COST AND MANAGEMENT ACCOUNTING

ASSIGNMENT NO – III

SOLUTION:-

Current Assets
(i) Current Ratio 

Current

Liabilities `2,40,000
2011-12 =
`1,00,000

= 2.4:1

`2,80,000
2012-13 =
`1,20,000

= 2.3:1

It is clear from the above calculations that liquidity has slightly deteriorated in 2012-13. However, it is still
above the ideal current ratio which is suggested as 2:1.

(ii) Debt-Equity Ratio (Debt/Equity)

`80,000
2011-12 =
`2,40,000

= 0.33

`80,000
2012-13 =
`2,60,000

= 0.31

The position has improved.

 (iii) Acid Test Ratio or Quick Ratio

Liquid or Quick Assets


Current Liabilities

`1,20,000
2011-12 =
`1,00,000

= 1.2

`1,40,000
2012-13 =
`1,20,000

= 1.17

This means that there has been a slight change in the quick ratio for the two periods. The ideal or standard
acid test ratio is often taken to be 1:1 (or 100%) for a safe current financial position.

(iv) Debtors’ Turnover Ratio

Net Sales
=
Average
Debtors

`6,00,000
=
`60,000

= 10 times

It means that 10% of sales effected always remain to be realised.

Debt Collection Period:

Average Debtors  Days in a year


Net Credit Sales

`60,000  365
 `6,00,000
= 36.5 days

This shows that the company’s debts are collected after an average of 36.5 days.

(v) Inventory Turnover Ratio

This ratio is an important indication of the speed with which inventories are converted into sales. In other
words, it reflects the degree of liquidity of inventories and their relationship with the turnover. It is calculated
as:
Cost of Goods Sold

Average Inventory at
Cost

Average inventory is calculated by adding opening and closing inventory figures and dividing the total by 2.
Thus, inventory turnover for 2012-13.
 `3,60,000
= 3.27 times.
`1,10,000

(i) Sales Ratios

(a) Sales to fixed assets or fixed assets turnover

ratio: Net Sales

Net Fixed Assets

`6,00,000
= 3.75 times.
`1,60,000

(b) Sales to net worth:

Sales

Capital Net Worth

`6,00,000
= 2.3 times.

`2,60,000

(c) Sales to working capital or working capital turnover ratio:

Sales

Working Capital

`6,00,000
= 3.75 times.

`1,60,000
(ii)Operating Ratio

Cost of Goods Sold  Operating Expenses

Operating Ratio = Sales  100

`3,60,000  `1,56,000
× 100 = 86%.
`6,00,000
(iii)Profit Ratios

a. Gross Profit Ratio = Gross Profit  100  `2,40,000  100  40%

Net Sales `6,00,000
Net Operating Profit
b. Net Profit Ratio =  100 `84,000
 100  14%
 `6,00,000
Net Sales

It should be noted that fixed interest charges are not considered as a charge against net operating profits.
Some writers calculate this ratio with net income (including non-operating items). In both cases income-tax is
ignored.