Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material is designed strictly as per the latest syllabus and exam pattern.

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Theory Questions

Question 1.
Explain the Operating ratio and Price earnings ratio. (4 Marks May 2011)
Answer:
Operating ratio: Operating ratio is the part of profitability ratios, it is used to calculate percentage of operating cost with sales and indicates operating efficiency of the firm with which it operates its business. It is calculated as:
Operating Ratio = \(\frac{\text { Operating Cost (COGS }+ \text { Operating Expenses) }}{\text { Sales }}\) × 100

Price Earnings Ratio (P/E Ratio): The price earnings ratio indicates payback period within which entire amount of investment in on equity share is expected to be recovered in form of EPS. It relates earnings to market price and is used as indicator of growth potential of an investment, risk association, company image etc. It is calculated as:
Price Earnings Ratio = \(\frac{\text { Market Price Share (MPS) }}{\text { Earning Per Share (EPS) }}\)

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 2.
Explain the important ratios that would be used in each of the following situations:
1. A bank is approached by a company for a loan of ₹ 50 lakhs for working capital purposes.
2. A long term creditor interested in determining whether his claim is adequately secured.
3. A shareholder who is examining his portfolio and who is to decide whether he should hold or sell his holding in the company.
4. A finance manager interested to know the effectiveness with which a firm uses its available resources. (4 Marks May 2012)
Answer:
Important Ratios used in different situations:
1. Liquidity Ratios: Liquidity ratio mainly Current ratio and Quick ratio would be used by the bank to check the ability of the company to pay its short-term liabilities.

2. Capital Structure/Leverage Ratios: Long-term creditor would use the capital structure/leverage ratios to evaluate long term stability and structure of the firm. A long term creditors may use Debt-service cover¬age and interest coverage ratio to check whether his claim is adequately secured or not.

3. Profitability Ratios: The shareholder would use the profitability ratios mainly return on equity, EPS and DPS to evaluate the profitability of the firm.

4. Activity Ratios: The finance manager would use capital turnover ratio, current and fixed assets turnover ratio, stock, debtors and creditors turnover ratio these ratios to evaluate the efficiency with which the firm manages and utilises its assets.

Question 3.
Comment on the Debt Service Coverage Ratio. (4 Marks May 2014)
Answer:
Debt Service Coverage Ratio (DSCR): Financial institutions are used DSCR to evaluate firm’s ability to pay off current interest and instalments. It is calculated as:
Debt Service Coverage Ratio = \(\frac{\text { Earning Available for Debt Service }}{\text { Interest }+ \text { Instalments }}\)
Earning for debt service = Net profit (Earning after taxes) + Non-cash operating expenses service like depreciation and other amortizations + Interest + other adjustments like loss on sale of Fixed Asset etc.

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Practical Problems

Various Ratios

Question 1.
The financial statements of a company contain the following information for the year ending 31st March, 2011:
Statement of profit for the year ended 31st March, 2011
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 1
You are required to calculate:
(i) Quick Ratio
(ii) Debt-Equity Ratio
(iii) Return on Capital Employed, and
(iv) Average Collection Period (Assuming 360 days in a year) (8 Marks Nov. 2011)
Answer:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 2

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 2.
The following accounting information and financial ratios of M Limited relate to the year ended 31st March, 2012:
Inventory Turnover Ratio – 6 Times
Creditors Turnover Ratio – 10 Times
Debtors Turnover Ratio – 8 Times
Current Ratio – 2.4
Gross Profit Ratio – 25%
Total sales ₹ 30,00,000; cash sales is 25% of credit sales; cash purchase ₹ 2,30,000; working capital ₹ 2,80,000; closing inventory is ₹ 80,000 more than opening inventory.
You are required to calculate:
(i) Average Inventory
(ii) Purchases
(iii) Average Debtors
(iv) Average Creditors
(v) Average Payment Period
(vi) Average Collection Period
(vii) Current Assets
(viii) Current Liabilities (8 Marks Nov. 2012)
Answer:
(i) Average Inventory:
Inventory Turnover Ratio = \(\frac{\text { COGS }}{\text { Average Inventory }}\) = 6 times
Average Inventory = \(\frac{\text { COGS }}{6}\) = \(\frac{30,00,000-25 \%}{6}\)
= ₹ 3,75,000

(ii) Purchases: Purchase = COGS + Closing Stock – Opening stock
= (30,00,000 – 25%) + 80,000 = ₹ 23,30,000

(iii) Average Debtors:
Debtors Turnover Ratio = \(\frac{\text { Credit Sales }}{\text { Average Debtors }}\) = 8 times
Average Debtors = \(\frac{\text { Credit Sales }}{8 \text { Times }}\) = \(\frac{24,00,000}{8 \text { Times }}\)
= ₹ 3,00,000
Credit Sales:
Total Sales = Credit Sales + Cash Sales
30,00,000 = Credit Sales + 25% of Credit Sales
125% of Credit Sales = ₹ 30,00,000
Credit Sale = \(\frac{30,00,000}{125 \%}\) = ₹ 24,00,000

(iv) Average Creditors:
Creditors Turnover Ratio = \(\frac{\text { Credit Purchase }}{\text { Average Creditors }}\) = 10 Times
Average Creditors = \(\frac{\text { Credit Purchase }}{10 \text { Times }}\)
= \(\frac{23,30,000-2,30,000}{10}\) = ₹ 2,10,000

(v) Average Payment period = \(\frac{365 \text { Days }}{\text { Creditors Turnover Ratio }}\) = \(\frac{365 \text { Days }}{10}\)
= 36.5 Days

(vi) Average Collection Period = \(\frac{365 \text { Days }}{\text { Debtors Turnover Ratio }}\) = \(\frac{365 \text { Days }}{8}\)
= 45.625 Days

(vii) CurrenrAssets Working Capital = Current Assets – Current Liabilities
= 2,80,000 ……………… (i)
\(\frac{\text { Current Assets }}{\text { Current Liabilities }}\) = 2.4
Current Assets = 2.4 Current Liabilities ………………. (ii)
CA – CL = 2,80,000
2.4 CL – CL = 2,80,000
Current Liabilities = \(\frac{2,80,000}{1.40}\) = ₹ 2,00,000
Current Assets = 2.4 × ₹ 2,00,000 = ₹ 4,80,000

(viii) current Liabilities = ₹ 2,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 3.
The following information relates to Beta Ltd. for the year ended 31st March 2013.
Net Working Capital – ₹ 12,00,000
Fixed Assets to Proprietor’s Fund Ratio – 0.75
Working Capital Turnover Ratio – 5 times
Return on Equity (ROE) – 15%
There is no debt capital.

You are required to calculate:
(i) Proprietor’s Fund
(ii) Fixed Assets
(iii) Net Profit Ratio. (5 Marks May 2013)
Answer:
(i) Proprietor’s Fund = Net Working Capital + Fixed Assets
= 12,00,000 + 0.75 Proprietor’s Fund
0.25 Proprietor’s Fund = 12,00.000
Proprietor’s Fund = \(\frac{12,00,000}{0.25}\) = 48,00,000

(ii) Fixed Assets:
Fixed Assets = 0.75 Proprietor’s Fund
= 0.75 of 48,00,000 = 36,00,000

(iii) Net profit Ratio = \(\frac{\text { PAT }}{\text { Sales }}\) × 100
= \(\frac{7,20,000}{60,00,000}\) × 100 = 12%

Working Notes:
PAT = 15% of Equity Fund/Proprietor’s Fund
= 15% of 48,00,000 = 7,20,000
Sales = 5 times of working capital
= 5 × 12,00,000 = 60,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 4.
The following information relate to a concern:
Debtors velocity – 3 months
Creditors velocity – 2 months
Stock turnover ratio – 1.5
Gross profit ratio – 25%
Bills receivables – ₹ 25,000
Bills payables – ₹ 10,000
Gross profit – ₹ 4,00,000
Fixed assets turnover ratio – 4
Closing stock of the period is ₹ 10,000 above the opening stock.

Find out:
1. Sales and cost of goods sold
2. Sundry Debtors
3. Sundry Creditors
4. . closing Stock
5. FIxed Assets . (8 Marks May 2017)
Answer:
1. Sales = Gross Profit ÷ Gross Profit Ratio
= ₹ 4,00,000 ÷ 25% = ₹ 16,00,000
Cost of goods sold = Sales – Gross Profit
= ₹ 16,00,000 – ₹ 4,00,000 = ₹ 12,00,000

2. Sundry debtors = Credit sales × 3/12 – Bills receivables
= ₹ 16,00,000 × 3/12 – ₹ 25,000 = ₹ 3,75,000

3. Sundry creditors = Credit Purchase × 2/12 – Bills payables
= ₹ 12,10,000 × 2/12 – ₹ 10,000 = ₹ 1,91,667
Credit purchase = COGS + Closing Stock – Opening Stock
= ₹ 12,00,000 + ₹ 10,000 = ₹ 12,10,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

4. Closing Stock : Average Stock = COGS ÷ 1.5 = ₹ 12,00,000 ÷ 1.5 = ₹ 8,00,000
Average Stock = \(\frac{\text { Opening Stock }+ \text { Closing Stock }}{2}\)
Opening Stock + Closing Stock
8,00,000 × 2 = Opening Stock + Closing Stock
16,00,000 = (Closing – 10,000) + Closing Stock
Closing Stock = ₹ 8,05,000 [Opening Stock = Closing – 10,000]

5. Fixed Asset Turnover = Sales ÷ Fixed asset
Fixed Asset = 16,00,000 ÷ 4 = ₹ 4,00,000
Assumption:

  1. All sales are credit sales
  2. All purchases are credit Purchase
  3. Stock Turnover Ratio and Fixed Asset Turnover Ratio may be calculated either on Sales or on Cost of Goods Sold.

Question 5.
The following is the information of XML Ltd. relate to the year ended 31-03-2018:
Gross profit – 20% of sales
Net profit – 10% of sales
Inventory holding period – 3 months
Receivable holding period – 3 months
Non-current assets to sales – 1 : 4
Non-current assets to current assets – 1 : 2
Current ratio – 2 : 1
Non-current liabilities to current liabilities – 1 : 1
Share capital to reserve and surplus – 4 : 1
Non-current assets as on 31.03.2017 – ₹ 50,00,000

Assume that:
(a) No change In Non-current assets during the year 2017-18.
(b) No depreciation charged on Non-current assets during the year 2017-18
(c) Ignoring tax
You are required to calculate cost of goods sold, Net profit, Inventory, recei-vables and cash for the year ended on 31.03.2018. (5 Marks Nov. 2018)
Answer:
(a) Net Profit = 10% of sales = 10% of ₹ 2,00,00,000 = ₹ 20,00,000

(b) Cost of Goods Sold = Sales – Gross Profit
= ₹ 2,00,00,000 – 20% = ₹ 1,60,00,000

(c) Inventory = COGS × 3/12 = ₹ 1,60,00,000 × 3/12 = ₹ 40,00,000
(d) Receivables = Sales × 3/12 = ₹ 2,00,00,000 × 3/12 = ₹ 50,00,000
(e) Cash = Current assets – Stock – receivables
= ₹ 1,00,00,000 – ₹ 40,00,000 – ₹ 50,00,000 = ₹ 10,00,000
Working:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 3

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 6.
Following figures and ratios are related to a company Q Ltd.:
Sales for the year (all credit) – ₹ 30,00,000
Gross Profit Ratio – 25%
Fixed Assets Turnover (based on COGS) – 1.5
Stock turnover (based on COGS) – 6
Liquid Ratio – 1 : 1
Current Ratio – 1.5 : 1
Receivables (Debtors) Collection Period – 2 months
Reserve and Surplus to Share Capital – 0.6 : 1
Capital Gearing Ratio – 0.5
Fixed Assets to Net Worth – 1.20 : 1

You are required to calculate Closing Stock, Fixed Assets, Current Assets, Debtors and Net Worth. (5 Marks May 2019)
Answer:
(1) Closing Stock:
Stock Turnover = COGS ÷ Closing Stock
6 = (₹ 30,00,000 – 25%) ÷ Closing Stock
Closing Stock = ₹ 3,75,000

(2) Fixed Assets:
Fixed Assets Turnover = COGS ÷ Fixed Assets
1.5 = (₹ 30,00,000 – 25%) ÷ Fixed Assets
Fixed Assets = ₹ 15,00,000

(3) Current Assets:
Liquid Ratio = [CA – Stock (Liquid Assets)] ÷ Current liabilities
1 = (CA – ₹ 3,75,000) ÷ Current liabilities
Current Liabilities = Current Assets – ₹ 3,75,000 ……….. Equation (i)
Current Ratio = Current Assets ÷ Current liabilities
1.5 Current Liabilities = Current Assets
1.5 (Current Assets – ₹ 3,75,000) = Current Assets
Current Assets = ₹ 11,25,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

(4) Debtors:
Debtors = Credit Sales × Average collection Period/12
= ₹ 30,00,000 × 2/12
= ₹ 5,00,000

(5) Net Worth:
Fixed Assets to Net Worth = Fixed Assets ÷ Net Worth
1.20 = ₹ 15,00,000 ÷ Net Worth
Net Worth = ₹ 12,50,000

Question 7.
Following information has been gathered from the books of Tram Ltd. The equity share of which is trading in the stock market at ₹ 14.
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 4
Calculate the following:
(a) Return on Capital Employed
(b) Earnings Per Share
(c) PE Ratio (5 Marks Nov. 2019)
Answer:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 5
Working Note:
Capital Employed = Equity Share Capital + Reserves + Preference Share Capital + Debentures
= ₹ 10,00,000 + ₹ 8,00,000 + ₹ 2,00,000 + ₹ 6,00,000
= ₹ 26,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 8.
Following Information relates to RM Co. Ltd.
Total Assets employed – ₹ 10,00,000
Direct Cost – ₹ 5,50,000
Other Operating Cost – ₹ 90,000
The goods will be sold to customers at 150 percent of the direct costs. 50 percent of the assets being financed by borrowed capital at an Interest cost of 8 percent per year. Tax rate is assumed to be 30 percent.
You are required to calculate:
(a) Net profit margin;
(b) Return on Assets;
(e) Asset turnover and
(d) Return on owners’ equity. (5 Marks Nov. 2020)
Answer:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 6

Dupont Roe

Question 9.
A limited Company’s books reveals following information:
Net Income : ₹ 13,60,000
Shareholder’s Equity : ₹ 14,00,000
Assets Turnover : ₹ 2.5 times
Net Profit Margin : ₹ 12%
You are required to calculate ROE of the company based on the ‘DuPont model’. (5 Marks Nov. 2018)
Answer:
Return on Equity = Net Profit Margin × Asset Turnover × Equity Multiplier
= 12% × 2.5 times × 3 times = 90%
Working Notes:
1. Sales.
Net profit Margin = Net Income ÷ Sales
Sales = ₹ 3,60,000 ÷ 12% = ₹ 30,00,000

2. ToralAssets:
Asset Turnover = Sales ÷ Total Assets = 2.5 times
Total Assets = Sales ÷ 2.5 = 30,00,000 ÷ 2.5 = ₹ 12,00,000

3. Equity Multiplier = Total Assets ÷ Equity
= ₹ 12,00,000 ÷ ₹ 4,00,000 = 3 times

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Trading and Profit & Loss Account and Balance Sheet

Question 10.
The assets of SONA Ltd. consist of fixed assets and current assets, while its current liabilities comprise bank credit in the ratio of 2 : 1.
You are required to prepare the Balance Sheet of the company as on 31st March 2013 with the help of following information:
Share Capital : ₹ 5,75,000
Working Capital (CA – CL) : ₹ 1,50,000
Gross Margin : 25%
Inventory Turnover : 5 times
Average Collection Period : 1.5 months
Current Ratio : 1.5 : 1
Quick Ratio : 0.8 : 1
Reserves & Surplus to Bank & Cash : 4 times
Answer:
SONA Ltd.
Balance Sheet
(As at 31.03.2013)
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 7

Working Notes:
1. Calculation of Current Assets and Current Liabilities:
Current Ratio = \(\frac{\mathrm{CA}}{\mathrm{CL}}\) = 1.5
CA = 1.5 CL
CA – CL = 1,50,000
1.5 CL – CL = .5 CL = 1,50,000
CL = 3,00,000
CA = 1.5 CL = 1.5 × 3,00,000
= 4,50,000

2. Calculation of Bank Credit and other CL:
\(\frac{C L}{\text { Bank Credit }}\) = 2 : 1
Bank credit = CL ÷ 2 = 3,00,000 ÷ 2
= 1,50,000
Other CL = 1,50,000

3. Calculation of Inventory:
Quick Ratio = \(\frac{\mathrm{CA}-\text { Inventory }}{\mathrm{CL}}\) = 0.8
CA – Inventory = 0.8 CL
4,50,000 – Inventory = 0.8 × 3,00,000
Inventory = 2,10,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

4. Calculation of Debtors and Bank and Cash:
Inventory Turnover = \(\frac{\text { COGS }}{\text { Inventory }}\) = 4
COGS = 5 × 2,10,000 = 10,50,000
Sales = \(\frac{\text { COGS }}{100-\text { margin }}\) × 100 = \(\frac{10,50,000}{100-25}\) × 100
= 14,00,000
Debtors = Sales × \(frac{\text { Average Collection Period }}{12}\)
= 14,00,000 × 1.5/12 = 1,75,000
Bank and Cash = CA – Inventory – Debtors
= 4,50,000 – 2,10,000 – 1,75,000
= 65,000

5. Calculation of Reserves & Surplus:
\(\frac{\text { Reserves & Surplus }}{\text { Bank & Cash }}\) = 4 times
Reserves & Surplus = 4 × 65,000 = 2,60,000

Question 11.
NOOR Limited provides the following information for the year ending 31st March, 2014:
Equity Share Capital : ₹ 25,00,000
Closing Stock : ₹ 6,00,000
Stock Turnover Ratio : 5 Times
Gross Profit Ratio : 25%
Net Profit/Sale : 20%
Net profit/Capital : 1 /4

You are required to prepare Trading and Profit and Loss Account for the year ending 31st March, 2014. (5 Marks May 2014)
Answer:
Trading and Profit & Loss Account
(For the year ending 31st March, 2014)
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 8

(ii) Calculation of Sales:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 9
Average Stock × 2 = Opening Stock + Closing Stock
4,68,750 × 2 = Opening Stock + 6,00,000
Opening Stock = 9,37,500 – 6,00,000 = ₹ 3,37,500
Note: All figures in Trading and Profit and Loss A/ c are balancing figures except calculated in working notes.

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 12.
SRS Ltd. has furnished the following ratios and information relating to the year ended 31st March, 2015.
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 10
You are required to:
(i) Calculate the operating expenses for the year ended 31 st March, 2015.
(ii) Prepare Balance Sheet as on 31st March, 2015. (8 Marks May 2015)
Answer:
(i) Operating Expenses = Gross Profit – EBIT
= ₹ 42,00,000 – ₹ 8,10,000 = ₹ 33,90,000
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 11

Working Notes:
(a) Return on Net Worth = \(\frac{\text { PAT }}{\text { Net Worth }}\) × 100 = 25%
Net Worth = \(\frac{3,75,000}{25 \%}\) = 15,00,000
Net Worth = Share Capital + Reserve = 15,00,000
Share Capital to Reserve = 7 : 3
Share Capital = 15,00,000 × 7/10 = 10,50,000
Reserve = 15,00,000 × 3/10 = 4,50,000
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 12

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 13.
VRA Limited has provided the following information for the year ending 31st March, 2015:
Debt Equity Ratio – 2 : 1
14% long term debt – ₹ 50,00,000
Gross Profit Ratio – 30%
Return on equity – 50%
Income Tax Rate – 35%
Capital Turnover Ratio – 1.2 Times
Opening Stock – ₹ 4,50,000
Closing Stock – 8% of sales

You are required to prepare Trading and Profit and Loss Account for the year ending 31st March, 2015. (8 Marks Nov. 2015)
Answer:
Trading and Profit & Loss Account
(For the year ending 31st March, 2015)
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 13
Working Notes:
(i) Calculation of Equity:
\(\frac{\text { Debt }}{\text { Equity }}\) = 2 : 1
Equity = Debt ÷ 2
50,00,000 ÷ 2 = ₹ 25,00,000

(ii) Calculation of Net Profit
After Tax (PA T):
Return on Equity = \(\frac{\text { PAT }}{\text { Equity }}\) × 100 = 50%
Profit After Tax = 50% of 25,00,000 = ₹ 2,50,000

(iii) Calculation of Income Tax:
Income Tax = 35% of PBT = 35% of \(\frac{\text { PAT }}{1-t}\)
= 35% of \(\frac{12,50,000}{1-.35}\) = 6,73,077

(iv) Calculation of Sales:
Capital Turnover Ratio = \(\frac{\text { Sales }}{\text { Capital }}\) = \(\frac{\text { Sales }}{\text { Equity + Debt }}\)
\(\frac{\text { Sales }}{25,00,000+50,00,000}\) = 1.2 times
Sales = 75,00,000 × 1.2 = ₹ 90,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 14.
With the following ratios and further information given below prepare a Trading Account, Profit and Loss Account and Balance Sheet of ABC Company. (8 Marks May 2016)
Fixed Assets – ₹ 40,000,000
Closing Stock – ₹ 4,00,000
Stock turnover ratio – 10 times
Gross Profit Ratio – 25%
Net Profit Ratio – 20%
Net profit to capital – 1/5
Capital to total liabilities – 1/2
Fixed assets to capital – 5/4
Fixed assets/Total current assets – 5/7
Answer:
Trading and Profit & Loss Account
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 14
Working Notes:
(i) Calculation of Capital
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 15

(ii) Calculation of Other Liabilities:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 16
Average stock = (Opening Stock + Closing Stock) ÷ 2
Opening Stock = (2,40,000 × 2) – 4,00,000 = ₹ 80,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 15.
The following figures and ratios pertains to ABG Company Limited for the year ending 31st March, 2016:
Annual sales (credit) – ₹ 50.00,000
Gross Profit ratio – 28%
Fixed assets turnover ratio (based on COGS) – 1.5
Stock turnover ratio (based on COGS) – 6
Quick ratio – 1 : 1
Current ratio – 1.5
Debtors collection period – 45 days
Reserve and surplus to Share capital – 0.60 : 1
Capital gearing ratio – 0.5
Fixed assets to net worth – 1.2 : 1

You are required to prepare the Balance Sheet as at 31 st March, 2016 based on the above information. Assume 360 days in a year. (8 Marks Nov. 2016)
Answer:
Balance Sheet
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 17
Working Notes:
(i) Cost of Goods Sold = Sales – Gross Profit (28% of Sales)
= ₹ 50,00,000 – ₹ 4,00,000 = ₹ 36,00,000

(ii) Closing Stock = Cost of Goods Sold/Stock Turnover
= ₹ 36,00,000/6 = ₹ 6,00,000

(iii) Fixed Assets = Cost of Goods Sold/Fixed Assets Turnover
= ₹ 36,00,000/1.5 = ₹ 24,00,000

(iv) Current Assets and Current Liabilities
Stock – 6,00,000 = (CR – LR) × CL OR CL = ₹ 12,00,000
= (1.5 – 1)CL
Current Assets = 12,00,000 × 1.5 = ₹ 18,00,000

(v) Debtors = Sales × Debtors Collection Period (days)/360 days
= ₹ 50,00,000 × 45/360 = ₹ 6,25,000

(vi) Net worth = Fixed Assets/ 1.2
= ₹ 24,00,000/1.2 = ₹ 20,00,000

(vii) Reserves and Surplus and Share Capital
Reserves & Surplus and Share Capital = 0.6 + 1 = 1.6
Reserves and Surplus = ₹ 20,00,000 × 0.6/1.6 = ₹ 7,50,000
Share Capital = Net worth – Reserves and Surplus
= ₹ 20,00,000 – ₹ 7,50,000 = ₹ 12,50,000

(viii) Long-term Debts
Capital Gearing Ratio = Long-term Debts/Equity Shareholders’ Fund (Net worth)
Long-term Debts = ₹ 20,00,000 × 0.5 = ₹ 10,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 16.
XY Ltd. provides the following information for the year ending 31st March, 2017:
Equity share capital – ₹ 8,00,000
Closing Stock – ₹ 1,50,000
Stock turnover ratio – 5 times
Gross Profit Ratio – 20%
Net Profit / Sales – 16%
Net profit/Capital – 25%
You are required to prepare Trading and Profit & Loss account for the year ending 31st March, 2017. (8 Marks Nov. 2017)
Answer:
Trading and Profit & Loss Account
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 18

Working Notes:
(i) Calculation of Net Profit:
\(\frac{\text { Net Profit }}{\text { Capital }}\) = 25% or Net Profit = 8,00,000 × 25%
= ₹ 2,00,000

(ii) Calculation of Sales:
\(\frac{\text { Net Profit }}{\text { Sales }}\) = 16% or Sales Sales = 2,00,000 ÷ 16%
= ₹ 12,50,000

(iii) Calculation of Opening Stock:
COGS = 80% of Sales = 80% of 12,50,000 = 10,00,000
\(\frac{\text { COGS }}{\text { Average Stock }}\) = 5 or Average Stock = 10,00,000 ÷ 5
Average stock = (Opening Stock + Closing Stock) ÷ 2 = 2,00,000
Opening Stock = (2,00,000 × 2) – 1,50,000 = ₹ 2,50,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 17.
Equity share capital G Ltd. has furnished the following information relating to the year ended 31st March, 2017 and 31st March, 2018:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 19

  • Net profit ratio: 8%
  • Gross profit ratio: 20%
  • Long-term loan has been used to finance 40% of the fixed assets.
  • Stock turnover with respect to cost of goods sold is 4.
  • Debtors represent 90 days sales.
  • The company holds cash equivalent to 1 1/2 months cost of goods sold.
  • Ignore taxation and assume 360 days in a year.

You are required to prepare Balance Sheet as on 31st March, 2018 in following format: (8 Marks May 2018)
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 20
Answer:
Balance Sheet
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 21

Working Notes:
(1) Net Profit – Change in Reserve and Surplus
= 25,00,000 – 20,00,000 = ₹ 5,00,000

(2) Sales:
Net Profit ratio = 8% of sales
∴ Sales = Net Profit ÷ Net profit ratio
= 5,00,000 ÷ 8% = ₹ 62,50,000

(3) Cost of Goods Sold = Sales – Gross Profit (20% of Sales)
= ₹ 62,50,000 – 20% of ₹ 62,50,000 = ₹ 50,00,000

(4) Fixed Assets = Long term loan ÷ 40%
= 1 30,00,000 ÷ 40% = ₹ 75,00,000

(5) Closing Stock = Cost of Goods Sold ÷ Stock Turnover
= ₹ 50,00,000 ÷ 4 = ₹ 12,50,000

(6) Debtors = Sales × Debtors Collection Period (days)/360 days
= ₹ 62,50,000 × 90/360 = ₹ 15,62,500

(7) Cash Equivalent = COGS X 1.5/12
= ₹ 50,00,000 × 1.5/12 = ₹ 6,25,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 18.
The accountant of Moon Ltd. has reported the following data:
Gross profit : ₹ 60,000
Gross profit margin : 20%
Total Assets Turnover : 0.30:1
Net Worth to Total Assets : 0.90:1
Current Ratio : 1.5 : 1
Liquid Assets to current liability : 1 : 1
Credit Sales to Total Sales : 0.80:1
Average Collection Period : 60 days
Days in a Year : 360 days

You are required to complete the following: (5 Marks May 2018)
Balance Sheet of Moon Ltd.
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 22
Answer:
Balance Sheet of Moon Ltd.
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 23

Working Notes:
(1) Sales = Gross Profit ÷ Gross Profit ratio
= 60,000 ÷ 20% = ₹ 3,00,000

(2) Total Assets = Sales/Total Assets Turnover
= 3,00,000 ÷ .030 = ₹ 10,00,000

(3) Net worth = Total Assets × 0.90
= ₹ 10,00,000 × 0.90 = ₹ 9,00,000

(4) Current Assets = Current Liabilities × 1.50
= ₹ 1,00,000 × 1.50 = ₹ 1,50,000

(5) Fixed Assets = Total Assets – Current Assets
= ₹ 10,00,000 – ₹ 1,50,000 = ₹ 8,50,000

(6) Liquid Assets = Current Liabilities × 1
= ₹ 1,00,000 × 1 = ₹ 1,00,000

(7) Closing Stock = Current Assets – Liquid Assets
= ₹ 1,50,000 – ₹ 1,00,000 = ₹ 50,000

(8) Debtors = Credit Sales × Debtors Collection Period (days)/360 days
= ₹ 3,00,000 ×.080 × 60/360 = ₹ 40,000

(9) Cash = Current Assets – Stock – Debtors
= ₹ 1,50,000 – 50,000 – ₹ 40,000 = ₹ 60,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 19.
From the following information, complete the Balance Sheet given below: (5 Marks Jan 2021)
(a) Equity share capital : ₹ 2,00,000
(b) Total debt to owner’s equity : 0.75
(c) Total assets turnover : 2 Times
(d) Inventory turnover : 8 Times
(e) Fixed assets to owner’s equity : .60
(f) Current debt to total debt : .40

Balance Sheet of XYZ Co. as on March 31, 2020
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 24
Answer:
Balance Sheet of XYZ Co. as on March 31, 2020
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 25

Working Notes:
1. Total debt:
0.75 × Owners equity = 0.75 × ₹ 2,00,000 = ₹ 1,50,000

2. Current debt:
Current debt to total debt = 0.40
Current debt = 0.40 × ₹ 1,50,000 = ₹ 60,000

3. Long term debt:
Long term debt = Total debt – Current debt
= ₹ 1,50,000 – ₹ 60,000 = ₹ 90,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

4. Fixed assets:
0.60 × Owners equity = 0.60 × ₹ 2,00,000 = ₹ 1,20,000

5. Total of liability side:
Total debt + Owners equity = ₹ 1,50,000 + ₹ 2,00,000 = ₹ 3,50,000

6. Total assets consisting of fixed assets and current assets must be equal to ₹ 3,50,000 hence, current assets should be ₹ 2,30,000.

7. Total assets turnover is 2 times:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 26

8. Cash : = ₹ 2,30,000 – ₹ 87,500 = ₹ 1,42,500

Important Questions

Question 1.
The following figures and ratios are related to a company:
(a) Sales for the year (all credit) – ₹ 30,00,000
(b) Gross profit ratio – 25 per cent
(c) Fixed assets turnover (basis on cost of goods sold) – 1.5
(d) Stock turnover (basis on cost of goods sold) – 6
(e) Liquid ratio – 1 : 1
(f) Current ratio – 1.5 : 1
(g) Debtors collection period – 2 months
(h) Reserve and surplus to Share capital – 0.6 : 1
(i) Capital gearing ratio – 0.5
(j) Fixed assets to net worth – 1.20 : 1

You are required to prepare:
1. Balance Sheet of the company on the basis of above details.
2. The statement showing working capital requirement, if the company wants to make a provision for contingencies @ 10% of net working capital including such provision.
Answer:
(1) Projected Balance Sheet Balance Sheet
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 27
Debt = 0.5 × ₹ 12,50,000 = ₹ 6,25,000
Assumption: Preference Share capital is zero.

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

e. Reserves & Surplus = 12,50,000 × 0.6/1.6 = ₹ 4,68,750
f. Share Capital – 12,50,000 × 1/1.6 = ₹ 7,81,250
g. Stock Turnover = \(\frac{\text { COGS }}{\text { Stock }}\) = 6 times
Stock = \(\frac{22,50,000}{6}\) = ₹ 3,75,000

h. Debtors = Sales × \(\frac{\text { Collection Period }}{12}\)
= 30,00,000 × \(\frac{2}{12}\) = ₹ 5,00,000

i. Stock = CL (Current ratio – Liquid ratio)
Current Liabilities = \(\frac{\text { Stock }}{\text { CR-LR }}\)
= \(\frac{3,75,000}{1.5-1}\) = ₹ 7,50,000

j. Current Ratio = \(\frac{\mathrm{CA}}{\mathrm{CL}}\) = 1.5 times
Current Assests = 1.5 × 7,50,000 = ₹ 11,25,000

k. Cash in Hand = 25,000 – 3,75,000 – 5,00,000
= ₹ 2,50,000

(2) Statement of Working Capital Requirement
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 28

Question 2.
JKL Limited has the following Balance Sheets as on March 31, 2006 and March 31, 2005:
Balance Sheet (₹ in Lakh)
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 29

The Income Statement of the JKL Ltd. for the year ended is as follows (₹ in Lakh):
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 30
Required:
(1) Calculate for the years 2005 and 2006:
a. Inventory turnover ratio
b. Financial Leverage
c. Return on Investment (ROI)
d. Return on Equity (ROE)
e. Average Collection period.
(2) Give a brief comment on the financial position of JKL Limited.
Answer:
(i) Computation of Ratios
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 31

(2) Brief comment on the financial position of JKL Ltd

  • The inventory turnover ratio is increased from 5.21 times to 7.28 times. This indicates the reduction in investment of stock and increase in sale turnover with reduced stocks.
  • The financial leverage of the company is increased from 1.22 times to 2.98 times, which indicates the lower the cushion for paying interest on borrowings. The increase in ratio warns the increase in risk as to over gearing, which constitutes a strain on profits.
  • There is a steep fall in ROI from 12.86% to 2.86%, this may be due to increase in finances from fresh issue of share and loan funds for expansion, modernization or new investment proposals, and increase in sales has not resulted in increase of company’s profitability.
  • The return on equity has also fallen from 19.63% to 1.43%. The current year PAT may not be sufficient for declaration of dividends to share-holders.
  • The increase in sale and reduction in investment in debtor’s balances has resulted in reduction of average collection period from 30.7 days to 24.6 days.

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 3.
MNP Limited has made plans for the next year 2010-11. It is estimated that the company will employ total assets of ₹ 25,00,000; 30% of assets being financed by debt at an interest cost of 9% p.a. the direct costs for the year are estimated at ₹ 15,00,000 and all other operating expenses are estimated at ₹ 2,40,000. The sales revenue are estimated at ₹ 22,50,000. Tax rate is assumed to be 40%.

You are required to calculate:
(i) Net profit margin,
(ii) Return on Assets,
(iii) Assets turnover,
(iv) Return on equity
Answer:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 32

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 4.
The following information relates to Beta Ltd. for the year ended 31st March 2013.
Net Working Capital – ₹ 12,00,000
Fixed Assets to Proprietor’s Fund Ratio – 0.75
Working Capital Turnover Ratio – 5 times
Return on Equity (RoE) – 15%
There is no debt capital.

You are required to calculate:
(i) Proprietor’s Fund
(ii) Fixed Assets
(iii) Net Profit Ratio.
Answer:
(i) Proprietor’s Fund = Net Working Capital + Fixed Assets
= 12,00,000 + 0.75 Proprietor’s Fund
0.25 Proprietor’s Fund = 12,00,000
Proprietor’s Fund = \(\frac{12,00,000}{0.25}\) = 48,00,000

(ii) Fixed Assets:
Fixed Assets = 0.75 Proprietor’s Fund
= 0.75 of 48,00,000 = 36,00,000

(iii) Net profit Ratio = \(\frac{\text { PAT }}{\text { Sales }}\) × 100
= \(\frac{7,20,000}{60,00,000}\) × 100 = 12%

Working Notes:
PAT = 15% of Equity Fund/Proprietor’s Fund
= 15% of 48,00,000 = 7,20,000
Sales = 5 times of working capital
= 5 × 12,00,000 = 60,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 5.
With the following ratios and further information given below prepare a Trading Account, Profit and Loss Account and Balance Sheet of ABC Company.
Fixed Assets – ₹ 40,00,000
Closing Stock – ₹ 4,00,000
Stock turnover ratio – 10 times
Gross Profit Ratio – 25%
Net Profit Ratio – 20%
Net profit to capital – 1/5
Capital to total liabilities – 1/2
Fixed assets to capital – 5/4
Fixed assets /Total current assets – 5/7
Answer:
Trading and Profit & Loss Account
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 33

Balance Sheet
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 34

Working Notes:
(i) Calculation of Capital:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 35
(vi) Calculation of Opening Stock:
COGS = 75% of Sales 75% of 32,00,000 = 24,00,000
\(\frac{\text { COGS }}{\text { Average Stock }}\) = 10 or Average Stock = 24,00,000 ÷ 10
= 2,40,000
Average Stock = (Opening Stock + Closing Stock) ÷ 2 = 2,40,000
Opening Stock = (2,40,000 × 2) – 4,00,000 = ₹ 80,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 6.
The following figures and ratios pertains to ABG Company Limited for the year ending 31st March, 2016:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 36
You are required to prepare the Balance Sheet as at 31st March, 2016 based on the above information. Assume 360 days in a year.
Answer:
Balance Sheet
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 37

Working Notes:
(i) Cost of Goods Sold = Sales – Gross Profit (28% of Sales)
= ₹ 50,00,000 – ₹ 14,00,000 = ₹ 36,00,000

(ii) Closing Stock = Cost of Goods Sold/Stock Turnover
= ₹ 36,00,000/6 = ₹ 6,00,000

(iii) Fixed Assets = Cost of Goods Sold/Fixed Assets Turnover
= ₹ 36,00,000/1.5 = ₹ 24,00,000

(iv) Current Assets and Current Liabilities
Stock = (CR – LR) × CL OR CL = ₹ 12,00,000
6,00,000 = (1.5 – 1) CL
Current Assets = 12,00,000 × 1.5 = ₹ 18,00,000

(v) Debtors = Sales × Debtors Collection Period (days)/360 days
Net worth = ₹ 50,00,000 × 45/360 = ₹ 6,25,000

(vi) Net worth = Fixed Assets/1.2

(vii) Reserves and Surplus and Share Capital = ₹ 24,00,000/1.2 = ₹ 20,00,000
Reserves & Surplus and Share Capital = 0.6 + 1 = 1.6
Reserves and Surplus Share Capital = ₹ 20,00,000 × 0.6/1.6 = ₹ 7,50,000
Share Capital = ₹ 20,00,000 – ₹ 7,50,000 = ₹ 12,50,000

(viii) Long- term Debts
Capital Gearing Ratio = Long-term Debts/Equity Share holders’ Fund (Net worth)
Long-term Debts = ₹ 20,00,000 × 0.5 = ₹ 10,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 7.
The following accounting information and financial ratios of PQR Ltd. relate to the year ended 31st December, 2019:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 38
If value of fixed assets as on 31st December, 2019 amounted to ₹ 26 lakhs, prepare a summarised profit and loss account of the company for the year ended 31st December, 2019 and also the balance sheet as on 31st December, 2019.
Answer:
Profit and Loss account for the year ended 31.12.2019
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 39

Working Notes:
(a) Calculation of Sales:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 40

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

(c) Calculation of Raw Material Consumption and Direct Wages.
Works Cost = Sales – Gross Profit
= 78,00,000 – 15% of Sales = ₹ 66,30,000
Raw Material Consumption = 20% of 66,30,000 = ₹ 13,26,000
Direct Wages = 10% of ₹ 66,30,000 = ₹ 6,63,000

(d) Calculation of Finished Goods Stock
Finished Goods Stock 6% of ₹ 66,30,000 = ₹ 3,97,800

(e) calculation of Raw Material Stock
Raw Material Stock = Raw Material Consumption × 3/12
= ₹ 13,26,000 × 3/12 = ₹ 3,31,500

(f) calculation of Current Liabilities:
Current Ratio = \(\frac{\text { Current Assets }}{\text { Current Liabilities }}\) = 2
Current Liabilities = ₹ 22,00,000 ÷ 2 = ₹ 11,00,000

(g) Calculation of Receivables:
Receivables = Credit Sales × \(\frac{\mathrm{ACP}}{365}\)
= 78,00,000 × \(\frac{60}{365}\) = ₹ 12,82,192

(h) Calculation of Long Term Loan:
\(\frac{\text { Long Term Loan }}{\text { Current Liabilities }}=\) = 2
Long Term Loan = 2 × ₹ 11,00,000 = ₹ 22,00,000

(i) Calculation of Cash Balance:
Current Assets = Cash + Stock + Receivables
Cash Balance = ₹ 22,00,000 – (₹ 3,97,800 + ₹ 3,31,500 + ₹ 12,82,192)
= ₹ 1,88,508

(j) Calculation of Net Worth:
Total Liabilities = Total Assets (Fixed Assets + Current Assets)
= ₹ 22,00,000 + ₹ 26,00,000 = ₹ 48,00,000
Net Worth = Total Liabilities – Long Term Loan – Current Liabilities
= ₹ 48,00,000 – ₹ 22,00,000 – ₹ 11,00,000
= ₹ 15,00,000

(k) Calculation of Capital, Reserve and Surplus:
Net Worth = Share Capital + Reserve and surplus
Capital to Reserve and Surplus = 1 : 4
Share Capital = ₹ 15,00,000 × 1/5 = ₹ 3,00,000
Reserve and Surplus = ₹ 15,00,000 × 4/5 = ₹ 12,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 8.
In a meeting held at Solan towards the end of 2018, the Directors of M/s HPCL Ltd. have taken a decision to diversify. At present HPCL Ltd. sells all finished goods from its own warehouse.

The company issued debentures on 01.01.2019 and purchased fixed assets on the same day. The purchase prices have remained stable during the concerned period. Following information is provided to you:
Income Statement
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 41

Balance Sheet
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 42
You are required to calculate the following ratios for the years 201 $ and 2019.
(1) Gross Profit Ratio
(2) Operating Expenses to Sales Ratio
(3) Operating Profit Ratio
(4) Capital Turnover ratio
(5) Stock Turnover ratio
(6) Net Profit to Net worth Ratio, and
(7) Receivables Collection Period.
Ratio relating to capital employed should be based on the capital at the end of the year. Give the reasons for change in the ratios for 2 years. Assume opening stock of ₹ 40,000 for the year 2018. Ignore Taxation.
Answer:
Computation of Ratios
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 43

Analysis:
The decline in the Gross profit ratio could be either due to a reduction in the selling price or increase in the direct expenses (since the purchase price has remained the same). Similarly there is a decline in the ratio of operating expenses to sales. However since operating expenses have little bearing with sales, a decline in this ratio cannot be necessarily be interpreted as an increase in operational efficiency.

An in-depth analysis reveals that the decline in the warehousing and the administrative expenses has been partly set off by an increase in the transport and the selling expenses. The operating profit ratio has remained the same in spite of a decline in the Gross profit margin ratio. In fact the company has not benefited at all in terms of operational performance because of the increased sales. The company has not been able to deploy its capital efficiently. This is indicated by a decline in the Capital turnover from 3 to 2.5 times.

In case the capital turnover would have remained at 3 the company would have increased sales and profits by ₹ 67,000 and ₹ 3,350 respectively. The decline in the stock turnover ratio implies that the company has increased its investment in stock. Return on Net worth has declined indicating that the additional capital employed has failed to increase the volume of sales proportionately. The increase in the Average collection period indicates that the company has become liberal in extending credit on sales. However, there is a corresponding increase in the current assets due to such a policy. It appears as if the decision to expand the business has not shown the desired results.

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 9.
Following is the abridged Balance Sheet of Alpha Ltd:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 44
With the help of the additional information furnished below, you are required to prepare trading and profit & loss account and a balance sheet as at 31st March, 2019:
(1) The company went in for reorganisation of capital structure, with share capital remaining the same as follows:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 45
Debentures were issued on 1st April, interest being paid annually on 31st March.

(2) Land and Buildings remained unchanged. Additional plant and machinery has been bought and a further ₹ 5,000 depreciation written off. (The total fixed assets then constituted 60% of total fixed and current assets.)
(3) Working capital ratio was 8 : 5.
(4) Quick assets ratio was 1 : 1.
(5) The receivables (four-fifth of the quick assets) to sales ratio revealed a credit period of 2 months. There were no cash sales.
(6) Return on net worth was 10%.
(7) Gross profit was at the rate of 15% of selling price.
(8) Stock turnover was eight times for the year.
(9) Ignore Taxation.
Answer:
Projected Profit and Loss account for the year ended 31-03-2019
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 46

Projected Balance Sheet as at 31st March, 2019
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 47

Working Notes:
(1) Total Liabilities:
Share capital = 50% of total liabilities = ₹ 1,00,000
Total Liabilities = ₹ 1,00,000 ÷ 50% = ₹ 2,00,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

(2) Classification of total liabilities:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 48

(3) Fixed Assets:
Total liabilities = Total Assets = ₹ 2,00,000
Fixed Assets = 60% of total fixed assets and current assets
= ₹ 2,00,000 × 60% = ₹ 1,20,000

(4) Calculation of Historical cost of Plant & Machinery:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 49

(5) Current Assets:
Current assets = Total assets-Fixed assets
= ₹ 2,00,000 – ₹ 1,20,000 = ₹ 80,000

(6) Calculation of Stock:
Quick ratio = \(\frac{\text { Current assets }- \text { Stock }}{\text { Current liabilities }}\) = 1
= \(\frac{80,000-\text { Stock }}{50,000}\) = 1
Stock = ₹ 80,000 – ₹ 50,000 = ₹ 30,000

(7) Receivables:
Receivables = 4/5th of quick assets = (₹ 80,000 – ₹ 30,000) × 4/5 = ₹ 40,000

(8) Receivables turnover ratio:
= \(\frac{\text { Receivables }}{\text { Credit Sales }}\) × 12Months = 12 months
= \(\frac{40,000}{\text { Credit Sales }}\) × 12Months = 2 months
Credit sales = 40,000 × 12/2 = ₹ 2,40,000

(9) Return on net worth :
Net worth = ₹1,00,000 + ₹ 30,000 = ₹ 1,30,000
Net profit = ₹ 1,30,000 × 10% = ₹ 13,000

Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material

Question 10.
The Balance Sheets of A Ltd. and B Ltd. as on 31st March 2020 are as follows:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 50
Additional information available:

  1. 75% of the Inventory in A Ltd. readily saleable at cost plus 20%,
  2. 50% of Sundry Debtors of B Ltd. are due from C Ltd. which is not in a position to repay the amount B Ltd. agreed to accept 15% debentures of C Ltd.
  3. B Ltd. had also proposed 15% dividend but that was not shown in the accounts.
  4. At the year end, B Ltd. sold investments amounting to ₹ 1,20,000 and repaid Sundry Creditors.

On the basis of the given Balance Sheet and the additional information, you are required to evaluate liquidity of the companies. All working should form part of die answer,
Answer:
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 51
Financial Analysis and Planning-Ratio Analysis – CA Inter FM Study Material 52

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