Page 74 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 4: Ratio Analysis

Notes

Task From the following particulars, prepare Trading, Profi t & Loss account and a
balance sheet.
Current ratio -3
Liquid ratio -1.8

Bank overdraft - `20,000
Working capital - `2,40,000
Debtors velocity -1 month; Gross profit ratio -20%

Proprietary ratio (Fixed assets/shareholders’ fund) -.9
Reserves and surpluses -.25 of share capital

Opening stock - `1,20,000; 8% Debentures -` 3,60,000
Long term investments -`2,00,000
Stock turnover ratio -10 times
Creditors velocity -1/2 month

Net profit to share capital -20%

Self Assessment

State whether the following statements are true or false:
14. The stock turnover ratio expresses the speed of converting the stock into cash.
15. Higher the duration shows greater the effectiveness in collecting the dues.

16. Greater the duration is better the liquidity management of the firm in availing the credit
period of the creditors and vice versa.
4.7 DUPONT Analysis

This was an analysis established by the DUPONT INC., USA to study the return on investment.
It was the first company developed the chart which depicted the influences of Return on

Investment. The company underwent for the consideration two important ratios, Net profi t ratio
and Capital turnover ratio, for the return on investment. A change in any one of the two ratios
reflects immediately on the Return on investment. The various associated factors are considered

to study the impact of the profitability of the firm. This type of analysis to correct the problems

not only to identify with the specifi c cause which drastically affects the profi tability but also to
fi nd the possible ways and means to improve the profi tability. Having developed the chart for
analysis was called as DUPONT Chart.

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