Ratio Analysis: Problems and Solutions
Arjun EP
Ratio analysis problem and solution includes mixed problems and solution of different accounting ratios like amount of sales, net profit after tax, average collection period , current ratio, quick ratio, debt equity ratio and more.
MIXED PROBLEMS AND SOLUTIONS
PROBLEM: 6
ABC Company Ltd provides you following information and balance sheet on 31 December:
Balance Sheet
|
Liabilities |
Amount |
Assets |
Amount |
|
Equity shares capital @ Rs 100 |
200,000 |
Fixed assets |
475,000 |
|
6% Preference shares capital |
50,000 |
Long term investment |
50,000 |
|
8% Debentures |
50,000 |
Other quick assets |
135,000 |
|
Current liabilities |
180,000 |
Closing stock |
20,000 |
|
General reserve |
180,000 |
Preliminary expenses |
10,000 |
|
P&L account last year |
131,750 |
Account receivable |
157,500 |
|
P&L account current year |
55,750 |
|
|
|
|
847,500 |
|
847,500 |
Other information:
Fixed assets turnover ratio was 3 times for the year.
Net profit margin before interest and tax was 10% opening stock sales.
Company is within 50% tax brackets.
Working days during the year was 360 days.
Required: (a) Amount of sales; (b) Net profit after tax; (c) Average collection period; (d) Current ratio;
(e) Quick ratio; (f) Debt equity ratio; (g) Return on shareholders’ equity
[Answer: Sales = Rs 14,25,000; NPAT = Rs 69,250; ACP = 40 days;
C.R = 1.74: 1; QR = 1.62: 1; DER = 8.2%; ROESF = 11.88%;
*QA = (Current assets – Closing stock) = Rs 292,500
SOLUTION:
Amount of sales
|
Fixed assets turnover ratio |
= |
Net sales ÷ Net fixed assets |
|
3 times |
= |
Sales ÷ 475,000 |
|
Sales |
= |
475,000 x 3 |
|
|
= |
Rs 14,25,000 |
Net profit after tax
|
Net profit before interest and tax (14,25,000 @ 10%) |
142,500 |
|
|
Less: Interest on debentures (50,000 @ 8%) |
40,000 |
|
|
Net profit before tax |
138,500 |
|
|
Less: Tax (138,500 @ 50%) |
69,250 |
|
|
Net profit after tax |
69,250 |
|
Average collection period (ACP)
= (Account receivable x Days in year) ÷ Credit sales
= (1,57,500 x 360 days) ÷ 14,25,000
= 39.78 or 40 days
Current ratio
Given and working note for current assets
= Other quick assets + Closing stock + Account receivable
= 135,000 + 20,000 + 157,500
= 312,500
Now,
Current ratio
= Current assets ÷ Current liabilities
= 312,500 ÷ 180,000
= 1.74:1
Quick ratio
Given and working note for quick assets
= Current assets – Closing stock = 312,500 – 20,000 = Rs 292,500
Now,
Quick ratio = Quick assets ÷ Current liabilities = 292,500 ÷ 180,000 = 1.62:1
Debt equity ratio (DER)
Given and working note for shareholders equity
= Equity shares + Preference shares + General reserve + P&L last year + P&L CY – Preliminary expenses
= 200,000 + 50,000 + 180,000 + 131,750 + 55,750 – 10,000
= Rs 607,500
Now, DER
= (long-term debts ÷ Shareholders equity) x 100
= (50,000 ÷ 607,500) x 100
= 0.082 x 100
= 8.2%
Return on equity shareholders’ fund (ROESF)
Only equity shareholders fund = SHE – Preference shares = 607,500 – 50,000 = Rs 557,500
Now, ROESF
= (NPAT – Preference dividend) x 100
= (69,250 – 3,000) x 100
= 0.1188 x 100
= 11.88%
#####
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Click on link for YouTube videos |
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Accounting for Share |
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Share in Nepali |
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Debentures |
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Final Accounts: Class 12 |
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Final Accounts in Nepali |
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Work Sheet |
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Ratio Analysis (Accounting Ratio) |
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Fund Flow Statement |
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Cash Flow Statement |
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Theory Accounting Xii |
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Theory: Cost Accounting |
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Cost Accounting |
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LIFO−FIFO |
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Cost Sheet, Unit Costing |
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Cost Reconciliation Statement |
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#####
PROBLEM: 7
ABC Company Ltd provides you following balance sheet on 31st December 2020: ($/₹/Rs)
|
Liabilities |
Amount |
Assets |
Amount |
|
Equity shares capital @ Rs 100 |
500,000 |
Fixed assets |
400,000 |
|
General reserve |
50,000 |
Inventories |
100,000 |
|
8% Debentures |
100,000 |
Sundry debtors |
80,000 |
|
Sundry creditors |
30,000 |
Rent receivable |
20,000 |
|
Bills payable |
40,000 |
Cash and bank |
120,000 |
|
Outstanding interest |
8,000 |
Prepaid expenses |
20,000 |
|
Retained earning |
22,000 |
Preliminary expenses |
10,000 |
|
|
750,000 |
|
750,000 |
Additional information:
(a) Sales during the year Rs 14,00,000.
(b) Gross profit 40% of sales.
(c) Net profit after tax Rs 150,000.
(d) Opening inventory Rs 68,000.
Required: (1) Current ratio; (2) Quick ratio; (3) Debt equity ratio; (4) Fixed assets turnover ratio
(5) Stock turnover ratio; (6) Return on shareholders’ equity
[Answer: C.R = 4.36: 1; QR = 2.82: 1; DER = 17.8%;
FATR = 3.5 times; STR = 10 times; ROSE = 26.69%]
SOLUTION:
Given and working note:
Current assets
= Inventory + Debtors + Rent receivable + cash + prepaid expenses
= 100,000 + 80,000 + 20,000 + 120,000 + 20,000
= Rs 340,000
Current liabilities
= Creditors + Bills payable + outstanding expenses
= 30,000 + 40,000 + 8,000
= Rs 78,000
Quick assets
= Current assets – Closing stock – Prepaid
= 340,000 – 100,000 − 20,000
= Rs 220,000
Shareholders’ equity (SHE)
= Equity shares + General reserve + Retained earning – Preliminary expenses
= 500,000 + 50,000 + 22,000 – 10,000
= Rs 562,000
Cost of goods sold
= Sales – Gross profit
= 14,00,000 – 14,00,000 @ 40%
= 14,00,000 – 5,60,000
= Rs 840,000
Average inventory
= (opening stock + closing stock) ÷ 2
= (68,000 + 100,000) ÷ 2
= 84,000
Now,
Current ratio
= Current assets ÷ Current liabilities
= 340,000 ÷ 78,000
= 4.36: 1
Quick ratio
= Quick assets ÷ Current liabilities
= 222,000 ÷ 78,000
= 2.82: 1
Debt equity ratio (DER)
= Long-term debts ÷ SHE
= 100,000 ÷ 562,000
= 0.178 or 17.8%
Fixed assets turnover ratio (FATR)
= Sales ÷ Net fixed assets
= 14,00,000 ÷ 4,00,000
= 3.5 times
Stock turnover ratio (STR)
= Cost of goods sold ÷ Average stock
= 840,000 ÷ 84,000
= 10 times
Return on shareholders’ equity (ROSE)
= NPAT ÷ SHE
= 150,000 ÷ 562,000
= 0.2669 or 26.69%
###########
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Click on link for YouTube videos: |
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Accounts: Class 11 |
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Adjustment in Final Accounts |
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Capital and Revenue |
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Single Entry System |
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Non-Trading Concern |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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PROBLEM: 8
Following is financial statement of ABC Company Ltd on 31st December 2020: (Amount: $/₹/Rs)
Trading, Profit and Loss Account
|
Particulars |
Amount |
Particulars |
Amount |
|
To Opening stock |
39,800 |
By Sales |
340,000 |
|
To Purchased |
218,100 |
By Closing stock |
59,600 |
|
To Wages |
5,700 |
|
|
|
To Gross profit |
136,000 |
|
|
|
|
399,600 |
|
399,600 |
|
To Office expenses |
60,000 |
By Gross profit |
136,000 |
|
To Selling expenses |
12,000 |
By profit on sales of plant |
2,400 |
|
To Interest on loan |
6,000 |
By Interest received |
1,200 |
|
To Loss on sales of furniture |
1,600 |
|
|
|
To Net profit before tax |
60,000 |
|
|
|
|
139,600 |
|
139,600 |
Balance Sheet
|
Liabilities |
Amount |
Assets |
Amount |
|
Equity shares of Rs 100 each |
80,000 |
Factory premises |
160,000 |
|
Reserve and surplus |
2,000 |
Plant and machinery |
32,000 |
|
Profit and loss account (NPBT) |
60,000 |
Stock |
59,600 |
|
Bank loan |
112,000 |
Sundry debtors |
28,000 |
|
Sundry creditors |
33,600 |
Bill receivable |
4,000 |
|
Outstanding expenses |
8,000 |
Bank balance |
10,000 |
|
|
|
Discount on shares |
2,000 |
|
|
295,600 |
|
295,600 |
Tax bracket is 50%.
Required: (a) Gross profit ratio; (b) Net profit ratio; (c) Debt equity ratio; (d) Debt to total capital ratio
(e) Current ratio; (f) Quick ratio; (g) Total assets turnover ratio; (h) Total capital turnover ratio
(i) Fixed assets turnover ratio; (j) Stock turnover ratio; (k) Return on assets; (l) Return on shareholder equity
[Answer: GPR = 40%; NPR = 8.82%; DER = 101.82%; DTCR = 50.45%; C.R = 2.44: 1;
QR = 1.01: 1; TATR = 1.15 times; TCTR = 1.35 times; FATR = 1.77 times;
STR = 4.1 times; ROA = 12.81%; ROSE = 27.27%;
SOLUTION:
Gross profit ratio (GPR)
= (Gross profit ÷ Sales) x 100
= (136,000 ÷ 340,000) x 100
= 0.40 x 100
= 40%
Net profit ratio (NPR)
NPAT = 60,000 – 60,000 @ 50% = Rs 30,000*
Now,
= (Net profit ÷ Sales) x 100
= (30,000 ÷ 340,000) x 100
= 0.0882 x 100
= 8.82%
Debt equity ratio (DER)
Shareholder equity (SHE)
= Equity shares + General reserve + P&L account – Discount on share
= 80,000 + 2,000 + 60,000@50% – 2,000
= Rs 110,000
Now, DER
= (Long-term debts ÷ Shareholders equity) x 100
= (112,000 ÷ 110,000) x 100
= 0.80 x 100
= 101.82%
Debt to total capital ratio (DTCR)
Total capital = SHE + Long-term debt = 110,000 + 112,000 = Rs 222,000
Now,
= (Long-term debts ÷ Total capital) x 100
= (112,000 ÷ 222,000) x 100
= 0.5045 x 100
= 50.45%
Current ratio
|
Current assets |
Current liabilities |
|
Quick assets |
|||
|
Stock |
59,600 |
|
Creditor |
33,600 |
|
= Current assets – Closing stock – Prepaid |
|
Debtors |
28,000 |
|
O/s expenses |
8,000 |
|
= 101,600 – 59,600 – Nil |
|
B/R |
4,000 |
|
|
41,600 |
|
= Rs 42,000 |
|
Bank |
10,000 |
|
|
|
|
|
|
|
101,600 |
|
|
|
|
|
Now,
Current ratio
= Current assets ÷ Current liabilities
= 101,600 ÷ 41,600
= 2.44: 1
Quick ratio
= Quick assets ÷ Current liabilities
= 42,000 ÷ 41,600
= 1.01: 1
Total assets turnover ratio
= Sales ÷ Total assets
= 340,000 ÷ 295,000
= 1.15 times
Total capital turnover ratio
= Sales ÷ Total capital
= 340,000 ÷ 252,000
= 1.35 times
Fixed assets turnover ratio (FATR)
Fixed assets = premises + plant and machinery = 160,000 + 32,000 = Rs 192,000
Now,
= Sales ÷ Fixed assets
= 340,000 ÷ 192,000
= 1.77 times
Stock turnover ratio (STR)
|
Cost of goods sold |
Average inventory |
|
= Sales – Gross profit |
= (Opening + Closing) ÷ 2 |
|
= 340,000 – 136,000 |
= (39,800 + 59,600) ÷ 2 |
|
= Rs 204,000 |
= 49,700 |
Now, STR
= COGS ÷ Average inventory
= 204,000 ÷ 49,700
= 4.1 times
Return on assets (ROA)
Net total assets = Total assets ‒ Discount on share = 295,600 ‒ 2,000 = 293,600
Now, ROA
= (NPAT ÷ Net assets) x 100
= (30,000 ÷ 293,000) x 100
= 0.1022 x 100
= 10.22%
Return on shareholders’ equity (ROSE)
= (NPAT ÷ Shareholders) x 100
= (30,000 ÷ 110,000) x 100
= 0.2143 x 100
= 27.27%
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