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FRSA Module 4 – Problems and Solutions

Ratio Analysis

A. Liquidity Ratios

1. From the following compute current ratio, quick ratio, cash ratio and Net Working

Capital ratio

Rs. Rs.

Stock 36,500 Prepaid expenses 1,000

Sundry Debtors 63,500 Bank overdraft 20,000

Cash in hand & bank 10,000 Sundry creditors 25,000

Bills receivable 9,000 Bills payable 16,000

Short term investments 30,000 Outstanding expenses 14,000

(i). Current Ratio Current Assets 150000

= Current Assets/CL Current Liabilities 75000

Current Ratio = 2:1

(ii). Quick Ratio Current Assets – Stock & Prepaid Exp. 112,500

Current Liabilities 75,000

Quick Ratio = 1.5:1

(iii). Cash Ratio Cash Balance + Bank Balance +Short

term Marketable Securities 40,000


Cash Ratio = 0.53:1

(iv) Net Working Capital CA - CL 75,000

2. Calculate Current Ratio, , quick ratio, cash ratio and Net Working Capital ratio from the

following:

Prepaid Expenses Rs. 20,000; Creditors Rs.20,000

Debentures Rs.2,00,000; Machinery Rs.50,000

Debtors Rs.40,000; Investments (Short term) Rs.10,000

Bills Payable Rs.10,000; Stock Rs.20,000

Outstanding Expenses Rs.20,000; Accrued Income Rs.5,000

(i). Current Ratio Current Assets 95,000


Current Ratio = 1.9:1

(ii). Quick Ratio Current Assets – Stock & Prepaid Exp. 55,000


Quick Ratio = 1.1:1


(iii). Cash Ratio Cash Balance + Bank Balance + Short



Cash Ratio = 0.2:1

(iv) Net Working Capital CA - CL 45,000

3. The following is the Balance Sheet of a company as on 31st March 2011:

Liabilities Rs. Assets Rs.

Share capital

Profit and Loss account

General Reserve

12% Debentures

Sundry Creditors

Bills Payable

2,00,000

30,000

40,000

4,20,000

1,00,000

50,000

Land and Buildings

Plant and Machinery

Stock

Sundry debtors

Bills receivable

Cash at bank

1,40,000

3,50,000

2,00,000

1,00,000

10,000

40,000

Calculate:

(i). Current ratio, (ii). Quick ratio and (iii). Absolute liquid Ratio

(i). Current Ratio Current Assets 3,50,000

Current Liabilities 1,50,000

Current Ratio = 2.33:1

(ii). Quick Ratio Current Assets – Stock & Prepaid Exp. 1,50,000


Quick Ratio = 1:1

(iii). Cash Ratio Cash Balance + Bank Balance +Short



Cash Ratio = 0.267:1

(iv) Net Working Capital CA - CL 1,00,000

4. The data extracted from the books of the three automobile companies are provided

below:

Particulars Ashok Leyland (Rs.) Mahindra & Mahindra (Rs.) Tata Motors (Rs.)

Inventories 22,00,000 14,00,000 19,00,000

Debtors 10,00,000 32,00,000 30,00,000

Accounts Payable 11,50,000 12,00,000 28,00,000

Cash 2,00,000 60,000 1,00,000

Bank 6,70,000 -3,10,000 -6,30,000

Required: (a) Find the liquidity ratios for the above companies (b) Evaluate the performance of the companies on relative basis


Ratio Formula Ashok Leyland Mahindra & Mahindra

Tata Motors

Current Ratio

Current Assets / Current Liabilities

=4070000/ 1150000

=4660000/ 1510000

=5000000/ 3430000

3.54:1 3.09:1 1.46:1

Liquid Ratio

Current Assets - Stock / Current Liabilities

=4070000-2200000/ 1150000

=4660000-1400000/ 1510000

=5000000-1900000/ 3430000

1.63:1 2.16:1 0.90:1

Cash Ratio Cash + Bank + ST Mkt. Sec/ CL

=870000/ 1150000

=60000/1510000

=100000/ 3430000

0.757:1 0.040:1 0.029:1

Net Working Capital

CA - CL 29,20,000 31,50,000 15,70,000

Q5: Calculate the amount of Current Assets and Current Liabilities.

Current ratio 2.5 and Working capital Rs.60,000.

Working Capital = Current Assets - Current Liabilities

Current Ratio = 2.5 Current Assets : 1 Current Liabilities

Rs.60,000 = 2.5 x - 1 x; Rs.60,000 = 1.5 x

x = 60,000/1.5

x = 40000

Current Assets Rs.1,00,000

Current Liabilities Rs. 40,000

B. Activity Ratios

1. Calculate the Debtors Turnover Ratio and Average Collection Period from the following

information:

• Total sales = Rs. 4,00,000

• Cash sales = 20% of total sales

• Debtors on 1.1.2004 = Rs. 40,000

• Debtors on 31.12.2004 = Rs. 1,20,000

Answer

Debtors Turnover Ratio = Credit Sales / Average Debtors

Credit Sales = Total Sales – Cash Sales; Rs.4,00,000-Rs.80,000 (20% of Rs.4,00,000) =

Rs.3,20,000

Average Debtors = (Opening Debtors + Closing Debtors)/2 = (Rs.40,000+Rs.1,20,000)/2

= Rs.80,000

Therefore DTR = Rs.3,20,000/Rs.80,000 = 4 Times


Average Collection Period = No. of days in a year or months / DTR

= 365 Days (or) 12 Months / 4 Times

= 91 Days (or) 3 Months

2. From the following details, Calculate (a) Debtors Turnover Ratio and (b) Debtors Average

Collection Period:

• Total Sales - Rs.4,00,000 Sales Returns - Rs.25,000

• Cash Sales - Rs. 30,000 Debtors – Rs.10,000

• Bills Receivables - Rs. 25,000

Answer

Debtors Turnover Ratio = Credit Sales / Average Debtors

Credit Sales = Total Sales – Cash Sales – Sales Returns;

= Rs.4,00,000-Rs.30,000-Rs.25,000= Rs. 3,45,000

Average Debtors = Debtors + Bills Receivables (Closing) = Rs.10,000+Rs.25,000 = Rs.35,000

Therefore DTR = Rs.3,45,000/Rs.35,000 = 9.86 Times

Average Collection Period = No. of days in a year or months / DTR

= 365 Days (or) 12 Months / 4 Times

= 37 Days (or) 1.217 Months

3. Calculate the Creditor’s Turnover Ratio from the following figures.

• Credit purchases during 2005 = Rs. 12,00,000

• Creditors + Bills Payables on 1.1.2005 = Rs. 4,00,000

• Creditors + Bills Payables on 31.12.2005 = Rs. 2,00,000

Creditors Turnover Ratio = Credit Purchases / Average Creditors

Average Creditors = (Opening Creditors + Closing Creditors)/2

= (Rs.4,00,000 + Rs.2,00,000)/2 = Rs.3,00,000

Creditors Turnover Ratio = Rs.12,00,000/Rs.3,00,000 = 4 Times

Average Collection Period = No. of Days in a year (or) Months in a year / CTR

= 365 days (or) 12 months /4 Times

= 91 Days (or) 3 Months

4. From the following information, calculate –

• (i) Payable Turnover Ratio

• (ii) Average Payment Period

• Total Purchases - Rs.80,000; Cash Purchases – Rs.20,000

• Purchase returns - Rs. 5,000; Sales returns – Rs.10,000

• Bills Receivables - Rs.12,000; Creditors – Rs.20,000

• Bills Payables - Rs. 15,000; Debtors – Rs.40,000


Answer:

Creditors Turnover Ratio = Credit Purchases / Average Creditors

Credit Purchases = Total Purchases – Cash Purchases – Purchase Returns

= Rs.80,000-Rs.20,000-Rs.5,000 = Rs.55,000

Average Creditors = Bills Payable + Creditors (Closing)

= Rs.15,000 + Rs.20,000 = Rs.35,000

Creditors Turnover Ratio = Rs.55,000/Rs.35,000 = 1.57 Times

Average Collection Period = No. of Days in a year (or) Months in a year / CTR

= 365 days (or) 12 months /1.57 Times

= 232 Days (or) 7.64 Months

Stock Turnover Ratio

5. From the following information, calculate stock turnover ratio :

• Opening Stock Rs. 18,000 Wages Rs. 14,000

• Closing Stock Rs. 22,000 Sales Rs. 80,000

• Purchases Rs. 46,000 Carriage Inwards Rs. 4,000

Answer:

Stock (or) Inventory Turnover Ratio = Net Sales or Cost of Goods Sold / Average Inventory

Net Sales = Rs.80,000

Average Inventory = (Opening Stock + Closing Stock)/2

= (Rs.18,000 + Rs.22,000)/2 = Rs.20,000

Therefore, Stock Turnover Ratio = Rs.80,000/Rs.20,000 = 4 Times

6. From the following information, calculate stock turnover ratio.

• Sales: Rs. 4,00,000, Gross Profit Ratio : 10% on Sales

• Opening stock = Rs. 38,500 Closing stock = Rs.41,500

Answer:

Stock (or) Inventory Turnover Ratio = Net Sales or Cost of Goods Sold / Average Inventory

Net Sales = Rs.4,00,000


= (Rs.38,500 + Rs.41,500)/2 = Rs.40,000

Therefore, Stock Turnover Ratio = Rs.4,00,000/Rs.40,000 = 10 Times

Based on Cost of Goods Sold

Cost of Goods Sold = Sales – Gross Profit

= Rs.4,00,000 – Rs.40,000 = Rs.3,60,000


= (Rs.38,500 + Rs.41,500)/2 = Rs.40,000

Therefore, Stock Turnover Ratio = Rs.3,60,000/Rs.40,000 = 9 Times


7. The data extracted from the books of the two cement companies are provided below:

Particulars Ambuja Cements (Rs.)

Acc Limited (Rs.)

Sales 2500 2250

Purchases 1450 1125

Opening Stock 450 225

Closing Stock 275 145

Creditors 120 130

Debtors 240 220

Bills Payable 85 115

Bills Receivable 115 135

Required: Compute the Following Ratios:

(i) Debtors Turnover Ratio (ii) Creditors Turnover Ratio and (iii) Stock Turnover Ratio

Answer:

8. From the following information, calculate (i) Total Assets Turnover (ii) Fixed Assets

Turnover and (iii) Working Capital Turnover Ratios:

(Rs.) (Rs.)

Preference Shares Capital 4,00,000 Plant and Machinery 8,00,000

Equity Share Capital 6,00,000 Land and Building 5,00,000

General Reserve 1,00,000 Motor Car 2,00,000

Profit and Loss Account 3,00,000 Furniture 1,00,000

15% Debentures 2,00,000 Stock 1,80,000

14% Loan 2,00,000 Debtors 1,10,000

Creditors 1,40,000 Bank 80,000

Bills Payable 50,000 Cash 30,000

Outstanding Expenses 10,000 Sales for the year 2018 were Rs. 30,00,000.

Answer:

(i) Total Assets Turnover Ratio = (Net Sales /Total Assets)


= (Rs.30,00,000/Rs.20,00,000) = 1.5 Times

(ii) Fixed Assets Turnover Ratio = (Net Sales /Fixed Assets)

= (Rs.30,00,000/Rs.16,00,000) = 1.88 Times

(iii) Working Capital Turnover Ratio = (Net Sales /Net Working Capital)

Net Working Capital = Current Assets – Current Liabilities = Rs. 4,00,000 – Rs.2,00,000

= Rs.2,00,000

= (Rs.30,00,000/Rs.2,00,000) = 15 Times

C. Profitability Ratios

The data extracted from the books of the two FMCG companies are provided below:

Particulars Nestle (Rs.) HUL (Rs.)

Sales 800000 650000

Other Income 50000 25000

Cost of Goods Sold 350000 300000

Employee Benefit Cost 120000 85000

Finance Cost 30000 15000

Other Expenses 50000 15000

Required: Compute the Following Ratios:

(i) Gross Profit Ratio (ii) Net Profit Ratio (iii) Operating Ratio and (iv) Operating Profit Ratio


The Statement of Profit and Loss and the Balance Sheet for Ultra Tech Cements Limited

Statement of Profit and Loss for the year ended 31.3.2018 Balance Sheet as on 31.3.2018

Particulars Rs. Equity and Liabilities Rs.

Revenue (from Sales) 2,80,000 Share Capital (10000 Shares) 1,00,000

Cost of Goods Sold 1,45,000 Reserves and Surplus 40,000

Operating Expense (including Rs. 25,000 Depreciation)

30,000 Non-Current Liability 20,000

Interest Expense 12,000 Current Liability 15,000

Tax Rate 30% Total 1,75,000

Assets Rs.

Non-Current Assets

Fixed Assets 85,000

Non-Current Investment 35,000

Current Assets

Cash and Bank 15,000

Stock 20,000

Debtors 5,000

Marketable Securities 15,000

Total 1,75,000

The Company declared Rs.2/ per share as dividend. The market price of the stock is Rs. 14 per share.

Required: Find (i) Return on Investment (ii) Return of Equity (iii) Return on Total Assets

Answer:

Ratio Formula Calculation Answer

(i) Return on Investment

(Profit before Interest and Tax /Capital Employed)x100

(105000/(85000+55000-15000)x100

84.00%

(ii) Return of Equity (PAT / Net worth) X 100

(65100/140000)x100 46.50%

(iii) Return on Total Assets

(PAT / Total Assets) x100

(65100/175000)x100 37.20%

D. Market Ratios

The Statement of Profit and Loss and the Balance Sheet for Tata Steel Limited (Rs. In Crore)

Statement of Profit and Loss for the year ended 31.3.2018

Balance Sheet as on 31.3.2018


Revenue (from Sales) 65,000 Share Capital (5000 Shares) 50,000

Cost of Goods Sold 32,000 Reserves and Surplus 12,540

Operating Expense (including Rs. 2800 Depreciation)

12,000 Non-Current Liability 18,600

Interest Expense 8,000 Current Liability 7,560


Tax Rate 30% Total 88,700

Assets Rs.

Non-Current Assets

Fixed Assets 44,000

Non-Current Investment 22,000

Current Assets

Cash and Bank 11,700

Stock 5,000

Debtors 3,500

Marketable Securities 2,500

Total 88,700

The Company declared Rs.3/ per share as dividend. The market price of the stock is Rs. 12 per share.

Required: Find (i) Earnings Per Share (ii) Price to Earnings Ratio (iii) Dividend Yield Ratio (iv) Book Value per Share and (v) Price to Book Value

Answer:


(i) Earnings Per Share (PAT – Preference Dividend) / Number of Equity Shares

9100/5000 Shares Rs.1.82

(ii) Price to Earnings Ratio

Market Price of the share/ EPS

Rs.12/Rs.1.82 6.59 Times

(iii) Dividend Yield Ratio

(Dividend per share / Market price of the Share) x 100

(Rs.3/Rs.12)x100 25%

(iv) Book Value per Share

Net Assets / Number of shares 88700/5000 Shares Rs.17.74

(v) Price to Book Value

Market price of the share/ Book Value per share

Rs.12/Rs.17.74 0.68 Times

E. Solvency Ratios

The Statement of Profit and Loss and the Balance Sheet for MRF Tyres Limited (Rs. In Lakhs)

Statement of Profit and Loss for the year ended 31.3.2018 Balance Sheet as on 31.3.2018


Revenue (from Sales) 16,445 Share Capital (400 Shares) 4,000

Cost of Goods Sold 7,138 Reserves and Surplus 6,653

Operating Expense (including Rs. 340 Depreciation) 2,440

Long term Borrowings 1,868

Interest Expense 253 Creditors 5,771

Tax Rate 32% Total 18,292

Assets Rs.

Non-Current Assets

6,614 Fixed Assets 8,171

2,116 Investments 3,848

Current Assets


Stock 1,348

Debtors 3,455

Cash and Bank 1,470

Total 12,019

Required: Find (i) Debt to Equity Ratio (ii) Capital Gearing Ratio (iii) Solvency Ratio (iv) Equity or Proprietary Ratio and (v) Interest Coverage Ratio

Answer:


(i) Debt to Equity Ratio

Debt / Equity 1868/4000 0.47:1

(ii) Capital Gearing Ratio

Total Debt/ Capital Employed 1868/(8171+6273-5771) 0.22:1

(iii) Solvency Ratio (PAT + Depreciation)/Total Liabilities

(4498+340)/12019 0.40:1

(iv) Equity or Proprietary Ratio

Shareholders' Funds/ Total Capital Employed

(4000+6653)/(8171+6273-5771)

1.23:1

(v) Interest Coverage Ratio

Profit before Interest and tax/Total Interest

6867/253 27.14:1

F. Balance Sheet Reconstruction

Future Retail Limited provides the following information as on 31.3.2018

Particulars Rs.

Working Capital 2,40,000

Bank Overdraft 40,000

Fixed Assets to Proprietary Funds ratio 0.75

Reserves and Surplus 1,60,000

Current ratio 2.5

Liquid ratio 1.5

Required: Prepare a summarized Balance Sheet as at 31.03.2018

Answer:

(i) Current Assets and Current Liabilities:

Current Ratio = 2.5:1 i.e 2.5 times Current Assets and 1 time Current liabilities

X denotes as amount therefore Current Ratio = 2.5X : 1X

Working Capital = Rs. 2,40,000

Working Capital = Current Assets – Current Liabilities

Therefore, Rs.2,40,000 = 2.5X -1X

1.5X = Rs.240,000; X = 240000/1.5


X = Rs. 160,000

Current Assets = 2.5 X = 2.5 * Rs.160000 = Rs.4,00,000

Current Liabilities = 1X = 1 * Rs.160000 = Rs.1,60,000

(ii) Stock

Liquid Ratio = (Current Assets – Stock) / Current Liabilities

1.5 = (Rs.4,00,000 – Stock)/ Rs.1,60,000

1.5 x Rs.1,60,000 = Rs.4,00,000 – Stock

Stock = Rs.4,00,000 – Rs.2,40,000 = Rs.1,60,000

(iii) Fixed Assets and Shareholders Funds

Use Balance Sheet Equation for identifying the Fixed Assets and Shareholders’ Funds

Balance Sheet Equation

Shareholders’ Funds + Current Liabilities = Fixed Assets + Current Assets

Fixed Assets to Proprietary Funds ratio = 0.75

It means 0.75 time Fixed Assets and 1 Time Proprietary Funds Ratio

Assume X as amount, Therefore Fixed Assets is 0.75 X and Proprietary Funds is 1 X

Substitute Values into Equation

1X + Rs.1,60,000 = 0.75X + Rs.4,00,000

1X – 0.75X = Rs.4,00,000 – Rs.1,60,000

0.25X = Rs.2,40,000; X = Rs.2,40,000/0.25

X = Rs.9,60,000

Fixed Assets is 0.75X = 0.75 * Rs. 9,60,000 = Rs.7,20,000

Shareholders’ Funds is 1 X = 1 * Rs.9,60,000 = Rs.9,60,000

Summarized Balance Sheet:

Balance Sheet

Liability Rs.

Shareholders' Funds

Share Capital 800000

Reserves and Surplus 160000

Current Liabilities

Bank Overdraft 40000

Other Current Liabilities 120000


Total 1120000

Assets

Fixed Assets 720000

Current Assets

Stock 160000

Other current assets 240000

Total 1120000

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