Tutorial 7-: Ratio Analysis

TUTORIAL 7-
RATIO ANALYSIS
Q) Calculate liquid ratio
Liabilities $ Assets $
Equity shares of $ 10 each 1,00,000 Goodwill 60000
Reserves 20,000 Fixed Assets 140000
P.L. A/c 30,000 Stock 30000
Secured loan 80,000 Sundry Debtors 30000
Sundry creditors 50,000 Advances 10000
Provision for taxation 20,000 Cash Balance 10000
3,00,000 300000
The sales for the year were $ 5,60,000.

• Liquidity Ratio = Liquid Assets / Liquid Liabilities
• Liquid Assets = Sundry Debtors + Advances + Cash
Balance
• 30,000 + 10,000 + 30,000 = 70,000
• Liquid Liabilities = Provision for Taxation + sundry
creditors
• = 20,000 + 50,000 = 70,000
• Liquid Ratio = 70,000 / 70,000= 1
Q
• The ITM trading company provides you the following data
for the year 2016:
• Inventory turnover ratio: 12 times
• Opening inventory at cost: $36,000
• Closing inventory at cost: $54,000
• Calculate cost of goods sold for the year 2016.
Ans
• Inventory turnover ratio = Cost of goods sold
Average inventory at cost
• 12 times = Cost of goods sold/$45,000*
• Cost of goods sold = $45,000 × 12 times
• = $540,000
• *($36,000 + $54,000)/2
Exercise 4. contd…
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550
Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.
Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?

Ans : ( Average Debtors / Net Sales) x 12
= (125 / 1500) x 12
= 1 month
Ans : (Average Creditors / Purchases ) x 12

= (26 / 1050) x 12
= 0.3 months
Exercise 6. A Company has Net Worth of Rs.5 Lac, Term Liabilities of Rs.10 Lac. Fixed Assets
worth RS.16 Lac and Current Assets are Rs.25 Lac. There is no intangible Assets or other Non
Current Assets. Calculate its Net Working Capital.
Answer
Total Assets = 16 + 25 = Rs. 41 Lac
Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac
Current Liabilities = 41 – 15 = 26 Lac
Therefore Net Working Capital = C. A – C.L

= 25 – 26 = (- )1 Lac
Exercise 8 : Suppose Current Ratio is

4 : 1. NWC is Rs.30,000/-. What is the
amount of Current Assets ?
Answer : 4a - 1a = 30,000
Therefore a = 10,000
i.e. Current Liabilities is Rs.10,000
Hence Current Assets would be
4a = 4 x 10,000 = Rs.40,000/-
From the following information, calculate Fixed Asset and Working Capital
Turnover Ratios:
• Working capital turnover ratio = Net sales/ revenue from operations
Working capital
& quick ratio also
1) Stock turnover ratio
Problem solving
• From the following particulars, calculate the creditors turnover ratio
and average payment period of Company X for the year 2017:
Particulars Amount (in Rs.)

Total purchases 400,000
Cash purchases (included in above) 50000
Purchases returns 20000
Creditors at the end 60000
Bills payable at end 20000
• For the year 2016, the creditor turnover ratio was 6.9 times and
average payment period was 52 days.
• Analyse the results for 2 years and make the suitable interpretation.
• Creditor turnover ratio = net credit purchase/ Average
creditor
• = 330000/80000= 4.13 times
• Average payment period = 365/4.13
=88 days
Problem Solving – 1
• Donny’s Furniture Company sells industrial furniture for office
buildings.
• During the current year, Donny reported cost of goods sold on its
income statement of $1,000,000. Donny’s beginning inventory
was $3,000,000 and its ending inventory was $4,000,000.
• You are required to:
– Calculate the Inventory Turnover Ratio and
– Make suitable interpretation of the same.
Practical Problem – I
Following information is given for a company:
Particulars Amount ( in Rs.)
Plant and Machinery 400,000
Marketable securities 150,000
Bills receivable 40,000
Cash in hand 45,000
Cash at bank 30,000
Inventories 75,000
Bank overdraft 70,000
Sundry creditors 60,000
Bills payable 90,000
Outstanding expenses 30,000
You are required to calculate the liquidity ratios and interpret the same.
THANK YOU
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TUTORIAL 7-

Equity shares of $ 10 each 1,00,000 Goodwill 60000

Reserves 20,000 Fixed Assets 140000

P.L. A/c 30,000 Stock 30000

Secured loan 80,000 Sundry Debtors 30000

Sundry creditors 50,000 Advances 10000

Provision for taxation 20,000 Cash Balance 10000

The sales for the year were $ 5,60,000.

Capital + Reserves 355 Net Fixed Assets 265

P & L Credit Balance 7 Cash 1

Loan From S F C 100 Receivables 125

Bank Overdraft 38 Stocks 128

Creditors 26 Prepaid Expenses 1

Provision of Tax 9 Intangible Assets 30

Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?

Ans : (Average Creditors / Purchases ) x 12

Therefore Net Working Capital = C. A – C.L

Exercise 8 : Suppose Current Ratio is

i.e. Current Liabilities is Rs.10,000

Hence Current Assets would be

Particulars Amount (in Rs.)

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