BIITM - Suman - Financial Statement Analysis (1)

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CHAPTER-I

FINANCIAL STATEMENTS

LEARNING OBJECTIVESAfter studying this chapter, you will be able to:• Explain the meaning of financial statements of a company;• Describe the form and content of balance sheet of a company;• Prepare the Balance heet of a company as per chedule !" Part " of the #ompanies

Act $%&'(• )now the ma*or headings under which the +arious assets and liabilities can be shown(• Explain the meaning, ob*ecti+es and limitations of analysis using accounting ratios• #alculate +arious ratios to assess the sol+ency, li uidity, efficiency and profitability of

the firm(• "nterpret the +arious ratios for inter and intra-firm comparison(

define #ash .low tatement

• /now its ob*ecti+es• understand its uses 01ses of #ash .low tatement2• explain the 3imitations of #ash .low tatements• classify the #ash .lows as•( cash flow from 4perating Acti+ities•( cash flow from 4perating•( cash .low from .inancing Acti+ities• ma/e a format of #ash .low tatement as per 5e+ised A -6(• prepare #ash .low tatement in a Prescribed .ormat(

1.0 7he financial statements are the end products of the accounting process whichsummaries the financial position and performance of a business concern in an organi8edmanner( .inancial tatements pro+ide a summari8ed +iew of the operations of the business(7hey ser+e as an important medium in communicating accounting information to +arioususers of accounts(

"f you can read a cric/et scoreboard, you can learn to read basic financial statements( 3et9sbegin by loo/ing at what financial statements do(

1.1 Financial Statement !" a c!m#an$.inancial tatements show you where a company9s money came from, where it went, andwhere it is now(.inancial statements are the basic and formal annual reports through which the corporatemanagement communicates financial information to its owners and +arious other externalparties which include-in+estors, tax authorities, go+ernment, employees, etc(

7here are two main financial statements( 7hey are: $ balance sheets; < incomestatements(

Balance sheets show what a company owns and what it owes at a fixed point in time(

"ncome statements show how much money a company made and spent o+er a period of time(

3et9s loo/ at the Balance heet in more detail(

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%SERS OF FINANCIAL STATEMENTS

1.& In'e t!( an) #!tential in'e t!(

7he present in+estors want to decide whether they should hold the securities of the

company or sell them(Potential in+estors, on the other hand, want to /now whether they should in+est in theshares of the company or not(

"n+estors hareholders or owners and potential in+estors, thus, ma/e use of the financialstatements to *udge the present and future earning capacity of the business, to *udge theoperational efficiency of the business and to /now the safety of in+estment and growthprospects(

Len)e( *l!n+ te(m c(e)it!(.inancial statement helps lenders such as debenture holders, suppliers of loans and leases inascertaining the long term and short term sol+ency of the business( 7hey li/e to /now thefinancial soundness of the business i(e( the ability of the business to repay debt on maturityand whether the enterprise earns sufficient profits so as to pay interest regularly(

Mana+ement

Analysis of financial statements enable the management to e+aluate the o+erall efficieny of the firm( "t helps to ascertain the sol+ency of the enterprise; to /now about its +iability as agoing concern and to pro+ide ade uate information for planning and controlling the affairs of the business( .uture forecasts can easily be made by analy8ing the past date(

S,##lie( * !(t te(m c(e)it!(#reditors=suppliers supplying goods to a business are interested to /now as to whether thebusiness would be in a position to pay the amounts on time( 7hey are interested in short-term sol+ency i(e( the li uidity of the business(

7hey are more interested in current assets and current liabilities of the business( "f currentassets are sufficient, say, twice the current liabilities, they are satisfied that the businesswould be able to discharge the short-term debts on time(

Em#l!$ee an) T(a)e %ni!n

Employees are interested in better emoluments, bonus and continuance of business andwhether the dues li/e pro+ident fund, E " et(, ha+e been deposited with the authorities(

7hey would therefore, li/e to /now its financial performance and profitability and operatingsustainability(

G!'e(nment an) it a+encie.inancial statements are used by go+ernment and its agencies to formulate policies toregulate the acti+ities of business, to formulate taxation policies, to compile national incomeaccounts(

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7axation authorities such as income tax department use the financial statements fordetermination of income tax; sales tax department is interested in sales while the excisedepartment is interested in production(

St!c e/c an+etoc/ exchange uses the financial statements to analy8e and thereafter, inform its membersabout the performance, financial health, etc( of the company, to see whether financialstatements prepared are in conformity with the specified laws and rules and to see whetherthey safeguard the interest of +arious concerned agencies(

4ther 5egulatory authorities such as, #ompany 3aw Board, EB", toc/ Exchanges, 7axAuthorities etc( would li/e that the financial statements prepared are in conformity with thespecified laws and rules, and are to safeguard the interest of +arious concerned agencies(.or example, taxation authorities would be interested in ensuring proper assessment of taxliability of the enterprise as per the laws in force from time to time(C, t!me(#ustomers are interested to ascertain continuance of an enterprise(

.or example, an enterprise may be supplier of a particular type of consumer goods and incase it appears that the enterprise may not continue for a long time, the customer has tofind an alternate source(

BALANCE SHEET- MEANING AN P%RPOSE

Balance heet is a financial statement that summari8es a company9s assets, liabilities andshareholders9 e uity at a specific point in time( 7hese three balance sheet segments gi+e

in+estors an idea as to what the company owns and owes, as well as the amount in+estedby the shareholders(

7he balance sheet show: Assets > 3iabilities ? hareholders9 E uity

A balance sheet thus, pro+ides detailed information about a company9s assets, liabilities andshareholders9 e uity(

Assets are things that a company owns that ha+e +alue( 7his typically means they can eitherbe sold or used by the company to ma/e products or pro+ide ser+ices that can be sold(Assets include physical property, such as plants, truc/s, e uipment and in+entory( "t alsoincludes things that can9t be touched but ne+ertheless exist and ha+e +alue, such astrademar/s and patents( And cash itself is an asset( o are in+estments a company ma/es(

3iabilities are amounts of money that a company owes to others( 7his can include all /indsof obligations, li/e money borrowed from a ban/ to launch a new product, money owed tosuppliers for materials, payroll a company owes to its employees, taxes owed to thego+ernment( 3iabilities also include obligations to pro+ide goods or ser+ices to customers inthe future(

hareholders9 e uity is sometimes called capital or net worth( "t9s the money that would beleft if a company sold all of its assets and paid off all of its liabilities( 7his lefto+er moneybelongs to the shareholders, or the owners, of the company(

A company has to pay for all the things it has assets by either borrowing moneyliabilities or getting it from shareholders shareholders9 e uity (

3



7he purpose of a Balance heet is to report the financial position of a company at a certainpoint in time( "t is di+ided into two columns( 7he first column shows what the company owesliabilities and net worth ( 7he second shows what the company owns assets on the right(At the bottom of each list is the total of that column( As the name implies, the bottom line of the balance sheet must always @balance( "n other words, the total assets are e ual to thetotal liabilities plus the net worth(

7he balance sheet is one of the most important pieces of financial information issued by acompany( "t is a snapshot of what a company owns and owes at the point in time( 7heincome statement, on the other hand, shows how much re+enue and profit a company hasgenerated o+er a certain period(

either statement is better than the other-rather, the financial statements are built to beused together to present a complete picture of a company9s finances(

CONTENTS OF BALANCE SHEET

7he prescribed form of the Balance heet is gi+en in Part " of chedule !" of the #ompaniesAct, $%&'(7he #ompanies Act has laid down two forms of the Balance heet /nown as :

i Cori8ontal formii !etical form

.45 A7 4. 1 A5" ED BA3A #E CEE7 C45" 4 7A3 .45#CED13E !" PA57 "

Balance heet of F( #4(37D(As at F

.iguresfor thepre+iousyear 5s(

3iabilities .iguresfor thecurrentyear5s(

.iguresfor thepre+iousyear5s(

Assets .iguresfor thecurrentyear5s(

$( hare #apital<( 5eser+es and surplus6( ecured 3oansG( 1nsecured 3oans&( #urrent 3iabilities and Pro+isions

a #urrent 3iabilitiesb Pro+isions

$( .ixed Assets<( "n+estments6( #urrent Assets, 3oansand Ad+ances

a #urrent Assetsb 3oans and Ad+ances

G( iscellaneousExpenditure

&( Profit and 3oss A=c

ote: A footnote to the Balance heet may be added to show the contingent liabilities(

7he format of the detailed Balance heet of a company in a hori8ontal form is gi+en below:

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FORMAT OF THE ETAILE BLANCE SHEET IN A HORI ONTAL FORM

H!(i2!ntal F!(m !" Balance S eetBalance S eet !" 3.4Name !" t e C!m#an$5 a !n 3..

.igures forthepre+ious

year 5s(

3iabilities .igures forthecurrent

year5s(

.igures forthepre+ious

year5s(

Assets .igures forthecurrent

year5s(

S a(e Ca#ital

Authorised

Fshares of 5sF( Each

Preference

E uity

"ssued:

Preference

E uity

3ess: #alls 1npaid:

Add: .orfeited

hares

Re e('e an)

S,(#l, 6

#apital 5eser+e

#apital 5edemption 5eser+e

ecurities Premium

4ther 5eser+es

Profit and 3oss Account

Sec,(e) L!an 6

Debentures

3oans and Ad+ance from

Ban/s3oans and Ad+ance from

ubsidiary #ompanies

4ther 3oans and Ad+ances

%n ec,(e) L!an 6

.ixed Deposits

3oans and Ad+ances from

ubsidiaries

#ompanies

hort 7erm 3oans and

Ad+ances

4ther 3oans and Ad+ances

C,((ent Lia7ilitie an)P(!'i i!n 6

A. C,((ent Lia7ilitie

Acceptances

Debentures

undry #reditors

4utstanding Expenses

B. P(!'i i!n 6

.or 7axation

.or Di+idends

.or #ontingencies

.or Pro+ident .und chemes

.or "nsurance, Pension and

4ther similar benefits

Fi/e) A et 6

Hoodwill

3and

Building

3easehold Premises

5ailway idings

Plant and achinery

.urniture

Patents and 7rademar/s

3i+e toc/

!ehicles

In'e tment 6

Ho+ernment or 7rust ecurities,hares, Debentures, Bonds

C,((ent A et 8 L!an an)A)'ance 6

4A5 C,((ent A et 6

"nterest Accrued

tores and pare parts

3oose 7ools

toc/ in 7rade

Ior/ in Progress

undry Debtors

#ash and Ban/ balances

4B5 L!an an) A)'ance 6

Ad+ances and 3oans to ubsidiary

Bills 5ecei+able

Ad+ance Payments

Mi cellane!, -E/#en)it,(e6

Preliminary Expenses

Discount on "ssue of hares andother Deferred Expenses

P(!"it an) L! Acc!,nt

4)e7it Balance6 i" an$5

5



F!(mat !" t e Balance S eet in 'e(tical "!(m

Balance S eet !" 3. A !n 33

Particulars chedule

umber

.igures as

at the endof currentfinancialyear

.igures as at

the end ofpre+iousfinancial year

I. S!,(ce !" F,n) 6 1. S a(e !l)e(9 F,n) 6 a hare #apital b 5eser+es and urplus &. L!an F,n) 6 a ecured loans

b 1nsecured loans T!tal4Ca#ital Em#l!$e)5II. A##licati!n !" F,n) 1. Fi/e) A et 6 a Hross bloc/ b 3ess : depreciation c et bloc/ d #apital wor/-in-progress &. In'e tment 6 :. C,((ent A et 8 L!an an) A)'ance 6

a "n+entories b undry Debtors c #ash and Ban/ Balances d 4ther #urrent Assets e 3oans and Ad+ances Le 6 C,((ent Lia7ilitie an) P(!'i i!n 6

a #urrent liabilitiesb Pro+isions

Net C,((ent A et ;. a iscellaneous expenditure to the

extent not written-off or ad*usted( b Profit and 3oss account debit balance, if anyTOTAL

ote: A footnote to the Balance heet may be added to show the contingent liabilities(

6



HO< TO REA A COMPAN=9S BALANCE SHEET

4i5 LIABILITIES SI E1. S a(e Ca#ital6 1nli/e 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,their friends, relati+es as well as the general public in case of listed companies( 7he capital is/nown share capital and shareholders get di+idend out of the profits of the company asreturn on their in+estment(hare #apital is broadly di+ided into: Authorised #apital, "ssued #apital, ubscribed #apital,#alled up and Paid up capital(

Authorised #apital is the maximum share capital that a company is allowed to issue duringits lifetime( "t is stated in the emorandum of Association(

"ssued #apital is that part of authori8ed capital, which is offered to the public for

subscription, including shares offered to the +endors 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 companyfor payment by the subscribers to the shares(

Paid up capital 7he amount that the shareholders ha+e actually paid to the company is calledas paid up capital of the company(

#alls in arrears must be shown by the way of deduction from the called up capital and

.orfeited shares account by the way of addition to the paid up capital(

<( Re e('e an) S,(#l, 6 5eser+es represent that portion of earnings and receipts of acompany which are set apart by the management for a general or a specific purpose( 7hisitem includes accumulated profits, reser+es and funds- such as capital reser+es, capitalredemption reser+e, balance of securities premium account, general reser+e, credit balanceof profit and loss account, and other reser+es specifying the nature of each reser+e and theamount in respect thereof including the additions during the current year(

6( Sec,(e) L!an 6 3ong-term loans, which are ta/en against security of one or moreassets of the company, are included under this head( Debentures and secured loans andad+ances from ban/s, subsidiary companies, etc(, fall under this category( 3i/ewise interestaccrued and due on secured loans is also recorded under the same head(

G( %n ec,(e) L!an 6 3oans and ad+ances which are not bac/ed by any security in the formof assets of the company are shown under this heading( 7his item includes fixed deposits,unsecured loans and ad+ances from subsidiary companies, short-term loans and ad+ancesfrom ban/s and other sources(

7



&(C,((ent Lia7ilitie an) P(!'i i!n : #urrent liabilities refer to such liabilities, whichmature within a period of one year( 7hey include bills payable, sundry creditors, ad+ancepayments and unexpired discounts, unclaimed di+idends, "nterest accrued but not paid, andother liabilities( Pro+isions refer to the amounts set aside out of re+enue profits for somespecific liabilities payable within a period of one year( 7hose include pro+ision for taxation,proposed di+idends, pro+ision for contingencies, pro+ision for pro+ident fund, pro+ision forinsurance; pension and similar staff benefit schemes, etc( Both the sub headings currentliabilities as well as pro+isions must be shown separately under two sub-heads- a #urrentliabilities b Pro+isions(

C!ntin+ent lia7ilitie7hese are the liabilities which may arise in future on the happening of some e+ent(#ontingent liabilities are not included in the total of the liability side( 7hese are shown as afootnote to the Balance heet(

.ollowing are the usual types of contingent liabilities:

i #laims against the company not ac/nowledged as debt(ii 1ncalled liability on shares partly paid(iii Arrears of fixed cumulati+e di+idend(i+ Estimated amount of contracts remaining to be executed on capital account

and not pro+ided for(+ Bills discounted not yet matured(

ASSETS SI E$( Fi/e) A et : 7hese are assets which are meant for use in business and not forsale( 7hese assets pro+ide a long term economic benefit, usually for more than one year tothe firm( 7hese include goodwill, land, buildings, leaseholds, plant and machinery, railwaysidings, furniture and fittings, patents, li+estoc/, +ehicles, etc( 7hese assets are shown atcost less depreciation till the date(<( In'e tment 6 Business is supposed to great profit( Ihen generated, this profit inexcess of what is re uired for the business can be in+ested into say, shares or debentures of +arious companies( "n+estments thus represent assets held by an enterprise for earningincome( 1nder this head, +arious in+estments made such as in+estment in go+ernmentsecurities or trust securities; in+estment in shares, debentures, and bonds of othercompanies, immo+able properties, etc(, are shown(6( C,((ent A et 8 L!an an) A)'ance : 4ne the fixed assets are in a state of readiness to produce or pro+ide goods and ser+ices, the company needs current assets tocarry out business operations( 7hese assets are held for consumption of for sale and areexpected to be reali8ed in cash during the normal operating cycle( #urrent assets includein+entories, debtors, cash etc( 3oans and ad+ances refer to those assets which are held for ashort term and are expected to be reali8ed within one year( 7hese include ad+ancepayments, loans to subsidiary companies etc( Both the sub headings- current assets as wellas loans and ad+ances must be shown separately under two sub-heads- a #urrent Assetsb 3oans and Ad+ances( "t includes interest accrued on in+estment, in+entories, sundrydebtors, bills recei+able, cash and ban/ balances while loans and ad+ances and otherad+ances li/e prepaid expenses, etc(

G( iscellaneous Expenditure: 7he expenditure which has not been fully written off

shown under this heading( "t includes preliminary expenses, ad+ertisement expenditure,discount on issue of shares and debentures, share issue expenses, etc(

8



&( Profit and 3oss Account: Ihen the Profit and 3oss account shows a debit balance,i(e(, loss which could not be ad*usted against general reser+es, is shown on the asset side of the Balance heet(

Ill, t(ati!n 1 ( Hi+e three examples of each of the following $ current liabilities; <contingent liabilities; 6 current assets; G miscellaneous expenditure; & pro+isions(olution :

Ceadings Examples

$( #urrent liabilities

<( #ontingent liabilities

6( #urrent assets

G( iscellaneous Expenditure

&( Pro+isions

$( undry creditors<( Bill payable6( 1nclaimed di+idend$( #laims against company not ac/nowledge as debt<( 1ncalled liability on partly paid shares

6( Estimated amount of contract remaining to beexecuted($( toc/ in trade(<( #ash at ban/6( tores and spare parts$( Preliminary expenses<( Discount allowed on issue of shares and debentures6( 1nderwriting commission$( Pro+ision for taxation<( Proposed di+idend

6( Pro+ident fund(

Ill, t(ati!n & ( 1nder which heading and sub-heading will you show the following items:$ hare forfeited account; < ecurities premium account; 6 1nclaimed di+idend GProposed di+idend & Arrears of fixed cumulati+e di+idend on preference shares(olution :( o( "tems Ceading ub-heading

$( hare forfeited account hare #apital --<( ecurities premium account 5eser+es and surplus --

6( 1nclaimed di+idend #urrent 3iabilities and pro+isions #urrent liabilityG( Proposed di+idend #urrent 3iabilities and Pro+isions Pro+isions

& Arrears of fixed cumulati+eDi+idend on preferenceshares

#ontingent liability --

Ill, t(ati!n : ( Hi+e the headings and sub-headings under which the following will be shownin a company9s balance sheet as per chedule !" Part " of the #ompany9s Act $%&'( i $JKdebentures ii preliminary expenses iii Plant and achinery i+ #apital reser+e + billspayable +i general reser+e +ii interest paid out of capital during construction +iiirailway sidings ix stores L spare part x fixed deposits(

9



S!l,ti!n6( o( "tems Ceadings ub-Ceadings

i $J K Debentures ecured 3oans --ii Preliminary expenses iscellaneous Expenditure --

iii Plant L achinery .ixed assets --i+ #apital 5eser+e 5eser+es and urplus --

+ Bills Payable #urrent liabilities andpro+isions

#urrent liabilities

+i Heneral reser+e 5eser+es L surplus --+ii "nterest paid out of

capital duringconstruction

iscellaneous expenditure --

+iii 5ailway sidings .ixed assets --ix tore and spare parts #urrent assets, loans L

ad+ances#urrent assets

x .ixed deposits 1nsecured loans --

Ill, t(ati!n ; ( 7he following figures were extracted from the trial balance of M 3td( sharecapital $J,JJJ e uity shares of 5s( $J each fully paid :ecurities premium 5s( $J,JJJ$<K Debentures 5s( &J,JJJ.ixed deposits 5s( <&,JJJ

#reditors 5s( &,JJJNou are re uired to draw up the liabilities side of the balance sheet, according to there uirements of the #ompanies Act(olution :

A EM75A#7 4. BA3A #E CEE7 4. M 37D( A A7 FF

3iabilities 5s(CA5E #AP"7A3:Authori8ed #apitalFFe uity shares of 5s( $J each

"ssued and subscribed

$J,JJJ e uity shares of 5s( $J each

5E E5!E A D 15P31 :ecurities premium

E#15ED 34A :$<K DEBE 715E1 E#15ED 34A :.ixed deposits#155E 7 3"AB"3"7"E A D P54!" "4 :A #urrent liabilitiesundry creditors

B Pro+isions

$,JJ,JJJ

$J,JJJ

&J,JJJ

$J,JJJ

&,JJJ---

10



olution:M 37D(

BA3A #E CEE7 A 4 FFFFFFF

3iabilities Amount5s( Assets Amount5s(AC5E #AP"7A3:Authori8ed #apital$,JJ,JJJ E uity hares of 5s( $J each

"ssued #apital :&J,JJJ E uity hares of 5s( $J each

ubscribed #apital:GG,&JJ E uity hares of 5s( $J each

G,G&,JJJ3ess: #alls in Arrears $,JJJ G,GG,JJJAdd: hare .orfeited A=c G,JJJ

$J,JJ,JJJ

&,JJ,JJJ

G,G ,JJJ

Ill, t(ati!n @. .rom the following balances ta/en from the boo/s of Hu*arat Exports 3td(prepare #ompany9s Balance heet in Cori8ontal .orm:

5s( 5s(

3and and Buildings 6,<&,JJJ Patents O,<JJPlant and achinery <,%J,JJJ "n+estments <J,JJJ

undry Debtors '&,JJJ Preliminary Expenses <,JJJ

,JJJ E uity hares of 5s( $JJ ecurities premium <J,JJJ

each 5s( &J called up G,JJ,JJJ Pro+ision for "ncome tax <G,JJJ

$&K debentures $,JJ,JJJ #losing toc/ $,< ,JJJ

Debenture 5edemption 5eser+e &J,JJJ #ash $<,JJJ

Prepaid "nsurance G, JJ Ad+ance "ncome 7ax G,JJJ

Profit L 3oss #r( $,$6,JJJ undry #reditors $&,<JJBills Payable $&,JJJ 4utstanding expenses G, JJ

Heneral 5eser+e $,JJ,JJJ Proposed Di+idend $',JJJ

"n+estments are in partly-paid shares on which calls of 5s( $J,JJJ ha+e not been made(

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olution:BA3A #E CEE7 4. H1SA5A7 EMP457 37D(

As at FFFFFFin hori8ontal form

3iabilities 5s( Assets 5s(AC5E #AP"7A3:Authori8ed #apital"ssued #apital,JJJ E uity shares of5s($JJ eachubscribed #apital,JJJ E uity shares of5s($JJ each, 5s( &J called up

5E E5!E A D 15P31 :ecurities PremiumHeneral 5eser+eProfit L 3oss A=cDebenture 5edemption 5eser+e

E#15ED 34A :$&K Debentures

1 E#15ED 34A :

#155E 7 3"AB"3"7"E A DP54!" "4 :A #urrent liabilitiesBills payableundry #reditors4utstanding Expenses

B Pro+isions Pro+ision for "ncome tax Proposed di+idend

QQQQQQRQQQ

,JJ,JJJ

G,JJ,JJJ

<J,JJJ

$,JJ,JJJ$,$6,JJJ

&J,JJJ

$,JJ,JJJ

$&,JJJ--

$&,JJJ$&,<JJ

G, JJ

<G,JJJ

$',JJJ

."MED A E7 :3and and BuildingPlant and achineryPatents

" !E 7 E 7 :

#155E 7 A E7 , 34A A DAD!A #E :A #urrent assets: #losing toc/ undry Debtors #ash

B 3oans and Ad+ances Prepaid "nsurance Ad+ance "ncome 7ax

" #E33A E41 EMPE D"715E:Preliminary Expenses

6,<&,JJJ<,%J,JJJ

O,<JJ

<J,JJJ

$,< ,JJJ'&,JJJ$<,JJJ

G, JJG,JJJ

<,JJJ

,& ,JJJ ,& ,JJJ

ote: #ontingent 3iabilities: .or partly-paid shares 5s( $J,JJJ

RATIO ANAL=SIS

1.; 5atio analysis is not *ust comparing different numbers from the balance sheet, incomestatement and cash flow statement( "t is comparing the number against pre+ious years ,other companies, the industry , or e+en the economy in general( 5atios loo/ at therelationships between indi+idual +alues and relate them to how a company has performed inthe past and might perform in the future(

13



.or example current assets alone don9t tell us a whole lot , but when we di+ide them by thecurrent liabilities we are able to determine whether the company has enough money toco+er short debts( 7herefore we can say that when one figure is expressed in terms of another figure by di+iding each other the relation which is established between them iscalled ration(

1.> Meanin+ !" Rati! Anal$ i

5atio Analysis is the relationship between two terms of financial data expressed in the formof ratios and then interpreted with a +iew to e+aluating the financial condition andperformance of a firm(

5atio Analysis can also help us to chec/ whether a business is doing better this year than itwas last year; and it can tell us if our business is doing better or worse than similar type of business(

Example : .irm A earns a profit of 5s( &J,JJJ while .irm B earns a profit of 5s( $,JJ,JJJ(Ihich of them is more efficientR Ie could tend to belie+e that firm B is more efficient thanfirm A( But in order to understand correctly , we need to find out their sales figure( ay firmA9s sales are 5s( &,JJ,JJJ while firm B9s sale are 5s( &J,JJ,JJJ( ow let9s compare thepercentage of profit earned by them on sales(

.or A: &J,JJJ M $JJ > $J K &,JJ,JJJ

.or B: $,JJ,JJJ M $JJ > < K &J,JJ,JJJ

7his clearly shows that firm A is doing better than .irm B(7his example shows that figure assumes significance only when expressed in relation toother related figures(

1.>.1 O7 ecti'e !" Rati! Anal$ i 6 7he main ob*ecti+e of analy8ing financial statement with the help of ratios are:

$( 7he 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(

<( 7he analysis would help the management to find out the o+erall as well as thedepartment T wise efficiency of the firm on the basis of the a+ailable financialinformation(

6( 7he short term as well as the long tem sol+ency of the firm can be determined withthe help of ration analysis(

G( "nter T firm comparison becomes easy with the help of ratios(

1.>.& A)'anta+e !" Rati!n Anal$ i 6

.inancial statement prepared at the end of the year do not always con+ey to the readerthe real profitability and financial health of the business( 7hey contain +arious facts andfigures and it is for the reader to conclude what these figures indicated( 5atio Analysis isan important tool for analy8ing these financial statements ( ome important ad+antagederi+ed by the firm by the use of accounting ratios are:

1. Hel# in Financial tatement anal$ i"t is east to understand the financial position of a business enterprise in respect ofshort term sol+ency, li uidity and profitability with the help of ratio( "t tells us thechanges ta/ing place in the financial condition of the business(

14



&. Sim#li"ie) acc!,ntin+ "i+,(eAbsolute figures are not of mush use( 7hey become important when relationships areestablished say between gross profit and sales(

:. Hel# in calc,latin+ !#e(ati!n e""icienc$ !" t e 7, ine ente(#(i e

5atio enable the user of financial information to determine operating efficiency of afirm by relating the profit figure to the capital employed for a gi+en period(

;. Facilitie inte(- "i(m c!m#a(i !n5atio analysis pro+ides data for inter- firm comparison( "t re+els strong and wea/firms, o+er+alues and under+alues firms as well as successful and unsuccessful firms(

>. Ma e inte(- "i(m c!m#a(i !n #! i7le5atio Analysis helps the firm to compare its own performance o+er a period of time aswell as the performance of different di+isions of the firm( "t helps in deciding whichdi+ision are more efficient than other(

?. Hel# in "!(eca tin+5atio Analysis helps in planning and forecasting ( 5atios pro+ides clues on trends andfutures problems ( e(g if the sales of a firm during the year are 5s( $J la/hs and hea+erage stoc/ /ept during the year 5s( < la/hs, it must be ready to /eep a stoc/ of5s( 6 la/hs which is <J K of the 5s( $& la/hs(

1.>.: Limitati!n !" Rati! Anal$ i

5atio Analysis is a useful techni ue to e+aluate the performance and financial position ofany business unit but it does suffer from a number of limitations( 7hese must be /eptin mind while analysing financial statements(

1. Hi t!(ical Anal$ i5atio Analysis is historical in nature a the finicial statement on the basis of whichratios are calculated are historical in nature(

&. P(ice Le'el C an+e#hanges in price le+el often ma/e comparison of figures of the pre+ious yearsdifficult( E(g ratio of sales to fixed assets in <JJ' would be much higher than in <JJJdue to rising prices, fixed assets being expressed on cost(

:. N!t F(ee "(!m 7ia"n many situations, the accountant has to ma/e a choice out of the +ariousalternati+es a+ailable ( e(g choice of the method depreciation, choice in the methodof in+entory +aluation etc( ince there is a sub*ecti+ity inherent in the choice , ratioanalysis cannot be said to be free from bias(

;. <in)! )(e in+Iindow dressing is slowly the position better than what it is( ome companies , in

order to co+er up their bad finicial position resort to window dressing( By hidingimportant facts, they try to depict a better financial position(

15



>. ,alitati'e "act!( i+n!(e)5atio Analysis is a uantitati+e analysis( "t ignores ualitati+e factors li/e debtorscharacter, honesty, past record etc(

?. i""e(ent acc!,ntin+ #(actice (en)e( (ati! inc!m#a(a7le

7he result of two firms are comparable with the help of accounting ratios only if theyfollow the same accounting methods ( e(g( if one firm changes depreciation onstraight line method while another is charging on diminishing balance method,accounting ratios will not be strictly comparable(

1.? Cla i"icati!n !" Rati!

Different types of ratios are computed depending on the purpose for which they areneeded( Broadly spea/ing ,they are grouped under four heads:

$( 3i uidity ratios<( ol+ency ratios6( 7urno+er or Acti+ity ratiosG( Profitability ratios

1.?.1 LI %I IT= RATIOS

3i uidity is the short term sol+ency of the enterprise( "(e( the ability of the businessenterprise to meet its short term obligation as and when they are due( 7he li uidity ratios,therefore , are also called the short- term sol+ency ratios(

7he most common ratios which measures the extent of li uidity or the lac/ of it are:a #urrent ratiob Uuic/ ratio= Acid test ratio

C,((ent Rati!#urrent ratio establishes the relationship between current assets and #urrent liability( "tmeasures the ability of the firm to meet its short term obligation as and when they becomedue( "t is calculated as:

#urrent ratio> #urrent Assets#urrent liabilities

16

#lassification of 5atio

3i uidity ratios ol+ency ratios Acti+ity 5atiosProfitability 5atios

1. Current ratio;2. Quick Ratio.

1.Debt equality ratio;2. otal !""e"t to #ebt

ratio;3.$ro%rietary ratio;4.&ntere"t Co'era(e

Ratio.

1. )tock urno'er;2. Debtor" urno'er;3. Cre#itor" urno'er;4. *i+e# !""e"t

urno'er;5. ,orkin( Ca%ital

urno'er.

1. -ro"" $ro itRatio

2. /et $ro itRatio

3. %eratin(Ratio

4. Return $ro itRatio



#urrent assets include cash and those assets which can be con+erted into cash within ayear( #urrent assets will therefore include cash , ban/, stic/ raw materials , wor/ in progressand finished goods , debtors less pro+ision , bills recei+able, mar/etable securities, prepaidexpenses, short term loans and ad+ances and accrued incomes(

#urrent liability include all those liabilities maturing with in one year(#urrent liabilities include creditors, bills payable, outstanding expenses, income recei+ed inad+ance , ban/ o+erdraft, short-term loans, pro+ision for tax , proposed di+idend andunclaimed di+idend(

Henerally , a current ratio of <:$ is considered satisfactory(

Inte(#(etati!n : "t pro+ides a measure of degree to which current assets co+er currentliabilities( 7he higher the ratio , the greater the margin of safety for the short term creditors(Cowe+er, the ratio should neither be +ery high nor +ery low( A +ery highcurrent ratio indicates idle funds , piled up stoc/s, loc/ed amount in debtors while a lowratio puts the business in a situation where it will not be able to pay its short- term debt ontime(

Ill, t(ati!n 1

#alculate current ratio from the following information:

toc/ 5s ('J,JJJ ; #ash GJ,JJJ; Debtors GJ,JJJ; #reditors &J,JJJBills 5ecei+able <J,JJJ; Bills Payable 6J,JJJ; Ad+ance 7ax G,JJJBan/ 4+erdraft G,JJJ; Debentures 5s( <,JJ,JJJ; Accrued interest 5s( G,JJJ(

S!l,ti!n

C,((ent A et > 5s('J,JJJ ? 5s(GJ,JJJ ? 5s(GJ,JJJ ? 5s(<J,JJJ ? 5s(G,JJJ ?5s(G,JJJ

> 5s($,' ,JJJC,((ent Lia7ilitie > 5s(&J,JJJ ? 5s(6J,JJJ ? 5s(G,JJJ > 5s( G,JJJC,((ent Rati! > 5s($,' ,JJJ : 5s( G,JJJ > < : $(

Ill, t(ati!n &

#urrent Assets of a company are 5s( $J,JJ,JJJ and current liabilities are 5s( ',JJ,JJJ( 7hemanagement is interested in ma/ing the ratio <:$ by ma/ing payment of certain currentliabilities( Ad+ise the management as to how much of current liabilities should be paid toattain the desired ratio(S!l,ti!n

3et the current liabilities to be paid > x$J,JJ,JJJ-x > <',JJ,JJJ-x$J,JJ,JJJ-x > < ',JJ,JJJ-x $J,JJ,JJJ-x > $<,JJ,JJJ-<x x > <,JJ,JJJ

,ic Rati! * Aci) te t (ati!*LiD,i) (ati!Uuic/ ratio establishes the relationship between uic/= li uid assets and current liabilities( "tmeasures the ability of the firm to meet its short term obligations as and when they becomedue without relying upon the reali8ation of stoc/( "t is calculated as:

Uuic/ ratio > Uuic/ Assets #urrent 3iabilities

17



7he uic/ assets are defined as those assets which can be con+erted into cash immediatelyor reasonably soon without a loss of +alue( .or calculating uic/ assets we exclude theclosing stoc/ and prepaid expenses from the current assets(Henerally, a li uid ratio of $:$ is considered satisfactory(

Inte(#(etati!n6 Uuic/ ratio is considered better than current ratio as a measure of li uidityposition of the business because of exclusion of in+entories( 7he idea behind this ratio is thatstoc/ are sometimes a problem because they can be difficult to sell or use( 7hat is , e+enthrough a supermar/et has thousand of people wal/ing through its doors e+ery day, thereare still items on its shel+es that don9t sell as uic/ly as the supermar/et would li/e(imilarly, there are some items that will sell +ery well( e+ertheless , there are some

business whose stoc/s will sell or be used slowly and if those businesses needed to sellsome of their stoc/s to try to co+er an emergency, they would be disappointed( "t us a morepenetrating test of li uidity than current ratio yet it should be used cautiously as all debtorsmay not be li uid or cash may be re uired immediately for certain expenses(

Ill, t(ati!n :

#alculate uic/ ratio from the information gi+en in illustration $(

S!l,ti!nUuic/ Assets > #urrent Assets T toc/ T Ad+ance 7axUuic/ Assets > 5s( $,' ,JJJ T 5s( 'J,JJJ ? 5s( G,JJJ > 5s( $,JG,JJJ#urrent 3iabilities > 5s( G,JJJUuic/ ratio > Uuic/ Assets = #urrent 3iabilities

> 5s( $,JG,JJJ : 5s( G,JJJ > $(<6:$

Ill, t(ati!n ;

M 3td( has a current ratio of 6(&:$ and uic/ ratio of <:$( "f excess of current assets o+eruic/ assets represented by stoc/ is 5s( $,&J,JJJ, calculate current assets and currentliabilities(

S!l,ti!n3et #urrent 3iabilities > x#urrent Assets > 6(&xAnd Uuic/ Assets > <xtoc/ > #urrent Assets T Uuic/ Assets$,&J,JJJ > 6(&x T <x$,&J,JJJ > $(&xx > 5s($,JJ,JJJ#urrent Assets > 6(&x > 6(& V $,JJ,JJJ > 5s( 6,&J,JJJ(

Ill, t(ati!n >

#alculate the current ratio from the following information :Ior/ing capital 5s( %,'J,JJJ; 7otal debts 5s(<J, J,JJJ; 3ong-term 3iabilities5s($',JJ,JJJ; toc/ 5s( G,JJ,JJJ; prepaid expenses 5s( J,JJJ(

18



S!l,ti!n#urrent 3iabilities > 7otal debt- 3ong term debt

> <J, J,JJJ T $',JJ,JJJ

> G, J,JJJ

Ior/ing capital > #urrent Assets T #urrent liability%,'J,JJJ > #urrent Assets T G, J,JJJ#urrent Assets > $G,GJ,JJJ Uuic/ Assets > #urrent Assets T stoc/ ? prepaid expenses

> $G,GJ,JJJ T G,JJ,JJJ ? J,JJJ > %,'J,JJJ

#urrent ratio > #urrent Assets = #urrent liabilities > $G,GJ,JJJ=G, J,JJJ > 6:$

Uuic/ ratio > Uuic/ Assets = #urrent liabilities> %,'J,JJJ=G, J,JJJ

> <:$

1.?.& S!l'enc$ Rati!

ol+ency ratio are used to *udge the long term financial soundness of any business( 3ongterm ol+ency means the ability of theEnterprise to meet its long term obligation on the due date( 3ong term lenders are basicallyinterested in two things: payment of interest periodically and repayment of principalamount at the end of the loan period( 1sually the following ratios are calculated to *udge thelong term financial sol+ency of the concern(

$( Debt e uity ratio;<( 7otal Assets to Debt 5atio;6( Proprietary ratio;G( "nterest #o+erage 5atio(

e7t-ED,it$ Rati!

Debt E uity 5atio measures the relationship between long-term debt and shareholders9 funds( "t measures the relati+e proportion of debt and e uality in financing the assets of afirm(

"t is computed as follows:

Debt-E uity ratio > 3ong-term Debt9s= hare holder funds

Ihere T3ong- term Debt > Debentures ? 3ong T term loans

hareholders .unds > E uity hare #apital ? Preference hare #apital ?5eser+es and urplusT .ictitious Assets

19



Inte(#(etati!n6 A low )e7t e uity ratio reflects more security to long term creditors( .romsecurity point of +iew, capital structure with less debt and more e uity is consideredfa+ourable as it reduces the chances of ban/ruptcy( A high ratio, on the other hand, is considered ris/y as it may put the firm into difficulty in

meeting its obligations to outsiders( Cowe+er, from the perspecti+e of the owners, greateruse of debt, firm can en*oy the benefits of trading on e uity which help in ensuring higherreturns for them if the rate of earning on capital employed is higher than the rate of interest payable( But it is considered ris/y and so , with the exception of a few business ,the prescribed ratio is limited to <:$(

Ill, t(ati!n ?#alculate Debt E uity , from the following information:$J,JJJ preference share of 5s( $J each 5s( $,JJ,JJJ&,JJJ e uity shares of 5s( <J each 5s( $,JJ,JJJ#reditors 5s( G&,JJJDebentures 5s( <,<J,JJJProfit and 3oss accounts #r( 5s( OJ,JJJ

S!l,ti!n

Debt > Debentures > 5s( <,<J,JJJE uity > E uity share capital ? Preferences hare #apital ? profit and 3oss accounts

> 5s( $,JJ,JJJ ? 5s( $,JJ,JJJ ? 5s( OJ,JJJ > 5s( <,OJ,JJJ

Debt E uity 5atio > 3ong term debt= shareholders9 funds > 5s( <,<J,JJJ = 5s( <,OJ,JJJ > J( $:$

Ill, t(ati!n @#alculate Debt E uity 5atio, from the following information :7otal Debts 5s( 6,JJ,JJJ ; 7otal assets 5s( &,GJ,JJJ; #urrent liabilities 5s( OJ,JJJ(

S!l,ti!n3ong-term Debt > 7otal Debt T #urrent 3iabilities

> 5s( 6,JJ,JJJ T 5s( OJ,JJJ > 5s( <,6J,JJJ

hareholders .unds > 7otal Assets T 7otal Debts > 5s( &,GJ,JJJ T 5s( 6,JJ,JJJ

> 5s( <,GJ,JJJ

Debt E uity 5atio > 3ong term debt= hareholders9 funds > 5s( <,6J,JJJ=5s( <,GJ,JJJ> J(%':

T!tal A et t! e7t Rati!

7his 5atio established a relationship between total assets and long debts( "t measures theextend to which debt is being co+ered by assets( "t is calculated as7otal Assets to Debt 5atio > 7otal assets

3ong-term Debt

20



S!l,ti!n

Debt e uity 5atio > 3ong-term Debt=E uity

7otal Assets 5atio> 7otal Assets = long term Debt

Proprietary 5atio > hareholders .unds=7otal assets

Debt e uity ratio > 5s( 6,&J,JJJ=5s( $',GJ,JJJ > J(<$6

7otal Assets 5atio> 5s( <$,%J,JJJ= 5s( 6,&J,JJJ > '(<'

Proprietary 5atio > 5s( $',GJ,JJJ=5s( <$,%J,JJJ > J(OG%

Ill, t(ati!n 10

.rom the following information, calculate Debt E uity 5atio, Debt 5atio,Proprietary 5atio and5atio of 7otal Assets to Debt(

Balance S eet a !n ecem7e( :18 &00?

E uity share #apital 6,JJ,JJJ .ixed Assets G,&J,JJJPreference hare #apital $,JJ,JJJ #urrent Assets 6,&J,JJJ5eser+es &J,JJJ Preliminary Expenses $&,JJJProfit L loss A=# '&,JJJ$$ K ortgage 3oan $, J,JJJ#urrent liabilities $,<J,JJJ

,$&,JJJ ,$&,JJJ

S!l,ti!n

hareholders .unds > E uity hares capital ? Preference hares capital ?5eser+es ? profit K loss A=# - Preliminary Expenses

> 5s( 6,JJ,JJJ ? 5s( $,JJ,JJJ ? 5s(&J,JJJ ? 5s( '&,JJJ- 5s( $&,JJJ > 5s( &,JJ,JJJ

Debt E uity 5atio > Debt = E uity > 5s( $, J,JJJ=5s( &,JJ,JJJ > J(6': $

Proprietary 5atio > Proprietary funds = 7otal Assets > 5s( &,JJ,JJJ=5s( ,JJ,JJJ

> J('<&:$

7otal Assets to Debt 5atio > 7otal Assets = Debt > 5s( ,JJ,JJJ=5s( $, J,JJJ

> G(GG:$

22



Ill, t(ati!n 11

7he debt e uity ratio of M 3td( is $:<( Ihich of the following would increase=decrease or not change the debt e uity ratioR

i "ssue of new e uity sharesii #ash recei+ed from debtorsiii ale of fixed assets at a profiti+ 5edemption of debentures+ Purchase of goods on credit(

S!l,ti!n

a 7he ratio will decrease( 7his is because the debt remains the same, e uity increases(b 7he ratio will not change ( 7his is because neither the debt nor e uality is affected(c 7he ratio will decrease ( 7his is because the debt remains unchanged while e uity

increases by the amount of profit(d 7he ratio will decrease ( 7his is because debt decreases while e uity remains same (e 7he ratio will not change ( 7his is because neither the debt nor e uity is affected(

Inte(e t C!'e(a+e Rati!

"nterest #o+erage 5atio established a relationship between profit before interest on long-term debt and taxes and the interest on long term debts( "t measures the debt ser+icingcapacity of the business in respect of fixed interest on long term debts( "t generallyexpressed as W number of times9("t is calculated as follows:"nterest #o+erage 5atio > et Profit before "nterest and 7ax = "nterest on long term debt

Inte(#(etati!n 6 "t re+eals the number of times interest on long-term debt is co+ered bythe profits a+ailable for interest( "t is a measure of protection a+ailable to the creditors forpayment of interest on long term loans( A higher ratio ensures safety of interest paymentdebt and it also indicates a+ailability of surplus for shareholders(

Ill, t(ati!n 1&

et Profit as per Profit L 3oss A=# 5s( &,GJ,JJJ;Pro+ision for tax 5s, <,$J,JJJ;"nterest on Debentures and other long terms loans 5s( $,&J,JJJ#alculate interest co+erage ratio(

S!l,ti!n

Profit before interest and tax > 5s( &,GJ,JJJ ? 5s( <,$J,JJJ ? 5s( $,&J,JJJ > 5s( %,JJ,JJJ"nterest co+erage 5atio > et Profit before "nterest and 7ax= interest on long term debt

> 5s( %,JJ,JJJ = 5s( $,&J,JJJ> ' times(

Ill, t(ati!n 1:

#alculate interest co+erage ratio from the following information:et Profit after tax 5s( 6J,JJJ; $&K 3ong-term Debt $J,JJ,JJJ; and 7ax 5ate

23



'JK(

S!l,ti!n

et Profit after tax > 5s( 6J,JJJ7ax 5ate > 'JK(et Profit before tax > et Profit after tax M $JJ = $JJ T tax rate

> 5s( 6J,JJJ M $JJ = $JJ- 'J > 5s( O&,JJJ

"nterest on 3ong 7erm Debt > $&K of 5s( $J,JJ,JJJ > 5s( $,&J,JJJet profit before interest and tax > et profit before tax ? "nterest

> 5s( O&,JJJ ? 5s( $,&J,JJJ> 5s( <,<&,JJJ

"nterest #o+erage 5atio > et Profit before "nterest and 7ax="nterest on long term debt > 5s( <,<&,JJJ=5s( $,&J,JJJ > $(& times(

1.?.: Acti'it$ 4!( T,(n!'e(5 Rati!

7he Acti+ity or 7urno+er 5atios measures how well the facilities at the disposal of theconcern are being utili8ed( 7hey are /nown as turno+er ratios as they indicates the speedwith which the assets are being con+erted or turned o+er into sales( A proper balancedbetween sales and assets generally reflects tat assets are being managed well( 7hey areexpressed as Wnumber of times9( ome of the important acti+ity ratios are:

$( toc/ 7urn-o+er;<( Debtors 5ecei+able 7urno+er;6( #reditors Payable 7urno+er;G( .ixed Assets 7urno+er;&( Ior/ing #apital 7urno+er(

St!c 4!( In'ent!($5 T,(n!'e( Rati!

"t establishes a relationship between cost of goods and a+erage in+entory( "t determines theefficiency with which stoc/ is con+erted into sales during the accounting period underconsideration( "t is calculated as:toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/Ihere - A+erage stoc/ > opening ? closing stoc/ =< and#ost of goods sold > et ales - gross profit !(#ost of goods sold > opening stoc/ ? net purchases ? direct expenses

T closing stoc/

Inte(#(etati!n : "t indicates the speed with which in+entory is con+erted into sales( Ahigher ratio indicated that stoc/ is selling uic/ly( 3ow stoc/ turno+er ratio indicates thatstoc/ is not selling uic/ly and remaining idle resulting in increased storage cost andbloc/ing of funds( Cigh turno+er is good but it must be carefully interpreted as it may bedue to buying in small lots or selling uic/ly at low margin to reali8e cash( 7hus , a firmshould ha+e neither a +ery high nor a +et low stoc/ turno+er ratio(

Ill, t(ati!n 1;

.rom the following information, calculate stoc/ turno+er ratio :

4pening toc/ 5s(<J,JJJ;#losing toc/ 5s($J,JJJ;Purchases 5s( &J,JJJ Iages 5s( $6,JJJ;sales 5s( J,JJJ ; #arriage "nwards 5s( <,JJJ ; #arriage outwards 5s( ',JJJ

24



S!l,ti!n

toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/#ost of Hoods old > 4pening toc/ ? Purchases T #losing toc/ ? Direct Expenses

> 5s( <J,JJJ? 5s(&J,JJJ? 5s($&,JJJT5s($J,JJJ

> 5s( O&,JJJ

A+erage toc/ > 4pening toc/ ? #losing toc/ =< > 5s( <J,JJJ ? 5s( $J,JJJ =<

> 5s( $&,JJJ

toc/ 7urno+er 5atio > 5s( O&,JJJ=5s( $&,JJJ > & 7imes(

Ill, t(ati!n 1>

.rom the following information, calculate stoc/ turno+er ratio(4pening stoc/ 5s & ,JJJ; Excess of #losing stoc/ opening stoc/ 5s( G,JJJ; sales 5s(',GJ,JJJ; Hross Profit X <& & on cost

S!l,ti!n

#ost of goods old > ales - Hross 3oss > 5s( ',GJ,JJJ T <&=$<& ',GJ,JJJ > 5s( &,$<,JJJ

#losing stoc/ > 4pening stoc/ ? 5s( GJJJ > 5s( & ,JJJ ? 5s G,JJJ > 5s( '<,JJJ

A+erage stoc/ > 4pening stoc/ ? #losing toc/ =<> & ,JJJ ?'<,JJJ =<

> 5s( 'J,JJJ

toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/ > 5s(&,$<,JJJ=5s( 'J,JJJ > (&6 times(

Ill, t(ati!n 1?

A trader carries an a+erage stoc/ of 5s( J,JJJ( Cis stoc/ turno+er is times( "f he sellsgoods at profit of <JK on sales( .ind out the profit(

S!l,ti!n

toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/ > #ost of Hoods old=5s( J,JJJ

#ost of Hoods old > 5s( J,JJJ V > 5s( ',GJ,JJJ

ales > #ost of Hoods old V $JJ= J > 5s( ',GJ,JJJ V $JJ= J > 5s( ,JJ,JJJ

Hross Profit > ales T #ost of Hoods old

> 5s( ,JJ,JJJ T 5s( ',GJ,JJJ> 5s( $,'J,JJJ(

25



e7t!( T,(n!'e( Rati! !( Recei'a7le T,(n!'e( Rati!"t establishes a relationship between net credit sales and a+erage debtors or recei+ables( "tdetermine the efficiency with which the debtors are con+erted into cash("t is calculated as follows :Debtors 7urno+er ratio > et #redit sales= A+erage Accounts 5ecei+able

Ihere A+erage Account 5ecei+able > 4pening Debtors and Bills 5ecei+able ? #losingDebtors and Bills 5ecei+able =<

ote: Debtors should be ta/en before ma/ing any pro+ision for doubtful debts(Inte(#(etati!n : 7he ratio indicated the number of times therecei+ables are turned o+er and con+erted into cash in an accounting period( Cigherturno+er means that the amount from debtors is being collected more uic/ly( Uuic/collection from debtors increases the li uidity of the firm( 7his ratio also helps in wor/ing outthe a+erage collection period as follows:

e7t c!llecti!n #e(i!) 7his shows the a+erage period for which the credit sales remain outstanding or the a+eragecredit period en*oyed by the debtors( "t indicates how uic/ly cash is collected from thedebtors("t is calculates as follows:

Debt collection period > $< months=&< wee/s=6'& daysDebtors9 turno+er ratio

Ill, t(ati!n 1@#alculate the Debtors 7urno+er 5atio and debt collection period in months from thefollowing information:7otal sales > 5s( <,JJ,JJJ#ash sales > 5s( GJ,JJJDebtors at the beginning of the year > 5s( <J,JJJDebtors at the end of the year > 5s( 'J,JJJ

S!l,ti!n

A+erage Debtors > 5s( <J,JJJ ? 5s( 'J,JJJ =< > 5s( GJ,JJJ

et credit sales > 7otal sales - #ash sales > 5s(<,JJ,JJJ - 5s(GJ,JJJ

> 5s( $,'J,JJJ

Debtors 7urno+er 5atio > et #redit sales=A+erage Debtors > 5s( $,'J,JJJ=5s( GJ,JJJ > G 7imes(

Debt collection period > $< months=&< wee/s=6'& daysDebtors9 turno+er

> $<=G> 6 months

26



> 5s( $,'J,JJJ

Fi/e) A et T,(n!'e( Rati!7his ratio establishes a relationship between net sales and net fixed assets( "t determined

the efficiency with which the firm is utili8ing its fixed assets("t is computed follows.ixed Assets 7urno+er> et sales= et .ixed AssetsIhere et .ixed Assets >.ixed Assets- Depreciation

Inte(#(etati!n6 7his ratio re+eals how efficiently the fixed assets are being utilised("t indicates the firms9 ability to sales per rupee of in+estment in fixed assets( A high ratioindicates more efficient utili8ation of fixed assets(

Ill, t(ati!n 1

.rom the following information, calculate .ixed Assets 7urno+er 5atio:Hross fixed asset 5s( G,JJ,JJJ; Accumulated Depreciation 5s( $,JJ,JJJ; ar/etablesecurities 5s( <J,JJJ; #urrent Assets 5s( $,6J,JJJ; iscellaneous expenditure 5s, <J,JJJ;#urrent 3iabilities 5s( &J,JJJ; Hross sales 5s( $ ,6J,JJJ; sale return 5s( 6J,JJJ

S!l,ti!n

et fixed asset > Hross fixed asset- Depreciation> 5s( G,JJ,JJJ - 5s( $,JJ,JJJ> 5s(6,JJ,JJJ

et ale > Hross sale T ale 5eturns> 5s( $ ,6J,JJJ - 5s( 6J,JJJ> 5s( $ ,JJJ

.ixed Asset 7urno+er 5atio> et ale= net .ixed assets > 5s( $ ,6J,JJJ= 5s(6,JJ,JJJ > ' times(

<!( in+ Ca#ital T,(n O'e( Rati!

7his ratio establishes the relationship between net ale and wor/ing capital( "t determinesthe efficiency with which the wor/ing capital is being utilised .

"t is calculated as followers 6

wor/ing capital 7urno+er > et ale= wor/ing #apital

Inte(#(etati!n6 7his ratio indicates the firms9 ability to generate sales per rupee of wor/ing( A higher ratio would normally indicate more efficient utili8ed of wor/ing capital ; throughneither a +ery high nor a +ery low ratio is desirable(

28



Ill, t(ati!n &0

.rom the following information, calculate i .ixed Assets 7urno+er and ii Ior/ing #apital7urno+er 5atios :Preference hares #apital ',JJ,JJJ Plant and achinery ',JJ,JJJ

E uity hare #apital G,JJ,JJJ 3and and Building O,JJ,JJJ

Heneral 5eser+e <,JJ,JJJ otor #ar <,&J,JJJ

Profit and 3oss Account <,JJ,JJJ .urniture &J,JJJ

$&K Debentures 6,JJ,JJJ toc/ $,OJ,JJJ

$GK 3oan $,JJ,JJJ Debtors $,<J,JJJ

#reditors $,GJ,JJJ Ban/ %J,JJJ

Bills Payable 6J,JJJ #ash <J,JJJ

4utstanding Expenses 6J,JJJ

20,00,000 &08008000

ales for the year were 5s( 'J,JJ,JJJ(

S!l,ti!n

ales > 5s 'J,JJ,JJJ.ixed Assets > 5s( ',JJ,JJJ ? 5s(O,JJ,JJJ ? 5s( <,&J,JJJ ? 5s( &J,JJJIor/ing capital > #urrent Assets T #urrent 3iabilities#urrent Assets > toc/ ? Debtors ? ban/ ? cash

5s( $(OJ,JJJ ? 5s( $(<J,JJJ ? 5s( %J,JJJ ? 5s( <J,JJJ5s( G,JJ,JJJ

#urrent 3iabilities > #reditors ? B"P ? 4" Exp > 5s( $,GJ,JJJ ? 5s( 6J,JJJ ? 5s( 6J,JJJ > 5s( <,JJ,JJJ

Ior/ing capital > 5s( G,JJ,JJJ ? 5s( <,JJ,JJJ > 5s( <,JJ,JJJ

.ixed 7urn o+er 5atio > et sale = .ixed assests > 5s( 'J,JJ,JJJ= 5s( $',JJ,JJJ > 6(O& times

Ior/ing capital 7urno+er > et ale = Ior/ing #apital > 5s( 'J,JJ,JJJ= 5s( <,JJ,JJJ > 6J times(

P(!"ita7ilit$ Rati!E+ery business must earn sufficient profits to sustain the operations of the business and tofund expansion and growth(Profitability ratios are calculated to analysis the earning capacity of the business which is theoutcome of utilisation of resources employed in the business( 7here is a close relationshipbetween the profit and the efficiency with which the resources employed in the business areutilised( 7here are two ma*or types ofProfitability 5atios(

• Profitability in relation to sales• Profitability in relation to in+estment .

29



.ollowing are the important Profitability ratio

$( Hross Profit 5atio

<( et profit 5atio6( 4perating 5atioG( 4perating Profit 5atio&( 5eturn on "n+estment 54" or 5eturn on #apital Employed 54#E'( Earnings per hareO( Price Earning 5atio(( Di+idend Payout 5atio

G(! P(!"it Rati! !( G(! ma(+in

Hross profit ratio establishes relationship between G(! P(!"it an) net ale. It)ete(mine t e e""icienc$ it ic #(!),cti!n8 purchase and selling operations arebeing carried on( It i calc,late) a percentage of sales( "t is computed as follows:

Hross Profit 5atio > Hross Profit= et ales V $JJ

Inte(#(etati!n : Hross Profit is the difference between sale and cost of good sold( HrossProfit margin reflect the efficiency with which the management produces each unit of output( "t also include the margin a+ailable to co+er operating expenses and non operatingexpenses( A high Hross Profit margin relati+e to the industry a+erage employees that thefirm is able to produced at comparati+ely at lower cost(

Ill, t(ati!n &1

.ollowing information is a+ailable for the year <JJ', calculate gross profit ratio:

ales 5s( $,<J,JJJHross Profit 5s( 'J,JJJ5eturn inwards 5s <J,JJJ

S!l,ti!n

et ales > ales - 5eturn inwards > 5s( $,<J,JJJ- <J,JJJ > 5s( $,JJ,JJJ

Hross Profit 5atio > Hross Profit= et ales V $JJ > 5s('J,JJJ=5s($,JJ,JJJ V $JJ

> 'JK(

Ill, t(ati!n &&#alculate Hross Profit ratio from the following information:4pening stoc/ 5s( &J,JJJ; closing stoc/ 5s( O&,JJJ; cash sale 5s( $,JJ,JJJ; credits sales 5s$,OJ,JJJ; 5eturns outwards 5s( $&,JJJ; purchased 5s( <,%J,JJJ; ad+ertisement expenses

5s( 6J,JJJ; carriage inwards 5s( $J,JJJ(

30



Ill, t(ati!n &;

Hross profit ratio is <& K ( #ost of goods sold is 5s( 6,JJ,JJJ( "ndirect expenses 5s( 'J,JJJ(

#alculate et Profit 5atio(

S!l,ti!n

ales > $JJ= $JJ T <& M 5s( 6,JJ,JJJ > 5s( G,JJ,JJJ

Hross profit > ale- cost of goods sold> 5s( G,JJ,JJJ T 5s('J,JJJ> 5s( GJ,JJJ

et Profit 5atio > et profit M $JJ et ale

5s( GJ,JJJ= 5s( G,JJ,JJJ x $JJ

> $J K

O#e(atin+ Rati!

4perating 5atio establishes relationship between operating cost and net sales( "t determinethe operational efficiency with the production , purchase and selling operations are beingcarried on( "t is calculated as follows:

4perating 5atio > #ost of ales ? 4perating Expenses = et ales V $JJ

4perating expenses include office expenses, administrati+e expenses, sellingexpenses and distribution expenses(

Inte(#(etati!n6 4perating 5atio indicates the 4perating cost incurred is computed toexpress#ost of operation excluding financial charge in relation to sales( A corollary of it is W4perating Profit 5atio9( "t helps to analyse the performance of business and throw light onthe operations efficiency of the business( "t is +ery useful for inter- firm as well as intra firmcomparisons( 3ower operating ratio is a +ery healthy sign(

O#e(atin+ P(!"it Rati!

4perating Profit 5atio establishes the relationship between 4perating Profit and net sales("t can be computed directly or as a residual of operating ratio(

4perating Profit 5atio > 4perating Profit= ales V $JJ

Ihere 4perating Profit > ales T #ost of 4peration

Inte(#(etati!n6 4perating 5atio determine the operational efficiency of the management ("t helps in /nowing the amount of profit earned from regular business transactions on a saleof 5s( $JJ( "t is +ery useful for inter firm as well as intra firm comparisons( Cigheroperating ratio indicates that the firm has got enough margins to meet its non operatingexpenses well as to create reser+e and pay di+idends(

32



Ill, t(ati!n &>

#alculate the operating ratio from gi+en the following information:

ales 5s( <,JJ,JJJ; ales returns rs( 6J,JJJ; operating expenses 5s( &&,JJJ; #ost of goods sold 5s( $,OJ,JJJ

S!l,ti!n4perating 5atio > #ost of goods sold ? elling Expenses M $JJ

et ales > 5s( $,OJ,JJJ ? &&,JJJ M $JJ

5s($,OJ,JJJ <,JJ,JJJ- 6J,JJJ

> $6<(6& K

Ill, t(ati!n &?#alculate the Hross profit 5atio, et Profit 5atio and 4perating 5atio from the gi+en thefollowing information:

ales 5s( G,JJ,JJJ#ost of Hoods old 5s( <,<J,JJJelling expenses 5s( <J,JJJAdministrati+e Expenses 5s( 'J,JJJ

S!l,ti!n

Hross Profit > ales T #ost of goods sold> 5s( G,JJ,JJJ T 5s( <,<J,JJJ> 5s( $, J,JJJ

Hross Profit 5atio > Hross s Profit M $JJ ales

> 5s( $ , J,JJJ M $JJ 5s G ,JJ,JJJ

> G& K

et Profit > Hross Profit T "ndirect expenses > 5s( $, J,JJJ T 5s( <J,JJJ ? 5s( 'J,JJJ > 5s( $,JJ,JJJ

et Profit 5atio > et profit = ales V $JJ > 5s( $,JJ,JJJ= G,JJ,JJJ M $JJ

> <& K

4perating Expenses > elling Expenses ? Administrati+e Expenses > 5s( <J,JJJ ? 'J,JJJ

> 5s( J,JJJ

4perating 5atio > #ost of goods ? 4perating Expenses M $JJet a les

> 5s( < ,<J,JJJ ? 5s( J,JJJ M $JJ5sG, JJ,JJJ

> O& K

33



Ret,(n !n Ca#ital Em#l!$e) !( Ret,(n !n In'e tment 4ROCE !( ROI5

7his ratio establishes the relationship between net profit before "nterest and 7ax and capitalemployees( "t measures how efficiently the long-term funds supplied by the long-

term creditors and shareholders are being used. It is expressed as apercentage.Thus, it is computed as follows:

5eturn on "n+estment > Profit before "nterest and 7ax=#apital Employed V $JJ

Ihere capital employed > Dept ? e uity

O(

#apital Employed > .ixed Assets ? Ior/ing #apital

Inte(#(etati!n 6 "t explains the o+erall utilisation of fund by a business( "t re+eals theefficiency of the business in utilisation of funds entrusted to it by, share holders , debenture-holders and long-term liabilities( .or inter-firm comparison, it is considered good measure of profitability(

Ill, t(ati!n &@

Liabilities Rs. Assets Rs.

E uity hare #apital$,JJ,JJJ e uity share

of 5s( $J each

$J,JJ,JJJ .ixed assets et $G,JJ,JJJ

5eser+es <,&J,JJJ #urrent Assets $<,&J,JJJ$J K Debentures &,JJ,JJJ Preliminary Expenses $,JJ,JJJ#urrent 3iability O,&J,JJJProfit for the year <,&J,JJJ

<O,&J,JJJ <O,&J,JJJ

Calculate Return on Capital employed

Solution

5eturn on "n+estment > Profit before "nterest and 7ax=#apital Employed V $JJ

Profit before "nterest and 7ax:Profit for the year > 5s( <,&J,JJJAdd interest $J K of &,JJ,JJJ > 5s( &J,JJJProfit before interest and tax > 6,JJ,JJJ

Capital Employes = NetAssets + working Capital= Rs. 14,00,000 + Rs( 12,50,000 – Rs. 7,50,000)= Rs. 19,00,000

Earnings Per Share7his ratio measures the earning a+ailable to an e uity shareholders per share( "tb indicatesthe profitability of the firm on a per share basis(

7he ratio is calculated as -Earning Per hare > Profit a+ailable for e uity shareholders= o( of E uity hares

34



"n this context, earnings refer to profit a+ailable for e uity shareholders whichis wor/ed out as Profit after 7ax T Di+idend on Preference hares(

Inte(#(etati!n : 7his ratio is +ery important from e uity shareholders point of +iew andso also for the share price in the stoc/ mar/et( 7his also helps comparison with other firm9sto ascertain its reasonableness and capacity to pay di+idend( But increase in Earning per

share does not ha+e always indicate increase in profitability because sometimes , whenbonus shares are issued , earning per share would decrease ( "n these cases, the earningper share is misleading as the actual earning ha+e not decreased(

Ill, t(ati!n &

#alculate earning per share from the following information:

&J,JJJ e uity shares of 5s( $J each 5s &,JJ,JJJ$J K Preference share capital 5s $,JJ,JJJ% K Debentures 5s( <,JJ,JJJet Profit after tax 5s( <,JJ,JJJ

Solution

Earning per share > Profit a+ailable for e uity shareholders= o( of E uity hare> 5s $,$J,JJJ T $J,JJJ = &J,JJJ> 5s( < per share

Price Earning Ratio

7his ratio establishes a relationship between mar/et price per share and earning per share(7he ob*ecti+e of this ratio is to find out the expectations of the shareholders(

7his ratio is calculated as TP=E 5atio > ar/et price of a hare=Earnings per hare

Inte(#(etati!n : "t indicates the numbers of times of EP the share is being uoted in themar/et( "t reflects in+estors9 expectation about the growth in the firms9 earning andreasonableness of the mar/et price of its shares( P=E ratios +ary from industry to industryand company to company in the same industry depending upon in+estors perception of theirfuture(

Illustration 29

Earning per share 5s( $&J ( mar/et price per share 5s( 6JJJ( #alculate price Earning ratio(

S!l,ti!n6

P=E 5atio > ar/et price of a hare=Earnings per hare 5s( 6,JJJ= 5s( $&J > 5s( <J

Illustration 30

#alculated price earning ratio from the following information:

E uity share capital 5s( $J per hare 5s <,&J,JJJ5eser+es including current year9s profit 5s $,JJ,JJJ$J K Preference hare #apital 5s <,&J,JJJ

35



% K Debentures 5s <,JJ,JJJProfit before interest 5s 6,6J,JJJar/et Price per hare 5s &J(7ax rate &J K

S!l,ti!nP=E 5atio > ar/et price of a hare=Earnings per hare

Earning per share > Profit a+ailable for e uity shareholders= o( of E uity hare

Profit a+ailable for e uity shareholders:

Profit before interest > 5s( 6,6J,JJJ3ess interest on debentures > 5s $ ,JJJ

5s 6,$<,JJJ

3ess tax &J K of 5s( 6,$<,JJJ > 5s( $(&',JJJ3ess preference di+idend > 5s( <&,JJJEarning after 7ax > 5s $,6$,JJJ

Earning per share > Earning after tax = o(of e uity shares > 5s $,6$,JJJ= <&,JJJ

> 5s( &(<G

P=E 5atio > ar/et price share = Earning per share> 5s( &J= 5s( &(<G> 5s( %(&G

i'i)en) Pa$!,t Rati!

7his refers to the proportion of earning that are distributed against theshareholders( "t is computed as T

Di+idend Payout 5atio > Di+idend Per hare Earnings Per hare

Inte(#(etati!n 6 "t expresses the relationship between what is a+ailable per share andwhat is actually paid in the form of di+idends out of a+ailable earnings( 7his ratio reflectscompany9s9 di+idend policy( A higher payout ratio may mean lower retention or adeteriorating li uidity position(

Illustration 31#alculate di+idend payout ratio(, "f di+idend paid per share 5s( <('< per share from theinformation of "llustration 6J

S!l,ti!n6

.rom the abo+e "llustration , earning per share> 5s( &(<GDi+idend paid per share > 5s( <('< per hare

o( Di+idend payout 5atio> Di+idend per share

Earning per ratio > 5s( <('<

36



5s( &(<G> 5s( 4(&J

1.7 Meaning of Cash Flow Statement

Ca" lo i" a#e u% o t o or#" i.e. Ca" an# *lo erea" Ca" ean" ca" balance inan# inclu#in( ca" at bank balance an# *lo ean" c an(e" ic ay be or increa"e or #ecrea"e in t e ca" o'e ent" o t e bu"ine"".

Ca" *lo )tate ent #eal" it only "uc ite " ic are connecte# it ca" i.e. ite "relatin( to in lo an# out lo o ca" . &n ot er or#" it i" %re%are# to "tu#y t e c an(e" in ca"or to " o i %act o 'ariou" tran"action" on t e ca" . &n " ort it i" a "tate ent ic i"

%re%are# to " o t e lo o ca" in t e bu"ine"" #urin( a %articular %erio#. &t t u" tell" about

t e c an(e" in ca" %o"ition o a bu"ine"". e c an(e" ay be relate# eit er it t e ca"recei%t" or ca" %ay ent" or #i"bur"e ent" o ca" . u" Ca" *lo )tate ent i" a "u ary o ca" recei%t" an# %ay ent" ereby reconcilin( t e o%enin( ca" balance it t e clo"in( ca"inclu#in( bank balance" in #one. &t al"o e+%lain" t e rea"on" or t e c an(e" in t e ca" %o"itiono t e bu"ine"" on account o t e Decrea"e in t e ca" %o"ition i" ter e# a" out lo o ca" an#increa"e i" ter e# in lo . Ca" lo "tate ent al"o tell" about 'ariou" "ource" in ca" "uc a"ca" ro o%eration" "ale o current an# i+e# !""et" i""ue o " are" #ebenture" al"o ter e# a"in lo o ca" erea" lo"" ro o%eration" %urc a"e o current an# i+e# a""et" re#e %tion o

%re erence " are" #ebenture" an# ot er lon( ter loan" etc are al"o ter e# a" out lo o ca" .

e Ca" *lo )tate ent i" %re%are# becau"e o nu ber o erit" ic are o ere# by it. )uc

erit" are al"o ter e# a" it" ob:ecti'e". e i %ortant objectives are a" ollo "

1. To Help the Management in Ma ing F!t!"e Financial #olicies $ Ca" *lo "tate ent i"'ery el% ul to t e ana(e ent. e ana(e ent can ake it" uture inancial %olicie" an#i" in a %o"ition to kno about "ur%lu" or #e icit o ca" . !ccor#in(ly ana(e ent cant ink o in'e"tin( "ur%lu" un#" i nay in eit er " ort ter or lon( ter in'e"t ent". u"ca" i" t e center o all inancial #eci"ion".

2. Helpf!l in %ecla"ing %ivi&en&s etc. $ Ca" *lo )tate ent i" 'ery el% ul in #eclarin(#i'i#en#" etc. i" "tate ent can "u%%ly in or ation re(ar#in( to un#er"tan# t e liqui#ity.&t u"t be %ai# it in 42 #ay".

3. Cash Flow Statement is %iffe"ent than Cash '!&get () Ca" bu#(et i" %re%are# it t eel% o in lo an# out lo o ca" . & t ere i" any 'ariation t e "a e can be correcte#.

4. Helpf!l in &evising the cash "e*!i"ement () Ca" lo "tate ent i" el% ul in #e'i"in(t e ca" require ent or re%ay ent o liabilitie" an# re%lace ent o i+e# a""et".

5. Helpf!l in fin&ing "easons fo" the &iffe"ence ) Ca" *lo )tate ent i" al"o el% ul inin#in( rea"on" or t e #i erence bet een %ro it" lo""e" earne# #urin( t e %erio# an# t ea'ailability o ca" et er ca" i" in "ur%lu" or #e icit.

6. +s pe" +S) , Cash Flow Statement () Ca" *lo )tate ent i" %re%are# it a 'ie toi( li( t t e ca" (enerate# ro recurrin( acti'itie" or ca" lo"" i any ere a" net %ro it

37



i" calculate# a ter akin( a#:u"t ent" on account o non ca" ite " in t e %ro it an# lo""account.

7. Helpf!l in p"e&icting sic ness of the b!siness() Ca" lo i" el% ul in %re#ictin("ickne"" o t e bu"ine"" it t e el% o #i erent ratio".

1.7.1 -S S /F C+SH F / ST+T M T

3i4 Sho"t)Te"m #lanning ( e Ca" *lo )tate ent (i'e" in or ation re(ar#in( "ource" an#a%%lication o ca" an# ca" equi'alent" or a "%eci ic %erio# "o t at it beco e" ea"ier to

%lan in'e"t ent" o%eratin( an# inancin( nee#" o an enter%ri"e.

3ii4 The Cash Flow helps !n&e"stan& i*!i&it5 an& Solvenc5 ( )ol'ency i" t e ability o t e bu"ine"" to eet it" current liabilitie". Quarterly or ont ly Ca" *lo )tate ent" el%a"certain liqui#ity in a better ay. *inancial in"titution" like bank" %re er t e Ca" *lo)tate ent to analy"e liqui#ity.

3iii4 fficient Cash Management ( e Ca" *lo )tate ent %ro'i#e" in or ation relatin( to"ur%lu" or #e icit o ca" . !n enter%ri"e t ere ore can #eci#e about t e " ort<terin'e"t ent" o t e "ur%lu" an# can arran(e t e " ort<ter cre#it in ca"e o #e icit.

3iv4 Compa"ative St!&5 ( ! co %ari"on o t e Ca" *lo " or t e %re'iou" year it t e bu#(ete# i(ure" o t e "a e year ill in#icate a" to at e+tent t e ca" re"ource" o t e bu"ine"" ere (enerate# an# a%%lie# accor#in( to t e %lan. &t i" t ere ore u"e ul or t e

ana(e ent to %re%are ca" bu#(et".

3v4 6easons fo" Cash #osition ( e Ca" *lo )tate ent e+%lain" t e rea"on" or lo er an#i( er ca" balance" it t e enter%ri"e. )o eti e" a lo er ca" balance i" oun# in "%iteo i( er %ro it" or a i( er ca" balance i" oun# in "%ite o lo er %ro it". Rea"on" or "uc "ituation" can be analy"e# it t e el% o t e Ca" *lo )tate ent. )o eti e" in"%ite o i( %ro it" (one= !n" er" to "uc que"tion" can be oun# ro t e Ca" *lo)tate ent.

3vi4 Test fo" the Management %ecisions ( &t i" a (eneral rule t at i+e# a""et" are %urc a"e#ro t e un#" rai"e# ro lon(<ter "ource" an# t e be"t ay to re%ay t e lon(<ter #ebti" out o %ro it". e Ca" *lo )tate ent " o " clearly et er t e ca" in lo " roo%eration" a'e been u"e# or t e %urc a"e o i+e# a""et" or et er t e"e a""et" a'e

been %urc a"e# ro ca" in lo " ro lon(<ter #ebt". )i ilarly it al"o e+%lain" et er t e #ebenture" a'e been re#ee e# out o %ro it" or not. u" t e Ca" *lo )tate ent an

be u"e# to te"t t e cre#ibility o t e ana(e ent #eci"ion".

1.7.2 M T+T / S /F C+SH ST+T M T

ou( t e Ca" *lo )tate ent i" a 'ery u"e ul tool o inancial analy"i" it a" it" li itation"ic u"t be ke%t in in# at t e ti e o it" u"e. e"e li itation" are

3i4 on)cash T"ansaction a"e igno"e& ( e Ca" *lo )tate ent " o " only in lo " an#out lo " o ca" . &t #oe" not " o non<ca" tran"action" like t e %urc a"e o buil#in(" byt e i""ue o " are" or #ebenture" to t e 'en#or" or i""ue o bonu" " are".

38



3ii4 ot a s!bstit!te fo" an ncome Statement ( !n inco e "tate ent " o " bot ca" an#non<ca" ite ". e inco e "tate ent " o " t e net inco e o t e ir erea" t e Ca"*lo )tate ent " o " only t e net ca" in lo " or out lo " ic #o not re%re"ent t e net

%ro it" or lo""e" o t e enter%ri"e.

3iii4 Histo"ical in at!"e ( &t rearran(e" t e e+i"tin( in or ation a'ailable in t e inco e"tate ent an# t e balance " eet. &t ill beco e ore u"e ul i it i" acco %anie# by t e

%ro:ecte# Ca" *lo )tate ent.3iv4 gno"ance () &t i(nore" ba"ic accountin( conce%t i.e. accrual conce%t.

1.7. M#/6T+T % F T / S +S # 6 +CC/- T 8 ST+%+6%) 36 9 S %4

3i4 Cash co %ri"e" ca" on an# an# #e an# #e%o"it" it bank".

3ii4 Cash *!ivalents are " ort<ter i( ly liqui# in'e"t ent" t at are rea#ily con'ertible intot e kno n a ount o ca" an# ic are "ub:ect to an in"i(ni icant ri"k o c an(e in 'alue.!n in'e"t ent nor ally quali ie" a" ca" equi'alent only en it a" a " ort aturity o"ay t ree ont " or le"" ro t e #ate o acqui"ition >+a %le" o ca" equi'alent" are atrea"ury bill" b co ercial %a%er c oney arket un#" an# # &n'e"t ent" in

%re erence " are" an# re#ee able it in t ree ont " can al"o be taken a" ca" equi'alent"i t ere i" no ri"k o t e ailure o t e co %any.

3iii4 Cash Flows are in lo " an# out lo " o ca" an# ca" equi'alent". !)<3 require" a Ca"*lo )tate ent to be %re%are# an# %re"ente# in a anner t at it " o " ca" lo " ro

bu"ine"" tran"action" #urin( a %erio# cla""i yin( t e into

i %eratin( !cti'itie"; ii &n'e"tin( !cti'itie" ; an# iii *inancin( !cti'itie".

3iv4 /pe"ating +ctivities ( %eratin( acti'itie" are t e %rinci%al re'enue<%ro#ucin( acti'itie" o t e enter%ri"e an# ot er acti'itie" t at are not in'e"tin( or inancin( acti'itie".

3v4 nvesting +ctivities ( &n'e"tin( acti'itie" are t e acqui"ition an# #i"%o"al o lon(<tera""et" an# ot er in'e"t ent" not inclu#e# in ca" equi'alent".

3vi4 Financing +ctivities ( *inancin( acti'itie" are t e acti'itie" t at re"ult in c an(e in t e "i?ean# co %o"ition o t e o ner"@ ca%ital inclu#in( %re erence " are ca%ital in t e ca"e o aco %any an# borro in( o t e enter%ri"e.

1.: Classification of Cash Flows (

!" #i"cu""e# earlier t e Ca" *lo )tate ent " o " t e ca" in lo " "ource" an# ca"out lo " u"e" or a%%lication" o ca" an# ca" equi'alent" #urin( an accountin( %erio#.Aence it i" e""ential to kno about t e 'ariou" ite " o so!"ces 3o" inflows of cash4 an&!ses 3o!tflows of cash4 of cash. !" %er the +cco!nting Stan&a"&) 3+S) t e c an(e"re"ultin( in in lo " an# out lo " ca" an# ca" equi'alent" ari"e on account o t ree ty%e" o acti'itie" i.e. o%eratin( in'e"tin( an# inancin( a" #i"cu""e# belo

1.:.1 3i4 /pe"ating +ctivities (

%eratin( !cti'itie" are t e %rinci%al re'enue %ro#ucin( acti'itie" o t e enter%ri"e an# ot er acti'itie" t at are not relate# to in'e"tin( or inancin( acti'itie". e e+a %le" are a Ca" recei%t" ro t e "ale o (oo#" an# ren#erin( o "er'ice".b Ca" recei%t" ro royaltie" ee" co i""ion an# ot er re'enue.

39



c Ca" %ay ent" to "u%%lier" o (oo#" an# "er'ice".# Ca" %ay ent" to an# on be al o e %loyee" or a(e" etc.e Ca" recei%t" an# %ay ent" o an in"urance enter%ri"e or %re iu " an# clai " annuitie"

an# ot er %olicy bene it".

Ca" %ay ent" or re un#" o inco e ta+e" unle"" t ey can be "%eci ically i#enti ie# itinancin( an# in'e"tin( acti'itie".

( Ca" recei%t" an# %ay ent" relatin( to uture contract" or ar# contract" o%tioncontract" an# " a% contract" en t e contract" are el# or #ealin( or tra#in(

%ur%o"e".

e %rinci%al re'enue %ro#ucin( acti'ity o an enter%ri"e i" t e ain acti'ity bu"ine"" carrie#on by it to earn %ro it". >+a %le" o a inancial enter%ri"e; (i'in( loan" an# #ealin( in "ecuritie"i" t e %rinci%al re'enue %ro#ucin( acti'ity. )i ilarly or an in"urance co %any acce%tin(

%re iu an# %ay ent" o clai " i" t e %rinci%al re'enue %ro#ucin( acti'ity.

e net e ect o t e o%eratin( acti'itie" on t e lo o ca" i" re%orte# a" ca" lo ro or ca"u"e# in %eratin( !cti'itie" in t e Ca" *lo )tate ent.

1.:.2 3ii4 nvesting +ctivities

&n'e"tin( acti'itie" are t e acqui"ition an# #i"%o"al o t e lon(<ter a""et" an# ot er in'e"t ent"not inclu#e# in ca" equi'alent" e"e acti'itie" inclu#e tran"action" in'ol'in( %urc a"e an#"ale o t e lon(<ter %ro#ucti'e a""et" like ac inery lan# an# buil#in(" etc. ic are notel# or re"ale. e ca" lo ro in'e"tin( acti'itie" are

a Ca" %ay ent" to acquire i+e# a""et" inclu#in( intan(ible" an# al"o %ay ent" or ca%itali?e# re"earc an# #e'elo% ent co"t" an# "el con"tructe# i+e# a""et".

b Ca" recei%t" ro t e #i"%o"al o i+e# a""et" inclu#in( intan(ible" .

c Ca" %ay ent" to %urc a"e acquire " are" arrant" or #ebt in"tru ent" o ot er enter%ri"e" an# intere"t" in :oint 'enture" ot er t an %ay ent" or t o"e in"tru ent"con"i#ere# to be ca" equi'alent" an# t o"e el# or tra#in( or #ealin( %ur%o"e" .

# Ca" recei%t" ro "ale #i"%o"al o " are" arrant" or #ebt in"tru ent" o ot er enter%ri"e" an# intere"t in :oint 'enture" ot er t an recei%t" ro t o"e in"tru ent"con"i#ere# to be ca" equi'alent" an# t o"e el# or #ealin( or tra#in( %ur%o"e" .

e Ca" recei%t" ro "ale #i"%o"al o " are" arrant" or #ebt in"tru ent" o ot er

enter%ri"e" an# intere"t in :oint 'enture" ot er t an recei%t" ro t o"e in"tru ent"con"i#ere# to be ca" equi'alent" an# t o"e el# or #ealin( or tra#in( %ur%o"e" .

Ca" recei%t" ro re%ay ent" o a#'ance" an# loan" a#e to t ir# %artie" ot er t ana#'ance" an# loan" o inancial enter%ri"e" .

( Ca" recei%t" relatin( to uture contract" or ar# contract" o%tion contract" an# " a%contract" e+ce%t en t e contract" are el# or tra#in( %ur%o"e" or t e recei%t" arecla""i ie# a" inancin( acti'itie".

Ca" %ay ent" relatin( to uture contract" or ar# contract" o%tion contract" an# " a%contract" e+ce%t en t e contract" are el# or tra#in( %ur%o"e" or t e %ay ent" are

cla""i ie# a" inancin( acti'itie".

40



1.:. 3iii4 Financing +ctivities

*inancin( acti'itie" are t e acti'itie" ic re"ult in c an(e" in t e "i?e an# co %o"ition o t eo ner@" ca%ital inclu#in( %re erence " are ca%ital in t e ca"e o a co %any an# borro in(" o t e enter%ri"e ro ot er "ource". e ca" lo ro inancin( acti'itie" are a Ca" %rocee#" ro t e i""ue o " are" or ot er "i ilar in"tru ent".b Ca" %rocee#" ro t e i""ue o #ebenture" loan note" bon#" an# ot er " ort ter

borro in(".

c Buy<back o equity " are".# Ca" re%ay ent" o t e a ount" borro e# inclu#in( re#e %tion o #ebenture".e $ay ent" o #i'i#en#" bot equity an# %re erence #i'i#en#".

$ay ent" or intere"t on #ebenture" an# loan".

ll!st"ation 1. )tate a tran"action a %art o ic i" cla""i ie# a" an &n'e"tin( !cti'ity an#anot er %art i" cla""i ie# a" a *inancin( !cti'ity.

Sol!tion (

$ay ent o in"tall ent" o an a""et %urc a"e# on Aire<$urc a"e# on Aire<$urc a"e ba"i". e in"tall ent a" t o co %onent" i.e. %rinci%al an# intere"t. $rinci%al i" cla""i ie# a"an &n'e"tin( !cti'ity an# intere"t a" a *inancin( !cti'ity.

Classification of '!siness +ctivities as pe" +S) , showing the inflow an& /!tflow of Cash

/pe"ating +ctivities

Cash nflow Cash /!tflow

i Ca" )ale" i Ca" $urc a"e"

ii Ca" recei'e# ro #ebtor" ii $ay ent to Cre#itor"

iii Ca" recei'e# ro Co i""ion an# *ee" iii Ca" %eratin( >+%en"e"

i' Royalty i' $ay ent o ,a(e"

' &nco e a+

n the case of Financial Companies n the case of Financial Companies

' Ca" recei'e# or intere"t an# #i'i#en#" 'i Ca" %ai# or intere"t

41



ll!st"ation 2. &#enti y t e tran"action" a" belon(in( to i %eratin( ii &n'e"tin( iii*inancin( !cti'itie" an# i' Ca" >qui'alent".1. Ca" )ale"; 2. &""ue o ) are Ca%ital; 3. &""ue o Debenture"; 4. $urc a"e o ac ine"; 5.)ale o ac ine"; 6. Ca" recei'e# ro Debtor"; 7. Co i""ion an# Royalty recei'e#; 8.$urc a"e o &n'e"t ent"; 9. Re#e %tion o Debenture" an# $re erence ) are"; 10. Re%ay ent o a on(<ter oan; 11. &ntere"t %ai# on Debenture" or lon(<ter loan" by a *inance co %anyan# b /on< inance co %any; 12. ice >+%en"e"; 13. Di'i#en# recei'e# on ) are" bya *inance co %any an# b /on< inance co %any; 14. &ntere"t recei'e# on &n'e"t ent" by a*inance co %any an# b /on< inance co %any; 15. anu acturin( >+%en"e"; 16. Rent recei'e#

by a co %any o"e ain bu"ine"" i" a real e"tate bu"ine"" b anu acturin(; 17. )ellin( an#Di"tribution >+%en"e"; 18. )ale o &n'e"t ent by a *inance co %any an# b /on< inanceco %any; 19. $urc a"e o -oo# ill; 20. Di'i#en#" %ai#; 21. Ca" $urc a"e"; 22. Ca" %ai# toCre#itor"; 23. )ale o $atent"; 24. &nco e a+ re un# recei'e#; 26. Bank Balance; 27. Ca"Cre#it; 28. ) ort<ter #e%o"it" in Bank"; 29. &n'e"t ent in arketable )ecuritie" ) ort<ter ;30. Rent %ai# an# 31. Buy<back o >quity " are".

Sol!tion (%eratin( !cti'itie" 1 6 7 11 a 12 13 a 14 a 15 16 a 17 18 a 21 22 24 25 30.&n'e"tin( !cti'itie" 4 5 8 13 b 14 b 16 b 20 31.*inancial !cti'itie" 2 3 9 10 11b 18b 19 23.Ca" >qui'alent" 26 27 28 29.

ll!st"ation *ro t e ollo in( #etail" calculate ca" ro o%eration"

R".

)ale" 2 50 000

$urc a"e" 1 25 000

,a(e" 30 000

!""u e t at all t e abo'e tran"action" ere in ca" .

Sol!tion (

Ca" ro o%eration" E Ca" in lo Ca" out lo

E )ale" $urc a"e" a(e"

E R". 2 50 000 R". 1 25 000 R". 30 000

E R". 2 50 000 R". 1 55 000 E R". 95 000

43



ll!st"ation < Calculation o Ca" &n lo ro Debtor" . Calculate t e Ca" &n lo roDebtor" ro t e ollo in( in or ation

$articular" R".

a otal )ale" 4 00 000Ca" )ale" 1 20 000%enin( Debtor" 40 000Clo"in( Debtor" 60 000)ale" Return" 10 000

b Cre#it )ale" 2 00 000Ba# Debt" 15 000Di"count !llo e# 5 000%enin( Debtor" 14 000Clo"in( Debtor" 25 000)ale" Return" 10 000

c %enin( Debtor" 10 000Clo"in( Debtor" 25 000%enin( Bill" Recei'able" 12 000Clo"in( Bill" Recei'able" 15 000otal )ale" 2 40 000Ca" )ale" 20F o Cre#it )ale"Di"count !llo e# 8 000Ba# Debt" 10 000)ale" Return" 12 000

Sol!tion! C!)A &/* , *R D>B R)

#a"tic!la"s 6s.

%enin( Debtor" 40 000!## Cre#it )ale" otal )ale" Ca" )ale" R". 4 00 000 R". 1 20 000 2 80 000

3 20 000e"" )ale" Return" 10 000

Clo"in( Balance o Debtor" 60 000 70 000Cash nflow f"om %ebto"s 2 50 000

Alternative Solution : Cash Flow f"om %ebto"s = a" balancin( i(ure by %re%arin( t e otal

Debtor" !ccount.

44



Total %ebto"s +cco!ntDr. Cr.

#a"tic!la"s 6s. #a"tic!la"s 6s.

o Balance b # 40 000 By )ale" Return" 10 000o Cre#it )ale" By Ca" &n lo ro Debtor" 2 50 000

otal )ale" 4 00 000 Balancin( *i(ure 5 000e"" 1 20 000 2 80 000 By Balance c # 60 000

3 20 000 3 20 0003b4

#a"tic!la"s 6s.

%enin( Balance Debtor" 14 000!## Cre#it )ale" 2 00 000

2 14 000e"" Ba# Debt" 15 000

Di"count !llo e# 5 000)ale" Return" 10 000Clo"in( Balance o Debtor" 25 000 55 000

Cash nflow f"om %ebto"s 1 59 000

Alternative Solution : Total %ebto"s +cco!nt

Dr. Cr.


o Balance b # 14 000 By )ale" Return" 10 000o Cre#it )ale" 2 00 000 By Ba# Debt" 15 000

By Di"count !llo e# 5 000 2 80 000 By Ca" &n lo ro Debtor" 1 59 000

Balancin( *i(ureBy Balance c # 25 000

2 14 000 2 14 000

Total %ebto"s +cco!nt c Dr. Cr.


o Balance b # 10 000 By Bill Recei'able 3 000o Cre#it )ale" 2 00 000 By Di"count !llo e# 8 000

By Ba# Debt" 10 000 By )ale" Return" 12 000

By Ca" &n lo ro Debtor" 1 52 000 Balancin( *i(ure

45



By Balance c # 25 0002 10 000 2 10 000

ll!st"ation > Calculation o Ca" ut lo to Cre#itor" . Calculate t e Ca" ut lo toCre#itor" ro t e ollo in( in or ation

#a"tic!la"s 6s.

a otal $urc a"e 1 20 000Ca" $urc a"e" 50F o Cre#it $urc a"e"%enin( Cre#itor" 6 000Clo"in( Cre#itor" 15 000$urc a"e Return" 15 000Di"count Recei'e# 5 000

b Cre#it $urc a"e" 2 00 000%enin( Balance o Cre#itor" 15 000Clo"in( Balance o Cre#itor" 6 000Di"count Recei'e# 1 500$urc a"e Return" 3 500%enin( Balance o Bill" $ayable ! c 18 000Clo"in( Balance o Bill" $ayable ! c 24 000

Sol!tion (

a C! CG !& / * C!)A G * , CR>D& R)

$articular" R".%enin( Balance o Cre#itor" 6 000!## HCre#it $urc a"e 80 000

86 000e"" Di"count Recei'e# 5 000 $urc a"e Return" 15 000

Clo"in( Balance o Cre#itor" 15 000 35 000

Cash /!tflows to C"e&ito"s 51 000

H et Cre#it $urc a"e" E +; Ca" $urc a"e" E2

+

otal $urc a"e E2+

+ + E 1 20 000 r + E R". 80 000

!lternati'ely t e ca" out lo can be calculate# by %re%arin( t e otal Cre#itor" !ccount.

T/T+ % 'T/6S +CC/- T Dr. Cr.


o Di"count Recei'e# 5 000 By Bill Recei'able 6 000o $urc a"e Return" 15 000 By Di"count !llo e# 80 000o Ca" ut lo to Cre#itor" 51 000

Balancin( *i(ure

46



o Balance c # 15 00086 000 86 000

b C!)A G * , CR>D& R)

$articular" R".%enin( Balance o Cre#itor" 6 000%enin( Balance o Bill" $ayable 18 000!## Cre#it $urc a"e" 2 00 000

2 33 000e"" Di"count Recei'e# 1 500 $urc a"e Return" 3 500

Clo"in( Balance o Cre#itor" 6 000Clo"in( Balance o Bill" $ayable 24 000 35 000

Cash /!tflows to C"e&ito"s 1 98 000

!lternati'ely t e ca" out lo can be calculate# by %re%arin( t e otal Cre#itor" !ccount.

T/T+ % 'T/6S +CC/- T Dr. Cr.


o Di"count Recei'e# 5 000 By Balance b # %enin( 15 000o $urc a"e Return" 15 000 By Cre#it $urc a"e 2 00 000o Bill" $ayable !cce%te# H 51 000

o Ca" ut lo to Cre#itor" 1 98 000Balancin( *i(ure

o Balance c # Clo"in( 6 0002 15 000 2 15 000

H Bill" $ayable acce%te# E Clo"in( balance o bill" %ayable %enin( balance o bill" %ayable

E R". 24 000 R". 18 000 E R". 6 000

How is the amo!nt of ncome Ta? pai& &ete"mine&;

#"ovision fo" Ta? +cco!nt Dr. Cr.


o Bank ! c a+ $ai# ..I.. By Balance b # I..o Balance c # I... By $ro it an# o"" ! c I..

$ro'i"ion a#e #urin( t e yearII II

47



ote ( & only t e %ro'i"ion or ta+ i" (i'en in t e t o Balance ) eet" an# no in or ation about

ta+ %ai# i" (i'en t e a ount in t e %re'iou" year@" Balance ) eet i" treate# a" t e ta+ %ai# #urin(

t e current year. &t in'ol'e" an out lo o ca" .

e current year@" %ro'i"ion or ta+ re%re"ent" t e a ount o ta+ %ro'i#e# or t e current year. &t

i" a##e# back to t e current year@" %ro it" to calculate ca" ro o%eratin( acti'itie" un#er t ein#irect et o# . &t i" erely a book entry an# #oe" not in'ol'e t e out lo o ca" .

e %ro'i"ion or a+ !ccount %ro'i#e" in or ation about t e ta+ %ai# #urin( t e current year a"

ell a" t e ta+ %ro'i#e# or t e current year.


ell a" t e out lo o ca" .


ell a" t e ta+ %ro'i#e# or t e current year.

e ollo in( illu"tration " o " o inco e ta+ %ai# i" #eter ine#.

ll!st"ation @ . Ca" *lo ro %eratin( !cti'ity it i""in( ! ount" un#er t e Directet o# . $re%are t e Ca" *lo )tate ent ro %eratin( !cti'itie" by t e Direct et o# rot e ollo in( (i'en in or ation <

#"ofit an& oss +cco!nt

or t e year en#e# 31 "t arc 2007 Dr. Cr.


o %enin( )tock 20 000 By )ale" o $urc a"e Ca" 7 500

Ca" 25 000 Cre#it 1 25 000 2 00 000Cre#it 75 000 1 00 000 By Clo"in( )tock 26 000

o )ellin( >+%en"e" 12 000 By Co i""ion" 14 000o ice >+%en"e" 28 000 By Royaltie" 10 000o Ba# Debt" 4 000 By $urc a"e" Return" 1 000

o Di"count !llo e# 2 000o De%reciation 15 000o a+ $ro'i"ion" 30 000o )ale" Return 2 000o /et $ro it 43 000

2 56 000 2 56 000

+&&itional nfo"mation (arc 31 2006 arc 31 2007

R". R".Debtor" 15 000 10 000

Cre#itor" 14 000 10 000ut"tan#in( )ellin( >+%. 3 000 4 000

48



$re%ai# ice >+%en"e" 2 000 3 000!ccrue# Royaltie" 12 000 11 000!#'ance Co i""ion 9 000 8 000a+ $ro'i"ion 40 000 60 000

Sol!tion (C+SH F / F6/M /# 6+T 8 +CT 9 T S

#a"tic!la"s 6s.3a4 /pe"ating Cash 6eceipts

i Ca" )ale" 75 000ii Ca" recei'e# ro Debtor" /ote 1 1 14 000iii Ca" ro Royaltie" /ote 5 11 000i' Ca" ro Co i""ion" /ote 6 13 000 2 13 000

3b4 /pe"ating Cash #a5ments

i Ca" $urc a"e 25 000ii Ca" %ai# to Cre#itor" /ote 2 75 000iii Ca" %ai# or )ellin( >+%. /ote 3 11 000i' Ca" %ai# or o ice >+%. /ote 4 28 000 1 37 000

c Ca" &n lo " ro %eratin( !cti'itie" be ore /ote<3 76 000# e"" &nco e a+ $ai# #urin( t e year /ote<7 10 000et Cash Flow f"om /pe"ating +ctivities 3c)&4 66 000

ote ( De%reciation i" a non<ca" e+%en#iture an# t ere ore it i" i(nore#.

o" ing otes ( i""in( &n or ation to be Calculate#

T/T+ % 'T/6S +CC/- T 1. Dr. Cr.

#a"tic!la"s #a"tic!la"s 6s.

o Balance b # 15 000 By )ale" Return" 2 000o Cre#it )ale" 1 25 000 By Di"count !llo e# 2 000

By Ba# Debt" 4 000By Ca" Recei'e# Bal. *i(. 1 14 000By Balance c # 18 000

1 40 000 1 40 000

T/T+ C6 % T/6 +CC/- T 2. Dr. Cr.

#a"tic!la"s #a"tic!la"s 6s.

o $urc a"e Return" 1 000 By Balance b # 14 000o Di"count Recei'e# 5 000 By Cre#it $urc a"e" 75 000o Cash #ai& Balancin( *i(. 73 000

49



#6/9 S / F/6 T+A +CC/- T7. Dr. Cr.

#a"tic!la"s 6s. #a"tic!la" 6s.

o Bank ! c a+ $ai# 10 000 By Balance b # 40 000 By $ro it an# o"" ! c 30 000

o !#'ance Co i""ion ! c 8 000 $ro'i"ion a#e !t t e en#

70 000 70 000

2. C+SH F / F6/M 9 ST 8 +CT 9 T S

&n'e"tin( !cti'itie" o an enter%ri"e are acqui"ition an# #i"%o"al o t e lon(<ter a""et" an#

ot er in'e"t ent" not inclu#e# in ca" equi'alent". !ccor#in(ly t e ca" in lo an# out lo

relatin( to t e i+e# a""et" " are an# #ebt in"tru ent" o ot er enter%ri"e" intere"t" in :oint

'enture" a#'ance" an# loan" to t ir# %artie" an# al"o t eir re%ay ent" are " o n un#er

&n'e"tin( !cti'itie" in t e Ca" *lo )tate ent. e Ca" *lo ro &n'e"tin( !cti'itie" i"

a"certaine# by analy?in( t e c an(e" in *i+e# !""et" an# on(<ter &n'e"t ent" in t e

be(innin( an# at t e en# o t e year.

+sce"taining Missing +mo!nts "ega"&ing Fi?e& +ssets o" %ep"eciation

Case 1 ( , en t e i+e# a""et i" " o n at t e ritten #o n 'alue.

Fi?e& +ssets +cco!nt 3+t w"itten &own val!e4 Dr. Cr.


o Balance b # I. By Bank ! c I.

o Bank ! c $urc a"e" .I $ro it an# o"" ! c I.o $ro it an# o"" ! c I. o"" on )ale o *i+e# !""et I.$ro it on )ale o *i+e# !""et I. By De%reciation ! c I.

By Balance c # I.I.. I.

otes ( 1 -enerally t e %urc a"e o i+e# a""et" i" a balancin( a ount on t e #ebit "i#e o t eaccount an# #e%reciation or t e "ale o i+e# a""et on t e cre#it "i#e o t e account.

2. &n or ation re(ar#in( #e%reciation i" (enerally (i'en in t e que"tion. )tu#ent" arerequire# to in# out only t e "ale or t e %urc a"e "ale o a""et.

3. & bot "ale an# #e%reciation are not (i'en t en a""u e it i" eit er "ale or #e%reciation

an# (i'e your a""u %tion.

51



4. &n t e ca"e o lan# it " oul# be a""u e# "ale a" #e%reciation i" not c ar(e# on lan#. &nt e ca"e o %atent" (oo# ill an# tra#e ark" it " oul# be a""u e# "ale a"#e%reciation i" not c ar(e# on lan#. &n t e ca"e o %atent" (oo# ill.

ll!st"ation 7. J t#. a" %lant an# ac inery o"e ritten #o n 'alue on 1 "t !%ril 2006 a"R".8 60 000 an# on 31 "t arc 2007 a" R". 9 50 000. De%reciation or t e year a" R".40 000. !t t e be(innin( o t e year a %art o %lant a" "ol# or R". 5 000 ic a# a ritten#o n 'alue o R". 20 000. Calculate t e /et Ca" *lo ro &n'e"tin( !cti'itie".

Sol!tion ( C!)A * , *R &/K>) &/- !C &K& &>)

$articular" R".Ca" $ay ent to acquire $lant an# ac inery /ote 1 50 000Ca" Recei%t" ro )ale o $lant an# ac inery 25 000 1 25 000

ote (# + T + % M+CH 6 +CC/- T

Dr. Cr.

%ate #a"tic!la"s 6s. %ate #a"tic!la" 6s.

2006 2006!%r 1 o Balance b # 8 60 000 !%r 1 By Bank ! c 25 000

o $ro it an# o"" ! c 5 000 2007 By De%reciation ! c 40 000$ro it on )ale o $lant ar 31 By Balance c # 9 50 000o Bank ! c $urc a"e" 1 50 000Balancin( *i(ure

10 15 000 10 15 000

Case 2 ( , en t e i+e# a""et" are " o n at co"t an# accu ulate# #e%reciation t e %ro'i"ionor #e%reciation i" "e%arately i" "e%arately aintaine# .Gn#er t i" ca"e in contra"t to t e abo'e ca"e #e%reciation i" not #irectly c ar(e# to t e !""et"account. e #e%reciation or t e %erio# i" #ebite# to t e De%reciation !ccount tran" er to t e$ro it an# o"" !ccount an# cre#ite# to !ccu ulate# De%reciation !ccount. &n t e Balance) eet a""et a%%ear" at it" ori(inal co"t an# t e accu ulate# #e%reciation i" " o n a" a #e#uctionro t e !""et" !ccount. &n "uc ca"e" e %re%are "e%arate account" or i+e# a""et" an#

accu ulate# #e%reciation or %ro'i"ion" or #e%reciation. De%reciation or t e year can bea"certaine# ro $ro'i"ion or t e De%reciation !ccount.

Fi?e& +ssets +cco!nt 3+t Cost4 Dr. Cr.


o Balance b # I. By Bank ! c )ale o *i+e# !""et I.o $ro it an# o"" ! c .I By !ccu ulate# De%. ! c I.

$ro it on )ale o *i+e# !""et I. !ccu ulate# De%. ono Bank ! c $ur. o *i+e# !""et I. *i+e# !""et )ol# I.

By $ro it an# o"" ! c I.

52



o"" on )ale o *i+e# !""et I..By Balance c # I..

II II

ote ( /or ally t e %urc a"e o i+e# a""et i" a balancin( a ount on t e #ebit "i#e o t eaccount an# t e "ale o i+e# a""et on t e cre#it "i#e o t e account.

+CC-M- +T % % #6 C +T / +CC/- T Dr. Cr.


o *i+e# !""et ! c I. By Bank ! c )ale o *i+e# !""et I.o $ro it an# o"" ! c .I By !ccu ulate# De%. ! c I.

$ro it on )ale o *i+e# !""et I. !ccu ulate# De%. ono Bank ! c $ur. o *i+e# !""et I. *i+e# !""et )ol# I.

By $ro it an# o"" ! c I.o"" on )ale o *i+e# !""et I..

By Balance c # I..II II

ote ( e !ccu ulate #e%reciation on t e i+e# a""et "ol# or #e%reciation c ar(e# or t ecurrent accountin( year ay not be (i'en ic " all be t e balancin( a ount.

. C+SH F / F6/M F + C 8 +CT 9 T S

*inancin( !cti'itie" o an enter%ri"e are t o"e acti'itie" t at re"ult in c an(e in t e "i?e an#co %o"ition o o ner"@ ca%ital an# borro in( o t e enter%ri"e. &t inclu#e" %rocee#" ro i""ue

o " are" or ot er "i ilar in"tru ent" i""ue o #ebenture" loan" bon#" ot er " ort<ter or lon(<ter borro in(" an# re%ay ent" o a ount" borro e#. !ccor#in(ly recei%t" an# %ay ent" onaccount o t e abo'e are #i"clo"e# in t e Ca" *lo )tate ent a" t e Ca" *lo ro *inancin(!cti'itie".

Di'i#en#" %ai# in all enter%ri"e" an# intere"t %ai# in t e ca"e o non< inancin( enter%ri"e" areal"o inclu#e# in inancin( acti'itie".

&t i" i %ortant to note t at an increa"e in " are ca%ital #ue to bonu" i""ue ill not be " o n in t eca" lo "tate ent "ince it i" a ca%itali?ation o re"er'e". , en " are" are i""ue# at a %re iut e ca" lo "tate ent re lect" t e total ca" (enerate# by t e i""ue i.e. *ace Kalue o ) are" $re iu .

e Ca" *lo ro *inancin( !cti'itie" i" a"certaine# by analy?in( t e c an(e in >quity an#$re erence ) are Ca%ital Debenture" an# ot er borro in(".

ll!st"ation :. *ro t e ollo in( in or ation calculate t e Ca" *lo ro *inancin(!cti'itie"

$articular" 31.3.2006 31.3.2007R" R"

>quity ) are Ca%ital 4 00 000 5 00 00010F Debenture" 1 50 000 1 00 000

53



)ecuritie" 40 000 50 000

Additional Information : &ntere"t %ai# on #ebenture" R". 10 000

Sol!tion (Calculation o /et Ca" *lo *ro *inancin( !cti'itie"

$articular" R".

Ca" $rocee#" ro t e &""ue o ) are" &nclu#in( $re iu 1 10 000&ntere"t %ai# on Debenture" 10 000Re#e %tion o Debenture" 50 000et Cash Flow f"om Financing +ctivities 50 000

ll!st"ation D. JLM t#. %ro'i#e" t e ollo in( in or ation. Calculate t e /et Ca" *lo ro*inancin( !cti'itie"

$articular" 31.3.2006 31.3.2007R" R"

>quity ) are Ca%ital 10 00 000 15 00 00010F Debenture" 1 00 000 II..

8F Debenture" III 2 00 000

Additional Information : i &ntere"t %ai# on Debenture" R". 10 000ii Di'i#en# %ai# R". 50 000iii Durin( t e year 2006<2007 XZY t#. i""ue# bonu" " are" in t e ratio o 2 1 by

ca%itali"in( re"er'e.

Sol!tion (Calculation o /et Ca" *lo *ro *inancin( !cti'itie"

$articular" R".

Ca" $rocee#" ro t e &""ue 8F o Debenture" 2 00 000Re#e %tion o 10F Debenture" 1 00 000&ntere"t %ai# 10 000Di'i#en# %ai# 50 000et Cash Flow f"om Financing +ctivities 40 000

ote ( Bonu" " are" i" not to be " o n in t e Ca" *lo )tate ent becau"e t ere i" no ca" lo .

54



e or at" or calculatin( Ca" *lo ro %eratin( !cti'itie" by Direct et o# an# &n#irectet o# are (i'en belo

56



1.D.1 % 6 CT M TH/%* R ! * R C!)A * , ) ! > >/

or t e year en#e# I.N !" %er !ccountin( )tan#ar#<3 Re'i"e# O

$articular" R".

1. Ca" *lo ro %eratin( !cti'itie"!. %eratin( Ca" Recei%t" e.(.

Ca" )ale" I. Ca" recei'e# ro Cu"to er" I. ra#in( Co i""ion" recei'e# I. Royaltie" recei'e# I. I..

B %eratin( Ca" $ay ent" e.(. Ca" $urc a"e" I

Ca" $ai# to t e )u%%lier" I Ca" $ai# or Bu"ine"" >+%en"e" like ice >+%en"e"

anu acturin( >+%en"e" )ellin( an# Di"tribution>+%. >tc. I ...

C Ca" (enerate# ro %eration" ! B ID &nco e a+ $ai# /et o a+ Re un# recei'e# I> Cash Flow befo"e ?t"ao"&ina"5 tem I.* >+traor#inary &te " Recei%t $ay ent < I.- /et Ca" ro or u"e# in %eratin( !cti'itie" I.

&&. Ca" *lo ro &n'e"tin( !cti'itie")a e a" un#er &n#irect et o#

&&&. Ca" *lo ro *inancin( !cti'itie" I)a e a" un#er &n#irect et o#

&K. /et &ncrea"e Decrea"e in Ca" an# Ca" >qui'alent" I)a e a" un#er &n#irect et o# < & && &&& I

K. !## Ca" an# Ca" >qui'alent" in t e be(innin( o t e year )a e a" un#er &n#irect et o# I

K&. Ca" an# Ca" >qui'alent" in t e en# o t e year I

57



. Cash Flow f"om nvesting +ctivities $rocee#" ro )ale o *i+e# !""et" I $rocee#" ro )ale o &n'e"t ent" I $rocee#" ro )ale o &ntan(ible !""et" I &ntere"t an# Di'i#en# recei'e#

*or /on< inancial co %anie" only I Rent &nco e I $urc a"e o *i+e# !""et" I $urc a"e o &n'e"t ent" I $urc a"e &ntan(ible !""et" like -oo# ill I /et Ca" ro or u"e# in *inancin( !cti'itie" I

. Cash f"om Financing +ctivities $rocee#" ro &""ue o ) are" an# Debenture" I $rocee#" ro t er on(<ter Borro in(" I *inal Di'i#en# $ai# I &ntere"t an# Debenture" an# oan" $ai# I Re%ay ent o oan" I Re#e %tion o Debenture" $re erence ) are" I /et Ca" ro or u"e# in *inancin( !cti'itie" I

9. et nc"ease B %ec"ease in Cash an& Cash *!ivalents 3 E E 4 I

9. +&& ( Cash an& Cash *!ivalents in the beginning of the 5ea" Ca" in Aan# Ca" at Bank e"" Bank 'er#ra t I ) ort<ter De%o"it" I

arketable )ecuritie" I I9 . Cash an& Cash *!ivalents in the en& of the 5ea" Ca" in Aan# I Ca" at Bank e"" Bank 'er#ra t I ) ort<ter De%o"it" I arketable )ecuritie" I I

ote ( ! ount" in bracket" in#icate ne(ati'e a ount" i.e. a ount" t at are to be #e#ucte#.

ll!st"ation 11. *ro t e ollo in( in or ation %re%are t e Ca" *lo )tate ent or t e year en#e#arc 31 2007

#a"tic!la"s 6s.%enin( Ca" Balance 10 000Clo"in( Ca" Balance 12 000Decrea"e in Debtor" 5 000&ncrea"e in Cre#itor" 7 000)ale o *i+e# !""et" 20 000Re#e %tion o Debenture" 50 000

/et $ro it or t e year 20 000

59



Sol!tion (Cash Flow Statement

or t e year en#e# 31 "t arc 2007

$articular" R".+. Cash Flow f"om /pe"ating +ctivities 20 000

/et $ro it or t e year be ore ta+!## &ncrea"e in Cre#itor" 7 000

Decrea"e in Debtor" 5 000 12 000 /et Ca" %ro'i#e# by %eratin( !cti'itie" 32 000

'. Cash Flow f"om nvesting +ctivities 20 000$rocee#" ro )ale o *i+e# !""et" 20 000

/et Ca" ro &n'e"tin( !cti'itie"

C. Cash Flow f"om Financing +ctivitiesRe#e %tion o Debenture" 50 000

/et Ca" u"e# in *inancin( !cti'itie" 50 000D. /et &ncrea"e in Ca" ! B C 2 000

!## Ca" at t e be(innin( o t e %erio# 10 000Cash at the en& of the pe"io& 12 000

ll!st"ation 12. *ro t e ollo in( %articular" %re%are t e Ca" *lo )tate ent or t e year

en#e# 31"t

arc 2007 by t e Direct et o#

i Ca" "ale" R". 65 86 000.ii Ca" collecte# ro #ebtor" #urin( t e year a ounte# to R". 33 23 400.iii Ca" %ai# to "u%%lier" a" R". 79 36 810.i' R".9 87 500 a" %ai# to an# or e %loyee".' *urniture o t e book 'alue o R". 18 500 a" "ol# or R". 11 000 an# a ne urniture

co"tin(R". 83 160 a" %urc a"e#.

'i Debenture" o t e ace 'alue o R". 3 00 000 ere re#ee e# at a %re iu o 2 %er centintere"t on #ebenture". &ntere"t on #ebenture" R". 84 000 a" al"o %ai#.3vii4 Di'i#en# R". 4 50 000 or t e year en#e# 31 "t arc 2007 a" #i"tribute# in ay 2007.3viii4 Ca" in an# an# at bank a" on arc 31 2006 an# arc 31 2007 a" R". 51 070 an#

R". 5 74 000 re"%ecti'ely.

60



Sol!tion (

C+SH F / ST+T M T /F A T%. 3% 6 CT M TH/%4or t e year en#e# 31 "t arc 2007

$articular" R".+. Cash Flow f"om /pe"ating +ctivities

3i4 /pe"ating Cash 6eceipts (Ca" Recei'e# ro Cu"to er" 28 00 0003ii4 /pe"ating Cash #a5ments (Ca" $ai# to )u%%lier" 20 00 000,a(e" an# )alarie" 1 00 000'er ea# >+%en"e" 2 00 000 23 00 000

Ca" -enerate# ro %eration" 5 00 000e"" &nco e a+ $ai# 2 50 000

/et Ca" ro %eratin( !cti'itie" 2 50 000'. Cash Flow f"om nvesting +ctivities

$urc a"e o *i+e# !""et" 2 00 000$rocee#" ro )ale o *i+e# !""et" 1 00 000

/et Ca" G"e# in &n'e"tin( !cti'itie" 1 00 000C. Cash Flow f"om Financing +ctivities

$rocee#" ro &""ue o >quity ) are" 3 00 000$ay ent o Bank oan 3 00 000Di'i#en# $ai# 50 000

Net Cash Used in Financing Activities 50 000%. et nc"ease in Cash an& Cash *!ivalents 3+E'EC4 1 00 000. Cash an& Cash *!ivalent at the beginning of the 5ea" 50 000F. Cash an& Cash *!ivalent at the n& of the 5ea" 1 50 000

ll!st"ation 1<. e inancial %o"ition o !BC t#. a" on 31 "t arc a" a" ollo "

Dr. Cr.

iabilities 200@ 2007 +ssets 200@ 20076s. 6s. 6s. 6s.

Current iabilitie" 72 000 82 000 Ca" 8 000 7 2000oan ro M t#. I. 40 000 Debtor" 70 000 76 800oan ro Bank 60 000 50 000 )tock 50 000 44 000) are Ca%ital 2 00 000 2 00 000 an# 40 000 60 000$ro it an# o"" ! c 96 000 98 000 Buil#in(" 1 00 000 1 10 000

ac inery 2 14 000 2 44 000$ro'i"ion or De%. 54 000 72 000

4 28 000 4 70 000 4 28 000 4 70 000

62



Durin( t e year. R". 52 000 ere %ai# a" #i'i#en#. $re%are Ca" *lo )tate ent.

Sol!tion (C+SH F / ST+TM T

for the year ended 31 st March, !!" $articular" R".

Cash Flow f"om /pe"ating +ctivities /et %ro it be ore ta+ an# e+traor#inary ite "

)ee ,orkin( /ote 54 000!## De%reciation 18 000%eratin( $ro it be ore ,orkin( Ca%ital C an(e" 72 000!## Decrea"e in )tock" 6 000

&ncrea"e in Current iabilitie" 10 000e"" &ncrea"e in Debtor" 6 800

/et Ca" ro %eratin( !cti'itie" 81 200Cash Flow f"om nvesting +ctivities$urc a"e o Buil#in( 10 000$urc a"e o an# 20 000$urc a"e o ac inery 30 000

/et Ca" u"e# in &n'e"tin( !cti'itie" 60 000Cash Flow f"om Financing +ctivities$rocee#" o oan ro M t#. 40 000Re%ay ent o Bank oan 10 000$ay ent o Di'i#en# 52 000

/et ca" u"e# in *inancin( !cti'itie" 22 000et %ec"ease in Cash an& Cash *!ivalents 800Cash an& cash e*!ivalents at the beginning 8 000Cash an& cash e*!ivalents at the en& of the pe"io& 7 200

o" ing ote (Clo"in( Balance a" %er $ro it an# o"" ! c on 31 "t arc 2007 98 000

ess ( %enin( Balance a" %er $ro it an# o"" ! c a" on 1 "t !%ril 2006 96 000 $ro it or t e year 2 000

!## Di'i#en#" $ai# 52 000 /et $ro it be ore a+ 54 000

63



ll!st"ation 1>. *ro t e ollo in( %articular" o JLM t#. %re%are t e Ca" *lo )tate ent.

Dr. Cr.iabilities arc 31 arc 31 +ssets arc 31 arc 31

2006 2007 2006 2007R". R". R". R".

>quity ) are Ca%ital 3 00 000 3 50 000 *i+e# !""et" /et 5 10 000 6 20 00012F $re . ) are Ca%ital 2 00 000 1 00 000 10F &n'e"t ent 30 000 80 00010F Debenture" 1 00 000 2 00 000 Ca" in Aan# 20 000 35 000$ro it an# o"" ! c 1 10 000 2 70 000 Ca" at Bank 20 000 40 000Cre#itor" 70 000 1 45 000 Debtor" -oo# 1 00 000 2 00 000$ro'i"ion or Doubt ul Debt" 10 000 15 000 )tock 1 00 000 90 000

Di"count on Deb. 10 000 15 0007 90 000 10 80 000 7 90 000 10 80 000

Lou are in or e# t at #urin( t e year i ! ac ine it a book 'alue o R". 40 000 a" "ol# or 25 000.ii De%reciation c ar(e# #urin( t e year a" R".70 000.iii $re erence " are" ere re#ee e# on 31 "t arc 2007 at a %re iu o 5F.i' !n &nteri Di'i#en# 15 %er cent a" %ai# on equity " are" on 31 "t arc 2007.

$re erence Di'i#en# a" al"o %ai# on 31 "t arc 2007.

' /e " are" an# #ebenture" ere i""ue# on 31"t

arc 2007.



3+4 Cash Flow f"om /pe"ating +ctivitiesClo"in( Balance a" %er $ro it an# o"" ! c 2 70 000

ess ( %enin( Balance a" %er $ro it an# o"" ! c 1 10 000

1 60 000+&& ( +pp"op"iation of F!n&

$re erence Di'i#en# 24 000&nteri Di'i#en# 45 000&ncrea"e in $ro'i"ion or Doubt ul Debt" )ince all #ebtor" are (oo# /ote 1 5 000 74 000

et #"ofit befo"e ta? 2 34 000+&& ( on ope"ating ?penses ( De%reciation 70 000

&ntere"t on on( er Borro in(" Debenture" 10 000o"" on )ale o ac inery 15 000

64



$re iu $ayable on Re#e %tion o $re erence ) are" 5 000 1 00 0003 34 000

ess ( on ope"ating ncomes (&ntere"t on &n'e"t ent 3 000%eratin( $ro it be ore ,orkin( Ca%ital C an(e" 3 31 000

+&& ( %ec"ease in C!""ent +ssets an& nc"ease in C!""ent iabilities Decrea"e in )tock 10 000

&ncrea"e in Cre#itor" 75 000 85 0004 16 000

ess ( nc"ease in C!""ent +ssets an& %ec"ease in C!""ent iabilities

&ncrea"e in Debtor" 1 00 000et Cash f"om /pe"ating +ctivities 3 16 000

'. Cash Flow f"om nvesting +ctivities$urc a"e o *i+e# !""et" 2 20 000$rocee#" ro )ale o ac inery 25 000&ntere"t on &n'e"t ent 3 000$urc a"e o &n'e"t ent" 50 000

/et Ca" G"e# in &n'e"tin( !cti'itie" 2 42 000

3C 4 Cash Flow f"om Financing +ctivities$rocee#" ro &""ue o ) are Ca%ital 50 000$rocee#" ro lon(<ter borro in(" Debenture" 95 000N R". 1 00 000 R". 5 000 Di"count on &""ue o Debenture" /ote 2 O

Re#e %tion o $re erence ) are" R". 1 00 000 R". 5 000 1 05 000&ntere"t $ai# on on(< er Borro in(" 10 000&nteri Di'i#en# %ai# 45 000$re erence Di'i#en# $ai# #urin( t e year 24 000

/et Ca" G"e# in *inancin( !cti'itie" 39 000

et nc"ease in Cash an& Cash *!ivalents 3+E'EC4 35 000Cash an& Cash *!ivalents in the beginning of pe"io& 40 000Ca" in Aan# an# Ca" at BankCash in Cash *!ivalents at the en& of pe"io& 75 000Ca" in Aan# an# Ca" at Bank

65



o" ing otes (

a. &ncrea"e in $ro'i"ion or Doubt ul Debt" i all #ebtor" a'e been con"i#ere# a" (oo#

re%re"ent" tran" er o t e $ro it ro $ro it an# o"" !ccount. &t i" a##e# back to t e

current year@" %ro it" to in# out ca" ro %eratin( !cti'itie".

b. &ncrea"e in Di"count on t e &""ue o Debenture" or " are" i" #e#ucte# ro increa"e in

Debenture" or " are" to a"certain t e net a ount o i""ue.

F A % +SS TS +CC/- T 3+T .%.943. Dr. Cr.


o Balance b # 5 10 000 By Bank ! c 25 000o Bank ! c $urc a"e 2 20 000 By $ro it an# o"" ! c

Balancin( *i(ure o"" on )ale 15 000By De%reciation ! c 70 000By Balance c # 6 20 000

7 30 000 7 30 000

ll!st"ation 1@. e "u ari?e# Balance ) eet" o JLM t#. a" on 31 "t arc 2006 an# 2007are (i'en belo <

Dr. Cr.iabilities arc 31 arc 31 +ssets arc 31 arc 31

2006 2007 2006 2007R". R". R". R".

) are Ca%ital 4 50 000 4 50 000 *i+e# !""et" 4 00 000 3 20 000-eneral Re"er'e 3 00 000 3 10 000 &n'e"t ent 50 000 60 000$ro it an# o"" ! c 56 000 68 000 )tock 2 40 000 2 10 000Cre#itor" 1 68 000 1 34 000 Debtor" 2 10 000 4 55 000$ro'i"ion or a+ation 75 000 10 000 Bank 1 49 000 1 97 000ort(a(e I. 2 70 000

10 49 000 12 42 000 10 49 000 12 42 000

Additional Information :i &n'e"t ent" co"tin( R". 8 000 ere "ol# #urin( t e year 2006<07 or R". 8 500.ii $ro'i"ion or ta+ a#e #urin( t e year a" R". 9 000.iii Durin( t e year %art o t e i+e# a""et" co"tin( R". 10 000 a" "ol# or R". 12 000 an# t e

%ro it a" inclu#e# in t e $ro it an# o"" !ccount.i' Di'i#en#" %ai# #urin( t e year a ounte# to R". 40 000Lou are require# to %re%are a Ca" *lo )tate ent.

66





3+4 Cash Flow f"om /pe"ating +ctivities (

Clo"in( Balance a" %er $ ! c 31.3.2007 68 000ess ( %enin( Balance o $ro it an# o"" ! c 31.3.2006 56 00012 000

+&& ( +pp"op"iation of F!n& (&nteri Di'i#en# 40 000$ro'i"ion or a+ 9 000ran" er to Re"er'e 10 000 59 000

/et $ro it be ore ta+ an# e+traor#inary ite " 71 000+&&( on /pe"ating ?penses ( 70 000

De%reciation /ote 1

e"" on /pe"ating ncomes ( 500$ro it on )ale o &n'e"t ent" 2 000 67 500%eratin( $ro it be ore ,orkin( Ca%ital C an(e" 1 38 500+&& ( %ec"ease in C!""ent +ssets an& nc"ease in C!""ent iabilities (

Decrea"e in )tock R". 2 40 000 R". 2 10 000 30 000ess ( nc"ease in C!""ent +ssets an& &ec"ease in C!""ent iabilities (

&ncrea"e in Debtor" R". 4 55 000 R". 2 10 000 2 45 000Decrea"e in Cre#itor" R". 1 68 000 R". 1 34 000 34 000 2 79 000Cash 8ene"ate& f"om /pe"ations 1 10 500

e"" &nco e ta+ $ai# 74 000

/et Ca" u"e# in %eratin( !cti'itie" ! 1 84 5003'4 Cash Flow f"om nvesting +ctivities

$urc a"e o &n'e"t ent 18 000)ale o *i+e# !""et" 12 000)ale o &n'e"t ent" 8 500

/et Ca" ro &n'e"tin( !cti'itie" B 2 5003C4 Cash Flow f"om Financing +ctivities

ort(a(e oan 2 70 000Di'i#en# $ai# 40 000

/et Ca" ro *inancin( !cti'itie" C 2 30 000

3%4 et nc"ease in Cash an& Cash *!ivalents 3+E'EC4 48 000 3 4 Cash an& Cash *!ivalents at the beginning of the 5ea" 1 49 0003F4 Cash an& Cash *!ivalents at the en& of the 5ea" 1 97 000

o" ing otes (

67



1 Dr. Fi?e& +ssets +cco!nt Cr.


o Balance b # 4 00 000 By Bank ! c 12 000o $ro it an# o"" ! c 2 000 By De%reciation ! c Bal. *i(. 70 000

$ro it on )ale By Balance c # 3 20 000

4 02 000 4 02 000

2 Dr. nvestment +cco!nt Cr.


o Balance b # 4 00 000 By Bank ! c 8 500o $ro it an# o"" ! c $ro it 2 000 By De%reciation ! c Bal. *i(. 60 000o Bank ! c Balance *i(. 18 500

68 500 68 500

3 Dr. nvestment +cco!nt Cr.


o Bank ! c Balancin( *i(. 4 00 000 By Balance b # 75 000o Balance c # 2 000 By $ro it an# o"" ! co 18 500 $ro'i"ion a#e 9 000

84 000 84 500

et #"ofit o" %"awings ( )o eti e" in t e ca"e o a "ole tra#er or a %artner" i% ir ca%italo t e %ro%rietor or %artner" i" (i'en but t e a ount o #ra in(" or net %ro it" a#e ay bei""in(. e ca%ital account ay be %re%are# to in# t e net %ro it" or #ra in(".

ll!st"ation 17. e "u ari?e# Balance ) eet" o JLM t#. a" on 31 "t arc 2006 an# 2007are (i'en belo < Dr. Cr.

iabilities 200@ 2007 +ssets 2006 2007R". R". R". R". Cre#itor" 40 000 44 000 *i+e# !""et" 10 000 7 000r". !@" oan 25 000 I Debtor" 30 000 50 000oan ro Bank 40 000 50 000 )tock 35 000 25 000Ca%ital o ! an# B 1 25 000 1 53 000 ac inery 80 000 55 000

an# 40 000 50 000Buil#in(" 35 000 60 000

2.30 000 2 47 000 2 30 000 2 47 000

Durin( t e year a ac ine co"tin( R". 10 000 accu ulate# #e%reciation R". 3 000 a" "ol# or R". 5 000. e %ro'i"ion or #e%reciation a(ain"t ac inery a" on arc 31 2006 an# arc 312007 a" o R". 25 000 an# R". 40 000 re"%ecti'ely.

68

$ro it E Ca%ital at t e en# Dra in(" Ca%ital at t e be(innin(

Dra in(" E Ca%ital at t e be(innin( $ro it Ca%ital at t e en#



e /et $ro it" or t e year a ounte# to R". 45 000. Lou are require# to %re%are t e Ca" *lo)tate ent.Sol!tion (

C+SH F / ST+TM T for the year ended 31 st March, !!"

$articular" R".3+4 Cash Flow f"om /pe"ating +ctivities /et $ro it be ore a+ 45 000

+&& ( on /pe"ating ?penses (De%reciation )ee /ote 3 18 000o"" on )ale o ac inery )ee /ote 4 2 000 20 000

%eratin( $ro it be ore ,orkin( Ca%ital C an(e" 65 000!## Decrea"e in Current !""et or &ncrea"e in Current iabilitie"

Decrea"e in )tock 10 000&ncrea"e in Cre#itor" 4 000 14 000

79 000e"" &ncrea"e in Current !""et or Decrea"e in Current iabilitie"

&ncrea"e in Debtor" 20 000 /et Ca" ro %eratin( !cti'itie" 59 000

B Cash Flow f"om nvesting +ctivities$urc a"e o an# 10 000$urc a"e o Buil#in(" 25 000$rocee#" ro )ale o ac inery 25 000

/et ca" u"e# in &n'e"tin( acti'itie" 30 000

C Cash Flow f"om Financing +ctivities$rocee#" o oan ro Bank 10 000$ay ent o r". !@" oan 25 000Dra in(" /ote 1 17 000 32 000

/et Ca" u"e# in *inancin( !cti'itie"3%4 et %ec"ease in Cash an& Cash *!ivalents 3+E'EC4 3 0003 4 Cash an& cash e*!ivalents at the beginning of the pe"io& 10 0003F4 Cash an& cash e*!ivalents at the en& of the pe"io& 7 000otes (Dra in(" E %enin( Ca%ital o ! an# B /et $ro it" Clo"in( Ca%ital o ! an#

B E R". 1 25 000 R". 45 000 R". 1 53 000 E R". 17 000 2 Dr. Machine"5 +cco!nt Cr.

#a"tic!la"s 6s. #a"tic!la"s 6s.o Balance b # 1 05 000 By Ca" ! c 5 000

R". 80 000 R". 25 000 By $ro'i"ion or De%reciation 3 000By $ro it an# o"" ! c 2 000o"" on )ale /ote 4 95 000

1 05 000 1 05 000

69



H)o eti e" i+e# a""et" are " o n at the w"itten &own val!e 3afte" &e&!cting &ep"eciation4in the balance sheet an& the acc!m!late& &ep"eciation is given in the a&&itionalinfo"mation a" in t e %re"ent illu"tration . &n "uc a ca"e t e o%enin( an# clo"in( balance" int e re"%ecti'e *i+e# !""et" account ill be t e total a ount o book 'alue " o n in t e balance" eet %lu" balance o t e accu ulate# #e%reciation %ro'i#e# in a##itional in or ation.

3 Dr. #"ovision fo" %ep"eciation +cco!nt Cr.

#a"tic!la"s 6s. #a"tic!la"s 6s.o De%reciation on ac inery )ol# 3 000 By Balance ! c 25 000o Balance c # 40 000 By De%reciation %ro'i#e#

Balancin( *i(ure 18 000

43 000 43 000

4. o"" on )ale o ac inery E Co"t !ccu ulate# De%reciation )ellin( $rice ER". 10 000 R". 3 000 R". 3 000 R". 5 000 E R".2 000

ll!st"ation 1:. *ro t e ollo in( Balance ) eet" o " -u%ta Co. %re%are t e Ca" *lo)tate ent or t e year en#e# arc 31

iabilities 200@ 2007 +ssets 2006 2007R". R". R". R".

Cre#itor" 20 000 22 000 Ca" 8 000 22 000

ut"tan#in( >+%en"e" 5 000 1 000 Debtor" 15 000 11 000oan ro J 10 000 5 000 Bill" Recei'able 5 000 ICa%ital 1 08 000 1 68 000 )tock 20 000 28 000

*i+e# !""et" 95 000 1 35 0002.30 000 2 47 000 2 30 000 2 47 000

Durin( t e year t e %ro%rietor intro#uce# R". 20 000 a" a##itional ca%ital. e net %ro it" or t eyear a ter c ar(in( R". 5 000 a" #e%reciation on i+e# a""et" ere R". 50 000.

Sol!tion (

70



C+SH F / ST+TM T for the year ended 31 st March, !!"

$articular" R".3+4 Cash Flow f"om /pe"ating +ctivities

/et $ro it be ore a+ 50 000 /on< %. >+%en"e" De%reciation 5 000%eratin( %ro it be ore ,orkin( Ca%ital C an(e" 55 000

+&& ( %ec"ease in C!""ent +ssets inc"ease in C!""ent iabilities (Debtor" 4 000Bill" Recei'able" 5 000Cre#itor" 2 000 11 000

66 000

ess ( nc"ease in C!""ent +ssets &ec"ease in c!""ent liabilities()tock 8 000

ut"tan#in( >+%en"e" 4 000 12 000 /et Ca" ro %eratin( !cti'itie" 54 000

3'4 Cash Flow f"om nvesting +ctivities*i+e# !""et" $urc a"e# )ee ,orkin( /ote 2

/et Ca" u"e# in &n'e"tin( !cti'itie" 45 0003C4 Cash Flow f"om Financing +ctivities

Re%ay ent o oan ro J 5 000 !##itional Ca%ital &ntro#uce# 20 000 Dra in( )ee ,orkin( /ote<1 10 000

/et Ca" u"e# in *inancin( !cti'itie" 5 0003%4 et nc"ease in Cash an& Cash *!ivalents 3+E'EC4 14 0003 4 Cash 'alance on +p"il 1, 200@ 8 0003F4 Cash 'alance on Ma"ch, 1, 2007 22 000o" ing otes (

1 Dr. C+# T+ +CC/- T Cr.

#a"tic!la"s 6s. #a"tic!la"s 6s.o Ca" ! c 10 000 By Balance b # 1 08 000

R". 80 000 R". 25 000 By Ca" ! c!##itional Ca%italBy $ro it an# o"" ! c 50 000o"" on )ale /ote 4 95 000

1 78 000 /et $ro it 1 78 000

2 Dr. F A % +CC/- T Cr.

#a"tic!la"s 6s. #a"tic!la"s 6s.o Balance b # 95 000 By De%reciation 5 000o Bank ! c By Balance c # 1 35 000

$urc a"e Balancin( *i(ure 45 000

1.40 000 1 40 000

71



Te(m int(!),ce) in t e c a#te(

$( .inancial tatements

<( Profit and loss Account

6( Balance heet

G( Preliminary expense

&( hare #apital

'( #ontingent liabilities

O( Proposed di+idend

( Pro+ision for taxation

%( 5atio Analysis

$J( 3i uidity ratios

$$( ol+ency ratios

$<( 7urno+er ratios

$6( Profitability ratios

$G( 5eturn on in+estment

$&( Uuic/ Assets

$'( 5ecei+ables

$O( Earning per share

$ ( Di+idend payout

19. Ca" *lo

<J( 3i uidity

<$( #ash E ui+alent

<<( "n+esting Acti+ities

<6( Extraordinary

<G( Accounting

<&( ol+ency

<'( 4perating Acti+ities

<O( .inancing Acti+ities

< ( Appropriation

S,mma($

72



.inancial tatements: .inancial statements are the basic and formal annual reports throughwhich the corporate management communicates financial information to its owners and+arious other external parties which include-in+estors, tax authorities, go+ernment,employees, etc( 7here are two main financial statements( 7hey are: $ balance sheets; <income statements(

Balance sheet: 7he Balance heet shows what a company owns and what it owes at a fixedpoint in time(

"ncome statement: 7he "ncome tatement shows how much money a company made andspent o+er a period of time(

1sers of financial statements: 7hese include in+estors and potential in+estors; lenders=longterm creditors; management; suppliers=short term creditors; employees and trade unions;go+ernment and its agencies; stoc/ exchange and its customers

5atio Analysis is the relationship between two items of financial data expressed in the formof ratios and then interpreted with a +iew to e+aluating the financial condition andperformance of a firm(

4b*ecti+es of 5atio Analysis

7he analysis would enable the calculation of not only the present earning capacity of thebusiness but would also help in the estimation of the future earning capacity( 7he analysiswould help the management to find out the o+erall as well as the department-wise efficiencyof the firm on the basis of the a+ailable financial information( 7he short term as well as thelong term sol+ency of the firm can be determined w6ith the help of ratio analysis( "nter-firmcomparison becomes easy with the help of ratios(

Advantages of #atio Analysis

5atio Analysis simplifies .inancial tatements, facilitates inter-firm comparison; ma/es intra-firm comparison possible and helps in forecasting

Limitati!n !" Rati! Anal$ i

5atio Analysis is historical in nature; changes in price le+el often ma/e comparison of figuresof the pre+ious years difficult( "t is not free from bias( ome companies, in order to co+erup their bad financial position report to window dressing( 5atio Analysis ignores ualitati+e

factors and different accounting practices render ratios incomparable

T$#e !" Rati!

.inancial ratios can be classified into four important categories:$( 3i uidity 5atios: 3i uidity ratios help the users in /nowing the extent of short-

term debt paying ability of a firm( 7hey include current ratio and uic/ ratio(<( ol+ency 5atios: ol+ency ratios analyse the long-term debt paying capacity of

the firm( 7hey include Debt e uity ratio; 7otal Assets to Debt 5atio; Proprietaryratio and "nterest #o+erage 5atio(

73



6( Acti+ity or 7urno+er 5atios: Acti+ity ratios help in commenting on the efficiency of the firm in managing it assets( 7he speed with which assets are con+erted intosales is captured by acti+ity ratios( 7hese include toc/ 7urno+er; Debtors5ecei+able 7urno+er; #reditors Payable 7urno+er; .ixed Assets 7urno+er andIor/ing #apital 7urno+er(

G( Profitability 5atios: Profitability ratios are calculated to measure the profitability of a business enterprise( 7hese include Hross Profit 5atio; et profit 5atio;4perating 5atio; 4perating Profit ratio; return on "n+estment 54" ; Earnings perhare; Price Earning 5atio and Di+idend payout ratio

RATIOS AT A GLANCE

5atio .ormulae$( #urrent ratio

Current a""et"

#urrent liabilities<( Uuic/ ratio

Quick a""et"#urrent liabilities

6( "n+entory turno+er ratioCo"t o (oo#" "ol#A+erage in+entory

G( Debtors recei+ables turno+er ratio!nnual /et cre#it "ale"A+erage accounts recei+ables

&( Debt recei+ables collection period 6'& days=&< wee/s= $< months

Debtors turno+er ratio' #reditors turno+er ratio

Net Credit Purchase

A+erage #reditor etO( A+erage #redit Payment period 6'& days=&< wee/s= $< months

Creditor turnover ratio

( wor/ing capital 7urno+er et alewor/ing #apital

%( .ixed Asset 7urno+er ratio et sale or cost of saleet fixed assets

$J( #urrent assets turno+er ratio et sales#urrent assets

$$( Debt- e uity ratio 7otal long term debthareholders9 funds

$<( 7otal assets to debts 7otal assets3ong term debts

$6( Proprietary ratiohareholders .unds7otal assets

$G( Hross Profit ratio Hross Profit= et ales V $JJ

$&( et Profit 5atio et profit = et ales V $JJ

$'( 4perating ratio 4perating cost M $JJet sales

74



$O( 4perating profit ratio 4perating profit M $JJet sales

$ ( 5eturn on capital employed 54" et profit before interest, tax L di+idend M $JJ#apital employed

$%( Earnings per share EP et income after interest,tax and preferencedi+idend M $JJumber of e uity shares

<J( Di+idends per share Di+idends amountumbers of e uity share

<$( Price earning ratio ar/et price of shareEP#

<<( Di+idend payout ratio Di+idend per shareEarning per share

eanin( o ca" lo "tate ent &t i" a "tate ent ic i" %re%are# to " o t e lo o ca" in a bu"ine"" un#ertakin(.

/' CT 9 S (

i el% ul in akin( inancial %olicie"

ii el% ul in #eci"ion akin( to #eclare #i'i#en#.

iii C*) i" #i erent t an eac Bu#(et.

i' Ael% ul in #e'i"in( t e eac que"tion.

' el% ul in tellin( rea"on" or #i erence bet een %ro it an# lo""

-S S (

i el%" in akin( " ort " ort ter %lannin(ii el%" un#er"tan#in( liqui#ity "ol'ency.

iii el%" in co %arati'e "tu#y.

i' te"t" or ana(e ent #eci"ion M T+T / (

1. /on eac tran"action are i(nore#.

2. /ot "uitable or an inco e "tate ent

3. Ai"torical in nature. /pe"ating +ctivities ( %eratin( acti'itie" are t e %rinci%al re'enue<%ro#ucin( acti'itie"

o t e enter%ri"e an# ot er acti'itie" t at are not in'e"tin( or inancin( acti'itie". nvesting +ctivities ( &n'e"tin( acti'itie" are t e acqui"ition an# #i"%o"al o lon(<ter

a""et" an# ot er in'e"t ent" not inclu#e# in ca" equi'alent". Financing +ctivities ( *inancin( acti'itie" are t e acti'itie" t at re"ult in c an(e in t e

"i?e an# co %o"ition o t e o ner"@ ca%ital inclu#in( %re erence " are ca%ital in t eca"e o a co %any an# borro in( o t e enter%ri"e.

Ve($ S !(t an) !(t An e( ,e ti!n

75



b 3i uidity ratio impro+es with increase in credit sale(c Ior/ing capital is the excess of current assets o+er current liability(d #urrent ratio measures the li uidity of the business(e Debt e uity ratio measures short term financial position of the business

Ans- A .alse b 7rue c 7rue d 7rue e false

( Assuming the current ratio is < , state in each of the following cases whether the

ratio will impro+e or decline or will ha+e no change(a( Payment of a current liabilityb(Purchase of fixed assetsc( #ash collected from customersd("ssue of new share

Ans- A impro+e b decline c o change d "mpro+e

%( 7he current ratio of a company is <&: $( Ihich of the following suggestion wouldimpro+e , reduce or not change itR

i Payment to trade creditorsii ale of machinery for cashiii Purchase of goodsi+ "ssue of e uity share

Ans- A impro+e b impro+e c o change d "mpro+e

$J( Ihat are the category under which the +arious ratios are groupedR$$( Ihat does debt- e uity ratio indicatesR$<( Ihat is stoc/ T turno+er ratio, how it is calculatedR Ihat are the implications of

high and low stoc/ turn o+er ratioR$6( tate the meaning and ob*ecti+e of the following- a Proprietary ratio b 4perating ratio$G( Ihat do you mean by the interest co+erage ratioR Explain in brief, gi+ing its

formulaR$&( tate the significance and method of calculating the following-

a(#urrent ratiob(4perating ratioc( 5eturn on in+estment ratio 54"

$'( Ihat are the different names of acti+ity ratiosR ame fi+e acti+ity ratios($O( Describe three ratio based upon sales($ ( Explain in about &J words the importance of the following ratios-

a(proprietary ratiob(Debt e uity ratio

$%( Hi+e the method of computing and the purpose of the following ratios-a( Acid 7est ratiob("n+entory turno+er ratioc( Debt e uity ratiod(5eturn on in+estment ratio

<J( Ihat will be the impact of following suggestions on the debt e uity ratio, assumingthe gi+en ratio to be $:<R

a( "ssue of e uity sharesb(#ash recei+ed from debtorsc( 5edemption of debenturesd(Purchase of goods on credit(

Ans- A Decrease b o change c decrease d o change

77



SS+ T # I- ST / S1. , at i" Ca" *lo )tate ent= Ao it i" %re%are#= , at are it" u"e"=

2. , at i" Ca" *lo )tate ent= -i'e t ree ite " o "ource" in lo o ca" .

3. >+%lain t e u"e" o ca" *lo )tate ent.

4. >nu erate any t ree a:or "ource" o ca" in lo .5. , at i" eant by Ca" *lo )tate ent= >+%lain brie ly o t e "tate ent i"

%re%are# a" %er !)<3 re'i"e# .

6. >+%lain t e ter PCa" *lo @. -i'e t ree ite " o u"e" out lo o ca" .

7. >nu erate t e 'ariou" "te%" in'ol'e# in t e %re%aration o PCa" *lo )tate ent@.

21. *or calculatin( Pca" lo ro o%eratin( acti'itie" ro t e (i'en i(ure o /et$ro it earne# #urin( a year o oul# you #eal it increa"e in Debtor"Decrea"e in )tock Decrea"e in Bill" $ayable an# &ncrea"e in Cre#itor".

22. *or calculatin( Ca" *lo ro o%eratin( !cti'itie"@ ro a (i'en i(ure o P/et

$ro it"@ earne# #urin( a year o oul# you #eal it t e #ecrea"e in %reli inarye+%en"e" #ecrea"e in %re%ai# e+%en"e" increa"e in in'entory an# increa"e in Bill"$ayable=

23. >+%lain t e i %act o increa"e in #ebtor" #ecrea"e in in'entorie" increa"e incre#itor" an# #ecrea"e in bill" %ayable on t e co %utation o ca" lo o%eratin(acti'itie".

24. *or calculatin( ca" lo ro o%eratin( acti'itie" ro a (i'en i(ure o /et$ro it earne# #urin( a year o ill you #eal it t e re#e %tion o #ebenture"#ecrea"e in out"tan#in( e+%en"e" increa"e in ca" balance an# #ecrea"e inin'entorie" #ecrea"e in Bill" $ayable increa"e in cre#itor" an# increa"e in#ebtor".

PRACTICAL %ESTIONS

78



$( 7he following figures are extracted from the boo/s of AB# #o( Draw up the 3iabilities sideaccording to law(

5s(6J,JJJ shares of 5s( $J each, 5s( paid up <,GJ,JJJecurities Premium <J,JJJ5eser+es 6&,JJJ#reditors G&,JJJ

.ixed deposits <&,JJJ

<( 7he following balances appeared in the boo/s of 1tsa+ Publications 3td(

5s(Hoodwill <,JJ,JJJPlant L achinery $,'J,JJJBuilding $,G&,JJJ#ash in hand $J,JJJtoc/ in trade &J,JJJ$J,JJJ shares of 5s( $J each, 5s( paid up J,JJJ%K debentures <,&J,JJJ

Preliminary expenses $J,JJJ#reditor &J,JJJDi+idend Payable <&,JJJPrepare balance sheet of company as per the Performa gi+en as per chedule !" Part " of the #ompanies Act $%&'(

6( 7he following ledger balances were extracted from the boo/s of A/ash 3td( on 6$ st

arch, <JJO:-3and and Buildings <,JJ,JJJ; $<K Debentures 5s(<,JJ,JJJ; hares #apital5s($,JJ,JJJ; E uity hares of 5s($<each fully paid up; Plant and achinery5s( ,JJ,JJJ; Hoodwill 5s(<,JJ,JJJ; "n+estments in shares of 5a*a 3td( 5s(<,JJ,JJJ;Heneral reser+e 5s(<,JJ,JJJ; toc/ in trade 5s($,JJ,JJJ; Bills 5ecei+able 5s(&J,JJJ;Debtors 5s($,&J,JJJ; #reditors 5s($,JJ,JJJ; Ban/ 3oan 1nsecured 5s( $,JJ,JJJ;Pro+ision for taxation 5s(&J,JJJ; Discount on issue of $<K debentures 5s(&,JJJ;Proposed di+idend 5s(&&,JJJ(Nou are re uired to prepare the balance sheet of the company as per schedule !" Part "of the companies Act, $%&'(

G( anu 3td( has an authori8ed capital of 5s(&J,JJ,JJJ di+ided into e uity shares of 5s($Jeach( 7he company in+ited applications for 6,JJ,JJJ shares( Applications for <,O&,JJJshares were recei+ed( All calls were made and were duly recei+ed except the final call of 5s(6 per share on &,JJJ shares( G,JJJ of the shares on which the final call was notrecei+ed were forfeited( how how share capital will appear in the Balance sheet of thecompany as per schedule !" part " of the companies act $%&'R

&( 7he following balances ha+e been extracted from the boo/s of 5ishi 3td( on 6$(6($%%';hare capital 5s($J,JJ,JJJ, securities premium 5s($,JJ,JJJ, $<K debentures

5s(&,JJ,JJJ, creditors 5s(<, JJ,JJJ, proposed di+idend 5s(&J,JJJ, profit and lossaccount Dr 5s(&J,JJJ, discount on issue of $<K debentures 5s( $,JJ,JJJ( Prepare thebalance sheet of the company as per schedule !" part " of the companies act $%&'(

79



'( 7he following balances are supplied on the basis of which you are re uired to show thema*or appropriate heads under which the items gi+en below will appear in the balancesheet of 5a*co 3td( as on 6$ st arch <JJO:

5s(Plant L achinery &,'J,JJJBuilding $J,JJ,JJJE uity share capital Authorised <J,JJ,JJJ

E uity share of 5s($JJ each 5s(OJ called and paid up $G,JJ,JJJ$JK debentures &&,JJJDiscount on "ssue of $JK debentures &,JJJ.urniture and fixtures $&,JJJ3ong 7erm Ban/ 3oan secured $,<&,JJJ

O( Prepare a balance sheet of !i/as 3td( as on arch 6$, <JJO as per pro+isions of Part-",chedule !", 1nder section <$$ of the companies Act $%&' from the following

information(5s(

Heneral reser+e 6,JJJDebentures 6,JJJProfit L 3oss A=c #r( $,<JJDepreciation on .ixed Assets OJJHross .ixed Assets %,JJJ#urrent 3iabilities <,&JJPreliminary Expenses 6JJPreference hare #apital &,JJJ#urrent Assets ',$JJ

( 7he following figures were extracted from the trial balance of MN 3td(: hare #apital: $J,JJJ E uity hares of 5s($J each fully called up and paid up(

5s(ecurities Premium $J,JJJ$<K debentures &J,JJJ.ixed Deposits #r( <&,JJJ#reditors &,JJJ

Nou are re uired to draw up the liabilities side of the balance sheet of the companyaccording to the re uirements of the companies act(

%( 7he following balances appear in the boo/s of 5uia Publications 3td(:

5s(Hoodwill <J,JJJPlant L achinery $,'J,JJJBuilding $,G&,JJJ#ash at hand $J,JJJtoc/ in trade OJ,JJJhare capital: $,JJJ e uity shares of 5s($JJ

each issued at Par, 5s( J per share called up and paid up J,JJJK debentures <,&J,JJJ

Preliminary expenses &,JJJ#reditor &&,JJJDi+idend Payable <&,JJJ

howing the abo+e items under the ma*or; heads in accordance with Part " of chedule!" of the #ompanies Act $%&', prepare a balance sheet of the company(

80



$J( .ind out current ratio(Hross Debtors 5s( <J,JJJ; Pro+ision for Bad debts 5s( 6,JJJ; Bills recei+able 5s($6,JJJ; toc/ twice of net debtors; #ash in hand 5s( $',JJJ; Ad+ance to suppliers 5s($&,JJJ; #reditors for goods 5s( <O,JJJ; Bills payable 5s( ,JJJ; 4utstanding expenses5s( $&,JJJ; Prepaid expenses 5s( &,JJJ "n+estment 3ong term 5s( $<,JJJ;0Ans( #urrent 5atio <:$2

$$( .ind out current liabilities when current ration is <(&:$ and current assets are 5s(O&,JJJ(0Ans( #urrent 3iabilities 5s( 6J,JJJ2

$<( 7he ratio of current assets 5s( ',JJ,JJJ to current liabilities is $(&:$( 7he accountantof this firm is interested in maintaining a current ratio of <:$ by paying some part of current liabilities( Nou are re uired to suggest him the amount of current liabilitieswhich must be paid for this purpose(

0Ans( 5s( <,JJ,JJJ2

$6( A firm had current liabilities of 5s( %J,JJJ( "t then ac uired stoc/-in-trade at a cost of 5s( $J,JJJ on credit( After this ac uisition the current ratio was <:$( Determine thesi8e of current assets and wor/ing capital after and before the stoc/ was ac uired(0Ans( #(A( 5s( <,JJ,JJJ, 5s( $,%J,JJJ; I(#( 5s( $,JJ,JJJ, 5s( $,JJ,JJJ2

$G( A 3td( company has a current ratio of 6(&:$ and acid test ratio of <:$( "f the in+entoryis 5s( 6J,JJJ, find out its total current assets and total current liabilities(0Ans( #urrent Assets 5s( OJ,JJJ; #urrent 3iabilities 5s( <J,JJJ2

$&( Hi+en: #urrent ratio <( ; Acid test ratio $(&; Ior/ing capital > 5s( $,'<,JJJ(.ind out: #urrent assets;, #urrent liabilities; 3i uid Assets(0Ans( A 5s( <,&<,JJJ; b 5s( %J,JJJ; c $,6&,JJJ2

$'( .rom the following, calculate Debt-E uity 5atio(E uity share capital 5s( $,&J,JJJ( Preference hare capital 5s( &J,JJJ, Heneralreser+es 5s( $,JJ,JJJ, Accumulated profits 5s( 'J,JJJ, Debentures 5s( $,&J,JJJ(undry creditors 5s( J,JJJ, Expenses payable 5s( <J,JJJ( Preliminary Expenses notyet written off 5s( $J,JJJ(06 :O2

$O( #alculate Debt E uity 5atio from the Balance heet of M 3td( as on 6$ st arch <JJO

3iabilities 5s( Assets 5s(E uity shares of 5s( $J each$$K preference share capitalecurities premium accountHeneral reser+eProfit and 3oss account$<K Debentures of 5s( $JJ eachBills payable7rade creditors4utstanding ExpensesPro+ision for tax

,JJ,JJJG,JJ,JJJ

J,JJJ&, J,JJJ$,GJ,JJJ

$J,JJ,JJJJ,JJJ

$,GJ,JJJ'J,JJJ

<,<J,JJJ

3and and BuildingsPlant and achinery.urniture and fittingstoc/7rade debtors#ash in hand#ash at ban/Bills recei+able

',<J,JJJ$<,JJ,JJJ

$, J,JJJ&,6J,JJJG,OJ,JJJ

'&,JJJ6,JJ,JJJ$,6&,JJJ

6&,JJ,JJJ 6&,JJ,JJJ

0Ans( $ :<2

$ ( .rom the following calculate debt-e uity ratio:

81



5s(Preference share capital <,JJ,JJJE uity share capital G,JJ,JJJ#apital reser+es $,JJ,JJJProfit L 3oss account $,JJ,JJJ$GK Debentures <,JJ,JJJ1nsecured loans $,JJ,JJJ

#reditors GJ,JJJBills payable <J,JJJPro+ision for taxation $J,JJJPro+ision for di+idends <J,JJJ 0Ans( J(6O& : $2

$%( 7he debt-e uity ratio of a company is $:<( Ihich of the following suggestions wouldi increase, ii decrease, and iii not change it(

a "ssue of e uity shares,b #ash recei+ed from debtorsc 5edemption of debentures for cash,d Purchased goods on credit,e 5edemption of debentures by con+ersion into shares,f "ssue of shares against the purchase of a fixed asset,g "ssue of debentures against the purchase of a fixed asset(0Ans( a ii , b iii , c ii , d iii , e ii , f ii , g i 2

<J( Debtors in the beginning 5s( %J,JJJ; debtors at the end 5s( %',JJJ credit sales duringthe year 5s( G,'&,JJJ( calculate debtors turno+er ration(

0Ans( & times2

<$( 5s( $,O&,JJJ is the net credit sales of a concern during $% %( "f debtors turno+er is times, calculate debtors in the beginning and at the end of the year( Debtors at the endis 5s( O,JJJ more than at the beginning(

0Ans( 5s( $ ,6O& and 5s( <&, 6O&2

<<( .rom the following figures, compute the debtors turno+er ratio:Near " Near ""5s( 5s(

Hross sales %,&J,JJJ ,JJ,JJJales returns &J,JJJ &J,JJJDebtors in the beginning of year ',JJJ $,$O,JJJDebtors at the end $,$O,JJJ ',JJJPro+ision for doubtful debts O,JJJ ',JJJ

0Ans( $ year , O times "" year O(6% times2

<6( 4pening stoc/ 5s( O',<&J; #losing toc/ 5s( % ,&JJ; ales 5s( &,<J,JJJ; ales5eturns 5s( <J,JJJ; Purchases 5s( 6,<<,<&J( #alculate stoc/ turno+er ratio(

0Ans( 6(G6 times2

<G( A+erage stoc/ carried by a trader is 5s( 'J,JJJ stoc/ turno+er ratio is $J times( Hoods

are sold at a profit of $JK on cost( .ind out the profit(

82



6G( 4pening stoc/ 5s( J,JJJ; Purchase 5s G,6J,%JJ; Direct expenses 5s G,JJJ; #losingstoc/ 5s( $,'J,JJJ; Administrati+e expenses 5s <$,$JJ; elling and distribution

expenses 5s GJ,JJJ; ales 5s $J,JJ,JJJ #alculate :a Hross Profit ratiob 4perating ratio

Ans( Hross Profit ratio > 'G(&<K, 4perating ratio > G$('K

6&(.rom the following information, calculate stoc/ turno+er ratio, operating ratio and capitalturno+er ratio(

5s(4pening toc/ < ,JJJ#losing toc/ <<,JJJPurchases G',JJJales %J,JJJales return $J,JJJ#arriage inwards G,JJJ4ffice expenses G,JJJelling and distribution expenses <,JJJ#apital employed <,JJ,JJJ

Ans( a <(<G times b OO(&K c (G times

6'( #alculate the following ratios, from the details gi+en as under :a #urrent ratiob Acid test ratioc 4perating ratiod Hross profit ratio

5s(3i uid assets GJ,JJJ#urrent liabilities <J,JJJtoc/ $J,JJJales &J,JJJ4perating expenses $&,JJJ#ost of goods sold <J,JJJ

Ans( i &:< ii <:$ iii OJK i+ 'JK

6O( Balance sheet of WA9 3td( is gi+en below :

3iabilities Amount 5s( Assets Amount 5s(Paid up e uityhare capital :$&K debenturesPL3 a=c for the currentEar after taxesHeneral reser+e#urrent liabilities

G,JJ,JJJ <,JJ,JJJ

6,JJ,JJJ 6,JJ,JJJ &, J,JJJ

BuildingachineryDebtorstoc/Ban/

',JJ,JJJ $,<J,JJJ ',&J,JJJ 6,&J,JJJ 'J,JJJ

$O, J,JJJ $O, J,JJJ

85



Additional "nformation:et sales for the current year 5s( &O,'J,JJJ#ompute any three of the following ratios:a et profit ratiob .ixed assets turno+er ratio,c Debt e uity ratioAns( et profit ratio &(<$ Approx , #urrent ratio $( 6 :$, .ixed asset turno+er ratio

times, Debt le uity ratio $:&

6 ( .rom the following information calculate any three of the following ratios:a Hross Profit ratiob Ior/ing capital turno+er ratioc Debt-e uity ratiod Proprietary ratio"nformation:et sales 5s &,JJ,JJJ; #ost of goods sold 5s( 6,JJ,JJJ; #urrent assets 5s( <,JJ,JJJ;#urrent liabilities 5s( $,GJ,JJJ; paid up share capital 5s( <,&J,JJJ; $6K Debentures5s $,JJ,JJJ(Ans( H(P( 5atio GJK; Ior/ing #apital 7(4( 5atio ( 6 times; Debt E uity 5atio GJK;Proprietary 5atio &$K

6%( .rom the following information, calculate the stoc/ turno+er ratio and the gross profitratio(

5s(4pening stoc/ $ ,JJJ#losing stoc/ <<,JJJPurchases G',JJJIages $G,JJJales J,JJJ#arriage inwards G,JJJ0Ans( Hross profit ratio <&K; stoc/ turno+er ratio 6 times2

GJ( A company has a loan of 5s( &J,JJ,JJJ as part of its capital employed( 7he interestpayable on the loan is $JK and the 5(4("( of the company is $&K( Assuming that therate of income tax is &JK, calculate the amount of gain to the shareholders9 becauseof the loan obtained by the company(0Ans( Hian to shareholders 5s( $,<&,JJJ2

G$( #alculate any three of the following ratios with the help of the information gi+enbelow:-

a 4perating ratiob Hross profit ratioc Uuic/ ratiod Ior/ing capital turno+er ratioe Proprietary ratio

"nformation:E uity share capital 5s( $,JJ,JJJ; K preference share capital 5s( J,JJJ; %Kdebentures 5s( 'J,JJJ; Heneral 5eser+e 5s( $J,JJJ; ales 5s( <,JJ,JJJ; 4peningstoc/ 5s( $<,JJJ; Purchases 5s( $,<J,JJJ; Iages 5s( ,JJJ; #losing toc/ 5s($ ,JJJ; selling and distribution expenses 5s( <,JJJ; other current assets 5s( &J,JJJ,fixed assets 5s( <,$<,JJJ and current liabilities 5s( 6J,JJJ0 a '<K; b 6%K; c $('O:$; %d 6(<$ times; e 'O( ' K2

86



G<( 7he following is the Balance heet of !inod ills 3td( as on 6$ st December, <JJ':

5s(undry #reditorsBills payable

7ax pro+ision4utstanding expenses$<K Debentures$JK Preference share capitalE uity share capital5eser+e .und

'J,JJJ$,JJ,JJJ

$,6J,JJJ$J,JJJO,JJ,JJJ$,JJ,JJJ&,JJ,JJJG,JJ,JJJ

Ban/7rade in+estments

Boo/ Debts Debtorstoc/.ixed Assets $ ,JJ,JJJ3ess: Depreciation &,JJ,JJJ

&J,JJJ$,&J,JJJ

<,JJ,JJJ6,JJ,JJJ

$6,JJ,JJJ

<J,JJ,JJJ <J,JJ,JJJ

4ther information supplied is as follows 5s(

et sales 6J,JJ,JJJ

#ost of goods sold <&, J,JJJ4perating expenses <,<J,JJJ

a Uuic/ ratio; b 7otal assets to debt ratio; c #urrent ratio; d Hross profit ratio;e 4perating ratio f et profit ratio(

0Ans( a $(66:$, b <( ':$; c <(66:$; d $GK; e %6(66K; f '('OK2

G6( .rom the following information, calculate stoc/ turno+er ratio, operating ratio; fixedassets turno+er ratio and current assets turno+er ratio:-

5s(4pening stoc/ &',JJJ

#losing stoc/ GG,JJJ

Purchases %<,JJJ

ales $, J,JJJ

ales returns <J,JJJ

#arriage inwards ,JJJ

4ffice Expenses ,JJJ

elling L Distribution Expenses G,JJJ

.ixed assets OJ,JJJ

#urrent assets 'J,JJJ

0Ans( toc/ 7urno+er 5atio <(<G times; 4perating 5atio OO(&K, .ixed assets 7urno+er5atio $(' times, #urrent Assets turno+er ratio $( O times2

87



GG .rom the following data, calculate:-a Hross profit ratio,b et profit ratioc Ior/ing capital turno+er ratio,d Debt-e uity ratio,e Proprietary ratio

5s(

et sales 6J,JJ,JJJ #ost of sales <J,JJ,JJJet profit 6,JJ,JJJ.ixed assets ',&J,JJJ#urrent assets ',JJ,JJJ#urrent liabilities <,JJ,JJJPaid-up share capital &,JJ,JJJDebentures <,&J,JJJ

0Ans( H(P( ratio> 66 $=6K; (P( 5atio>$JK; Ior/ing capital turno+er ratio> & times;Debt e uity ratio>J(6$:$, Proprietary ratio i(e( shareholder9s funds=total assets >'GK2

G&( Iith the help of the gi+en information, calculate any three of the following ratios:

a 4perating ratiob Uuic/ ratioc Ior/ing capital turno+er ratiod Debt e uity ratio(

"nformation: E uity share capital 5s( &J,JJJ; $<K preference share capital 5s(GJ,JJJ; $<K debentures 5s( 6J,JJJ; Heneral 5eser+e 5s( GJ,JJJ; ales 5s(6,JJ,JJJ; 4pening stoc/ 5s( <J,JJJ; Purchases 5s( $,GJ,JJJ; Iages 5s( 6J,JJJ;#losing stoc/ 5s( GJ,JJJ; elling and distribution expenses 5s( $ ,JJJ; 4ther#urrent assets 5s( $,JJ,JJJ and current liabilities 5s( 'J,JJJ(

0Ans( a &'K; b $('O:$; c $( O& times; d J(<6($

OBJECTIVE T=PE %ESTIONS"( "ndicate whether increase in debtors = current assets results in :

i "ncrease in cashii Decrease in cashiii on of the abo+e(

""( "ndicate whether increase in current liabilities results in :i "ncrease in cashii Decrease in cashiii one of the abo+e(

"""( tate whether the following would result in inflow or outflow of cash :i "ssue of sharesii Payment of di+idendiii Purchase of fixed assetsi+ #ash from operations profits+ ale of fixed assets+i 5edemption of debentures

88



"!( .ill in the blan/s :

a et profit are 5s( <J,JJJ( 7here is an increase in the amount of debtors of5s( &,JJ( Ihat would be the amount of cash flow from operating acti+ities

5s( <J,JJJ, 5s($&,JJJ 5s( <&,JJJ

" "" """

b et profit are 5s( $<,&JJ, after debiting depreciation 5s( ,6&JJ andn there is adecrease in stoc/ worth 5s( <,OJJ( 7he cash flow from operating acti+itieswould be

5s( $',JJJ, 5s($&,<JJ 5s( $ ,OJJ

" "" """

Ans( "( decrease in cash "" "ncrease in #ash """ i in .low ii out flowiii out flow i+ in flow + in flow +i outflow( "! a $&JJ b $ OJJ

B. SHORT ANS<ER %ESTIONS

$( Ihat is W#ash .low tatement9R Explain(<( Irite what is inflow of each and outflow of cashR

6( Ihat are non-operating Expenses and "ncomes(

G( Irite about treatment of depreciation in a #ash .low tatement(

&( Ihat do you /now about 7reatment of Di+idend declared and paid in a #ash .lowtatement

'( Irite about treatment of pro+ision for tax and tax paid in #ash .low tatement(

E ERCISE 6

$( #alculate cash flow from operating acti+ities from the following information :

5s(

ales $,<J,JJJ

Purchases OJ,JJJ

Iages <&,JJJ

Assume that all the transactions were in cash( Ans 5s <&,JJJ

<( #alculate cash flow from operating acti+ities from the following figures :

5s(

ales <,O&,JJJ

#ost of ales <,<&,JJJ

4pening Balance of Debtors <J,JJJ

#losing Balance of Debtors <J,JJJ

4pening Balance of #reditors &,JJJ

#losing Balance of #reditors $J,JJJ

4pening Balance of 4utstanding Expenses $,<&J

#losing Balance of 4utstanding Expenses <,O&J

Ans( &$&JJ

89



6( #alculate cash flow from operating acti+ities after calculating ad*usted profit from thefollowing : 5s(i Depreciation allowed $&,JJJii 3oss on ale of achine <,&JJiii Discount on "ssue of hares written off $,JJJi+ Hoodwill written off $,&JJ+ 7ransfer to Heneral 5eser+e <,JJJ

+i et Profit after abo+e ad*ustments $&,JJJ+ii "ncrease in #urrent Assets <,&JJ+iii Decrease in #urrent 3iabilities 6,&JJ

Ans( 6$,JJJ&( #alculate cash flow from operating acti+ities from the following :

Particulars 2004Rs

2005 (Rs.)

Profit and 3oss Appropriation A=cBills 5ecei+ablesPro+isions for Depreciation5ent 4utstandingPrepaid "nsuranceHoodwilltoc/

<J,JJJ$G,JJJ6J,JJJ

$,'JJ$,GJJ

<J,JJJ$G,JJJ

6J,JJJ$ ,JJJ6<,JJJ

G,JJJ$,<JJ

$',JJJ$ ,JJJ

Ans( 5s( $J,'JJ'( #alculate cash flow from operating acti+ities from the following Profit and 3oss A=c of

a business for the year ended on 6$(6(<JJ& :

Particulars Rs. Particulars Rs.7o alaries7o Depreciation on fixed assets7o Preliminary Exp( w=off(7o Discount on issue of deb(7o Heneral 5eser+e7o Discount on ales7o Hoodwill7o et Profit

<<,6JJ,<JJ$,&JJ$,JJJ

$<,JJJG,$ J6,<<J

$','JJ

By Hross ProfitBy 5ent 5ecei+edBy Profit on ale of fixedassets

&G,&JJ

6,<JJ$$,6JJ

'%,JJJ

Ans( 5s( 6$,<<JO( #alculate cash flow from operating acti+ities from the following details:

Particulars 31.3.07

Rs

31.3.08

(Rs.)Profit and 3oss A=cHeneral 5eser+ePro+isions for DepreciationPrepaid Expenses1nearned "ncomes4utstanding ExpensesHoodwillundry #reditorsBills 5ecei+able

G&,JJJ&,JJJ

$ ,JJJ<,GJJ$,&JJ

JJ$J,JJJ

&,JJJ',GJJ

'J,JJJ$J,JJJ< ,JJJ

$, JJ<,&JJ$,<JJO,JJJ6,JJJ%,'JJ

!n". R" 29 800

( #alculate cash flow from operating acti+ities from the following data :

90



$&( .rom the following information, calculate cash from operating acti+ities :

Particulars 2007 Rs

2008(Rs.)

toc/Debtors

#reditorsExpenses 4utstandingBills PayableAccrued "ncomeProfit L 3oss A=c

',JJJ<,&JJ

6,<JJ6&J

6,&JJJJ

,JJJ

&,JJJ<,6JJ

<, JJG&J

<,<JJ%JJ

%,JJJ

Ans( 5s( &JJ

$'( #alculate cash from operating acti+ities from the following Profit and 3oss account(

P(!"it an) L! Acc!,ntfor the year ending on 6$(6(J

Dr( #r( (

Particulars Rs. Particulars Rs.7o alaries7o 5ent7o Pro+ision for Bad debts7o Depreciation7o 3oss on ale of land7o Hoodwill written off

7o Proposed di+idend7o Pro+ision for tax7o et Profit

$, JJ$,JJJ

<JJGJJ6JJ&JJ

OJJGJJ

<,&JJO, JJ

By Hross ProfitBy Profit on ale of PlantBy "ncome 7ax 5efund

',&JJOJJ'JJ

O, JJ

Ans( 5s( 6OJJ

$O( .rom the following information prepare a #ash .low tatement :-

5s4perating #ash Balance $&,JJJ#losing #ash Balance $%,JJJ

"ncrease in #reditors $6,JJJDecrease in Debtors $O,JJJ.ixed assets purchase 6J,JJJ5edemption of $<K debentures $G,JJJProfit for the year $ ,JJJ

Ans( #ash flow from operating in+esting and financing acti+ities > 5s( G JJJ, 5s( 6J,JJJ 5s($G,JJJ (

93



1 . .rom the following information prepare a #ash .low tatement :-

5s4perating #ash Balance $,JJ,JJJ#losing #ash Balance $,<J,JJJ"ncrease in #reditors &J,JJJDecrease in Debtors OJ,JJJ.ixed assets purchase <,JJ,JJJ5edemption of $<K debentures &,JJ,JJJProfit for the year <,JJ,JJJ

Ans( #ash flow from operating in+esting and financing acti+ities > 5s( 6<J,JJJ 5s( <,JJ,JJJL 5s( &,JJ,JJJ (

$%( #alculate #ash .low operating acidities from the following Profit and 3oss A=c for theyear ending on 6$(6(J&:

Liabilities 2007 Particulars 2008(Rs.)

7o alaries7o Depreciation7o 3oss on ale of Plant7o Hoodwill written off 7o Pro+ision for tax7o et Profit

<,&JJ<JJ$JJGJJ$,JJJ$,$JJ

&,6JJ

By Hross ProfitBy Profit on ale of landBy "ncome tax 5efund

G,&JJGJJGJJ

&,6JJ

Ans( 5s <,JJJ

<J( .rom the following Balance heets of =s 5ahman L Bros( 3td( prepare a #ash .lowtatement as per A -6 5e+ised :

Liabilities 2007 (Rs.)

2008(Rs.)

Assets 2007 (Rs

2008(Rs.)

E uity hare#apital$&K Preference

hare#apitalHeneral 5eser+eProfit L 3oss A=c#reditors

$,&J,JJJ

O&,JJJ<J,JJJ<J,JJJ6<,&JJ

<,%O,&JJ

<,JJ,JJJ

&J,JJJ6&,JJJ<G,JJJG%,&JJ

6,& ,&JJ

HoodwillBuildingsPlantDebtorstoc/#ash

6',JJJJ,JJJGJ,JJJ

$,$%,JJJ$J,JJJ$<,&JJ

<,%O,&JJ

<J,JJJ'J,JJJ

$,JJ,JJJ$,&G,&JJ

$&,JJJ%,JJJ

6,& ,&JJ

Depreciation charged on Plant was 5s( $J,JJJ and on building was 5s( <J,JJJ(Ans( 5s( G$,&JJ 5s( OJ,JJJ L 5s( <&,JJJ

<$( Prepare #ash .low tatement as per A (6 5e+ised from the following Balanceheets of <JJO and <JJ (

94



i Depreciation written off on .ixed Assets 5s( <6,GJJ

ii Di+idend paid on E uity hare #apital 5s( <J,JJJ

Prepaid #ash .low tatement as per A -6 5e+ised

Ans( 5s( &OJJJ, 5s( %',JJJ L 5s( GJ,JJJ

<G( .ollowing are the Balance heets of Ali L Bros( 3td(

Liabilities 31.3.07 (Rs.)

31.3.08(Rs.)

Assets 31.3.07 (Rs

31.3.08(Rs.)

E uity hare#apital$&K5edeemablePreferencehare

#apitalHeneral 5eser+eProfit L 3oss A=cC,((entLia7ilitie 6ProposedDi+idendundry #reditorsBills Payable4utstandingalaryPro+ision for 7ax

G, J,JJJ<,'J,JJJ

G ,JJJY

'O,<JJOJ,JJJ$O,<JJ6%,<JJ'O,<JJ

$J,G , JJ

O,<J,JJJ$,<J,JJJ

O<,JJJ'G, JJ

%6,'JJ$,JJ,JJJ

<O,<JJ$G,GJJO', JJ

$<, , JJ

"n+estmentsDiscount on"ssue of hares.actory Buildingsachinery.ixed Deposits

PreliminaryExpensesC,((ent A etundry Debtorstoc/Ban/#ash

G<,<JJ

$,<J,JJJ<,JJ,JJJ<,$',JJJ

<G,JJJ

<G,JJJ

$, J,JJJ<,JG,JJJ

6J,'JJO,JJJ

$J,G ,JJJ

Y

%',JJJ$,<J,JJJG,& ,GJJ

G,JJJ

$', JJ

<,&%,<JJ$, O,<JJ

&J,JJJ$O,<JJ

$<, , JJ

Ans( 5s( $,O',JJJ, 5s( $,O%,<JJ L 5s( 6<, JJPrepare #ash .low tatement as per A -6 5e+ised

<&( .ollowing are the Balance heets of hafi L Bros( 3td( as at 6$ st arch, <JJ


31.3.08(Rs.)

Assets 31.3.07 (Rs

31.3.08(Rs.)

hare #apital$&K DebenturesHeneral 5eser+eProfit L 3oss A=cPro+( for "ncome7ax#reditorsBills PayablePro+( for doubtfuldebts

$,JJ,JJJ&J,JJJ<J,JJJ$$,JJJG,JJJ&,JJJ<,JJJ6,JJJ$,%&,JJJ

$,$J,JJJ6J,JJJ<J,JJJ$%,JJJ$$,JJJ

G,JJJ6,JJJ<,GJJ

$,%%,GJJ

Hoodwill3andachinerytoc/DebtorsPreliminary

Expenses#ash

&,JJJG<,JJJ'J,JJJ<&,JJJ6J,JJJ

6,JJJ6J,JJJ

$,%&,JJJ

G,JJJ'',JJJJ,JJJ<$,JJJ<G,JJJ

<,JJJ<,GJJ

$,%%,GJJ

Ans( 5s( 6&,%JJ, 5s( &6,&JJ L 5s( $J,JJJ

Additional Infor ation !

96



i During the year <JJ , a part of achine costing 5s( O,&JJ Accumulated depreciationthereon being 5s( <,&JJ was sold for 5s( 6,JJJ(

ii "ncome tax was paid 5s, G,JJJ during <JJ (iii Depreciation on achinery for <JJ was pro+ided at 5s( &,JJJ( Prepare #ash .low

tatement as per A -6 re+ised

<'( .rom the following Balance heets of =s eyamat L Bros( 3td( for two years <JJOand <JJ , prepare cash .low tatement


31.3.08(Rs.)

Assets 31.3.07

(Rs

31.3.08

(Rs.)hare #apitalP L 3 A=c$&K Debentures#reditors

6',JJJ<J,JJJY%,JJJ

'&,JJJ

6J,JJJ$G,JJJ

&,JJJ$$,JJJ

'J,JJJ

Hoodwillachinerytoc/Debtors#ash

&,JJJ<J,JJJ$ ,JJJ$%,JJJ

6,JJJ'&,JJJ

',JJJ<&,JJJ$<,JJJ$&,JJJ

<,JJJ'J,JJJ

Additional Infor ation !i A achine of the boo/ +alue of 5s ',JJJ was sold for 5s(',&JJ during <JJ (ii Debentures were redeemed for 5s( G,%JJ(iii #ash di+idend of 5s( <,&JJ was paid during <JJ (i+ Depreciation on achinery was pro+ided 5s( $,JJJ

Ans( 5s( <$JJ, G&JJ L 5s( G%JJ&@. .rom the following Balance heets of hahid L Bros( 3td( prepare #ash .low

tatement as per A -6 5e+isedBalance S eet


31.3.08(Rs.)

Assets 31.3.07 (Rs

31.3.08(Rs.)

hare #apital$&K DebenturesHeneral 5eser+eP L 3 A=c#reditorsBills PayablePro+( for tax

6,JJ,JJJ$,&J,JJJ

GJ,JJJO<,JJJ&&,JJJ<J,JJJGJ,JJJ

',OO,JJJ

G,JJ,JJJ$,JJ,JJJ

OJ,JJJ% ,JJJ6,JJJ$',JJJ&J,JJJ

,$O,JJJ

HoodwillBuildingsDebtors#ashBills 5ecei+abletoc/

$,$&,JJJ<,JJ,JJJ$,'J,JJJ

<&,JJJ<J,JJJ

$,&O,JJJ

',OO,JJJ

%J,JJJ$,OJ,JJJ<,JJ,JJJ

$ ,JJJ6J,JJJ

6,J%,JJJ

,$O,JJJ

Additional Infor ation !i Depreciation on Building is $&K(ii "ncome 7ax paid is 5s( GJ,JJJ(ote : Pro+ision for tax is to be treated as a non-current liability(

Ans( 5s( &O,JJJ, 5s "3 L 5s( &J,JJJ

97



< ( .ollowing are the comparati+e Balance heets of AB# #o( 3td( for the year <JJO and<JJ (


31.3.08(Rs.)

Assets 31.3.07

(Rs

31.3.08(Rs.)

E uity hare#apital$&K Debentures7rade #reditorsHeneral 5eser+eProfit L 3oss A=c

G&,JJJ$J,JJJ,OJJ&,JJJ$J,JJJO ,OJJ

'&,JJJ<J,JJJ$$,JJJ

O,&JJ$&,JJJ

$,$ ,&JJ

.ixed Assetstoc/Debtors#ashPreliminary Exp(

G',OJJ$$,JJJ$ ,JJJ

<,JJJ$,JJJ

O ,OJJ

6,JJJ$6,JJJ$%,&JJ

<,&JJ&JJ

$,$ ,&JJ

Prepare #ash .low tatement( As per A -6 re+isedAns( 5s( ', JJ 5s( 6',&JJ L 5s( 6J,JJJ

<%( .rom the following Balance heets of ia-ul-Ca ue L #o, Prepare #ash .lowtatement as per A -6 re+ised


31.3.08(Rs.)

Assets 31.3.07 (Rs

31.3.08(Rs.)

hare #apitalDepreciation5eser+eProfit and 3oss A=c$&K Debentures#reditors

J,JJJGJ,JJJ6J,JJJGJ,JJJ<J,JJJ

<,$J,JJJ

$,JJ,JJJG6,JJJ&J,JJJ<J,JJJ$O,JJJ

<,6J,JJJ

achinery at costDebtorstoc/Preliminary

ExpensesBan/ Balance

$,<J,JJJGJ,JJJ6J,JJJ

G,JJJ$',JJJ

<,$J,JJJ

$,GG,JJJ6&,JJJ6<,JJJ

6,JJJ$',JJJ

<,6J,JJJ

Ans( 5s( <G,JJJ, 5s( <G,JJJ, 5s( "3

6J( .rom the following Balance heets of Ba/hte unaeem #o( 3td(, prepare the #ash.low tatement( As per A -6 re+ised


31.3.08(Rs.)

Assets 31.3.07 (Rs

31.3.08(Rs.)

hare #apitalDepreciation5eser+eProfit and 3oss A=c

$6K DebenturesBills Payable#reditors

$,<J,JJJ%,JJJ',JJJ

6&,JJJ

$&,JJJ<&,JJJ

<,$J,JJJ

<,JJ,JJJ%,&JJ%,JJJ

<J,JJJ

$J,&JJ&$,JJJ

6,JJ,JJJ

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BIITM - Suman - Financial Statement Analysis (1)

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