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# Important Questions - Ratio Analysis Commerce Notes | EduRev

## Commerce : Important Questions - Ratio Analysis Commerce Notes | EduRev

``` Page 1

Ques 1
From the following Balance Sheet of Sunrise Ltd., calculate
(i) Current Ratio;
(ii) Quick Ratio
Particulars
I. EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital  9,00,000
(b) Reserves and Surplus  3,00,000
2. Non-Current Liabilities
(a) Long-term Borrowings  4,12,000
(b) Long-term Provisions  1,76,000
3. Current Liabilities
(a) Short-term Borrowings  3,00,000
(c) Short-term Provisions 1 50,000
Total  21,98,000
II. ASSETS
1. Non-Current Assets
Fixed Assets:
Tangible Assets  14,00,000
2. Current Assets
(a) Inventories  2,00,000
(c) Cash and Cash Equivalents  3,80,000
(d) Other Current Assets  1,48,000
Total  21,98,000
(i) Inventories include Loose Tools of Rs. 30,000.
(ii) Other Current Assets consist of prepaid expenses.
Solution:
(i) Current Ratio
Current Assets = Inventories (except Loose Tools) + (Trade Receivables – Provision for Bad Debts) + Cash and Cash
Equivalents + Other Current Assets
= Rs. 1,70,000 + (Rs. 70,000 – 5,000) + Rs. 3,80,000 + Rs. 1,48,000 = Rs. 7,63,000
Current Liabilities = Short-term Borrowings + Trade Payables + Short-term Provisions (except Provision for Bad Debts) = Rs.
3,00,000 + Rs. 60,000 + Rs. 45,000 = Rs. 4,05,000
Current Ratio = Current Assets / Current Liabilities = (Rs.) 7,00,000 / Rs. 4,05,000= 1.88:1
(ii) Quick Ratio
Quick Assets = Current Assets – Prepaid Expenses – Inventories (except Loose Tools) = Rs. 7,63,000 – Rs. 1,48,000 – *
1,70,000 = Rs. 4,45,000
Quick Ratio = Quick Assets / Current Liabilities  = Rs. 4,45,000 / (Rs.) 4,05,000= 1.099:1

Ques 2
The Current Ratio of a company is 2:1. State giving reasons which of the following would improve, reduce or not change
the ratio:
(i) Sale of fixed assets on a credit of 2 months.
(ii) Sale of fixed assets for cash.
(iii) Sale of fixed assets on long – term deferred payment basis.
(iv) Purchase of fixed assets on a credit of 3 months.
(v) Purchase of fixed assets on long – term deferred payment basis.
(vi) Sale of goods for cash at cost.
(vii) Sale of goods at profit for cash.
(viii) Sale of goods at loss for cash.
(ix) Sale of goods at profit on credit.
(x) Sale of goods at loss on credit.
Page 2

Ques 1
From the following Balance Sheet of Sunrise Ltd., calculate
(i) Current Ratio;
(ii) Quick Ratio
Particulars
I. EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital  9,00,000
(b) Reserves and Surplus  3,00,000
2. Non-Current Liabilities
(a) Long-term Borrowings  4,12,000
(b) Long-term Provisions  1,76,000
3. Current Liabilities
(a) Short-term Borrowings  3,00,000
(c) Short-term Provisions 1 50,000
Total  21,98,000
II. ASSETS
1. Non-Current Assets
Fixed Assets:
Tangible Assets  14,00,000
2. Current Assets
(a) Inventories  2,00,000
(c) Cash and Cash Equivalents  3,80,000
(d) Other Current Assets  1,48,000
Total  21,98,000
(i) Inventories include Loose Tools of Rs. 30,000.
(ii) Other Current Assets consist of prepaid expenses.
Solution:
(i) Current Ratio
Current Assets = Inventories (except Loose Tools) + (Trade Receivables – Provision for Bad Debts) + Cash and Cash
Equivalents + Other Current Assets
= Rs. 1,70,000 + (Rs. 70,000 – 5,000) + Rs. 3,80,000 + Rs. 1,48,000 = Rs. 7,63,000
Current Liabilities = Short-term Borrowings + Trade Payables + Short-term Provisions (except Provision for Bad Debts) = Rs.
3,00,000 + Rs. 60,000 + Rs. 45,000 = Rs. 4,05,000
Current Ratio = Current Assets / Current Liabilities = (Rs.) 7,00,000 / Rs. 4,05,000= 1.88:1
(ii) Quick Ratio
Quick Assets = Current Assets – Prepaid Expenses – Inventories (except Loose Tools) = Rs. 7,63,000 – Rs. 1,48,000 – *
1,70,000 = Rs. 4,45,000
Quick Ratio = Quick Assets / Current Liabilities  = Rs. 4,45,000 / (Rs.) 4,05,000= 1.099:1

Ques 2
The Current Ratio of a company is 2:1. State giving reasons which of the following would improve, reduce or not change
the ratio:
(i) Sale of fixed assets on a credit of 2 months.
(ii) Sale of fixed assets for cash.
(iii) Sale of fixed assets on long – term deferred payment basis.
(iv) Purchase of fixed assets on a credit of 3 months.
(v) Purchase of fixed assets on long – term deferred payment basis.
(vi) Sale of goods for cash at cost.
(vii) Sale of goods at profit for cash.
(viii) Sale of goods at loss for cash.
(ix) Sale of goods at profit on credit.
(x) Sale of goods at loss on credit.

(xi) Purchase of goods for cash.
(xii) Purchase of goods on credit.
(xiii) B/P given to creditors.
(xiv) Cash paid against B/P.
(xv) Redemption of Debentures.
(xvi) Issue of Shares for Cash.
(xvii) Issue of Shares against purchase of fixed assets
(xviii) Payment of Final dividend already declared.
(xix) Cash collected from debtors.
(xxi) B/R endorsed to creditors.
(xxii) B/R dishonoured.
Solution:
Reason
(i) Improve As only current assets have increased, whereas, current liabilities remain unchanged.
(ii) Improve As only current assets have increased, whereas, current liabilities remain unchanged.
(iii) No Change As both current assets and current liabilities have remain unchanged.
(iv) Reduce As only current liabilities have increased, whereas, current assets remain unchanged.
(v) No Change As both current assets and current liabilities have remain unchanged.
(vi) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(vii) Improve As only current assets (cash) have increased by the amount of profit, whereas, current liabilities
remain unchanged.
(viii) Reduce As only current assets (cash) have decreased by the amount of loss, whereas, current liabilities
remain unchanged.
(ix) Improve As current assets have increased by the amount of profit (included in Trade Receivables),
whereas, current liabilities remain unchanged.
(x) Reduce As only current assets (Trade Receivables) have decreased by the amount of loss, whereas,
current liabilities remain unchanged.
(xi) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(xii) Reduce As both current assets and current liabilities have increased by the same amount.
(xiii) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current liability into another current liability.
(xiv) Improve As both current assets and current liabilities have decreased by the same amount.
(XV) Reduce As only current assets (cash) have decreased by the amount of redemption of debentures,
whereas, current liabilities remain unchanged.
(xvi) Improve As only current assets (cash) have increased by the amount of issue of shares, whereas, current
liabilities remain unchanged.
(xvii) No Change As both current assets and current liabilities have remain unchanged.
(xviii) Improve As both current assets and current liabilities have decreased by the same amount.
(xix) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(XX) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(xxi) Improve As both current assets and current liabilities have decreased by the same amount.
(xxii) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.

Ques 3
The Current Assets of a firm are Rs. 8,00,000 and Current Liabilities are Rs. 3,00,000. The firm is interested in maintaining
a Current Ratio of 2:1, by acquiring some current assets on credit. State the amount of current assets that should be
acquired.
Solution:
Let the amount of current assets to be acquired = x
Page 3

Ques 1
From the following Balance Sheet of Sunrise Ltd., calculate
(i) Current Ratio;
(ii) Quick Ratio
Particulars
I. EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital  9,00,000
(b) Reserves and Surplus  3,00,000
2. Non-Current Liabilities
(a) Long-term Borrowings  4,12,000
(b) Long-term Provisions  1,76,000
3. Current Liabilities
(a) Short-term Borrowings  3,00,000
(c) Short-term Provisions 1 50,000
Total  21,98,000
II. ASSETS
1. Non-Current Assets
Fixed Assets:
Tangible Assets  14,00,000
2. Current Assets
(a) Inventories  2,00,000
(c) Cash and Cash Equivalents  3,80,000
(d) Other Current Assets  1,48,000
Total  21,98,000
(i) Inventories include Loose Tools of Rs. 30,000.
(ii) Other Current Assets consist of prepaid expenses.
Solution:
(i) Current Ratio
Current Assets = Inventories (except Loose Tools) + (Trade Receivables – Provision for Bad Debts) + Cash and Cash
Equivalents + Other Current Assets
= Rs. 1,70,000 + (Rs. 70,000 – 5,000) + Rs. 3,80,000 + Rs. 1,48,000 = Rs. 7,63,000
Current Liabilities = Short-term Borrowings + Trade Payables + Short-term Provisions (except Provision for Bad Debts) = Rs.
3,00,000 + Rs. 60,000 + Rs. 45,000 = Rs. 4,05,000
Current Ratio = Current Assets / Current Liabilities = (Rs.) 7,00,000 / Rs. 4,05,000= 1.88:1
(ii) Quick Ratio
Quick Assets = Current Assets – Prepaid Expenses – Inventories (except Loose Tools) = Rs. 7,63,000 – Rs. 1,48,000 – *
1,70,000 = Rs. 4,45,000
Quick Ratio = Quick Assets / Current Liabilities  = Rs. 4,45,000 / (Rs.) 4,05,000= 1.099:1

Ques 2
The Current Ratio of a company is 2:1. State giving reasons which of the following would improve, reduce or not change
the ratio:
(i) Sale of fixed assets on a credit of 2 months.
(ii) Sale of fixed assets for cash.
(iii) Sale of fixed assets on long – term deferred payment basis.
(iv) Purchase of fixed assets on a credit of 3 months.
(v) Purchase of fixed assets on long – term deferred payment basis.
(vi) Sale of goods for cash at cost.
(vii) Sale of goods at profit for cash.
(viii) Sale of goods at loss for cash.
(ix) Sale of goods at profit on credit.
(x) Sale of goods at loss on credit.

(xi) Purchase of goods for cash.
(xii) Purchase of goods on credit.
(xiii) B/P given to creditors.
(xiv) Cash paid against B/P.
(xv) Redemption of Debentures.
(xvi) Issue of Shares for Cash.
(xvii) Issue of Shares against purchase of fixed assets
(xviii) Payment of Final dividend already declared.
(xix) Cash collected from debtors.
(xxi) B/R endorsed to creditors.
(xxii) B/R dishonoured.
Solution:
Reason
(i) Improve As only current assets have increased, whereas, current liabilities remain unchanged.
(ii) Improve As only current assets have increased, whereas, current liabilities remain unchanged.
(iii) No Change As both current assets and current liabilities have remain unchanged.
(iv) Reduce As only current liabilities have increased, whereas, current assets remain unchanged.
(v) No Change As both current assets and current liabilities have remain unchanged.
(vi) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(vii) Improve As only current assets (cash) have increased by the amount of profit, whereas, current liabilities
remain unchanged.
(viii) Reduce As only current assets (cash) have decreased by the amount of loss, whereas, current liabilities
remain unchanged.
(ix) Improve As current assets have increased by the amount of profit (included in Trade Receivables),
whereas, current liabilities remain unchanged.
(x) Reduce As only current assets (Trade Receivables) have decreased by the amount of loss, whereas,
current liabilities remain unchanged.
(xi) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(xii) Reduce As both current assets and current liabilities have increased by the same amount.
(xiii) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current liability into another current liability.
(xiv) Improve As both current assets and current liabilities have decreased by the same amount.
(XV) Reduce As only current assets (cash) have decreased by the amount of redemption of debentures,
whereas, current liabilities remain unchanged.
(xvi) Improve As only current assets (cash) have increased by the amount of issue of shares, whereas, current
liabilities remain unchanged.
(xvii) No Change As both current assets and current liabilities have remain unchanged.
(xviii) Improve As both current assets and current liabilities have decreased by the same amount.
(xix) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(XX) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(xxi) Improve As both current assets and current liabilities have decreased by the same amount.
(xxii) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.

Ques 3
The Current Assets of a firm are Rs. 8,00,000 and Current Liabilities are Rs. 3,00,000. The firm is interested in maintaining
a Current Ratio of 2:1, by acquiring some current assets on credit. State the amount of current assets that should be
acquired.
Solution:
Let the amount of current assets to be acquired = x

Current Ratio = Current Assets / Current Liabilities  = 8,00,000 + x / 3,00,000 + x  = 2
Or, 8,00,000 + x = 6,00,000 + 2x
i. e. 8,00,000 – 6,00,000 = 2x – x
i.e. x or Amount of current assets to be acquired =Rs. 2,00,000

Ques 4
A business has a current ratio of 3:1 and quick ratio of 1.2:1. If the working capital is Rs. 1,80,000. Calculate the total Current
Assets and value of Stock.
Solution:
Current Ratio = Current Assets / current Liabilities  = 3
Current Assets = 3 Current Liabilities
Given: Working Capital = Rs. 1,80,000
It means: Current Assets – Current Liabilities = Rs. 1,80,000
{ Working Capital = Current Assets – Current Liabilities} Or, 3 Current Liabilities* – Current Liabilities = Rs. 1,80,000 {"Current
Assets = 3 Current Liabilities}
i.e. Current Liabilities = Rs. 90,000
i.e. Current Assets = 3 Current Liabilities = 3 x 90,000 = Rs. 2,70,000
Quick Ratio = Quick Assets / Current Liabilities  = 1.2
It means: Quick Assets = 1.2 Current Liabilities = 1.2 x 90,000 = Rs. 1,08,000
Given: Stock = Current Assets – Quick Assets
Stock = 2,70,000 -1,08,000 = Rs. 1,62,000

Ques 5
A firm has Current Ratio of 4:1 and Quick Ratio of 2.5 :1. Assuming Inventories are Rs. 22,500; find out total Current Assets
and total Current Liabilities. {CBSE, Delhi 200
Solution:
Current Ratio = Current Assets (CA) / Current Liabilities (CL) = 4
Current Assets =4 CL
Quick Ratio – Quick Assets / Current Liabilities  = 2.5
Liquid Assets =2.5 CL
Liquid Assets = Current Assets – Stock
Or, 2.5 CL* =4 CL**- 22,500
{'Liquid Assets = 2.5 CL; **Current Assets = 4 CL} i.e. CL or Current Liabilities = Rs. 15,000
i.e. Current Assets = 4 Current Liabilities = 4 x 15,000 = Rs. 60,000

Ques 6
a. Calculate Debt to Equity Ratio from the following information:
Particulars  Amt. (Rs.)
Shareholders' Funds 10.00,000
Total Debts 15,00,000
Current Liabilities 2,50,000
Solution:
Debt to Equity Ratio =Debt / Equity
Debt = Total Debts – Current Liabilities = Rs. 15,00,000 – Rs. 2,50,000 = Rs. 12,50,000 Equity (Shareholders' Funds) = Rs.
10,00 000
Debt to Equity Ratio = Rs. 12,50,000 / Rs. 10,00,000= 1.25:1

b. Total Debt = Rs. 12,00,000; Current Assets = Rs. 3,00,000; Working Capital = Rs. 1,00,000; Shareholders'
Funds = Rs. 5,00,000
Solution:
Debt to Equity Ratio = Debt / Equity
Debt = Total Debt – Current Liabilities** = Rs. 12,00,000 – Rs. 2,00,000 = Rs. 10,00,000
"Current Liabilities = Current Assets – Working Capital – Rs. 3,00,000 – Rs. 1,00,000 = Rs. 2,00,000
Equity (Shareholders' Funds) = Rs. 5,00,000
Debt to Equity Ratio =Rs. 10,00,000 / Rs. 5,00,000 = 2:1

c. Total Assets = Rs. 10,00,000; Current Liabilities = Rs. 2,00,000; Equity = Rs. 3,00,000
Solution:
Page 4

Ques 1
From the following Balance Sheet of Sunrise Ltd., calculate
(i) Current Ratio;
(ii) Quick Ratio
Particulars
I. EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital  9,00,000
(b) Reserves and Surplus  3,00,000
2. Non-Current Liabilities
(a) Long-term Borrowings  4,12,000
(b) Long-term Provisions  1,76,000
3. Current Liabilities
(a) Short-term Borrowings  3,00,000
(c) Short-term Provisions 1 50,000
Total  21,98,000
II. ASSETS
1. Non-Current Assets
Fixed Assets:
Tangible Assets  14,00,000
2. Current Assets
(a) Inventories  2,00,000
(c) Cash and Cash Equivalents  3,80,000
(d) Other Current Assets  1,48,000
Total  21,98,000
(i) Inventories include Loose Tools of Rs. 30,000.
(ii) Other Current Assets consist of prepaid expenses.
Solution:
(i) Current Ratio
Current Assets = Inventories (except Loose Tools) + (Trade Receivables – Provision for Bad Debts) + Cash and Cash
Equivalents + Other Current Assets
= Rs. 1,70,000 + (Rs. 70,000 – 5,000) + Rs. 3,80,000 + Rs. 1,48,000 = Rs. 7,63,000
Current Liabilities = Short-term Borrowings + Trade Payables + Short-term Provisions (except Provision for Bad Debts) = Rs.
3,00,000 + Rs. 60,000 + Rs. 45,000 = Rs. 4,05,000
Current Ratio = Current Assets / Current Liabilities = (Rs.) 7,00,000 / Rs. 4,05,000= 1.88:1
(ii) Quick Ratio
Quick Assets = Current Assets – Prepaid Expenses – Inventories (except Loose Tools) = Rs. 7,63,000 – Rs. 1,48,000 – *
1,70,000 = Rs. 4,45,000
Quick Ratio = Quick Assets / Current Liabilities  = Rs. 4,45,000 / (Rs.) 4,05,000= 1.099:1

Ques 2
The Current Ratio of a company is 2:1. State giving reasons which of the following would improve, reduce or not change
the ratio:
(i) Sale of fixed assets on a credit of 2 months.
(ii) Sale of fixed assets for cash.
(iii) Sale of fixed assets on long – term deferred payment basis.
(iv) Purchase of fixed assets on a credit of 3 months.
(v) Purchase of fixed assets on long – term deferred payment basis.
(vi) Sale of goods for cash at cost.
(vii) Sale of goods at profit for cash.
(viii) Sale of goods at loss for cash.
(ix) Sale of goods at profit on credit.
(x) Sale of goods at loss on credit.

(xi) Purchase of goods for cash.
(xii) Purchase of goods on credit.
(xiii) B/P given to creditors.
(xiv) Cash paid against B/P.
(xv) Redemption of Debentures.
(xvi) Issue of Shares for Cash.
(xvii) Issue of Shares against purchase of fixed assets
(xviii) Payment of Final dividend already declared.
(xix) Cash collected from debtors.
(xxi) B/R endorsed to creditors.
(xxii) B/R dishonoured.
Solution:
Reason
(i) Improve As only current assets have increased, whereas, current liabilities remain unchanged.
(ii) Improve As only current assets have increased, whereas, current liabilities remain unchanged.
(iii) No Change As both current assets and current liabilities have remain unchanged.
(iv) Reduce As only current liabilities have increased, whereas, current assets remain unchanged.
(v) No Change As both current assets and current liabilities have remain unchanged.
(vi) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(vii) Improve As only current assets (cash) have increased by the amount of profit, whereas, current liabilities
remain unchanged.
(viii) Reduce As only current assets (cash) have decreased by the amount of loss, whereas, current liabilities
remain unchanged.
(ix) Improve As current assets have increased by the amount of profit (included in Trade Receivables),
whereas, current liabilities remain unchanged.
(x) Reduce As only current assets (Trade Receivables) have decreased by the amount of loss, whereas,
current liabilities remain unchanged.
(xi) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(xii) Reduce As both current assets and current liabilities have increased by the same amount.
(xiii) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current liability into another current liability.
(xiv) Improve As both current assets and current liabilities have decreased by the same amount.
(XV) Reduce As only current assets (cash) have decreased by the amount of redemption of debentures,
whereas, current liabilities remain unchanged.
(xvi) Improve As only current assets (cash) have increased by the amount of issue of shares, whereas, current
liabilities remain unchanged.
(xvii) No Change As both current assets and current liabilities have remain unchanged.
(xviii) Improve As both current assets and current liabilities have decreased by the same amount.
(xix) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(XX) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(xxi) Improve As both current assets and current liabilities have decreased by the same amount.
(xxii) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.

Ques 3
The Current Assets of a firm are Rs. 8,00,000 and Current Liabilities are Rs. 3,00,000. The firm is interested in maintaining
a Current Ratio of 2:1, by acquiring some current assets on credit. State the amount of current assets that should be
acquired.
Solution:
Let the amount of current assets to be acquired = x

Current Ratio = Current Assets / Current Liabilities  = 8,00,000 + x / 3,00,000 + x  = 2
Or, 8,00,000 + x = 6,00,000 + 2x
i. e. 8,00,000 – 6,00,000 = 2x – x
i.e. x or Amount of current assets to be acquired =Rs. 2,00,000

Ques 4
A business has a current ratio of 3:1 and quick ratio of 1.2:1. If the working capital is Rs. 1,80,000. Calculate the total Current
Assets and value of Stock.
Solution:
Current Ratio = Current Assets / current Liabilities  = 3
Current Assets = 3 Current Liabilities
Given: Working Capital = Rs. 1,80,000
It means: Current Assets – Current Liabilities = Rs. 1,80,000
{ Working Capital = Current Assets – Current Liabilities} Or, 3 Current Liabilities* – Current Liabilities = Rs. 1,80,000 {"Current
Assets = 3 Current Liabilities}
i.e. Current Liabilities = Rs. 90,000
i.e. Current Assets = 3 Current Liabilities = 3 x 90,000 = Rs. 2,70,000
Quick Ratio = Quick Assets / Current Liabilities  = 1.2
It means: Quick Assets = 1.2 Current Liabilities = 1.2 x 90,000 = Rs. 1,08,000
Given: Stock = Current Assets – Quick Assets
Stock = 2,70,000 -1,08,000 = Rs. 1,62,000

Ques 5
A firm has Current Ratio of 4:1 and Quick Ratio of 2.5 :1. Assuming Inventories are Rs. 22,500; find out total Current Assets
and total Current Liabilities. {CBSE, Delhi 200
Solution:
Current Ratio = Current Assets (CA) / Current Liabilities (CL) = 4
Current Assets =4 CL
Quick Ratio – Quick Assets / Current Liabilities  = 2.5
Liquid Assets =2.5 CL
Liquid Assets = Current Assets – Stock
Or, 2.5 CL* =4 CL**- 22,500
{'Liquid Assets = 2.5 CL; **Current Assets = 4 CL} i.e. CL or Current Liabilities = Rs. 15,000
i.e. Current Assets = 4 Current Liabilities = 4 x 15,000 = Rs. 60,000

Ques 6
a. Calculate Debt to Equity Ratio from the following information:
Particulars  Amt. (Rs.)
Shareholders' Funds 10.00,000
Total Debts 15,00,000
Current Liabilities 2,50,000
Solution:
Debt to Equity Ratio =Debt / Equity
Debt = Total Debts – Current Liabilities = Rs. 15,00,000 – Rs. 2,50,000 = Rs. 12,50,000 Equity (Shareholders' Funds) = Rs.
10,00 000
Debt to Equity Ratio = Rs. 12,50,000 / Rs. 10,00,000= 1.25:1

b. Total Debt = Rs. 12,00,000; Current Assets = Rs. 3,00,000; Working Capital = Rs. 1,00,000; Shareholders'
Funds = Rs. 5,00,000
Solution:
Debt to Equity Ratio = Debt / Equity
Debt = Total Debt – Current Liabilities** = Rs. 12,00,000 – Rs. 2,00,000 = Rs. 10,00,000
"Current Liabilities = Current Assets – Working Capital – Rs. 3,00,000 – Rs. 1,00,000 = Rs. 2,00,000
Equity (Shareholders' Funds) = Rs. 5,00,000
Debt to Equity Ratio =Rs. 10,00,000 / Rs. 5,00,000 = 2:1

c. Total Assets = Rs. 10,00,000; Current Liabilities = Rs. 2,00,000; Equity = Rs. 3,00,000
Solution:

Debt to Equity Ratio = Debt / Equity
Debt = Total Assets – Current Liabilities – Equity
= Rs. 10,00,000 – Rs. 2,00,000 – Rs. 3,00,000 = Rs. 5,00,000
Debt to Equity Ratio = (Rs.) 5,00,000 / Rs. 3,00,000 = 1.66:1

Ques 7
June Ltd. has a Quick Ratio of 2.2:1. Its Net Working Capital is Rs. 2,00,000, Inventories of Rs. 80,000, Total Assets are of Rs.
3,80,000 and Total Debt of Rs. 3,00,000. Calculate Debt to Equity Ratio.
Solution:
Quick Ratio = Quick Assets / Current Liabilities  =  2.2
Quick Assets = 2.2 Current Liabilities
Working Capital = (Quick Assets + Inventories) – Current Liabilities
{: Current Assets = Quick Assets + Inventories)
2,00,000 = 2.2 Current Liabilities + Rs. 80,000 (inventories) – Current Liabilities
Current Liabilities = Rs. 1,00,000
Debt = Total Debt – Current Liabilities
= Rs. 3,00,000 – Rs. 1,00,000 = Rs. 2,00,000
Equity = Total Assets – Total Debt
= Rs. 3,80,000 – Rs. 3,00,000 = Rs. 80,000
Debt to Equity Ratio  = Debt / Equity  = Rs. 2,00,000 / Rs. 80,000  = 2.5:1

Ques 8
Assuming that the Debt – Equity Ratio is 2. State giving reasons whether this ratio would increase, decrease or remain
unchanged in the following cases:
(a) Purchase of fixed asset on a credit of 2 months.
(b) Purchase of fixed asset on a long – term deferred payment basis.
(c) Issue of New shares for cash.
(d) Issue of Bonus shares.
(e) Sale of fixed asset at a loss of Rs. 3,000.
(f) Conversion of debentures into equity shares.
(g) Sale of a fixed asset at profit.
(h) Purchase of a fixed asset on long – term deferred payment basis.
Solution:
S. No. Effect on Debt –
Equity Ratio
Reason
(a) No Change As both Equity and Debt are not affected.
(b) Increase As only Debt has increased, whereas, Equity remains unchanged.
(c) Decrease As only Equity has increased, whereas, Debt remains unchanged.
(d) No Change As both Equity and Debt are not affected.
(e) Increase As only Equity has decreased, whereas, Debt remains unchanged.
(f) Decrease As Debt remains unchanged, but equity (shareholders' funds) increases.
(g) Increase As Debt increases, but equity (shareholders' funds) remains unchanged.
(h) No Change As both debt and equity remain unchanged.

Ques 9
ABC Ltd. has 10% Debentures of Rs. 7,00,000. Its profit after interest and after tax is Rs. 1,68,000. Calculate Interest
Coverage Ratio, if tax rate is 40%.
Solution:
Interest Coverage Ratio =Profit before Interest and Tax
Interest on Long – Term Debt
Profit before Interest and Tax = Rs. 3,50,000
(WN:1)

Interest on Debentures = Rs. 7,00,000 x 10/100 = Rs. 70,000
Interest Coverage Ratio = Rs. 3,50,000 / Rs. 70,000 = 5 Times
Working Notes:
1. Calculation of Profit before interest and Tax: It can be calculated in 2 steps:
Step 1. Calculate "Profit after Interest and before Tax". Let Profit after Interest and before Tax be x.
It means, Tax = 40% of x.
Page 5

Ques 1
From the following Balance Sheet of Sunrise Ltd., calculate
(i) Current Ratio;
(ii) Quick Ratio
Particulars
I. EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital  9,00,000
(b) Reserves and Surplus  3,00,000
2. Non-Current Liabilities
(a) Long-term Borrowings  4,12,000
(b) Long-term Provisions  1,76,000
3. Current Liabilities
(a) Short-term Borrowings  3,00,000
(c) Short-term Provisions 1 50,000
Total  21,98,000
II. ASSETS
1. Non-Current Assets
Fixed Assets:
Tangible Assets  14,00,000
2. Current Assets
(a) Inventories  2,00,000
(c) Cash and Cash Equivalents  3,80,000
(d) Other Current Assets  1,48,000
Total  21,98,000
(i) Inventories include Loose Tools of Rs. 30,000.
(ii) Other Current Assets consist of prepaid expenses.
Solution:
(i) Current Ratio
Current Assets = Inventories (except Loose Tools) + (Trade Receivables – Provision for Bad Debts) + Cash and Cash
Equivalents + Other Current Assets
= Rs. 1,70,000 + (Rs. 70,000 – 5,000) + Rs. 3,80,000 + Rs. 1,48,000 = Rs. 7,63,000
Current Liabilities = Short-term Borrowings + Trade Payables + Short-term Provisions (except Provision for Bad Debts) = Rs.
3,00,000 + Rs. 60,000 + Rs. 45,000 = Rs. 4,05,000
Current Ratio = Current Assets / Current Liabilities = (Rs.) 7,00,000 / Rs. 4,05,000= 1.88:1
(ii) Quick Ratio
Quick Assets = Current Assets – Prepaid Expenses – Inventories (except Loose Tools) = Rs. 7,63,000 – Rs. 1,48,000 – *
1,70,000 = Rs. 4,45,000
Quick Ratio = Quick Assets / Current Liabilities  = Rs. 4,45,000 / (Rs.) 4,05,000= 1.099:1

Ques 2
The Current Ratio of a company is 2:1. State giving reasons which of the following would improve, reduce or not change
the ratio:
(i) Sale of fixed assets on a credit of 2 months.
(ii) Sale of fixed assets for cash.
(iii) Sale of fixed assets on long – term deferred payment basis.
(iv) Purchase of fixed assets on a credit of 3 months.
(v) Purchase of fixed assets on long – term deferred payment basis.
(vi) Sale of goods for cash at cost.
(vii) Sale of goods at profit for cash.
(viii) Sale of goods at loss for cash.
(ix) Sale of goods at profit on credit.
(x) Sale of goods at loss on credit.

(xi) Purchase of goods for cash.
(xii) Purchase of goods on credit.
(xiii) B/P given to creditors.
(xiv) Cash paid against B/P.
(xv) Redemption of Debentures.
(xvi) Issue of Shares for Cash.
(xvii) Issue of Shares against purchase of fixed assets
(xviii) Payment of Final dividend already declared.
(xix) Cash collected from debtors.
(xxi) B/R endorsed to creditors.
(xxii) B/R dishonoured.
Solution:
Reason
(i) Improve As only current assets have increased, whereas, current liabilities remain unchanged.
(ii) Improve As only current assets have increased, whereas, current liabilities remain unchanged.
(iii) No Change As both current assets and current liabilities have remain unchanged.
(iv) Reduce As only current liabilities have increased, whereas, current assets remain unchanged.
(v) No Change As both current assets and current liabilities have remain unchanged.
(vi) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(vii) Improve As only current assets (cash) have increased by the amount of profit, whereas, current liabilities
remain unchanged.
(viii) Reduce As only current assets (cash) have decreased by the amount of loss, whereas, current liabilities
remain unchanged.
(ix) Improve As current assets have increased by the amount of profit (included in Trade Receivables),
whereas, current liabilities remain unchanged.
(x) Reduce As only current assets (Trade Receivables) have decreased by the amount of loss, whereas,
current liabilities remain unchanged.
(xi) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(xii) Reduce As both current assets and current liabilities have increased by the same amount.
(xiii) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current liability into another current liability.
(xiv) Improve As both current assets and current liabilities have decreased by the same amount.
(XV) Reduce As only current assets (cash) have decreased by the amount of redemption of debentures,
whereas, current liabilities remain unchanged.
(xvi) Improve As only current assets (cash) have increased by the amount of issue of shares, whereas, current
liabilities remain unchanged.
(xvii) No Change As both current assets and current liabilities have remain unchanged.
(xviii) Improve As both current assets and current liabilities have decreased by the same amount.
(xix) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(XX) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.
(xxi) Improve As both current assets and current liabilities have decreased by the same amount.
(xxii) No Change Both current assets and current liabilities have remain unchanged because there is only
conversion of one current asset into another current asset.

Ques 3
The Current Assets of a firm are Rs. 8,00,000 and Current Liabilities are Rs. 3,00,000. The firm is interested in maintaining
a Current Ratio of 2:1, by acquiring some current assets on credit. State the amount of current assets that should be
acquired.
Solution:
Let the amount of current assets to be acquired = x

Current Ratio = Current Assets / Current Liabilities  = 8,00,000 + x / 3,00,000 + x  = 2
Or, 8,00,000 + x = 6,00,000 + 2x
i. e. 8,00,000 – 6,00,000 = 2x – x
i.e. x or Amount of current assets to be acquired =Rs. 2,00,000

Ques 4
A business has a current ratio of 3:1 and quick ratio of 1.2:1. If the working capital is Rs. 1,80,000. Calculate the total Current
Assets and value of Stock.
Solution:
Current Ratio = Current Assets / current Liabilities  = 3
Current Assets = 3 Current Liabilities
Given: Working Capital = Rs. 1,80,000
It means: Current Assets – Current Liabilities = Rs. 1,80,000
{ Working Capital = Current Assets – Current Liabilities} Or, 3 Current Liabilities* – Current Liabilities = Rs. 1,80,000 {"Current
Assets = 3 Current Liabilities}
i.e. Current Liabilities = Rs. 90,000
i.e. Current Assets = 3 Current Liabilities = 3 x 90,000 = Rs. 2,70,000
Quick Ratio = Quick Assets / Current Liabilities  = 1.2
It means: Quick Assets = 1.2 Current Liabilities = 1.2 x 90,000 = Rs. 1,08,000
Given: Stock = Current Assets – Quick Assets
Stock = 2,70,000 -1,08,000 = Rs. 1,62,000

Ques 5
A firm has Current Ratio of 4:1 and Quick Ratio of 2.5 :1. Assuming Inventories are Rs. 22,500; find out total Current Assets
and total Current Liabilities. {CBSE, Delhi 200
Solution:
Current Ratio = Current Assets (CA) / Current Liabilities (CL) = 4
Current Assets =4 CL
Quick Ratio – Quick Assets / Current Liabilities  = 2.5
Liquid Assets =2.5 CL
Liquid Assets = Current Assets – Stock
Or, 2.5 CL* =4 CL**- 22,500
{'Liquid Assets = 2.5 CL; **Current Assets = 4 CL} i.e. CL or Current Liabilities = Rs. 15,000
i.e. Current Assets = 4 Current Liabilities = 4 x 15,000 = Rs. 60,000

Ques 6
a. Calculate Debt to Equity Ratio from the following information:
Particulars  Amt. (Rs.)
Shareholders' Funds 10.00,000
Total Debts 15,00,000
Current Liabilities 2,50,000
Solution:
Debt to Equity Ratio =Debt / Equity
Debt = Total Debts – Current Liabilities = Rs. 15,00,000 – Rs. 2,50,000 = Rs. 12,50,000 Equity (Shareholders' Funds) = Rs.
10,00 000
Debt to Equity Ratio = Rs. 12,50,000 / Rs. 10,00,000= 1.25:1

b. Total Debt = Rs. 12,00,000; Current Assets = Rs. 3,00,000; Working Capital = Rs. 1,00,000; Shareholders'
Funds = Rs. 5,00,000
Solution:
Debt to Equity Ratio = Debt / Equity
Debt = Total Debt – Current Liabilities** = Rs. 12,00,000 – Rs. 2,00,000 = Rs. 10,00,000
"Current Liabilities = Current Assets – Working Capital – Rs. 3,00,000 – Rs. 1,00,000 = Rs. 2,00,000
Equity (Shareholders' Funds) = Rs. 5,00,000
Debt to Equity Ratio =Rs. 10,00,000 / Rs. 5,00,000 = 2:1

c. Total Assets = Rs. 10,00,000; Current Liabilities = Rs. 2,00,000; Equity = Rs. 3,00,000
Solution:

Debt to Equity Ratio = Debt / Equity
Debt = Total Assets – Current Liabilities – Equity
= Rs. 10,00,000 – Rs. 2,00,000 – Rs. 3,00,000 = Rs. 5,00,000
Debt to Equity Ratio = (Rs.) 5,00,000 / Rs. 3,00,000 = 1.66:1

Ques 7
June Ltd. has a Quick Ratio of 2.2:1. Its Net Working Capital is Rs. 2,00,000, Inventories of Rs. 80,000, Total Assets are of Rs.
3,80,000 and Total Debt of Rs. 3,00,000. Calculate Debt to Equity Ratio.
Solution:
Quick Ratio = Quick Assets / Current Liabilities  =  2.2
Quick Assets = 2.2 Current Liabilities
Working Capital = (Quick Assets + Inventories) – Current Liabilities
{: Current Assets = Quick Assets + Inventories)
2,00,000 = 2.2 Current Liabilities + Rs. 80,000 (inventories) – Current Liabilities
Current Liabilities = Rs. 1,00,000
Debt = Total Debt – Current Liabilities
= Rs. 3,00,000 – Rs. 1,00,000 = Rs. 2,00,000
Equity = Total Assets – Total Debt
= Rs. 3,80,000 – Rs. 3,00,000 = Rs. 80,000
Debt to Equity Ratio  = Debt / Equity  = Rs. 2,00,000 / Rs. 80,000  = 2.5:1

Ques 8
Assuming that the Debt – Equity Ratio is 2. State giving reasons whether this ratio would increase, decrease or remain
unchanged in the following cases:
(a) Purchase of fixed asset on a credit of 2 months.
(b) Purchase of fixed asset on a long – term deferred payment basis.
(c) Issue of New shares for cash.
(d) Issue of Bonus shares.
(e) Sale of fixed asset at a loss of Rs. 3,000.
(f) Conversion of debentures into equity shares.
(g) Sale of a fixed asset at profit.
(h) Purchase of a fixed asset on long – term deferred payment basis.
Solution:
S. No. Effect on Debt –
Equity Ratio
Reason
(a) No Change As both Equity and Debt are not affected.
(b) Increase As only Debt has increased, whereas, Equity remains unchanged.
(c) Decrease As only Equity has increased, whereas, Debt remains unchanged.
(d) No Change As both Equity and Debt are not affected.
(e) Increase As only Equity has decreased, whereas, Debt remains unchanged.
(f) Decrease As Debt remains unchanged, but equity (shareholders' funds) increases.
(g) Increase As Debt increases, but equity (shareholders' funds) remains unchanged.
(h) No Change As both debt and equity remain unchanged.

Ques 9
ABC Ltd. has 10% Debentures of Rs. 7,00,000. Its profit after interest and after tax is Rs. 1,68,000. Calculate Interest
Coverage Ratio, if tax rate is 40%.
Solution:
Interest Coverage Ratio =Profit before Interest and Tax
Interest on Long – Term Debt
Profit before Interest and Tax = Rs. 3,50,000
(WN:1)

Interest on Debentures = Rs. 7,00,000 x 10/100 = Rs. 70,000
Interest Coverage Ratio = Rs. 3,50,000 / Rs. 70,000 = 5 Times
Working Notes:
1. Calculation of Profit before interest and Tax: It can be calculated in 2 steps:
Step 1. Calculate "Profit after Interest and before Tax". Let Profit after Interest and before Tax be x.
It means, Tax = 40% of x.

It means: x – 40% of x = Rs. 1,68,000; or 60% of x = Rs. 1,68,000 or x = Rs. 2,80,000
Step 2. Calculate "Profit before Interest and Tax":
Profit before Interest and Tax = Profit after Interest and before Tax + Interest = 2,80,000 + 70,000
= Rs. 3,50,000.

Ques 10
From the following, calculate Inventory Turnover Ratio:
Amt. (Rs.)
Opening Inventory 15,000
Revenue from Operations 2,00,000
Closing Inventory 25,000
Gross Profit 25% of Cost
Solution:
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Let: Cost of Revenue from Operations = x
It means: Gross Profit = 25% of x
We know: = Cost of Revenue from Operations + Gross Profit = Revenue from Operations
If means, x + 25% of x = Rs. 2,00,000
x or Cost of Revenue from Operations = Rs. 1,60,000
Average Inventory = Opening Inventory + Closing Inventory / 2
= RS.15,000 + RS.25,000 /2 = Rs. 20,000
Inventory Turnover Ratio = Rs. 1,60,000 /  Rs. 20,000 = 8 Times

Ques 11
Cost of Revenue from Operations = Rs. 3,00,000; Inventory Turnover Ratio = 3 Times. Calculate the value of Opening
Inventory and Closing Inventory in each of the following alternative cases:
Case 1. If Closing Inventory was Rs. 1,00,000 more than the Opening Inventory.
Case 2. If Closing Inventory was 3 times of the Opening Inventory.
Case 3. If Closing Inventory was 3 times more than the Opening Inventory.
Case 4. If Opening Inventory was 1/3
rd
of the Closing Inventory.
Solution:
Inventory Turnover Ratio = Cost of Revenue From Operations / Average Inventory
Cost of Revenue from Operations = Rs. 3,00,000
3 = Rs. 3,00,000 / Average Inventory
Average Inventory =Rs. 3,00,000 / 3= Rs. 1,00,000
Case 1. If Closing Inventory is Rs. 1,00,000 more than the Opening Inventory
Let Opening Inventory = x
Closing Inventory = x + Rs. 1,00,000
Average Inventory = Opening Inventory + Closing Inventory / 2
Rs. 1,00,000 = × + × + (Rs.) 1,00,000 / 22
Rs. 2,00,000 = 2 x + Rs. 1,00,000
x or Opening Inventory = Rs. 50,000
Closing Inventory = Rs. 50,000 + Rs. 1,00,000 = Rs. 1,50,000
Case 2. If Closing Inventory was 3 times of the Opening Inventory
Let Opening Inventory = x
Closing Inventory = 3x
Average Inventory = Opening Inventory + Closing Inventory / 2
Rs. 1,00,000 =× + 3× / 2
Rs. 2,00,000 = 4x
x or Opening Inventory = Rs. 50,000
Closing Inventory = 3x Rs. 50,000 = Rs. 1,50,000
Case 3. If Closing Inventory was 3 times more than the Opening Inventory
Let Opening Inventory = x
Closing Inventory = x + 3x = 4x
Average Inventory= Opening Inventory + Closing Inventory /  2
Rs. 1,00,000 = ×+4×
Rs. 2,00,000 = 5x
x or Opening Inventory = Rs. 40,000
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