Question
Following items are taken out of BalanceSheet of A&B Co Ltd.
a) Cash Rs. 20,000
b) Account receivable Rs.100,000
c) Account payable Rs.350,000
d) Notes payable Rs. 250,000
e) Inventory Rs. 300,000
f) Long term debt Rs. 500,000
g) Furniture Rs.1,500,000
h) Common Stock Rs 5,00,000
i) Retained EarningsRs.3,20,000
j) Earning before interest and tax Rs600,000
k) Company paid interestRs.140,000
From the given data find out followingratios:
1. Total debtratio
2. Cash Ratio
3. Acid testRatio
4. Currentratio
5. Interest CoverageRatio
Explanation / Answer
(1) Total DebtRatio = Total Debt / TotalAssets Total Debt = (Accounts Payable + Notes Payable +Long-term debt) Total Debt = (350,000 + 250,000 + 500,000) Total Debt = Rs.1,100,000 Total Assets = (Cash + Accounts receivables +Invnentory + Furniture) Total Assets = (20,000 + 100,000 + 300,000 +1,500,000) Total Assets = Rs.1,920,000 Total Debt Ratio = Rs.1,100,000 / Rs.1,920,000
Total Debt Ratio = 0.57 (2) Cash Ratio = [(CashEquivalents + Cash) / (Accruals + Accounts Payable + NotesPayable)] Cash Ratio =[(20,000) / (350,000 + 250,000)] Cash Ratio =[(20,000) / 600,000] Cash Ratio =0.033
(3) Acid Test Ratio = [(Cash +Accounts receivables + short-term investments) / CurrentLiaibilities] Acid Test Ratio = [(20,000 + 100,000 ) / (350,000 +250,000)] Acid Test Ratio = [120,000 / 600,000]
Acid Test Ratio = 0.2 (4) Current Ratio = Current Assets /Current Liabilities Current Ratio = [(20,000 + 100,000 + 300,000) /(350,000 + 250,000)] Current Ratio = [420,000 / 600,000]
Current Ratio = 0.7 (5) Interest CoverageRatio = EBIT / Interest Interest Coverage Ratio = Rs.600,000 /Rs.140,000
Interest CoverageRatio = 4.26 (1) Total DebtRatio = Total Debt / TotalAssets Total Debt = (Accounts Payable + Notes Payable +Long-term debt) Total Debt = (350,000 + 250,000 + 500,000) Total Debt = Rs.1,100,000 Total Assets = (Cash + Accounts receivables +Invnentory + Furniture) Total Assets = (20,000 + 100,000 + 300,000 +1,500,000) Total Assets = Rs.1,920,000 Total Debt Ratio = Rs.1,100,000 / Rs.1,920,000
Total Debt Ratio = 0.57 (2) Cash Ratio = [(CashEquivalents + Cash) / (Accruals + Accounts Payable + NotesPayable)] Cash Ratio =[(20,000) / (350,000 + 250,000)] Cash Ratio =[(20,000) / 600,000] Cash Ratio =0.033
(3) Acid Test Ratio = [(Cash +Accounts receivables + short-term investments) / CurrentLiaibilities] Acid Test Ratio = [(20,000 + 100,000 ) / (350,000 +250,000)] Acid Test Ratio = [120,000 / 600,000]
Acid Test Ratio = 0.2 (4) Current Ratio = Current Assets /Current Liabilities Current Ratio = [(20,000 + 100,000 + 300,000) /(350,000 + 250,000)] Current Ratio = [420,000 / 600,000]
Current Ratio = 0.7 (5) Interest CoverageRatio = EBIT / Interest Interest Coverage Ratio = Rs.600,000 /Rs.140,000
Interest CoverageRatio = 4.26