Problem ‐ 1

The following Profit or Loss Account of Fantasy Ltd. for the year 31‐3‐2000 is given in T-Format below:
Particular ₦ Particular ₦
Opening Stock 76,250 By Sales 500,000
Purchases 315,250 “ Closing stock 98,500
Carriage and Freight 2,000
Wages 5,000
Gross Profit b/d 200,000
598,500 598,500

Administration expenses 101,000 Gross Profit b/d 200,000

Selling and Dist. expenses 12,000 Non‐operating incomes:
Non‐operating expenses 2,000 Interest on Securities 1,500
Financial Expenses 7,000 Dividend on shares 3,750
Net Profit c/d 84,000 Profit on sale of shares 750
206,000 206,000
Calculate:
1. Gross Profit Ratio 2. Expenses Ratio 3. Operating Ratio
1. Net Profit Ratio 5. Operating (Net) Profit Ratio 6. Stock Turnover Ratio.

Solution – 1 (Problem related to Revenue Ratio)

Gross profit
1. Gross Profit Margin = X 100
Sales

2,00,000
X 100
5,00,000

= 40%

Op. Expenses
2. Expenses Ratio = X 100
Net Sales

113,000
X 100
500,000

= 22.60%

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 Cost of goods sold + Op. Expenses
3. Operating Ratio = X 100
Net Sales

300,000 + 113,000
X 100
5,00,000

= 82.60%

Cost of Goods sold = Op. stock + purchases + carriage and Freight + wages – Closing Stock

= 76250 + 315250 + 2000 + 5000 ‐ 98500

= ₦300,000
Net Profit
4. Net Profit Ratio = X 100
Net Sales

84,000
X 100
5,00,000

= 16.8%

Op. Profit
5. Operating Profit Ratio = X 100
Net Sales

Operating Profit = Sales – (Op. Exp. + Admin Exp.)

87,000
X 100
500,000

= 17.40%

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 6. Stock Turnover Ratio = Cost of goods sold
Avg. Stock
300,000
87,375

= 3.43 times

Problem ‐ 2
The Balance Sheet of Punjab Auto Limited as on 31‐12‐2002 was as follows:
Particular ₦ Particular ₦
Equity Share Capital 40,000 Plant and Machinery 24,000
Capital Reserve 8,000 Land and Buildings 40,000
8% Loan on Mortgage 32,000 Furniture & Fixtures 16,000
Creditors 16,000 Stock 12,000
Bank overdraft 4,000 Debtors 12,000
Taxation: Investments (Short‐term) 4,000
Current 4,000 Cash in hand 12,000
Future 4,000
Profit and Loss A/c 12,000
1,20,000 1,20,000
From the above, compute (a) the Current Ratio, (b) Quick Ratio, (c) Debt‐Equity Ratio, and (d)
Proprietary Ratio.

Solution – 2 (Problem related to Balance Sheet Ratio)

Current Assets
1. Current Ratio =
Current liabilities
Current Assets = Stock + debtors + Investments (short term) +
Cash In hand

Current Liabilities = Creditors + bank overdraft + Provision for

Taxation (current & Future)
CA = 12000 + 12000 + 4000 + 12000

= 40,000

CL = 16000 + 4000 + 4000 + 4000

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 = 28,000
= 40,000
28,000

= 1.43 : 1

Quick Assets
2. Quick Ratio =
Quick Liabilities

Quick Assets = Current Assets ‐ Stock

Quick Liabilities = Current Liabilities – (BOD + PFT future)

QA = 40,000 – 12,000

= 28,000

QL = 28,000 – (4,000 + 4,000)

= 20,000

= 28,000
20,000

= 1.40 : 1

3. Debt – Equity Ratio = Long Term Debt (Liabilities)

Shareholders Fund
LTL = Debentures + long term loans

SHF = Eq. Sh. Cap. + Reserves & Surplus + Preference Sh.

Cap. – Fictitious Assets

LTL = 32,000

SHF = 40,000 + 8,000 + 12,000

= 60,000

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 = 32,000
60,000

= 0.53 : 1

Shareholders’ Funds
4. Proprietary Ratio =
Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus + Preference Sh.

Cap. – Fictitious Assets

Total Assets = Total Assets – Fictitious Assets

SHF = 40,000 + 8,000 + 12,000

= 60,000

TA = 1,20,000

= 60,000
1,20,000

= 0.5 : 1

Problem ‐ 3

The details of Shreenath Company are as under:

Sales (40% cash sales) 1,500,000
Less: Cost of sales 750,000
Gross Profit: 750,000
Less: Office Exp. (including int. on debentures) 125,000
Selling Exp. 125,000 250,000
Profit before Taxes: 500,000
Less: Taxes 250,000
Net Profit: 250,000

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 Balance Sheet
Particular ₦ Particular ₦
Equity share capital 2,000,000 Fixed Assets 5,500,000
10% Preference share capital 2,000,000 Stock 175,000
Reserves 1,100,000 Debtors 350,000
10% Debentures 1,000,000 Bills receivable 50,000
Creditors Bank‐ 100,000 Cash 225,000
overdraft Bills 150,000 Fictitious Assets 100,000
payable 45,000
Outstanding expenses 5,000
6,400,000 6,400,000
Beside the details mentioned above, the opening stock was of ₦325,000. Taking 360 days of the year,
calculate the following ratios; also discuss the position of the company:
(1) Gross profit ratio.
(2) Stock turnover ratio.
(3) Operating ratio.
(4) Current ratio.
(5) Liquidratio.
(6) Debtors ratio.
(7) Creditors ratio.
(8) Proprietary ratio.
(9) Rate of return on net capital employed.
10) Rate of return on equity shares.

Solution – 3 (Problem related to Composite Ratio)

Gross profit
1. Gross Profit Margin = X 100
Sales

750,000
X 100
1,500,000

= 50%

Cost of goods sold

2. Stock Turnover Ratio =
Avg. Stock
Avg. stock = Opening Stock + Closing Stock

2
COGS = Sales – GP

325,000 + 175,000
2

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 AS = 250,000

COGS = 1,500,000 – 750,000

750,000

= 750,000
250,000
= 3 times
Op. Profit
3. Operating Profit Ratio = X 100
Net Sales

Operating Profit = Sales – (Op. Exp. + COGS.)

OP = 1,500,000 – (750,000 + 125,000 +

25,000)

= 600,000

(excluding Interest on Debentures)

= 600,000
X 100
1,500,000

= 40%

Current Assets
4. Current Ratio =
Current liabilities
Current Assets = Stock + debtors + Bills receivable + Cash

Current Liabilities = Creditors + bank overdraft + Bills payable +

Outstanding expenses
CA = 175,000 + 350,000 + 50,000 + 225,000

= 800,000

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 CL = 100,000 + 150,000 + 45,000 + 5,000

= 300,000
= 800,000
300,000

= 2.67 : 1

Liquid Assets
5. Quick Ratio / Liquid Ratio =
Liquid Liabilities

(Liquid) Quick Assets = Current Assets ‐ Stock

(Liquid) Quick Liabilities = Current Liabilities – BOD

QA = 800,000 – 1,75,000

= 625,000

QL = 300,000 – 150,000

= 150,000

= 625,000
150,000

= 4.17 : 1

6. Debtors Ratio = Debtors + Bills receivable X 365 / 360 days

Credit sales
= 350,000 + 50,000
900,000 X 360 days
(60% of 15,00,000)
= 0.444 X 360 days

= 160 days

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 7. Creditors Ratio = Creditors + Bills payable X 365 / 360 days
Credit Purchase
= 100,000 + 45,000
750,000
Notes: If credit purchase could not find out X 360 days
at that point Cost of Goods sold consider
Credit purchase
= 0.193 X 360 days

= 69 days

Shareholders’ Funds
8. Proprietary Ratio =
Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus + Preference Sh.

Cap. – Fictitious Assets

Total Assets = Total Assets – Fictitious Assets

SHF = 2,000,000 + 2,000,000 + 1,100,000 – 100,000

= 5,000,000

TA = 6,400,000 – 100,000

= 6,300,000

= 5,000,000
6,300,000

= 0.79 : 1
Note:
Rate of Return on Capital Rate of Return on Share Rate of return on Equity
Employed holders Fund Shareholders Fund

= EBIT X 100 = PAT X 100 = PAT – Pref. Div. X 100

Capital employed SHF ESHF
CE = Eq Sh. Cap. + Pref. Sh. SHF = Eq. Sh. Cap. + Pref. Sh. ESHF = Eq. Sh. Cap. +

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Cap. + Reserves & Surplus + Cap. + Reserves & Surplus – Reserves & Surplus –
Debenture + Long Term Loan Fictitious Assets Fictitious Assets
– Fictitious Assets
1,500,000
Sales
Less: Cost of goods sold 750,000

Gross profit 750,000

Less: Operating expenses (including Depreciation) 150,000

Earnings before Interest & Tax (EBIT) 600,000

Less: Interest Cost 100,000

Earnings before Tax (EBT) 500,000

Less: Tax liability 250,000

Earnings after Tax (EAT/ PAT) 250,000

Less: Preference share dividend 200,000

Distributional Profit 50,000

9. 10. 11.

Rate of Return on Capital Rate of Return on Share Rate of return on Equity

Employed holders Fund Shareholders Fund

= EBIT X 100 = PAT X 100 = PAT – Pref. Div. X 100

Capital employed SHF ESHF
CE = Eq Sh. Cap. + Pref. Sh. SHF = Eq. Sh. Cap. + Pref. Sh. ESHF = Eq. Sh. Cap. +
Cap. + Reserves & Surplus + Cap. + Reserves & Surplus – Reserves & Surplus –
Debenture + Long Term Loan Fictitious Assets Fictitious Assets
– Fictitious Assets
CE = 2,000,000 + 2,000,000 SHF = 2,000,000 + 2,000,000 ESHF = 2,000,000 +
1,100,000+1,000,000–100,000 1,100,000 – 100,000 1,100,000 – 100,000

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 = 6,000,000 = 5,000,000 = 3,000,000

= 600,000 X 100 = 250,000 X 100 = 50,000 X 100

6,000,000 5,000,000 3,000,000
= 10% = 5% = 1.67 %

Problem = 4
From the following particulars extracted from the books of Ashok & Co. Ltd., compute the following
ratios and comment:
(a) Current ratio, (b) Acid Test Ratio, (c) Stock‐Turnover Ratio, (d) Debtors Turnover Ratio, (e)
Creditors' Turnover Ratio, and Average Debt Collection period.
1‐1‐2002 31‐12‐2002
₦ ₦
Bills Receivable 30,000 60,000
Bills Payable 60,000 30,000
Sundry Debtors 120,000 150,000
Sundry Creditors 75,000 105,000
Stock‐in‐trade 96,000 144,000
Additional information:
(a) On 31‐12‐2002, there were assets: Building ₦200,000, Cash ₦120,000 and Cash at Bank
₦96,000.
(b) Cash purchases ₦138,000 and Purchases Returns were ₦18,000.
(c) Cash sales ₦150,000 and Sales returns were ₦6,000.
Rate of gross profit 25% on sales and actual gross profit was ₦150,000.

Solution – 4 (Problem related to find out missing item)

Notes: In this problem available information is not enough to solve ratios asked sothat
need to prepare Trading Account to identify values which are not given in the question.

Trading Account

Particular Amount Particular Amount

₦ ₦
Opening Stock 96,000 By Sales: Cash 150,000

Purchase: Cash 138,000 Credit 456,000

Credit 378,000 606,000

516,000 Less: S/R 6,000 600,000

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Less: P/R 18,000 498,000 Closing Stock 144,000

To Gross Profit 150,000

744,000 744,000

Gross profit
1. Gross Profit Margin = X 100
Sales

25% = 150,000 X 100

Sales

Sales = 150,000 X 100

25

Sales = 600,000

Current Assets
2. Current Ratio =
Current liabilities
Current Assets = Stock + debtors + Bills receivable + Cash +
Bank Balance

Current Liabilities = Creditors + Bills payable

CA = 144,000 + 150,000 + 60,000 + 120,000 + 96,000

= 570,000
CL = 105,000 + 30,000
= 135,000
= 570,000
135,000

= 4.22 : 1

Cash & Cash Equivalent Assets

3. Acid Test Ratio =
Liquid Liabilities

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 Cash & Cash equivalent Assets = Cash + Bank + Short
term Investments
(Liquid) Quick Liabilities = Current Liabilities – BOD

= 120,000 + 96,000
= 216,000
QL = 105,000 + 30,000
= 135,000
= 216,000
135,000

= 1.6 : 1

Cost of goods sold

4. Stock Turnover Ratio =
Avg. Stock
Avg. stock = Opening Stock + Closing Stock
2
COGS = Sales – GP

96,000 + 144,000
2

AS = 120,000

COGS = 600,000 – 150,000

450,000
= 450,000
120,000
= 3.75 times

5. Debtors Ratio =
Debtors + Bills receivable X 365 / 360 days
(Avg. debt collection period) Credit sales

= 150,000 + 60,000 X 365 days

456,000

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 = 0.461 X 365 days

= 168 days

6. Creditors Ratio = Creditors + Bills payable X 365 / 360 days

Credit Purchase
= 105,000 + 30,000 X 365 days
378,000
= 0.357 X 365 days

= 130 days

Problem ‐
From the following information, prepare the Balance Sheet of ABB Ltd. Showing the details of
working:
Paid up capital ₦50,000
Plant and Machinery ₦125,000
Total Sales (p.a.) ₦500,000
Gross Profit 25%
Annual Credit Sales 80% of net sales
Current Ratio 2
Inventory Turnover 4
Fixed Assets Turnover 2
Sales Returns 20% of sales
Average collection period 73 days
Bank Credit to trade credit 2
Cash to Inventory 1 : 15
Total debt to current Liabilities 3

Solution ‐
1. Net Sales = Total Sales ‐ Sales Return
= 500,000 ‐ 100,000
= ₦400,000
2. Credit Sales = 80% of Net Sales
= 400,000 x 80%
= ₦320,000
3. Gross Profit = 25% of Net sales
= 400,000 x 25%
= ₦100,000

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4. Cost of Goods Sold = Net Sales ‐ Gross Profit
= 400,000 ‐ 100,000
= ₦300,000
Cost of Goods Sold
5. Inventory =
Inventory Turnover
= 300,000
4
= ₦75,000
365
6. Receivable Turnover = 73
= 5

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 Credit Sales
Receivables =
Receivables Turnover
= 3,20,000
5
=₦64,000
7. Cash = 1/5 of Inventory
= 1/5 x 75,000
= ₦5,000
8. Total Current Assets = Inventory + Receivables + Cash
= 75,000 + 64,000 + 5,000
= ₦144,000
Current Assets
9. Total Current Liabilities =
2
= 144,000
2
= ₦72,000
10. Bank Credit = 2/3 x Current Liabilities
= 2/3 x 72,000
= ₦48,000
11. Trade Credit = 1/2 of Bank Credit OR 1/3 of Current Liabilities
₦24,000
12. Total Debt = Current Liabilities x 3
72,000 x 3
= ₦216,000
13. Long term debt = Total Debt ‐ Current Liabilities
= 216,000 ‐ 72,000
= ₦144,000
14. Fixed Assets = 1/2 of Net Sales =
1/2 x 4,00,000
= ₦200,000
15. Other fixed Assets = Fixed Assets ‐ Plant & Machinery
= 200,000 ‐ 125,000
= ₦75,000
16. Total Assets = Fixed Assets + Current Assets

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 = 200,000 + 144,000
= 344,000
17. Net worth = Total Assets ‐ Total Debt
344,000 ‐ 216,000
= ₦128,000
18. Reserves & Surplus = Net worth ‐ Paid Up capital
= 128,000 ‐ 50,000
= 78,000

Balance Sheet
LIABILITIES AMOUNT ASSETS AMOUNT
Paid Up Capital 50,000 Plant & machinery 125,000
Reserves & Surplus 78,000 Other Fixed Assets 75,000
Long term Debt 144,000 Inventory 75,000
Bank credit 48,000 Receivables 64,000
Trade credit 24,000 Cash 5,000
344,000 3,44,000

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