RATIO ANALYSIS

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RATIO ANALYSIS

• CAIIB Financial Management MODULE C RATIO
  ANALYSIS
• R K MOHANTY
• FACULTY MEMBER, SIR SPBT COLLEGE,
• CENTRAL BANK OF INDIA, MUMBAI

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FINANCIAL STATEMENTS

• Financial Statements generally consists of the
  following two types
• Profit Loss Account which summarises the
  expenses incurred and revenues received during
  the period covered by it and
• Balance Sheet which lists out the Assets and
  Properties owned by the Unit and the Liabilities
  it owes to outsiders and also to its owners.

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Who are interested in financial statements ?
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Who are interested in financial statements ?
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Who are interested in financial statements ?
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Major Components of Profit Loss Statement

• NET SALES This is the key figure in the Income
  Statement. Which can be arrived from the
  following
• Net Sales Gross Sales
  Excise Duty
• Where Gross Sales (Total Domestic Sales
  Export Sales) (Sales Tax Octroi Sales
  Return)

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Major Components of Profit Loss Statement

• 2. COST OF PRODUCTION It is the sum of Cost of
  Raw Materials consumed and all Manufacturing
  Expenses.
• COP Cost of R.M.
  Manufacturing Expenses
• Manufacturing Expenses include
• (i) Spares
• (ii) Power fuel
• (iii) Wages Salaries (Direct Labour)
• (iv) Other Manufacturing Expenses
• (v) Depreciation
• (vi) Difference between Opening Closing Stock
  of SIP

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Major Components of Profit Loss Statement

• 3. COST OF SALES
• It is the sum of Cost of Production and
  Difference between Opening Closing Stock of
  Finished Goods

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Major Components of Profit Loss Statement

• 4. GROSS PROFIT
• Net Sales Cost of Sales
• The percentage of Gross Profit to Net sales
  indicates whether the average sale price is
  sufficient to cover all expenses.

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Major Components of Profit Loss Statement

• 5. OPERATING EXPENSES These are the expenses
  which are required to run the business on daily
  basis, such as
• Selling Expenses
• Administrative Expenses
• General Expenses
• Provision for Bad Debts
• Other Misc. Expenses

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Major Components of Profit Loss Statement

• 5. OPERATING PROFIT When you deduct all the
  operating expenses from the Gross Profit you
  arrive at the Operating Profit.
• Operating Profit Gross Profit - All
  Operating Expenses
• Finally to this Operating Profit, Other incomes
  not arising out from normal operations are added
  and other Non-operating expenses are deducted to
  arrive at the figure of NET PROFIT BEFORE TAX
  (NPBT).
• From this NPBT so arrived, Income Tax is adjusted
  first and thereafter Dividend is distributed as
  per Managements Policy.
• The Balance amount is reinvested in business in
  the form of RESERVES or added in the Capital
  Account.

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Major Components of balance sheet

• Balance Sheet is a statement of Assets
  Liabilities as on a given date. It reflects the
  Financial Position of a concern as on a date. The
  Balance Sheet can be looked at from two angles
• ASSETS as USES and LIABILITIES as SOURCES OF
  FUNDS
• ASSETS as what the Business Owns and LIABILITIES
  as what the Business Owes.

LIABILITIES ASSETS
NET WORTH FIXED ASSETS
TERM LIABILITIES CURRENT ASSETS
CURRENT LIABILITIES OTHER NON CURRENT ASSETS
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Major Components of balance sheet

• 1. Net Worth It is the total investment of the
  owners in the Business.
• For a Limited Company it comprises of a sum of
  Share Capital Reserves
• Share Capital is the direct investment of the
  owners in the business. This includes Equity
  Share Capital and Preference Share Capital.
• Reserves Profits of the business which have
  been reinvested in the business. In
  Proprietorship and Partnership Firms they are
  added to Capital and not shown separately.

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Major Components of balance sheet

• 2. TERM LIABILITIES All those borrowings made
  by the concern which are repayable after One Year
  of the Balance Sheet date are called Term
  Liabilities. These include
• TERM LOANS
• DEBENTURE
• TERM DEPOSITS
• REDEEMABLE PREFERENCE SHARE CAPITAL
• (Maturing with 12 years of
  Balance Sheet Date)

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Major Components of balance sheet

• 3. CURRENT LIABILITIES All those borrowings
  made by the concern which are expected to be
  repaid within 12 months of the date of the
  Balance Sheet. These include
• CREDITORS
• PROVISIONS FOR EXPENSES
• BANK BORROWING FOR WORKING CAPITAL
• DEPOSITS MATURING WITHIN 12 MONTHS
• INSTALLMENTS OF TERM LOANS
• DEBENTURES/REDEEMABLE PREFERENCE SHARES
  MATURING WITHIN ONE YEAR
• Total of Term Liabilities Current
  Liabilities is called Outside Liabilities and
  is the Total Borrowings of the Firm

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Major Components of balance sheet

• 4. FIXED ASSETS These are the assets which help
  in the production of goods services of the
  concern. They are tangible in nature and have a
  long life. The examples of Fixed Assets are
• Land
• Building
• Plant Machineries
• Furniture Fixtures etc.

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Major Components of balance sheet

• 5. CURRENT ASSETS These are the assets which are
  expected to be consumed or converted into cash
  through the normal business operations and
  usually within one year. Such as
• Cash Bank Balances
• FDs with Banks
• Short Term Govt .Securities
• Stocks of R.M., Semi F.G and F.G
• Stores, Spares
• Advance Payment for Suppliers
• Prepaid Insurance
• Debtors Bills Receivables

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Major Components of balance sheet

• 6. NON CURRENT ASSETS These are the assets which
  do not fall in the above two categories of
  assets. They are
• Corporate Investments
• Loans not recoverable within 1 year
• Non Consumable Spares
• Deferred Receivables
• Advance for Capital Expenditure
• Intangible Assets Goodwill, Patent, Trade
  Mark
• Preliminary Pre-operative Expenses

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FINANCIAL Statements are studied to know

• Does the firm has liquidity to meet its short
  term obligations?
• Would the firm be able to meet its long term
  commitments?
• Is the firm using its assets efficiently?
• How profitable are the operations of the firm?

• Lenders need it for carrying out -
• Technical Appraisal
• Commercial Appraisal
• Financial Appraisal
• Economic Appraisal
• Management Appraisal

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What is Financial analysis?

• It is the process of identifying the financial
  strengths weaknesses of a firm by properly
  establishing relationships between the items of
  the Balance Sheet and Profit Loss A/c.
• This is done by
• (1) The Firms Management
• (2) Owners
• (3) Creditors
• (4) Investors
• (5) Bankers Others

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Why Financial analysis?

1. TRADE CREDITORS They do it to know the firms
   ability to meet their claim. Liquidity
2. SUUPLIERS OF LONG TERM DEBT They need to know
   the firms long term solvency. Profitability
   over a long period of time
3. INVESTORS They are concerned about the firms
   earnings.
4. BANKERS They need to understand the soundness
   of the Business so as to take a good Credit
   Decision.

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Ratio Analysis

• Its a tool which enables the banker or lender to
  arrive at the following factors
• Liquidity position
• Profitability
• Solvency
• Financial Stability
• Quality of the Management
• Safety Security of the loans advances to be
  or already been provided

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Ratio Analysis

• Ratio is the indicated quotient of two
  mathematical expressions i.e. the relationship
  between two or more things.
• Ratio Analysis involves comparison for
  useful interpretation of the financial statement.
  A single ratio does not indicate favourable or
  unfavourable condition. It should be compared
  with some sort of standard. Standard of
  comparison may consist of
• Ratios calculated from the past financial
  statements of the same firm.
• Ratios developed using the projected financial
  statements of the same firm.
• Ratios of some selected firms, especially the
  most progressive and successful at the same point
  of time and
• Ratios of the industry level to which the firm
  belongs.

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How a Ratio is expressed?

• As Percentage - such as 25 or 50 . For
  example if net profit is Rs.25,000/- and the
  sales is Rs.1,00,000/- then the net profit can be
  said to be 25 of the sales.
• As Proportion - The above figures may be
  expressed in terms of the relationship between
  net profit to sales as 1 4.
• As Pure Number /Times - The same can also be
  expressed in an alternatively way such as the
  sale is 4 times of the net profit or profit is
  1/4th of the sales.

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Format of balance sheet for ratio analysis
LIABILITIES ASSETS
NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partners Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Revaluation Other Reserves) Credit Balance in PL A/c FIXED ASSETS LAND BUILDING, PLANT MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value
LONG TERM LIABILITIES/BORROWED FUNDS Term Loans (Banks Institutions) Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities NON CURRENT ASSETS Investments in quoted shares securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature
CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or deposits Expenses payable provisions against various items CURRENT ASSETS Cash Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks Inventory (RM,SIP,FG) Stores Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 months
CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or deposits Expenses payable provisions against various items INTANGIBLE ASSETS Patent, Goodwill, Debit balance in PL A/c, Preliminary or Preoperative expenses
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Classification of Ratios
Balance Sheet Ratio PL Ratio or Income/Revenue Statement Ratio Balance Sheet and Profit Loss Ratio
Financial Ratio Operating Ratio Composite Ratio
Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors Turnover Ratio,
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Some important notes

• Liabilities have Credit balances and Assets have
  Debit balances
• Current Liabilities are those which have either
  become due for payment or shall fall due for
  payment within 12 months from the date of Balance
  Sheet
• Current Assets are those which undergo change in
  their shape/form within 12 months. These are also
  called Working Capital or Gross Working Capital
• Net Worth Long Term Liabilities are also called
  Long Term Sources of Funds
• Current Liabilities are known as Short Term
  Sources of Funds
• Long Term Liabilities Short Term Liabilities
  are also called Outside Liabilities
• Current Assets are Short Term Use of Funds

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Some important notes

• Assets other than Current Assets are Long Term
  Use of Funds
• Installments of Term Loan Payable in 12 months
  are to be taken as Current Liability, only for
  Calculation of Current Ratio Quick Ratio.
• If there is profit it shall become part of Net
  Worth under the head Reserves and if there is
  loss it will become part of Intangible Assets
• Investments in Govt. Securities to be treated
  current only if these are marketable and due.
  Investments in other securities are to be treated
  Current if they are quoted. Investments in
  allied/associate/sister units or firms to be
  treated as Non-current.
• Bonus Shares as issued by capitalization of
  General Reserves and as such do not affect the
  Net Worth. But with Rights Issue, change takes
  place in Net Worth and Current Ratio.

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• Current Ratio It is the relationship between
  the current assets and current liabilities of a
  concern.
• Current Ratio Current Assets/Current
  Liabilities
• If the Current Assets and Current
  Liabilities of a concern are Rs.4,00,000 and
  Rs.2,00,000 respectively, then the Current Ratio
  will be Rs.4,00,000/Rs.2,00,000 2 1
• The ideal Current Ratio preferred by
  Banks is 1.33 1
• Current Assets Cash those assets which
  can be converted into cash within 1 year. For
  example, Marketable securities, Debtors,
  Inventories, Prepaid Expenses.
• Current Liabilities Creditors, Bills
  Payable, Accrued Expenses, Short Term Bank Loans,
  Income Tax Liabilities and long Term Liabilities
  maturing in the current year.

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• Current Ratio measures the firms short term
  solvency. A ratio greater than 1 means that the
  firm has more current assets than current claims
  against them.
• As a conventional rule a Current Ratio of 2 is
  considered most satisfactory. This rule is based
  on the logic that in a worse situation, even if
  the value of current assets become half, the firm
  will be able to meet its current obligations. It
  represents the Margin of Safety i.e. a cushion
  of protection for creditors. Higher the ratio
  greater the margin of safety.

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• Net Working Capital This is worked out as
  surplus of Long Term Sources over Long Term Uses,
  alternatively it is the difference of Current
  Assets and Current Liabilities. It measures the
  firms potential reservoir of funds.
• NWC Current Assets Current
  Liabilities

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3. ACID TEST or QUICK RATIO It is the ratio
between Quick Current Assets and Current
Liabilities. Quick Current Assets Quick
assets are those which can be immediately
converted into cash without a loss of value. Cash
Bank balances are the most liquid assets.
Examples of quick Assets are Cash/Bank
Balances, Receivables upto 6 months, Quickly
realizable securities such as Govt. Securities or
quickly marketable/quoted shares and Bank Fixed
Deposits. Inventories are less liquid hence the
same is deducted from the Current Assets to
arrive at Quick Assets. Acid Test or Quick
Ratio Quick Current Assets/Current
Liabilities Example Cash
50,000 Debtors
1,00,000 Inventories 1,50,000
Current Liabilities 1,00,000 Total Current
Assets 3,00,000 Current Ratio gt
3,00,000/1,00,000 3 1 Quick Ratio
gt 1,50,000/1,00,000 1.5
1
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• DEBT EQUITY RATIO It is the relationship
  between borrowers fund (Debt) and Owners
  Capital (Equity). It represents the lenders
  contribution for each Rupee of owners
  contribution.
• Long Term Outside Liabilities / Tangible
  Net Worth
• Liabilities of Long Term Nature
• Total of Capital and Reserves Surplus Less
  Intangible Assets
• For instance, if the Firm is having the
  following
• Capital
  Rs. 200 Lacs
• Free Reserves Surplus Rs.
  300 Lacs
• Long Term Loans/Liabilities Rs. 800
  Lacs
• Debt Equity Ratio will be gt
  800/500 1.6 1

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5. PROPRIETARY RATIO This ratio indicates the
extent to which Tangible Assets are financed by
Owners Fund. Proprietary Ratio (Tangible Net
Worth/Total Tangible Assets) x 100 The
ratio will be 100 when there is no Borrowing for
purchasing of Assets. 6. GROSS PROFIT RATIO
By comparing Gross Profit percentage to Net Sales
we can arrive at the Gross Profit Ratio which
indicates the manufacturing efficiency as well as
the pricing policy of the concern. Gross
Profit Ratio (Gross Profit / Net Sales ) x
100 Alternatively , since Gross Profit
is equal to Sales minus Cost of Goods Sold, it
can also be interpreted as below
Gross Profit Ratio (Sales Cost of goods
sold)/ Net Sales x 100 A higher Gross
Profit Ratio indicates efficiency in production
of the unit.
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• 7. OPERATING PROFIT RATIO
• It is expressed as gt (Operating
  Profit / Net Sales ) x 100
• Higher the ratio indicates operational
  efficiency
• NET PROFIT RATIO
• It is expressed as gt ( Net
  Profit / Net Sales ) x 100
• It measures overall profitability.
• 
  

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9. STOCK/INVENTORY TURNOVER RATIO
It indicates the efficiency of the firm in
selling its products. It is calculated by
dividing the Cost of Goods Sold by Average
Inventory. To arrive at the number of days,
weeks or months turnover the following formulas
may be applied. (Average
Inventory/Sales) x 365 for days (Average
Inventory/Sales) x 52 for weeks
(Average Inventory/Sales) x 12 for months
Average Inventory or Stocks (Opening
Stock Closing Stock)

-----------------------------------------

2 This ratio indicates the number
of times the inventory is rotated during the
relevant accounting period, i.e. how rapidly the
inventory is turning into receivables through
sales. Generally a high inventory turnover is
indicative of good inventory management and vice
versa.

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10. DEBTORS TURNOVER RATIO This is
also called Debtors Velocity or Average
Collection Period or Period of Credit given .
(Average Debtors/Sales ) x 365 for days

(52 for weeks 12 for months)
11. ASSET TRUNOVER RATIO
Net Sales/Tangible Assets 12. FIXED
ASSET TURNOVER RATIO Net Sales /Fixed
Assets 13. CURRENT ASSET TURNOVER
RATIO Net Sales / Current Assets
14. CREDITORS TURNOVER RATIO This is also
called Creditors Velocity Ratio, which determines
the creditor payment period. (Average
Creditors/Purchases)x365 for days

(52 for weeks 12 for months)


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15. RETRUN ON ASSETS Net
Profit after Taxes/Total Assets
16. RETRUN ON CAPITAL EMPLOYED ( Net
Profit before Interest Tax / Average Capital
Employed) x 100 Average Capital
Employed is the average of the equity share
capital and long term funds provided by the
owners and the creditors of the firm at the
beginning and end of the accounting period.



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• Composite Ratio
• 17. RETRUN ON EQUITY CAPITAL (ROE)
• Net Profit after Taxes /
  Tangible Net Worth
• EARNING PER SHARE EPS indicates the quantum of
  net profit of the year that would be ranking for
  dividend for each share of the company being held
  by the equity share holders.
• Net profit after Taxes and Preference
  Dividend/ No. of Equity Shares
• 19. PRICE EARNING RATIO PE Ratio indicates the
  number of times the Earning Per Share is covered
  by its market price.
• Market Price Per Equity Share/Earning Per
  Share

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20. DEBT SERVICE COVERAGE RATIO This ratio is
one of the most important one which indicates the
ability of an enterprise to meet its liabilities
by way of payment of installments of Term Loans
and Interest thereon from out of the cash
accruals and forms the basis for fixation of the
repayment schedule in respect of the Term Loans
raised for a project. (The Ideal DSCR Ratio is
considered to be 2 ) PAT Depr. Annual
Interest on Long Term Loans Liabilities
--------------------------------------------------
------------------------------- Annual
interest on Long Term Loans Liabilities
Annual Installments payable on Long Term Loans
Liabilities ( Where PAT is Profit
after Tax and Depr. is Depreciation)


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• LIQUIDITY RATIOS
• CURRENT RATIO C.A / C.L
• QUICK RATIO (C.A INVENTORY)/C.L
• ACTIVITY RATIOS
• INVENTORY TURNOVER RATIO (COST OF GOODS SOLD
  OR SALES)/INVENTORY
• DEBTORS TURNOVER RATIO (CREDIT SALES OR
  SALES)/AVERAGE DEBTORS
• INVENTORY PERIOD 360/INVENTORY TURNOVER
• COLLECTION PERIOD 360/DEBTORS TURNOVER
• ASSETS TURNOVER SALES/NET ASSETS OR CAPITAL
  EMPLOYED
• WORKING CAPITAL TURNOVER SALES/NET WORKING
  CAPITAL

• PROFITABILITY RATIOS
• GROSS MARGIN GROSS PROFIT/SALES
• NET MARGIN PAT/SALES, EBIT/SALES
• PAT TO EBIT RATIO PAT/EBIT
• RETRUN ON INVESTMENT RATIO EBIT/NET ASSETS OR
  CAPITAL EMPLOYED
• RETRUN ON EQUITY PAT/NET WROTH
• LEVERAGE RATIOS
• TOTAL DEBT RATIO TOTAL DEBT/CAPITAL EMPLOYED
• DEBT EQUITY RATIO NET WORTH/TOTAL DEBT
• CAPITAL EQUITY RATIO C.E OR NET ASSETS / NET
  WORTH
• INTEREST COVERAGE RATIO (EBITDepr.)/INTEREST

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EXERCISE 1



LIABILITES ASSETS
Capital 180 Net Fixed Assets 400
Reserves 20 Inventories 150
Term Loan 300 Cash 50
Bank C/C 200 Receivables 150
Trade Creditors 50 Goodwill 50
Provisions 50
800 800

• What is the Net Worth Capital Reserve
  200
• Tangible Net Worth is Net Worth -
  Goodwill 150
• Outside Liabilities TL CC Creditors
  Provisions 600
• Net Working Capital C A - C L 350 -
  250 50
• Current Ratio C A / C L 350 /
  300 1.17 1
• Quick Ratio Quick Assets / C L
  200/300 0.66 1

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EXERCISE 2
LIABILITIES 2006-07 2007-08 2006-07 2007-08
Capital 300 350 Net Fixed Assets 730 750
Reserves 140 160 Security Electricity 30 30
Bank Term Loan 320 280 Investments 110 110
Bank CC (Hyp) 490 580 Raw Materials 150 170
Unsec. Long T L 150 170 S I P 20 30
Creditors (RM) 120 70 Finished Goods 140 170
Bills Payable 40 80 Cash 30 20
Expenses Payable 20 30 Receivables 310 240
Provisions 20 40 Loans/Advances 30 190
Goodwill 50 50
Total 1600 1760 1600 1760
1. Tangible Net Worth for 1st Year ( 300
140) - 50 390
2. Current Ratio for 2nd Year (170 30
17020 240 190 ) / (580708070)
820
/800 1.02
3. Debt Equity Ratio for 1st Year 320150 /
390 1.21
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Exercise 3.

LIABIITIES ASSETS
Equity Capital 200 Net Fixed Assets 800
Preference Capital 100 Inventory 300
Term Loan 600 Receivables 150
Bank CC (Hyp) 400 Investment In Govt. Secu. 50
Sundry Creditors 100 Preliminary Expenses 100
Total 1400 1400
1. Debt Equity Ratio will be 600 /
(200100) 2 1
2. Tangible Net Worth Only equity Capital
i.e. 200
3. Total Outside Liabilities / Total Tangible Net
Worth (600400100) / 200

11 2
4. Current Ratio will be (300 150 50 ) /
(400 100 ) 1 1
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Exercise 4.
LIABILITIES ASSETS
Capital Reserves 355 Net Fixed Assets 265
P L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

• What is the Current Ratio ? Ans (1125
  1281) / (3826915)
• 
  255/88 2.89 1
• Q What is the Quick Ratio ? Ans (1251)/
  88 1.43 11
• Q. What is the Debt Equity Ratio ? Ans LTL
  / Tangible NW
• 
  100 / ( 362 30)
• 
  100 / 332 0.30 1

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Exercise 4. contd
LIABILITIES ASSETS
Capital Reserves 355 Net Fixed Assets 265
P L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550
Q . What is the Proprietary Ratio ? Ans (TNW
/ Tangible Assets) x 100

(362 - 30 ) / (550 30) x 100

(332 / 520) x 100 64
Q . What is the Net Working Capital ? Ans
C. A - C L. 255 - 88 167
Q . If Net Sales is Rs.15 Lac, then What would
be the Stock Turnover Ratio in Times ? Ans
Net Sales / Average Inventories/Stock
1500 / 128
12 times approximately
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Exercise 4. contd
LIABILITIES ASSETS
Capital Reserves 355 Net Fixed Assets 265
P L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

• What is the Debtors Velocity Ratio ? If the
  sales are Rs. 15 Lac.
• Ans ( Average Debtors / Net Sales) x 12
  (125 / 1500) x 12
• 
  1 month

Q. What is the Creditors Velocity Ratio if
Purchases are Rs.10.5 Lac ? Ans (Average
Creditors / Purchases ) x 12 (26 / 1050) x
12 0.3 months
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Exercise 5. Profit to sales is 2 and
amount of profit is say Rs.5 Lac. Then What is
the amount of Sales ? Answer Net Profit
Ratio (Net Profit
/ Sales ) x 100
2 (5 x100) /Sales
Therefore Sales 500/2 Rs.250 Lac
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Exercise 6. A Company has Net Worth of Rs.5
Lac, Term Liabilities of Rs.10 Lac. Fixed Assets
worth RS.16 Lac and Current Assets are Rs.25 Lac.
There is no intangible Assets or other Non
Current Assets. Calculate its Net Working
Capital.
Answer Total Assets 16 25
Rs. 41 Lac Total Liabilities NW LTL CL
5 10 CL 41 Lac Current Liabilities 41
15 26 Lac Therefore Net Working Capital
C. A C.L
25 26 (- )1 Lac
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Exercise 7 Current Ratio of a concern is 1
1. What will be the Net Working Capital ? Answer
It suggest that the Current Assets is equal to
Current Liabilities hence the NWC would be NIL (
since NWC C.A - C.L )
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Exercise 8 Suppose Current Ratio is 4 1.
NWC is Rs.30,000/-. What is the amount of
Current Assets ? Answer 4a - 1a
30,000 Therefore a 10,000
Thus Current Liabilities is Rs.10,000 Hence
Current Assets would be 4a 4 x 10,000
Rs.40,000/-
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Exercise 9. The amount of Term Loan installment
is Rs.10000/ per month, monthly average interest
on TL is Rs.5000/-. If the amount of
Depreciation is Rs.30,000/- p.a. and PAT is
Rs.2,70,000/-. What would be the DSCR ? DSCR
(PAT Depr. Annual Intt.) / (Annual Intt.
Annual Installment) (270000 30000
60000 ) / (60000 120000) 360000 /
180000 2
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Exercise 10 Total Liabilities of a firm is
Rs.100 Lac and Current Ratio is 1.5 1. If Fixed
Assets and Other Non Current Assets are to the
tune of Rs. 70 Lac and Debt Equity Ratio being 3
1. What would be the Long Term Liabilities?
Answer We can
easily arrive at the amount of Current Asset
being Rs. 30 Lac i.e. ( Rs. 100 L - Rs. 70 L
). If the Current Ratio is 1.5 1, then
Current Liabilities works out to be Rs. 20 Lac.
That means the aggregate of Net Worth and
Long Term Liabilities would be Rs. 80 Lacs. If
the Debt Equity Ratio is 3 1 then Debt works
out to be Rs. 60 Lacs and equity Rs. 20 Lacs.
Therefore the Long Term Liabilities would be
Rs.60 Lac.
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Exercise 11 Current Ratio is say 1.2 1 .
Total of balance sheet being Rs.22 Lac. The
amount of Fixed Assets Non Current Assets is
Rs. 10 Lac. What would be the Current
Liabilities?
Answer When Total Assets is Rs.22 Lac then
Current Assets would be (Total Assets less
FixedNon Current Assets) 22 10 i.e Rs. 12
Lac. Thus we can easily arrive at the Current
Liabilities figure which should be Rs. 10 Lac,
since the Curret Ratio being 1.2 1
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• Exercise 12 Total Sales (all credit sales) of
  a firm is Rs.640000. It has gross profit margin
  of 15 and a Current Ratio of 2.5. The firms
  Current liabilities are Rs.96000, Inventories
  Rs.48000 and Cash Rs.16000.
• Determine the average inventory to be carried by
  the firm, if an inventory turnover of 5 times is
  expected? Assuming a year having 360 days.
• Inventory Turnover Cost of Goods Sold /
  Average Inventory
• Given that Gross Profit margin is 15 means
  the Goods sold should be 85 of the sales. So
  Cost of Goods Sold Sales x 85 640000 x 85
  544000
• Hence 5 544000 / Average Inventory
• or Average Inventory 544000/5
  108800

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Exercise 12 Total Sales (all credit sales) of
a firm is Rs.640000. It has gross profit margin
of 15 and a Current Ratio of 2.5. The firms
Current liabilities are Rs.96000, Inventories
Rs.48000 and Cash Rs.16000. b) Determine the
average collection period if the opening balance
of debtors is intended to be Rs.80000/-. Assume a
year having 360 days. Average Collection Period
(Average Debtors/Credit Sales) x 360 Average
Debtors (Opening Bal of Debtors Closing Bal
of Debtors)/2 Current Liabilities given is
Rs.96000/-, Current Ratio is 2.5 So Current
Assets 96000 x 2.5 240000 If you deduct
Inventory and Cash i.e. 48000 16000 64000
from Current Assets, you get closing balance of
Debtors, So Closing Balance of Debtors is 240000
64000 176000 Therefore the average Debtors
would be (80000 176000)/2 128000 Hence
Average Collection Period (128000/640000)x360

72 days.
57

• EXERCISE 13. A firm sold its stocks in CASH,
  in order to meet its liquidity needs. Which of
  the following Ratio would be affected by this?
• Debt Equity Ratio
• Current Ratio
• Debt Service Coverage Ratio
• Quick Ratio

• EXERCISE 14. A company is found to be carrying a
  high DEBT EQUITY Ratio. To improve this, a bank
  may suggest the company to
• Raise long term interest free loans from friends
  and relatives
• Raise long term loans from Institutions
• Increase the Equity by way of Bonus Issue
• Issue Rights share to existing share holders.

• EXERCISE 15. Which of the following is a
  fictitious Asset?
• Goodwill
• Preliminary Expenses
• Pre-operative expenses
• Book Debts which have become doubtful of recovery

58

• EXERCISE 16. Under which of the following methods
  of depreciation on Fixed Assets, the annual
  amount of depreciation decreases?
• Written Down Value method
• Straight Line method
• Annuity method
• Insurance policy method

• EXERCISE 17 Debt Service Coverage Ratio (DSCR)
  shows
• Excess of current assets over current liabilities
• Number of times the value of fixed assets covers
  the amount of loan
• Number of times the companys earnings cover the
  payment of interest and repayment of principal of
  long term debt
• Effective utilisation of assets

• EXERCISE 18. Which of the following is not
  considered a Quick Asset?
• Cash and Bank balances
• Bank Fixed Deposits
• Current Book Debts
• Loans and Advances

59
Questions on Fund Flow Statement

• Q 19. Fund Flow Statement is prepared from the
  Balance sheet
• Of three balance sheets
• Of a single year
• Of two consecutive years
• None of the above.

• Q 20. Why this Fund Flow Statement is studied
  for ?
• It indicates the quantum of finance required
• It is the indicator of utilisation of Bank funds
  by the concern
• It shows the money available for repayment of
  loan
• It will indicate the provisions against various
  expenses

• Q 21. In a Fund Flow Statement , the assets
  are represented by ?
• Application of Funds
• Sources of Funds
• Surplus of sources over application
• Deficit of sources over application

60

• Q 22. In Fund Flow Statements the Liabilities
  are represented by ?
• Sources of Funds
• Use of Funds
• Deficit of sources over application
• All of the above.

• Q 23 . When the long term sources are more than
  long term uses, in the fund flow statement, it
  would suggest ?
• Increase in Current Liabilities
• Decrease in Working Capital
• Increase in NWC
• Decrease in NWC

• Q 24. When the long term uses in a fund flow
  statement are more than the long term sources,
  then it would mean ?
• Reduction in the NWC
• Reduction in the Working Capital Gap
• Reduction in Working Capital
• All of the above

61

• Q 25. How many broader categories are there for
  the Sources of funds, in the Fund Flow Statement
  ?
• Only One, Source of Funds
• Two, Long Term and Short Term Sources
• Three , Long, Medium and Short term sources
• None of the above.

• R K MOHANTY
• email ID rajendra2411_at_gmail.com,
• rajendra2411_at_hotmail.com