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Working capital turn over ratio is 6 and current ratio is 2:1. If current liabilities are Rs 10 lac and net profit to sales percent 5% . What is the amount of net profit?
a. Rs 10 lac
b. Rs 8 lac
c. Rs 7 lac
d. Rs 6 lac
Ans - d
Let me Explain
Since CR=2:1 and liabilities are 10 lac
Hence current asset will be 20 lac
Now since wc turn over is 6 that means the total turn over will be 20×6= 120 lac
Then profit should be 120×5%=6 lac
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XYZ shoes sells shoes. It is applying for loans to help fund to increase the inventory. The bank asks for its balance sheet so they can analysis the current debt levels. According to XYZ shoes's balance sheet it reported 10,00,000 of current liabilities and only 2,50,000 of current assets. Will the loan get approved?
a. 0.25
b. 0.5
c. 0.75
d. 1
Ans - a
Solution :
Current Ratio = Current Assets / Current Liabilities
= 250000 / 1000000
= 0.25
XYZ shoes only has enough current assets to pay off 25 percent of his current liabilities. This shows that XYZ shoes is highly leveraged and highly risky. Banks would prefer a current ratio of at least 1 or 2, so that all the current liabilities would be covered by the current assets. Since XYZ shoes's ratio is so low, it is unlikely that it will get approved for his loan.
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ABC Agency has several loans from banks for equipment they purchased in the last five years. All of these loans are coming due which is decreasing their working capital. At the end of the year, they had 1,00,000 of current assets and 1,25,000 of current liabilities. Find out its Working Capital Ratio.
a. 0.6
b. 0.8
c. 1
d. 1.2
Ans - b
Solution :
The working capital ratio is calculated by dividing current assets by current liabilities.
WC Ratio = CA/CL
= 100000 / 125000
= 0.80
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Working capital turn over ratio is 4 and current ratio is 3:1. If current liabilities are Rs. 15 lac and net profit to sales percent 7%, what is the amount of net profit?
a. Rs. 10.2 lac
b. Rs. 11.4 lac
c. Rs. 12.6 lac
d. Rs. 13.8 lac
Ans - c
Solution :
Since CR=3:1 and current liabilities are Rs. 15 lac
Current assets will be Rs. 45 lac
Now since wc turn over ratio is 4 that means the total turn over will be 45 × 4 = 180 lac
Then profit should be 180 × 7% = 12.6 lac
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Govind's Furniture Company sells industrial furniture for office buildings. During the current year, it reported cost of goods sold on its income statement of 10,00,000. Govind's beginning inventory was 30,00,000 and its ending inventory was 40,00,000. Govind's turnover is ...... times.
a. 0.25
b. 0.29
c. 0.33
d. 0.37
Ans - b
Solution :
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
= 1000000 / ((3000000+4000000)/2)
= 1000000 / (7000000/2)
= 1000000 / 3500000
= 0.29 Times
This means that Govind only sold roughly a third of its inventory during the year. It also implies that it would take Govind approximately 3 years to sell his entire inventory or complete one turn. In other words, Govind does not have very good inventory control.
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Raju's Furniture Company sells industrial furniture for office buildings. During the current year, Raju reported cost of goods sold on its income statement of 25,00,000. Raju's beginning inventory was 40,00,000 and its ending inventory was 60,00,000. Calculate Raju's Furniture Company's Inventory Turnover Ratio.
a. 0.25
b. 0.33
c. 0.5
d. 0.67
Ans - c
Solution :
Inventory Turnover Ratio = Cost of goods sold / Average inventory for that period
= 2500000 / ((4000000 + 6000000)/2)
= 2500000 / 5000000
= 0.5
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A company has net worth of Rs 10 lac, term liabilities are Rs 10 lac. Fixed Assets worth Rs 16 lac and current assets are Rs 25 lac. There is no intangible assets or the non current assets. Calculate it's net working capital.
a. 1 lac
b. 2 lac
c. 3 lac
d. 4 lac
Ans - d
Let me Explain
Here Net worth = capital + reserve = 10 lac
Since capital is a kind of liability hence liability = 10 lac
Liabilities = 10+10 = 20 lac
Assets= 16+25= 41 lac
But as per balance sheet Total assets = Total liabilities
Hence liabilities must be 41 lac also
In 41 lac ( 41-20= 21 ) i.e 21 lac will be CL
NWC = CA-CL
= 25 - 21
= 4 lac
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A company has total assets at 1,50,000 and its total liabilities are 50,000. Based on the accounting equation, we can assume the total equity is 1,00,000. Find the Debt Ratio.
a. 0.33
b. 0.5
c. 0.67
d. 0.75
Ans - a
Solution :
DR = TL / TA
= 50000 / 150000
= 0.33
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Seela's Tech Company is a tech start up company that manufactures a new tablet computer. Seela is currently looking for new investors and has a meeting with an angel investor. The investor wants to know how well Seela uses her assets to produce sales, so he asks for her financial statements. Here is what the financial statements reported:
Beginning Assets: 50,000
Ending Assets: 1,00,000
Net Sales: 25,000
The total asset turnover ratio is ......
a. 0.33
b. 0.5
c. 0.67
d. 0.75
Ans - a
Solution :
Asset Turnover Ratio or Total Asset Turnover Ratio = Net Sales / Average Total Assets
= 25000 / ((50000+100000)/2)
= 25000 / (150000/2)
= 25000 / 75000
= 0.33
As you can see, seela's ratio is only 0.33. This means that for every Rupee in assets, seela only generates 33 Paisa. In other words, Seela's start up is not very efficient with its use of assets.
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