance Sheet


DebtEquity

Equity = 25 00 0002

50,00,000 , ,`

`




12,50,000 19,23,077 ` `

Tax = ` 19,23,077 – `12,50,000 = ` 6,73,077


1 2 1 225 00 000 50 00 000


` `




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13.(a) The answer should be focused on using the current and quick ratios. While the

current ratio has steadily increased, it is to be noted that the liquidity has notresulted from the most liquid assets as the CEO proposes. Instead, from the quick ratio, it isnoted that the increase in liquidity is caused by an increase in inventories. For a fresh cheesecompany, it can be argued that inventories are relatively liquid when compared to otherindustries. Also, given the information, the industry- benchmark can be used to derivethat the company's quick ratio is very similar to the industry level and that thecurrent ratio is indeed slightly higher - again, this seems to come from inventories.

(b) Inventory turnover, day’s sales in receivables, and the total asset turnover ratio are to bementioned here. Inventory turnover has increased over time and is now above the industryaverage. This is good - especially given the fresh cheese nature of the company’s industry. In2014, it means for example that every 365/62.65 = 5.9 days the company is able to sell itsinventories as opposed to the industry average of 6.9 days. Days' sales in receivables havegone down over time, but are still better than the industry average. So, while they are able toturn inventories around quickly, they seem to have more trouble collecting on these sales,although they are doing better than the industry. Finally, total asset turnover is gone downover time, but it is still higher than the industry average. It does tell us somethingabout a potential problem in the company's long term investments, but again, theyare still doing better than the industry.

(c) Solvency and leverage is captured by an analysis of the capital structure of thecompany and the company's ability to pay interest. Capital structure: Both the equitymultiplier and the debt-to-equity ratio tell us that the company has become lesslevered. To get a better idea about the proportion of debt in the firm, we can turn the D/Eratio into the D/V ratio: 2014: 43%, 2013: 46%, 2012:47%, and the industryaverage is47%. So based on this, we would like to know why this is happening and whether this isgood or bad. From the numbers it is hard to give a qualitative judgment beyondobserving the drop in leverage. In terms of the company's ability to pay interest, 2014looks pretty bad. However, remember that times interest earned uses EBIT as a proxyfor the ability to pay for interest, while we know that we should probably consider cashflow instead of earnings. Based on a relatively large amount of depreciation in 2014 (seeinfo), it seems that the company is doing just fine.

14. Preparation of Financial Statements

Land and Building = ` 80,000Total Liabilities = Total Assets` 2,00,000 = Total Assets

16







16







17

Fixed Assets = 60% of Total Gross Fixed Assets and Current Assets= ` 2,00,000 × 60/100= ` 1,20,000

Calculation of Additions to Plant & Machinery

Current Assets = Total Assets – Fixed Assets= ` 2,00,000 – ` 1,20,000 = ` 80,000

Calculation of Stock

Quick Ratio = 1Current Assets - StockCurrent Liabilities

150 000

80,000 - Stock,

``

` 50,000 = ` 80,000 – StockStock = ` 80,000 – ` 50,000

= ` 30,000Debtors = 4/5th of Quick Assets

= (` 80,000 – 30,000) × 4/5= ` 40,000

Debtors Turnover Ratio40 000 12 2, months

Credit Sales

2 Credit Sales = 4,80,000Credit Sales = 4,80,000/2

= 2,40,000Gross Profit (15% of Sales)` 2,40,000 × 15/100 = ` 36,000Return on Networth (profit after tax)Networth = ` 1,00,000 + ` 30,000

= ` 1,30,000Net Profit = ` 1,30,000 × 10/100 = ` 13,000Debenture Interest = ` 20,000 × 5/100 = ` 1,000

17






150 000

80,000 - Stock,

``

` 50,000 = ` 80,000 – StockStock = ` 80,000 – ` 50,000


= (` 80,000 – 30,000) × 4/5= ` 40,000


Credit Sales




17






150 000

80,000 - Stock,

``

` 50,000 = ` 80,000 – StockStock = ` 80,000 – ` 50,000


= (` 80,000 – 30,000) × 4/5= ` 40,000


Credit Sales




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Projected Profit and Loss Account for the year ended 31-3-2014

Ganesha LimitedProjected Balance Sheet as on 31st March, 2014

15. Working Notes;1. Net Working Capital = Current Assets – Current Liabilities

= 2 - 1 = 1

Current Assets =1

Net Working Capital × 2

=1

8,00,000 × 2

Current Assets = 16,00,000Current Liabilities = 16,00,000 – 8,00,000 = 8,00,000

2. Liquid Ratio = Liquid AssetsCurrent Liabilities

1.25 = Current Assets - StockCurrent Liabilities

1.25 = 16,00,000 - Stock8,00,000

1.25 x 8,00,000 = 16,00,000 – Stock10,00,000 = 16,00,000 – StockStock = 6,00,000Liquid Assets = 1.25 x 8,00,000 = 10,00,000

18




= 2 - 1 = 1

Current Assets =1


=1

8,00,000 × 2




1.25 = 16,00,000 - Stock8,00,000


18




= 2 - 1 = 1

Current Assets =1


=1

8,00,000 × 2




1.25 = 16,00,000 - Stock8,00,000


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3. Stock Turnover Ratio = COGSStock

7 COGS6,00,000

COGS = 42,00,0004. Sales – Gross Profit = COGS

Gross Profit 25%Sales

Gross Profit = 25% SalesSales – 25% Sales = COGS

Sales =0 75

42,00,000 = 56,00,000.

5. Debtors turnover Ratio = 12 81 5.

Credit SalesDebtorsDebtors Turnover

56 00 000 7 00 0008

, , , ,

6. 2SalesFixedAssets

56 00 000 28 00 0002

, ,FixedAssets , ,

7. Net worth = Fixed Assets + Current Assets – Long-term Debt – Current Liabilities= 28,00,000 + 16,00,000 – 0 – 8,00,000= 36,00,000

8. 0 25Reserves & Surplus .Capital

Net worth = Reserves and Surplus + Capital

1 2536,00,000Capital = 28,80,000

.

Reserves and Surplus = 0.25 x 28,80,000= 7,20,000

9. Cash = Liquid Assets – Debtors= 10,00,000 – 7,00,000 = 3,00,000

10. Long Term Debts = NilDraft Balance Sheet

(Note: The above solution has been worked out by ignoring the Net worth to Fixed assets ratiogiven in the question in order to match the total of assets and liabilities in the Balance Sheet).

19


7 COGS6,00,000




Sales =0 75

42,00,000 = 56,00,000.



56 00 000 7 00 0008

, , , ,


56 00 000 28 00 0002

, ,FixedAssets , ,




1 2536,00,000Capital = 28,80,000

.





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7 COGS6,00,000




Sales =0 75

42,00,000 = 56,00,000.



56 00 000 7 00 0008

, , , ,


56 00 000 28 00 0002

, ,FixedAssets , ,




1 2536,00,000Capital = 28,80,000

.





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16. Comment on Debt Service Coverage Ratio (DSCR)Debt service coverage ratio indicates the capacity of a firm to service a particular level of debti.e. repayment of principal and interest. High credit rating firms target DSCR to be greater than2 in its entire loan life. High DSCR facilitates the firm to borrow at the most competitive rates.Lenders are interested in this ratio to judge the firm’s ability to pay off current interest andinstallments.The debt service coverage ratio can be calculated as under:

Earnings available for debt serviceDebt Service Coverage RatioInterest + Installments

Or, Debt Service Coverage Ratio = EBITDAPrincipal Repayment DueInterest

1 - Tc

CA INTER FINANCIAL MANAGEMENT Answers · So, Sales = `75,00,000 × 1.2 = `90,00,000 Closing Stock =...

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