Assignment I - Journal Q.1 Journalize the following relating to April 2009: Particulars 1. R. started business with 2.

He purchased furniture for 3. Paid salary to his clerk 4. Paid rent 5. Received interest Solution: Date 1 Cash A/c Dr To Capital A/c 2 Furniture A/c Dr To Cash A/c 3 Salary A/c Dr To Cash A/c 4 Rent A/c Dr To Cash A/c 5 Cash A/c Dr To Interest A/c Particulars Ledger Folio Debit Amount (Rs) 100,000 Credit Amount (Rs) Rs. 1,00,000 20,000 1,000 5,000 2,000

100,000 20,000 20,000 1,000 1,000 5,000 5,000 2,000 2,000

Q.2 Journalize transactions of M/s X & Co. for the month of March 2009 on the basis of double entry system: 1. X introduced cash Rs. 4,00,000. 2. Cash deposited in the Citibank Rs. 2,00,000. 3. Cash loan of Rs. 50,000 taken from Y. 4. Salaries paid for the month of March 2009, Rs. 30,000 and Rs. 10,000 is still payable for the month of March 2009. 5. Furniture purchased Rs. 50,000. Solution: Date Particulars 1 Cash A/c Dr To Captial (X) A/c 2 Bank A/c Dr To Cash A/c 3 Cash A/c Dr To Y A/c 4 Salary A/c Dr To Cash A/c To Outstanding Salary A/c 5 Furniture A/c Dr To Cash A/c Ledger Folio Debit Amount (Rs) 400,000 200,000 200,000 50,000 50,000 40,000 30,000 10,000 50,000 50,000 Credit Amount (Rs) 400,000

Q.3 Journalize the following transactions. 1. December 1, 2008, Ajit started-business with cash Rs. 4,00,000. 2: December 3, he paid into the bank Rs. 20,000. 3. December 5, he purchased goods for cash Rs. 1,50,000. 4. December 8, he sold goods for cash Rs. 60,000. 5. December 10, he purchased furniture and paid by cheque Rs. 50,000. 6. December 12, he sold goods to Arvind Rs. 40,000. 7. December 14, he purchased goods from Amrit Rs. 1,00,000. 8. December 15, he returned goods to Amrit Rs. 50,000. 9. December 16, he received from Arvind Rs. 39,600 in full settlement. 10. December 18, he withdrew goods for personal use Rs. 10,000. 11. December 20, he withdrew cash from business for personal use Rs. 20,000. 12. December 24, he paid telephone charges Rs. 10,000. 13. December 26, cash paid to Amrit in full settlement Rs. 49,000. 14. December 31, paid for stationery Rs. 2,000, rent Rs. 5,000 and salaries to staff Rs. 20,000. 15. December 31, goods distributed by way of free samples Rs. 10,000. 16. December 31, wages paid for erection of Machinery Rs. 80,000. 17. Personal income tax liability of X of Rs. 17,000 was paid out of petty cash of business. 18. Purchase of goods from Naveen of the list price of Rs. 20,000. He allowed 10% trade discount, Rs. 500 cash discount was also allowed for quick payment. Solution: Date Particulars 1-Dec-08 Cash A/c Dr To Capital A/c 3-Dec-08 Bank A/c Dr To Cash A/c 5-Dec-08 Purchase A/c Dr To Cash A/c 8-Dec-08 Cash A/c Dr To Sales A/c 10-Dec-08 Furniture A/c Dr To Bank A/c 12-Dec-08 Arvind A/c Dr To Sales A/c 14-Dec-08 Purchase A/c Dr To Amrit A/c Ledger Folio Debit Amount (Rs) 400,000 20,000 20,000 150,000 150,000 60,000 60,000 50,000 50,000 40,000 40,000 100,000 100,000 Credit Amount (Rs) 400,000

15-Dec-08 Amrit A/c Dr To Purchase Returns A/c 16-Dec-08 Cash A/c Dr Discount A/c Dr To Arvind A/c 18-Dec-08 Drawings Dr To Purchase A/c 20-Dec-08 Drawings Dr To Cash A/c 24-Dec-08 Telephone A/c Dr To Cash A/c 26-Dec-08 Amrit A/c Dr To Cash A/c To Discount A/c 31-Dec-08 Stationery A/c Dr Rent A/c Dr Salary A/c Dr To Cash A/c 31-Dec-08 Advertising A/c Dr To Purchase A/c 31-Dec-08 Machinery A/c Dr To Cash A/c 31-Dec-08 Drawings Dr To Petty Cash A/c 31-Dec-08 Purchase A/c Dr Discount A/c Dr To Cash A/c

50,000 50,000 39,600 400 40,000 10,000 10,000 20,000 20,000 10,000 10,000 50,000 49,000 1,000 2,000 5,000 20,000 27,000 10,000 10,000 80,000 80,000 17,000 17,000 18,000 500 17,500

Q 4 Transactions of Ramesh for April are given below. Journalize them. 2009 April 1 April 2 April 3 April 5 April 13 April 20 April 24 April 28 April 30 Rs. 1,00,000 70,000 5,000 1,000 1,500 2,250 1,450 50 2,150 100 8,000 500 1,000

Ramesh started business with Paid into bank Bought goods for cash Drew cash from bank for credit Sold to Krishna goods on credit Bought from Shyam goods on credit Received from Krishna Allowed him discount Paid Shyam cash Discount allowed Cash sales for the month Paid Rent Paid Salary

Solution: Date Particulars 1-Apr Cash A/c Dr To Capital (X) A/c 2-Apr Bank A/c Dr To Cash A/c 3-Apr Purchase A/c Dr To Cash A/c 5-Apr Cash A/c Dr To Bank A/c 13-Apr Krishna A/c Dr To Sales A/c 20-Apr Purchase A/c Dr To Shyam A/c 24-Apr Cash A/c Dr Discount A/c Dr To Krishna A/c 28-Apr Shyam A/c Dr To Discount A/c To Cash A/c Ledger Folio Debit Amount (Rs) 100,000 70,000 70,000 5,000 5,000 1,000 1,000 1,500 1,500 2,250 2,250 1,450 50 1,500 2,250 100 2,150 Credit Amount (Rs) 100,000

30-Apr Cash A/c Dr To Sales A/c Rent A/c Dr Salary A/c Dr To Cash A/c

8,000 8,000 500 1,000 1,500

Assignment II Ledger Q. 1 Prepare the Stationery Account of a firm for the year ended December 31, 2008: 2008 January 1 April 5 November 15 December 31 Solution: Stationery A/c Amount (Rs) 480 800 1,280 By Profit and Loss A/c 31-Dec By Balance c/d 2,560 2,320 240 2,560 Particulars Stock in hand Purchase of stationery by cheque Purchase of stationery on credit from Five Star Stationery Mart Stock in hand Rs. 480 800 1,280 240

Date

Particulars

Date

Particulars

Amount (Rs)

1-Jan To Balance b/d 5-Apr To Bank A/c To Five Star 15-Nov Stationery Mart

Q.2 Prepare a ledger from the following transactions in the books of a trader Debit Balance on January 1, 2008: Cash in Hand Rs. 8,000, Cash at Bank Rs. 25,000, Stock of Goods Rs. 20,000, Building Rs. 10,000. Sundry Debtors: Vijay Rs. 2,000 and Madhu Rs. 2,000. Credit Balances on January 1, 2008: Sundry Creditors: Anand Rs. 5,000. Following were further transactions in the month of January 2008: January 1 January 4 January 8 January 12 January 15 January 18 Solution: Cash A/c Amount (Rs) 8,000 1,980 300 300 1,000 31-Jan By Balance c/d 11,580 Bank A/c Amount (Rs) 25,000 Amount (Rs) 7,780 11,580 Amount (Rs) 3,800 Purchased goods worth Rs. 5,000 for cash less 20% trade discount and 5% cash discount. Received Rs. 1,980 from Vijay and allowed him Rs. 20 as discount. Purchased plant from Mukesh for Rs. 5,000 and paid Rs. 100 as cartage for bringing the plant to the factory and another Rs. 200 as installation charges. Sold goods to Rahim on credit Rs. 600. Rahim became insolvent and could pay only 50 paise in a rupee. Sold goods to Ram for cash Rs. 1,000.

Date

Particulars

Date

Particulars

1-Jan To Balace b/d 4-Jan To Vijay A/c To Plant & Machinery 8-Jan A/c 15-Jan To Rahim A/c 18-Jan To Ram A/c

1-Jan By Purchase A/c

Date

Particulars

Date

Particulars

1-Jan To Balance b/d

31-Jan By Balance c/d 25,000 Purchase A/c Amount (Rs) 20,000 3,800 200 31-Jan By Balance c/d 24,000 Building A/c Amount (Rs) 10,000 31-Jan By Balance c/d 10,000 Vijay A/c Amount (Rs) 2,000 4-Jan By Cash A/c 4-Jan By Discount A/c 2,000

25,000 25,000

Date

Particulars

Date

Particulars

Amount (Rs)

1-Jan To Balance b/d 1-Jan To Cash A/c 1-Jan To Discount A/c

24,000 24,000

Date

Particulars

Date

Particulars

Amount (Rs)

1-Jan To Balance b/d

10,000 10,000

Date

Particulars

Date

Particulars

Amount (Rs)

1-Jan To Balance b/d

1,980 20 2,000

Madhu A/c Amount (Rs) 2,000 31-Jan By Balance c/d 2,000 Anand A/c Amount (Rs) Amount (Rs) 5,000 2,000 2,000 Amount (Rs)

Date

Particulars

Date

Particulars

1-Jan To Balance b/d

Date

Particulars

Date

Particulars

1-Jan By Balance b/d 31-Jan To Balance c/d 5,000 5,000 Discount A/c Amount (Rs)

5,000

Date

Particulars

Date

Particulars

Amount (Rs) 200

1-Jan By Purchase A/c 4-Jan To Vijay A/c 31-Jan To Balance c/d 20 180 200 Mukesh A/c Amount (Rs)

200

Date

Particulars

Date

Particulars

Amount (Rs) 5,000

By Plant & Machinery 8-Jan A/c

31-Jan To Balance c/d

5,000 5,000 Sales A/c Amount (Rs) Amount (Rs) 600 1,000 5,000

Date

Particulars

Date

Particulars

12-Jan By Rahim A/c 18-Jan By Cash A/c 31-Jan To Balance c/d 1,600 1,600 Rahim A/c Amount (Rs) 600 15-Jan By Cash A/c 15-Jan By Bad Debt A/c 600 Plant & Machinery A/c Amount (Rs) 5,000 300 31-Jan By Balance c/d 5,300

1,600

Date

Particulars

Date

Particulars

Amount (Rs)

12-Jan To Sales A/c

300 300 600

Date

Particulars

Date

Particulars

Amount (Rs)

8-Jan To Mukesh A/c 8-Jan To Cash A/c

5,300 5,300

Bad Debt A/c Amount (Rs) 300 31-Jan By Balance c/d 300 300 300 Amount (Rs)

Date

Particulars

Date

Particulars

15-Jan To Rahim A/c

Q. 3 The following data is given by Mr. S, the owner, with a request to compile only the two personal accounts of Mr. H and Mr. R, in his ledger, for the month of April 2008. 1 Mr. S owes Mr. R Rs. 15,000; Mr. H owes Mr. S Rs. 20,000. 4 Mr. R sold goods worth Rs. 60,000 @ 10% trade discount to Mr. S. 5 Mr. S sold to Mr. H goods prices at Rs.30,000. 17 Record purchase of Rs. 25,000 net from R, which were sold to H at profit of Rs. 15,000. 18 Mr. S rejected 10% of Mr. Rs goods of 4th April. 19 Mr. S issued a cash memo for Rs. 10,000 to Mr. H who came personally for this consignment of goods, urgently needed by him. 22 Mr. H cleared half his total dues to Mr. S, enjoying a % cash discount (of the payment received, Rs. 20,000 was by cheque). 26 Rs total dues (less Rs. 10,000 held back) were cleared by cheque, enjoying a cash discount of Rs. 1,000 on the payment made. 29 Close Hs Account to record the fact that all but Rs. 5,000 was cleared by him, by a cheque, because he was declared bankrupt. 30 Balance Rs Account. Solution: Mr H A/c Amount (Rs) 20,000 30,000 40,000 22-Apr 22-Apr 22-Apr 29-Apr 29-Apr By Cash A/c By Discount A/c By Bank A/c By Bank A/c By Bad Debt A/c 24,775 225 20,000 40,000 5,000 Amount (Rs)

Date 1-Apr 5-Apr 17-Jan

Particulars To Balance b/d To Sales A/c To Sales A/c

Date

Particulars

Mr R A/c Amount (Rs) Amount (Rs) 15,000 54,000 25,000

Date

Particulars

Date

Particulars

1-Apr By Balance b/d 4-Apr By Purchase A/c 17-Jan By Purchase A/c 18-Apr To Purchase returns A/c To Bank A/c To Discount A/c To Balance c/d 5,400 77,600 1,000 10,000

Assignment III Trial Balance Q. 1 Given below is a ledger extract relating to the business of X and Co. as on March 31, 2009. You are required to prepare the Trial Balance. Cash Account Dr. Particulars To Capital A/c To Rams A/c To Cash Sales Rs. Particulars 10,000 By Furniture A/c 25,000 By Salaries A/c 500 By Shyams A/c By Cash Purchases By Capital A/c By Balance c/d 35,500 Furniture Account Dr. Particulars To Cash A/c Rs. 3,000 Salaries Account Dr. Particulars To Cash A/c Rs. 2,500 Shyams Account Dr. Particulars To Cash A/c To Purchase Returns A/c To Balance c/d Rs. Particulars 21,000 By Purchases A/c (Credit Purchases) 500 3,500 25,000 25,000 Cr. Rs. 25,000 Particulars 2,500 By Balance c/d Cr. Rs. 2,500 2,500 Particulars 3,000 By Balance c/d Cr. Rs. 3,000 3,000 Cr. Rs. 3,000 2,500 21,000 1,000 500 7,500 35,500

Purchases Account Dr. Particulars To Cash A/c (Cash Purchases) To Sundries as per Purchases Book (Credit Purchases) Rs. Particulars 1,000 By Balance c/d 25,000 26,000 Purchases Returns Account Dr. Particulars To Balance c/d Rs. Particulars 500 By Sundries as per Purchases Return Book 500 Rams Account Dr. Particulars To Sales A/c (Credit Sales) Rs. Particulars By Cash A/c By Balance c/d 30,000 Sales Account Dr. Particulars To Balance c/d Rs. Particulars By Sundries as per Sales Book (Credit sales) 30,500 Sales Returns Account Dr. Particulars To Sundries as per Sales Return Book Rs. Particulars Cr. Rs. 100 30,500 By Cash A/c (Cash Sales) Cr. Rs. 500 30,000 30,500 30,000 By Sales Returns A/c Cr. Rs. 100 25,000 4,900 30,000 Cr. Rs. 500 500 Cr. Rs. 26,000 26,000

100 By Balance c/d

100 Capital Account Dr. Particulars To Cash A/c To Balance c/d Rs. 9,500 10,000 Solution: Particulars 500 By Cash A/c

100

Cr. Rs. 10,000 10,000

S. No.

Trial Balance X and Co. as on March 31, 2009 Debit Amount (Total) Credit Amount (Total) Ledger Account L.F. No. Rs Rs 7,500 3,000 2,500 3,500 26,000 500 4,900 30,500 100 9,500 44,000 44,000

1. Cash Account 2. Furniture Account 3. Salaries Account 4. Shyam's Account 5. Purchases Account 6. Purchase Returns Account 7. Ram's Account 8. Sales Account 9. Sales Returns Account 10. Capital Account

Q.2 From the following ledger balances, prepare a trial balance of Anuradha Traders as on March 31, 2009: Account Head Rs. Capital Sales 1,00,000 1,66,000

Purchases Sales return Discount allowed Expenses Debtors Creditors Investments Cash at bank and in hand Interest received on investments Insurance paid Solution:

1,50,000 1,000 2,000 10,000 75,000 25,000 15,000 37,000 1,500 2,500

S. No. Capital Sales

Trial Balance Anuradha Traders as on March 31, 2009 Debit Amount (Total) Credit Amount (Total) Ledger Account L.F. No. Rs Rs 100,000 166,000

Purchases 150,000 Sales return 1,000 Discount allowed 2,000 Expenses 10,000 Debtors 75,000 Creditors 25,000 Investments 15,000 Cash at bank and in hand 37,000 Interest received on investments 1,500 Insurance paid 2,500 292,500 292,500

Q.3 One of your clients, X has asked you to finalize his accounts for the year ended March 31, 2009. Till date, he himself has recorded the transactions in books of accounts. As a basis for audit, X furnished you with the following statement. Dr. Balance Xs Capital Xs Drawings Leasehold premises Sales Due from customers Purchases Purchases return Loan from bank Creditors Trade expenses Cash at bank Bills payable Salaries and wages Stock (1.4.2008) Rent and rates Sales return 5,454 463 98 5,454 528 700 226 100 600 264 1,259 264 256 564 750 2,750 530 Cr. Balance 1,556

The closing stock on March 31, 2009 was valued at Rs. 574. X claims that he has recorded every transaction correctly as the trial balance is tallied. Check the accuracy of the above trial balance.

Solution: Trial Balance of X as on March 31, 2009 S. No. Ledger Account L.F. No. Dr. Balance Xs Capital Xs Drawings Leasehold premises Sales Due from customers Purchases Purchases return Loan from bank Creditors Trade expenses Cash at bank Bills payable Salaries and wages Stock (1.4.2008) Rent and rates Sales return 564 750 2,750 530 1259 264 256 528 700 226 100 600 264 463 98 5,454 5,454 Cr. Balance 1,556

Assignment IV Final Accounts Q.1 From the following information, prepare a Trading Account of M/s. ABC Traders for the year ended March 31, 2009: Rs. Opening Stock Purchases Carriage Inwards Wages Sales Returns inward Returns outward Closing stock 1,00,000 6,72,000 30,000 50,000 11,00,000 1,00,000 72,000 2,00,000

Solution: Trading Account of M/s. ABC Traders for the year ended March 31, 2009 Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Opening Stock Purchases Less: Return Outwards Carriage Inwards Wages Gross Profit 100,000 672,000 (72,000) 30,000 50,000 420,000 1,200,000 Closing Stock 200,000 1,200,000 Sales Less: Return Inwards 1,100,000 (100,000)

Q.2 Revenue expenses and gross profit balances of M/s ABC Traders for the year ended on March 31, 2009 were as follows: Gross Profit Rs. 4,20,000, Salaries Rs. 1,10,000, Discount (Cr.), Rs. 18,000, Discount (Dr.) Rs. 19,000, Bad Debts Rs. 17,000, Depreciation Rs. 65,000, Legal Charges Rs. 25,000, Consultancy Fees Rs. 32,000, Audit Fees Rs. 1,000, Electricity Charges Rs. 17,000, Telephone, Postage and Telegrams Rs. 12,000, Stationery Rs. 27,000, Interest paid on Loans Rs. 70,000. Prepare Profit and Loss Account of M/s ABC Traders for the year ended on March 31, 2009. Solution: P&L Account of M/s ABC Traders for the year ended on March 31, 2009 Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Salaries Discount (Dr) Bad Debts Depreciation Legal Charges Consultancy Fees Audit Fees Electricity Charges Telephone, Postage & Telegrams Stationery Interest paid on loans Net Profit 110,000 19,000 17,000 65,000 25,000 32,000 1,000 17,000 12,000 27,000 70,000 43,000 438,000 438,000 Gross Profit Discount (Cr) 420,000 18,000

Q.3 Mr. X submits you the following information for the year ended March 31, 2009: Rs. Stock as on April 1, 2008 Purchases Manufacturing expenses Expenses on sale Expenses on administration Financial charges Sales Gross profit is 20% of sales. Compute the net profit of Mr. X for the year ended March 31, 2009. Also prepare Trading & Profit & Loss A/c. Solution: Trading Account of Mr X for the year ended on March 31, 2009 Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Opening Stock Purchases Manufacturing Expenses Gross Profit 150,000 437,000 85,000 125,000 797,000 Closing Stock 172,000 797,000 Sales 625,000 1,50,000 4,37,000 85,000 33,000 18,000 6,000 6,25,000

P&L Account of Mr X for the year ended on March 31, 2009 Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Expenses on Sale Expenses on administration Financial charges Net Profit 33,000 18,000 6,000 68,000 125,000 125,000 Gross Profit 125,000

Q.4 A book keeper has submitted to you the following trial balance of X wherein the total of debit and credit balances is not equal: Particulars Capital Cash in hand Purchases Sales Cash at bank Fixtures & fittings Freehold premises Lighting and heating Bills receivable Returns inwards Salaries Creditors Debtors Stock (1.1.2008) Printing Bills payable Rates, taxes and insurance Discounts received Discounts allowed Debit Balances Rs. 8,990 885 225 1,500 65 1,075 5,700 3,000 225 1,875 190 445 24,175 Credit Balances Rs. 7,670 30 11,060 825 30 1,890 200 21,705

You are required to: (i) Redraft the Trial Balance correctly. (ii) Prepare a Trading and Profit and Loss Account and a Balance Sheet after taking into account the following adjustments: (a) Stock in hand on 31.12.2008 was valued at Rs. 1,800 (b) Depreciate fixtures and fittings by Rs. 25. (c) Rs. 350 was due and unpaid in respect of salaries. (d) Rates and insurance had been in paid in advance to the extent of Rs. 40.

Solution: S. No. Ledger Account Capital Cash in hand Purchases Sales Cash at bank Fixtures & fittings Freehold premises Lighting and heating Bills receivable Returns inwards Salaries Creditors Debtors Stock (1.1.2008) Printing Bills payable Rates, taxes and insurance Discounts received Discounts allowed 22,940 200 22,940 190 445 5,700 3,000 225 1,875 885 225 1,500 65 825 30 1,075 1,890 30 8,990 11,060 Trial Balance of X L.F. No. Dr. Balance Cr. Balance 7,670

Trading Account of Mr X for the year ended December 31,2008.

Particulars Stock (1.1.2008.) Purchases Gross Profit

Debit Amount (Rs) 3,000 8,990 840 12,830 Sales

Particulars

Credit Amount (Rs) 11,060 (30) 1,800 12,830

Less: Return Inwards Stock (31.12.2008.)

P&L Account of Mr X for the year ended December 31,2008. Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Depreciation F&F Outstanding Salaries Rates, taxes & Insurance Less: Advance Lighting & Heating Salaries Printing Discount allowed Net Profit 25 350 190 (40) 65 1,075 225 200 (805) 1,285 Balance Sheet of Mr X as on December 31,2008. Credit Amount (Rs) Particulars Fixed Assets 7,670 (805) Fixtures & Fittings Less: Depreciation Freehold premises 1,285 Gross Profit Discount received 840 445

Particulars Reserves & Capital Capital Net Profit Liabilities

Debit Amount (Rs)

225 (25) 1,500

Creditors Bills Payable Outstanding Salaries

1,890 1,875 350

Current Assets Cash in hand Cash at bank Bills receivable Debtors Stock Advance rates & insurance 30 885 825 5,700 1,800 40 10,980

10,980

Q.5 The following is trial balance extracted from the books of X as on 31 March 2009: Debit Amount Rs. Capital Account Plant and Machinery Furniture Purchases and Sales Returns Opening stock Discount Sundry Debtors/Creditors Salaries Manufacturing wages Carriage outwards Provision for doubtful debts Rent, rates and taxes Advertisements Cash 78,000 2,000 60,000 1,000 30,000 425 45,000 7,550 10,000 1,200 10,000 2,000 6,900 2,54,075 Credit Amount Rs. 1,00,000 1,27,000 750 800 25,000 525 2,54,075

Prepare trading and profit and loss account for the year ended 31 March 2009 and a balance sheet on that date after taking into account the following adjustments: (a) Closing stock was valued at Rs. 34,220. (b) Provision for doubtful debts is to be kept at Rs. 500 (c) Depreciate plant and machinery @ 10% p.a. (d) The proprietor has taken goods worth Rs. 5,000 for personal use and additionally distributed goods worth Rs. 1,000 as samples. (e) Purchase of furniture Rs. 920 has been passed through purchases book.

Solution: Trading Account of Mr X for the year ended March 31, 2009. Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Opening Stock Purchases Less: Purchase Returns Less: Furniture Less: Drawings Less: Advertisement Manufacturing Wages Gross Profit 30,000 60,000 (750) (920) (5,000) (1,000) 10,000 67,915 160,245 Closing Stock 34,220 160,245 Sales Less: Sales Returns Provision for doubtful debts 127,000 (1,000) 25

P&L Account of Mr X for the year ended March 31, 2009. Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Dicount allowed Salaries Carriage Outwards Deprecitation P&M Rent, rates & taxes Distributed goods Advertisements Net Profit 425 7,550 1,200 7,800 10,000 1,000 2,000 38,740 68,715 68,715 Gross Profit Discount received 67,915 800

Particulars Reserves & Capital Capital Net Profit Less: Drawings

Balance Sheet of Mr X as on March 31,2009. Credit Amount (Rs) Particulars Fixed Assets 100,000 38,740 (5,000) Plant & Machinery Less: Depreciation Furniture Add: Provision Current Assets 25,000 Stock Debtors Less: Provision for doubtful debts Cash 158,740

Debit Amount (Rs)

78,000 (7,800) 2,000 920

Liabilities Creditors

34,220 45,000 (500) 6,900 158,740

Q.6 From the following trial balance and other information prepare profit and loss account for the year ended 31 March 2009 and a balance sheet on that date: Debit Rs. Xs Capital Account Withdrawals of goods for personal use Balance at bank Motor Vehicle Debtors and Creditors Printing and stationery Gross Profit Provision for doubtful debts Bad debts Freehold premises Repairs to Premises General Reserve Proprietors remuneration Stock Delivery expenses Administrative expenses Rates and taxes Drawings Unpaid wages Last Year Profit and Loss Account Balance 1,000 1,76,000 1,50,000 2,94,000 6,600 11,400 8,00,000 47,600 20,000 2,80,000 99,000 1,31,400 15,000 1,00,000 21,32,000 Credit Rs. 10,00,000 2,30,000 5,71,400 5,000 2,00,000 1,600 1,24,000 21,32,000

Adjustments (i) Depreciation on Motor Vehicles @ 50% (ii) Creditors include a claim for damages of Rs. 30,000 and which was settled by paying Rs. 20,000. (iii) Rates paid in advance Rs. 3,000. (iv) Provision for bad debts is to be reduced to Rs. 3,500. (v) The item of repairs to premises includes Rs. 20,000 for acquisition of capital asset. (vi) Stock of stationery in hand on 31 March 2009 is Rs. 2,200.

Solution: P&L Account for the year ended March 31, 2009. Debit Amount (Rs) Particulars 11,400 47,600 (20,000) 20,000 99,000 131,400 15,000 (3,000) 75,000 6,600 (2,200) 202,100 582,900 Balance Sheet as on March 31, 2009. Credit Amount (Rs) Particulars 1,000,000 (1,000) (100,000) 200,000 124,000 Motor Vehicle Less: Depreciation Freehold premises Add: Capital asset Balance at Bank Less: Damage settlement 582,900 Gross Profit Discount for damages paid Provison for bad debts Credit Amount (Rs) 571,400 10,000 1,500

Particulars Bad Debts Repair to premises Less: Capital expense

Proprietor's remuneration Delivery expenses Administrative expenses Rates & taxes Less: Rates paid in advance Depreciation on Motor Vehicles Printing & stationery Less: adjustments Net Profit

Particulars Capital Less: Drawings Less: Drawings General Reserve P&L balance Net Profit

Debit Amount (Rs) 150,000 (75,000) 800,000 20,000 176,000

202,100 Creditors Less: damages settlement Unpaid Wages 230,000 (30,000) 1,600 Stock of Stationery Stock Debtors Less: Provision for doubtful debts Rates paid in advance 1,626,700

(20,000) 2,200 280,000 294,000 (3,500) 3,000 1,626,700

Q.7 The following trial balance has been extracted from the books of Ms. X. Prepare the final accounts for the year ended 31 March 2009 and a balance sheet on that date: Debit Rs. Drawings Buildings Debtors and creditors Returns Purchases and sales Discount Life insurance Cash Stock (opening) Bad debts Reserve for bad debts Carriage inwards Wages Machinery Furniture Salaries Bank commission Bills receivable/payable Trade expenses/Capital 35,000 60,000 50,000 3,500 3,00,000 7,100 3,000 30,000 12,000 5,000 6,200 27,700 8,00,000 60,000 35,000 2,000 60,000 13,500 15,10,000 40,000 9,00,000 15,10,000 Credit Rs. 80,000 2,900 4,65,000 5,100 17,000

Adjustments: (i) Depreciate building by 5%; furniture and machinery by 10% p.a. (ii) Trade expenses Rs. 2,500 and wages Rs. 3,500 have not been paid as yet. (iii) Allow interest on capital at 5% p.a. (iv) Make provision for doubtful debts at 5%. (v) Machinery includes Rs. 2,00,000 of a machine purchased an 31 December 2008. Wages include Rs. 5,700 spent on the installation of machine. Stock on 31 March 2009 was valued at Rs. 50,000.

Solution: Trading Account of Mr X for the year ended March 31, 2009. Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Opening Stock Purchases Less: Purchase Returns Trade expenses Unpaid trade expenses Wages Less: Installation charges Carriage Inwards Unpaid wages Gross Profit 12,000 300,000 (2,900) 13,500 2,500 27,700 (5,700) 6,200 3,500 169,200 526,000 Closing Stock 50,000 526,000 Sales Less: Sales Returns Reserve for bad debt 465,000 (3,500) 14,500

P&L Account of Mr X for the year ended March 31, 2009. Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Dicount allowed Salaries Depreciation building Depreciation furniture Depreciation machinery Bank Commission Interest on Capital Bad Debts 7,100 35,000 3,000 6,000 65,143 2,000 45,000 Gross Profit Discount received 169,200 5,100

5,000 Net Profit 6,058 174,300 Balance Sheet of Mr X as on March 31, 2009. Credit Amount (Rs) Particulars 900,000 (35,000) (3,000) 45,000 Buildings Less: Depreciation Machinery Add: Provision Less: Depreciation Net Profit 6,058 Furniture Less: Depreciation Creditors Bills Payable 80,000 40,000 Stock Debtors Less: Provision for bad debts Bills Receivable Cash 174,300

Particulars Capital Less: Drawings Less: Life Insurance Interest on Capital

Debit Amount (Rs) 60,000 (3,000) 800,000 5,700 (65,143) 60,000 (6,000) 50,000 50,000 (2,500) 60,000 30,000 1,039,058

Unpaid Trade expenses Unpaid wages

2,500 3,500 1,039,058

Q.8 The following is the Trial Balance of X on 31 March 2009: Debit Rs. Capital Drawings Opening Stock Purchases Freight on Purchases Wages (11 months upto 28-2-2009) Sales Salaries Postage, Telegrams, Telephones Printing and Stationery Miscellaneous Expenses Creditors Investments Discounts Received Debtors Bad Debts Provision for Bad Debts Building Machinery Furniture Commission on Sales Interest on Investments Insurance (Year up to 31-7-2009) Bank Balance 60,000 75,000 15,95,000 25,000 66,000 1,40,000 12,000 18,000 30,000 1,00,000 2,50,000 15,000 3,00,000 5,00,000 40,000 45,000 24,000 1,50,000 34,45,000 Credit Rs. 8,00,000 23,10,000 3,00,000 15,000 8,000 12,000 34,45,000

Adjustments: (i) Closing Stock Rs. 2,25,000. (ii) Machinery worth Rs. 45,000 purchased on 1-10-08 was shown as Purchases. Freight paid on the Machinery was Rs. 5,000, which is included in Freight on Purchases. (iii)Commission is payable at 2% on Sales. (iv) Investments were sold at 10% profit, but the entire sales proceeds have been taken as Sales. (v) Write off Bad Debts Rs. 10,000 and create a provision for Doubtful Debts at 5% of Debtors.

(vi) Depreciate Building by 2% p.a. and Machinery and Furniture at 10% p.a. Prepare Trading and Profit and Loss Account for the year ending 31 March 2009 and a Balance Sheet as on that date. Solution: Trading Account of Mr X for the year ended March 31, 2009. Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Opening Stock Purchases Less: Purchase of Machinery Freight on purchases Less: Freight on purchase of machinery Wages Outstanding wages Gross Profit 75,000 1,595,000 (45,000) 25,000 (5,000) 66,000 6,000 708,000 2,425,000 Closing Stock 225,000 2,425,000 Sales Less: Proceeds from investments 2,310,000 (110,000)

P&L Account of Mr X for the year ended March 31, 2009. Debit Amount Credit Amount Particulars (Rs) Particulars (Rs) Depreciation: Building Depreciation: Furniture Depreciation: Machinery Salaries Postage, telegrams & telephones Printing & Stationery Miscellaneous Expenses Insurance 7,500 4,000 52,500 140,000 12,000 18,000 30,000 Gross Profit Discount Received Intereset on investments Proceeds from investments 708,000 15,000 12,000 10,000

24,000 Less: Prepaid Insurance Commission on Sales Outstanding commission on Sales Bad Debts Add: Write off Provision for bad debts Net Profit (8,000) 45,000 10,000 15,000 10,000 4,000 381,000 745,000 Balance Sheet of Mr X as on March 31, 2009. Credit Amount (Rs) Particulars 800,000 (60,000) 381,000 Machinery Add: Purchase of machinery Add: Freight on purchase of machinery Less: Depreciation Building Less: Depreciation Furniture Less: Depreciation Bank Balance Stock Investments Outstanding commission on Sales 10,000 Less: Sale of investments 745,000

Particulars Capital Less: Drawings Net Profit

Debit Amount (Rs) 500,000 45,000 5,000 (52,500) 300,000 (7,500) 40,000 (4,000) 150,000 225,000 100,000 (100,000)

Outstanding wages

6,000

Debtors Less: Write off bad debts Less: Provision for bad debts Prepaid Insurance

250,000 (10,000) (12,000) 8,000 1,437,000

Creditors

300,000

1,437,000

Assignment V - Financial Statement Analysis

Q.1 From the following particulars relating to AB Co. prepare a Balance Sheet as on 31.12.2009: Fixed assets / turnover ratio Debt collection period Gross profit Consumption of raw materials Stock of Raw materials Finished goods Fixed Assets to Current Assets Current Ratio Long Term loan to current Liability Capital to Reserve Value of Fixed Assets 1:2 Two months 25% 40% of cost 4 months consumption 20% of turnover at cost 1:1 2:1 1:3 5:2 Rs. 10,50,000

Solution: Fixed Assets = Rs. 10,50,000 Fixed assets / turnover ratio = Fixed assets / Sales =1:2 Sales = Rs 21,00,000 Fixed assets / current assets = 1:1 Current assets = Rs 10,50,000 Gross Profit = 25% * Sales Gross Profit = Rs 5,25,000 Cost of Goods Sold = Sales Gross Profit Cost of Goods Sold (COGS) = Rs 15,75,000 Consumption of raw material = 40% * COGS Consumption of raw material = Rs 6,30,000 Stock of raw material = COGS /12 *4 Stock of raw material = Rs 2,10,000 Finished goods = 20% * COGS Finished goods = Rs 3,15,000 Debt Collection Period = Average debtors * 12 / Net Credit Sales Average Debtors = Net credit Sales/12 * debt collection period Average debtors = Rs 21,00,000 * 2/12 Average debtors = Rs 3,50,000 Current ratio = Current Assets / Current Liabilities = 2 :1 Current Liabilities = Rs 5,25,000

Long term loan to current liability = 1: 3 Long term loan = Rs 1,75,000 Total Assets = Fixed Assets + Current Assets = Rs 21,00,000 Total Liabilities = Rs 21,00,000 Networth = ESC + R&S = Total Liabilities Current Liabilities Long Term Debt Networth = 21,00,000 - 5,25,000 - 1,75,000 Capital + Reserves & Surplus = Rs 14,00,000 Capital to Reserves = 5:2 Capital = Rs 10,00,000 Reserves = Rs 4,00,000 Balance Sheet of AB Co. as on 31.12.2009 Particulars Shareholders Funds Capital Reserves Current Liabilities Long Term Debt Credit Amount (Rs) Rs 14,00,000 Rs 10,00,000 Rs 4,00,000 Rs 5,25,000 Rs 1,75,000 Particulars Fixed Assets Debit Amount (Rs) Rs 10,50,000

Current Assets Debtors Stock of raw material Finished Goods Cash (B.f.) Total Assets

Rs 10,50,000 Rs 3,50,000 Rs 2,10, 000 Rs 3,15,000 Rs 1,75,000 Rs 21,00,000

Total Liabilities

Rs 21,00,000

Q.2 From the following particulars prepare the Balance Sheet of A Ltd.: Current Ratio Current Assets/Fixed Assets Fixed Assets to turnover Gross Profit Debtors Velocity Creditors Velocity Stock Velocity Debt equity ratio Working Capital 1.50 1:2 1:1 25% 2 months 2 months 3 months 2:5 Rs. 2,00,000

Solution: Working Capital = Current Assets Current Liabilities = Rs 2,00,000 Current Ratio = Current Assets / Current Liabilities => Current Assets = Rs 6,00,000 => Current Liabilities = Rs 4,00,000 Current Assets to Fixed Assets = 1: 2 Fixed Assets = Rs 12,00,000 Total Assets = Total Liabilities = Rs 18,00,000 Fixed Assets to Turnover = 1:1 Turnover = Sales = Rs 12,00,000 Gross Profit = 25* Sales = Rs 4,00,000 Cost of Goods Sold (COGS) = Rs 9,00,000 Debtors Velocity = 2 months Debtors = 12,00,000 /12 *2 = Rs 2,00,000 Creditors Velocity = 2 months Creditors = Rs 9,00,000 /12 * 2 = Rs 1,50,000 Stock Velocity = 3 months Stock = Rs 9,00,000 /12 * 3 = Rs 2,25,000 Debt to Equity Ratio = 2: 5 & Debt + Equity = Total Liabilities Creditors = 18,00,000 4,00,000 = 14,00,000 Debt = Rs 4,00,000 Equity = Rs 10,00,000 Balance Sheet of A Limited Particulars Equity Credit Amount (Rs) Rs 10,00,000 Particulars Fixed Assets Debit Amount (Rs) Rs 12,00,000

Current Liabilities Long Term Debt

Rs 4,00,000 Rs 4,00,000 Current Assets Debtors Stock Cash (B.f.) Rs 6,00,000 Rs 1,50,000 Rs 2,25, 000 Rs 2,75,000 Rs 18,00,000

Total Liabilities

Rs 18,00,000

Total Assets

Q.3 From the following information, you are required to prepare a Balance Sheet: Current Ratio Liquid Ratio Stock Turnover ratio (Closing Stock) Gross profit ratio Debt collection period Reserves and surplus to capital Turnover to fixed assets Fixed assets to net worth Sales for the year 1.75 1.25 9 25% 1.50 months 0.20 1.20 1.25 Rs. 12,00,000

Solution: Sales (Turnover) = Rs 12,00,000 Turnover to Fixed Assets = 1.2 Fixed Assets = Rs 10,00,000 Fixed Assets to Networth = 1.25 Networth = Rs 8,00,000 = Reserves & Surplus + Capital Gross Profit = 25 * Sales = Rs 3,00,000 Cost of Goods Sold (COGS) = Sales Gross Profit Cost of Goods Sold (COGS) = Rs 9,00,000 Stock Turnover ratio = 9 Stock = 9,00,000/9 = Rs 1,00,000 Debt Collection Period = 1.5 Months Debtors = 12,00,000/12*1.5 = Rs 1,50,000 Reserves & Surplus to Capital = 0.2 Capital = Rs 6,66,667 Reserves & Surplus = Rs 1,33,333 Current Ratio = Current Assets / Current Liabilities = 1.75 Liquid Ratio = (Current Assets Stock ) / Current Liabilities = 1.25 (1.75 CL 1,00,000) / CL =1.25 Current Liabilities = Rs 2,00,000 Current Assets = Rs 3,50,000 Total Assets = Fixed Assets + Current Assets = Rs 13,50,000 Long Term Liabilities = Total Liabilities Current Liabilities Networth Long Term Liabilities = 13,50,000 2,00,000 8,00,000 = Rs 3,50,000

Balance Sheet Particulars Networth Capital Reserves & Surplus Current Liabilities Long Term Debt Total Liabilities Credit Amount (Rs) Rs 8,00,000 Rs 6,66,667 Rs 1,33,333 Rs 2,00,000 Rs 3,50,000 Rs 13,50,000 Particulars Fixed Assets Current Assets Debtors Stock Cash (B.f.) Total Assets Debit Amount (Rs) Rs 10,00,000 Rs 3,50,000 Rs 1,50,000 Rs 1,00, 000 Rs 1,00,000 Rs 13,50,000

Q. 4 Mr. Desai intends to supply goods on credit to A Ltd. and B Ltd. The relevant financial data relating to the companies for the year ended 30th June, 2009 are as under: A Ltd. Stock Debtors Cash Trade Creditors Bank overdraft Creditors for expenses Total purchases Cash purchases Solution: Financ ial Ratio A Ltd B Ltd 8,00,000 1,70,000 30,000 3,00,000 40,000 60,000 9,30,000 30,000 B Ltd. 1,00,000 1,40,000 60,000 1,60,000 30,000 10,000 6,60,000 20,000

Advice with reasons, as to which of the companies he should prefer to deal with

Credit =(9,30,000-30,000)/3,00,000 Turnov =3 er Credit Payme nt Period Curren t Ratio Quick Ratio 4 Months

=(6,60,000-20,000)/1,60,000 =4 3 Months

=(8,00,000+1,70,000+30,000)/(3,00,000+ 40,000+60,000) =2.5 =(1,70,000+30,000)/( 3,00,000+60,000) =0.56

=(1,00,000+1,40,000+60,000)/(1,60,000+ 30,000+10,000) =1.5 =(1,40,000+60,000)/(1,60,000+10,000) =1.18

Mr Desai should prefer to deal with B Ltd. Reasons are mentioned below: 1. Quick ratio of 1.18 of B Ltd is better than .56 of A Ltd. 2. Credit Payment Period of 3 months of B Ltd is better than 4 months of A Ltd. 3. Current ratio of 2.5 of A Ltd is better than 1.5 of B Ltd. Since stock can not be converted into cash quickly, quick ratio and credit payment period of B Ltd are more important in view of requirement of Mr Desai. Therefore, he must choose B Ltd for dealing.

Q.5 The following is the Trading & Profit & Loss A/c of X Ltd. As on December 31, 2008: Trading & P&L Account (31.12.2008) Opening Stock Purchases G.P. Depreciation G. Expenses Directors Fees N.P. 1,30,000 Cash Sales 4,20,000 Credit Sales 60,000 Stock 13,100 G.P. 20,900 10,000 16,000 60,000 Balance Sheet as at 31st December, 2008 Share Capital Profit & Loss A/c Creditors Bank overdraft 3,60,000 Fixed Assets 24,600 Stock 1,40,000 Debtors 51,000 5,75,000 5,75,000 2,05,600 2,10,000 1,60,000 60,000 80,000 3,20,000 2,10,000 60,000

1. The rate of stock turnover is to be doubled. 2. Stock is to be reduced by Rs. 60,000 by the end of the financial year. 3. The ratio of cash sales to Credit sales is to be doubled. 4. Directors remuneration are to be increased by Rs. 15,000. 5. Rate of gross profit to sales is to be increased by 331/3%. 6. The ratio of trade creditors to closing stock and the ratio of debtors to credit sales will remain the same as in the year just ended. 7. General expenses and depreciation are to remain the same. Draft budgeted Trading and Profit and loss account and balance sheet, assuming that the objectives had been achieved. Solution: Financial figure/ ratio Stock turnover Stock Cash Sales / Credit Sales Existing figure / ratio (2008) Desired figure / ratio (2009)

=3,40,000*2/(2,10,000+1,30,000) 4 =2 2,10,000 1:4 1,50,000 1:2

Directors Remuneration Gross Profit to Sales Trade Creditors to Closing Stock Debtors to Credit Sales General Expenses Depreciation

10,000 15% =1,40,000/2,10,000 =66.67% 1:2 20,900 13,100

25,000 20% 66.67% 1:2 20,900 13,100

Solution: Since Stock in 2009 = Rs 1,50,000 Cost of goods sold = Rs (2,10,000+1,50,000)/2 * 4 = Rs 7,20,000 Let Sales be x => 20%x = x 7,20,000 => Sales = Rs 9,00,000 => GP = Rs 1,80,000 => Cash Sales = Rs 3,00,000 => Credit Sales = Rs 6,00,000 => Debtors = Rs 3,00,000 Trade Creditors = 1,50,000 *66.67% = Rs 1,00,000 7,20,000 = 2,10,000 + Purchases 1,50,000 => Purchases = Rs 6,60,000 Drafted Trading & Profit and Loss Account and Balance Sheet: Trading & P&L Account (31.12.2009) Opening Stock Purchases G.P. Depreciation G. Expenses Directors Fees N.P. 2,10,000 Cash Sales 6,60,000 Credit Sales 1,80,000 Stock 13,100 G.P. 20,900 25,000 1,21,000 1,80,000 Balance Sheet as at 31st December, 2009 Share Capital Profit & Loss A/c 3,60,000 Fixed Assets 24,600 Stock 2,05,600 1,50,000 1,80,000 3,00,000 6,00,000 1,50,000 1,80,000

Net Profit Bank overdraft Creditors

1,21,000 Debtors 36,900 Less : Depreciation 1,00,000 6,42,500

3,00,000 -13,100 6,42,500

Q.6 You are given the following figures worked out from the profit and loss account and balance sheet of Z Ltd. relating to the year 2008. Prepare the balance sheet. Fixed Assets (net after writing off 30%) Fixed Assets Turnover ratio Finished goods turnover ratio Rate of gross profit to sales Net profit (before interest) to sale Fixed charges cover (debenture interest 7%) Debt collection period Material consumed to sales Stock of raw materials (in terms of number of months consumption) Current ratio Quick ratio Reserves to capital Rs. 10,50,000 2 6 25% 8% 8 1 months 30% 8 2.4 1.0 0.20

Solution: Fixed Assets = Rs 10,50,000 Sales (Turnover) = Rs 21,00,000 Gross Profit = Rs 5,25,000 Cost of Goods Sold (COGS) = Rs 15,75,000 Finished Goods = Rs 2,62,500 Net Profit before interest = Rs 1,68,000 Annual Interest Payments = Rs 21,000 Net Profit after interest = Rs 1,47,000 Debentures (7%) = Rs 3,00,000 Debtors = Rs 2,62,500 Material Consumed = Rs 6,30,000 Stock of Raw Material = Rs 4,20,000 Current Ratio Quick Ratio = Stock / Current Liabilities = 1.4 Stock = 2,62,500 + 4,20,000 = 6,82,500 Current Liabilities = Rs 4,87,500 Current Assets = Rs 11,70,000 Capital + Reserves & Surplus = 22,20,000 4,87,500 -3,00,000 = Rs 14,32,500 Capital = Rs 11,93,750 Reserves & Surplus = Rs 2,38,750

Balance Sheet of Z Ltd as at 31st December, 2008 Capital Reserves & Surplus Profit & Loss A/c b/d Net Profit after interest 7% Debentures Current Liabilities 91,750 1,47,000 Debtors 3,00,000 Stock of Raw Materials Finished Goods 4,87,500 Cash (B. f.) 22,20,000 Net Profit is part of Reserves & Surplus. 2,62,500 4,20,000 2,62,500 2,25,000 22,20,000 11,93,750 Fixed Assets Current Assets 10,50,000 11,70,000

Q.7 The summarized Balance Sheet of X Ltd. as at 31st December 2008 and its summarized Profit and Loss Account for the year ended on that date, are as follows. The corresponding figures of the previous year are also shown: Balance Sheet Liabilities 2008 2007 (Rs. in lakhs ) Share capital 60,000 shares of Rs. 100 each Reserve & Surplus 29.25 8% Debenture Current Liabilities & Provisions : Sundry Creditors Provision Taxation Proposed Dividend Total : for 45.75 13.50 15.00 Fixed Assets At cost less 60.00 Depreciation: Property 24.00 Plant 15.00 Current Assets 24.00 Stock of finished goods 10.50 Sundry Debtors Bank 4.50 63.75 168.00 2008 Cost of Sales Gross Profit C/d 136.50 2007 Trading & Profit and Loss Account 2008 225.00 225.00 63.00 63.00 19.50 2007 180.00 180.00 45.00 45.00 15.00 (Rs. in lakhs) 162.00 135.00 Sales (all credit) 63.00 45.00 225.00 180.00 Overhead Expenses Net Profit before taxation Provision for taxation Dividend-paid Proposed and 6.00 4.50 43.50 19.50 63.00 8.25 30.00 Gross Profit b/d 15.00 45.00 6.30 Net profit b/d (Rs. in lakhs) 3.00 85.50 168.00 136.50 42.75 41.25 1.50 31.50 30.00 9.00 21.00 61.50 82.50 18.00 48.00 66.00 Assets 2008 2007 (Rs. in lakhs)

60.00

Surplus for the year carried to Balance Sheet

5.25 19.50

4.20 15.00 19.50 15.00

You are required to interpret the above statement using significant accounting ratios. Solution: Following are the five steps in examining the performance of the company in the year 2008 as compared to the year 2007. Step 1: Calculation of the ratios Financial Ratio Return on Employed (RoCE) =19.86 % =19.5/225*100% =8.67% 2008 =16.36% =15/180*100% =8.34% =180/(60+24+15) =1.82 =70.5/37.5 =1.88 =135/31.5 =4.29 =30/180*365 =60.83 Days = ~61 days =15/84 =.18 =8,70,000/60,000 =14.5 2007 =(15+1.2)/(60+24+15) Capital =(19.5+1.2)/(60+29.25+15)

Net Profit Ratio (NPR)

Capital Employed Turnover =225/(60+29.25+15) Ratio (CETR) =2.16 Current Ratio (CR) =85.5/63.75 =1.34 Stock Turnover Ratio (STR) =162/42.75 =3.79 Average Collection Period =41.25/225*365 (ACP) =66.91 Days= ~67 days Debt / Equity Ratio (D/E) Earning per share (EPS) =15/89.25 =.17 =11,25,000/60,000 =18.75

Dividend payout ratio (DPS =(6,00,000/60,000)/18.75*100% =(4,50,000/60,000)/14.5*100% / EPS) =53.33% =51.72% Gross Profit Ratio (GPR) =63/225*100% =28% =45/180*100% =25%

2. Comment on Individual Ratios: 1. Return on Capital Employed (RoCE) has increased from 16.36% in 2007 to 19.86% in 2008. This is achieved with the help of increased profitability on sales and more efficient utilization of capital employed.

2. Net Profit Ratio (NPR) has increased from 8.34% in 2007 to 8.67% in 2008. This is achieved with the help of increased profitability on sales. 3. Capital employed turnover ratio (CETR) has increased from 1.82 in 2007 to 2.16 in 2008. This is increased with the help of more efficient use of capital employed. 4. Current ratio (CR) has decrease to 1.34 in 2008 from 1.88 in 2007. This indicates that Working Capital Management (WC Mgt) of the company is not showing healthy signs. The reason for decline in CR is financing fixed assets out of working capital (WC). During the year, there is substantial increase in fixed assets without any efforts to raise long term funds. Long term funds have increased by 5.25 lacs on account of retained profits. 5. Stock Turnover ratio (STR) has decreased from 4.29 in 2007 to 3.79 in 2008. This indicates that Stock is not being efficiently utilized. 6. Average Collection Period (ACP) has increased to 67 days in 2008 from 61 days in 2007. This indicates poor collection as compared to previous year. 7. There is no noticeable change in debt/equity ratio. The debt/equity ratio (.18) of the company is low which indicates presence of less long term debt as compared to equity capital. 8. Earning per share (EPS) has increased to 18.75 in 2008 from 14.5 in 2007 (growth of 29.31% over previous year) indicates healthy growth of EPS. 9. Dividend payout ratio (DPR) has increased to 53.33% in 2008 from 51.72% in 2007 which is not a healthy sign in view of difficult working capital situation of the company. Dividend per share (DPS) has increased to 10 in 2008 from 7.5 in 2007. 10. Gross profit ratio (GPR) has increase to 28% in 2008 from 25% in 2007 which indicates 12% y/y growth in gross profit ratio. Step 3: Critical Appraisal The profitability of the company increased in account of increase in sales. Overheads have increased considerably. Working capital management is not satisfactory. Dividend payout should not have been so high in view of working capital problems. Step 4: Overall Performance Overall performance of the company is satisfactory (RoCE has improved) Step 5: Suggestion for the future 1. Try to improve working capital situation. 2. Try to control the overheads. 3. Funds may be raised through debentures, long term loans etc as the companys debt/equity ratio is low. Such funds may be used to improve working capital situation and also for expansion and diversification of the business.

Q.8 X Ltd. has been existence for two years. Summarized Balance Sheets as on 31st December, 2007 and 31st December, 2008 are given below: Balance Sheet (Figures in lakhs of rupees) Liabilities Equity shares of Rs. 100 each Reserves Profit & Loss A/c Loans on Mortgage Bank overdraft Creditors Provision for Taxation Proposed Dividend .60 .68 .20 6.16 2008 2 .20 .28 2.20 2007 Assets 2 Fixed Assets (Less Dep.) .40 Stock .04 Debtors 1.60 Cash and Bank Balances .40 1.80 .26 .30 6.80 6.16 6.80 2008 4.16 .60 .80 .60 2007 3.96 1.20 1.60 .04

You are also given the Profit and Loss Account of the Company for the two years. Profit & Loss Account (Figures in lakhs of rupees) 2008 Interest on Loan Directors Remuneration .20 Provision for Taxation Dividends Transfer to Reserve Balance C/F .68 .20 .20 .28 1.608 .048 2007 .096 Balance B/F Profit for the year after running costs & .60 Depreciation .26 .30 .20 .04 1.496 1.608 1.496 2008 2007 .28

1.608

1.216

Total Sales amounted to Rs. 12 lakhs in 2007 and Rs. 10 lakhs in 2008. Make a through overall analysis of this company.

Solution: Step 1: Calculation of Financial Ratios S. No. 1 Financial ratio 2008 2007 =(1.216-.3)/(2+.4+.04+1.6) =22.67% =.54/12*100% =4.5% =12/(2+.4+.04+1.6) =2.97 Return on Capital Employed =(1.608(RoCE) .2)/(2+.2+.28+2.2) =30.09% 2 3 4 5 6 7 8 9 10 Net Profit Ratio (NPR) =.68/10*100% =6.8%

Capital Employed Turnover =10/(2+.2+.28+2.2) Ratio (CETR) =2.14 Current Ratio (CR) Stock Turnover Ratio (STR) Average (ACP) Collection

=(.6+.8+.6)/(.6+.68+.2) =(1.2+1.6+.04)/(1.8+.26+.3) =1.35 =1.20 =(10-1.608)/.6 =13.99 =29.2 Days =2.20/2.48 =.89 =68,000/2000 =34 =(12-1.216)/1.2 =8.99 =1.6/12*365 =48.67 Days =1.6/2.44 =.66 =54,000/2000 =27 =.3/.54 =55.56% =1.216/12*100% =10.13%

Period =.8/10*365

Debt / Equity Ratio (D/E) Earning per share (EPS)

Dividend payout ratio (DPS / =.2/.68 EPS) =29.41% Gross Profit Ratio (GPR) =.1.608/10*100% =16.08%

Step 2: Comments on individual ratios 1. Sales have decreased to 10 lacs in 2008 from 12 lacs in 2007. This is not a positive signal since topline has decreased by 16.67% y/y. 2. Return of Capital Employed (RoCE) has increased by 32.73% to 30.09% in 2008 from 22.67% in 2007. This is attributed to higher return on sales and but less efficient utilization of capital employed. 3. Net Profit Ratio (NPR) has increased to 6.8% in 2008 from 4.5% in 2007. This is a healthy signal since profitability on sales has increased 51.11% y/y basis. 4. Capital Employed Turnover Ratio (CETR) has decreased to 2.14 in 2008 from 2.97 in 2007. This is not a healthy signal since CETR has decreased by 28%.

5. Current Ratio has increased by 12.5% to 1.35 in 2008 from 1.20 in 2007.. This indicates that current assets have increased more w.r.t. current liabilities and is a healthy signal. 6. Stock Turnover Ratio (STR) has increased to 13.99 in 2008 from 7.08 in 2007 which is a healthy signal since stock activity has improved compared to cost of goods sold. 7. Average Collection Period (ACP) has decreased to 29.2 days from 48.67 days which indicates that collection of credit sales has improved as compared to previous year and cash is collected faster. 8. Debt / Equity Ratio has increased to .88 in 2008 from .66 in 2007 which indicates that company has raised long term debt (Mortgage debt) to finance its activities in the year 2008. 9. Earning per share (EPS) has increased to 34 in 2008 from 27 in 2007 which is a healthy sign since EPS growth is a strong signal for investors and creditors for the business. 10. Dividend payout ratio (DPR) has decreased to 29.41% in 2008 from 55.56% in 2007 which indicates that company prefers to retain its profits for future expansions. 11. Gross Profit Ratio (GPR) has increased to 16.08% in 2008 from 10.13% in 2007 which is 58.74% increase on y/y basis. This indicates that overall profitability of the business has significantly improved. Step 3: Critical Appraisal It is noticed that sales have decreased but all other performance indicators for the company have significantly improved over previous year. 32.73% increase in RoCE is surely a very good performance indicator of increased profitability. CETR decreased indicates less efficient utilization of resources. Improved current ratio, lower collection period and higher stock turnover ratio indicated enhanced activity in many aspects of the business. It seems that the firm is poised for rapid growth path. Step 4: Overall Performance The overall performance of the company is good. Since all major indicators are better but sales and CETR have decreased over previous year. Step 5: Suggestions for the future The company should improve the utilization of resources. It is required to improve turnover to increase topline growth.