(i) Fromthe followingcalculate TradeReceivablesTurnoverRatio':Totalrevenuefromoperation fortheyear ₹ 8,40,000Cash revenue from operations 40% of credit revenue fromoperationsClosingtradereceivable₹ 2,00,000Excessof closingtradereceivables over openingtradereceivables₹80,000(ii) Fromthefollowinginformationcalculate'InterestCoverageRatio':ProfitafterInterest and Tax₹4,97,000RateofIncomeTax30%12%Debentures₹6,00,000
Question
(i) Fromthe followingcalculate TradeReceivablesTurnoverRatio':Totalrevenuefromoperation fortheyear ₹ 8,40,000Cash revenue from operations 40% of credit revenue fromoperationsClosingtradereceivable₹ 2,00,000Excessof closingtradereceivables over openingtradereceivables₹80,000(ii) Fromthefollowinginformationcalculate'InterestCoverageRatio':ProfitafterInterest and Tax₹4,97,000RateofIncomeTax30%12%Debentures₹6,00,000
Solution
(i) To calculate the Trade Receivables Turnover Ratio, we first need to find out the credit revenue from operations.
Given that cash revenue is 40% of credit revenue, we can express credit revenue as 100% and cash revenue as 40%. Therefore, the remaining 60% is the credit revenue.
Total revenue from operations = ₹ 8,40,000
So, credit revenue = 60% of total revenue = 0.60 * 8,40,000 = ₹ 5,04,000
Trade Receivables Turnover Ratio = Credit Sales / Average Trade Receivables
We know that the excess of closing trade receivables over opening trade receivables is ₹80,000. Therefore, the opening trade receivables = closing trade receivables - excess = ₹ 2,00,000 - ₹ 80,000 = ₹ 1,20,000
So, the average trade receivables = (Opening Trade Receivables + Closing Trade Receivables) / 2 = (₹ 1,20,000 + ₹ 2,00,000) / 2 = ₹ 1,60,000
Therefore, Trade Receivables Turnover Ratio = ₹ 5,04,000 / ₹ 1,60,000 = 3.15 times
(ii) To calculate the Interest Coverage Ratio, we first need to find out the profit before interest and tax (PBIT).
Given that the profit after interest and tax (PAT) is ₹4,97,000 and the rate of income tax is 30%, we can find out the profit before tax (PBT) using the formula:
PBT = PAT / (1 - Tax Rate) = ₹4,97,000 / (1 - 0.30) = ₹7,10,000
The interest on debentures is 12% of ₹6,00,000 = ₹72,000
So, the PBIT = PBT + Interest = ₹7,10,000 + ₹72,000 = ₹7,82,000
Interest Coverage Ratio = PBIT / Interest = ₹7,82,000 / ₹72,000 = 10.86 times
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