12 RATIO ANALYSES

Format of Income Statement Format of Income and Financial Statement I Sources of Funds Equity Share Capital Add Reserve Fund/(Loss) a Equity / Equity Share Holders Funds b Add Preference Share Capital Shareholders funds (a+b) c Add Long term debt (a+b+c) Capital employed / Investment II Applications of Funds Fixed Assets Net Working Capital Current Assets Liquid Assets Stock in Trade (d+e) Current Liabilities Liquid Liabilities Bank OD Net Working Capital (e-g) II+IV

XXX XXX XXX XXX XXX XXX XXX

XXX

III d e

Add

XXX XXX

XXX

f g IV V

Add

XXX XXX

XXX XXX XXX

Format of Income Statement Format of Income and Financial Statement I Sources of Funds Equity Share Capital Add Reserve Fund/(Loss) A Equity / Equity Share Holders Funds B Add Preference Share Capital Shareholders funds (a + b) C Add Long term debt (a + b + c) Capital employed / Investment II Applications of Funds Fixed Assets Net Working Capital Current Assets Liquid Assets Stock in Trade (d + e) Current Liabilities : [CA-CWA-CS] M: Trichy: 93451 22645/Chennai: 93453 96855 12.1

XXX XXX XXX XXX XXX XXX XXX

XXX

III D E

Add

XXX XXX

XXX

F G IV V

Add

Liquid Liabilities Bank OD Net Working Capital (e - g) II+IV Format of Financial Statement Sales Add Cost of good sold Gross Profit Add Operating Income Less Operating Expense Add Less Less Less Less Less Non-Operating Income Non-Operating Expense Earning Before Int. Tax (EBIT) Interest Earning Before Tax (EBT) Tax Earning After Tax (EAT) Pref. Dividend Equity/Equity Shareholder Dividend Retain Earnings

XXX XXX

XXX XXX XXX

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

1.

Ratio Analysis: Ratio Analysis is based on the fact that a single accounting figure by itself may not communicate any meaningful information but when expressed as a relative to some other figure, it may definitely provide some significant information. Ratio analysis is comparison of different numbers from the balance sheet, income statement and cash flow statement against the figures of previous year, other companies, the industry, or even the economy in general for the purpose of financial analysis. Types of Ratios: The ratios can be classified into following four broad categories: Liquidity Ratios: Liquidity or short term solvency means ability of the business to pay its short-term liabilities. Current Ratios: The current ratio is one of the best known measures of financial strength.

2. a)

Quick Ratios: The Quick Ratio is sometimes called the acid-test ratio and is one of the best measures of liquidity. It is a more conservative measures than current ratio.

Cash Ratio / Absolute Liquidity Ratio: The cash ratio measures the absolute liquidity of the business. This ratio considers only the absolute liquidity available with the firm.

Basic Defense Interval: This ratio helps in determining the number of days the company can coverers cash expenses without the aid of additional financing.

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M: Trichy: 93451 22645/Chennai: 93453 96855

12.2

Net Working Capital Ratio: It helps to determine a companys ability to weather financial crises over time. Net Working Capital Ratio = Current Assets Current Liabilities (excluding short-term bank borrowing )

b) Capital Structure / Leverage Ratios: The capital structure / leverage ratios may be defined as those financial ratios which measure the long term stability and structure of the firm. Capital Structure: These ratios provide an insight into the following technique used by a business and focus, as a consequence, on the long-term solvency position. Equity Ratio: The ratio indicates proportion of owners fund to total fund invested in the business.

Debt Ratio: This ratio is used to analyse the long-term solvency of a firm

Debt to Equity Ratio: Debt equity ratio is the indicator of leverage

Coverage Ratio: The coverage ratios measure the firms ability to service the fixed liabilities. Debt Service Coverage Ratio: Lenders are interested in debt service coverage to judge the firms ability to pay off current interest and installments.

Interest Coverage Ratio: Also known as times interest earned ratio indicates the firms ability to meet interest (and other fixed-charges) obligations.

Preference Dividend Coverage Ratio: This ratio measures the ability of a firm to pay dividend on preference shares which carry a stated rate of return.

Capital Gearing Ratio: In addition to debt-equity ratio, sometimes capital gearing ratio is also calculated to show the proportion of fixed interest (dividend) bearing capital to funds belonging to equity shareholders.

c)

Activity Ratios: These ratios are employed to evaluate the efficiency with which the firm manages and utilities its assets.

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M: Trichy: 93451 22645/Chennai: 93453 96855

12.3

Capital Turnover Ratio: This ratio indicates the firms ability of generating sales per rupee of long term investment.

Fixed Assets Turnover Ratio: A high fixed assets turnover ratio indicates efficient utilisation of fixed assets in generating sales.

Working Capital Turnover

Working Capital Turnover is segregated into Inventory Turnover, Debtors Turnover, Creditors Turnover. Inventory Turnover Ratio: This ratio also known as stock turnover ratio establishes the relationship between the cost of goods sold during the year and average inventory held during the year.

Debtors Turnover Ratio: The debtors turnover ratio deals on the collection and credit policies of the firm.

Creditors Turnover Ratio: This ratio shows the velocity of debt payment by the firm. It is calculated as follows:

d) Profitability Ratios: The profitability ratios measure the profitability or the operational efficiency of the firm. These ratios reflect the final results of business operations. Return of Equity (ROE): Return on Equity measures the profitability of equity shares invested in the firm. This ratio reveals how profitability of the owners funds have been utilized by the firm.

Earnings per Share: The profitability of a firm from the point of view of ordinary shareholders can be measured in terms of number of equity shares. This is known as Earnings per share.

Dividend per Share: Dividend per share ratio indicates the amount of profit distributed to shareholders per share.

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M: Trichy: 93451 22645/Chennai: 93453 96855

12.4

Price Earnings Ratio: The price earning ratio indicates the expectation of equity investors about the earnings of the firm. It relates earnings to market price and is generally taken as a summary measure of growth potential of an investment, risk characteristics, shareholders orientation, corporate image and degree of liquidity.

Return of Capital Employed/Return on Investment: It is the percentage of return of funds invested in the business by its owners.

Return on Assets (ROA): This ratio measures the profitability of the firm in terms of assets employed in the firm.

Gross Profit Ratio: This ratio is used to compare departmental profitability or product profitability.

Operating Profit Ratio:

Net Profit Ratio: It measures overall profitability of the business.

Yield: This ratio indicates return on investment; this may be on average investment or closing investment. Dividend (%) indicates return on paid up value of shares. But yield (%) is the indicates of true return in which share capital is taken at its market value.

(Or)

Market Value/Book Value per Share: This ratio indicates market response of the shareholders investment.

Or

Question 1: : [CA-CWA-CS] M: Trichy: 93451 22645/Chennai: 93453 96855 12.5

Particulars Rs.10 Equity share capital Rs.10.10% Preference share capital Rs.100.12% Debentures Reserve fund Profit & loss[Opening Balance] Stock Debtors / Creditors Bills receivable/ Bills payable Cash / Bank Purchases / sales Direct Wages Administration Expenses Selling & Distribution Income from let out Expenses for let out Interest Fixed assets 1. 2. 3. 4. 5. 6. Closing Stock Rs.2,000 Tax rate is 40% Market price per share is Rs.40 proposed dividend Rs.1 per share the above adjustments were made Redeem Debenture Rs.500

Debit

Credit 10,000 5,000 5,000 2,000 3,000

1,000 500 500 5,560 15,000 1,000 500 500 1000 500 600 25,840 51,500 51,500 25,000 300 200

Calculate all ratios SOLUTION: Trading A/C & Profit and Loss A/C To Opening Stock Purchases Direct Wages Gross Profit Administration expenses Selling & Distribution expenses Expenses for let out TO Interest on Debentures TO Net Profit 1,000 15,000 1,000 10,000 27,000 500 500 500 600 8,900 11,000 Profit and Loss Appropriation A/c Provision for Tax Proposed Dividend 3,560 500 Opening Bal NP b/d 3,000 8,900 11,000 Gross Profit b/d Income from let out 27,000 10,000 1,000 By Sales Closing Stock 25,000 2,000

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12.6

Proposed Equity dividend Closing Balance

1,000 6,840 11,900 Balance sheet 11,900

Equity Share Capital Preference Share Capital Debentures Reserve Fund Profit & loss Creditors Bills Payable

10,000 5,000 5,000 2,000 6,840 300 200 29,340

Fixed Assets Stock Debtors Bills Receivable Bank

25,840 2,000 500 500 500

29,340

Income statement Sales Less Add Less Add Add Less Cost of Goods Sold Opening Stock Purchases Closing Stock Material consumption Direct wages Other Operating Income Other operating expenses Administration expenses Selling & Distribution expenses Operating profit Add Less Less Less Less Non Operating income Non Operating exp EBIT Interest NP / P / EBT Tax EAT Preference Dividend Earnings avail to ESH No of Shares Earning Per Share [EPS] 500 500 1,000 9,000 1,000 10,000 500 9,500 600 8900 3560 5340 500 4840 1,000 4.84 1,000 15,000 2,000 14,000 1,000 Gross Profit 15,000 10,000 -25,000

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M: Trichy: 93451 22645/Chennai: 93453 96855

12.7

FINANCIAL STATEMENT Sources of Funds Equity / ESH fund Equity Share Capital Reserve Fund Profit and Loss Net worth 10% Redeemable Preference Share Capital Share holders Fund 12% Debenture A Investment / Capital employed Applications of funds B Fixed Assets Working capital Current Assets Debtors Bills Receivable Receivable Cash and Bank balance Liquid asset Stock I Current Asset Current Liabilities Creditors Bills Payable Payable Other Current Liabilities Liquid Liabilities Bank Overdraft II C Current Liabilities Net Working Capital I II A=B+C RATIOS No 1 2 3 Ratio Return on Equity Return on holders fund ROI / ROCE Share Formulae EAT P. Div/Equity100 EAT / Share Holders fund 100 (EAT + Int) /( Inv/CEMP ) 100 (or) EBIT TAX / INV / Cap emp x 100 Workings 4840 / 18840 100 5340 / 23840 100 (5340+600) / 28840 100 (or) (9500-3560) / 28840 100 Answer 25.69% 22.39% 20.59% 300 200 500 -500 -500 3000 28,840 500 500 1000 500 1500 2000 3500 25,840 10,000 2,000 6,840 18,840 5,000 23,840 5,000 28,840

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12.8

4 5 6

GP Ratio Operating Profit Ratio Operating Ratio

7 8

NP Ratio Exp Ratio Admn. OH Ratio Sell and Dist OH Ratio EPS Payout Ratio

GP / sales 100 OP / Sales 100 Oper. Exp / sales 100 Nt: Oper.exp = cogs + other op exp NP / S x 100 Admin O/H / Sales100 Sell O/H / Sales100 Earn avail to ESH / No.of Shares Dividend per share / EPS x 100 (or) Total Dividend / Earnings for ESH x 100 Retained Earnings Per share / EPS x 100 (or) Total Retained Earnings/ Earnings available to ESH Market price per share / EPS D / Mkt price 100 EPS / Mkt Price 100

10,000 / 25,000 100 9000 / 25000 100 (15000+1000)/25000100

40% 36% 64%

5340 / 25000 100 500 / 2500100 500 / 2500100 4840 / 1000 1/4.84 x 100 (or) 1000 / 4840 x 100 3.84 / 4.84 x 100 (or) 3840 / 4840 x 100

21.36% 2% 2% 4.84 20.66%

9 10

11

Retained Ratio

Earning

79.33%

12 13 14 15

Price Earning Ratio [PE Ratio] Dividend yield Ratio Earnings yield Ratio

40 / 4.84 1/40 100 4.84 / 40 100 15,000 / (1000+2000)/2

8.26 2.5% 12.1% 10 times

Turnover Ratio / Activity Ratio Inventory Turnover TO / Inv Ratio Nt: COGS / S / Avg.Stk Stock velocity ratio Days (or) months in a year / Inv. Turnover ratio (or) Days (or)months in a year / COGS Avg Stock TO / Avg. Drs Nt: Cr. Sales / (Drs + BR)/2 Days / months in a year / DTR To / Crs Nt: Cr. Purchases / (Crs + BP)/2 Days / months in a year / CTR To/FA Nt: Sales / FA

16

360 / 10 (or) 360 / 15000 x 1500 25000 / 1000

36 days

17

Receivable Turnover Ratio/ Drs Turnover ratio Drs Velocity ratio Crs Turnover ratio

25 times

18 19

360 / 25 15000 / 500

14.4 days 30 times

20 21

Crs velocity ratio FA Turnover ratio

360 / 30 25000 / 25840

12 days 0.97 times

22 23

Interest coverage ratio Dividend Coverage Ratio

COVERAGE RATIOS EBIT / Interest 9500 / 600 EAT / P.D 5340 / 500 (or) (or) EAT / [PD + ED] 5340 / 1500

16 times 3.6 times

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M: Trichy: 93451 22645/Chennai: 93453 96855

12.9

24

Loan Coverage Ratio

EBIT / I + (Loan instat / (1T)) (or) EBIT + Int (1 T) Int (1-T) + Loan Investment

= 9500 / 600 + (500 / (1 0.4)) (or) 5340 + 600 (1 0.4) / 600 (1 0.4) + 500

6.6

SOLVENCY RATIOS 25 26 27 28 I. Short Term Current Ratio Liquid Ratio / Quick Ratio Cash Reserve Ratio/ Super Quick Ratio Debt Equity CA / CL QA / QL Cash + Mkt Securities / CL L. T. Debt / Share Holders fund L T Debt + P.S. Cap / Equity Total Debt / Equity 3500 / 500 1500 / 500 500 / 500 5000 / 25840 = 5000 + 5000 / 18840 [5000 + 500] / 23840 7:1 3:1 1:1 0.21 : 1 0.53 : 1 0.23:1

Question 2: Current Ratio = 2, Liquid Ratio = 1 and Working Capital = Rs.1,00,000. Calculate Current Asset, Current Liabilities and Liquid Asset CR WC 1 1,00,000 LR CA / CL = 2/1 CA CL 21 2,00,000 1,00,000 LA / CL = 1 / 1 = 1,00,000 / 1,00,000

Question 3: CR = 2, LR = 1, Stock= Rs. 100,000 Calculate CA / CL / LA CR = CA / CL = 2/1 LR = LA / CL = 1 / 1 ST = CA LA 1 = 2 1= 1,00,000 = 2,00,000 1,00,000 Question 4: Calculation of Ratios: JKL Limited has the following B/S as on March 31of 2006 and 2005: Particulars Sources of Funds: Shareholders Funds Loan Funds Applications of Funds: Fixed Assets Cash and bank : [CA-CWA-CS] 3,466 489 2,900 470 12.10 2,377 3,570 5,947 1,472 3,083 4,555 Rs. in lakhs 31.03.06 31.03.05

M: Trichy: 93451 22645/Chennai: 93453 96855

Debtors Stock Other Current Assets Less: Current Liabilities

1,495 2,867 1,567 (3,937) 5,947

1,168 2,407 1,404 (3,794) 4,555

The Income Statement of the JKL Ltd. for the year ended is as follows: Particulars Sales Less: Cost of Goods sold Gross Profit Less: Selling, General & Admn. expenses Earnings before Interest & Tax (EBIT) Interest Expense Profits before Tax Tax Profits after Tax (PAT) Required: (i) Calculate for the year 2005-06: (a) (b) (c) (d) (e) (ii) Inventory turnover ratio Financial Leverage Return on Investment (ROI) Return on Equity (ROE) Average Collection period. (PE-II-May 2006)(12 marks) Solution: Ratios for the year 2005-2006 (a) Inventory turnover ratio: = COGS/Average Inventory = 20860/((2867+2407)/2) = 7.91 (b) Financial Leverage = EBIT/(EBIT-I) = for 2005-06: 170/57 = 2.98 and for 2004-05: 596/481 = 1.22 (c) ROI = NOPAT/Average Capital Employed = 57(1-0.4)/((5947+4555)/2) = 34.2/5251 = 0.65% (d) ROE = PAT/Average Shareholders Funds = 34/((2377+1472)/2) = 34/1924.5 = 1.77% (e) Average Collection Period = Ave. Debtors/Ave. Sales per day = ((1495+1168)/2)/(22,165/365) = 60.7 lacs (ii) Brief Comment on the financial position of JKL Ltd: The profitability of operations of the company are showing sharp decline due to increase in operating expenses. The financial and operating leverages are becoming adverse. The liquidity of the company is under great stress. Question 5: Preparation of Balance Sheet: From the following information, prepare a summarised Balance Sheet as at 31 st March, 2002: Working Capital Bank overdraft Rs.2,40,000 Rs.40,000 Rs. in lakhs 31.03.06 22,165 20,860 1,305 1,135 170 113 57 23 34 31.0305 13,882 12,544 1,338 752 586 105 481 192 289

Give a brief comment on the Financial Position of JKL Limited.

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12.11

Fixed Assets to Proprietary ratio Reserves and Surplus Current ratio Liquid ratio Solution: Working notes: 1. Current assets and Current liabilities computation:

0.75 Rs.1,60,000 2.5 1.5 (PE-II-Nov.2002) (6 marks)

Working Capital = Current Assets Current Liabilities = 2.5 1 = 1.5 = 240,000 Therefore = Current Asset = 240,0002.5/1.5 = 400,000 and Current Liabilities = 160,000 2. Computation of stock: Stock = Current Assets Liquid Assets = 400,000 240,000 = 160,000 Where, Liquid Asset from Liquid Ratio = Liquid assets / Current Liabilities = 1.5 160,000 = 240,000 3. Computation of Proprietary fund; Fixed assets; Capital and Sundry creditors Proprietary ratio = Fixed Assets/Proprietary fund = 0.75 and Or Or and Capital Sundry creditors Fixed assets Net working capital Rs.2,40,000/0.25 Proprietary fund Fixed assets = = = = = = = = = = Balance Sheet Liabilities Capital Reserves & Surplus Bank overdraft Sundry creditors Rs. 8,00,000 1,60,000 40,000 1,20,000 11,20,000 Question 6: Completion of Balance Sheet: With the help of the following information complete the Balance Sheet of MNOP Ltd.: Equity share capital Current debt to total debt Total debt to owners equity : [CA-CWA-CS] Rs. 1,00,000 .40 .60 12.12 The relevant ratios of the company are as follows: 11,20,000 Assets Fixed assets Stock Current assets Rs. 7,20,000 1,60,000 2,40,000 0.75 Proprietary fund 0.25 Proprietary fund Proprietary fund Rs.9,60,000 0.75 proprietary fund 0.75 Rs.9,60,000 = Rs.7,20,000 Rs.8,00,000 Proprietary fund Reserves & Surplus Rs.9,60,000 Rs.1,60,000 = (Current liabilities Bank overdraft) (Rs.1,60,000 Rs.40,000) =Rs.1,20,000

Construction of Balance sheet: (Refer to working notes 1 to 3)

M: Trichy: 93451 22645/Chennai: 93453 96855

Fixed assets to owners equity Total assets turnover Inventory turnover (PE-II-May 2005) (7 marks) Solution: MNOP Ltd Balance Sheet Liabilities Owner equity Current debt Long term debt Rs 1,00,000 24,000 36,000 1,60,000 Working Notes Assets

.60 2 Times 8 Times

Rs 60,000 60,000 40,000 1,60,000

Fixed assets Cash Inventory

1. Total debt = 0.60 Owners equity = 0.60 Rs 1,00,000 = Rs 60,000 Current debt to total debt = 0.40 , hence current debt = 0.40 60,000 = 24,000 2. Fixed assets = 0.60 Owners equity = 0.60 Rs 1,00,000 = Rs 60,000 3. Total equity = Total debt + Owners equity = Rs.60,000+Rs.1,00,000 = Rs.1,60,000 4.Total assets consisting of fixed assets and current assets must be equal to Rs.1,60,000 (Assets = Liabilities + Owners equity). Since Fixed assets are Rs 60,000 , hence, current assets should be Rs 1,00,000 5. Total assets to turnover = 2 Times : Inventory turnover = 8 Times Hence, Inventory /Total assets = 2/8=1/4, Total assets = 1,60,000 Therefore Inventory = 1,60,000/4 = 40,000 Balance on Asset side Cash = 1,00,000 40,000 = 60,000 Question 7: Completion of Balance Sheet: Using the following data, complete the Balance Sheet given below: Gross Profits Shareholders Funds Gross Profit margin Credit sales to Total sales Total Assets turnover Inventory turnover Average collection period(360 days year) Current ratio Long-term Debt to Equity Rs. 54,000 Rs Rs.6,00,000 20% 80% 0.3 times 4 times 20 days 1.8 40%

Balance Sheet Creditors Long-term debt Shareholders funds XXX XXX XXX Cash Debtors Inventory Fixed assets : [CA-CWA-CS] XXX XXX XXX XXX 12.13

M: Trichy: 93451 22645/Chennai: 93453 96855

(PE-II-Nov. 2005)(12 Marks) Solution: Gross Profits (given) = Rs. 54,000 Gross Profit Margin given = 20%, Sales = = Rs. 54,000 / 0.20 = Rs. 2,70,000

Credit Sales to Total Sales = 80%, Credit Sales = Rs. 2,70,0000.80 = Rs. 2,16,000 Total Assets Turnover = 0.3 times, Total Assets = Sales / Total Assets = 270,000/0.3= 900,000 Sales Gross Profits = COGS; COGS = Rs. 270,000 54,000 = Rs. 2,16,000 Inventory turnover = 4 times Inventory = COGS/Inventory Turnover = 216,000/4= Rs.54,000 Average Collection Period = 20 days Debtors turnover = 360/Average Collection Period = 360/20=18 Debtors = Credit Sales / Debtors turnover = Rs 216,000/18= Rs.12,000 Current ratio = 1.8 , hence 1.8 = (Debtors + Inventory + Cash)/Creditors 1.8 Creditors 1.8 Creditors = (Rs. 12,000 + Rs. 54,000 + Cash) = Rs. 66,000 + Cash

Long-term Debt to Equity = 40% Shareholders Funds = Rs. 6,00,000 Long-term Debt= Rs. 6,00,00040% = Rs. 2,40,000 Creditors (Bal .fig) = 9,00,000 (6,00,000 + 2,40,000) = Rs. 60,000 Cash = (60,0001.8) 66,000 = Rs. 42,000 Balance Sheet (in Rs) Creditors (Bal. Fig) Long- term debt Shareholders funds 60,000 2,40,000 6,00,000 9,00,000 Question 8: Completion of Balance Sheet: Using the following information, complete the Balance Sheet given below: (i) (ii) (iii) (iv) (v) (vi) Total debt to net worth Total assets turnover Gross profit on sales Average collection period (Assume 360 days in a year) Inventory T.O ratio (COGS/Cl. Inventory) Acid test ratio 3 0.75 1:2 2 30% 40days Cash Debtors Inventory Fixed Asset(Bal.fig) 42,000 12,000 54,000 7,92,000 9,00,000

Balance Sheet as on March 31, 2007 Liabilities Equity Shares Capital Reserves and Surplus Total Debt: : [CA-CWA-CS] Rs. 4,00,000 6,00,000 Assets Fixed Assets Current Assets: Inventory Rs.

M: Trichy: 93451 22645/Chennai: 93453 96855

12.14

Current Liabilities

Debtors Cash

Solution: Net Worth = Capital + Reserves and surplus = 4,00,000 + 6,00,000 = Rs. 10,00,000 Total Debt/ Networth = = Rs 500,000 Total Liability side = 4,00,000 + 6,00,000 + 5,00,000 = Rs. 15,00,000= Total Assets Total Assets Turnover = Sales / Total assets = 2 = Sales / 15,00,00 Sales = Rs. 30,00,000 Gross Profit on Sales : 30% i.e. Rs. 9,00,000, COGS = Rs. 30,00,000 Rs. 9,00,000 = Rs. 21,00,000 Inventory turnover = COGS/Inventory =3 = 2100,000/Inventory Inventory = Rs. 7,00,000 Ave collection period = Ave debtors /Sales/ day = 40 = Debtors /3000,000/360, Debtors = Rs 333,333 Acid test ratio = (Current Assets Stock) /Current Liabilities 0.75 = (Current Assets 700,000)/500,000 Current Assets = Rs. 10,75,000. Fixed Assets = Total Assets Current Assets = 15,00,000 10,75,000 = Rs. 4,25,000 Cash and Bank balance = Current Assets Inventory Debtors = 1075,000 700,000 333,333 = 41,667 Balance Sheet as on March 31, 2007 Liabilities Equity Share Capital Reserves & Surplus Total Debt: Current liabilities 5,00,000 5,00,000 Rs. 4,00,000 6,00,000 Assets Fixed Assets Current Assets: Inventory Debtors Cash 7,00,000 3,33,333 41,667 15,00,000 Rs. 425,000

Question 9: Preparation of Profit and Loss A/c and Balance Sheet from Ratios: The following accounting information & financial ratios of PQR Ltd. relate to the year ended 31.12.2006: I Accounting Information: Gross Profit Net profit Raw materials consumed Direct wages Stock of raw materials Stock of finished goods Debt collection period All sales are on credit II Financial Ratios: Fixed assets to sales Fixed assets to Current assets Current ratio Long-term loans to Current liabilities Capital to Reserves and Surplus 1:3 13 : 11 2:1 2:1 1:4 15% of Sales 8% of sales 20% of works cost 10% of works cost 3 months usage 6% of works cost 60 days

If value of fixed assets as on 31-12-2005 amounted to Rs. 26 lakhs, prepare a summarised P&L A/c of the company for the year ended 31-12-2006 & also the B/S. (PE-II-May 07) : [CA-CWA-CS] M: Trichy: 93451 22645/Chennai: 93453 96855 12.15

Solution: (a) i. ii. iii. Working Notes: Sales = Fixed Assets/ Sales = 1/3 26,00,000 /Sales = 1/3 = Sales = Rs. 78,00,000 Current Assets (CA) = Fixed Asset /CA = 13/1126,00,000 /CA = 13/11= CA= Rs. 22,00,000 Calculation of Raw Material Consumption and Direct Wages Sales Less: gross profit Works cost Raw material consumption (20% of works cost) Direct wages (10% of works cost) iv. v. vi. vii. viii. ix. 78,00,000 11,70,000 66,30,000 13,26,000 663,000

Stock of Raw Materials (= 3 months usage) = 13,26,000 3/12 = Rs. 331,500 Stock of Finished Goods (= 6% of Works Cost) = 66,30,000 6/100 = Rs. 397,800 Current Liabilities (CL) = CA / CL = 2 22,00,000/CL = 2 = CL = Rs. 11,00,000 Debtors = ACP = Debtors/Credit Sales365= Debtors/78,00,000365 = 60 = Debtors = 12,82,192 Long term loan (LTL) = LTL / CL = 2/1 = LTL / 11,00,000 = 2/1 = LTL = 22,00,000 Calculation of Cash Balance Current assets Less: debtors 12,82,192 3,31,500 20,11,492 1,88,508 26,00,000 22,00,000 48,00,000 22,00,000 33,00,000 15,00,000 Raw materials stock Cash balance 22,00,000

finished goods stock 3,97,800 x. Calculation of Net worth Fixed assets Current assets Total assets Less: long term loan Net worth xi. xii. current liabilities 11,00,000

Net worth = Share capital + Reserves = 15,00,000 Share Capital = Capital / R/S = = Share Capital = 15,00,000 1/5 = Rs. 300,000 Reserves and Surplus (R/S) = Capital / R/S = 4/5 = R/S = 15,00,000 4/5 = Rs. 1200,000 PROFIT AND LOSS A/C OF PQR LTD.FOR THE YEAR ENDED 31-12-2006 Particulars To To To To To To Direct materials Direct wages Works (O.H) (bal fig) Gross Profit c/d (15% of sales) Selling & distribution (bal) Net profit (8% of sales) Rs. 13,26,000 6,63,000 46,41,000 11,70,000 78,00,000 5,46,000 6,24,000 11,70,000 11,70,000 By Gross Profit b/d 78,00,000 11,70,000 By Particulars Sales Rs. 78,00,000

: [CA-CWA-CS]

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12.16

BALANCLE SHEET OF PQR LTD.AS AT 31-12-2006 Liabilities Share capital Reserves & surplus Long term loans Current liabilities Rs. 3,00,000 12,00,000 22,00,000 11,00,000 Assets Fixed assets Current assets: Stock of raw material Stock of finished goods Debtors Cash 48,00,000 Question 10: Complete Ratio Analysis: Following incomplete information of X Ltd. are given below: Trading and Profit & Loss A/c for the year ended 31.3.2008 Particulars To To To To To To To To To To To Opening stock Purchases Direct expenses Gross profit c/d Establishment expenses Interest on loan Provision for taxation Net profit c/d Proposed dividends Transfer to G.Reserve Balance transferred Balance sheet to Rs.000 700 ? 175 ? ? 740 60 ? ? ? ? ? ? ? Balance Sheet as at 31st March, 2008 Liabilities Paid-up capital General reserve: Balance at the beginning of the year Proposed addition Profit and loss account 10% Loan account Current liabilities Other information: i. ii. Current ratio is 2:1. Closing stock is 25% of sales. : [CA-CWA-CS] M: Trichy: 93451 22645/Chennai: 93453 96855 12.17 ? ? ? ? ? ? (Rs.000) 1,000 Assets Fixed assets: Plant & machinery Other fixed assets Current assets: Stock Sundry debtors Cash at bank ? ? 125 ? 1,400 ? (Rs.000) ? By By Balance b/f Net profit b/d ? 140 ? By By Gross profit b/d Commission ? ? 100 By By Particulars Sales Closing stock Rs.000 ? ? 3,31,500 3,97,800 12,82,192 1,88,508 48,00,000 Rs. 26,00,000

iii. iv. v. vi. vii. viii. ix.

Proposed dividend to paid-up capital ratio is 2:3. Gross profit ratio is 60% of turnover. Loan is half of current liabilities. Transfer to general reserves to proposed dividends ratio is 1:1. Profit carried forward is 10% of proposed dividends. Provision for taxation is equal to the amount of net profit of the year. Balance to credit of general reserve at the beginning of the year is twice the amount transferred to that account from the current years profits. Trading and Profit & Loss A/c for the year ended 31.3.2008 & The Balance Sheet as on that date. (20 Marks)(May, 2008)

You are required to complete:

Solution: Trading and Profit & Loss A/c for the year ended 31-3-2008 Particulars To To To To To To To To To To To Opening stock Purchases (Bal. Fig.) Direct expenses Gross profit c/d (W.N.9) Establishment expenses Interest on loan Provision for tax (W.N.8) Net profit c/d Proposed dividends (W.N.1) Transfer to general reserve (W.N.2) Balance transferred to B/S(W.N.3) 66.66 1,400.00 Balance Sheet as at 31st March, 2008 Liabilities Paid-up capital General reserve: Balance at the beginning (W.N.14) Proposed addition (W.N.2) Profit and loss A/c 10% Loan A/c (W.N.4) Current liabilities (W.N.5) 1333.34 666.67 66.66 600.00 1,200.00 4,866.67 (Rs.000s) 1,000.00 Assets Fixed assets: Plant & machinery Other fixed assets (Bal Fig) Current Assets: Stock (W.N.11) Sundry debtors (W.N.13) Cash at bank 1341.67 933.33 125.00 4,866.67 1,400.00 1066.67 (Rs. in 000s) 1,400.00 (Rs.000s) 700.00 2613.33 175.00 3,220.00 6,708.33 740.00 60.00 1,260.00 1,260.00 3,320.00 666.67 666.67 By By Balance b/f Net profit (Bal Fig) 3,320.00 140.00 1,260.00 By By Gross profit (Bal. Fig) Commission 6,708.33 3,220.00 100.00 By By Particulars Sales (W.N.10) Closing stock (W.N.11) (Rs.000s) 5366.66 1341.67

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Working Notes: 1. 2. 3. 4. 5. 6. 7. Proposed dividend to paid-up capital is 2:3: i.e. Proposed dividend =2/3 of capital = Rs.1,000,000 2/3 = Rs. 666,667 Transfer to General Reserve is equal to proposed dividend i.e., 1:1. Proposed dividend is Rs.666,667, therefore general reserve is also Rs. 666,667 Profit carried forward to Balance Sheet = 10% of Proposed Dividend i.e., Rs. 666.67 thousand 10% = Rs.66.66 thousand 10% Loan implies interest on loan being 10%: i.e. Rs.60,000100/10= Rs. 600,000 Loan is half of current liabilities which means current liabilities are twice of loan i.e., Rs.600,000 2 = Rs.1,200,000 Current Ratio = Current Assets/Current Liabilities = 2/1 i.e. Current Assets = 2 Current Liabilities or 2 Rs.1,200,000 = Rs.2,400,000 Current Net Profit Proposed dividend Transfer to general reserve Profit and loss balance transferred to balance sheet Less: Balance b/f Net profit for the year 8. 9. 10. Provision for taxation is equal to current net profit i.e., = Rs.1,260,000 Gross profit being balancing figure of Profit and Loss A/c = Rs. 3220,000 Gross profit = 60% of sales i.e. Rs.3,220,000 = 60% of sales Or, sales = Rs 3220,000100/60 = Rs= Rs. 5366,670 11. 12. 13. 14. 15. Closing stock is 25% of sales i.e., 25% of Rs. 5,366,670 = Rs. 1,341,670 Purchases being balancing figure of Trading A/c = Rs.2,613.33 thousand Debtors = Current Assets Closing Stock Cash at Bank = Rs.2,400,000 Rs.1,341,670 Rs.125,000 = Rs.933,30 Balance of general reserve at the beginning of the year is twice of the amount transferred to general reserve during the year i.e. 2 x Rs.666,670 = Rs.1,333,340 Other fixed assets = Total of B/S (liabilities side) - Current assets Plant and machinery i.e., Rs. 4,866,670 - Rs. 2,400,000 Rs.1,400,000 = Rs.1,066,670 (Rs. in 000s) 666.67 666.67 66.66 1,400.00 140.00 1,260.00

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M: Trichy: 93451 22645/Chennai: 93453 96855

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