Ratio Analysis

Ratio Analysis
It describes the significant relationship which

exists between various items of a balance sheet and a

profit and loss account of a firm.

 It is possible to assess the profitability, solvency and

efficiency of an enterprise through the technique of ratio
analysis
 Objectives of Ratio analysis

S Simplify complex figures and establish relationships.

P
Provides comparative analysis.

I
Identification of problem areas.

C
Check effectiveness of decisions.

E
Enables SWOT analysis.
Simplify complex figures and establish relationships.
Simplifying the complex accounting figures and

bring out their relationships and assess the

managerial efficiency, firm’s credit worthiness, earning

capacity, etc.
Provides Comparative Analysis
Comparisons with certain bench marks to assess as to
whether firm, performance is better or otherwise.

For this purpose, the profitability, liquidity, solvency, etc.

Of a business may be compared:
Identification of problem areas
Identifying the problem areas as well as the bright areas
of the business.

Problem areas would need more attention and bright areas

will need polishing to have still better results.
Check effectiveness of decisions
Understand whether the business firm has taken the right
kind of operating, investing and financing decisions.

It indicates how far they have helped in improving the

performance.
Enables SWOT analysis.
Helps the management a great deal in understanding

the current threats and opportunities and allows business to

do its

own

SWOT (Strength- Weakness-Opportunity-Threat) analysis.

 Limitations of Ratio analysis

I
Ignore price-level changes

D
Different accounting practices

E
Effected of personal ability and bias

A
Affected by window dressing
Ignore Price-level Changes
Analysis is based on stable money measurement principle.

A change in the price level makes analysis of financial

statement of different

accounting years meaningless because accounting records

ignore changes in value of money.
Different Accounting Practices
There are differing accounting policies for

valuation of stock, calculation of depreciation, treatment

of intangibles, etc. available for various aspects of
business transactions.

Valid comparison of their financial statements is not

possible
Effected by Non-monetary Aspects
Accounting provides information about quantitative (or
monetary) aspects of business.

It reflects only the monetary aspects,

ignoring completely the non-monetary (qualitative) factors.

.
Affected by personal judgment
Accounting data “reflect a combination of recorded facts,
accounting conventions and personal judgments .

Thus, the ratio analysis may not reveal the true state of
affairs and so the analysis

will also not give the true picture.

 Types of ratios

Profitability
Liquidity Ratio Solvency Ratio Turnover Ratio
Ratio

Debt equity Inventory Gross Profit

Current ratio ratio Turnover Ratio Ratio

Proprietary Trade receivable

Quick ratio ratio Turnover Ratio
Operating Ratio

Total assets to Working Capital Operating Profit

debts ratio Turnover Ratio Ratio

Interest Trade payable

Net Profit Ratio
converge ratio Turnover Ratio

Return Of
Investment Ratio
Liquidity Ratio
To meet its commitments, business needs liquid funds.

The ability of the business to pay the amount due to

stakeholders as and when it is due is known as liquidity,

and the ratios calculated to measure it are known as

‘Liquidity Ratios’. They are essentially short-term in
nature.
 Current Assets
Current Ratio/ Working Capital Ratio =
Current Liability
Current Assets Current Liability
•Trade Receivables (debtors • Bank Overdraft
and bills receivables
•Trade Payable (Creditors And
•Inventories (Excluding Spare Bills Payables)
Parts and Loose Tools)
•Outstanding Expense
•Trade investment and
Marketable Securities •Unearned Income

•Cash in hand •Provision for Tax

•Bank balance •Proposed Dividend,

•Prepaid expenses •Unclaimed Dividend,

•Accrued income •Provision For Doubtful Debts

•Short term loans and •Short term borrowings

advances
 Standard Ratio 2 : 1
 Liquidity ratio

Quick Ratio/ Liquid Ratio/ Acid Quick Assets/Liquid Assets

Test Ratio =
Current Liability
Quick Assets/Liquid Assets =
Quick Assets = Current Assets – Inventories- Prepaid expenses
–Advance tax
Current Liability
•Short-term Borrowings
•Trade Payables
•Other Current
•Liabilities
•Short-term Provisions

 Standard Ratio 1 : 1
 From the following compute Current Ratio/ quick ratio
No Items Rs No Items Rs
1 Current Investments 40,000 7 Short-Term Provisions 3,000
2 Inventories 5,000 8 Other Current Liabilities 5,000
3 Trade Receivables 2,000 9 Short-term Loans & 4,000
Advances
4 Short-term Borrowings 20,000 10 Tangible Fixed Assets 1,00,000
5 Trade Payables 2,500 11 Cash & Cash Equivalents 10,000
6. Prepaid expenses 2,000 12 Advance tax 8,000
Current Assets = Current Investments + Inventories + Trade
Receivables + Cash & Cash Equivalents + Short-term Loans & Advances +
Prepaid expenses +Advance tax
= 40,000 + 5,000 + 2,000 + 10,000 + 4,000 + 2,000 + 8,000
= 71,000

Current Liabilities = Short-term Borrowings + Trade payables + Short-

term Provisions + Other Current Liabilities
= 20,000 + 2,500 + 3,000 + 5,000
= 30,500

Current Assets 71,000

Current Ratio = = = 2.32 : 1
Current Liability 30,500
 From the following compute Current Ratio/ quick ratio
No Items Rs No Items Rs
1 Current Investments 40,000 7 Short-Term Provisions 3,000
2 Inventories 5,000 8 Other Current Liabilities 5,000
3 Trade Receivables 2,000 9 Short-term Loans & 4,000
Advances
4 Short-term Borrowings 20,000 10 Tangible Fixed Assets 1,00,000
5 Trade Payables 2,500 11 Cash & Cash Equivalents 10,000
6. Prepaid expenses 2,000 12 Advance tax 8,000
Quick Assets = Current Assets – Inventories- Prepaid expenses –
Advance tax
= 71,000 – 5,000 – 8,000 - 2,000
= 56,000

Current Liabilities = Short-term Borrowings + Trade payables + Short-

term Provisions + Other Current Liabilities
= 20,000 + 2,500 + 3,000 + 5,000
= 30,500

Quick Assets 56,000

Quick Ratio = = = 1.8 : 1
Current Liability 30,500
 From the following compute Current Ratio
No Items Amount` No Items Amount
1 Total Assets 1,00,000 3 Non-Current Liabilities 20,000

2 Shareholders’ Funds 60,000 4 Non-Current Assets 50,000

Current Assets = Total Assets – Non- Current Assets

= 1,00,000 – 50,000
= 50,000

Current Liabilities = Total Assets – Shareholders Funds – Non-Current

liabilities
= 1,00,000 – 60,000 – 20,000
= 20,000

Current Assets 50,000

Current Ratio = = = 2.5 : 1
Current Liability 20,000
PROBLEM

The current Ratio of a company is 2:1. State giving reasons which

of the following would improve, reduce or not change in the ratio

1. Repayment of current liability.

2. Purchased goods on credit.
3. Sale of an office typewriter (Book value – Rs. 4,000) for Rs.
3,000 only;
4. Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000;
5. Payment of dividend.

Solution
Let us assume that current assets are Rs. 200,000 and current liabilities
are Rs. 100,000; and so the current ratio is 2:1

Case 1st Assume;- Rs. 50,000 of creditors is paid by cheque

2,00,00 - 50000 1,50,000

Current Ratio =
1,00,000- 50000
=
50,000 = 3 : 1

Improve
PROBLEM

The current Ratio of a company is 2:1. State giving reasons which

of the following would improve, reduce or not change in the ratio

1. Repayment of current liability.

2. Purchased goods on credit.
3. Sale of an office typewriter (Book value – Rs. 4,000) for Rs.
3,000 only;
4. Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000;
5. Payment of dividend.

Solution
Let us assume that current assets are Rs. 200,000 and current liabilities
are Rs. 100,000; and so the current ratio is 2:1

Case 2nd Assume;- Rs. 100,000 of goods purchase on credit

2,000,00 + 1,00,000 3,00,000

Current Ratio =
1,00,000 + 1,00,000
=
2,00,000 = 1.5 : 1

Reduce
PROBLEM

The current Ratio of a company is 2:1. State giving reasons which

of the following would improve, reduce or not change in the ratio

1. Repayment of current liability.

2. Purchased goods on credit.
3. Sale of an office typewriter (Book value – Rs. 4,000) for Rs.
3,000 only
4. Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000
5. Payment of dividend.

Solution
Let us assume that current assets are Rs. 200,000 and current liabilities
are Rs. 100,000; and so the current ratio is 2:1

Case 3rd

2,00,00 + 3000 2,0 3,000

Current Ratio =
1,00,000
=
1,00,000 = 2.03 : 1

Improve
PROBLEM

The current Ratio of a company is 2:1. State giving reasons which

of the following would improve, reduce or not change in the ratio

1. Repayment of current liability.

2. Purchased goods on credit.
3. Sale of an office typewriter (Book value – Rs. 4,000) for Rs.
3,000 only;
4. Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000
5. Payment of dividend.

Solution
Let us assume that current assets are Rs. 200,000 and current liabilities
are Rs. 100,000; and so the current ratio is 2:1

Case 4th

2,00,00 – 10,000 + 11,000 2,01,000

Current Ratio =
1,00,000
=
1,00,000 = 2.01 : 1

Improve
PROBLEM

The current Ratio of a company is 2:1. State giving reasons which

of the following would improve, reduce or not change in the ratio

1. Repayment of current liability.

2. Purchased goods on credit.
3. Sale of an office typewriter (Book value – Rs. 4,000) for Rs.
3,000 only;
4. Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000;
5. Payment of dividend.

Solution
Let us assume that current assets are Rs. 200,000 and current liabilities
are Rs. 100,000; and so the current ratio is 2:1

Case 5th Assume;- Rs. 50,000 of dividend is paid by cheque

2,00,00 - 50000 1,50,000

Current Ratio =
1,00,000- 50000
=
50,000 = 3 : 1

Improve
PROBLEM

The current Ratio of a company is 2:1. State giving reasons which

of the following would improve, reduce or not change in the ratio

1. Cash paid to trade payables

2. Sale of fixed tangible assets for cash
3. Issue of new shares for cash
4. Payment of final dividend already declared.

Sr. Effect on Reason

current ratio
1 Improve Both current assets and current liabilities have decreased
by the same amount

2 Improve Current liabilities remain unchanged but current assets

have increased

3 Improve Current liabilities remain unchanged but current assets

have increased
4
Both current assets and current liabilities have decreased
Improve
by the same amount
Given
Current Ratio Is 4 : 1 and Acid Test Ratio is 2.5 : 1

It means

Current Assets = 4

Current Liability = 1

Quick Assets = 2.5

Working Capital = Current Assets Current Liability

Working Capital = 4 1 = 3

Inventory = Current Assets Quick Assets

Inventory = 4 2.5 = 1.5

 Problem
Current liabilities of a company are Rs 3,50,000. Its current ratio is 3:1
and Acid Test Ratio is 1.75 : 1. Calculate the value Of Current Assets,
Liquid Assets and inventories

Current Assets
Current Ratio =
Current Liability

3 (Given) = Current Assets

3,50,000 (Given)

Current Assets = 3,50,000 X 3 = 10,50,000

Quick Assets
Quick Ratio =
Current Liability

Quick Assets
1.75 (Given) =
3,50,000 (Given)

Quick Assets = 3,50,000 X 1.75 = 6,12,500

Inventory = Current Assets Quick Assets

Inventory = 10,50,000 - 6,12,500 = 4,37,500

Problem
Current assets of the company are Rs 3, 60,000. Its current ratio is
2.4: 1 and acid test ratio is 1.3: 1. Calculate the value of current
liabilities, liquid assets and inventories

Current Assets
Current Ratio =
Current Liability

2.4 (Given) 3, 60,000 (Given)

=
Current Liability

Current Liability = 3, 60,000 / 2.4 = 1,50,000

Quick Assets
Quick Ratio =
Current Liability

Quick Assets
1.3 (Given) =
1,50,000

Quick Assets = 1,50,000 X 1.3 = 1,95,000

Inventory = 3, 60,000 - 1,95,000 = 1,65,000

Problem
Working capital of the company is Rs 30,000. Its current ratio is
2.5 : 1. Calculate the value of Current liability, acid test ratio.
Assuming inventory of Rs 26,000

Working capital = Current Assets Current Liability

Working capital = 2.5 (Given) 1 (Given)

1.5 = 2.5 1

30,000 = Current Assets

Current Assets = 30,000 X 2.5

= 50,000
1.5

Working capital = Current Assets Current Liability

30,000 = 50,000 Current Liability

Current Liability = 20,000

Problem
Working capital of the company is Rs 30,000. Its current ratio is
2.5 : 1. Calculate the value of Current liability, acid test ratio.
Assuming inventory of Rs 26,000

Quick Assets
Quick Ratio =
Current Liability

Quick Assets = Current Assets Inventory

Quick Assets = 50,000 26,000

Quick Assets = 24,000

24,000
Quick Ratio =
20,000

Quick Ratio = 1.2 : 1

Problem
The Current Ratio of A Ltd. is 4.5 : 1 and Liquid Ratio is 3:1.
Inventories are 3,00,000. Calculate current liabilities.

Inventory = Current Assets Quick Assets

1.5 = 4.5 3

3,00,000 = Current Assets

Current Assets = 3,00,000 X 4.5

= 9,00,000
1.5

Current Assets
Current Ratio =
Current Liability

9,00,000
4.5 =
Current Liability

Current Liability = 9,00,000 / 4.5 = 2,00,000

Problem
The ratio of current assets Rs 6,00,000 to current liability Rs 4,00,000
is 1.5 : 1. The accountant of the firm is interested in maintain a
current ratio of 2 : 1 by paying off a part of the current liabilities.
Compute the amount of current liabilities that should be paid so that
current ratio at the level of 2 : 1 may be maintained

Current Assets
Current Ratio =
Current Liability

Let the current liability paid be X

6,00,000 - X
2 = 4,00,000 - X

8,00,000 - 2X = 6,00,000 - X

X = 8,00,000 – 6,00,000

X = 2,00,000

Current liability paid will be Rs 2,00,000 to make the current ratio 2:!
Numerical Ability Zone
Problem
1. Current Ratio is 3.5:1. Working Capital is Rs. 9, 00,000. Calculate
the amount of Current Assets and Current Liabilities.
2. 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.
3. 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.
4. H 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
1. Current Assets Rs. 1,26,000 and Current Liabilities Rs. 36,000
2. Current Liabilities Rs. 1,08,000, current liabilities Rs. 24,000
3. Current Assts Rs. 3,00,000, Liquid Assets Rs. 75,000 and Inventory
Rs. 2,25,000
4. Current Ratio 2.4:1
Problem
The ratio of current assets Rs 3,00,000 to current liability Rs 1,25,000
is 2.4 : 1. The accountant of the firm is interested in maintain a
current ratio of 2 : 1 by acquiring some of the current assets on credit
Compute the amount of current assets that should be acquired so that
current ratio at the level of 2 : 1 may be maintained

Answer
Current Assets Rs. 50,000 must be acquired to maintain to current ratio
of 2 :1
Solvency Ratio
Solvency of business is determined by its ability

to meet its contractual obligations towards stakeholders,

particularly towards external stakeholders.

They are essentially long-term in nature,

 Solvency
Ratio

Total assets Interest

Debt equity Proprietary
to debts converge
ratio ratio
ratio ratio
 Debt/Long term loans
Debt Equity Ratio =
Equity/Shareholders Funds

Debt/Long Term Loans Equity/Shareholders’ Funds

•Debentures •Equity Shares Capital

•Mortgage Loan •Preference Share Capital

•Bank Loan •General Reserves

•Long Term Loan •Security Premium

•Public Deposits •Capital Reserves

•Long term provisions •Profit And Loss ( Cr. Balance)

•Less;- preliminary expenses

 Standard Ratio 2 : 1
Equity/Shareholders’ Funds
•Total Assets ( Non Current Assets + Current Assets)

•Less:- Current Liability

•Less:- Non current Liability (Long Term Debts + Long Term Provisions)

Equity/Shareholders’ Funds
•Non Current Assets

•Add :- Working Capital ( Current Assets – Current Liability)

•Less:- Non current Liability (Long Term Debts + Long Term Provisions)
Calculate Debt Equity Ratio
S. Items Amount
1 Equity share capital 5,00,000
2 General reserves 1,00,000
3 Accumulated profits 50,000
4 10% debentures 1,30,000
5 Current Assets 1,00,000
6. Preliminary expenses 10,000

Debt = 10% Debentures

Debt = 1,30,000
Equity/ Shareholders’ Funds = Equity share capital + General
reserves + Accumulated profits –
Preliminary Expenses
Equity/ Shareholders’ Funds = 5,00,000 + 1,00,000 + 50,000 -10,000
= 6,40,000
Debt
Debt Equity Ratio =
Equity/Shareholders Funds

Debt Equity Ratio = 1,30,000 = .203 : 1

6,40,000
Calculate Debt Equity Ratio
Items Amount
Total Assets 1,25,000
Total Debts 1,00,000
Current Liabilities 50,000

Long term debts = Total Debts – Current Liabilities

= 1,00,000 - 50,000
= 50,000

Equity = Total Assets - Total Debts

= 1,25,000 - 1,00,000
= 25,000

Debt
Debt Equity Ratio =
Equity/Shareholders Funds

Debt Equity Ratio = 50,000 = 2 : 1

25,000
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would Increase , decrease or not change
in the ratio

1. Further issue of equity shares

2. Cash received from debtors
3. Sale of goods on cash basis
4. Redemption of debentures
5. Purchase of goods on credit.

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Case 1st Assume;- Assume that Rs. 1,00,000 worth of equity shares are issued.

2,00,000 2,00,000
Debt Equity Ratio =
1,00,000 + 1,00,000
=
2,00,000 = 1 : 1

Decrease
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would Increase , decrease or not change
in the ratio

1. Further issue of equity shares

2. Cash received from debtors
3. Sale of goods on cash basis
4. Redemption of debentures
5. Purchase of goods on credit.

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Case 2nd Cash received from debtors will leave the Debt and Equity funds
unchanged
2,00,000 2,00,000
Debt Equity Ratio =
1,00,000
=
1,00,000 = 2 : 1

Unchanged
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would improve, reduce or not change in
the ratio

1. Further issue of equity shares

2. Cash received from debtors
3. Sale of goods on cash basis
4. Redemption of debentures
5. Purchase of goods on credit.

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Sale of goods on cash basis will leave the Debt and Equity funds
Case 3rd
unchanged
2,00,000 2,00,000
Debt Equity Ratio = = = 2 : 1
1,00,000 1,00,000

Unchanged
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would Increase , decrease or not change
in the ratio

1. Further issue of equity shares

2. Cash received from debtors
3. Sale of goods on cash basis
4. Redemption of debentures
5. Purchase of goods on credit.

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Case 4th Assume;- Rs. 50,000 of debentures are redeemed for cash

2,000,00 – 50,000 1,50,000

Debt Equity Ratio = = = 1.5 : 1
1,00,000 1,00,000

Decrease
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would Increase , decrease or not change
in the ratio

1. Further issue of equity shares

2. Cash received from debtors
3. Sale of goods on cash basis
4. Redemption of debentures
5. Purchase of goods on credit.

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Case 5th Purchase of goods on credit will leave the Debt and Equity
funds unchanged
2,00,000 2,00,000
Debt Equity Ratio =
1,00,000
=
1,00,000 = 2 : 1

Unchanged
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would Increase , decrease or not change
in the ratio

1. Conversion of debentures into equity shares.

2. Sale of a fixed asset at profit.
3. Purchase of a fixed asset on long-term deferred payment basis.
4. Payment to creditors

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Case 1st Assume;- Assume that Rs. 50,000 debentures were converted into shares

2,000,00 – 50,000 1,50,000

Debt Equity Ratio =
1,00,000 + 50,000
=
1,50,000 = 1 : 1

Decrease
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would Increase , decrease or not change
in the ratio

1. Conversion of debentures into equity shares.

2. Sale of a fixed asset at profit.
3. Purchase of a fixed asset on long-term deferred payment basis.
4. Payment to creditors

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Case 2nd Machinery costing Rs 2,00,000 was sold for Rs 3,00,000

2,00,000 2,00,000
Debt Equity Ratio =
1,00,000 + 1,00,000
=
2,00,000 = 1 : 1

Decrease
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would increase , decrease or not change
in the ratio

1. Conversion of debentures into equity shares.

2. Sale of a fixed asset at profit.
3. Purchase of a fixed asset on long-term deferred payment basis.
4. Payment to creditors .

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Machinery purchase of Rs 1,00,000 on credit for 2 years

Case 3rd

2,00,000 + 1,00,000 3,00,000

Debt Equity Ratio = = = 3 : 1
1,00,000 1,00,000

Increase
PROBLEM

The Debt Equity ratio of a company of a company is 2:1. State giving

reasons which of the following would Increase , decrease or not change
in the ratio

1. Conversion of debentures into equity shares.

2. Sale of a fixed asset at profit.
3. Purchase of a fixed asset on long-term deferred payment basis.
4. Payment to creditors

Solution
Let us assume that debts are Rs 2,00,000 and equity are Rs. 1,00,000.

Case 4th There will be no effect on debt and equity

2,000,00 2,00,000
Debt Equity Ratio = = = 2 : 1
1,00,000 1,00,000

Unchanged
Total Assets to Debt Ratio Total Assets
=
Debt

Total Assets
Debt/Long Term Loans
•Debentures • Non - Current Assets

•Mortgage Loan •Current Assets

•Bank Loan

•Long Term Loan

•Public Deposits

•Long Term Provisions

 Equity/ Shareholders funds
Proprietary Ratio =
Total Assets

Equity/Shareholders’ Funds Total Assets

•Equity Shares Capital • Non - Current Assets

•Preference Share Capital •Current Assets

•General Reserves

•Security Premium

•Capital Reserves

•Profit And Loss ( Cr. Balance)

•Less;- Preliminary Expenses

•Less :- Profit & loss (Dr balance)

 Calculate: Total Assets to Debt Ratio Proprietary, Ratio.
S. Items Amount
1 Long-Term Borrowings 1,00,000
2 Long-Term Provisions 50,000
3 Current Liabilities 25,000
4 Non-Current Assets 1,80,000
5 Current Assets 45,000

Total Assets = Non-Current Assets + Current Assets

= 1,80,000 + 45,000
= 2,25,000

Debt = Long-Term Borrowings + Long-Term Provisions

= 1,00,000 + 50,000
= 1,50,000

Total Assets
Total Assets to Debt Ratio =
Debt
2,25,000
Total Assets to Debt Ratio = = 1.5 : 1
1,50,000
Calculate: Total Assets to Debt Ratio Proprietary, Ratio.
S. Items Amount
1 Long-Term Borrowings 1,00,000
2 Long-Term Provisions 50,000
3 Current Liabilities 25,000
4 Non-Current Assets 1,80,000
5 Current Assets 45,000
Shareholders’ Funds = Total Assets - Debt

Shareholders’ Funds = 2,25,000 – 1,75,000 = 50,000

Total Assets = 2,25,000

Shareholders Funds
Proprietary Ratio =
Total Assets

50,000
Proprietary Ratio =
2,25,000

Proprietary Ratio = 0.22 : 1

 Profit before Interest and Tax
Interest Coverage Ratio =
Interest on Long-term Debt
Problem
A Ltd. has 8% Debentures of 5,00,000. Its profit before interest &
tax is 2,00,000. Calculate Interest Coverage Ratio.

Profit before Interest and Tax

Interest Coverage Ratio =
Interest on Long-term Debt

2,00,000
Interest Coverage Ratio =
40,000

Interest Coverage Ratio = 5 times

Problem
Net profit after interest and tax 1,98,000
Rate of income tax 40%
15% debentures 2,00,000

Profit before Interest and Tax

Interest Coverage Ratio =
Interest on Long-term Debt

If profit after tax = 60% Profit before tax is = 100

If profit after tax = 1,98,000 The profit before tax = X

100
X = X 1,98,000 = 3,30,000
60

The profit before tax and interest = 3,30,000 + 30,000

( 15% of 2,00,000)
= 3,60,000

3,60,000
Interest Coverage Ratio = = 12 times
30,000
Turnover ratio

Refers to the ratios that are calculated for

measuring the efficiency of operation of

business based on effective utilization of
resources.

These are also known as ‘efficiency Ratios’.

 Turnover Ratio

Inventory Debtors Working Capital Creditor

turnover ratio Turnover Ratio Turnover Ratio Turnover Ratio

NOTE:-

Turnover ratio are calculated in times

 Cost of Revenue from Operations
Inventory Turnover Ratio = Average Inventory

Cost of Revenue from Operations =

Opening Inventory (excluding Spare Parts and Loose Tools)
+ Net Purchases
+ Direct Expenses
– Closing Inventory (excluding Spare Parts and Loose Tools)

OR
Revenue from Operations
– Gross Profit

Average Inventory
= Opening Inventory + Closing Inventory

2
 365
Average age of Inventory =
Inventory Turnover Ratio
 Trading A/C

Particulars Amount Particulars amount

To Opening Inventory 2,00,000 By Revenue From Operations 9,00,000

To Net Purchases 3,00,000 By Closing Inventory 1,00,000

To Direct Expenses 2,00,000
To Gross Profit 3,00,000

1,000,000 1,000,000

Cost of Revenue from = Revenue From Operations Gross Profit

Operations

Cost of Revenue from = 9,00,000 3,00,000 = 6,00,000

Operations
 Trading A/C

Particulars Amount Particulars amount

To Opening Inventory 2,00,000 By Revenue From Operations 9,00,000

To Net Purchases 3,00,000 By Closing Inventory 1,00,000

To Direct Expenses 2,00,000
To Gross Profit 3,00,000

1,000,000 1,000,000

Cost of Revenue from = Opening Inventory + Net Closing

Operations Purchase + Direct Inventory
Expenses

Cost of Revenue from = 7,00,000 1,00,000 = 6,00,000

Operations
Calculate Inventory Turnover Ratio
Calculate Inventory Turnover Ratio: Revenue from operations
15,00,000; Gross Profit 6,00,000; Purchase of stock-in- trade
7,00,000.Opening Inventory 4,00,000.Closing Inventory 5,00,000

Cost of Revenue from Operations

Inventory Turnover Ratio
= Average Inventory

Cost of Revenue from = Revenue From Operations Gross Profit

Operations

Cost of Revenue from = 15,00,000 6,00,000 = 9,00,000

Operations

Average Inventory = Opening Inventory + Closing Inventory

2

Average Inventory = 4,00,000+ 5,00,000

2

Average Inventory = 4,50,000

Calculate Inventory Turnover Ratio
Calculate Inventory Turnover Ratio: Revenue from operations
15,00,000; Gross Profit 6,00,000; Purchase of stock-in- trade
7,00,000.Opening Inventory 4,00,000.Closing Inventory 5,00,000

Cost of Revenue from Operations

Inventory Turnover Ratio
= Average Inventory

9,00,000
Inventory Turnover Ratio =
4,50,000

Inventory Turnover Ratio = 2 Times

365
Average age of Inventory =
Inventory Turnover Ratio

365
Average age of Inventory = = 183 days ( approx)
2
Calculate Inventory Turnover Ratio
Calculate inventory turnover ratio:
Revenue from operations 5,00,000; Gross Profit 40% of revenue
from operations; and Average inventory 30,000.

Cost of Revenue from Operations

Inventory Turnover Ratio
= Average Inventory

Gross Profit = Revenue from Operations X 40

1,00

Gross Profit = 5,00,000 X 40 = 2,00,000

1,00

Cost of Revenue from = Revenue from Operations Gross Profit

Operations

Cost of Revenue from = 5,00,000 2,00,000 = 3,00,000

Operations
Calculate Inventory Turnover Ratio
Calculate inventory turnover ratio:
Revenue from operations 5,00,000; Gross Profit 40% of revenue
from operations; and Average inventory 30,000.

Cost of Revenue from Operations

Inventory Turnover Ratio
= Average Inventory

3,00,000
Inventory Turnover Ratio =
30,000.

Inventory Turnover Ratio = 10 Times

365
Average age of Inventory =
Inventory Turnover Ratio

365
Average age of Inventory = = 37 days ( approx)
10
Calculate Inventory Turnover Ratio
Cost of Revenue from Operations = 3,00,000
Inventory Turnover Ratio = 6 Times
Find out the value of Opening Inventory, if opening inventory is 10,000
less than the closing inventory.

Cost of Revenue from Operations

Inventory Turnover Ratio
= Average Inventory

3,00,000
6 =
Average Inventory

Average Inventory = 50,000

Calculate Inventory Turnover Ratio
Cost of Revenue from Operations = 3,00,000
Inventory Turnover Ratio = 6 Times
Find out the value of Opening Inventory, if opening inventory is 10,000
less than the closing inventory.

Let Closing Inventory = X

Than Opening Inventory = X – 10,000

Average Inventory = Opening Inventory + Closing Inventory

2

50,000 = X – 10,000 + X
2
1,00,000 = X – 10,000 + X

2 X = 1,00,000 + 10,000

X = 55,000

Therefore Opening Inventory = 55000 – 10,000 = 45,000

Calculate Inventory Turnover Ratio
Opening inventory Rs 29,000.Closing inventory Rs 31,000. Revenue from
operations Rs 3,20,000. Gross profit 25% on revenue from operations.
Calculate. Inventory turnover ratio.

= 25
Gross Profit Revenue from Operations X
1,00

Gross Profit = 3,20,000 X 25 = 80,000

1,00

Cost of Revenue from = Revenue from Operations Gross Profit

Operations

Cost of Revenue from = 3,20,000 80,000 = 2,40,000

Operations

Average Inventory = Opening Inventory + Closing Inventory

2

Average Inventory = 29,000+ 31,000

2
Average Inventory = 30,000
Calculate Inventory Turnover Ratio
Opening inventory Rs 29,000.Closing inventory Rs 31,000. Revenue from
operations Rs 3,20,000. Gross profit 25% on revenue from operations.
Calculate. Inventory turnover ratio.

Cost of Revenue from Operations

Inventory Turnover Ratio
= Average Inventory

2,40,000
Inventory Turnover Ratio =
30,000.

Inventory Turnover Ratio = 8 Times

365
Average age of Inventory =
Inventory Turnover Ratio

365
Average age of Inventory = = 46 days ( approx)
8
Calculate Inventory Turnover Ratio
Revenue from operations Rs 2, 00,000. Gross profit Rs 25% on cost.
Opening inventory was 1/3rd of the value of closing inventory. Closing
inventory was 30% of revenue from operations. Calculate Inventory
turnover ratio
Let Cost of Revenue from = X
Operations

Cost of Revenue from = Revenue from Operations Gross Profit

Operations

X = 2,00,000 X
(25% of cost = 1/4th of cost)
4

4X = 8,00,000 X

5 X = 8,00,000

X = 8,00,000 = 1,60,000
5

Cost of Revenue from = 1,60,000

Operations
Calculate Inventory Turnover Ratio
Revenue from operations Rs 2, 00,000. Gross profit Rs 25% on cost.
Opening inventory was 1/3rd of the value of closing inventory. Closing
inventory was 30% of revenue from operations. Calculate Inventory
turnover ratio

Closing Inventory = Revenue from Operations X 30

1,00
= 2,00,000 X 30 = 60,000
1,00
Opening Inventory = Closing Inventory X 1
3
Opening Inventory = 20,000

Opening Inventory + Closing Inventory

Average Inventory =
2

Average Inventory = 20,000 + 60,000

2

Average Inventory = 40,000

Calculate Inventory Turnover Ratio
Revenue from operations Rs 2, 00,000. Gross profit Rs 25% on cost.
Opening inventory was 1/3rd of the value of closing inventory. Closing
inventory was 30% of revenue from operations. Calculate Inventory
turnover ratio

Cost of Revenue from Operations

Inventory Turnover Ratio
= Average Inventory

1,60,000
Inventory Turnover Ratio =
40,000

Inventory Turnover Ratio = 4 Times

Calculate Inventory Turnover Ratio
Cost of revenue fro operation Rs 4,50,000
Inventory turnover ratio 5 times
Calculate the value of opening and closing inventory in each of the
following alternatives cases.
• If closing inventory was Rs 80,000 in excess of opening inventory
• If closing inventory was 3 times than in the opening inventory
• If closing inventory was Rs 3 times more than excess of opening
inventory

Cost of Revenue from Operations

Inventory Turnover Ratio
= Average Inventory

4,50,000
5 =
Average Inventory

Average Inventory = 90,000

Calculate Inventory Turnover Ratio
Cost of revenue fro operation Rs 4,50,000
Inventory turnover ratio 5 times
Calculate the value of opening and closing inventory.
•If closing inventory was Rs 80,000 in excess of opening inventory
•If closing inventory was 3 times than in the opening inventory
•If closing inventory was Rs 3 times more than excess of opening inventory

Let Opening Inventory = X

Than closing Inventory = X + 80,000

90,000 = Opening Inventory + Closing Inventory

2

90,000 = X + X + 80,000
2
1,80,000 = X + X + 80,000

2 X = 1,80,000 - 80,000

X = 50,000

Therefore Closing Inventory = 50,000 + 80,000 = 1,30,000

Calculate Inventory Turnover Ratio
Cost of revenue fro operation Rs 4,50,000
Inventory turnover ratio 5 times
Calculate the value of opening and closing inventory.
•If closing inventory was Rs 80,000 in excess of opening inventory
•If closing inventory was 3 times than in the opening inventory
•If closing inventory was Rs 3 times more than excess of opening inventory

Let Opening Inventory = X

Than closing Inventory = 3X

90,000 = Opening Inventory + Closing Inventory

2

90,000 = X + 3X
2
1,80,000 = X + 3X

4 X = 1,80,000

X = 45,000

Therefore Closing Inventory = 45,000 X 3 = 1,35,000

Calculate Inventory Turnover Ratio
Cost of revenue fro operation Rs 4,50,000
Inventory turnover ratio 5 times
Calculate the value of opening and closing inventory.
•If closing inventory was Rs 80,000 in excess of opening inventory
•If closing inventory was 3 times than in the opening inventory
•If closing inventory was Rs 3 times more than excess of opening inventory

Let Opening Inventory = X

Than closing Inventory = X + 3 X

90,000 = Opening Inventory + Closing Inventory

2

90,000 = X + 4X
2
1,80,000 = X + 4X

5 X = 1,80,000

X = 36,000

Therefore Closing Inventory = 36,000 X 4 = 1,44,000

 Net Credit Revenue from
Trade Receivable Turnover Operations
Ratio =
Average Trade Receivable

Net Credit Revenue from Operations

Total revenue from operations
– Cash Revenue From Operations
- Returns From Revenue From Operations

Average Trade Receivable

Opening Trade Receivables + Closing Trade Receivables

=
2
Trade Receivables =
Debtors + Bills Receivables

365
Debts collection period =
Trade Receivable Turnover Ratio
Trade Receivable Turnover Ratio
Total Revenue from Operations for the year Rs 2,00,000
Cash Revenue from Operations for the year Rs 40,000
Trade receivables in the beginning of the year Rs 20,000
Trade receivables in the end of the year Rs 60,000

Credit Revenue from Operations = Total Revenue from Operations

– Cash revenue from operations

Credit Revenue from Operations = 2,00,000 – 40,000

Credit Revenue from Operations = 1,60,000

Opening Trade Receivables +

Average Trade Receivable = Closing Trade Receivables

20,000 + 60,000
Average Trade Receivable =
2

Average Trade Receivable = 40,000

Trade receivable turnover ratio
Total Revenue from Operations for the year Rs 2,00,000
Cash Revenue from Operations for the year Rs 40,000
Trade receivables in the beginning of the year Rs 20,000
Trade receivables in the end of the year Rs 60,000

Trade Receivable Turnover Credit Revenue from Operations

=
Ratio Average Trade Receivable

Trade Receivable Turnover 1,60,000

=
Ratio 40,000

Trade Receivable Turnover

= 4 Times
Ratio

365
Debts collection period =
Trade Receivable Turnover Ratio

365
Debts collection period = = 91 days ( approx)
4
Trade Receivable Turnover Ratio
Total revenue from operations for the year Rs 4,00,000
Cash revenue from operations being 25% of credit revenue from
operations
Closing trade receivables Rs 1,00,000
Excess of closing trade receivables over
Opening trade receivables Rs 40,000

Credit revenue from = Revenue from - Cash revenue from

operations operations operations
Calculate Trade Receivable Turnover Ratio
Total revenue from operations for the year Rs 4,00,000
Cash revenue from operations being 25% of credit revenue from
operations
Closing trade receivables Rs 1,00,000
Excess of closing trade receivables over
Opening trade receivables Rs 40,000

Credit revenue from = Revenue from - Cash revenue from

operations operations operations

Let credit Revenue from = X

Operations
X = 4,00,000 X
25% of credit from operations
4

4X = 1,600,000 X

5 X = 1,600,000

X = 1,600,000 = 3,20,000
5
 Calculate Trade Receivable Turnover Ratio
Total revenue from operations for the year Rs 4,00,000
Cash revenue from operations being 25% of credit revenue from
operations
Closing trade receivables Rs 1,00,000
Excess of closing trade receivables over
opening trade receivables Rs 40,000

Opening Trade Receivables +

Average Trade Receivable = Closing Trade Receivables

60,000 + 100,000 80,000

Average Trade Receivable = =
2

Trade Receivable Turnover Credit Revenue from Operations

=
Ratio Average Trade Receivable

Trade Receivable Turnover 3,20,000

=
Ratio 80,000

Trade Receivable Turnover

= 4 Times
Ratio
Trade receivable turnover Ratio
Total revenue from operations for the year Rs 2,25,000
Cash revenue from operations 20% of total sales
Revenue from operations returns
(Out of credit revenue from operations) Rs 20,000
Trade receivables
Opening balance Rs 8,000
Closing balance Rs 12,000

Cash revenue from 20

= X 2,25,000
operations
100
Cash revenue from
operations = 45,000

Credit revenue from = Revenue from cash from

-
operations operations operations returns

Credit revenue from = 225000 - 45,000 = 1,80,000

operations

Net Credit revenue from =

Credit revenue
- - Revenue from
from operations operations returns
operations
Net Credit revenue from = 1,80,000 - 20,000 = 1,60,000
operations
 Trade Receivable Turnover Ratio
Total revenue from operations for the year Rs 2,25,000
Cash revenue from operations 20% of total sales
Revenue from operations returns
(Out of credit revenue from operations) Rs 20,000
Trade receivables
Opening balance Rs 8,000
Closing balance Rs 12,000
Opening Trade Receivables +
Average Trade Receivable = Closing Trade Receivables

8,000 + 12,000 10,000

Average Trade Receivable = =
2

Trade Receivable Turnover Credit Revenue from Operations

=
Ratio Average Trade Receivable

Trade Receivable Turnover 1,60,000

=
Ratio 10,000

Trade Receivable Turnover

= 16 Times
Ratio
 Trade Receivable Turnover Ratio
Total revenue from operations for the year Rs 2,25,000
Cash revenue from operations 20% of total sales
Revenue from operations returns
(Out of credit revenue from operations) Rs 20,000
Trade receivables
Opening balance Rs 8,000
Closing balance Rs 12,000
Numerical Ability Zone
Problem
Calculate Current Ratio, Opening And Closing Inventory
Inventory Turnover Ratio 4 Times
Revenue from Operations Rs 2,00,000.
Gross profit 25% of cost of Revenue from Operations
Inventory at the end is Rs.20,000 more than Inventory at the beginning.
Current liabilities Rs.40,000 and Acid Test Ratio 0.75

Answer
1. Current ratio = 2 : 1
2. Opening inventory = 30,000
3. Closing inventory = 50,000
Calculate Opening Receivables and Closing Receivables
Trade receivables turnover ratio 4 times
Cost of revenue from operations Rs.6,40,000.
Gross profit 20% of Revenue from Operations
Closing receivables were Rs.20,000 more than at the beginning.
Cash Revenue from Operations being 33 * 1/3% of Credit Revenue from
Operations

Answer
Opening Receivables Rs 1,40,000
Closing Receivables Rs 1,60,000
Trade Payable Turnover Ratio = Net Credit Purchase
Average Trade Payables

Average Trade Payable

Opening Trade Payables + Closing Trade Payables

=
2
Trade Payable =
Creditors + Bills Payable

365
Average Payment Period =
Trade Payables Turnover Ratio
Calculate Trade Payable Turnover Ratio
No. Items Amount (`)
1. Credit Purchase 6,20,000
2. Purchase Returns 20,000
3. Opening Creditors 1,00,000
4. Closing Creditors 1,40,000
5. Opening Bills Payables 25,000
6. Closing Bills Payables 35,000
Net Credit Purchase = Credit Purchase -Purchase Returns
Net Credit Purchase = 6,20,000 - 20,000 = 6,00,000

Average Trade Payable = Opening Trade Payables + Closing Trade

Payables

Average Trade Payable = 1,00,000 + 1,40,000 + 25,000 + 35,000

2

Average Trade Payable = 1,50,000

Calculate Trade Payable Turnover Ratio
S.No. Items Amount (`)
1. Credit Purchase 6,20,000
2. Purchase Returns 20,000
3. Opening Creditors 1,00,000
4. Closing Creditors 1,40,000
5. Opening Bills Payables 25,000
6. Closing Bills Payables 35,000

Trade Payable Turnover Ratio Net Credit Purchase

=
Average Trade Payables

6,00,000
Trade Payable Turnover Ratio = = 4 times
1,50,000

365
Average Payment Period =
Trade Payables Turnover Ratio

365
Average Payment Period = = 91 days ( approx)
4
 Working Capital Turnover Revenue from Operations
Ratio =
Working Capital

Working Capital
Current Assets – Current Liabilities

Current Assets Current Liability

•Trade Receivables •Short-term Borrowings
•Inventories (Excluding Spare •Trade Payables
Parts and Loose Tools)
•Other Current
•Short Term Loans and Advances
•Liabilities
•Current Investments
•Short-term Provisions
•Cash and Cash Equivalents
•Other Current Assets
 Calculate Working turnover ratio
S.No. Items Amount (`)
1. Revenue from Operations 12,00,000
2. Current Assets 5,00,000
3. Total Assets 8,00,000
4. Non Current Liabilities 4,00,000
5. Shareholders’ Funds 2,00,000
Working Capital = Current Assets – Current Liabilities
Total Assets – Total Non-Current
Current Liabilities = Liabilities – Shareholders’ Fund

Current Liabilities = 8,00,000 – 4,00,000 – 2,00,000

Current Liabilities = 2,00,000

Working Capital = 5,00,000 – 2,00,000 = 3,00,000

Working Capital Turnover Ratio = Revenue from Operations

Working Capital

Working Capital Turnover Ratio = 12,00,000

= 4 Times
3,00,000
Profitability Ratio
Refers to the analysis of profits in relation to

Sales or funds (or assets) employed in the business

 Profitability Ratio

Gross Operating Return Of

Operating Net Profit
Profit Profit Investment
Ratio Ratio
Ratio Ratio Ratio

NOTE:-

Profitability ratios are calculated in percentage

 Gross Profit
Gross Profit Ratio = X 100
Revenue from Operations

Gross Profit =
Revenue from Operations
- Cost of Revenue from Operations

Cost of Revenue from Operations =

Opening Inventory (excluding Spare Parts and Loose Tools)

+ Net Purchases

+ Direct Expenses

– Closing Inventory (excluding Spare Parts and Loose Tools)

OR
Revenue from Operations
– Gross Profit
Calculate Gross Profit Ratio from the following:
Sr. No Items Amount
1 Opening Inventory 50,000
2 Purchases 1,50,000
3 Returns outwards 20,000
4 Wages 10,000
5 Revenue from Operations 2,50,000
6 Closing Inventory 40,000

Cost of Revenue from = Opening Inventory (50,000)

Operations
+ Net Purchases (150,000- 20,000)
+ Direct Expenses (10,000)
– Closing Inventory (40,000)

Cost of Revenue from =

1,50,000
Operations
Calculate Gross Profit Ratio from the following:
Sr. no Items amount
1 Opening Inventory 50,000
2 Purchases 1,50,000
3 Returns outwards 20,000
4 Wages 10,000
5 Revenue from Operations 2,50,000
6 Closing Inventory 40,000

Gross Profit = Revenue from Cost of Revenue from

Operations Operations

Gross Profit = 2,50,000 1,50,000 = 1,00,000

Gross Profit
Gross Profit Ratio = X 100
Revenue from Operations

1,00,000 = 40%
Gross Profit Ratio = X 100
2,50,000
Calculate Gross Profit Ratio from the following:
Credit Revenue from Operations 3,00,000
Cash Revenue from Operations (being 25% of total revenue from
operations)
Purchases 3,20,000
Excess of closing inventory over opening inventory 40,000

Total Revenue from Credit Revenue Cash Revenue

= + from Operations
Operations from Operations

Let total Revenue from = X

Operations
X = 3,00,000 + X 25% of total revenue
4 from operations
4X 1,200,000
= + X

3 X = 1,200,000

X = 1,200,000 = 4,00,000
3
Calculate Gross Profit Ratio from the following:
Credit Revenue from Operations 3,00,000
Cash Revenue from Operations (being 25% of total revenue from
operations)
Purchases 3,20,000
Excess of closing inventory over opening inventory 40,000

Cost of Revenue from Purchases – Excess of Closing Inventory

= over opening inventory
Operations
(assume opening inventory = 0)
Cost of Revenue from 40,000
Operations = 32,00,000

Gross Profit = Revenue from Cost of Revenue from

Operations Operations

Gross Profit = 4,00,000 2,80,000 = 1,20,000

Gross Profit
Gross Profit Ratio = X 100
Revenue from Operations

1,20,000 X 100 = 30%

Gross Profit Ratio =
4,00,000
Calculate Gross Profit Ratio from the following:
Opening inventory Rs 60,000, closing inventory Rs 1,00,000. Inventory
turnover ratio 8 times. Selling price 25% above Cost of Revenue from
Operations . Calculate the gross profit ratio.

Average Inventory Opening Inventory + Closing Inventory

=
2

60,000 + 1,00,000
Average Inventory
= = 80,000
2

Cost of Revenue from Operations

Inventory Turnover Ratio =
Average Inventory

Cost of Revenue from Operations

8 =
80,000

Cost of Revenue from = 6,40,000

Operations
Calculate Gross Profit Ratio
Opening inventory Rs 60,000, closing inventory Rs 1,00,000. Inventory
turnover ratio 8 times. Selling price 25% above Cost of Revenue from
Operations . Calculate the gross profit ratio.

= Cost of Revenue from 25

Gross Profit X
Operations
1,00

Gross Profit = 6,40,000 X 25 = 1,60,000

1,00

Revenue from = Cost of Revenue + Gross Profit

Operations from Operations

8,00,000 = 6,40,000 1,60,000

Gross Profit
Gross Profit Ratio = X 100
Revenue from Operations

1,60,000 X 100 = 20%

Gross Profit Ratio =
8,00,000
Non-operating Expenses Operating Expenses

Loss On Sales of Fixed

Assets Office, Administrative,

Loss from Fire

Selling and Distribution Expenses,

Income Tax
Employees Benefit Expenses
Charity/Donation

Interest on Long Term Depreciation and Amortization

Loans/Debentures Expenses
Non-operating income Operating Income

Profit on sales of fixed Discount received

assets

Income tax refund Commission received

Rent received

Dividend received
 Trading A/C & Profit and loss account

Particulars Amount Particulars amount

To cost of revenue 6,00,000 By Revenue From Operations 9,00,000

From operations
3,00,000
To Gross Profit
9,00,000 9,00,000

To Operating Expense 70,000 By Gross Profit 3,00,000

Office, Administrative, By operating income 20,000

Employees Benefit
Expenses
Selling and Distribution
Expenses
Depreciation and
Amortization Expenses

Operating Cost Cost of revenue from operations + operating exp.

- Operating Income

Operating Cost 6,00,000 +70,000- 20,000 = 6,50,000

 Trading A/C & Profit And Loss Account

Particulars Amount Particulars amount

To cost of revenue 6,00,000 By Revenue From Operations 9,00,000

From operations
3,00,000
To Gross Profit
9,00,000 9,00,000

To operating expense 70,000 By Gross Profit 3,00,000

Office, Administrative, By operating income 20,000

Employees Benefit
Expenses
Selling and Distribution
Expenses
Depreciation and
Amortization Expenses

Operating Profit Gross Profit + Operating Income

- Operating Expenses

Operating Profit 3,00,000 + 20,000 – 70,000 = 2,50,000

 Trading A/C & Profit And Loss Account

Particulars Amount Particulars amount

To cost of revenue 6,00,000 By Revenue From Operations 9,00,000

From operations
3,00,000
To Gross Profit
9,00,000 9,00,000

To Operating Expense 70,000 By Gross Profit 3,00,000

By Operating Income 20,000

To Non-Operating 50,000
Expense By Non Operating 50,000
Income

To Net Profit 2,50,000

3,70,000 3,70,000
 Gross Profit – Operating Exp
Operating Profit + Operating Income
Ratio =
Revenue from Operations
X 100

Operating Profit Operating Profit

Ratio =
Revenue from Operations
X 100

Operating Expenses =
Office, Administrative,
Selling and Distribution Expenses,
Employees Benefit Expenses
Depreciation and Amortization Expenses
 Cost of Revenue from Operations
Operating Ratio = + Operating Exp – operating income
X 100
Revenue from Operations

Operating Ratio = Operating Cost

X 100
Revenue from Operations

Operating Expenses =
Office, Administrative,
Selling and Distribution Expenses,
Employees Benefit Expenses
Depreciation and Amortization Expenses
 Net Profit
Net Profit Ratio = X 100
Revenue from Operations

Net Profit
Gross Profit + All Indirect Income – All Indirect Expenses
 Trading A/C & Profit and loss account

Particulars Amount Particulars amount

To cost of revenue 6,00,000 By Revenue From Operations 9,00,000

From operations
3,00,000
To Gross Profit
9,00,000 9,00,000

To Operating Expense 70,000 By Gross Profit 3,00,000

By operating income 20,000

Gross profit + Operating Income

- Operating Exp
Operating Profit = X 100
Ratio Revenue from Operations

3,00,000 + 20,000 - 70,000

Operating Profit = X 100
Ratio 9,00,000

Operating Profit = 28%

Ratio
 Trading A/C & Profit And Loss Account

Particulars Amount Particulars amount

To cost of revenue 6,00,000 By Revenue From Operations 9,00,000

From operations
3,00,000
To Gross Profit
9,00,000 9,00,000

To operating expense 70,000 By Gross Profit 3,00,000

By operating income 20,000

Cost of Revenue from Operations

+ Operating Exp – Operating Income
Operating Ratio = X 100
Revenue from Operations

6,00,000 + 70,000 - 20,000

Operating Ratio = X 100
9,00,000

Operating Ratio = 72%

 Trading A/C & Profit And Loss Account

Particulars Amount Particulars amount

To cost of revenue 6,00,000 By Revenue From Operations 9,00,000

From operations
3,00,000
To Gross Profit
9,00,000 9,00,000

To Operating Expense 70,000 By Gross Profit 3,00,000

By Operating Income 20,000

To Non-Operating 50,000
Expense By Non Operating 50,000
Income
To Net Profit 2,50,000

3,70,000 3,70,000

Net Profit Ratio = Net Profit

Revenue from Operations X 100

Net Profit Ratio = 2,50,000

X 100 = 27%
9,00,000
Revenue from Operating Profit Operating cost
operations

100% 60% 40%

From the following Calculate Operating Ratio
Sr. no Items amount
1 Cost of Revenue from Operations 50,000
2 Revenue from Operations 1,50,000
3 Operating Expenses 10,000

Cost of Revenue from Operations

+ Operating Exp – Operating Income
Operating Ratio = X 100
Revenue from Operations

50,000 + 10,000
Operating Ratio = X 100
1,50,000

Operating Ratio = 40%

 From the following Calculate Operating profit Ratio
Sr. no Items amount
1 Cost of Revenue from Operations 190,000
2 Revenue from Operations 2,50,000
3 Operating Expenses 14,000
4 Dividend Received 3000
5. Discount Received 4000

Gross Profit = Revenue from Cost of Revenue from

Operations Operations

Gross Profit = 2,50,000 190,000 = 60,000

Gross profit + Operating Income

- Operating Exp
Operating profit Ratio = X 100
Revenue from Operations

60,000 + 4000- 14,000

Operating profit Ratio = X 100
2,50,000

Operating profit Ratio 50,000 X 100 = 20%

=
2,50,000
Calculate operating Ratio .
Items Amount
Revenue from operation 2,60,000
Revenue from operation returns 10,000
Cost of revenue from operations 1,50,000
Selling expenses 10,000
Administrative expenses 20,000
Employees Benefit Expenses 25,000
Depreciation and Amortization Expenses 5,000
Operating Expenses = Administrative = 20,000
Selling Expenses = 10,000
Employees Benefit Expenses = 25,000
Depreciation and Amortization Expenses = 5000

Operating Expenses = 60,000

Cost of Revenue from Operations

= + Operating Exp -Operating Income
Operating Ratio X 100
Revenue from Operations

150,000 + 60,000
Operating Ratio = X 100 = 84%
2,60,000- 10,000
 From Operating Profit Ratio
No. Items Amount
1. Revenue from Operations 2,00,000
2. Gross Profit 75,000
3. Office Expenses 15,000
4. Selling Expenses 26,000
5. Interest on Debentures 5,000
6. Accidental Losses 12,000
7. Income from Rent 3,000
8. Commission Received 2,000
Gross profit – Operating Exp
Operating Profit =
Ratio X 100
Revenue from Operations

Operating Profit = Gross Profit + Other Operating Income – Other

Operating Expenses

Operating Profit = 75,000 + 2,000 – 15,000 – 26,000 = 36,000

Operating Profit 36,000

= X 100 = 18%
Ratio 2,00,000
 Calculate operating Profit Ratio.
Items Items
Revenue from operation 4,10,000
Revenue from operation returns 10,000
Gross profit 1,60,000
Office expenses 15,000
Selling expenses 26,000
Interest on debentures 10,000
Loss by fire 24,000
Discount Received Gross profit + other operating5,000
Operating Profit Ratio =
Income – Operating Exp
X 100
Revenue from Operations

Operating Profit = Gross Profit + Other Operating Income – Other

Operating Expenses

Operating Profit = 1,60,000 + 5,000 - 15,000 – 26000.

= 124,000
124,000
Operating profit Ratio = X 100 = 31%
4,00,000
Calculate Net Profit Ratio , Operating Profit Ratio
No. Items Amount
1. Revenue from Operations 2,00,000
2. Gross Profit 75,000
3. Office Expenses 15,000
4. Selling Expenses 26,000
5. Interest on Debentures 5,000
6. Accidental Losses 12,000
7. Income from Rent 3,000
8.Net Commission
Profit RatioReceived Net Profit 2,000
=
Revenue from Operations X 100

Net Profit = Gross Profit + All Income – All Indirect Expenses

Net Profit = 75,000 + (3,000 + 2,000) – (15,000 + 26,000

+ 12000 + 5000)
Net Profit = 22,000

Net Profit Ratio = 22,000 X 100

= 11%
2,00,000
 Calculate operating Profit Ratio and net profit Ratio .
Items Items
Opening inventory 3,00,000
Closing inventory 4,20,000
Purchases 14,00,000
Wages 3,70,000
Carriage inwards 1,50,000
Administrative exp 84,000
Selling exp 36,000
Income tax 1,00,000
Profit on sale of fixed asset 20,000
Gross Profit
Revenue from
= operations
Revenue from Operations Cost of Revenue from
24,00,000
Operations

Gross Profit = 24,00,000 Opening Inventory (3,00,000)

+ Net Purchases (14,00,000)
+ Direct Expenses (5,20,000)
– Closing Inventory (4,20,000)

Gross Profit = 24,00,000 18,00,000

Gross Profit = 6,00,000
Calculate operating Profit Ratio and Net Profit Ratio.
Items Items
Opening inventory 3,00,000
Closing inventory 4,20,000
Purchases 14,00,000
Wages 3,70,000
Carriage inwards 1,50,000
Administrative exp 84,000
Selling exp 36,000
Income tax 1,00,000
Profit on sale of fixed asset 20,000
Gross profit – Operating Exp
Operating
Revenue Profit
from Ratio =
operations 24,00,000
X 100
Revenue from Operations

Operating Profit = Gross Profit + Other Operating Income

– Other Operating Expenses

Operating Profit = 6,00,000 – 84,000 – 36000

= 4,80,000

4,80,000
Operating profit Ratio = X 100 = 20%
24,00,000
 Calculate Operating Profit Ratio and Net Profit Ratio
Items Items
Opening inventory 3,00,000
Closing inventory 4,20,000
Purchases 14,00,000
Wages 3,70,000
Carriage inwards 1,50,000
Administrative exp 84,000
Selling exp 36,000
Income tax 1,00,000
Profit on sale of fixed asset 20,000
Revenue from operations 24,00,000
Net Profit Ratio = Net Profit
Revenue from Operations X 100

Net Profit = Gross Profit + All Income – All Indirect Expenses

Net Profit = 6,00,000 –(84,000 + 36,000 + 1,00,000) + (20,000)

Net Profit = 4,00,000

Net Profit Ratio = 4,00,000 X 100 = 16.67%

24,00,000
 Return on Investments /Return on Capital Employed

Profit before Interest and Tax

= X 100
Capital Employed

Net Profit before Interest, Tax and Dividend

Gross Profit + Other Income – Indirect Expenses

Capital Employed (Liability Approach)

Shareholders’ Fund (Share Capital + Reserves and Surplus)
+ Non- Current Liabilities (Long-term Borrowing + Long-term Provisions)

OR
Capital Employed (Assets Approach
Non-Current Assets (Tangible Assets + Intangible Assets
+ Non- Current investment + Long-term Loans and Advances)
+ Working Capital
 Balance sheet ( Old Format)

Liability Amount Assets Amount

Share holder fund Non Current Assets

Share capital 6,00,000 Tangible Assets + 8,00,000

Intangible Assets
Reserves & surplus 3,00,000

Non- Current investment

Non Current Liabilities + Long-term Loans and 6,00,000
Advances
Long-term Borrowing 4,00,000

Long-term Provisions 2,00,000

Current Assets 4,00,000

Current Liabilities 3,00,000

18,00,000 18,00,000

Capital Employed (Liability = Shareholders’ Fund + Non- Current Liabilities

Approach)

= 15,00,000
 Balance sheet ( Old Format)

Liability Amount Assets Amount

Share holder fund Non Current Assets

Share capital 6,00,000 Tangible Assets + 8,00,000

Intangible Assets
Reserves & surplus 3,00,000

Non- Current investment

Non Current Liabilities + Long-term Loans and 6,00,000
Advances
Long-term Borrowing 4,00,000

Long-term Provisions 2,00,000

Current Assets 4,00,000

Current Liabilities 3,00,000

18,00,000 18,00,000

Capital Employed (Assets = Non Current Assets + Current Liabilities –

Approach) current Liability

= 14,00,000 + 6,00,000 – (4,00,000-.3.00.000)

 Calculate Return on capital employed from the following:
Sr no Items Amount
1 Share Capital 50,000
2. Reserves & Surplus 25,000
3. Net Fixed Assets 2,25,000
4. Non Current Trade Investments 25,000
5. Current Assets 1,10,000
6. 12% Long term borrowings 2,00,000
7. Current Liabilities 85,000
8 Net profit before tax 60,000

Return on Capital Employed = Profit before Interest and Tax

X 100
Capital Employed

Net Profit before Interest, = Net Profit before interest and tax
Tax and Dividend = 60,000 + 24,000

Interest = 2,00,000
X 12 = 24,000
100
 Calculate return on Capital Employed
Sr no Items Amount
1 Share Capital 50,000
2. Reserves & Surplus 25,000
3. Net Fixed Assets 2,25,000
4. Non Current Trade Investments 25,000
5. Current Assets 1,10,000
6. 12% Long term borrowings 2,00,000
7. Current Liabilities 85,000
8 Net profit before tax 60,000

Capital Employed = Share Capital + Reserves & Surpluses +

12% long term borrowings

Capital Employed = 50,000 + 25,000 + 2,00,000 = 2,75,000

Return on Capital Employed = Profit before Interest and Tax

X 100
Capital Employed

Return on Capital Employed = 84,000

X 100 = 30.54%
2,75,000
Calculate return on Capital Employed
Net profit after interest but before tax Rs 1,40,000. 15% Long Term
debts Rs 4,00,000. Shareholder funds Rs 2,40,000. Tax Rate 50%.
Calculate return on Capital Employed

Net Profit after Interest, but before Tax = 1,40,000

Add:- 15% interest on Rs 4,00,000 = 60,000 + 1,40,000

Profit before Interest and Tax = 2,00,000

Capital Employed = 15% Long Term debts + Shareholder funds

Capital Employed = Rs 4,00,000. + Rs 2,40,000 = 6,40,000

Return on Capital = Profit before Interest and Tax

X 100
Employed
Capital Employed

Return on Capital Employed = 2,00,000

X 100 = 31.25%
6,40,000
 Calculate return on Capital Employed
Gross profit Rs 1,00,000. Office and administrative expenses Rs
10,000. Selling and distribution expenses Rs 25,000. Interest on long
term debts Rs 8,000. Tax RS 12000. Non current assets RS 3,00,000.
Current assets Rs 1,50,000 and current liability Rs 1,25,000

Return on Capital Employed = Profit before Interest and Tax

X 100
Capital Employed

Profit before Interest = Gross profit – Office and Administrative

and Tax Exp – Selling Exp

Profit before Interest = 1,00,000 – 10,000 – Rs 25,000

and Tax

Profit before Interest = 65,000

and Tax
Calculate return on capital employed
Gross profit Rs 1,00,000. Office and administrative expenses Rs
10,000. Selling and distribution expenses Rs 25,000. Interest on long
term debts Rs 8,000. Tax RS 12000. Non current assets RS 3,00,000.
Current assets Rs 1,50,000 and current liability Rs 1,25,000

Capital Employed = Non-Current Assets + Current Assets

- Current liability

Capital Employed = 3,00,000 + 1,50,000 - 1,25,000 = 3,25,000

Return on Capital = Profit before Interest and Tax

X 100
Employed
Capital Employed

Return on Capital = 65,000

X 100
Employed = 20%
3,25,000