(i) Gross profit ratio = \(\cfrac { Gross\ profit }{ Revenue\ from\ operators } \times 100=\cfrac { 3,00,000 }{ 5,00,000 } \times 100=60\)
Gross profit = Revenue from operations – Cost of revenue from operations
= 5,00,000 – 2,00,000 = Rs.3,00,000
(ii) Net profit ratio = \(\cfrac { Net\ profit\ after\ tax }{ Revenue\ fromoperations } \times 100=\cfrac { 1,50,000 }{ 5,00,000 } \times 100=30\)
 

Trade payables turnover ratio = \(\frac{Net\ credit\ purchases}{Average\ trade\ payables}\) = \(\frac{1,00,000}{20,000}\) = 5 times
Average trade payables = \(\frac{Opening\ trade\ payables + Closing\ trade\ payables}{2}\)
= \(\frac{(20,000 + 4,000) + (10,000 + 6,000)}{2}\) = Rs.20,000
payment period (in days) = \(\frac{Number\ of\ days\ in\ a\ year}{Trade\ payables\ turnover\ ratio}\) = \(\frac{365}{5}\) = 73 days. 

Inventory turnover ratio = \(\frac{Cost\ of\ revenue\ from\ operations}{Average\ inventory}\) = \(\frac{1,20,000}{30,000}\) = 4 times
Cost of revenue from operations
= Opening inventory + Net Purchases + Direct expenses (carriage inwards) – Closing inventory
= 40,000 + 90,000 + 10,000 – 20,000
= Rs.1,20,000
Average inventory = \(\frac{Opening\ inventory + Closing\ inventory}{2}\)
= \(\frac{40,000 + 20,000}{2}\) = Rs.30,000
Inventory conversion period (in months) = \(\frac{Number\ of\ months\ in\ a\ year}{Inventory\ turnover\ ratio}\) = \(\frac{12}{4}\) = 3 months

Proprietary ratio = \(\frac{Shareholders ' funds}{Total assets}\) = \(\frac{2,00,000}{4,00,000}\) = 0.5:1
Shareholders’ funds = Equity share capital + Preference share capital + Reserves and surplus
= 1,00,000 + 75,000 + 25,000
= Rs. 2,00,000
(iii) Capital gearing ratio
Proprietary ratio gives the proportion of shareholders’ funds to total assets. Proprietary ratio shows the extent to which the total assets have been financed by the shareholders’ funds. It is calculated as follows:
Capital gearing ratio = \(\frac{Funds\ bearing\ fixed\ interest\ or\ fixed\ dividend}{Equity\ shareholders'\ funds}\)

Capital gearing ratio is a measure of long term solvency as well as capital structure. When thecapital gearing ratio is greater than one, the firm is said to be high geared.

Debt equity ratio = \(\frac{Long\ term\ debt}{Shareholders'funds}\) = \(\frac{80,000}{1,60,000}\) = 0.5:1
Long term debt = Debentures = Rs.80,000
Shareholders’ funds = Equity share capital + Reserves and surplus
= 1,00,000 + 60,000 = Rs.1,60,000
(ii) Proprietary ratio
Proprietary ratio gives the proportion of shareholders’ funds to total assets. Proprietary ratio shows the extent to which the total assets have been financed by the shareholders’ funds. It is calculated as follows:
Proprietary ratio = \(\frac{Shareholders'funds}{Total\ assets}\)
Higher the proprietary ratio, greater is the satisfaction for lenders and creditors, as the firm is less dependent on external sources of finance.

(i) Current ratio = \(\frac{Current assets}{Current liabilities}\) = \(\frac{1,50,000}{50,000}\) = 3:1
Current assets = Inventories + Trade receivables + Cash and cash equivalents + Prepaid expenses
= 45,000 + 70,000 + 30,000 + 5,000 = Rs.1,50,000
Current liabilities = Short term borrowings + Trade payables + Expenses payable + Short term provisions
= 17,000 + 25,000 + 3,000 + 5,000 = Rs.50,000
(ii) Quick ratio = \(\frac{Quick assets}{Current liabilities}\) = \(\frac{1,00,000}{50,000}\) = 2:1
Quick assets = Total current assets – Inventories – Prepaid expenses
= 1,50,000 – 45,000 – 5,000 = Rs.1,00,000

Net profit ratio = \(\frac { Net\ profit\ after\ tax }{ Revenue\ from\ operations } \)
Net profit = Revenue from operations - Cost of revenue from operations - Administration expenses - Selling expenses
= 9,60,000 - 5,50,000 - 1,45,000 - 25,000 = Rs.2,40,000
∴ Net profit ratio = \(\frac { 2,40,000 }{ 9,60,000 } \) \(\times\) 100 = 25%

Operating cost ratio = \(\frac { Operating\ cost }{ Revenue\ from\ operations } \) \(\times\) 100
Cost of revenue from operations = Purchases of stock-in-trade + Change in inventories of stock in trade + Direct expenses (wages)
= Rs.8,60,000 + 40,000 = Rs.9,00,000
Operating expenses = Administrative expenses + Selling and distribution expenses + Employee benefits expenses (salaries)
= 50,000 + 90,000 + 1,60,000 = Rs.3,00,000
Operating cost = Cost of revenue from operations + Operating expenses
= 9,00,000 + 3,00,000 = Rs.12,00,000
∴ Operating cost ratio = \(\frac { 12,00,000 }{ 15,00,000 } \) \(\times\) 100 = 80%

Trade payables turnover ratio = \(\frac { Net\ credit\ purchases }{ Average\ trade\ payables } \)
Net credit purchases = Rs.9,50,000
Average trade payables = \(\frac { Opening\ trade\ payables+Closing\ trade\ payables }{ 2 } \)
= \(\frac { (60,000+45,000)+(50,000+35,000) }{ 2 } \)
= \(\frac { 1,05,000+85,000 }{ 2 } =\frac { 1,90,000 }{ 2 } \) = Rs.95,000
Trade payables turnover ratio = \(\frac { 9,50,000 }{ 95,000 } \) = 10 times
Credit payment period (in days) = \(\frac { Number\ of\ days\ in\ a\ year }{ Trade\ payables\ turn\ over\ ratio } \)
= \(\frac { 365 }{ 10 } \) = 36.5 days

Trade receivable turnover ratio = \(\frac { Credit\ revenue\ from\ operations }{ Average\ trade\ receivables } \)
Trade receivables = Debtors + Bills receivable
= Rs.1,10,000 + Rs.1,40,000 = Rs.2,50,000
∴ Trade receivable turnover ratio = \(\frac { 10,00,000 }{ 2,50,000 } \) = 4 times
Debt collection period (in months) = \(\frac { Number\ of\ months\ in\ a\ year }{ Trade\ receivables\ turn\ over\ ratio } \)
= \(\frac { 12 }{ 4 } \)  = 3 months.

Inventory turnover ratio = \(\frac { Credit\ revenue\ from\ operations }{ Average\ inventory } \)
Cost of revenue from operations = Opening inventory + Net Purchases + Direct expenses
(carriage inwards) - Closing inventory
= Rs.1,70,000 + Rs.6,90,000 + Rs.20,000 - Rs.1,30,000
= Rs.7,50,000
Average inventory = \(\frac { Opening\ inventory+Closing\ inventory }{ 2 } \)
= \(\frac { 1,70,000+1,30,000 }{ 2 } =\frac { 3,00,000 }{ 2 } \)
= Rs.1,50,000
∴ Inventory turnover ratio = \(\frac { 7,50,000 }{ 1,50,000 } \)  = 5 times
Inventory conversion period (in months) =  \(\frac { Number\ of\ months\ in\ a\ year }{ Inventory\ turnover\ ratio } \)
= \(\frac { 12 }{ 5 } \) = 2.4 months.

Capital gearing ratio = \(\frac { Funds\ bearing\ fixed\ interest\ and\ fixed\ dividend }{ Equity\ Shareholder's\ funds } \)
Funds bearing fixed = 5% Preference capital + 6% Debentures
interest or fixed dividend = Rs.1,00,000 + Rs.3,00,000
= Rs.4,00,000
Equity shareholder's funds = Equity share capital + General reserve + Surplus
= Rs.4,00,000 + Rs.2,50,000 + Rs.1,50,000
= Rs.8,00,000
Capital gearing ratio = \(\frac { 4,00,000 }{ 8,00,000 } \) = 0.5 : 1

Proprietary ratio = \(\frac { Shareholder's\ funds }{ Totalassets } \)
Shareholder's funds = Equity share capital + Preference share capital + Reserves and surplus
= Rs.2,50,000 + Rs.1,50,000 + Rs.50,000 = Rs.4,50,000
Total assets = Rs.6,00,000
∴ Proprietary ratio = \(\frac { 4,50,000 }{ 6,00,000 } \) = 0.75 : 1

Debit equity ratio = \(\frac { Long\ term\ debt }{ Shareholders\ funds } \ \)
Long term debt = Debentures
= Rs.6,00,000
Shareholder's funds = Equity share capital + Reserves and surplus
= Rs.6,00,000 + Rs.2,00,000 = Rs.8,00,000
∴ Debt equity ratio = \(\frac { 6,00,000 }{ 8,00,000 } \) = 0.75:1

(i) Current ratio = \(\frac { Current\quad assets }{ Current\quad liabilities } \)
Current assets = Inventories + Trade debtors + Cash and cash equivalents + Prepaid expenses
= Rs.1,60,0,000 + Rs.3,20,000 + Rs.80,000 + Rs.40,000 = Rs.6,00,000
Current liabilities = Short term borrowings + Trade payables + Expenses payable + Short term provisions
= Rs.50,000 + Rs.,10,000 + Rs.15,000 + Rs.25,000 = Rs.4,00,000
Current ratio = \(\frac { 6,00,000 }{ 4,00,000 } \) = 1.5:1
(ii) Quick ratio = \(\frac { Quick\quad assets }{ Current\quad liabilities } \)
Quick assets = Current assets - Inventories - Prepaid expenses
= Rs.6,00,000 - Rs.1,60,000 - Rs.40,000 = Rs.4,00,000
Quick ratio = \(\frac { 4,00,000 }{ 4,00,000 } \) =1:1

Following are the limitations of ratio analysis:
(i) Accuracy of financial information : The accuracy of a ratio depends on the accuracy of information taken from financial statements.
(ii) Consistency in preparation of financial statements: Inter-firm comparisons with the help of ratio analysis will be meaningful only if the firms follow uniform accounting procedures consistently.
(iii) Non-availability of standards or norms: Ratios will be meaningful only if they are compared with accepted standards or norms. Only few financial ratios have universally recognised standards.
(iv) Change in price level : Ratio analysis may not reflect price level changes and current values as they are calculated based on historical data given in financial statements.

Following are the advantages of ratio analysis:
(i) Measuring operational efficiency : Ratio analysis helps to know operational efficiency of a business by finding the relationship between operating cost and revenues and also by comparison of present ratios with those of the past ratios.
(ii) Intra Firm Comparison: Comparison efficiency of different division of an organisation is possible by comparing the relevant ratio.
(iii) Inter Firm Comparison: Ratio analysis helps the firm to compare its performance with other firms.

(i) Operating profit ratio gives the proportion of operating profit to revenue from operations.
(ii) Operating profit ratio is an indicator of operational efficiency of an organisation.
(iii) It may be computed as follows: Operating profit ratio
= \(\frac { Operating\ profit }{ Revenue\ from\ operations } \times 100\)
Alternatively, it is calculated as under.
Operating profit ratio = 100% - Operating cost ratio
Operating profit = Revenue from operations - Operating cost
(iv) A higher ratio indicates better profitability. Greater the operting ratio, higher is the margin available for paying non-operating expenses.

(i) Inventory conversion period is the time taken to sell the inventory.
(ii) A shorter inventory conversion period indicates more efficiency in the management of inventory.
(iii) It is computed as follows:
Inventory conversion period (in days)
= \(\frac { Number\ of\ days\ in\ a\ year }{ Inventory\ turnover\ ratio } \)
Inventory conversion period (in months)
= \(\frac { Number\ of\ month\ in\ a\ year }{ Inventory\ turnover\ ratio } \).

Following are the objectives of ratio analysis:
(i) To simplify accounting figures
(ii) To facilitate analysis of financial statements
(iii) To analyse the operational efficiency of a business
(iv) To help in budgeting and forecasting
(v) To facilitate intra firm and inter firm comparison of performance

Operating cost ratio = \(\cfrac { Operating\ cost }{ Revenue\ from\ operations } \times 100=\cfrac { 4,80,000 }{ 8,00,000 } \times 100=60\)%
Cost of revenue from operations = Purchases of stock-in-trade + Change in inventories of stock in trade + Direct expenses (wages)
= 4,50,000 + (40,000) + 10,000 = Rs.4,20,000
Operating expenses = Administrative expenses + Selling and distribution expenses+ Employee benefits expenses (salaries)
= 20,000 + 28,000 + 12,000 = Rs.60,000
Operating cost = Cost of revenue from operations + Operating expenses
= 4,20,000 + 60,000 = Rs.4,80,000
Tutorial Note
Loss on sale of fixed assets is a non-operating item, hence it is ignored.
(iii) Operating profit ratio
Operating profit ratio gives the proportion of operating profit to revenue from operations.
Operating profit ratio is an indicator of operational efficiency of an organisation. It may be computed as follows
Operating profit ratio = \(\cfrac { Operating\ profit }{ Revenue\ from\ operations } \times 100\)
Alternatively, it is calculated as under.
Operating profit ratio = 100 – Operating cost ratio
Operating profit = Revenue from operations – Operating cost
A higher ratio indicates better profitability. Greater the operating ratio, higher is the margin available for paying non-operating expenses
Tutorial note
Operating cost ratio + Operating profit ratio = 100%