Question 42 of 47intermediate🔧 ApplyNumerical4 marks

From the following Balance Sheet and other information, calculate following ratios: (i) Debt-Equity Ratio (ii) Working Capital Turnover Ratio (iii) Trade Receivables Turnover Ratio Balance Sheet as at March 31, 2017 I. Equity and Liabilities: 1. Shareholders’ funds: a) Share capital 10,00,000; b) Reserves and surplus 7,00,000; c) Money received against share warrants 2,00,000 2. Non-current Liabilities: Long-term borrowings 12,00,000 3. Current Liabilities: Trade payables 5,00,000 Total: 36,00,000 II. Assets: 1. Non-current Assets: Fixed assets 18,00,000 – Tangible assets 2. Current Assets: a) Inventories 4,00,000; b) Trade Receivables 9,00,000; c) Cash and cash equivalents 5,00,000 Total: 36,00,000 Additional Information: Revenue from Operations Rs. 18,00,000

Correct Answer

(i) Debt-Equity Ratio = 0.63 : 1

(ii) Working Capital Turnover Ratio = 1.38 times

(iii) Trade Receivables Turnover Ratio = 2 times

Exercise: Questions for Practice | Q: 17 | (Page 45)
For More Understanding

Explanation

This question requires calculation of three solvency and efficiency ratios from the given Balance Sheet data. The Debt-Equity Ratio measures the relationship between long-term debt and shareholders' funds. The Working Capital Turnover Ratio measures efficiency in utilizing working capital to generate revenue. The Trade Receivables Turnover Ratio measures how efficiently trade receivables are collected.

Solution Steps

  1. Step 1: Calculate Debt-Equity Ratio Debt = Long-term borrowings = Rs. 12,00,000 Equity = Share capital + Reserves and surplus + Money received against share warrants = Rs. 10,00,000 + Rs. 7,00,000 + Rs. 2,00,000 = Rs. 19,00,000 Debt-Equity Ratio = Debt / Equity = 12,00,000 / 19,00,000 = 0.63 : 1

  2. Step 2: Calculate Working Capital Turnover Ratio Current Assets = Inventories + Trade Receivables + Cash and cash equivalents = Rs. 4,00,000 + Rs. 9,00,000 + Rs. 5,00,000 = Rs. 18,00,000 Current Liabilities = Trade payables = Rs. 5,00,000 Working Capital = Current Assets - Current Liabilities = Rs. 18,00,000 - Rs. 5,00,000 = Rs. 13,00,000 Working Capital Turnover Ratio = Revenue from Operations / Working Capital = 18,00,000 / 13,00,000 = 1.38 times

  3. Step 3: Calculate Trade Receivables Turnover Ratio Trade Receivables Turnover Ratio = Revenue from Operations / Trade Receivables = 18,00,000 / 9,00,000 = 2 times

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