Solution

TEST YOUR KNOWLEDGE - RATIOS

Class 12 - Accountancy
Section A
1. Proprietary Ratio compare proprietor’s fund with the total assets of an enterprise. In simple words, proprietary ratio establishes the
relationship between shareholders funds & total assets. It indicate the proportion of total assets financed by shareholder's funds.
2. Debt Equity Ratio indicate the relationship between Owner's funds and borrowed funds.
1:1 ratio indicate a good sign for the company.
Section B
3. Gross Profit Ratio = Gross Profit
× 100
Revenue from Operations

50,000
Gross Profit Ratio = 1,00,000
× 100 = 50%
Current Assets
Current Ratio = Current Liabilities
Inventory+Cash and Cash Equivalents+Trade Reccivables
Current Ratio = Current Liabilities
15,000+17,500+27,500
Current Ratio = 40,000
= 1.5 : 1
Liquid Assets
Liquid Ratio = Current Liabilities
Cash and Cash Equivalents + Trade
Liquid Ratio = Current Liabilities
17,500+27,500
Liquid Ratio = 40,000
= 1.125 : 1
Inventory Turnover Ratio = Cost of Goods Sold

Average Stock

Revenue from Operations-Gross Profit

Inventory Turnover Ratio = Average Stock

1,00,000−50,000
Inventory Turnover Ratio = 15,000
= 3.33 times
T
Liquid Assets = Current Assets - Inventory - Prepaid Expenses
₹1,75,000 (Note)
4. Proprietary Ratio will be := Shareholders' Funds
= = 0.7 : 1.
BG

Total Assets ₹2,50,000

Note: Calculation of Shareholders' Funds or Equity or Proprietors' Funds:
Liabilities Side Approach ₹ Assets Side Approach ₹

Equity Share Capital 1,00,000 Fixed Assets 1,25,000

Add: Reserves and Surplus 25,000 Add: Working Capital* 1,10,000

Equity Shareholders' Funds 1,25,000 2,35,000

Add: Preference Share Capital 50,000 Less: Long-term Borrowings (Debentures) 60,000

Shareholders' Funds 1,75,000 Shareholders' Funds 1,75,000

Working Note.1:
*Working Capital will be = Current Assets (Current Investments + Cash and Cash Equivalents + Other Current Assets) - Current
Liabilities (Trade Payables)
= ₹ 75,000 + ₹ 40,000 + ₹ 10,000 De- ₹ 15,000 = ₹ 1,10,000
5. Revenue from Operations is × ₹6, 40, 000
100

80

Total Revenue from Operations is = ₹ 8,00,000

As Cash Revenue from Operations being 33 % of Credit Revenue from Operations,
1

The Ratio of Cash Revenue from Operations and Credit

Revenue from Operations = 33 % : 100 or 1:3 or :
1

3
1

4
3

Credit Revenue from Operations = ₹8, 00, 000 × 3

4
= ₹ 6,00,000
credit Revenue from Operations
Trade Receivables Turnover Ratio
Average Trade Receivables

₹6,00,000
4 (Given) = Average Trade Receivables

₹6,00,000
Average Trade Receivables = 4
= ₹ 1,50,000
Opening Trade Receivables = ₹1, 50, 000 − 1

2
of 20,000
= ₹ 1,40,000

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 Closing Trade Receivables = ₹1, 50, 000 + 1

2
of ₹ 20,000
= ₹ 1,60,000
6. Credit Sale = ₹ 5,00,000
Rate of Credit Sale to Cash Sale = 4 : 1
Cash Sale = × 5,00,000 = ₹ 1,25,000
1

Total Sales = Cash Sales + Credit Sales = ₹ 1,25,000 + ₹ 5,00,000 = ₹ 6,25,000

Cost of Goods Sold = Purchases - Return Outward or purchase return + Carriage Inwards + Wages + Decrease in Inventory
(excess of opening stock than closing stock)
= ₹ 3,00,000 - ₹ 10,000 + ₹ 10,000 + ₹ 50,000 + ₹ 10,000
= ₹ 3,60,000
Gross Profit = Total Sales - Cost of Goods Sold
= ₹ 6,25,000 - ₹ 3,60,000 = ₹ 2,65,000
2,65,000
Gross Profit Ratio = Gross Profit

Net Sales
× 100 =
6,25,000
× 100 = 42.40%
Section C
7. Statement showing the effect (increase, decrease or no effect) of various transactions on Current Ratio is as follows:
Tr. Current
Reason of effect
No. Ratio will

a Improve Both the current assets and current liabilities are decreased by the same amount.

Neither the current assets not the current liabilities are affected since there is only a conversion of one
b Not Change
current asset (i.e., Inventory) into another current asset (i.e., Cash).

c Reduce Current liabilities remain unchanged but current assets are decreased by amount of loss.

d Improve Current liabilities remain unchanged but current assets are increased by amount of profit.
T
e Reduce Both the current assets and current liabilities are increased by the same amount.

Neither the current assets not the current liabilities are affected since there is only a conversion of one
BG

f Not change
current asset (i.e., Cash) into another current asset (i.e., Inventory).

Neither the current assets nor the current liabilities are affected since both the non-current assets and non-
g Not change
current Liabilities are increased by the same amount.

8. i. Net Sales = 5,00,000

Cost of Goods Sold = 3,00,000
Gross Profit = Net Sales - Cost of Goods Sold
= 5,00,000 - 3,00,000 = 2,00,000
Gross Profit
Gross Profit Ratio = Net Sales
× 100

2,00,000
=
5,00,000
× 100 = 40%
ii. Current Assets = 2,00,000
Current Liabilities = 1,40,000
Working Capital = Current Assets - Current Liabilities
= 2,00,000 - 1,40,000 = 60,000
Working Capital Turnover Ratio = Net Sales

Working Capital

5,00,000
=
60,000
= 8.33 Times.
iii. Long-term Debts = 13% Debentures = 1,00,000
Equity = Paid-up Share Capital = 2,50,000
Long Term Debts
Debt-Equity Ratio = Equity

1,00,000
=
2,50,000
= 0.4 : 1
Net Sales 5,00,000
9. Working Capital Turnover Ratio = Working Capital
= 1,25,000
= 4 times
Working Note:
Net Sales = Cash Sale + Credit Sale - Sales Return
Net sales = 1,30,000 + 3,80,000 - 10,000
Net Sales = Rs. 5,00,000

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 Working Capital = Current Assets - Current Liabilities
Working Capital = 1,40,000 + 90,000 - 1,05,000
Working Capital = 1,25,000
1,70,000
Debt-Equity Ratio = Debt

Equity
= 1,00,000
= 1.7: 1
Long-term Debt = Total Debts - Current Liabilities
= Rs. 2,50,000 - Rs. 80,000
= Rs. 1,70,000
Equity = Total Assets - Total Debts
= Rs. 3,50,000 - Rs. 2,50,000 = Rs. 1,00.000
10. Computation of ratios is as follows:-
i. Gross Profit Ratio = Gross Profit

Revenue from Operations

× 100

Gross Profit = Revenue from Operations - Cost of Revenue from Operations

= Revenue from Operations - (Opening Inventory + Purchases + Wages + Carriage Inwards - Closing Inventory)
= 24,00,000 - (3,00,000 + 14,00,000 + 3,70,000 + 1,50,000 - 4,20,000)
= 24,00,000 - 18,00,000 = 6,00,000.
6,00,000
G.P. Ratio = 24,00,000
× 100 = 25%
Cost of Revenue from Operations + Operating Exp.
ii. Operating Ratio = Revenue from Operations
× 100

Operating Exp. = Administrative Exp. + Selling Exp.

= 84,000 + 36,000 = 1,20,000
18,00,000+1,20,000
Operating Ratio = 24,00,000
× 100 = 80%
Operating Profit
iii. Operating Profit Ratio = Revenue from Operations
× 100

Operating Profit = G.P. - Operating Exp. (i.e., Administrative Exp. and Selling Exp.)
= 6,00,000 - 84,000 - 36,000 = 4,80,000
T
4,80,000
Operating Profit Ratio = 24,00,000
× 100 = 20% operating ratio+operating profit ratio=100%
Net Profit
iv. Net Profit Ratio = × 100
BG

Revenue from Operations

Net Profit = G.P. - Administrative Exp. - Selling Exp. - Income Tax + Profit on sale of fixed assets
= 6,00,000 - 84,000 - 36,000 - 1,00,000 + 20,000
= 4,00,00
4,00,000
Net Profit Ratio = 24,00,000
× 100 = 16.67%

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