PSG INSTITUTE OF MANAGEMENT: COIMBATORE

UT MBA - Accounting for Managers

Ratios – Problems to Solve in class
1. From the following data of Sridevi Textiles, compute the ‘Current Ratio’.
Particulars Rs. Particulars Rs.
Sundry Debtors - CA 40,000 Sundry Creditors – CL 20,000
Prepaid Expenses - CA 20,000 Debentures – LTL 1,00,000
Short-term Investments – CA 10,000 Inventories - CA 20,000
Loose Tools 5,000 Outstanding Expenses - CL 20,000
Bills Payable - CL 10,000

Current Ratio = Current Assets / Current Liabilities

Current Ratio = (40000+20000+10000+20000)/(10000+20000+20000) = 90000/50000 = 1.80

2. The following is the Trading Account of Raaha Garments. Calculate the Stock Turnover Ratio and Gross profit ratio
TRADING ACCOUNT
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 40,000 By Sales 2,00,000
To Purchases 1,00,000 By Closing stock 20,000
To Carriage 10,000
To Gross Profit 70,000
2,20,000 2,20,000

Gross Profit Ratio = (Gross Profit / Net Sales) = 70000 / 200000 = .35
Gross Margin = 35%

Stock Turnover Ratio = Inventory Turnover Ratio = (COGS / Average Inventory) = 120000/30000
= 4 Times
COGS = 40000+100000-20000 = 120000
Average Inventory = (40000+20000)/2 = 30000

3. Net Solutions Ltd., Bangalore wants to know its position in the stock market. They have provided
us the following data:
Net profit before tax Rs. 1,00,000
Taxation at 50% of Net Profit before Tax
10% preference share capital (Rs. 10 each) Rs. 1,00,000
Equity Share capital (Rs. 10 share) Rs. 1,00,000
Market Price per Share Rs.80
Calculate their earnings per share and Price Earnings Ratio
Earnings Per Share = ((Net Profit-Preference Dividend) / Number of Equity Shares)
EPS = (50000 – 10000)/ 10000 = 40000/10000 = Rs. 4

Price Earnings Ratio (PE Multiple ) = Market Price per share / Earnigns per share for the full year
= Rs. 80 / Rs. 4 = 20 times

The market price per share that we pay now is 20 times the recent 12 months earnings of the
company.
Trailnig EPS = EPS of the last twelve months = EPS of the recent four quarters….

4.Palamudhir Nilayam, Peelamedu had the following data retrieved from its accounting records for the year
end March 2014.
Rs. Rs.
Sales 10,00,000 Purchases 6,00,000
Sales Returns 1,00,000 Purchases Returns 1,50,000
Opening Stock 2,00,000 Closing Stock 50,000
They have requested for help in calculating their profitability.
Calculate the Gross Profit ratio (considering that there is no other direct expenses).
 Answer:
Gross Profit = Net Sales – COGS
COGS = Opn Stock + Net Purchase – Closing Stock
COGS = 2L + (6L – 1.5L) - .5L = 2L + 4.5L - .5L = 6L
Gross Profit = 9L – 6L = 3L
Gross Profit Ratio = Gross Profit / Net Sales = 3L / 9L = 0.33

5. Palamudhir Nilayam further provides following data:

Rs. Rs.
Profit before Tax 10,000 No. of Equity Shares 3,000
Provision for Tax 5,000 Dividend per Equity Share 0.40
Preference Dividend 2,000

They would like to know their dividend payout ratio, and their retained earnings ratio.
Answer:
Dividend Payout Ratio = Dividend Per Share / Earnings Per Share

Dividend Per Share = Total Dividends / Number of equity shares

Dividend per Equtiy Share = Rs. 0.40
Earnintgs per Share = (Net Profit – Prefernce Dividend)/ Number of Equity Shares
= (5000 – 2000)/3000 = Rs.1
Dividend Payout Ratio = DPS / EPS
= 0.4/1
= 0.4 (or) 40%

Retained EArnigns Ratio = 1- Dividend Payout ratio = 1-0.4 = 0.6 (or) 60%

6. Arjun Textiles further provides the following figures.

Rs.
Total Sales for the year 2003 1,00,000
Cash Sales for the year 2003 20,000
Debtors as on 01.01. 2003 10,000
Debtors as on 31.12. 2003 15,000
Bills Receivable as on 01.01.2003 7,500
Bills Receivable as on 31.12. 2003 12,500

Let us find the Debtors Turnover Ratio for Arjun Textiles.

Debtors Turnover Ratio = Credit Sales / Average Debtors

Average Debtors = (17500 + 27500)/2 =

 7. Further data dug out from Palamudhir Nilayam records:

Credit Sales for the Year Rs. 12,000 Bills receivable Rs. 1,000
Debtors 1,000

Let us calculate the Debtors’ Turnover Ratio and Debt Collection Period (debtor days).

Debtors Turnover Ratio = Credit Sales / Average Debtors

= 12000 / 2000 = 6
Deb Collection Period (or) Debtor Days = (Average Debtor/Credit Sales)*365 = (2000/12000)*365 = 60.8 days
Since the questions is not clear as what is the opening debtors and closing debtors, similarly opering Bills receivable and closing
Bills receivable, I consider the given bills receivable and debtors to be closing figures.

8. Use the following figures from Arjun Textiles to calculate the Creditors’ Turnover Ratio and the Average Age of Accounts
Payable:

Rs. Rs.
Credit purchase during 1988 1,00,000 Bills Payable on 1.1.1988 4,000
Creditors on 1.1.1988 20,000 Bills Payable on 31.12.1988 6,000
Creditors on 31.12.1988 2,000

9. Net Solutions Limited assumes that their net profit before Interest and Tax to Rs. 5,00,000. They require us to find out
what will be the interest coverage ratio, if 10% Debentures of amount Rs. 10,00,000 is outstanding
Interest Coverage Ratio = (Profit after tax + Interest + depreciation ) / Total interest Commitment
= 500000 / 100000 = 5 Times

Exercise:

1. Sigma Limited, manufacturers of Steel pipes, ingots and billets, are planning an expansion. They are on the look out for export
opportunities to the Middle East, and some African Countries.
The following is their profit and loss account for the year ending 31st March 2004, and their balance sheet as on that date.

Dr. PROFIT AND LOSS ACCOUNT Cr.

Opening stock of finished goods 10,00,000 Sales 1,00,00,000
Opening stock of raw materials 5,00,000 Closing stock of raw materials 15,00,000
Purchase of raw materials 30,00,000 Closing stock of finished goods 10,00,000
Direct wages - DE 20,00,000 Profit on sale of shares 5,00,000
Manufacturing expenses - DE 10,00,000
Administration expenses 5,00,000
Selling and distribution expenses 5,00,000
Loss on sale of plant 5,50,000
Interest on debentures 1,00,000
Not Profit 38,50,000
1,30,00,000 1,30,00,000

COGS = Openign Stock + purchases – Closing Stock

BALANCE SHEET

Liabilities Rs. Assets Rs.

Share Capital : Fixed assets 2,50,000
Equity share capital 10,00,000 Stock of raw materials 15,00,000
Preference share capital 10,00,000 Stock of finished goods 10,00,000
Reserves 1,00,000 Sundry debtors 1,00,000
Debentures 7,50,000 Bank balance 50,000
Sundry creditors 50,000
 29,00,000 29,00,000

As a winter intern at Sigma Limited, you are required to advise the top management on the proposal to expand. Comment on their
liquidity, profitability and leverage position after redrafting the balance sheet and calculating the:
(i) Gross Profit Ratio (ii) Overall Profitability Ratio = Net Profit Ratio , Gross Profit Ratio , Operating Ratio
Ratio
(iii) Current Ratio (iv) Debt-Equity Ratio = Total Debt / Shareholders Equity
= Interest bearing debt / Shareholders Equity
= 750000 / (1000000+100000)
(v) Stock Turnover Ratio = (COGS / Average Inventory) (vi) Liquidity Ratio = (Current Ratio –
Inventory) /Current Liabilities