JAIIB/CAIIB - QUESTIONS BASED ON FOREIGN EXCHANGE

1)For Indian banks _____ is a “HOME CURRENCY”:

2)For Bank Of America in Chicago, ______ is the “HOME CURRENCY”:

3)Rate quotes where the Home Currency fluctuates against a given unit of Foreign currency is _____ rate quotation:

4)The quote 1USD=46.50/46.70 in India is a _____ quotation:

5)What is the maxim in a Direct Rate Quote?

6)The quote 1USD=46.50/46.70 in USA is a _____quotation:

7)What is the maxim in an indirect rate quote?

8)As per the convention , in a direct rate quote, the first rate is always the _____ :

9)If SBI is quoting 1USD=46.50/70 in the inter-bank markets, it implies that:

10)The principle followed by SBI in the rate quote 1USD=46.50/70 is_____:

11)While quoting Buying rates, Banks deduct their margins from the interbank rates and while quoting selling rates, they add their margins to the interbank rates:

12)If a Bank wants a margin of 10 paisa and the market quote is USD 46.50/70,what would be the USD TT buying rate for this Bank for that day?

13)If a Bank wants a margin of 5 paisa and the market quote is USD 46.50/70, what would be the USD TT selling rate for this bank for that day?

14)Banks in India have to be guided by the directives from ____ while quoting rates:

15)As per convention, Forward premium or discounts are quoted in Basis points only:

16)While quoting forward margins, the same convention as the normal rate quoting are used. Therefore ______:

17)If the forward points in the markets are such that the first quote is higher than the second, it implies that the currency is in discount:

18)On 1 Oct 2009, SBI quotes spot USD=46.00/10 and forward margins are (1) November: 10/20  (2) December: 15/25, this means:

19)While quoting Forward margins, if the buy margin is higher than the sell margin, it means the currency is in discount:

20)On 1 Jan 2010, SBI quotes spot USD=45.00/10 and Forward margins are (1) February: 15/10 (2) March: 25/20, this means____:

21)Which of the following is correct?

22)Forward margins are based on the______:

23)Fixed exchange rates are those where the Central bank of the country (Example: RBI in India or Bank of England in UK) decides to peg their currency with one or more foreign currencies:

24)Floating exchange rates are those that are determined solely by market forces without any interference by the Central Banks:

25)In India, the exchange rates are:

26)Percent means one part in hundred and per milli means one part in thousand:

27)If Flls sold equity worth Rs. 200 cr and converted the proceeds to US Dollars for repatriation, the dollar is likely to ____ against the rupee in the Inter- bank markets that day:

28)If there is massive inflow of USD due to a FDI deal, the dollar is likely to ______against the rupee that day:

29)Value date means the date on which the actual cash flows will take place:

30)In Inter-bank market quotes, which of the following is not correct?

31)In Inter-Bank markets, unless otherwise specified, the rates quoted are Spot rates (by default): 

32)The buying rate is also called the “BID-RATE” and the selling rate is also called the “OFFER RATE”:

33)The transaction that takes place subsequent to _____ is known as Forward rate:

34)If the value date is same as the date of transaction, it is called a _____ deal:

35)The date for Forward Contract is calculated from _____ date:

36)If a customer enters in to a forward contract for 50 days delivery on 31/10/2009 (Monday), the 50days term will begin from _____ presuming next three days are working days:

37)In India, if a bank fails to deliver funds either in foreign currency or in Indian rupees as per the value date required by the contract, it has to pay penal interest at the rate of 3% plus NSE MIBOR for each day of default:

38)Forward margins are also called:

39)While quoting rates for bill buying taking the transit period in to account, if the currency is in premium in future, Banks round the contract period to the lower month while quoting Bill buying rates (earlier month). This way, Banks pay less to the customer:

40)ABC Exports approaches your Bank with an export bill on 1/11/2009. It is a usance bill with 60 days usance. The transit period as per FEDAI is 25 days. The inter-bank rates are:

1) Spot 46.50/70  2)February 20/25   3)March 25/30

If the exchange margin is 5 paisa, Bill buying rate would be:

41)While quoting rates for bill buying taking the transit period into account, if the currency is at a discount in future, Banks round the contrast period to the later month while quoting Bill buying rates:

42)XYZ Exports approaches PNB with an export bill on 1/6/2009. It is a usance bill with 60 days usance. The transit period as per FEDAI is 25days. The inter-bank rates are:

1) June spot: 46.00/10     2)July 20/15     3)August 30/25

If the exchange margin is 5 paisa, Bill buying rate would be:

43)Inter bank market quote is USD1=46.50/70 & ABC Bank wants to quote rates to its customers keeping a margin of 20 paisa on purchases & 25 paisa on sales.

The rates quoted by the bank will be-

44)An Inward Remittance is received on behalf of a NRI customer in USD. For the bank, this represents a ______ transaction:

45)In case the price of one currency is not quoted against the other currency & the parity between them is obtained by using an intermediary currency, the mechanism is called:

46)The principle applied when the parity between two currencies not quoted against each other directly is obtained using an intermediary is called:

47)In Indian market, the US dollar is quoted at US$ 1=Rs. 48.2100/2300, & in US market, EUR 1=USD 1.3150/3160, Find Euro/INR parity using cross rate mechanism:

48)Your correspondent wants to fund his INR account (Vostro) account with Rs. 10,00,000. The market rate for USD is USD=49.20/30 & your margin is 0.10%. What is the amount that you would advise your correspondent to remit in US dollars?

49)An exporter customer has presented a Sight bill for USD 1,00,000/- for negotiation under LC with TT reimbursement. The inter-bank exchange rate is:

US$ 1=Rs. 48.4200/4300. Quote a bill buying rate keeping a margin 0.15%  & rounding off to two decimals:

50)Mr. ‘X’ maintaining an account with you has received an inward remittance of EUR 10,000/ already credited to your Nostro A/c. The Inter-bank market rates are:

EUR 1=Rs. 55.4525/4675. Exchange Margin required by the Bank is 0.08%  & the rate is to be rounded off to 0.25 paise. What is the rate to be quoted & the rupee equivalent to be credited to Mr. X’s account:  

ANS:-  ( Please also cross check ans from your records  there may be typing mistake)

1	INR	2	USD	3	Direct	4	Direct	5	Buy low sell high
6	indirect	7	Buy high sell low	8	Buying rat e	9	46.50	10	Buy low sell high
11	true	12	46.40	13	46.75	14	marketconditions	15	True
16	Quates for buying are mentioned 1st	17	true	18	Usd is premium for Nov and Dec.	19	true	20	Currency is at discount
21		22i	Intt in twocurrency,contract period of forward, demand and supply	23	true	24	true	25	Direct quotes and floating rate
26	true	27	appreciated	28	depreciated	29	true	30
31	true	32	true	33	Spote rate	34	Cash and ready	35	Spot
36	2.11.09	37	true	38	Swap margin or swap point	39	true	40	46.75
41	true	42	45.65	43	46.30/46.95	44	Purchases  if converted into INR	45	Cross rate mach
46		47	63.3961/4707

QUESTIONS

I. Objective type: on Final accounts

a) Fill in the blanks:

1. Net Profit is transferred from Profit and loss account to ________

account.

2. Closing stock is valued at Cost Price or ________ price whichever

is lower.

3. Outstanding expenses are shown on the ________ side of the

balance sheet.

4. Prepaid expenses are shown on the ________ side of the balance

sheet.

5. Income accrued but not received will be shown on the ________

side of the Balance sheet.

6. Income received in advance will be shown on the ________side

of the Balance sheet

7. Interest on capital is debited in ________ account

8. Interest on drawings is credited in ________ account.

9. Interest on loan borrowed unpaid is shown on the ________ side

of the Balance sheet.

10. Depreciation is deducted from the concerned ________ in the

Balance sheet.

11. Provision for Bad and Doubtful debts is deducted from ________

in the Balance sheet.

12. Provision for discount on creditors is deducted from ________in

the Balance sheet.

13. Debts which are not recoverable from Sundry debtors are termed

as ________.

(Answers: 1. Capital, 2. Market, 3. Liabilities, 4. Assets, 5. Assets,

6. Liabilities, 7. Profit & Loss A/c., 8.Profit and Loss

Account, 9. Liabilities, 10. Fixed asset, 11. Sundry debtors,

12. Sundry creditors, 13. Bad debts).

b) Choose the correct answer:

1. Returns inwards are deducted from

             a) Purchases b) Sales c) Returns outward

2. The Profit and Loss account shows

      a) Financial position of the concern

b) Net profit or Net loss c) Gross profit or Gross Loss

3. Rent outstanding is

               a) a liability b) an asset c) an income

4. Closing stock is shown in

 a) Profit and loss account b) Trading account and Balance sheet

c) None of the above.

5. Opening stock is shown in

         a) Balance sheet b) Profit and Loss account c) Trading account

6. Gross Profit is transferred to

  a) Capital account b) Profit and loss account c) None of the above

7. Interest on capital is added to

   a) Expense A/c b) Income A/c c) Capital A/c

8. Interest on drawings is deducted from

     a) Income A/c b) Capital A/c c) Expense A/c

9. Outstanding interest on loan borrowed is to be added to

     a) Asset A/c b) Income A/c c) Loan A/c

10. All the items given in the adjustment will appear at _________ in

the Final accounts.

       a) Three places b) Two places c) One Place

(Answers: 1. (b); 2. (b); 3. (a); 4. (b); 5. (c); 6. (b); 7. (c); 8. (b):

9. (c); 10. (b))

QUESTIONS

I. Objective Type:  in complete records

a) Fill in the blanks:

1. Incomplete records are those records which are not kept under

________ system.

2. Statement of affairs method is also called as ________ method.

3. ________ capital can be found by preparing a statement of affairs

at the beginning of the year.

4. A statement of affairs resembles a ________.

5. Closing capital can be found by preparing a statement affairs at

the ________ of the year.

6. In ________ system, only personal and cash accounts are opened.

7. Credit purchase can be ascertained as the balancing figure in the

________.

8. The excess of assets over liabilities is ________.

9. The total assets of a proprietor are Rs.5,00,000. His liabilities

Rs.3,50,000. Then his capital in the business is ________.

10. A firm has assets worth Rs.60,000 and capital Rs.45,000. Then

it’s liabilities is ________.

(Answer: 1) Double Entry; 2) Net worth; 3) Opening; 4) Balance

Sheet; 5) end; 6) Single entry; 7) Total creditors A/c.;

8) Capital; 9) Rs. 1,50,000; 10) Rs.15,000)

b) Choose the Correct Answer:

1. Under the networth method the basis for ascertaining the profit is

a) the difference between the capital on two dates.

b) the difference between the liabilities on two dates.

c) the difference between the gross assets on two dates.

2. Incomplete records are generally used by

a) Small traders b) Company c) Government

3. Credit sales is obtained from

a) Bills Receivable account b) Total debtors account

c) Total creditors account

4. Single Entry System is

a) a Scientific method b) an Incomplete Double Entry System

c) None of the above.

5. The capital of a business is ascertained by preparing

a) Trading account b) Statement of profit or loss

c) Statement of affairs

(Answers: 1.(a); 2.(a); 3.(b); 4. (b); 5.(c))

QUESTIONS

I. Objective Type:  depreciation

a) Fill in the blanks:

1. All assets whose benefit is derived for a __________ period of

time are called as Fixed Assets.

2. The estimated sale value of the asset at the end of it’s economic

life is called as ________ value.

3. ________ method of depreciation is calculated on the original

cost of asets.

4. Under ________ method, depreciation is calculated on the book

value of the asset each year.

5. _______ method of depreciation is used in the case of Lease.

6. Under insurance policy method, cash is paid by way of _______

every year.

7. ________ method of depreciation is suitable for special type of

asset like Loose tools.

(Answeres: 1. Long; 2. Residual / Scrap; 3. Straight line; 4. Written

down value; 5. Annuity; 6. Premium; 7. Revaluation)

b) Choose the correct answer :

1. Depreciation arises due to

a) wear and tear of the asset b) fall in the market value of asset

c) fall in the value of money

2. Under straight line method, rate of depreciation is calculated on

  a) Original cost b) Written down value c) Cost less scrap value

3. Under diminishing balance method, depreciation

      a) decreases every year b) increases every year c) constant every year

4. The term depletion is used for

    a) Intangible assets b) Fixed assets c) Natural resources

5. If selling price is more than the book value of the asset on the date

of sale, it is

       a) a loss b) an income c) a profit

6. If selling price is less than the book value of the asset it denotes

        a) loss b) capital profit c) expenditure

7. Profit made on sale of fixed asset is debited to

    a) Profit and Loss account b) Fixed Asset account c) Deprecnation account

8. Loss on sale of fixed asset appear on the

  a) credit side of Depreciation accountb) debit side of fixed asset account

c) credit side of fixed asset acount

9. The amount of depreciation charged on a machinery will be debited

to

        a) Machinery account b) Depreciation account c) Cash account

10. Total amount of depreciation provided on the written down value

method at the rate of 10% p.a. on Rs.10,000 for first three years

will be

      a) Rs. 2,107 b) Rs. 2,710 c) Rs. 2,701

(Answers : 1. (a); 2. (a); 3. (a); 4. (c); 5. (c); 6. (a); 7. (b); 8. (c);

9. (b); 10. (b))

Problems :

1. A company purchased Furniture for Rs.28,000. Depreciation is

to be provided annually according to the Straight Line Method.

The useful life of the furniture is 5 years and the residual value is

Rs.2,000. You are required to find out the amount of depreciation.

               (Answer : Rs.5,200)

2. From the following particulars, find out the rate of depreciation,

under Straight Line Method. Cost of Fixed Asset Rs. 50,000

Residual Value Rs. 5,000 Estimated Life 10 years

                 (Answer : Rate of Dep. 9%)

3. A Plant has the original value of Rs.5,00,000. The scrap value in

10 years time is expected to be Rs.20,000. Determine the rate of

depreciation when the management wants to depreciate it by Straight Line Method.

                     (Answer : Rate of Dep. : 9.6%)

4. A machine costing Rs.3,00,000 is estimated to have a life of 10

years and estimated scrap value is Rs.20,000 at the end of its life.

Calculate the rate of depreciation under the Straight Line Method.

              (Answer : Rate of dep : 9.3%)

5. A machine was purchased for Rs.2,40,000 on 1.1.2000. This is

expected to last for five years. Estimated scrap at the end of five

years is Rs.40,000. Find out the rate of depreciation under the

Straight Line Method.

                  (Answer : Rate of Dep : 16.7%)

6. Find out the rate of depreciation under straight line method:

Cost of the plant Rs. 2,30,000 Installation charges Rs. 20,000

Expected life in years 10 years Scrap value Rs. 50,000

                  (Answer: Rate of Dep: 8%)

:  RATIOS

 ”

Expression of Ratios:

Ratios are expressed in three ways:

1. Time: In this type of expression one number is divided by another number and the quotient is taken as number of times. For example, expressing the attendance of 40 students present in a class of 80 students would be:

40

—— = 0.5 times

80

2. Percentage: It is expressed in Percentage. When the above example is expressed as percentage, it would be as under

40

—— x 100 = 50%

80

3. Pure: It is expressed as a proportion. In the above example, this would be as under

40 1

—— = —— = 0.5

80 2

This may also be expressed as 0.5:1.

The study of relationships between various items or groups of items in financial statements is known as ‘Financial Ratio Analysis’.

Objectives:

The objectives of using ratios are to test the profitability, financial position (liquidity and solvency) and the operating efficiency of a concern.

Advantages of Ratio Analysis:

Ratio analysis is an important technique in financial analysis. It is a means for judging the financial soundness of the concern. The advantages of accounting ratios are as follows:

1. It is an useful device for analysing the financial statements.

2. It simplifies, summarizes the accounting figures to make it understandable.

3. It helps in financial forecasting.

4. It facilitates interfirm and intrafirm comparisons.

Ratio analysis is useful in finding the strength and weakness of a business concern. After identifying the weakness, the ratios are also helpful in determining the causes of the weakness.

 Classification of Ratios:

The classification of ratios on the basis of purpose is as follows:

Ratios

Liquidity Solvency Profitability Activity

(Turnover)

1. Current Ratio 1. Debt-Equity Ratio 1. Gross Profit Ratio 1. Capital Turnover Ratio

2. Liquid Ratio 2. Proprietory Ratio 2. Net Profit Ratio 2. Fixed Asset

3. Absolute Liquid Ratio 3. Operating Profit Ratio Turnover Ratio

4. Operating Ratio 3. Stock Turnover Ratio

4. Debtors Turnover Ratio

5.Creditors Turnover Ratio

I. Liquidity Ratios

Liquidity Ratios measure the firms’ ability to pay off current dues i.e., repayable within a year. Liquidity ratios are otherwise called as Short Term Solvency Ratios. The important liquidity ratios are

1. Current Ratio

2. Liquid Ratio

              3. Absolute Liquid Ratio

1. Current Ratio :

This ratio is used to assess the firm’s ability to meet its current liabilities. The relationship of current assets to current liabilities is known as current ratio. The ratio is calculated as:

                                    Current Assets

Current Ratio = ————————

                                   Current Liabilities

Current Assets are those assets, which are easily convertible into cash within one year. This includes cash in hand, cash at bank, sundry debtors, bills receivable, short term investment or marketable securities, stock and prepaid expenses.

Current Liabilities are those liabilities which are payable within one year. This includes bank overdraft, sundry creditors, bills payable and outstanding expenses.

Illustration : 1

From the following compute current ratio:

Rs.. Stock 36,500 Prepaid expenses Rs 1,000 Sundry Debtors 63,500 Bank overdraft 20,000

Cash in hand & bank 10,000 Sundry creditors 25,000 Bills receivable 9,000 Bills payable 16,000 Short term investments 30,000 Outstanding expenses 14,000

Solution:

                          Current Assets

Current Ratio = ————————

                               Current Liabilities

Current Assets = Stock + Sundry debtors + Cash in hand and bank + Bills receivable + Short term investments + Prepaid expenses

= 36,500 + 63,500 + 10,000 + 9,000 + 30,000 + 1,000 = Rs. 1,50,000

Current Liabilities = Bank overdraft + Sundry creditors+ Bills payable + Outstanding expenses

              = 20,000 + 25,000 + 16,000 + 14,000 = Rs. 75,000.

                            1,50,000

Current Ratio = —————

                            75,000

                                                               = 2 : 1

2. Liquid Ratio

This ratio is used to assess the firm’s short term liquidity. The relationship of liquid assets to current liabilities is known as liquid ratio. It is otherwise called as Quick ratio or Acid Test ratio. The ratio is calculated as:

                    Liquid Assets

Liquid Ratio = ————————

                                  Current Liabilities

Liquid assets means current assets less stock and prepaid expenses.

Illustration : 2

Taking the figures from the above illustration liquid ratio is calculated as follows:

Solution:

                            Liquid Assets

Liquid Ratio = ———————

                                      Current liabilities

Liquid Assets = Current Assets – (Stock + Prepaid expenses)

= 1,50,000 – (36,500 + 1,000)

= 1,50,000 – 37,500

= Rs. 1,12,500

                        1,12,500

Liquid Ratio = ——————

                           75,000

                                                  = 1.5 : 1

3. Absolute Liquid Ratio

It is a modified form of liquid ratio. The relationship of absolute liquid assets to liquid liabilities is known as absolute liquid ratio. This ratio is also called as ‘Super Quick Ratio’. The ratio is calculated as:

                                           Absolute Liquid Assets

Absolute Liquid Ratio = ———————–——

                                                   Liquid Liabilities

Absolute liquid assets means cash, bank and short term investments. Liquid liabilities means current liabilities less bank overdraft.

Illustration : 3

Taking the figures from Illustration : 1

Solution:

                                            Absolute Liquid Assets

Absolute Liquid Ratio = —————————

                                      Liquid liabilities

Absolute Liquid Assets = Cash + Bank + Short term investments

= 10,000 + 30,000 = Rs. 40,000

Liquid Liabilities = Current liabilities –– Bank overdraft

= 75,000 – 20,000  = Rs. 55,000

                                      40,000

Absolute Liquid Ratio = ———— = 0.73 : 1

                                       55,000

(Note : All liquidity ratios are expressed as a proportion)

II. Solvency Ratios

Solvency refers to the firms ability to meet its long term  indebtedness. Solvency ratio studies the firms ability to meet its long term obligations. The following are the important solvency ratios:

1. Debt-Equity Ratio

2. Proprietory Ratio

1. Debt Equity Ratio

This ratio helps to ascertain the soundness of the long term financial position of the concern. It indicates the proportion between total long term debt and shareholders funds. This also indicates the extent to which the firm depends upon outsiders for its existence. The ratio is

calculated as:

                                    Total long term Debt

Debt-Equity Ratio = ————————

                                          Shareholders funds

Total long term debt includes Debentures, long term loans from banks and financial institutions. Shareholders funds includes Equity share capital, Preference share capital, Reserves and surplus.

Illustration : 4

Calculate Debt Equity Ratio from the following information.

Rs.

Debentures 2,00,000

Loan from Banks 1,00,000

Equity share capital 1,25,000

Reserves 25,000

Solution:

                                        Total Long Term Debt

Debt - Equity Ratio = ———————————

                                      Shareholders funds

Total long term debt = Debentures + Loans from Bank

                = 2,00,000 + 1,00,000= Rs. 3,00,000

Shareholders funds = Equity Share Capital + Reserves

= 1,25,000 + 25,000 = Rs. 1,50,000

                            

                                3,00,000

Debt-Equity Ratio = ————— = 2:1

                                 1,50,000

2. Proprietory Ratio

This ratio shows the relationship between proprietors or shareholders funds and total tangible assets. The ratio is calculated as:

                                        Share holders funds (Proprietors funds)

Proprietory Ratio = ———————————————

                                         Total tangible assets

Tangible assets will include all assets except goodwill, preliminary expenses etc.

Illustration : 5

From the following calculate Proprietory Ratio

Rs. Rs.

Equity share capital 1,00,000 Furniture 10,000

Preference share capital 75,000 Bank 20,000

Reserves & surplus 25,000 Cash 25,000

Machinery 30,000 Stock 15,000

Goodwill 5,000

Solution :

                                   Shareholders funds

Proprietory Ratio = —————————

                                          Total tangible assets

Shareholders fund = Equity capital + Preference Share Capital + Reserve & Surplus

= 1,00,000 + 75,000 + 25,000= Rs. 2,00,000

Total tangible assets= Machinery + Furniture + Bank + Cash+ Stock

= 30,000 + 10,000 + 20,000 + 25,000+ 15,000= Rs. 1,00,000

          2,00,000

= ————— = 2:1

      1,00,000

(Note : All solvency ratios are expressed as a proportion.)

III. Profitability Ratios

Efficiency of a business is measured by profitability. Profitability ratio measures the profit earning capacity of the business concern. The important profitability ratios are discussed below:

   1. Gross Profit Ratio

2. Net Profit Ratio

         3. Operating Profit Ratio

4. Operating Ratio

1. Gross Profit Ratio

This ratio indicates the efficiency of trading activities. The relationship of Gross profit to Sales is known as gross profit ratio. The ratio is calculated as:

                               Gross Profit

Gross Profit Ratio = —————— x 100

                                    Sales

Gross profit is taken from the Trading Account of a business  concern. Otherwise Gross profit can be calculated by deducting cost of goods sold from sales. Sales means Net sales.

            

                 Gross Profit = Sales –– Cost of goods sold

Cost of goods sold = Opening Stock + Purchases –– Closing Stock

(or) Sales –– Gross Profit

Illustration : 6

From the following particulars ascertain gross profit ratio

Rs. Rs.

Cash sales 40,000 Sales return 5,000

Credit sales 65,000 Gross profit 40,000

Solution:

                               Gross Profit

Gross Profit Ratio = —————— x 100

                                        Sales

Sales = Total Sales –– Sales Returns

= 40,000 + 65,000 –– 5,000= Rs. 1,00,000

          40,000

= ————— x 100 = 40%

     1,00,000

Solution:

                                      Operating Profit

Operating Profit Ratio = —————— x 100

                                        Sales

Operating profit = Net profit + Non-operating expenses –– Non-operating income.

Non-operating expenses = Interest on loan + Loss on sale of furniture.

                   = 30,000 + 10,000= Rs. 40,000

Non-operating income = Interest received from investments +Profit on sale of investment

                          = 20,000 + 30,000= Rs.50,000

Operating profit = 3,00,000 + 40,000 –– 50,000= Rs. 2,90,000

                                       2,90,000

Operating Profit Ratio = ———— x 100

                                        5,80,000

                                                                                    = 50%

4. Operating Ratio

This ratio determines the operating efficiency of the business concern. Operating ratio measures the amount of expenditure inurred in production, sales and distribution of output. The relationship betweenOperating cost to Sales is known as Operating Ratio. The ratio is

calculated as:

                      Cost of goods sold +Operating expenses

Operating Ratio = —————————— x 100

                                       Sales

Illustration : 9

From the following details, calculate the operating ratio.

Rs.

Cost of goods sold 6,00,000

Operating expenses 40,000

Sales 8,20,000

Sales returns 20,000

Solution:

                          Cost of goods sold +Operating expenses

Operating Ratio = ——————————                            x 100

                                       Sales

       6,00,000 + 40,000

= —————————— x 100

        8,20,000 - 20,000

                                     6,40,000

Operating Ratio = ———————— x 100 = 80%

                                     8,00,000

(Note: All profitability ratios will be expressed in terms of percentage.)

IV. Activity Ratios

Activity ratios indicate the performance of the business. The performance of a business is judged with its sales (turnover) or cost of goods sold. These ratios are thus referred to as turnover ratios. Afew important activity ratios are discussed below:

1. Capital turnover ratio

2. Fixed assets turnover ratio

3. Stock turnover ratio

4. Debtors turnover ratio

5. Creditors turnover ratio

1. Capital Turnover Ratio

This shows the number of times the capital has been rotated in the process of carrying on business. Efficient utilisation of capital wouldlead to higher profitability. The relationship between Sales and Capital employed is known as Capital Turnover Ratio. The ratio is calculated as:

                                                  Sales

Capital Turnover Ratio = ————————

                                          Capital Employed

Where Sales means Sales less sales returns and Capital employed refers to total long term funds of the business concern i.e.,Equity share capital, Preference share capital, Reserves and surplus and Long term borrowed funds.

Illustration : 10

Calculate capital turnover ratio from the following information

Rs.

Cash sales 2,00,000

Credit sales 1,75,000

Sales return 25,000

Equity Share Capital 1,00,000

Long term loan 50,000

Reserves 25,000

Solution:

                                           Sales

Capital Turnover Ratio = ————————

                                     Capital Employed

Net Sales = Cash sales + Credit sales – Sales returns

= 2,00,000 + 1,75,000 - 25,000= Rs. 3,50,000

Capital Employed = Share capital + Long term loan+ Reserves

= 1,00,000 + 50,000 + 25,000= Rs. 1,75,000

                                         3,50,000

Capital Turnover Ratio = ———— = 2 times

                                        1,75,000

2. Fixed Assets Turnover Ratio:

This shows how best the fixed assets are being utilised in the business concern. The relationship between Sales and Fixed assets isknown as Fixed assets turnover ratio. The ratio is calculated as:

                                                 Sales

Fixed assets turnover Ratio = ——————

                                              Fixed assets

Fixed assets means Fixed assets less depreciation

Illustration : 11

Calculate the fixed asset turnover ratio from the following figures.

Rs.

Sales 6,15,000

Sales Return 15,000

Fixed assets 1,50,000

Solution:

                                                Sales

Fixed assets turnover ratio = ———————

                                             Fixed assets

Sales = Sales - Sales return

= 6,15,000 - 15,000 = Rs. 6,00,000

                                              6,00,000

Fixed assets turnover ratio = ————— = 4 Times

                                                  1,50,000

3. Stock Turnover Ratio

This ratio is otherwise called as inventory turnover ratio. It indicates whether stock has been efficiently used or not. It establishes a relationship between the cost of goods sold during a particular period and the average amount of stock in the concern. The ratio is calculated

as:

                               Cost of goods sold

Stock turnover ratio = ————————

                                 Average stock

                                    Opening stock + closing stock

Average stock = —————————————

                                                 2

If information to calculate average stock is not given then closing stock may be taken as average stock.

Illustration : 12

Calculate stock turnover ratio from the following:

Rs.

Cost of goods sold 6,75,000

Stock at the beginning of the year 1,00,000

Stock at the end of the year 1,25,000

Solution:

                                  Cost of goods sold

Stock turnover ratio = ————————

                                Average stock

                         Opening Stock + Closing Stock

Average stock = —————————————

                                         2

                   1,00,000 + 1,25,000

= —————————

                             2

                         2,25,000

               = —————

                        2

                                                = Rs. 1,12,500

4. Debtors Turnover Ratio

This establishes the relationship between credit sales and average  accounts receivable. Debtors turnover ratio indicates the efficiency of the business concern towards the collection of amount due from debtors.The ratio is calculated as:

                                             Credit Sales

Debtors turnover Ratio = ————————————

                                         Average Accounts Receivable

Accounts receivable includes sundry debtors and bills receivable.

           Opening (debtors + bills receivable) + Closing (debtors + bills receivable)

Average accounts receivable = —————————————

                                                         2

In case credit sales is not given, total sales can be taken as credit sales.

5. Creditors Turnover Ratio:

This establishes the relationship between credit purchases and average accounts payable. Creditors turnover ratio indicates the period in which the payments are made to creditors. The ratio is calculated as:

                                               Credit Purchases

Creditors turnover ratio = ———————————

                                              Average Accounts payable

Accounts payable include sundry creditors and bills payable.

          Opening (creditors + bills payable) + Closing (creditors + bills payable)

Average accounts payable = —————————————

                                                                  2

In case credit purchases is not given total purchases can be taken as credit purchases.

Illustration : 15

Calculate creditors turnover ratio from the following:

Rs.

Credit purchases 1,50,000

Opening creditors 36,000

Closing creditors 24,000

Solution:

                                          Credit Purchases

Creditors Turnover Ratio = ——————————

                                         Average accounts payable

                           36,000 + 24,000

Average Creditors = ————————

                                             2

60,000

= ——— = Rs. 30,000

2

1,50,000

= ———— = 5 Times

30,000

(Note: All turnover ratios will be expressed in terms of times.

Table showing summary of Accounting Ratios

S.No Description

of the Ratio Formula Notes

1. Current ratio            Current assets

                                 Current liabilities

Current assets include cash in hand, cash at bank, sundry

debtors, bills receivable, marketable securities, stock and prepaid

expenses. Current liabilities include Bank overdraft, sundry creditors, bills

payable and outstanding expenses.

2. Liquid Ratio               Liquid assets

  Current liabilities

Liquid assets mean current

assets less stock and prepaid

expenses

3. Absolute Liquid Ratio

                   Absolute Liquid assets

            Liquid liabilities

Absolute Liquid assets means cash, bank and short term

investment. Liquid liabilities means current liabilities less bank overdraft.

4. Debt Equity Ratio

                   Long Term Debts

            Shareholders funds

Long term debts include

Debentures, long term loans from banks and financial

institutions. Shareholders funds include

Equity share capital, Preference share capital, Reserves and surplus.

5. Proprietory Ratio

                                    Shareholders’ funds

                                       Total tangible assets

Tangible assets include all assets except goodwill,

preliminary expenses etc.

6. Gross Profit Ratio

Gross profit

–––———— x 100

Sales

Gross profit = Sales – Cost of goods sold.

Cost of goods sold = Opening stock + Purchases – Closing stock

7. Net Profit Ratio

Net profit

———— x 100

Sales

           Net profit = Gross profit –

(Administration, Selling and distribution and financial

expenses expenses)

8. Operating Profit Ratio

Operating profit

                              ————          x 100

Sales

Operating profit = Net profit + Non-operating expenses – Non operating income [OR]

Gross profit – Operating expenses

9. Operating Ratio

Cost of goods sold + Operating expenses

                                                                                        x 100

Sales

10. Capital Turnover Ratio

Sales

Capital Employed

Capital employed = Equity share capital + Preference share

capital + reserves and surplus + long term borrowed funds

11. Fixed Assets Turnover Ratio

Sales

Fixed Assets

Fixed assets = Fixed assets – Depreciation

12. Stock Turnover Ratio

Cost of goods sold

Average stock

Average stock = opening stock + closing stock divided by two

13. Debtors Turnover Ratio

Credit Sales

Average accounts receivable

(Debtors + Bills receivable)

Average accounts receivable is calculated by dividing the

opening balance of debtors and bills receivable and closing

balance of debtors and bills receivable by two.

S.No Description of  the Ratio  Formula Notes

Net sales = Total sales (cash & credit) – Sales returns

Objective Type:

a) Fill in the blanks:  RATIO

1. _______ is a mathematical relationship between two items expressed in quantitative form.

2. Ratio helps in _______ forecasting.

3. _______ Ratio measures the firm ability to pay off its current dues.

4. _______ are those assets which are easily convertible into cash.

5. Bank overdraft is an example of _______ liability.

6. Liquid ratio is used to assess the firm’s _______ liquidity.

7. Liquid assets means current assets less _______ and _______.

8. _______ ratio is modified form of liquid ratio.

9. Liquid liabilities means current liabilities less _______.

10. Proprietory ratio shows the relathionship between _______ and

total tangible assets.

11. Gross profit can be ascertained by deducting cost of goods sold

from _______.

12. Stock turnover ratio is otherwise called as _______.

13. 100% – Operating profit ratio is equal to _______ ratio.

14. When total sales is Rs.2,00,000, cash sales is Rs.65,000, then

credit sales will be Rs._______.

15. Liquid ratio is otherwise known as _______.

(Answer: 1. Ratio; 2. Financial; 3. Liquid; 4. Current Assets; 5. Current; 6. Short term; 7. Stock, prepaid expenses;8. Absolute liquid; 9. Bank overdraft; 10. Shareholdersfund / Proprietors fund; 11. Sales; 12. Inventory turnover

ratio; 13. Operating ratio; 14. Rs.1,35,000; 15. Quickratio (Acid test ratio))

b) Choose the correct answer:

1. All solvency ratios are expressed in terms of

                   a) Proportion b) Times c) Percentage

2. All activity ratios are expressed in terms of

                        a) Proportion b) Times c) Percentage

3. All profitability ratios are expressed in terms of

                  a) Proportion b) Times c) Percentage

4. Liquid liabilities means

                   a) Current liabilities b) Current liabilities – Bank overdraft

                      c) Current liabilities + Bank overdraft

5. Shareholders funds includes

                  a) Equity share capital, Preference share capital, Reserves &Surplus

          b) Loans from banks and financial institutions

               c) Equity share capital, Preference share capital, Reserves & Surplus and Loans                               from banks and financial institutions

6. Which of the following option is correct

a) Tangible Assets = Land + Building + Furniture

b) Tangible Assets = Land + Building + Goodwill

c) Tabgible Assets = Land + Furniture + Goodwill + Copy right

7. Gross profit ratio establishes the relationship between

a) Gross profit & Total sales

b) Gross profit & Credit sales

c) Gross profit & Cash sales

8. Opening stock is equal to Rs.10,000, Purchase Rs.2,00,000 and closing stock is Rs.5,000. Cost of goods sold is equal to

                       a) Rs. 2,15,000 b)Rs. 2,10,000 c) Rs. 2,05,000

9. Operating ratio is equal to

a) 100 – Operating profit ratio

b) 100 + Operating profit ratio

c) Operating profit ratio

10. Total sales is Rs,3,40,000 and the gross profit made isRs.1,40,000. The cost of goods sold will be ________

                     a) Rs.2,00,000 b) Rs. 4,80,000 c) Rs. 3,40,000

11. Total sales of a business concern is Rs.8,75,000. If cash sales is

Rs.3,75,000, then credit sales will be

               a) Rs.12,50,000 b) Rs.5,00,000 c) 12,00,000

12. Cost of goods sold is Rs.4,00,000 and average stock is Rs.80,000.

Stock turnover ratio will be

                        a) 5 times b) 4 times c) 7 times

13. Current assets of a business concern is Rs.60,000 and current

liabilities are Rs.30,000.Current ratio will be

                     a) 1 : 2 b) 1 : 1 c) 2 : 1

14. Equity share capital is Rs.2,00,000, Reserves & surplus is

Rs.30,000. Debenture Rs.40,000 and the shareholders funds will

be

                        a) Rs.2,00,000 b) Rs. 2,30,000 c) Rs. 1,90,000

(Answers: 1. (a); 2. (b); 3. (c); 4. (b); 5. (a); 6. (a); 7. (a); 8. (c); 9. (a);

10. (a); 11. (b); 12. (a); 13. (c); 14. (b))