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Accounting Ratio Ts grewal solution volume-3(2023-2024):part-1
Question 1:
From the following compute Current Ratio:
Answer:
Current Assets = Trade Receivables + Pre-paid Expenses + Cash and Cash Equivalents + Marketable Securities + Inventories
= ` 3,60,000+ ` 80,000 + ` 1,00,000 + 1,00,000 + 1,60,000
= ` 8,00,000
Current Liabilities = Bills Payable + Sundry Creditors + Expenses Payable
= ` 40,000 + `2,00,000 + ` 1,60,000
= ` 4,00,000
Current ratio= Current assets/Current liabilities
=8,00,000/4,00,000
=2:1
Question 2:
Calculate Current Ratio from the following information:
Answer:
Total Assets = Fixed Tangible Assets + Non - Current Investments + Current Assets
20,00,000 = 10,00,000 + 6,00,000 + Current Assets
Current Assets = 20,00,000 – 16,00,000 = ` 4,00,000
Total Assets = Shareholder’s Funds + Non – Current Liabilities + Current Liabilities
20,00,000= 12,80,000 + 5,20,000 + Current Liabilities
Current Liabilities = 20,00,000 – 18,00,000 = ` 2,00,000
Page Current ratio= Current assets/Current liabilities=4,00,000/2,00,000=2:1
Question 3;
Current Assets `10,00,000, Inventories `5,00,000, Working capital `6,00,000, Calculate Current Ratio.
Answers;
Current liabilities = Current Assets- Working capital
Current liabilities = 10,00,000 - 6,00,000 =4,00,000
Current ratio= Current Assets/ Current liabilities
Current ratio= 10,00,000/4,00,000= 2.5:1
Question 4:
Trade Payables ` 50,000, Working Capital ` 9,00,000, Current Liabilities ` 3,00,000. Calculate Current Ratio.
Answer:
Working Capital = Current Assets - Current Liabilities
9,00,000 = Current Assets − 3,00,000
Current Assets = 9,00,000 + 3,00,000 = ` 12,00,000
Current Ratio=CurrentAssets/CurrentLiabilities=12,00,000/3,00,000=4:1
Question 5:
Working Capital `6,00,000, Total Debt `27,00,000, Non-Current liabilities `24,00,000. Calculate Current Ratio.
Answers;
Current liabilities=Total Debt- Non-Current liabilities
Current liabilities=27,00,000-24,00,000=3,00,000
Current Assets= Current liabilities+ Working Capital
Current Assets=3,00,000+6,00,000=9,00,000
Current ratio= Current Assets/ Current liabilities
Current ratio=9,00,000/3,00,000=3:1
Question 6:
Current Ratio is 2.5, Working Capital is ` 1,50,000. Calculate the amount of Current Assets and Current Liabilities.
Answer:
Current Ratio=Current Assets/Current Liabilities
2.5=Current Assets/Current Liabilities
Current Assets=2.5×Current Liabilities
Working Capital=Current Assets-Current Liabilities
=1,50,000=2.5
Current Assets-Current Liabilities
Current Liabilities=1,50,000/1.5
Current Liabilities= ` 1,00,000
Current Assets=2.5
Current Assets=Current Liabilities × Ratio of Current Assets
Current Assets=2.5×1,00,000
Current Assets= ` 2,50,000
Question 7:
Working Capital is `18,00,000; Trade Payables `1,80,000; and Other Current Liabilities are `4,20,000. Calculate Current Ratio.
Answer:
Question 8:
Working Capital `9,00,000; Total Debts (Liabilities) `19,50,000; Long-Term Debts `15,00,000. Calculate Current Ratio.
Answer:
Question 9:
Current Assets are ` 7,50,000 and Working Capital is ` 2,50,000. Calculate Current Ratio.
Answer:
Current Assets = ` 7,50,000
Working Capital = ` 2,50,000
Working Capital = Current Assets – Current Liabilities
2,50,000 = 7,50,000 – Current Liabilities
Current Liabilities = 7,50,000 – 2,50,000 = ` 5,00,000
Current ratio= Current assets/Current liabilities=7,50,000/5,00,000=1.5:1
Question 10:
A company had Current Assets of `4,50,000 and Current Liabilities of `2,00,000. Afterwards it purchased goods for `30,000 on credit. Calculate Current Ratio after the purchase.
Answer:
Before purchased goods
Current Assets of `4,50,000 and Current Liabilities of `2,00,000
Current Ratio after the purchase
Current Ratio= Current Assets+ purchased goods/ Current Liabilities+ purchased goods
Current Ratio= 4,50,000+ 30,000/ 2,00,000+30,000
Current Ratio= 4,80,000/ 2,30,000
Current Ratio= 2.09:1 = 2.09:1
Question 11:
Current Liabilities of a company were `1,75,000 and its Current Ratio was 2: 1. It paid `30,000 to a Creditor. Calculate Current Ratio after payment.
Answer:
Current Ratio= 2:1 before payment to Creditor
Current Liabilities = `1,75,000 before payment to Creditor
Current Assets = (`1,75,000×2)=3,50,000 before payment to Creditor
Current Ratio After payment to Creditor
=3,50,000-30,000/1,75,000-30,000
Current Ratio = 3,20,000/1,45,000
Current Ratio = 2.21/1
Question 12:
Ratio of Current Assets (`3,00,000) to Current Liabilities ( `2,00,000) is 1.5:1. The accountant of the firm is interested in maintaining a Current Ratio of 2:1 by paying off a part of the Current Liabilities. Compute amount of the Current Liabilities that should be paid so that the Current Ratio at the level of 2:1 may be maintained.
Answer:
Current ratio= Current assets/Current liabilities=1.5:1
The company is interested in maintaining the Current Ratio of 2:1 by paying off the liability.
Let the liability paid-off by the company = x
∴ New Current Assets = 3,00,000 − x
New Current Liabilities = 2,00,000 − x
New Current ratio= 3,00,000-x/2,00,000-x=2:1
Or 3,00,000-3x=4,00,000-2x
Or 1,00,000
Therefore, liability of `1,00,000 need to be paid-off by the company in order to maintain the Current Ratio of 2 : 1.
Question 13:
Ratio of Current Assets ( `8,75,000) to Current Liabilities ( `3,50,000) is 2.5:1. The firm wants to maintain Current Ratio of 2:1 by purchasing goods on credit. Compute amount of goods that should be purchased on credit.
Answer:
Current Assets = ` 8,75,000
Current Liabilities = ` 3,50,000
Current Ratio = 2.5:1
The business is interested to maintain its Current Ratio at 2:1 by purchasing goods on credit.
Let the amount of goods purchased on credit be ‘x’
Current Liabilities = ` 3,50,000 + x
Current Assets = ` 8,75,000 + x
Current ratio= Current assets/Current liabilities=8,75,,000+x/3,50,000+x=2/1
8,75,000 + x = 7,00,000 + 2x
8,75,000 – 7,00,000 = 2x – x
1,75,000 = x
Therefore, goods worth ` 1,75,000 must be purchased on credit to maintain the current ratio at 2:1.
Question 14:
A firm had Current Assets of `5,00,000. It paid Current Liabilities of `1,00,000 and the Current Ratio became 2:1. Determine Current Liabilities and Working Capital before and after the payment was made.
Answer:
Firm disposed off liabilities of ` 1,00,000 which results in decrease in current liabilities and current assets by the same amount.
After disposing liabilities:
Current Assets = ` 4,00,000 ( ` 5,00,000 – ` 1,00,000)
And, Let Current Liabilities be (x – ` 1,00,000)
Current ratio= Current assets/Current liabilities=4,00,000/x-1,00,000=2:1
4,00,000 = 2x – 2,00,000
6,00,000 = 2x
Therefore, x = 3,00,000
Current Liabilities after payment = x – ` 1,00,000 = ` 2,00,000
Working Capital after Payment = Current Assets – Current Liabilities
= ` 4,00,000 – ` 2,00,000 = ` 2,00,000
Current Assets before payment = ` 5,00,000
Current Liabilities before Payment = ` 3,00,000
Therefore, Working Capital Before Payment = Current Assets – Current Liabilities
= ` 5,00,000 – ` 3,00,000 = ` 2,00,000
Question 15:
State giving reason, whether the Current Ratio will improve or decline or will have no effect in each of the following transactions if Current Ratio is 2:1:
(a) Cash paid to Trade Payables.
(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Payment of final Dividend already declared.
(e) Purchase of Stock-in-Trade on credit.
(f) Bills Receivable endorsed to a Creditor dishonoured.
(g) Purchases of Stock-in-Trade for cash.
(h) Sale of Fixed Assets (Book Value of `50,000) for `45,000.
(i) Sale of Fixed Assets (Book Value of `50,000) for `60,000.
Answer:
Let’s assume Current Assets as ` 2,00,000 and Current Liabilities as ` 1,00,000
Current Ratio=Current Assets/Current Liabilities
Current Ratio=2,00,000/1,00,000=2:1
(a) Cash paid to Trade Payables (say ` 50,000)
Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)
(b) Bills Payable discharged (say ` 50,000)
Current Ratio = 2,00,000−50,000/1,00,000−50,000=3:1 (Improve)
(c) Bills Receivable endorsed to a creditor (say ` 50,000)
Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)
(d) Payment of final Dividend already declared (say ` 50,000)
Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)
(e) Purchase of Stock-in-Trade on credit (say ` 50,000)
Current Ratio =2,00,000+50,000/1,00,000+50,000=1.67:1 (Decline)
(f) Bills Receivable endorsed to a Creditor dishonoured (say ` 50,000)
Current Ratio =2,00,000+50,000/1,00,000+50,000=1.67:1 (Decline)
(g) Purchase of Stock-in-Trade for cash (say ` 50,000)
Current Ratio =2,00,000+50,000−50,000/1,00,000=2:1 (No effect)
(h) Sale of Fixed Assets (Book value of ` 50,000) for ` 45,000
Current Ratio=2,00,000+45,000/1,00,000=2.45:1 (Improve)
(i) Sale of Fixed Assets (Book value of ` 50,000) for ` 60,000
Current Ratio =2,00,000+60,000/1,00,000=2.6:1 (Improve)
Question 16:
From the following information, calculate Liquid Ratio:
Answer:
Quick Assets or Liquid Assets = Currents Assets – Inventories – Pre-paid Expenses
= ` 2,00,000 – ` 50,000 – ` 10,000 = ` 1,40,000
Current Liabilities = ` 70,000
Current ratio= liquid assets or quick assets/Current liabilities=1,40,000/70,000=2:1
Question 17:
Quick Assets `3,00,000; Inventory (Stock) `80,000; Prepaid Expenses `20,000; Working Capital `2,40,000. Calculate Current Ratio.
Answer:
Current Assets= Quick Assets +Inventory (Stock) +Prepaid Expenses
Current Assets= 3,00,000+ 80,000+20,000
Current Assets= 4,00,000
Current Liabilities = Current Assets- Working Capital
Current Liabilities = 4,00,000 - 2,40,000
Current Liabilities = 1,60,000
Question 18:
Current Assets `6,00,000; Inventories `1,20,000; Working Capital `5,04,000. Calculate Quick Ratio.
Answer:
Question 19:
Current Liabilities of a company are ` 6,00,000. Its Current Ratio is 3 : 1 and Liquid Ratio is 1 : 1. Calculate value of Inventory
Answer:
Current ratio= Quick assets/Current liabilities=3/1
Acid test ratio= Liquied assets/Current liabilities=1/1
Current Liabilities = 6,00,000
Current Assets = 3 × Current Liabilities
= 3 × 6,00,000 = 18,00,000
Liquid Assets = 1 × 6,00,000 = 6,00,000
Inventory = Current Assets − Liquid Assets
= 18,00,000 − 6,00,000 = 12,00,000
Question 20:
Moon Ltd. has a Current Ratio of 3.5 : 1 and Quick Ratio of 2 : 1. If the Inventories is ` 24,000; calculate total Current Liabilities and Current Assets.
Answer:
Current ratio= Current assets/Current liabilities=3.5/1
Quick ratio= Quick assets/Current liabilities=2/1
Let Current Liabilities be = x
Current Assets = 3.5 x
Quick Assets = 2 x
Stock = Current Assets − Quick Assets
24,000 = 3.5 x − 2 x
or, 24,000 = 1.5 x
x = 16,000
Current Liabilities = x = ` 16,000
Current Assets = 3.5 x = 3.5 × 16,000 = ` 56,000
Question 21:
Umesh Ltd. has Current Ratio of 4.5 : 1 and a Quick Ratio of 3 : 1. If its inventory is ` 36,000, find out its total Current Assets and total Current Liabilities.
Answer:
Current ratio= Current assets/Current liabilities=4.5/1
Quick ratio= Quick assets/Current liabilities=3/1
Inventory = 36,000
Let Current Liabilities be = x
Current Assets = 4.5x
Quick Assets = 3x
Stock = Current Assets − Quick Assets
36,000 = 4.5x − 3x
x = 24,000
Current Assets = 4.5x = 4.5 × 24,000 = 1,08,000
Liquid Assets= 3x = 3 × 24,000 = 72,000
Question 22:
Current Ratio 4; Liquid Ratio 2.5; Inventory ` 6,00,000. Calculate Current Liabilities, Current Assets and Liquid Assets.
Answer:
Current ratio= Current assets/Current liabilities=4/1
Liquid ratio= Liquid assets/Current liabilities=2.5/1
Inventory = 6,00,000
Let Current Liabilities be = x
Current Assets = 4x
Quick Assets = 2.5x
Stock = Current Assets − Quick Assets
6,00,000 = 4x − 2.5x
x = 4,00,000
Current Assets = 4x = 4 × 4,00,000 = 16,00,000
Liquid Assets = 2.5x = 2. 5× 4,00,000 = 10,00,000
Question 23:
Current Liabilities of a company are `1,50,000. Its Current Ratio is 3 : 1 and Acid Test Ratio (Liquid Ratio) is 1 : 1. Calculate values of Current Assets, Liquid Assets and Inventory.
Answer:
Current ratio= Current assets/Current liabilities=3/1
Acid test ratio= Liquid assets/Current liabilities=1/1
Current Liabilities = 1,50,000
Current Assets = 3 × Current Liabilities
= 3 × 1,50,000 = 4,50,000
Liquid Assets = 1 × 1,50,000 = 1,50,000
Inventory = Current Assets − Liquid Assets
= 4,50,000 − 1,50,000 = 3,00,000
Question 24:
Xolo Ltd.'s Liquidity Ratio is 2.5 : 1. Inventory is ` 6,00,000. Current Ratio is 4 : 1. Find out the Current Liabilities.
Answer:
Current ratio= Current assets/Current liabilities=4/1
Quick ratio= Quick assets/Current liabilities=2.5/1
Let the Current Liabilities be = x
Current Assets = 4x
Quick Assets = 2.5x
Stock = Current Assets − Quick Assets
6,00,000 = 4x − 2.5x
or, x = 4,00,000
Current Liabilities = x = ` 4,00,000
Question 25:
Current Assets of a company is are ` 5,00,000. Its Current Ratio is 2.5 : 1 and Quick Ratio is 1 : 1. Calculate value of Current Liabilities, Liquid Assets and Inventory.
Answer:
Current ratio= Current assets/Current liabilities=2.5/1
Quick ratio= Liquid assets/Current liabilities=1/1
Current Assets = 5,00,000
Current ratio= Current assets/Current liabilities=5,00,000/2.5=2,00,000
Liquid Assets = Current Liabilities × 1 = 2,00,000
Inventory = Current Assets − Quick Assets
= 5,00,000 − 2,00,000 = 3,00,000
Question 26:
Working Capital ` 3,60,000; Total :Debts ` 7,80,000; Long-term Debts ` 6,00,000; Inventories ` 1,80,000. Calculate Liquid Ratio.
Answer:
Current Liabilities = Total Debts − Long-term Debts
= 7,80,000 − 6,00,000 = 1,80,000
Current Assets = Current Liabilities + Working Capital
= 1,80,000 + 3,60,000 = 5,40,000
Quick Assets = Current Assets − Stock
= 5,40,000 − 1,80,000 = 3,60,000
Current ratio= Quick assets/Current liabilities=3,60,000/1,80,000=2:1
Question 27:
Quick Ratio of a company is 2:1. State giving reasons, which of the following transactions would (i) improve, (ii) reduce, (iii) Not change the Quick Ratio:
(a) Purchase of goods for cash; (b) Purchase of goods on credit; (c) Sale of goods (costing `20,000) for `20,000; (d) Sale of goods (costing `20,000) for `22,000; (e) Cash received from Trade Receivables.
Answer:
Quick Ratio = 2:1
Let Quick Assets be = ` 40,000
Current Liabilities = ` 20,000
(a) Purchase of goods for Cash- Reduce
Reason: This transaction will result decrease in cash and increases in stock. Liquid Asset will decrease due payment for goods purchased.
Example: Purchase of goods ` 10,000 for cash
Quick Assets = 40,000 − 10,000 (Cash) = ` 30,000
Quick ratio (After purchase of Assets)= (40,000-10,000)/20,000=1.5:1
(b) Purchase of goods on Credit- Reduce
Reason: Purchase of goods on credit will result increase in Current Liabilities and no change in Quick Assets.
Example: if Purchase of goods on Credit `10,000
Current Liabilities = 20,000 + 10,000 (Creditors) = `30,000
Quick ratio (After purchase of goods on credit)= 40,000/(20,000+10,000)=1.33:1
(c) Sale of goods for ` 20,000- Improve
Reason: Sale of goods will result in increase in Quick Assets by the amount of ` 40,000 in the form of either in cash or debtor. This transaction will result no change in current liabilities.
Quick ratio (After sale of goods)= (40,000+20,000)/20,000=3:1
(d) Sale of goods costing ` 20,000 of or ` 22,000- Improve
Reason: This transaction will increase the Quick Assets by ` 22,000 in the form of either in cash or debtors but no effect on the Current Liabilities.
Quick Assets after sale of goods = 40,000 + 22,000 = ` 62,000
Quick Ratio after sale of goods= (40,000+22,000)/20,000=3.1:1
(e) Cash received from debtors- No change
Reason: This transaction results increase in one quick asset in the form of cash and decrease in other quick asset in the form of debtor with equal amount. Therefore it result in no change in the total of Quick Assets.
Example: Cash received from debtors `10,000
Quick Assets = 40,000 + 10,000 (Cash) − 10,000 (Debtors) = 40,000
Quick ratio (After cash received from debtors)
= (40,000-10,000+10,000)/20,000=2:1
Question 28:
Quick Ratio of Z Ltd. is 1:1. State, with reason, which of the following transactions would (i) Increase (ii) Decrease or (ii) Not change the ratio.
(a) Included in the trade payables was bill payable of 3,000 which was met on maturity;
(b) Debentures of 50,000 were converted into equity shares.
(CBSE 2014)
Answer:
Question 29:
The Quick Ratio of a company is 0.8:1. State with reason, whether the following transactions will increase, decrease or not change the Quick Ratio:
(i) Purchase of loose tools for `2,000; (ii) Insurance premium paid in advance `500; (iii) Sale of goods on credit `3,000; (iv) Honoured a bills payable of `5,000 on maturity.
Answer:
Question 30:
Venus Limited's Inventory is `3,00,000. Total Liquid Assets are `12,00,000 and Quick Ratio is 2:1. Work out Current Ratio.
Answer:
Quick ratio = Quick Assets/Current assets=2:1
Quick Assets = 12,00,000
Current liabilities Quick assets/2=12,00,000/2=6,00,000
Current Assets = Quick Assets + Stock
= 12,00,000 + 3,00,000 = 15,00,000
Current ratio= Current assets / Current liabilities=15,00,000/6,00,000=2.5:1
Question 31:
Total Assets `11,00,000; Fixed Assets `5,00,000; Capital Employed `10,00,000. There were no Long-term Investments.
Calculate Current Ratio.
Answer:
Current Assets = Total Assets − Fixed Assets
Fixed Assets = 5,00,000
Total Assets = 11,00,000
∴ Current Assets = 11,00,000 − 5,00,000 = 6,00,000
Current Liabilities = Total Assets − Capital Employed
= 11,00,000 − 10,00,000 = 1,00,000
Current ratio= Current Assets/ Current liabilities=6,00,000/1,00,000=6:1
Question 32:
Capital Employed `20,00,000; Fixed Assets `14,00,000; Current Liabilities `2,00,000. There are no Long-term Investments. Calculate Current Ratio.
Answer:
Capital Employed = 20,00,000
Fixed Assets = 14,00,000
Current Assets = Capital Employed + Current Liabilities − Fixed Assets
= 20,00,000 + 2,00,000 − 14,00,000 = 8,00,000
Current ratio= Current Assets/ Current liabilities=8,00,000/2,00,000=4:1
Question 33:
From the following calculate: (i) Current Ratio; and (ii) Quick Ratio:
Answer:
(i) Current ratio
Current RatioCurrent Assets=Total Assets-Fixed Assets-Non-Current Investment - Long term Loans and Advances
=16,00,000-6,00,000-1,00,000-1,00,000= ` 8,00,000
Current Liabilities=Total Debt - Non-Current Liabilities
=12,00,000-4,00,000-4,00,000= ` 4,00,000
Current Ratio=Current AssetsCurrent Liabilities
=8,00,000/4,00,000=2:1
(ii) Quick Ratio
Quick Assets=Current Assets-Stock-Prepaid Expenses
=8,00,000-1,90,000−10,000= ` 6,00,000
Quick Ratio=Quick Assets/Current Liabilities
=6,00,000/4,00,000=1.5:1
Question 34:
Following is the Balance Sheet of Crescent Chemical Works Limited as at 31st March, 2021:
Compute Current Ratio and Liquid Ratio
Answer:
Current Assets = Inventory + Trade Receivables + Cash and Cash Equivalents
= 50,000 + 30,000 + 20,000 = 1,00,000
Current Liabilities = Short-term Borrowings + Trade Payables + Provision for Tax
= 3,000 + 13,000 + 4,000 = 20,000
Quick Assets = Trade Receivables + Cash and Cash Equivalents
= 30,000 + 20,000 = 50,000
Current ratio= Current Assets/ Current liabilities=1,00,000/20,000=5:1
Quick ratio= Liquid Assets/ Current liabilities=50,000/20,000=2.5:1
Comments:
1. Ideal Current Ratio for a business is considered to be 2:1. But in this case the ratio is quite high i.e. 5:1. This may be due to the following reasons:
(i) Blockage of Funds in Stock
(ii) High Amount outstanding from Debtors
(iii) Huge Cash and Bank Balances
2. Ideal Quick Ratio of a business is supposed to be 1:1. This implies that Liquid Assets should be equal to the Current Liabilities. But in the given case Quick Ratio is 2.5 : 1 which indicates that the Liquid Assets are quite high in comparison to the Current Liabilities.
Question 35:
Total Assets ` 2,60,000; Total Debts ` 1,80,000; Current Liabilities ` 20,000. Calculate Debt to Equity Ratio.
Answer:
Total Debts = 1,80,000
Current Liabilities = 20,000
Long-term Debts = Total Debts − Current Liabilities
= 1,80,000 − 20,000 = 1,60,000
Equity = Total Assets − Total Liabilities
= 2,60,000 − 1,80,000 = 80,000
Debt equity ratio= Long-term Debt /equity=1,60,000/80,000=2:1
Question 36:
Calculate Debt to Equity Ratio: Equity Share Capital ` 5,00,000; General Reserve ` 90,000; Accumulated Profits ` 50,000; 10% Debentures ` 1,30,000; Current Liabilities ` 1,00,000.
Answer:
Equity = Equity Share Capital + General Reserve + Accumulated Profits
= 5,00,000 + 90,000 + 50,000 = 6,40,000
Debt = 10% Debentures = 1,30,000
Debt equity ratio= Debt /equity=1,30,000/6,40,000=0.203:1
Question 37:
From the following information, calculate Debt to Equity Ratio:
Note: Either Number of shares or Price of par share is wrongly printed in the book, either of both must have been changed.
Answer:
Long-Term Debt = Debentures = ` 1,50,000
Shareholder’s Funds = Equity Share Capital + Preference Share Capital + General Reserve + Surplus
= ` 2,00,000 + ` 1,00,000 + ` 90,000 + `40,000 = ` 4,30,000
Debt-equity ratio= Long-Term Debt /Equity = 1,50,000/4,30,000 = 0.35:1
Question 38:
Capital Employed `8,00,000; Shareholders' Funds `2,00,000. Calculate Debt to Equity Ratio.
Answer:
Shareholders’ Funds = 2,00,000
Capital Employed = 8,00,000
Long- Term Debts = Capital Employed − Shareholders’ Funds
= 8,00,000 − 2,00,000 = 6,00,000
Debt equity ratio= Long-term Debt /equity=6,00,000/2,00,000=3:1
Question 39:
Balance Sheet had the following amounts as at 31st March, 2021:
Calculate ratios indicating the Long-term and the Short-term financial position of the company.
Answer:
(i) Debt-Equity Ratio is an indicator of Long-term financial health. It shows the proportion of Long-term loan in comparison of shareholders’ Funds.
Debt-Equity Ratio = Long Term Debts/Equity
Debt = Loan from IDBI @ 9% = 30,00,000
Equity = 10% Preference Share Capital + Equity Share Capital + Reserves & Surplus
= 5,00,000 + 15,00,000 + 4,00,000 = 24,00,000
Debt-Equity Ratio = 30,00,000/24,00,000 = 1.25:1
(ii) Current Ratio is an indicator of short-term financial portion. It shows the proportion of Current Assets in comparison of Current Liabilities.
Current Ratio = Current Assets/Current Liabilities
Current Assets = 12,00,000
Current Liabilities = 8,00,000
Current Ratio = 12,00,000/8,00,000 = 1.5:1
Note: In the above question, Securities Premium Reserve is not considered while computing Equity because it is already included in the amount of Reserves and Surplus.
Question 40:
Calculate Debt to Equity Ratio from the following information:
Answer:
Question 41:
When Debt to Equity Ratio is 2, state giving reason, whether this ratio will increase or decrease or will have no change in each of the following cases:
(i) Sale of Land (Book value `4,00,000) for `5,00,000; (ii) Issue of Equity Shares for the purchase of Plant and Machinery worth `10,00,000; (iii) Issue of Preference Shares for redemption of 13% Debentures, worth `10,00,000.
Answer:
Debt-Equity Ratio = 2:1
Let Long-term loan = ` 20,00,000
Shareholders’ Funds = ` 10,00,000
(i) Sale of Land (Book Value ` 4,00,000) for ` 5,00,000- Decrease
Reason: This transaction will result increase in Shareholders’ Funds by ` 1,00,000 as profit on sale of Land.
Shareholders’ Funds after adjusting profit on sale of land = 10,00,000 + 1,00,000 = ` 11,00,000
Debt equity ratio= 20,00,000/11,00,000=1.81:1
(ii) Issue of Equity share for the purchase of plant and Machinery worth ` 10,00,000- Decrease
Reason: This transaction will increase the amount of Shareholders Fund by ` 10,00,000 in the form of equity shares and have no effect on Long-term Loans.
Debt equity ratio= Long-term Debt /equity=20,00,000/20,00,000=1:1
(iii) Issue of preference Shares for redemption of 13% Debentures worth ` 10,00,000- Decrease
Reason: This transaction will lead to decrease in Long-term Loan by ` 10,00,000 in the form of redemption of debentures and increase in Shareholders’ Funds with the same amount in the form of Preference Shares.
Debt equity ratio= Long-term Debt /equity=20,00,000-10,00,000/10,00,000+10,00,000=5:1
Question 42:
Debt to Equity Ratio of a company is 0.5:1. Which of the following suggestions would increase, decrease or not change it:
Answer:
Debt Equity Ratio = 0.5:1
Let Long- term Loan be = ` 5,00,000
Shareholders’ Funds = ` 10,00,000
Debt equity ratio= Debt /equity=5,00,000/10,00,000=0.5:1
(i) Issue of Equity shares- Decrease
Reason: Issue of equity shares results in increase in Shareholders’ Funds in the form of equity shares but there will be no change in Long-term Loan.
Example: Issue of equity share ` 5,00,000
Shareholders’ Funds after issue of equity shares = 10,00,000 + 15,00,000
= ` 15,00,000
Debt equity ratio= Debt /equity=5,00,000/15,00,000=0.33:1
(ii) Cash received from Debtors- No Change
Reason: Cash received from debtors will increase one current asset in the form of cash and decrease other asset in the form of debtors. This transaction will have no effect on Long-term Loan and Shareholders’ Funds.
(iii) Redemption of Debentures- Decrease
Reason: This transaction will result decrease in Long-term Loans in the form of reduction in debtors and no change in Shareholders’ Funds.
Example: Redemption of Debentures `2,00,000
Long-term Loan = 5,00,000 − 2,00,000 = 3,00,000
Debt equity ratio after redemption of debenture = Debt /equity=3,00,000/10,00,000=0.3:1
(iv) Purchased of goods on Credit- No Change
Reason: Neither Long-term loan nor share holders’ funds will be affected by this transaction because purchase of goods results no change in Long-term Loan and Shareholders’ Funds.
Question 43:
Assuming That the Debt to Equity Ratio is 2 : 1, state giving reasons, which of the following transactions would (i) increase; (ii) Decrease; (iii) Not alter Debt to Equity Ratio:
(i) Issue of new shares for cash.
(ii) Conversion of debentures into equity shares
(iii) Sale of a fixed asset at profit.
(iv) Purchase of a fixed asset on long-term deferred payment basis.
(v) Payment to creditors.
Answer:
Let’s take Debt and Equity as ` 2,00,000 and ` 1,00,000
Debt to Equity Ratio=Debt/Equity
=2,00,000/1,00,000=2:1
(i) Issue of new shares for cash (say ` 50,000)
Debt to Equity Ratio =2,00,000/1,00,000+50,000=1.33:1(Decrease)
(ii) Conversion of debentures into equity shares (say ` 50,000)
Debt to Equity Ratio =2,00,000/1,00,000+50,000=1.33:1(Decrease)
(iii) Sale of a fixed asset at profit (say ` 50,000 profit)
Debt to Equity Ratio =2,00,000/1,00,000+50,000=1.33:1(Decrease)
(iv) Purchase of fixed asset on long term payment basis (say ` 50,000)
Debt to Equity Ratio =2,00,000+50,000/1,00,000=2.5:1(Increase)
(v) Payment to creditors (say ` 50,000)
Debt to Equity Ratio =2,00,000/1,00,000=2:1(No Change)
Question 44:
From the following Balance Sheet of ABC Ltd. as at 31st March, 2022, Calculate Debt to Equity Ratio:
Answer:
Long-term Debt = Debentures = 2,50,000
Equity = Equity Share Capital + 10% Preference Share Capital + Reserves and Surplus
= 5,00,000 + 5,00,000 + 2,40,000 = 12,40,000
Debt equity ratio= Long-term Debt /equity=2,50,000/12,40,000=0.2:1
Question 45:
Calculate Total Assets to Debt Ratio from the following information:
Long-term Debts ` 4,00,000; total Assets ` 7,70,000.
Answer:
Long-term Debts = 4,00,000
Total Assets = 7,70,000
Total assets to Debt ratio= Total assets / Debt =7,70,000/4,00,000=1.925:1
Question 46:
Shareholders' Funds ` 1,60,000; Total Debts ` 3,60,000; Current Liabilities ` 40,000.
Calculate Total Assets to Debt Ratio.
Answer:
Total Debts = 3,60,000
Shareholders’ Funds = 1,60,000
Current Liabilities = 40,000
Total Assets = Total Debts + Shareholders’ Funds
= 3,60,000 + 1,60,000 = 5,20,000
Long-term Debts = Total Debt − Current Liabilities
= 3,60,000 − 40,000 = 3,20,000
Total assets to Debt ratio= Total assets / Debt =5,20,000/3,20,000=13:8 or 1.625:1
Question 47:
Total Debt ` 60,00,000; Shareholders' Funds ` 10,00,000; Reserves and Surplus ` 2,50,000; Current Assets ` 25,00,000; Working Capital ` 5,00,000. Calculate Total Assets to Debt Ratio.
Answer:
Total Assets to Debt Ratio = Total Assets/Long Term Debt
Working Capital = Current Assets – Current Liabilities
5,00,000 = 25,00,000 – Current Liabilities
Current Liabilities = ` 20,00,000
Long Term Debts = Total Debt – Current Liabilities
= 60,00,000 – 20,00,000
= ` 40,00,000
Total Assets = Total Liabilities = Total Debt + Shareholders’ Funds
= 60,00,000 + 10,00,000
= ` 70,00,000
Total Assets to Debt Ratio = 70,00,000/40,00,000 = 7 : 4 or 1.75 : 1
Question 48:
Total Debt `15,00,000; Current Liabilities `5,00,000; Capital Employed `15,00,000. Calculate Total Assets to Debt Ratio.
Answer:
Total Assets to Debt Ratio = Total Assets/Long Term Debt
Capital Employed = Total Assets – Current Liabilities
15,00,000 = Total Assets – 5,00,000
Total Assets = ` 20,00,000
Long Term Debt = Total Debt – Current Liabilities
= 15,00,000 – 5,00,000
= ` 10,00,000
Total Assets to Debt Ratio = 20,00,000/10,00,000 = 2 : 1
Question 49:
Calculate Total Assets to Debt Ratio from the following information:
Answer:
Total Assets = ` 15,00,000
Current Liabilities = Creditors + Bills Payable + Bank Overdraft + Outstanding Expenses
= ` 90,000 + ` 60,000 + ` 50,000 + ` 20,000 = ` 2,20,000
Long-Term Debt = Total Debt – Current Liabilities
= ` 12,00,000 – ` 2,20,000 = ` 9,80,000
Total assets to Debt ratio= Total assets / Long-Term Debt =15,00,000/9,80,000=1.53:1
Question 50:
Total Debt `12,00,000; Shareholders' Funds `2,00,000; Reserves and Surplus `50,000; Current Assets `5,00,000; Working Capital `1,00,000. Calculate Total Assets to Debt Ratio.
Answer:
Question 51:
Calculate ‘Total Assets to Debt ratio’ from the following information;
Answers;
Total asset to debt ratio= total asset / debt
= 9,00,000/ 3,00,000
=3:1
Working note:
Wn-1.
Total Assets = Total Liabilities = Equity Share Capital + Long-term Borrowings + Surplus, i.e., Balance in Statement of Profit and Loss + General Reserve + Current Liabilities + Long-term Provisions = 9,00,000
Wn-2
Debt = Long-term Borrowings + Long-term Provisions = 3,00,000.
Question 52:
From the following information, calculate Total Assets to Debt Ratio:
Answer:
Question 53:
From the following information, calculate Proprietary Ratio:
Answer:
Proprietary Ratio=Shareholders' Funds
Total AssetsProprietary Ratio=Share Capital+Reserves and SurplusNon-Current Assets+Current
Assets to Proprietary Ratio =3,00,000+1,80,000/13,20,000+6,00,000=0.25:1 or 25%
Question 54
From the following information, calculate Proprietary Ratio:
Answer:
Proprietary Ratio= Shareholders’ fund/Total Assets
Proprietary Ratio= 5,25,000×100/7,50,000=70%
Total Assets = Fixed Assets + Current Assets + Investments
Total Assets = 3,75,000 + 1,50,000 + 2,25,000 = 7,50,000
Shareholders’ Funds = Equity Share Capital + Preference Share Capital + Reserves and Surplus
= 3,00,000 + 1,50,000 + 75,000 = 5,25,000
Question 55:
Calculate Proprietary Ratio from the following:
Answer:
Total Assets = Fixed Assets + Trade Investments + Current Assets
= 7,00,000 + 2,45,000 + 3,00,000 = 12,45,000
Shareholders’ Funds = Equity Share Capital + 10% Preference Share Capital + Reserves and Surplus
= 4,50,000 + 3,20,000 + 65,000 = 8,35,000
Proprietary Ratio= Shareholders’ fund/Total Assets=8,35,000/12,45,000=0.67:1
Question 56:
Calculate Proprietary Ratio, if Total Assets to Debt Ratio is 2: 1. Debt is `5,00,000. Equity Shares Capital is 0.5 times of debt. Preference Shares Capital is 25% of equity share capital. Net profit before tax is `10,00,000 and rate of tax is 40%.
(CBSE Sample Paper 2020)
Answer:
Total Assets to Debt Ratio is 2: 1
Debt = `5,00,000
Total Assets = 10,00,000 (5,00,000×2)
Equity Shares Capital is 0.5 times of debt
Equity Shares Capital is(0.5×5,00,000)=2,50,000
Preference Shares Capital is 25% of equity share capital
2,50,000×25/100=62,500
Total Share Capital = Equity Shares Capital+ Preference Shares Capital
Total Share Capital = 2,50,000+62,500
Total Share Capital = 3,12,500
Rate of tax is 40%
Tax is 4,00,000 (40% of 10,00,000)
Surplus (Net Profit after Tax)=10,00,000-4,00,000
Surplus (Net Profit after Tax)=6,00,000
Share Holders’ Fund= Total Share Capital+ Surplus
Share Holders’ Fund= 3,12,500+ 6,00,000
Share Holders’ Fund= 3,12,500+ 6,00,000
Share Holders’ Fund= 9,12,500
Proprietary Ratio= Share Holders’ Fund/Total Assets
Proprietary Ratio= 9,12,500/10,00,000
Proprietary Ratio 0.912: 1 or 91.2%.
Question 57:
State with reason, whether the Proprietary Ratio will improve, decline or will not change because of the following transactions if Proprietary Ratio is 0.8 : 1:
(i) Obtained a loan of ` 5,00,000 from State Bank of India payable after five years.
(ii) Purchased machinery of ` 2,00,000 by cheque.
(iii) Redeemed 7% Redeemable Preference Shares ` 3,00,000.
(iv) Issued equity shares to the vendor of building purchased for ` 7,00,000.
(v) Redeemed 10% redeemable debentures of ` 6,00,000.
Answer:
Question 58:
From the following information, calculate:
(a) Proprietary Ratio
(b) Debt to Equity Ratio; and
(c) Total Assets to Debt Ratio.
Answer:
(a) Proprietary Ratio
Proprietary Ratio= Share Holders’ Fund/Total Assets
Proprietary Ratio =20,00,000×100/80,00,000
Proprietary Ratio =25%
(b) Debt to Equity Ratio
Debt to Equity Ratio= Debt/Equity
Debt to Equity Ratio= 40,00,000/20,00,000
Debt to Equity Ratio= 2/1=2:1
(c) Total Assets to Debt Ratio
Total Assets to Debt Ratio= Total Assets/Debt
Total Assets to Debt Ratio= 80,00,000/40,00,000
Total Assets to Debt Ratio= 2/1=2:1
Working Notes:
1. Total Assets=Current Assets+ Non-Current Assets
Total Assets=40,00,000+40,00,000
Total Assets=80,00,000
2. Share holders’ fund= Total Assets - Current Liabilities - Long-term Provisions - Long-term Borrowings
Share holders’ fund=80,00,000-20,00,000-25,00,000-15,00,000
Share holders’ fund=20,00,000
Question 59:
From the following information, calculate:
Answer;
Proprietary ratio=shareholders’ fund/total asset × 100
Proprietary ratio=3,00,000/21,00,000×100=14.29%
Total asset= capital employed + current liability
21,00,000= 15,00,000 + 6,00,000
Current liability= current assets - working capital
6,00,000= 7,50,000 -1,50,000
Shareholders' fund= capital employed- non-current liabilities
3,00,000= 15,00,000- 12,00,000
Debt = total debts- current liabilities
12,00,000 =18,00,000- 6,00,000
(b) Debt equity ratio
Debt to equity ratio= debt/equity
Debt to equity ratio =12,00,000/3,00,000
Debt to equity ratio =4/1
(c)
Total asset to debt ratio= total asset/ Debt
Total asset to debt ratio=21,00,000/12,00,000
Total asset to debt ratio=1.75:1
Question 60:
If Net Profit before Interest and Tax is `10,00,000 and interest on Long-term Funds is `2,00,000, find Interest Coverage Ratio.
Answer:
Net Profit before Interest and Tax = 10,00,000
Interest = 2,00,000
Interest Coverage Ratio= Net Profit before Interest and Tax/Interest
Interest Coverage Ratio =10,00,000/2,00,000
Interest Coverage Ratio = 5 times
Question 61:
From the following information, calculate Interest Coverage Ratio: Profit after Tax `4,25,000; Tax `75,000; Interest on Long-term Funds `1,25,000.
Answer:
Profit before Interest and Tax = Profit after Tax + Tax +Interest
Profit before Interest and Tax = 4,25,000 + 75,000 + 1,25,000
Profit before Interest and Tax = 6,25,000
Interest Coverage Ratio= Net Profit before Interest and Tax/Interest
Interest Coverage Ratio =6,25,000/1,25,000=5 times
Question 62;
From the following detail, calculate Interest Coverage ratio;
Answers;
Interest coverage ratio= net profit before interest and tax/ interest on long term debt
Interest coverage ratio =11,20,000/1,20,000
Interest coverage ratio =9.33
Working notes;
Wn-1
Net profit after tax=7,00,000
Tax rate 30%
Net profit after tax = 70%
Net profit before tax=7,00,000 × 100/70
Net profit before tax= 10,00,000
Wn-2
Interest on loan term borrowings=20,00,000×6/100=1,20,000
Net profit before Interest and tax= 10,00,000+1,20,000=11,20,000
Question 63;
From the following information, calculate Interest Coverage ratio;
Net profit after interest and Tax `1,20,000; Rate of Income tax;40%; 15%; Debentures `1,00,000; 12% Mortgage loan `1,00,000.
Answers;
Interest coverage ratio = net profit before interest and tax / interest on long term debt
Interest coverage ratio = 2,27,000/ 27,000
Interest coverage ratio = 8.41 times
Working notes;
Wn-1
Net profit after interest and tax 1,20,000
Rate of income tax 40%
Net profit before tax= 60%
Net profit before tax=1,20,000×100/60=2,00,000
Wn-2
Interest on long term borrowings= 27,000
Interest on debenture= 1,00,000 × 15 / 100= 15,000
Interest on 12% Mortgage loan= 1,00,000 ×12 / 100= 12,000
Net profit before interest and tax= 2,00,000+ 27,000 =2,27,000
Question 64:
From the following information, calculate Interest Coverage Ratio:
Answer:
Interest on 10% debentures=50,000×10/1000=5,000
Profit before Interest and Tax = Profit after Tax + Tax + Interest on Debentures + Interest on Long-term Loans from Bank
Profit before Interest and Tax = 75,000 + 9,000 + 5,000 + 5,000
Profit before Interest and Tax = 94,000
Total Interest Amount = Interest on Debentures + Interest on Long-term loans from Bank
Total Interest Amount = 5,000 + 5,000
Total Interest Amount = 10,000
Interest Coverage Ratio = Net Profit before Interest and Tax/Interest
Interest Coverage Ratio = 94,000/10,000
Interest Coverage Ratio = 9.4 times
Question 65:
From the following details, calculate Inventory Turnover Ratio:
Answer:
Question 66:
Cost of Revenue from Operations (Cost of Goods Sold) `5,00,000; Purchases `5,50,000; Opening Inventory `1,00,000.
Calculate Inventory Turnover Ratio.
Answer:
Cost of Goods Sold = Opening Inventory + Purchases − Closing Inventory
5,00,000 = 1,00,000 + 5,50,000 − Closing Inventory
Closing Inventory = 1,50,000
Question 67:
Calculate Inventory Turnover Ratio from the following information:
Opening Inventory is `50,000; Purchases `3,90,000; Revenue from Operations, i.e., Net Sales `6,00,000; Gross Profit Ratio 30%.
Answer:
Cost of Goods Sold = Net Sales – Gross Profit
= ` 6,00,000 – 30% of ` 6,00,000
= ` 6,00,000 – ` 1,80,000 = ` 4,20,000
Cost of Goods Sold = Opening Inventory + Purchases – Closing Inventory
` 4,20,000 = ` 50,000 + ` 3,90,000 – Closing Inventory
Closing Inventory = ` 50,000 + ` 3,90,000 – ` 4,20,000
= ` 20,000
Question 68
From the following information, calculate Inventory Turnover Ratio:
Answers:
Inventory turnover ratio= Cost of revenue from operation/ average inventory
Inventory turnover ratio= 6,50,000 / 1,30,000 = 5 Times
Question 69:
:
Calculate Inventory Turnover Ratio from the following:
Answer:
Sales = 6,40,000
Gross Profit = 25% on Sales
Gross profit=6,40,000×25/100=1,60,000
Cost of Goods Sold = Total Sales − Gross Profit
Cost of Goods Sold = 6,40,000 – 1,60,000
Cost of Goods Sold = 4,80,000
Question 70:
From the following information, calculate Inventory Turnover Ratio:
Answer:
Question 71:
Revenue from Operations `4,00,000; Gross Profit `1,00,000; Closing Inventory `1,20,000; Excess of Closing Inventory over Opening Inventory `40,000. Calculate Inventory Turnover Ratio.
Answer:
Average Inventory= 80,000+1,20,000/2
Average Inventory= 1,00,000
Cost of Goods Sold = Revenue - Gross Profit
Cost of Goods Sold = 4,00,000 - 1,00,000=3,00,000
Inventory turnover Ratio= Cost of Goods Sold/Average inventory
Inventory turnover Ratio=3,00,000/1,00,000
Inventory turnover Ratio= 3 Times
Question 72:
From the following data, calculate Inventory Turnover Ratio:
Total Sales `10,00,000; Sales Return `1,00,000; Gross Profit `1,80,000; Closing Inventory `2,00,000; Excess of Closing Inventory over Opening Inventory `20,000.
Answer:
Cost of Goods Sold = Net Sales (Sales – Sales Return) – Gross Profit
= ` 10,00,000 – ` 1,00,000 – ` 1,80,000
= ` 7,20,000
Closing Inventory = ` 2,00,000
Closing Inventory is ` 40,000 more than the Opening Inventory
Therefore, Opening Inventory = ` 1,60,000 ( `2,00,000 – ` 40,000)
Question 73:
`2,00,000 is the Cost of Revenue from Operations (Cost of Goods Sold), during the year. If Inventory Turnover Ratio is 8 times, calculate inventories at the end of the year. Inventories at the end is 1.5 times that of in the beginning.
Answer:
Let Opening Inventory = x
Closing Inventory = 1.5 × x = 1.5 x
Opening Inventory = x = ` 20,000
Closing Inventory = 1.5 x = 20,000 × 1.5 = ` 30,000
Question 74:
From the following information obtained from the books of Kundan Ltd., calculate the Inventory Turnover Ratio for the years 2015-16 and 2016-17:
In the year 2015-16, inventory increased by `2,00,000. (Delhi and Al 2018)
Answer:
It is assumed
Cost =100
Profit=25
Revenue=125
Gross Profit=50,00,000×25/125=10,00,000
Cost of goods sold=50,00,000-10,00,000 =40,00,000
Opening Inventory=7,00,000-2,00,000=5,00,000
Average Inventory=5,00,000+7,00,000/2=6,00,000
Inventory turnover Ratio( 2015-16)= 40,00,000/6,00,000
Inventory turnover Ratio( 2015-16)= 6.67 Time
Gross Profit=75,00,000×25/125=15,00,000
Cost of goods sold=75,00,000-15,00,000 =60,00,000
Average Inventory=7,00,000+17,00,000/2=12,00,000
Inventory turnover Ratio ( 2016-17)= 60,00,000/12,00,000
Inventory turnover Ratio ( 2016-17)= 5 Times
Question 75:
Calculate Inventory Turnover Ratio from the following information:
Opening Inventory ` 40,000; Purchases ` 3,20,000; and Closing Inventory ` 1,20,000.
State, giving reason, which of the following transactions would (i) increase, (ii) decrease, (iii) neither increase nor decrease the Inventory Turnover Ratio:
(a) Sale of goods for ` 40,000 (Cost ` 32,000).
(b) increase in the value of Closing Inventory by ` 40,000.
(c) Goods purchased for ` 80,000.
(d) Purchases Return ` 20,000.
(e) goods costing ` 10,000 withdrawn for personal use.
(f) Goods costing ` 20,000 distributed as free samples.
Answer:
Cost of Goods Sold = Opening Stock + Purchases + Closing Stock
= 40,000 + 3,20,000 − 1,20,000 = 2,40,000
(a) Sale of goods for ` 40,000 (Cost ` 32,000)- Increase
Reason: This transaction will decrease stock at the end (closing stock). Decrease in closing stock will result increase the proportion of Cost of Goods Sold and decrease in Average Stock
(b) Increase in value of Closing Stock by 40,000- Decrease
Reason: Increase in Closing Stock results decrease in Cost of Goods Sold and increase in Average Stock.
(c) Goods purchased for ` 80,000- Decrease
Reason: This Transaction increases the amount of Closing Stock. Increase in Closing Stock reduces the proportion of Cost of Goods Sold and Increase in Average Stock.
(d) Purchase Return ` 20,000- Increase
Reason: It will result decrease in Cost of Goods Sold and Average Stock with same amount.
(e) Goods costing ` 10,000 withdrawn for personal use- Increase
Reason: Drawing of goods will decrease the amount of Closing Stock and increase in Cost of Goods Sold.
(f) Goods costing ` 20,000 distributed as free sample- Increase
Reason: Goods distributed as free sample reduces Closing Stock. Reduction in Closing Stock will result increase in Cost of Goods Sold and decrease in Average Stock.
Question 76:
Following figures have been extracted from Shivalika Mills Ltd.:
Inventory in the beginning of the year ` 60,000.
Inventory at the end of the year ` 1,00,000.
Inventory Turnover Ratio 8 times.
Selling price 25% above cost.
Compute amount of Gross Profit and Revenue from Operations (Net Sales).
Answer:
Average Inventory= Opening Inventory +Closing Inventory/2
=60,000+1,00,000/2=80,000
Inventory tunover ratio= Cost of goods sold / Average Stock
8 = Cost of goods sold / 80,000
Cost of goods sold=6,40,000
Gross Profit = 25% on Cost
Gross profit =6,40,000×25/100=1,60,000
Sales = Cost of Goods Sold + Gross Profit
= 6,40,000 + 1,60,000 = 8,00,000
Question 77:
From the following Information, calculate Inventory Turnover Ratio:
Credit Revenue from Operations ` 6,00,000; Cash Revenue from Operations ` 2,00,000, Gross Profit 25% of Cost, Closing Inventory was 3 times the Opening Inventory. Opening Inventory was 10% of Cost of Revenue from Operations.
Answer:
Average Inventory=60,000+1,80,000/2= ` 1,20,000
Opening Inventory=6,00,000×10%= ` 60,000
Closing Inventory=60,000×3= ` 1,80,000
Cost of Revenue from Operations=Revenue from Operations-Gross Profit
=8,00,000-2,00,000= ` 6,00,000
Inventory Turnover Ratio=Cost of Revenue from OperationsAverage Inventory
=6,00,000/1,20,000=5 Times
Question 78:
From the following information, calculate value of Opening Inventory:
Goods are sold at a profit of 25% on cost.
Answer:
Let Cost of Goods Sold be = x
Gross profit=X×25/100=25X/100
Cost of goods sold = Sales – Gross profit
Or X=4,80,000-25X/100
Or X+25X/100=4,80,000
Or 125X/100=4,80,000
X=4,80,000×100/125=3,84,000
Cost of Goods Sold = x = ` 3,84,000
Cost of Goods Sold = Opening Inventory (Stock) + Purchases − Closing Inventory (Stock)
3,84,000 = Opening Inventory + 3,60,000 − 68,000
Opening Inventory = 3,84,000 − 2,92,000 = ` 92,000
Question 79:
From the following information, determine Opening and Closing inventories:
Inventory Turnover Ratio 5 Times, Total sales `2,00,000, Gross Profit Ratio 25%. Closing Inventory is more by `4,000 than the Opening Inventory.
Answer:
Sales = 2,00,000
Gross Profit = 25% on Sales
Gross Profit = 2,00,000×25/100=50,000
Cost of Goods Sold = Total Sales − Gross Profit
= 2,00,000 − 50,000 = 1,50,000
Inventory tunover ratio= Cost of goods sold / Average Stock
5=1,50,000/ Inventory tunover
Inventory tunover=30,000
Let Opening Inventory = x
Closing Inventory = x + 4,000
30,000=X+X+4,000/2
Or, 60,000=2X+4,000
Or, X=28,000
Opening Inventory = x = ` 28,000
Closing Inventory = x + 4,000 = 28,000 + 4,000 = ` 32,000
Question 80:
Inventory Turnover Ratio 5 times; Cost of Revenue from Operations (Cost of Goods Sold) ` 18,90,000. Calculate Opening Inventory and Closing Inventory if Inventory at the end is 2.5 times more than that in the beginning.
Answer:
Inventory tunover ratio= Cost of goods sold / Average Stock
5=18,90,000/Average Inventory
Average Inventory=3,78,000
Let Opening Inventory = x
Closing Inventory = 2.5x + x = 3.5 x
Average Inventory = Opening Inventory + Closing Inventory /2
3,78,000=X+3.5X/2
Or, 4.5X =7,56,000
Or, X =1,68,000
Opening Inventory = x = ` 1,68,000
Closing Inventory = 3.5 x = 3.5 × 1,68,000 = ` 5,88,000