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ILLUSTRATION:

Trading, Profit & Loss A/C

Trading A/c

Particulars Rs. Particulars Rs.

Opening Stock

Purchases

Manufacturing Expenses

Carriage Inwards

Gross Profit c/d

90,000

1,50,000

30,000

10,000

1,20,000

Sales

Less Sales Returns

Closing Stock3,00,000

1,00,000

4,00,000 4,00,000

Profit & Loss A/cPaticulars Rs. Particulars Rs.

Selling and Distribution Expenses

Interest on long term debt

Loss on sale of fixed assets

Taxation

To Profit & Loss Appropriation

A/c c/d

20,000

35,000

10,000

10,000

45,000

Gross Profit b/d 1,20,000

1,20,000 1,20,000

Profit & Loss Appropriation A/cParticulars Rs. Particulars Rs.

To Preference Dividend

To Balance c/d5,000

40,000By Profit & Loss A/c 45,000

45,000 45,000

Note: Credit Sales are 20% of total salesCash Purchases are 50% of total Purchases.

Market Price per Share = Rs. 50.

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Balance Sheet of XYZ Ltd. as on 31.3.07

Liabilities Rs. Assets Rs.

Share Capital

20,000 equity shares @ Rs. 10 each

10% preference share capital

Reserves and Surplus

General Reserve

Capital Reserve

Profit & Loss A/C

Secured Loans

10% Bank Loans

10% debentures

Current Liabilities and Provisions

Bills Payable

Creditors

Provision for taxation

Bank overdraft

Provision for Preference dividend

2,00,000

50,000

50,000

40,000

40,000

2,50,000

1,00,000

30,000

1,40,000

10,000

10,000

5,000

Fixed Assets

Land & Building

Plant & Machinery

Furniture & Fixtures

Current Assets, Loans & Advances

Stock

Debtors

Cash

Bank

Prepaid Expenses

Bills Receivables

Miscellaneous Expenses

Preliminary Expenses

Discount on shares

3,00,000

3,00,000

25,000

60,000

40,000

50,000

50,000

20,000

50,000

10,000

20,000

9,25,000 9,25,000

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Calculation of Financial Ratios:

LIQUIDITY RATIO

1. Current ratio = Total Current Assets

Total Current Liabilities

= 2,70,000/1,95,000 = 1.38

2. Quick Ratio = Quick Assets

Quick Liabilities

= 1,90,000/1,85,000 = 1.027

3. Absolute Liquidity Ratio = Super Quick Assets

Quick Liabilities

= 1,00,000/1,85,000 = 0.54

4. Stock to Working Capital Ratio = Stock at the endWorking Capital

= 1,00,000/75,000 = 1.33

SOLVENCY RATIOS:

1. Proprietary Ratio = Total Shareholders FundsTotal Assets

= 3,50,000/8,95,000 = 0.39

2. Debt-Equity Ratio = Total Debts

Owners Funds

= 3,50,000/3,50,000 = 1

3. Capital Gearing Ratio = Fixed Assets/Dividend Bearing SecuritiesEquity Share Capital + Reserves & Surplus

= 4,00,000/3,00,000 = 1.33

4. Times Interest Earned = Profit before Interest and Tax

` Interest on Debt

= 90,000/35,000 = 2.57 times

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PROFITABILITY RATIOS:

1. Gross Profit Ratio = Gross ProfitNet sales

= 1,20,000/3,00,000 x 100 = 40%

2. Operating Ratio = COGS + Operating Expenses

Net Sales

= 2,00,000/3,00,000 = 0.66

3. Net Profit Ratio = Net ProfitNet Sales

= 45,000/3,00,000 x 100 = 15%

4. Operating Profit Ratio = Operating ProfitNet Sales

= 1,00,000/3,00,000 = 0.33

5. Return On Total Assets = EBIT

Total Assets

= 90,000/8,95,000 = 0.1

6. Earning Per Share Ratio = PATPreference DividendNo. of Equity Shares Outstanding

= 40,000/20,000 = 2

7. Return on Equity Ratio = PAT x 100Equity

= 45,000/3,50,000 x 100 = 12.85%

8. Return on Capital Employed = EBIT x 100

Capital Employed

= 90,000/7,00,000 x 100 = 12.85%

9. PriceEarning Ratio = Market Price per Share

EPS

= 50/2 = 25

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ACTIVITY RATIOS:

1. Stock Turnover Ratio = Cost of goods sold

Average Inventory at cost

= 1,80,000/95,000 = 1.89

2. Average no. of days to turnover velocity = No. of days

Stock Turnover Ratio

= 52/1.89 = 27.5

3. Debtors Turnover Ratio = Net Credit SalesDebtors + Bills Receivables

= 60,000/ 90,000 = 0.66

4. Debt Collection Period = No. of weeks

Debtors Turnover Ratio

= 52/ 0.66 = 78.8

5. Creditors Turnover Ratio = Net Credit Purchases

Creditors + Bills Payable

= 75,000/1,70,000 = 0.44

6. Debt Payment Period = No. of weeksCreditors Turnover Ratio

= 52/ 0.26 = 200

7. Working Capital Turnover Ratio = Cost of Goods Sold

Working Capital

= 1,80,000/75,000 = 2.4

8. Capital Turnover Ratio = Net Sales

Capital Employed

= 3,00,000/ 7,00,000 = 0.42

9. Fixed Assets Turnover Ratio = Net salesNet Fixed Assets

= 3,00,000/ 6,25,000 = 0.48