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Questions:

Generic 5

10 x 5 = 50

From the following trading activities of Naveen Ltd. calculate
(i) Gross profit ratio
(ii) Net profit ratio
(iii) Operating cost ratio
(iv) Operating profit ratio

Statement of Profit and loss
Particulars	Rs.
I. Revenue from operations	20,000
II. Other income:
Income from investments	200
III. Total revenues (I+II)	20,200
IV. Expenses:
Purchases of stock-in-trade	17,000
Changes in inventories	-1,000
Finance costs	300
Other expenses (administration and selling)	2,400
Total expenses	18,700
V. Profit before tax (III - IV)	1,500

Calculate
(i) Inventory turnover ratio
(ii) Trade receivable turnover ratio
(iii) Trade payable turnover ratio and
(iv) Fixed assets turnover ratio from the following information obtained from Delphi Ltd.

Particulars	As on 31st March, 2018 Rs.	As on 31st March, 2019 Rs.
Inventory	1,40,000	1,00,000
Trade receivables	80,000	60,000
Trade payables	40,000	50,000
Fixed assets	5,50,000	5,00,000

Additional information:
(i) Revenue from operations for the year Rs.10,50,000
(ii) Purchases for the year Rs.4,50,000
(iii) Cost of revenue from operations Rs.6,00,000.
Assume that sales and purchases are for credit.

From the following Balance Sheet of Arunan Ltd. as on 31.03.2019 calculate
(i) Debt-equity ratio
(ii) Proprietary ratio and
(iii) Capital gearing ratio.

Balance Sheet of Arunan Ltd. as on 31.03.2019
Particulars	Rs.
I EQUITY AND LIABILITIES
1. Shareholders' funds
(a) Share capital
Equity share capital	1,50,000
8% Preference share capital	2,00,000
(b) Reserves and surplus	1,50,000
2. Non current liabilities
Long term borrowings (9% Debentures)	4,00,000
3. Current liabilities
Short-term borrowings from banks	25,000
Trade payables	75,000
Total	10,00,000
II ASSETS
1. Non-current assets
Fixed assets	7,50,000
2. Current assets
(a) Inventories	1,20,000
(b) Trade receivables	1,00,000
(c) Cash and cash equivalents	27,500
(d) Other current assets
Expenses paid in advance	2,500
Total	10,00,000

Calculate operating profit ratio under the following cases.
Case 1: Revenue from operations Rs 10,00,000, Operating profit Rs.1,50,000.
Case 2: Revenue from operations Rs.15,00,000, Operating cost Rs.12,00,000.
Case 3: Revenue from operations Rs.20,00,000, Gross profit 30% on revenue from operations, Operating expenses Rs.4,00,000

Following is the extract of balance sheet of Abdul Ltd., as on 31^st March, 2019:

Particulars	Rs.
I. EQUITY AND LIABILITIES
1. Shareholders' funds
(a) Share capital	2,00,000
(b) Reserves and surplus	50,000
2. Non-current liabilities
Long-term borrowings	1,50,000
3. Current liabilities
(a) Trade payables	1,30,000
(b) Other current liabilities	5,000
(c) Short-term provisions	20,000
Provision for tax	30,000
Total	5,55,000

Net profit before interest and tax for the year was Rs. 60,000. Calculate the return on capital employed for the year.

From the following trading activities of Rovina Ltd. calculate
(i) Gross profit ratio
(ii) Net profit ratio
(iii) Operating cost ratio
(iv) Operating profit ratio

**Statement of Profit and Loss**
Particulars	Rs.
I. Revenue from operations	4,00,000
II. Other Income:
Income from investments	4,000
III. Total revenues (I+II)	4,04,000
IV. Expenses:
Purchases of Stock-in-trade	2,10,000
Changes in inventories	30,000
Finance costs	24,000
Other expenses (Administration and selling)	60,000
Total expenses	3,24,000
V Profit before tax (III - IV)	80,000

From the following statement of profit and loss of Dericston Ltd. calculate
(i) Gross profit ratio
(ii) Net profit ratio

**Statement of Profit and Loss**
Particulars	Rs.
I. Revenue from operations	24,00,000
II. Other Income:
Income from investment	70,000
III. Total revenues (I+II)	24,70,000
IV. Expenses:
Purchases of Stock-in-trade	18,80,000
Changes in inventories	- 80,000
Employee benefits expense	2,90,000
Other expenses	1,10,000
Provision for tax	30,000
Total expenses	22,30,000
V. Profit for the year	2,40,000

Calculate operating profit ratio under the following cases.
Case 1: Revenue from operations Rs. 8,00,000, Operating profit Rs. 2,00,000.
Case 2: Revenue from operations Rs. 20,00,000, Operating cost Rs. 14,00,000.
Case 3: Revenue from operations Rs. 10,00,000, Gross profit 25% on revenue from operations, Operating expenses Rs. 1,00,000.

Calculate
(i) Inventory turnover ratio
(ii) Trade receivables turnover ratio
(iii) Trade payables turnover ratio and
(iv) Fixed assets turnover ratio from the following information obtained from Aruna Ltd.

Particulars	As on 31^st March, 2019 Rs.	As on 31^st March, 2019 Rs.
Inventory	3,60,000	4,40,000
Trade receivables	7,40,000	6,60,000
Trade payables	1,90,000	2,30,000
Fixed assets	6,00,000	8,00,000

Additional information:
(i) Revenue from operations for the year Rs. 35,00,000
(ii) Purchases for the year Rs. 21,00,000
(iii) Cost of revenue from operations Rs. 16,00,000.
Assume that sales and purchases are for credit.

10.

From the following Balance Sheet of James Ltd. as on 31.03.2019 calculate
(i) Debt-equity ratio
(ii) Proprietary ratio
(iii) Capital gearing ratio

**Balance Sheet of Sundaram Ltd. as on 31.3.2019**
Particulars	Amount Rs.
I. EQUITY AND LIABILITIES
1. Shareholders' funds
(a) Share capital
Equity share capital	2,50,000
6% Preference share capital	2,00,000
(b) Reserves and surplus	1,50,000
2. Non-current liabilities
Long-term borrowings (8% Debentures)	3,00,000
3. Current liabilities
Short-term borrowings from banks	2,00,000
Trade payables	1,00,000
Total	12,00,000
II ASSETS
1. Non-current assets
Fixed assets	8,00,000
2. Current assets
(a) Inventories	1,20,000
(b) Trade receivables	2,65,000
(c) Cash and Cash equivalents	10,000
(d) Other current assets
Expenses paid in advance	5,000
Total	12,00,000

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Answers Key:

Generic 5

10 x 5 = 50

(i) Gross profit ratio = \(\frac{Gross\ profit}{Revenue\ from\ operations}\) = \(\times\) 100 = \(\frac{4,000}{20,000}\) \(\times\) 100 = 20%
Cost of revenue from operations = Purchase of stock-in-trade + Changes in inventory + Direct expenses
= 17,000 – 1,000 + 0 = Rs.16,000
Gross profit = Revenue from operations – Cost of revenue from operations
= 20,000 – 16,000 = Rs.4,000
(ii) Net profit ratio = \(\frac{Net\ profit\ after\ tax}{Revenue\ from\ operations}\) \(\times\) 100 = \(\frac{1,500}{20,000}\) \(\times\) 100 = 7.5%

(i) Inventory turnover ratio = \(\frac{Cost\ of\ revenue\ from\ operations}{Average\ inventory}\) = \(\frac{6,00,000}{1,20,000}\) = 5 times
Average inventory = \(\frac{Opening\ inventory + Closing\ inventory}{2}\)
= \(\frac{1,40,000 + 1,00,000}{2}\)= \(\frac{2,40,000}{2}\)= Rs. 1,20,000
(ii) Trade receivables turnover ratio = \(\frac{Credit\ revenue\ from\ operations}{Average\ trade\ receivables}\)
= \(\frac{10,50,000}{70,000}\) = 15 times
Average trade receivables = \(\frac{Opening\ trade\ receivables + Closing\ trade\ receivables}{2}\)
= \(\frac{80,000 + 60,000}{2}\) =\(\frac{1,40,000}{2}\)= Rs.70,000
(iii) Creditors payables turnover ratio = \(\frac{Net\ credit purchases}{Average\ trade\ payables}\) = \(\frac{4,50,000}{45,000}\)= 10 times
Average trade payables = \(\frac{Opening\ trade\ payables + Closing\ trade\ payables}{2}\)
= \(\frac{40,000 + 50,000}{2}\) = \(\frac{90,000}{2}\) = Rs. 45,000
(iv) Fixed assets turnover ratio = \(\frac{Revenue\ from\ operations}{Average\ xed\ assets}\)= \(\frac{10,50,000}{5,25,000}\) = 2 times
Average fixed assets = \(\frac{Opening\ fixed\ assets + Closing\ fixed\ assets}{2}\)
= \(\frac{5,50,000 + 5,00,000}{2}\) = \(\frac{10,50,000}{2}\)= Rs. 5,25,000

(i) Debt equity ratio = \(\frac{Long\ term\ debt}{Shareholders'funds}\) = \(\frac{4,00,000}{5,00,000}\) = 0.8:1
Long term debt = 9% Debentures = Rs.4,00,000
Shareholders’ funds = Equity share capital + Preference share capital + Reserves and surplus
= 1,50,000 + 2,00,000 + 1,50,000 = Rs.5,00,000
(ii) Proprietary ratio = \(\frac{Shareholders'funds}{Total\ assets}\) = \(\frac{5,00,000}{10,00,000}\) = 0.5:1
(iii) Capital gearing ratio = \(\frac{Funds\ bearing\ fixed interest\ and\ dividend}{Equity\ Shareholders'funds}\) = \(\frac{6,00,000}{3,00,000}\) = 2:1
Funds bearing fixed interest or dividend = 8% Preference share capital + 9% Debentures
= 2,00,000 + 4,00,000 = Rs.6,00,000
Equity shareholders’ funds = Equity share capital + Reserves and surplus
= 1,50,000 + 1,50,000 = Rs. 3,00,000

Case 1: Operating ration = \(\cfrac { Operating\quad profit }{ Revenuefrom\quad operations } \times 100\)
= \(\cfrac { 1,50,000 }{ 10,00,000 } \times 100=15\)%
Case 2: Operating profit ratio = \(\cfrac { Operating\quad profit }{ Revenuefrom\quad operations } \times 100\)
= \(\cfrac { 3,00,000 }{ 15,00,000 } \times 100=20\)%
Operating profit = Revenue from operations – Operating Cost
= 15,00,000 – 12,00,000 = Rs.3,00,000
Case 3:Operating profit ratio = \(\cfrac { Operating\quad profit }{ Revenuefrom\quad operations } \times 100\)
= \(\cfrac { 2,00,000 }{ 20,00,000} \times 100=10\)
Gross profit = \(20,00,000\times \cfrac { 30 }{ 100 } \) = Rs.6,00,000
Operating profit = Gross profit – Operating expenses
Operating profit = Rs.6,00,000 – 4,00,000 = Rs.2,00,000

Return on Investment = \(\frac { Net\ profit\ before\ interest\ and\ tax }{ Capital\ employed } \) x 100
Capital employed = Share capital + Reserves and surplus + Long term borrowings
= 2,00,000 + 50,000 + 1,50,000 = Rs.4,00,000
∴ Return on Investment = \(\frac { 60,000 }{ 4,00,000 } \) x 100 = 15%

Gross profit ratio = \(\frac { Gross\ profit }{ Revenue\ from\ operations } \) x 100
Cost of revenue from operations = Purchases of stock-in-trade + Change in inventory + Direct expenses
= 2,10,000 + 30,000 + 0
= Rs.2,40,000
Gross profit = Revenue from operations - Cost of revenue from operations
= 4,00,000 - 2,40,000 = Rs.1,60,000
∴ Gross profit ratio = \(\frac { 1,60,000 }{ 4,00,000 } \) x 100 = 40%
(ii) Net profit ratio = \(\frac { Net\ profit\ after\ tax }{ Revenue\ from\ operations } \) x 100
=\(\frac { 80,000 }{ 4,00,000 } \) x 100 = 20%
(iii) Operating cost ratio = \(\frac { Operating\ cost }{ Revenue\ from\ operations } \) x 100
Operating cost = Cost of revenue from operations + Operating expenses
Operating expenses = Other expenses = Rs.60,000
Operating cost = 2,40,000 + 60,000 = Rs.3,00,000
∴ Operating cost ratio = \(\frac { 3,00,000 }{ 4,00,000 } \) x 100 = 75%
(iv) Operating profit ratio = \(\frac { Operating\ profit }{ Revenue\ from\ operations } \) x 100
Operating profit = Revenue from operations - Operating Cost
= Rs.4,00,000 - 3,00,000 = Rs.1,00,000
∴ Operating profit ratio = \(\frac { 1,00,000 }{ 4,00,000 } \) x 100 = 25%

Gross profit ratio = \(\frac { Gross\ profit }{ Revenue\ from\ operations } \) x 100
Gross profit = Revenue from operations - Cost of revenue from operations
Cost of revenue from operations = Purchases of stock-in-trade + Change in inventories
= 18,80,000 + (-80,000)
= Rs.18,00,000
Gross profit = 24,00,000 - 18,00,000 = Rs.6,00,000
∴ Gross profit ratio = \(\frac { 6,00,000 }{ 24,00,000 } \) x 100 = 25%
(ii) Net profit ratio = \(\frac { Net\ profit\ after\ tax }{ Revenue\ from\ operations } \) x 100
= \(\frac { 2,40,000 }{ 24,00,000 } \) x 100 = 10%

Case 1: Operating profit ratio = \(\frac { Operating\ profit }{ Revenue\ from\ operations } \) \(\times\) 100
=\(\frac { 2,00,000 }{ 8,00,000 } \) \(\times\) 100 = 25%
Case 2: Operating profit ratio = \(\frac { Operating\ profit }{ Revenue\ from\ operations } \) \(\times\) 100
Operating profit = Revenue from operations - Operating Cost
= Rs.20,00,000 - 14,00,000 = Rs.6,00,000
∴ Operating profit ratio = \(\frac { 6,00,000 }{ 20,00,000 } \) \(\times\) 100 = 30%
Case 3: Operating profit ratio = \(\frac { Operating\ profit }{ Revenue\ from\ operations } \) \(\times\) 100
Operating profit = Gross profit - Operating expenses
Gross profit = 25% of 10,00,000 = Rs.2,50,000
Operating profit = 2,50,000 - 1,00,000 = Rs.1,50,000
∴ Operating profit ratio = \(\frac { 1,50,000 }{ 10,00,000 } \) \(\times\) 100 = 15%

(i) Inventory turnover ratio =  \(\frac { Cost\ of\ revenue\ from\ operations }{ Average\ inventory } \)
Cost of revenue from operations = Rs.16,00,000
Average inventory = \(\frac { Opening\ inventory+Closing\ inventory }{ 2 } \)
= \(\frac { 3,60,000+4,40,000 }{ 2 } =\frac { 8,00,000 }{ 2 } \) = 4,00,000
∴ Inventory turnover ratio =  \(\frac { 16,00,000 }{ 4,00,000 } \) = 4 times
(ii) Trade receivables turnover ratio = \(\frac { Credit\ revenue\ from\ operations }{ Average\ trade\ receivables } \)
Credit revenue from operations = Rs.35,00,000
Average trade receivables = \(\\ \frac { Opening\ trade\ receivables+Closing\ trade\ receivables }{ 2 } \)
= \(\frac { 7,40,000+6,60,000 }{ 2 } =\frac { 14,00,000 }{ 2 } \)
= Rs.7,00,000
∴ Trade receivables turnover ratio =\(\frac { 35,00,000 }{ 7,00,000 } \) = 5 times
(iii) Trade payables turnover ratio = \(\frac{Net credit purchases}{Average trade payables}\)
Net credit purchases = Rs.21,00,000
Average trade payables = \(\frac { Opening\ trade\ payables+Closing\ trade\ payables }{ 2 } \)
= \(\frac { 1,90,000+2,30,000 }{ 2 } \)
= \(\frac { 4,20,000 }{ 2 } \)= Rs.2,10,000
∴ Trade payables turnover ratio =  \(\frac { 21,00,000 }{ 2,10,000 } \) = 10 times
(iv) Fixed assets turnover ratio = \(\frac { Revenue\ from\ operations }{ Average\ fixed\ assets } \)
Revenue from operations = Rs.35,00,000
Average fixed assets = \(\frac { Opening\ fixed\ assets+Closing\ fixed\ assets }{ 2 } \)
= \(\frac { 6,00,000+8,00,000 }{ 2 } =\frac { 14,00,000 }{ 2 } \) = Rs.7,00,000
∴ Fixed assets turnover ratio = \(\frac { 35,00,000 }{ 7,00,000 } \).

10.

(i) Debt equity ratio = \(\frac { Long\quad term\quad debt }{ Shareholders\quad funds } \)
Long term debt = Debentures
= Rs.3,00,000
Shareholder's funds = Equity share capital + Reserves and surplus + Preference share capital
= Rs.2,50,000 + 1,50,000 + Rs.2,00,000 = Rs.6,00,000
∴ Debt equity ratio = \(\frac { 3,00,000 }{ 6,00,000 } \) = 0.5 : 1
(ii) Proprietary ratio = \(\frac { Shareholder's\quad funds }{ Total\quad assets } \)
Shareholder's funds = Rs.6,00,000
Total assets = Rs.12,00,000
∴ Proprietary ratio = \(\frac { 6,00,000 }{ 12,00,000 } \) = 0.5 : 1
(iii) Capital gearing ratio = \(\frac { Funds\quad bearing\quad fixed\quad interest\quad and\quad fixed\quad dividend }{ Equity\quad Shareholder's\quad funds } \)
Funds bearing fixed = 6% Preference capital + 8% Debentures
interest and fixed dividend = Rs.2,00,000 + Rs.3,00,000 = Rs.5,00,000
Equity shareholder's funds = Equity share capital + General reserve and Surplus
= Rs.2,50,000 + Rs.1,50,000 = Rs.4,00,000
∴ Capital gearing ratio = \(\frac { 5,00,000 }{ 4,00,000 } \) = 1.25 : 1