Financial ratio

Numerical Problems : Ratio Analysis

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Financial Ratio Analysis Numerical

A financial ratio is nothing but a parameter to measure the company’s financial status. Also, financial ratios compare the state of the company with different pieces of financial information.

Question No. 1 The following financial information are provided of a company:

Total Credit Sales of the YearRs. 20,00,000
Inventory at the end of the yearRs. 4,00,000
Gross Profit Margin30%
Account Receivable at the endRs. 1,00,000

Opening Balance of Inventory was less by Rs. 2,00,000 than the ending balance of inventory,

Find:

  1. Stock Turnover Ratio
  2. Average Collection Period

Solution:

Stock Turnover Ratio = (Cost of Goods Sold)/(Average Inventory)

Cost of Goods Sold Ratio = Sales (100%) – Gross Profit Margin =100%-30% = 70%

Where, Cost of Goods Sold = 70%* 20,00,000 = Rs.14,00,000

Average Inventory = (Opening Stock Closing Stock)/2 = ((4,00,000-2,00,000)+4,00,000)/2 = Rs. 3,00,000

Stock Turnover Ratio = 14,00,000/3,00,000 = 4.67

Average Collection Period = (Debtors*Days in Year)/Credit Sales

= (1,00,000*365)/20,00,000 = 18.25

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Question No. 2 The Balance Sheet of a company for the year ended 31st March, 2018 is given as below:

LiabilitiesAmount (Rs.)AssetsAmount (Rs.)
Authorised Capital (10,000 shares of Rs. 100 each)10,00,000Land and Building2,00,000
Issued Capital(5,000 shares of Rs. 100 each)5,00,000Plant and Machinery4,00,000
Debenture @ 12%1,00,000Inventory and Finished Goods1,00,000
Accounts Payable2,00,000Accounts Receivable2,50,000
Bills Payable1,00,000Cash at Bank50,000
Profit of last year40,000
Profit of current year60,000
Total10,00,000Total10,00,000

The Company issued 5,000 shares to purchase the following assets and liabilities of a company at an agreed value of Rs. 120 per share.

Plant and MachineryRs. 4,00,000
Account ReceivableRs. 1,00,000
InventoryRs. 1,00,000
Cash at BankRs. 50,000
Accounts Payable Rs. 1,00,000

Calculate 

  1. Interest Coverage Ratio of the company
  2. Current and Quick Ratio after the merger
  3. Debt-Equity Ratio of the company after and before the merger

Solution:

  1. Interest Coverage Ratio = Earning before interest and taxes/ Interest Charge)

= (60,000+12,000)/12,000 = 72,000/12,000 = 6 times

Working Note:
Earning before interest and taxes = Interest + Profit of current year
EBIT = 12,000 + 60,000 = Rs. 72,000
Interest = 1,00,000 × 12 % = Rs. 12,000
  1. Current and Quick Ratio after the Merger

Current Ratio = Current Assets/Current Liabilities = 6,50,000/4,00,000 = 1.625:1

Working Note:
Current Asset = Inventory + Accounts Receivable + Cash at Bank (Before and After Merger)                       
= 100000+250000+50000+100000+50000+100000                       
= Rs. 6,50,000
Current Liabilities = Accounts Payable + Bills Payable                             
= 200000+100000+100000                             
= Rs. 4,00,000

Quick Ratio = (Current Asset- Liabilities)/( Current Liabilities) = (6,50,000-1,00,000-1,00,000)/ 4,00,000 = 1.125:1

  1. Debt-Equity Ratio of the company after and before the merger

Debt-Equity Ratio= Long term Debt/ Shareholder’s Equity (Excluding Current Liabilities)……..A

Debt-Equity Ratio = Total Debt/ Shareholder’s Equity (Including Current Liabilities)………….B

Before Merger

Debt-Equity Ratio = 1,00,000/(500000+40000+60000) =0.167= 16.7%..A

= (1,00,000+2,00,000+1,00,000)/(5,00,000+40,000+60,000) = 0.667 = 66.7% B

After Merge

Debt-Equity Ratio = 1,00,000/(5,00,000+40,000+60,000+6,00,000) = 0.667 =66.7%……..A

= (1,00,000+2,00,000+1,00,000+1,00,000)/1,00,000 = 0.417 = 41.7%………B

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Question No. 3 The following is the financial information of a firm:

Total Assets ( Including Preliminary Expenses)Rs. 2,40,000
Opening InventoryRs. 80,000
Closing InventoryRs. 40,000
Days in a year360 days
Gross Profit ( 20% of Sales)Rs. 120,000
Average Collection Period36 days

Required:

  1. Amount of Sales
  2. Amount of Debtors
  3. Total Asset Turnover Ratio
  4. Inventory Turnover Ratio

Solution:

  1.  Amount of Sales

Gross Profit Margin = (Gross Profit/Sales)*100

or, 20 = (1,20,000/Sales)*100

or, Amount of Sales = 1,20,00000/20

Amount of Sales = Rs. 6,00,000

  1. Amount of Debtors

Average Collection Period = (Debtors* Days in Year)/Sales

or, 36 = (Debtors*360)/ 6,00,000

or, Debtors = (36*6,00,000)/360

or, Debtors = Rs. 60,000

  1. Total Asset Turnover

Total Asset Turnover = Sales/ Total Asset = 6,00,000/2,40,000 = 2.5 times

  1. Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory

or, Cost of Goods Sold = Sales – Gross Profit = Rs. 6,00,000- 1,20,000 =Rs. 4,80,000

Average Inventory = (Opening Inventory + Closing Inventory)/2 = Rs. (80,000+40,000)/2 = Rs.60,000

Inventory Turnover Ratio =Rs. 4,80,000/60,000 = 8 times

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Question No. 4 A company presents the following financial indicators:

Opening StockRs. 20,000
Closing StockRs. 10,000
PurchasesRs. 60,000
SalesRs. 1,05,000
Sales ReturnRs. 5,000
Carriage InwardRs. 5,000
Office and Administration ExpensesRs.5,000
Selling ExpensesRs. 3,000

Required:

  1. Stock Turnover Ratio
  2. Net Profit Margin
  3. Return of Assets, of value of Rs. 1,70,000

Solution:

Dr. Trading and P/L Ac Cr.

ParticularsAmount (Rs.)ParticularsAmount (Rs.)
To Opening Stock
To Purchase
To Carriage Inward
To Gross Profit		20,000
60,000
5,000
25,000		By Sale 1,05,000
Less: Sales Return 5,000

By Closing Stock		1,00,000


10,000
1,10,0001,10,000
To Office & Ad. Expenses
To Selling Expenses
To Net Profit		5,000
3,000
17,000		By Gross Profit25,000
25,00025,000

Stock Turnover Ratio = Cost of Goods Sold/ Average Inventory

Where, Cost of Goods Sold = Sales -Gross Profit = Rs. (1,00,000-25,000) = Rs. 75,000

Average Stock = (Opening Stock+ Closing Stock)/2 = (20,000+10,000)/2 = Rs. 15,000

Stock Turnover Ratio = 75,000/15,000 = 5 Times

Net Profit Margin = ( Net Profit After Tax/ Sales )*100

=(17,000/1,00,000)*100 =17%

Return on Asset = (Net Profit/Total Assets)*100%

= (17,000/1,70,000)*100 = 10%

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Question No. 5 A company provides the following information from its book:

Common Stock, Rs. 100 legal ValueRs. 2,00,000
Preference Stock of 10% at Rs. 50 parRs. 1,00,000
Net profit after taxRs. 45,000
Interest ExpensesRs. 12,000
Total assets for the current yearRs. 4,50,000
Market Price of common stock at end of current yearRs 4,50,000
Equity dividends were paid at the rate of Rs. 10 per share
Shareholders’ equity for current yearRs. 3,60,000

Required:

  1. Return on Assets
  2. Return on Common Shareholders’ Equity
  3. Earning per share
  4. Price earning ratio

Solution:

Return on Assets = Net Profit after tax/ Total Assets

= 45,000/4,50,000 = 0.10 = 10%

Return on Common Shareholders’ Equity=(Net Profit after tax-Preference Dividend)/Common Shareholders’ Equity

= (45,000-10,000)/(3,60,000-1,00,000)

= 35,000/2,60,000

= 0.1346

= 13.46%

Working Note:
Preference Dividend = 10% * 1,00,000 =Rs. 10,000
Common Shareholders’ Equity=Shareholders’ Equity-Preference Share Capital =Rs.( 3,60,000-1,00,000)=Rs. 2,60,000

Earning per share = (Net Profit after tax- Preference Dividend)/ Number of Equity Shares

= (45,000-10,000)/2,000 = Rs. 17.5

Price Earning Ratio = Market Value Per Share/ Earning Per Share

= 12.75/17.5 = 0.7286 = 72.86%

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Question No 6 A company has registered the following details in its books of accounts

Net SalesRs. 9,00,000
Inventory Turnover Ratio10 times
Account Receivable at the end of the periodRs. 2,00,000
Net Income After TaxRs. 50,000
Total Assets ValueRs. 7,50,000
Debenture Interest PaidRs. 25,000
Income Tax PaidRs. 30,000
Days in a year360 days
Share Capital
Preference Capital Share 8%Rs. 75,000
Equity share capital of Rs. 100 eachRs. 1,20,000

Required:

  1. Value of Inventory
  2. Average Collection Period
  3. Return on Assets

Solution:

Inventory Turnover Ratio = Sales/ Closing Stock

or, Closing Stock = Sales/ Inventory Turnover Ratio

or, Value of Inventory = 9,00,000/10 = Rs. 90,000

Average Collection Period = (Closing Debtors* Days in year)/(Credit Sales)

or ACP = ( 2,00,000*360)/9,00,000

= 80 Days

Return on Asset = ( Net Profit after tax + Interest )/ Total Assets

or, ROA =(50,000+ 25,000)/ 7,50,000

or, = 75,000/7,50,000 =0.10 = 10.00%

OR

Return on Asset = Net Profit After Tax / Total Assets

= 50,000/ 7,50,000

= 0.0667 = 6.67%

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Question No. 7 Following figures were extracted from the book of a company:

Amount of Current LiabilitiesRs. 25,000
Amount of Net ProfitRs. 2,55,000
Quick Ratio0.50 Times
Total AssetsRs. 20,00,000
Net Profit Margin15%
Non-Liquid Current AssetsRs. 25,000

Required:

  1. Amount of Quick Assets
  2. Total Assets Turnover Ratio
  3. Amount of Total Sales
  4. Current Ratio

Solution:

Amount of Quick Assets

Quick Ratio = Quick Assets/Current Liabilities

or, 0.50 = Quick Assets/ 25,000

or, Quick Assets = 25000*.50 = Rs. 12,500

Amount of Total Sales

Net Profit Margin = Net Profit / Sales

or, 0.15 = 2,55,000/ Sales

or, Sales = 2,55,000/0.15 =Rs.17,00,000

Total Assets Turnover Ratio = Sales / Total Assets

Or, Total Assets Turnover Ratio = 17,00,000/20,00,000 =0.85 Times

Current Ratio = Current Assets/ Current Liabilities

= (Non-Liquid Current Assets + Quick Assets)/Current Liabilities

= ( 25,000+12,500)/25,0000 =37,500/25,000 = 1.5:1

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Question No. 8 The Balance Sheet of Madan Mohan Limited as on 31-04-2022 was as follow :

ParticularsAmount (Rs.)ParticularsAmount (Rs.)
Equity Share Capital40,000Plant and Machinery24,000
Capital Reserve8,000Land and Buildings40,000
8% Loan on Mortgage32,000Furniture & Fixtures16,000
Creditors16,000Stock12,000
Bank Overdraft4,000Debtors12,000
TaxationInvestments (Short-term)4,000
Current4,000Cash in Hand12,000
Future4,000
Profit and Loss A/C12,000
Total1,20,000Total1,20,000

From the information above mentioned, compute:

  1. Current Ratio
  2. Quick Ratio
  3. Debt-Equity Ratio
  4. Proprietary Ratio

Solution:

Current Ratio = Current Assets/Current Liabilities

Current Assets = Stock + Debtors +Investment (short-term) + Cash in hands

or, = 12,000 + 12,000 + 4,000 + 12,0000

or, = Rs. 40,000

Current Liabilities = Creditors + Bank Overdraft + Provision for Taxation (Current and Future)

or, = 16,000 + 4,000 + 4,000 + 4,000

or, = Rs. 28,000

Current Ratio = 40,000/28000 = 1.43 : 1

Quick Ratio = Quick Assets/ Quick Liabilities

Quick Assets =Current Assets – Stock

or, = 40,000 -12,000 =Rs. 28,000

Quick Liabilities = Current Liabilities – ( Bank overdraft + Provision for Taxes (future))

or, = 28,000 – (4,000+4,000) = Rs. 20,000

Quick Ratio = 28,000/20,000 = 1.40 : 1

Debt-Equity Ratio = Long-term Debt (Liabilities)/Shareholders Fund

Long term Liabilities = Debentures + Long term Loans

or, LTB = Rs. 32,000

Shareholders Fund = Equity Share Capital + Reserves & Surplus + Preference Share

or, = 40,000 + 8,000 + 12,000 = Rs. 60,000

Debt Equity Ratio = 32,000 + 60,000 = 0.53 : 1

Proprietary Ratio = Shareholder’s Fund/ Total Assets

Shareholders Fund = Equity Share Capital + Reserves & Surplus + Preference Share

or, = 40,000 + 8,000 + 12,000 = Rs. 60,000

Total Assets = Total Assets – Fictitious Assets

or, = 1,20,000

Proprietary Ratio = 60,000/1,20,000 = 0.5 : 1

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