Accounting Ratios Class 12

Classification of Ratios : Accounting ratios are used to analyse the financial position of the firm. They are being categorised into different types which are given as below:

  1. Balance Sheet Ratios
  2. Statement of Profit & Loss Ratios
  3. Composite Ratios

However, from the users point of view, they are interested to know about the liquidity, solvency, turnover and profitability of the organisation. So, the main categories of ratio from financial users perspective are:




Liquidity Ratios : Liquidity means the firms ability to meet its current liabilities. In other words, the ability of a business to pay its short-term debts is frequently referred to as liquidity position of the business. Short term creditors of the firm are generally interested to know about the liquidity position of the firm. The liquidity ratio is further categorised into two parts: (i) Current Ratio & (ii) Liquid Ratio

a. Current Ratio : It shows the relationship between current assets and current liabilities. It is also known as working capital ratio. The ideal current ratio is 2:1.  The term current assets means the assets which are easily convertible into cash or cash equivalents within 12 months & the term current liabilities means the liabilities which are payable within a period of 12 months.

b. Liquid Ratio : It shows the relationship between liquid assets and current liabilities. It is also known as acid test ratio or quick ratio. The ideal liquid ratio is 1:1.  The term liquid assets means the assets which are easily convertible into cash or cash equivalents very shortly. All current assets except inventories and prepaid expenses are included in liquid assets.

Computation of current ratio

Classification of Ratios : Example 1

On the basis of the following information calculate the current ratio:

 

Explanation : –

Current Ratio

Current ratio = 700000/200000

Current ratio = 3.5 :1
Working note 1 : Current assets = Inventory + Trade receivable + Current investment + Prepaid expenses + Advance tax
Current assets = 45000 + 50000 + 100000 + 55000 + 450000
Current assets = 700000
Working note 2 : Current liabilities = Bank overdraft + Trade payables + Other current liabilities
Current liabilities = 100000 + 60000 + 40000
200000




Computation of liquidity ratio

Classification of Ratios : Example 2

On the basis of the following information calculate the liquidity ratio:

 

Explanation : –

Liquidity Ratio

Liquidity ratio = 65000/130000

Liquidity ratio = 0.5 :1
Working note 1 : Liquid assets = Current assets (-) ( Stock + Prepaid expenses + Advance tax )
Liquid assets = 160000 (-) 30000 + 25000 + 40000
Liquid assets = 65000
Working note 2 : Current assets = Stock + Sundry debtors + Current investment + Prepaid expenses + Advance tax
Current assets = 30000 + 50000 + 15000 + 25000 + 40000
Current assets = 160000
Working note 3 : Current liabilities = Bank overdraft + Trade payables + Other current liabilities
Current liabilities = 55000 + 45000 + 30000
130000

 

Computation of quick ratio

Classification of Ratios : Example 3

On the basis of the following information calculate the Quick ratio:

 

Explanation : –

Quick Ratio

Quick ratio = 21000/12000

Quick ratio = 1.75 :1
Working note 1 : Liquid assets = Current assets (-) ( Inventory + Prepaid expenses + Advance tax )
Liquid assets = 65000 (-) 20000 + 18000 + 6000
Liquid assets = 21000
Working note 2 : Quick liabilities = Current liabilities (-) Bank overdraft
Quick liabilities 32000 (-) 20000
Quick liabilities 12000
Working note 3 : Current assets = Inventory + Trade receivable + Current investment + Prepaid expenses + Advance tax
Current assets = 20000 + 15000 + 6000 + 18000 + 6000
Current assets = 65000
Working note 4 : Current liabilities = Bank overdraft + Trade payables + Other current liabilities
Current liabilities = 20000 + 5000 + 7000
32000




when current liabilities are given

Classification of Ratios : Example 4

From the following information compute the current ratio.

 

Explanation : –

Current Ratio

Current Ratio = 1300000/400000

Current Ratio = 3.25 :1
Workings:
Working Capital = Current assets (-) current liabilities
900000 = Current assets (-) 400000
Current assets = 1300000
Workings:
current liabilities = Trade Payables (+) Other Current Liabilities
current liabilities = 225000 (+) 175000
current liabilities = 400000

 

Determination of working capital

Classification of Ratios : Example 5

From the following given information:
A firm had current assets of RS. 140000
it then paid a current liability of RS. 20000
After this payment the current ratio was 3 : 2
Determine the current liabilities and working capital after the payment.

 

Explanation : –

Working capital = Current assets (-) Current liabilities
= 120000 (-) 80000
= 40000
Workings:
Current Assets = 140000
Current Assets After the payment of RS. 20000 would be 140000 (-) 20000 = 120000
As current ratio is 3 : 2 and current assets are RS. 120000

Current Ratio

3/2 = 120000/Current liabilities

Current liabilities = 240000/3

Current liabilities = 80000




Determination of working capital when current ratio given

Classification of Ratios : Example 6

From the following information:
A firm had current assets of RS. 225000
it then paid a current liability of RS. 45000
After this payment the current ratio was 9 : 7
Determine the current liabilities and working capital Before the payment.

 

Explanation : –

(i) Working capital = Current assets (-) Current liabilities
= 180000 (-) 140000
= 40000
Workings:
Current Assets = 225000
Current Assets After the payment of RS. 45000 would be 225000 (-) 45000 = 180000
As current ratio is 9 : 7 and current assets are RS. 180000

Current Ratio

9/7 = 180000/Current liabilities

Current liabilities = 1260000/9

Current liabilities = 140000
Before the payment of liabilities of RS. 45000 total amount of
Current liabilities = 45000 + 140000
Current liabilities = 185000
Working capital = 40000

 

Liquid ratio on the basis of working capital

Classification of Ratios : Example 7

Current Assets = Rs. 80000 . Inventory = Rs. 15000 . Prepaid Expenses = Rs. 50000 . Working Capital = Rs. 50000 Calculate Liquid Ratio.

 

Explanation : –

Liquid Assets = Current Assets (-) Inventory (-) Prepaid Expenses
Liquid Assets = 80000 (-) 15000 (-) 50000
Liquid Assets = 15000
Current Liabilities = 30000

Liquid Ratio = 15000/30000

Liquid Ratio = 0.5
Working Note 1 :
Current Liabilities = Current Assets (-) Working Capital
= 80000 (-) 50000
= 30000

 

Calculation of Liquid Ratio

Classification of Ratios : Example 8

Current Assets of ABC Ltd. are Rs. 72000 and the current ratio is 1.2 . Value of inventories is Rs. 27000 . Calculate liquid ratio.

 

Explanation : –

Current Ratio

OR

Current Liabilities

Current Liabilities = 72000/1.2

Current Liabilities = 60000

Quick Ratio

Quick Ratio = 45000/60000

Quick Ratio = 0.75
Working Notes:
Liquid Assets = Current Assets (-) Inventory
Liquid Assets = 72000 (-) 27000
Liquid Assets = 45000




Current Ratio on the basis of Quick Ratio

Classification of Ratios : Example 9

Value of Inventory of HRD & Co. is Rs. 240000 . Liquid Assets are Rs. 120000
Quick Ratio is 0.5 . Calculate the current ratio .

 

Explanation : –

Quick Ratio

OR

Current liabilities

Current Liabilities = 120000/0.5

Current Liabilities = 240000

Current Ratio

Current Ratio = 360000/240000

Current Ratio = 1.5 :1
Working Notes:
Current Assets = Liquid Assets + Inventory
= 120000 + 240000
= 360000

 

Solvency Ratio Analysis

Solvency Ratio Analysis : It measure the ability of a business to survive for a long period of time. These ratios are very important for stockholders and creditors as these ratios assess the ability of the firm to meet its long term liabilities.

The solvency ratios are categorised into following types :

a) Debt Equity Ratio

b) Total Assets to Debt Ratio

c) Proprietary Ratio

d) Interest Coverage Ratio

Debt Equity Ratio

It explains the relationship between long term debts and shareholder’s funds. The debt-equity ratio of 2:1 is considered as ideal.

Here, Debt includes Long-term Borrowings and Long-term Provisions. Shareholder’s Funds include Share Capital and Reserve & Surplus.

 

Total Assets to Debt Ratio

This ratio is a variation of debt-equity ratio. In this ratio, assets are expressed in terms of long term debts.

Here, Total Assets = Non- Current Assets + Non-Current Investments + Long Term Loans & Advances + Current Assets

Debts = Long-term Borrowings and Long-term Provisions




Proprietary Ratio

It is the proportion of total assets funded by the shareholders. A higher proprietary ratio is an indicator of sound financial position from long-term point of view.

 

Interest Coverage Ratio

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges.

How to compute debt equity ratio – Solvency Ratio Analysis – Question 1

From the following information calculate the debt equity ratio.

Explanation : –

Debt equity ratio

= 650000/250000

= 2.6 : 1
Working note 1 : Long term Debt = 12 % Debentures + Long term borrowings + Long term provisions
Long term Debt = 500000 + 50000 + 100000
Long term Debt = 650000
Working note 2 : Shareholders fund = Equity Share Capital + Preference share capital + Reserve and surplus + Securities premium + Profit and loss balance
Shareholders fund = 150000 + 50000 + 30000 + 15000 + 5000
Shareholders fund = 250000




When total debts are given – Solvency Ratio Analysis – Question 2

From the following information compute the current ratio.

Explanation : –

Current Ratio

Current Ratio = 35000/20000

Current Ratio = 1.75 :1
Workings:
Working Capital = Current assets (-) Current liabilities
15000 = Current assets (-) 20000
Current assets = 35000
Workings:
Current liabilities = Total debt (-) Long term debt
Current liabilities = 40000 (-) 20000
Current liabilities = 20000

How to compute debt equity ratio – Solvency Ratio Analysis – Question 3

From the following information calculate debt equity ratio.

Explanation : –

Debt equity ratio

Debt equity ratio = 200000/400000

Debt equity ratio = 0.5 : 1
Working note 1 : Long term Debt = Long term borrowings + Long term provisions
Long term Debt = 120000 + 80000
Long term Debt = 200000
Working note 2 : Shareholders fund = Non current assets + Working capital (-) Non current liabilities
OR
Shareholders fund = Non current assets + Current assets (-) Current liabilities (-) Long term borrowings (-) Long term provisions
Shareholders fund = 500000 + 200000 (-) 100000 (-) 120000 (-) 80000
Shareholders fund = 400000

Calculation of Equity ratio – Solvency Ratio Analysis – Question 4

From the Following information calculate Equity Ratio

Explanation : –

Equity Ratio

Equity Ratio = 600000/300000

Equity Ratio = 2
Working note 1 :
Shareholders’ Equity = Share Capital + Reserves + Surplus
= 500000 + 300000 + -200000
= 600000
Capital employed = Non Current Assets + Current Assets (-) Trade Payables
Capital employed = 250000 + 100000 (-) 50000
Capital employed = 300000




Calculation of Proprietary Ratio – Solvency Ratio Analysis – Question 5

Compute Proprietary ratio if equity share capital is Rs. 125000 ,Preference Share Capital is Rs. 100000 ,Capital Reserve is Rs. 80000 ,Profit & Loss Balance is Rs. 55000 . The value of 7 % Debentures is Rs. 62500 and 9 % Mortgage loan- Rs. 112500 .Value of Current Liabilities
is Rs. 262500 Non Current Assets is worth Rs. 275000 Value of Current Assets is Rs. 125000 .

Explanation : –

Proprietary Ratio

Proprietary Ratio = 360000/400000

Proprietary Ratio = 0.9
Working note 1 : Shareholders’ Funds = Equity share capital + Preference share capital + Capital reserve + Profit and loss balance
Shareholders’ Funds = 125000 + 100000 + 80000 + 55000 Shareholders’ Funds = 360000
Working note 2 : Total Assets = Non current assets + Current assets
Total Assets = 275000 + 125000
Total Assets = 400000

Debt to total assets ratio – Solvency Ratio Analysis – Question 6

Compute Debt to Total Assets Ratio from the above information.

Explanation : –

Debt to total assets ratio

Debt to Total Assets Ratio = 250000/125000

Debt to Total Assets Ratio = 2 :1
Working note 1 :
Total Assets = Fixed Assets + Non Current Investments + Current Assets
= 80000 + 20000 + 25000
Total Assets = 125000

Interest Coverage Ratio – Solvency Ratio Analysis – Question 7

Compute Interest Coverage ratio if equity share capital is Rs. 1200000 ,Preference Share Capital is Rs. 720000 ,Capital Reserve is Rs. 360000 ,Profit & Loss Balance is Rs. 600000 . The Value of 13 % debentures is Rs. 250000 and 11 % Mortgage loan of Rs. 300000 .The value of Current Liabilities is Rs. 1180000 Non Current Assets is worth Rs. 2400000 Value of Current Assets is Rs. 3000000 .

Explanation : –

Interest Coverage Ratio

Interest Coverage Ratio = 589500/65500

Interest Coverage Ratio = 9 times
Working Notes:
Interest on debenture = 13% x 250000
= 32500
Interest on loan = 11% x 300000
33000
Total interest charges = 6550

Interest Coverage Ratio & Debt Service Coverage Ratio – Question 8

Calculate- Interest Coverage Ratio & Debt Service Coverage Ratio from the following information. Net Profit before interest and tax is Rs. 300000 . 5 % Long Term Debt 500000 (Principle amount is repayable in 10 equal installments) .

Explanation : –

Interest Coverage Ratio

= 300000/25000

= 12 times

Debt service coverage ratio

Debt Service Coverage Ratio = 300000/(25000+50000)

Debt Service Coverage Ratio = 300000/75000

Debt Service Coverage Ratio = 4 times
Working Notes:
1. Interest on Long Term Debt = 5 % x 500000
25000




Activity Ratio Analysis

Activity Ratio Analysis – Activity ratios are financial analysis tools used to measure a business’ ability to convert its assets into cash. These ratios are known as turnover ratios because they indicate the rapidity with which the resources available to the concern are being used to produce revenue from operations.

The different types of activity ratios are:

  1.  Inventory Turnover Ratio
  2. Trade Receivables Turnover Ratio
  3. Trade Payables Turnover Ratio
  4. Working Capital Turnover Ratio

Inventory Turnover Ratio

It indicates the relationship between the cost of revenue from operations during the year and average inventory during the year.

Here, Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage Inward + Wages + Other Direct Charges – Closing Inventory

Trade Payables Turnover Ratio

It indicates the relationship between credit purchases and average trade payables during the year.

Trade Payables include Creditors and Bills Payables.

 

Trade Receivables Turnover Ratio

It indicates the relationship between credit revenue from operations and average trade receivables during the year.

Working Capital Turnover Ratio

This ratio is important in non-manufacturing concerns where current assets play a major role in generating sales. It indicates the efficient use of working capital.




Calculation of current assets turnover ratio – Classification of Ratios – Question 1

From the following information calculate the Current assets turnover ratio:

Revenue from the operation for the year were RS. 2800000

Explanation : –

Current assets turnover ratio

Current assets turnover ratio = 2800000/400000

Current assets turnover ratio = 7 Times
Working note 1 : Current assets = Cash + Bank + Stock
Current assets = 150000 + 120000 + 130000
Current assets = 400000

Calculation of inventories when Inventory Ratio is given – Classification of Ratios – Question 2

Calculate the value of opening Inventory from the following information.
Cost of revenue from operations is 1200000 and Inventory turnover ratio is 3 Times. and opening inventory is 40000 less than the closing inventory

Explanation : –

Inventory turnover ratio

3 = 1200000/Average inventory

Average inventory = 400000
Workings:

Opening inventory = 400000 (-)40000/2

Opening inventory 380000

Closing inventory = 400000 (+)40000/2

Closing inventory = 420000

Activity Ratio Analysis – Classification of Ratios – Question 3

Calculate the value of opening Inventory from the following information:
Cost of revenue from operations is 16000 and Inventory turnover ratio is 1 Times. and opening inventory is 6 Times More than the closing inventory.

Explanation : –

Inventory turnover ratio

1 = 16000/Average inventory

Average inventory = 16000
Workings:

32000 = Opening inventory + Closing inventory

Since the opening inventory is 6 Times More than the closing inventory therefore the ratio between opening inventory and closing inventory will be 7 : 1

Opening inventory = 32000 x 7/8

Opening inventory = 28000

Closing inventory = 32000 x 1/8

Closing inventory = 4000




When inventory and current assets given – Classification of Ratios – Question 4

From the following information compute the current ratio.

Explanation : –

Current Ratio

Current Ratio = 900000/300000

Current Ratio = 3 :1
Workings:
Working Capital = Current assets (-) Current liabilities
600000 = 900000 (-) Current liabilities
Current liabilities = 300000

Fixed assets turnover ratio – Classification of Ratios – Question 5

From the following information, calculate fixed assets turnover ratio:

Revenue from the operation for the year were RS. 2000000

Explanation : –

Fixed assets turnover ratio = 2000000/500000

Fixed assets turnover ratio = 4 Times
Total Fixed assets = Land + Building + Furniture
Total Fixed assets = 300000 + 50000 + 150000
Total Fixed assets = 500000

Inventory turnover ratio and average age of inventory – Classification of Ratios – Question 6

Calculate Inventory turnover ratio and average age of inventory from the following information:

Explanation : –

Inventory turnover ratio

Inventory turnover ratio = 1176000/30000

Inventory turnover ratio = 39.2 Times

Average age of inventory = 360/39.2

= 9.18 Days
Workings:
Cost of goods sold = Net Sales (-) gross profit
1200000 (-) 2% X 1200000
1200000 (-) 24000
1176000
Net sales = Cash sales + Credit Sales (-) Return Inwards
800000 + 400000 (-) 0
1200000

= 30000




Inventory turnover ratio when closing stock is given – Classification of Ratios – Question 7

Calculate Inventory turnover ratio from the following information:

Explanation : –

Inventory turnover ratio

Inventory turn over ratio = 600000/240000

= 2.5 Times
Workings:
Cost of goods sold = Net Sales (-) gross profit
= 2000000 (-) 70% x 2000000
= 2000000 (-) 1400000
= 600000
Net sales = Cash sales + Credit Sales
500000 + 1500000
2000000

Average inventory = 240000
Cost of goods sold = Opening inventory + Purchases (-) Closing inventory
600000 = Opening inventory + 840000 (-) 360000
= Opening inventory + 480000
Opening inventory = 120000

Inventory turnover ratio when GP ratio based on cost – Classification of Ratios – Question 8

Calculate Inventory turn over ratio from the following information: Gross profit ratio is 10 % Of cost and revenue from operation is RS. 770000 . Opening inventory was 9/11 of closing inventory and closing inventory was 10 % of revenue from operation.

Explanation : –

Inventory turnover ratio

Inventory turnover ratio = 700000/70000

Inventory turnover ratio = 10 Times
Working note: = Gross profit ratio is 10% Of cost
Therefore goods costing Rs. = 100 is sold for RS. 110
Cost of goods sold = 100
If revenue from operation is = 770000

Cost of goods sold = 700000 ( 770000 X 100/110 )

= 70000
Closing inventory = 10% x Revenue from operation
Closing inventory = 10% x 770000
Closing inventory = 77000

Opening inventory = 9/11 x Closing inventory

Opening inventory = 9/11 x 77000

Opening inventory = 63000

Inventory turnover ratio when GP ratio is negative – Classification of Ratios – Question 9

Calculate Inventory turnover ratio from the following information:

Explanation : –

Inventory turnover ratio

Inventory turnover ratio = 525000/37500

Inventory turnover ratio = 14 Times
Workings:
Cost of goods sold = Revenue from operation (-) gross profit
= 500000 (-) -5% X 500000
= 500000 (-) -25000
= 525000

= 37500

Inventory turnover ratio when opening stock is given – Classification of Ratios – Question 10

Calculate Inventory turn over ratio from the following information:

Explanation : –

Inventory turnover ratio

Inventory turn over ratio = 280000/80000

Inventory turn over ratio = 3.5 Times
Workings:
Cost of goods sold = Opening inventory + Purchases + Direct expenses – Closing inventory
280000 = 40000 + 300000 + 60000 – Closing inventory
Closing inventory = 120000

Average inventory = 80000




Total assets turnover ratio – Classification of Ratios – Question 11

From the following information calculate the total assets turnover ratio.

Revenue from the operation for the year were RS. 4800000

Explanation : –

Total assets turnover ratio

Total assets turnover ratio = 4800000/1600000

Total assets turnover ratio = 3 Times
Working note 1 : Total assets = Inventories + Cash + Sundry debtors + Land + Plant
Total assets = 125000 + 400000 + 175000 + 400000 + 500000
Total assets = 1600000

Working capital turnover ratio – Classification of Ratios – Question 12

From the following information calculate the working capital turnover ratio:

Revenue from the operation for the year were RS. 1850000

Explanation : –

Working capital turnover ratio

Working capital turnover ratio = 1850000/370000

Working capital turnover ratio = 5 Times
Working note 1 : Working capital = Current assets (-) Current liabilities
Working capital = 550000 (-) 180000
Working capital = 370000
Working note 2 : Current assets = Cash + Bank + Trade receivable
Current assets = 200000 + 300000 + 50000
Current assets = 550000
Working note 3 : Current liabilities = Trade Payables + Short term borrowings
Current liabilities = 60000 + 120000
Current liabilities = 180000

Determination of current assets when current ratio is given – Question 13

Current Ratio of a business is 13 : 11 and Quick Ratio is 0.75 .
If Working Capital is Rs. 200000 then calculate the value of current assets and inventory.

Explanation : –

Working Capital = Current Assets (-) Current Liabilities
or
Current Liabilities = Current Assets (-) Working Capital
= 1300000 (-) 200000
= 1100000

Quick Ratio

or
Liquid Assets = Current Liabilities x Quick Ratio
= 1100000 x 0.75
= 825000
Inventory = Current Assets (-) Liquid Assets
= 1300000 (-) 825000
= 475000
Working Note 1 :
Working Capital = Current Assets (-) Current Liabilities
Working Capital = 13 (-) 11
Working Capital = 2
When working capital = 2 then Current Assets = 13
When working capital = 200000 then Current Assets = 1300000




Trade payable turnover ratio – Classification of Ratios – Question 14

Calculate the trade payable turnover ratio and average payment period From the following information. Credit purchases during the 2016-2017 is 1000000 . Balance of opening Creditors and Bills payable on 01.04.2016 is RS. 40000 and 15000 and the Balance of Closing Creditors and bills payable on 31.03.2017 is RS. 35000 and 10000

Explanation : –

Traade payable turnover ratio

Trade Payable Turnover Ratio = 1000000/50000

Trade Payable Turnover Ratio = 20 Times

Average Payment period = 360/20

Average Payment period = 18 Days
Workings:

Average trade Payables = 100000/2

Average trade Payables = 50000

Trade receivable turnover ratio – Classification of Ratios – Question 15

Calculate the Trade receivable Turnover Ratio and average collection period from the following information: Total revenue from the operation is 100000 and cash revenue is 10 % of total revenue from the operation. Balance of opening receivable on 01.04.2016 is RS. 60000 and the Balance of Closing receivable on 31.03.2017 is 40000

Explanation : –

Trade receivable Turnover Ratio = 90000/50000

Trade receivable Turnover Ratio = 1.8 Times

Average Collection period = 360/1.8

Average Collection period = 200 Days
Workings:
Credit sales = 100000 x 0.9
= 90000

Average trade receivables 50000

Profitability Ratios

It is also known as income ratio. The objective of every organisation is to earn profit and hence the organisations would definitely want to keep a track on various aspects of profit like operating profit, net profit etc. Therefore, they prepare and compute the profitability ratios.

The different types of profitability ratios are:

  1. Gross Profit Ratio
  2. Operating Ratio
  3. Net Profit Ratio
  4. Operating Profit Ratio
  5. Earning Per Share

Gross Profit Ratio

This ratio establishes a relationship between Gross profit and revenue from Operations i.e. Net Sales.

Gross Profit = Revenue from Operations – Cost of Revenue from Operations

Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage Inward + Wages + Other Direct Charges – Closing Inventory




Operating Ratio

This ratio compares an enterprise’s cost of revenue from operations and operating expenses to its revenue from operations.

Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage Inward + Wages + Other Direct Charges – Closing Inventory

Operating Expenses = Employee Benefit Expense + Depreciation Expense + Other Expense

 

Net Profit Ratio

This ratio establishes a relationship between Net profit and revenue from Operations i.e. Net Sales.

Operating Profit Ratio

Operating Profit = Gross Profit – Other Operating Expenses + Other Operating Incomes

Earning Per Share

Earning per share helps in calculating the profitability of the company.

 

Calculation of Earning Per Share

Profitability Ratios – Questions 1 : –

On the basis of the following data calculate earning per share

Explanation: –

EBIT = 800000
Less: Interest on Debentures = 200000
EBT = 600000
Less: Tax = 150000
EAT = 450000
Less: Preference Dividend = 300000
Earnings for Equity Shareholders = 150000
Less: Retained Earnings = 75000
Dividend Paid = 75000

Earning per sale

= 150000/300000

= 0.5 Per share




Gross Profit Ratio, Operating Ratio & Operating Profit Ratio

Profitability Ratios – Question 2 : –

The following information is given
If Revenue from Operations of XYZ Ltd is Rs. 1000000 Cost of Revenue from Operations is Rs. 450000 Selling Expense is Rs. 80000 Administrative Expenses is Rs. 60000
Calculate- Gross Profit Ratio ,Operating Ratio , Operating Profit Ratio

Explanation : –

Gross profit ratio

Gross Profit Ratio= 550000/1000000 x 100  = 55%

Operating Ratio

Operating Ratio = 590000/1000000 x 100

Operating Ratio = 59 %
= 100 (-) Operating Ratio
= 100 (-) 59
Operating Profit Ratio = 41 %
Working Notes:
Gross Profit = Revenue from Operations (-) Cost of Revenue from Operations
Gross Profit = 1000000 (-) 450000
Gross Profit = 550000

Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses
Operating Cost = 450000 + 80000 + 60000
Operating Cost = 590000

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