PROBLEMS

1. The balance sheets and trading and profit and loss accounts for the year ended 30 June, 19X2 of S Ltd and T Ltd
are given in Tables 4.30 and 4.31. You may assume that stocks have increased evenly throughout the year. You are
required to:
(a) Calculate three of the following ratios separately for each company:
(i) net profit for the year as a percentage of net assets employed at 30 June, 19X2;
(ii) net profit for the year as a percentage of sales;
(iii) gross profit for the year as a percentage of sales;
(iv) current assets to current liabilities at 30 June, 19X2;
(v) liquid ratio at 30 June, 19X2; and
(vi) stock turnover during the year.
(b) Describe briefly the main conclusions which you draw from a comparison of the ratios which you have
calculated for each company. (C.A., adapted)
Table 25.30: S Ltd and T Ltd

Balance Sheet
as on 30 June, 19X2 (Rs)

S Ltd T Ltd
Fixed assets at cost 60,000 30,000
Less: Provision for depreciation 20,000 10,000
40,000 20,000
Current assets
Stock 57,000 30,000
Debtors 22,000 20,000
Cash 11,000 10,000
90,000 60,000
Less: Current liabilities 30,000 30,000
Net current assets 60,000 30,000
Net assets 100,000 50,000
Paid-up share capital 95,000 45,000
Revenue reserve 5,000 5,000
100,000 50,000
Table 25.31: S Ltd and T Ltd
Trading and Profit and Loss Account
for the year ended 30 June, 19X2 (sh.)
S Ltd T Ltd
Sales 160,000 120,000
Stock at July 1,
19X1 39,000 20,000
Add: Purchases 114,000 85,000
153,000 105,000
Less: Stock at
June 30, 19X2 57,000 30,000
Cost of goods sold 96,000 75,000
Gross profit 64,000 45,000
Less: General expenses 56,000 39,000
Net profit for the year 8,000 6,000
Add: Balance brought forward 3,000 1,000
11,000 7,000
Less: Dividend paid 6,000 2,000 Balance carried forward 5,000
5,000
2. Extracts from financial accounts of XYZ Ltd are given below:

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 Table 25.32: XYZ Ltd
Year I Year II
Assets Liabilities Assets Liabilities
Stock 10,000 – 20,000 –
Debtors 30,000 – 30,000 –
Payment in advance 2,000 – – –
Cash in hand 20,000 – 15,000 –
Sundry creditors – 25,000 – 30,000
Acceptances – 15,000 – 12,000
Bank overdraft – – – 5,000
62,000 40,000 65,000 47,000
Sales amounted to Rs 350,000 in the first year and Rs 300,000 in the second year. You are required to comment
on the solvency position of the concern with the help of accounting ratios.
3. From the following information you are required to (a) analyze the relative position of ABC Ltd in the industry and (b) point out the
deficiencies and suggest improvements.
Table 25.33: ABC Ltd
Balance Sheet
as on 31 December, 19X1 (sh.)
Share capital 1,278,000 Fixed assets:
Current liabilities: Equipment 600,000
Creditors 150,000 Less: Depreciation 80,000 520,000
Bank loan 300,000 Current assets:
Cash 180,000
Debtors 240,000
Stock 660,000
Prepaid expenses 128,000
Total capital 1,728,000 Total assets 1,728,000
Table 25.34: ABC Ltd
Profit and Loss
for the year ended 31 December, 19X1 (sh.)
Sales 345,000
Cost of goods sold 150,000
Gross profit 195,000
Operating expenses 90,000
Profit before interest and taxes 105,000
Interest 24,000
Profit before taxes 81,000
Tax 27,000

Profit after taxes 54,000

Table 25.35: ABC Ltd
Industry Averages
Current ratio 2.95
Quick ratio 1.05
Debt-equity ratio 50%
Times interest earned 2.60%
Inventory turnover 0.35
Fixed-assets turnover 0.80
Total assets turnover 0.50

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Net profit margin 16%
Return on assets 15%
Return on equity 21%
4. The two firms, M and N, have the following data:
N M
sh. Sh.
Sales 800,000 200,000
Total assets 4,000,000 600,000
Net profit 750,000 420,000
Compute return on investment for both firms. Explain how the figures are similar and how they are different.

5. Using the following data, complete the balance sheet given below:
Gross profit (Rs) 54,000
Shareholders’ equity (Rs) 600,000
Gross profit margin 20%
Credit-sales to total-sales 80%
Total assets turnover 0.3 times
Inventory turnover 4 times
Average collection period (a 360-day year) 20 days
Current ratio 1.8
Long-term debt to equity 40%

Balance Sheet
Creditors ......... Cash .........
Long-term debt ......... Debtors .........
Shareholders’ equity ......... Inventory .........
......... Fixed assets .........
......... .........

6. The total sales (all credit) of a firm are sh. 640,000. It has a gross profit margin of 15% and a
current ratio of 2.5. The firm’s current liabilities are sh. 96,000; inventories sh. 48,000 and cash
sh. 16,000.
(a) Determine the average inventory to be carried by the firm, if an inventory turnover of 5
times is expected? 9 assume a 360 day year).
(b) Determine the average collection period if the opening balance of debtors is intended to
be of sh. 80,000? ( assume a 360 day year)

7.
Assume that a firm has owners’ equity of sh. 100,000. The ratios for the firm are:
Current debt to total debt 0.4
Total debt to owners’ equity 0.6
Fixed assets to owners’ equity 0.6
Total assets turnover 2 times
Inventory turnover 8 times

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The statement of financial position relevant to the ratios is given as follows:
Assets: sh.
Cash ……………..
Inventory ………………
Total current assets ……………….
Fixed assets ………………..
Total assets ………………..
Liabilities:
Current debt …………………
Long term debt ………………….
Total debt ………………….
Owners’ equity …………………
Total capital ………………..

Required:
Complete the statement of financial position given above.

7. From the information provided relating to a company, calculate Altman’s Z-score and
comment on the financial condition of the company:

Particulars `
Equity Share Capital (of ` 10 each) 2,00,000
12% Preference Share Capital (of ` 100 each) 1,00,000
Fixed Assets 3,00,000
Current Assets 2,00,000
Fictitious Assets 25,000
Current Liabilities 1,00,000
10% Debentures 2,00,000
General Reserve 75,000
Profit & Loss A/c (Cr.) 50,000
Sales 10,00,000
Earnings before Tax 1,30,000
Interest on Debentures 20,000
Market Value of each Equity Share 15
Market Value of each Preference Share 150

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8. Using Altman’s Model, compute the value of Z from the provided data (Balance Sheet
extract):

Liabilities ` Assets `
Share Capital (@ `10 each) 200,000 Fixed Assets 420,000
Reserves & Surplus 60,000 Inventory 180,000
10% Debentures 300,000 Book Debts 70,000
Sundry Creditors 80,000 Loans & Advances 20,000
Outstanding Expenses 60,000 Cash at Bank 10,000
7,00,000 7,00,000

9. Following is the extract of a Balance Sheet of a company as on 31 March, 2014:

Liabilities ` Assets `
Equity Share Capital (`100) 400,000 Fixed Assets 10,00,000
Reserves & Surplus 225,000 Trade Investment 200,000
12% Debentures 3,00,000 Stock 125,000
10% Bank Loan 200,000 Debtors 75,000
Current Liabilities 300,000 Preliminary Expenses 25,000
14,25,000 1,425,000
Additional Information
Net sales for 2013-14 were ` 20,00,000.
Price-Earnings Ratio is ` 10.
Dividend Pay-out Ratio is 50%.
Dividend per Share in 2013-14 is ` 20.
Corporate Tax Rate is 50%.
Using Altman’s Model, calculate the Z-score of the company and interpret the result.

10. Using Altman’s Model, compute the value of Z from the provided data (Balance Sheet extract):
Liabilities ` Assets `
Share Capital (@ `10 each) 2,00,000 Fixed Assets 4,20,000
Reserves & Surplus 60,000 Inventory 1,80,000
10% Debentures 3,00,000 Book Debts 70,000
Sundry Creditors 80,000 Loans & Advances 20,000
Outstanding Expenses 60,000 Cash at Bank 10,000
7,00,000 7,00,000
Additional Information
Market value per share ` 12.50.
Operating Profit (20% on sales) ` 140,000.

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11. Following is the extract of a Balance Sheet of a company as on 31 March, 2014:

Liabilities ` Assets `
Equity Share Capital (`100) 4,00,000 Fixed Assets 10,00,000
Reserves & Surplus 2,25,000 Trade Investment 2,00,000
12% Debentures 3,00,000 Stock 1,25,000
10% Bank Loan 2,00,000 Debtors 75,000
Current Liabilities 3,00,000 Preliminary Expenses 25,000
14,25,000 14,25,000
Additional Information
Net sales for 2013-14 were ` 20,00,000.
Price-Earnings Ratio is ` 10.
Dividend Pay-out Ratio is 50%.
Dividend per Share in 2013-14 is ` 20.
Corporate Tax Rate is 50%.
Using Altman’s Model, calculate the Z-score of the company and interpret the result.

12. Balance Sheet (extract) of Q Ltd. as on 31 March 2014.

Liabilities ` in Crores Assets ` in Crores
Equity Shares 20.80 Fixed Assets 105.60
Long-term Liabilities 104.00 Current Assets 57.60
Current Liabilities 78.40 Profit & Loss A/c 40.00
203.20 203.20
Additional Information :
Depreciation written off `8 crores.
Preliminary Expenses written off `1.60 crores.
Net Loss `25.60 crores.
Ascertain the stage of sickness.
12. Following information is available in respect of five companies:

Company Total Debt to Total Assets Actual Status of the Company

P 0.50 Non-failed
Q 0.80 Non-failed
R 0.40 Non-failed
S 0.60 Failed
T 0.70 Failed
Determine the Optimum Cut-off Point for the ratio of Total Debt to Total Asset.
Determine the percentage of error in Corporate Distress Prediction.