What do you mean by Ratio Analysis?
Answer :
Ratio Analysis is a technique of financial analysis. It describes the relationship between various items of Balance Sheet and Income Statements. It helps us in ascertaining profitability, operational efficiency, solvency, etc. of a firm. It may be expressed as a fraction, proportion, percentage and in times. It enables budgetary controls by assessing qualitative relationship among different financial variables. Ratio Analysis provides vital information to various accounting users regarding the financial position and viability and performance of a firm. It also lays down the basic framework for decision making and policy designing by management.
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Who are the users of financial ratio analysis? Explain the significance of ratio analysis to them?
Answer :
The users of financial ratio analysis are as follows:
1. Investors
2. Management
3. Short term Creditors
4. Long term Creditors.
The following points signify the importance of ratio analysis for these users.
1. Investors The main concern for the investors is the security of the funds invested by them in the business and returns on their investments. The security of the funds is directly related to the profitability and operational efficiency of the business. Consequently, they are interested in knowing Earnings Per Share, Return on Investment and Return on Equity.
2. Management They uses ratio analysis to determine how effectively the assets are being used. They are interested in future growth and prospects. They design various policy measures and draft future plans. Consequently, they are interested in Activity Ratios and Profitability Ratios like, Net Profit Ratio, Debtors Turnover Ratio, Fixed Assets Turnover Ratios, etc.
3. Shortterm Creditors Shortterm creditors are interested in timely payment of their debts in short run. Consequently, they are interested in Liquidity Ratios like, Current Ratio, Quick Ratios etc. These ratios reveal the current financial position of the business.
4. Longterm Creditors Longterm creditors provide funds for more than one year, so they are interested in long term solvency of the firm and in assessing the ability of the firm to pay timely interests. Consequently, they are interested in calculating Solvency Ratios like, DebtEquity Ratio, Proprietary Ratio, Total Assets to Debt Ratio, Interest Coverage Ratio, etc.
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What are the various types of ratios?
Answer :
What are liquidity ratios? Discuss the importance of current and liquid ratio.
Answer :
What relationships will be established to study:
a. Inventory Turnover
b. Debtor Turnover
c. Payables Turnover
d. Working Capital Turnover.
Answer :
How would you study the solvency position of the firm?
Answer :
Why would the inventory turnover ratio be more important when analysing a grocery store than an insurance company?
Answer :
What are important profitability ratios? How are they worked out?
Answer :
The liquidity of a business firm is measured by its ability to satisfy its longterm obligations as they become due? Comment.
Answer :
Financial ratio analysis is conducted by four groups of analysts: managers, equity investors, longterm creditors, and shortterm creditors. What is the primary emphasis of each of these groups in evaluating ratios?
Answer :
The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of day's sales in inventory. Explain.
Answer :
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 :
Following is the Balance Sheet of Rohit and Co. as on March 31, 2006
Liabilities 
Amount Rs 
Assets 
Amount Rs 
Share Capital 
1,90,000 
Fixed Assets 
1,53,000 
Reserves 
12,500 
Stock 
55,800 
Profit and Loss 
22,500 
Debtors 
28,800 
Bills Payables 
18,000 
Cash at Bank 
59,400 
Creditors 
54,000 



2,97,000 

2,97,000 




Calculate Current Ratio
Answer :
Following is the Balance Sheet of Title Machine Ltd. as on March 31, 2006.
Liabilities 
Amount Rs 
Assets 
Amount Rs 
Equity Share Capital 
24,000 
Buildings 
45,000 
8% Debentures 
9,000 
Stock 
12,000 
Profit and Loss 
6,000 
Debtors 
9,000 
Bank Overdraft 
6,000 
Cash in Hand 
2,280 
Creditor 
23,400 
Prepaid Expenses 
720 
Provision for Taxation 
600 



69,000 

69,000 




Calculate Current Ratio and Liquid Ratio.
Answer :
Current Ratio is 3:5. Working Capital is Rs 9,00,000. Calculate the amount of Current Assets and Current Liabilities.
Answer :
Shine Limited has a current ratio 4.5:1 and quick ratio 3:1; if the stock is 36,000, calculate current liabilities and current assets.
Answer :
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 stock.
Answer :
Handa Ltd.has stock of Rs 20,000. Total liquid assets are Rs 1,00,000 and quick ratio is 2:1. Calculate current ratio.
Answer :
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 :
Calculate Current Ratio if:
Stock is Rs 6,00,000; Liquid Assets Rs 24,00,000; Quick Ratio 2:1.
Answer :
Compute Stock Turnover Ratio from the following information:

Rs 
Net Sales 
2,00,000 
Gross Profit 
50,000 
Closing Stock 
60,000 
Excess of Closing Stock over Opening Stock 
20,000 
Answer :
Calculate following ratios from the following information:
(i) Current ratio (ii) Acid test ratio (iii) Operating Ratio (iv) Gross Profit Ratio

Rs 
Current Assets 
35,000 
Current Liabilities 
17,500 
Stock 
15,000 
Operating Expenses 
20,000 
Sales 
60,000 
Cost of Goods Sold 
30,000 
Answer :
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:

Rs 
Sales 
25,20,000 
Net Profit 
3,60,000 
Cast of Sales 
19,20,000 
Longterm Debts 
9,00,000 
Creditors 
2,00,000 
Average Inventory 
8,00,000 
Current Assets 
7,60,000 
Fixed Assets 
14,40,000 
Current Liabilities 
6,00,000 
Net Profit before Interest and Tax 
8,00,000 
Answer :
Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:

Rs 
Paidup Capital 
5,00,000 
Current Assets 
4,00,000 
Net Sales 
10,00,000 
13% Debentures 
2,00,000 
Current Liability 
2,80,000 
Cost of Goods Sold 
6,00,000 
Answer :
Calculate Stock Turnover Ratio if:
Opening Stock is Rs 76,250, Closing Stock is 98,500, Sales is Rs 5,20,000, Sales Return is Rs 20,000, Purchases is Rs 3,22,250.
Answer :
Calculate Stock Turnover Ratio from the data given below:

Rs 
Stock at the beginning of the year 
10,000 
Stock at the end of the year 
5,000 
Carriage 
2,500 
Sales 
50,000 
Purchases 
25,000 
Answer :
A trading firm's average stock is Rs 20,000 (cost). If the stock turnover ratio is 8 times and the firm sells goods at a profit of 20% on sale, ascertain the profit of the firm.
Answer :
You are able to collect the following information about a company for two years:


2004 

2005 
Book Debts on Apr. 01 
Rs 
4,00,000 
Rs 
5,00,000 
Book Debts on Mar. 30 


Rs 
5,60,000 
Stock in trade on Mar. 31 
Rs 
6,00,000 
Rs 
9,00,000 
Sales (at gross profit of 25%) 
Rs 
3,00,000 
Rs 
24,00,000 
Calculate Stock Turnover Ratio and Debtor Turnover Ratio if in the year 2004 stock in trade increased by Rs 2,00,000.
Answer :
The following Balance Sheet and other information, calculate following ratios:
(i) Debt Equity Ratio (ii) Working Capital Turnover Ratio (iii) Debtors Turnover Ratio
Liabilities 
Amount Rs 
Assets 
Amount Rs 
General Reserve 
80,000 
Preliminary Expenses 
20,000 
Profit and Loss 
1,20,000 
Cash 
1,00,000 
Loan @15% 
2,40,000 
Stock 
80,000 
Bills Payable 
20,000 
Bills Receivables 
40,000 
Creditors 
80,000 
Debtors 
1,40,000 
Share Capital 
2,00,000 
Fixed Assets 
3,60,000 

7,40,000 

7,40,000 




Answer :
The following is the summerised Profit and Loss account and the Balance Sheet of Nigam Limited for the year ended March 31, 2007 :
Expenses/Losses 
Amount Rs 
Revenue/Gains 
Amount Rs 
Opening Stock 
50,000 
Sales 
4,00,000 
Purchases 
2,00,000 
Closing Stock 
60,000 
Direct Expenses 
16,000 


Gross Profit 
1,94,000 



4,60,000 

4,60,000 
Salary 
48,000 
Gross Profit 
1,94,000 
Loss on Sale of Furniture 
6,000 


Net Profit 
1,40,000 



1,94,000 

1,94,000 




Balance Sheet of Nigam Limited as on March 31, 2007


Liabilities 
Amount Rs 
Assets 
Amount Rs 
Profit and Loss 
1,40,000 
Stock 
60,000 
Creditors 
1,90,000 
Land 
4,00,000 
Equity Share Capital 
2,00,000 
Cash 
40,000 
Outstanding Expenses 
70,000 
Debtors 
1,00,000 

6,00,000 

6,00,000 




Calculate:
(i) Quick Ratio
(ii) Stock Turnover Ratio
(iii) Return on Investment
Answer :
From the following, calculate (a) Debt Equity Ratio (b) Total Assets to Debt Ratio (c) Proprietary Ratio.

Rs 
Equity Share Capital 
75,000 
Preference Share Capital 
25,000 
General Reserve 
50,000 
Accumulated Profits 
30,000 
Debentures 
75,000 
Sundry Creditors 
40,000 
Outstanding Expenses 
10,000 
Preliminary Expenses to be writtenoff 
5,000 
Answer :
Cost of Goods Sold is Rs 1,50,000. Operating expenses are Rs 60,000. Sales is Rs 2,60,000 and Sales Return is Rs 10,000. Calculate Operating Ratio.
Answer :
The following is the summerised transactions and Profit and Loss Account for the year ending March 31, 2007 and the Balance Sheet as on that date.
Expenses/Losses 
Amount Rs 
Revenue/Gains 
Amount Rs 
Opening Stock 
5,000 
Sales 
50,000 
Purchases 
25,000 
Closing Stock 
7,500 
Direct Expenses 
2,500 


Gross Profit 
25,000 



57,500 

57,500 
Administrative Expenses 
7,500 
Gross Profit 
25,000 
Interest 
1,500 


Selling Expenses 
6,000 


Net Profit 
10,000 



25,000 

25,000 




Liabilities 
Amount Rs 
Assets 
Amount Rs 
Share Capital 
50,000 
Land and Building 
25,000 
Current Liabilities 
20,000 
Plant and Machinery 
15,000 
Profit and Loss 
10,000 
Stock 
7,500 


Sundry Debtors 
7,500 


Bills Receivables 
6,250 


Cash in Hand and at Bank 
8,750 


Furniture 
10,000 

80,000 

80,000 




Calculate (i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Stock Turnover Ratio (v) Fixed Assets Turnover Ratio.
Answer :
From the following information calculate Gross Profit Ratio, Stock Turnover Ratio and Debtors Turnover Ratio.

Rs 
Sales 
3,00,000 
Cost of Gods Sold 
2,40,000 
Closing Stock 
62,000 
Gross Profit 
60,000 
Opening Stock 
58,000 
Debtors 
32,000 
Answer :
Company Accounts and Analysis of Financial Statements  Accountancy : CBSE NCERT Exercise Solutions for Class 12th for Accounting Ratios will be available online in PDF book form soon. The solutions are absolutely Free. Soon you will be able to download the solutions.
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