FAWCM – Practice Questions

Question 1Prepare a Common Size Profit and Loss Account from the following information and present you analysis.For P&L Account Base Number for % calculation will be SalesFor Balance Sheet base number for % calculation will be Total AssetsProfit and Loss Account of Two Companies competing in the same sectorParticulars Anand

LimitedKishore Limited

Particulars Anand Limited

Kishore Limited

To Cost of Goods soldTo Office and Administrative ExpensesTo Selling and Distribution ExpensesTo Net Profit

800000

400000

250000550000

1200000

650000

450000200000

By Sales 2000000 2500000

2000000 2500000 2000000 2500000

Solution

ParticularsAnand Limited

Kishore Limited

Particulars

Anand Limited

Kishore Limited

To Cost of Goods sold

40% 48%

By Sales 100% 100%

To Office and Administrative Expenses

20% 26%

To Selling and Distribution Expenses

13% 18%

To Net Profit 28% 8%

100% 100% 100% 100%

Comments There is a significant difference between the profitability of the two companies, as Anand

Limited is earning 28% margin, whereas Kishore Limited is earning only 8% Cost of Goods of Anand Limited is also relatively lower compared to Kishore Limited. Other costs like Administration and Selling Expenses are also significantly lower. Based on the ratios, it seems that Kishore Limited’s business is inefficiently managed and

needs substantial efforts to improve the profitability in comparison to the competitor.

Balance Sheet of Two Companies competing in the same sectorLiabilities Anand Kishore Assets Anand KishoreEquityEquity CapitalReservesDebtLong Term Loan/DebtCurrent LiabilitiesBills PayableTax PayableCreditors

10,00,000 5,00,000

22,00,000

90,000 2,00,000 3,10,000

10,00,000 3,00,000

11,50,000

90,000 2,20,000 2,00,000

Fixed AssetsLandBuildingsPlantFurnitureCurrent AssetsCashDebtorsStock

8,00,000 3,50,000 5,00,0006,00,000

50,000 9,00,000

11,00,000

3,20,000 5,00,000 2,00,000

1,00,000

90,000 8,50,000 9,00,000

4300000 2960000 43,00,000 29,60,000

SolutionConvert the Balance Sheets into % format. Consider the Total of Assets or Total of Liabilities as 100%. Partial solution is as under. Please complete the same for practice.Liabilities Anand Kishore Assets Anand KishoreEquityEquity CapitalReservesDebtLong Term Loan/DebtCurrent LiabilitiesBills PayableTax PayableCreditors

Please compute

Please compute

Fixed AssetsLandBuildingsPlantFurnitureCurrent AssetsCashDebtorsStock

18.6%8.1%

11.6%14%

1.2%20.9%25.6%

Please compute

100 100 100 100Comments

Comment on the Capital Structure as to How both the companies is funding with own capital or outside capital etc.

Compare which company has Current assets more than Fixed assets

Question 2

Ratio AnalysisCalculate(Any Seven) the ratios based on the following Profit and Loss Account and Balance Sheet

1.Current Ratio 2.Quick Ratio 3.Operating Expenses Ratio 4.Operating Profit Ratio 5.Stock/Inventory Turnover Ratio 6.Debtor’s/Receivables Turnover Ratio & Average Collection Period (Number of days of sales) 7.Creditor’s Turnover Ratio & Average Payment Period 8.Return on Capital Employed Ratio 9. Return on Equity 10. Debt/Equity Ratio 11. Proprietary Ratio

Profit & Loss A/C

Particulars Amount Particulars AmountTo Opening StockTo PurchaseTo Gross Profit

2,00,00025,00,000

24,50,000

By SalesBy Closing Stock

50,00,000 1,50,000

51,50,000 51,50,000To Selling & Distribution ExpensesTo Administrative ExpensesTo DividendTo TaxTo Net Profit

5,00,000

5,00,000 2,00,000

2,00,00011,50,000

By Gross ProfitBy Profit on sale of Asset

24,50,000 1,00,000

25,50,000 25,50,000Balance Sheet

Liabilities Amount Assets AmountEquityEquity Share CapitalReserve and SurplusLong Term DebtCurrent LiabilitySundry CreditorsOthers Payables

10,00,0005,50,00020,00,000

3,00,0002,00,000

Fixed AssetsLand & BuildingPlant & MachineryCurrent AssetsStockSundry Debtors/ReceivablesCash & Bank Balances

15,00,00012,00,000

5,50,0005,50,0002,50,000

40,50,000 40,50,000

Calculation of RatiosRatio Formula Computation Result RemarksCurrent Ratio

Current Assets / Current Liabilities

1350000 / 500000 2.7 times Provide your comments

Quick Ratio

Current Assets-Inventory /Current Liabilities

1350000-550000 / 500000

1.6 times Provide your comments

Operating Expenses Ratio

Operating Expenses / Sales

3550000/5000000 71 % Provide your comments

Operating Expenses = (Opening Stock+Purchases-Closing Stock+Selling and Distribution+Administration Expenses) /Sales

Operating Profit ratio

(Sales-Operating Expenses) / Sales

(5000000-3550000)/5000000

29 % Provide your comments

Inventory Turnover Ratio

Sales / Inventory 5000000/550000 9.09 Times

Provide your comments

Receivable or Debtor’s Turnover Ratio

Sales / Receivables 5000000/550000 9.09 times

Provide your comments

Average Collection Period or Days number of Sales

Receivables /Sales * 365 days

550000/5000000*365

40 Days Provide your comments

Creditors Turnover Ratio

Purchases / Creditors 2500000/300000 8.33 Times

Provide your comments

Creditors Number of Days or Purchases or Average Payment Period

Creditors / Purchases * 365

300000/2500000*365

43.8 Days Provide your comments

Return on Capital Employed

(Net Profit + Dividend) / Total Assets

(1150000+200000)/4050000

33.33% Provide your comments

Return on Equity

(Net Profit + Dividend)/(Equity+reserves)

(1150000+200000)/(1000000+5500000)

87.0% Provide your comment

Debt Equity Ratio

Long Term Debt / (Equity + reserves) Or

(Long Term Debt + Current Liabilities) / (Equity+ Reserves & Surplus)

2000000/(1000000+550000)

(2000000+500000)/ (1000000+550000)

1.29 Times

1.61Times

Provide your comment

Proprietary Ratio

Equity + reserves / Total Assets

(1000000+550000)/4050000

38% Provide your comment

Question 3

Calculation of another ratio by taking clues from one ratio

From the following details, you are required to find out:

(a) Sales; (b) Inventory Value (c) Equity (d) Profit after Tax (e) Profit after tax as % of sales

(1) Inventory or Stock Turnover Ratio = 4(2) Debt = Rs. 20,00,000(3) Debt Equity Ratio = 2:1(4) Debtor's Turnover Ratio = 5(5) Debtors or Receivables = Rs, 3,00,000(6) Return on Equity = 15%

SalesDebtors = 300000Debtors Turnover Ratio = 5 times, Therefore Sales is 5 Time of ReceivablesTherefore Sales = 300000*5 = 1500000

InventoryInventory Turnover Ratio = Sales / InventoryTherefore 4 = 1500000/Inventory ValueTherefore Inventory Value = 1500000/4 = 375000

EquityDebt Equity Ratio = Debt / EquityTherefore 2 = Debt / EquityTherefore Equity = 2000000/2Therefore Equity = 1000000

Profit After TaxReturn on Equity = Profit After Tax / EquityTherefore 10% = PAT/1000000Therefore PAT = 100000

PAT as % of salesPAT = 100000Sales = 1500000PAT as % of Sales = 6.67%

Question 4

Applying Dupont Model and Comparison

Particulars PAT Equity PBT EBIT Sales AssetsAyush Limited

3,50,000 15,00,000 5,50,000 9,00,000 45,00,000 40,00,000

Piyush Limited

5,00,000 20,00,000 7,00,000 9,00,000 75,00,000 40,00,000

Applying Dupont Model for Ayush Limited. You apply to Piyush Limited and provide your analysis

Ayush LimitedTax Burden PAT/ PBT 350000/550000 63.63% Ayush Ltd has a tax

burden of approx. 36% and Piyush Limited has _________. Who is better?

Interest Burden

PBT/EBIT 550000/900000 61.11% Ayush Ltd has a pay interest to the extent of approx. 39% of the EBIT.

EBIT Margin EBIT/Sales 900000/4500000 20% Ayush Limited has 20% profitability margin

Asset Utilisation

Sales / Assets

4500000/4000000 1.125 Asset utilisation is better being more than 1

Leverage Assets / Equity

4000000/1500000 2.67 Relatively Balanced Leveraged being less than 3

Theory preparation SyllabusPage 567-577 of Prasanna Chandra’s Book