Question

The following is the summarised transactions and profit and loss account for the year ending March 31, 2007 and the Balance Sheet as on that date.

$$\begin{array}{cccc}\text{Particulars}& \text{Amt.}& \text{Particulars}& \text{Amt}\\ \text{Opening Stock}& 5,000& \text{Sales}& 50,000\\ \text{Purchases}& 25,000& \text{Closing Stock}& 7,500\\ \text{Direct Expenses}& 2,500& & \\ \text{Gross Profit}& \underset{–}{25,000}& & \underset{–}{}\\ & \underset{–}{57,500}& & \underset{–}{57,500}\\ \text{Administrative Expenses}& 7,500& \text{Gross Profit}& 25,000\\ \text{Interest}& 1,500& & \\ \text{Selling Expensses}& 6,000& & \\ \text{Net Profit}& \underset{–}{10,000}& & \underset{–}{}\\ & \underset{–}{25,000}& & \underset{–}{25,000}\end{array}$$

Balance Sheet

$$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt.}& \text{Assets}& \text{Amt}\\ \text{Share Capital}& 50,000& \text{Land and Building}& 25,000\\ \text{Current Liabilities}& 20,000& \text{Plant and Machinery}& 15,000\\ \text{Profit and Loss}& 10,000& \text{Stock}& 7,500\\ & & \text{Sundry Debtors}& 7,500\\ & & \text{Bills Receivables}& 6,250\\ & & \text{Cash in hand and at bank}& 8,750\\ & & \text{Furniture}& 10,000\\ & \underset{–}{}& & \underset{–}{}\\ & \underset{–}{80,000}& & \underset{–}{80,000}\end{array}$$

Calculate:
(i) Gross Profit Ratio
(ii) Current Ratio
(iii) Acid Test Ratio
(iv) Stock Turnover Ratio
(v) Fixed Assets Turnover Ratio

Answer 1

(i) Gross Profit Ratio
$=\frac{GrossProfit}{NetSales}\times 100=\frac{Rs.25,000}{Rs.50,000}\times 100=50\%$

(ii) Current ratio
$=\frac{\text{Current Assets}}{\text{Current Liabilities}}$

Current Assets
= Stock + Sundry Debtors + Bills Receivable + Cash in hand and at Bank
= Rs. 7,500 + Rs. 7,500 + Rs. 6,250 + Rs. 8,750
= Rs. 30,000

Current Ratio$=\frac{Rs.30,000}{Rs.20,000}=\frac{3}{2}or1.5:1$

(iii) Acid Test Ratio
$=\frac{LiquidAssets}{CurrentLiabilities}$

Liquid Assets = Current Assets – Stock
= Rs. 30,000 – Rs. 7,500
= Rs. 22,500

Acid Test Ratio $=\frac{Rs.22,500}{Rs.20,000}=\frac{9}{8}or1.125:1$

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

Cost of Goods Sold
= Opening Stock + Purchases + Direct Expenses - Closing Stock
= Rs. 5,000 + Rs. 25,000 + Rs. 2,500 - Rs. 7,500
= Rs. 25,000

$\text{Average Stock}=\frac{\text{Opening Stock + Closing Stock}}{2}=\frac{Rs.5,000+Rs.7,500}{2}=\frac{Rs.12,500}{2}=Rs.6,250$

$\text{Stock Turnover Ratio}=\frac{Rs.25,000}{Rs.6,250}=4\text{times}$

$\left(v\right)\text{Fixed Assets Turnover Ratio}=\frac{\text{Net Sales}}{\text{Net Fixed Assets}}$

Net Fixed Assets
= Land and Building + Plant and Machinery + Furniture
= Rs. 25,000 + Rs. 15,000 + Rs. 10,000
= Rs. 50,000

Fixed Assets Turnover Ratio $=\frac{Rs.50,000}{Rs.50,000}=1:1$