Question

The following is the summarised Profit and Loss Account and the Balance sheet of Nigam Limited for the year ended March 31, 2007

Profit and Loss Account
for the year ended March 31, 2007
$$\begin{array}{cccc}\text{Particulars}& \text{Amt. (Rs.)}& \text{Particular}& \text{Amt (Rs.)}\\ \text{Opening Stock}& 50,000& \text{Sales}& 4,00,000\\ \text{Purchases}& 2,00,000& \text{Closing Stock}& 60,000\\ \text{Direct Expenses}& 16,000& & \\ \text{Gross Profit}& \underset{–}{1,94,000}& & \underset{–}{}\\ & \underset{–}{4,60,000}& & \underset{–}{4,60,000}\\ \text{Salary}& 48,000& \text{Gross Profit}& 1,94,000\\ \text{Loss on Sale of Furniture}& 6,000& & \\ \text{Net profit}& \underset{–}{1,40,000}& & \underset{–}{}\\ & \underset{–}{6,00,000}& & \underset{–}{6,00,000}\end{array}$$

Balance Sheet of Nigam Limited
as on March 31, 2007

$$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs.)}& \text{Assets}& \text{Amt. (Rs.)}\\ \text{Profit and Loss}& 1,40,000& \text{Stock}& 60,000\\ \text{Creditors}& 1,90,000& \text{Land}& 4,00,000\\ \text{Equity Share Capital}& 2,00,000& \text{Cash}& 40,000\\ \text{Outstanding Expenses}& 70,000& \text{Debtors}& 1,00,000\\ & \underset{–}{}& & \underset{–}{}\\ & \underset{–}{6,00,000}& & \underset{–}{6,00,000}\end{array}$$

Calculate:
(i) Quick Ratio
(ii) Stock Turnover Ratio
(iii) Return on Investment

Answer 1

Quick Ratio
$=\frac{\text{Quick Assets}}{\text{current Liabilities}}$

Quick Assets
= Cash + Debtors
= Rs. 40,000 + Rs. 1,00,000
= Rs. 1,40,000

Current Liabilities
= Creditors + Outstanding Expenses
= Rs. 1,90,000 + Rs. 70,000
= Rs. 2,60,000

Quick Ratio
$=\frac{Rs.1,40,000}{Rs.2,60,000}=7:13=0.54:1$

(ii) Stock Turnover Ratio
$=\frac{\text{Cost of Goods Sold}}{\text{Average Stock}}$

Cost of Goods Sold
= Sales – Gross Profit
= Rs. 4,00,000 – Rs. 1,94,000
= Rs. 2,06,000

Average Stock
$=\frac{\text{Opening Stock + Closing Stock}}{2}$
$=\frac{Rs.50,000+Rs.60,000}{2}=\frac{Rs.1,10,000}{2}=Rs.55,000$

Stock Turnover Ratio
$=\frac{Rs.2,06,000}{Rs.55,000}$
= $3.75\text{times}$

(iii) Return On Investment
$=\frac{ProfitbeforeInterestandTax}{CapitalEmployed}\times 100$

Capital Employed
= Equity Share Capital + Profit and Loss
= Rs. 2,00,000 + Rs. 1,40,000
= Rs. 3,40,000

Return on Investment
$=\frac{Rs.1,40,000}{Rs.3,40,000}\times 100$
= 41.18%