Additional Solved Sums, Financial Management, Prassanna Chandra

CHAPTER 2 1. As a rule of thumb, real straddles of liaison are calculated by subtracting the inflation regularise from the nominal arrange. What is the error from using this rule of thumb for calculating real pass judgments of return in the succeeding(a) cases? Nominal rate (%)7121822 Inflation rate (%)4 6 810 antecedent pic 2. As a rule of thumb, real rates of please are calculated by subtracting the inflation rate from the nominal rate. What is the error from using this rule of thumb for calculating real rates of return in the following cases? Nominal rate (%)481119 Inflation rate (%)13 2 4 event pic CHAPTER 3 1.At the end of display, 20X6 the remainders in the various accounts of Dhoni & order are as follows Rs. in million Accounts proportionateness rightfulness crownwork cxx Preference capital 30 icy assets (net) 217 Reserves and surfeit 200 notes and swear 35 Debentures (secured) deoxycytidine monophosphate Marketable securities 18 Term loans (secured) 90 R eceivables 200 short argot acquire (unsecured) 70 Inventories210 Trade creditors 60 Provisions 20 Pre- compensable expenses 10 Required jell the balance rag week of Dhoni & Company as per the format specified by the Companies Act. ascendent correspondence Sheet of Dhoni & Company As on March 31, 20 X 6 Liabilities Assets office capital Fixed assets truth 120 top restore assets 217 Preference 30 Reserve & surplus 200 Investments Marketable securities 18 Secured loans topical assets, loans & advances Debentures degree centigrade Term loans 90 Pre- paid expenses 10 Unsecured loans Inventories 210 Short term ank get 70 Receivables 200 new liabilities & provisions coin & curse 35 Trade creditors 60 Provisions 20 690 690 2. At the end of March, 20X7 the balances in the various accounts of Sania Limited are as follows Rs. in million Accounts end Equity capital 250 Preference capital 80 Fixed assets (net)380 Reserves and sur plus350 notes and fix100 Debentures (secured)190 Marketable securities 30 Term loans (secured)120 Receivables420 short-run bank borrowing (unsecured) cx Inventories310 Trade creditors 90 Provisions 70 Pre-paid expenses 20 Required Prepare the balance sheet of Sania Limited as per the format specified by the Companies Act. Solution Balance Sheet of Sania Limited as on March 31, 20 X 7 Liabilities Assets Share capital Fixed assets Equity 250 sack rooted(p) assets 380 Preference 80 Reserve & surplus 350 Investments Marketable securities 30 Secured loans genuine assets, loans & advances Debentures 190 Term loans 120 Pre-paid expenses 20 Unsecured loans Inventories 310 Short term bank borrowing 110 Receivables 420 menstruum liabilities & provisions Cash & Bank 100 Trade creditors 90 Provisions 70 1260 1260 3. The comparative degree balance sheets of half-evergreen Company are abandoned below (Rs. in million) Owners Equity and Liabilities As on 31. 3. 20X6 As on 31. 3. 20X7 Share capital 70 70 Reserves and surplus 40 80 Long-term debt 80 90 Short-term bank borrowings 80 85 Trade creditors 40 70 Provisions 10 20 nub320415 Assets Fixed assets (net)120210 Inventories 90 95 Debtors 60 65 Cash 25 30 Other assets 25 15 resume320415 The acquire and expiry account of Evergreen Company for the year ending 31st March 2007 is attached below (Rs. in million) benefit & dismissal Account for the Period 1. 4. 20X6 to 31. 3. 20X7 scratch gross gross sales750 Cost of goods interchange 505 Stocks290 Wages and salaries105 Other manufacturing expenses110 245 porcine advantage in ope balancen(p) expenses135 Selling, administ symmetryn and general120 wear and tear 15 operating(a) improvement110 Non-operating surplus or deficit(20) EBIT 90 arouse 25 meshwork out front measure revenue 65 Tax 15 improvement after tax 50 Dividends 10 well-kept stipend 40 Required (a) Prepare the classified change die har d statement for the stopover 1. 4. 20X6 to 31. 3. 20X7 b) Develop the cash in hand flow identity for the period 1. 4. 20X6 to 31. 3. 20X7 Solution A. Cash flow from operating activities - crystallize shekels before tax and extraordinary items 85 - Adjustments for raise paid 25 Depreciation 15 - operate gain ground before working capital changes one hundred twenty-five - Adjustments for Inventories (5) Debtors (5) Trade creditors 30 Provisions 10 Increase in other assets 10 - Cash generated rom ope balancens 165 Income tax paid (15) - Cash flow before extraordinary items cl Extraordinary item (20) - Net cash flow from operating activities 130 B. Cash flow from expend activities - Purchase of fixed assets (105) - Net cash flow from investing activities (105) C. Cash flow from financing activities - Increase in loans 15 - Dividends paid (10) - elicit paid (25) Net cash flow from f inancing activities (20) D. Net increase in cash and cash equivalents 5 - Cash and cash equivalents as on 31. 03. 0X6 25 - Cash and cash equivalents as on 31. 03. 207 30 NoteIt has been growd that other assets represent other on-line(prenominal) assets. (b) A. Cash flow from assets -Operating cash flow90 -Net capital spending (105) -Decrease in net working capital35 -Cash flow from assets20 B. Cash flow to creditors - invade paid25 -Repayment of long term debt (15) -Cash flow to creditors10 C. Cash flow to shareholders -Dividends paid10 -Net new equity raised 0 -Cash flow to shareholders10 We find that (A)=(B) + ( C) i. e. Cash flow from assets=Cash flow to creditors + Cash flow to shareholders 4. The comparative balance sheets of Xavier Limited are accustomed below (Rs. in million) Owners Equity and Liabilities As on 31. 3. 20X6 As on 31. 3. 20X7 Share capital 20 30 Reserves and surplus 10 18 Long-term debt 30 25 Short-term bank borrowings 15 15 Trade creditors 10 15 Provisions 5 8 integrality 90 111 Assets Fixed assets (net) 16 20 Inventories 44 55 Debtors 20 21 Cash 5 8 Other assets 5 7 Total 90 111 The realize and handout account of Xavier Limited for the year 2007 is given below (Rs. in million) Profit & Loss Account for the Period 1. 4. 20X6 to 31. 3. 20X7 Net sales220Cost of goods change 140 Stocks 90 Wages and salaries 35 Other manufacturing expenses 15 80 plebeian profit Operating expenses 40 Selling, administ proportionalityn and general 20 Depreciation 5 Operating profit 15 Non-operating surplus or deficit 1 EBIT 16 kindle 4 Profit before tax 12 Tax 2 Profit after tax 10 Dividends 2 maintained earnings 8 Required (a) Prepare the classified cash flow statement for the period 1. 4. 20X6 to 31. 3. 20X7 b) Develop the cash flow identity for the period 1. 4. 20X6 to 31. 3. 20X7 Solution A. Cash flow from operating activities - Net profit before tax and extraordinary items 11 - Adjustments for evoke paid 4 De preciation 5 - Operating profit before working capital changes 20 Adjustments for - Inventories (11) Debtors (1) Trade creditors 5 Provisions 3 Increase in other assets (2) - Cash generated from ope rations 14 Income tax paid (2) - Cash flow before extraordinary items 12 Extraordinary item 1 - Net cash flow from operating activities 13 B. Cash flow from investing activities - Purchase of fixed assets (9) - Net cash flow from investing activities (9) C. Cash flow from financing activities 10 - Increase in equity - Repayment of term loans (5) -Dividend paid (2) - Interest paid (4) Net cash flow from financing activities (1) D. Net increase in cash and cash equivalents 3 - Cash and cash equivalents as on 31. 03. 20X6 5 - Cash and cash equivalents as on 31. 03. 207 8 NoteIt has been assumed that other assets represent other current assets. (b) ACash flow from as sets -Operating cash flow19 -Net capital spending(9) -Decrease in net working capital(9) Cash flow from assets 1 B. Cash flow to creditors -Interest paid 4 -Repayment of long term debt 5 -Cash flow to creditors 9 C. Cash flow to shareholders -Dividends paid 2 -Net new equity raised(10) -Cash flow to shareholders (8) We find that (A)=(B) + ( C) i. e. , Cash flow from assets=Cash flow to creditors + Cash flow to shareholders CHAPTER 4 1. post-mortem Companys net profit margin is 8 percent, gibe assets disorder ratio is 2. 5 times, debt to total assets ratio is 0. 6. What is the return on equity for Premier? Solution Net profit Return on equity = Equity = Net profit Net sales Total assets x xNet sales Total assets Equity 1 = 0. 08 x 2. 5 x = 0. 5 or 50 per cent 0. 4 Debt Equity Note = 0. 6 So = 1- 0. 6 = 0. 4 Total assets Total assets Hence Total assets/Equity = 1/0. 4 2. The following information is given for Alpha Corporation gross sales3500 Current ratio1. 5 Acid outpouring ra tio1. 2 Current liabilities1000 What is the inventory perturbation ratio? Solution Current assets = Current liabilities x 1. 5 = 1000 x 1. 5 = 1500 Quick assets= Current liabilities x 1. 2 = 1000 x 1. 2 = 1200Inventories= 300 3500 roll turnover ratio == 11. 7 300 3. The following information is given for Beta Corporation. Sales5000 Current ratio1. 4 size up turnover5 ratio Acid test ratio1. 0 What is the level of current liabilities? Solution 4. Safari Inc. has profit before tax of Rs. 90 million. If the companys times pursuit covered ratio is 4, what is the total interest iron boot? Solution PBT= Rs. 90 million PBIT clock interest covered = = 4 Interest So PBIT = 4 x Interest PBT = PBIT interest = 4x interest- interest = 3 x interest = 90 million and so interest = 90/3 = Rs. 30 million 5. A has profit before tax of Rs. 0 million. If its times interest covered ratio is 6, what is the total interest charge? Solution PBT= Rs. 40 million PBIT Times interest covered = = 6 Intere st So PBIT = 6 x Interest PBIT Interest = PBT = Rs. 40 million 6 x Interest Interest = Rs. 40 million 5 x Interest = Rs. 40 million Hence Interest = Rs. 8 million 6. McGill Inc. has profit before tax of Rs. 63 million. If the companys times interest covered ratio is 8, what is the total interest charge? Solution PBT= Rs. 63 million PBIT Times interest covered = = 8 Interest So PBIT = 8 x Interest PBIT Interest = PBT = Rs. 63 million x Interest Interest = 7 x Interest = Rs. 63 million Hence Interest = Rs. 9 million 7. The following entropy applies to a firm Interest chargesRs. 200,000 SalesRs. 6,000,000 Tax rate40 percent Net profit margin5 percent What is the firms times interest covered ratio? Solution Sales = Rs. 6,000,000 Net profit margin = 5 per cent Net profit = Rs. 6,000,000 x 0. 05 = 300,000 Tax rate = 40 per cent 300,000 So, Profit before tax = = Rs. 500,000 (1-. 4) Interest charge = Rs. 200,000 So Profit before interest and taxes = Rs. 700,000 Hence 700,000 Times in terest covered ratio = = 3. 5 200,000 8.The following data applies to a firm Interest chargesRs. 50,000 SalesRs. 300,000 Tax rate 25 percent Net profit margin 3 percent What is the firms times interest covered ratio? Solution Sales = Rs. 300,000 Net profit margin = 3 per cent Net profit = Rs. 300,000 x 0. 03 = 9,000 Tax rate = 25 per cent 9,000 So, Profit before tax = = Rs. 12,000 (1-. 25) Interest charge = Rs. 50,000 So Profit before interest and taxes = Rs. 62,000 Hence 62,000 Times interest covered ratio == 1. 24 50,000 9. The following data applies to a firm Interest chargesRs. 10,000,000 SalesRs. 80,000,000 Tax rate 50 percentNet profit margin 10 percent What is the firms times interest covered ratio? Solution Sales = Rs. 80,000,000 Net profit margin = 10 per cent Net profit = Rs. 80,000,000 x 0. 1 = 8,000,000 Tax rate = 50 per cent 8,000,000 So, Profit before tax = = Rs. 16,000,000 (1-. 5) Interest charge = Rs. 10,000,000 So Profit before interest and taxes = Rs. 26,000,000 H ence 26,000,000 Times interest covered ratio == 2. 6 10,000,000 10. A firms current assets and current liabilities are 25,000 and 18,000 respectively. How practically special funds can it borrow from banks for short term, without reducing the current ratio below 1. 5? Solution CA = 25,000CL = 18,000 permit BB stand for bank borrowing CA+BB = 1. 35 CL+BB 25,000+BB = 1. 35 18,000+BB 1. 35x 18,000 + 1. 35 BB = 25,000 + BB 0. 35BB = 25,000- 24,300 = 700 BB = 700/0. 35 = 2,000 11. LNGs current assets and current liabilities are 200,000 and 140,000 respectively. How much additional funds can it borrow from banks for short term, without reducing the current ratio below 1. 33? Solution CA = 200,000CL = 140,000 permit BB stand for bank borrowing CA+BB = 1. 33 CL+BB 200,000+BB = 1. 33 140,000+BB 1. 33 x 140,000 + 1. 33BB = 200,000 + BB 0. 33 BB = 200,000- 186,200 = 13,800 BB =13,800/0. 33 = 41,818 12.Navneets current assets and current liabilities are 10,000,000 and 7,000,000 respectively . How much additional funds can it borrow from banks for short term, without reducing the current ratio below 1. 4? Solution CA = 10,000,000CL = 7,000,,000 Let BB stand for bank borrowing CA+BB = 1. 4 CL+BB 10,000,000+BB = 1. 4 7,000,000+BB 1. 4 x 7,000,000 + 1. 4BB = 10,000,000 + BB 0. 4 BB = 10,000,000- 9,800,000 = 200,000 BB = 200,000/0. 40 = 500,000 13. A firm has total annual sales (all credit) of 25,000,000 and accounts due of 8,000,000. How speedily (in how many days) essential accounts receivable be collected if management wants to reduce the accounts receivable to 6,000,000? Solution 25,000,000Average daily credit sales = = 68,493 365 If the accounts receivable has to be reduced to 6,000,000 the ACP must be 6,000,000 = 87. 6 days 68,493 14. A firm has total annual sales (all credit) of 1,200,000 and accounts receivable of 500,000. How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to 300,000? Soluti on 1,200,000 Average daily credit sales = = 3287. 67 365 If the accounts receivable has to be reduced to 300,000 the ACP must be 300,000 = 91. 3 days 3287. 67 15. A firm has total annual sales (all credit) of 100,000,000 and accounts receivable of 20,000,000.How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to 15,000,000? Solution 100,000,000 Average daily credit sales = = 273,972. 6 365 If the accounts receivable has to be reduced to 15,000,000 the ACP must be 15,000,000 = 54. 8 days 273,972. 6 16. The financial ratios of a firm are as follows. Current ratio = 1. 25 Acid-test ratio = 1. 10 Current liabilities=2000 Inventory turnover ratio=10 What is the sales of the firm? Solution Current assets = Current liabilities x Current ratio = 2000 x 1. 25 = 2500 Current assets Inventories = Current liabilities x Acid test ratio 2000 x 1. 10 = 2200 Inventories = 300 Sales = Inventories x Inventory turnover ratio = 300 x 10 = 3000 17. The financial ratios of a firm are as follows. Current ratio = 1. 33 Acid-test ratio = 0. 80 Current liabilities=40,000 Inventory turnover ratio=6 What is the sales of the firm? Solution Current assets = Current liabilities x Current ratio = 40,000 x 1. 33 = 53,200 Current assets Inventories = Current liabilities x Acid test ratio = 40,000 x 0. 80 = 32,000 Inventories = 21,200Sales = Inventories x Inventory turnover ratio = 21,200 x 6 = 127,200 18. The financial ratios of a firm are as follows. Current ratio = 1. 6 Acid-test ratio = 1. 2 Current liabilities=2,000,000 Inventory turnover ratio=5 What is the sales of the firm? Solution Current assets = Current liabilities x Current ratio = 2,000,000 x 1. 6 = 3,200,000 Current assets Inventories = Current liabilities x Acid test ratio = 2,000,000 x 1. 2 = 2,400,000 Inventories = 800,000 Sales = Inventories x Inventory turnover ratio = 800,000 x 5 = 4,000,000 19.Complete the balance sheet and sales data (fill in the bl anks) using the following financial data Debt/equity ratio= 0. 80 Acid-test ratio= 1. 1 Total assets turnover ratio= 2 Days sales outstanding in Accounts receivable= 30 days Gross profit margin= 30 percent Inventory turnover ratio = 6 Balance sheet Equity capital 80,000Plant and equipment. . . . Retained earnings 50,000Inventories. . . . Short-term bank borrowings . . . . Accounts receivable. . . . Cash. . . . . . . .. . . . Sales. . . . Cost of goods change .. Solution Debt/equity = 0. 80 Equity = 80,000 + 50,000 = 130,000 So Debt = Short-term bank borrowings = 0. x 130,000 = 104,000 Hence Total assets = 130,000+104,000 = 234,000 Total assets turnover ratio = 2 So Sales = 2 x 234,000 = 468,000 Gross profit margin = 30 per cent So Cost of goods interchange = 0. 7 x 468,000 = 327,600 Days sales outstanding in accounts receivable = 30 days Sales So Accounts receivable = x 30 360 468,000 = x 30 = 39,000 360 Cost of goods sold 327,600 Inventory turnover ratio === 6 Inventory Inventory So Inventory = 54,600 As short bank borrowing is a current liability, Cash + Accounts receivable Acid-test ratio = Current liabilities Cash + 39,000 = = 1. 1 104 ,000 So Cash = 75,400Plant and equipment = Total assets Inventories Accounts receivable Cash = 234,000 54,600 39,000 75,400 = 65,000 Putting together everything we get Balance Sheet Equity capital 80,000Plant & equipment65,000 Retained earnings50,000Inventories54,600 Short-term bank borrowings 104,000Accounts receivable39,000 Cash75,400 234,000 234,000 Sales 468,000 Cost of goods sold327,600 20. Complete the balance sheet and sales data (fill in the blanks) using the following financial data Debt/equity ratio= 0. 40 Acid-test ratio= 0. 9 Total assets turnover ratio= 2. 5 Days sales outstanding in Accounts receivable= 25 daysGross profit margin= 25 percent Inventory turnover ratio = 8 Balance sheet Equity capital 160,000,000Plant and equipmentRetained earnings 30,000,000Inventories Short-term bank borrowings . . . Accounts receivable .. . . . Cash . . . . . . . . . . . . Sales . . Cost of goods sold . Solution Debt/equity = 0. 40 Equity = 160,000,000 + 30,000,000 = 190,000,000 So Debt = Short-term bank borrowings = 0. 4 x 190,000,000 = 76,000,000 Hence Total assets = 190,000,000+ 76,000,000 = 266,000,000 Total assets turnover ratio = 2. 5 So Sales = 2. 5 x 266,000,000 = 665,000,000Gross profit margin = 25 per cent So Cost of goods sold = 0. 75 x 665,000,000 = 498,750,000 Days sales outstanding in accounts receivable = 25 days Sales So Accounts receivable = x 25 360 665,000,000 = x 25 = 46,one hundred eighty,556 360 Cost of goods sold 498,750,000 Inventory turnover ratio == = 8 Inventory Inventory So Inventory = 62,343,750 As short-term bank borrowings is a current liability, Cash + Accounts receivable Acid-test ratio = Current liability Cash + 46,180,556 = = 0. 9 76,000 ,000 So Cash = 22,219,444 Plant and equipment = Total assets Inventories Accounts receivable Cash 266,000,000 62,343,750 46,180,556 22,219,444 = 135,256,250 Putting together everything we get Balance Sheet Equity capital 160,000,000Plant & equipment 135,256,250 Retained earnings 30,000,000Inventories62,343,750 Short-term bank borrowings 76,000,000Accounts receivable46,180,556 Cash22,219,444 266,000,000 266,000,000 Sales 665,000,000 Cost of goods sold 498,750,000 21. Complete the balance sheet and sales data (fill in the blanks) using the following financial data Debt/equity ratio= 1. 5 Acid-test ratio= 0. 3 Total assets turnover ratio= 1. 9 Days sales outstanding inAccounts receivable= 25 days Gross profit margin= 28 percent Inventory turnover ratio = 7 Balance sheet Equity capital 600,000Plant and equipment. . . . Retained earnings 100,000Inventories. . . . Short-term bank borrowings . . . Accounts receivable. . . . Cash. . . . . . . .. . . . Sales. . . .. Cost of goods sold Solution Debt/equity = 1. 5 Equity = 600,000 + 100,000 = 700,000 So Debt = Short-term bank borrowings =1. 5 x 700,000 = 1050 ,000 Hence Total assets = 700,000+1050,000 = 1,750,000 Total assets turnover ratio = 1. 9 So Sales = 1. 9 x 1,750,000 = 3,325,000 Gross profit margin = 28 per cent So Cost of goods sold = 0. 2 x 3,325,000 = 2,394,000 Days sales outstanding in accounts receivable = 25 days Sales So Accounts receivable = x 25 360 3,325,000 = x 25 = 230,903 360 Cost of goods sold 2,394,000 Inventory turnover ratio === 7 Inventory Inventory So Inventory = 342,000 As short-term bank borrowings is a current liability , Cash + Accounts receivable Acid-test ratio = Current liabilities Cash + 230,903 = = 0. 3 1050 ,000 So Cash = 84,097 Plant and equipment = Total assets Inventories Accounts receivable Cash = 1,750,000 342,000 230,903 84,097 = 1,093,000 Putting together everything we get Balance SheetEquity capital 600,000Plant &equipment 1,093,000 Retained earnings100,000Inventories 342,000 Short-term bank borrowings 1050,000Accounts receivable 230,903 Cash 84,097 1,750,000 1,750,000 Sales 3,325,000 Co st of goods sold2,394,000 22. Compute the financial ratios for lift Ltd. Evaluate Acmes performance with reference to the standards. Acme Limited Balance Sheet, March 31, 20X7 Liabilities and Equity Equity capital Rs. 60,000,000 Reserves and surplus45,000,000 Long-term debt72,000,000 Short-term bank borrowing40,000,000 Trade creditors30,000,000 Provisions15,000,000 Total 62,000,000 AssetsFixed assets (net) Rs. 110,000,000 Current assets Cash and bank 30,000,000 Receivables45,000,000 Inventories 61,000,000 Pre-paid expenses 10,000,000 Others 6,000,000 Total 262,000,000 Acme Limited Profit and Loss Account for the Year Ended March 31, 20X7 Net sales Rs. 320,000,000 Cost of goods sold 204,000,000 Gross profit 116,000,000 Operating expenses 50,000,000 Operating profit 66,000,000 Non-operating surplus 4,000,000 Profit before interest and tax 70,000,000 Interest 12,000,000 Profit before tax 58,000,000 Tax 20,000,000 Profit after tax 38,000,000Dividends 4,000,000 Retained earnings 34,000 ,000 AcmeStandard Current ratio 1. 3 Acid-test ratio 0. 70 Debt-equity ratio 2. 0 Times interest covered ratio 4. 5 Inventory turnover ratio 5. 0 Average collection period 45 days Total assets turnover ratio 1. 5 Net profit margin ratio 8 % Earning power 20 % Return on equity 18 % Solution For purposes of ratio analysis, we may recast the balance sheet as under. Let assume that Others in the balance sheet represents other current assets. Liabilities and Equity Equity capital . 60,000,000 Reserves and surplus45,000,000 Long-term debt72,000,000 Short-term bank borrowing40,000,000Total 217,000,000 Fixed assets (net) 110,000,000 Current assets Cash and bank30,000,000 Receivables45,000,000 Inventories61,000,000 Pre-paid expenses10,000,000 Others 6,000,000 152,000,000 Less Current liabilities Trade creditors30,000,000 Provisions15,000,000 45,000,000 Net current assets 107,000,000 Total 217,000,000 Current assets (i) Current ratio = Current liabilities 152,000,000 == 1. 8 85,000,000 (Curre nt liabilities here includes short-term bank borrowing also) Current assets Inventories 91,000,000 (ii) Acid-test ratio = == 1. 1 Current liabilities 85,000,000 Current liabilities here includes short-term bank borrowing also) Long-term debt + Short-term bank borrowing (iii) Debt-equity ratio = Equity capital + Reserves & surplus 72,000,000 + 40,000,000 = = 1. 1 60,000,000 + 45,000,000 Profit before interest and tax (iv) Times interest coverage ratio = Interest 70,000,000 == 5. 83 12,000,000 Cost of goods sold204,000,000 (v) Inventory turnover period = = = 3. 34 Inventory61,000,000 365 (vi) Average collection period = Net sales / Accounts receivable 365 = =51. 3 days 320,000,000/45,000,000 (vii) Total assets =Equity + Total debt =( 60,000,000 + 45,000,000 ) +(72,000,000+40,000,000) = 217,000,000 Net sales320,000,000Total assets turnover ratio = == 1. 5 Total assets217,000,000 Profit after tax 38,000,000 (ix) Net profit margin= = = 11. 9% Net sales 320,000,000 PBIT 70,000,000 (x) Ea rning power = = = 32. 3 % Total assets 217,000,000 Equity earning 38,000,000 (xi) Return on equity = = = 36. 2 % Net worth 105,000,000 The comparison of the Acmes ratios with the standard is given below AcmeStandard Current ratio 1. 8 1. 3 Acid-test ratio 1. 1 0. 7 Debt-equity ratio 1. 1 2. 0 Times interest covered ratio 5. 8 4. 5 Inventory turnover ratio 3. 3 5. 0Average collection period 51. 3 days 45 days Total assets turnover ratio 1. 5 1. 5 Net profit margin ratio 11. 9 % 8 % Earning power 32. 3 % 20 % Return on equity 36. 2 % 18 % 23. Compute the financial ratios for Nainar Ltd. Evaluate Nainars performance with reference to the standards. Nainar Limited Balance Sheet, March 31, 20X7 Liabilities and Equity Equity capital Rs. 100,000,000 Reserves and surplus 65,000,000 Long-term debt 140,000,000 Short-term bank borrowing 70,000,000 Trade creditors 24,000,000 Provisions 19,000,000 Total 418,000,000 Assets Fixed assets (net) Rs. 206,000,000Current assets Cash and bank 25,000,000 Receivables 70,000,000 Inventories 85,000,000 Pre-paid expenses 20,000,000 Others 12,000,000 Total 418,000,000 Nainar Limited Profit and Loss Account for the Year Ended March 31, 20X7 Net sales Rs. 740,000,000 Cost of goods sold 520,000,000 Gross profit 220,000,000 Operating expenses 102,000,000 Operating profit 118,000,000 Non-operating surplus 12,000,000 Profit before interest and tax 130,000,000 Interest 22,000,000 Profit before tax 108,000,000 Tax 46,000,000 Profit after tax 62,000,000 Dividends 20,000,000Retained earnings 42,000,000 NainarStandard Current ratio 1. 7 Acid-test ratio 1. 0 Debt-equity ratio 1. 4 Times interest covered ratio 5. 5 Inventory turnover ratio 6. 0 Average collection period 40 days Total assets turnover ratio 2. 0 Net profit margin ratio 8 % Earning power 30 % Return on equity 35 % Solution For purposes of ratio analysis, we may recast the balance sheet as under. Let assume that Others in the balance sheet represents other current assets. Liabilities and Equity Equity capital 100,000,000Reserves and surplus 65,000,000 Long-term debt 140,000,000 Short-term bank borrowing 70,000,000 Total 375,000,000 Assets Fixed assets (net) 206,000,000 Current assets Cash and bank 25,000,000 Receivables 70,000,000 Inventories 85,000,000 Pre-paid expenses 20,000,000 Others 12,000,000 212,000,000 Less Current liabilities Trade creditors24,000,000 Provisions19,000,000 43,000,000 Net current assets 169,000,000 Total 375,000,000 Current assets (i) Current ratio = Current liabilities 212,000,000 == 1. 9 113,000,000 ( Current liabilities here includes short-term bank borrowing also)Current assets Inventories 127,000,000 (ii) Acid-test ratio = == 1. 1 Current liabilities 113,000,000 ( Current liabilities here includes short-term bank borrowing also) Long-term debt + Short-term bank borrowing (iii) Debt-equity ratio = Equity capital + Reserves & surplus 140,000,000 + 70,000,000 = = 1. 3 100,000,000 + 65,000,000 Profit before interest and tax (iv) Times int erest coverage ratio = Interest 130,000,000 == 5. 9 22,000,000 Cost of goods sold520,000,000 (v) Inventory turnover period = = = 6. 1 Inventory85,000,000 365 (vi) Average collection period = Net sales / Accounts receivable 365 = =34. 5 days 740,000,000/70,000,000 (vii)Total assets = Equity + Total debt =(100,000,000 + 65,000,000 ) +(140,000,000+70,000,000) = 375,000,000 Net sales740,000,000 Total assets turnover ratio = == 2. 0 Total assets375,000,000 Profit after tax 62,000,000 (ix) Net profit margin= = = 8. 4 % Net sales 740,000,000 PBIT 130,000,000 (x) Earning power = = = 34. 7 % Total assets 375,000,000 Equity earning 62,000,000 (xi) Return on equity = = = 37. 6 % Net worth 165,000,000 The comparison of the Nainars ratios with the standard is given below NainarStandard Current ratio 1. 9 1. 7 Acid-test ratio 1. 1 1. 0 Debt-equity ratio 1. 3 1. 4 Times interest covered ratio 5. 9 5. 5Inventory turnover ratio 6. 1 6. 0 Average collection period 34. 5 days 40 days Total assets tur nover ratio 2. 0 2. 0 Net profit margin ratio 8. 4 % 8 % Earning power 34. 7 % 30 % Return on equity 37. 6 % 35 % 24. The comparative balance sheets and comparative Profit and Loss accounts for Nalvar Limited, are given below Comparative Balance Sheets, Nalvar Limited (Rs. in million) 20X3 20X4 20X5 20X6 20X7 Share capital 1. 6 1. 6 1. 1. 8 2 Reserves and surplus 1. 0 1. 6 2. 4 2. 3 3 Long-term debt 1. 4 1. 5 1. 8 1. 6 1. 4 Short-term bank borrowing 1. 3 1. 5 1. 7 1. 5 1. 2 Current liabilities 1. 1 1. 3 1. 5 1. 6 1. 8 Total 6. 4 7. 5 9. 2 8. 9. 4 Assets Net fixed assets 1. 2 1. 4 2 1. 7 2 Current assets Cash and bank 0. 3 0. 3 0. 2 0. 4 0. 3 Receivables 1. 8 2. 1 2. 5 2. 4 2. Inventories 1. 8 2. 2 2. 8 2. 4 2. 8 1. 3 1. 5 1. 7 1. 9 1. 8 Other assets Total 6. 4 7. 5 9. 2 8. 8 9. 4 Comparative Profit and Loss Accounts, Nalvar Limited (Rs. in million) 20X4 20X5 20X6 20X7 20X3 Net sales 3. 8 4. 2 5. 3 6. 5 7. 8 Cost of goods so ld 2. 6 3. 3. 9 4 4. 8 Gross profit 1. 2 1. 1 1. 4 2. 5 3 Operating expenses 0. 3 0. 3 0. 4 0. 6 0. 6 Operating profit 0. 9 0. 8 1 1. 9 2. 4 Non-operating surplus deficit 0. 1 0. 2 0. 1 0. 3 0. 3 Profit before interest and tax 1 1 1. 2. 2 2. 7 Interest 0. 1 0. 1 0. 2 0. 1 0. 1 Profit before tax 0. 9 0. 9 0. 9 2. 1 2. 6 Tax 0. 05 0. 08 1 1. 2 1. 2 Profit after tax 0. 85 0. 82 -0. 1 0. 9 1. 4 Required Compute the important ratios for Nalvar Limited for the years 20X3-20X7.You may assume that other assets in the balance sheet represent other current assets. Current ratio Debt-equity ratio Total assets turnover ratio Net profit margin Earning power Return on equity Solution We will rearrange the balance sheets as under for ratio analysis. It is assumed that Other assets are other current assets Liabilities and Equity Current ratio 2. 2 2. 2 2. 3 2. 3 2. 5 Debt-equity ratio 1. 0 0. 9 0. 8 0. 8 0. Total assets turnover ratio 0. 7 0. 7 0. 7 0. 9 1. 0 Net profit ma rgin(%) 22. 4 19. 5 -1. 9 13. 8 17. 9 Earning power (%) 18. 9 16. 1 14. 3 30. 6 35. 5 Return on equity (%) 32. 7 25. 6 -2. 4 22. 0 28. 0 26. The comparative balance sheets and comparative Profit and Loss accounts for Somani Limited, a machine tool manufacturer, are given below Comparative Balance Sheets, Somani Limited (Rs. in million) 20X5 20X6 20X7 20X4 20X3 Share capital 41 50 50 50 55 Reserves and surplus 16 36 72 118 150 Long-term debt 28 25 30 29 22 Short-term bank borrowing 35 30 36 38 38 Current liabilities 24 28 30 30 25 Total 144 169 218 265 290 Assets Net fixed assets 72 80 75 102 103 Current assets Cash and bank 8 9 15 12 11 Receivables 24 30 59 62 85 Inventories 35 42 55 75 79 Other Assets 5 8 14 14 12 Total 144 169 218 265 290 Comparative Profit & Loss Account of Somani Ltd (Rs. n million) 20X4 20X5 20X6 20X7 20X3 Net sales 285 320 360 350 355 Cost of goods sold 164 150 170 175 174 Gross profit 121 170 190 175 181 Operating expenses 64 66 68 68 64 Operating profit 57 104 122 107 117 Non-operating surplus deficit 3 4 4 3 3 Profit before interest and tax 60 108 126 110 120 Interest 8 6 10 12 12 Profit before tax 52 102 116 98 108 Tax 15 26 30 26 29 Profit after tax 37 76 86 72 79 Compute the following ratios for years 20X3-20X7 Current ratio Debt-equity ratio Total assets turnover ratio Net profit margin Earning power Return on equity For ratio analysis purpose, we will rearrange the balance sheet as under. It is assumed that Other assets are other current assets 20X3 20X4 20X5 20X6 20X7 Share capital 41 50 Current ratio 1. 2 1. 5 2. 2 2. 4 3. 0 Debt-equity ratio 1. 1 0. 6 0. 5 0. 4 0. Total assets turnover ratio 2. 4 2. 3 1. 9 1. 5 1. 3 Net profit margin (%) 13. 0 23. 8 23. 9 20. 6 22. 3 Earning power (%) 50. 0 76. 6 67. 0 46. 8 45. 3 Return on equity (%) 64. 9 88. 4 70. 5 42. 9 38. 5 26. The Balance sheets and Profit and Loss accounts of LKG Corp oration are given below. Prepare the commonalty size and common base financial statements Balance Sheets (Rs. n million) 206 207 Shareholders funds 256 262 Loan funds 156 212 Total 412 474 Fixed assets 322 330 Investments 15 15 Net current assets 75 129 Total 412 474 Profit & Loss Accounts (Rs. n million) 206 207 Net sales 623 701 Cost of goods sold 475 552 Gross profit 148 149 PBIT 105 89 Interest 22 21 PBT 83 68 Tax 41 34 PAT 42 34 Solution cat valium Size statements Profit and Loss Account Regular ( in Rs. Common Size(%) million) 206 207 206 207 Net sales 623 701 100 100 Cost of goods sold 475 552 76 79 Gross profit 148 149 24 21 PBIT 105 89 17 13 Interest 22 21 4 3 PBT 83 68 13 10 Tax 41 34 7 5 PAT 42 34 7 5 Balance Sheet Regular ( in million) Common Size(%) 206 207 206 207 Shareholders funds 256 262 62 55 Loan funds 156 212 38 45 Total 412 474 100 100 Fixed assets 322 330 78 70 Investments 15 15 4 3 Net c urrent assets 75 129 18 27 Total 412 474 100 100 27. The Balance sheets and Profit and Loss accounts of Grand Limited are given below. Prepare the common size and common base financial statements Balance Sheet 206 207 Shareholders fund 85 85 Loan funds 125 180 Total 210 265 Fixed assets 127 170 Investments 8 10 Net current assets 75 85 Total 210 265 Profit & Loss Account 206 207 Net sales 450 560 Cost of goods sold 320 410 Gross profit 130 150 PBIT 85 98 Interest 12 17 PBT 73 81 Tax 22 38 PAT 51 43 Solution Balance Sheet Regular (Rs. n million) Common Size(%) 206 207 206 207 Shareholders funds 85 85 40 32 Loan funds 125 180 60 68 Total 210 265 100 100 Fixed assets 127 170 60 64 Investments 8 10 4 4 Net current assets 75 85 36 32 Total 210 265 100 100 Profit & Loss Account Regular (Rs. n million) Common Size(%) 206 207 206 207 Net sales 450 560 100 100 Cost of goods sold 320 410 71 73 Gross profit 130 150 29 27 PBIT 85 98 19 18 Interest 12 17 3 3 PBT 73 81 16 14 Tax 22 38 5 7 PAT 51 43 11 8 Common base year statements Balance Sheet Regular (Rs. n million) Common base year (%) 206 207 206 207 Shareholders funds 85 85 100 100 Loan funds 125 180 100 144 Total 210 265 100 126 Fixed assets 127 170 100 134 Investments 8 10 100 125 Net current assets 75 85 100 113 Total 210 265 100 126 Profit & Loss Account Regular (Rs. n million) Common base year (%) 206 207 206 207 Net sales 450 560 100 124 Cost of goods sold 320 410 100 128 Gross profit 130 150 100 115 PBIT 85 98 100 115 Interest 12 17 100 142 PBT 73 81 100 111 Tax 22 38 100 173 PAT 51 43 100 84 CHAPTER 5 1. The profit and loss account of Sasi Industires Limited for years 1 and 2 is given below Using the percent of sales method, prepare the pro forma profit and loss account for year 3. Assume that the sales will be 3500 in year 3. If dividends are raised to 40, what numerate of retained earnings can be expected for year 3? Year 1 2 Net sa les 2300 2700 Cost of goods sold 1760 2000 Gross profit 540 700 Selling expenses 150 180 General and administration expenses 120 124 Depreciation 94 84 Operating profit 176 312 Non-operating surplus deficit 12 10 lettuce before interest and tax 188 322 Interest 30 38 Earnings before tax 158 284 Tax 56 96 Earnings after tax 102 188 Dividends 35 35 Retained earnings 67 153 Solution Year 1 2 Average percent Proforma Profit & Loss of sales account for year 3 assuming sales of 3500 Net sales 2300 2700 100 3500 Cost of goods sold 1760 2000 75. 30 2635. 43 Gross profit 540 700 24. 70 864. 57 Selling expenses 150 180 6. 59 230. 80 General and administration expenses 120 124 4. 90 171. 7 Depreciation 94 84 3. 60 125. 97 Operating profit 176 312 9. 60 336. 14 Non-operating surplus deficit 12 10 0. 45 15. 61 Earnings before interest and tax 188 322 10. 05 351. 75 Interest 30 38 1. 36 47. 46 Earnings before tax 158 284 8. 69 304. 29 Tax 56 96 3. 00 104. 3 Earnings after tax 102 188 5. 70 199. 46 Dividends(given) 35 35 40 Retained earnings 67 153 159. 46 2. The profit and loss account of KG Electronics Limited for years 1 and 2 is given below Using the percent of sales method, prepare the pro forma profit and loss account for year 3. Assume that the sales will be 26,000 in year 3. If dividends are raised to 500, what amount of retained earnings can be expected for year3 . Year 1 2 Net sales 18,230 22,460 Cost of goods sold 13,210 16100 Gross profit 5020 6360 Selling expenses 820 890 General and administration expenses