12 RATIO ANALYSES Format of Income Statement Format of Income and Financial Statement I
Sources of Funds
Add a b c
Add Add
Equity Share Capital
XXX
Reserve Fund/(Loss)
XXX
Equity / Equity Share Holders Funds
XXX
Preference Share Capital
XXX
Shareholders’ funds (a+b)
XXX
Long term debt (a+b+c)
XXX
Capital employed / Investment II
XXX
Applications of Funds
Fixed Assets
XXX
Net Working Capital
III
Current Assets d e
Add
Liquid Assets
XXX
Stock in Trade (d+e)
XXX
XXX
Current Liabilities f g
Add
Liquid Liabilities
XXX
Bank OD
XXX
XXX
IV
Net Working Capital (e-g)
XXX
V
II+IV
XXX
Format of Income Statement Format of Income and Financial Statement I
Sources of Funds Add
A B C
Add Add
Equity Share Capital
XXX
Reserve Fund/(Loss)
XXX
Equity / Equity Share Holders Funds
XXX
Preference Share Capital
XXX
Shareholders’ funds (a + b)
XXX
Long term debt (a + b + c)
XXX
Capital employed / Investment II
XXX
Applications of Funds
Fixed Assets
XXX
Net Working Capital
III
Current Assets D E
Add
Liquid Assets
XXX
Stock in Trade (d + e)
XXX
XXX
Current Liabilities
:
[CA-CWA-CS]
M: Trichy: 93451 22645/Chenn ai: 93453 96855
12.1
F G
Add
Liquid Liabilities
XXX
Bank OD
XXX
XXX
IV
Net Working Capital (e - g)
XXX
V
II+IV
XXX
Format of Financial Statement
Sales
XXX
Cost of good sold
XXX
Gross Profit
XXX
Add
Operating Income
XXX
Less
Operating Expense
XXX
Add
XXX Add
Non-Operating Income
XXX
Less
Non-Operating Expense
XXX
Earning Before Int. Tax (EBIT)
XXX
Interest
XXX
Earning Before Tax (EBT)
XXX
Tax
XXX
Earning After Tax (EAT)
XXX
Pref. Dividend
XXX
Equity/Equity Shareholder
XXX
Dividend
XXX
Retain Earnings
XXX
Less Less Less Less
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.
2. a)
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.
Quick Ratios: The Quick Ratio is sometimes called the “acid -test” ratio and is one of t he 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.
:
[CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.2
Net Working Capital Ratio: It helps to determine a company’s 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 th e 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 firm’s ability to service the fixed liabilities.
Debt Service Coverage Ratio: Lenders are interested in debt service coverage to judge the firm’s ability to pay off current interest and installments.
Interest Coverage Ratio: Also known as “times interest earned ratio” indicates the firm’s ability to meet interest (and other fixed-charges) obligations.
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)
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.
Activity Ratios: These ratios are employed to evaluate the efficiency with which the firm manages and utilities its assets.
:
[CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.3
Capital Turnover Ratio: This ratio indicates the firm’s 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 debtor’s 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.
:
[CA-CWA-CS]
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 gr owth 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.
Net Profit Ratio: It measures overall profitability of the business.
Operating Profit Ratio:
Gross Profit Ratio: This ratio is used to compare departmental profitability or product profitability.
Return on Assets (ROA): This ratio measures the profitability of the firm in terms of assets employed in the firm.
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
Debit
Rs.10 Equity share capital
Credit
10,000
Rs.10.10% Preference share capital
5,000
Rs.100.12% Debentures
5,000
Reserve fund
2,000
Profit & loss[Opening Balance]
3,000
Stock
1,000
Debtors / Creditors
500
300
Bills receivable/ Bills payable
500
200
Cash / Bank
5,560
Purchases / sales
15,000
Direct Wages
1,000
Administration Expenses
500
Selling & Distribution
500
Income from let out
1000
Expenses for let out
500
Interest
600
Fixed assets
25,840 51,500
1.
Closing Stock Rs.2,000
2.
Tax rate is 40%
3.
Market price per share is Rs.40
4.
proposed dividend Rs.1 per share
5.
the above adjustments were made
6.
Redeem Debenture Rs.500
25,000
51,500
Calculate all ratios SOLUTION: Trading A/C & Profit and Loss A/C
To
Opening Stock
1,000
Purchases
15,000
Direct Wages
By
Sales Closing Stock
25,000 2,000
1,000
Gross Profit
10,000 27,000
27,000
Administration expenses
500
Gross Profit b/d
Selling & Distribution expenses
500
Income from let out
Expenses for let out
500
TO Interest on Debentures
600
TO Net Profit
10,000 1,000
8,900 11,000
11,000
Profit and Loss Appropriation A/c
Provision for Tax Proposed Dividend
:
[CA-CWA-CS]
3,560 500
Opening Bal
3,000
NP b/d
8,900
M: Trichy: 93451 22645/Chennai: 93453 96855
12.6
Proposed Equity dividend
1,000
Closing Balance
6,840 11,900
11,900
Balance sheet
Equity Share Capital
10,000
Fixed Assets
25,840
Preference Share Capital
5,000
Stock
Debentures
5,000
Debtors
500
Reserve Fund
2,000
Bills Receivable
500
Profit & loss
6,840
Bank
500
Creditors
300
Bills Payable
200
2,000
29,340
29,340
Income statement Sales Less
25,000
Cost of Goods Sold
Opening Stock Add
Purchases
Less
Closing Stock
1,000 15,000 2,000
Material consumption Add
14,000
Direct wages
Add
Other Operating Income
Less
Other operating expenses
Add
1,000
15,000
Gross Profit
10,000
--
Administration expenses
500
Selling & Distribution expenses
500
1,000
Operating profit
9,000
Non Operating income
1,000 10,000
Less
Non Operating exp
500
EBIT Less
Less
Less
9,500
Interest
600
NP / P / EBT
8900
Tax
3560
EAT
5340
Preference Dividend
500
Earnings avail to ESH
4840
No of Shares
1,000
Earning Per Share [EPS]
:
[CA-CWA-CS]
4.84
M: Trichy: 93451 22645/Chennai: 93453 96855
12.7
FINANCIAL STATEMENT Sources of Funds
Equity / ESH fund Equity Share Capital
10,000
Reserve Fund
2,000
Profit and Loss
6,840
Net worth
18,840
10% Redeemable Preference Share Capital
5,000 23,840
Share holder’s Fund
12% Debenture A
5,000
Investment / Capital employed
28,840
Applications of funds B
Fixed Assets
25,840
Working capital Current Assets
Debtors
500
Bills Receivable
500
Receivable
1000
Cash and Bank balance
I
500
Liquid asset
1500
Stock
2000
Current Asset
3500
Current Liabilities
Creditors
300
Bills Payable
200
Payable
500
Other Current Liabilities
--
Liquid Liabilities
500
Bank Overdraft
--
II
Current Liabilities
C
Net Working Capital I – II
500 3000
A=B+C
28,840
RATIOS No
Ratio
Formulae
Workings
Answer
1
Return on Equity
EAT – P. Div/Equity×100
4840 / 18840 × 100
25.69%
2
Return on holders fund
EAT / Share Holder’s fund × 100
5340 / 23840 × 100
22.39%
3
ROI / ROCE
(EAT + Int) /( Inv/CEMP ) × 100
(5340+600) / 28840 × 100
20.59%
Share
(or)
(or) (9500-3560) / 28840 × 100
EBIT – TAX / INV / Cap emp x 100 :
[CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.8
4
GP Ratio
GP / sales × 100
10,000 / 25,000 × 100
40%
5
Operating Profit Ratio
OP / Sales × 100
9000 / 25000 × 100
36%
6
Operating Ratio
Oper. Exp / sales × 100
(15000+1000)/25000×100
64%
NP / S x 100
5340 / 25000 ×100
21.36%
Admin O/H / Sales×100
500 / 2500×100
2%
Sell O/H / Sales×100
500 / 2500×100
2%
Nt: Oper.exp = cogs + other op exp
7
NP Ratio
8
Exp Ratio Admn. OH Ratio Sell and Ratio
Dist
OH
9
EPS
Earn avail to ESH / No.of 4840 / 1000 Shares
4.84
10
Payout Ratio
Dividend per share / EPS x 100 (or)
1/4.84 x 100
20.66%
Total Dividend / Earnings for ESH x 100
1000 / 4840 x 100
Retained Earnings share / EPS x 100
3.84 / 4.84 x 100 (or)
11
Retained Ratio
Earning
Per
(or)
79.33%
3840 / 4840 x 100
(or) Total Retained Earnings/ Earnings available to ESH 12
Price Earning Ratio [PE Ratio]
Market price per share / 40 / 4.84 EPS
8.26
13
Dividend yield Ratio
D / Mkt price × 100
1/40 × 100
2.5%
14
Earnings yield Ratio
EPS / Mkt Price × 100
4.84 / 40 × 100
12.1%
15,000 / (1000+2000)/2
10 times
Turnover Ratio / Activity Ratio
15
16
Inventory Ratio
Turnover
TO / Inv Nt: COGS / S / Avg.Stk
Stock velocity ratio
Days (or) months in a year / 360 / 10 Inv. Turnover ratio
36 days (or)
(or) Days (or)months in a year / COGS × Avg Stock
360 / 15000 x 1500
Receivable Turnover Ratio/ Drs Turnover ratio
TO / Avg. Drs
25000 / 1000
18
Drs Velocity ratio
Days / months in a year / 360 / 25 DTR
14.4 days
19
Crs Turnover ratio
To / Crs
30 times
17
25 times
Nt: Cr. Sales / (Drs + BR)/2
15000 / 500
Nt: Cr. Purchases / (Crs + BP)/2
20
Crs velocity ratio
Days / months in a year / 360 / 30 CTR
12 days
21
FA Turnover ratio
To/FA
0.97 times
25000 / 25840
Nt: Sales / FA COVERAGE RATIOS
22
Interest coverage ratio
EBIT / Interest
9500 / 600
16 times
23
Dividend Ratio
EAT / P.D
5340 / 500
3.6 times
Coverage
(or) EAT / [PD + ED] :
[CA-CWA-CS]
(or) 5340 / 1500 M: Trichy: 93451 22645/Chennai: 93453 96855
12.9
24
Loan Coverage Ratio
EBIT / I + (Loan instat / (1T))
= 9500 / 600 + (500 / (1 – 0.4))
(or)
5340 + 600 (1 – 0.4) / 600 (1 – 0.4) + 500
EBIT + Int (1 – T) Int (1-T) Investment
+
6.6
(or)
Loan
SOLVENCY RATIOS
I. Short Term 25
Current Ratio
CA / CL
3500 / 500
7:1
26
Liquid Ratio / Quick QA / QL Ratio
1500 / 500
3:1
27
Cash Reserve Ratio/
Cash + Mkt Securities / CL
500 / 500
1:1
L. T. Debt / Share Holders fund
5000 / 25840 =
0.21 : 1
Super Quick Ratio 28
Debt Equity
L T Debt + P.S. Cap / 5000 + 5000 / 18840 Equity
0.53 : 1
Total Debt / Equity
0.23:1
[5000 + 500] / 23840
Question 2: Current Ratio = 2, Liquid Ratio = 1 and Working Capital = Rs.1,00,000. Calculate Current Asset, Current Liabilities and Liquid Asset
CR
CA / CL = 2/1
WC
CA – CL
1
2 – 1
1,00,000
2,00,000 – 1,00,000
LR
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
Rs. in lakhs 31.03.06
31.03.05
Shareholders Funds
2,377
1,472
Loan Funds
3,570
3,083
5,947
4,555
3,466
2,900
489
470
Sources of Funds:
Applications of Funds:
Fixed Assets Cash and bank
:
[CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.10
Debtors
1,495
1,168
Stock
2,867
2,407
Other Current Assets
1,567
1,404
(3,937)
(3,794)
5,947
4,555
Less: Current Liabilities
The Income Statement of th e JKL Ltd. for the year end ed is as follows: Particulars
Rs. in lakhs
31.03.06
31.0305
Sales
22,165
13,882
Less: Cost of Goods sold
20,860
12,544
1,305
1,338
1,135
752
Earnings before Interest & Tax (EBIT)
170
586
Interest Expense
113
105
Profits before Tax
57
481
Tax
23
192
Profits after Tax (PAT)
34
289
Gross Profit Less: Selling, General & Admn. expenses
Required: (i)
(ii)
Calculate for the year 2005-06: (a)
Inventory turnover ratio
(b)
Financial Leverage
(c)
Return on Investment (ROI)
(d)
Return on Equity (ROE)
(e)
Average Collection period.
Give a brief comment on the Financial Position of JKL Limited. (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
:
Rs.2,40,000
Bank overdraft
Rs.40,000
[CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.11
Fixed Assets to Proprietary ratio
0.75
Reserves and Surplus
Rs.1,60,000
Current ratio
2.5
Liquid ratio
1.5 (PE-II-Nov.2002) (6 marks)
Solution: Working notes: 1. Current assets and Current liabilities computation:
Working Capital = Current Assets – Current Liabilities = 2.5 – 1 = 1.5 = 240,000 Therefore = Current Asset = 240,000×2.5/1.5 = 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
Fixed assets
=
0.75 Proprietary fund
and
Net working capital
=
0.25 Proprietary fund
Or
Rs.2,40,000/0.25
=
Proprietary fund
Or
Pr oprietary fund
=
Rs.9,60,000
and
Fixed assets
=
0.75 proprietary fund
=
0.75 Rs.9,60,000 =
Capital
=
Sundry creditors
Proprietary fund
=
Rs.9,60,000
=
(Current liabilities
=
(Rs.1,60,000
Rs.7,20,000
Reserves & Surplus
Rs.1,60,000 =
Rs.8,00,000
Bank overdraft)
Rs.40,000) =Rs.1,20,000
Construction of Balance sheet: (Refer to working notes 1 to 3) Balance Sheet Liabilities
Rs.
Assets
Rs.
Capital
8,00,000
Fixed assets
7,20,000
Reserves & Surplus
1,60,000
Stock
1,60,000
Bank overdraft
40,000
Current assets
2,40,000
Sundry creditors
1,20,000 11,20,000
11,20,000
Question 6: Completion of Balance Sheet:
With the help of th e following information complete the Balan ce Sheet of MNOP Ltd.: Equity share capital
Rs. 1,00,000
The relevant ratios of the company are a s follows:
:
Current debt to total debt
.40
Total debt to owner’s equity
.60
[CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.12
Fixed assets to owner’s equity
.60
Total assets turnover
2 Times
Inventory turnover
8 Times
(PE-II-May 2005) (7 marks) Solution: MNOP Ltd Balance Sheet Liabilities
Rs
Assets
Rs
Owner equity
1,00,000
Fixed assets
60,000
Current debt
24,000
Cash
60,000
Long term debt
36,000
Inventory
40,000
1,60,000
1,60,000
Working Notes
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 2. Fixed assets = 0.60
Owners equity = 0.60
60,000 = 24,000
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 equi ty). 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
Rs. 54,000
Shareholders’ Funds
Rs.6,00,000
Gross Profit margin
20%
Credit sales to Total sales
80%
Total Assets turnover
0.3 times
Inventory turnover
4 times
Average collection period(360 days year)
20 days
Current ratio
1.8
Long-term Debt to Equity
40%
Balance Sheet
:
Creditors
XXX
Cash
XXX
Long-term debt
XXX
Debtors
XXX
Shareholders’ funds
XXX
Inventory
XXX
Fixed assets
XXX
[CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.13
(PE-II-Nov. 2005)(12 Marks) Solution:
Gross Profits (given) = Rs. 54,000 Gross Profit Margin given = 20%,
Credit Sales to Total Sales = 80%,
Sales =
= Rs. 54,000 / 0.20 = Rs. 2,70,000
Credit Sales = Rs. 2,70,000×0.80 = 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; Inventory turnover = 4 times
COGS = Rs. 270,000 – 54,000 = Rs. 2,16,000
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
= (Rs. 12,000 + Rs. 54,000 + Cash)
1.8 Creditors
= Rs. 66,000 + Cash
Long-term Debt to Equity = 40% Shareholders Funds = Rs. 6,00,000
Long-term Debt= Rs. 6,00,000×40% = Rs. 2,40,000
Creditors (Bal .fig) = 9,0 0,000 – (6,00,000 + 2,40,000) = Rs. 60,000
Cash = (60,000×1.8) – 66,000 = Rs. 42,000
Balance Sheet (in Rs)
Creditors (Bal. Fig)
60,000
Cash
42,000
Long- term debt
2,40,000
Debtors
12,000
Shareholders’ funds
6,00,000
Inventory
54,000
Fixed Asset(Bal.fig)
7,92,000
9,00,000
9,00,000
Question 8: Completion of Balance Sheet:
Using the following information, complete the Balance Sheet given below: (i)
Total debt to net worth
1:2
(ii)
Total assets turnover
2
(iii)
Gross profit on sales
30%
(iv)
Average collection period
40days
(Assume 360 days in a year) (v)
Inventory T.O ratio (COGS/Cl. Inventory)
3
(vi)
Acid test ratio
0.75
Balance Sheet as on March 31, 2007 Liabilities
Rs.
Assets
Rs.
Equity Shares Capital
4,00,000
Fixed Assets
Reserves and Surplus
6,00,000
Current Assets:
Total Debt:
:
[CA-CWA-CS]
Inventory
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 = ½ = 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 Gross Profit on Sales : 30% i.e. Rs. 9,00,000,
Sales = Rs. 30,00,000
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
Rs.
Assets
Equity Share Capital
4,00,000
Fixed Assets
Reserves & Surplus
6,00,000
Current Assets:
Total Debt: Current liabilities
5,00,000
Rs.
425,000
Inventory
7,00,000
Debtors
3,33,333
Cash
41,667
5,00,000
15,00,000
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
15% of Sales
Net profit
8% of sales
Raw materials consumed
20% of works cost
Direct wages
10% of works cost
Stock of raw materials
3 months’ usage
Stock of finished goods
6% of works cost
Debt collection period
60 days
All sales are on credit II
Financial Ratios:
Fixed assets to sales
1:3
Fixed assets to Current assets
13 : 11
Current ratio
2:1
Long-term loans to Current liabilities
2:1
Capital to Reserves and Surplus
1:4
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 = 13/11 26,00,000 /CA = 13/11= CA= Rs. 22,00,000 Calculation of Raw Material Consumption an d Direct Wages Sales
78,00,000
Less: gross profit
11,70,000
Works cost
66,30,000
Raw material consumption (20% of works cost)
13,26,000
Direct wages (10% of works cost) iv. v. vi. vii. viii. ix.
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 Current Liabilities (CL) = CA / CL = 2
22,00,000/CL = 2 = CL = Rs. 11,00,000
Debtors = ACP = Debtors/Credit Sales×365= Debtors/78,00,000×365 = 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
22,00,000 12,82,192
Raw materials stock
x.
6/100 = Rs. 397,800
3,31,500
finished goods stock 3,97,800
20,11,492
Cash balance
1,88,508
Fixed assets
26,00,000
Current assets
22,00,000
Total assets
48,00,000
Calculation of Net worth
Less: long term loan
22,00,000
current liabilities 11,00,000
33,00,000
Net worth
15,00,000
Net worth = Share capital + Reserves = 15,00,000 xi. xii.
Share Capital = Capital / R/S = ¼ = 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
Rs.
To
Direct materials
13,26,000
To
Direct wages
6,63,000
To
Works (O.H) (bal fig)
46,41,000
To
Gross Profit c/d (15% of sales)
11,70,000
By
Particulars
Rs.
Sales
78,00,000
78,00,000
To
Selling & distribution (bal)
5,46,000
To
Net profit (8% of sales)
6,24,000 11,70,000
:
[CA-CWA-CS]
78,00,000
By
Gross Profit b/d
11,70,000
11,70,000
M: Trichy: 93451 22645/Chennai: 93453 96855
12.16
BALANCLE SHEET OF PQR LTD.AS AT 31-12-2006 Liabilities
Rs.
Share capital
Assets
3,00,000
Fixed assets
Rs.
26,00,000
Reserves & surplus
12,00,000
Current assets:
Long term loans
22,00,000
Stock of raw material
3,31,500
Current liabilities
11,00,000
Stock of finished goods
3,97,800
Debtors
12,82,192
Cash
1,88,508
48,00,000
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
Rs.’000
To
Opening stock
700
To
Purchases
?
To
Direct expenses
175
To
Gross profit c/d
?
Particulars
Rs.’000
By
Sales
?
By
Closing stock
?
?
?
To
Establishment expenses
740
By
Gross profit b/d
?
To
Interest on loan
60
By
Commission
100
To
Provision for taxation
?
To
Net profit c/d
? ?
?
To
Proposed dividends
?
By
Balance b/f
140
To
Transfer to G.Reserve
?
By
Net profit b/d
?
To
Balance transferred Balance sheet
?
to
?
? st
Balance Sheet as at 31 March, 2008 Liabilities
(Rs.’000)
Assets
Paid-up capital
1,000
Fixed assets:
General reserve:
(Rs.’000)
Plant & machinery
1,400 ?
Balance at the beginning of the year
?
Other fixed assets
Proposed addition
?
Current assets:
Profit and loss account
?
Stock
?
10% Loan account
?
Sundry debtors
?
Current liabilities
?
Cash at bank
125
?
?
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
iii.
Proposed dividend to paid-up capital ratio is 2:3.
iv.
Gross profit ratio is 60% of turnover.
v. vi. vii. viii. ix.
Loan is half of current liabilities. Transfer to general reserves to proposed dividend s 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 year’s profits.
You are required to complete: Trading and Profit & Loss A/c for the year ended 31.3.2008 & The Balance Sheet as on that date. (20 Marks)(May, 2008) Solution:
Trading and Profit & Loss A/c for the year ended 31-3-2008 Particulars
(Rs.‘000s)
To
Opening stock
700.00
To
Purchases (Bal. Fig.)
2613.33
To
Direct expenses
175.00
To
Gross profit c/d (W.N.9)
3,220.00
Particulars
(Rs.‘000s)
By
Sales (W.N.10)
5366.66
By
Closing stock (W.N.11)
1341.67
6,708.33
6,708.33
To
Establishment expenses
740.00
By
Gross profit (Bal. Fig)
3,220.00
To
Interest on loan
60.00
By
Commission
100.00
To
Provision for tax (W.N.8)
1,260.00
To
Net profit c/d
1,260.00 3,320.00
3,320.00
To
Proposed dividends (W.N.1)
666.67
By
Balance b/f
140.00
To
Transfer to general reserve (W.N.2)
666.67
By
Net profit (Bal Fig)
1,260.00
To
Balance transferred to B/S(W.N.3) 66.66 1,400.00
1,400.00
st
Balance Sheet as at 31 March, 2008 Liabilities
(Rs.‘000s)
Assets
Paid-up capital
1,000.00
Fixed assets:
General reserve:
(Rs. in ‘000s)
Plant & machinery
1,400.00 1066.67
Balance at the beginning (W.N.14)
1333.34
Other fixed assets (Bal Fig)
Proposed addition (W.N.2)
666.67
Current Assets:
Profit and loss A/c
66.66
Stock (W.N.11)
1341.67
10% Loan A/c (W.N.4)
600.00
Sundry debtors (W.N.13)
933.33
Current liabilities (W.N.5)
1,200.00
Cash at bank
125.00
4,866.67
:
[CA-CWA-CS]
4,866.67
M: Trichy: 93451 22645/Chennai: 93453 96855
12.18
Working Notes:
1.
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
2.
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
3.
Profit carried forward to Balance Sheet = 10% of Proposed Dividend i.e., Rs. 666.67 thousand × 10% = Rs.66.66 thousand
4.
10% Loan implies interest on loan being 10%: i.e. Rs.60,000×100/10= Rs. 600,000
5.
Loan is half of current liabilities which means current liabilities are twice of loan i.e., Rs.600,000 × 2 = Rs.1,200,000
6.
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
7.
(Rs. in ‘000s)
Current Net Profit Proposed dividend
666.67
Transfer to general reserve
666.67
Profit and loss balance transferred to balance sheet
66.66 1,400.00
Less: Balance b/f
140.00
Net profit for the year
1,260.00
8.
Provision for taxation is equal to current net profit i.e., = Rs.1,260,000
9.
Gross profit being balancing figure of Profit and Loss A/c = Rs. 3220,000
10.
Gross profit = 60% of sales i.e. Rs.3,220,000 = 60% of sales Or, sales = Rs 3220,000×100/60 = Rs= Rs. 5366,670
11.
Closing stock is 25% of sales i.e., 25% of Rs. 5,366,670 = Rs. 1,341,670
12.
Purchases being balancing figure of Trading A/c = Rs.2,613.33 thousand
13.
Debtors = Current Assets – Closing Stock – Cash at Bank = Rs.2,400,000 – Rs.1,341,670 – Rs.125,000 = Rs.933,30
14.
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
15.
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
:
[CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.19
