Transcript RATIO ANALYSIS - Indian Institute of Banking and Finance

3:13 PM
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 ?
Management of the
Company :
They want to know
•The Financial position of the concern
•How far the targets of production, sales
and profits have been achieved?
•To determine the Tax liabilities
•What is the amount available for dividends,
bonus payments?
•Planning the future activities of the
concern
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WHO ARE INTERESTED IN FINANCIAL STATEMENTS ?
Workers & Unions : They
want to know the profits
made by the concern and
the share the workers
claim as bonus etc.
Government : To know the
profits of the concern and
the Tax liability thereon.
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WHO ARE INTERESTED IN FINANCIAL STATEMENTS ?
Creditors , Bankers & Financial Institutions :
General financial position to determine if the concern is
worth lending to.
Whether the sales, production, profitability are increasing or
decreasing?
The liquidity position of the concern i.e. meeting the liabilities
in time.
The assets that are available to secure their advances.
The stake of the owners of the concern as compared to the
amount lent.
How the amount lent to the concern has been utilised, and so
on?
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MAJOR COMPONENTS OF PROFIT & LOSS STATEMENT
1. 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 Management’s
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:
1. ASSETS as USES and LIABILITIES as SOURCES OF
FUNDS
2. 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 Firm’s Management
(2) Owners
(3) Creditors
(4) Investors
(5) Bankers & Others
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WHY FINANCIAL ANALYSIS?
A. TRADE CREDITORS : They do it to know the firm’s ability to
meet their claim. [Liquidity]
B. SUUPLIERS OF LONG TERM DEBT : They need to know the
firm’s long term solvency. [Profitability over a long period of
time]
C. INVESTORS : They are concerned about the firm’s earnings.
D. BANKERS : They need to understand the soundness of the
Business so as to take a good Credit Decision.
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RATIO ANALYSIS
It’s 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 :
1. Ratios calculated from the past financial statements of the same firm.
2. Ratios developed using the projected financial statements of the same
firm.
3. Ratios of some selected firms, especially the most progressive and
successful at the same point of time; and
4. 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
FIXED ASSETS : LAND & BUILDING, PLANT &
Share Capital/Partner’s Capital/Paid up Capital/ MACHINERIES
Owners Funds
Original Value Less Depreciation
Reserves ( General, Capital, Revaluation & Other [Net Value or Book Value or Written down value]
Reserves)
Credit Balance in P&L A/c
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
INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c,
Preliminary or Preoperative expenses
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CLASSIFICATION OF RATIOS
Balance Sheet
Ratio
P&L 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
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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



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
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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1.
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 firm’s 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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2.
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 firm’s 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
Total Current Assets 3,00,000
Current Ratio = >
Quick Ratio
=>
Current Liabilities 1,00,000
3,00,000/1,00,000
1,50,000/1,00,000
= 3:1
= 1.5 : 1
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4. DEBT EQUITY RATIO : It is the relationship between
borrower’s fund (Debt) and Owner’s Capital (Equity). It
represents the lender’s contribution for each Rupee of owner’s
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 => 800/500 = 1.6 : 1
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5. PROPRIETARY RATIO : This ratio indicates the extent to which
Tangible Assets are financed by Owner’s 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 =>
(Operating Profit / Net Sales ) x 100
Higher the ratio indicates operational efficiency
8. NET PROFIT RATIO :
It is expressed as =>
( 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
18. 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 :
PROFITABILITY RATIOS :
1. CURRENT RATIO = C.A / C.L
2. QUICK RATIO = (C.A –
INVENTORY)/C.L
1. GROSS MARGIN = GROSS
PROFIT/SALES
2. NET MARGIN = PAT/SALES,
EBIT/SALES
3. PAT TO EBIT RATIO = PAT/EBIT
4. RETRUN ON INVESTMENT RATIO
= EBIT/NET ASSETS OR CAPITAL
EMPLOYED
5. RETRUN ON EQUITY = PAT/NET
WROTH
ACTIVITY RATIOS :
1. INVENTORY TURNOVER RATIO =
(COST OF GOODS SOLD OR
SALES)/INVENTORY
2. DEBTORS TURNOVER RATIO =
(CREDIT SALES OR
SALES)/AVERAGE DEBTORS
3. INVENTORY PERIOD =
360/INVENTORY TURNOVER
4. COLLECTION PERIOD =
360/DEBTORS TURNOVER
5. ASSETS TURNOVER =
SALES/NET ASSETS OR CAPITAL
EMPLOYED
6. WORKING CAPITAL TURNOVER =
SALES/NET WORKING CAPITAL
LEVERAGE RATIOS :
1. TOTAL DEBT RATIO = TOTAL
DEBT/CAPITAL EMPLOYED
2. DEBT EQUITY RATIO = NET
WORTH/TOTAL DEBT
3. CAPITAL EQUITY RATIO = C.E
OR NET ASSETS / NET WORTH
4. INTEREST COVERAGE RATIO =
(EBIT+Depr.)/INTEREST
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EXERCISE 1
3:13 PM
LIABILITES
Capital
Reserves
ASSETS
180 Net Fixed Assets
20 Inventories
Term Loan
300 Cash
Bank C/C
200 Receivables
Trade Creditors
50 Goodwill
Provisions
50
800
a.
b.
c.
d.
e.
f.
400
150
50
150
50
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
3:13 PM
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
140
170
30
20
310
240
30
190
50
50
1600
1760
70 Finished Goods
Bills Payable
40
80 Cash
Expenses Payable
20
30 Receivables
Provisions
20
40 Loans/Advances
Goodwill
Total
1600
1760
1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390
2. Current Ratio for 2nd Year : (170 + 30 +170+20+ 240 + 190 ) / (580+70+80+70)
820 /800 = 1.02
3. Debt Equity Ratio for 1st Year : 320+150 / 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.
Sundry Creditors
100 Preliminary Expenses
Total
1400
1. Debt Equity Ratio will be : 600 / (200+100)
50
100
1400
= 2:1
2. Tangible Net Worth : Only equity Capital i.e. = 200
3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 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
P & L Credit Balance
Net Fixed Assets
7 Cash
Loan From S F C
100 Receivables
265
1
125
Bank Overdraft
38 Stocks
Creditors
26 Prepaid Expenses
1
9 Intangible Assets
30
Provision of Tax
Proposed Dividend
15
550
Q. What is the Current Ratio ?
Q What is the Quick Ratio ?
128
550
Ans : (1+125 +128+1) / (38+26+9+15)
: 255/88 = 2.89 : 1
Ans : (125+1)/ 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.
3:13 PM
contd…
LIABILITIES
Capital + Reserves
P & L Credit Balance
Loan From S F C
ASSETS
355
Net Fixed Assets
265
7 Cash
100 Receivables
1
125
Bank Overdraft
38 Stocks
Creditors
26 Prepaid Expenses
1
9 Intangible Assets
30
Provision of Tax
Proposed Dividend
128
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
46
Exercise 4.
3:13 PM
contd…
LIABILITIES
Capital + Reserves
P & L Credit Balance
Loan From S F C
ASSETS
355
Net Fixed Assets
7 Cash
100 Receivables
265
1
125
Bank Overdraft
38 Stocks
Creditors
26 Prepaid Expenses
1
9 Intangible Assets
30
Provision of Tax
Proposed Dividend
128
15
550
550
Q. 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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3:13 PM
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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3:13 PM
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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3:13 PM
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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3:13 PM
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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3:13 PM
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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3:13 PM
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 Fixed+Non
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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3:13 PM
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.
a) 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
or
5 = 544000 / Average Inventory
Average Inventory = 544000/5 = 108800
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3:13 PM
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.
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3:13 PM
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?
1.
2.
3.
4.
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 :
1.
2.
3.
4.
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?
1.
2.
3.
4.
Goodwill
Preliminary Expenses
Pre-operative expenses
Book Debts which have become doubtful of recovery
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3:13 PM
EXERCISE 16. Under which of the following methods of depreciation on
Fixed Assets, the annual amount of depreciation decreases?
1.
2.
3.
4.
Written Down Value method
Straight Line method
Annuity method
Insurance policy method
EXERCISE 17 Debt Service Coverage Ratio (DSCR) shows :
1. Excess of current assets over current liabilities
2. Number of times the value of fixed assets covers the amount of loan
3. Number of times the company’s earnings cover the payment of
interest and repayment of principal of long term debt
4. Effective utilisation of assets
EXERCISE 18. Which of the following is not considered a Quick Asset?
1.
2.
3.
4.
Cash and Bank balances
Bank Fixed Deposits
Current Book Debts
Loans and Advances
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3:13 PM
Questions on Fund Flow Statement
Q 19. Fund Flow Statement is prepared from the Balance sheet :
1.
2.
3.
4.
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 ?
1.
2.
3.
4.
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 ?
1.
2.
3.
4.
Application of Funds
Sources of Funds
Surplus of sources over application
Deficit of sources over application
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3:13 PM
Q 22. In Fund Flow Statements the Liabilities are represented by ?
1.
2.
3.
4.
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 ?
1.
2.
3.
4.
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 ?
1.
2.
3.
4.
Reduction in the NWC
Reduction in the Working Capital Gap
Reduction in Working Capital
All of the above
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3:13 PM
Q 25. How many broader categories are there for the Sources of funds,
in the Fund Flow Statement ?
1.
2.
3.
4.
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 : [email protected],
[email protected]
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