Chapter accounting-ratios: Accounting Ratios Case Study Questions | accountancy Class 12 CBSE

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Chapter accounting-ratios: Accounting Ratios Case Study Questions | accountancy Class 12 CBSE | ByteNotes.in

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Case Set 1

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Priya runs a retail garment store. At the end of the financial year 2023-24, her accountant compiled the following data: Inventories Rs. 60,000; Trade Receivables Rs. 40,000; Cash and Cash Equivalents Rs. 20,000; Advance Tax Rs. 5,000; Short-term Borrowings Rs. 30,000; Trade Payables Rs. 45,000. Priya wants to understand her store's short-term financial health before approaching the bank for a working capital loan. The bank manager has asked her to present the liquidity ratios to assess the firm's ability to meet its current obligations. Priya needs to calculate and interpret both the current ratio and the quick ratio to make a meaningful presentation.

Question 1: Calculate the Current Ratio for Priya's garment store from the given data.

Current Assets = Inventories + Trade Receivables + Cash + Advance Tax = 60,000 + 40,000 + 20,000 + 5,000 = Rs. 1,25,000
Current Liabilities = Short-term Borrowings + Trade Payables = 30,000 + 45,000 = Rs. 75,000
Current Ratio = 1,25,000 / 75,000 = 1.67 : 1

Question 2: Calculate the Quick (Liquid) Ratio for Priya's store and state whether it meets the ideal standard.

Quick Assets = Current Assets – Inventories – Advance Tax = 1,25,000 – 60,000 – 5,000 = Rs. 60,000
Quick Ratio = 60,000 / 75,000 = 0.80 : 1
The ideal Quick Ratio is 1:1; Priya's ratio of 0.80:1 is below the ideal, indicating some liquidity pressure.

Question 3: Priya wants to improve her current ratio. She is considering two options: (a) paying off Rs. 15,000 of trade payables immediately, or (b) purchasing goods worth Rs. 15,000 on credit. Analyse the effect of each option on the current ratio and advise her.

Original Current Ratio = 1,25,000 / 75,000 = 1.67:1
Option (a): Paying Rs. 15,000 cash — Current Assets reduce to Rs. 1,10,000; Current Liabilities reduce to Rs. 60,000; New ratio = 1,10,000/60,000 = 1.83:1 (Improved)
Option (b): Buying goods on credit — Current Assets increase to Rs. 1,40,000; Current Liabilities increase to Rs. 90,000; New ratio = 1,40,000/90,000 = 1.56:1 (Reduced)
Advice: Option (a) improves the current ratio; Priya should pay off trade payables to strengthen her liquidity position before approaching the bank.

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Case Set 2

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ABC Manufacturing Ltd. has provided the following summarised balance sheet data for the year ended March 31, 2024: Equity Share Capital Rs. 5,00,000; Reserves and Surplus Rs. 1,50,000; 12% Debentures Rs. 2,00,000; Other Long-term Liabilities Rs. 50,000; Current Liabilities Rs. 1,00,000; Fixed Assets Rs. 7,00,000; Non-current Investments Rs. 50,000; Current Assets Rs. 2,50,000. The company's long-term lenders wish to evaluate the firm's solvency position to decide on renewing the debenture agreement. The board of directors has asked the finance manager to calculate relevant solvency ratios to present at the next meeting.

Question 1: Calculate the Debt-Equity Ratio for ABC Manufacturing Ltd.

Long-term Debts = 12% Debentures + Other Long-term Liabilities = 2,00,000 + 50,000 = Rs. 2,50,000
Shareholders' Funds (Equity) = Equity Share Capital + Reserves and Surplus = 5,00,000 + 1,50,000 = Rs. 6,50,000
Debt-Equity Ratio = 2,50,000 / 6,50,000 = 0.38 : 1

Question 2: Calculate the Proprietary Ratio and the Total Assets to Debt Ratio for ABC Manufacturing Ltd.

Total Assets = Fixed Assets + Non-current Investments + Current Assets = 7,00,000 + 50,000 + 2,50,000 = Rs. 10,00,000
Proprietary Ratio = Shareholders' Funds / Total Assets = 6,50,000 / 10,00,000 = 0.65:1
Total Assets to Debt Ratio = Total Assets / Long-term Debts = 10,00,000 / 2,50,000 = 4:1

Question 3: Interpret the solvency position of ABC Manufacturing Ltd. based on the Debt-Equity Ratio and Proprietary Ratio calculated. Also state the significance of a low Debt-Equity Ratio from the perspective of long-term lenders.

Debt-Equity Ratio of 0.38:1 is well below the safe standard of 2:1, indicating the company is not heavily reliant on external debt and financial risk is low.
Proprietary Ratio of 0.65:1 indicates that 65% of total assets are financed by shareholders' funds, which is a positive sign and provides high security to creditors.
From lenders' perspective: A low Debt-Equity Ratio means the firm has less indebtedness; it reduces chances of bankruptcy and provides greater safety for lenders' funds, as the company is primarily owner-financed.
Note: The total of Debt to Capital Employed Ratio and Proprietary Ratio equals 1, confirming the complementary nature of these ratios.

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Case Set 3

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Sunrise Traders is a wholesale grocery business. For the year 2023-24, the following information is available: Opening Inventory Rs. 40,000; Closing Inventory Rs. 60,000; Net Purchases Rs. 2,80,000; Wages Rs. 20,000; Carriage Inwards Rs. 10,000; Revenue from Operations Rs. 4,00,000. Additionally, Trade Receivables at the beginning were Rs. 30,000 and at the end Rs. 50,000. The owner, Mr. Suresh, wants to evaluate how efficiently the business is managing its inventory and collecting its receivables, as he suspects slow inventory movement and delayed collections are affecting working capital.

Question 1: Calculate the Inventory Turnover Ratio for Sunrise Traders.

Cost of Revenue from Operations = Opening Inventory + Purchases + Wages + Carriage – Closing Inventory = 40,000 + 2,80,000 + 20,000 + 10,000 – 60,000 = Rs. 2,90,000
Average Inventory = (40,000 + 60,000) / 2 = Rs. 50,000
Inventory Turnover Ratio = 2,90,000 / 50,000 = 5.8 times

Question 2: Calculate the Trade Receivables Turnover Ratio and Average Collection Period for Sunrise Traders.

Average Trade Receivables = (30,000 + 50,000) / 2 = Rs. 40,000
Trade Receivables Turnover Ratio = Revenue from Operations / Average Trade Receivables = 4,00,000 / 40,000 = 10 times
Average Collection Period = 365 / 10 = 36.5 days

Question 3: Based on the Inventory Turnover Ratio and Trade Receivables Turnover Ratio calculated, interpret the efficiency of Sunrise Traders' operations. What do low turnover ratios indicate and what corrective measures can Mr. Suresh take?

Inventory Turnover of 5.8 times means inventory is converted into sales about 5.8 times per year — average holding period ≈ 63 days. This is moderate; if industry average is higher, it suggests slow-moving inventory.
Trade Receivables Turnover of 10 times with collection period of 36.5 days indicates fairly efficient collection. However, if the credit period offered is shorter, it may indicate delayed collections.
Low Inventory Turnover can result from: bad buying, obsolete stock, or excess inventory — Mr. Suresh should review procurement and reduce slow-moving stock.
Corrective measures: Offer discounts for faster payments, review credit terms given to customers, and improve inventory management through better demand forecasting.

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Case Set 4

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XYZ Ltd. has reported the following profitability-related data for the year ending March 31, 2024: Revenue from Operations Rs. 8,00,000; Cost of Revenue from Operations Rs. 5,60,000; Selling Expenses Rs. 40,000; Administrative Expenses Rs. 60,000; Net Profit after Tax Rs. 96,000; Tax Rate 40%. Capital Employed Rs. 4,00,000. The company's management is reviewing its profitability indicators to compare performance with the previous year and with competitor firms. They are particularly interested in gross profit ratio, operating ratio, and return on capital employed.

Question 1: Calculate the Gross Profit Ratio for XYZ Ltd.

Gross Profit = Revenue from Operations – Cost of Revenue from Operations = 8,00,000 – 5,60,000 = Rs. 2,40,000
Gross Profit Ratio = (Gross Profit / Revenue from Operations) × 100 = (2,40,000 / 8,00,000) × 100 = 30%

Question 2: Calculate the Operating Ratio and Operating Profit Ratio for XYZ Ltd.

Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses = 5,60,000 + 40,000 + 60,000 = Rs. 6,60,000
Operating Ratio = (6,60,000 / 8,00,000) × 100 = 82.5%
Operating Profit Ratio = 100 – 82.5 = 17.5%

Question 3: Calculate the Return on Capital Employed (ROCE) for XYZ Ltd. and explain its significance in assessing company performance.

Net Profit after Tax = Rs. 96,000; Tax Rate = 40%
Net Profit before Tax = 96,000 × 100/60 = Rs. 1,60,000
Interest on Debt: Not separately given; assuming PBIT = Net Profit before Tax (no interest given) = Rs. 1,60,000
ROCE = (Profit before Interest and Tax / Capital Employed) × 100 = (1,60,000 / 4,00,000) × 100 = 40%
Significance: ROCE of 40% means the company earns Rs. 40 for every Rs. 100 of capital employed. It measures overall efficiency of funds utilisation and is useful for inter-firm comparison. A higher ROCE than the interest rate paid indicates profitable use of debt.

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Case Set 5

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Meera Ltd. is a listed company with the following data for FY 2023-24: 1,00,000 Equity Shares of Rs. 10 each fully paid; 10% Preference Share Capital Rs. 2,00,000; General Reserve Rs. 3,00,000; Net Profit after Tax Rs. 2,50,000; Dividend declared on equity shares @ 20%; Market Price per equity share Rs. 50. The company's investors are keen to evaluate shareholder-related financial ratios before making further investment decisions. The Finance Director has been asked to present EPS, Book Value per Share, Dividend Payout Ratio, and P/E Ratio.

Question 1: Calculate the Earnings Per Share (EPS) for Meera Ltd.

Preference Dividend = 10% × 2,00,000 = Rs. 20,000
Profit available for Equity Shareholders = 2,50,000 – 20,000 = Rs. 2,30,000
Number of Equity Shares = 1,00,000
EPS = 2,30,000 / 1,00,000 = Rs. 2.30 per share

Question 2: Calculate the Dividend Payout Ratio and Price-Earnings (P/E) Ratio for Meera Ltd.

Dividend per Share = 20% × Rs. 10 = Rs. 2 per share
Dividend Payout Ratio = Dividend per Share / EPS = 2 / 2.30 = 0.87 (or 87%)
P/E Ratio = Market Price / EPS = 50 / 2.30 = 21.74 times

Question 3: Calculate Book Value per Share for Meera Ltd. and explain what a high P/E Ratio and a high Dividend Payout Ratio individually indicate to investors.

Equity Shareholders' Funds = Equity Share Capital + General Reserve = 10,00,000 + 3,00,000 = Rs. 13,00,000
Book Value per Share = 13,00,000 / 1,00,000 = Rs. 13 per share
High P/E Ratio (21.74 times): Indicates investors expect high future growth in company's earnings; market has priced the share at a premium relative to current earnings — shows investor confidence.
High Dividend Payout Ratio (87%): Indicates the company distributes most of its earnings as dividends, leaving little for reinvestment. This may suit income-seeking investors but may limit company's growth potential.

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Chapter accounting-ratios: Accounting Ratios | Case Study Questions

Passage

Question 1: Calculate the Current Ratio for Priya's garment store from the given data.

Question 2: Calculate the Quick (Liquid) Ratio for Priya's store and state whether it meets the ideal standard.

Question 3: Priya wants to improve her current ratio. She is considering two options: (a) paying off Rs. 15,000 of trade payables immediately, or (b) purchasing goods worth Rs. 15,000 on credit. Analyse the effect of each option on the current ratio and advise her.

Passage

Question 1: Calculate the Debt-Equity Ratio for ABC Manufacturing Ltd.

Question 2: Calculate the Proprietary Ratio and the Total Assets to Debt Ratio for ABC Manufacturing Ltd.

Question 3: Interpret the solvency position of ABC Manufacturing Ltd. based on the Debt-Equity Ratio and Proprietary Ratio calculated. Also state the significance of a low Debt-Equity Ratio from the perspective of long-term lenders.

Passage

Question 1: Calculate the Inventory Turnover Ratio for Sunrise Traders.

Question 2: Calculate the Trade Receivables Turnover Ratio and Average Collection Period for Sunrise Traders.

Question 3: Based on the Inventory Turnover Ratio and Trade Receivables Turnover Ratio calculated, interpret the efficiency of Sunrise Traders' operations. What do low turnover ratios indicate and what corrective measures can Mr. Suresh take?

Passage

Question 1: Calculate the Gross Profit Ratio for XYZ Ltd.

Question 2: Calculate the Operating Ratio and Operating Profit Ratio for XYZ Ltd.

Question 3: Calculate the Return on Capital Employed (ROCE) for XYZ Ltd. and explain its significance in assessing company performance.

Passage

Question 1: Calculate the Earnings Per Share (EPS) for Meera Ltd.

Question 2: Calculate the Dividend Payout Ratio and Price-Earnings (P/E) Ratio for Meera Ltd.

Question 3: Calculate Book Value per Share for Meera Ltd. and explain what a high P/E Ratio and a high Dividend Payout Ratio individually indicate to investors.

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