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Accountancy 6 Marks Question

Accounting Ratios · CBSE STD 12 Commerce (CBSE - English Medium). 97 questions.

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Question 16 Marks
Calculate Gross Profit Ratio from the following data:
Answer
If Total Revenue from Operations is ₹ 100, Cash Revenue from Operations will be $₹\ 33 \frac{1}{3}$ and Credit Revenue from Operations $₹\ 66 \frac{2}{3}$
Hence,
If Credit Revenue from Operations is $₹\ 66 \frac{2}{3}$ Total Revenue from Operations will be= ₹ 100
If Credit Revenue from Operations is ₹ 2,00,000
Total Revenue from Operations will be $=\frac{100}{66\frac{2}{3}}\times ₹\ 2,00,000$
$=100\times\frac{2}{200}\times ₹\ 2,00,000$
$=₹\ 3,00,000$
Cost of Revenue from Operations = Purchases + Carriage Inwards - Excess of Closing Inventory over Opening Inventory
= ₹ 2,25,000 + ₹ 25,000 - ₹ 10,000
= ₹ 2,40,000
Gross Profit = Total Revenue from Operations - Cost of Revenue from Operations
= ₹ 3,00,000 - ₹ 2,40,000 = ₹ 60,000
Gross Profit Ratio $=\frac{\text{Gross Profit}}{\text{Net Revenue from Operations x}}\times100$
$=\frac{₹\ 60,000}{₹\ 3,00,000}\times100= 20 \%$
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Question 26 Marks
Calculate G.P. Ratio from the following:
Credit Revenue from Operations were $ \frac{1}{4}\text{th}$ of Total Revenue from Operations. Credit Revenue from Operations were ₹ 1,20,000. Credit Purchases were $ \frac{1}{5}\text{th}$ of Cash Purchases. Credit Purchases were ₹ 40,000. Opening Inventory ₹ 70,000. It was ₹ 20,000 more than Closing Inventory; Carriage ₹ 15,000, Wages ₹ 45,000.
Answer
Step I:
If Credit Revenue from Operations is ₹ 1,
Total Revenue from Operations will ₹ 4
If Credit Revenue from Operations is ₹ 1,20,000,
Total Revenue from Operations will be ₹ 1,20,000 × 4 = ₹ 4,80,000
Step II:
If Credit Purchase is ₹ 1, Cash Purchase will be ₹ 5 and hence total Purchase will be ₹ 6
$\therefore$ If Credit Purchase is ₹ 1, Total Purchase = ₹ 6
If Credit Purchase is ₹ 40,000, Total Purchase $=\frac{₹\ 6}{₹\ 1}\times₹\ 40,000=₹\ 2,40,000$
Step III:
Cost of Revenue from Operations = Opening Inventory + Purchase + Carriage + Wages - Closing Inventory
= ₹ 70,000 + ₹ 2,40,000 + ₹ 15,000 + ₹ 45,000 - ₹ 50,000
= ₹ 3,20,000
Gross Profit = Total Revenue from Operations - Cost of Revenue from Operations
= ₹ 4,80,000 - ₹3,20,000
= ₹ 1,60,000
Gross Profit Ratio $=\frac{\text{Gross Profit}}{\text{Net Revenue from Operations}}\times100$
$=\frac{₹\ 1,60,000}{₹\ 4,80,000}\times100=33.33\%$
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Question 36 Marks
Distinguish between Current Ratio and Quiek Ratio.
Answer
Distinction between Current Ratio and Quick Ratio
Basis of Distinction
Current Ratio
Quick Ratio(or Liquid Ratio)
1.
Relationship
It establishes a relationship between current Assest and Current Liabilities.
It establishes a relationship between Liquid Assets and Current Liabilities.
2.
Formula for computation
 Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$ Quick Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
3.
Obejctive
It measures the ability of the firm to meet its current liabilities within 12 months from the date of balance Sheet or within the period of operting cycle.
It measures the ability of the firm to meet its current liabilities immediately or within a month.
4.
Ideal Ratio
Current Ratio of 2 : 1 is Considered as an ideal ratio.
Quick Ratio of 1 : 1 is Considered as an ideal ratio.
5.
True Measurement
It is not a true measurement of short-term financial position of the firm as it may include a large amount of inventoires which may not be quickly convertible in to cash.
It removes this shortcoming of current ratio by excluding the amount of inventories.
 
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Question 46 Marks
Calculate Return on Investment from the following:
Answer
Return on Investment $=\frac{\text{Net profit before Interst and Tax}}{\text{Capital Employed }}\times10$ Calculation of Net Profit before Interest and Tax: Net Profit after Tax = ₹ 96,000 Net Profit before Tax $=96,000\times\frac{100}{50}=1,92,000$
Net Profit before Interest and Tax = ₹ 1,92,000 + Interest on Loan ₹ 36,000 + Interest on Debentures ₹ 12,000 = ₹ 2,40,000 Capital Employed = Shareholder's Funds + Non Current Liabilities = Equity Capital + Pref. Capital + Reserves + Current year's Profit + 15% Loans + 10% Debentures = ₹ 5,00,000 + ₹ 1,00,000 + ₹ 1,44,000 + ₹ 96,000 + ₹ 2,40,000 + ₹ 1,20,000 = ₹ 12,00,000 $=\frac{2,40,000}{12,00,000}\times100=20\%$
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Question 56 Marks
Comment upon the short-term financial position of the Company on the basis of the following:
Goodwill ₹ 1,00,000; Sundry Debtors ₹ 2,50,000; Machinery ₹ 4,00,000; Inventory ₹ 5,00,000; Bills Payable ₹ 30,000; Sundry Creditors ₹ 4,20,000; Prepaid Expenses ₹ 25,000; Cash ₹ 40,000; Marketable Securities ₹ 80,000; Bills Receivable ₹ 30,000; Debentures ₹ 1,00,000; Expenses Payable ₹ 10,000; Live Stock ₹ 50,000; Patents ₹ 20,000 Provision for Taxation ₹ 40,000.
Answer
Short-term financial position can be ascertained by analysing its Liquidity Ratios. Liquidity Ratios include the following two ratios:
  1. Current Ratio.
  2. Quick Ratio.
  1. Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$
Current Assets =Sundry Debtors + Inventory + Prepaid Expenses + Cash + Marketable Securities + Bills Receivable

= ₹ 2,50,000 + ₹ 5,00,000 + ₹ 2,10,000 + ₹ 25,000 + ₹ 40,000 + ₹ 80,000 + ₹ 30,000

= ₹ 9,25,000

Current Liabilities = Bills Payable + Sundry Creditors + Expenses Payable + Provision for Taxation

= ₹ 30,000 + ₹ 4,20,000 + ₹ 10,000 + ₹ 40,000

= ₹ 5,00,000

Current Ratio$=\frac{₹\ 9,25,000}{₹\ 5,00,000}= 1.85:1$
  1. Quick Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
Liquid Assets = Sundry Debtors + Cash + Marketable Securities + Bills Receivable

= ₹ 2,50,000 + ₹ 40,000 + ₹ 80,000 + ₹ 30,000

= ₹ 5,00,000

Quick Ratio $=\frac{₹\ 4,00,000 }{₹\ 5,00,000} =8:1$
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Question 66 Marks
Following information is available for the year ending 31st March, 2018. Calculate gross profit ratio:
Answer
Net Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operations= ₹ 25,000 + ₹ 75,000 = ₹ 1,00,000
Net Purchases = Cash Purchases + Credit Purchases - Return Outwards
= ₹ 15,000 + ₹ 60,000 - ₹ 2,000 = ₹ 73,000
Cost of Revenue from Operations = Purchases + (Opening Inventory - Closing Inventory) + Direct Expenses
= Purchases + Decrease in inventory + Carriage Inwards + Wages
= ₹ 73,000 + ₹ 10,000 + ₹ 2,000 + ₹ 5,000
= ₹ 90,000
Gross Profit = Revenue from Operations - Cost of Revenue from Operations
= ₹ 1,00,000 - ₹ 90,000
= ₹ 10,000
Gross Profit Ratio = Gross Profit/ Net Revenue from Operations × 100
= ₹ 10,000/ ₹ 1,00,000 × 100 = 10%
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Question 76 Marks
A company's inventory turnover is 5 times. Inventory at the end of the year ₹ 4,000 more than inventory at the beginning of the year. Revenue from Operations during the year (all credit) were ₹ 3,00,000. Rate of Gross Profit is 25% on cost of Revenue from Operations. Current Liabilities at the end of the year were ₹ 50,000. Quick Ratio is 1 : 1. Calculate:
  1. Cost of revenue from operations (Cost of Goods Sold).
  2. Opening inventory.
  3. Closing inventory.
  4. Quick Assets.
  5. Current Assets at the end.
Answer
Gross Profit is 25% of cost. Therefore, goods costing ₹ 100 is sold for ₹ 125.
If Revenue from Operations are 125, Cost is 100
  1. If Revenue from Operations are ₹ 3,00,000, Cost is $\frac{100}{125}\times3,00,000$
= ₹ 2,40,000

Average Inventory $=\frac{₹\ 2,40,000}{5}=₹\ 48,000$
  1. Opening Inventory $=₹\ 48,000 - \frac{1}{2}\text{ of }4,000 = ₹\ 46,000$
  2. Closing Inventory $=₹\ 48,000 + \frac{1}{2}\text{ of }4,000 = ₹\ 50,000$
Current Liabilities are ₹ 50,000 and Quick Ratio is 1, therefore,
  1. Quick Assets = ₹ 50,000 × 1 = ₹ 50,000
  2. Current Assets = Quick Assets + Closing Inventory
= ₹ 50,000 + ₹ 50,000 = ₹ 1,00,000
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Question 86 Marks
Calculate Operating Profit Ratio and Operating Ratio from the following:
Cash Revenue from Operations ₹ 2,00,000; Credit Revenue from Operations ₹ 1,30,000; Revenue from Operations Return (Sales Return) ₹ 10,000; Cost of Revenue from Operations ₹ 1,80,000; Office and Administration Expenses ₹ 40,000; Selling Expenses ₹ 36,000; Interest on Debentures ₹ 23,000.
Answer
Operating Profit Ratio $=\frac{\text{Operating Profit}}{\text{Net Revenue from Operations }}\times100$
Operating Profit = Gross Profit - Operating Expenses
Gross Profit = Net Revenue from Operations - Cost of Revenue from Operations
= (Cash Revenue from Operations + Credit Revenue from Operations - Revenue from Operations Return) - Cost of Revenue from Operations
= (₹ 2,00,000 + ₹ 1,30,000 - ₹ 10,000) - ₹ 1,80,000
= ₹ 3,20,000 - ₹ 1,80,000 = ₹ 1,40,000
Operating Expenses = Ofice and Administration Expenses + Selling Expenses
= ₹ 40,000 + ₹ 36,000 = ₹ 76,000
Operating Profit Ratio $=\frac{64,000}{3,20,000}\times100=20\%$
Operating Ratio $=\frac{\text{Cost of Revenue from Operations + Operating Expenses}}{\text{Net Revenue from Operations}}\times100$
Operating Ratio $=\frac{₹\ 1,80,000+₹\ 76,000}{₹\ 3,20,000 }\times100$
$=\frac{₹\ 2,56,000}{₹\ 3,20,000}\times100=80\%$
Note: Interest on Debentures is not considered for calculating the above mentioned ratios.
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Question 96 Marks
Opening Inventory ₹ 28, 000; Closing Inventory ₹ 52,000 ; Revenue from Operations ₹ 6,00, 000; Gross Profit $33\frac{1}{3}\%$ on Calculate Inventory Turnover Ratio.
Answer
Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$ Gross Profit Ratio is $33\frac{1}{3}\%$ on Cost. Therefore, Goods costing ₹ 100 is sold for $₹\ 133\frac{1}{3}.$ If Revenue from Operations are $₹\ 133\frac{1}{3}.$ Cost of Revenue from Operations is ₹ 100 If Revenue from Operations are ₹ 6,00,000 Cost of Revenue from Operations is $\frac{100}{133^\frac{1}{3}}\times\ ₹\ 6,00,000$ $= 100\times\ \frac{3}{400}\times\ ₹\ 6,00,000$$= ₹\ 4,50,000$
Average Inventory $=\frac{\text{Opening Inventory + Closing Inventory}}{2}$ Average Inventory $=\frac{₹ \ 28,000 +₹\ 52,000}{2}$ $=\frac{₹\ 80,000}{2}=₹\ 40,000$ Inventory Turnover Ratio $=\frac{₹ \ 4,50,000}{₹ \ 40,000}=11.25\text{ times}$
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Question 106 Marks
Calculate trade receivables turnover ratio from the following:

State, giving reason, what will be the effect of the following on trade receivables turnover ratio:
  1. Received ₹ 20,000 from a customer.
  2. Sale of goods on credit ₹ 30,000
  3. Cash Revenue from Operations ₹ 40,000
Answer
Trade Receivables Turnover Ratio $=\frac{\text{Credit Revenue from Operations}}{\text{Average Trade Receivables}}$
$=\frac{3,80,000 - 20,000}{\frac{1}{2}(70,000 + 1, 10,000)}=\frac{3,60,000}{90,000}=4\text{ Times}$
Provisions for Doubtful Debts are ignored while calculating trade receivables turnover ratio.
Effects on Trade Receivables Turnover Ratio:
Tr.
No.
Trade Receivables Turnover
Ratio will
Reason
i.
Increase
Receipt from trade receivables will decrease the closing trade receivables which will result in increase in trade receivables turnover ratio:
$\frac{3,60,000}{\frac{1}{2}(70,000+90,000)}=\frac{3,60,000}{80,000}=4.5\text{ times}$
ii.
Decrease
Credit revenue from operations will result in equal increase in Credit revenue from operations and Closing trade receivables which will result in decrease in trade receivables turnover ratio:
$\frac{3,90,000}{\frac{1}{2}(70,000+1,40,000)}=\frac{3,90,000}{1,05,000}=3.71\text{ Times}$
iii.
Not Alter
Neither the Credit revenue from operations nor the Trade Receivables are affected.
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Question 116 Marks
Calculate Return on Investment from the following:
Answer
Return on Investment or Capital Employed $=\frac{\text{Net profit before Interst & Tax}}{\text{Capital Employed }}\times100$
Net Profit before Interest = Gross Profit - Indirect Expenses (i.e., Office Expenses)
Gross Profit = Revenue from Operations -Cost of Revenue from Operations
Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage Inwards - Closing Inventory
= ₹ 40,000 + ₹ 6,00,000 +₹ 15,000 - ₹ 60,000
= ₹ 5,95,000
Gross Profit = ₹ 7,00,000 - ₹ 5,95,000 = ₹ 1,05,000
Net Profit before Interest = Gross Profit - Office Expenses
= ₹ 1,05,000 - ₹ 30,000 = ₹ 75,000
Capital Employed = Non Current Assets + Current Assets - Current Liabilities
= ₹ 2,00,000 + ₹ 1,50,000 - ₹ 50,000
= ₹ 3,00,000
Return on Investment $=\frac{75,000}{3,00,000}\times100=25\%$
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Question 126 Marks
  1. you are required to fill in the missing figure in the following Commomn Size Balance Sheet:
  1. Also calculate the Debt Equity Ratio.
Answer
  1.  


Hint: First of all, missing figure of 'Total of Equity and Liabilities' (or Total of Assets) will be found out on the basis of Current Assets.
  1. Debt Equity Ratio : 2012 : 0.94 : 1
2013 : 0.53 : 1
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Question 136 Marks
Compute 'Trade Receivables Turnover Ratio' from the following information: Total Revenue from Operations ₹ 5,20,000, Cash Revenue from Operations 60% of the Credit Revenue from Operations, Closing Trade Receivables ₹ 80,000, Opening Trade Receivables are $\frac{3}{4}\text{th}$ of Closing Trade Receivables.
Answer
Trade Receivables Turnover Ratio $=\frac{\text{ Credit Revenue from Operations }}{\text{Average Trade Receivables}}$
  1. In order to ascertain the Trade Receivables Turnover Ratio, the figure of Credit Revenue from Operations will have to be ascertained. It is as follows:
If Credit Revenue from Operations are 100,

Cash Revenue from Operations will be 60

Therefore, Total Revenue from Operations will be 100 + 60 = 160

Again, if total Revenue from Operations are 160,

Credit Revenue from Operations = 100

If total Revenue from Operations are 5,20,000,

Credit Revenue from Operation $=\frac{100}{160}\times5,20,000= ₹\ 3,25,000$
  1. Opening Trade Receivable $=₹\ 80,000\times\frac{3}{4}=₹\ 60,000$
Average Trade Receivable $=\frac{₹\ 60,000+₹\ 80,000}{2}=₹\ 70,000$
  1. Trade Receivables Turnover Ratio $=\frac{3,25,000}{70,000}=4.64\text{ times}$
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Question 146 Marks
From the following informations, calculate the Inventory Turnover Ratio and the Gross Profit Ratio:
Answer
Inventory Turnover Ratio $= \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$
Cost of Revenue from Operations Opening Inventory + Purchases +Wages+ Carriage Inwards - Closing Inventory
= ₹ 18,000 + ₹ 46,000 + ₹ 14,000 + ₹ 4,000 - ₹ 22,000
= ₹ 60,000
Average Inventory $=\frac{\text{Opening Inventory + Closing Inventory}}{2}$
$=\frac{ ₹\ 18,000+₹\ 22,000}{2}$
$=\frac{ ₹\ 40,000}{2}= ₹\ 20,000$
Inventory Turnover Ratio $=\frac{₹\ 60,000}{₹\ 20,000}=3\text{ times}$
Gross Profit Ratio $=\frac{\text{Gross Profit}}{\text{Net Revenue from Operations}}\times100$
Gross Profit = Revenue from Operations - Cost of Revenue from Operations
= ₹ 80,000 - ₹ 60,000
= ₹ 20,000
Gross Profit Ratio $=\frac{₹\ 20,000}{₹\ 80,000}\times100=25\%$
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Question 156 Marks
From the following information related to Naveen Ltd. calculate (a) Return on Investment and (b) Total Assets to Debt Ratio:
Information: Fixed Assets ₹ 75,00,000; Current Assets ₹ 40,00,000; Current Liabilities ₹ 27,00,000; 12% Debentures ₹ 80,00,000 and Net Profit before Interest, Tax and Dividend ₹ 14,50,000.
Answer
  1. Return on Investment (or Return on Capital Employed) $=\frac{\text{ Net Profit before Interest & Tax}}{\text{Capital Employed}}\times100$
Capital Employed = Fixed Assets + Current Assets - Current Liabilities

= ₹ 75,00,000 + ₹ 40,00,000 - ₹ 27,00,000

= ₹ 88,00,000

Return on Investment $=\frac{14,50,000}{88,00,000}\times100=16.48\%$
  1. Total Assets to Debt Ratio $=\frac{\text{Total Assets}}{\text{Long term Debts}}$
Total Assets = Fixed Assets + Current Asset

= ₹ 75,00,000 + ₹ 40,00,000 = ₹ 1,15,00,000

Long Term Debts = 12% Debentures= ₹ 80,00,000

Total Assets to Debt Ratio $=\frac{1,15,00,000}{80,00,000}=1.44:1$
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Question 166 Marks
Following particulars are obtained from the books of A Ltd. as on 31.3.2018

You are required to calculate:
  1. Working Capital Ratio.
  2. Debt Equity Ratio.
  3. Trade Receivables Turnover Ratio if credit revenue from operations are ₹ 7,20,000.
Answer
  1. Working Capital Ratio (Current Ratio ) $=\frac{\text{Current Assets}}{\text{Current Liabilities}} $
Current Assets = Inventory + Trade Receivables + Cash

= ₹ 44,000 + ₹ 1,20,000 + ₹ 36,000

= ₹ 2,00,000

Current Liabilities = Trade Payables + Bank Overdraft

= ₹ 60,000 + ₹ 20,000

= ₹ 80,000

Working Capital Ratio $=\frac{₹\ 2,00,000}{₹\ 80,000}= 2.5:1$
  1. Debt Equity Ratio $=\frac{\text{Debts}}{\text{Equity}}$
$=\frac{\text{Long Term Borrowings}}{\text{Share Capital+ Reserves & Surplus}}$

$=\frac{₹\ 1,00,000}{₹\ 3,00,000 + ₹\ 1,00,000 }= \frac{₹\ 1,00,000}{₹\ 4,00,000}= 0.25:1$
  1. Trade Receivables Turnover Ratio $=\frac{\text{Credit Revenue from Operations}}{\text{Trade Receivables}}$
$=\frac{₹\ 7,20,000}{₹\ 1,20,000}= 6\text{ times}$
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Question 176 Marks
Opening Trade Receivables ₹ 3,60,000; Cash Revenue from Operations being 20% of Credit Revenue from Operations. Excess of Closing Trade Receivables over Opening Trade Receivables ₹ 60,000. Cost of Revenue from Operations ₹ 18,00,000; Gross a Profit ₹ 5,40,000. Calculate Trade Receivables Turnover Ratio.
Answer
Trade Receivables Turnover Ratio $=\frac{\text{Credit Revenue from Operations}}{\text{Trade Receivables}}$
Revenue from Operations = Cost of Revenue from Operations + Gross Profit
= ₹ 18,00,000 + ₹ 5,40,000 = ₹ 23,40,000
Ratio of Cash Revenue from Operations to Credit Revenue from Operations = 1 : 5
$\therefore$ Credit Revenue from Operations $=₹\ 23,40,000 \times \frac{5}{6} = ₹\ 19,50,000$
Closing Trade Receivables = Opening Trade Receivables + ₹ 60,000
= ₹ 3,60,000 + ₹ 60,000
= ₹ 4,20,000
Average Trade Receivables $=\frac{\text{Opening Trade Receivables + Closing Trade Receivables}}{2}$
$=\frac{₹\ 3,60,000 + ₹\ 4,20,000}{2}$
$=\frac{₹\ 7,80,000}{2} = ₹\ 3,90,000$
Trade Receivables Turnover Ratio $=\frac{₹\ 19,50,000}{₹\ 3,90,000}= 5 \text{ times}$
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Question 186 Marks
Following is the Balance Sheet of Vikas Ltd. as at 31st March, 2018 Note:
Throw light on the short-term financial position of the Company with the help of suitable ratios.
Answer
Short-term financial position can be ascertained by analysing its Liquidity Ratios. Liquidity Ratios include the following two ratios:
  1. Current Ratio.
  2. Quick Ratio.
  1. Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$
Current Assets = Inventory + Trade Receivables + Cash & Cash Equivalents + Expenses paid in Advance.

= ₹ 7,60,000 + ₹ 8,10,000 + ₹ 2,10,000 + ₹ 20,000

= ₹ 18,00,000

Current Liabilities = 11% Debentures (Due for Redemption on 31.3.2019 + Bank Overdraft + Trade Payables + Provision for Taxation.

= ₹ 1,50,000 + ₹ 60,000 + ₹ 3,20,000 + ₹ 70,000

= ₹ 6,00,000

Current Ratio$=\frac{₹\ 18,00,000}{₹\ 6,00,000}= 3:1$
  1. Quick Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
Liquid Assets = Trade Receivables + Cash & Cash Equivalents

= ₹ 8,10,000 + ₹ 2,10,000 = ₹ 10,20,000

Quick Ratio $=\frac{₹\ 10,20,000 }{₹\ 6,00,000} =1.7:1$
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Question 196 Marks
Opening Inventory ₹ 29,000; Purchases ₹ 2,42,000; Revenue from Operations ₹ 3,20,000; Gross Profit Ratio is 25% on revenue from operations. Calculate Inventory Turnover ratio.
Answer
Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations }}{\text{Average Inventory}}$
Cost of Revenue from Operations = Revenue from Operations - Gross Profit
= ₹ 3,20,000 - 25% of 3,20,000
= ₹ 3,20,000 - ₹ 80,000
= ₹ 2,40,000
Calculation of Closing Inventory:
Cost of Revenue from Operations = Opening Inventory + Purchases - Closing Inventory
Hence, Closing Inventory = Opening Inventory + Purchases - Cost of Revenue from Operations
= 29,000 + 2,42,000 - 2,40,000
= 31,000
Average Inventory $=\frac{\text{Opening Inventory}+\text{Closing Inventory}}{2}$
Average Inventory $=\frac{₹\ 29,000\ +\ ₹\ 31,000}{2}$
Average Inventory $=\frac{₹\ 60,000}{2}=₹\ 30,000$
Inventory Turnover Ratio $=\frac{₹\ 2,40,000}{₹\ 30,000}=8\text{ times}$
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Question 206 Marks
Calculate G.P. Ratio from the following:
Cash Revenue from Operations are $\frac{1}{3}\text{rd}$ of total Revenue from Operations. Cash Revenue from Operations were ₹ 6,00,000; Credit Purchases are 25% of total purchases. Credit Purchases were ₹ 3,00,000. Opening Inventoryt ₹ 1,00,000; Closing Inventory was ₹ 50,000 more than Opening Inventory. Carriage ₹ 15,000. Wages ₹ 35,000.
Answer
If Cash Revenue from Operations is ₹ 1
Total Revenue from Operations will be = ₹ 3
If Cash Revenue from Operations is ₹ 6,00,000
Total Revenue from Operations will be $=\frac{3}{1}\times₹ \ 6,00,000$
$= ₹ \ 18,00,000$
If Credit Purchase is ₹ 25
Total Purchase will be = ₹ 100
If Credit Purchase is ₹ 3,00,000Total Purchase will be $=\frac{100}{25}\times₹ \ 3,00,000$
$= ₹ \ 12,00,000$
Cost of Revenue from Operations = Purchases+ Carriage+ Wages - Excess of Closing Inventory over Opening Inventory
= ₹ 12,00,000 + ₹ 15,000 + ₹ 35,000 - ₹ 50,000
= ₹ 12,00,000
Gross Profit = Revenue from Operations - Cost of Revenue from Operations
= ₹ 18,00,000 - ₹ 12,00,000
= ₹ 6,00,000
Gross Profit Ratio $=\frac{\text{Gross Profit}}{\text{Net Revenue from Operations}}\times100$
$=\frac{₹ \ 6,00,000}{₹ \ 18,00,000}\times100=33.33\%$
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Question 216 Marks
Calculate:
  1. Operating Profit Ratio.
  2. Net Profit Ratio from the following.
​​​​​​​
Answer
  1. Operating Profit Ratio $=\frac{\text{Operating Profit}}{\text{Net Revence from Operations}}\times100$
Operating Profit = G.p - Other Operating Exp. (i.e. Office Exp. and Selling Exp.)

G.p. = Revenue from Operations - Returns Inwards - Cost OF Revenue from Operations

= ₹ 8,30,000 - ₹ 30,000 - ₹ 5,00,000 = ₹ 3,00,000

Other Operating Exp. = Office Exp. + Selling Exp.

= ₹ 40,000 + ₹ 18,000 = ₹ 58,000

Operating Profit Ratio $=\frac{ ₹\ 3,00,000- ₹\ 58,000}{ ₹\ 8,00,000}\times100 =30.25\%$
  1. Net Profit Ratio $​​​​​=\frac{​​\text{Net Prof}}{\text{Revenue from Operations}}\times100$
Net Profit = G.P. - Indirect Exp. & Losses + Other Incomes

= ₹ 3,00,000 - ₹ 40,000 - ₹ 18,000 - ₹ 12,000 + ₹ 24,000 - ₹ 10,000 =₹ 2,16,000

Net Profit Ratio $=\frac{₹\ 2,16,000}{₹\ 8,00,000}\times=27\%$
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Question 226 Marks
Calculate G.P. Ratio from the following:
Answer
If Total Revenue from Operations is ₹ 100, Cash Revenue from Operations will be ₹ 25 and Credit Revenue from Operations ₹ 75
Hence,
If Credit Revenue from Operations is ₹ 75
Total Revenue from Operations will be = ₹ 100
If Credit Revenue from Operations is ₹ 6,00,000
Total Revenue from Operations will be $=\frac{100}{75}\times ₹\ 6,00,000$
Cost of Revenue from Operations = Purchases - Excess of Closing Inventory over Opening Inventory
= ₹ 6,90,000 - ₹ 50,000 = ₹ 6,40,000
Gross Profit = Total Revenue from Operations - Cost of Revenue from Operations
= ₹ 8,00,000- ₹ 6,40,000 = ₹ 1,60,000
Gross Profit Ratio $=\frac{\text{Gross Profit}}{\text{Net Revenue from Operations}}\times100$
$=\frac{₹\ 1,60,000}{₹\ 8,00,000}\times100= 20\%$
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Question 236 Marks
Calculate Operating Profit Ratio and Operating Ratio from the following:
Net Revenue from Operations ₹ 3,00,000; Gross Profit ₹ 1,20,000; Operating Expenses ₹ 45,000.
Answer
Operating Profit Ratio $=\frac{\text{Operating Profit}}{\text{Net Revenue from Operations }}\times100$ Operating Profit = Gross Profit - Operating Expenses = ₹ 1,20,000 + ₹ 45,000 = ₹ 75,000 $=\frac{₹\ 75,000}{₹\ 3,00,000}\times100=25\%$ Operating Ratio $=\frac{\text{Cost of Revenue from Operations + Operating Expenses}}{\text{Net Revenue from Operations}}\times100$Cost of Revenue from Operations = Net Revenue from Operations - Gross Profit
= ₹ 3,00,000 - ₹ 1,20,000
= ₹ 1,20,000
Operating Ratio $=\frac{₹\ 1,80,000+₹\ 45,000}{₹\ 3,00,000 }\times100$
$=\frac{₹\ 2,25,000}{₹\ 3,00,000}\times100=75\%$
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Question 246 Marks
The ratio of Current Assets (₹ 9,00,000) to Current Liabilities is 1.5 : 1. The accountant of this firm is interested in maintaining a Current Ratio of 2 : 1 by paying some part of Current Liabilities. You are required to suggest him the amount of Current Liabilities which must be paid for this purpose.
Answer
Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$ 1.5 (Given) $=\frac{₹\ 9,00,000\text{(Given)}}{\text{Current Liabilities}}$ $\therefore$ Current Liabilities $=\frac{₹\ 9,00,000}{1.5}= ₹\ 6,00,000$In order to increase Current Ratio, Current Liabilities must be paid. But payment of Current Liabilities will result in equivalent reduction in the amount of Current Assets as well as Current Liabilities. Let's assume the amount to be paid as x. After the payment of Current Liabilities of ₹ x.
Current Liabilities = ₹ 6,00,000 - x
Current Assets = ₹ 9,00,000 - x
Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$ 2 (Ratio to be maintained) $=\frac{₹\ 9,00,000-\text{x}}{₹\ 6,00,000-\text{x}}$ ₹ 12,00,000 - 2x = ₹ 9,00,000 - x x = ₹ 3,00,000 Therefore, Current Liabilities off ₹ 3,00,000 must be paid to maintain the Current Ratio of 2 : 1.
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Question 256 Marks
Calculate 'Return on Investment' and 'Debt to Equity Ratio' from the following information:
Answer
  1. Return on Investment $=\frac{\text{Net Profit before Interest and Tax}}{\text{Capital Employed}}\times100$
Calculation of Net Profit before Interest and Tax:

Net Profit after Tax = ₹ 6,00,000

Net Profit before Tax $=6,00,000\times\frac{100}{60}=₹\ 10,00,000$

Net Profit before Interest and Tax = ₹ 10,00,000 + Interest ₹ 1,00,000

= ₹ 11,00,000

Return on Investment $=\frac{11,00,000}{80,00,000}\times100=13.75\%$
  1. Debt Equity Ratio $=\frac{\text{Debt}}{\text{Equity}}$
Debt = 10% Debentures = ₹ 10,00,000

Equity = Capital Employed - Debt

= ₹ 80,00,000 - ₹ 10,00,000 = ₹ 70,00,000

Debt Equity Ratio $=\frac{10,00,000}{70,00,000}=0.14:1$
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Question 266 Marks
Calculate current assets of a company from the following information:
  1. Inventory turnover 4 times.
  2. Inventory in the end is ₹ 20,000 more than inventory in the beginning.
  3. Revenue from Operations ₹ 3,00,000.
  4. Gross profit ratio 20%.
  5. Current liabilities ₹ 40,000.
  6. Quick ratio 0.75.
Answer
Current Assets = Liquid Assets+ Closing Inventory With the help of Quick Ratio, we can find out Liquid Assets: Quick Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$ $0. 75 \text{(Given)}=\frac{\text{Liquid Assets}}{₹\ 40,000}$ or Liquid Assets = ₹ 40,000 × 0.75 = ₹ 30,000 With the help of Inventory Turnover Ratio, we can find out Closing Inventory: Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$ $4 \text{(Given)}=\frac{\text{(Revenue from Operations - Gross Profit)}}{\text{Average Inventory}}$ Average Inventory $= \frac{(₹\ 3,00,000- 20\% \text{of}\ ₹\ 3,00,000)}{4}$ Average Inventory $= \frac{₹\ 2,40,000}{4} = ₹\ 60,000$ Closing Inventory $= ₹\ 60,000 +\frac{1}{2}\text{of}\ ₹\ 20,000$ = ₹ 60,000 + ₹ 10,000= ₹ 70,000
Current Assets = Liquid Assets + Inventory = ₹ 30,000 + ₹ 70,000 = ₹ 1,00,000
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Question 276 Marks
Following particulars are given to you:

Calculate the Current Ratio and Quick Ratio. What Conclusions do you draw from these ratios?
Answer
  1. Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$
Current Assets = Inventories + Trade Receivables + Short Term Investments + Payment in Advance + Cash & Cash Equivalents + Accrued Income.

= ₹ 2,50,000 + ₹ 1,30,000 + ₹ 30,000 + ₹ 20,000 + ₹ 40,000 = ₹ 10,000

= ₹ 4,80,000

Current Liabilities = Short term Provision + Short term Borrowings + Trade Payables + Expenses Payable.

= ₹ 20,000 + ₹ 30,000 + ₹ 95,000 + ₹ 5,000

= ₹ 1,50,000

Current Ratio $=\frac{₹\ 4,80,000}{₹\ 1,50,000}=3.2:1$
  1. Quick Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
Liquid Assets = Current Assets - Inventories - Payment in advance.

= ₹ 4,80,000 - ₹ 2,50,000 - ₹ 20,000

= ₹ 2,10,000

Quick Ratio $=\frac{₹\ 2,10,000}{₹\ 1,50,000}=1.4:1$
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Question 286 Marks
Calculate Trade Receivables Turnover Ratio and Average Collection Period from the following:
Answer
In order to ascertain the Trade Receivables Turnover Ratio, the figure of Credit Revenue from Operations will have to be ascertained. It is as follows:
If Credit revenue from operations are 100, Cash revenue from operations will be 20
Therefore, Total revenue from operations will be 100 + 20 = 120
Again, If total revenue from operations are 120
Credit revenue from operations = 100
If total revenue from operations are 4,80,000
Credit revenue from operations $=\frac{100}{120}\times4,80,000=₹\ 4,00,000$
Closing Trade Receivables = Opening Trade Receivables + Excess of Closing Trade Receivables over Opening Trade Receivables
= 60,000 + 30,000 = ₹ 90,000
Average Trade Receivables $=\frac{\text{Opening Trade Receivables + Closing Trade Receivables}}{2}$
$=\frac{₹\ 60,000+₹\ 90,000}{2}=₹\ 75,000$
Trade Receivables Turnover Ratio $=\frac{\text{Credit Revenue from Operations}}{\text{Average Trade Receivables}}$
$=\frac{₹\ 4,00,000}{₹\ 75,000}=5.33\text{ Times}$
Average Collection Period $=\frac{\text{Days in a year}}{\text{Trade Receivables Turnover Ratio}}$
$=\frac{365}{5.33}=68.48 \text{ days or 69 days}$
It is to be noted that any fraction of a day such as .48 would, in practice, mean that the payment will be received next day.
Hence, in the above case, 68.48 days would imply 69 days.
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Question 296 Marks
The Current Ratio of a Company is 0.8 : 1. State giving reasons which of the following transactions would.
  1. Improve.
  2. Reduce.
  3. Not change; The Current Ratio.
  1. Payment of Outstanding Liabilities.
  2. Purchase of goods on Credit.
  3. Sale of furniture costing ₹ 10,000 at a loss of ₹ 2,000.
  4. Sale of goods costing ₹ 10,000 at a profit of ₹ 1,000.
  5. Payment of dividend payable.
Answer
Statement showing the effect of various transactions on Current Ratio:
Tr.No.
Current Ratio will
Reasons
(a)
Reduce.
Since current ratio is 0.8 : 1 which is less than one and both the current assets and current liabilities are decreased by the same amount.
(b)
Improve.
Since current ratio is less than one and both the current assets and current liabilities are increased by the same amount.
(c)
Improve.
Current liabilities remain unchanged but current assets are increased.
(d)
Improve.
Current liabilities remain unchanged but current assets are increased by the amount of profit.
(e)
Reduce.
Since current ratio is less than one and both the current assets and current liabilities are decreased by the same amount.
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Question 306 Marks
The debt-equity ratio of a company is 1 : 2. Which of the following suggestions would increase, decrease or not change it?
  1. Issue of Equity Shares.
  2. Cash Received from Trade Receivables.
  3. Sale of Goods on Cash Basis.
  4. Repayment of long term borrowings.
  5. Purchased Goods on Credit.
Answer
Debt-Equity Ratio $=\frac{\text{Debt}}{\text{Equity}}\text{ or }\frac{\text{Long term Debts}}{\text{Shareholder's Funds}}$
In the above question, Debt-Equity Ratio is given as 1 : 2, therefore, it may be assumed that Long-term Debts are ₹ 1,00,000 and Shareholder's Funds are ₹ 2,00,000.
  1. Issue of Equity Shares: Suppose Equity Shares worth ₹ 1,00,000 are issued then by the issue of equity shares, shareholder's funds will be increased and will stand at ₹ 2,00,000 + ₹ 1,00,000 = ₹ 3,00,000. Therefore, the revised ratio will be:
$\frac{₹\ 1,00,000}{₹\ 3,00,000}=0.33:1$

Before the issue of equity shares the ratio was 1 : 2 (or 0.5 : 1) which is now reduced to 0.33 : 1. It means that the ratio has decreased.

Therefore, it can be concluded that increase in shareholder's funds decreases the ratio.
  1. Cash Received from Trade Receivables: By receiving cash from Trade Receivables there will be affect on the cash and trade receivables only.
Hence, there will be no change in debt-equity ratio because neither the long-term debts nor the Shareholder's Funds are affected.
  1. Sale of Goods on Cash Basis: Goods sold on Cash will affect only the Inventories and Cash.
Hence, there will be no change in debt-equity ratio because neither the long-term debts nor the Shareholder's Funds are affected.
  1. Repayment of Long term Borrowings: Suppose there is repayment of long term borrowings for ₹ 50,000 then by the repayment of long term. borrowings of ₹ 50,000, Long-term Debts will be reduced by ₹ 50,000 and these will stand at ₹ 1,00,000 - ₹ 50,000 = ₹ 50,000. Therefore, the revised ratio will be:
$\frac{₹\ 50,000}{₹\ 2,00,000}=0.25:1$

Before the repayment of long term borrowings, the ratio was 1 : 2 (or 0.5 : 1) which is now reduced to 0.25 : 1. It means that the ratio has decreased.

Therefore, it can be concluded that decrease in long-term debts decreases this ratio.
  1. Purchase of Goods on Credit: Goods Purchased on credit will affect only the inventories and trade payables.
Hence, there will be no change in debt-equity ratio because neither the long-term debts nor the Shareholder's Funds are affected.
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Question 316 Marks
Calculate Current Ratio and Quick Ratio from the following. Also give your opinion about the short term financial position of the company:-
Answer
Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$
Current Assets = Cash & Cash Equivalents + Trade Receivables + Short Term Investments + Inventory of Raw Materials + Inventory of Finished Goods + Prepaid Expenses.
= ₹ 10,000 + ₹ 71,000 + ₹ 20,000 + ₹ 80,000 + ₹ 60,000 = ₹ 9,000
= ₹ 2,50,000
Current Liabilities = Trade Payables + Provision for Taxation + Outstanding Expenses.
= ₹ 1,00,000 + ₹ 25,000 + ₹ 5,000
= ₹ 1,30,000
Current Ratio $=\frac{₹\ 2,50,000}{₹\ 1,30,000}=1.92:1$
Quick Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
Liquid Assets = Cash & Cash Equivalents + Trade Receivables + Short Term Investments.
= ₹ 10,000 - ₹ 71,000 + ₹ 20,000
= ₹ 1,01,000
Quick Ratio $=\frac{₹\ 1,01,000}{₹\ 1,30,000}=0.78:1$
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Question 326 Marks
Closing Inventory ₹ 22,000; Purchases ₹ 1,48,000; Purchase Return ₹ 8,000; Carriage ₹ 4,000; Revenue from Operations (Sales) ₹ 1,90,000; Revenue from Operations Return (Sales Return) ₹ 10,000; Gross Profit 20% on Cost. Calculate Inventory Turnover Ratio.
Answer
Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations }}{\text{Average Inventory}}$
Cost of Revenue from Operations = Net Revenue from Operations - Gross Profit
Net Revenue from Operations = Revenue from Operations - Revenue from Operations Return
= ₹ 1,90,000 - 10,000
= ₹ 1,80,000
Gross Profit = 20% on cost
Therefore, goods costing ₹ 100 is sold for ₹ 120
If Revenue from Operations is ₹ 120, Gross Profit is ₹ 20
If Revenue from Operations is ₹ 1,80,000
Gross Profit is $ \frac{20}{120}\times₹\ 1,80,000=₹\ 30,000$
Cost of Revenue from Operations = ₹ 1,80,000 - ₹ 30,000
= ₹ 1,50,000
Average Inventory $=\frac{\text{Opening Inventory}+\text{Closing Inventory}}{2}$
Since figure of opening inventory is not given, it may be calculated as follows:
Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage - Closing Inventory
Hence, Opening Inventory = Cost of Revenue from Operations - Purchases - Carriage + Closing Inventory
= ₹ 1,50,000 - 1,40,000 - 4,000 + 22,000
= ₹ 28,000
Average Inventory $=\frac{₹\ 28,000\ +\ ₹\ 22,000}{2}$
$=\frac{₹\ 50,000}{2}=₹\ 25,000$
Inventory Turnover Ratio $=\frac{₹\ 1,50,000}{₹\ 25,000}=6\text{ times}$
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Question 336 Marks
Calculate (i) Debt Equity Ratio, (ii) Proprietary Ratio and (iii) Total Assets to Debt Ratio from the following information:
Answer
  1. Debt-Equity Ratio $=\frac{\text{Long term Debts}}{\text{Shareholder's Funds}}$
Long-term Debts = 5% Debentures + Loan from IDBI

= ₹ 15,00,000 + ₹ 10,00,000 = ₹ 25,00,000

Shareholder's Funds = Equity Share Capital + Reserves + P & L Balance.

= ₹ 28,00,000 + ₹ 12,00,000 + ₹ 4,00,000

= ₹ 44,00,000

$=\frac{₹\ 25,00,000}{₹\ 44,00,000}=.57:1$
  1. Proprietary Ratio $=\frac{\text{Shareholder's Funds}}{\text{Total Assets}}$
Total Assets = Goodwill + Other Non Current Assets + Current Assets.

= ₹ 6,00,000 + ₹ 46,00,000 + ₹ 28,00,000

= ₹ 80,00,000

Proprietary Ratio $=\frac{₹\ 44,00,000}{₹\ 80,00,000}=.55\text{ or }55\%$
  1. Total Assets to Debt Ratio $=\frac{\text{Total Assets}}{\text{Long Term Debts}}$
$=\frac{₹\ 80,00,000}{₹\ 25,00,000}=3.2:1$
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Question 346 Marks
Calculate the amount of Opening Trade Receivables and Closing Trade Receivables from the following particulars:
Cost of Revenue from Operations : ₹ 9,00,000
Gross Profit on Revenue from Operations : 25%
Cash Revenue from Operations : 20% of Credit Revenue from Operations
Trade Receivables Turnover Ratio : 5 Times
Closing Trade Receivables were 3 times than that in the beginning.
Answer
Gross Profit is 25% on Revenue from Operations.
It means if Revenue from Operations
Gross Profit
& Cost of Revenue from Operations
=
=
=
₹ 100
₹ 25
₹ 75
If Cost of Revenue from Operations is ₹ 75, Revenue from Operations is ₹ 100
If Cost of Revenue from Operations is ₹ 9,00,000, Revenue from Operations is $\frac{100}{75}\times9,00,000=₹\ 12,00,000$
As Cash Revenue from Operations being 20% of Credit Revenue from Operations
The ratio between Cash Revenue from Operations and Credit Revenue from Operations = 20 : 100 or 1 : 5
Therefore Credit Revenue from Operations $=12,00,000\times\frac{5}{6}=₹\ 10,00,000 $
Trade Receivables Turnover Ratio $=\frac{\text{Credit Revenue from Operations}}{\text{Average Trade Receivables}}$
Average Trade Receivables $=\frac{10,00,000}{5}=₹\ 2,00,000$
Total of Opening Trade Receivables and Closing Trade Receivables
₹ 2,00,000 × 2 = ₹ 4,00,000
Since Closing Trade Receivables are 3 times than that in the beginning, ratio between Opening Trade Receivables and Closing Trade Receivables will be 1 : 3
$\therefore$ Opening Trade Receivables $₹\ 4,00,000\times\frac{1}{4}₹\ 1,00,000$
Closing Trade Receivables $=₹\ 4,00,000\times\frac{3}{4}=₹\ 3,00,000$
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Question 356 Marks
From the following information calculate any two of the following ratios:
  1. Current Ratio.
  2. Debt Equity Ratio.
  3. Operating Ratio.
Revenue from Operations ₹ 1,00,000; Cost of Revenue from Operations was 80% of Revenue from Operations; Equity Share Capital ₹ 7,00,000; General Reserve ₹ 3,00,000; Operating Expenses ₹ 10,000; Quick Assets ₹ 6,00,000; 9% Debentures ₹ 5,00,000; Closing Inventory ₹ 50,000; Prepaid Expenses ₹ 10,000 and Current Liabilities ₹ 4,00,000.
Answer
  1. Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$
Current Assets = Quick Assets + Closing Inventory + Prepaid Exp.

= ₹ 6,00,000 + ₹ 50,000 + ₹ 10,000 = ₹ 6,60,000

Current Ratio $=\frac{6,60,000}{4,00,000}=1.65:1$
  1. Debt-Equity Ratio $=\frac{\text{Long term Debts}}{\text{Shareholder's Funds}}$
Shareholder's Funds = Equity Share Capital + General Reserve

= ₹ 7,00,000 + ₹ 3,00,000 = ₹ 10,00,000

Debt-Equity Ratio $=\frac{5,00,000\text{ (Debentures)}}{10,00,000}=0.5:1$
  1. Operating Ratio $=\frac{\text{Cost of Revenue from Operations + Operating Expenses }}{\text{Net Revenue from Operations}}\times100$
$=\frac{80,000+10,000 }{1,00,000}\times100=90\%$
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Question 366 Marks
The quick ratio of a company is 1 : 1. State giving reasons, which of the following would improve, reduce or not change the ratio?
  1. Purchase of machinery for cash.
  2. Purchase of goods on credit.
  3. Sale of furniture at cost.
  4. Sale of goods at a profit.
  5. Redemption of Debentures.
  6. Cash received from Debtors.
Answer
Statement showing the effect of various transactions on Current Ratio:
Tr.No.
Quick Ratio will
Reasons
(i)
Reduce
Quick Assets have decreased without affecting Current Liabilities.
(ii)
Reduce
Current Liabilities will increase without affecting Quick Assets.
(iii)
Improve.
Quick Assets have increased without affecting Current Liabilities
(iv)
Improve.
Quick Assets have increased without affecting Current Liabilities
(v)
No Change.
Both the Quick Assets (Cash) and Current Liabilities are decreased because redeemable debentures are included in Current Liabilities
(vi) No Change. One Quick Asset (Debtors) is converted into another Quick Asset (Cash)
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Question 376 Marks
Calculate inventory turnover ratio from the following: Opening Inventory ₹ 20,000; Purchases ₹ 2,40,000 and Closing Inventory ₹ 60,000. State, giving reason, whichof the following transactions will (a) Increase (b) Decrease or (c) Not alter the inventory turnover ratio:
  1. Goods purchased for ₹ 40,000
  2. Sale of goods for ₹ 25,000 (Cost ₹ 30,000)
  3. Decrease in the value of closing inventory by ₹ 20,000
  4. Increase in the value of closing inventory by ₹ 10,000
  5. Goods costing ₹ 5,000 distributed as free samples.
Answer
Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations (i.e., Opening Inventory + Purchases - Closing Inventory)}}{\text{Average Inventory}}$
$=\frac{20,000 + 2,40,000 - 60,000}{\frac{1}{2}(20,000 + 60,000)}$
$=\frac{2,00,000}{40,000}=5\text{ times}$
Tr. No.
Effect
Reason
i.
Decrease
Cost of revenue from operations will remain unchanged because of increase in purchase and increase in closing inventories. Hence, it will be: Opening Inventory ₹ 20,000 + Purchase ₹ 2,80,000 - Closing Inventory ₹ 1,00,000 = ₹ 2,00,000. Average Inventory will be: $\frac{20,000+1,00,000}{2}=₹\ 60,000.$
Hence, Inventory turnover ratio will be: $\frac{2,00,000}{60,000}=3.33 \text{ times}$
ii.
Increase
Cost of revenue from operations will increase because of decrease in closing inventory by ₹ 30,000. Hence, Cost of revenue from operations will be: Opening Inventory ₹ 20,000 + Purchase ₹ 2,40,000 - Closing Inventory ₹ 30,000 = ₹ 2,30,000. Average Inventory will be: $\frac{20,000+30,000}{2}=₹\ 25,000.$
Hence, Inventory turnover ratio will be: $\frac{2,30,000}{25,000}=9.2 \text{ times}$
iii.
Increase
Cost of revenue from operations will increase because of decrease in closing inventory. Hence, Cost of revenue from operations will be: Opening Inventory ₹ 20,000 + Purchase ₹ 2,40,000 - Closing Inventory ₹ 40,000 = ₹ 2,20,000. Average Inventory will be: $\frac{20,000+40,000}{2}=₹\ 30,000.$
Hence, Inventory turnover ratio will be: $\frac{2,20,000}{30,000}=7.33 \text{ times}$
iv.
Decrease
Cost of revenue from operations will decrease because of increase in closing inventory. Hence, Cost of revenue from operations will be: Opening Inventory ₹ 20,000 + Purchase ₹ 2,40,000 - Closing Inventory ₹ 70,000 = ₹ 1, 90,000. Average Inventory will be: $\frac{20,000+70,000}{2}=₹\ 45,000.$
Hence, Inventory turnover ratio wiII be: $\frac{1,90,000}{45,000}=4.22 \text{ times}$
v.
Increase
Cost of revenue from operations will remain unchanged because of decrease in purchase and decrease in closing inventory. Hence, it will be Opening Inventory ₹ 20,000 + Purchase ₹ 2,35,000 - Closing Inventory ₹ 55,000 = ₹ 2,00,000. Average Inventory will be: $\frac{20,000+55,000}{2}=₹\ 37,500.$
Hence, Inventory turnover ratio will be: $\frac{2,00,000}{37,500}=5.33 \text{ times}$
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Question 386 Marks
On the basis of the following information, calculate any two of the following ratios:
  1. Operating Ratio.
  2. Liquid Ratio.
  3. Proprietary Ratio
Information: Cash Revenue from Operations ₹ 4,00,000; Credit Revenue from Operations ₹ 2,15,000; Revenue from Operations Returns (Sales Returns) ₹ 27,000; Cost of Revenue from Operations ₹ 3,90,000; Selling and Distribution Expenses ₹ 7,000; Administration Expenses ₹ 3,000; Current Liabilities ₹ 1,95,000; Current Assets ₹ 3,94,000; Closing Inventory ₹ 23,000; Equity Share Capital ₹ 4,37,000; 6% Preference Share Capital ₹ 1,74,000; Fixed Assets ₹ 4,30,000.
Answer
  1. Operating Ratio $=\frac{\text{Cost of Revenue from Operations + Operating Expenses }}{\text{Net Revenue from Operations}}\times100$
Net Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operations - Revenue from Operations Returns

= ₹ 4,00,000 + ₹ 2,75,000 - ₹ 27,000

= ₹ 6,48,000

Operating Exp. = Selling & Distribution Exp. + Administration Exp.

= ₹ 7,000 + ₹ 3,000 = ₹ 10,000

Operating Ratio $=\frac{3,90,000+10,000}{6,48,000}\times100=61.73\%$
  1. Liquid Ratio $=\frac{\text{Liquid Assets (i.e.,Current Assets-Inventory)}}{\text{Current Liabilities}}$
$=\frac{₹\ 3,94,000-₹\ 23,000}{₹\ 1,95,000}$

$=\frac{₹\ 3,71,000}{₹\ 1,95,000}=1.9:1$
  1. Proprietary Ratio $=\frac{\text{Shareholder's Funds}}{\text{Total Assets}}$
Shareholder's Funds = Equity Share Capital+ Preference Share Capital

= ₹ 4,37,000 + ₹ 1,74,000 = ₹ 6,11,000

Total Assets = Current Assets + Fixed Assets

= ₹ 3,94,000 + ₹ 4,30,000 = ₹ 8,24,000

Proprietary Ratio $=\frac{₹\ 6,11,000}{₹\ 8,24,000}$
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Question 396 Marks
On the basis of the following information calculate:
  1. Liquid Ratio.
  2. Gross Profit Ratio.
  3. Operating Ratio.
​​​​​
Answer
  1. Liquid Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
Liquid Assets = Current Assets - Inventory

= ₹ 3,96,00,000 - ₹ 2,31,00,000 = ₹ 1,65,00,000

Current Liabilities = Current Assets - Net Working Capital

= ₹ 3,96,00,000 - ₹ 1,76,00,000 = ₹ 2,20,00,000

Hence, Liquid Ratio $=\frac{₹\ 1,65,00,000}{₹\ 2,20,00,000}=0.75:1$
  1. Gross Profit Ratio $= \frac{\text{Gross Profit}}{\text{Revenue from Operations}}\times100$
Gross Profit = Revenue from Operations - Cost of Revenue from Operations

= ₹ 15,00,00,000 - ₹ 10,20,00,000

= ₹ 4,80,00,000

Hence, Gross Profit Ratio $ =\frac{₹\ 4,80,00,000 }{₹\ 15,00,00,000 }\times100 =32\%$
  1. Operating Ratio $=\frac{\text{Cost of Revenue from Operations + Operating Exp.}}{\text{Net Revenue from Operations}}\times100$
$=\frac{₹\ 10,20,00,000+₹\ 1,80,00,000}{₹\ 15,00,00,000}\times100$

$=\frac{₹\ 12,00,00,000}{₹\ 15,00,00,000}\times100=80\%$​​​​​​​
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Question 406 Marks
The following information is given about a company-

From the above information, calculate the following ratios:
  1. Gross Profit Ratio.
  2. Operating Ratio.
  3. Inventory Turnover Ratio.
  4. Trade Receivables Turnover Ratio.
Answer
  1. Gross Profit Ratio $=\frac{\text{Gross Profit}}{\text{Net Revenue from Operations}}\times100$
$=\frac{₹\ 30,000}{₹\ 1,50,000}\times100=20\%$
  1. Operating Ratio $=\frac{\text{Cost of Revenue from Operations + Operating Expenses}}{\text{Net Revenue from Operations}}\times100$
Cost of Revenue from Operations = Revenue from Operations - Gross Profit

= ₹ 1,50,000 - ₹ 30,000

= ₹ 1,20,000

Operating Ratio $=\frac{₹\ 1,20,000 +₹\ 7,500}{₹\ 1,50,000}\times100$

$=\frac{₹\ 1,27,500}{₹\ 1,50,000}\times100=85\%$
  1. Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$
Average Inventory $=\frac{\text{Opening Inventory + Closing Inventory}}{2}$

$=\frac{₹\ 29,000+₹\ 31,000}{2}=₹\ 30,000$

Inventory Turnover Ratio $=\frac{₹\ 1,20,000}{₹\ 30,000}=4\text{ times}$
  1. Trade Receivables Turnover Ratio $=\frac{\text{Revenue from Operations}}{\text{Trade Receivables}}$
$=\frac{₹\ 1,50,000}{₹\ 16,000}=9.375\text{ times}$
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Question 416 Marks
Following particulars are given to you:

Calculate (i) Debt Equity Ratio, (ii) Total Assets to Debt Ratio and (iii) Proprietary Ratio.
Answer
  1. Debt-Equity Ratio $=\frac{\text{Debt}}{\text{Equity}}\text{ or }\frac{\text{Long term Debts}}{\text{Shareholder's Funds}}$
Long-Term Debts = Long term Borrowings + Long term Provisions.

= ₹ 7,00,000 + ₹ 2,25,000 = ₹ 9,25,000

Shareholder's Funds = Non Current Assets + Working Capital - Non Current Liabilities.

Working Capital = Current Assets - Current Liabilities.

= ₹ 5,40,000 - ₹ 1,40,000 = ₹ 4,00,000

Long term Debts refer to Non Current Liabilities.

$\therefore$ Shareholder's Funds = ₹ 12,00,000 + ₹ 4,00,000 - ₹ 9,25,000

= ₹ 6,75,000

Debt Equity Ratio $=\frac{₹\ 9,25,000}{₹\ 6,75,000}=1.37$
  1. Total Assets to Debt Ratio $=\frac{\text{Total Assets}}{\text{Debt}}$
Total Assets = Non Current Assets + Current Assets.

= ₹ 12,00,000 + ₹ 5,40,000 = ₹ 17,40,000

Total Assets to Debt Ratio $=\frac{₹\ 17,40,000}{₹\ 9,25,000}=1.88:1$
  1. Proprietary Ratio $=\frac{\text{Proprietor's Funds}}{\text{Total Assets}}$
$=\frac{₹\ 6,75,000}{₹\ 17,40,000}\times100=38.79\%$
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Question 426 Marks
Opening Trade Receivables ₹ 10,000; Total Revenue from Operations (Total Sales) ₹ 4,00,000; Cash Revenue from Operations being $\frac{1}{2}\text{th}$ of Total Revenue from
Operations; Revenue from Operations Return (Sales Return) ₹ 60,000 $\big(\frac{1}{3}\text{rd}$ out of Cash Revenue from Operations$\big)$; Closing Trade Receivables were four times than that in the beginning. Calculate Trade Receivables Turnover Ratio and Average Collection Period.
Answer
Trade Receivables Turnover Ratio $=\frac{\text{Net Credit Revenue from Operations}}{\text{Average Trade Receivables}}$
Net Credit Revenue from Operations = Credit Revenue from Operations - Credit Revenue from Operations Return
Since Cash Revenue from Operations is $\frac{1}{2}\text{th}$ of Total Revenue from Operations,
Credit Revenue from Operations = $\frac{1}{3}\text{rd}$ of Total Revenue from Operations
$= \frac{1}{3}\text{of}\ ₹\ 4,00,000 = ₹\ 2,40,000$
Since Cash Revenue from Operations Return is $\frac{1}{3}\text{rd}$ of Total Revenue from Operations Return,
Credit Revenue from Operations Return = $\frac{1}{2}\text{th}$ of Total Revenue from Operations Return
$= \frac{1}{2}\text{of}\ ₹\ 60,000 = ₹\ 40,000$
$\therefore$ Net Credit Revenue from Operations = ₹ 2,40,000 - ₹ 40,000
= ₹ 2,00,000
Closing Trade Receivables = 4 times of Opening Trade Receivables
= 4 times of ₹ 10,000 = ₹ 40,000
$\therefore$ Average Trade Receivables $=\frac{\text{Opening Trade Receivables + Closing Trade Receivables}}{2}$
$=\frac{₹\ 10,000 +₹\ 40,000 }{2}=\frac{₹\ 50,000 }{2}= ₹\ 25,000$
Trade Receivables Turnover Ratio $=\frac{₹\ 2,00,000}{₹\ 25,000}=8\text{ times}$
Average Collection Period $=\frac{\text{Days in a Year}}{\text{Trade Receivables Turnover Ratio}}$
$=\frac{364\text{ days}}{8\text{ times}}=46\text{ times}$
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Question 436 Marks
From the information given below calculate the following ratios:
  1. Quick Ratio.
  2. Inventory Turnover Ratio.
  3. Debt-Equity Ratio.
Information: Current Assets ₹ 5,00,000; Opening Inventory ₹ 50,000; Closing Inventory ₹ 1,50,000; Cost of Revenue from Operations ₹ 12,00,000; Gross Profit ₹ 2,00,000; Indirect expenses ₹ 20,000; Equity Share Capital ₹ 7,00,000; 10% Preference Share Capital ₹ 3,00,000; 12% Debentures ₹ 2,00,000; Current Liabilities ₹ 2,00,000; General Reserve ₹ 1,00,000.
Answer
  1. Quick Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
Liquid Assets = Current Assets - Closing Inventory

= ₹ 5,00,000 - ₹ 1,50,000 = ₹ 3,50,000

Quick Ratio $=\frac{₹\ 3,50,000}{₹\ 2,00,000}=1.75:1$
  1. Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$
Average Inventory $=\frac{\text{Opening Inventory + Closing Inventory}}{2}$

$=\frac{₹\ 50,000+₹\ 1,50,000}{2}$

$=\frac{₹\ 2,00,000}{2}=₹\ 1,00,000$

Inventory Turnover Ratio $=\frac{₹\ 12,00,000}{₹\ 1,00,000}=12\text{ times}$
  1. Debt-Equity Ratio $=\frac{\text{Long Term Debts}}{\text{Shareholder's Funds}}$
Long Term Debts = 12% Debentures

= ₹ 2,00,000

Shareholder's Funds = Equity Share Capital + 10% Preference Share Capital + General Reserve + Net Profit (i.e., G.P. - Indirect Exp. - Interest on Debentures)

= ₹ 7,00,000 + ₹ 3,00,000 + ₹ 1,00,000 + ₹ 1,56,000 (i.e., ₹ 2,00,000 - ₹ 20,000 - ₹ 24,000)

= ₹ 12,56,000

Debt Equity Ratio $=\frac{₹\ 2,00,000}{₹\ 12,56,000}=0.159:1$
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Question 446 Marks
Current Ratio of a Company is 2 : 1. Which of the following suggestions would improve the ratio, which would reduce it and which would not change it?
  1. Purchase of goods on Credit.
  2. Purchase of goods against Cheque.
  3. Sale of goods Costing ₹ 50,000 for ₹ 60,000 on Credit.
  4. To sell a fixed asset at a slight loss.
  5. To borrow money on a promissory note $\Big(\frac{\text{B}}{\text{P}}\Big).$
  6. To give promissory note to a Creditor.
Answer
Current Ratio as given in the question is 2 : 1. In order to understand the question in a simple manner, it may be assumed that current assets are ₹ 2,00,000 and current liabilities are ₹ 1,00,000.
  1. Purchase of Goods on Credit: Suppose, goods for ₹ 25,000 is purchased on credit, the revised current ratio would be:
$\frac{2,00,000+25,000\text{(Inventory)}}{1,00,000+25,000\text{(Trade Payables)}}=\frac{2,25,000}{1,25,000}=1.8:1$

$\therefore$ the current ratio is reduced.
  1. Purchase of Goods against Cheque: Suppose, goods for ₹ 25,000 is purchased for cash, the revised current ratio would be:
$\frac{2,00,000+25,000\text{(Inventory)}-25,000\text{(Bank)}}{1,00,000}=\frac{2,00,000}{1,00,000}=2:1$

$\therefore$ the current ratio has not changed.
  1. Sale of Goods Costing ₹ 50,000 for ₹ 60,000 on Credit: The effect of the above will be decrease in Inventory by ₹ 50,000 and increase in Trade Receivables by ₹ 60,000. Thus the revised current ratio would be:
$\frac{2,00,000+50,000\text{(Inventory)}+60,000\text{(Trade Receivables)}}{1,00,000}=\frac{₹\ 2,10,000}{₹\ 1,00,000}=2.1:1$

$\therefore$ the current ratio is improved.
  1. To sell a fixed asset at a slight loss: Sale of a fixed asset results in the increase in Cash balance even though the asset is sold at a slight loss. Suppose the fixed asset worth ₹ 50,000 is sold at a loss of ₹ 1,500 i.e., at ₹ 48,500, the revised current ratio would be:
$\frac{2,00,000+48,500\text{(Cash)}}{1,00,000}=\frac{2,48,500}{1,00,000}=2.485:1$

$\therefore$ the current ratio is improved.
  1. To borrow money on a promissory note $\Big(\frac{\text{B}}{\text{P}}\Big):$ Borrowing money on the basis of a promissory note increases cash on one hand and increases $\frac{\text{B}}{\text{P}}$ on the other hand. Thus, if ₹ 40,000 are borrowed on the basis of a promissory, then the revised current ratio would be:
$\frac{2,00,000+40,000\text{(Cash)}}{1,00,000+40,000\big(\frac{\text{B}}{\text{P}}\big)}=\frac{2,40,000}{1,40,000}=1.71:1$

$\therefore$ the current ratio is reduced.
  1. To give a promissory note to a creditor: Suppose a promissory note for ₹ 25,000 is given to a creditor. Its effect would be an increase in $\frac{\text{B}}{\text{P}}$ by ₹ 25,000 and decrease in the trade payables by ₹ 25,000. Thus the revised ratio would be:
$\frac{2,00,000}{1,00,000+25,000\big(\frac{\text{B}}{\text{P}}\big)-25,000(\text{Creditors})}=\frac{₹\ 2,00,000}{₹\ 1,00,000}=2:1$

$\therefore$ the current ratio has not changed.
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Question 456 Marks
Briefly explain the meaning and significance of any two of the following ratios:
  1. Gross Profit Ratio.
  2. Inventory Turnover Ratio.
  3. Current Ratio.
Answer
  1. Gross Profit Ratio: This ratio establishes a relationship between gross profit and Revenue from Operations i.e., Net Sales. This ratio is computed and presented in percentage. The formula for computing this ratio is:
Gross Profit Ratio $=\frac{\text{Gross Profit}}{\text{Revence from Operations i.e. Net Sales}}\times100$
Objective and-Significarice: This ratio measures the margin of profit available on Revenue from Operations. The higher the gross profit ratio, the better it is. No ideal standard is fixed for this ratio, but the gross profit ratio should be adequate enough not only to cover the operating expenses but also to provide for depreciation, interest on loans, dividends and creation of reserves.
  1. Inventory Turnover Ratio: It indicates the relationship between the cost of Revenue from Operations and average inventory. It shows how quickly the inventory is rotated into sales or the number of times the inventory is turned into sales during the year.
Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$
Significance: This ratio indicates whether inventory has been efficiently used or not. It shows the speed with which the inventory is rotated into revenue from operations or the number of times the inventory is turned into revenue from operations during the year. The higher the ratio, the better it is, since it indicates that inventory is' selling quickly.
  1. Current Ratio: The ratio explains the relationship between current assets and current liabilities of a business. The formula for calculating the-ratio is:
Current Ratio $=\frac{\text{Current Assets }}{\text{Current liabilities}}$
Significance: This ratio is used to.assessthe firm's ability to meet its short-term liabilities on time. According to accounting principles, a current ratio of 2 : 1 is supposed to an ideal ratio it means that curent assest of a business sholud, at least be twice of its current liabilities.
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Question 466 Marks
Following information is given to you:


Notes:

On the basis of the informations given above, calculate any two of the following ratios:
  1. Liquid Ratio.
  2. Inventory Turnover Ratio.
  3. Debt Equity Ratio.
Answer
  1. Liquid Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
Liquid Assets = Trade Receivables + Cash & Cash Equivalents

= 1,75,000 + 25,000 = 2,00,000

Current Liabilities = Trade Payables + Outstanding Expenses

= 1,50,000 + 10,000 = 1,60,000

Liquid Ratio $=\frac{2,00,000}{1,60,000}=1.25:1$
  1. Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$
Cost of Revenue from Operations = Revenue from Operations - Gross Profit

= 8,00,000 - 1,76,000 = 6,24,000

Average Inventory $=\frac{\text{Opening Inventory + Closing Inventory}}{2}$

$=\frac{44,000 + 60,000}{2}$

$=52,000$

Inventory Turnover Ratio $=\frac{6,24,000}{52,000}=12\text{ times.}$
  1. Debt Equity Ratio $=\frac{\text{Debt}}{\text{Equity}}\text{ or }\frac{\text{Long Term Debts}}{\text{Shareholder's Funds}}$
Long Term Loans = Debentures = ₹ 2,00,000.

Shareholder's Funds = Share Capital + General Reserve + Profit and Loss Balance

= 4,50,000 + 1,20,000 + 70,000

= ₹ 6,40,000

Debt Equity Ratio $=\frac{2,00,000}{6,40,000}=0.3125:1$
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Question 476 Marks
What is 'Window Dressing'? Explain with the help of an example.
Answer
Window dressing is a technique used by companies and financial managers to manipulate financial statements and reports to show more favorable results for a period. Although window dressing is illegal or fraudulent, it is slightly dishonest and is usually done to mislead investors.Example of Window Dressing:
Let's assume that a company operates throughout the year with a negative balance in its general ledger account Cash, Checking Account. (At the bank, the checking account has a positive balance due to the time it takes for the company's checks to clear.) In order to avoid its December 31 balance sheet reporting a negative cash balance, the company decides to postpone issuing checks for vendors' invoices that should have been paid. The postponement allows its general ledger Cash account to temporarily have a positive amount. On January 2, the company will issue the postponed checks and will resume its normal practice of having a negative balance in its Cash account.
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Question 486 Marks
Calculate:
  1. Inventory Turnover Ratio.
  2. Average Age of Inventory.
  3. Working Capital Turnover Ratio.
from the following detail:

Answer
  1. Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$
Cost of Revenue from Operations = Revenue from Operations - Gross Profit

= ₹ 8,00,000 - ₹ 2,00,000

= ₹ 6,00,000

Average Inventory $=\frac{\text{Opening Inventory + Closing Inventory}}{2}$

$=\frac{₹\ 40,000+₹\ 80,000}{2}$$=\frac{₹\ 1,20,000}{2}$

$= ₹\ 60,000$

Inventory Turnover Ratio $=\frac{₹\ 6,00,000}{₹\ 60,000}=10\text{ times}$
  1. Average Age oflnventory $=\frac{\text{Days in a Year}}{\text{Inventory Turnover Ratio}}$
$=\frac{365\text{ days}}{10\text{ times}}=37\text{ days}$
  1. Working Capital Turnover Ratio $=\frac{\text{Net Revenue from Operations}}{\text{Working Capital}}$
Working Capital = Current Assets - Current Liabilities

Current Assets = Trade Receivables + Closing Inventory + Cash & Cash Equivalents

= ₹ 1, 15,000 + ₹ 80,000 + ₹ 1,00,000

= ₹ 2,95,000

Current Liabilities = Trade Payables + Outstanding Expenses

= ₹ 75,000 + ₹ 20,000 = ₹ 95,000

Working Capital = ₹ 2,95,000 - ₹ 95,000 = ₹ 2,00,000

Working Capital Turnover Ratio $=\frac{₹\ 8,00,00}{₹\ 2,00,00}=4 \text{ times}$
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Question 496 Marks

Calculate the value of Opening and Closing Inventory in each of the following alternative cases:
Case I: If closing inventory was ₹ 1,00,000 in excess ofopening inventory.
Case II: If closing inventory was 2 times that in the beginning.
Case III: If closing inventory was 2 times more than that in the beginning.
Case IV: If closing inventory was 3 times that in the beginning.
Answer
Cost of Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operations - Gross Profit
= 1,00,000 + 5,00,000 - 1,20,000 = ₹ 4,80,000
Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$
4 (Given) $=\frac{₹\ 4,80,000}{\text{Average Inventory}}$
$\therefore$ Average Inventory $=\frac{₹\ 4,80,000}{4}=₹\ 1,20,000$
Case I:
Opening Inventory $=₹\ 1,20,000-\frac{1}{2}\text{ of }₹\ 1,00,000=₹\ 70,000$
Closing Inventory $=₹\ 1,20,000+\frac{1}{2}\text{ of }₹\ 1,00,000=₹\ 1,70,000$
Case II:
Opening Inventory + Closing Inventory = Average Inventory × 2
= 1,20,000 × 2 = ₹ 2,40,000
Since Closing Inventory was 2 times than that in the beginning, ratio between Opening Inventory and Closing Inventory will be 1 : 2.
$\therefore$ Opening Inventory $=₹\ 2,40,000\times\frac{1}{3}=₹\ 80,000$
Closing Inventory $=₹\ 1,20,000\times\frac{2}{3}=₹\ 1,60,000$
Case III:
Since Closing Inventory was 2 times more than that in the beginning, ratio between Opening Inventory and Closing Inventory will be 1 : 3.
$\therefore$ Opening Inventory $=₹\ 2,40,000\times\frac{1}{4}=₹\ 60,000$
Closing Inventory $=₹\ 1,20,000\times\frac{3}{4}=₹\ 1,80,000$
Case IV:
Since Closing Inventory was 3 times than that in the beginning, ratio between Opening Inventory and Closing Inventory will be 1 : 3.
$\therefore$ Opening Inventory $=₹\ 2,40,000\times\frac{1}{4}=₹\ 60,000$
Closing Inventory $=₹\ 1,20,000\times\frac{3}{4}=₹\ 1,80,000$
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Question 506 Marks
Following is the Balance Sheet of XY Ltd. as at 31st March, 2018. Other Informations:
Annual Revenue from Operations
₹ 8,00,000
Percentage of Gross Profit on Revenue from Operations
20%
Calculate:
  1. Inventory Turnover Ratio.
  2. Trade Receivables Turnover Ratio.
  3. Working Capital Turnover Ratio.
Answer
  1. Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Inventory}}$
Gross Profit = 20% on Revenue from Operations

$=₹\ 8,00,000\times\frac{20}{100}$

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

= ₹ 8,00,000 - ₹ 1,60,000

= ₹6,40,000

Inventory Turnover Ratio $=\frac{₹ \ 6,40,000}{₹\ 1,20,000}=5.33\ \text{times}$
  1. Trade Receivables Turnover Ratio $=\frac{\text{Credit Revenue from Operations}}{\text{Trade Receivables}}$
$=\frac{₹ \ 8,00,000}{₹\ 36,000}$

$=\frac{₹ \ 8,00,000}{₹\ 36,000}=22\text{ times}$
  1. Working Capital Turnover Ratio $=\frac{\text{Net Revenue from Operations}}{\text{Working Capital}}$
Working Capital = Inventory + Trade Receivables + Cash & Cash Equivalents - Trade Payables - Bank Overdraft

= ₹ 1,20,000 + ₹ 36,000 + ₹ 14,000 - ₹ 50,000 - ₹ 20,000

= ₹ 1,00,000

Working Capital Turnover Ratio $=\frac{₹ \ 8,00,000}{₹\ 1,00,000}=8\text{ times}$
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