Question 14 of 47intermediate🔧 ApplyNumerical4 marks

From the following information, calculate the following ratios: i) Liquid Ratio ii) Inventory turnover ratio iii) Return on investment Inventory in the beginning Rs. 50,000; Inventory at the end Rs. 60,000; Net Profit Rs. 2,17,900; 10% Debentures Rs. 2,50,000; Revenue from operations Rs. 4,00,000; Gross Profit Rs. 1,94,000; Cash and Cash Equivalents Rs. 40,000; Money received against share warrants Rs. 20,000; Trade Receivables Rs. 1,00,000; Trade Payables Rs. 1,90,000; Other Current Liabilities Rs. 70,000; Share Capital Rs. 2,00,000; Reserves and Surplus Rs. 1,20,000 (Balance in the Statement of Profit & Loss)

Correct Answer

(i) Liquid Ratio = 0.54 : 1

(ii) Inventory Turnover Ratio = 3.75 times

(iii) Return on Investment = 41.17%

Exercise: Questions for Practice | Q: 18 | (Chapter: 46)
For More Understanding

Explanation

This question tests the student's ability to calculate three key accounting ratios from given financial data. The Liquid Ratio measures short-term liquidity, Inventory Turnover Ratio measures efficiency in inventory management, and Return on Investment measures profitability relative to capital employed. Students must correctly identify the components for each ratio and apply the appropriate formulas.

Solution Steps

  1. Step 1 (Liquid Ratio): Calculate Liquid Assets = Cash and Cash Equivalents + Trade Receivables = Rs. 40,000 + Rs. 1,00,000 = Rs. 1,40,000

  2. Step 2 (Liquid Ratio): Calculate Current Liabilities = Trade Payables + Other Current Liabilities = Rs. 1,90,000 + Rs. 70,000 = Rs. 2,60,000

  3. Step 3 (Liquid Ratio): Liquid Ratio = Liquid Assets / Current Liabilities = Rs. 1,40,000 / Rs. 2,60,000 = 0.54 : 1

  4. Step 4 (Inventory Turnover Ratio): Calculate Cost of Revenue from Operations = Revenue from Operations - Gross Profit = Rs. 4,00,000 - Rs. 1,94,000 = Rs. 2,06,000

  5. Step 5 (Inventory Turnover Ratio): Calculate Average Inventory = (Opening Inventory + Closing Inventory) / 2 = (Rs. 50,000 + Rs. 60,000) / 2 = Rs. 55,000

  6. Step 6 (Inventory Turnover Ratio): Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory = Rs. 2,06,000 / Rs. 55,000 = 3.75 times

  7. Step 7 (ROI): Calculate Net Profit before Interest and Tax = Net Profit + Interest on Debentures = Rs. 2,17,900 + (10% of Rs. 2,50,000) = Rs. 2,17,900 + Rs. 25,000 = Rs. 2,42,900

  8. Step 8 (ROI): Calculate Shareholders' Funds = Share Capital + Reserves and Surplus + Money received against share warrants = Rs. 2,00,000 + Rs. 1,20,000 + Rs. 20,000 = Rs. 3,40,000

  9. Step 9 (ROI): Calculate Capital Employed = Shareholders' Funds + Long-term Debts (Debentures) = Rs. 3,40,000 + Rs. 2,50,000 = Rs. 5,90,000

  10. Step 10 (ROI): Return on Investment = (Net Profit before Interest and Tax / Capital Employed) × 100 = (Rs. 2,42,900 / Rs. 5,90,000) × 100 = 41.17%

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