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 (b) Trade Payables 60,000 (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 (b) Trade Receivables 70,000 (c) Cash and Cash Equivalents 3,80,000 (d) Other Current Assets 1,48,000 Total 21,98,000 Additional Information: (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 â€“ Provision for Bad Debts) + Cash and Cash Equivalents + Other Current Assets = Rs. 1,70,000 + (Rs. 70,000 â€“ 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 â€“ Prepaid Expenses â€“ Inventories (except Loose Tools) = Rs. 7,63,000 â€“ Rs. 1,48,000 â€“ * 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 â€“ term deferred payment basis. (iv) Purchase of fixed assets on a credit of 3 months. (v) Purchase of fixed assets on long â€“ 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 (b) Trade Payables 60,000 (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 (b) Trade Receivables 70,000 (c) Cash and Cash Equivalents 3,80,000 (d) Other Current Assets 1,48,000 Total 21,98,000 Additional Information: (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 â€“ Provision for Bad Debts) + Cash and Cash Equivalents + Other Current Assets = Rs. 1,70,000 + (Rs. 70,000 â€“ 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 â€“ Prepaid Expenses â€“ Inventories (except Loose Tools) = Rs. 7,63,000 â€“ Rs. 1,48,000 â€“ * 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 â€“ term deferred payment basis. (iv) Purchase of fixed assets on a credit of 3 months. (v) Purchase of fixed assets on long â€“ 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. (xx) B/R received 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 (b) Trade Payables 60,000 (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 (b) Trade Receivables 70,000 (c) Cash and Cash Equivalents 3,80,000 (d) Other Current Assets 1,48,000 Total 21,98,000 Additional Information: (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 â€“ Provision for Bad Debts) + Cash and Cash Equivalents + Other Current Assets = Rs. 1,70,000 + (Rs. 70,000 â€“ 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 â€“ Prepaid Expenses â€“ Inventories (except Loose Tools) = Rs. 7,63,000 â€“ Rs. 1,48,000 â€“ * 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 â€“ term deferred payment basis. (iv) Purchase of fixed assets on a credit of 3 months. (v) Purchase of fixed assets on long â€“ 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. (xx) B/R received 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 â€“ 6,00,000 = 2x â€“ 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 â€“ Current Liabilities = Rs. 1,80,000 { Working Capital = Current Assets â€“ Current Liabilities} Or, 3 Current Liabilities* â€“ 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 â€“ 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 â€“ Quick Assets / Current Liabilities = 2.5 Liquid Assets =2.5 CL Liquid Assets = Current Assets â€“ 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 â€“ Current Liabilities = Rs. 15,00,000 â€“ 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 â€“ Current Liabilities** = Rs. 12,00,000 â€“ Rs. 2,00,000 = Rs. 10,00,000 "Current Liabilities = Current Assets â€“ Working Capital â€“ Rs. 3,00,000 â€“ 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 (b) Trade Payables 60,000 (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 (b) Trade Receivables 70,000 (c) Cash and Cash Equivalents 3,80,000 (d) Other Current Assets 1,48,000 Total 21,98,000 Additional Information: (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 â€“ Provision for Bad Debts) + Cash and Cash Equivalents + Other Current Assets = Rs. 1,70,000 + (Rs. 70,000 â€“ 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 â€“ Prepaid Expenses â€“ Inventories (except Loose Tools) = Rs. 7,63,000 â€“ Rs. 1,48,000 â€“ * 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 â€“ term deferred payment basis. (iv) Purchase of fixed assets on a credit of 3 months. (v) Purchase of fixed assets on long â€“ 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. (xx) B/R received 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 â€“ 6,00,000 = 2x â€“ 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 â€“ Current Liabilities = Rs. 1,80,000 { Working Capital = Current Assets â€“ Current Liabilities} Or, 3 Current Liabilities* â€“ 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 â€“ 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 â€“ Quick Assets / Current Liabilities = 2.5 Liquid Assets =2.5 CL Liquid Assets = Current Assets â€“ 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 â€“ Current Liabilities = Rs. 15,00,000 â€“ 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 â€“ Current Liabilities** = Rs. 12,00,000 â€“ Rs. 2,00,000 = Rs. 10,00,000 "Current Liabilities = Current Assets â€“ Working Capital â€“ Rs. 3,00,000 â€“ 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 â€“ Current Liabilities â€“ Equity = Rs. 10,00,000 â€“ Rs. 2,00,000 â€“ 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) â€“ Current Liabilities {: Current Assets = Quick Assets + Inventories) 2,00,000 = 2.2 Current Liabilities + Rs. 80,000 (inventories) â€“ Current Liabilities Current Liabilities = Rs. 1,00,000 Debt = Total Debt â€“ Current Liabilities = Rs. 3,00,000 â€“ Rs. 1,00,000 = Rs. 2,00,000 Equity = Total Assets â€“ Total Debt = Rs. 3,80,000 â€“ 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 â€“ 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 â€“ 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 â€“ term deferred payment basis. Solution: S. No. Effect on Debt â€“ 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 â€“ 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 (b) Trade Payables 60,000 (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 (b) Trade Receivables 70,000 (c) Cash and Cash Equivalents 3,80,000 (d) Other Current Assets 1,48,000 Total 21,98,000 Additional Information: (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 â€“ Provision for Bad Debts) + Cash and Cash Equivalents + Other Current Assets = Rs. 1,70,000 + (Rs. 70,000 â€“ 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 â€“ Prepaid Expenses â€“ Inventories (except Loose Tools) = Rs. 7,63,000 â€“ Rs. 1,48,000 â€“ * 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 â€“ term deferred payment basis. (iv) Purchase of fixed assets on a credit of 3 months. (v) Purchase of fixed assets on long â€“ 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. (xx) B/R received 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 â€“ 6,00,000 = 2x â€“ 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 â€“ Current Liabilities = Rs. 1,80,000 { Working Capital = Current Assets â€“ Current Liabilities} Or, 3 Current Liabilities* â€“ 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 â€“ 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 â€“ Quick Assets / Current Liabilities = 2.5 Liquid Assets =2.5 CL Liquid Assets = Current Assets â€“ 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 â€“ Current Liabilities = Rs. 15,00,000 â€“ 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 â€“ Current Liabilities** = Rs. 12,00,000 â€“ Rs. 2,00,000 = Rs. 10,00,000 "Current Liabilities = Current Assets â€“ Working Capital â€“ Rs. 3,00,000 â€“ 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 â€“ Current Liabilities â€“ Equity = Rs. 10,00,000 â€“ Rs. 2,00,000 â€“ 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) â€“ Current Liabilities {: Current Assets = Quick Assets + Inventories) 2,00,000 = 2.2 Current Liabilities + Rs. 80,000 (inventories) â€“ Current Liabilities Current Liabilities = Rs. 1,00,000 Debt = Total Debt â€“ Current Liabilities = Rs. 3,00,000 â€“ Rs. 1,00,000 = Rs. 2,00,000 Equity = Total Assets â€“ Total Debt = Rs. 3,80,000 â€“ 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 â€“ 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 â€“ 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 â€“ term deferred payment basis. Solution: S. No. Effect on Debt â€“ 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 â€“ 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 â€“ 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. 40,000Read More

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