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Ratio GKB's Ratio Industry Averages

The document provides instructions for answering multiple questions about accounting concepts and ratios. It asks the student to compare various financial ratios of a company to industry averages, analyze a cash flow statement, demonstrate inventory valuation methods, and explain accounting concepts. The student is directed to keep answers short, focus on logic and arguments, and choose between two options for question 2.

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Nidhi Ann Francis
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22 views3 pages

Ratio GKB's Ratio Industry Averages

The document provides instructions for answering multiple questions about accounting concepts and ratios. It asks the student to compare various financial ratios of a company to industry averages, analyze a cash flow statement, demonstrate inventory valuation methods, and explain accounting concepts. The student is directed to keep answers short, focus on logic and arguments, and choose between two options for question 2.

Uploaded by

Nidhi Ann Francis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Attempt all questions. Each answer should be written in your own language.

Avoid bookish
language. Building logical and scientific arguments would be rewarded more marks. Answer
must be short and to the point. There is an internal choice in question no.2 only.

1.A company, GKB in ophthalmic industry has the following ratios calculated for the year 2019.
Industry averages are also given. Compare GKB’s each and every ratio with industry average
and comment on possible reasons for the variation and possible improvements in the same.
(12 marks)

Ratio GKB’s Ratio Industry Averages


Current Ratio 1.98 1.60
Quick Ratio 0.85 0.95
Cash Conversion Cycle 90 days 70 days
Total-debt-to-total assets 51% 45%
Interest Coverage 2.55 3.20
Operating Profit Margin 12.4% 15.6%
Net Profit Margin 8.7% 11.2%
Sale-to-total assets 1.75 1.82
Return on assets 5.63% 7.1%
Return on equity 13.5% 16%
Inventory Turnover Ratio 5 times 6 times
Fixed Assets Turnover Ratio 2 times 2.5 times

2. Analyze the following cash flow statement and comment on the liquidity position and
financial planning of the company. (14
marks)
Particulars Details Amount
(A)Cash Flow from Operating Activities
Change in P & L account balance 88000
(a) Adjustment for non-cash/non-operating items debited
to P & L account
 Depreciation on fixed asset for the period 30000
 Goodwill written off 25000
 Interim dividend paid 5000
 Final dividend paid 15000
 Preference Dividend paid 12000
35000
 Tax Provision for the year
30000
 Transfer to General Reserve

(b) Adjustment for non-cash/non-operating items credited


nil 152000
to P & L account

Cash Flow from Operating activities before adjustment for 240000


working capital items (cash operating profit)

(c) Adjustment for working capital items (other than cash


and cash equivalents)
 Decrease in Debtors 40000
 Increase in Stock (32000)
 Increase in Bills Receivables (10000)
 Increase in Creditors 136000
 Increase in Outstanding Expenses 10000 144000
Cash flow from operating activities before tax 384000
Less: Income tax paid 34000

Net Cash Flow from Operating Activities 350000


(B) Cash Flow from Investing Activities
 Purchase of Plant (410000)
 Sale of Land and Building 10000
Net Cash Flow from Investing Activities (400000)
(C)Cash Flow from Financing Activities
 Issue of Equity Shares 100000
 Dividend on equity paid (interim+final) (20000)
 Preference dividend paid (12000)
Net Cash Flow from Financing Activities 68000
Total flow (change) of cash from all the activities during 18000
the year
Add: Opening Balance of Cash and Cash Equivalent
 Cash Balance 15000
 Bank Balance 10000
 Bank Overdraft (20000)
Closing Balance of Cash and Cash Equivalent 5000
(20000 + 8000 – 5000) 23000

OR

Which of the accounting concepts/conventions are applicable in the following situations and
Why?
(14 marks)

a) The accountant decided to make provision for doubtful debts as he could foresee that a
part of debtors would not pay back money to the business.
b) The accountant told to somebody, ‘A business is not started with the intention of closing
it down in near future.’
c) The accountant applied this concept to find out profit or loss of the business.
d) The owner of the business took Rs.5,000 from the business. The accountant decided to
write the same in the books of accounts.
e) The accountant decided to show a plant and machinery purchased at Rs.5,00,000 (market
price Rs.5,50,000) at Rs. 5,00,000 only.
f) A business uses weighted average method for inventory valuation from the last 3 years;
the accountant doesn’t want to change the method of inventory valuation.
g) Ranveer recently opened a demand account with ICICI Direct. He purchased 10 shares of
a XYZ Co. The XYZ Co. sends him ‘Annual Report’ of the company.

3. To show your understanding of (a) FIFO (b) LIFO (c) Simple Average of Prices Method and
(d) Weighted Average of Prices Method of valuation of inventory under continuous inventory
valuation system, think hypothetical five transactions of purchase of inventory and five
transactions of issue of inventory and prepare stock register under each of the four inventory
valuation methods. (12
marks)

4. Think about the following questions and explain in your own language: (12 marks)
a) Is Depreciation a non-cash expense? Why is it shown every year as an expense?
b) What is materiality under the accounting convention of materiality?
c) Why adjustments affect two sides/two accounts when adjusted in Final a/cs?
d) Why Trial Balance is not the conclusive and overall proof of accuracy of books of
accounts?
e) Why is accounting equation always balanced?
f) Why is it statutory to get the books of accounts of a listed public company audited every
year?

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