financial statement analysis by nawaz

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FINANCIAL STATEMENT ANALYSIS

ASSIGNMENT

Centre Name: MSRSAS

Course Name:MBA IN ENGINEERING OPERATIONS

Name of the Student : Syed Muthaher Nawaz

Student Registration No : HEB0909013

Module Leader at MSRSAS: Mr. Praveen

FULL TIME 2009 BATCH

M. S. Ramaiah School of Advanced StudiesNew BEL Road, Gnanagangothri Campus, MSR Nagar, Bangalore-560 054

Tel: 23605539 / 23601983 / 2360 4759. Fax: 2360 1923Website: http://www.msrsas.org

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M.S Ramaiah School of Advanced Studies Postgraduate Engineering and Management Programme (PEMP)

Date Stamp from

ARO

Signature of ARO

Staff

Signature of

Module Leader

Signature of

Course Manager

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 2

Declaration Sheet

Student Name Syed Muthaher Nawaz

Reg. No HEB0909013

Course MBA in Engineering Operations Batch Full time 2009

Module Code MBA 503

Module Title FINANCIAL STATEMENT ANALYSIS

Module Start Date 21-12-2009 Submission Date 16-01-2010

Module Leader Mr. Praveen

Submission ArrangementsThis assignment must be submitted to Academic Records Office (ARO) by the submission date before 1730hours for both Full-Time and Part-Time students.

Extension requests

Extensions can only be granted by the Head of the Department / Course Manager. Extensions granted by anyother person will not be accepted and hence the assignment will incur a penalty. A copy of the extensionapproval must be attached to the assignment submitted.

Late submission Penalties

Unless you have submitted proof of Mitigating Circumstances or have been granted an extension, the penaltiesfor a late submission of an assignment shall be as follows:

Up to one week late: Penalty of one grade (5 marks) One-Two weeks late: Penalty of two grades (10 marks) More than Two weeks late: Fail - 0% recorded (F2)

All late assignments must be submitted to Academic Records Office (ARO). It is your responsibility toensure that the receipt of a late assignment is recorded in the ARO. If an extension was agreed, theauthorization should be submitted to ARO during the submission of assignment.

To ensure assignments are written concisely, the length should be restricted a limit indicated in theassignment questions. Each participant is required to retain a copy of the assignment in his or her record incase of any loss.

Declaration

The assignment submitted herewith is a result of my own investigations and that I have conformed to the

guidelines against plagiarism as laid out in the PEMP Student Handbook. All sections of the text and results,

which have been obtained from other sources, are fully referenced. I understand that cheating and plagiarism

constitute a breach of University regulations and will be dealt with accordingly.

Signature of

DelegateDate


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M. S. Ramaiah School of Advanced StudiesPostgraduate Engineering and Management Programme- Coventry University (UK)

Assessment Sheet

Department Management Studies

Course MBA in Engineering Operations Batch Full-Time 2009

Module Code MBA 503 Module Title Financial Statement Analysis

Module Leader Mr. PraveenModule CompletionDate

16-01-2010

Student Name Syed Muthaher Nawaz ID Number HEB0909013

Attendance Details Theory Laboratory Fine Paid(if any for shortage of attendance)

Remarks

Written Examination Marks Sheet (Assessor to Fill)

Q. No a b c d Total Remarks

1

2

3

4

5

6

Marks Scored for 100 Marks Scored out of 50

Result PASS FAIL

Assignment Marks-Sheet (Assessor to Fill)

Part a b c d Total Remarks

A

B

C

Marks Scored for 100 Marks Scored out of 50

Result PASS FAIL

PMAR- form completed for student feedback(Assessor has to mark) Yes NoOverall-Result

Components Assessor Reviewer

Written Examination (Max 50) Pass / Fail

Assignment (Max 50) Pass / FailTotal Marks (Max 100) (Before Late Penalty) Grade

Total Marks (Max 100) (After Late Penalty) Grade

IMPORTANT1. The assignment and examination marks have to be rounded off to the nearest integer and entered in the respective fields2. A minimum of 40% required for a pass in both assignment and written test individually3. A student cannot fail on application of late penalty (i.e. on application of late penalty if the marks are below 40, cap at 40 marks)

Signature of Reviewer with date Signature of Module Leader with date



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Abstract

.



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Table of contents

Abstract.....................................................................................................................03

List of figures............................................................................................................05

Part A

1.1 Study of literature and keyfindings....................................................................05

1.2 Discussion andinterpretations.............................................................................06

1.3 Conclusions andrecommendations......................................................................07

1.4 View on futuredirections.....................................................................................08

Part B

2.1.1Data collection and review of literature on current issues..................................09

2.1.2 Tactics employed by predator and Target Company.........................................13

2.2.1 Rationale and the background studyof selected company...............................20

2.2.2 Inference from the income statement with emphasis on numbers talk..............21

2.3.1 Background study of combination of securities................................................23

2.3.2 Concurrence to Indian share market for benefit o share holders........................23

Part C

3.1 Calculation of Economic Order Quantity.............................................................30

3.1 Cash flow satement preparation using indirect method........................................32

3.3 Calculation of NPM, ROA, Asset turnover and Return on owners equity.........34

3.4 Selection of appropriate cases...............................................................................35

Part-D

Remarks on module learning outcomes......................................................................37



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References..................................................................................................................39



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PART-A

Problem statement:

Major initiatives taken up by the government and reserve bank

of India in order to contain the global recession has had a positive

impact on indian financial markets.

Critically debate and justify your arguments by assessing

financial status of business organisations during global recession.In what factors the business organisations should lay thrust, to

consistently perform and adopt different pricing, economic and

financial strategies to prevent the effect of global recession and the

government policies adopted.

Definition of recession - A drastic slowing of the economy, where gross national or domestic

product has fallen in two consecutive quarters. A recession would be indicated by a slowing

of a nation's production, rising unemployment and falling interest rates, usually following a

decline in the demand for money. An economy, which grows over a period of time, tends to

slow down the growth as a part of the normal economic cycle. A recession normally takes

place when consumers lose confidence in the growth of the economy and spend less. This

leads to a decreased demand for goods and services, which in turn leads to a decrease in

production, lay-offs and a sharp rise in unemployment. Investors spend less; as they fear

stocks values will fall and thus stock markets fall on negative sentiment.

http://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=888, Summary of the

Annual Report of RBI for the year ended June 2009, Date: 27/08/2009

The Indian economy witnessed moderation in growth in 2008-09 in comparison with the

robust growth performance in the preceding five years. The deceleration in growth was broad

based across three major constituent segments of GDP, i.e. agriculture, industry and services.

Government consumption demand increased by 20.2 per cent, and the contribution ofgovernment consumption expenditure to overall growth accordingly increased to 32.5 per cent

http://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=888http://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=888


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from an average contribution of 5.9 per cent in the preceding five years. Corporate

performance remained dampened, with significant fall in sales growth in the second half of

the year, and decline in profits in last three consecutive quarters of the year. In 2009-10 so far,

emerging signs of recovery are yet to indicate any clear trend, and the deficient monsoon and

the depressed export performance have to be seen along with the improving growth in core

infrastructure sector, recovering industrial production and more optimistic business outlook.

Recognizing the balance of risks to growth, the First Quarter Review of Monetary Policy for

2009-10 placed the projection for GDP growth at 6.0 per cent, with an upward bias. The

inflation environment remained highly volatile during 2008-09

For enhancing the availability of domestic liquidity, besides the usual reduction in Cash

Reserve Ratio, greater access under the Liquidity Adjustment Facility (LAF) through repose,

and unwinding of the MSS (Managed Security Service) securities, several other conventional

as well as unconventional instruments were also used depending on the nature and expected

magnitude of the demand for liquidity, such as a second LAF window providing access to

liquidity in the afternoon as against the normal LAF access in the morning, special 14 days

report facility using Statutory Liquidity Ratio (SLR) eligible securities up to 1.5 per cent of

Net Demand and Time Liabilities (NDTL) for meeting the liquidity needs of Non Banking

Financial Company (NBFCs), housing finance companies and mutual funds, advance release

of money at the request of the Government to the banks towards Agricultural Debt Waiver

and Debt Relief Scheme, increase in export credit refinance limit for commercial banks, and

special refinance facilities for specialized financial institutions such as the SIDBI, NHB and

EXIM Bank. The additional liquidity that was made available exceeded Rs.4, 00,000 crore

(by the end of the year), which is unprecedented and amounted to 7.9 per cent of GDP.

Discussion and interpretation of effect of recession on Indian economy

Article- Arab News, The Middle East's Leading English Language Daily, Tuesday 7

October 2008, Indian economy faces slowdown not recession by, Mahmood Rafique I(http://www.arabnews.com/?page=6&section=0&article=115219&d=7&m=10&y=2008)

The Indian economy is immune to the global mortgage crisis, failures of banks in the West

and liquidity crisis. "Indian economy is based on robust fundamentals and enjoys the status of

one of the most dynamic and growing economies in the world with over 9 percent GDP last

year." India itself is a biggest consumer market with 300 million of middle classes and the

http://www.arabnews.com/?page=6&section=0&article=115219&d=7&m=10&y=2008http://www.arabnews.com/?page=6&section=0&article=115219&d=7&m=10&y=2008


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lowest debt ratio of 22 percent of the GNP. The country enjoys the highest savings rate of 28

percent of the GDP."

Money week magazine, article titled- India can't escape the global recession, ByCrisSholto Heaton Nov 24, 2008

Though India will not be directly impacted largely by the US recession, simply because India

is not which it was in the '80s-'90s.Although it will be immature to say that India will not be

impacted by the US recession at all the truth is that it will not get impacted adversely in the

magnitude of what everyone feels, However the fact that India is dependent on the foreign

money cannot be neglected The impact on companies could be substantial: around 40% of

new corporate debt was raised from foreign sources this year, twice as much as three yearsago. So even if local banks continue to lend, companies face something of a credit crunch.

And it's by no means certain that local banks will be lending as freely as before.

Outlookbusiness fully loaded magazine, November 14 2009 article title- A Majority Of One

Everybody wants the liberal monetary policy regime to continue. But the RBI wants toincrease interest rates. And it calls the shots by-JOHN SAMUEL RAJA D

Some of the direct impacts of the US recession on the Indian Market are,

Reduced liquidity in the Indian economy

Reduced industrial output

Reduced job opportunities

Stock Market is lingering in the bottom

Real estate market has started to take a beating

Inflation has increased

GDP has come down and the GPD forecast for the next two quarters are only average.

Views on future direction

The following measures can be adopted to tackle the recession:

http://www.moneyweek.com/about-us/the-moneyweek-team/cris-sholto-heaton.aspxhttp://www.moneyweek.com/about-us/the-moneyweek-team/cris-sholto-heaton.aspxhttp://www.moneyweek.com/about-us/the-moneyweek-team/cris-sholto-heaton.aspxhttp://www.123eng.com/forum/viewtopic.php?t=88968http://business.outlookindia.com/peoplefnl.aspx?pid=11355&author=John+Samuel+Raja+Dhttp://www.moneyweek.com/about-us/the-moneyweek-team/cris-sholto-heaton.aspxhttp://www.moneyweek.com/about-us/the-moneyweek-team/cris-sholto-heaton.aspxhttp://www.123eng.com/forum/viewtopic.php?t=88968http://business.outlookindia.com/peoplefnl.aspx?pid=11355&author=John+Samuel+Raja+D


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Government should hike its spending to create more jobs and boost the manufacturing

sectors in the country.

Government should try to increase the export against the initial export.

The way out for builders in real estate is to reduce the unrealistic prices of property to

bring back the buyers into the market.

The falling rupees against the dollar will bring a boost in the export industry. Though

the buyers in the west might become scarce.

Government must aim at raising finances for the incomplete projects that they are

developing.

The oil prices decline will also have a positive impact on the importers.

Dependence of the Indian economy on the outsourcing industry must minimize asmuch as possible.

PART-B

2.1 Examine a hostile acquisition in the US/Indian and discuss the

tactics employed by both the predator and the target companies.

Do you think that the management of the target firm was trying to

defeat the bid or to secure the highest price for its stockholders?

How did each announcement by the protagonists affect their stock

prices?

2.1.1 Data collection and review of literature and current issues.

This article has been published in Sanhita - a corporate issues magazine - by the Pune

Chapter of The Institute of Company Secretaries of India (ICSI) in July 2008

http://www.caclubindia.com/mobile/articles/display_article_list_mobile.asp?article_id=1455

A hostile takeover is an acquisition in which the company being purchased doesnt want to be

purchased, or doesnt want to be purchased by the particular buyer that is making a bid.

http://www.caclubindia.com/mobile/articles/display_article_list_mobile.asp?article_id=1455http://www.caclubindia.com/mobile/articles/display_article_list_mobile.asp?article_id=1455


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How can someone buy something thats not for sale? Hostile takeovers only work with

publicly traded companies. That is, they have issued stock that can be bought and sold on

public stock markets.

The two primary methods of conducting a hostile takeover are the tender offer

and the proxy fight.

http://www.taxguru.in/company-law/meaning-reason-and-legal-provisions-related-to-hostile-

takeover.html

A tender offer is a public bid for a large chunk of the targets stock at a fixed price, usually

higher than the current market value of the stock. The purchaser uses a premium price to

encourage the shareholders to sell their shares. The offer has a time limit, and it may have

other provisions that the target company must abide by if shareholders accept the offer.

In a proxy fight, the buyer doesnt attempt to buy stock. Instead, they try to convince the

shareholders to vote out current management or the current board of directors in favor of a

team that will approve the takeover. The term proxy refers to the shareholders ability to let

someone else make their vote for them, the buyer votes for the new board by proxy.

http://money.howstuffworks.com/hostile-takeover.htm/printable

Ways of opposing a hostile acquisition

http://www.investopedia.com/articles/stocks/08/corporate-takeover-defense.asp

Targeted company can prevent predator from hostile take over by buying back their

own stock from individual holders to increase their majority shares. Ideally owning

51% would ensure that no one could succeed in a hostile take over attempt.

The Golden Parachute- Its a provision in a CEOs contract. Which states that he

will get a large bonus in cash or stock if the company is acquired. This makes the

acquisition more expensive, and less attractive.

http://www.taxguru.in/company-law/meaning-reason-and-legal-provisions-related-to-hostile-takeover.htmlhttp://www.taxguru.in/company-law/meaning-reason-and-legal-provisions-related-to-hostile-takeover.htmlhttp://money.howstuffworks.com/hostile-takeover.htm/printablehttp://www.investopedia.com/articles/stocks/08/corporate-takeover-defense.asphttp://www.taxguru.in/company-law/meaning-reason-and-legal-provisions-related-to-hostile-takeover.htmlhttp://www.taxguru.in/company-law/meaning-reason-and-legal-provisions-related-to-hostile-takeover.htmlhttp://money.howstuffworks.com/hostile-takeover.htm/printablehttp://www.investopedia.com/articles/stocks/08/corporate-takeover-defense.asp


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Another option is staggered board of directors drags out the takeover process by

preventing the entire board from being replaced at the same time. The terms are

staggered, so that some members are elected every two years, while others are elected

every four.

Dual-class stock- this will allow the targeted company to hold onto voting stock,

while the company issues stock with little or no voting rights to the public. That way

investors can purchase stocks, but they cant purchase control of the company.

The crown jewels defense - Sometimes a specific aspect of a company is particularly

valuable. For example, a telecommunications company might have a highly regardedresearch and development (R&D) division. This division is the company's "crown

jewels." It might respond to a hostile bid by selling off the R&D division to another

company, or spinning it off into a separate corporation working separately

Flip-in - This common poison pill is a provision that allows current shareholders to

buy more stocks at a steep discount in the event of a takeover attempt. The provisionis often triggered whenever any one shareholder reaches a certain percentage of total

shares (usually 20 to 40 percent). The flow of additional cheap shares into the total

pool of shares for the company makes all previously existing shares worth less. The

shareholders are also less powerful in terms of voting, because now each share is a

smaller percentage of the total.

The people pill - High-level managers and other employees threaten that they will all

leave the company if it is acquired. This only works if the employees themselves are

highly valuable and vital to the company's success.

Who Benefits from a Hostile Takeover?

http://money.howstuffworks.com/hostile-takeover.htm/printable

While companies fight tooth and nail to prevent hostile takeovers, it isn't always clear why

http://money.howstuffworks.com/hostile-takeover.htm/printablehttp://money.howstuffworks.com/hostile-takeover.htm/printable


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they're fighting. Because the acquiring company pays for stocks at a premium price,

shareholders usually see an immediate benefit when their company is the target of an

acquisition. Conversely, the acquiring company often incurs debt to make their bid, or pays

well above market value for the target company's stocks. This drops the value of the bidder,

usually resulting in lower share values for stockholders of that company.

Some analysts feel that hostile takeovers have an overall harmful effect on the economy, in

part because they often fail. When one company takes over another, management may not

understand the technology, the business model or the working environment of the new

company. The debt created by takeovers can slow growth, and consolidation often results in

layoffs.

Another cost of hostile takeovers is the effort and money that companies put into their

takeover defense strategies. Constant fear of takeover can hinder growth and stifle innovation,

as well as generating fears among employees about job security.

Ultimately, we must measure the costs of mergers and acquisitions on a case-by-case basis.

Some have been financial disasters, while others have resulted in successful companies that

were far stronger than their predecessors were.

2.1.2 Tactics employed by predator and Target Company.

http://money.cnn.com/2004/12/13/technology/oracle_peoplesoft/

http://www.oracle.com/corporate/press/2004_dec/acquisition.html

http://money.cnn.com/2004/12/13/technology/oracle_peoplesoft/http://www.oracle.com/corporate/press/2004_dec/acquisition.htmlhttp://money.cnn.com/2004/12/13/technology/oracle_peoplesoft/http://www.oracle.com/corporate/press/2004_dec/acquisition.html


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One of the examples that can best explain a hostile acquisition is the hostile takeover of

peoplesoft by oracle, Oracle Corporation .on 13-DEC-2004 03:20 AMannounced that it has

signed a definitive merger agreement to acquire PeopleSoft, Inc., for $26.50 per share

(approximately $10.3 billion). The transaction was approved by the boards of directors of

both companies and was closed by early January.

The following were the corner stone events for the battle of acquisition

June 2 2003 PeopleSoft declares its intention to acquire JD Edwards in a $1.7bn stock-

based friendly acquisition. PeopleSoft's decision to swallow J.D. Edwards led Oracle

to launch its hostile takeover of the business software maker, according to many

analysts.

June 6 2003 Promoted by PeopleSoft's action, Oracle launches a hostile $5.1bn cash-

based takeover bid for PeopleSoft.

June 9 2003 the trio trade legal threats and Oracle claims PeopleSoft has threatened to

sue.

June 10 2003 PeopleSoft says it will not sue Oracle.

June 12 2003 PeopleSoft board of directors officially rejects Oracle's offer; JD

Edwards launches into a lawsuit against Oracle maintaining that the Oracle offer is

"illusory" and its sole aim is to disrupt the PeopleSoft/JD Edwards merger.

June 13 2003 PeopleSoft launches its own anti-Oracle lawsuit on the grounds that

Oracle's bid is nothing but a scheme to damage PeopleSoft's sales.

June 16 2003 in an attempt to accelerate its merger with JD Edwards, PeopleSoft

alters the terms of its agreement, converting the all-stock offer to a part cash/part stock

alternative, removing the requirement for shareholders to vote on the transaction.



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June 18 2003 Oracle increases its offer to $19.50 per share and goes to the courts in an

effort to prevent the PeopleSoft/JD Edwards acquisition going ahead.

June 19 2003 PeopleSoft exchange offer for JD Edwards share commences;

PeopleSoft board of directors recommends that stockholders reject Oracle's revised

offer.

June 22 2003 PeopleSoft formally rejects the revised offer from Oracle Corp.

June 23 2003 PeopleSoft announces it would entertain bids from rival companies in an

effort to block Oracle takeover.

Business week magazine, DECEMBER 13, 2004 NEWS ANALYSIS By Jim

Kerstetter Finally, Oracle Nails PeopleSoft, Eighteen months after it began, the bitter and

bizarre takeover battle is over. The new challenge: Make this $10.3 billion deal work

The deal, which was 65% above Oracle's initial offer, was closed on January 2005. The board

of directors of both companies approved it, just three weeks after PeopleSoft had rejected a$24-per-share offer. Oracle also won a resounding vote of confidence from PeopleSoft's

shareholders three weeks ago, when more than 60% of them decided to tender their

PeopleSoft shares to Oracle. Even so, until Dec. 13, PeopleSoft's board stood firm. It had

control of a so-called poison pill that would have allowed PeopleSoft to flood Wall Street

with new shares if Oracle gained a 20% stake, making the company too rich to acquire, even

for cash-heavy Oracle. A proxy fight at PeopleSoft's next shareholders' meeting in March

2005 had seemed likely.

The companies had also been due in Delaware court on Dec. 13 for a hearing on PeopleSoft's

poison pill. Oracle had planned to ask a judge to remove the anti-takeover provision. All

litigation between the two companies will now be dropped.

In many ways, the merger agreement was a sad ending for PeopleSoft and its ferociously

Loyal customers and a quiet ending to a spirited fight. Ellison & Co. showed remarkabletenacity for a year and a half. They overcame an antitrust challenge by the U.S. Justice Dept.,



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which attempted to block the takeover on grounds that it would be anticompetitive, warded

off scrutiny by the European Commission, and overcame skepticism that all they really

wanted to do was muck with PeopleSoft's planned acquisition of another software maker, J.D.

Edwards & Co.

http://www.icmrindia.org/casestudies/catalogue/Business%20strategy/Oracle%20Acquisition

%20of%20Peoplesoft-excerpts1.htm#THE_DEFENSE_STRATEGIES_

On June 30, 2003, the DOJ started its investigations into Oracle's acquisition bid. It filed a

suit on February 26, 2004, to challenge the proposed merger pursuant to Section 7 of the

Clayton Act. The trial began in June 2004. From the DOJ's viewpoint, Oracle's bid was anattempt to eliminate its major competitor. The DOJ expressed concern that Oracle could raise

prices of its software while spending less money on product improvements. Oracle, on its

part, supported its bid as an important measure to compete with archrivals -Microsoft and

IBM.

After EC's approval, the hurdles that still remained for Oracle were PeopleSoft's poison pill

and the company's Customer Assurance Plan. PeopleSoft had instituted its poison pill defence

in 1995. The defence allowed the company's existing shareholders to purchase the company's

stock at half price in an event of a hostile takeover bid in which the acquirer had acquired 20

percent of the company's stock. The Customer Assurance Plan (CAP) was adopted in June

2003 after Oracle had made its first takeover bid. The provisions under CAP guaranteed pay

back to PeopleSoft's customers between two and five times the software licensing fees if the

company was taken over within two years or if the product support declined within four years.

Learning outcomes form the acquisition case study

From the above case study we can converse that though peoplesoft tried to defeat the bid by

tactfully using techniques like

http://www.icmrindia.org/casestudies/catalogue/Business%20strategy/Oracle%20Acquisition%20of%20Peoplesoft-excerpts1.htm#THE_DEFENSE_STRATEGIES_http://www.icmrindia.org/casestudies/catalogue/Business%20strategy/Oracle%20Acquisition%20of%20Peoplesoft-excerpts1.htm#THE_DEFENSE_STRATEGIES_http://www.icmrindia.org/casestudies/catalogue/Business%20strategy/Oracle%20Acquisition%20of%20Peoplesoft-excerpts1.htm#THE_DEFENSE_STRATEGIES_http://www.icmrindia.org/casestudies/catalogue/Business%20strategy/Oracle%20Acquisition%20of%20Peoplesoft-excerpts1.htm#THE_DEFENSE_STRATEGIES_


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2.2 Compare the income statements of two proprietary concerns

and critically comment on the numbers talk in the income

statement of the selected concerns.

2.2.1 Rationale and the background study of selected company.

http://en.wikipedia.org/wiki/Income_statement

Income statement, also referred as profit and loss statement (P&L), earnings statement,

operating statement or statement of operations, is a company's financial statement that

indicates how the revenue (money received from the sale of products and services before

expenses are taken out, also known as the "top line") is transformed into the net income (the

result after all revenues and expenses have been accounted for, also known as the "bottom

line").

It displays the revenues recognized for a specific period, and cost and expenses charged

against these revenues, including write-offs and taxes.

The purpose of the income statement is to show managers and investors whether the company

made or lost money during the period being reported. The important thing to remember about

an income statement is that it represents a period of time. This contrasts with thebalance

sheet, which represents a single moment in time. Charitable that are required to publish

financial statements do not produce an income statement. Instead, they produce a similar

statement that reflects funding sources compared against program expenses, administrative

costs, and other operating commitments. This statement is commonly referred to as

the statement of activities. The donor restrictions on the funds received and expended further

categorizes revenues and expenses in the statement of activities.

The income statement can be prepared in one of two methods. The Single Step incomestatement takes a simpler approach, totaling revenues and subtracting expenses to find the

http://en.wikipedia.org/wiki/Income_statementhttp://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Net_incomehttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Write-offhttp://en.wikipedia.org/wiki/Taxhttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Balance_sheethttp://www.1800net.com/nprc/fasb117.html#2http://en.wikipedia.org/wiki/Income_statementhttp://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Net_incomehttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Write-offhttp://en.wikipedia.org/wiki/Taxhttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Balance_sheethttp://www.1800net.com/nprc/fasb117.html#2


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bottom line. The more complex Multi-Step income statement (as the name implies) takes

several steps to find the bottom line, starting with the gross profit. It then calculates operating

expenses and, when deducted from the gross profit, yields income from operations. Adding to

income from operations is the difference of other revenues and other expenses. When

combined with income from operations, this yields income before taxes. The final step is to

deduct taxes, which finally produces the net income for the period measured.

Below given are profit and loss accounts of two proprietary concerns and evaluation of their

number talk.

In the books of Dominic

Trading and Profit & Loss Account

For the year ended 31st March 2009

To Opening Stock 95000 By Sales 10500000

To Purchases 9000000 By Closing Stock 110000

To Gross Profit c/d 1515000

10610000 10610000

To Salaries 180000By Gross Profitb/d 1515000

To Electricity, Water 32000

To Misc Office Expenses 20000

To Transportation Charges 55000

To Interest and Bank Charges 32000

To Depreciation 9900

To Net Profit 1186100

1515000 1515000

http://en.wikipedia.org/wiki/Gross_profithttp://en.wikipedia.org/wiki/Operating_expenseshttp://en.wikipedia.org/wiki/Operating_expenseshttp://en.wikipedia.org/wiki/Gross_profithttp://en.wikipedia.org/wiki/Operating_expenseshttp://en.wikipedia.org/wiki/Operating_expenses


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In the books of Cork

Trading and Profit & Loss Account

For the year ended 31st March 2009

To Opening Stock 95000 By Sales 10500000

To Purchases 9000000 By Closing Stock 110000

To Gross Profit c/d 1515000

10610000 10610000

To Salaries 195000By Gross Profitb/d 1515000

To Electricity, Water 48000

To Transportation Charges 60000

To Interest and Bank Charges 27000

To Depreciation 7500

To Net Profit 1177500

1515000 1515000

Calculation of profitability ratios from the given profit and loss accounts

1. Gross profit ratio

The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of

goods sold. It is a very simple idea and it tells us how much gross profit per RS 1 of turnover

our business is earning.

Gross profit is the profit we earn before we take off any administration costs, selling costs and

so on. So we should have a much higher gross profit margin than net profit margin.

2. Net Profit ratio

Net Profit ratio is used to measure the overall profitability and hence it is very useful to

proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be

able to achieve a satisfactory return on its investment

3. Operating ratio



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Operating ratio shows the operational efficiency of the business. Lower operating ratio shows

higher operating profit and vice versa. An operating ratio ranging between 75% and 80% is

generally considered as standard for manufacturing concerns. This ratio is considered to be a

yardstick of operating efficiency but it should be used cautiously because it may be affected

by a number of uncontrollable factors beyond the control of the firm. Moreover, in some

firms, non-operating expenses from a substantial part of the total expenses and in such cases

operating ratio may give misleading results.

4. Inventory turnover ratio

Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually a

high inventory turnover/stock velocity indicates efficient management of inventory because

more frequently the stocks are sold, the lesser amount of money is required to finance

the inventory. A low inventory turnover ratio indicates an inefficient management

of inventory. A low inventory turnover implies over-investment in inventories, dull business,

poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods

and low profits as compared to total investment. The inventory turnover ratio is also an index

of profitability, where a high ratio signifies more profit; a low ratio signifies low profit.

Sometimes, a high inventory turnover ratio may not be accompanied by relatively highprofits. Similarly a high turnover ratio may be due to under-investment in inventories.

It may also be mentioned here that there are no rule of thumb or standard for interpreting

the inventory turnover ratio. The norms may be different for different firms depending upon

the nature of industry and business conditions. However the study of the comparative or trend

analysis of inventory turnover is still useful for financial analysis.

5.Expense ratios

Expense ratios indicate the relationship of various expenses to net sales. The operating reveals

the average total variations in expenses. But some of the expenses may be increasing while

some may be falling. Hence, expense ratios are calculated by dividing each item of expenses

or group of expense with the net sales to analyse the cause of variation of the operating ratio.



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While interpreting expense ratio, it must be remembered that for a fixed expense like rent, the

ratio will fall if the sales increase and for a variable expense, the ratio in proportion to sales

shall remain nearly the same.

Domnic

1. Gross profit ratio = (gross profit/ net sales) * 100

=(1515000/10500000) * 100

=14.42%

2. Net profit ratio = (Net profit/net sales) * 100

=(1186100/10500000) * 100

= 11.29%

3. Net operating profit ratio = (Gross profit All operating expenses) / (Sales)

={(1515000 (18000-2000-5500-9900)} / (10500000)

=0. 11: 1

4. Operating ratio = (cost of goods sold + operating expenses) / (net sales)

Where, Cost of good sold= sales gross profit

Cost of goods sold = 10500000-1515000= 8985000

Operating ratio = (985000 + 264900) / (10500000)

= 0.88: 1

5. Operating expenses ratio = (Total operating expenses) / (net sales)



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=(264900) / (10500000)

= 0.025:1

6. Inventory turnover ratio = (cost of goods sold) / (average inventory)

Where, average inventory = (opening inventory + closing inventory) / 2

= (95000+11000) / 2

= 102500

Inventory turnover ratio = (8985000) / (102500)

= 87.65:1

Cork

Gross profit ratio = (gross profit/ net sales) * 100

=(1515000/10500000) * 100

=14.42%

Net profit ratio = (Net profit/net sales) * 100

=(1177500/10500000) * 100

= 11.21%



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Net operating profit ratio = (Gross profit All operating expenses) / (Sales)

={(1515000 (195000-60000-7500)} / (10500000)

= 0. 11: 1

Operating ratio = (cost of goods sold + operating expenses) / (net sales)

Where, Cost of good sold= sales gross profit

Cost of goods sold = 10500000-1515000= 8985000

Operating ratio = (985000 + 262500) / (10500000)

= 0.88: 1

Operating expenses ratio = (Total operating expenses) / (net sales)

=(262500) / (10500000)

= 0.025:1

Inventory turnover ratio = (cost of goods sold) / (average inventory)

Where, average inventory = (opening inventory + closing inventory) / 2

= (95000+11000) / 2

= 102500

Inventory turnover ratio = (8985000) / (102500)

= 87.65:1



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2.3 Financial managers try to find the combination of

securities That maximizes the market value of the firm. Why

does pursuit of this goal benefit the shareholders?

2.3.1 Background study of combination of securities.

The ultimate aim of any individual or a firm is to maximize the profits or rate of returns or in

other words market value of ones investment. Thus investment management is as an ongoing

process, which needs to be constantly monitored, by the way of information as this may affect

the value of rate of security or rate of return on such security.

The primary function of corporate finance is resource acquisition, refers to the

generation of funds from both internal and external sources at the lowest possible cost to the

corporation. There are two main categories of resources are equity (shares) and liability

(Borrowings). The equities are proceeds from the sale of stock, returns from investments and

retained earnings. Liabilities include bank loans or other debts, accounts payable, product

warranties and other types of commitments from which an entity derives value. The second

function of corporate finance is resources allocation and investment of funds with the intent of

increasing shareholders wealth over a period of time. There are two basic categories

investments are current assets and fixed assets. Current assets include cash, inventory and

accounts receivable. The fixed assets are buildings, real estate and machinery. In addition, the

resource allocation function is concerned with intangible assets such as goodwill, patents and

brand names.

It is the duty of financial manager of a corporation to conduct the above functions in a

manner that maximizes shareholders wealth or stock price and he must balance the interests ofowners or shareholders and creditors including banks and bondholders and other parties, such

as employees, suppliers and customers. For example a corporation may choose to invest its

resources in risky ventures in an effort to offer its shareholders the potential for large profit.

However, risky investments may reduce the perceived security of the companies bond, thus

decreasing their value in the firm must pay to borrow money in the future. Conversely, if the

corporation invests too conservatively, it could fail to maximize the value of its equity. If the

firm performs better than other companies its stock price will rise, in theory, enabling it to

raise additional funds at a labour cost, among other benefits. Practical issues and factors



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influenced by corporate finance include employees salaries, marketing strategies customer

credit and the purchase of new equipment.

Diana R. Harrington-Corporate Financial Analysis- (2008).

The Financial decision affects both the profitability and risk of a firms operation. An

increase in cash holdings, for instance risk, but because of cash is not an earning asset,

converting other types of assets to cash reduces the other firms profitability. Similarly, the

issue of additional debt can raise the profitability of a firm, but more debt means more risk.

Striking a balance between risk and profitability that will maintain the long-term value of a

firms securities in the large of finance

Hence it is very important for a firm to establish a fair combination of securities by which the

market value of the firm increases. Therefore a finance manager needs to have a basic

knowledge and understanding of time value of money and risk return relationship. Hence,

while making valuation judgment about securities, the analyst constantly applies a process,

which may achieve the following.

a. A true picture of a company over a representative time span.

b. An estimate of current normal earning power and dividend payout.

c. Estimation of future profitability and growth and the reliability of such expectation.

d. Translation of all these elements into valuation of company and its securities.

The concept of time value of money provides a fundamental background for the valuation of

bonds and stocks. Therefore it is essential for a financial manager to evaluate the value of the

securities based on the available methods, which could be

Valuation concept

Bond value

Equity valuation: Dividend capitalization approach or ratio approach



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Debenture evaluation

Loan evaluation

2.3.2 Concurrence to Indian share market for benefit of shareholders.



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PART C

1) Calculate the Economic Order Quantity from the following information.

Also state the number of orders to be place in a year:

Consumption of materials per annum: 10,000 Kg.

Order Placing Cost per order: Rs. 50Cost Per Kg. of raw materials: Rs. 2

Storage Costs: 8% on average inventory

Solution:

Given that, Consumption of material: 10,000 Kg.

Order Placing Cost: Rs. 50

Cost Per Kg: Rs.2 (Cost per Kg of raw materials include Inventory cost)

Storage Cost: 8% on average inventory,

i.e. 8% of Rs.2

i.e. 0.08*2 = 0.16

Economic Order Quantity (EOQ) = (2*Consumption of material*order placing cost)/0.16

Hence Simplifying (2*10,000*50)/0.16

= 6,250,000

Hence 6, 250,000

= 2500

Hence EOQ=2,500 Number of orders to be placed in a year = 10,000/2,500 = 4



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2)

Solution for cash flow statement


Cash Flow statement as per 31st December 2008

Particulars Amount Amount

Cash from Operating activities

Net profit as per profit and loss account 165,000.00

Add: Decrease in Debtors 30,000.00

Decrease in BR 5,000.00

Increase in creditors 25,000.00225,000.00

Less: Increase in Stock (10,000.00)

Cash from Operations 215,000.00

Cash from Investing activities

Purchase of Fixed assets (150,000.00)

Cash from Financing activities

Purchase of Long term loan 30,000.00Dividends paid (90,000.00)

5,000.00

Opening Cash balance 30,000.00

Closing cash balance 35,000.00


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3. X Co. has made plans for the next year. It is estimated that the company will

employ total assets of Rs. 8,00,000, 50 per cent of the assets being financed by

borrowed capital at an interest cost of 8 per cent per year. The direct costs forthe year are estimated at Rs. 4,80,000 and all other operating expenses are

estimated at Rs. 80,000. The goods will be sold to customers at 150 per cent of

the direct costs. Tax rate is assumed to be 50 per cent. You are required to

calculate: (i) net profit margin; (ii) return on assets; (iii) asset turnover and (iv)

Return on owners equity.



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SOLUTION:

The net profit is calculated as follows: -

Particulars Amount in (Rs) Amount in (Rs)

Sales(150% of Rs 4,80,000) 7,20,000

(+) Direct costs 4,80,000

GROSS PROFIT 2,40,000

Operating expenses 80,000

(+)Interest {8% of Rs 4,00,000} 32,000 1,12,000

PROFIT BEFORE TAX(PBT) 1,28,000

Tax @ 50% 64000

NET PROFIT AFTER TAX(PAT) 64000

1. Net profit margin= PAT

Sales

= 64000

720000 = 0.89 =8.9%

Net profit margin = EBIT (1-T)

SALES

=1,60,000(1-0.5)

720000 =0.111 = 11.1%

2. Return on assets = EBIT(1-T)

ASSETS

= 160000(1-0.5)



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800000 =0.10 =10%

3. Asset turnover = SALES

ASSETS

= 720000

800000 = 0.09 Time

4. Return on equity = Net profit after taxes

Owners equity

= 64000

50% of 800000 = 64000

400000 = 0.16 = 16%

financial statement analysis by nawaz

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