Question

Shareholders’ Funds ₹ 10,00,000; Long-term Debts ₹ 20,00,000; Gross Profit at 20% on cost was ₹ 20,00,000. Calculate the Net Assets or Capital Employed Turnover Ratio.

Answer 1

Calculation of Total Revenue from Operations:

Since Gross Profit is 20% on Cost:

\[\text{Gross Profit} = 20\% \text{ of Cost}\]

$$20,00,000 = 0.20 \times \text{Cost}$$

$$\text{Cost of Revenue from Operations} = \frac{20,00,000}{0.20} = ₹ 1,00,00,000$$

Now, calculate total sales/revenue:

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

$$\text{Revenue from Operations} = ₹ 1,00,00,000 + ₹ 20,00,000$$

$${\text{Revenue from Operations} = ₹ 1,20,00,000}$$

Calculation of Capital Employed:

Using the Liabilities side approach:

$$\text{Capital Employed} = \text{Shareholders’ Funds} + \text{Long-term Debts}$$

$$\text{Capital Employed} = ₹ 10,00,000 + ₹ 20,00,000$$ 
$${\text{Capital Employed} = ₹ 30,00,000}$$

Calculation of Capital Employed Turnover Ratio:

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

$$\text{Capital Employed Turnover Ratio} = \frac{1,20,00,000}{30,00,000} = 4$$

Net Assets or Capital Employed Turnover Ratio = 4 Times