Solution:

(a) Current Ratio

= Current Assets/Current Liabilities
= 134000 / 76000
= 1.76
Current Assets
Debtors
Less Provision
Cash
Bank
Bills Receivable
Securities
Stock

Rs.

Rs.
42,000
2,000

Current Liabilities

Sundry Creditors
Provision for taxation
40,000 Bill payable
10,000
8,000
15,000
8,000
53,000
1,34,000

(b) Liquid Ratio

= Liquid Assets / Liquid Liabilities
= Current Assets Stocks / Liquid Liabilities
Liquid Ratio
= Rs.1, 34000 - 53,000 / 76,000
= 81, 1000 / 76,000
= 1.07(app)
(c) Inventory Turnover Ratio
= Net Sales / Average Inventory
= Rs.2, 52,000 / 50,000
= 5.04 times
Average Inventory
= Opening Stock + Closing Stock / 2
= Rs.47, 000 + 53,000 / 2
= 50,000
(d) Debtors turnover Ratio
= Total Receivables / Credit sales per day
Credit sales per day
= Total Sales / 360
= Rs.2, 52,000 / 360
= Rs.700
Debtors Turnover Ratio
= Rs.42, 000 + Rs.15, 000 / Rs.700
= 57,000 / 700
= 82 days

Rs.
32,000
15,000
29,000

76,000

Alternatively,
Debtors Turnover Ratio
= Total sales / Average Receivables
= Rs.2, 52,000 / Rs.57, 000
= 4.42
Average collection period
= 360days / 4.42
= 82 days
(e) Creditors turnover Ratio
= Total Accounts payable / credit purchase per day
Credit purchase per day
= Total purchase / 360days
= Rs.1, 80, 000 / 360
= Rs.500
Creditors turnover ratio
= Rs. 32,000 + Rs.29,000 / Rs.500
= 122 days
Illustration 6
The Balance Sheet Anish & Co. As on 31-12-2009 is as follows:.
Balance Sheet
Liabilities
Rs.
Assets
Share Capital
Fixed assets
10,000. 10%
1,00,000 Land & Building
Preference share of Rs.
Plant & machinery
10 each
20,000 Ordinary
Less depreciation
Shares
Of Rs. 10.each
2,00,000
Share premium
50,000 Motor Vehicles
Reserves
1,70,000 Less depreciation
Dividend Equalizations
25,000
Fund
10 % Debentures
25,000 Investments
Creditors
50,000
Bank Over draft
20,000 Current Assets

Rs.

Rs.
2,00,000

3,60,000
1,20,000
50,000
30,000

2,40,000

20,000
50,000

Provision Of taxation

30,000 Stock
Debtors
Less provision

80,000
2,000

Cash
Deferred
Advertisement
Expenditure

70,000

78,000
2,000
10,000
6,70,000

6,70,000

Calculate the value of capital employed in the business considering the following
information:
(a) Freehold land and buildings are valued at Rs.2,60,000
(b) Plant and machinery has a replacement cost of Rs.4,50,000

Depreciation on replacement cost would amount to Rs.1,50,000

(c) Motor vehicles would cost Rs.60,000 to replace
Depreciation on replacement cost would amount to Rs.36,000
(d) Investment have been analyzed to show the following:
Investment outside the business Rs.40,000
Investment inside the business Rs.10,000
(e) Include in the stock valuation are items now considered obsolete which amount to
Rs.2,000
Solution:
Fixed Assets
Land and Building
Plant & Machinery
Less depreciation
Motor Vehicles
Less Depreciation

Value of Capital Employed as on 31-12-2009

Rs.
Rs.

Investment made inside the

business
Current Assets
Stocks
Debtors

2,60,000
4,50,000
1,50,000
60,000
36,000

3,00,000

24,000
10,000
68,000
78,000

Cash
Less current liabilities
Creditors
Overdraft
Taxation

50,000
20,000
30,000

1,00,000
48,000
6,42,000

Alternative Method
Value of Capital Employed as on 31-12-2009
Issued Capital-Preference
Equity
Share premium A/c
Reserves
Dividend Equalizations Fund
10% Debentures
Difference on revaluation
Add: Land and Buildings
Plant and Machinery
Motor vehicles
Stock
Less: Assets not include in
capital employed:
Investment outside the business
Deferred advertising cost

1,00,000
2,00,000

3,00,000
50,000
1,70,000
25,000
25,000
60,000
60,000
4,000
(2,000)
1,22,000
40,000
10,000

72,000
6,42,000

Illustration 7
Redraft the following financial statements for the purpose of analysis and
then computer the following ratios:

(a)
(b)
(c)
(d)
(e)

Gross profit ratio

Return on capital Employed
Operating Cost Ratio
Net Profit Ratio
Current Ratio

(f) Liquid Ratio

(g) Stock turnover Ratio
Profit and Loss Account
Dr.

Cr.

Particulars
To Opening Stock
Raw Materials
Finished Goods
To Purchase of
Raw Material
To Wages
To Factory expenses
To Administration Expenses
To selling and distribution
Expenses
To interest on debentures
To loss on Sale of plant
To Net Profit

Liabilities
Share Capital
Equity shares
(2000 @ Rs. 10/-each)

Rs.
10,000
20,000
60,000
40,000
20,000
10,000
10,000

Particulars
By Sales
Closing Stock
Raw materials
Finished goods
Profit on Sale
Shares

2,000
13,000
75,000
2,60,000

Rs.

Balance Sheet
Assets
Fixed Assets

Rs.
2,00,000
30,000
20,000
10,000

2,60,000

Rs.
50,000

Stock of raw
20,000 Materials
Stock of finished

30,000

Preference Shares
(2000 @ Rs. 10/-each)

20,000 Goods

20,000

Reserves

20,000 Book debts

20,000

5% Debenture

40,000 Cash

15,000

Creditors

20,000

Bills Payable

10,000

Bank overdraft

5,000
1,35,000

1,35,000

Solution
Income Statement
Rs.

Particulars

Rs.

Sales

Less: cost of goods sold

materials consumed
Opening stock
Add: Purchases

Rs.
2,00,000

Raw

Less: Closing stock

Wages
Factory expenses
Cost of production
Add: Opening stock of finished goods

Less: Closing stock of finished goods

Gross profit
Less: Operating expenses:
Administration expenses
Selling and distribution
Expenses
Net Operating Profit
Add: Non-trading income
Profit on sale of shares

10,000
60,000
70,000
30,000

40,000
40,000
20,000
1,00,000
20,000
1,20,000
20,000

1,00,000
1,00,000

10,000
10,000

20,000
80,000
10,000

Less: Non-trading expenses or losses

Loss on sale of plant
Net profit before tax and Interest

90,000
13,000
77,000

Less:

2,000
75,000

Debenture interest
Net profit before tax

Balance Sheet
Cash balance
Book debts
Liquid Assets
Raw Materials
Finished goods
Current Assets
Less: Current Liabilities
Sundry creditors
B/P
Liquid Liabilities
Bank over draft

15,000
20,000
35,000
30,000
20,000

20,000
10,000
30,000
5,000

Working Capital
Add: fixed assets
Capital employed
Less: 5% Debentures
Shareholders funds
Less: Preference share capital
Equity shareholders net worth
Represented by
Equity share capital
Reserves

50,000
85,000

35,000
50,000
50,000
1,00,000
40,000
60,000
20,000
40,000

20,000
20,000

Calculation of Ratio:
Cross Profit Ratio = (Gross Profit / Sales) * 100
= (Rs.1, 00,000 / Rs.2, 00,000) * 100
= 50%
Net Profit Ratio = (Net Profit / Sales) * 100
= (Rs.75, 000 / Rs.2, 00,000) * 100
= 37.5%
Operating ratio

= (Operating Cost / Sales) * 100

= (Rs.1, 00,000 + Rs.20, 000 / Rs.2, 00,000) * 100
= (Rs.1, 20, 0000 / Rs.2, 00,000) * 100
= (Rs.1, 20,000 / Rs.2, 00,000) * 100
= 60%

Alternatively,
Operating Profit Ratio = (Operating profit / Sales) * 100
= (Rs.80, 000 / Rs.2, 00,000) * 100
= 40%
Return on Capital employed = (Operating profit / Capital Employed) * 100
= (Rs.80, 000 / Rs.1, 00,000) * 100
= 80%
Current Ratio

= (Current Assets / Current Liabilities)

= (Rs.85, 000 / Rs.35, 000)
= 2.43(~)

Liquid Ratio

= (Liquid assets / Liquid Liabilities)

= (Rs.35, 000 / 30,000)
= 1.17(~)

Sock turnover Ratio

= (Cost good sold / Average Stock*)

= (Rs.1, 00,000 / Rs.40, 000)
= 2.5times

*Average Stock of raw materials and Finished Goods

Raw materials Turnover Ratio

= (Materials Consumed / Average raw of raw

Materials Inventory)
= (Rs.40, 000 / Rs.20, 000)
= 2 times

Finished Goods Turnover Ratio

= (Cost of Goods sold / Average Finished Goods

Stock)
= (Rs.1, 00,000 / Rs.20, 000)
= 5 times

Illustration 8
The following are the summarized profit and loss account of priya
Ltd for the year enabled 31.12.2010 and Balance sheet as on that date.

Profit and Loss Account

Dr.
Particulars
To opening stock
To Purchase
To Incident Expense
To gross profit

Rs.
Particulars
99,500 By Sales
5,45,250 By closing
14,250
9,99,000

To opening Expense
Selling and Distribution
Expense

By Gross profit
30,000 By non-operating
Income interest
1,50,000 By profit on sale of share
15,000

Administrative Expense
Finance Charges
To non-operating Expense
Loss on sale of assets
To net profit

4,000
1,50,000
3,49,000

Cr.
Rs.
8,50,000
1,49,000
9,9,000
3,40,000
3,000
6,000

3,49,000

Balance Sheet
Liabilities
Issued Capital
2000 Equity shares
of Rs.100 Each
Reserve
Current Liabilities
P & L A/c

Rs.

Assets
Land & Buildings
Plant & Machinery
2,00,000 Stock
90,000 Sundry Debtors
1,30,000 Cash and Bank
60,000
4,80,000

Rs.
1,50,000
80,000
1,49,000
71,000
30,000
4,80,000

From the above statement you are required to calculate the following ratios and State the
purpose they serve.
i.
ii.
iii.
iv.
v.
vi.

Current Ratio
Liquid Ratio
Operating Ratio
Stock Turnover Ratio
Return on Total Resources
Turnover of fixed Assets

Solution:
i.

Current Ratio = (Current Assets) / (Current Liabilities)

= (Rs.1, 49,000 + Rs.71, 000 + Rs.30, 000) / (Rs.1, 30,000)
= (Rs.2, 50,000) / (Rs.1, 30,000)
= 1.923(Approx.)

ii.

Liquid Ratio = (Liquid Assets) / (Liquid Liabilities)

= (Rs.71, 000 + Rs.30, 000) / (Rs.1, 30,000)
= (Rs.1, 01,000) / (Rs.1, 30,000)
= 0.78(Approx.)
= 0.78: 1

Compare to the Standard of 2:1 expected for the Current Ratio the actual ratio pf 1.923 is very
near .But the liquid ratio which is 0.78:1 against the standard for 1:1 reveals that a large part of
the current assets consists of stock .Hence, it may be inferred that the liquidity position is not
satisfactory since the stock is not so easily convertible into Cash.

iii.

Operating Ratio

= (operating cost) / (Net sales) * 100

= (Rs.5, 10,000 + Rs.1, 95,000) / (Rs.8, 50,000) * 100
= (Rs.7, 05,000) / (Rs.8, 50,000) * 100
= 83 % (~)

Cost of goods sold

= Opening Stock + Purchase + Incidental

= Rs.99, 500 + Rs.5, 45,250 + Rs.14, 250
= Rs.5, 10,000

For every rupee worth of sales the ratio indicates that 83paise constitute cost of goods sold and
operating expense.
iv.

Stock Turnover Ratio = (Cost of goods sold) / (Average inventory at coast)

= (Rs.5, 10,000) / (Rs.1, 24,250)
= 4.1(Approx.)
Average inventory = (Rs.99, 500 + Rs.1, 49,000) / (2)
= Rs.1, 24,250

During 2000 the stock turned over slightly more than 4 times however .it should
be compared with the previous years ratios for arriving at any conclusions
v.

Return on total Resources = (Net profit) / ( Total assets )

= (Rs.1, 50,000) / (Rs.4, 80,000)
= 31:1

The Business has earned a return 31 paise foe every one rupee of total resources employed .This
ratio shows a favorable position .
vi.

Turnover of fixed Assets = (Net Sales) / (Fixed Assets)

= (Rs.8, 50,000) / (Rs.2, 30,000)
= 37:1

This shows that ever rupee worth of fixed assets has been used to generate net sales of Rs.3.70.
this ratio may also be calculated using cost goods sold, instead of net sales as follows:
vii.

Turnover of fixed assets = (Cost of goods sold) / (Fixed Assets)

= (Rs.5, 10,000) / (Rs.2, 30,000)
= 2.22:1

This means that every ruppe invested in fixed assets results in the sale of goods costing Rs. 2.22
Computation of Financial Statement Information from ratio

Illustration 9
Debtors Velocity

3 months

Creditors Velocity

2 months

Stock Velocity

8 months

Bills payable

Rs. 10,000

Bills receivable

Rs. 4,000

Total Sales

Rs. 2, 40,000

The closing stock is Rs.2, 000 more than the opening stock Gross profit on above sales is
Rs. 40,000.There are no cash sales and cash purchase and the accounting year consists of 360
working days .Find out:
a) Sundry Debtors
b) Sundry Creditors
c) Closing Stock

Solution:
(a) Calculation of Sundry Debtors
Debtors velocity = (Total Debtors) / (Total Credit Sales) * 100
Let a be the value of total Debtors
90 = (a*360) / (Rs.2, 40,000) Credit sales per day = (credit sales) / (360)
360 a = Rs.2,40,000 * 90
a = (Rs.2,40,000 / 360) * 90
= Rs.60, 000
Sundry Debtors = Total Debtors Bills Receivable
Sundry Debtors = Rs.60,000 Rs .10,000
= Rs.50,000
(b) Calculation of closing stock
Stock velocity = (credit of goods sold / Average stock)
Cost of goods sold = Sales Gross profit
Rs.2,00,000 = Rs.2,40,000 Rs.40,000
8 = (Rs.2,00,000 / Average stock)
= Rs.25,000
Average Stock = (opening stock + closing stock) / (2)
2 * Average stock = opening stock + closing stock
2 * 25,000 = opening + closing stock
Closing stock + opening stock = Rs.50,000 (1)
Adding stock opening stock = Rs.2,000 (2)
Adding both Equation we get
2 closing stock = Rs.52,000
Closing stock

= Rs.52,000 / 2
= 26,000

(c) Calculate of sundry creditors

Creditors velocity = (total creditors) / (credit purchase) * 360

Cost of goods sold opening stock + purchase closing stock

Rs.2,00,000 = Rs.24,000 + purchase Rs.26,000
Purchase = Rs.20,000 Rs.24,000 + Rs.26,000
Purchase = Rs.202,000
Let y The total creditors
60 = (y * 360) / (Rs.2,20,000) * 60
= 2,02,000
Y = (60 * 2,02,000) / (306)
= Rs.33,667(~)
Sundry creditors = Total creditors Bills payable
= Rs.33,667 Rs.4,000
= Rs.29,667 (approx..)
Illustration 10
From the following information , find out (a) Sales (b) Closing stock (c) Sundry
Debtors and (d) Sundry creditors
Gross profit Ratio
25 percent
Debtors Turnover Ratio
4months
Stock Turnover Ratio
4times
Creditors Turnover Ratio 6 months

Closing stock is Rs.10,000 more than the opening stock .Bills receivables amount to Rs.65,000
and Bills payable to Rs.80,000.cost of goods stock for year is Rs.9,00,000

Solution:
Calculation of sales:
Gross profit Ratio = 25%
Cost of goods sold to sales = 75%
Sales

= Cost of goods sold * 100 / 75

= Rs.9,00,000 * 100 / 75
= Rs.12,00,000

Calculation of closing stock:

Stock turnover ratio = (cost of goods sold) / (Average stock) = 4

4 = (Rs.9,00,000) / (Average stock)

4 * Average stock = Rs.9,00,000
Average Stock = Rs.2,25,000
Closing stock = Average + 1/2 (Different Between opening and Closing stocks)
Closing stock = Rs.2,25,000 + (1/2 * Rs.10,000)
= Rs.2,30,000
Calculation of Sundry Debtors:
Account Receivable = Sales * Debtors Turnover Ratio
= Rs.12,00,000 * 4/12 = Rs.4,00,000
Less Bills Receivable

= Rs.

65,000

Sundry Debtors

= Rs.3,35,000

Calculation of Sundry Creditors:

Purchase = Cost of goods sold + closing stock opening stock
= Rs.9,00,000 + Rs.2,30,000 Rs.2,20,000
= Rs.9,10,000
Amount payable = Purchase * creditors Turnover Ratio
= Rs,9,10,000 * 6/12 = Rs.4,55,000
Less Bills payable

= Rs.80,000

Sundry creditors

= Rs.3,75,000

Illustration 11
Calculate current assets, current liability, stock turnover ratio from the following
information:
Current ratio

: 2.5

Working capital

: Rs.60,000

Opening stock

: 29,000

Closing stock

: 31,000

Sales

: 3,20,000

Gross profit ratio

: 25% on sales
(B.Com., Bharathidasan, April 1992)

Solution:
Current ratio
2.5

= (Current assets) / (Current Liabilities)

= (current assets) / (Current liabilities)

Current assets = 2.5 current liabilities

Working capital

= current assets Current liabilities

60,000

= 2.5 current liabilities Current liabilities

60,000

= 1.5 current liabilities

Current liabilities

= (60,000) / (1.5)
= Rs.40,000

Current assets

= 2.5 current liabilities

= 2.5 * 40,000
= Rs.1,00,000

Gross profit : 25% on sales , i.e., 25% of 3,20,000 = Rs.80,000

Cost of goods sold = sales Gross profit
= 3,20,000 80,000
= Rs.2,40,000
Average stock

= (Operating stock + closing stock) / (2)

= (29,000 + 31,000) / (2)
= Rs.30,000

Stock turnover

= (Cost of goods sold) / (Average stock)

= (2,40,000) / (30,000)
= 8times

Illustration 12
From the following information make out a statement of proprietors fund
with as details as possible.

Current ratio

2.5

Liquid ratio

1.5

Proprietary ratio
(Fixed assets / proprietary funds)
Working capital

0.75
Rs. 60,000

Bank overdraft
Reserves and surplus

10,000
40,000

There are no long term loans or fictitious assets.

(C.S. Inter, June 1994: B.Com., S.V. Univ, April 1992)
(M.B.A. Andhra. March 1992: B.Com, Bharathidasan. Nov.1994)
Solution:
If current ratio is 2.5 . it means that for every Re.1 current liability , current assets
amount to Rs.2.5 .Therefore , excess of current assets over current liabilities is 2.5 1 =
1.5.Working capital being excess of current assets over current liabilities 1.5 should be working
Capital . the amount of working capital given in problems .Is Rs.60,000 Hence, if working
capital is 1.5.... Current assets are 2.5
Working Capital is Rs.60,000 then
Current assets = (2.5 * 60,000) / (1.5)
= Rs.1,00,000

If working capital is 1.5, current liabilities I

Working capital is Rs.60,000 then
Current liabilities = (Rs.60,000) / (1.5)
= 40,000

Liquid Ratio

= (Liquid assets) / (current liabilities)

1.5 = (current assets stock prepayments) / (40,000)
1.5 = (1,00,000 stock ) / (40,000)

1,00,000 stock = 60,000

Stock

= Rs.40,000

Proprietary Ratio

= (fixed Assets) / (Proprietors funds)

0.75

= (Fixed assets) / (proprietors funds)

Proprietors funds fixed assets = current current liabilities

According to this relationship , if 0.75 were the proprietary ratio , 75% of the total
capital covers fixed assets and balance of 25% finances working capital .accordingly
25% = 1,00,000 40,000
25% or = 60,000
1

= 60,000 * 4
= Rs.2,40,000 (proprietors funds)

This amount should include retained earnings also.

Statement of Proprietors Funds

Particulars
Name capital
Perceives and Supply

Rs.

Rs.

Rs.
2,00,000
40,000

Rs.

2,40,000
Fixed assets 75% of
Proprietors finds
Current assets:
Stock
Liquid assets

1,80,000
40,000
60,000
1,00,000

Current Liabilities:
Bank over drafts
Others

10,000
30,000
40,000

Working capital

60,000
2,40,000

Illustration 13
Following are the details of the trading activities of murugan Trades Ltd.
Stock velocity

8months

Debtors velocity

3months

Creditors velocity

2months

Cross profit ratio

25%

Gross profit for the year is Rs.4,00,000.Bills receivables Rs.25,000 and bills payable
Rs.10,000.Closing stock for the years is Rs.10,000 more than the opening stock . Find out
(i)Sales , (ii) Debtors (iii) Closing stock (iv) Creditors
(B.Com., Bharathidasan, Nov. 1995: M.com., Kerala, April 1995)
(B.Com., Madras, Sept 1991)

Solution:
Gross Profit ratio = (Gross profit ) / (sales) * 100
(25) / (100) = (4,00,000) / (sales)
25 ales = 4,00,00,000

(i) sales

= Rs.16,00,000

(ii)debtors
Debtors velocity given as 3months, indicates debt collection or average age of account
receivable.

Average age of debtors = (Months or days in a year) / (debtors turnover)

3

= (12 months) / (debtors turnover)

3 Debtors turnover = 12
Debtors turnover = 4

Debtors turnover Ratio = (Credit sales) / (Debtors + Bills receivable)

OR
Debtors + Bills receivables = (credit sales) / (debtors Turnover Ratio)
= (16,00,000) / (4)

Debtors +Bills receivables = Rs.4,00,000

Bills receivables =
Debtors

25,000

= Rs.3,75,000

(iii) Closing stock:

Stock velocity is 8 months . Hence. the turnover ratiois12/8 = 1.5

Stock turnover ratio = (cost of goods sold (sales Gross profit)) / (Average stock)
1.5

= (12,00,000) / (Average stock)

Average stock

= Rs.80,000

Average stock

=(opening stock + closing stock) / (2)

8,00,000

= (opening stock + closing stock) / (2)

Opening stock + Closing stock = 16,00,000

x + (x + 10,000) = 16,00,000
2x + 10,000

= 16,00,000

2x = 16,00,000 10,000
2x = 15,90,000
X = Rs.7,95,000
Opening stock is Rs.7,95,000 and closing stock Rs.8,05,000 . With the figures of
opening stock, closing stock, sales and gross profit, purchase may be ascertained as the balancing
figure by preparing trading account .
The figure of purchase is Rs.12,10,000
Trading Account
Dr.

Cr.

To opening stock
To purchase
Balancing figure
To cross profit

7,95,000 By sales
12,10,000 By closing stock

16,00,000
8,05,000

4,00,000
24,05,000

24,05,000

Satiating the figure in the creditors turnover formula

(iv) Creditors: Creditors velocity being 2 months, credits payment period is 2 months.

Accordingly , 12/2 = 6 is the creditors turnover ratio

Creditors turnover ratio = (Credit purchase) / (Creditors + bills payable)
6 = (12,10,000) / (creditors + bills payable)
Creditors + 10,000

= 2,01,667

Creditors + 10,000

= 2,01,667

Creditors

= 2,01,667 10,000

Creditors

= Rs.191,667

Illustration 14:

From the following details prepare the balance sheet of the firm concerned :
Stock velocity

Capital turnover ratio

Fixed assets turnover ratio

Gross profit ratio

20%

Debt collection period

2months

Creditors payment period

73days

The gross profit was Rs.60,000. Closing stock was Rs.5,000 in excess of the opening
stock.
(B.Com., Punjab, April 1995)

Solution:
Gross profit ratio is 20% of turnover. If sales are 100,gross is 20, i.e. 1/5 of turnover
Accordingly , gross profit Rs.60,000 is 1/5 of sales. Hence sales are Rs,3,00,000.
Sales gross profit = cost of goods sold
3,00,000 60,000 = Rs.2,40,000
Stock turnover ratio = (cost of goods sold) / (average stock)
6 = (2,40,000) /(Average stock)
6 Average stock
Average stock

= Rs.2,40,000
= Rs.40,000

Average stock

= (opening stock + closing stock) / (2)

40,000

= (opening stock + closing stock) / (2)

Opening stock + closing stock = 80,000

X + (x + 5,000) = 80,000
2x + 5,000

= 80,000
2x = 75,000
X = Rs.37,500

Opening stock is Rs.37,500 and closing stock Rs.42,500

Capital Turnover Ratio = (cost of goods sold) / (capital)

2
2capital
Capital

= (2,40,000) / (capital)
= 2,40,000
= Rs.1,20,000

Fixed assets turnover ratio = (cost of goods sold) / (Fixed assets)

4

= (2,40,000) / (Fixed assets)

4 fixed assets = 2,40,000

Fixed assets = Rs.60,000

Debtors turnover ratio = (12months) / (Debt Collection period)

= (12months) / (2)
= 6times

Debtors turnover ratio = (credit sales) / (Debtors)

6 = (3,00,000) / (Debtors)
6 Debtors = 3,00,000
Debtors = Rs.50,000

Creditors Turnover Ratio = (365 days) / (payment period)

= (365 days) / (73 days)
= 5 times

Creditors Turnover Ratio = (Credit purchase) / (Creditors)

Purchase = Cost of good sold + Closing stock opening stock
= 2,40,000 + 42,500 37,500
= 2,45,000
5 = (2,45,000) / (creditors)

5 Creditors = 2,45,000
Creditors = Rs.49,000

Balance Sheet as at
Liabilities
Capital
Creditors

Rs.

Assets
1,20,000 Fixed assets
49,000 Stock
Debtors
Cash (balancing figure)
1,69,000

Rs.
60,000
42,500
50,000
16,500
1,69,000

Illustration 15
The information relating to the business of XY company as at end of March 2010
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)

Gross profit ratio

Net profit / Sales
Stock turnover ratio
Net profit / Capital
Capital / total liabilities
Fixed assets / capital
Fixed assets / current assets
Fixed assets
Closing stock

25%
20%
10
1/5

5/4
5/7
Rs.10,00,000
1,00,000

(a) From the above information, find out (1) Cost of sales, (2) Gross profit, (3) Net profit, (4)
Value of current assets, (5) Amount of capital, (6) Amount of liabilities.

(b) Also prepare a trading and profit and loss account for the year ended 31st march 1994.
(B.A., Madras, March 1994; B. com., Bangalore, Nov.1995)
Solution
Since sales-cost of goods sold =Gross profit, it is necessary, first of all, to find out
the figure of sales.
Fixed assets/ Capita ratio is 5/4, Accordingly.
For 5 fixed assets

.. Capital is 4

10,00,000

..

=4*10,00,000 /5=8,00,000

Net profit /Capital ratio being 1/5,

For Rs. 5 capital .. Net profit is Re.1
8,00,000 ..?
8,00,000 / 5 = Rs . 1,60,000
Net profit/sales ratio being 20%,
For Rs. 20 net Profit .. Sales are Rs.100
1,60,000.?
= 100*1,60,000 / 20 = Rs. 8,00,000
Cost of goods sold = Sales gross profit
= 8,00,000- 25% of sales
= 8,00,000-2,00,000
= Rs.6,00,000
(1) Cost of goods sold Rs.6,00,000
(2) Gross profit Rs. 2,00,000.
(3) Net profit Rs. 1,60,000.
Fixed assets /current assets ratio is 5/7, This means.

For 5 fixed assets

current assets 7

10,00,000

?
= 7*10,00,000 / 5 = Rs.14,00,000

(iv) Current assets Rs.14,00,000

(v) Capital Rs.8,00,000
(vi) Liabilities Rs.16,00,000 (Capital/liabilities ratio being 1/2)
Stock Turnover ratio

= Cost of goods sold / Average inventory

10 = 6,00,000 / Average inventory

10 Average inventory = 6,00,000
Average inventory = Rs.60,000
Average Stock = (Opening stock + Closing stock) / 2
60,000 = (Opening stock + 1,00,000) / 2
Opening stock + 1,00,000 = 1,20,000
Opening stock

= 1,20,000 - 1,00,000 = Rs.20,000

Trading and profit and Loss Account for the year ended 31-3-2010
Dr.
Particulars
To opening stock
To purchases
(balancing figure)
To gross profit
To Administration,
selling& Distribution
expenses (balancing figure)
To net profit

Cr.
Rs
Particulars
20,000 By sales
6,80,000 By Closing stock
2,00,000
9,00,000
By gross profit b/d
40,000
1,60,000
2,00,000

Rs
8,00,000
1,00,000
_______
9,00,000
2,00,000
_______
2,00,000

Illustration 16
From the following data prepare balance sheet
Sale Rs.32,00,000
Sale to net worth 2.3 times
Current debt to net worth 42%
Total debt to net worth 75%
Current ratio 2.9 times
Net sales to inventory 4.7 times
Average collection period (assume 360 days ) 64 days
Fixed assets to net worth 53.2%
Solution:
Sales to net worth = Sales / Net worth
2.3 = 32,00,000 / Net worth
2.3 Net worth = 32,00,000
Net worth = 32,00,000 / 2.3 = Rs.13,91,304
Current debt is 42% of net worth i.e Rs. 5,84,348
Total debt 75% of net worth i.e Rs. 10,43,478
The difference between total debt and current debt should be longterm the same is
Rs.4,59,130.
Current ratio = Current assets / Current Liabilities
2.9 = Current assets / 5,84,348
Current assets = 5,84,384 * 2.9 = Rs. 16,94,609
Net sale inventory = Net sales / Inventory
4.7 = 32,00,000 / Inventory
4.7 Inventory = 32,00,000

Inventory = 32,00,000 / 4.7

= Rs.6,80,851

Debtors Turnover Ratio

= Net sales / Debtors

360 / 64 = (5.6 times) = 32,00,000 / Debtors

5.6 Debtors

= 32,00,000

Debtors = Rs.5,71,428
Fixed assets to Net Worth

= Fixed assets / Net worth

53.2% = Fixed assets / 13,91,304

100 Fixed Assets

= 13,91,304*53.2

Fixed Assets = Rs.7,40,173

Liabilites
Net worth
Long term debt
Current Liabilities

Rs.
13,91,304
4,59,130
5,84,348
________
24,34,782

Balance Sheet
Assets
Fixed Assets
Stock
Debtors
Cash(balancing figure)

REVIEW PROBLEMS
1. Balance sheet of ABC Co. as at Dec. 2010
Liabilities
Rs.
Assets
Equity share capital
2,000 Goodwill
Capital reserves
400 Fixed asset
Loan( mortgage ) 8%
1,600 Socks
creditors
800 Debtors
Bank overdraft
200 Inverstment
Taxtion current
200 Cash in hand
future
200
profit after tax and
1200
fixed deposit Int.
Less:
Transfer to reserve
400
Transfer to dividends
200
600
6,000

Rs.
7,40,173
6,80,851
5,71,428
4,42,330
24,34,782

(Rs. In 000s)
Rs.
1,200
2,800
600
600
200
600

_____
6,000