NCERT Solutions for Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 5

Accounting Ratios Class 12

Short answerslong answers : Solutions of Questions on Page Number : 272

Q1 :

What do you mean by Ratio Analysis?

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.

Q2 :

Who are the users of financial ratio analysis? Explain the significance of ratio analysis to them?

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. Short-term Creditors- Short-term 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. Long-term Creditors- Long-term 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, Debt-Equity Ratio, Proprietary Ratio, Total Assets to Debt Ratio, Interest Coverage Ratio, etc.

Q3 :

What are the various types of ratios?

Q4 :

What are liquidity ratios? Discuss the importance of current and liquid ratio.

Q5 :

What relationships will be established to study:

a. Inventory Turnover

b. Debtor Turnover

c. Payables Turnover

d. Working Capital Turnover.

Q6 :

How would you study the solvency position of the firm?

Q7 :

Why would the inventory turnover ratio be more important when analysing a grocery store than an insurance company?

Q8 :

What are important profitability ratios? How are they worked out?

Q9 :

The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due? Comment.

Q10 :

Financial ratio analysis is conducted by four groups of analysts: managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

Q11 :

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.

Q12 :

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.

Numerical questions : Solutions of Questions on Page Number : 273

Q1 :

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

Q2 :

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.

Q3 :

Current Ratio is 3:5. Working Capital is Rs 9,00,000. Calculate the amount of Current Assets and Current Liabilities.

Q4 :

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.

Q5 :

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.

Q6 :

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.

Q7 :

Calculate debt equity ratio from the following information:

 Rs Total Assets 15,00,000 Current Liabilities 6,00,000 Total Debts 12,00,000

Q8 :

Calculate Current Ratio if:

Stock is Rs 6,00,000; Liquid Assets Rs 24,00,000; Quick Ratio 2:1.

Q9 :

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

Q10 :

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

Q11 :

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 Long-term 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

Q12 :

Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:

 Rs Paid-up 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

Q13 :

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.

Q14 :

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

Q15 :

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.

Q16 :

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.

Q17 :

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

Q18 :

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

Q19 :

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 written-off 5,000

Q20 :

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.

Q21 :

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.

Q22 :

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