= ----------- = 23 Days
15.78
5) Fixed Asset To
Fixed Assets
Net Tangible Worth = ----------------------- X 100
Proprietor’s Fund
1,50,000
= ------------- X 100 = 76%
1,97,500
Net Sales
6) Turnover To Fixed Assets = ------------------
Fixed Assets
3,00,000
= ----------- = 2 Times
1,50,000
Illustration 5: from the following details prepare a statement of proprietary
fund with as many details as possible.
1) Stock Velocity 6
2) Capital Turnover Ratio 2
3) Fixed Assets Turnover Ratio 4
4) Gross Profit Turnover Ratio 20%
5) Debtors’ Velocity 2 Months
6) creditors’ velocity 73 days
Gross profit was rs.60,000. Reserves and surplus amount to 20,000. Closing
stock was rs.5,000 in excess of opening stock.
129
Solution:
1. Calculation Of Sales
Gross Profit
Gross Profit Ratio = --------------- X 100 = 20%
Sales
Rs.60,000
20
= --------------- = --------
Sales 100
1
= ---
5
Sales: Rs.3,00,000
2. Calculation Of Sundry Debtors
Debtors
Debtors’ Velocity = ------------ X 12 Months
Sales
Let Debtors Be X
X
2 = ----------- X 12
3,00,000
X
1
------------- = ---
3,00,000 6
X = Rs.50,000
Debtors: Rs.50,000
It Is Assumed That All Sales Are Credit Sales.
3. Calculation Of Stock
Cost Of Goods Sold
Stock Turnover Ratio = --------------------------- = 6
= Average Stock
Cost Of Goods Sold = Sales – Gross Profit
= Rs.3,00,000 – Rs.60,000
130
= Rs.2,40,000
Rs.2,40,000
------------------ = 6
Average Stock
Rs.2,40,000
Average Stock = --------------- = Rs.40,000
6
Opening Stock + Closing Stock
Average Stock
= --------------------------------------
2
Let Opening Stock Be Rs.X.
Then Closing Stock Will Be X + 5,000
X + X + 5,000
----------------
= 40,000
2
2X + 5,000
--------------
= 40,000
2
Cross Multiplying
2X + 5,000
= 80,000
2X
= 80,000 – 5,000
=
75,000
X
= 37,500
4. Calculation Of Creditors
Total Creditors
Creditors’ Velocity = ------------------------------ X 365
Days
Credit
Purchases
= 73 Days
Purchase
= Cost Of Goods + Closing Stock – Opening Stock
= Rs.2,40,000 + 42,500 – 37,500
= Rs.2,45,000
Let The Creditors Be X
X
-------------- X 365 = 73
2,45,000
131
365 X
= 2,45,000 X 73
2,45,000 X 73
X
= ----------------
365
Creditors = Rs.49,000
5. Calculation Of Fixed Assets
Costs Of Goods Sold
Fixed Assets Turnover Ratio = ----------------------------- = 4
Fixed Assets
Let Fixed Assets Be X
2,40,000
---------- = 4
X
X = 60,000
Fixed Assets = Rs.60,000
6. Shareholders’ Fund
Cost Of Goods Sold
Capital Turnover Ratio
= ----------------------- = 2
Proprietary Fund
2,40,000
--------------------- = 2
Proprietary Fund
Proprietary Fund = Rs.1,20,000
Shareholders’ Fund Includes Share Capital, Profit & Reserve.
Share Capital = Shareholders’ Fund – (Profit + Reserve)
= Rs.1,20,000 – Rs.80,000
= Rs.40,000
7. Calculation Of Bank Balance
Shareholders’ Fund + Current Liabilities = Fixed Assets + Current Assets
Rs.1,20,000 + 49,000
= Rs.60,000 + Current Assets
Current Assets
= Rs.1,09,000
132
Current Assets
= Stock + Debtors + Bank
Bank Balance
= Current Assets – (Stock +
Debtors)
= Rs.1,09,000– (42,500 + 50,000)
= Rs.1,09,000 – 92,500
= Rs.16,500
Balance Sheet As On …
---------------------------------------------------------------------------------
Liabilities
Rs.
Assets
Rs.
---------------------------------------------------------------------------------
Share Capital
40,000
Fixed Assets
60,000
Reserves & Surplus 20,000
Current Assets:
Profit
60,000
Stock
42,500
Current Liabilities 49,000
Debtors
50,000
Bank 16,500
----------
------------
1,69,000
1,69,000
---------------------------------------------------------------------------------
Illustration 6: The Following Data Is Furnished:
A) Working Capital Rs.45,000
B) Current Ratio 2.5
C) Liquidity Ratio 1.5
D) Proprietary Ratio – (Fixed Assets To Proprietary Funds) 0.75
E) Overdraft Rs.10,000
F) Retained Earnings Rs.30,000
There Are No Long Term Loans And Fictitious Assets.
Find Out:
1) Current Assets
2) Current Liabilities
3) Fixed Assets
4) Quick Assets
5) Quick Liabilities
6) Stock
7) Equity
Solution:
Current Assets
Current Assets
2.5
133
Current Liability
1.0
---
Working Capital
1.5
If Working Capital Is 1.5, Current Asset Will Be 2.5.
If Working Capital Is Rs.45,000, Current Assets Will Be Rs.75,000
Current Assets = Rs.75,000
Current Liability
Current Liability = Current Assets – Working Capital
= Rs.75,000 – Rs.45,000
= Rs.30,000
Fixed Assets
Shareholders’ Fund+ Current Liabilities = Fixed Assets + Current Assets
Shareholders’ Fund=Fixed Assets + Current Assets – Current Liabilities
= Fixed Assets + Rs.75,000 – Rs.30,000
= Fixed Assets + Rs.45,000
Let The Shareholders’ Fund Be X, Fixed Assets Will Be ¾ X
X
=
Rs. ¾ X + Rs.45,000
¼ X
=
Rs.45,000
X
=
Rs.1,80,000
¾ X
=
Rs.1,35,000
Fixed Assets
=
Rs.1,35,000
Shareholders Funds =
Rs.1,35,000 + Rs.45,000
=
Rs.1,80,000
Stock
Quick Assets
Liquid Ratio =
-------------------
Quick Liabilities
Quick Assets
=
Current Assets – Stock
Quick Liabilities
=
Current Liabilities – Bank Overdraft
Let The Value Of Stock Be X.
Quick Assets
Rs.75,000 – X
-------------------- =
---------------------
Quick Liabilities
30,000 – 10,000
134
75,000 - X
= ------------- = 1.5
20,000
Cross Multiplying
75,000 – X =
20,000 X 1.5
75,000 – X =
30,000
X
=
45,000
Stock
=
Rs.45,000
Quick Assets =
Rs.75,000 – Rs.45,000
=
Rs.30,000
Quick Liabilities
=
Rs.20,000
Equity
Shareholders’ Fund = Equity + Retained Earnings
Shareholders’ Fund = Rs.1,80,000 (As Calculated)
Retained Earnings = Rs.30,000 (As Given)
Equity
= Rs.1,50,000
Illustration 7:
From the following balance sheet of dinesh limited calculate (i)
current ratio (ii) liquid ratio (iii) debt-equity ratio (iv) proprietary ratio,
and (v) capital gearing ratio.
Balance Sheet Of Dinesh Limited As On 31-12-2005
---------------------------------------------------------------------------------
Liabilities
Rs.
Assets
Rs.
---------------------------------------------------------------------------------
Equity share capital 10,00,000
goodwill
5,00,000
6% preference capita l 5,00,000
plant & machinery 6,00,000
Reserves
1,00,000
land & buildings
7,00,000
Profit & loss a/c
4,00,000
furniture
1,00,000
Tax provision 1,76,000 stock 6,00,000
Bills payable
1,24,000
bills receivables
30,000
Bank overdraft
20,000
sundry debtors
1,50,000
Sundry creditors
80,000
bank account 2,00,000
12% debentures
5,00,000
short term investment 20,000
------------ ---------
29,00,000 29,00,000
---------------------------------------------------------------------------------
135
Current Assets
(I) Current = ------------------------
Ratio
Current Liabilities
Stock + Bills Receivables + Debtors + Bank + S.T. Investments
= ----------------------------------------------------------------
S.Creditors + Bills Payable + Bank O.D. + Tax Provision
10,00,000
= ------------ = 2.5 : 1.
4,00,000
Interpretation:
The current ratio in the said firm is 2.5:1 against a standard ratio
of 2:1. It is a good sign of liquidity. However, the stock is found occupying
60 percent of current assets which may not be easily realisable.
Current Assets – Stocks
(II) Liquid Ratio = --------------------------------
Current Liabilities
Liquid Assets
= ------------------------
Current Liabilities
4,00,000
= ----------
4,00,000
= 1:1.
Interpretation:
The standard for quick ratio is 1:1. The calculated ratio in case of
dinesh limited is also 1:1. The above two ratios show the safety in respect
of liquidity in the said firm.
Long Term Debt
(III) Debt Equity Ratio = -------------------------------------
Equity Shareholders’ Fund
136
Debentures
= ---------------------------------------------------------------------------
Equity Capital + Preference Capital + Reserves + Profit & Loss A/C
5,00,000
= -------------------------------------------------------
10,00,000 + 5,00,000 + 1,00,000 + 4,00,000
= 1:4.
Interpretation:
Debt-equity ratio indicates the firm’s long term solvency. It can be
observed that the firm’s long term loans are constituting 25 percent to that
of the owners’ fund. Although such a low ratio indicates better long term
solvency, the less use of debt in capital structure may not enable the firm
to gain from the full stream of leverage effects.
Proprietors’
Funds
(IV) Proprietary Ratio = ---------------------------
Total Assets
20,00,000
= ------------
= 20:29
29,00,000
Interpretation:
Out of total assets, seven-tenths are found financed by owners’
funds. In other words a large majority of long term funds are well invested
in various long term assets in the firm.
Owners’ Resources
(V) Capital Gearing Ratio = -------------------------------------------
Fixed-Interest
Bearing
Resources
Equity Share Capital + Reserves + P&L A/C
= -----------------------------------------------
Preference Capital + Debentures
10,00,000 + 1,00,000 + 4,00,000
= --------------------------------------------
5,00,000 + 5,00,000
137
15,00,000
= ---------------
= 1.5:1.
10,00,000
Interpretation:
Keeping rs.15 lakhs of equity funds as security, the firm is found to
have mobilised rs.10 lakhs from fixed interest bearing sources. It indicates
that the capital structure is low geared.
Illustration 8:
The following are the balance sheet and profit and loss account of
sundara products limited as on 31st december 2005.
Profit And Loss Account
To Opening Stock 1,00,000
By Sales
8,50,000
Purchases
5,50,000
Closing Stock 1,50,000
Direct Expenses
15,000
Gross Profit
3,35,000
------------
------------
10,00,000
10,00,000
------------
------------
To Admn. Expenses 50,000
By Gross Profit
3,35,000
Office Establishment 1,50,000
Non-Operating
Income
15,000
Financial Expenses 50,000
Non-Operating
Expenses/Losses
50,000
Net Profit
50,000
-----------
-----------
3,50,000
3,50,000
---------------------------------------------------------------------------------
Balance Sheet
Liabilities
Rs.
Assets
Rs.
Equity Share Capital
Land & Buildings
1,50,000
(2000 @ 100) 2,00,000
Plant & Machinery 1,00,000
Reserves
1,50,000
Stock In Trade 1,50,000
138
Current Liabilities 1,50,000
Sundry Debtors
1,00,000
P&L A/C Balance 50,000
Cash & Bank
50,000
----------
----------
5,50,000
5,50,000
---------------------------------------------------------------------------------
Calculate Turnover Ratios.
Solution:
(I) Share Capital To Turnover Ratio
Sales
= ----------------------------------
Total Capital Employed
Sales
= ------------------------------------------------
Equity + Reserve + P & L A/C Balance
8,50,000
= ----------
4,00,000
= 2.13 Times.
Interpretation:
This turnover ratio indicates that the firm has actually converted
its share capital into sales for about 2.13 times. This ratio indicates the
efficiency in use of capital resources and a high turnover ratio ensures
good profitability on operations on an enterprise.
(ii)
fixed asset’s turnover ratio
Sales
= ---------------------------
Total fixed assets
139
Sales
= ------------------------------------
Land + Plant & Machinery
8,50,000
= ------------
2,50,000
= 3.4 times.
Interpretation:
Although fixed assets are not directly involved in the process of
generating sales, these are said to back up the production process. A ratio
of 3.4 times indicates the efficient utilisation of various fixed assets in this
organisation.
(iii) Net working capital turnover:
Sales
= ----------------------------
Net Working Capital
Sales
= --------------------------------------------
Current Assets – Current Liabilities
8,50,000
= ------------