Question

From the following information, calculate:

1. Gross Profit Ratio;
2. Working Capital Turnover Ratio; and
3. Proprietary Ratio.

Particulars	₹	Particulars	₹
Paid-up Capital	8,00,000	Current Assets	5,00,000
Credit Sales	3,00,000	Current Liabilities	2,90,000
9% Debentures	3,40,000	Cash Sales: 75% of Credit Sales
Cost of Revenue from Operations	6,80,000	Net Profit for the year	1,55,000

Answer 1

Preliminary Calculations:

1. Total Revenue from Operations (Total Sales):

\[\text{Cash Sales} = 75\% \text{ of } 3,00,000 = ₹ 2,25,000\]

$$\text{Total Sales} = \text{Credit Sales} + \text{Cash Sales}$$

$$\text{Total Sales} = ₹ 3,00,000 + ₹ 2,25,000$$

$${\text{Total Revenue from Operations} = ₹ 5,25,000}$$

2. Working Capital:

$$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$$

$$\text{Working Capital} = ₹ 5,00,000 - ₹ 2,90,000$$

$${\text{Working Capital} = ₹ 2,10,000}$$

3. Shareholders’ Funds (Proprietor’s Funds):

$$\text{Shareholders' Funds} = \text{Paid-up Capital} + \text{Net Profit for the year}$$

$$\text{Shareholders' Funds} = ₹ 8,00,000 + ₹ 1,55,000$$

$${\text{Shareholders' Funds} = ₹ 9,55,000}$$

4. Total Assets:

Using the Liabilities side approach:

$$\text{Total Assets} = \text{Shareholders' Funds} + \text{Long-term Debt (9\% Debentures)} + \text{Current Liabilities}$$

$$\text{Total Assets} = ₹ 9,55,000 + ₹ 3,40,000 + ₹ 2,90,000$$

$${\text{Total Assets} = ₹ 15,85,000}$$

Ratio Calculations:

(i) Gross Profit / Gross Loss Ratio:

$$\text{Gross Profit} = \text{Total Revenue from Operations} - \text{Cost of Revenue from Operations}$$

$$\text{Gross Profit} = ₹ 5,25,000 - ₹ 6,80,000 = -₹ 1,55,000 \ {\text{(Gross Loss)}}$$

$$\text{Gross Profit Ratio} = \left( \frac{\text{Gross Profit}}{\text{Total Revenue from Operations}} \right) \times 100$$

$$\text{Gross Profit Ratio} = \left( \frac{-1,55,000}{5,25,000} \right) \times 100 \approx -29.5238\%$$

$${\text{Gross Profit Ratio} = -29.52\%}$$

(ii) Working Capital Turnover Ratio:

$$\text{Working Capital Turnover Ratio} = \frac{\text{Total Revenue from Operations}}{\text{Working Capital}}$$

$$\text{Working Capital Turnover Ratio} = \frac{5,25,000}{2,10,000} = 2.5$$

$${\text{Working Capital Turnover Ratio} = 2.5\text{ Times}}$$

(iii) Proprietary Ratio:

$$\text{Proprietary Ratio} = \left( \frac{\text{Shareholders' Funds}}{\text{Total Assets}} \right) \times 100$$

$$\text{Proprietary Ratio} = \left( \frac{9,55,000}{15,85,000} \right) \times 100 \approx 60.2523\%$$

$${\text{Proprietary Ratio} = 60.25\%} \ $$