Class 12 accountancy part 2 Book chapter 5 exercise solutions: Accountancy Class 12 part 2 Book Chapter 5 questions and answers
| Textbook | NCERT |
| Class | Class 12 |
| Subject | Accountancy |
| Chapter | part 2 Chapter 5 |
| Chapter Name | Accounting ratios class 12 solutions |
| Category | Ncert Solutions |
| Medium | English |
Are you looking for Ncert Solutions solutions for class 12 accountancy chapter 5? Now you can download Class 12 accountancy chapter 5 exercise solutions pdf from here.
Short Answer Questions
Question 1: What do you mean by Ratio Analysis?
Answer 1: Ratio Analysis is a financial tool used to evaluate the performance and financial health of a company by analyzing relationships between various financial statement items. It involves calculating and interpreting financial ratios that provide insights into aspects such as profitability, liquidity, efficiency, and solvency.
By comparing these ratios over time or against industry benchmarks, stakeholders can assess the company’s operational effectiveness, its ability to meet short-term and long-term obligations, and overall financial stability. Ratio analysis is commonly used by investors, creditors, and management to make informed decisions, identify trends, and strategize for future improvements.
Question 2: What are various types of ratios?
Answer 2: Accounting ratios are classified in two ways Categories as follows:
(i) Traditional Classification : Traditional ratios are those accounting ratios which are based on the Financial Statement like Trading and Profit and Loss Account and Balance Sheet. On the basis of accounts of financial statements, the Traditional Classification is further divided into the following categories
- (a) Income Statement Ratios: like Gross Profit Ratio, etc.
- (b) Balance Sheet Ratios: like Current Ratio, Debt Equity Ratio, etc.
- (c) Composite Ratios: like Debtors Turnover Ratio, etc.
(ii) Functional Classification : This classification of ratios is based on the functional need and the purpose for calculating ratio. The functional ratios are further divided into the following categories
- (a) Liquidity Ratio: These ratios are calculated to determine short term solvency.
- (b) Solvency Ratio: These ratios are calculated to determine long term solvency.
- (c) Activity Ratio: These ratios are calculated for measuring the operational efficiency and efficacy of the operations. These ratios relate to sales or cost of goods sold.
- (d) Profitability Ratio: These ratios are calculated to assess the profitability conditions of the firm.
Question 3: What relationships will be established to study:
a. Inventory turnover
b. Trade receivables turnover
c. Trade payables turnover
d. Working capital turnover
Answer 3: a. Inventory Turnover
Formula:
Inventory Turnover Ratio = \(\frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}\)
Relationship Established: It measures how efficiently a company manages its inventory by comparing the cost of goods sold to the average inventory held during the period. A higher ratio indicates efficient inventory management and faster conversion into sales.
b. Trade Receivables Turnover
Formula:
Trade Receivables Turnover Ratio = \(\frac{\text{Net Credit Sales}}{\text{Average Trade Receivables}}\)
Relationship Established: This ratio evaluates how effectively a company collects credit from its customers. A higher ratio implies prompt collection of receivables and better cash flow management.
c. Trade Payables Turnover
Formula:
Trade Payables Turnover Ratio = \(\frac{\text{Net Credit Purchases}}{\text{Average Trade Payables}}\)
Relationship Established: It measures the speed at which a company pays its suppliers. A lower ratio could indicate delayed payments, while a higher ratio suggests timely payment, maintaining supplier relationships.
d. Working Capital Turnover
Formula:
Working Capital Turnover Ratio = \(\frac{\text{Net Sales}}{\text{Working Capital}}\)
Relationship Established: This ratio determines how efficiently a company uses its working capital (current assets – current liabilities) to generate sales. A higher ratio shows efficient utilization of resources, while a lower ratio could indicate underutilization or liquidity issues.
Question 4: The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. What are the ratios used for this purpose?
Answer 4: The liquidity of a business firm is measured by its ability to pay its long term obligations. The long term obligations include payments of principal amount on the due date and payments of interests on the regular basis. Long term solvency of any business can be calculated on the basis of the following ratios.
a. Debt-Equity Ratio– It depicts the relationship between the borrowed fund and owner’s funds. The lower the debt-equity ratio higher will be the degree of security to the lenders. A low debt-equity ratio implies that the company can easily meet its long term obligations.
Debt – Equity Ratio = \(\frac{\text{Long term Debt}}{\text{Equity / share holders Fund}}\)
b. Total Assets to Debt Ratio- It shows the relationship between the total assets and the long term loans. A high Total Assets to Debt Ratio implies that more assets are financed by the owner’s fund and the company can easily meet its long-term obligations. Thus, a higher ratio implies more security to the lenders.
Total Assets to Debt Ratio = \(\frac{\text{Total Assets}}{\text{Long term Debt}}\)
c. Interest Coverage Ratio– This ratio depicts the relationship between amount of profit utilised for paying interest and amount of interest payable. A high Interest Coverage Ratio implies that the company can easily meet all its interest obligations out of its profit.
Interest Coverage Ratio = \(\frac{\text{Net Profit before Interest and Tax}}{\text{Interest on Long-term Loans}}\)
Question 5: The average age of inventory is viewed as the average length of time inventory is held by the firm for which explain with reasons.
Answer 5: Inventory Turnover Ratio: This ratio is computed to determine the efficiency with which the stock is used. This ratio is based on the relationship between cost of goods sold and average stock kept during the year.
Inventory/Stock Turnover Ratio = \(\frac{\text{Cost of goods Sold}}{\text{Average Stock}}\)
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses – Closing Stock
Or Cost of Goods sold = Net Sales – Gross Profit
Average Stock = \(\frac{\text{Opening Stock + Closing Stock}}{\text{2}}\)
Average Age of Inventory = \(\frac{\text{Days in a year}}{\text{Inventory Turnover Ratio}}\)
It shows the rate with which the stock is turned into sales or the number of times the stock in turned into sales during the year. In other words, this ratio reveals the average length of time for which the inventory is held by the firm.
Long Answer Questions
Question 1: What are liquidity ratios? Discuss the importance of current and liquid ratio.
Answer 1: Liquidity ratios are calculated to determine the short-term solvency of a business, i.e. the ability of the business to pay back its current dues. Liquidity means easy conversion of assets into cash without any significant loss and delay.
Short-term creditors are interested in ascertaining liquidity ratios for timely payment of their debts. Liquidity ratio includes:
- 1. Current Ratio
- 2. Liquid Ratio or Quick Ratio
1. Current Ratio– It explains the relationship between current assets and current liabilities. It is calculated as: current ratio = \(\frac{\text{current assets}}{\text{current liablities}}\)
Currents Assets are those assets that can be easily converted into cash within a short period of time like, cash in hand, cash at bank, marketable securities, debtors, stock, bills receivables, prepaid expenses. etc.
Current Liabilities are those liabilities that are to be repaid within a year like, bank overdraft, bills payables, Short-term creditors, provision for tax, outstanding expenses etc.
Importance of Current Ratio
It helps in assessing the firm’s ability to meet its current liabilities on time. The excess of current assets over current liabilities provide a sense of safety and security to the creditors. The ideal ratio of current assets over current liabilities is 2:1. It means that the firm has sufficient funds to meet its current liabilities. A higher ratio indicates poor investment policies of management and low ratio indicates shortage of working capital and lack of liquidity.
2. Liquid Ratio– It explains the relationship between liquid assets and current liabilities. It indicates whether a firm has sufficient funds to pay its current liabilities immediately. It is calculated as:
Liquid ratio = \(\frac{\text{Liquid assets}}{\text{current liablities}}\)
Liquid assets =current assets – stock – prepaid expenses
Importance of Liquid Ratio
It helps in determining whether a firm has sufficient funds if it has to pay all its current liabilities immediately.
It does not include stock, since it takes comparatively more time to convert the stock into cash. Further prepaid expenses are also not included in liquid assets, since these cannot be converted into cash. The ideal Liquidity Ratio is considered to be 1:1. It means that the firm has a rupee in form of liquid assets for every rupee of current liabilities.
Question 2: How would you study the Solvency position of the firm?
Answer 2: A firm’s solvency position can be best studied with the help of a group of ratios called Solvency Ratios. These ratios measure the financial position of the firm by measuring its ability to pay long-term liabilities, these long-term liabilities include principal amount payments on the due date and interest payments on a regular basis. The following ratios are used to determine the long-term solvency of a business.
1. Debt-Equity Ratio: This ratio shows the relationship between owner funds (equity) and borrowed funds (debt). A lower debt-equity ratio provides more security to the people who are lending to the business. It also shows that a company is able to meet long-term dues or responsibilities.
Debt-Equity ratio = \(\frac{\text{Long-term Debt}}{\text{(Equity / share Holders Fund)}}\)
2. Total Assets to Debt Ratio: It is based on the relationship between total assets and long-term loans. It shows what percentage of the company’s total assets are financed by creditors. A higher total assets to debt ratio makes the firm able to meet long-term requirements and provides more security to lenders.
Total Assets to Debt Ratio = \(\frac{\text{Total Assets}}{\text{Long-Term Debt}}\)
3. Interest Coverage Ratio: This ratio is used to determine the easiness with which a company is able to pay interest on outstanding debts. It is calculated by dividing earnings before interest and taxes with interest payments. Having a higher interest coverage ratio means that company is able to meet its obligations skillfully.
Interest Coverage Ratio = \(\frac{\text{Net Profit Before Interest And Tax}}{\text{Interest On Long Term Loans}}\)
d. Proprietary Ratio– This ratio shows the relationship between Total Assets and Shareholders’ funds. It is helpful in revealing the financial position of a business. A higher ratio ensures a greater degree of security for creditors. It is shown as:
Proprietary Ratio = \(\frac{\text{Shareholders Fund}}{\text{Total Asssets}}\) or \(\frac{\text{Equity}}{\text{Total Asssets}}\)
Question 3: What are various profitability ratios? How are these worked out?
Answer 3: Various Profitability Ratios and Their Calculation: Profitability ratios assess a company’s ability to generate earnings relative to its revenue, assets, equity, or other financial metrics. Below are the key profitability ratios and their methods of calculation:
1. Gross Profit Margin
Formula:
Gross Profit Margin = \(\left( \frac{\text{Gross Profit}}{\text{Net Sales}} \right) \times 100\)
How It Works:
- Gross Profit = Net Sales – Cost of Goods Sold (COGS)
- This ratio measures the percentage of revenue remaining after deducting direct production costs, indicating the efficiency of core operations.
2. Net Profit Margin
Formula:
Net Profit Margin = \(\left( \frac{\text{Net Profit}}{\text{Net Sales}} \right) \times 100\)
How It Works:
- Net Profit = Total Revenue – Total Expenses (including taxes, interest, and operating costs).
- This ratio indicates the percentage of revenue that translates into net profit, reflecting overall profitability after all expenses.
3. Operating Profit Margin
Formula:
Operating Profit Margin = \(\left( \frac{\text{Operating Profit}}{\text{Net Sales}} \right) \times 100\)
How It Works:
- Operating Profit = Gross Profit – Operating Expenses (like salaries, rent, and utilities).
- It evaluates profitability from core business operations, excluding non-operating income and expenses.
4. Return on Assets (ROA)
Formula:
ROA = \(\left( \frac{\text{Net Profit}}{\text{Total Assets}} \right) \times 100\)
How It Works:
- Indicates how efficiently a company uses its assets to generate profit.
- A higher ROA signifies better utilization of resources.
5. Return on Equity (ROE)
Formula:
ROE = \(\left( \frac{\text{Net Profit}}{\text{Shareholder’s Equity}} \right) \times 100\)
How It Works:
- Measures the return generated on the shareholders’ investment in the company.
- A higher ROE reflects efficient management and profitability relative to equity.
6. Earnings Per Share (EPS)
Formula:
EPS = \(\frac{\text{Net Income – Preferred Dividends}}{\text{Average Outstanding Shares}}\)
How It Works:
- Indicates the portion of a company’s profit allocated to each outstanding share of common stock.
- Higher EPS suggests better profitability and attractiveness to investors.
7. Return on Capital Employed (ROCE)
Formula:
ROCE = \(\left( \frac{\text{EBIT}}{\text{Capital Employed}} \right) \times 100\)
How It Works:
- Capital Employed = Total Assets – Current Liabilities or Equity + Long-Term Debt.
- This ratio measures the efficiency with which a company uses its capital to generate profits.
Question 4: The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity. Explain.
Answer 4: The above mentioned statement is true. There are two different ways to measure the liquidity of a firm first through current ratio of the firm and second through quick ratio of the firm. The second one is considered the more refine form of measuring the liquidity of the firm.
The current ratio ‘explains the relationship between current assets and current liabilities. If current assets are quite capable to pay the current liability the liquidity of the concerned firm will be considered good. But here generally one question arises there are certain assets which cannot be converted into cash quickly such as stock and prepaid expenses.
As far as the matter of prepaid expenses is concerned it’s ok but what about the stock if we measure the liquidity on the basis of conversion of current assets in cash there are many firms where conversion of stock is not possible into cash frequently say e.g., heavy machinery manufacturing companies, locomotive companies, etc. This is because, the heavy stocks like machinery, heavy tools etc. cannot be easily sold off. In this case it is always advisable to follow the current ratio for measuring the liquidity of a firm.
But on the other hand, in case of those firms where the stock can be easily realised or sold off consideration of stock should be avoided and to measure the liquidity of that firm Quick ratio should be calculated, e.g., the inventories of a service sector company are very liquid as there are no stocks kept for sale, so in that case liquid ratio must be followed for measuring the liquidity of the firm.
We can understand from the above mentioned statement in the light of another example where stock contribute the major portion in current assets in that case to find out the liquidity of that firm stock cannot be avoided to measure the liquidity of the firm. On the other hand where stock contributes a reasonably less amount it can be avoided and liquidity of that firm can be measured with the help of quick ratio. On the other hand where there is a lot of fluctuation in the price of stock it is always advisable to compute quick ratio and avoid the stock figure because it will reduce the authenticity of liquidity measure.
Numerical Questions
Question 1: Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, 2017. Calculate Current Ratio.
| Particulars | (Rs) |
| I. Equity and Liabilities: | |
| 1. Shareholders’ funds | |
| a) Share capital | 7,90,000 |
| b) Reserves and surplus | 35,000 |
| 2. Current Liabilities | |
| a) Trade Payables | 72,000 |
| Total | 8,97,000 |
| II. Assets | |
| 1. Non-current Assets | |
| a) Fixed assets | |
| Tangible assets | 7,53,000 |
| 2. Current Assets | |
| a) Inventories | 55,800 |
| b) Trade Receivables | 28,800 |
| c) Cash and cash equivalents | 59,400 |
| Total | 8,97,000 |
Answer 1: Calculation of Current Ratio
The Current Ratio is calculated using the formula:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
From the given balance sheet:
Current Assets:
- Inventories = Rs. 55,800
- Trade Receivables = Rs. 28,800
- Cash and Cash Equivalents = Rs. 59,400
Total Current Assets = 55,800 + 28,800 + 59,400 = Rs. 1,44,000
Current Liabilities:
- Trade Payables = Rs. 72,000
Current Ratio:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
= \(\frac{1,44,000}{72,000}\) = 2 : 1
The Current Ratio is 2:1, indicating that the company has Rs. 2 in current assets for every Rs. 1 of current liabilities, which is a favorable liquidity position.
Question 2: Following is the Balance Sheet of Title Machine Ltd. as at March 31, 2017.
| Particulars | AmountRs. |
| I. Equity and Liabilities | |
| 1. Shareholders’ funds | |
| a) Share capital | 24,00,000 |
| b) Reserves and surplus | 6,00,000 |
| 2. Non-current liabilities | |
| a) Long-term borrowings | 9,00,000 |
| 3. Current liabilities | |
| a) Short-term borrowings | 6,00,000 |
| b) Trade payables | 23,40,000 |
| c) Short-term provisions | 60,000 |
| Total | 69,00,000 |
| II. Assets | |
| 1. Non-current Assets | |
| a) Fixed assets | |
| Tangible assets | 45,00,000 |
| 2. Current Assets | |
| a) Inventories | 12,00,000 |
| b) Trade receivables | 9,00,000 |
| c) Cash and cash equivalents | 2,28,000 |
| d) Short-term loans and advances | 72,000 |
| Total | 69,00,000 |
Calculate Current Ratio and Liquid Ratio.
Answer 2: 1. Current Ratio
The formula for the Current Ratio is:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
From the given balance sheet:
- Current Assets:
- Inventories = Rs. 12,00,000
- Trade Receivables = Rs. 9,00,000
- Cash and Cash Equivalents = Rs. 2,28,000
- Short-term Loans and Advances = Rs. 72,000
Total Current Assets = 12,00,000 + 9,00,000 + 2,28,000 + 72,000 = Rs. 24,00,000
- Current Liabilities:
- Short-term Borrowings = Rs. 6,00,000
- Trade Payables = Rs. 23,40,000
- Short-term Provisions = Rs. 60,000
Total Current Liabilities = 6,00,000 + 23,40,000 + 60,000 = Rs. 30,00,000
Current Ratio Calculation:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
= \(\frac{24,00,000}{30,00,000}\) = 0.8 : 1
2. Liquid Ratio (Quick Ratio)
The formula for the Liquid Ratio is:
Liquid Ratio = \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\)
Liquid Assets exclude inventories (since they are not immediately liquid).
- Liquid Assets:
- Trade Receivables = Rs. 9,00,000
- Cash and Cash Equivalents = Rs. 2,28,000
- Short-term Loans and Advances = Rs. 72,000
Total Liquid Assets = 9,00,000 + 2,28,000 + 72,000 = Rs. 12,00,000
Liquid Ratio Calculation:
Liquid Ratio = \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\)
= \(\frac{12,00,000}{30,00,000}\) = 0.4 : 1
- Current Ratio = 0.8:1
- Liquid Ratio = 0.4:1
Question 3: Current Ratio is 3.5 : 1. Working Capital is Rs 90,000. Calculate the amount of Current Assets and Current Liabilities.
Answer 3: To calculate the Current Assets and Current Liabilities, we use the formulas:
- Working Capital:
Working Capital = Current Assets – Current Liabilities - Current Ratio:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
Represent Current Assets in terms of Current Liabilities
From the Current Ratio (3.5:1):
Current Assets = 3.5 × Current Liabilities
Substitute into the Working Capital Formula
Working Capital = Current Assets − Current Liabilities
Substitute Current Assets = 3.5 × Current Liabilities:
90,000 = (3.5 × Current Liabilities) − Current Liabilities
Simplify the Equation
90,000 = (3.5 − 1) × Current Liabilities
90,000 = 2.5 × Current Liabilities
Current Liabilities = \(\frac{90,000}{2.5}\) = 36,000
Calculate Current Assets
Current Assets = 3.5 × Current Liabilities = 3.5 × 36,000 = 1,26,000
- Current Assets = Rs. 1,26,000
- Current Liabilities = Rs. 36,000
Question 4: Shine Limited has a current ratio 4.5:1 and quick ratio 3:1; if the inventory is 36,000, calculate current liabilities and current assets.
Answer 4: To calculate the Current Liabilities and Current Assets, we use the relationships between the Current Ratio and Quick Ratio.
Given Data:
- Current Ratio = ( 4.5:1 )
- Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
- Quick Ratio = ( 3:1 )
- Quick Ratio = \(\frac{\text{Quick Assets}}{\text{Current Liabilities}}\)
- Inventory = Rs. 36,000.
- Quick Assets = Current Assets − Inventory
Relationship Between Current Assets and Quick Assets
From the Quick Ratio:
Quick Assets = 3 × Current Liabilities
From the Current Ratio:
Current Assets = 4.5 × Current Liabilities
Substituting Quick Assets = Current Assets − Inventory:
3 × Current Liabilities = (4.5 × Current Liabilities) − 36,000
Solve for Current Liabilities
3 × Current Liabilities = 4.5 × Current Liabilities − 36,000
36,000 = 4.5 × Current Liabilities − 3 × Current Liabilities
36,000 = 1.5 × Current Liabilities
Current Liabilities = \(\frac{36,000}{1.5}\) = 24,000
Calculate Current Assets
Using the Current Ratio formula:
Current Assets = 4.5 × Current Liabilities = 4.5 × 24,000 = 1,08,000
- Current Liabilities = Rs. 24,000
- Current Assets = Rs. 1,08,000
Question 5: Current Liabilities of a company are Rs. 75,000. If current ratio is 4:1 and Liquid Ratio is 1 : 1, calculate value of Current Assets, Liquid Assets and Inventory.
Answer 5: To calculate the values of Current Assets, Liquid Assets, and Inventory, we use the relationships between the Current Ratio and Liquid Ratio.
Given Data:
- Current Liabilities = Rs. 75,000
- Current Ratio = 4:1
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\) - Liquid Ratio = 1:1
Liquid Ratio} = \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\)
Calculate Current Assets
Using the Current Ratio formula:
Current Assets = Current Ratio × Current Liabilities
Current Assets = 4 × 75,000 = Rs.3,00,000
Calculate Liquid Assets
Using the Liquid Ratio formula:
Liquid Assets = Liquid Ratio × Current Liabilities
Liquid Assets = 1 × 75,000 = Rs.75,000
Calculate Inventory
The relationship between Current Assets, Liquid Assets, and Inventory is:
Inventory = Current Assets − Liquid Assets
Inventory = 3,00,000 − 75,000 = Rs.2,25,000
- Current Assets = Rs. 3,00,000
- Liquid Assets = Rs. 75,000
- Inventory = Rs. 2,25,000
Question 6: Handa Ltd. has inventory of Rs. 20,000. Total liquid assets are Rs. 1,00,000 and quick ratio is 2 : 1. Calculate current ratio.
Answer 6: To calculate the Current Ratio, we need to determine the Current Liabilities and Current Assets based on the given data.
Given Data:
- Inventory = Rs. 20,000
- Liquid Assets = Rs. 1,00,000
- Quick Ratio = 2:1
Quick Ratio = \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\)
Calculate Current Liabilities
Using the formula for Quick Ratio:
Current Liabilities = \(\frac{\text{Liquid Assets}}{\text{Quick Ratio}}\)
Current Liabilities = \(\frac{1,00,000}{2} = Rs. 50,000\)
Calculate Current Assets
The relationship between Current Assets, Liquid Assets, and Inventory is:
Current Assets = Liquid Assets + Inventory
Current Assets = 1,00,000 + 20,000 = Rs.1,20,000
Calculate Current Ratio
The formula for Current Ratio is:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
Current Ratio = \(\frac{1,20,000}{50,000}\) = 2.4 : 1
The Current Ratio is 2.4:1.
Question 7: Calculate debt-equity ratio from the following information:
| Rs | |
| Total Assets | 15,00,000 |
| Current Liabilities | 6,00,000 |
| Total Debts | 12,00,000 |
Answer 7: Debt Equity Ratio = \(\frac{Debt}{Equity}\)
EquityTotal AssetsTotal DebtsEquity=Total Assets-Total Debts
= 15,00,000 – 12,00,000
= 3,00,000
Long Term Debts = Total Debts − Current Liabilities
Debt Equity Ratio = \(\frac{\text{long term Debt}}{Equity}\)
or,Debt Equity Ratio = \(\frac{6,00,000}{3,00,000}\) = \(\frac{2}{1}\) = 2:1
Question 8: Calculate Current Ratio if: Inventory is Rs. 6,00,000; Liquid Assets Rs. 24,00,000; Quick Ratio 2 : 1.
Answer 8: To calculate the Current Ratio, we use the relationships between the Current Assets, Liquid Assets, and the given ratios
Given Data:
- Inventory = Rs. 6,00,000
- Liquid Assets = Rs. 24,00,000
- Quick Ratio = 2:1
Quick Ratio = \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\)
Calculate Current Liabilities
Using the Quick Ratio formula:
Current Liabilities = \(\frac{\text{Liquid Assets}}{\text{Quick Ratio}}\)
Current Liabilities = \(\frac{24,00,000}{2}\) = Rs. 12,00,000
Calculate Current Assets
The relationship between Current Assets, Liquid Assets, and Inventory is:
Current Assets = Liquid Assets + Inventory
Current Assets = 24,00,000 + 6,00,000 = Rs.30,00,000
Calculate Current Ratio
The formula for the Current Ratio is:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
Current Ratio = \(\frac{30,00,000}{12,00,000}\) = 2.5 : 1
The Current Ratio is 2.5:1.
Question 9: Compute Inventory Turnover Ratio from the following information:
| Revenue from Operations | Rs. 2,00,000 |
| Gross Profit | Rs. 50,000 |
| Inventory at the end Excess of inventory at the end over | Rs. 60,000 |
| inventory in the beginning | Rs. 20,000 |
Answer 9: To compute the Inventory Turnover Ratio, we use the formula:
Inventory Turnover Ratio = \(\frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}\)
Calculate Cost of Goods Sold (COGS)
From the given information:
Gross Profit = Revenue from Operations − COGS
Rearranging to calculate COGS:
COGS = Revenue from Operations − Gross Profit
COGS = 2,00,000 − 50,000 = Rs.1,50,000
Calculate Average Inventory
The inventory at the end is Rs. 60,000, and the excess of inventory at the end over the beginning inventory is Rs. 20,000. Thus:
Beginning Inventory = Ending Inventory − Excess Inventory
Beginning Inventory = 60,000 − 20,000 = Rs.40,000
Average Inventory = \(\frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2}\)
Average Inventory = \(\frac{40,000 + 60,000}{2}\) = Rs. 50,000
Calculate Inventory Turnover Ratio
Substitute the values into the formula:
Inventory Turnover Ratio = \(\frac{\text{COGS}}{\text{Average Inventory}}\)
Inventory Turnover Ratio = \(\frac{1,50,000}{50,000} = 3\)
The Inventory Turnover Ratio is 3 times.
Question 10: Calculate following ratios from the following information: (i) Current ratio (ii) Liquid ratio (iii) Operating Ratio (iv) Gross profit ratio
| Current Assets | Rs. 35,000 |
| Current Liabilities | Rs. 17,500 |
| Inventory | Rs. 15,000 |
| Operating Expenses | Rs. 20,000 |
| Revenue from Operations | Rs. 60,000 |
| Cost of Revenue from operation | Rs. 30,000 |
Answer 10: (i) Current Ratio
The formula for the Current Ratio is:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
Substitute the given values:
Current Ratio = \(\frac{35,000}{17,500}\) = 2:1
(ii) Liquid Ratio
The formula for the Liquid Ratio is:
Liquid Ratio = \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\)
Where:
Liquid Assets = Current Assets − Inventory
Liquid Assets = 35,000 − 15,000 = 20,000
Now substitute the values:
Liquid Ratio = \(\frac{20,000}{17,500}\) = 1.14:1
(iii) Operating Ratio
The formula for the Operating Ratio is:
Operating Ratio = \(\frac{\text{Operating Expenses} + \text{Cost of Revenue from Operations}}{\text{Revenue from Operations}} \times 100\)
Substitute the values:
Operating Ratio = \(\frac{20,000 + 30,000}{60,000} \times 100\)
Operating Ratio = \(\frac{50,000}{60,000} \times 100\) = 83.33%
(iv) Gross Profit Ratio
The formula for the Gross Profit Ratio is:
Gross Profit Ratio = \(\frac{\text{Gross Profit}}{\text{Revenue from Operations}} \times 100\)
Where:
Gross Profit = Revenue from Operations − Cost of Revenue from Operations
Gross Profit = 60,000 − 30,000 = 30,000
Substitute the values:
Gross Profit Ratio = \(\frac{30,000}{60,000} \times 100\) = 50%
- Current Ratio = 2:1
- Liquid Ratio = 1.14:1
- Operating Ratio = 83.33%
- Gross Profit Ratio = 50%
Question 11: From the following information calculate: (i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid Ratio (v) Net Profit Ratio (vi) Working Capital Ratio:
| Revenue from Operations | Rs. 25,20,000 |
| Net Profit | Rs. 3,60,000 |
| Cast of Revenue from Operations | Rs. 19,20,000 |
| Long-term Debts | Rs. 9,00,000 |
| Trade Payables | Rs. 2,00,000 |
| Average Inventory | Rs. 8,00,000 |
| Liquid Assets | Rs. 7,60,000 |
| Fixed Assets | Rs. 14,40,000 |
| Current Liabilities | Rs. 6,00,000 |
| Net Profit before Interest and Tax | Rs. 8,00,000 |
Answer 11: (i) Gross Profit Ratio
The formula is:
Gross Profit Ratio = \(\frac{\text{Gross Profit}}{\text{Revenue from Operations}} \times 100\)
Where:
Gross Profit = Revenue from Operations − Cost of Revenue from Operations
Gross Profit = 25,20,000 − 19,20,000 = Rs.6,00,000
Gross Profit Ratio = \(\frac{6,00,000}{25,20,000} \times 100\) = 23.81%
(ii) Inventory Turnover Ratio
The formula is:
Inventory Turnover Ratio = \(\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}\)
Inventory Turnover Ratio = \(\frac{19,20,000}{8,00,000} = 2.4 \, \text{times}\)
(iii) Current Ratio
The formula is:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
Where:
Current Assets = Liquid Assets + Inventory
Current Assets = 7,60,000 + 8,00,000 = Rs.15,60,000
Current Ratio = \(\frac{15,60,000}{6,00,000}\) = 2.6:1
(iv) Liquid Ratio
The formula is:
Liquid Ratio = \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\)
Liquid Ratio = \(\frac{7,60,000}{6,00,000}\) = 1.27:1
(v) Net Profit Ratio
The formula is:
Net Profit Ratio = \(\frac{\text{Net Profit}}{\text{Revenue from Operations}} \times 100\)
Net Profit Ratio = \(\frac{3,60,000}{25,20,000} \times 100 = 14.29\%\)
(vi) Working Capital Ratio
Working Capital is:
Working Capital = Current Assets − Current Liabilities
Working Capital = 15,60,000 − 6,00,000 = Rs.9,60,000
Working Capital Ratio = \(\frac{25,20,000}{9,60,000}\) = 2.625 times
- Gross Profit Ratio = 23.81%
- Inventory Turnover Ratio = 2.4 times
- Current Ratio = 2.6:1
- Liquid Ratio = 1.27:1
- Net Profit Ratio = 14.29%
- Working Capital Ratio = 2.625 times
Question 12: Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:
| Paid-up Share Capital | Rs. 5,00,000 |
| Current Assets | Rs. 4,00,000 |
| Revenue from Operations | Rs. 10,00,000 |
| 13% Debentures | Rs. 2,00,000 |
| Current Liabilities | Rs. 2,80,000 |
Answer 12: Gross Profit ratio = Gross profit/Net Revenue from operations × 100
Gross profit = Net revenue from operations – Cost of revenue from operations
= 10,00,000 – 6,00,000
= 4,00,000
Gross profit ratio = 4,00,000/10,00,000×100 = 40%
Working capital ratio = Revenue from operaions/working capital
working capital = current assets – Current Liablities
= 4,00,000 – 2,80,000
= 1,20,000
working capital ratio = 10,00,000/1,20,000
= 8.33times.
Debt equity ratio = Debt/equity
= 2,00,000/5.00,000 = 2:5 = 0.4:1
Proprietary Ratio = shareholders funds/total assets
Total asset = Paid up Capital + Debentures + Current Liablities
(:. Total Liablities = Total assets)
=5,00,000 + 2,00,000 + 2,80,000
= 9,80,000
Propriertary ratio = 5,00,000/9,80,000 = 25 : 49 = 0.51 : 1
Question 13: Calculate Inventory Turnover Ratio if:
Inventory in the beginning is Rs. 76,250, Inventory at the end is Rs. 98,500, Sales is Rs. 5,20,000, Sales Return is Rs. 20,000, Purchases is Rs. 3,22,250.
Answer 13: The Inventory Turnover Ratio is calculated using the formula:
Inventory Turnover Ratio = \(\frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}\)
Calculate Average Inventory
Average Inventory = \(\frac{\text{Opening Inventory} + \text{Closing Inventory}}{2}\)
Average Inventory = \(\frac{76,250 + 98,500}{2} = \frac{1,74,750}{2}\) = 87,375
Calculate Cost of Goods Sold (COGS)
The formula for COGS is:
COGS = Purchases + Opening Inventory − Closing Inventory
COGS = 3,22,250 + 76,250 − 98,500 = 3,00,000
Calculate Inventory Turnover Ratio
Inventory Turnover Ratio = \(\frac{\text{COGS}}{\text{Average Inventory}}\)
Inventory Turnover Ratio = \(\frac{3,00,000}{87,375} \approx 3.43 \text{ times}\)
The Inventory Turnover Ratio is 3.43 times.
Question 14: Calculate Inventory Turnover Ratio from the data given below:
| Inventory in the beginning of the year | Rs. 10,000 |
| Inventory at the end of the year | Rs. 5,000 |
| Carriage | Rs. 2,500 |
| Revenue from Operations | Rs. 50,000 |
| Purchases | Rs. 25,000 |
Answer 14: To calculate the Inventory Turnover Ratio, follow these steps:
Formula:
Inventory Turnover Ratio = \(\frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}\)
Calculate Average Inventory
Average Inventory = \(\frac{\text{Opening Inventory} + \text{Closing Inventory}}{2}\)
Average Inventory = \(\frac{10,000 + 5,000}{2} = \frac{15,000}{2} = 7,500\)
Calculate Cost of Goods Sold (COGS)
The formula for COGS is:
COGS = Purchases + Carriage + Opening Inventory − Closing Inventory
COGS = 25,000 + 2,500 + 10,000 − 5,000 = 32,500
Calculate Inventory Turnover Ratio
Inventory Turnover Ratio = \(\frac{\text{COGS}}{\text{Average Inventory}}\)
Inventory Turnover Ratio = \(\frac{32,500}{7,500} \approx 4.33 \text{ times}\)
The Inventory Turnover Ratio is 4.33 times.
Question 15: A trading firm’s average inventory is Rs 20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a profit of 20% on sale, ascertain the profit of the firm.
Answer 15: Formula for Inventory Turnover Ratio
Inventory Turnover Ratio = \(\frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}\)
Given:
Inventory Turnover Ratio = 8 and Average Inventory = 20,000
Rearranging to find COGS:
COGS = Inventory Turnover Ratio × Average Inventory
COGS = 8 × 20,000 = 1,60,000
Calculate Total Sales
The firm sells goods at a profit of 20% on sales. Let the Sales be ( x ).
Profit is 20% of sales:
Profit = 0.2 × x
Cost of Goods Sold (COGS) is the remaining 80% of sales:
COGS = 0.8 × x
From Step 1, we know:
COGS = 1,60,000
0.8 × x = 1,60,000
x = \(\frac{1,60,000}{0.8}\) = 2,00,000
So, Total Sales = Rs. 2,00,000.
Calculate Profit
Profit = 0.2 × Sales
Profit = 0.2 × 2,00,000 = 40,000
The profit of the firm is Rs. 40,000.
Question 16: You are able to collect the following information about a company for two years:
| 2015-16 | 2016-17 | |
| Trade receivables on Apr. 01 | Rs. 4,00,000 | Rs. 5,00,000 |
| Trade receivables on Mar. 31 | Rs. 5,60,000 | |
| Stock in trade on Mar. 31 | Rs. 6,00,000 | Rs. 9,00,000 |
| Revenue from operations (gross profit is 25% on cost of Revenue from operations) | Rs. 3,00,000 | Rs. 24,00,000 |
Calculate Inventory Turnover Ratio and Trade Receivables Turnover Ratio
Answer 16: Inventory turnover ratio = Cost of revenue from operations/Average Inventory
or,
Cost of revenue from operations = Revenue from Operartions – Gross profit
= 24,00,000 – 6,00,000
= 18,00,000
Average Inventor = Inventory in the begining+Inventory at the end/2
= 6,00,000+9,00,000/2
= 7,50,000
Inventory turnover ratio = 18,00,000/7,50,000 = 2.4times
Trade Recievable turnover ratio = Net credit sales/Average trade recievables
Average trade recievables = Trade Recievables in the begining+Trade Recievables at the end/2
= 5,00,000 + 5,60,000/2
= 5,30,000
Trade Recievables turnover Ratio = 24,00,000/5,30,000 = 4.53times
Note: It has been assumed that all sales are credit sales.
Question 17: From the following Balance Sheet and other information, calculate following ratios: (i) Debt-Equity Ratio (ii) Working Capital Turnover Ratio (iii) Trade Receivables Turnover Ratio
Balance Sheet as at March 31, 2017
| Particulars | Note No. | Rs. |
| I. Equity and Liabilities: | ||
| 1. Shareholders’ funds | ||
| a) Share capital | 10,00,000 | |
| b) Reserves and surplus | 9,00,000 | |
| c) Money received against share warrants | 2,00,000 | |
| 2. Non-current Liabilities | ||
| Long-term borrowings | 12,00,000 | |
| 3. Current Liabilities | ||
| Trade payables | 5,00,000 | |
| Total | 36,00,000 | |
| II. Assets | ||
| 1. Non-current Assets | ||
| a) Fixed assets | ||
| Tangible assets | 18,00,000 | |
| 2. Current Assets | ||
| a) Inventories | 4,00,000 | |
| b) Trade Receivables | 9,00,000 | |
| c) Cash and cash equivalents | 5,00,000 | |
| Total | 36,00,000 |
Additional Information: Revenue from Operations Rs. 18,00,000
Answer 17: 1. Debt-Equity Ratio
Formula:
Debt-Equity Ratio = \(\frac{\text{Long-Term Debt}}{\text{Shareholders’ Funds}}\)
- Long-Term Debt = ₹12,00,000 (Long-term borrowings)
- Shareholders’ Funds = Share Capital + Reserves and Surplus = ₹10,00,000 + ₹9,00,000 = ₹19,00,000
(Money received against share warrants is not included in Shareholders’ Funds under standard practice.)
Calculation:
Debt-Equity Ratio = \(\frac{12,00,000}{19,00,000}\) = 0.63 : 1
2. Working Capital Turnover Ratio
Formula:
Working Capital Turnover Ratio = \(\frac{\text{Revenue from Operations}}{\text{Working Capital}}\)
- Working Capital = Current Assets − Current Liabilities
Current Assets = Inventories + Trade Receivables + Cash and Cash Equivalents
Current Assets = 4,00,000 + 9,00,000 + 5,00,000 = ₹18,00,000
Current Liabilities = Trade Payables = ₹5,00,000 Therefore,
Working Capital = 18,00,000 − 5,00,000 = ₹13,00,000 - Revenue from Operations = ₹18,00,000
Calculation:
Working Capital Turnover Ratio = \(\frac{18,00,000}{13,00,000}\) = 1.38 times
3. Trade Receivables Turnover Ratio
Formula:
Trade Receivables Turnover Ratio = \(\frac{\text{Revenue from Operations}}{\text{Average Trade Receivables}}\)
- Trade Receivables = ₹9,00,000
- Since there is no opening trade receivables data, assume it to be the same as closing trade receivables. Thus,
Average Trade Receivables = ₹9,00,000 - Revenue from Operations = ₹18,00,000
Calculation:
Trade Receivables Turnover Ratio = \(\frac{18,00,000}{9,00,000} = 2 \text{ times}\)
- Debt-Equity Ratio = 0.63 : 1
- Working Capital Turnover Ratio = 1.38 times
- Trade Receivables Turnover Ratio = 2 times
Question 18: From the following information, calculate the following ratios:
i) Liquid Ratio
ii) Inventory Turnover Ratio
iii) Return on Investment
| Rs. | |
| Inventory in the beginning | 50,000 |
| Inventory at the end | 60,000 |
| Net Profit | 2,17,900 |
| 10% Debentures | 2,50,000 |
| Revenue from operations | 4,00,000 |
| Gross Profit | 1,94,000 |
| Cash and Cash Equivalents | 40,000 |
| Money received against share warrants | 20,000 |
| Trade Receivables | 1,00,000 |
| Trade Payables | 1,90,000 |
| Other Current Liabilities | 70,000 |
| Share Capital | 2,00,000 |
| Reserves and Surplus | 1,20,000 |
(Balance in the Statement of Profit & Loss A/c)
Answer 18: 1. Liquid Ratio (Quick Ratio)
Formula:
Liquid Ratio = \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\)
- Liquid Assets = Current Assets − Inventory
Current Assets = Trade Receivables + Cash and Cash Equivalents
Liquid Assets = 1,00,000 + 40,000 = ₹1,40,000 - Current Liabilities = Trade Payables + Other Current Liabilities
Current Liabilities = 1,90,000 + 70,000 = ₹2,60,000
Calculation:
Liquid Ratio = \(\frac{1,40,000}{2,60,000}\) = 0.54 : 1
2. Inventory Turnover Ratio
Formula:
Inventory Turnover Ratio = \(\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}\)
- Cost of Revenue from Operations = Revenue from Operations − Gross Profit
Cost of Revenue from Operations = 4,00,000 − 1,94,000 = ₹2,06,000 - Average Inventory = \(\frac{\text{Opening Inventory} + \text{Closing Inventory}}{2}\)
- Average Inventory = \(\frac{50,000 + 60,000}{2}\) = ₹55,000
Calculation:
Inventory Turnover Ratio = \(\frac{2,06,000}{55,000} \approx 3.75 \text{ times}\)
3. Return on Investment (ROI)
Formula:
ROI = \(\frac{\text{Net Profit before Interest and Tax}}{\text{Capital Employed}} \times 100\)
- Capital Employed = Equity Share Capital + Profit and Loss
- = 2,00,000 + 1,40,000
- = 3,40,000
Calculation:
ROI = \(\frac{1,40,000}{3,40,000} \times 100 \approx 41.17\%\)
- Liquid Ratio = 0.54 : 1
- Inventory Turnover Ratio = 3.75 times
- Return on Investment (ROI) = 41.17%
Question 19: From the following, calculate (a) Debt Equity Ratio (b) Total Assets to Debt Ratio (c) Proprietary Ratio.
| Equity Share Capital | Rs. 75,000 |
| Share application money pending allotment | Rs. 25,000 |
| General Reserve | Rs. 45,000 |
| Balance in the Statement of Profits and Loss | Rs. 30,000 |
| Debentures | Rs. 75,000 |
| Trade Payables | Rs. 40,000 |
| Outstanding Expenses | Rs. 10,000 |
Answer 19: a ) debt Equity Ratio = Debt/Equity
Equity/ Shareholder funds = Equity Share Capital + Preference Share Capital + General Reserve + Accumulated Profit
= 75,000 + 25,000 + 45,000 + 30,000
Debt = Debentures = 75,000
Debt Equity ratio = 75,000/1,75,000 = 3/7 = 0.43:1
b) Total Assets to debt Ratio = Total assets/Debt
Total Assets = Equity Share Capital + Preference share Capital + General Reserve + Accumulated Profits + Debentures + Sundry Creditors + Outstanding Expenses (∵ Total liabilities is equal to total assets)
= 75,000 + 25,000 + 45,000 + 30,000 + 75,000 + 40,000 + 10,000
= 3,00,000
Total Assets to Debt Ratio = 3,00,000/75,000 = 4:1
C) Proprietary Ratio = Shareholder Funds/Net Assets
Proprietary Ratio = 175,000/3,00,000 = 7/12 = 7:12 or 0.58:1
Question 20: Cost of Revenue from Operations is Rs 1,50,000. Operating expenses are Rs 60,000. Revenue from Operations is Rs 2,50,000. Calculate Operating Ratio.
Answer 20: The Operating Ratio can be calculated using the formula:
Operating Ratio = \(\frac{\text{Cost of Revenue from Operations} + \text{Operating Expenses}}{\text{Revenue from Operations}}\)×100
Given Data:
- Cost of Revenue from Operations = ₹1,50,000
- Operating Expenses = ₹60,000
- Revenue from Operations = ₹2,50,000
Calculation:
Operating Ratio = \(\frac{1,50,000 + 60,000}{2,50,000} \times 100\)
Operating Ratio = \(\frac{2,10,000}{2,50,000} \times 100\)
Operating Ratio = 84%
Question 21: Calculate the following ratio on the basis of following information:
(i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Inventory Turnover Ratio (v) Fixed Assets Turnover Ratio
| Rs. | |
| Gross Profit | 50,000 |
| Revenue from Operations | 100,000 |
| Inventory | 15,000 |
| Trade Receivables | 27,500 |
| Cash and Cash Equivalents | 17,500 |
| Current Liabilities | 40,000 |
| Land & Building | 50,000 |
| Plant & Machinery | 30,000 |
| Furniture | 20,000 |
Answer 21: 1. Gross Profit Ratio
Formula:
Gross Profit Ratio = \(\frac{\text{Gross Profit}}{\text{Revenue from Operations}} \times 100\)
Given Data:
- Gross Profit = ₹50,000
- Revenue from Operations = ₹1,00,000
Calculation:
Gross Profit Ratio = \(\frac{50,000}{1,00,000} \times 100 = 50\%\)
2. Current Ratio
Formula:
Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
Given Data:
- Current Assets = Inventory + Trade Receivables + Cash and Cash Equivalents
Current Assets = 15,000 + 27,500 + 17,500 = ₹60,000 - Current Liabilities = ₹40,000
Calculation:
Current Ratio = \(\frac{60,000}{40,000}\) = 1.5 : 1
3. Acid Test Ratio (Quick Ratio)
Formula:
Acid Test Ratio = \(\frac{\text{Quick Assets}}{\text{Current Liabilities}}\)
- Quick Assets = Current Assets − Inventory
Quick Assets = 60,000 − 15,000 = ₹45,000 - Current Liabilities = ₹40,000
Calculation:
Acid Test Ratio = \(\frac{45,000}{40,000}\) = 1.125 : 1
4. Inventory Turnover Ratio
Formula:
Inventory Turnover Ratio = \(\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}\)
- Assume that Cost of Revenue from Operations = Revenue from Operations − Gross Profit
Cost of Revenue from Operations = 1,00,000 − 50,000 = ₹50,000 - Average Inventory = Inventory (as only one value is provided) = ₹15,000
Calculation:
Inventory Turnover Ratio = \(\frac{50,000}{15,000} \approx 3.33 \, \text{times}\)
5. Fixed Assets Turnover Ratio
Formula:
Fixed Assets Turnover Ratio} = \(\frac{\text{Revenue from Operations}}{\text{Net Fixed Assets}}\)
- Net Fixed Assets = Land & Building + Plant & Machinery + Furniture
Net Fixed Assets = 50,000 + 30,000 + 20,000 = ₹1,00,000
Calculation:
Fixed Assets Turnover Ratio = \(\frac{1,00,000}{1,00,000}\) = 1 : 1 or 1 time
- Gross Profit Ratio = 50%
- Current Ratio = 1.5 : 1
- Acid Test Ratio = 1.125 : 1
- Inventory Turnover Ratio = 3.33 times
- Fixed Assets Turnover Ratio = 1 : 1 or 1 time
Question 22: From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio and Trade Receivables Turnover Ratio.
| Rs | |
| Revenue from Operations | 3,00,000 |
| Cost of Revenue from Operations | 2,40,000 |
| Inventory at the end | 62,000 |
| Gross Profit | 60,000 |
| Inventory in the beginning | 58,000 |
| Trade Receivables | 32,000 |
Answer 22: 1. Gross Profit Ratio
Formula:
Gross Profit Ratio = \(\frac{\text{Gross Profit}}{\text{Revenue from Operations}} \times 100\)
Given Data:
- Gross Profit = ₹60,000
- Revenue from Operations = ₹3,00,000
Calculation:
Gross Profit Ratio = \(\frac{60,000}{3,00,000} \times 100\) = 20%
Answer: Gross Profit Ratio = 20%
2. Inventory Turnover Ratio
Formula:
Inventory Turnover Ratio = \(\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}\)
Given Data:
- Cost of Revenue from Operations = ₹2,40,000
- Average Inventory = \(\frac{\text{Opening Inventory} + \text{Closing Inventory}}{2}\)
- Average Inventory = \(\frac{58,000 + 62,000}{2}\) = ₹60,000
Calculation:
Inventory Turnover Ratio = \(\frac{2,40,000}{60,000} = 4 \, \text{times}\)
Answer: Inventory Turnover Ratio = 4 times
3. Trade Receivables Turnover Ratio
Formula:
Trade Receivables Turnover Ratio = \(\frac{\text{Revenue from Operations}}{\text{Trade Receivables}}\)
Given Data:
- Revenue from Operations = ₹3,00,000
- Trade Receivables = ₹32,000
Calculation:
Trade Receivables Turnover Ratio = \(\frac{3,00,000}{32,000} \approx 9.375 \, \text{times}\)
- Gross Profit Ratio = 20%
- Inventory Turnover Ratio = 4 times
- Trade Receivables Turnover Ratio = 9.375 times