Important concepts of Ratio for CA Students

1. Basic Computations

Q1. Relationship between Fixed Assets, Working Capital and Proprietary FundsFrom the following information, calculate the amount of Fixed Assets & Proprietors’ Funds.

1. Ratio of Fixed Assets to Proprietors’ Funds = 0.75,2. Net Working Capital = Rs. 6,00,000

Q2. Computation of ACPCompute Average Collection Period from the following details by adopting a 360-day year.

(a)Average Inventory- Rs. 3,60,000, (b)Debtors – Rs. 2,40,000, (c) Inventory Turnover- 6 times, (d) GP Ratio- 10%, (e) Credit Sales to Total Sales- 80%

Q3. Computation of PE RatioCalculate PE Ratio from the following information-

Equity Capital (Rs 20 each)Fixed AssetsReserves and SurplusInvestments

Rs. 50LakhsRs. 30LakhsRs. 5LakhsRs. 5Lakhs

Secured Loans at 15%Operating Profit (subject to Tax 50%)Unsecured Loans at 12.5%Market Price per Share

Rs. 25LakhsRs. 25LakhsRs. 10LakhsRs. 50

Q4. Computation of EPSABC Ltd made Profits Before Tax of Rs. 93,20,000. Tax amounted to Rs. 28,00,000. The Company’s Share Capital is Rs. 120Lakhs, divided as –(a)Ordinary Shares (1,00,00,000 and (b) 8% Preference Shares Rs. 20,00,000.

Q5. Calculate the EPS for the year.Computation of Debt-Equity RatioFrom the following data, compute the Debt-Equity Ratio –(a) Proprietary Ratio – 0.4, (b) Current Ratio – 2.5, (c) Working Capital Turnover – 6, (d) Total Assets Turnover – 1.5, (e) Sales – Rs 12,00,000.

Q6. MNP Ltd has made plans for the next year. It is estimated that the Company will employ Total Assets Rs. 25,00,000, 30% of the Assets being financial by Debt at an interest cost of 9% p.a. The Direct Costs for the year are estimated at Rs. 15,00,000 and all other Operating Expenses are estimated at Rs. 2,40,000. The Sales Revenue are estimated at Rs. 22,50,000. Tax Rate is assumed to be 40%. You are required to calculate –

(i) Net Profit Margin, (ii) Return on Assets, (iii) Assets Turnover, (iv) Return on Equity.Q7. MN Limited gives you the following information related for the year ending 31st March. Calculate –(i) Quick Ratio, (ii) Fixed Assets Turnover Ratio, (iii) Proprietary Ratio, (iv) EPS, and (v) Price-Earning Ratio.

Particulars ParticularsCurrent RatioDebt-Equity RatioReturn on Total AssetsTotal Assets Turnover RatioGrass Profit Ratio

2.5 : 11 : 1.5

15%2

20%

Current Market Price per Equity ShareNet Working CapitalFixed Assets60,000 Equity Shares of Rs. 10 each20,000 9% Preference Shares of Rs. 10

Rs.16Rs.4,50,000

Rs.10,00,000Rs.6,00,000Rs.2,00,000

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Stock Turnover Ratio 7 eachOpening Stock Rs.3,80,000

Q8. Computation of Sales, Debtors, Purchases and Creditors Following are the ratios relating to the trading activities of Super Star Enterprises.

Debtors Velocity – 3 months.

Stock Velocity – 6 months.

Creditors Velocity – 2 months.

Gross Profit- 20%, Gross Profit for the year just ended was Rs5Lakhs.

Stock at the end of the year was Rs.20,000 more than it was at the beginning.

Bills Payable and Receivable were Rs.36,667 and Rs.60,000 respectively.

Q9. Computation of Current AssetsYou are required to calculate the Total Current Assets Ananya Limited from the given information:

Stock Turnover = 5 timesSales (All credit) = Rs. 7,20,000Gross Profit Ratio = 25%

Current Liabilities = 2,40,000Liquidly Ratio = 1.25Stock at the end is Rs. 30,000 more than stock in the beginning

2. Preparation of Balance Sheet from Ratios

Q10. Preparation of Balance Sheet from RatiosWorking Capital of Company is Rs. 1,35,000 and Current Ratio is 2.5 Liquid Ratio is 1.5 and the Proprietary Ratio 0.75. Bank Overdraft is Rs. 30,000 there and Long-term Loans and fictitious Assets. Reserves and Surplus amount to Rs. 90,000 and the Gearing Ratio [Equity Capital ÷ Preference Capital] is 2.From the above, ascertain the following items and draw the Statement of Proprietary Fund.

(i) Current Assets(ii) Current Liabilities(iii) Net Block

(iv) Proprietary Fund

(v) Quick Liabilities(vi) Quick Assets(vii) Stock and(viii) Preference and Equity Capital

Q11. Preparation of Balance Sheet from RatiosWith the help of the following information complete the Balance Sheet of MNOP Ltd.

Equity Share CapitalThe relevant ratios of the Company are as follows: Current Debt to Total Debt Total Debt to Owner’s Equity Fixed Assets to Owner’s Equity

Rs. 1,00,000

0.400.600.60



Total Assets Turnover Inventory Turnover

2 times8 times

Q12. Preparation of Balance Sheet from RatiosUsing the following information, complete the Balance Sheet given below:

(i) Total Debt to Net Worth: 1 : 2(ii) Total Assets Turnover : 2(iii) Gross Profit on Sales: 30%

(iv) Average Collection Period (Assume 360 Days in a year): 40 days(v) Inventory Turnover Ratio based on Cost of Goods Sold and year- end inventory:3(vi) Acid Test Ratio : 0.75

Balance Sheet as on 31st March

Liabilities Rs. Assets Rs.Equity Share CapitalReserves and SurplusTotal Debt: Current Liabilities

4,00,0006,00,000

-

Plant and Machinery and other Fixed AssetsCurrent Assets: Inventory Debtors Cash

-

---

Total Total

Q13. Preparing Balance Sheet from RatiosUsing the following data, complete the Balance Sheet given below –

Gross ProfitsShareholders’ FundsGross Profit MarginCredit Sales to Total Sales

Rs.54,000Rs,6,00,000

20%80%

Total Assets TurnoverInventory TurnoverAverage Collection Period (360 days a year)Current RatioLong-Term Debt to Equity

0.3 times4 times20 days

1.840%

Balance Sheet

Liabilities Rs. Assets Rs.CreditorsLong-Term DebtShareholders’ Funds

CashDebtorsInventoryFixed Assets

Total Total

Q14. Preparing of Balance Sheet from RatiosFrom the following information relating to Wise Ltd, prepare its summarized Balance

Sheet.



Current Ratio -2.5Acid Test Ratio -1.5Gross Profit to Sales Ratio -0.2Net Working Capital to Net Worth Ratio -0.3Sales to Net Fixed Assets Ratio -2.0Sales to Net Worth Ratio -1.5

Sales to Debtors Ratio -6.0Reserves to Capital Ratio -1.0Net Worth to Long Term Loan Ratio -20.0Stock Velocity -2 monthsPaid up Share Capital -Rs.10Lakhs

Q15. Preparation of balance Sheet Ratio

From the following of Wiser Ltd, prepare its proforma Balance Sheet if its Sales are Rs.16Lakhs.

Sales to Net Worth -2.3 timesCurrent Liabilities to Net Worth - 42%Total Liabilities to Net Worth - 75%

Current Ratio -2.9 timesSales to Closing Inventory -4.5 timesAverage Collection Period -64 days

Proforma Balance Sheet of Wiser Ltd

Liabilities Rs. Assets Rs.Net WorthLong Term LiabilitiesCurrent Liabilities

Fixed AssetsCashStockDebtors

Total TotalCalculations are to be made to the nearest rupee.

Q16. Preparing Balance Sheet from Ratios

Based on the following information, prepare the Balance Sheet of Star Enterprises as at 31st December.

Current Ratio -2.5Liquidity Ratio -1.5Net Working Capital -Rs.6LakhsStock Turnover Ratio -5Gross Profit to Sales -20%

Cost of Goods Sold to Net Fixed Assets 2Average Debt Collection Period 2.4 monthsFixed Assets to Net Worth 0.80Long Term Debt to Capital and Reserves 7/25

Q17. Preparing Balance Sheet from Ratios

Devdas asks you to prepare his Balance Sheet from the particulars furnished hereunder –

Stock Velocity: 6Capital Turnover Ratio: 2Fixed Assets Turnover Ratio: 4Debt Collection Period: 2 monthsCreditors Payment Period: 73 days

Gross Profit was Rs. 60,000Gross Profit Margin – 20%Excess of Closing Stock over Opening Stock was Rs5,000Difference in Balance Sheet represents Bank Balance.



Q18. Balance Sheet using Ratios, and Working Capital Forecast

The following figures and ratios are related to a Company:

Sales for the year (all credit)Gross Profit RatioFixed Assets Turnover (basis on Cost of Goods sold)Stock Turnover (basis on Cost of Goods Sold)Liquid Ratio

Rs.30,00,000

25%

1.5

61 : 1

Current RatioDebtors Collection PeriodReserves & Surplus to Share CapitalCapital Gearing RatioFixed Assets to Net Worth

1.5 : 12months

0.6 : 10.5

1.20 : 1

You are required to prepare:

1. Balance Sheet of the company on the basis of above details.2. Statement showing Working Capital Requirements, if the Company wants to make a provision

for contingencies at 10% of Net Working Capital including such provision.

3. Preparation of P&L A/c and Balance Sheet from Ratios

Q19. P&L Account and Balance Sheet Preparation from Ratios

Mass Media Ltd has furnished the following ratios and information for the year ending 31 st March.

SalesReturn on Net WorthTax RateShare Capital to ReservesNet Profit to Sales

Rs.60,00,00025%50%7 : 3

6.25%

Current RatioCost of Goods SoldInterest on DebenturesSundry Debtors & Sundry CreditorsInventory T/O (based on COGS)

2 timesRs. 18,00,000

Rs. 60,000Each Rs.2,00,000

12 Times

Required: (1) Calculate the Opening Expenses for the year, (2) Prepare the B/s in the following format –

Liabilities Rs. Assets Rs.Shares CapitalReserves and Surplus15% DebenturesSundry Creditors

Fixed AssetsCurrent Assets: Stock Debtors Cash

Total Total


The following accounting information and financial ratios of PQR Ltd relate to the year ended 31 st December –

I. Accounting Information II. Financial Ratios



Gross ProfitNet ProfitRaw Materials ConsumedDirect WagesStock of Raw MaterialsStock of Finished GoodsDebt Collection Period (All Sales are on credit.)

15% of Sales8% of Sales

20% of Works Cost10% of Works Cost

3 months’ usage6% of Works Cost

60 days

Fixed Assets to SalesFixed Assets to Current AssetsCurrent RatioLong Term Loans to Current LiabilitiesCapital to Reserves and Surplus

1:313:11

2:12:11:4

If value of Fixed Assets as on 31st December amounted to Rs. 26Lakhs, prepare a summarized P&L Account of the Company for the year ended 31st December, and also the Balance Sheet as on 31st December.

Q21. Preparation of Financial Statements from Ratios

From the following information of Sukanya & Co. Ltd, prepare its financial statements for the year just ended –

Current Ratio -2.5Quick Ratio -1.3Proprietary Ratio[Fixed Assets ÷ Proprietary Fund]- 0.6Gross Profit -10% of SalesDebtors Velocity -40 daysSales -7,30,000

Working Capital -Rs.1,20,000Bank Overdraft -Rs.15,000Share Capital -Rs.2,50,000Closing Stock -10% more than Opening StockNet Profit -10% of Proprietary Funds


From the following information and ratios, prepare the Profit and Loss Account and Balance Sheet of M/s. Sivaprakasam & Co, an expert Company.[Take 1 year = 360 days] (Ignore Taxation).

Current Assets to Stock -3:2Current Ratio -3.00Acid Test Ratio -1.00Financial Leverage (i.e. EBIT÷EBT) -2.20Earnings Per Share (each of RS. 10) -Rs.10.00Book Value per Share -Rs.40.00Average Collection Period -30 days

Fixed Assets Turnover Ratio -1.20Total Liabilities to net Worth -2.75Net Working Capital -Rs.10LakhsNet Profit to Sales -10%Variable Cost -60%Long Term Loan Interest -12%Stock Turnover Ratio -5.00

Q23. Preparation of Financial Statements from Ratios

Below is given the Balance Sheet of Sunrise Ltd as on 31st March 20X1 –

Liabilities Rs. Assets Rs.Share Capital: Fixed Assets:



14% Preference Shares Equity SharesGeneral Reserves12% DebenturesCurrent Liabilities

1,00,0002,00,000

40,00060,000

1,00,000

At Cost 5,00,000Less: Depreciation 1,60,000Stock in TradeSundry DebtorsCash

3,40,00060,00080,00020,000

Total 5,00,000 Total 5,00,000The following information is available. Prepare the forecast Balance Sheet as on 31st March 20X2.

1. Fixed Assets costing Rs. 1,00,000 to be installed on 1st April 20X1 and would become operative on that date, payment is required to be made on 31st March 20X2.

2. The Fixed Assets-Turnover Ratio would be 1.5 (on the basis of cost of Fixed Assets).3. The Stock-Turnover Ratio would be 14.4 (on the basis of the average of the opening and closing

stock).4. The break-up of cost and Profit would be as Follows: Materials-40%, Labour-25%, Manufacturing

Expenses-10%, Office and Selling Expenses-10%, Depreciation-5%, Profit-10% and Sales-100% The Profit is subject to interest and Taxation at 50%.

5. Debtors would be 1/9th of Sales while Creditors would be 1/5th of Materials Cost.6. A Dividend at 10% would be paid on Equity Shares in March 20X2.7. Rs. 50,000, 12% Debentures have been issued on 1st April 20X1.

4. Interpretation and Comments using Ratios

Q24. Ratios required by different Users.

Indicate the accounting ratios that will be used by each of the following –

a) A Long term Creditor interested in determining whether his claim is adequately secured.b) A Bank which has been approached by the Company for Short Term Loan / Overdraft.c) A shareholder who is analyzing his portfolio and who is to decide whether he should hold or sell

his Shares in a Company.Q25. Ratios as Indicators

Which accounting Ratio will be useful in indicating the following symptoms?

a) Low capacity utilization.b) Falling demand for the product in the

market.c) Inability to pay interest.d) Borrowing on Short-Term and Investing in

Long-Term Assets.e) Large inventory accumulation in

anticipation of price rise in future.

f) Inefficient collection of Debtors.g) Inability to pay dues to Financial

Institutions.h) Return of Shareholder’s Funds being much

higher than the overall return of investment.

i) Liquidity crisis.j) Increase in average credit period to

maintain sales in view of falling demand.

Q26. Ratio Computation & balance Sheet Analysis



JKL Limited has the following Financial Statements as on 31st March 20X2 and 31st March 20X1 – (in Rs. Lakhs)

Balance Sheet Profit and Loss Account

Particulars 31-03-20X2 31-03-20X1 Particulars 31-03-20X2 31-03-02X1Sources of FundsShareholders FundsLoan Funds

2,3773,570

1,4723,083

SalesLess: Cost of Goods sold

22,16520,860

13,88212,544

Gross ProfitLess: Selling, General and Administrative Expenses

1,3051,135

1,338 752Total 5,947 4,555

Applications of FundsFixed AssetsCash and BankDebtorsStockOther Current AssetsLess: Current Liabilities

3,466489

1,4952,867

1,567

(3,937)

2,900470

1,1682,407

1,404

(3,794)

EBITLess: Interest Expense

170113

586105

EBTLess: Tax

5723

481192

EAT 34 289

Total 5,947 4,555Calculate for the year- (1) Inventory Turnover Ratio, (2) Financial Leverage, (3) Return on Investment (ROI), (4) Return on Equity (ROE), and (5) Average Collection Period. Also, give a brief comment on the financial position of JKL Limited.

Q27. Ratio Computation & Balance Sheet Analysis

The directors of HPCL Ltd have taken a decision to diversify. At present HPCL Ltd sells all Finished Goods from its own Warehouse. The Company issue Debentures on 1st January of year 2 and purchased Fixed Assets on the same day. The purchase prices have remained stable during the concerned period. Following information is provided to you –

INCOME STATEMENTS

Particulars Year 1(Rs.) Year2(Rs.) Cash Sales Credit SalesLess: Cost of Goods Sold Gross ProfitLess: Expenses Warehousing Transport Administrative Selling Interest on Debentures

30,0002,70,000 3,00,000

2,36,000

32,0003,42,000 3,74,000

2,98,000

13,0006,000

19,00011,000

14,00010,00019,00014,000

64,000 76,000



Nil 49,000 2,000 59,000

Net Profit 15,000 17,000

BALANCE SHEETS

Particulars Year1(Rs.) Year2(Rs.)1.Fixed Assets (Net Block) Debtors Cash at Bank Stock Total Current Assets(CA)Less: Creditors(CL)2.Net Working Capital(CA-CL)

50,00010,00060,000

30,000

70,000

82,0007,000

94,000

40,000

1,07,000

1,20,00050,000

1,83,00076,000

Total Assets 1,00,000 1,47,000Represented by:1. Share Capital2. Reserves and Surplus3. Debentures

75,00025,000

-

75,00042,00030,000

Total funds 1,00,000 1,47,000Calculate the following ratios for Years 1and 2 – (1) GP Ratio, (2) Operating Expenses to Sales Ratio, (3) Operating Profit Ratio, (4) Capital Turnover Ratio, (5) Stock Turnover Ratio, (6) Net Profit to Net Worth Ratio, and (7) Debtors Collection period.

Ratio relating to Capital Employed should be based on the Capital at the end of the year. Give the reasons for the change in the ratios for 2 years. Assume Opening stock of Rs. 40,000 for year 1. Ignore Taxation.

Q28. Ratio Computation and Comments

Mr. Arun Commences Manufacture of Toy Trains on 1st January. His Trading Account for the first year is as follows –

Units Rs. Rs.Sales 1,00,000 4,50,00,000Less: Cost of Sales: Opening Stock of Raw Materials Add: Purchases

NIL4,50,00,000

Less: Closing Stock of Raw Materials4,50,00,000

45,00,000

Add: LabourAdd: Production Overhead

4,05,00,0001,44,00,000

72,00,000 Cost of Production Less: Closing Stock of Finished Goods

1,60,00060,000

6,21,00,0002,16,00,000

Net Cost of Sales 1,00,000 4,05,00,000 Gross Profit 45,00,000



Additional information:

Stocks of both Raw Materials and Finished Goods have increased uniformly over the year. The Raw Materials content of Finished Goods is Rs. 225 per unit. Mr. Arun was ill during August 2009 when he receive order for 12,000 units which was held up

by Stock Shortage, and were subsequently cancelled. He had further orders for 8,000 units on his books at the year end.

Required: Calculate the following ratios – (a) Inventory Turnover for Raw Material, (b) Inventory Turnover for Finished Goods,(c) Input-Output Ratio for Raw Materials, and (d) Stock-Out Ratio. Also, comment briefly on the above ratios.

Q29. Liquidity and Working Capital Analysis

Megatech Ltd is a manufacturer of products for the Construction Industry and its accounts are given for your consideration.

Calculate the Liquidity and Working Capital Ratios from the accounts and comment on the ratios.(Rs in Lakhs)

Particulars Year 20X2 Year20X1 TurnoverLess: Cost of Sales

2,065.001,478.00

1,788.701,304.00

Gross profit 586.40 484.70

Current Assets: Stock Debtors (Refer Note A) Short-Term Investments Cash at Bank and in Hand Sub-TotalCurrent Liabilities: Loans and Overdrafts Taxes Dividend Creditors(Refer to Note B) Sub-Total

119.00400.90

4.2048.20

109.00347.40

18.8048.00

572.30 523.2049.1062.0019.20

370.70

35.3046.7014.30

324.00501.00 420.30

Net Working Capital 71.30 102.90Notes:A Trade DebtorsB Trade Creditors

329.80236.20

285.40210.80





Education

Important concepts of Ratio for CA Students