Ratios affecting creditors: 1.a.1.

Current Ratio Current Ratio =

Ratio Current Assets (A) Current Liabilities (B) 1.5

Hence, Current Ratio (A/B) = WNI: Calculation of Current Assets Stocks Debtors(excluding provision) Bank (A) Current Liabilities Sundry Creditors (B) 1.a.2. Liquidity Ratio The liquidity ratio of the firm can be explained by Current Ratio which is computed above and Quick Ratio/ Acid Test Ratio which is as below: Quick Ratio/Acid Test Ratio =

250,000.00 135,000.00 65,000.00 450,000.00

300,000.00

Quick Assets (A) Quick Liabilities (B) 0.67

Hence, Current Ratio (A/B) = WN2: Calculation of Quick Assets Debtors(excluding provision) Bank (A) Quick Liabilities Sundry Creditors (B)

135,000.00 65,000.00 200,000.00

300,000.00

1.a.3. Fixed Assets Ratio: There are 2 ratios that can be calculated in case of fixed assets a. Fixed assets turnover ratio: reflects relationship between fixed assets and turnover Fixed Assets Turnover ratio = Sales Net fixed assets 2.29

Hence, the above ratio is

It is assumed that the total sales for the year is Rs. 20,00,000. b. Fixed assets to Net worth ratio: reflects relationship between fixed assets and net worth/ shareholders funds. It measures to what extent owners cash is locked in fixed assets. Fixed assets to net worth ratio = Net Fixed Assets

Net Worth Hence, fixed assets to net worth ratio is WN3: Calculation of Net worth Equity Share Capital 7% Pref Share Capital Reserves Profit and Loss account Less: Preliminary Expenses 0.95

500,000.00 100,000.00 400,000.00 10,000.00 (85,000.00) 925,000.00

Ratio affecting shareholders: 1.b.1.Ratio of divisible profits to preferance dividends =

Divisible profits Preferance dividend 74.29

Hence, the above ratio is WN4: Calculation of Divisible profits Profit before tax Less Tax @ 45% Profit after tax Add: Opening Balance in reserves and profit and loss a/c Profits available for distribution as dividends

200,000.00 90,000.00 110,000.00 410,000.00 520,000.00

Reserves and surplus of Rs. 4,00,000 are free reserves and available for distribution of dividend Preferance Dividend 100000*7% 7,000.00 Unattached Assets Pref Capital 13.25

1.b.2. Ratio of unattached assets to Pref Capital =

Hence, the above ratio is Calculation of Unattached Assets Fixed assets (Net) Stocks Debtors Bank Total Unattached Assets 1.b.3.Proprietary Ratio Proprietary Ratio =

875,000.00 250,000.00 135,000.00 65,000.00 1,325,000.00

Shareholder funds Total Assets 0.64

Hence, the above ratio is

WN5: Calculation of shareholder funds Equity Share Capital

500,000.00

Preferance Share Capital Reserves Profit and Loss account (after tax profits of 2011) Less: Preliminary expenses

100,000.00 400,000.00 120,000.00 (85,000.00) 1,035,000.00

WN6: Calculation of Total Assets Fixed Assets (Net) Investments in Subsidiaries Stocks Debtors Bank

875,000.00 300,000.00 250,000.00 135,000.00 65,000.00 1,625,000.00

1.b.4. Return on Equity shareholder's funds Return on equity shareholders funds = (NPAT - Preferance Dividend)*100 Equity shareholders funds 12.48

Hence, the above ratio is WN7: Calculation of NPAT-Preferance Dividends Profit for the Year Less: Tax @ 45% Net Profit after Tax Less: Preferance Dividend NPAT -Preferance Dividends WN8: Calculation of Equity shareholders funds Net worth as per WN3 Less: Pref Share Capital Less: Profit for the Year

200,000.00 90,000.00 110,000.00 7,000.00 103,000.00

1,035,000.00 100,000.00 110,000.00 825,000.00

Ratio affecting Debentureholders: 1.c.1. Debt service ratio Debt service ratio =

Profits before interest and Tax Interest charges 17.67

Hence, the ratio is WN9: Calcualtion for Profits before interest and tax Profits before tax Add: Interest to debentureholders

200,000.00 12,000.00 212,000.00

1.c.2. Fixed assets turnover ratio Fixed Assets Turnover ratio =

Sales Net fixed assets 2.29

Hence, the above ratio is

It is assumed that the total sales for the year is Rs. 20,00,000. 1.c.3. Working Capital Turnover ratio Working Capital Turnover ratio

Sales Working Capital 13.33

Hence, the ratio is

It is assumed that the total sales for the year is Rs. 20,00,000. WN 10: Calculation of Working Capital Current Assets as per WNI Less: Creditors Working Capital Q.2

450,000.00 300,000.00 150,000.00

The participation in the equity share capital of the company does not appear to be profitable due to following reasons: 1. The debentures of the company are due for redemption Q.3 Sales Less: Gross Profit Cost of Goods Sold Stock Turnover Ratio Cost of Goods Sold Closing Inventory 6.4 Average trade debtors*365 Net Credit Sales 24.64 2,000,000.00 400,000.00 1,600,000.00

Hence, the ratio is Average Collection Period

Hence, the average collection period is

Assumptions: 1. In the absence of information, closing inventory and debtors are considered as average inventory and debtors 2. It is assumed that entire sales of Rs. 20,00,000 is on credit basis

Amount 450000 300000

200000 300000

2000000 875000

875000

925000

520000 7000

ution of dividend

1325000 100000

1035000 1625000

103000*100 825000

212000 12000

(200000*6%)

2000000 875000

2000000 150000

ofitable due to following reasons:

1600000 250000

135000*365 2000000

erage inventory and debtors

1. Which Company is using sharholders investment more profitability Ratio NPAT -Preferance Dividend Equity shareholders funds X Ltd. 76000*100 398000 19.10

a. Return on shareholders fund Hence, the return on shareholder fund is (%) Calculation of Return to shareholders Sales Cost of Goods Sold Gross Profit Other Expenses Interest on Debenture Income Tax Net profit available for equity shareholders Calculation of shareholders fund Equity Share Capital Reserves & Surplus

1,120,000.00 800,000.00 320,000.00 160,000.00 8,000.00 76,000.00 76,000.00

220,000.00 178,000.00 398,000.00 Total Sales Owned Capital/Equityshareholders fund 1120000 398000 2.81 76000*100 1120000 6.8

b. Owned Capital Turnover

Hence, the ratio is c. Net Profit Margin The net profit margin is (%) Calculation of Return to shareholders Sales Cost of Goods Sold Gross Profit Other Expenses Interest on Debenture Income Tax Net profit after Tax 1. Which Company is using sharholders investment more profitability Net Profit after Tax*100 Net Sales

1,120,000.00 800,000.00 320,000.00 160,000.00 8,000.00 76,000.00 76,000.00

Company X has a return on sharholders fund of 19.10% and net profit margin of 6.8% which is higher than the corresponding figures for Company Y which is 17.33% and 4.8%. Although the Owned capital turnover ratio of Company X is lower than that of Company Y, Company X has been giving higher returns as compared to Company Y on shareholders funds.Thus Company X is using shareholders investments more profitably. 2. Which company is better able to meet its current obligations a.Liquid Ratio Hence, the ratio is Calculation of Liquid Assets Cash Liquid Assets Current liabilities 108000 181000 0.60

42,000.00

Debtors

66,000.00 108,000.00 Creditors Super liquid assets (Cash Balance) Current Liabilities 181,000.00 42000 181000 0.23 354000 181000 1.96

Calculation of Current Liabilities b. Super liquid ratio Hence, the ratio is c. Current Ratio Hence, the current ratio is Calculation of Current Assets Cash Debtors Stock

Current Assets Current Liabilities

42,000.00 66,000.00 246,000.00 354,000.00

2. Which Company is better meeting it's current obligations? Company Y has higher current ratio (2.05), liquid ratio (1.14) and the super liquid ratio (0.3) which is higher than that of Company X. Company X has current ratio of 1.96, liquid ratio of 0.60 and super liquid ratio of 0.23. Hence, Company Y has better ability to meet it's current obligations as compared to Company X. 3. Which company is collecting it's receivables faster? a. Accounts Collection Period Hence, the accounts collection period Debtors*No. of Days in a year Sales 114000*365 1120000 37.15

Since, Compay X has average collection period of 37 days (approx) which is higher than average collection period of Company Y of 44 days (approx), hence company X is collecting it's receivables faster. 4. Which company is earning a higher rate of return on its total investments? a. Return on Total Investments Hence, the ratio is Calculation of net profit before interest Sales Cost of Goods Sold Gross Profit Other Expenses Net Profit Before Interest Calculation of Total Investments Cash Debtors Stock Plant (Net) Net Profit before Interest Total Investments 160000 693000 0.23

1,120,000.00 800,000.00 320,000.00 160,000.00 160,000.00

42,000.00 66,000.00 246,000.00 339,000.00 693,000.00

Since, Company X has return on total assets ratio of 23% (approx) which is higher than the return on assets of Company Y which is 20% (approx), hence Company X is earning a higher rate of return on its total investments.

Since, Company X has return on total assets ratio of 23% (approx) which is higher than the return on assets of Company Y which is 20% (approx), hence Company X is earning a higher rate of return on its total investments. 5.If you were to buy the debentures of one of these two companies, which one would you choose? a. Interest Coverage ratio Hence, the coverage ratio is Calculation of net profit before interest Sales Cost of Goods Sold Gross Profit Other Expenses Net Profit Before Interest Net Profit before interest Debenture Interest 160000 8000 20

1,120,000.00 800,000.00 320,000.00 160,000.00 160,000.00

The debenture Interest coverage ability of Company X is 20 times which is higher than the debenture interest coverage ability ratio of Company Y which is 14 times. Hence, Company X has better ability to cover debenture interest. Hence, debentures of Company X should be purchased based on interest coverage ability.

Y Ltd. 78000*100 450000 17.33

1,640,000.00 1,300,000.00 340,000.00 172,000.00 12,000.00 78,000.00 78,000.00

350,000.00 100,000.00 450,000.00 1640000 450000 3.64 78000*100 1640000 4.8 Refer calculation as (a) above

1,640,000.00 1,300,000.00 340,000.00 172,000.00 12,000.00 78,000.00 78,000.00

of 6.8% which is higher than the Owned capital turnover ratio of er returns as compared to estments more profitably.

240000 210000 1.14

64,000.00

176,000.00 240,000.00 210,000.00 64000 210000 0.30 430000 210000 2.05

64,000.00 176,000.00 190,000.00 430,000.00

uid ratio (0.3) which is higher than d super liquid ratio of 0.23. Hence, ompany X.

200000*365 1640000 44.51

igher than average collection eceivables faster.

168000 860000 0.20

1,640,000.00 1,300,000.00 340,000.00 172,000.00 168,000.00

64,000.00 176,000.00 190,000.00 430,000.00 860,000.00

her than the return on assets of of return on its total investments.

her than the return on assets of of return on its total investments.

would you

168000 12000 14

1,640,000.00 1,300,000.00 340,000.00 172,000.00 168,000.00

her than the debenture interest better ability to cover debenture rest coverage ability.