financial ratios 25.10.2013
TRANSCRIPT
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FINANCIAL STATEMENTS
The financial statements are the end products of the accounting process which summaries the
financial position and performance of a business concern in an organized manner. Financial
Statements provide a summarized view of the operations of the business. They serve as an
important medium in communicating accounting information to various users of accounts.
If you can read a cricket scoreboard, you can learn to read basic financial statements. Lets begin
by looking at what financial statements do.
1.1 Financial Statements of a company
Financial Statements show you where a companys money came from, where it went, and where
it is now.
Financial statements are the basic and formal annual reports through which the corporate
management communicates financial information to its owners and various other e!ternal parties
which include"investors, ta! authorities, government, employees, etc.
There are two main financial statements. They are# $%& balance sheets' $(& income statements.
)alance sheets show what a company owns and what it owes at a fi!ed point in time.
Income statements show how much money a company made and spent over a period of time.
Lets look at the )alance Sheet in more detail.
USERS OF FINANCIAL STATEMENTS
1.2 Investos an! potential investos
The present investors want to decide whether they should hold the securities of the company or
sell them.
*otential investors, on the other hand, want to know whether they should invest in the shares of
the company or not.
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Investors $Shareholders or owners& and potential investors, thus, make use of the financial
statements to +udge the present and future earning capacity of the business, to +udge the
operational efficiency of the business and to know the safety of investment and growth prospects.
Len!es"lon# tem ce!itos
Financial statement helps lenders such as debenture holders, suppliers of loans and leases in
ascertaining the long term and short term solvency of the business. They like to know the
financial soundness of the business i.e. the ability of the business to repay debt on maturity and
whether the enterprise earns sufficient profits so as to pay interest regularly.
Mana#ement
nalyses of financial statements enable the management to evaluate the overall efficiency of the
firm. It helps to ascertain the solvency of the enterprise' to know about its viability as a going
concern and to provide ade-uate information for planning and controlling the affairs of the
business. Future forecasts can easily be made by analyzing the past date.
S$pplies"s%ot tem ce!itos
reditors/suppliers supplying goods to a business are interested to know as to whether the
business would be in a position to pay the amounts on time. They are interested in short"term
solvency i.e. the li-uidity of the business.
They are more interested in current assets and current liabilities of the business. If current assets
are sufficient, say, twice the current liabilities, they are satisfied that the business would be able
to discharge the short"term debts on time.
Employees an! Ta!e Unions
0mployees are interested in better emoluments, bonus and continuance of business and whether
the dues like provident fund, 0SI et., have been deposited with the authorities.
They would therefore, like to know its financial performance and profitability and operating
sustainability.
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&ovenment an! its a#encies
Financial statements are used by government and its agencies to formulate policies to regulate the
activities of business, to formulate ta!ation policies, to compile national income accounts.
Ta!ation authorities such as income ta! department use the financial statements for determination
of income ta!' sales ta! department is interested in sales while the e!cise department is interested
in production.
Stoc' e(c%an#e
Stock e!change uses the financial statements to analyze and thereafter, inform its members about
the performance, financial health, etc. of the company, to see whether financial statements
prepared are in conformity with the specified laws and rules and to see whether they safeguard
the interest of various concerned agencies.
1ther 2egulatory authorities $such as, ompany Law )oard, S0)I, Stock 0!changes, Ta!
uthorities etc.& would like that the financial statements prepared are in conformity with the
specified laws and rules, and are to safeguard the interest of various concerned agencies. For
e!ample, ta!ation authorities would be interested in ensuring proper assessment of ta! liability of
the enterprise as per the laws in force from time to time.
C$stomes
ustomers are interested to ascertain continuance of an enterprise.
For e!ample, an enterprise may be supplier of a particular type of consumer goods and in case it
appears that the enterprise may not continue for a long time, the customer has to find an alternate
source.
)ALANCE S*EET+ MEANIN& AN, -UR-OSE
)alance Sheet is a financial statement that summarizes a companys assets, liabilities and
shareholders e-uity at a specific point in time. These three balance sheet segments give investors
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an idea as to what the company owns and owes, as well as the amount invested by the
shareholders.
The balance sheet show# ssets 4 Liabilities 5 Shareholders 0-uity
balance sheet thus, provides detailed information about a companys assets, liabilities and
shareholders e-uity.
ssets are things that a company owns that have value. This typically means they can either be
sold or used by the company to make products or provide services that can be sold. ssets
include physical property, such as plants, trucks, e-uipment and inventory. It also includes things
that cant be touched but nevertheless e!ist and have value, such as trademarks and patents. nd
cash itself is an asset. So are investments a company makes.
Liabilities are amounts of money that a company owes to others. This can include all kinds of
obligations, like money borrowed from a bank to launch a new product, money owed to suppliers
for materials, payroll a company owes to its employees, ta!es owed to the government.
Liabilities also include obligations to provide goods or services to customers in the future.
Shareholders e-uity is sometimes called capital or net worth. Its the money that would be left if
a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to
the shareholders, or the owners, of the company.
company has to pay for all the things it has $assets& by either borrowing money $liabilities& or
getting it from shareholders $shareholders e-uity&.
The purpose of a )alance Sheet is to report the financial position of a company at a certain point
in time. It is divided into two columns. The first column shows what the company owes
$liabilities and net worth&. The second shows what the company owns $assets& on the right. t the
bottom of each list is the total of that column. s the name implies, the bottom line of the balance
sheet must always 6balance.7 In other words, the total assets are e-ual to the total liabilities plus
the net worth.
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The balance sheet is one of the most important pieces of financial information issued by a
company. It is a snapshot of what a company owns and owes at the point in time. The income
statement, on the other hand, shows how much revenue and profit a company has generated over
a certain period.
9either statement is better than the other"rather, the financial statements are built to be used
together to present a complete picture of a companys finances.
CONTENTS OF )ALANCE S*EET
The prescribed form of the )alance Sheet is given in *art I of Schedule :I of the ompanies ct,
%;orizontal form
$ii& :etical form
F12?T 1F S@??2IS0A )L90 S>00T$>12IB19TL F12?&
S>0A@L0 :I *2T I
)alance Sheet of C. 1.LTA.
s at C
Figures
for theprevious
year
2s.
Liabilities Figures
for thecurrent
year
2s.
Figures
for theprevious
year
2s.
ssets Figures
for thecurrent
year
2s.
%. Share apital
(. 2eserves and surplus
3. Secured Loans
8. @nsecured Loans
%. Fi!ed ssets
(. Investments
3. urrent ssets, Loans
and
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Reseves an!
S$pl$s3
apital 2eserve
apital 2edemption 2eserve
Securities *remium
1ther 2eserves
*rofit and Loss ccount
Sec$e! Loans3
Aebentures
Loans and dvance from
)anks
Loans and dvance from
Subsidiary ompanies
1ther Loans and dvances
Unsec$e! Loans3
Fi!ed Aeposits
Loans and dvances from
Subsidiaries
ompanies
Short Term Loans and
dvances
1ther Loans and dvances
C$ent Lia4ilities an!
-ovisions3
A. C$ent Lia4ilities
cceptances
Aebentures
Sundry reditors
1utstanding 0!penses
). -ovisions3
Investments3
Dovernment or Trust
Securities, Shares, Aebentures,
)onds
C$ent Assets5 Loans an!
A!vances3
A C$ent Assets3
Interest ccrued
Stores and Spare parts
Loose Tools
Stock in Trade
Eork in *rogress
Sundry Aebtors
ash and )ank balances
) Loans an! A!vances3
dvances and Loans to
Subsidiary
)ills 2eceivable
dvance *ayments
Miscellaneo$s+E(pen!it$e3
*reliminary 0!penses
Aiscount on Issue of Shares
and other Aeferred 0!penses
-ofit an! Loss Acco$nt
!e4it )alance3 if any
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For Ta!ation
For Aividends
For ontingencies
For *rovident Fund Schemes
For Insurance, *ension and
1ther similar benefits
Fomat of t%e )alance S%eet in vetical fom
)alance S%eet of 0. As on 00
*articulars Schedule
9umber
Figures as at
the end of
current
financial
year
Figures as at
the end of
previous
financial year
I. So$ce of F$n!s3
1. S%ae%ol!e6s F$n!s3
$a& Share apital
$b& 2eserves and Surplus
2. Loan F$n!s3
$a& Secured loans
$b& @nsecured loans
TotalCapital Employe!
II. Application of F$n!s
1. Fi(e! Assets3
$a& Dross block
$b& Less # depreciation
$c& 9et block
$d& apital work"in"progress
2. Investments3
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7. C$ent Assets5 Loans an! A!vances3
$a& Inventories
$b& Sundry Aebtors
$c& ash and )ank )alances
$d& 1ther urrent ssets
$e& Loans and dvances
Less3 C$ent Lia4ilities an! -ovisions3
$a& urrent liabilities
$b& *rovisions
Net C$ent Assets
8. $a& ?iscellaneous e!penditure to the e!tent
not written"off or ad+usted.
$b& *rofit and Loss account
$debit balance, if any&
TOTAL
9ote# footnote to the )alance Sheet may be added to show the contingent liabilities.
*O9 TO REA, A COM-AN:6S )ALANCE S*EET
i LIA)ILITIES SI,E
1. S%ae Capital3@nlike the non corporate entities were the entire capital is brought in by the
proprietors or the partners, in the case of a company, it is brought in by the promoters, theirfriends, relatives as well as the general public in case of listed companies. The capital is known
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share capital and shareholders get dividend out of the profits of the company as return on their
investment.
Share apital is broadly divided into# uthorised apital, Issued apital, Subscribed apital,
alled up and *aid up capital.
uthorised apital is the ma!imum share capital that a company is allowed to issue during its
lifetime. It is stated in the ?emorandum of ssociation.
Issued apital is that part of authorized capital, which is offered to the public for subscription,
including shares offered to the vendors for subscription other than cash $i.e. issue of shares in
consideration for some other asset purchased&.
alled"up capital means that part of subscribed capital which is called"up by the company for
payment by the subscribers to the shares.
*aid up capital The amount that the shareholders have actually paid to the company is called as
paid up capital of the company.
alls in arrears must be shown by the way of deduction from the called up capital and
Forfeited shares account by the way of addition to the paid up capital.
(. Reseves an! S$pl$s3 2eserves represent that portion of earnings and receipts of a company
which are set apart by the management for a general or a specific purpose. This item includes
accumulated profits, reserves and funds" such as capital reserves, capital redemption reserve,
balance of securities premium account, general reserve, credit balance of profit and loss account,
and other reserves specifying the nature of each reserve and the amount in respect thereof
including the additions during the current year.
3. Sec$e! Loans3 Long"term loans, which are taken against security of one or more assets of
the company, are included under this head. Aebentures and secured loans and advances from
%H
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banks, subsidiary companies, etc., fall under this category. Likewise interest accrued and due on
secured loans is also recorded under the same head.
8. Unsec$e! Loans3 Loans and advances which are not backed by any security in the form of
assets of the company are shown under this heading. This item includes fi!ed deposits, unsecured
loans and advances from subsidiary companies, short"term loans and advances from banks and
other sources.
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ASSETS SI,E
%. Fi(e! Assets# These are assets which are meant for use in business and not for sale.
These assets provide a long term economic benefit, usually for more than one year to the firm.
These include goodwill, land, buildings, leaseholds, plant and machinery, railway sidings,
furniture and fittings, patents, livestock, vehicles, etc. These assets are shown at cost less
depreciation till the date.
(. Investments3 )usiness is supposed to great profit. Ehen generated, this profit in e!cess
of what is re-uired for the business can be invested into say, shares or debentures of various
companies. Investments thus represent assets held by an enterprise for earning income. @nder
this head, various investments made such as investment in government securities or trust
securities' investment in shares, debentures, and bonds of other companies, immovable
properties, etc., are shown.
3. C$ent Assets5 Loans an! A!vances# 1ne the fi!ed assets are in a state of readiness to
produce or provide goods and services, the company needs current assets to carry out business
operations. These assets are held for consumption of for sale and are e!pected to be realized in
cash during the normal operating cycle. urrent assets include inventories, debtors, cash etc.
Loans and advances refer to those assets which are held for a short term and are e!pected to be
realized within one year. These include advance payments, loans to subsidiary companies etc.
)oth the sub headings" current assets as well as loans and advances must be shown separatelyunder two sub"heads" $a& urrent ssets $b& Loans and dvances. It includes interest accrued on
investment, inventories, sundry debtors, bills receivable, cash and bank balances while loans and
advances and other advances like prepaid e!penses, etc.
8. ?iscellaneous 0!penditure# The e!penditure which has not been fully written off shown
under this heading. It includes preliminary e!penses, advertisement e!penditure, discount on
issue of shares and debentures, share issue e!penses, etc.
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Ill$station 1. Dive three e!amples of each of the following $%& current liabilities' $(& contingent
liabilities' $3& current assets' $8& miscellaneous e!penditure' $eadings 0!amples
%. urrent liabilities
(. ontingent liabilities
3. urrent assets
8. ?iscellaneous 0!penditure
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shares
Ill$station 7. Dive the headings and sub"headings under which the following will be shown in a
companys balance sheet as per Schedule :I *art I of the ompanys ct %;eadings Sub">eadings
$i& %H Aebentures Secured Loans ""
$ii& *reliminary e!penses ?iscellaneous 0!penditure ""
$iii& *lant J ?achinery Fi!ed assets ""
$iv& apital 2eserve 2eserves and Surplus ""
$v& )ills *ayable urrent liabilities and provisions urrent liabilities
$vi& Deneral reserve 2eserves J surplus ""
$vii& Interest paid out of capital
during construction
?iscellaneous e!penditure ""
$viii& 2ailway sidings Fi!ed assets ""
$i!& Store and spare parts urrent assets, loans J advances urrent assets
$!& Fi!ed deposits @nsecured loans ""
Ill$station 8. The following figures were e!tracted from the trial balance of K Ltd. share capital
%H,HHH e-uity shares of 2s. %H each fully paid #
Securities premium 2s. %H,HHH
%( Aebentures 2s.
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ou are re-uired to draw up the liabilities side of the balance sheet, according to the
re-uirements of the ompanies ct.
Solution #
9 0KT2T 1F )L90 S>00T 1F K LTA. S T CC
Liabilities 2s.
S>20 *ITL#
uthorized apital
CCe-uity shares of 2s. %H each
Issued and subscribed
%H,HHH e-uity shares of 2s. %H each
20S02:0S 9A S@2*L@S#
Securities premium
S0@20A L19S#
%( A0)09T@20S
@9S0@20A L19S#
Fi!ed deposits
@2209T LI)ILITI0S 9A *21:ISI19S#
$& urrent liabilities
Sundry creditors
$)& *rovisions
%,HH,HHH
%H,HHH
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2s. 20 *ITL#
uthorized apital
Issued apital
Subscribed apital
%,HH,HHH 0-uity shares of
2s.%H each
20S02:0S 9A S@2*L@S#
Deneral reserve
S0@20A L19S#
%( Aebentures
@9S0@20A L19S#
)ank Loan
@2209T LI)ILITI0S 9A
*21:ISI19S#
$& urrent liabilities
reditors
$)&*rovisions
*roposed dividend
*rovision for ta!ation
MMMMMMNMMM
%H,HH,HHH
%H,HH,HHH
(,HH,HHH
(,HH,HHH
%,HH,HHH
%,HH,HHH
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Ill$station
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Ill$station =. From the following balances taken from the books of Du+arat 0!ports Ltd.
prepare ompanys )alance Sheet in >orizontal Form#
2s. 2s.
Land and )uildings 3,(
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Solution#
)L90 S>00T 1F D@O2T 0K*12TS LTA.
s at CCCCCCin horizontal form
Liabilities 2s. ssets 2s.
S>20 *ITL#
uthorized apital
Issued apital
G,HHH 0-uity shares of
2s.%HH each
Subscribed apital
G,HHH 0-uity shares of
2s.%HH each, 2s.
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*21:ISI19S#
$& urrent liabilities
)ills payable
Sundry reditors
1utstanding 0!penses
$)&*rovisions
*rovision for Income ta!
*roposed dividend
%
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P Financial ratio analysis looks at various ratios calculated from data taken from the financial
statements.
P Financial ratios should be e!amined in the conte!t of#
o the firms own financial history, known as trend analysis, and
o the industry in which the firm operates, known as cross"section analysis.
Listed below are several common ratios used to analyze a company. 2atios can be used to look
at a firms profitability, how efficiently it is managed, if it has ade-uate li-uidity, and if it has too
much debt.
RATIO ANAL:SIS
1.8 2atio analysis is not +ust comparing different numbers from the balance sheet, income
statement and cash flow statement. It is comparing the number against previous years , other
companies, the industry , or even the economy in general. 2atios look at the relationships
between individual values and relate them to how a company has performed in the past and might
perform in the future.
For e!ample current assets alone dont tell us a whole lot , but when we divide them by thecurrent liabilities we are able to determine whether the company has enough money to cover
short debts. Therefore we can say that when one figure is e!pressed in terms of another figure by
dividing each other the relation which is established between them is called ration.
1.; Meanin# of Ratio Analysis
2atio nalysis is the relationship between two terms of financial data e!pressed in the form of
ratios and then interpreted with a view to evaluating the financial condition and performance of a
firm.
2atio nalysis can also help us to check whether a business is doing better this year than it was
last year' and it can tell us if our business is doing better or worse than similar type of business.
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0!ample # Firm earns a profit of 2s.
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1. *elp in Financial statement analysis
It is east to understand the financial position of a business enterprise in respect of short
term solvency, li-uidity and profitability with the help of ratio. It tells us the changes
taking place in the financial condition of the business.
2. Simplifie! acco$ntin# fi#$es
bsolute figures are not of mush use. They become important when relationships are
established say between gross profit and sales.
7. *elps in calc$latin# opeation efficiency of t%e 4$siness entepise
2atio enable the user of financial information to determine operating efficiency of a firm
by relating the profit figure to the capital employed for a given period.
8. Facilities inte+ fim compaison
2atio analysis provides data for inter" firm comparison. It revels strong and weak firms,
overvalues and undervalues firms as well as successful and unsuccessful firms.
;. Ma'es inte+ fims compaison possi4le
2atio nalysis helps the firm to compare its own performance over a period of time a
swell as the performance of different divisions of the firm. It helps in deciding which
division are more efficient than other.
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2atio nalysis is a useful techni-ue to evaluate the performance and financial position of any
business unit but it does suffer from a number of limitations. These must be kept in mind
while analysing financial statements.
1. *istoical Analysis
2atio nalysis is historical in nature a the finicial statement on the basis of which ratios
are calculated are historical in nature.
2. -ice Level C%an#e
hanges in price level often make comparison of figures of the previous years difficult.
0.g ratio of sales to fi!ed assets in (HH= would be much higher than in (HHH due to rising
prices, fi!ed assets being e!pressed on cost.
7. Not Fee fom 4ias
In many situations, the accountant has to make a choice out of the various alternatives
available . e.g choice of the method depreciation, choice in the method of inventory
valuation etc. Since there is a sub+ectivity inherent in the choice , ratio analysis cannot be
said to be free from bias.
8. 9in!o? !essin#
Eindow dressing is slowly the position better than what it is. Some companies , in order
to cover up their bad finicial position resort to window dressing. )y hiding important
facts, they try to depict a better financial position.
;. @$alitative factos i#noe!
2atio nalysis is a -uantitative analysis. It ignores -ualitative factors like debtors
character, honesty, past record etc.
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The result of two firms are comparable with the help of accounting ratios only if they
follow the same accounting methods . e.g. if one firm changes depreciation on straight
line method while another is charging on diminishing balance method, accounting ratios
will not be strictly comparable.
1.< Classification of Ratios
Aifferent types of ratios are computed depending on the purpose for which they are
needed. )roadly speaking ,they are grouped under four heads#
%. Li-uidity ratios
(. Solvency ratios
3. Turnover or ctivity ratios
8. *rofitability ratios
1.
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Li-uidity is the short term solvency of the enterprise. I.e. the ability of the business enterprise to
meet its short term obligation as and when they are due. The li-uidity ratios, therefore , are also
called the short" term solvency ratios.
The most common ratios which measures the e!tent of li-uidity or the lack of it are#a& urrent ratio
b& Ruick ratio/ cid test ratio
C$ent Ratio
urrent ratio establishes the relationship between current assets and urrent liability. It measures
the ability of the firm to meet its short term obligation as and when they become due. It is
calculated as#
urrent ratio4 urrent ssets
urrent liabilities
urrent assets include cash and those assets which can be converted into cash within a year.
urrent assets will therefore include cash , bank, stick$raw materials , work in progress and
finished goods&, debtors$less provision&, bills receivable, marketable securities, prepaid e!penses,
short term loans and advances and accrued incomes.
urrent liability include all those liabilities maturing with in one year.
urrent liabilities include creditors, bills payable, outstanding e!penses, income received in
advance , bank overdraft, short"term loans, provision for ta! , proposed dividend and unclaimed
dividend.
Denerally , a current ratio of (#% is considered satisfactory.
Intepetation# It provides a measure of degree to which current assets cover current liabilities.
The higher the ratio , the greater the margin of safety for the short term creditors. >owever, the
ratio should neither be very high nor very low. very high
current ratio indicates idle funds , piled up stocks, locked amount in debtors while a low ratio
puts the business in a situation where it will not be able to pay its short" term debt on time.
(=
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Ill$station 1
alculate current ratio from the following information#
Stock 2s .=H,HHH ' ash 8H,HHH' Aebtors 8H,HHH' reditors
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Ruick ratio establishes the relationship between -uick/ li-uid assets and current liabilities. It
measures the ability of the firm to meet its short term obligations as and when they become due
without relying upon the realization of stock. It is calculated as#
Ruick ratio 4 Ruick ssets
urrent Liabilities
The -uick assets are defined as those assets which can be converted into cash immediately or
reasonably soon without a loss of value. For calculating -uick assets we e!clude the closing stock
and prepaid e!penses from the current assets.
Denerally, a li-uid ratio of %#% is considered satisfactory.
Intepetation3 Ruick ratio is considered better than current ratio as a measure of li-uidity
position of the business because of e!clusion of inventories. The idea behind this ratio is that
stock are sometimes a problem because they can be difficult to sell or use. That is , even through
a supermarket has thousand of people walking through its doors every day, there are still items
on its shelves that dont sell as -uickly as the supermarket would like. Similarly, there are some
items that will sell very well. 9evertheless , there are some business whose stocks will sell or be
used slowly and if those businesses needed to sell some of their stocks to try to cover an
emergency, they would be disappointed. It us a more penetrating test of li-uidity than current
ratio yet it should be used cautiously as all debtors may not be li-uid or cash may be re-uired
immediately for certain e!penses.
Ill$station 7
alculate -uick ratio from the information given in illustration %.
Sol$tion
Ruick ssets 4 urrent ssets Q Stock Q dvance Ta!
Ruick ssets 4 2s. %,=G,HHH Q $2s. =H,HHH 5 2s. 8,HHH& 4 2s. %,H8,HHH
urrent Liabilities 4 2s. G8,HHH
Ruick ratio 4 Ruick ssets / urrent Liabilities
4 2s. %,H8,HHH # 2s. G8,HHH
(G
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4 %.(3#%
Ill$station 8
K Ltd. has a current ratio of 3.
Stock 4 urrent ssets Q Ruick ssets
%,%,! 4 2s.%,HH,HHH
urrent ssets 4 3.
Ill$station ;
alculate the current ratio from the following information #
Eorking capital 2s. ;,=H,HHH' Total debts 2s.(H,GH,HHH' Long"term Liabilities 2s.%=,HH,HHH'
Stock 2s. 8,HH,HHH' prepaid e!penses 2s. GH,HHH.
Sol$tion
urrent Liabilities 4 Total debt" Long term debt
(;
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4 (H,GH,HHH Q %=,HH,HHH
4 8,GH,HHH
Eorking capital 4 urrent ssets Q urrent liability
;,=H,HHH 4 urrent ssets Q 8,GH,HHHurrent ssets 4 %8,8H,HHH
Ruickssets 4 urrent ssets Q $stock 5 prepaid e!penses&
4 %8,8H,HHH Q $8,HH,HHH 5 GH,HHH&
4 ;,=H,HHH
urrent ratio 4 urrent ssets / urrent liabilities
4 %8,8H,HHH/8,GH,HHH
4 3#%
Ruick ratio 4 Ruick ssets / urrent liabilities
4 ;,=H,HHH/8,GH,HHH
4 (#%
1.
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Aebt 0-uity 2atio measures the relationship between long"term debt and shareholders funds. It
measures the relative proportion of debt and e-uality in financing the assets of a firm.
It is computed as follows#
Aebt"0-uity ratio 4 Long"term Aebts/ Share holder funds
Ehere Q
Long" term Aebt 4 Aebentures 5 Long Q term loans
Shareholders Funds 4 0-uity Share apital 5 *reference Share apital 5
2eserves and SurplusQ Fictitious ssets
Intepetation3 low !e4te-uity ratio reflects more security to long term creditors. From
security point of view, capital structure with less debt and more e-uity is considered favourable
as it reduces the chances of bankruptcy.
high ratio, on the other hand, is considered risky as it may put the firm into difficulty in
meeting its obligations to outsiders. >owever, from the perspective of the owners, greater use of
debt, firm can en+oy the benefits of trading on e-uity which help in ensuring higher returns for
them if the rate of earning on capital employed is higher than the rate of interest payable. )ut it
is considered risky and so , with the e!ception of a few business , the prescribed ratio is limited
to (#%.
Ill$station ire"*urchase
basis. The installment has two components, i.e., principal and interest. *rincipal is classified as
an Investing ctivity and interest as a Financing ctivity.
Classification of )$siness Activities as pe AS+75 s%o?in# t%e inflo? an! O$tflo? of Cas%
Opeatin# Activities
Cas% Inflo? Cas% O$tflo?
$i& ash Sales $i& ash *urchases
$ii& ash received from debtors $ii& *ayment to reditors
$iii& ash received from ommission and Fees $iii& ash 1perating 0!penses
$iv& 2oyalty $iv&*ayment of Eages
$v& Income Ta!
In t%e case of Financial Companies In t%e case of Financial Companies
$v& ash received for interest and dividends $vi&ash paid for interest
$vi& Sale of securities $vii& *urchase of Securities
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Investin# Activities
Cas% Inflo? Cas% O$tflo?
$i& Sales of fi!ed ssets $i& *urchase of Fi!ed ssets
$ii& Sale of Investments $ii& *urchase of Investments
$iii& Interest 2eceived
$iv& Aividends 2eceived
Financin# Activities
Cas% Inflo? Cas% O$tflo?
$i& Issue of Shares in ash $i& *ayment of Loans
$ii& Issue of Aebentures in ash $ii& 2edemption of *reference Shares
$iii& *roceeds from Long"term )orrowings $iii& )uy"back of 0-uity Shares
$iv&*ayment of Aividend
$v& *ayment of Interest
$vi&2epayment of Finance/Lease Liability
9%y is it impotant to !isclose t%e cas% flo?s fom eac% activity sepaatelyJ
student will appreciate the importance of separate disclosure under each activity from the
following #
1perating ctivities Investing ctivities Financing ctivitiesThe amount of the cash flow
arising from operating
activities is a key indicator of
the e!tent to which the
operations of the enterprise
have generated cash, i.e.,
whether the cash generation is
ade-uate to maintain operating
The amount of the cash flow
arising from investing
activities represents the e!tent
to which e!penditure has been
incurred to generate future
income and cash flows.
The amount of the cash flow
arising from financing
activities is useful in assessing
claims on future cash flows by
providers of funds to the
enterprise.
=
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capability of the enterprise,
pay dividends, repay loans,
and make new investments. It
is also helpful in forecasting
future cash flows fromoperations.
Ill$station 2. Identify the transactions as belonging to $i& 1perating, $ii& Investing, $iii&
Financing ctivities, and $iv& ash 0-uivalents.
%. ash Sales' (. Issue of Share apital' 3. Issue of Aebentures' 8. *urchase of ?achines'
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Investing ctivities # 8,
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1pening Aebtors 8H,HHH
losing Aebtors =H,HHH
Sales 2eturns %H,HHH
$b& redit Sales (,HH,HHH
)ad Aebts %
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Cas% Inflo? fom ,e4tos (,
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Cas% Inflo? fom ,e4tos %,
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Ill$station ; $alculation of ash 1utflow to reditors&. alculate the ash 1utflow to
reditors from the following information #
-atic$las Rs.
$a& Total *urchase %,(H,HHH
ash *urchases
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V Let redit *urchases 4 !' ash *urchases 4(
!
Total *urchase 4(
!! + 4 %,(H,HHH 1r ! 4 2s. GH,HHH
lternatively, the cash outflow can be calculated by preparing the Total reditors ccount.
TOTAL ,E)TORS ACCOUNT
Ar. r.
-atic$las Rs. -atic$las Rs.
To Aiscount 2eceived
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lternatively, the cash outflow can be calculated by preparing the Total reditors ccount.
TOTAL ,E)TORS ACCOUNT
Ar. r.
-atic$las Rs. -atic$las Rs.
To Aiscount 2eceived
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Note 3 If only the provision for ta! is given in the two )alance Sheets and no information about
ta! paid is given, the amount in the previous years )alance Sheet is treated as the ta! paid
during the current year. It involves an outflow of cash.
The current years provision for ta! represents the amount of ta! provided for the current year. It
is added back to the current years profits to calculate cash from operating activities $under the
indirect method&. It is merely a book entry and does not involve the outflow of cash.
The provision for Ta! ccount provides information about the ta! paid during the current year as
well as the ta! provided for the current year.
The provision for Ta! ccount provides information about the ta! paid during the current year
as well as the outflow of cash.
The provision for Ta! ccount provides information about the ta! paid during the current year as
well as the ta! provided for the current year.
The following illustration shows how income ta! paid is determined.
Ill$station
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To Ta! *rovisions 3H,HHH
To Sales 2eturn (,HHH
To 9et *rofit 83,HHH
(,
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Net Cas% Flo? fom Opeatin# Activities c+! ==,HHH
Note 3 Aepreciation is a non"cash e!penditure and, therefore, it is ignored.
9o'in# Notes 3 ?issing Information to be alculated
TOTAL ,E)TORS ACCOUNT
%. Ar.
r.
-atic$las -atic$las Rs.
To )alance b/d %
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To Cas% -ai!$)alancing Fig.& 3,HHH
To )alance c/d %H,HHH
G;,HHH G;,HHH
SELLIN& ED-ENSES ACCOUNT
3. Ar.
r.
-atic$las Rs. -atic$la Rs.
To Cas% A"c$)alancing Fig& %%,HHH )y 1utstanding 0!penses /c 3,HHH
$In the beginning&
To 1utstanding 0!p. /c 8,HHH )y *rofit and Loss /c %(,HHH
%
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3%,HHH 3%,HHH
RO:ALTIES ACCOUNT
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-ROISION FOR TAD ACCOUNT. Ar.
r.
-atic$las Rs. -atic$la Rs.
To )ank /c $Ta! *aid& %H,HHH )y )alance b/d 8H,HHH
)y *rofit and Loss /c 3H,HHH
To dvance ommission /c G,HHH $*rovision made&
$t the end&
H,HHH H,HHH
2. CAS* FLO9 FROM INESTIN& ACTIITIES
Investing ctivities of an enterprise are ac-uisition and disposal of the long"term assets and
other investments not included in cash e-uivalents. ccordingly, the cash inflow and outflow
relating to the fi!ed assets, share and debt instruments of other enterprises, interests in +oint
ventures, advances and loans to third parties and also their repayments are shown under
Investing ctivities in the ash Flow Statement. The ash Flow from Investing ctivities is
ascertained by analyzing the changes in Fi!ed ssets and Long"term Investments in the
beginning and at the end of the year.
Ascetainin# Missin# Amo$nts e#a!in# Fi(e! Assets o ,epeciation
Case 1 3Ehen the fi!ed asset is shown at the written down value.
Fi(e! Assets Acco$nt At ?itten !o?n val$e
G%
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Ar. r.
-atic$las Rs. -atic$la Rs.
To )alance b/d C. )y )ank /c C.To )ank /c $*urchases& .C *rofit and Loss /c C.
To *rofit and Loss /c C. $Loss on Sale of Fi!ed sset&
C.
$*rofit on Sale of Fi!ed sset& C. )y Aepreciation /c C.
)y )alance c/d C.
C.. C.
Notes 3% Denerally, the purchase of fi!ed assets is a balancing amount on the debit side of the
account and depreciation or the sale of fi!ed asset on the credit side of the account.
(. Information regarding depreciation is generally given in the -uestion. Students are
re-uired to find out only the sale or the purchase/sale of asset.
3. If both sale and depreciation are not given, then assume it is either sale or depreciation
and give your assumption.
8. In the case of land, it should be assumed sale as depreciation is not charged on land. In
the case of patents, goodwill and trade marks, it should be assumed sale as
depreciation is not charged on land. In the case of patents, goodwill.
Ill$station =. K Ltd. has plant and machinery whose written down value on %stpril, (HH= was
2s.G,=H,HHH, and on 3%st?arch, (HH was 2s. ;,
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*articulars 2s.
ash *ayment to ac-uire *lant and ?achinery $9ote& %,
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To )alance b/d C. )y )ank /c $Sale of Fi!ed sset& C.
To *rofit and Loss /c .C )y ccumulated Aep. /c C.
*rofit on Sale of Fi!ed sset& C. $ccumulated Aep. on
To )ank /c $*ur. of Fi!ed sset& C. Fi!ed sset Sold&C.
)y *rofit and Loss /c C.
$Loss on Sale of Fi!ed sset&
C..
)y )alance c/d C..
CC CC
Note 3 9ormally, the purchase of fi!ed asset is a balancing amount on the debit side of the
account and the sale of fi!ed asset on the credit side of the account.
ACCUMULATE, ,E-RECIATION ACCOUNT
Ar. r.
-atic$las Rs. -atic$la Rs.
To Fi!ed sset /c C. )y )ank /c $Sale of Fi!ed sset& C.
To *rofit and Loss /c .C )y ccumulated Aep. /c C.
*rofit on Sale of Fi!ed sset& C. $ccumulated Aep. on
To )ank /c $*ur. of Fi!ed sset& C. Fi!ed sset Sold&
C.
)y *rofit and Loss /c C.
$Loss on Sale of Fi!ed sset&
C..
)y )alance c/d C..
CC CC
G8
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Note 3 The ccumulate depreciation on the fi!ed asset sold or depreciation charged for the
current accounting year may not be given, which shall be the balancing amount.
7. CAS* FLO9 FROM FINANCIN& ACTIITIES
Financing ctivities of an enterprise are those activities that result in change in the size and
composition of owners capital and borrowing of the enterprise. It includes proceeds from issue
of shares or other similar instruments, issue of debentures, loans, bonds, other short"term or long"
term borrowings and repayments of amounts borrowed. ccordingly, receipts and payments on
account of the above are disclosed in the ash Flow Statement as the ash Flow from Financing
ctivities.
Aividends paid $in all enterprises& and interest paid $in the case of non"financing enterprises& arealso included in financing activities.
It is important to note that an increase in share capital due to bonus issue will not be shown in the
cash flow statement, since it is a capitalization of reserves. Ehen shares are issued at a premium,
the cash flow statement reflects the total cash generated by the issue $i.e., Face :alue of Shares 5
*remium&.
The ash Flow from Financing ctivities is ascertained by analyzing the change in 0-uity and*reference Share apital, Aebentures and other borrowings.
Ill$station B. From the following information, calculate the ash Flow from Financing
ctivities #
*articulars 3%.3.(HH= 3%.3.(HH2s, 2s
0-uity Share apital 8,HH,HHH
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Additional Information : Interest paid on debentures 2s. %H,HHH
Sol$tion 3alculation of 9et ash Flow From Financing ctivities
*articulars 2s.
ash *roceeds from the Issue of Shares $Including *remium& %,%H,HHH
Interest paid on Aebentures $%H,HHH&
2edemption of Aebentures $
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*articulars 2s.
ash *roceeds from the Issue G of Aebentures (,HH,HHH
2edemption of %H Aebentures $%,HH,HHH&
Interest paid $%H,HHH&Aividend paid $
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1utflow on 2epayment of )ank Loan $Diven& 2s. (
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1..1 ,IRECT MET*O,
F12?T F12 S> FL1E STT0?09T
for the year ended C.
W s per ccounting Standard"3 $2evised&X
*articulars 2s.
%. ash Flow from 1perating ctivities
. 1perating ash 2eceipts, e.g.,
Q ash Sales C.
Q ash received from ustomers C.
Q Trading ommissions received C.
Q 2oyalties received C. C..
$)& 1perating ash *ayments, e.g.,
Q ash *urchases $C&
Q ash *aid to the Suppliers $C&
Q ash *aid for )usiness 0!penses like 1ffice 0!penses,
?anufacturing 0!penses, Selling and Aistribution
0!p. 0tc. $C& $...&
$& ash generated from 1perations $ Q )& C
$A& Income Ta! *aid $9et of Ta! 2efund received& $C&
$0& Cas% Flo? 4efoe E(tao!inay Item C.
$F& 0!traordinary Items $2eceipt/*ayment& $5/"&C.
$D& 9et ash from $or used in& 1perating ctivities C.
II. ash Flow from Investing ctivities
$Same as under Indirect ?ethod&
III. ash Flow from Financing ctivities C
$Same as under Indirect ?ethod&
I:. 9et Increase/Aecrease in ash and ash 0-uivalents C
$Same as under Indirect ?ethod " I 5 II 5 III& C
:. dd ash and ash 0-uivalents in the beginning of the year
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$Same as under Indirect ?ethod& C
:I. ash and ash 0-uivalents in the end of the year C
;H
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1..2 IN,IRECT MET*O,
F12?T F12 S> FL1E STT0?09T
for the year ended C.
W s per ccounting Standard"3 $2evised&X
*articulars 2s.
%. Cas% Flo? fom Opeatin# Activities
9et *rofit and Loss /c or Aifference between losing )alance and
1pening )alance of *rofit and Loss /c C
A!! 3 A Appopiation of f$n!s.
Transfer to reserve C
*roposed dividend for current year C
Interim dividend paid during the year C*rovision for ta! made during the current year C
0!traordinary item, if any, debited to the *rofit and Loss /c C
Less 30!traordinary item, if any, credited to the *rofit and Loss /c $C&
2efund of ta! credited to *rofit and Loss /c $C&
9et *rofit before Ta!ation and 0!traordinary Items C.
$)& A!! 3 Non opeatin# E(penses 3
Q Aepreciation C
Q *reliminary 0!penses / Aiscount on Issue of Shares
and Aebentures written off C
Q Doodwill, *atents and Trade ?arks mortized C.
Q Interest on )orrowings and Aebentures C.
Q Loss on Sale of Fi!ed ssets C.
C.
$& Less 3Non Opeatin# Incomes3
Q Interest Income C
Q Aividend Income C
Q 2ental Income C
Q *rofit on Sale of Fi!ed ssets C C
, Opeatin# -ofit 4efoe 9o'in# Capital C%an#es A)HC C
$0& A!! 3,ecease in C$ent Assets an! Incease in C$ent Lia4ilities
Q Aecrease in Stock/ Inventories C
;%
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Q Aecrease in Aebtors/ )ills 2eceivables C
Q Aecrease in ccrued Incomes C
Q Aecrease in *repaid 0!penses C
Q Increase in reditors /)ills *ayables C
Q Increase in 1utstanding 0!penses CQ Increase in dvance Incomes C
Q Increase in *rovision for Aoubtful Aebts. C
C
F Less 3Incease in C$ent Assets an! ,ecease in C$ent Lia4ilities
Q Aecrease in Stock/ Inventories C
Q Aecrease in Aebtors/ )ills 2eceivables C
Q Aecrease in ccrued Incomes C
Q Aecrease in *repaid 0!penses C
Q Increase in reditors /)ills *ayables C
Q Increase in 1utstanding 0!penses C
Q Increase in dvance Incomes C
Q Increase in *rovision for Aoubtful Aebts. C
& Cas% &eneate! fom Opeations ,EHF C
* Less 3 Income Ta( -ai! Net of Ta( Ref$n! eceive! C
I Less 3 Income Ta( -ai! Net of Ta( Ref$n! eceive! C
"+ E(tao!inayItems
Net Cas% fom o $se! in Opeatin# Activities C
II. Cas% Flo? fom Investin# Activities
Q *roceeds from Sale of Fi!ed ssets C
Q *roceeds from Sale of Investments C
Q *roceeds from Sale of Intangible ssets C
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Q Interest and Aividend received
$For 9on"financial companies only& C
Q 2ent Income C
Q *urchase of Fi!ed ssets $C&
Q *urchase of Investments $C&Q *urchase Intangible ssets like Doodwill $C&
9et ash from $or used in& Financing ctivities C
III. Cas% fom Financin# Activities
Q *roceeds from Issue of Shares and Aebentures C
Q *roceeds from 1ther Long"term )orrowings C
Q Final Aividend *aid $C&
Q Interest and Aebentures and Loans *aid $C&
Q 2epayment of Loans $C&
Q 2edemption of Aebentures / *reference Shares $C&
9et ash from $or used in& Financing ctivities C
I. Net Incease " ,ecease in Cas% an! Cas% E$ivalents IIIIII C
. A!! 3 Cas% an! Cas% E$ivalents in t%e 4e#innin# of t%e yea
Q ash in >and
Q ash at )ank $Less # )ank 1verdraft& C
Q Short"term Aeposits C
Q ?arketable Securities C C
I. Cas% an! Cas% E$ivalents in t%e en! of t%e yea
Q ash in >and C
Q ash at )ank $Less # )ank 1verdraft& C
Q Short"term Aeposits C
Q ?arketable Securities C C
Note 3 mounts in brackets indicate negative amounts, i.e., amounts that are to be
deducted.
;3
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Ill$station 11. From the following information, prepare the ash Flow Statement for the year
ended ?arch 3%, (HH #
-atic$las Rs.
1pening ash )alance %H,HHH
losing ash )alance %(,HHH
Aecrease in Aebtors
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Sol$tion 3
Cas% Flo? Statement
for the year ended 3%st?arch, (HH
*articulars 2s.
A. Cas% Flo? fom Opeatin# Activities (H,HHH
9et *rofit for the year before ta!
dd # Increase in reditors ,HHH
Aecrease in Aebtors
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$v& Furniture of the book value of 2s. %G,
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*roceeds from Sale of Fi!ed ssets %%,HHH
Cas% Flo? fom Financin# Activities $(,%=H&
2edemption of debentures at a premium W2s. 3,HH,HHH 5 2s. =,HHHX $3,H=,HHH&
Interest paid on debentures $G8,HHH& $3,;H,HHH&
Net Cas% $se! in Financin# Activities $3,;H,HHH&
9et increase in cash and cash e-uivalents
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Sol$tion 3
CAS* FLO9 STATEMENT OF D LT,. ,IRECT MET*O,
for the year ended 3%st?arch, (HH
*articulars 2s.
A. Cas% Flo? fom Opeatin# Activities
i Opeatin# Cas% Receipts 3
ash 2eceived from ustomers (G,HH,HHH
ii Opeatin# Cas% -ayments 3
ash *aid to Suppliers (H,HH,HHH
Eages and Salaries %,HH,HHH
1verhead 0!penses (,HH,HHH $(3,HH,HHH&
ash Denerated from 1perations
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Ar. r.
Lia4ilities 2< 2= Assets 2< 2=
Rs. Rs. Rs. Rs.
urrent Liabilities (,HHH G(,HHH ash G,HHH ,(HHH
Loan from B Ltd. C. 8H,HHH Aebtors H,HHH =,GHH
Loan from )ank =H,HHH
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Less # Increase in Aebtors $=,GHH&
9et ash from 1perating ctivities G%,(HH
Cas% Flo? fom Investin# Activities
*urchase of )uilding $%H,HHH&
*urchase of Land $(H,HHH&
*urchase of ?achinery $3H,HHH&
9et ash used in Investing ctivities $=H,HHH&
Cas% Flo? fom Financin# Activities
*roceeds of Loan from B Ltd. 8H,HHH
2epayment of )ank Loan $%H,HHH&
*ayment of Aividend $
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Ar. r.
Lia4ilities ?arch 3% ?arch 3%, Assets ?arch 3%, ?arch 3%
(HH= (HH (HH= (HH2s. 2s. 2s. 2s.
0-uity Share apital 3,HH,HHH 3,
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A!! 3 Appopiation of F$n!
*reference Aividend (8,HHH
Interim Aividend 8
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*roceeds from Sale of ?achinery (
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FIDE, ASSETS ACCOUNT AT 9.,.
3. Ar.
r.
-atic$las Rs. -atic$las Rs.
To )alance b/d
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$iii& Auring the year, part of the fi!ed assets costing 2s. %H,HHH was sold for 2s. %(,HHH and the
profit was included in the *rofit and Loss ccount.
$iv& Aividends paid during the year amounted to 2s. 8H,HHH
ou are re-uired to prepare a ash Flow Statement.
Sol$tion 3
CAS* FLO9 STATEMENT
for the year ended 31stMarch, !!"
*articulars 2s.
A Cas% Flo? fom Opeatin# Activities 3
losing )alance as per * J L /c $3%.3.(HH& =G,HHH
Less 3 1pening )alance of *rofit and Loss /c $3%.3.(HH=&
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Less # Income ta! *aid $8,HHH&
9et ash used in 1perating ctivities $& $%,G8,
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( Ar. Investment Acco$nt r.
-atic$las Rs. -atic$las Rs.
To )alance b/d 8,HH,HHH )y )ank /c G,
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2s. 2s. 2s. 2s.
reditors 8H,HHH 88,HHH Fi!ed ssets %H,HHH ,HHH
?rs. s Loan (
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$)& Cas% Flo? fom Investin# Activities
*urchase of Land $%H,HHH&
*urchase of )uildings $(
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the respective Fi!ed ssets account will be the total amount of book value shown in the balance
sheet plus balance of the accumulated depreciation provided in additional information.
3 Ar. -ovision fo ,epeciation Acco$nt r.
-atic$las Rs. -atic$las Rs.
To Aepreciation on ?achinery Sold 3,HHH )y )alance /c
(
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Auring the year, the proprietor introduced 2s. (H,HHH as additional capital. The net profits for the
year, after charging 2s.
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9et ash from 1perating ctivities
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Tems into!$ce! in t%e c%apte
%. Financial Statements
(. *rofit and loss ccount3. )alance Sheet
8. *reliminary e!pense
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S$mmay
Financial Statements# Financial statements are the basic and formal annual reports through which
the corporate management communicates financial information to its owners and various other
e!ternal parties which include"investors, ta! authorities, government, employees, etc. There are
two main financial statements. They are# $%& balance sheets' $(& income statements.
)alance sheet# The )alance Sheet shows what a company owns and what it owes at a fi!ed point
in time.
Income statement# The Income Statement shows how much money a company made and spent
over a period of time.
@sers of financial statements# These include investors and potential investors' lenders/long term
creditors' management' suppliers/short term creditors' employees and trade unions' government
and its agencies' stock e!change and its customers
2atio nalysis is the relationship between two items of financial data e!pressed in the form of
ratios and then interpreted with a view to evaluating the financial condition and performance of a
firm.
1b+ectives of 2atio nalysis
The analysis would enable the calculation of not only the present earning capacity of the business
but would also help in the estimation of the future earning capacity. The analysis would help themanagement to find out the overall as well as the department"wise efficiency of the firm on the
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basis of the available financial information. The short term as well as the long term solvency of
the firm can be determined w3ith the help of ratio analysis. Inter"firm comparison becomes easy
with the help of ratios.
Advantages of #atio Analysis
2atio nalysis simplifies Financial Statements, facilitates inter"firm comparison' makes intra"
firm comparison possible and helps in forecasting
Limitations of Ratio Analysis
2atio nalysis is historical in nature' changes in price level often make comparison of figures of
the previous years difficult. It is not free from bias. Some companies, in order to cover up their
bad financial position report to window dressing. 2atio nalysis ignores -ualitative factors and
different accounting practices render ratios incomparable
Types of Ratios
Financial ratios can be classified into four important categories#
%. Li-uidity 2atios# Li-uidity ratios help the users in knowing the e!tent of short"term
debt paying ability of a firm. They include current ratio and -uick ratio.
(. Solvency 2atios# Solvency ratios analyse the long"term debt paying capacity of the
firm. They include Aebt e-uity ratio' Total ssets to Aebt 2atio' *roprietary ratio and
Interest overage 2atio.
3. ctivity or Turnover 2atios# ctivity ratios help in commenting on the efficiency of
the firm in managing it assets. The speed with which assets are converted into sales is
captured by activity ratios. These include Stock Turnover' Aebtors $2eceivable&
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Turnover' reditors $*ayable& Turnover' Fi!ed ssets Turnover and Eorking apital
Turnover.
8. *rofitability 2atios# *rofitability ratios are calculated to measure the profitability of a
business enterprise. These include Dross *rofit 2atio' 9et profit 2atio' 1perating2atio' 1perating *rofit ratio' return on Investment $21I&' 0arnings per Share' *rice
0arning 2atio and Aividend payout ratio
RATIOS AT A &LANCE
2atio Formulae
%. urrent ratiourrent assets
urrent liabilities
(. Ruick ratioRuick assets
urrent liabilities
3. Inventory turnover ratioost of goods sold
verage inventory8. Aebtors $receivables& turnover rationnual 9et credit sales
verage accounts receivables
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$i& helps in making short short term planning
$ii& helps understanding li-uidity J solvency.
$iii& helps in comparative study.
$iv& tests for management decision
LIMITATION 3
%. 9on each transaction are ignored.
(. 9ot suitable for an income statement
3. >istorical in nature.
Opeatin# Activities 31perating activities are the principal revenue"producing activities
of the enterprise and other activities that are not investing or financing activities.
Investin# Activities 3Investing activities are the ac-uisition and disposal of long"term
assets and other investments not included in cash e-uivalents.
Financin# Activities 3Financing activities are the activities that result in change in the
size and composition of the owners capital $including preference& share capital in the
case of a company& and borrowing of the enterprise.
ey S%ot an! s%ot Ans?e @$estions
%. State whether the following statements are true or false.
$a& *rovision is the amount set aside or written off for any known liability.
$b& @nclaimed dividend is shown on the assets side of the balance sheet of the company.
$ c& *reliminary e!pense is a current liability.
$d& In the balance sheet of a company the items goodwill, patents and trade marks are
shown under the heading fi!ed assets.
$e& Aiscount allowed on the issue of shares or debentures is shown in the assets side of
the balance sheet.
$f& Aebentures are shown in the balance sheet under the item unsecured loans.
$g& Share forfeiture account is shown in the balance sheet under share capital account.
$h& @nclaimed dividend is shown in the balance sheet under the item current liabilities.
$i& Securities premium account is shown on the liability side of the balance sheet under
the heading share capital.
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Wns. $a& True $b& False $c& False $d& True $e& True $f& False $g& True $h& True $i& FalseX
(. Indicate whether following items belong to the asset side or the liability side of the balance
sheet of a company.
$a& alls unpaid.$b& *reliminary e!penses
$ c& apital redemption reserve
$d& cceptances
$e& *roposed dividend
$f& @ne!pired payments
Wns. $a& Liability $b& sset $c& Liability $d& Liability $e& Liability $f& sset X
3. Ehat is the contingent liabilityN Ehere it is shown in the )alance sheetN Dive three e!amples
of contingent liabilities.
8. >ow would you disclose the following items in the balance sheet of a limited company#"
$i& Loose tools $ii& Stock $iii& Doodwill $iv& Aiscount on issue of debentures not yet written of
$v& Securities premium.
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@nsecured loans miscellaneous e!penditure
*rovisions urrent assets
Secured loans Investments
2eserve and surplus Fi!ed assets
urrent liabilities
. *oint out whether following statement are true or falseN
a&urrent ratio improves increases in credit purchases.
b&Li-uidity ratio improves with increase in credit sale.
c& Eorking capital is the e!cess of current assets over current liability.
d&urrent ratio measures the li-uidity of the business.
e&Aebt e-uity ratio measures short term financial position of the business
ns" & False b& True c& True d& True e& false
G. ssuming the current ratio is ( , state in each of the following cases whether the ratio
will improve or decline or will have no change.
a. *ayment of a current liability
b. *urchase of fi!ed assets
c. ash collected from customers
d. Issue of new share
ns" & improve b& decline c& 9o change d& Improve
;. The current ratio of a company is (
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%(. Ehat is stock Q turnover ratio, how it is calculatedN Ehat are the implications of high
and low stock turn over ratioN
%3. State the meaning and ob+ective of the following"
a& *roprietary ratio
b& 1perating ratio%8. Ehat do you mean by the interest coverage ratioN 0!plain in brief, giving its formulaN
%ow it is preparedN Ehat are its usesN
%(%
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(. Ehat is ash Flow StatementN Dive three items of sources $inflow& of cash.
3. 0!plain the uses of cash Flow Statement.
8. 0numerate any three ma+or sources of cash in flow.
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-RACTICAL @UESTIONS
%. The following figures are e!tracted from the books of ) o. Araw up the Liabilities side
according to law.
2s.
3H,HHH shares of 2s. %H each, 2s. G paid up (,8H,HHH
Securities *remium (H,HHH
2eserves 3
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; debentures (,
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=. The following balances are supplied on the basis of which you are re-uired to show the ma+orappropriate heads under which the items given below will appear in the balance sheet of
2a+co Ltd. as on 3%st?arch (HH#
2s.
*lant J ?achinery
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%( debentures
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Wns. urrent Liabilities 2s. 3H,HHHX
%(. The ratio of current assets $2s. =,HH,HHH& to current liabilities is %.
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*rofit and Loss account
%( Aebentures of 2s. %HH each
)ills payable
Trade creditors
1utstanding 0!penses*rovision for ta!
%,8H,HHH
%H,HH,HHH
GH,HHH
%,8H,HHH
=H,HHH(,(H,HHH
Trade debtors
ash in hand
ash at bank
)ills receivable
8,H,HHH
=
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e& 2edemption of debentures by conversion into shares,
f& Issue of shares against the purchase of a fi!ed asset,
g& Issue of debentures against the purchase of a fi!ed asset.
Wns.$a& $ii&, $b& $iii&, $c& $ii&, $d& $iii&, $e& $ii&, $f& $ii&, $g& $i&X
(H. Aebtors in the beginning 2s. ;H,HHH' debtors at the end 2s. ;=,HHH credit sales during the
year 2s. 8,=
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(8. verage stock carried by a trader is 2s. =H,HHH stock turnover ratio is %H times. Doods are
sold at a profit of %H on cost. Find out the profit.
Wns. *rofit 2s. =H,HHHX
(
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Wns. = timesX
(;. From the following, compute working capital turnover'
2s.
Sales (
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Sales return %H,HHH *urchases returns %H,HHH
1pening stock 3H,HHH losing Stock %H,HHH
Wns. 33 %/3 X
33. From the following details calculate the operating ratio#
$a& 2s.
ost of goods sold
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To selling J distribution e!p.
To loss on sale of plant
To net profit
%8,HHH
%H,HHH
%,
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arriage inwards 8,HHH
1ffice e!penses 8,HHH
Selling and distribution e!penses (,HHH
apital employed (,HH,HHH
$ ns. $a& (.(8 times $b& .
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8H. company has a loan of 2s.
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%H *reference share capital
0-uity share capital
2eserve Fund
%,HH,HHH
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Information# 0-uity share capital 2s.
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$a& 9et profit are 2s. (H,HHH. There is an increase in the amount of debtors of
2s.
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(. alculate cash flow from operating activities from the following figures #
$2s.&
Sales (,
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2ent 1utstanding
*repaid Insurance
Doodwill
Stock
%,=HH
%,8HH
(H,HHH
%8,HHH
8,HHH
%,(HH
%=,HHH
%G,HHH
ns. $2s. %H,=HH&
=. alculate cash flow from operating activities from the following *rofit and Loss /c of a
business for the year ended on 3%.3.(HH< #
Particulars Rs. Particulars Rs.
To Salaries
To Aepreciation on fi!ed assets
To *reliminary 0!p. w/off.To Aiscount on issue of deb.
To Deneral 2eserve
To Aiscount on Sales
To Doodwill
To 9et *rofit
((,3HH
G,(HH
%,
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I. *rofits made during the year 2s. %,8
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Rs (Rs.
*rofit and Loss /c
Deneral 2eserve
Doodwill
Aepreciation
Aiscount on Issue of Aebenture
Sundry Aebtors
Sundry reditors
)ills *ayable
%
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1utstanding 2ent *ayable
*repaid Insurance
Doodwill
Stock
%=H
%8H
(,HHH
%,8HH
8GH
%(H
%,=HH
%,GHH
ns. $2s. %H=H&
%3. ompute cash flow from operating activities from the following details #
Particulars 200#
Rs
200$
(Rs.
*rofit J Loss /c
Aebtors
1utstanding 2ent
Doodwill
*repaid Insurance
reditors
%,%H,HHH
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Particulars 200#
Rs
200$
(Rs.
Stock
Aebtors
reditors
0!penses 1utstanding
)ills *ayable
ccrued Income
*rofit J Loss /c
=,HHH
(,
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%ia&ilities 200# Particulars 200$
(Rs.
To Salaries
To AepreciationTo Loss on Sale of *lant
To Doodwill written off
To *rovision for ta!
To 9et *rofit
(,
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(%. *repare ash Flow Statement as per S.3 $2evised& from the following )alance Sheets of
(HH and (HHG.
%ia&ilities 200#
(Rs.
200$
(Rs.
Assets 200#
(Rs
200$
(Rs.
0-uity Share apital
2eserve J Surplus
)ank Loan
reditors
)ank 1verdraft
*roposed Aividend
3H,HH
H
G,
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*rofit J Loss /c %,H3,%H
H
%,H3,(H
H
%,H3,%H
H
%,H3,(HH
ns. $2s. %H,GHH, 2s %H,HHH J 2s. (HHH&
Additional Information :
$i& Aividends were paid totaling 2s. 3,
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)ills *ayable
*rov. for doubtful
debts
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$iv& Aepreciation on ?achinery was provided 2s. %,HHH
ns. $2s. (%HH, 8
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(G. Following are the comparative )alance Sheets of ) o. Ltd. for the year (HH and
(HHG.
%ia&ilities !".!.0
#
(Rs.
!".!.0$
(Rs.
Assets !".!.0
#
(Rs
!".!.0$
(Rs.
0-uity Share apital
%
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3H. From the following )alance Sheets of )akhte ?unaeem o. Ltd., prepare the ash Flow
Statement. s per S"3 $revised&
%ia&ilities !".!.0#
(Rs.
!".!.0$
(Rs.
Assets !".!.0#
(Rs
!".!.0$
(Rs.Share apital
Aepreciation 2eserve
*rofit and Loss /c
%3 Aebentures
)ills *ayable
reditors
%,(H,HH
H
;,HHH
=,HHH
3
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