Question

From the following information, calculate the following ratios:

1. Liquid Ratio
2. Gross Profit Ratio
3. Debt-Equity Ratio

Information:

Revenue from Operations	₹ 4,00,000
Opening Inventory	₹ 10,000
Closing Inventory	₹ 3,000 less than Opening Inventory
Net Purchases	80% of Revenue from Operations
Direct Expenses	₹ 20,000
Current Assets	₹ 1,00,000
Prepaid Expenses	₹ 3,000
Current Liabilities	₹ 60,000
9% Debentures	₹ 4,00,000
Long-term loan from Bank	₹ 1,50,000
Equity Share Capital	₹ 8,00,000
8% Preference Share Capital	₹ 3,00,000

Answer 1

(i) Liquid Assets = Current Assets − Closing Inventory − Prepaid Expenses

= ₹ 1,00,000 − ₹ 7,000 − ₹ 3,000

= ₹ 90,000

Liquid Ratio = `"Liquid Assets"/"Current Liabilities"`

= `(₹ 90,000)/(₹ 60,000)`

= 1.5 : 1

(ii) Cost of Revenue from Operations = Opening Inventory + Net Purchases + Direct Expenses − Closing Inventory

= ₹ 10,000 + `80/100 xx ₹ 4,00,000` + ₹ 20,000 − ₹ 7,000

= ₹ 10,000 + ₹ 3,20,000 + ₹ 20,000 − ₹ 7,000

= ₹ 3,43,000

Gross Profit = Revenue from Operations − Cost of Revenue from Operations

= ₹ 4,00,000 − ₹ 3,43,000

= ₹ 57,000

Gross Profit Ratio = `"Gross Profit"/"Net Revenue from Operations" xx 100`

= `(₹ 57,000)/(₹ 4,00,000) xx 100`

= 14.25%

(iii) Long Term Debts = 9% Debentures + Long-term loan from Bank

= ₹ 4,00,000 + ₹ 1,50,000

= ₹ 5,50,000

Shareholder’s Funds = Equity Share Capital + 8% Preference Share Capital

= ₹ 8,00,000 + ₹ 3,00,000

= ₹ 11,00,000

Debt-Equity Ratio = `"Long Term Debts"/"Shareholder’s Funds"`

= `(₹ 5,50,000)/(₹ 11,00,000)`

= 0.5 : 1