Practice Questions: Ratio Analysis and Du Pont Analysis
Chapter Forty-Two
Syllabus topic 1, 4, "Combined Ratio : i) Return on capital employed (Including Long Term Borrowings) ii) Return on proprietor's Fund (Shareholders Fund and Preference Capital) iii) Return on Equity Capital iv) Dividend Payout Ratio v) Debt Service Ratio vi) Debtors Turnover vii) Creditors Turnover (Practical Question on Ratio Analysis and Du Point Analysis)"; "Ratio Analysis: Meaning, classification, Du Point Chart, advantages and limitations (Based on Vertical Form of Financial statements)"
Pages 112 to 116 of 162
Question 1 (15 marks)
The statements of Vishal Ltd for the year ended 31 March 2027 are given below.
Balance sheet, vertical form
| Particulars | Rs |
|---|---|
| Equity share capital, 80,000 shares of Rs 10 | 8,00,000 |
| 10 per cent preference share capital | 2,00,000 |
| Reserves and surplus | 2,00,000 |
| Proprietors' funds | 12,00,000 |
| 10 per cent debentures | 4,00,000 |
| CAPITAL EMPLOYED | 16,00,000 |
| Particulars | Rs |
|---|---|
| Fixed assets, net | 11,00,000 |
| Non-current investments | 50,000 |
| Working capital | 4,50,000 |
| CAPITAL EMPLOYED | 16,00,000 |
| Current assets | Rs |
|---|---|
| Stock | 3,00,000 |
| Debtors | 2,40,000 |
| Cash and bank | 1,50,000 |
| Prepaid expenses | 30,000 |
| Total | 7,20,000 |
| Current liabilities | Rs |
|---|---|
| Creditors | 1,80,000 |
| Outstanding expenses | 30,000 |
| Provision for taxation | 60,000 |
| Total | 2,70,000 |
Revenue statement
| Particulars | Rs |
|---|---|
| Net sales, all on credit | 24,00,000 |
| Less: cost of goods sold | 16,80,000 |
| Gross profit | 7,20,000 |
| Less: administrative expenses | 1,44,000 |
| Less: selling and distribution expenses | 2,16,000 |
| Operating profit | 3,60,000 |
| Add: non-operating income | 60,000 |
| Less: non-operating expenses | 20,000 |
| Profit before interest and tax | 4,00,000 |
| Less: interest on debentures | 40,000 |
| Profit before tax | 3,60,000 |
| Less: provision for taxation | 1,08,000 |
| Profit after tax | 2,52,000 |
Opening stock Rs 2,60,000, opening debtors Rs 1,60,000, opening creditors Rs 1,64,000. All purchases are on credit. An equity dividend of 8 per cent was declared.
Compute all the ratios named in the syllabus, carry out a Du Pont analysis, and comment on the liquidity, the solvency, the profitability and the efficiency of the company.
---
Question 2 (10 + 5 marks)
(a) From the following, prepare the current assets side of the balance sheet and compute the sales, the cost of goods sold and the gross profit. (10)
| Current ratio | 2.5 to 1 |
| Liquid ratio | 1.5 to 1 |
| Working capital | Rs 3,00,000 |
| Stock turnover ratio, on closing stock | 6 times |
| Gross profit ratio | 20 per cent |
| Debtors turnover ratio | 12 times |
There are no prepaid expenses and no bank overdraft.
(b) State the Du Pont identity, and explain how a jeweller and a supermarket can earn the same return on capital employed. (5)
---
Question 3 (8 + 7 marks)
(a) Give the advantages and the limitations of ratio analysis. (8)
(b) Answer in one or two sentences each: (7)
- Where does preference share capital sit in the debt equity ratio, and where in the capital gearing ratio?
- Why is the numerator of the return on capital employed taken before interest?
- Which two ratios must total 100, and what does the check prove?
- What is the signature of an overvalued closing stock in the ratios?
- Why is cost of goods sold used in the stock turnover ratio rather than sales?
- Is a current ratio of 6 to 1 favourable?
- A company declares a dividend of 8 per cent. Is its dividend payout ratio 8 per cent?
---
Answers
Answer 1
Working notes.
| Rs | |
|---|---|
| Average stock, (2,60,000 + 3,00,000) over 2 | 2,80,000 |
| Average debtors, (1,60,000 + 2,40,000) over 2 | 2,00,000 |
| Average creditors, (1,64,000 + 1,80,000) over 2 | 1,72,000 |
The rest of this chapter
Module one is free. The rest of B.Com. (Accountancy) Semester 3 is part of the bundle.
You are reading a chapter from a later module. Everything in module one of every subject stays free, and so does the syllabus.
See the semester for ₹499 Already bought it? Sign in
Free either way: the syllabus, and module one of every subject.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.