12th | Accounting Ratios | Question No. 141 To 145 | Ts Grewal Solution 2022-2023

Y Ltd.'s profit after interest and tax was ` 1,00,000. Its Current Assets were  ` 4,00,000; Current Liabilities  ` 2,00,000; Fixed Assets  ` 6,00,000 and 10% Long-term Debt  ` 4,00,000. The rate of tax was 20%. Calculate 'Return on Investment' of Y Ltd.

Return on Investment = (Net Profit before Interest, Tax and Dividend/ Capital Employed × 100)
Let Profit before tax be  ` 100
Tax =  ` 20
Profit after tax =  ` (100 – 20) =  ` 80
If Profit after tax is  ` 80 then profit before tax is =  ` 100
If Profit after tax is  ` 1,00,000 then profit before tax is =  ` (1,00,000 × 100/80) =  ` 1,25,000
Interest on long-term borrowings =  ` (4,00,000 × 10/100)=  ` 40,000
Profit after interest and Tax =  ` (1,25,000 + 40,000) =  ` 1,65,000
Capital Employed = Fixed Assets+ Current Assets – Current Liabilities
                              =  ` (6,00,000 + 4,00,000 – 2,00,000) =  ` 8,00,000
Return on Investment = (1,65,000/8,00,000 × 100 )= 20.625% or 20.63% (approx.)

Calculate Return on Investment (ROI) from the following details: Net Profit after Tax  ` 6,50,000; Rate of Income Tax 50%; 10% Debentures of  ` 100 each  ` 10,00,000; Fixed Assets at cost  ` 22,50,000; Accumulated Depreciation on Fixed Assets up to date  ` 2,50,000; Current Assets  ` 12,00,000; Current Liabilities  ` 4,00,000.

Net Fixed Assets = Fixed Assets (at cost) − Accumulated Depreciation

= 22,50,000 − 2,50,000 = 20,00,000

Capital Employed = Net Fixed Assets + Current Assets − Current Liabilities

= 20,00,000 + 12,00,000 − 4,00,000

= 28,00,000

Interest on 10% Debentures = 10% of 10,00,000 = 1,00,000

Let Profit before Tax be = x

Profit after Tax = Profit Before Tax − Tax

Tax Rate = 50%

∴ Tax = 0.5 x

x − 0.5 x = 6,50,000

x = 13,00,000

Net Profit before Tax = x = 13,00,000

Profit before Interest and Tax = Profit before Tax + Interest on Long-term Debt

= 13,00,000 + 1,00,000

= 14,00,000

Return on Investment = Net profit  Before Interest and Tax ×100/ Capital Employed

Return on Investment = 14,00,000 ×100 / 28,00,000=50%

From the following Balance Sheet of Global Ltd., you are required to calculate Return on Investment for the year 2020-21:

BALANCE SHEET OF GLOBAL LTD. as at 31st March, 2021
Particulars	Note No.	Amount  `
I. EQUITY AND LIABILITIES 1. Shareholder's Funds
(a) Share Capital–Equity Shares of  ` 10 each Fully paid		5,00,000
(b) Reserves and Surplus		4,20,000
2. Non-Current Liabilities
15% Long-term Borrowings		16,00,000
3. Current Liabilities		8,00,000
Total		33,20,000
II. ASSETS
1. Non-Current Assets
(a) Fixed Assets		16,00,000
(b) Non-Current Investments:
(i) 10% Investments		2,00,000
(ii) 10% Non-trade Investments		1,20,000
2. Current Assets		14,00,000
Total		33,20,000

Additional Information: Net Profit before Tax for the year 2020-21 is ` 9,72,000.

Return on Investment = (Net Profit before Interest, Tax and Dividend/ Capital Employed × 100)
Interest on borrowings =  ` (16,00,000 × 15/100)=  ` 2,40,000
Net Profit before Tax =  ` 9,72,000
Net Profit before Interest and Tax =  ` (9,72,000 + 2,40,000) =  ` 12,12,000
Net Profit before Interest and Tax (excluding interest on Non-trade investments) =  ` (12,12,000 – 12,000) =  ` 12,00,000
Capital Employed = Shareholder’s Funds + Non-Current Liabilities – Non-Trade Investment
                        =  ` (5,00,000 + 4,20,000 + 16,00,000 – 1,20,000) =  ` 24,00,000
Return on Investment = (12,00,000/24,00,000 × 100) = 50%

 

State with reason whether the following transactions will increase, decrease or not change the 'Return on Investment' Ratio:
(i) Purchase of machinery worth  `10,00,000 by issue of equity shares.
(ii) Charging depreciation of  `25,000 on machinery.
(iii) Redemption of debentures by cheque  `2,00,000.
(iv) Conversion of 9% Debentures of  `1,00,000 into equity shares.

Transaction	Impact
Purchase of machinery worth  ` 10,00,000 by issue of equity shares.	Issue of shares will lead to an increase in the capital employed by  ` 10,00,000.But profit remains intact and so there will be a decline in the return on investment ratio.
Charging depreciation of  ` 25,000 on machinery.	Simultaneous decrease in profits and capital employed by  ` 25,000 will lead to a decline in return on investment ratio.
Redemption of debentures by cheque  ` 2,00,000.	Redemption of debentures will lead to a decrease in the capital employed by  ` 2,00,000. But profit remains intact and so there will be an increase in the return on investment ratio.
Conversion of 9% Debentures of  ` 1,00,000 into equity shares.	Decrease in debentures and increase in share capital causing a simultaneous increase and decrease in capital employed will leave the return on investment ratio unchanged.

Calculate Revenue from Operations of BN Ltd. from the following information:

Current Assets 8,00,000

Quick Ratio is 1.5:1

Current Ratio is 2:1.

Inventory Turnover Ratio is 6 times.

Goods were sold at a profit of 25% on cost.

(CBSE 2019)

 

 

Current Ratio = Current Assets/ Current Liabilities

2:1 = 8,00,000/ Current Liabilities

Current Liabilities= 8,00,000/2=4,00,000

 

Quick Assets= 4,00,000×1.5=6,00,000

Working Capital = Current Assets - Current Liabilities

Working Capital = 8,00,000 – 4,00,000

Working Capital = 4,00,000

Inventory= Current Assets – Quick Assets

Inventory= 8,00,000 – 6,00,000

Inventory= 2,00,000

Inventory Turnover Ratio= Cost of Revenue from operation/Average Inventory

Cost of Revenue from operation = Inventory× Inventory Turnover Ratio

Cost of Revenue from operation = 2,00,000 × 6

Cost of Revenue from operation = 12,00,000

 

Profit of 25% on cost

therefore,

it is assumed that

Cost is equal to 100%

Revenue	=	Cost	+ Profit
125	=	100	+25

 

Hence,

Revenue= 12,00,000×125/100=15,00,000