Test 2: Financial Analysis and Planning - Ratio Analysis: answer key

Question 1 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. Bharat Renewables Components Ltd. manufactures precision enclosures and control assemblies for solar-storage projects. Its finance committee is reviewing operating efficiency and the duration for which funds remain tied up between procurement, production, sale and collection for the year ended 31 March 2027. All monetary amounts are in ₹ lakh. Balance-sheet figures are opening and closing balances; turnover calculations should use average balances. Adopt a 360-day year and a 30-day month. Annual operating data: Net sales ₹18,000 (including credit sales ₹15,000); cost of goods sold ₹12,960; annual net credit purchases from suppliers ₹10,800; EBIT ₹1,200; cash generated from operations before interest and tax ₹1,800. The capital structure comprises equity share capital ₹4,000, reserves ₹1,000, 10% debentures ₹1,200, an 11% term loan of ₹1,500 and 9% preference share capital of ₹500. Equity beta is 1.10 and the corporate tax rate is 25%. Selected balance-sheet information: | Particulars | 1 April 2026 | 31 March 2027 | |---|---:|---:| | Total assets | 9,600 | 10,400 | | Fixed assets | 4,800 | 5,200 | | Current assets | 3,800 | 4,200 | | Current liabilities | 1,600 | 2,000 | | Inventory | 1,320 | 1,560 | | Trade receivables | 1,400 | 1,600 | | Trade payables | 1,100 | 1,300 | Management confirms that all listed receivables and payables are trade balances, the purchase figure is net credit purchases after returns, and COGS includes all manufacturing costs charged to inventory. There were no acquisitions or disposals outside the disclosed fixed-asset movement and no seasonal anomalies. Use sales as the numerator for asset, capital and working-capital turnover; use COGS for inventory turnover, credit sales for receivables turnover and net credit purchases for payables turnover. For the operating-cycle questions, add inventory holding days to collection days; the cash conversion cycle further deducts payment days.

Calculate the Total Asset Turnover Ratio of Bharat Renewables Components Ltd. for FY 2026-27 using the average total assets and the sales-based numerator.

1. 1.80 times (correct answer)
2. 1.73 times
3. 1.30 times
4. 2.00 times

Answer: A — 1.80 times

Explanation. Average Total Assets = (₹9,600 + ₹10,400) ÷ 2 = ₹10,000 lakh. Total Asset Turnover Ratio = Net Sales ÷ Average Total Assets = ₹18,000 ÷ ₹10,000 = 1.80 times. Option b uses closing assets instead of average assets. Option c incorrectly uses COGS of ₹12,960 lakh despite the question expressly requiring the sales basis. The average-balance approach reflects the assets employed throughout the year more appropriately.

Where it goes wrong. Using closing total assets instead of average total assets, or substituting COGS for sales when a sales-based turnover calculation is specified.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 2 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Determine the Inventory Turnover Ratio and Inventory Holding Period of Bharat Renewables Components Ltd. for FY 2026-27.

1. 8 times and 45 days
2. 9 times and 40 days (correct answer)
3. 10 times and 36 days
4. 9 times and 45 days

Answer: B — 9 times and 40 days

Explanation. Average Inventory = (₹1,320 + ₹1,560) ÷ 2 = ₹1,440 lakh. Inventory Turnover Ratio = COGS ÷ Average Inventory = ₹12,960 ÷ ₹1,440 = 9 times. Inventory Holding Period = 360 ÷ 9 = 40 days. Option c results from using sales rather than COGS. Option d obtains the correct turnover but applies an incorrect holding-period conversion. The question expressly prescribes a 360-day year.

Where it goes wrong. Using revenue instead of COGS for stock turnover, or confusing the 360-day annual period with another day-count convention.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 3 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Calculate the Receivables Turnover Ratio and Average Collection Period of Bharat Renewables Components Ltd. for FY 2026-27.

1. 12 times and 30 days
2. 9.38 times and 38.40 days
3. 10 times and 36 days (correct answer)
4. 8.33 times and 43.20 days

Answer: C — 10 times and 36 days

Explanation. Average Receivables = (₹1,400 + ₹1,600) ÷ 2 = ₹1,500 lakh. Receivables Turnover Ratio = Credit Sales ÷ Average Receivables = ₹15,000 ÷ ₹1,500 = 10 times. Average Collection Period = 360 ÷ 10 = 36 days. Option a uses total sales of ₹18,000 lakh instead of credit sales. Option b uses closing receivables rather than the average balance, distorting the collection period.

Where it goes wrong. Including cash sales in the receivables turnover numerator or using closing debtors instead of average receivables.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 4 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Based on the inventory holding period, average collection period and average payment period of Bharat Renewables Components Ltd., determine its Operating Cycle and Cash Conversion Cycle, respectively.

1. 116 days and 76 days
2. 76 days and 40 days
3. 80 days and 36 days
4. 76 days and 36 days (correct answer)

Answer: D — 76 days and 36 days

Explanation. Inventory Holding Period = 40 days and Collection Period = 36 days. Operating Cycle = 40 + 36 = 76 days. Payables Turnover = Net Credit Purchases ÷ Average Payables = ₹10,800 ÷ [(₹1,100 + ₹1,300) ÷ 2] = 9 times. Payment Period = 360 ÷ 9 = 40 days. Cash Conversion Cycle = 76 − 40 = 36 days. Option a incorrectly adds the payment period instead of deducting it.

Where it goes wrong. Adding the supplier payment period to the Operating Cycle instead of deducting it to calculate the Cash Conversion Cycle.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 5 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. Zenith Power Systems Ltd. distributes battery modules and grid-control equipment to commercial renewable-energy installers. Management is evaluating a proposal to extend customer credit selectively while negotiating improved supplier terms. The financial information below relates to FY 2026-27. All monetary amounts are in ₹ lakh. Opening and closing balances are as at 1 April 2026 and 31 March 2027. Use average balances for turnover calculations and a 360-day year with 30-day months. Annual operating data: Total sales ₹24,000, comprising cash sales ₹6,000 and credit sales ₹18,000; cost of goods sold ₹18,000; annual net credit purchases ₹18,600; EBIT ₹1,500; cash generated from operations before interest and tax ₹2,400. Equity share capital is ₹4,000 and reserves ₹2,000; preference share capital is ₹500. Financing includes ₹1,000 of 10% debentures and a ₹1,500 term loan carrying 12% interest. The corporate tax rate is 25% and equity beta is 1.20. Interest and cash-flow figures provide corporate context; the questions focus on asset utilisation and the operating cycle. Selected balance-sheet information: | Particulars | Opening | Closing | |---|---:|---:| | Total assets | 11,600 | 12,400 | | Fixed assets | 4,800 | 5,200 | | Current assets | 6,800 | 7,200 | | Current liabilities | 2,800 | 3,200 | | Inventory | 2,100 | 2,700 | | Trade receivables | 1,900 | 2,100 | | Trade payables | 1,500 | 1,600 | Current assets other than inventory and receivables average ₹2,600; current liabilities other than trade payables average ₹1,450. Net credit purchases are already stated after returns. No write-offs, factoring or unusual supplier financing occurred. Use sales for total-asset, fixed-asset, capital and working-capital turnover; use COGS for stock turnover, credit sales for receivables turnover and net credit purchases for payables turnover. For cycle analysis, Operating Cycle = inventory holding period + collection period; Cash Conversion Cycle = Operating Cycle − payment period.

Calculate the Fixed Asset Turnover Ratio of Zenith Power Systems Ltd. using its annual sales and average fixed assets.

1. 4.80 times (correct answer)
2. 4.62 times
3. 3.60 times
4. 5.00 times

Answer: A — 4.80 times

Explanation. Average Fixed Assets = (₹4,800 + ₹5,200) ÷ 2 = ₹5,000 lakh. Fixed Asset Turnover Ratio = Sales ÷ Average Fixed Assets = ₹24,000 ÷ ₹5,000 = 4.80 times. Option b uses closing fixed assets of ₹5,200 lakh. Option c uses COGS of ₹18,000 lakh rather than the stipulated sales figure. Option d does not use the supplied average fixed-asset denominator.

Where it goes wrong. Using closing fixed assets rather than average fixed assets, or using cost of goods sold when the question requires sales.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 6 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Determine the Working Capital Turnover Ratio of Zenith Power Systems Ltd. using average working capital and annual sales.

1. 8.00 times
2. 6.00 times (correct answer)
3. 3.43 times
4. 4.00 times

Answer: B — 6.00 times

Explanation. Average Current Assets = (₹6,800 + ₹7,200) ÷ 2 = ₹7,000 lakh. Average Current Liabilities = (₹2,800 + ₹3,200) ÷ 2 = ₹3,000 lakh. Average Working Capital = ₹7,000 − ₹3,000 = ₹4,000 lakh. Working Capital Turnover = Sales ÷ Average Working Capital = ₹24,000 ÷ ₹4,000 = 6 times. Option a divides sales by current liabilities alone, while option c uses current assets without deducting current liabilities.

Where it goes wrong. Confusing working capital with current assets or current liabilities, instead of calculating current assets minus current liabilities.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 7 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Calculate the Payables Turnover Ratio and Average Payment Period of Zenith Power Systems Ltd. for FY 2026-27.

1. 11.61 times and 31 days
2. 9 times and 40 days
3. 12 times and 30 days (correct answer)
4. 10 times and 36 days

Answer: C — 12 times and 30 days

Explanation. Average Payables = (₹1,500 + ₹1,600) ÷ 2 = ₹1,550 lakh. Payables Turnover Ratio = Annual Net Credit Purchases ÷ Average Payables = ₹18,600 ÷ ₹1,550 = 12 times. Average Payment Period = 360 ÷ 12 = 30 days. Option a uses COGS rather than net credit purchases, while option d incorrectly uses the receivables-related or another assumed turnover figure.

Where it goes wrong. Using COGS or sales instead of annual net credit purchases when calculating the Payables Turnover Ratio.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 8 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Calculate the Operating Cycle and Cash Conversion Cycle of Zenith Power Systems Ltd. using the average inventory, receivables and payables balances.

1. 88 days and 118 days
2. 78 days and 48 days
3. 88 days and 48 days
4. 88 days and 58 days (correct answer)

Answer: D — 88 days and 58 days

Explanation. Inventory Turnover = ₹18,000 ÷ ₹2,400 = 7.5 times; inventory period = 360 ÷ 7.5 = 48 days. Receivables Turnover = ₹18,000 ÷ ₹2,000 = 9 times; collection period = 40 days. Operating Cycle = 48 + 40 = 88 days. Payables Turnover = ₹18,600 ÷ ₹1,550 = 12 times; payment period = 30 days. Cash Conversion Cycle = 88 − 30 = 58 days.

Where it goes wrong. Using total sales instead of credit sales for receivables, or adding rather than deducting the supplier payment period.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 9 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. A company reports opening total assets of ₹10,000 lakh and closing total assets of ₹12,000 lakh. Current liabilities are ₹2,000 lakh at both the beginning and end of the year. Annual sales are ₹18,000 lakh. Calculate the Capital Turnover Ratio using average net assets.

A company reports opening total assets of ₹10,000 lakh and closing total assets of ₹12,000 lakh. Current liabilities are ₹2,000 lakh at both the beginning and end of the year. Annual sales are ₹18,000 lakh. Calculate the Capital Turnover Ratio using average net assets.

1. 2.00 times (correct answer)
2. 1.80 times
3. 2.25 times
4. 1.50 times

Answer: A — 2.00 times

Explanation. Opening Net Assets = ₹10,000 − ₹2,000 = ₹8,000 lakh. Closing Net Assets = ₹12,000 − ₹2,000 = ₹10,000 lakh. Average Net Assets = (₹8,000 + ₹10,000) ÷ 2 = ₹9,000 lakh. Capital Turnover Ratio = Sales ÷ Average Net Assets = ₹18,000 ÷ ₹9,000 = 2 times. Option b uses total assets incorrectly, while option c uses only closing net assets.

Where it goes wrong. Using total assets directly instead of deducting current liabilities to derive net assets or capital employed.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 10 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. A manufacturing company provides the following data: opening current assets ₹3,600 lakh, opening current liabilities ₹1,200 lakh, closing current assets ₹4,400 lakh and closing current liabilities ₹1,600 lakh. Annual sales are ₹15,600 lakh. Calculate its Working Capital Turnover Ratio using average working capital.

A manufacturing company provides the following data: opening current assets ₹3,600 lakh, opening current liabilities ₹1,200 lakh, closing current assets ₹4,400 lakh and closing current liabilities ₹1,600 lakh. Annual sales are ₹15,600 lakh. Calculate its Working Capital Turnover Ratio using average working capital.

1. 5.00 times
2. 6.00 times (correct answer)
3. 7.50 times
4. 4.50 times

Answer: B — 6.00 times

Explanation. Opening Working Capital = 3,600 − 1,200 = ₹2,400 lakh. Closing Working Capital = 4,400 − 1,600 = ₹2,800 lakh. Average Working Capital = (2,400 + 2,800) ÷ 2 = ₹2,600 lakh. Working Capital Turnover = ₹15,600 ÷ ₹2,600 = 6 times. Option a uses closing working capital; option c uses current assets without deducting current liabilities.

Where it goes wrong. Using closing working capital or current assets alone instead of average net working capital.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 11 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. An engineering company reports opening total assets of ₹90 lakh and closing total assets of ₹110 lakh. Its annual net sales are ₹250 lakh and cost of goods sold is ₹180 lakh. Calculate the Total Asset Turnover Ratio using the sales basis and average total assets.

An engineering company reports opening total assets of ₹90 lakh and closing total assets of ₹110 lakh. Its annual net sales are ₹250 lakh and cost of goods sold is ₹180 lakh. Calculate the Total Asset Turnover Ratio using the sales basis and average total assets.

1. 1.80 times
2. 2.27 times
3. 2.50 times (correct answer)
4. 2.78 times

Answer: C — 2.50 times

Explanation. Average Total Assets = (₹90 lakh + ₹110 lakh) ÷ 2 = ₹100 lakh. The question requires the sales-based calculation. Total Asset Turnover = ₹250 lakh ÷ ₹100 lakh = 2.50 times. Option a uses COGS of ₹180 lakh as the numerator. Option b divides sales by closing assets, while option d uses COGS with closing assets. Both numerator and denominator must correspond to the basis specified.

Where it goes wrong. Mixing sales-based and COGS-based turnover calculations or using a closing asset figure despite the availability of average assets.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 12 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company has opening fixed assets of ₹45 lakh and closing fixed assets of ₹55 lakh. Annual net sales are ₹240 lakh, while COGS is ₹180 lakh. Determine the Fixed Asset Turnover Ratio using average fixed assets and sales.

A company has opening fixed assets of ₹45 lakh and closing fixed assets of ₹55 lakh. Annual net sales are ₹240 lakh, while COGS is ₹180 lakh. Determine the Fixed Asset Turnover Ratio using average fixed assets and sales.

1. 3.60 times
2. 4.36 times
3. 5.33 times
4. 4.80 times (correct answer)

Answer: D — 4.80 times

Explanation. Average Fixed Assets = (₹45 lakh + ₹55 lakh) ÷ 2 = ₹50 lakh. Fixed Asset Turnover Ratio = Sales ÷ Average Fixed Assets = ₹240 lakh ÷ ₹50 lakh = 4.80 times. Option a uses COGS instead of sales. Option b divides sales by closing fixed assets, and option c divides by opening fixed assets. Both balances must be averaged when the question provides both.

Where it goes wrong. Using opening or closing fixed assets in place of the average denominator, or substituting COGS for the required sales numerator.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 13 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A trading company has opening inventory of ₹15 lakh and closing inventory of ₹21 lakh. Its annual cost of goods sold is ₹144 lakh. Calculate the Inventory Turnover Ratio and Inventory Holding Period using a 360-day year.

A trading company has opening inventory of ₹15 lakh and closing inventory of ₹21 lakh. Its annual cost of goods sold is ₹144 lakh. Calculate the Inventory Turnover Ratio and Inventory Holding Period using a 360-day year.

1. 8 times and 45 days (correct answer)
2. 8 times and 40 days
3. 9 times and 40 days
4. 7.2 times and 50 days

Answer: A — 8 times and 45 days

Explanation. Average Inventory = (₹15 lakh + ₹21 lakh) ÷ 2 = ₹18 lakh. Inventory Turnover Ratio = COGS ÷ Average Inventory = ₹144 lakh ÷ ₹18 lakh = 8 times. Inventory Holding Period = 360 ÷ 8 = 45 days. Option b obtains the correct turnover but uses an incorrect day-count conversion. Option c uses closing inventory as the denominator, leading to an incorrect turnover calculation.

Where it goes wrong. Using closing inventory rather than average inventory and confusing the annual turnover period with the number of days in a month.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 14 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A manufacturing company provides the following inventory balances: Opening raw materials ₹8 lakh, work-in-progress ₹6 lakh and finished goods ₹10 lakh; closing raw materials ₹10 lakh, work-in-progress ₹8 lakh and finished goods ₹12 lakh. Its annual COGS is ₹162 lakh. Calculate the Inventory Holding Period in months, assuming a 360-day year and 30 days per month.

A manufacturing company provides the following inventory balances: Opening raw materials ₹8 lakh, work-in-progress ₹6 lakh and finished goods ₹10 lakh; closing raw materials ₹10 lakh, work-in-progress ₹8 lakh and finished goods ₹12 lakh. Its annual COGS is ₹162 lakh. Calculate the Inventory Holding Period in months, assuming a 360-day year and 30 days per month.

1. 1.50 months
2. 2.00 months (correct answer)
3. 2.50 months
4. 3.00 months

Answer: B — 2.00 months

Explanation. Opening Total Inventory = 8 + 6 + 10 = ₹24 lakh. Closing Total Inventory = 10 + 8 + 12 = ₹30 lakh. Average Inventory = (24 + 30) ÷ 2 = ₹27 lakh. Inventory Turnover = ₹162 lakh ÷ ₹27 lakh = 6 times. Holding Period = 360 ÷ 6 = 60 days. In months, 60 ÷ 30 = 2 months. Option a considers only part of inventory, while option c applies an incorrect conversion.

Where it goes wrong. Calculating average inventory from only raw materials or finished goods instead of including raw materials, work-in-progress and finished goods.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 15 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company reports annual credit sales of ₹216 lakh, opening trade receivables of ₹21 lakh and closing trade receivables of ₹27 lakh. Calculate its Receivables Turnover Ratio and Average Collection Period.

A company reports annual credit sales of ₹216 lakh, opening trade receivables of ₹21 lakh and closing trade receivables of ₹27 lakh. Calculate its Receivables Turnover Ratio and Average Collection Period.

1. 10 times and 36 days
2. 8 times and 45 days
3. 9 times and 40 days (correct answer)
4. 12 times and 30 days

Answer: C — 9 times and 40 days

Explanation. Average Trade Receivables = (₹21 lakh + ₹27 lakh) ÷ 2 = ₹24 lakh. Receivables Turnover Ratio = ₹216 lakh ÷ ₹24 lakh = 9 times. Average Collection Period = 360 ÷ 9 = 40 days. Option a assumes a higher turnover by using an incorrect average receivables figure. Option d could arise from using total sales or an incorrect denominator rather than the stated credit sales and average receivables.

Where it goes wrong. Confusing credit sales with total sales or calculating the collection period using closing receivables rather than the average balance.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 16 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company reports total annual sales of ₹200 lakh, of which 90% are credit sales. Opening receivables are ₹18 lakh and closing receivables are ₹22 lakh. Calculate the Average Collection Period using a 360-day year.

A company reports total annual sales of ₹200 lakh, of which 90% are credit sales. Opening receivables are ₹18 lakh and closing receivables are ₹22 lakh. Calculate the Average Collection Period using a 360-day year.

1. 36 days
2. 45 days
3. 50 days
4. 40 days (correct answer)

Answer: D — 40 days

Explanation. Credit Sales = 90% × ₹200 lakh = ₹180 lakh. Average Receivables = (₹18 lakh + ₹22 lakh) ÷ 2 = ₹20 lakh. Receivables Turnover = ₹180 lakh ÷ ₹20 lakh = 9 times. Average Collection Period = 360 ÷ 9 = 40 days. Option a uses total sales of ₹200 lakh, producing 36 days. Option b incorrectly uses closing receivables only.

Where it goes wrong. Including cash sales in the credit-sales numerator when computing the collection period.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 17 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company makes gross annual purchases of ₹160 lakh, of which ₹40 lakh are cash purchases. Purchase returns of ₹5 lakh relate entirely to credit purchases. Opening trade payables are ₹10 lakh and closing trade payables are ₹13 lakh. Calculate the Payables Turnover Ratio and Average Payment Period.

A company makes gross annual purchases of ₹160 lakh, of which ₹40 lakh are cash purchases. Purchase returns of ₹5 lakh relate entirely to credit purchases. Opening trade payables are ₹10 lakh and closing trade payables are ₹13 lakh. Calculate the Payables Turnover Ratio and Average Payment Period.

1. 10 times and 36 days (correct answer)
2. 11.5 times and 31.30 days
3. 8.7 times and 41.38 days
4. 9.57 times and 37.62 days

Answer: A — 10 times and 36 days

Explanation. Gross Credit Purchases = ₹160 − ₹40 = ₹120 lakh. Net Credit Purchases = ₹120 − ₹5 = ₹115 lakh. Average Payables = (₹10 + ₹13) ÷ 2 = ₹11.50 lakh. Payables Turnover = ₹115 ÷ ₹11.50 = 10 times. Average Payment Period = 360 ÷ 10 = 36 days. Option b omits the purchase return adjustment; other options incorrectly adjust the cash-purchase or average-payables figures.

Where it goes wrong. Failing to exclude cash purchases or deduct purchase returns while deriving annual net credit purchases.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 18 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A trading company reports COGS of ₹180 lakh, opening inventory of ₹25 lakh and closing inventory of ₹31 lakh. Twenty per cent of its total purchases are cash purchases. Credit purchase returns amount to ₹4.80 lakh. Average trade payables are ₹12 lakh. Calculate the Average Payment Period using a 360-day year.

A trading company reports COGS of ₹180 lakh, opening inventory of ₹25 lakh and closing inventory of ₹31 lakh. Twenty per cent of its total purchases are cash purchases. Credit purchase returns amount to ₹4.80 lakh. Average trade payables are ₹12 lakh. Calculate the Average Payment Period using a 360-day year.

1. 36 days
2. 30 days (correct answer)
3. 24 days
4. 45 days

Answer: B — 30 days

Explanation. Total Purchases = COGS + Closing Inventory − Opening Inventory = 180 + 31 − 25 = ₹186 lakh. Cash Purchases = 20% × 186 = ₹37.20 lakh. Gross Credit Purchases = 186 − 37.20 = ₹148.80 lakh. Net Credit Purchases = 148.80 − 4.80 = ₹144 lakh. Payables Turnover = 144 ÷ 12 = 12 times. Average Payment Period = 360 ÷ 12 = 30 days.

Where it goes wrong. Using total purchases or COGS directly as net credit purchases without adjusting inventory movement, cash purchases and returns.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 19 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A manufacturing enterprise has the following average periods: raw material storage period 30 days, work-in-progress conversion period 12 days, finished goods storage period 18 days, receivables collection period 40 days and payables deferral period 36 days. Calculate its Operating Cycle and Cash Conversion Cycle. For this question, Operating Cycle = Raw Material Storage + WIP Conversion + Finished Goods Storage + Receivables Collection; Cash Conversion Cycle = Operating Cycle − Payables Deferral Period.

A manufacturing enterprise has the following average periods: raw material storage period 30 days, work-in-progress conversion period 12 days, finished goods storage period 18 days, receivables collection period 40 days and payables deferral period 36 days. Calculate its Operating Cycle and Cash Conversion Cycle. For this question, Operating Cycle = Raw Material Storage + WIP Conversion + Finished Goods Storage + Receivables Collection; Cash Conversion Cycle = Operating Cycle − Payables Deferral Period.

1. 100 days and 76 days
2. 96 days and 60 days
3. 100 days and 64 days (correct answer)
4. 88 days and 52 days

Answer: C — 100 days and 64 days

Explanation. Total Inventory Period = Raw Material Storage 30 + WIP Conversion 12 + Finished Goods Storage 18 = 60 days. Operating Cycle = Inventory Period + Receivables Collection Period = 60 + 40 = 100 days. Cash Conversion Cycle = Operating Cycle − Payables Deferral Period = 100 − 36 = 64 days. Option a adds the payment period, while option d omits part of the manufacturing inventory conversion period.

Where it goes wrong. Omitting one component of the manufacturing inventory cycle or adding the payables deferral period instead of deducting it.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 20 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company is implementing a working-capital improvement programme. It expects to reduce inventory holding by 4 days, reduce the collection period by 5 days and extend the supplier payment period by 3 days. Annual COGS is ₹18,000 lakh, annual credit sales are ₹27,000 lakh and annual net credit purchases are ₹15,000 lakh. Assuming a 360-day year and unchanged operating volumes, calculate the total cash released through these improvements.

A company is implementing a working-capital improvement programme. It expects to reduce inventory holding by 4 days, reduce the collection period by 5 days and extend the supplier payment period by 3 days. Annual COGS is ₹18,000 lakh, annual credit sales are ₹27,000 lakh and annual net credit purchases are ₹15,000 lakh. Assuming a 360-day year and unchanged operating volumes, calculate the total cash released through these improvements.

1. ₹575 lakh
2. ₹525 lakh
3. ₹650 lakh
4. ₹700 lakh (correct answer)

Answer: D — ₹700 lakh

Explanation. Inventory cash released = 4 × (₹18,000 ÷ 360) = ₹200 lakh. Receivables cash released = 5 × (₹27,000 ÷ 360) = ₹375 lakh. Additional supplier financing from extending payment = 3 × (₹15,000 ÷ 360) = ₹125 lakh. Total cash released = ₹200 + ₹375 + ₹125 = ₹700 lakh. Option b omits the supplier-payment benefit; other options mix the different daily cost and sales bases.

Where it goes wrong. Applying one daily turnover base to all three working-capital components instead of using COGS, credit sales and net credit purchases separately.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis