Balance sheet Analysis

C A LC U L AT I O N O F BA L A N C E S H E E T W I T H R AT I O S
 Question/Information

 Total debt to net worth: 0.5 to 1

 Total Asset Turnover Ratio( based on sales): 2
 Gross profit: 30%
 Average Collection period: (based on 360 days): 40
days
 Inventory Turn over: 3 times
 Quick Ratio:0.75:1
 Additional Information

Assets Rs. Liabilities and Equity Rs

Notes and accounts
Cash payable
Accounts receivable Common Stock 200,000
Inventory Retained Earning 300,000
Plant
Total Liabilities and
Total Assets Equity
 Solution

1.Debt to Net worth Ratio= total debt/*net worth

*net worth= common stock + Retained Earning
0.5= Total Debt/500,000=250,000 (notes payable and
accounts payable)
Putting Value of above information in the balance
sheet than we have following position.
 Balance sheet

Assets Rs. Liabilities and Equity Rs

Notes and accounts
Cash payable 250,000
Accounts receivable Common Stock 200,000
Inventory Retained Earning 300,000
Plant
Total Liabilities and
Total Assets 750,000 Equity 750,000
 Cost of goods sold and sales

2. Total assets Turn over= Sales/Total Assets

2=Sales/750,000 = Sales =1,500,000
3. Gross profit Ratio= Gross profit/sales x100
30=Gross profit/1,500,000
Gross profit= 450,000
4. Cost of goods sold= Sales-Gross profit
=1,500,000-450,000= 1,0500,00 (cost of goods sold)
 Accounts receivable

 Now we have to calculate the debtor. Since we do not have

accounts receivable turn over we have to calculate first the
average collection period.
 Accounts receivable turnover ratio ?
 Average collection period(ACP)= 40 days
 Accounts receivable turnover ratio= 360/ACP
 =360/40=9 So A/R turn over =9
 A/R turn over=Sales/av. Debtor.
 =9=1,5000,000/Av. debtor
 Av. Debtor= 1,66,667
 After calculating the debtor the balance
sheet would be as follows
 Balance sheet

Assets Rs. Liabilities and Equity Rs

Notes and accounts
Cash payable 250,000
Accounts receivable 166,667 Common Stock 200,000
Inventory Retained Earning 300,000
Plant
Total Liabilities and
Total Assets 750,000 Equity 750,000
 Inventory

 Inventory turn over ratio= cost of goods

sold/Inventory
=3=1,050,000/Inventory

Inventory=350,000
After putting value of inventory
the balance sheet as follows
 Balance sheet

Assets Rs. Liabilities and Equity Rs

Notes and accounts
Cash payable 250,000
Accounts receivable 166,667 Common Stock 200,000
Inventory 350,000 Retained Earning 300,000
Plant
Total Liabilities and
Total Assets 750,000 Equity 750,000
 Quick Assets

 Quick ratio= Quick Assets (liquid assets)/current

liabilities
 =0.75= quick asset/250,000
 Quick assets=187,500
 Quick assets include cash and accounts receivable only
i.e
 187,500= cash + A/R
 187,000= Cash +166,667
 Cash=20,833
 So the balance sheet would be like that
 Balance sheet

Assets Rs. Liabilities and Equity Rs

Notes and accounts
Cash 20,833 payable 250,000
Accounts receivable 166,667 Common Stock 200,000
Inventory 350,000 Retained Earning 300,000
Plant 212,500
Total Liabilities and
Total Assets 750,000 Equity 750,000