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 27,000

Profit on sale of shares 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 Amount (Rs.)

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)

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 Net Amount

Sales (Less: Returns) 1,440,000

Less: Cost of Sales:

Opening Stock 228, 750

(+) Purchases 966,750

1,195,500

(-) Closing Stock 295,500 (-) 900,000

GROSS PROFIT 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 (-) 120,000

PAT/NET PROFIT 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 Amount (Rs.) Applications/Assets Amount (Rs.)

Current Debt 24,000 Cash 60,000

Long-term Debt (+) 36,000 Inventory (+) 40,000

Total Debt 60,000 Total Current Assets 1,00,000

Owner's Equity (+) 1,00,000 Fixed Assets (+) 60,000

TOTAL LIABILITIES 1,60,000 TOTAL ASSETS 1,60,000

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