Question
141:
Y Ltd.'s profit
after interest and tax was ` 1,00,000. Its Current Assets
were ` 4,00,000; Current
Liabilities ` 2,00,000; Fixed Assets ` 6,00,000 and 10% Longterm Debt
`
4,00,000. The rate of tax was 20%. Calculate 'Return on Investment' of Y
Ltd.
Answer:
Return on Investment = (Net Profit before Interest, Tax and
Dividend/ Capital Employed × 100)
Let Profit before tax be ` 100
Tax = ` 20
Profit after tax = ` (100 – 20) = ` 80
If Profit after tax is ` 80 then profit before tax is = ` 100
If Profit after tax is ` 1,00,000 then profit before tax is = ` (1,00,000 × 100/80) = ` 1,25,000
Interest on longterm borrowings = ` (4,00,000 × 10/100)= ` 40,000
Profit after interest and Tax = ` (1,25,000 + 40,000) = ` 1,65,000
Capital Employed = Fixed Assets+ Current Assets – Current Liabilities
= ` (6,00,000 + 4,00,000 – 2,00,000) = ` 8,00,000
Return on Investment = (1,65,000/8,00,000 × 100 )= 20.625% or 20.63%
(approx.)
Question
142:
Calculate Return on Investment (ROI) from the following details: Net Profit after Tax ` 6,50,000; Rate of Income Tax 50%; 10% Debentures of ` 100 each ` 10,00,000; Fixed Assets at cost ` 22,50,000; Accumulated Depreciation on Fixed Assets up to date ` 2,50,000; Current Assets ` 12,00,000; Current Liabilities ` 4,00,000.
Answer:
Net Fixed Assets = Fixed Assets (at cost) − Accumulated Depreciation
= 22,50,000 − 2,50,000 = 20,00,000
Capital Employed = Net Fixed Assets + Current Assets − Current Liabilities
= 20,00,000 + 12,00,000 − 4,00,000
= 28,00,000
Interest on 10% Debentures = 10% of 10,00,000 = 1,00,000
Let Profit before Tax be = x
Profit after Tax = Profit Before Tax − Tax
Tax Rate = 50%
∴ Tax = 0.5 x
x − 0.5 x = 6,50,000
x = 13,00,000
Net Profit before Tax = x = 13,00,000
Profit before Interest and Tax = Profit before Tax + Interest on Longterm Debt
= 13,00,000 + 1,00,000
= 14,00,000
Return on Investment = Net
profit Before Interest and Tax ×100/ Capital
Employed
Return on Investment = 14,00,000 ×100 / 28,00,000=50%
Question
143:
From the following Balance Sheet of Global Ltd., you are required to calculate Return on Investment for the year 202021:
BALANCE SHEET OF GLOBAL LTD. as at 31st March, 2021 

Particulars 
Note No. 
Amount ` 
I. EQUITY AND LIABILITIES 1. Shareholder's Funds 


(a) Share Capital–Equity Shares of ` 10 each Fully paid 

5,00,000 
(b) Reserves and Surplus 

4,20,000 
2. NonCurrent Liabilities 


15% Longterm Borrowings 

16,00,000 
3. Current Liabilities 

8,00,000 
Total 

33,20,000 
II. ASSETS 


1. NonCurrent Assets 


(a) Fixed Assets 

16,00,000 
(b) NonCurrent Investments: 


(i)
10% Investments 

2,00,000 
(ii)
10% Nontrade Investments 

1,20,000 
2. Current Assets 

14,00,000 
Total 

33,20,000 
Additional Information: Net Profit before Tax for the year 202021 is ` 9,72,000.
Answer:
Return on Investment = (Net Profit before Interest, Tax and
Dividend/ Capital Employed × 100)
Interest on borrowings = ` (16,00,000 × 15/100)= ` 2,40,000
Net Profit before Tax = ` 9,72,000
Net Profit before Interest and Tax = ` (9,72,000 + 2,40,000) = ` 12,12,000
Net Profit before Interest and Tax (excluding interest on Nontrade
investments) = ` (12,12,000 – 12,000) = ` 12,00,000
Capital Employed = Shareholder’s Funds + NonCurrent Liabilities – NonTrade
Investment
= ` (5,00,000 +
4,20,000 + 16,00,000 – 1,20,000) = ` 24,00,000
Return on Investment = (12,00,000/24,00,000 × 100) = 50%
Question
144:
State with reason whether the following transactions will
increase, decrease or not change the 'Return on Investment' Ratio:
(i) Purchase of machinery worth `10,00,000 by issue of equity shares.
(ii) Charging depreciation of `25,000 on machinery.
(iii) Redemption of debentures by cheque `2,00,000.
(iv) Conversion of 9% Debentures of `1,00,000 into
equity shares.
Answer:
Transaction 
Impact 
Purchase
of machinery worth ` 10,00,000 by issue of equity shares. 
Issue
of shares will lead to an increase in the capital employed by ` 10,00,000.But profit remains intact and so there will be
a decline in the return on investment ratio. 
Charging
depreciation of ` 25,000 on machinery. 
Simultaneous
decrease in profits and capital employed by ` 25,000 will lead to a decline in return on investment
ratio. 
Redemption
of debentures by cheque ` 2,00,000. 
Redemption
of debentures will lead to a decrease in the capital employed by ` 2,00,000. But profit remains intact and so there will be
an increase in the return on investment ratio. 
Conversion
of 9% Debentures of ` 1,00,000 into equity shares. 
Decrease
in debentures and increase in share capital causing a simultaneous increase
and decrease in capital employed will leave the return on investment ratio
unchanged. 
Question 145:
Calculate Revenue from Operations of BN Ltd. from the following information:
Current Assets 8,00,000
Quick Ratio is 1.5:1
Current Ratio is 2:1.
Inventory Turnover Ratio is 6 times.
Goods were sold at a profit of 25% on cost.
(CBSE 2019)
Answer:
Current Ratio = Current Assets/ Current Liabilities
2:1 = 8,00,000/ Current Liabilities
Current Liabilities= 8,00,000/2=4,00,000
Quick Assets= 4,00,000×1.5=6,00,000
Working Capital = Current Assets  Current Liabilities
Working Capital = 8,00,000 – 4,00,000
Working Capital = 4,00,000
Inventory= Current Assets – Quick Assets
Inventory= 8,00,000 – 6,00,000
Inventory= 2,00,000
Inventory Turnover Ratio= Cost of Revenue from operation/Average Inventory
Cost of Revenue from operation = Inventory× Inventory Turnover Ratio
Cost of Revenue from operation = 2,00,000 × 6
Cost of Revenue from operation = 12,00,000
Profit of 25% on cost
therefore,
it is assumed that
Cost is equal to 100%
Revenue 
= 
Cost 
+ Profit 
125 
= 
100 
+25 
Hence,
Revenue= 12,00,000×125/100=15,00,000
Class : 12th  Ts Grewal solution 20222023
Volume 3  Chapter 4: Accounting Ratio
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