M.com. semester - ii (cbcs) corporate finance most important questions

bysuraj patel education -
0

 M.COM. SEMESTER - II (CBCS)

CORPORATE FINANCE



Unit-3 RATIO ANALYSIS


Q.11. ASSET MANAGEMENT RATIO / TURNOVER RATIO / PERFORMANCE RATIO / ACTIVITY RATIO

ANS:

Asset management ratios measure how effectively the firm employs its resources. These ratios are also called `activity or turnover ratios’ which involve  comparison between the level of sales and investment in various accounts – inventories, debtors, fixed assets, etc. Asset management ratios are used to measure the speed with which various accounts are converted into sales or cash. The following asset management ratios are calculated for analysis. These ratios also analyse the use of resources and the utility of each component of total assets. The profitability of the firm can be determined by activity ratios coupled with the degree of leverage.

1. Inventory Turnover Ratio

A considerable amount of a company’s capital may be tied up in the financing of raw materials, work-in-progress and finished goods. It is important to ensure that the level of stocks is kept as low as possible, consistent with the need to fulfil customers’ orders in time. The ratio is calculated as:

                       Cost of Goods Sold     OR             Sales       

                        Average Inventory              Average Inventory

Average Inventory = (opening stock + closing stock)/2

The higher the stock turnover rate or the lower the stock turnover period the better, although the ratios will vary between companies. For example, the stock turnover rate in a food retailing company must be higher than the rate in a manufacturing concern. The inventory turnover ratio measures how many times a company’s inventory has been sold during the year. If the inventory turnover ratio has decreased from past, it means that either inventory is growing or sales are dropping. In addition to that, if a firm has a turnover that is slower than for its industry, then there may be obsolete goods on hand, or inventory stocks may be high. Low inventory turnover has impact on the liquidity of the business.

2. Inventory Ratio

The level of inventory in a company may be assessed by the use of the inventory ratio, which measures how much has been tied up in inventory. The formula is:

 

3. Debtors Turnover Ratio

Debtor’s turnover, which measures whether the amount or resources tied up in debtors, is reasonable and whether the company has been efficient in converting debtors into cash. The formula is:

                                  Credit Sales              

                              Average Debtors

The higher the ratio, the better the position.

4. Debtors Collection period or Debtors Velocity Ratio

Average debtors collection period measures how long it takes to collect amounts from

 

The actual collection period can be compared with the stated credit terms of the company. If it is longer than those terms, then this indicates inefficiency in collecting debts.

5. Bad Debts to Sales Ratio

It measures the proportion of bad debts to sales and calculated as:


Bad debts to sales ratio indicate the efficiency of the credit control procedures of the company. Its level will depend on the type of business. Mail order companies have to accept a fairly high level of bad debts, while retailing organizations should maintain very low levels of ratio. The actual ratio is compared with the target or norm to decide whether it is acceptable or not.

6. Creditors Turnover Ratio

The measurement of the credit turnover period shows the average time taken to pay for goods and services purchased by the company. The formula is:

                                Net Credit Purchase     

                                  Average Creditors

Here purchases refer to net credit purchases and average creditors are given by opening creditors and bills payable + closing creditors and bills payable divided by two. In general, the longer the credit period achieved the better, because delays in payment mean that the operations of the company are being financed interest free by suppliers or materials. But there will be a point beyond which delays in payment will damage relationships with suppliers which, if they are operating in a seller’s market, may harm the company. If too long a period is taken to pay creditors, the credit rating of the company may suffer, thereby making it more difficult to obtain supplies in the future.

7. Creditors Payment Period or Creditors Velocity Ratio

     

Generally, payment period of 50 to 60 days is considered ideal.

8. Fixed Assets Turnover Ratio

This ratio will be analysed further with ratios for each main category of asset. This is a difficult set of ratios to interpret as asset values are based on historical cost. An increase in the fixed asset figure may result from the replacement of an asset at an increased price or the purchase of an additional asset intended to increase production capacity. The formula is:

                                 Sales      

                          Fixed Assets

The ratio of the accumulated depreciation provision to the total of fixed assets at cost might be used as an indicator of the average age of the assets, particularly when depreciation rates are noted in the accounts. The ratio of sales value per square foot of floor space occupied is particularly significant for trading concerns, such as a wholesale warehouse or a departmental store.

9. Total Assets Turnover Ratio

This ratio indicates the number of times total assets are being turned over in a year. The Formula is

                                        Sales        

                                 Total Assets

The higher the ratio indicates overtrading of total assets, while a low ratio indicates idle capacity.

10. Working Capital Turnover Ratio

This ratio is calculated as follows:

                                         Sales             

                                 Working Capital

This ratio indicates the extent of working capital turned over in achieving sale of the firm.

11. Sales to Capital Employed Ratio

This ratio is ascertained by dividing sales with capital employed. The formula is:

                                          Sales        

                             Capital Employed

This ratio indicates efficiency in utilization of capital employed in generating revenue.

 


If you want exam most important question bank pdf then you have to pay per subject 100/- rupees only . 

Contact 8652719712 / 8779537141 


Telegram Group

Mumbai Univeersity :- https://t.me/mumbaiuniversityidol
Suraj Patel Education :- https://t.me/surajpateleducation
F.Y.J.C EXAM :- https://t.me/FYJCexam
S.Y.J.C EXAM :- https://t.me/SYJCexam
M.Com Part 1 EXAM :- https://t.me/McomPart1Exam
M.Com Part 2 EXAM :- https://t.me/McomPart2Exam

YouTube Channel 

https://www.youtube.com/channel/UCv8JIY58xfWHUIXVu9wxNHw


  1. M.com. semester - ii (cbcs) corporate finance most important questions,
  2. corporate finance M.com. semester - ii (cbcs) most important questions,
  3. Munbai university M.com. semester - ii (cbcs) corporate finance most important questions,
  4. corporate finance Munbai university M.com. semester - ii (cbcs) most important questions,
  5. Corporate finance m.com semester 2 question papers with answers pdf mumbai university,
  6. Corporate finance m.com semester 2 question papers with answers pdf,
  7. m.com semester 2 Corporate finance question papers with answers pdf,
  8. M.com. semester - ii (cbcs) corporate finance most important question papers with answers pdf,
  9. most important question papers M.com. semester - ii (cbcs) corporate financ

Tags

You may like these posts

Post a Comment

Previous Post Next Post

Recent Post

Direct Tax