1.

Assuming the current ratio of a company is 2, state in each of the following

cases whether the ratio will improve or decline or will have no change:

(i) Payment of Current Liability

(ii) Purchase of Fixed Assets
(iii) Cash Collected from Customers
(iv) Bills Receivable Dishonoured
(v) Issue of New shares CA(F) 90/ ACS (F) 87

Answer;

Current Ratio = Current Assets =2:1

Current Liabilities

Thus, if Current Assets in Rs. 2 Lakhs then Current Liability will be Rs 1 Lakh.

(i) Payment of Current Liability will reduce the numerator and

denominator. E.g. if Liability of Rs. 10,000/- paid it will come down
to:
Rs. 1,00,000 - Rs. 10,000 = Rs. 90,000/-
Under Current Assets cash will come down resulting in current Assets:

= Rs. 2,00,000 – Rs. 10,000 = Rs.1,90,000/-

In this case Current Ratio:

= CA = 1.90 = 19 = 2.11:1
CL 0.90 9

Payment of Current Liability will improve Current Ratio.

(ii) Purchase of Fixed Assets: The Cash and Bank Component will come
down. Current Liability will remain unchanged.

Current Ratio will Decline.

(iii) Cash Collected from Debtors: In this case Cash position will go up
while Debtors will be reduced. In this way total Current Assets will
remain unchanged.

Thus, it will not change.

 (iv) Bills Receivable Dishonoured: Bills Receivable will Come Down. ……
Debtors will go up. Thus, CA will remain unchanged.

Current Ratio will not change.

(v) Issue of New Shares: Cash will go up. It will result in increase in
Current Assets. Numerator improvement with constant Current
Liability will improve Current Ratio.

2. The following figures are extracted from the books of ABC Ltd. And XYZ Ltd.
(Rs. in Lakhs):

ABC Ltd. XYZ Ltd.

Sales 800 1000
Net Proift 60 50
Capital Employed 400 250

Calculate the Primary Ratio by establishing two secondary ratio of which the
primary ratio is composed of and also give your judgement on the performance of
both the companies.

Answer. A(SCF) 86

Primary Ratio:

Return on Capital Employed = Net Profit

Capital Employed

ABC Ltd. = 60 x 100 = 15%

400

XYZ Ltd. = 50 x 100 = 20%

250

Two Secondary Ratios Net Profit x Sales

Sales Capital Employed.

Net Profit =
Sales

ABC Ltd. = 60 x 100 = 7.5%

800
XYZ Ltd. = 50 x 100 = 5%
1000

Net Profit Ratio:

ABC XYZ
Net Profit = 7.5 % 5%
Sales

Sales
Capital Employed

ABC Ltd = 800 x 100% = 200%

400

XYZ Ltd = 1000 x 100% = 400%

250

Net Profit x Sales x 100

Sales Capital Employed.

ABC Ltd. = 60 x 800 = 3 = 15 %

800 400 20

XYZ Ltd. = 50 x 1000 = 20 %

1000 250

Judgment:

(i) Net Profit of ABC Ltd (7.5%) is higher than that of XYZ Ltd.
(ii) Return on Capital Employed of ABC Ltd. (15%) is less than of XYZ Ltd.
(20%)
Question: 3

Mr. X intends to supply goods to Ram Ltd. And Shyam Limited. The relevant financial
data’s of these two companies for the year ended 31.03.2014 are as follows:

Ram Ltd. Shyam Ltd.

Terms of Payment 3 Months 3 Months
Rs. Rs.
Stock 8,00,000 1,00,000
Debtors 1,70,000 1,40,000
Cash 30,000 60,000
Creditors 3,00,000 1,60,000
Bank Over Draft 40,000 30,000
Creditors for Expenses 60,000 10,000
Purchases (Total) 9,30,000 6,60,000
Purchases (Cash) 30,000 20,000

Advise with reasons, as to which Company he should prefer to deal with

ACS (1) Adapted

Answer:

In order to arrive at the conclusion Current Ratio, Liquid Ratio, Creditors Velocity
and Average Credit period of both Ram Ltd. And Shyam Ltd. is required to be
compared:

Ram Ltd. Shyam Ltd.

Stock 8,00,000 1,00,000
Debtors 1,70,000 1,40,000
Cash 30,000 60,000
Current Assets 10,00,000 3,00,000

Ram Ltd. Shyam Ltd.

Trade Creditors 3,00,000 1,60,000
Bank O/D 40,000 30,000
Creditors for
Expanses 60,000 10,000
Current Liabilities 4,00,000 2,00,000

(i)Current Ratio : CA/CL

=1000000/400000 =2.5 :1 300000/200000 =1.5:1
(ii) Liquid Ratio:

Liquid Assets = Current Assets - Stock

Current Liabilities Current Liabilities

= 10,00,000 - 8,00,000 3,00,000 - 1,00,000

4,00,000 2,00,000

= 2,00,000 2,00,000
4,00,000 2,00,000

= 0.5:1 1:1

(iii) Creditors’ Turnover Ratio (Creditors’ Velocity)

Credit Purchases
Creditors = 9,30,000 - 30,000 6,60,000 - 20,000
3,00,000 1,60,000

= 9,00,000 6,40,000
3,00,000 1,60,000

= 3 Times 4 Times

(iv) Average Credit

Period = 365 365

3 4

Days in Year = 122 days 91 days

Creditors’ Turnover Ratio
 Analysis: Liquid Ratio, Creditors’ Velocity and Average Credit Period are better in
case of Shyam Ltd.

Terms of payment: 3 months, is followed by Shyam Ltd. because its Average Credit
period 91 days.

Current Ratio, is better in case of Ram Ltd. but Ram Ltd. is less reliable in
comparison to Shyam Ltd. on the basis of Liquidity Credit Velocity and Average
collection Period.
Ram is discharging its liability in average period of 4 months4.

From Creditors’ point of view Shyam ltd. is better to deal with.

4.The Profit and Loss A/c of M/s. Happy ltd. for the year ended 31.03.2014 is given
below:

Profit and Loss A/c for the year ended 31.03.2014.

To Opening Stock 90,000 By Sales 9,00,000
To Purchases 5,60,000 By Closing Stock 90,000
To Wages 2,14,000
To Salaries 16,000
To Electricity 10,000
To Misce Expenses 10,000
To Depreciation 30,000
To Net Profit 60,000
9,90,000 9,90,000

Balance Sheet as on 31.03.2014

Share Capital
Equity Share 1,80,000 Fixed Assets 5,40,000
Reserve & Surplus 1,20,000 Less Depreciation 1,50,000 3,90,000
Secured Loans 2,10,000 Stock 90,000
Sundry Creditors 90,000 Sundry Debtors 1,05,000
Cash 15,000
6,00,000 6,00,000

Discuss under the following important functional grouping the usual ratios and
comment on the financial strength of the company:
(i) Liquidity and Solvence Test Ratio
(ii) Profitability Test Ratio
(iii) Overall measures Ratio
 ACS (I) (Adapted)
Answer:

(i) Current Ratio:

Current Assets:
Stock 90,000
Sundry Debtors 1,05,000
Cash 15,000
Current Assets 2,10,000
Current Liabilities: Sundry Creditors = 90,000

Current Ratio = CA = 2,10,000 = 2.3:1

CL 90,000

The Slandered Ratio is 2%

Thus, the Company has sufficient fund to meet its current liabilities.
The Company’s position is more than satisfactory.

(ii) Liquid Ratio:

Liquid Assets = Current Assets - Stock

Current Liabilities Current Liabilities

2,10,000 - 90,000 = 1,20,000 = 1.3

90,000 90,000

The normal standard is 1. The Company’s position is 1:3. Thus it is satisfactory.

(C) Solvency Test Ratios: Debt - Equity Ratio

(i) Debts = Secured Loan

Share Holders’ Fund Share Capital Reserve

Rs. 2,10,000 = 2,10,000 = 0.7

Rs. 1,80,000+Rs. 1,20,000 3,00,000

(ii) Debts = Rs. 2,10,000 = 2,10,000

Long Term Funds . Debt + Equity 2,10,000 + 3,00,000
=210000/510000 =0.41
 (iii) External Equities = Loan + Creditors = 2,10,000 + 90,000
Internal Equities Share Holder Fund 1,80,000 + 1,20,000

= 3,00,000 = 1 The company can raise more funds than it is

3,00,000 having.It is adopting conservatism and therefore
not raising funds.

Fixed Assets Ratio:

Fixed Assets = 3,90,000 = 3,90,000 = 0.76

Loan Term Funds Debt + Equity 5,10,000

The Long term funds have been utilised for meeting part of working Capital
requirements.
The ratio is Satisfactory.

Profitability Test Ratio:

(i) Net Profit Ratio = Net Profit x 100

Sales

= 60,000 x 100 = 6.7%

9,00,000

The ratio is unsatisfactory.

Overall Ratio:

Return on Share Holders’ Fund =

Net Prof. = 60,000

Share holders’ Fund E-Share + Reserve

= 60,000 = 60,000 = 0.2 or 20%

1,80,000 + 20,000 3,00,000

The Ratio is Satisfactory.

 (iv) Return on Capital Employed:

Net Prof. after Interest and Tax

Capital Employed

= 60,000 = 60,000 = 60,000

Share Holders’ Fund + Debt 3,00,000 + 2,10,000 5,10,000

= 0.117 or 11.7%

On the basis of following figures derived from the Accounts of X Ltd. prepare a report
on the level of efficiency of financial and operating management of the company:

Capital Turnover Net Profit on ROI Current

Year
Ratio Sales (%) Ratio
1 1.0 8 8 6
2 2.0 10 20 4
3 3.0 11.5 34.5 2
4 5.0 13 65 0.5

Answer:

To,
The Managing Director
X Company Ltd.

Subject: Level of efficiency on financial and operational Management.

Dear Sir,
The figures of the company has been analysis by the undersigned.
Accordingly, the observation of operational and financial management is being given
as hereunder.
Year 1: The Company has not been able to utilise its capacity and therefore its capital
turnover is low. The co. has large amount of unutilised funds and therefore, its
working capital is high. Its Current Ratio establishes this status. This is a case of over
capitalisation. That is why Return on investment (ROI) and net profit is not
satisfactory.
Year 2: There has been some improvement in comparison to previous year. However
there is large scope for reduction in current Ratio and improvement in Capital
Turnover Ratio.
Year 3: Lower Current Ratio and Higher Capital Turn Ratio indicates good effort from
the management. ROI is showing significant Recovery.
Year 4: Capital Turnover Ratio, net profit to sales ratio and ROI is quite high. Current
Ratio is too low and it is not a good situation. It requires improvement.
Conclusion: The ratio maintained in 4th year be continued. However the profit may be
ploughed back to maintain Current Ratio at 2.

Yours’ faithfully

Legal Advisor

6.From the Following information as contained in the Income statement and Balance
Sheet of AB Ltd. for the year 2013, you are required to prepare a Funds Flow Statement
and describe the significant development revealed by the statement. You are also
required to prepare a statement of working Capital showing increase and decrease in
each component thereof:
Answer:
A. Income Statement and Reconciliation of Earnings for 2013.

Net Sale 25,20,000

Less: Cost of Sales 19,80,000
Depreciation 60,000
Salaries and Wages 2,40,000
Operating Expanses 80,000
Provision for Tax 88,000 24,48,000

Net Operating Profit 72,000

Non-Operating Income
Profit on sale of Equipment 12,000
--------
84000

Retained Earnings (Balance in P&L A/c) 1,51,800

2,35,800

Less: Dividend declared and Paid during the year 72,000

Profit & Loss A/c Balance as on 31.03.2013 1,63,800

B. Comparative Balance Sheet

As on 31.03.2012 As on 31.03.2013
Fixed Assets

Land 48,000 96,000

Buildings & Equipments 3,60,000 5,76,000

Current Assets
Cash 60,000 72,000
Debtors 1,68,000 1,86,000
Stock 2,64,000 96,000
Advances 7,800 9,000
9,07,800 10,35,000

Capital 3,60,000 4,44,000

Profit & Loss A/C 1,51,800 1,63,800
Creditors 2,40,000 2,34,000
Outstanding Expanses 24,000 48,000
Income Tax payable 12,000 13,200
Accumulated
Depreciation 1,20,000 1,32,000
9,07,800 10,35,000

Cost of equipment sold was Rs. 72,000

Answer:

1. Provision for Depreciation A/c

To Equipment sold 48,000 By Bal B/D 1,20,000
(Balancing Figure) ” Depreciation 60,000
1,80,000

To Bal c/d 1,32,000

1,80,000
(2) Equipment Sold
Cost 72,000
Less: Depreciation 48,000
Written Down
Value 24,000
Profit on Sale 12,000
Sale Proceeds 36,000

(3) Equipment Sold A/C

To Building & Equipment A/c 72,000 By Bank (Sales Price) 72,000
P&L A/c 12,000 " Balance C/F 5,76,000
84,000 6,48,000

(4) Building & Equipment A/c

To Balance 3,60,000 By Equipment Sold 72,000
Bank (Purchases) 2,88,000 " Balance C/F 5,76,000
6,48,000 6,48,000

Statement of Changes in working Capital.

As on
Increase Decrease
Particulars As on 31.03.2012 31.03.2013
A. Curent Assets
Cash 60,000 72,000
Debtors 1,68,000 1,86,000
Stock 2,64,000 96,000
Advances 7,800 96,000
4,99,800 3,36,000

B. Current Liabilities
S. Creditors 2,40,000 2,34,000
O/s Expenses 24,000 48,000
Tax Payable 12,000 13,200
2,76,000 2,95,200
C. Working Capital
(A-B) 2,23,800 67,800 -- 1,56,000

Funds Flow Statement

SOURCES APPLICATIONS
Net operating profit 72000 Purchase of Fixed Assets
Add: Depreciation 60000 Land 48000
Funds from operations:132000 Building and Equipments 288000
Issue of capital 84000 ------------
Sale of Equipment 36000 336000
Decrease in working capital 156000 Dividend Paid 72000
408000 408000

Significant Development:1.Decrease in working capital of Rs.156000is good.

Reduction in stock is encouraging.
2.Expansion in Fixed Assets has been carried out firstly by issue of capital and
secondly through reduction in working capital.