2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Accounting Notes

Ratio Analysis:
Problems and
Solutions |
Accounting
Article shared by :
Here is a compilation of top thirteen
accounting problems on ratio analysis
with its relevant solutions.

Problem 1:

The following is the Balance Sheet

of a company as on 31st March:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Problem 2:

From the following particulars

found in the Trading, Profit and
Loss Account of A Company Ltd.,
work out the operation ratio of the
business concern:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Problem 3:

ADVERTISEMENTS:

The following is the summarised

Profit and Loss Account of Taj
Products Ltd. for the year ended
31st December:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Problem 4:

From the following Balance Sheet

and additional information, you
are required to calculate:

(i) Return on Total Resources

ADVERTISEMENTS:

(ii) Return on Capital Employed

(iii) Return on Shareholders’ Fund

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Problem 5:

A company has capital of Rs. 10,

00,000; its turnover is 3 times the
capital and the margin on sales is 6%.
What is the return on investment.

Problem 6:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Ram & Company supplies you the

following information regarding
the year ended 31st December:

Significance:

A high Inventory turnover ratio is better

than a low ratio. A high ratio implies
good inventory ‘management and an
indication of under-investment. It will
adversely affect the ability of a firm to
meet customers’ demand. At the same
time, a higher ratio reflects efficient
business activities.

A low inventory turnover ratio is

dangerous. It is an indication of
excessive inventory and over investment
in inventory. A low ratio may be result
of inferior quality goods, stock of un-
saleable and absolute goods. A lower
ratio reflects dull business and suggests
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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

that some steps should be taken to push

up sales.

Problem 7:

The following is the Profit and

Loss Account of Burn Ltd.

= Rs. 60,000 + Rs. 6, 00,000

= Rs. 5, 90,000

Problem 8:

Calculate Debtors Velocity from

the following details:
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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Opening Balance of Debtors Rs. 10,000

Credit Sales during the year Rs. 20,000

Sales Returns Rs. 1,000

Discount on Sales Rs. 50

Cash collected from Debtors during the

year Rs, 5,000

Bad Debts Rs. 500

Bad Debt Provision at 10%

Note:

Bills Receivable from the buyer of fixed

assets, should be excluded.
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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Bad and doubtful debts and their

provisions are not deducted from the
total debtors in order to avoid the
impression that a larger amount of
receivables have been collected.

Significance:

A turnover ratio of 8 signifies that

debtors get converted into cash 8 times
in a year. The average collection period
of 1.5 months implies that debtors are
collected in 45 days. The average
collection period ratio measures the
quality of debtors since it indicates the
rapidity or slowness of their
collectability. The shorter the average
collection period, the better the quality
of debtors.

The higher the Turnover Ratio and the

shorter the average collection period,
the better the trade credit management
and the better the liquidity of debtors.
That is, high Turnover Ratio and short
collection period imply prompt payment
on the part of debtors. On the other
hand, low Turnover Ratio and long
collection period reflects that payments
by debtors are delayed.

Problem 9:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

The Capital of a Company is as

follows:

Problem 10:

Assume that a firm has owners’

equity of Rs. 1, 00,000. The ratios
for the firm are:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Problem 11:

With the following ratios and

further information given below,
prepare a Trading, Profit and Loss
Account and Balance Sheet:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Problem 12:

Extract from financial accounts of

X, Y, Z Ltd. are:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Problem 13:

Following is the summarised

Balance Sheet of a concern as at
31st December:

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

Comments:

1. Liquidity and Solvency Position:

Current Ratio is 2.9. It means current

assets of Rs.2.90 are available against
each rupee of current liability. The
position is satisfactory on the basis of
current ratio. However, the Liquid Ratio
is 0.65: 1. It means greater part of
current assets constitute stock; the stock
is slow-moving. Therefore, the liquidity
position is not satisfactory.

2. Credit Terms:

The collection system is faulty because

debtors enjoy a credit facility for 96
days, which is beyond normal period.

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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

The performance of Debt Collection

Department is poor.

3. Profitability:

Gross Profit Ratio is 20% which is a

healthy sign. But the Net Profit Ratio is
only 5%. It means operating expenses
are higher.

4. Investment Structure:

Debt-Equity Ratio is 0.34: 1. It means

the firm is not dependent on outside
liabilities. The position is satisfactory.
Capital Gearing Ratio is also
satisfactory. However, the fixed assets to
proprietorship ratio reveals that the
entire fixed assets were not purchased
by the proprietors’ equity. It means the
firm depends on outside liabilities. It is
not desired.

5. Return on Proprietors’ Fund:

5% of the sales is net profit and are

available for the proprietors. The state
of low return is not desirable.

Stock Turnover Ratio and Turnover to

fixed assets indicate an unhealthy sign.
Fixed assets are not used properly. It is a
sign of under trading. The economic
condition of the firm is not sound. The
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2/17/2018 Ratio Analysis: Problems and Solutions | Accounting

firm can increase the rate of return on

investment by increasing production.

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