financial ratios 25.10.2013

8/13/2019 Financial Ratios 25.10.2013

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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

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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#


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#


)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

==


67/156

Investin# Activities


$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


$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.

=


68/156

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'


69/156

Investing ctivities # 8,


70/156

1pening Aebtors 8H,HHH

losing Aebtors =H,HHH

Sales 2eturns %H,HHH

$b& redit Sales (,HH,HHH

)ad Aebts %


71/156

Cas% Inflo? fom ,e4tos (,


72/156

Cas% Inflo? fom ,e4tos %,


73/156

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


74/156

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


75/156

lternatively, the cash outflow can be calculated by preparing the Total reditors ccount.


Ar. r.


To Aiscount 2eceived


76/156

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


77/156

To Ta! *rovisions 3H,HHH

To Sales 2eturn (,HHH

To 9et *rofit 83,HHH

(,


78/156

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


%. Ar.

r.

-atic$las -atic$las Rs.

To )alance b/d %


79/156

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

%


80/156

3%,HHH 3%,HHH

RO:ALTIES ACCOUNT


81/156

-ROISION FOR TAD ACCOUNT. Ar.

r.


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%


82/156

Ar. r.


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. ;,


83/156

*articulars 2s.

ash *ayment to ac-uire *lant and ?achinery $9ote& %,


84/156

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.


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


85/156

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


86/156

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 $


87/156

*articulars 2s.

ash *roceeds from the Issue G of Aebentures (,HH,HHH

2edemption of %H Aebentures $%,HH,HHH&

Interest paid $%H,HHH&Aividend paid $


88/156

1utflow on 2epayment of )ank Loan $Diven& 2s. (


89/156

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

G;


90/156

$Same as under Indirect ?ethod& C

:I. ash and ash 0-uivalents in the end of the year C

;H


91/156

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

;%


92/156

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

;(


93/156

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


94/156

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


95/156

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


96/156

$v& Furniture of the book value of 2s. %G,


97/156

*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


98/156

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


99/156

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


100/156

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 $


101/156

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,


102/156

A!! 3 Appopiation of F$n!

*reference Aividend (8,HHH

Interim Aividend 8


103/156

*roceeds from Sale of ?achinery (


104/156

FIDE, ASSETS ACCOUNT AT 9.,.

3. Ar.

r.


To )alance b/d


105/156

$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=&


106/156

Less # Income ta! *aid $8,HHH&

9et ash used in 1perating ctivities $& $%,G8,


107/156

( Ar. Investment Acco$nt r.


To )alance b/d 8,HH,HHH )y )ank /c G,


108/156

2s. 2s. 2s. 2s.

reditors 8H,HHH 88,HHH Fi!ed ssets %H,HHH ,HHH

?rs. s Loan (


109/156

$)& Cas% Flo? fom Investin# Activities

*urchase of Land $%H,HHH&

*urchase of )uildings $(


110/156

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.


To Aepreciation on ?achinery Sold 3,HHH )y )alance /c

(


111/156

Auring the year, the proprietor introduced 2s. (H,HHH as additional capital. The net profits for the

year, after charging 2s.


112/156

9et ash from 1perating ctivities


113/156

Tems into!$ce! in t%e c%apte

%. Financial Statements

(. *rofit and loss ccount3. )alance Sheet

8. *reliminary e!pense


114/156

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

%%8


115/156

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&

%%


116/156

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


117/156


118/156

$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.

%%G


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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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financial ratios 25.10.2013

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