Question

(a) From the following calculate 'Trade Receivables Turnover Ratio'.

Total Revenue from operation for year Rs 8,40,000.

Cash Revenue from operation-40% of credit revenue from operation.

Closing Trade Receivable over Opening Trade Receivable by Rs 80,000. Opening Trade Receivables in 20% of credit Revenue from operation.

(b) From the following, calculate Interest Coverage Ratio.

Profit after Interest and Tax Rs 4,97,000.

Rate of Income Tax 30%.

12% Debentures Rs 6,00,000.

Answer 1

Trade Receivables Turnover Ratio= $\frac{\text{Credit Revenue from Operations}}{\text{Average Trade Receivable}}$

=$\frac{6,00,000}{1,60,000}=3.75$ times.

Working Notes :

(i) Calculation of Credit Revenue from Operations.

Let Credit Revenue from Operations = x

Cash Revenue from Operation = 40% of x

$=\frac{4x}{10}$

$x+\frac{4x}{10}=8,40,000$

$10x+4x=84,00,000$

$14x=84,00,000$

x = 6,00,000 (Credit revenue from operation)

(ii) Average Trade Receivables

$=\frac{\text{Opening Trade Receivables + Closing Trade Receivables}}{2}$

$=\frac{1,20,000+2,00,000}{2}=1,60,000$

(b) Interest Coverage Ratio $=\frac{\text{Net Profit before interest and tax}}{\text{Interest on long term debt}}$

$=\frac{7,82,000}{72,000}=10.86$ times.

Working Notes :

(i) Interest on debentures = 12% of 6,00,000

= 72,000

(ii) Calculation of net profit before interest and tax

Profit after interest and tax = 4,97,000

Rate of tax = 30%

Step 1 : Let profit after interest and before tax be x

It means tax = 30% of x

x - 30% of x = 4,97,000

70% of x = 4,97,000

$x=4,97,000\times \frac{100}{70}=Rs7,10,000$

Step 2 : Calculation profit before interest and tax

Profit before interest and tax = Profit after interest and before tax + interest

= 7,10,000 + 72,000 = 7,82,000.