Chapter 25

PROBLEMS

1. The balance sheets and trading and profit and loss accounts
for the year ended 30 June, 19X2 of S Ltd and T Ltd are given in
Tables 4.30 and 4.31. You may assume that stocks have
increased evenly throughout the year. You are required to:
(a) Calculate three of the following ratios separately for each
company:
(i) net profit for the year as a percentage of net assets
employed at 30 June, 19X2;
(ii) net profit for the year as a percentage of sales;
(iii) gross profit for the year as a percentage of sales;
(iv) current assets to current liabilities at 30 June, 19X2;
(v) liquid ratio at 30 June, 19X2; and
(vi) stock turnover during the year.
(b) Describe briefly the main conclusions which you draw from
a comparison of the ratios which you have calculated for
each company. (C.A., adapted)
Table 25.30: S Ltd and T Ltd
Balance Sheet
as on 30 June, 19X2
S Ltd

(Rs)
T Ltd

Fixed assets at cost60,00030,000

Less: Provision for depreciation20,000
40,000 20,000
Current assets
Stock
57,000
30,000
Debtors
22,000
20,000
Cash
11,000
10,000
90,000
60,000
Less: Current liabilities30,000 30,000
Net current assets
60,00030,000
Net assets
100,000 50,000
Paid-up share capital
95,00045,000
Revenue reserve
5,000 5,000
100,000
50,000

10,000

Table 25.31: S Ltd and T Ltd

Trading and Profit and Loss Account

for the year ended 30 June, 19X2(Rs)

S Ltd
T Ltd
Sales
160,000 120,000
Stock at July 1,
19X1
39,000
20,000
Add: Purchases114,000
85,000
153,000
105,000
Less: Stock at
June 30, 19X2 57,000
30,000
Cost of goods sold
96,000 75,000
Gross profit
64,000 45,000
Less: General expenses
56,000
39,000
Net profit for the year
8,000
6,000
Add: Balance brought forward 3,000
1,000
11,000
7,000
Less: Dividend paid
6,000
2,000 Balance carried
forward
5,000
5,000
2. Extracts from financial accounts of XYZ Ltd are given below:
Table 25.32: XYZ Ltd
Year I
Year II
AssetsLiabilitiesAssets Liabilities
Stock
10,000
20,000
Debtors
30,000
30,000
Payment in advance 2,000

Cash in hand20,000 15,000
Sundry creditors 25,000 30,000
Acceptances
15,000 12,000
Bank overdraft

5,000
62,00040,00065,00047,000
Sales amounted to Rs 350,000 in the first year and Rs
300,000 in the second year. You are required to comment on
the solvency position of the concern with the help of
accounting ratios.
3. From the following information you are required to (a) analyze the
relative position of ABC Ltd in the industry and (b) point out the
deficiencies and suggest improvements.
Table 25.33: ABC Ltd
Balance Sheet

as on 31 December, 19X1 (Rs)

Share capital1,278,000Fixed assets:
Current liabilities:
Equipment
600,000
Creditors 150,000Less: Depreciation
80,000
520,000
Bank loan 300,000Current assets:
Cash
180,000
Debtors
240,000
Stock
660,000
Prepaid expenses
128,000
Total capital1,728,000Total assets
1,728,000
Table 25.34: ABC Ltd
Profit and Loss
for the year ended 31 December, 19X1
(Rs)
Sales
345,000
Cost of goods sold
150,000
Gross profit
195,000
Operating expenses
90,000
Profit before interest and taxes105,000
Interest
24,000
Profit before taxes
81,000
Tax
27,000
Profit after taxes
54,000
Table 25.35: ABC Ltd
Industry Averages
Current ratio
Quick ratio
Debt-equity ratio
Times interest earned
Inventory turnover
Fixed-assets turnover
Total assets turnover
Net profit margin
Return on assets
Return on equity

2.95
1.05
50%
2.60%
0.35
0.80
0.50
16%
15%
21%

4. The two firms, M and N, have the following data:

N
Rs
Sales
Total assets
Net profit

M
Rs

800,000
4,000,000600,000
750,000420,000

200,000

Compute return on investment for both firms. Explain how

the figures are similar and how they are different.
5. The summary of the balance sheets and the profit and loss
accounts from 19X1 to 19X5 for Jagan Limited is given in
Tables 25.36 and 25.37. During this period, the company
undertook a major expansion programme. You are required
to calculate important ratios for the five years and assess the
financial health of the company. Also, explain the
implications of the development of the financial health of the
company for the shareholders. (C.A. Engg., adapted)
Table 25.36: Jagan Ltd
Balance Sheets(Rs 000)
19X119X219X319X4

19X5

Liabilities and Equity

Creditors
25 25 25 25 25
Debentures
2501,0001,7502,500
3,250
Share capital 1,0001,0001,0001,000
1,000
Reserves
2252252252,252,25
Total
1,5002,2503,00037,50
45,00
Asset
Cash
50 50 50 50 50
Debtors
50 50 50 50 50
Stock
40065090011,501,400
Fixed assets, net1,0001,5002,0002,500 3,000
Total

1,5002,2503,0003,750

4,500

Table 25.37: Jagan Ltd

Profit and Loss Accounts (Summary) (Rs 000)
19X119X2 19X319X4 19X5
Sales
300450 600750900
Cost of goods sold100150200250300
Gross profit
200300 400500600

Operating expenses25 50100150200

EBIT
175250 300350400
Interest
15 67.5127.5195270
Profit before tax160182.5172.5155130
Tax
67.5575.35 73.55 65.15
53.1
Net profit
92.45107.1598.9589.85 76.9
No. of shares 100100 100100100
P/E ratio
5 5
4 3.5 3.5
6. Using the following data, complete the balance sheet given
below:
Gross profit (Rs)
54,000
Shareholders equity (Rs)600,000
Gross profit margin
20%
Credit-sales to total-sales80%
Total assets turnover0.3 times
Inventory turnover 4 times
Average collection period (a 360-day year)
20 days
Current ratio
1.8
Long-term debt to equity40%
Balance Sheet
Creditors
......... Cash
.........
Long-term debt.........
Debtors
Shareholders equity
.........
......... Fixed assets.........
.........
.........

.........
Inventory .........

7. Surendra Mohan and Sons are wholesale distributors of

electric goods. Tables 25.38 and 25.39 contain their balance
sheets and profit and loss statements during the period 19X1
to 19X3. You are required to critically evaluate the firms
financial performance.
Table 25.38: Surendra Mohan and Sons
Comparative Balance Sheets(Rs)
19X319X219X1
Liabilities and Capital
Creditors
65,99462,22955,065
Accrued expenses2,6451,9201,168
Total current liabilities68,63964,149

56,233

Owners capital208,812181,341163,394
Total
277,451245,490219,627
19X319X219X1
Assets
Cash
19,55014,3769,542
Debtors
86,78461,60140,217
Stock
61,66163,16768,086
Prepaid expenses2,6671,433 863
Total current assets170,662140,577 118,708
Fixed assets
99,28597,87896,229
Investments
7,5047,0354,690
Total non-current assets106,789104,913
100,919
Total
277,451245,490219,627
Table 25.39: Surendra Mohan and Sons
Summarised Profit and Loss Statements
19X319X219X1

(Rs)

Sales
481,053457,172 399,291
Cost of goods sold310,720275,514229,878
Gross profit
170,333181,658169,413
Operating expenses141,377137,984
120,593
Net profit
28,956 43,674 48,820
8. The following are the comparative financial statements for
three years for Plastic Works Limited. You are required to
comment on the firms financial condition and indicate the
areas which require managements attention.
Table 25.40: Plastic Works Limited
Comparative Balance Sheets(Rs)
19X319X219X1
Liabilities and Capital
Bank borrowing
30,525 10,175

Creditors
331,127147,725113,980
Accrued expenses
21,510 14,361
20,350
Provision for dividend
20,350 20,350
20,350
Provision for taxes56,36788,43586,111
Total current liabilities 459,879281,046 240,791
Long-term loan 71,225 Nil Nil

Total liabilities531,104281,046240,791
Share capital 407,000407,000407,000
Reserves and surplus80,98388,826
67,067
Net worth
487,983495,826474,067
Total Funds 1019,087776,872714,858
Assets
Cash
99,164 35,922 13,930
Debtors
215,356207,780211,196
Stock:
Raw material 133,577107,409 98,411
Work in process
47,882 50,179
42,230
Finished goods 266,534177,788174,892
Prepaid expenses17,35013,72612,697
Total current assets779,863592,804 553,356
19X319X219X1
Buildings, plant and equipment 229,314
177,047
161,502
Misc. fixed assets9,9107,021

Total non-current assets239,224184,068 161,502

Total Assets 1,019,087776,872714,858
Table 25.41: Plastic Works Limited
Summarised Profit & Loss Statements
for the year ended 31 December(Rs)
19X3 19X2 19X1
Sales
1,872,9371,599,3151,429,818
Cost of goods sold896,953 767,673
683,597
Gross profit 975,984 831,642 746,221
19X3 19X2 19X1
Operating expenses846,059 640,048
545,750
Profit before taxes129,925 191,594
200,471
Taxes
56,367 88,435 93,050
Net profit
73,558 103,159 107,421
Dividends
81,400
81,400
81,400
9. Tata Iron & Steel Company Limited (TISCO). TISCO was
established in 1907 at Jamshedpur. It is the largest private
sector company. Tables 25.42 and 25.43 give the profit and
loss statements and balance sheets for the last seven years

for the company. You are required to provide an analysis of

the companys financial performance.
Table 25.42: Tata Iron and Steel Company Limited
March

Summarised Balance Sheet as on 31

(Rs in crore)
19951996199719981999
2001

2000
ASEETS
Gross fixed assets
6,962.897,408.467,850.82
8,948.52
10,032.1710,668.3311,258.17
Less: Cumulative depreciation1,749.412,014.902,324.42
2,648.48
2,973.593,241.953,720.08
Net fixed assets
5,213.485,393.565,526.40
6,300.04
7,058.587,426.387,538.09
Investments
220.65410.94664.90626.08
588.84
818.89850.83
Current Assets
Inventories
1,039.70
Receivables
1,948.40
Marketable investment
399.51
Cash and bank balance
336.19

865.341,076.571,021.11
1,016.51944.85921.77
1,341.871,723.632,178.76
1,874.181,868.772,060.70
175.51365.75479.77453.03
342.35381.38
162.44437.09251.38462.96
232.87239.78
2,545.163,603.043,931.02
3,904.09
3,626.393,388.843,603.63
Misc. expenses not written off31.33167.99278.32896.98
1,118.53
828.12920.29
Total Assets
7,835.119,209.789,920.87
11,274.16
11,992.8312,119.8812,531.46
CAPITAL & LIABILITIES
Net worth
4,064.88
Share capital
367.77

2,688.043,742.403,974.02
4,164.424,558.404,888.43
336.87367.23367.38367.55
517.77507.77

Equity capital
336.87367.23367.38367.55
367.77
367.77367.77
Preference capital
0.00 0.00 0.00 0.00 0.00
150.00
140.00
Reserves & surplus
2,351.173,375.173,606.64
3,697.33
3,796.654,040.634,380.66
Total borrowings
3,582.733,842.074,082.49
5,212.44
5,503.264,946.524,672.56
Current liabilities & provisions1,564.341,625.311,864.36
1,996.84
2,325.152,614.962,970.47
Current liabilities
1,421.511,326.821,385.47
1,414.66
1,463.351,492.551,696.38
Sundry creditors
1,256.721,203.971,251.00
1,296.61
1,340.171,345.651,574.35
Others
164.79122.85134.47118.05
123.18
146.90122.03
Provisions
142.83298.49478.89582.18
861.80
1,122.411,274.09
Tax provision
21.2418.96111.40150.58
185.53
167.04180.20
Dividend provision
118.24156.97165.66147.25
147.11
147.11183.89
Other provisions
3.35122.56201.83284.35
529.16
808.26910.00
Total Liabilities 7,835.11 9,209.78 9,920.87 11,274.16
11,992.8312,119.8812,531.46
Table 25.43: Tata Iron and Steel Company Limited
Summarized Profit & Loss Account for the Year Ending
on 31 March
(Rs in crore)
2000
Income
Sales
7012.35
Less: Excise
710.09
Net sales
6175.03

19951996199719981999
2001
4993.396349.356919.4
6885.127015.167822.58
440.77592.61696.49724.34
796.86920.83
4552.625756.746222.916288.01
6218.36901.75

Other income
96.73
Change in stocks
33.19
Non-recurring income
152.44
Total Income
6457.78
PBDIT (EBITDA)
1058.26
Less: Depreciation
382.18
PBIT
687.15
Less: Interest
360.35

44.5876.18150.52117.16
68.5186.53
17.3566.2442.12 4.846.18
56.74
16.03 0.35 11.227.59139.84
13.15
4595.885899.516426.756437.56
6406.066944.69
808.11212.741260.451030.38
1291.981507.68
262.26297.61326.83343.23
426.54492.25
545.84915.13933.62
676.08865.441015.43
281.4348.91390.66323.42
388.35412.39

PBT
264.44566.22542.96
363.73
315.73477.09603.04
Less: Tax provision
0.25 0.4373.7541.65 33.5
54.5
49.6
PAT
264.19565.79469.21
322.08
282.23422.59553.44
Appropriation of Profit
Equity Dividends
118.24156.97165.66147.25
147.11
154.86196.09
Dividend Tax
0
016.5714.7316.18
17.04
21.52
Retained earnings
145.95408.82286.98160.1
118.94
250.69335.83
Other Financial Items
Cash profit
530.35867.3801.69665.31
664.41
849.131045.69
Cash flow from business activities681.14638.86881.3880.44
1007.98
1323.941718.7
Value of output
4504.295795.266238.26257.51
6189.62
6154.846812.71
Gross value added
1501.192174.542205.362055.3
1998.68
2273.552732.1
Net value added
1238.93 1876.93 1878.53 1712.07
1616.5
1847.01 2239.85

10. Agro-Chemical & Pesticides Industry. The financial data in

Table 25.44 related to ten agro-chemicals and pesticides
companies for the year ending on March 31, 19X2. Provide a
detailed analysis of the profitability and the market
performance of the companies. How have these companies
performed in relation to the industry performance? Show
computations.