Ratio Analysis - Advanced Questions
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PGP/SS/07-09
Saurabh Jain
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT
MANAGEMENT ACCOUNTING – TRIMESTER 1
ADVANCED QUESTIONS ON RATIO ANALYSIS
Question 1: X Co. has made plans for the next year. It is estimated that the company will employ total assets of Rs. 8,00,000. 50 per cent of the assets being financed by borrowed capital at an interest cost of 8 per cent per year. The direct costs for the year are estimated at Rs. 4,80,000 and all other operating expenses are estimated at Rs. 80,000. The goods will be sold to customers at 150 per cent of the direct costs. Tax rate is assumed to be 50 per cent. Calculate: a. Net Profit Margin/NP Ratio b. ROA c. Assets turnover ratio d. Return on owner’s equity [Hint – Return on shareholder’s funds]
Question 2: The total sales (all credit) of a firm are Rs. 6,40,000. It has a gross profit margin of 15 per cent and a current ratio of 2.5. The firm’s current liabilities are Rs. 96,000, Inventories as Rs. 48,000 and cash as Rs. 16,000. a. Determine the average inventory to be carried by the firm, if an inventory turnover of 5 times is expected. b. Determine the average collection period if the opening balance of debtors is intended to be Rs. 80,000. [In both the above cases, assume a year to have 360 days]
PGP/SS/07-09
Saurabh Jain
Question 3: The following figures relate to the trading activities of Hind traders limited for the year ended June 30th 06.
Sales
1,500,000
Purchases
966,750
Opening Stock
228,750
Closing Stock
295,500
Sales Returns
60,000
Selling & Distribution Expenses:Salaries
45,900
Advertising
14,100
Traveling
6,000
Non-operating expenses:Loss on sale of assets
12,000
Administrative expenses:Salaries
81,000
Rent
8,100
Stationary
7,500
Depreciation
27,900
Other Charges
49,500
Provision for taxation
120,000
Non-Operating Income:Dividend on shares Profit on sale of shares
27,000 9,000
You are required to: a. Rearrange the above figures in a form suitable for analysis. [i.e. an Income Statement] b. Show separately the following ratios: (1) GP Ratio (2) Operating Profit Ratio (3) Stock turnover ratio
PGP/SS/07-09
Saurabh Jain
Question 4: Assume that a firm has owner’s equity of Rs. 1,00,000 Ratios given: Current debt to total debt - 0.40 : 1 Total debt to owner’s equity - 0.60 : 1 Fixed Assets to owner’s equity - 0.60 : 1 Total Assets turnover - 2 times Inventory turnover - 8 times
Complete the following balance sheet based on the information given above: Sources/Liabilities
Amount (Rs.)
Applications/Assets
Current Debt
Cash
Long-term Debt
Inventory
Total Debt
Total Current Assets
Owner's Equity
Fixed Assets
TOTAL LIABILITIES
TOTAL ASSETS
(SOLUTIONS ON NEXT PAGE)
Amount (Rs.)
PGP/SS/07-09
Saurabh Jain
SOLUTIONS:
To Question 1: a. 8.9% b. 10% c. 0.9 times d. 16%
To Question 2: a. Rs. 1,08,800 b. 72 days
To Question 3: a. Particulars
Gross Amount
Sales (Less: Returns)
Net Amount 1,440,000
Less: Cost of Sales: Opening Stock
228, 750
(+) Purchases
966,750 1,195,500
(-) Closing Stock
295,500
GROSS PROFIT
(-) 900,000 540,000
(-) Non-operating Expenses
12,000
(-) Selling & Dist. Exp.
66,000
(Sal.+ Advertising +Traveling) (-) Administrative Exp.
174,000
(-) 252,000
(+) Non-Operating Profit
36,000
(+) 36,000
(Dividend on shares +Profit on sale) EBIT/PBT
324,000 (-) Provision for taxation
PAT/NET PROFIT
(-) 120,000 204,000
PGP/SS/07-09
Saurabh Jain
b. (1) 37.5 % (2) 22.5 % (3) 3.43 times
To Question 4: 1. Total debt = 0.60 * Owner’s Equity = 0.60 * 1,00,000 = 60,000 2. Fixed Assets = 0.60 * Owner’s Equity = 0.60 * 1,00,000 = 60,000 3. Total Capital = Total Debt + Owner’s Equity = 60,000 + 1,00,000 = 1,60,000 4. Total Assets = Current Assets + Fixed Assets = 1,60,000 = Total Capital Since FA = 60,000, Thus, 1,00,000 5. Assets Turnover = 2 times Sales/TA = 2 times Thus, x/1,60,000 = 2 and therefore Sales = 3,20,000 6. Inventory turnover ratio = 8 times COGS or Sales / Average Inventory => 3,20,000/x = 8 and therefore Inventory = 40,000 7. Cash = Current Assets - Inventory (assumption) 1,00,000 – 40,000 = 60,000 8. Current Debt = 0.40 * Total Debt 0.40 * 60,000 = 24,000 9. Long-term debt = Total debt – current debt 60,000 – 24,000 = 36,000
Therefore, Sources/Liabilities Current Debt Long-term Debt Total Debt Owner's Equity TOTAL LIABILITIES
Amount (Rs.) 24,000 (+) 36,000 60,000 (+) 1,00,000 1,60,000
Applications/Assets Cash Inventory Total Current Assets Fixed Assets TOTAL ASSETS
*****
Amount (Rs.) 60,000 (+) 40,000 1,00,000 (+) 60,000 1,60,000
Saurabh Jain
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT
MANAGEMENT ACCOUNTING – TRIMESTER 1
ADVANCED QUESTIONS ON RATIO ANALYSIS
Question 1: X Co. has made plans for the next year. It is estimated that the company will employ total assets of Rs. 8,00,000. 50 per cent of the assets being financed by borrowed capital at an interest cost of 8 per cent per year. The direct costs for the year are estimated at Rs. 4,80,000 and all other operating expenses are estimated at Rs. 80,000. The goods will be sold to customers at 150 per cent of the direct costs. Tax rate is assumed to be 50 per cent. Calculate: a. Net Profit Margin/NP Ratio b. ROA c. Assets turnover ratio d. Return on owner’s equity [Hint – Return on shareholder’s funds]
Question 2: The total sales (all credit) of a firm are Rs. 6,40,000. It has a gross profit margin of 15 per cent and a current ratio of 2.5. The firm’s current liabilities are Rs. 96,000, Inventories as Rs. 48,000 and cash as Rs. 16,000. a. Determine the average inventory to be carried by the firm, if an inventory turnover of 5 times is expected. b. Determine the average collection period if the opening balance of debtors is intended to be Rs. 80,000. [In both the above cases, assume a year to have 360 days]
PGP/SS/07-09
Saurabh Jain
Question 3: The following figures relate to the trading activities of Hind traders limited for the year ended June 30th 06.
Sales
1,500,000
Purchases
966,750
Opening Stock
228,750
Closing Stock
295,500
Sales Returns
60,000
Selling & Distribution Expenses:Salaries
45,900
Advertising
14,100
Traveling
6,000
Non-operating expenses:Loss on sale of assets
12,000
Administrative expenses:Salaries
81,000
Rent
8,100
Stationary
7,500
Depreciation
27,900
Other Charges
49,500
Provision for taxation
120,000
Non-Operating Income:Dividend on shares Profit on sale of shares
27,000 9,000
You are required to: a. Rearrange the above figures in a form suitable for analysis. [i.e. an Income Statement] b. Show separately the following ratios: (1) GP Ratio (2) Operating Profit Ratio (3) Stock turnover ratio
PGP/SS/07-09
Saurabh Jain
Question 4: Assume that a firm has owner’s equity of Rs. 1,00,000 Ratios given: Current debt to total debt - 0.40 : 1 Total debt to owner’s equity - 0.60 : 1 Fixed Assets to owner’s equity - 0.60 : 1 Total Assets turnover - 2 times Inventory turnover - 8 times
Complete the following balance sheet based on the information given above: Sources/Liabilities
Amount (Rs.)
Applications/Assets
Current Debt
Cash
Long-term Debt
Inventory
Total Debt
Total Current Assets
Owner's Equity
Fixed Assets
TOTAL LIABILITIES
TOTAL ASSETS
(SOLUTIONS ON NEXT PAGE)
Amount (Rs.)
PGP/SS/07-09
Saurabh Jain
SOLUTIONS:
To Question 1: a. 8.9% b. 10% c. 0.9 times d. 16%
To Question 2: a. Rs. 1,08,800 b. 72 days
To Question 3: a. Particulars
Gross Amount
Sales (Less: Returns)
Net Amount 1,440,000
Less: Cost of Sales: Opening Stock
228, 750
(+) Purchases
966,750 1,195,500
(-) Closing Stock
295,500
GROSS PROFIT
(-) 900,000 540,000
(-) Non-operating Expenses
12,000
(-) Selling & Dist. Exp.
66,000
(Sal.+ Advertising +Traveling) (-) Administrative Exp.
174,000
(-) 252,000
(+) Non-Operating Profit
36,000
(+) 36,000
(Dividend on shares +Profit on sale) EBIT/PBT
324,000 (-) Provision for taxation
PAT/NET PROFIT
(-) 120,000 204,000
PGP/SS/07-09
Saurabh Jain
b. (1) 37.5 % (2) 22.5 % (3) 3.43 times
To Question 4: 1. Total debt = 0.60 * Owner’s Equity = 0.60 * 1,00,000 = 60,000 2. Fixed Assets = 0.60 * Owner’s Equity = 0.60 * 1,00,000 = 60,000 3. Total Capital = Total Debt + Owner’s Equity = 60,000 + 1,00,000 = 1,60,000 4. Total Assets = Current Assets + Fixed Assets = 1,60,000 = Total Capital Since FA = 60,000, Thus, 1,00,000 5. Assets Turnover = 2 times Sales/TA = 2 times Thus, x/1,60,000 = 2 and therefore Sales = 3,20,000 6. Inventory turnover ratio = 8 times COGS or Sales / Average Inventory => 3,20,000/x = 8 and therefore Inventory = 40,000 7. Cash = Current Assets - Inventory (assumption) 1,00,000 – 40,000 = 60,000 8. Current Debt = 0.40 * Total Debt 0.40 * 60,000 = 24,000 9. Long-term debt = Total debt – current debt 60,000 – 24,000 = 36,000
Therefore, Sources/Liabilities Current Debt Long-term Debt Total Debt Owner's Equity TOTAL LIABILITIES
Amount (Rs.) 24,000 (+) 36,000 60,000 (+) 1,00,000 1,60,000
Applications/Assets Cash Inventory Total Current Assets Fixed Assets TOTAL ASSETS
*****
Amount (Rs.) 60,000 (+) 40,000 1,00,000 (+) 60,000 1,60,000
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