1.

Premier Company's net profit margin is 8 percent, total assets turnover ratio is
2.5 times, debt to total assets ratio is 0.6. What is the return on equity for
Premier?

Solution:
Net profit
Return on equity =
Equity
=

Net profit

Net sales

Total assets

x
Net sales

x
Total assets

Equity

1
=

0.08

2.5

= 0.5 or 50 per cent

0.4

Debt

Equity

Note :

= 0.6
Total assets

= 1- 0.6 = 0.4
Total assets

Hence Total assets/Equity

2.

So

= 1/0.4

The following information is given for Alpha Corporation

Sales
3500
Current ratio
1.5
Acid test ratio
1.2
Current liabilities
1000
What is the inventory turnover ratio?

Solution:
Current assets =
=
Quick assets =
=
Inventories
=

3.

Current liabilities x 1.5

1000 x 1.5 = 1500
Current liabilities x 1.2
1000 x 1.2 = 1200
300
3500
Inventory turnover ratio =
= 11.7
300
The following information is given for Beta Corporation.
Sales
Current ratio
Inventory turnover
ratio
Acid test ratio

5000
1.4
5
1.0

What is the level of current liabilities?

Solution:
Inventory = 5000/5 = 1000
Current assets
Current ratio =

= 1.4
Current liabilities
Current assets Inventories

4.

Safari Inc. has profit before tax of Rs.90 million. If the company's times interest
covered ratio is 4, what is the total interest charge?

Solution:
PBT

Rs.90 million
PBIT

Times interest covered =

= 4
Interest

So PBIT = 4 x Interest
PBT = PBIT interest
= 4x interest- interest = 3 x interest = 90 million
Therefore interest = 90/3 = Rs.30 million
5.

A has profit before tax of Rs.40 million. If its times interest covered ratio is 6, what
is the total interest charge?

Solution:
PBT

Rs. 40 million
PBIT

Times interest covered =

= 6
Interest

So PBIT = 6 x Interest
PBIT Interest = PBT = Rs.40 million
6 x Interest Interest = Rs. 40 million
5 x Interest

= Rs.40 million

Hence Interest = Rs.8 million

6.

McGill Inc. has profit before tax of Rs.63 million. If the company's times interest
covered ratio is 8, what is the total interest charge?

Solution:
PBT

Rs.63 million
PBIT

Times interest covered =

= 8
Interest

So PBIT = 8 x Interest
PBIT Interest = PBT = Rs.63 million
8 x Interest Interest = 7 x Interest = Rs.63 million
Hence Interest
7.

= Rs.9 million

The following data applies to a firm :

Interest charges
Rs.200,000
Sales
Rs.6,000,000
Tax rate
40 percent
Net profit margin
5 percent
What is the firm's times interest covered ratio?

Solution:
Sales = Rs.6,000,000
Net profit margin = 5 per cent
Net profit = Rs.6,000,000 x 0.05 = 300,000
Tax rate

= 40 per cent

300,000
So,

Profit before tax =

= Rs.500,000
(1-.4)

Interest charge

= Rs.200,000

So Profit before interest and taxes = Rs.700,000

Hence
Times interest covered ratio =

700,000
= 3.5
200,000

8.

The following data applies to a firm:

Interest charges
Sales
Tax rate
Net profit margin

Rs.50,000
Rs.300,000
25 percent
3 percent

What is the firm's times interest covered ratio?

Solution:
Sales = Rs.300,000
Net profit margin = 3 per cent
Net profit = Rs.300,000 x 0.03 = 9,000
Tax rate

= 25 per cent
9,000

So,

Profit before tax =

= Rs.12,000
(1-.25)

Interest charge

= Rs.50,000

So Profit before interest and taxes = Rs.62,000

Hence
Times interest covered ratio =

62,000
= 1.24
50,000

9.

The following data applies to a firm :

Interest charges
Sales
Tax rate
Net profit margin

Rs.10,000,000
Rs.80,000,000
50 percent
10 percent

What is the firm's times interest covered ratio?

Solution:
Sales = Rs.80,000,000
Net profit margin = 10 per cent
Net profit = Rs.80,000,000 x 0.1 = 8,000,000
Tax rate = 50 per cent
8,000,000
So, Profit before tax =
= Rs.16,000,000
(1-.5)
Interest charge = Rs.10,000,000
So Profit before interest and taxes = Rs.26,000,000
Hence
26,000,000
Times interest covered ratio =
= 2.6
10,000,000
10.

A firm's current assets and current liabilities are 25,000 and 18,000 respectively.
How much additional funds can it borrow from banks for short term, without
reducing the current ratio below 1.35?

Solution:
CA = 25,000 CL = 18,000
Let BB stand for bank borrowing
CA+BB
= 1.35
CL+BB
25,000+BB
=

1.35

18,000+BB
1.35x 18,000 + 1.35 BB = 25,000 + BB
0.35BB = 25,000- 24,300 = 700
BB = 700/0.35 = 2,000
11.

LNGs current assets and current liabilities are 200,000 and 140,000 respectively.
How much additional funds can it borrow from banks for short term, without
reducing the current ratio below 1.33?

Solution:
CA = 200,000 CL = 140,000
Let BB stand for bank borrowing

CA+BB
= 1.33
CL+BB
200,000+BB
=
140,000+BB

1.33

1.33 x 140,000 + 1.33BB = 200,000 + BB

0.33 BB = 200,000- 186,200 = 13,800
BB =13,800/0.33 = 41,818
12.

Navneets current assets and current liabilities are 10,000,000 and 7,000,000
respectively. How much additional funds can it borrow from banks for short term,
without reducing the current ratio below 1.4?

Solution:
CA = 10,000,000

CL = 7,000,,000

Let BB stand for bank borrowing

CA+BB
= 1.4
CL+BB
10,000,000+BB
=

1.4

7,000,000+BB
1.4 x 7,000,000 + 1.4BB = 10,000,000 + BB
0.4 BB = 10,000,000- 9,800,000 = 200,000
BB = 200,000/0.40 = 500,000
13.

A firm has total annual sales (all credit) of 25,000,000 and accounts receivable of
8,000,000. How rapidly (in how many days) must accounts receivable be collected
if management wants to reduce the accounts receivable to 6,000,000?

Solution:
25,000,000
Average daily credit sales =

= 68,493

365
If the accounts receivable has to be reduced to 6,000,000 the ACP must be:
6,000,000
= 87.6 days
68,493

14.

A firm has total annual sales (all credit) of 1,200,000 and accounts receivable of
500,000. How rapidly (in how many days) must accounts receivable be collected if
management wants to reduce the accounts receivable to 300,000?

Solution:
1,200,000
Average daily credit sales =

= 3287.67
365

If the accounts receivable has to be reduced to 300,000 the ACP must be:
300,000
= 91.3 days
3287.67
15.

A firm has total annual sales (all credit) of 100,000,000 and accounts receivable of
20,000,000. How rapidly (in how many days) must accounts receivable be
collected if management wants to reduce the accounts receivable to 15,000,000?

Solution:
100,000,000
Average daily credit sales =

= 273,972.6
365

If the accounts receivable has to be reduced to 15,000,000 the ACP must be:
15,000,000
= 54.8 days
273,972.6
16.

The financial ratios of a firm are as follows.

Current ratio
Acid-test ratio
Current liabilities
Inventory turnover ratio
What is the sales of the firm?

=
=
=
=

1.25
1.10
2000
10

Solution:
Current assets = Current liabilities x Current ratio
=
2000
x
1.25
=
Current assets - Inventories

2500

= Current liabilities x Acid test ratio

= 2000
x
1.10 = 2200

Inventories

300

Sales

=
=

Inventories
300

x Inventory turnover ratio

x
10
= 3000

17.

The financial ratios of a firm are as follows.

Current ratio
=
Acid-test ratio
=
Current liabilities
=
Inventory turnover ratio
=
What is the sales of the firm?

1.33
0.80
40,000
6

Solution:
Current assets = Current liabilities x Current ratio
=
40,000 x 1.33 = 53,200
Current assets - Inventories

18.

Inventories

Sales

=
=

= Current liabilities x Acid test ratio

=
40,000 x 0.80 = 32,000

21,200
Inventories x Inventory turnover ratio
21,200
x 6
= 127,200

The financial ratios of a firm are as follows.

Current ratio
Acid-test ratio
Current liabilities
Inventory turnover ratio

=
=
=
=

1.6
1.2
2,000,000
5

What is the sales of the firm?

Solution:

Current assets = Current liabilities x Current ratio

= 2,000,000
x
1.6
= 3,200,000
Current assets - Inventories

Inventories

Sales

=
=

= Current liabilities x
=
2,000,000 x

Acid test ratio

1.2 = 2,400,000

800,000
Inventories x Inventory turnover ratio
800,000 x 5
= 4,000,000

19.

Complete the balance sheet and sales

financial data:
Debt/equity ratio
Acid-test ratio
Total assets turnover ratio
Days' sales outstanding in
Accounts receivable
Gross profit margin
Inventory turnover ratio

data (fill in the blanks) using the following

=
=
=

0.80
1.1
2

=
=
=

30 days
30 percent
6

Balance sheet
Equity capital
80,000 Plant and equipment
Retained earnings
50,000 Inventories
Short-term bank borrowings . . . . Accounts receivable
Cash
....
Sales
....
Cost of goods sold ..

....
....
....
....
....

Solution:
Debt/equity = 0.80
Equity = 80,000 + 50,000 = 130,000
So Debt = Short-term bank borrowings = 0.8 x 130,000

= 104,000

Hence Total assets = 130,000+104,000 = 234,000

Total assets turnover ratio = 2
So Sales = 2 x 234,000 = 468,000
Gross profit margin = 30 per cent
So Cost of goods sold = 0.7 x 468,000 = 327,600
Days sales outstanding in accounts receivable = 30 days
Sales
So Accounts receivable =

30

360
468,000
=

x 30

= 39,000

360
Cost of goods sold
Inventory turnover ratio =

327,600
=

Inventory

= 6
Inventory

So Inventory = 54,600
As short-term bank borrowing is a current liability,
Cash + Accounts receivable
Acid-test ratio =
Current liabilities
Cash + 39,000
=

1.1

104 ,000
So Cash = 75,400
Plant and equipment = Total assets - Inventories Accounts receivable Cash
= 234,000 - 54,600
- 39,000 75,400
= 65,000
Putting together everything we get
Balance Sheet
Equity capital
80,000
Retained earnings
50,000
Short-term bank borrowings 104,000

Plant & equipment

Inventories
Accounts receivable
Cash

234,000
Sales
Cost of goods sold
20.

65,000
54,600
39,000
75,400
234,000

468,000
327,600

Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Debt/equity ratio
= 0.40
Acid-test ratio
= 0.9
Total assets turnover ratio
= 2.5
Days' sales outstanding in
Accounts receivable
= 25 days
Gross profit margin
= 25 percent
Inventory turnover ratio
= 8
Balance sheet
Equity capital
160,000,000
Retained earnings
30,000,000
Short-term bank borrowings . . .

Sales
Cost of goods sold

....
.....
.

Plant and equipment-------Inventories

Accounts receivable .. . . .
Cash
....
....

Solution:
Debt/equity = 0.40
Equity = 160,000,000 + 30,000,000 = 190,000,000
So Debt = Short-term bank borrowings = 0.4 x 190,000,000 = 76,000,000
Hence Total assets = 190,000,000+ 76,000,000 = 266,000,000
Total assets turnover ratio = 2.5
So Sales = 2.5 x 266,000,000 = 665,000,000
Gross profit margin = 25 per cent
So Cost of goods sold = 0.75 x 665,000,000 = 498,750,000
Days sales outstanding in accounts receivable = 25 days
Sales
So Accounts receivable =

25

360
665,000,000
=

x 25

= 46,180,556

360
Cost of goods sold

498,750,000

Inventory turnover ratio =

=
Inventory

= 8
Inventory

So Inventory = 62,343,750
As short-term bank borrowings is a current liability,
Cash + Accounts receivable
Acid-test ratio =
Current liability
Cash + 46,180,556
=

= 0.9
76,000 ,000

So Cash = 22,219,444
Plant and equipment = Total assets - Inventories Accounts receivable Cash
= 266,000,000 - 62,343,750 - 46,180,556 22,219,444
= 135,256,250
Putting together everything we get
Balance Sheet
Equity capital
Retained earnings
Short-term bank borrowings

Sales
Cost of goods sold

160,000,000
30,000,000
76,000,000
266,000,000
665,000,000
498,750,000

Plant & equipment 135,256,250

Inventories
62,343,750
Accounts receivable 46,180,556
Cash
22,219,444
266,000,000

21.

Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Debt/equity ratio
Acid-test ratio
Total assets turnover ratio
Days' sales outstanding in
Accounts receivable
Gross profit margin
Inventory turnover ratio

= 1.5
= 0.3
= 1.9
= 25 days
= 28 percent
= 7

Balance sheet
Equity capital
600,000 Plant and equipment
Retained earnings
100,000 Inventories
Short-term bank borrowings . . . Accounts receivable
Cash
....
Sales
. . . ..
Cost of goods sold

....
....
....
....
....

Solution:
Debt/equity = 1.5
Equity = 600,000 + 100,000 = 700,000
So Debt = Short-term bank borrowings =1.5 x 700,000

= 1050,000

Hence Total assets = 700,000+1050,000 = 1,750,000

Total assets turnover ratio = 1.9
So Sales = 1.9 x 1,750,000 = 3,325,000
Gross profit margin = 28 per cent
So Cost of goods sold = 0.72 x 3,325,000 = 2,394,000
Days sales outstanding in accounts receivable = 25 days
Sales
So Accounts receivable =

25

360
=

Inventory turnover ratio =

So Inventory = 342,000

3,325,000
x 25 = 230,903
360
Cost of goods sold
2,394,000
=
= 7
Inventory
Inventory

As short-term bank borrowings is a current liability ,

Cash + Accounts receivable
Acid-test ratio =
Current liabilities
Cash + 230,903
=

0.3

1050 ,000
So Cash = 84,097
Plant and equipment = Total assets - Inventories Accounts receivable Cash
= 1,750,000 342,000 230,903 84,097
= 1,093,000
Putting together everything we get
Balance Sheet
Equity capital
600,000
Retained earnings
100,000
Short-term bank borrowings 1050,000

Plant &equipment 1,093,000

Inventories
342,000
Accounts receivable 230,903
Cash
84,097

1,750,000

1,750,000

Sales
Cost of goods sold
22.

3,325,000
2,394,000

Compute the financial ratios for Acme Ltd. Evaluate Acme's performance with
reference to the standards.
Acme Limited Balance Sheet, March 31, 20X7
Liabilities and Equity
Equity capital
Reserves and surplus
Long-term debt
Short-term bank borrowing
Trade creditors
Provisions
Total

Rs.60,000,000
45,000,000
72,000,000
40,000,000
30,000,000
15,000,000
62,000,000

Assets
Fixed assets (net)
Current assets
Cash and bank
Receivables

Rs.110,000,000
30,000,000
45,000,000

Inventories
Pre-paid expenses
Others

61,000,000
10,000,000
6,000,000
262,000,000

Total

Acme Limited Profit and Loss Account for the Year Ended March 31, 20X7
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Non-operating surplus
Profit before interest and tax
Interest
Profit before tax
Tax
Profit after tax
Dividends
Retained earnings

Rs.320,000,000
204,000,000
116,000,000
50,000,000
66,000,000
4,000,000
70,000,000
12,000,000
58,000,000
20,000,000
38,000,000
4,000,000
34,000,000
Acme

Current ratio
Acid-test ratio
Debt-equity ratio
Times interest covered ratio
Inventory turnover ratio
Average collection period
Total assets turnover ratio
Net profit margin ratio
Earning power
Return on equity

Standard
1.3
0.70
2.0
4.5
5.0
45 days
1.5
8%
20 %
18 %

Solution:
For purposes of ratio analysis, we may recast the balance sheet as under.
Let assume that Others in the balance sheet represents other current assets.
Liabilities and Equity
Equity capital
Reserves and surplus
Long-term debt
Short-term bank borrowing

.60,000,000
45,000,000
72,000,000
40,000,000
Total

217,000,000

Assets
Fixed assets (net)
Current assets
Cash and bank
30,000,000
Receivables
45,000,000
Inventories
61,000,000
Pre-paid expenses
10,000,000
Others
6,000,000
Less:
Current liabilities
Trade creditors
30,000,000
Provisions
15,000,000
Net current assets
Total
Current assets
(i) Current ratio =
Current liabilities

110,000,000

152,000,000

45,000,000
107,000,000
217,000,000

152,000,000
=

1.8

85,000,000
(Current liabilities here includes short-term bank borrowing also)
Current assets Inventories

91,000,000

(ii) Acid-test ratio =

=
Current liabilities
85,000,000
(Current liabilities here includes short-term bank borrowing also)

= 1.1

Long-term debt + Short-term bank borrowing

(iii) Debt-equity ratio =
Equity capital + Reserves & surplus
72,000,000 + 40,000,000
=

= 1.1
60,000,000 + 45,000,000
Profit before interest and tax

(iv) Times interest coverage ratio =

Interest
70,000,000
=

= 5.83
12,000,000
Cost of goods sold

(v) Inventory turnover period

204,000,000
=

Inventory

= 3.34
61,000,000

365
(vi) Average collection period =
Net sales / Accounts receivable
365
=
= 51.3 days
320,000,000/45,000,000
(vii)
Total assets =Equity + Total debt =( 60,000,000 + 45,000,000 )
+(72,000,000+40,000,000)
= 217,000,000
Net sales
320,000,000
Total assets turnover ratio =
=
= 1.5
Total assets
217,000,000
Profit after tax
(ix) Net profit margin

38,000,000
=

Net sales
70,000,000

PBIT
(x) Earning power =

= 11.9%
320,000,000

=
Total assets

= 32.3 %
217,000,000

Equity earning
(xi) Return on equity =

38,000,000
=

Net worth

= 36.2 %
105,000,000

The comparison of the Acmes ratios with the standard is given below

Acme
Current ratio
1.8
Acid-test ratio
1.1
Debt-equity ratio
1.1
Times interest covered ratio 5.8
Inventory turnover ratio
3.3
Average collection period 51.3 days
Total assets turnover ratio 1.5
Net profit margin ratio
11.9 %
Earning power
32.3 %
Return on equity
36.2 %

23.

Standard
1.3
0.7
2.0
4.5
5.0
45 days
1.5
8%
20 %
18 %

Compute the financial ratios for Nainar Ltd. Evaluate Nainar's performance with
reference to the standards.

Nainar Limited Balance Sheet, March 31, 20X7

Liabilities and Equity
Equity capital
Reserves and surplus
Long-term debt
Short-term bank borrowing
Trade creditors
Provisions

Rs.100,000,000
65,000,000
140,000,000
70,000,000
24,000,000
19,000,000
418,000,000

Total
Assets
Fixed assets (net)
Current assets
Cash and bank
Receivables
Inventories
Pre-paid expenses
Others

Rs.206,000,000
25,000,000
70,000,000
85,000,000
20,000,000
12,000,000
418,000,000

Total

Nainar Limited Profit and Loss Account for the Year Ended March 31, 20X7
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Non-operating surplus
Profit before interest and tax
Interest
Profit before tax
Tax
Profit after tax
Dividends
Retained earnings

Rs.740,000,000
520,000,000
220,000,000
102,000,000
118,000,000
12,000,000
130,000,000
22,000,000
108,000,000
46,000,000
62,000,000
20,000,000
42,000,000
Nainar

Current ratio
Acid-test ratio
Debt-equity ratio
Times interest covered ratio
Inventory turnover ratio
Average collection period
Total assets turnover ratio
Net profit margin ratio
Earning power
Return on equity

Standard
1.7
1.0
1.4
5.5
6.0
40 days
2.0
8%
30 %
35 %

Solution:
For purposes of ratio analysis, we may recast the balance sheet as under.
Let assume that Others in the balance sheet represents other current assets.
Liabilities and Equity
Equity capital
Reserves and surplus
Long-term debt
Short-term bank borrowing

100,000,000
65,000,000
140,000,000
70,000,000
Total

Assets
Fixed assets (net)
Current assets
Cash and bank
Receivables
Inventories
Pre-paid expenses
Others
Less:
Current liabilities
Trade creditors
Provisions
Net current assets

375,000,000
206,000,000

25,000,000
70,000,000
85,000,000
20,000,000
12,000,000

24,000,000
19,000,000
Total

212,000,000

43,000,000
169,000,000
375,000,000

Current assets
(i) Current ratio =
Current liabilities
212,000,000
=

= 1.9
113,000,000
( Current liabilities here includes short-term bank borrowing also)
Current assets Inventories

127,000,000

(ii) Acid-test ratio =

=
Current liabilities
113,000,000
( Current liabilities here includes short-term bank borrowing also)
Long-term debt + Short-term bank borrowing
(iii) Debt-equity ratio =
Equity capital + Reserves & surplus

= 1.1

140,000,000 + 70,000,000
=
= 1.3
100,000,000 + 65,000,000
Profit before interest and tax
(iv) Times interest coverage ratio =
Interest
130,000,000
=

= 5.9
22,000,000
Cost of goods sold

(v) Inventory turnover period

520,000,000
=

Inventory
365

= 6.1
85,000,000

(vi) Average collection period =

Net sales / Accounts receivable
365
=
= 34.5 days
740,000,000/70,000,000
(vii)
Total assets =

Equity + Total debt =(100,000,000 + 65,000,000 )

+(140,000,000+70,000,000)
= 375,000,000
Net sales

Total assets turnover ratio

740,000,000

= 2.0

Total assets

375,000,000

Profit after tax

(ix) Net profit margin

62,000,000
=

Net sales
130,000,000

PBIT
(x) Earning power =

= 8.4 %
740,000,000

=
Total assets

= 34.7 %
375,000,000

Equity earning
(xi) Return on equity =

62,000,000
=

Net worth

= 37.6 %
165,000,000

The comparison of the Nainars ratios with the standard is given below

Nainar
Current ratio
Acid-test ratio
Debt-equity ratio
Times interest covered ratio
Inventory turnover ratio
Average collection period
Total assets turnover ratio
Net profit margin ratio
Earning power
Return on equity

24.

Standard

1.9
1.1
1.3
5.9
6.1
34.5 days
2.0
8.4 %
34.7 %
37.6 %

1.7
1.0
1.4
5.5
6.0
40 days
2.0
8%
30 %
35 %

The comparative balance sheets and comparative Profit and Loss accounts for
Nalvar Limited, are given below:
Comparative Balance Sheets, Nalvar Limited
(Rs. in million)

Share capital
Reserves and surplus
Long-term debt
Short-term bank borrowing
Current liabilities
Total
Assets
Net fixed assets
Current assets
Cash and bank
Receivables
Inventories
Other assets
Total

20X3
1.6
1.0
1.4
1.3
1.1
6.4

20X4
1.6
1.6
1.5
1.5
1.3
7.5

20X5
1.8
2.4
1.8
1.7
1.5
9.2

20X6
1.8
2.3
1.6
1.5
1.6
8.8

20X7
2
3
1.4
1.2
1.8
9.4

1.2

1.4

1.7

0.3
1.8
1.8

0.3
2.1
2.2

0.2
2.5
2.8

0.4
2.4
2.4

0.3
2.5
2.8

1.3
6.4

1.5
7.5

1.7
9.2

1.9
8.8

1.8
9.4

Comparative Profit and Loss Accounts, Nalvar Limited

(Rs. in million)

Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Non-operating surplus deficit
Profit before interest and tax
Interest
Profit before tax
Tax
Profit after tax

20X3
3.8
2.6
1.2
0.3
0.9
0.1
1
0.1
0.9
0.05
0.85

20X4
4.2
3.1
1.1
0.3
0.8
0.2
1
0.1
0.9
0.08
0.82

20X5
5.3
3.9
1.4
0.4
1
0.1
1.1
0.2
0.9
1
-0.1

20X6
6.5
4
2.5
0.6
1.9
0.3
2.2
0.1
2.1
1.2
0.9

20X7
7.8
4.8
3
0.6
2.4
0.3
2.7
0.1
2.6
1.2
1.4

Required: Compute the important ratios for Nalvar Limited for the years 20X3-20X7.
You may assume that other assets in the balance sheet represent other current
assets.
Current ratio
Debt-equity ratio
Total assets turnover ratio
Net profit margin
Earning power
Return on equity
Solution:
We will rearrange the balance sheets as under for ratio analysis. It is assumed that
Other assets are other current assets
Liabilities and Equity
20X4
20X5
20X6
20X3
20X7
Share capital
1.6
1.6
1.8
1.8
2
Reserves and surplus
1
1.6
2.4
2.3
3
Long-term debt
1.4
1.5
1.8
1.6
1.4
Short-term
bank
borrowing
1.3
1.5
1.7
1.5
1.2
Total
5.3
6.2
7.7
7.2
7.6
Assets
Net fixed assets
1.2
1.4
2
1.7
2
Current assets
Cash and bank
0.3
0.3
0.3
0.2
0.4
Receivables
2.5
1.8
2.1
2.5
2.4

Inventories
Other current assets
Less: Current liabilities
Other current liabilities
Net current assets
Total

1.8
1.3
1.1

5.2
1.1
4.1
5.3

2.2
1.5
1.3

2.8
1.7

7.2

1.3 1.5
4.8
6.2

1.5
5.7
7.7

6.1

2.4
1.9

2.8
1.8

7.1

1.6

1.6
5.5
7.2

1.8

The required ratios are as under:

Current ratio
Debt-equity ratio
Total assets turnover ratio
Net profit margin(%)
Earning power (%)
Return on equity (%)

20X4 20X5
20X6
20X7
20X3
2.2
2.2
2.3
2.3
2.5
1.0
0.9
0.8
0.8
0.5
0.7
0.7
0.7
0.9
1.0
22.4
19.5
-1.9
13.8
17.9
18.9
16.1
14.3
30.6
35.5
32.7
25.6
-2.4
22.0
28.0

26. The comparative balance sheets and comparative Profit and Loss accounts for
Somani Limited, a machine tool manufacturer, are given below:
Comparative Balance Sheets, Somani Limited (Rs. in million)

Share capital
Reserves and surplus
Long-term debt
Short-term bank borrowing
Current liabilities
Total
Assets
Net fixed assets
Current assets
Cash and bank
Receivables
Inventories
Other Assets
Total

20X3 20X4 20X5 20X6

41
50
50
50
16
36
72
118
28
25
30
29
35
30
36
38
24
28
30
30
144
169
218
265

20X7
55
150
22
38
25
290

72

80

75

102

103

8
24
35
5
144

9
30
42
8
169

15
59
55
14
218

12
62
75
14
265

11
85
79
12
290

7.4
1.8
5.6
7.6

Comparative Profit & Loss Account of Somani Ltd

(Rs. in million)

Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Non-operating surplus deficit
Profit before interest and tax
Interest
Profit before tax
Tax
Profit after tax

20X3 20X4 20X5

285
320
360
164
150
170
121
170
190
64
66
68
57
104
122
3
4
4
60
108
126
8
6
10
52
102
116
15
26
30
37
76
86

20X6
350
175
175
68
107
3
110
12
98
26
72

20X7
355
174
181
64
117
3
120
12
108
29
79

Compute the following ratios for years 20X3-20X7:

Current ratio
Debt-equity ratio
Total assets turnover ratio
Net profit margin
Earning power
Return on equity
For ratio analysis purpose, we will rearrange the balance sheet
assumed that Other assets are other current assets
20X3
20X4
20X5
20X6
Share capital
41
50
50
50
Reserves and surplus
16
36
72
118
Long-term debt
28
25
30
29
Short-term
bank
borrowing
35
30
36
38
120
141
188
235
Total
Assets
Net fixed assets
72
80
75
102
Current assets
Cash and bank
8
9
15
12
Receivables
24
30
59
62
Inventories
35
42
55
75
Other assets
5
72
8 89 14 143 14 163
Less : Current liabilities 24
24 28 28 30 30
30 30
Net current assets
48
61
113
133
120
141
188
235
Total

as under. It is
20X7
55
150
22
38
265
103
11
85
79
12
25

187
25
162
265

The ratios worked out are as under:

20X3 20X4 20X5 20X6 20X7

1.2
1.5
2.2
2.4
3.0
1.1
0.6
0.5
0.4
0.3
2.4
2.3
1.9
1.5
1.3
13.0 23.8 23.9 20.6 22.3
50.0 76.6 67.0 46.8 45.3
64.9 88.4 70.5 42.9 38.5

Current ratio
Debt-equity ratio
Total assets turnover ratio
Net profit margin (%)
Earning power (%)
Return on equity (%)

26. The Balance sheets and Profit and Loss accounts of LKG Corporation are given
below.
Prepare the common size and common base financial statements
Balance Sheets
Shareholders funds
Loan funds
Total
Fixed assets
Investments
Net current assets
Total

(Rs. in million)
20x7
20x6
256
262
156
212
412
474
322
330
15
15
75
129
412
474

Profit & Loss Accounts

Net sales
Cost of goods sold
Gross profit
PBIT
Interest
PBT
Tax
PAT

(Rs. in million)
20x6
20x7
623
701
475
552
148
149
105
89
22
21
83
68
41
34
42
34

Solution:
Common Size statements:
Profit and Loss Account

Net sales
Cost of goods sold
Gross profit
PBIT
Interest
PBT
Tax
PAT

27.

Regular ( in
Rs. million)
20x6 20x7
623
701
475
552
148
149
105
89
22
21
83
68
41
34
42
34

Common Size(%)
20x6
20x7
100
100
76
79
24
21
17
13
4
3
13
10
7
5
7
5

Balance Sheet
Regular ( in
million)
20x6 20x7

Common Size(%)
20x6
20x7

Shareholders' funds
Loan funds
Total
Fixed assets
Investments
Net current assets

256
156
412
322
15
75

262
212
474
330
15
129

62
38
100
78
4
18

55
45
100
70
3
27

Total

412

474

100

100

The Balance sheets and Profit and Loss accounts of Grand Limited are given below.
Prepare the common size and common base financial statements
Balance Sheet
Shareholders fund
Loan funds
Total
Fixed assets
Investments
Net current assets
Total

20x6
85
125
210
127
8
75
210

20x7
85
180
265
170
10
85
265

Profit & Loss Account

20x6
Net sales
450
Cost of goods sold
320
Gross profit
130
PBIT
85
Interest
12
PBT
73
Tax
22
PAT
51

20x7
560
410
150
98
17
81
38
43

Solution:

Balance Sheet
Shareholders'
funds
Loan funds
Total
Fixed assets
Investments
Net current assets
Total
Profit & Loss
Account
Net sales
Cost of goods sold
Gross profit
PBIT
Interest
PBT
Tax
PAT

Regular (Rs. in
million)
20x7
20x6
85
125
210
127
8
75
210

85
180
265
170
10
85
265

Regular (Rs. in
million)
20x6
20x7
450
560
320
410
130
150
85
98
12
17
73
81
22
38
51
43

Common
Size(%)
20x6
20x7
40
60
100
60
4
36
100

32
68
100
64
4
32
100

Common
Size(%)
20x6
20x7
100
100
71
73
29
27
19
18
3
3
16
14
5
7
11
8

Common base year statements

Regular (Rs. in
Common base year
Balance Sheet
million)
(%)
20x6
20x7
20x6
20x7
Shareholders' funds
85
85
100
100
Loan funds
125
180
100
144
Total
210
265
100
126
Fixed assets
127
170
100
134
Investments
8
10
100
125
Net current assets
75
85
100
113
Total
210
265
100
126

Profit & Loss Account

Net sales
Cost of goods sold
Gross profit
PBIT
Interest
PBT
Tax
PAT

Regular (Rs. in
million)
20x7
20x6
450
560
320
410
130
150
85
98
12
17
73
81
22
38
51
43

Common base
year (%)
20x6
20x7
100
124
100
128
100
115
100
115
100
142
100
111
100
173
100
84