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
Cash Balance + Bank Balance +Short
(iii). Cash Ratio 40,000
term Marketable Securities
Current Liabilities 75,000
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 Liabilities 50,000
Current Ratio = 1.9:1
(ii). Quick Ratio Current Assets – Stock & Prepaid Exp. 55,000
Current Liabilities 50,000

Quick Ratio = 1.1:1

FRSA Module 4 – Problems and Solutions

Cash Balance + Bank Balance + Short

(iii). Cash Ratio 10,000
term Marketable Securities
Current Liabilities 50,000
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 2,00,000 Land and Buildings 1,40,000
Profit and Loss account 30,000 Plant and Machinery 3,50,000
General Reserve 40,000 Stock 2,00,000
12% Debentures 4,20,000 Sundry debtors 1,00,000
Sundry Creditors 1,00,000 Bills receivable 10,000
Bills Payable 50,000 Cash at bank 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
Current Liabilities 1,50,000
Quick Ratio = 1:1
Cash Balance + Bank Balance +Short
(iii). Cash Ratio 40,000
term Marketable Securities
Current Liabilities 1,50,000
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
FRSA Module 4 – Problems and Solutions

Mahindra &
Ratio Formula Ashok Leyland Tata Motors
Mahindra
Current Current Assets / =4070000/ =4660000/ =5000000/
Ratio Current Liabilities 1150000 1510000 3430000
3.54:1 3.09:1 1.46:1
Current Assets - =4070000- =4660000- =5000000-
Stock / Current 2200000/ 1400000/ 1900000/
Liquid Ratio Liabilities 1150000 1510000 3430000
1.63:1 2.16:1 0.90:1
Cash + Bank + ST =870000/ =60000/151000 =100000/
Cash Ratio Mkt. Sec/ CL 1150000 0 3430000
0.757:1 0.040:1 0.029:1
Net
Working CA - CL 29,20,000 31,50,000 15,70,000
Capital

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
FRSA Module 4 – Problems and Solutions

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
FRSA Module 4 – Problems and Solutions

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
Average Inventory = (Opening Stock + Closing Stock)/2
= (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
Average Inventory = (Opening Stock + Closing Stock)/2
= (Rs.38,500 + Rs.41,500)/2 = Rs.40,000
Therefore, Stock Turnover Ratio = Rs.3,60,000/Rs.40,000 = 9 Times
FRSA Module 4 – Problems and Solutions

7. The data extracted from the books of the two cement companies are provided below:
Particulars Ambuja Acc Limited
Cements (Rs.) (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)
FRSA Module 4 – Problems and Solutions

= (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
FRSA Module 4 – Problems and Solutions

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
30,000 Non-Current Liability 20,000
Depreciation)
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
(Profit before Interest
(i) Return on (105000/(85000+55000-
and Tax /Capital 84.00%
Investment 15000)x100
Employed)x100
(PAT / Net worth) X
(ii) Return of Equity (65100/140000)x100 46.50%
100
(iii) Return on Total (PAT / Total Assets)
(65100/175000)x100 37.20%
Assets x100

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
Balance Sheet as on 31.3.2018
ended 31.3.2018
Particulars Rs. Equity and Liabilities Rs.
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.
12,000 Non-Current Liability 18,600
2800 Depreciation)
Interest Expense 8,000 Current Liability 7,560
FRSA Module 4 – Problems and Solutions

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:
Ratio Formula Calculation Answer
(PAT – Preference Dividend) /
(i) Earnings Per Share 9100/5000 Shares Rs.1.82
Number of Equity Shares
(ii) Price to Earnings Market Price of the share/
Rs.12/Rs.1.82 6.59 Times
Ratio EPS
(iii) Dividend Yield (Dividend per share / Market
(Rs.3/Rs.12)x100 25%
Ratio price of the Share) x 100
(iv) Book Value per
Net Assets / Number of shares 88700/5000 Shares Rs.17.74
Share
(v) Price to Book Market price of the share/
Rs.12/Rs.17.74 0.68 Times
Value Book Value per share

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
Particulars Rs. Equity and Liabilities Rs.
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 Long term Borrowings 1,868
Rs. 340 Depreciation) 2,440
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
FRSA Module 4 – Problems and Solutions

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:
Ratio Formula Calculation Answer
(i) Debt to Equity
Debt / Equity 1868/4000 0.47:1
Ratio
(ii) Capital Gearing
Total Debt/ Capital Employed 1868/(8171+6273-5771) 0.22:1
Ratio
(PAT + Depreciation)/Total
(iii) Solvency Ratio (4498+340)/12019 0.40:1
Liabilities
(iv) Equity or Shareholders' Funds/ Total (4000+6653)/(8171+6273-
1.23:1
Proprietary Ratio Capital Employed 5771)
(v) Interest Profit before Interest and
6867/253 27.14:1
Coverage Ratio tax/Total Interest

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
FRSA Module 4 – Problems and Solutions

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
FRSA Module 4 – Problems and Solutions

Total 1120000

Assets
Fixed Assets 720000
Current Assets
Stock 160000
Other current assets 240000
Total 1120000

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