Question

Quiz 2 Date of Submission 19th September 2020 Note: Write in your own words. Explain the concept with help of proper examples. Copy/paste from Books, Internet Resources, Journals and Material provided by Course Instructor will lead zero marks. Submit within time. Late submission will also cause zero marking. If students are unable to attempt in MS Word, they can submit handwritten with proper lining and formats within time. Q 1: State the effect of the following on the Current Ratios and Liquidity Ratios: a. Payment of an amount due to a supplier b. Collection of an amount de from the customer c. Sale of goods for cash at normal profit d. Sale of long-term investment e. Purchase of machinery on deferred payment systems, installments being payable half yearly Q2: The following are the extracts from the Financial Statements of Sitara Ltd., Company: Accounts 31st December 2018 31st December 2019 Inventories Rs. 10,000 Rs. 25,000 Accounts Receivable 20,000 20,000 Bills Receivable 10,000 5,000 Advances 2,000 0 Cash in Hand 18,000 15,000 Accounts Payable 25,000 30,000 Bills Payable 15,000 20,000 Bank Overdraft 0 2,000 9% Debentures 200,000 200,000 Sales for the Year 350,000 300,000 Gross Profit 70,000 50,000 With the help of detail given above, calculate for 2018 and 2019 the following: a. Current Ratio b. Liquidity Ratio c. Inventory Turnover Ratio d. Accounts Receivable Turn Ratio

Answer 1

Q1

a. Effect on current ratio:- Payment of amount due to a supplier will reduce both current assets and current liability. If current assests is greater than current liability, payment of amount due to a supplier will increase current ratio and vice versa.

Effect on liquidity ratio:-Liquidity ration means, Liquid assets (cash, marketable security. accounts receivable) divided by current liability. Payment of amount due to a supplier will effect both liquid assets(cash) and current liability so it effects same as cuurent ratio.

b.Effect on current ratio:- Collecton of an amount due from customer will not effect current ration. Beacause it effect only current assets, it will reduce accounts receivable at the same time increase cash.

Effect on liquidity ratio:- Same as current ratio

c.Effect on current ratio:-Sale of goods for a normal profoit will increase current ratio. It effects only current assets, a the time of sale of goods inventory value will decrease and cash will increase greater than decrease in value inventory because it contain some normal profit.

Effect on liquidity ratio:- Sale of goods for a normal profoit will increase liquidity ration greater than current ratio. Because inventory value (goods) not include the calculation of liquid ratio, so it contain only increase the value cash with normal profit

d.Effect on current ratio:- Sale of longter investment will increase current ratio, long term investment not include the calculation of current ration but when it sale cash will increase.

Effect on liquidity ratio:-Same as current ratio

e.Effect on current ratio:- At the time of purchase of machinery no effect on current assets, because assets is longterm nature but it will effect on current libility because instalment will due half yearly. When instalment is due it will increase current liability and decrease current ration.

Effect on liquidity ratio:-Same as current ratio

Q2

a. Current ration = Current assets / Current libility

2018

current assets= 10000+20000+10000+2000+18000=60000

current liability=25000+15000=40000

Current ration=60000/40000=1.5

2019

current assets= 25000+20000++5000+15000=65000

current liability=30000+20000=50000

Current ration=65000/50000=1.3

b. Liquidity ratio= Liquid assets / Current liability

2018

liquid assets (not include inventory)=20000+10000+2000+18000=50000

current liability=25000+15000=40000

Liquidity ratio=50000/40000=1.25

2019

liquid assets (not include inventory)=20000++5000+15000=40000

current liability=30000+20000=50000

Liquidity ratio=40000/50000=.8

c. Inventory turnover ratio= Cost of goods sold / Average inventory

Cost of goods sold = Sales - Gross profit

Average inventory = Bigining invenory+Ending inventory / 2

2018

Cost of goods sold= 350000-70000=280000

Average inventory = 10000+25000 / 2 =17500

Inventory turnonver ration= 280000/17500=16

2019

Cost of goods sold= 300000-50000=250000

Average inventory = 10000+25000 / 2 =17500

Inventory turnonver ration= 250000/17500=14.28

d. Accounts receivable turnover ratio= Net credit sale / Average accounts receivable

Average accounts receivable= Begining accounts receivable+Ending accounts receivable / 2

Question not specify whether it is credit sale or cash sale so we assume all sales are credit sale

2018

Average accounts receivable = 20000+20000 / 2 =20000

Accounts receivable turnover ratio=350000/20000=17.5

2019

Average accounts receivable = 20000+20000 / 2 =20000

Accounts receivable turnover ratio=300000/20000=15