Assignment I - Journal Q.1 Journalize the following relating to April 2009: Particulars Rs. 1. R. started business with 1,00,000 2. He purchased furniture for 20,000 3. Paid salary to his clerk 1,000 4. Paid rent 5,000 5. Received interest 2,000 Solution: Date Particulars Ledger Folio Debit Amount (Rs) Credit Amount (Rs) 1 Cash A/c Dr 100,000 To Capital A/c 100,000 2 Furniture A/c Dr 20,000 To Cash A/c 20,000 3 Salary A/c Dr 1,000 To Cash A/c 1,000 4 Rent A/c Dr 5,000 To Cash A/c 5,000 5 Cash A/c Dr 2,000 To Interest A/c 2,000
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Assignment I - Journal
Q.1 Journalize the following relating to April 2009:
Particulars Rs.
1. R. started business with 1,00,000
2. He purchased furniture for 20,000
3. Paid salary to his clerk 1,000
4. Paid rent 5,000
5. Received interest 2,000
Solution:
Date Particulars Ledger Folio
Debit Amount
(Rs)
Credit
Amount (Rs)
1 Cash A/c Dr 100,000
To Capital A/c
100,000
2 Furniture A/c Dr 20,000
To Cash A/c
20,000
3 Salary A/c Dr 1,000
To Cash A/c
1,000
4 Rent A/c Dr 5,000
To Cash A/c
5,000
5 Cash A/c Dr 2,000
To Interest A/c
2,000
Q.2 Journalize transactions of M/s X & Co. for the month of March 2009 on the basis of
double entry system:
1. X introduced cash Rs. 4,00,000.
2. Cash deposited in the Citibank Rs. 2,00,000.
3. Cash loan of Rs. 50,000 taken from Y.
4. Salaries paid for the month of March 2009, Rs. 30,000 and Rs. 10,000 is still payable for the
month of March 2009.
5. Furniture purchased Rs. 50,000.
Solution:
Date Particulars Ledger Folio
Debit Amount
(Rs)
Credit Amount
(Rs)
1 Cash A/c Dr 400,000
To Captial (X) A/c 400,000
2 Bank A/c Dr 200,000
To Cash A/c 200,000
3 Cash A/c Dr 50,000
To Y A/c 50,000
4 Salary A/c Dr 40,000
To Cash A/c 30,000
To Outstanding Salary A/c 10,000
5 Furniture A/c Dr 50,000
To Cash A/c 50,000
Q.3 Journalize the following transactions.
1. December 1, 2008, Ajit started-business with cash Rs. 4,00,000.
2: December 3, he paid into the bank Rs. 20,000.
3. December 5, he purchased goods for cash Rs. 1,50,000.
4. December 8, he sold goods for cash Rs. 60,000.
5. December 10, he purchased furniture and paid by cheque Rs. 50,000.
6. December 12, he sold goods to Arvind Rs. 40,000.
7. December 14, he purchased goods from Amrit Rs. 1,00,000.
8. December 15, he returned goods to Amrit Rs. 50,000.
9. December 16, he received from Arvind Rs. 39,600 in full settlement.
10. December 18, he withdrew goods for personal use Rs. 10,000.
11. December 20, he withdrew cash from business for personal use Rs. 20,000.
12. December 24, he paid telephone charges Rs. 10,000.
13. December 26, cash paid to Amrit in full settlement Rs. 49,000.
14. December 31, paid for stationery Rs. 2,000, rent Rs. 5,000 and salaries to staff Rs. 20,000.
15. December 31, goods distributed by way of free samples Rs. 10,000.
16. December 31, wages paid for erection of Machinery Rs. 80,000.
17. Personal income tax liability of X of Rs. 17,000 was paid out of petty cash of business.
18. Purchase of goods from Naveen of the list price of Rs. 20,000. He allowed 10% trade
discount, Rs. 500 cash discount was also allowed for quick payment.
Solution:
Date Particulars Ledger Folio
Debit Amount
(Rs)
Credit Amount
(Rs)
1-Dec-08 Cash A/c Dr 400,000
To Capital A/c 400,000
3-Dec-08 Bank A/c Dr 20,000
To Cash A/c 20,000
5-Dec-08 Purchase A/c Dr 150,000
To Cash A/c 150,000
8-Dec-08 Cash A/c Dr 60,000
To Sales A/c 60,000
10-Dec-08 Furniture A/c Dr 50,000
To Bank A/c 50,000
12-Dec-08 Arvind A/c Dr 40,000
To Sales A/c 40,000
14-Dec-08 Purchase A/c Dr 100,000
To Amrit A/c 100,000
15-Dec-08 Amrit A/c Dr 50,000
To Purchase Returns A/c 50,000
16-Dec-08 Cash A/c Dr 39,600
Discount A/c Dr 400
To Arvind A/c 40,000
18-Dec-08 Drawings Dr 10,000
To Purchase A/c 10,000
20-Dec-08 Drawings Dr 20,000
To Cash A/c 20,000
24-Dec-08 Telephone A/c Dr 10,000
To Cash A/c 10,000
26-Dec-08 Amrit A/c Dr 50,000
To Cash A/c 49,000
To Discount A/c 1,000
31-Dec-08 Stationery A/c Dr 2,000
Rent A/c Dr 5,000
Salary A/c Dr 20,000
To Cash A/c 27,000
31-Dec-08 Advertising A/c Dr 10,000
To Purchase A/c 10,000
31-Dec-08 Machinery A/c Dr 80,000
To Cash A/c 80,000
31-Dec-08 Drawings Dr 17,000
To Petty Cash A/c 17,000
31-Dec-08 Purchase A/c Dr 18,000
Discount A/c Dr 500
To Cash A/c 17,500
Q 4 Transactions of Ramesh for April are given below. Journalize them.
2009 Rs.
April 1 Ramesh started business with 1,00,000
April 2 Paid into bank 70,000
April 3 Bought goods for cash 5,000
April 5 Drew cash from bank for credit 1,000
April 13 Sold to Krishna goods on credit 1,500
April 20 Bought from Shyam goods on credit 2,250
April 24 Received from Krishna 1,450
Allowed him discount 50
April 28 Paid Shyam cash 2,150
Discount allowed 100
April 30 Cash sales for the month 8,000
Paid Rent 500
Paid Salary 1,000
Solution:
Date Particulars Ledger Folio
Debit Amount
(Rs)
Credit Amount
(Rs)
1-Apr Cash A/c Dr 100,000
To Capital (X) A/c 100,000
2-Apr Bank A/c Dr 70,000
To Cash A/c 70,000
3-Apr Purchase A/c Dr 5,000
To Cash A/c 5,000
5-Apr Cash A/c Dr 1,000
To Bank A/c 1,000
13-Apr Krishna A/c Dr 1,500
To Sales A/c 1,500
20-Apr Purchase A/c Dr 2,250
To Shyam A/c 2,250
24-Apr Cash A/c Dr 1,450
Discount A/c Dr 50
To Krishna A/c 1,500
28-Apr Shyam A/c Dr 2,250
To Discount A/c 100
To Cash A/c 2,150
30-Apr Cash A/c Dr 8,000
To Sales A/c 8,000
Rent A/c Dr 500
Salary A/c Dr 1,000
To Cash A/c 1,500
Assignment II – Ledger
Q. 1 Prepare the Stationery Account of a firm for the year ended December 31, 2008:
2008 Particulars Rs.
January 1 Stock in hand 480
April 5 Purchase of stationery by cheque 800
November 15 Purchase of stationery on credit from Five Star Stationery Mart 1,280
December 31 Stock in hand 240
Solution:
Stationery A/c
Date Particulars
Amount
(Rs) Date Particulars Amount (Rs)
1-Jan To Balance b/d
480
5-Apr To Bank A/c
800
15-Nov
To Five Star
Stationery Mart
1,280
By Profit and
Loss A/c 2,320
31-Dec By Balance c/d 240
2,560 2,560
Q.2 Prepare a ledger from the following transactions in the books of a trader
Debit Balance on January 1, 2008:
Cash in Hand Rs. 8,000, Cash at Bank Rs. 25,000, Stock of Goods Rs. 20,000, Building Rs.
10,000. Sundry Debtors: Vijay Rs. 2,000 and Madhu Rs. 2,000.
Credit Balances on January 1, 2008:
Sundry Creditors: Anand Rs. 5,000.
Following were further transactions in the month of January 2008:
January 1 Purchased goods worth Rs. 5,000 for cash less 20% trade discount and 5%
cash discount.
January 4 Received Rs. 1,980 from Vijay and allowed him Rs. 20 as discount.
January 8 Purchased plant from Mukesh for Rs. 5,000 and paid Rs. 100 as cartage for
bringing the plant to the factory and another Rs. 200 as installation charges.
January 12 Sold goods to Rahim on credit Rs. 600.
January 15 Rahim became insolvent and could pay only 50 paise in a rupee.
January 18 Sold goods to Ram for cash Rs. 1,000.
Solution:
Cash A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Jan To Balace b/d
8,000 1-Jan By Purchase A/c
3,800
4-Jan To Vijay A/c
1,980
8-Jan
To Plant & Machinery
A/c
300
15-Jan To Rahim A/c
300
18-Jan To Ram A/c
1,000
31-Jan By Balance c/d
7,780
11,580
11,580
Bank A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Jan To Balance b/d
25,000
31-Jan By Balance c/d
25,000
25,000
25,000
Purchase A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Jan To Balance b/d
20,000
1-Jan To Cash A/c
3,800
1-Jan To Discount A/c
200
31-Jan By Balance c/d
24,000
24,000
24,000
Building A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Jan To Balance b/d
10,000
31-Jan By Balance c/d
10,000
10,000
10,000
Vijay A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Jan To Balance b/d
2,000
4-Jan By Cash A/c
1,980
4-Jan By Discount A/c
20
2,000
2,000
Madhu A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Jan To Balance b/d
2,000
31-Jan By Balance c/d
2,000
2,000
2,000
Anand A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Jan By Balance b/d
5,000
31-Jan To Balance c/d
5,000
5,000
5,000
Discount A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Jan By Purchase A/c
200
4-Jan To Vijay A/c
20
31-Jan To Balance c/d
180
200
200
Mukesh A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
8-Jan
By Plant & Machinery
A/c
5,000
31-Jan To Balance c/d
5,000
5,000
5,000
Sales A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
12-Jan By Rahim A/c
600
18-Jan By Cash A/c
1,000
31-Jan To Balance c/d
1,600
1,600
1,600
Rahim A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
12-Jan To Sales A/c
600
15-Jan By Cash A/c
300
15-Jan By Bad Debt A/c
300
600
600
Plant & Machinery A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
8-Jan To Mukesh A/c
5,000
8-Jan To Cash A/c
300
31-Jan By Balance c/d
5,300
5,300
5,300
Bad Debt A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
15-Jan To Rahim A/c
300
31-Jan By Balance c/d
300
300
300
Q. 3 The following data is given by Mr. S, the owner, with a request to compile only the two
personal accounts of Mr. H and Mr. R, in his ledger, for the month of April 2008.
1 Mr. S owes Mr. R Rs. 15,000; Mr. H owes Mr. S Rs. 20,000.
4 Mr. R sold goods worth Rs. 60,000 @ 10% trade discount to Mr. S.
5 Mr. S sold to Mr. H goods prices at Rs.30,000.
17 Record purchase of Rs. 25,000 net from R, which were sold to H at profit of Rs. 15,000.
18 Mr. S rejected 10% of Mr. R’s goods of 4th
April.
19 Mr. S issued a cash memo for Rs. 10,000 to Mr. H who came personally for this
consignment of goods, urgently needed by him.
22 Mr. H cleared half his total dues to Mr. S, enjoying a ½% cash discount (of the payment
received, Rs. 20,000 was by cheque).
26 R’s total dues (less Rs. 10,000 held back) were cleared by cheque, enjoying a cash discount
of Rs. 1,000 on the payment made.
29 Close H’s Account to record the fact that all but Rs. 5,000 was cleared by him, by a
cheque, because he was declared bankrupt.
30 Balance R’s Account.
Solution:
Mr H A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Apr To Balance b/d
20,000
5-Apr To Sales A/c
30,000
17-Jan To Sales A/c
40,000
22-Apr By Cash A/c
24,775
22-Apr By Discount A/c
225
22-Apr By Bank A/c
20,000
29-Apr By Bank A/c
40,000
29-Apr By Bad Debt A/c
5,000
Mr R A/c
Date Particulars
Amount
(Rs) Date Particulars
Amount
(Rs)
1-Apr By Balance b/d
15,000
4-Apr By Purchase A/c
54,000
17-Jan By Purchase A/c
25,000
18-Apr To Purchase returns A/c
5,400
To Bank A/c
77,600
To Discount A/c
1,000
To Balance c/d
10,000
Assignment III – Trial Balance
Q. 1 Given below is a ledger extract relating to the business of X and Co. as on March 31, 2009.
You are required to prepare the Trial Balance.
Cash Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Capital A/c 10,000 By Furniture A/c 3,000
To Ram’s A/c 25,000 By Salaries A/c 2,500
To Cash Sales 500 By Shyam’s A/c 21,000
By Cash Purchases 1,000
By Capital A/c 500
By Balance c/d 7,500
35,500 35,500
Furniture Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Cash A/c 3,000 By Balance c/d 3,000
3,000 3,000
Salaries Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Cash A/c 2,500 By Balance c/d 2,500
2,500 2,500
Shyam’s Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Cash A/c 21,000 By Purchases A/c
(Credit Purchases)
25,000
To Purchase Returns A/c 500
To Balance c/d 3,500 -
25,000 25,000
Purchases Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Cash A/c (Cash Purchases) 1,000 By Balance c/d 26,000
To Sundries as per Purchases
Book (Credit Purchases) 25,000
-
26,000 26,000
Purchases Returns Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance c/d 500 By Sundries as per Purchases
Return Book
500
500 500
Ram’s Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Sales A/c (Credit Sales) 30,000 By Sales Returns A/c 100
By Cash A/c 25,000
By Balance c/d 4,900
30,000 30,000
Sales Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance c/d 30,500 By Cash A/c (Cash Sales) 500
By Sundries as per Sales Book
(Credit sales) 30,000
30,500 30,500
Sales Returns Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Sundries as per Sales
Return Book 100
By Balance c/d 100
100 100
Capital Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Cash A/c 500 By Cash A/c 10,000
To Balance c/d 9,500 -
10,000 10,000
Solution:
Trial Balance X and Co. as on March 31, 2009
S. No. Ledger Account L.F. No.
Debit Amount (Total)
Rs
Credit Amount (Total)
Rs
1. Cash Account
7,500
2. Furniture Account
3,000
3. Salaries Account
2,500
4. Shyam's Account
3,500
5. Purchases Account
26,000
6. Purchase Returns Account
500
7. Ram's Account
4,900
8. Sales Account
30,500
9. Sales Returns Account
100
10. Capital Account
9,500
44,000
44,000
Q.2 From the following ledger balances, prepare a trial balance of Anuradha Traders as on
March 31, 2009:
Account Head Rs.
Capital 1,00,000
Sales 1,66,000
Purchases 1,50,000
Sales return 1,000
Discount allowed 2,000
Expenses 10,000
Debtors 75,000
Creditors 25,000
Investments 15,000
Cash at bank and in hand 37,000
Interest received on investments 1,500
Insurance paid 2,500
Solution:
Trial Balance Anuradha Traders as on March 31, 2009
S. No. Ledger Account L.F. No.
Debit Amount (Total)
Rs
Credit Amount (Total)
Rs
Capital
100,000
Sales
166,000
Purchases
150,000
Sales return
1,000
Discount allowed
2,000
Expenses
10,000
Debtors
75,000
Creditors
25,000
Investments
15,000
Cash at bank and in hand
37,000
Interest received on investments
1,500
Insurance paid
2,500
292,500
292,500
Q.3 One of your clients, X has asked you to finalize his accounts for the year ended March 31,
2009. Till date, he himself has recorded the transactions in books of accounts. As a basis for
audit, X furnished you with the following statement.
Dr. Balance Cr. Balance
X’s Capital 1,556
X’s Drawings 564
Leasehold premises 750
Sales 2,750
Due from customers 530
Purchases 1,259
Purchases return 264
Loan from bank 256
Creditors 528
Trade expenses 700
Cash at bank 226
Bills payable 100
Salaries and wages 600
Stock (1.4.2008) 264
Rent and rates 463
Sales return 98
5,454 5,454
The closing stock on March 31, 2009 was valued at Rs. 574. X claims that he has recorded every
transaction correctly as the trial balance is tallied. Check the accuracy of the above trial balance.
Solution:
Trial Balance of X as on March 31, 2009
S. No. Ledger Account L.F. No. Dr. Balance Cr. Balance
X’s Capital 1,556
X’s Drawings 564
Leasehold premises 750
Sales 2,750
Due from customers 530
Purchases 1259
Purchases return 264
Loan from bank 256
Creditors 528
Trade expenses 700
Cash at bank 226
Bills payable 100
Salaries and wages 600
Stock (1.4.2008) 264
Rent and rates 463
Sales return 98
5,454 5,454
Assignment IV – Final Accounts
Q.1 From the following information, prepare a Trading Account of M/s. ABC Traders for the
year ended March 31, 2009: Rs.
Opening Stock 1,00,000
Purchases 6,72,000
Carriage Inwards 30,000
Wages 50,000
Sales 11,00,000
Returns inward 1,00,000
Returns outward 72,000
Closing stock 2,00,000
Solution:
Trading Account of M/s. ABC Traders for the year ended March 31, 2009
Particulars
Debit Amount
(Rs) Particulars
Credit Amount
(Rs)
Opening Stock
100,000 Sales
1,100,000
Purchases
672,000 Less: Return Inwards
(100,000)
Less: Return Outwards
(72,000)
Carriage Inwards
30,000
Wages
50,000
Gross Profit
420,000 Closing Stock
200,000
1,200,000
1,200,000
Q.2 Revenue expenses and gross profit balances of M/s ABC Traders for the year ended on
Provision for taxation 8.25 6.30 Net profit b/d 19.50 15.00
Dividend-paid and
Proposed 6.00 4.50
Surplus for the year
carried to Balance Sheet 5.25 4.20
19.50 15.00 19.50 15.00
You are required to interpret the above statement using significant accounting ratios.
Solution:
Following are the five steps in examining the performance of the company in the year 2008 as
compared to the year 2007.
Step 1: Calculation of the ratios
Financial Ratio 2008 2007
Return on Capital
Employed (RoCE)
=(19.5+1.2)/(60+29.25+15)
=19.86 %
=(15+1.2)/(60+24+15)
=16.36%
Net Profit Ratio (NPR) =19.5/225*100%
=8.67%
=15/180*100%
=8.34%
Capital Employed Turnover
Ratio (CETR)
=225/(60+29.25+15)
=2.16
=180/(60+24+15)
=1.82
Current Ratio (CR) =85.5/63.75
=1.34
=70.5/37.5
=1.88
Stock Turnover Ratio (STR) =162/42.75
=3.79
=135/31.5
=4.29
Average Collection Period
(ACP)
=41.25/225*365
=66.91 Days= ~67 days
=30/180*365
=60.83 Days = ~61 days
Debt / Equity Ratio (D/E) =15/89.25
=.17
=15/84
=.18
Earning per share (EPS) =11,25,000/60,000
=18.75
=8,70,000/60,000
=14.5
Dividend payout ratio (DPS
/ EPS)
=(6,00,000/60,000)/18.75*100%
=53.33%
=(4,50,000/60,000)/14.5*100%
=51.72%
Gross Profit Ratio (GPR) =63/225*100%
=28%
=45/180*100%
=25%
2. Comment on Individual Ratios: -
1. Return on Capital Employed (RoCE) has increased from 16.36% in 2007 to 19.86%
in 2008. This is achieved with the help of increased profitability on sales and more
efficient utilization of capital employed.
2. Net Profit Ratio (NPR) has increased from 8.34% in 2007 to 8.67% in 2008. This is
achieved with the help of increased profitability on sales.
3. Capital employed turnover ratio (CETR) has increased from 1.82 in 2007 to 2.16 in
2008. This is increased with the help of more efficient use of capital employed.
4. Current ratio (CR) has decrease to 1.34 in 2008 from 1.88 in 2007. This indicates that
Working Capital Management (WC Mgt) of the company is not showing healthy signs.
The reason for decline in CR is financing fixed assets out of working capital (WC).
During the year, there is substantial increase in fixed assets without any efforts to raise
long term funds. Long term funds have increased by 5.25 lacs on account of retained
profits.
5. Stock Turnover ratio (STR) has decreased from 4.29 in 2007 to 3.79 in 2008. This
indicates that Stock is not being efficiently utilized.
6. Average Collection Period (ACP) has increased to 67 days in 2008 from 61 days in
2007. This indicates poor collection as compared to previous year.
7. There is no noticeable change in debt/equity ratio. The debt/equity ratio (.18) of the
company is low which indicates presence of less long term debt as compared to equity
capital.
8. Earning per share (EPS) has increased to 18.75 in 2008 from 14.5 in 2007 (growth of
29.31% over previous year) indicates healthy growth of EPS.
9. Dividend payout ratio (DPR) has increased to 53.33% in 2008 from 51.72% in 2007
which is not a healthy sign in view of difficult working capital situation of the company.
Dividend per share (DPS) has increased to 10 in 2008 from 7.5 in 2007.
10. Gross profit ratio (GPR) has increase to 28% in 2008 from 25% in 2007 which
indicates 12% y/y growth in gross profit ratio.
Step 3: Critical Appraisal
The profitability of the company increased in account of increase in sales. Overheads have
increased considerably.
Working capital management is not satisfactory. Dividend payout should not have been so high
in view of working capital problems.
Step 4: Overall Performance
Overall performance of the company is satisfactory (RoCE has improved)
Step 5: Suggestion for the future
1. Try to improve working capital situation.
2. Try to control the overheads.
3. Funds may be raised through debentures, long term loans etc as the company’s
debt/equity ratio is low. Such funds may be used to improve working capital situation and
also for expansion and diversification of the business.
Q.8 X Ltd. has been existence for two years. Summarized Balance Sheets as on 31st
December, 2007 and 31st December, 2008 are given below:
Balance Sheet (Figures in lakhs of rupees)
Liabilities 2008 2007 Assets 2008 2007
Equity shares of Rs. 100 each 2 2 Fixed Assets (Less Dep.) 4.16 3.96
Reserves .20 .40 Stock .60 1.20
Profit & Loss A/c .28 .04 Debtors .80 1.60
Loans on Mortgage 2.20 1.60 Cash and Bank Balances .60 .04
Bank overdraft .40
Creditors .60 1.80
Provision for Taxation .68 .26
Proposed Dividend .20 .30
6.16 6.80 6.16 6.80
You are also given the Profit and Loss Account of the Company for the two years.
Profit & Loss Account (Figures in lakhs of rupees)
2008 2007 2008 2007
Interest on Loan .048 .096 Balance B/F - .28
Directors’
Remuneration
.20 .60
Profit for the year after
running costs &
Depreciation 1.608 1.216
Provision for Taxation .68 .26
Dividends .20 .30
Transfer to Reserve .20 .20
Balance C/F .28 .04
1.608 1.496 1.608 1.496
Total Sales amounted to Rs. 12 lakhs in 2007 and Rs. 10 lakhs in 2008.
Make a through overall analysis of this company.
Solution:
Step 1: Calculation of Financial Ratios
S. No. Financial ratio 2008 2007
1 Return on Capital Employed
(RoCE)
=(1.608-
.2)/(2+.2+.28+2.2)
=30.09%
=(1.216-.3)/(2+.4+.04+1.6)
=22.67%
2 Net Profit Ratio (NPR) =.68/10*100%
=6.8%
=.54/12*100%
=4.5%
3 Capital Employed Turnover
Ratio (CETR)
=10/(2+.2+.28+2.2)
=2.14
=12/(2+.4+.04+1.6)
=2.97
4 Current Ratio (CR) =(.6+.8+.6)/(.6+.68+.2)
=1.35
=(1.2+1.6+.04)/(1.8+.26+.3)
=1.20
5 Stock Turnover Ratio (STR) =(10-1.608)/.6
=13.99
=(12-1.216)/1.2
=8.99
6 Average Collection Period
(ACP)
=.8/10*365
=29.2 Days
=1.6/12*365
=48.67 Days
7 Debt / Equity Ratio (D/E) =2.20/2.48
=.89
=1.6/2.44
=.66
8 Earning per share (EPS) =68,000/2000
=34
=54,000/2000
=27
9 Dividend payout ratio (DPS /
EPS)
=.2/.68
=29.41%
=.3/.54
=55.56%
10 Gross Profit Ratio (GPR) =.1.608/10*100%
=16.08%
=1.216/12*100%
=10.13%
Step 2: Comments on individual ratios
1. Sales have decreased to 10 lacs in 2008 from 12 lacs in 2007. This is not a positive
signal since topline has decreased by 16.67% y/y.
2. Return of Capital Employed (RoCE) has increased by 32.73% to 30.09% in 2008
from 22.67% in 2007. This is attributed to higher return on sales and but less efficient
utilization of capital employed.
3. Net Profit Ratio (NPR) has increased to 6.8% in 2008 from 4.5% in 2007. This is a
healthy signal since profitability on sales has increased 51.11% y/y basis.
4. Capital Employed Turnover Ratio (CETR) has decreased to 2.14 in 2008 from 2.97
in 2007. This is not a healthy signal since CETR has decreased by 28%.
5. Current Ratio has increased by 12.5% to 1.35 in 2008 from 1.20 in 2007.. This
indicates that current assets have increased more w.r.t. current liabilities and is a healthy
signal.
6. Stock Turnover Ratio (STR) has increased to 13.99 in 2008 from 7.08 in 2007 which
is a healthy signal since stock activity has improved compared to cost of goods sold.
7. Average Collection Period (ACP) has decreased to 29.2 days from 48.67 days which
indicates that collection of credit sales has improved as compared to previous year and
cash is collected faster.
8. Debt / Equity Ratio has increased to .88 in 2008 from .66 in 2007 which indicates that
company has raised long term debt (Mortgage debt) to finance its activities in the year
2008.
9. Earning per share (EPS) has increased to 34 in 2008 from 27 in 2007 which is a
healthy sign since EPS growth is a strong signal for investors and creditors for the
business.
10. Dividend payout ratio (DPR) has decreased to 29.41% in 2008 from 55.56% in 2007
which indicates that company prefers to retain its profits for future expansions.
11. Gross Profit Ratio (GPR) has increased to 16.08% in 2008 from 10.13% in 2007 which is 58.74% increase on y/y basis. This indicates that overall profitability of the
business has significantly improved.
Step 3: Critical Appraisal
It is noticed that sales have decreased but all other performance indicators for the company have
significantly improved over previous year. 32.73% increase in RoCE is surely a very good
performance indicator of increased profitability. CETR decreased indicates less efficient
utilization of resources. Improved current ratio, lower collection period and higher stock turnover
ratio indicated enhanced activity in many aspects of the business. It seems that the firm is poised
for rapid growth path.
Step 4: Overall Performance
The overall performance of the company is good. Since all major indicators are better but sales
and CETR have decreased over previous year.
Step 5: Suggestions for the future
The company should improve the utilization of resources. It is required to improve turnover to