Fma financial accounting assignments with solutions

Assignment I - Journal

Q.1 Journalize the following relating to April 2009:

Particulars Rs.
1. R. started business with 1,00,000
2. He purchased furniture for 20,000
3. Paid salary to his clerk 1,000
4. Paid rent 5,000
5. Received interest 2,000

Solution:
Debit Amount Credit
Date Particulars Ledger Folio (Rs) Amount (Rs)
1 Cash A/c Dr 100,000

To Capital A/c 100,000
2 Furniture A/c Dr 20,000

To Cash A/c 20,000
3 Salary A/c Dr 1,000

To Cash A/c 1,000
4 Rent A/c Dr 5,000

To Cash A/c 5,000
5 Cash A/c Dr 2,000

To Interest A/c 2,000

Q.2 Journalize transactions of M/s X & Co. for the month of March 2009 on the basis of
double entry system:
1. X introduced cash Rs. 4,00,000.
2. Cash deposited in the Citibank Rs. 2,00,000.
3. Cash loan of Rs. 50,000 taken from Y.
4. Salaries paid for the month of March 2009, Rs. 30,000 and Rs. 10,000 is still payable for the
month of March 2009.
5. Furniture purchased Rs. 50,000.

Solution:
Debit Amount Credit Amount
Date Particulars Ledger Folio (Rs) (Rs)
1 Cash A/c Dr 400,000
To Captial (X) A/c 400,000
2 Bank A/c Dr 200,000
To Cash A/c 200,000
3 Cash A/c Dr 50,000
To Y A/c 50,000
4 Salary A/c Dr 40,000
To Cash A/c 30,000
To Outstanding Salary A/c 10,000
5 Furniture A/c Dr 50,000
To Cash A/c 50,000

Q.3 Journalize the following transactions.
1. December 1, 2008, Ajit started-business with cash Rs. 4,00,000.
2: December 3, he paid into the bank Rs. 20,000.
3. December 5, he purchased goods for cash Rs. 1,50,000.
4. December 8, he sold goods for cash Rs. 60,000.
5. December 10, he purchased furniture and paid by cheque Rs. 50,000.
6. December 12, he sold goods to Arvind Rs. 40,000.
7. December 14, he purchased goods from Amrit Rs. 1,00,000.
8. December 15, he returned goods to Amrit Rs. 50,000.
9. December 16, he received from Arvind Rs. 39,600 in full settlement.
10. December 18, he withdrew goods for personal use Rs. 10,000.
11. December 20, he withdrew cash from business for personal use Rs. 20,000.
12. December 24, he paid telephone charges Rs. 10,000.
13. December 26, cash paid to Amrit in full settlement Rs. 49,000.
14. December 31, paid for stationery Rs. 2,000, rent Rs. 5,000 and salaries to staff Rs. 20,000.
15. December 31, goods distributed by way of free samples Rs. 10,000.
16. December 31, wages paid for erection of Machinery Rs. 80,000.
17. Personal income tax liability of X of Rs. 17,000 was paid out of petty cash of business.
18. Purchase of goods from Naveen of the list price of Rs. 20,000. He allowed 10% trade
discount, Rs. 500 cash discount was also allowed for quick payment.

Solution:
1-Dec-08 Cash A/c Dr 400,000
To Capital A/c 400,000
3-Dec-08 Bank A/c Dr 20,000
To Cash A/c 20,000
5-Dec-08 Purchase A/c Dr 150,000
To Cash A/c 150,000
8-Dec-08 Cash A/c Dr 60,000
To Sales A/c 60,000
10-Dec-08 Furniture A/c Dr 50,000
To Bank A/c 50,000
12-Dec-08 Arvind A/c Dr 40,000
To Sales A/c 40,000
To Amrit A/c 100,000

15-Dec-08 Amrit A/c Dr 50,000
To Purchase Returns A/c 50,000
16-Dec-08 Cash A/c Dr 39,600
Discount A/c Dr 400
To Arvind A/c 40,000
18-Dec-08 Drawings Dr 10,000
To Purchase A/c 10,000
To Cash A/c 20,000
24-Dec-08 Telephone A/c Dr 10,000
To Cash A/c 10,000
26-Dec-08 Amrit A/c Dr 50,000
To Cash A/c 49,000
To Discount A/c 1,000
31-Dec-08 Stationery A/c Dr 2,000
Rent A/c Dr 5,000
Salary A/c Dr 20,000
To Cash A/c 27,000
31-Dec-08 Advertising A/c Dr 10,000
To Purchase A/c 10,000
31-Dec-08 Machinery A/c Dr 80,000
To Cash A/c 80,000
To Petty Cash A/c 17,000
Discount A/c Dr 500
To Cash A/c 17,500

Q 4 Transactions of Ramesh for April are given below. Journalize them.

2009 Rs.
April 1 Ramesh started business with 1,00,000
April 2 Paid into bank 70,000
April 3 Bought goods for cash 5,000
April 5 Drew cash from bank for credit 1,000
April 13 Sold to Krishna goods on credit 1,500
April 20 Bought from Shyam goods on credit 2,250
April 24 Received from Krishna 1,450
Allowed him discount 50
April 28 Paid Shyam cash 2,150
Discount allowed 100
April 30 Cash sales for the month 8,000
Paid Rent 500
Paid Salary 1,000

Solution:
1-Apr Cash A/c Dr 100,000
To Capital (X) A/c 100,000
2-Apr Bank A/c Dr 70,000
To Cash A/c 70,000
3-Apr Purchase A/c Dr 5,000
To Cash A/c 5,000
To Bank A/c 1,000
13-Apr Krishna A/c Dr 1,500
To Sales A/c 1,500
20-Apr Purchase A/c Dr 2,250
To Shyam A/c 2,250
Discount A/c Dr 50
To Krishna A/c 1,500
28-Apr Shyam A/c Dr 2,250
To Discount A/c 100
To Cash A/c 2,150

To Sales A/c 8,000
Rent A/c Dr 500
Salary A/c Dr 1,000
To Cash A/c 1,500

Assignment II – Ledger

Q. 1 Prepare the Stationery Account of a firm for the year ended December 31, 2008:
2008 Particulars Rs.
January 1 Stock in hand 480
April 5 Purchase of stationery by cheque 800
November 15 Purchase of stationery on credit from Five Star Stationery Mart 1,280
December 31 Stock in hand 240

Solution:
Stationery A/c

Amount
Date Particulars (Rs) Date Particulars Amount (Rs)

1-Jan To Balance b/d 480

5-Apr To Bank A/c 800
To Five Star
15-Nov Stationery Mart 1,280
By Profit and
Loss A/c 2,320
31-Dec By Balance c/d 240

2,560 2,560

Q.2 Prepare a ledger from the following transactions in the books of a trader
Debit Balance on January 1, 2008:
Cash in Hand Rs. 8,000, Cash at Bank Rs. 25,000, Stock of Goods Rs. 20,000, Building Rs.
10,000. Sundry Debtors: Vijay Rs. 2,000 and Madhu Rs. 2,000.
Credit Balances on January 1, 2008:
Sundry Creditors: Anand Rs. 5,000.
Following were further transactions in the month of January 2008:
January 1 Purchased goods worth Rs. 5,000 for cash less 20% trade discount and 5%
cash discount.
January 4 Received Rs. 1,980 from Vijay and allowed him Rs. 20 as discount.
January 8 Purchased plant from Mukesh for Rs. 5,000 and paid Rs. 100 as cartage for
bringing the plant to the factory and another Rs. 200 as installation charges.
January 12 Sold goods to Rahim on credit Rs. 600.
January 15 Rahim became insolvent and could pay only 50 paise in a rupee.
January 18 Sold goods to Ram for cash Rs. 1,000.

Solution:
Cash A/c

Amount Amount
Date Particulars (Rs) Date Particulars (Rs)

1-Jan To Balace b/d 8,000 1-Jan By Purchase A/c 3,800

4-Jan To Vijay A/c 1,980
To Plant & Machinery
8-Jan A/c 300

15-Jan To Rahim A/c 300

18-Jan To Ram A/c 1,000

31-Jan By Balance c/d 7,780

11,580 11,580

Bank A/c

Amount Amount

1-Jan To Balance b/d 25,000


25,000 25,000

Purchase A/c

Amount Amount


1-Jan To Cash A/c 3,800

1-Jan To Discount A/c 200


24,000 24,000

Building A/c

Amount Amount



10,000 10,000

Vijay A/c

Amount Amount


4-Jan By Cash A/c 1,980

4-Jan By Discount A/c 20

2,000 2,000

Madhu A/c

Amount Amount



2,000 2,000

Anand A/c

Amount Amount

1-Jan By Balance b/d 5,000

31-Jan To Balance c/d 5,000

5,000 5,000

Discount A/c

Amount Amount

1-Jan By Purchase A/c 200

4-Jan To Vijay A/c 20

31-Jan To Balance c/d 180

200 200

Mukesh A/c

Amount Amount
By Plant & Machinery
8-Jan A/c 5,000


5,000 5,000

Sales A/c

Amount Amount

12-Jan By Rahim A/c 600

18-Jan By Cash A/c 1,000


1,600 1,600

Rahim A/c

Amount Amount

12-Jan To Sales A/c 600

15-Jan By Cash A/c 300

15-Jan By Bad Debt A/c 300

600 600

Plant & Machinery A/c

Amount Amount

8-Jan To Mukesh A/c 5,000

8-Jan To Cash A/c 300


5,300 5,300

Bad Debt A/c

Amount Amount

15-Jan To Rahim A/c 300

31-Jan By Balance c/d 300

300 300

Q. 3 The following data is given by Mr. S, the owner, with a request to compile only the two
personal accounts of Mr. H and Mr. R, in his ledger, for the month of April 2008.
1 Mr. S owes Mr. R Rs. 15,000; Mr. H owes Mr. S Rs. 20,000.
4 Mr. R sold goods worth Rs. 60,000 @ 10% trade discount to Mr. S.
5 Mr. S sold to Mr. H goods prices at Rs.30,000.
17 Record purchase of Rs. 25,000 net from R, which were sold to H at profit of Rs. 15,000.
18 Mr. S rejected 10% of Mr. R’s goods of 4th April.
19 Mr. S issued a cash memo for Rs. 10,000 to Mr. H who came personally for this
consignment of goods, urgently needed by him.
22 Mr. H cleared half his total dues to Mr. S, enjoying a ½% cash discount (of the payment
received, Rs. 20,000 was by cheque).
26 R’s total dues (less Rs. 10,000 held back) were cleared by cheque, enjoying a cash discount
of Rs. 1,000 on the payment made.
29 Close H’s Account to record the fact that all but Rs. 5,000 was cleared by him, by a
cheque, because he was declared bankrupt.
30 Balance R’s Account.

Solution:

Mr H A/c

Amount Amount

1-Apr To Balance b/d 20,000

5-Apr To Sales A/c 30,000

17-Jan To Sales A/c 40,000

22-Apr By Cash A/c 24,775

22-Apr By Discount A/c 225

22-Apr By Bank A/c 20,000

29-Apr By Bank A/c 40,000

29-Apr By Bad Debt A/c 5,000

Mr R A/c

Amount Amount

1-Apr By Balance b/d 15,000

4-Apr By Purchase A/c 54,000

17-Jan By Purchase A/c 25,000

18-Apr To Purchase returns A/c 5,400

To Bank A/c 77,600

To Discount A/c 1,000

To Balance c/d 10,000

Assignment III – Trial Balance

Q. 1 Given below is a ledger extract relating to the business of X and Co. as on March 31, 2009.
You are required to prepare the Trial Balance.
Cash Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Capital A/c 10,000 By Furniture A/c 3,000
To Ram’s A/c 25,000 By Salaries A/c 2,500
To Cash Sales 500 By Shyam’s A/c 21,000
By Cash Purchases 1,000
By Capital A/c 500
By Balance c/d 7,500
35,500 35,500
Furniture Account
Dr. Cr.
To Cash A/c 3,000 By Balance c/d 3,000
3,000 3,000
Salaries Account
Dr. Cr.
To Cash A/c 2,500 By Balance c/d 2,500
2,500 2,500
Shyam’s Account
Dr. Cr.
To Cash A/c 21,000 By Purchases A/c 25,000
(Credit Purchases)
To Purchase Returns A/c 500
To Balance c/d 3,500 -
25,000 25,000

Purchases Account
Dr. Cr.
To Cash A/c (Cash Purchases) 1,000 By Balance c/d 26,000
To Sundries as per Purchases
Book (Credit Purchases) 25,000 -
26,000 26,000
Purchases Returns Account
Dr. Cr.
To Balance c/d 500 By Sundries as per Purchases 500
Return Book
500 500
Ram’s Account
Dr. Cr.
To Sales A/c (Credit Sales) 30,000 By Sales Returns A/c 100
By Cash A/c 25,000
By Balance c/d 4,900
30,000 30,000
Sales Account
Dr. Cr.
To Balance c/d 30,500 By Cash A/c (Cash Sales) 500
By Sundries as per Sales Book
(Credit sales) 30,000
30,500 30,500
Sales Returns Account
Dr. Cr.
To Sundries as per Sales
Return Book 100 By Balance c/d 100

100 100
Capital Account
Dr. Cr.
To Cash A/c 500 By Cash A/c 10,000
To Balance c/d 9,500 -
10,000 10,000

Solution:
Trial Balance X and Co. as on March 31, 2009
Debit Amount (Total) Credit Amount (Total)
S. No. Ledger Account L.F. No. Rs Rs

1. Cash Account 7,500

2. Furniture Account 3,000

3. Salaries Account 2,500

4. Shyam's Account 3,500

5. Purchases Account 26,000

6. Purchase Returns Account 500

7. Ram's Account 4,900

8. Sales Account 30,500

9. Sales Returns Account 100

10. Capital Account 9,500

44,000 44,000

Q.2 From the following ledger balances, prepare a trial balance of Anuradha Traders as on
March 31, 2009:
Account Head Rs.
Capital 1,00,000
Sales 1,66,000

Purchases 1,50,000
Sales return 1,000
Discount allowed 2,000
Expenses 10,000
Debtors 75,000
Creditors 25,000
Investments 15,000
Cash at bank and in hand 37,000
Interest received on investments 1,500
Insurance paid 2,500

Solution:
Trial Balance Anuradha Traders as on March 31, 2009
Debit Amount (Total) Credit Amount (Total)
S. No. Ledger Account L.F. No. Rs Rs
Capital
100,000
Sales
166,000
Purchases
150,000
Sales return
1,000
Discount allowed
2,000
Expenses
10,000
Debtors
75,000
Creditors
25,000
Investments
15,000
Cash at bank and in hand
37,000
Interest received on investments
1,500
Insurance paid
2,500

292,500 292,500

Q.3 One of your clients, X has asked you to finalize his accounts for the year ended March 31,
2009. Till date, he himself has recorded the transactions in books of accounts. As a basis for
audit, X furnished you with the following statement.
Dr. Balance Cr. Balance
X’s Capital 1,556
X’s Drawings 564
Leasehold premises 750
Sales 2,750
Due from customers 530
Purchases 1,259
Purchases return 264
Loan from bank 256
Creditors 528
Trade expenses 700
Cash at bank 226
Bills payable 100
Salaries and wages 600
Stock (1.4.2008) 264
Rent and rates 463
Sales return 98
5,454 5,454
The closing stock on March 31, 2009 was valued at Rs. 574. X claims that he has recorded every
transaction correctly as the trial balance is tallied. Check the accuracy of the above trial balance.

Solution:
Trial Balance of X as on March 31, 2009
S. No. Ledger Account L.F. No. Dr. Balance Cr. Balance
X’s Capital 1,556
X’s Drawings 564
Leasehold premises 750
Sales 2,750
Due from customers 530
Purchases 1259
Purchases return 264
Loan from bank 256
Creditors 528
Trade expenses 700
Cash at bank 226
Bills payable 100
Salaries and wages 600
Stock (1.4.2008) 264
Rent and rates 463
Sales return 98
5,454 5,454

Assignment IV – Final Accounts

Q.1 From the following information, prepare a Trading Account of M/s. ABC Traders for the
year ended March 31, 2009: Rs.
Opening Stock 1,00,000
Purchases 6,72,000
Carriage Inwards 30,000
Wages 50,000
Sales 11,00,000
Returns inward 1,00,000
Returns outward 72,000
Closing stock 2,00,000

Solution:
Trading Account of M/s. ABC Traders for the year ended March 31, 2009
Particulars (Rs) Particulars (Rs)

Opening Stock 100,000 Sales 1,100,000

Purchases 672,000 Less: Return Inwards (100,000)

Less: Return Outwards (72,000)


Wages 50,000

Gross Profit 420,000 Closing Stock 200,000

1,200,000 1,200,000

Q.2 Revenue expenses and gross profit balances of M/s ABC Traders for the year ended on
March 31, 2009 were as follows:
Gross Profit Rs. 4,20,000, Salaries Rs. 1,10,000, Discount (Cr.), Rs. 18,000, Discount (Dr.) Rs.
19,000, Bad Debts Rs. 17,000, Depreciation Rs. 65,000, Legal Charges Rs. 25,000, Consultancy
Fees Rs. 32,000, Audit Fees Rs. 1,000, Electricity Charges Rs. 17,000, Telephone, Postage and
Telegrams Rs. 12,000, Stationery Rs. 27,000, Interest paid on Loans Rs. 70,000.
Prepare Profit and Loss Account of M/s ABC Traders for the year ended on March 31, 2009.

Solution:
P&L Account of M/s ABC Traders for the year ended on March 31, 2009

Salaries 110,000 Gross Profit 420,000

Discount (Dr) 19,000 Discount (Cr) 18,000

Bad Debts 17,000

Depreciation 65,000

Legal Charges 25,000

Consultancy Fees 32,000

Audit Fees 1,000

Electricity Charges 17,000
Telephone, Postage &
Telegrams 12,000

Stationery 27,000

Interest paid on loans 70,000

Net Profit 43,000

438,000 438,000

Q.3 Mr. X submits you the following information for the year ended March 31, 2009:
Rs.
Stock as on April 1, 2008 1,50,000
Purchases 4,37,000
Manufacturing expenses 85,000
Expenses on sale 33,000
Expenses on administration 18,000
Financial charges 6,000
Sales 6,25,000
Gross profit is 20% of sales.
Compute the net profit of Mr. X for the year ended March 31, 2009. Also prepare Trading &
Profit & Loss A/c.

Solution:
Trading Account of Mr X for the year ended on March 31, 2009

Opening Stock 150,000 Sales 625,000

Purchases 437,000

Manufacturing Expenses 85,000


797,000 797,000

P&L Account of Mr X for the year ended on March 31, 2009

Expenses on Sale 33,000 Gross Profit 125,000
Expenses on
administration 18,000

Financial charges 6,000

Net Profit 68,000

125,000 125,000

Q.4 A book keeper has submitted to you the following trial balance of X wherein the total of
debit and credit balances is not equal:
Particulars Debit Balances Credit Balances
Rs. Rs.
Capital - 7,670
Cash in hand - 30
Purchases 8,990 -
Sales - 11,060
Cash at bank 885 -
Fixtures & fittings 225 -
Freehold premises 1,500 -
Lighting and heating 65 -
Bills receivable - 825
Returns inwards - 30
Salaries 1,075 -
Creditors - 1,890
Debtors 5,700 -
Stock (1.1.2008) 3,000 -
Printing 225 -
Bills payable 1,875 -
Rates, taxes and insurance 190 -
Discounts received 445 -
Discounts allowed - 200
24,175 21,705
You are required to:
(i) Redraft the Trial Balance correctly.
(ii) Prepare a Trading and Profit and Loss Account and a Balance Sheet after taking into account
the following adjustments:
(a) Stock in hand on 31.12.2008 was valued at Rs. 1,800
(b) Depreciate fixtures and fittings by Rs. 25.
(c) Rs. 350 was due and unpaid in respect of salaries.
(d) Rates and insurance had been in paid in advance to the extent of Rs. 40.

Solution:
Trial Balance of X
S. No. Ledger Account L.F. No. Dr. Balance Cr. Balance

Capital 7,670

Cash in hand 30

Purchases 8,990

Sales 11,060

Cash at bank 885

Fixtures & fittings 225

Freehold premises 1,500

Lighting and heating 65

Bills receivable 825

Returns inwards 30

Salaries 1,075

Creditors 1,890

Debtors 5,700

Stock (1.1.2008) 3,000

Printing 225

Bills payable 1,875

Rates, taxes and insurance 190

Discounts received 445

Discounts allowed 200

22,940 22,940

Trading Account of Mr X for the year ended December 31,2008.


Stock (1.1.2008.) 3,000 Sales 11,060

Purchases 8,990 Less: Return Inwards (30)

Gross Profit 840 Stock (31.12.2008.) 1,800

12,830 12,830

P&L Account of Mr X for the year ended December 31,2008.

Depreciation F&F 25 Gross Profit 840

Outstanding Salaries 350 Discount received 445

Rates, taxes & Insurance 190

Less: Advance (40)

Lighting & Heating 65

Salaries 1,075

Printing 225

Discount allowed 200

Net Profit (805)

1,285 1,285

Balance Sheet of Mr X as on December 31,2008.
Credit Amount Debit Amount
Reserves & Capital Fixed Assets

Capital 7,670 Fixtures & Fittings 225

Net Profit (805) Less: Depreciation (25)

Liabilities Freehold premises 1,500

Creditors 1,890 Current Assets

Bills Payable 1,875 Cash in hand 30

Outstanding Salaries 350 Cash at bank 885

Bills receivable 825

Debtors 5,700

Stock 1,800
Advance rates &
insurance 40

10,980 10,980

Q.5 The following is trial balance extracted from the books of X as on 31 March 2009:
Rs. Rs.
Capital Account - 1,00,000
Plant and Machinery 78,000 -
Furniture 2,000 -
Purchases and Sales 60,000 1,27,000
Returns 1,000 750
Opening stock 30,000 -
Discount 425 800
Sundry Debtors/Creditors 45,000 25,000
Salaries 7,550 -
Manufacturing wages 10,000 -
Carriage outwards 1,200 -
Provision for doubtful debts - 525
Rent, rates and taxes 10,000 -
Advertisements 2,000 -
Cash 6,900 -
2,54,075 2,54,075
Prepare trading and profit and loss account for the year ended 31 March 2009 and a balance
sheet on that date after taking into account the following adjustments:
(a) Closing stock was valued at Rs. 34,220.
(b) Provision for doubtful debts is to be kept at Rs. 500
(c) Depreciate plant and machinery @ 10% p.a.
(d) The proprietor has taken goods worth Rs. 5,000 for personal use and additionally
distributed goods worth Rs. 1,000 as samples.
(e) Purchase of furniture Rs. 920 has been passed through purchases book.

Solution:
Trading Account of Mr X for the year ended March 31, 2009.


Purchases 60,000 Less: Sales Returns (1,000)
Provision for doubtful
Less: Purchase Returns (750) debts 25

Less: Furniture (920)

Less: Drawings (5,000)

Less: Advertisement (1,000)

Manufacturing Wages 10,000


160,245 160,245

P&L Account of Mr X for the year ended March 31, 2009.

Dicount allowed 425 Gross Profit 67,915

Salaries 7,550 Discount received 800

Carriage Outwards 1,200

Deprecitation P&M 7,800

Rent, rates & taxes 10,000

Distributed goods 1,000

Advertisements 2,000

Net Profit 38,740

68,715 68,715

Balance Sheet of Mr X as on March 31,2009.
Reserves & Capital Fixed Assets

Capital 100,000 Plant & Machinery 78,000

Net Profit 38,740 Less: Depreciation (7,800)

Less: Drawings (5,000) Furniture 2,000

Add: Provision 920
Liabilities Current Assets

Creditors 25,000 Stock 34,220

Debtors 45,000
Less: Provision for
doubtful debts (500)

Cash 6,900

158,740 158,740

Q.6 From the following trial balance and other information prepare profit and loss account for
the year ended 31 March 2009 and a balance sheet on that date:
Debit Credit
Rs. Rs.
X’s Capital Account - 10,00,000
Withdrawals of goods for personal use 1,000 -
Balance at bank 1,76,000 -
Motor Vehicle 1,50,000 -
Debtors and Creditors 2,94,000 2,30,000
Printing and stationery 6,600 -
Gross Profit - 5,71,400
Provision for doubtful debts - 5,000
Bad debts 11,400 -
Freehold premises 8,00,000 -
Repairs to Premises 47,600 -
General Reserve - 2,00,000
Proprietor’s remuneration 20,000 -
Stock 2,80,000 -
Delivery expenses 99,000 -
Administrative expenses 1,31,400 -
Rates and taxes 15,000 -
Drawings 1,00,000 -
Unpaid wages - 1,600
Last Year Profit and Loss Account Balance - 1,24,000
21,32,000 21,32,000
Adjustments
(i) Depreciation on Motor Vehicles @ 50%
(ii) Creditors include a claim for damages of Rs. 30,000 and which was settled by paying Rs.
20,000.
(iii) Rates paid in advance Rs. 3,000.
(iv) Provision for bad debts is to be reduced to Rs. 3,500.
(v) The item of repairs to premises includes Rs. 20,000 for acquisition of capital asset.
(vi) Stock of stationery in hand on 31 March 2009 is Rs. 2,200.

Solution:
P&L Account for the year ended March 31, 2009.

Bad Debts 11,400 Gross Profit 571,400
Discount for damages
Repair to premises 47,600 paid 10,000

Less: Capital expense (20,000) Provison for bad debts 1,500

Proprietor's remuneration 20,000

Delivery expenses 99,000

Administrative expenses 131,400

Rates & taxes 15,000
Less: Rates paid in
advance (3,000)
Depreciation on Motor
Vehicles 75,000

Printing & stationery 6,600

Less: adjustments (2,200)

Net Profit 202,100

582,900 582,900

Balance Sheet as on March 31, 2009.

Capital 1,000,000 Motor Vehicle 150,000

Less: Drawings (1,000) Less: Depreciation (75,000)

Less: Drawings (100,000) Freehold premises 800,000

General Reserve 200,000 Add: Capital asset 20,000

P&L balance 124,000 Balance at Bank 176,000
Net Profit Less: Damage settlement

202,100 (20,000)

Creditors 230,000 Stock of Stationery 2,200

Less: damages settlement (30,000) Stock 280,000

Unpaid Wages 1,600 Debtors 294,000
Less: Provision for
doubtful debts (3,500)

Rates paid in advance 3,000

1,626,700 1,626,700

Q.7 The following trial balance has been extracted from the books of Ms. X. Prepare the final
accounts for the year ended 31 March 2009 and a balance sheet on that date:
Debit Credit
Rs. Rs.
Drawings 35,000 -
Buildings 60,000 -
Debtors and creditors 50,000 80,000
Returns 3,500 2,900
Purchases and sales 3,00,000 4,65,000
Discount 7,100 5,100
Life insurance 3,000 -
Cash 30,000 -
Stock (opening) 12,000 -
Bad debts 5,000 -
Reserve for bad debts - 17,000
Carriage inwards 6,200
Wages 27,700
Machinery 8,00,000
Furniture 60,000
Salaries 35,000
Bank commission 2,000
Bills receivable/payable 60,000 40,000
Trade expenses/Capital 13,500 9,00,000
15,10,000 15,10,000
Adjustments:
(i) Depreciate building by 5%; furniture and machinery by 10% p.a.
(ii) Trade expenses Rs. 2,500 and wages Rs. 3,500 have not been paid as yet.
(iii) Allow interest on capital at 5% p.a.
(iv) Make provision for doubtful debts at 5%.
(v) Machinery includes Rs. 2,00,000 of a machine purchased an 31 December 2008. Wages
include Rs. 5,700 spent on the installation of machine.
Stock on 31 March 2009 was valued at Rs. 50,000.

Solution:


Purchases 300,000 Less: Sales Returns (3,500)

Less: Purchase Returns (2,900) Reserve for bad debt 14,500

Trade expenses 13,500

Unpaid trade expenses 2,500

Wages 27,700

Less: Installation charges (5,700)


Unpaid wages 3,500


526,000 526,000


Dicount allowed 7,100 Gross Profit 169,200

Salaries 35,000 Discount received 5,100

Depreciation building 3,000

Depreciation furniture 6,000

Depreciation machinery 65,143

Bank Commission 2,000

Interest on Capital 45,000
Bad Debts

5,000

Net Profit 6,058

174,300 174,300

Balance Sheet of Mr X as on March 31, 2009.

Capital 900,000 Buildings 60,000

Less: Drawings (35,000) Less: Depreciation (3,000)

Less: Life Insurance (3,000) Machinery 800,000

Interest on Capital 45,000 Add: Provision 5,700

Less: Depreciation (65,143)

Net Profit 6,058 Furniture 60,000


Creditors 80,000 Stock 50,000

Bills Payable 40,000 Debtors 50,000
Less: Provision for bad
debts (2,500)

Unpaid Trade expenses 2,500 Bills Receivable 60,000

Unpaid wages 3,500 Cash 30,000

1,039,058 1,039,058

Q.8 The following is the Trial Balance of X on 31 March 2009:
Debit Credit
Rs. Rs.
Capital - 8,00,000
Drawings 60,000 -
Opening Stock 75,000 -
Purchases 15,95,000 -
Freight on Purchases 25,000 -
Wages (11 months upto 28-2-2009) 66,000 -
Sales - 23,10,000
Salaries 1,40,000 -
Postage, Telegrams, Telephones 12,000 -
Printing and Stationery 18,000 -
Miscellaneous Expenses 30,000 -
Creditors - 3,00,000
Investments 1,00,000 -
Discounts Received - 15,000
Debtors 2,50,000 -
Bad Debts 15,000 -
Provision for Bad Debts - 8,000
Building 3,00,000 -
Machinery 5,00,000 -
Furniture 40,000 -
Commission on Sales 45,000 -
Interest on Investments - 12,000
Insurance (Year up to 31-7-2009) 24,000 -
Bank Balance 1,50,000 -
34,45,000 34,45,000
Adjustments:
(i) Closing Stock Rs. 2,25,000.
(ii) Machinery worth Rs. 45,000 purchased on 1-10-08 was shown as Purchases. Freight paid on
the Machinery was Rs. 5,000, which is included in Freight on Purchases.
(iii)Commission is payable at 2½% on Sales.
(iv) Investments were sold at 10% profit, but the entire sales proceeds have been taken as Sales.
(v) Write off Bad Debts Rs. 10,000 and create a provision for Doubtful Debts at 5% of Debtors.

(vi) Depreciate Building by 2½% p.a. and Machinery and Furniture at 10% p.a. Prepare Trading
and Profit and Loss Account for the year ending 31 March 2009 and a Balance Sheet as on
that date.

Solution:

Opening Stock 75,000 Sales 2,310,000
Less: Proceeds from
Purchases 1,595,000 investments (110,000)
Less: Purchase of
Machinery (45,000)

Freight on purchases 25,000
Less: Freight on purchase
of machinery (5,000)

Wages 66,000

Outstanding wages 6,000


2,425,000 2,425,000


Depreciation: Building 7,500 Gross Profit 708,000

Depreciation: Furniture 4,000 Discount Received 15,000

Depreciation: Machinery 52,500 Intereset on investments 12,000
Proceeds from
Salaries 140,000 investments 10,000
Postage, telegrams &
telephones 12,000

Printing & Stationery 18,000

Miscellaneous Expenses 30,000
Insurance

24,000

Less: Prepaid Insurance (8,000)

Commission on Sales 45,000
Outstanding commission
on Sales 10,000

Bad Debts 15,000

Add: Write off 10,000

Provision for bad debts 4,000

Net Profit 381,000

745,000 745,000

Balance Sheet of Mr X as on March 31, 2009.

Capital 800,000 Machinery 500,000
Add: Purchase of
Less: Drawings (60,000) machinery 45,000
Add: Freight on purchase
Net Profit 381,000 of machinery 5,000


Building 300,000


Furniture 40,000


Bank Balance 150,000

Stock 225,000

Investments 100,000
Outstanding commission
on Sales 10,000 Less: Sale of investments (100,000)

Outstanding wages 6,000 Debtors 250,000

Less: Write off bad debts (10,000)
Less: Provision for bad
Creditors 300,000 debts (12,000)

Prepaid Insurance 8,000

1,437,000 1,437,000

Assignment V - Financial Statement Analysis
Q.1 From the following particulars relating to AB Co. prepare a Balance Sheet as on 31.12.2009:
Fixed assets / turnover ratio 1:2
Debt collection period Two months
Gross profit 25%
Consumption of raw materials 40% of cost
Stock of Raw materials 4 months consumption
Finished goods 20% of turnover at cost
Fixed Assets to Current Assets 1:1
Current Ratio 2:1
Long Term loan to current Liability 1:3
Capital to Reserve 5:2
Value of Fixed Assets Rs. 10,50,000
Solution:
Fixed Assets = Rs. 10,50,000
Fixed assets / turnover ratio = Fixed assets / Sales =1:2
 Sales = Rs 21,00,000
Fixed assets / current assets = 1:1
 Current assets = Rs 10,50,000
Gross Profit = 25% * Sales
 Gross Profit = Rs 5,25,000
Cost of Goods Sold = Sales – Gross Profit
 Cost of Goods Sold (COGS) = Rs 15,75,000
Consumption of raw material = 40% * COGS
 Consumption of raw material = Rs 6,30,000
Stock of raw material = COGS /12 *4
 Stock of raw material = Rs 2,10,000
Finished goods = 20% * COGS
 Finished goods = Rs 3,15,000
Debt Collection Period = Average debtors * 12 / Net Credit Sales
 Average Debtors = Net credit Sales/12 * debt collection period
 Average debtors = Rs 21,00,000 * 2/12
 Average debtors = Rs 3,50,000
Current ratio = Current Assets / Current Liabilities = 2 :1
 Current Liabilities = Rs 5,25,000

Long term loan to current liability = 1: 3
 Long term loan = Rs 1,75,000
Total Assets = Fixed Assets + Current Assets = Rs 21,00,000
 Total Liabilities = Rs 21,00,000
 Networth = ESC + R&S = Total Liabilities – Current Liabilities – Long Term Debt
 Networth = 21,00,000 - 5,25,000 - 1,75,000
 Capital + Reserves & Surplus = Rs 14,00,000
Capital to Reserves = 5:2
 Capital = Rs 10,00,000
 Reserves = Rs 4,00,000
Balance Sheet of AB Co. as on 31.12.2009
Particulars Credit Amount (Rs) Particulars Debit Amount (Rs)
Shareholders’ Rs 14,00,000 Fixed Assets Rs 10,50,000
Funds
Capital Rs 10,00,000
Reserves Rs 4,00,000 Current Assets Rs 10,50,000
Current Liabilities Rs 5,25,000 Debtors Rs 3,50,000
Long Term Debt Rs 1,75,000 Stock of raw Rs 2,10, 000
material
Finished Goods Rs 3,15,000
Cash (B.f.) Rs 1,75,000
Total Liabilities Rs 21,00,000 Total Assets Rs 21,00,000

Q.2 From the following particulars prepare the Balance Sheet of A Ltd.:
Current Ratio 1.50
Current Assets/Fixed Assets 1:2
Fixed Assets to turnover 1:1
Gross Profit 25%
Debtors Velocity 2 months
Creditors Velocity 2 months
Stock Velocity 3 months
Debt equity ratio 2:5
Working Capital Rs. 2,00,000
Solution:
Working Capital = Current Assets – Current Liabilities = Rs 2,00,000
Current Ratio = Current Assets / Current Liabilities
=> Current Assets = Rs 6,00,000
=> Current Liabilities = Rs 4,00,000
Current Assets to Fixed Assets = 1: 2
 Fixed Assets = Rs 12,00,000
 Total Assets = Total Liabilities = Rs 18,00,000
Fixed Assets to Turnover = 1:1
 Turnover = Sales = Rs 12,00,000
 Gross Profit = 25* Sales = Rs 4,00,000
Debtors Velocity = 2 months
 Debtors = 12,00,000 /12 *2 = Rs 2,00,000
Creditors Velocity = 2 months
 Creditors = Rs 9,00,000 /12 * 2 = Rs 1,50,000
Stock Velocity = 3 months
 Stock = Rs 9,00,000 /12 * 3 = Rs 2,25,000
Debt to Equity Ratio = 2: 5
& Debt + Equity = Total Liabilities – Creditors = 18,00,000 – 4,00,000 = 14,00,000
 Debt = Rs 4,00,000
 Equity = Rs 10,00,000
Balance Sheet of A Limited
Equity Rs 10,00,000 Fixed Assets Rs 12,00,000

Current Liabilities Rs 4,00,000
Long Term Debt Rs 4,00,000
Current Assets Rs 6,00,000
Debtors Rs 1,50,000
Stock Rs 2,25, 000
Cash (B.f.) Rs 2,75,000

Q.3 From the following information, you are required to prepare a Balance Sheet:
Current Ratio 1.75
Liquid Ratio 1.25
Stock Turnover ratio (Closing Stock) 9
Gross profit ratio 25%
Debt collection period 1.50 months
Reserves and surplus to capital 0.20
Turnover to fixed assets 1.20
Fixed assets to net worth 1.25
Sales for the year Rs. 12,00,000
Solution:
Sales (Turnover) = Rs 12,00,000
Turnover to Fixed Assets = 1.2
 Fixed Assets = Rs 10,00,000
Fixed Assets to Networth = 1.25
 Networth = Rs 8,00,000 = Reserves & Surplus + Capital
Gross Profit = 25 * Sales = Rs 3,00,000
Cost of Goods Sold (COGS) = Sales – Gross Profit
Stock Turnover ratio = 9
 Stock = 9,00,000/9 = Rs 1,00,000
Debt Collection Period = 1.5 Months
 Debtors = 12,00,000/12*1.5 = Rs 1,50,000
Reserves & Surplus to Capital = 0.2
 Capital = Rs 6,66,667
 Reserves & Surplus = Rs 1,33,333
Current Ratio = Current Assets / Current Liabilities = 1.75
Liquid Ratio = (Current Assets – Stock ) / Current Liabilities = 1.25
 (1.75 CL – 1,00,000) / CL =1.25
 Current Assets = Rs 3,50,000
 Total Assets = Fixed Assets + Current Assets = Rs 13,50,000
 Long Term Liabilities = Total Liabilities – Current Liabilities – Networth
 Long Term Liabilities = 13,50,000 – 2,00,000 – 8,00,000 = Rs 3,50,000

Balance Sheet
Networth Rs 8,00,000 Fixed Assets Rs 10,00,000
Capital Rs 6,66,667
Reserves & Surplus Rs 1,33,333 Current Assets Rs 3,50,000
Current Liabilities Debtors Rs 1,50,000
Long Term Debt Rs 2,00,000 Stock Rs 1,00, 000
Rs 3,50,000 Cash (B.f.) Rs 1,00,000

Q. 4 Mr. Desai intends to supply goods on credit to A Ltd. and B Ltd. The relevant financial data
relating to the companies for the year ended 30th June, 2009 are as under:
A Ltd. B Ltd.
Stock 8,00,000 1,00,000
Debtors 1,70,000 1,40,000
Cash 30,000 60,000
Trade Creditors 3,00,000 1,60,000
Bank overdraft 40,000 30,000
Creditors for expenses 60,000 10,000
Total purchases 9,30,000 6,60,000
Cash purchases 30,000 20,000
Advice with reasons, as to which of the companies he should prefer to deal with
Solution:
Financ A Ltd B Ltd
ial
Ratio
Credit =(9,30,000-30,000)/3,00,000 =(6,60,000-20,000)/1,60,000
Turnov =3 =4
er
Credit 4 Months 3 Months
Payme
nt
Period
Curren =(8,00,000+1,70,000+30,000)/(3,00,000+ =(1,00,000+1,40,000+60,000)/(1,60,000+
t Ratio 40,000+60,000) 30,000+10,000)
=2.5 =1.5
Quick =(1,70,000+30,000)/( 3,00,000+60,000) =(1,40,000+60,000)/(1,60,000+10,000)
Ratio =0.56 =1.18
Mr Desai should prefer to deal with B Ltd. Reasons are mentioned below: -
1. Quick ratio of 1.18 of B Ltd is better than .56 of A Ltd.
2. Credit Payment Period of 3 months of B Ltd is better than 4 months of A Ltd.
3. Current ratio of 2.5 of A Ltd is better than 1.5 of B Ltd.
Since stock can not be converted into cash quickly, quick ratio and credit payment period of
B Ltd are more important in view of requirement of Mr Desai. Therefore, he must choose B
Ltd for dealing.

Q.5 The following is the Trading & Profit & Loss A/c of X Ltd. As on December 31, 2008:
Trading & P&L Account (31.12.2008)
Opening Stock 1,30,000 Cash Sales 80,000
Purchases 4,20,000 Credit Sales 3,20,000
G.P. 60,000 Stock 2,10,000
Depreciation 13,100 G.P. 60,000
G. Expenses 20,900
Director’s Fees 10,000
N.P. 16,000
60,000 60,000
Balance Sheet as at 31st December, 2008
Share Capital 3,60,000 Fixed Assets 2,05,600
Profit & Loss A/c 24,600 Stock 2,10,000
Creditors 1,40,000 Debtors 1,60,000
Bank overdraft 51,000
5,75,000 5,75,000
1. The rate of stock turnover is to be doubled.
2. Stock is to be reduced by Rs. 60,000 by the end of the financial year.
3. The ratio of cash sales to Credit sales is to be doubled.
4. Directors – remuneration are to be increased by Rs. 15,000.
5. Rate of gross profit to sales is to be increased by 331/3%.
6. The ratio of trade creditors to closing stock and the ratio of debtors to credit sales will remain
the same as in the year just ended.
7. General expenses and depreciation are to remain the same.
Draft budgeted Trading and Profit and loss account and balance sheet, assuming that the
objectives had been achieved.
Solution:
Financial figure/ ratio Existing figure / ratio (2008) Desired figure /
ratio (2009)
Stock turnover =3,40,000*2/(2,10,000+1,30,000) 4
=2
Stock 2,10,000 1,50,000
Cash Sales / Credit Sales 1:4 1:2

Director’s Remuneration 10,000 25,000
Gross Profit to Sales 15% 20%
Trade Creditors to Closing Stock =1,40,000/2,10,000 66.67%
=66.67%
Debtors to Credit Sales 1:2 1:2
General Expenses 20,900 20,900
Depreciation 13,100 13,100
Solution:
Since Stock in 2009 = Rs 1,50,000
 Cost of goods sold = Rs (2,10,000+1,50,000)/2 * 4 = Rs 7,20,000
Let Sales be x
=> 20%x = x – 7,20,000
=> Sales = Rs 9,00,000
=> GP = Rs 1,80,000
=> Cash Sales = Rs 3,00,000
=> Credit Sales = Rs 6,00,000
=> Debtors = Rs 3,00,000
Trade Creditors = 1,50,000 *66.67% = Rs 1,00,000
7,20,000 = 2,10,000 + Purchases – 1,50,000
=> Purchases = Rs 6,60,000
Drafted Trading & Profit and Loss Account and Balance Sheet: -
Trading & P&L Account (31.12.2009)
Opening Stock 2,10,000 Cash Sales 3,00,000
Purchases 6,60,000 Credit Sales 6,00,000
G.P. 1,80,000 Stock 1,50,000
Depreciation 13,100 G.P. 1,80,000
G. Expenses 20,900
Director’s Fees 25,000
N.P. 1,21,000
1,80,000 1,80,000
Balance Sheet as at 31st December, 2009
Share Capital 3,60,000 Fixed Assets 2,05,600
Profit & Loss A/c 24,600 Stock 1,50,000

Net Profit 1,21,000 Debtors 3,00,000
Bank overdraft 36,900 Less : Depreciation -13,100
Creditors 1,00,000
6,42,500 6,42,500

Q.6 You are given the following figures worked out from the profit and loss account and balance
sheet of Z Ltd. relating to the year 2008. Prepare the balance sheet.
Fixed Assets (net after writing off 30%) Rs. 10,50,000
Fixed Assets Turnover ratio 2
Finished goods turnover ratio 6
Rate of gross profit to sales 25%
Net profit (before interest) to sale 8%
Fixed charges cover (debenture interest 7%) 8
Debt collection period 1½ months
Material consumed to sales 30%
Stock of raw materials (in terms of number of month’s consumption) 8
Current ratio 2.4
Quick ratio 1.0
Reserves to capital 0.20
Solution:
Fixed Assets = Rs 10,50,000
Sales (Turnover) = Rs 21,00,000
Gross Profit = Rs 5,25,000
Cost of Goods Sold (COGS) = Rs 15,75,000
Finished Goods = Rs 2,62,500
Net Profit before interest = Rs 1,68,000
Annual Interest Payments = Rs 21,000
Net Profit after interest = Rs 1,47,000
Debentures (7%) = Rs 3,00,000
Debtors = Rs 2,62,500
Material Consumed = Rs 6,30,000
Stock of Raw Material = Rs 4,20,000
Current Ratio – Quick Ratio = Stock / Current Liabilities = 1.4
Stock = 2,62,500 + 4,20,000 = 6,82,500
 Current Assets = Rs 11,70,000
Capital + Reserves & Surplus = 22,20,000– 4,87,500 -3,00,000 = Rs 14,32,500
 Capital = Rs 11,93,750
 Reserves & Surplus = Rs 2,38,750

Balance Sheet of Z Ltd as at 31st December, 2008
Capital 11,93,750 Fixed Assets 10,50,000
Reserves & Surplus Current Assets 11,70,000
Profit & Loss A/c b/d 91,750
Net Profit after interest 1,47,000 Debtors 2,62,500
7% Debentures 3,00,000 Stock of Raw Materials 4,20,000
Finished Goods 2,62,500
Current Liabilities 4,87,500 Cash (B. f.) 2,25,000
22,20,000 22,20,000

Net Profit is part of Reserves & Surplus.

Q.7 The summarized Balance Sheet of X Ltd. as at 31st December 2008 and its summarized
Profit and Loss Account for the year ended on that date, are as follows. The corresponding
figures of the previous year are also shown:
Balance Sheet
Liabilities 2008 2007 Assets 2008 2007
(Rs. in lakhs ) (Rs. in lakhs)
Share capital Fixed Assets –
60,000 shares of At cost less
Rs. 100 each 60.00 60.00 Depreciation:
Reserve & Surplus Property 21.00 18.00
29.25 24.00 Plant 61.50 48.00
8% Debenture 15.00 15.00 82.50 66.00
Current Liabilities Current Assets -
& Provisions :
Sundry Creditors 45.75 24.00 Stock of finished 42.75 31.50
goods
Provision for 13.50 10.50 Sundry Debtors 41.25 30.00
Taxation
Proposed Bank 1.50 9.00
Dividend 4.50 3.00
63.75 85.50
Total : 168.00 136.50 168.00 136.50
Trading & Profit and Loss Account
2008 2007 2008 2007
(Rs. in lakhs) (Rs. in lakhs)
Cost of Sales 162.00 135.00 Sales (all credit) 225.00 180.00
Gross Profit C/d 63.00 45.00
225.00 180.00 225.00 180.00
Overhead Expenses 43.50 30.00 Gross Profit b/d 63.00 45.00
Net Profit before taxation 19.50 15.00
63.00 45.00 63.00 45.00
Provision for taxation 8.25 6.30 Net profit b/d 19.50 15.00
Dividend-paid and
Proposed 6.00 4.50

Surplus for the year
carried to Balance Sheet 5.25 4.20
19.50 15.00 19.50 15.00
You are required to interpret the above statement using significant accounting ratios.
Solution:
Following are the five steps in examining the performance of the company in the year 2008 as
compared to the year 2007.
Step 1: Calculation of the ratios
Financial Ratio 2008 2007
Return on Capital =(19.5+1.2)/(60+29.25+15) =(15+1.2)/(60+24+15)
Employed (RoCE) =19.86 % =16.36%
Net Profit Ratio (NPR) =19.5/225*100% =15/180*100%
=8.67% =8.34%
Capital Employed Turnover =225/(60+29.25+15) =180/(60+24+15)
Ratio (CETR) =2.16 =1.82
Current Ratio (CR) =85.5/63.75 =70.5/37.5
=1.34 =1.88
Stock Turnover Ratio (STR) =162/42.75 =135/31.5
=3.79 =4.29
Average Collection Period =41.25/225*365 =30/180*365
(ACP) =66.91 Days= ~67 days =60.83 Days = ~61 days
Debt / Equity Ratio (D/E) =15/89.25 =15/84
=.17 =.18
Earning per share (EPS) =11,25,000/60,000 =8,70,000/60,000
=18.75 =14.5
Dividend payout ratio (DPS =(6,00,000/60,000)/18.75*100% =(4,50,000/60,000)/14.5*100%
/ EPS) =53.33% =51.72%
Gross Profit Ratio (GPR) =63/225*100% =45/180*100%
=28% =25%

2. Comment on Individual Ratios: -
1. Return on Capital Employed (RoCE) has increased from 16.36% in 2007 to 19.86%
in 2008. This is achieved with the help of increased profitability on sales and more
efficient utilization of capital employed.

2. Net Profit Ratio (NPR) has increased from 8.34% in 2007 to 8.67% in 2008. This is
achieved with the help of increased profitability on sales.
3. Capital employed turnover ratio (CETR) has increased from 1.82 in 2007 to 2.16 in
2008. This is increased with the help of more efficient use of capital employed.
4. Current ratio (CR) has decrease to 1.34 in 2008 from 1.88 in 2007. This indicates that
Working Capital Management (WC Mgt) of the company is not showing healthy signs.
The reason for decline in CR is financing fixed assets out of working capital (WC).
During the year, there is substantial increase in fixed assets without any efforts to raise
long term funds. Long term funds have increased by 5.25 lacs on account of retained
profits.
5. Stock Turnover ratio (STR) has decreased from 4.29 in 2007 to 3.79 in 2008. This
indicates that Stock is not being efficiently utilized.
6. Average Collection Period (ACP) has increased to 67 days in 2008 from 61 days in
2007. This indicates poor collection as compared to previous year.
7. There is no noticeable change in debt/equity ratio. The debt/equity ratio (.18) of the
company is low which indicates presence of less long term debt as compared to equity
capital.
8. Earning per share (EPS) has increased to 18.75 in 2008 from 14.5 in 2007 (growth of
29.31% over previous year) indicates healthy growth of EPS.
9. Dividend payout ratio (DPR) has increased to 53.33% in 2008 from 51.72% in 2007
which is not a healthy sign in view of difficult working capital situation of the company.
Dividend per share (DPS) has increased to 10 in 2008 from 7.5 in 2007.
10. Gross profit ratio (GPR) has increase to 28% in 2008 from 25% in 2007 which
indicates 12% y/y growth in gross profit ratio.

Step 3: Critical Appraisal
The profitability of the company increased in account of increase in sales. Overheads have
increased considerably.
Working capital management is not satisfactory. Dividend payout should not have been so high
in view of working capital problems.

Step 4: Overall Performance
Overall performance of the company is satisfactory (RoCE has improved)

Step 5: Suggestion for the future
1. Try to improve working capital situation.
2. Try to control the overheads.
3. Funds may be raised through debentures, long term loans etc as the company’s
debt/equity ratio is low. Such funds may be used to improve working capital situation and
also for expansion and diversification of the business.

Q.8 X Ltd. has been existence for two years. Summarized Balance Sheets as on 31st
December, 2007 and 31st December, 2008 are given below:
Balance Sheet (Figures in lakhs of rupees)
Liabilities 2008 2007 Assets 2008 2007
Equity shares of Rs. 100 each 2 2 Fixed Assets (Less Dep.) 4.16 3.96
Reserves .20 .40 Stock .60 1.20
Profit & Loss A/c .28 .04 Debtors .80 1.60
Loans on Mortgage 2.20 1.60 Cash and Bank Balances .60 .04
Bank overdraft .40
Creditors .60 1.80
Provision for Taxation .68 .26
Proposed Dividend .20 .30
6.16 6.80 6.16 6.80
You are also given the Profit and Loss Account of the Company for the two years.
Profit & Loss Account (Figures in lakhs of rupees)
2008 2007 2008 2007
Interest on Loan .048 .096 Balance B/F - .28
Directors’ Profit for the year after
Remuneration running costs &
.20 .60 Depreciation 1.608 1.216
Provision for Taxation .68 .26
Dividends .20 .30
Transfer to Reserve .20 .20
Balance C/F .28 .04
1.608 1.496 1.608 1.496
Total Sales amounted to Rs. 12 lakhs in 2007 and Rs. 10 lakhs in 2008.
Make a through overall analysis of this company.

Solution:
Step 1: Calculation of Financial Ratios
S. No. Financial ratio 2008 2007
1 Return on Capital Employed =(1.608- =(1.216-.3)/(2+.4+.04+1.6)
(RoCE) .2)/(2+.2+.28+2.2) =22.67%
=30.09%
2 Net Profit Ratio (NPR) =.68/10*100% =.54/12*100%
=6.8% =4.5%
3 Capital Employed Turnover =10/(2+.2+.28+2.2) =12/(2+.4+.04+1.6)
Ratio (CETR) =2.14 =2.97
4 Current Ratio (CR) =(.6+.8+.6)/(.6+.68+.2) =(1.2+1.6+.04)/(1.8+.26+.3)
=1.35 =1.20
5 Stock Turnover Ratio (STR) =(10-1.608)/.6 =(12-1.216)/1.2
=13.99 =8.99
6 Average Collection Period =.8/10*365 =1.6/12*365
(ACP) =29.2 Days =48.67 Days
7 Debt / Equity Ratio (D/E) =2.20/2.48 =1.6/2.44
=.89 =.66
8 Earning per share (EPS) =68,000/2000 =54,000/2000
=34 =27
9 Dividend payout ratio (DPS / =.2/.68 =.3/.54
EPS) =29.41% =55.56%
10 Gross Profit Ratio (GPR) =.1.608/10*100% =1.216/12*100%
=16.08% =10.13%

Step 2: Comments on individual ratios
1. Sales have decreased to 10 lacs in 2008 from 12 lacs in 2007. This is not a positive
signal since topline has decreased by 16.67% y/y.
2. Return of Capital Employed (RoCE) has increased by 32.73% to 30.09% in 2008
from 22.67% in 2007. This is attributed to higher return on sales and but less efficient
utilization of capital employed.
3. Net Profit Ratio (NPR) has increased to 6.8% in 2008 from 4.5% in 2007. This is a
healthy signal since profitability on sales has increased 51.11% y/y basis.
4. Capital Employed Turnover Ratio (CETR) has decreased to 2.14 in 2008 from 2.97
in 2007. This is not a healthy signal since CETR has decreased by 28%.

5. Current Ratio has increased by 12.5% to 1.35 in 2008 from 1.20 in 2007.. This
indicates that current assets have increased more w.r.t. current liabilities and is a healthy
signal.
6. Stock Turnover Ratio (STR) has increased to 13.99 in 2008 from 7.08 in 2007 which
is a healthy signal since stock activity has improved compared to cost of goods sold.
7. Average Collection Period (ACP) has decreased to 29.2 days from 48.67 days which
indicates that collection of credit sales has improved as compared to previous year and
cash is collected faster.
8. Debt / Equity Ratio has increased to .88 in 2008 from .66 in 2007 which indicates that
company has raised long term debt (Mortgage debt) to finance its activities in the year
2008.
9. Earning per share (EPS) has increased to 34 in 2008 from 27 in 2007 which is a
healthy sign since EPS growth is a strong signal for investors and creditors for the
business.
10. Dividend payout ratio (DPR) has decreased to 29.41% in 2008 from 55.56% in 2007
which indicates that company prefers to retain its profits for future expansions.
11. Gross Profit Ratio (GPR) has increased to 16.08% in 2008 from 10.13% in 2007
which is 58.74% increase on y/y basis. This indicates that overall profitability of the
business has significantly improved.

Step 3: Critical Appraisal
It is noticed that sales have decreased but all other performance indicators for the company have
significantly improved over previous year. 32.73% increase in RoCE is surely a very good
performance indicator of increased profitability. CETR decreased indicates less efficient
utilization of resources. Improved current ratio, lower collection period and higher stock turnover
ratio indicated enhanced activity in many aspects of the business. It seems that the firm is poised
for rapid growth path.

Step 4: Overall Performance
The overall performance of the company is good. Since all major indicators are better but sales
and CETR have decreased over previous year.

Step 5: Suggestions for the future
The company should improve the utilization of resources. It is required to improve turnover to
increase topline growth.

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