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CAIIB Financial Management MODULE C RATIO ANALYSISR K MOHANTYFACULTY MEMBER, SIR SPBT COLLEGE,CENTRAL BANK OF INDIA, MUMBAI

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Financial Statements generally consistsof the following two types :

Profit & Loss Account whichsummarises the expenses incurred andrevenues received during the periodcovered by it ; and

Balance Sheet which lists out theAssets and Properties owned by theUnit and the Liabilities it owes to

outsiders and also to its owners.

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1. NET SALES : This is the key figure in the Income

Statement. Which can be arrived from the following :

Net Sales = Gross Sales Excise Duty

Where Gross Sales = (Total Domestic Sales +

Export Sales) (Sales Tax + Octroi + Sales Return)

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2. COST OF PRODUCTION : It is the sum of Cost of RawMaterials consumed and all Manufacturing Expenses.

COP = Cost of R.M. +Manufacturing Expenses

Manufacturing Expenses include :

(i) Spares

(ii) Power & fuel

(iii) Wages & Salaries (Direct Labour)

(iv) Other Manufacturing Expenses

(v) Depreciation

(vi) Difference between Opening & Closing Stock of SIP

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3. COST OF SALES :

It is the sum of Cost of Production andDifference between Opening & ClosingStock of Finished Goods

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4. GROSS PROFIT :

Net Sales Cost of Sales

The percentage of Gross Profit to Netsales indicates whether the averagesale price is sufficient to cover all

expenses.

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5. OPERATING EXPENSES : These are the expenses which arerequired to run the business on daily basis, such as;

Selling Expenses

Administrative Expenses General Expenses

Provision for Bad Debts

Other Misc. Expenses

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5. OPERATING PROFIT : When you deduct all the operating

expenses from the Gross Profit you arrive at the Operating

Profit.

Operating Profit = Gross Profit - All Operating Expenses

Finally to this Operating Profit, Other incomes not arising out

from normal operations are added and other Non-operating

expenses are deducted to arrive at the figure of NET

PROFIT BEFORE TAX (NPBT).

From this NPBT so arrived, Income Tax is adjusted first and

thereafter Dividend is distributed as per ManagementsPolicy.

The Balance amount is reinvested in business in the form of

RESERVES or added in the Capital Account.

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Balance Sheet is a statement of Assets & Liabilities as on a

given date. It reflects the Financial Position of a concern as

on a date. The Balance Sheet can be looked at from two

angles:

1. ASSETS as USES and LIABILITIES as SOURCES OF

FUNDS

2. ASSETS as what the Business Owns and LIABILITIES as

what the Business Owes.

LIABILITIES ASSETS

NET WORTH FIXED ASSETS

TERM LIABILITIES CURRENT ASSETS

CURRENT LIABILITIES OTHER NON CURRENTASSETS

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1. Net Worth : It is the total investment of theowners in the Business.

For a Limited Company it comprises of a sum of Share

Capital + ReservesShare Capital is the direct investment of the owners

in the business. This includes Equity Share Capitaland Preference Share Capital.

Reserves : Profits of the business which have beenreinvested in the business. In Proprietorship andPartnership Firms they are added to Capital and notshown separately.

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2. TERM LIABILITIES : All those borrowingsmade by the concern which are repayable afterOne Yearof the Balance Sheet date are called TermLiabilities. These include

TERM LOANS

DEBENTURE

TERM DEPOSITSREDEEMABLE PREFERENCE SHARE CAPITAL

(Maturing with 12 years of Balance Sheet Date)

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3. CURRENT LIABILITIES : All thoseborrowings made by the concern which are expectedto be repaid within 12 months of the date of theBalance Sheet. These include

CREDITORSPROVISIONS FOR EXPENSES

BANK BORROWING FOR WORKING CAPITAL

DEPOSITS MATURING WITHIN 12 MONTHS

INSTALLMENTS OF TERM LOANSDEBENTURES/REDEEMABLE PREFERENCE SHARES MATURING

WITHIN ONE YEAR

Total of Term Liabilities + Current Liabilities is called

Outside Liabilities and is the Total Borrowings of the Firm

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4. FIXED ASSETS: These are the assets whichhelp in the production of goods & services of theconcern. They are tangible in nature and have a longlife. The examples of Fixed Assets are :

Land

Building

Plant & MachineriesFurniture & Fixtures etc.

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5. CURRENT ASSETS: These are the assetswhich are expected to be consumed or convertedinto cash through the normal business operationsand usually within one year. Such as:

Cash & Bank BalancesFDs with Banks

Short Term Govt .Securities

Stocks of R.M., Semi F.G and F.G

Stores, SparesAdvance Payment for Suppliers

Prepaid Insurance

Debtors & Bills Receivables

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6. NON CURRENT ASSETS: These are theassets which do not fall in the above two categoriesof assets. They are:

Corporate Investments

Loans not recoverable within 1 year

Non Consumable Spares

Deferred ReceivablesAdvance for Capital Expenditure

Intangible Assets [ Goodwill, Patent, TradeMark]

Preliminary & Pre-operative Expenses

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Lenders need it forcarrying out :-

Technical Appraisal

CommercialAppraisal

Financial Appraisal

Economic Appraisal

ManagementAppraisal

Does the firm has liquidity

to meet its short term

obligations?

Would the firm be able tomeet its long term

commitments?Is the firm using its assets

efficiently?How profitable are the

operations of the firm?

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It is the process of identifying the financial strengths& weaknesses of a firm by properly establishingrelationships between the items of the BalanceSheet and Profit & Loss A/c.

This is done by

(1) The Firms Management

(2) Owners

(3) Creditors

(4) Investors

(5) Bankers & Others

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A. TRADE CREDITORS : They do it to know thefirms ability to meet their claim. [Liquidity]

B. SUUPLIERS OF LONG TERM DEBT : They needto know the firms long term solvency.[Profitability over a long period of time]

C. INVESTORS : They are concerned about thefirms earnings.

D. BANKERS : They need to understand thesoundness of the Business so as to take a goodCredit Decision.

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Its a tool which enables the banker orlender to arrive at the following factors :

Liquidity position

Profitability Solvency Financial Stability

Quality of the Management Safety & Security of the loans & advances

to be or already been provided

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Ratio is the indicated quotient of two mathematical expressionsi.e. the relationship between two or more things.

Ratio Analysis involves comparison for useful interpretation ofthe financial statement. A single ratio does not indicatefavourable or unfavourable condition. It should becompared with some sort of standard. Standard of comparisonmay consist of :

1. Ratios calculated from the past financial statements of thesame firm.

2. Ratios developed using the projected financial statements ofthe same firm.

3. Ratios of some selected firms, especially the most progressiveand successful at the same point of time; and

4. Ratios of the industry level to which the firm belongs.

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As Percentage - such as 25% or 50% .For example if net profit is Rs.25,000/- andthe sales is Rs.1,00,000/- then the net profitcan be said to be 25% of the sales.

As Proportion -The above figures may beexpressed in terms of the relationshipbetween net profit to sales as 1 : 4.

As Pure Number /Times - The same canalso be expressed in an alternatively waysuch as the sale is 4 times of the net profit orprofit is 1/4th of the sales.

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LIABILITIES ASSETS

NET WORTH/EQUITY/OWNED FUNDSShare Capital/Partners Capital/Paid upCapital/ Owners Funds

Reserves ( General, Capital, Revaluation &Other Reserves)Credit Balance in P&L A/c

FIXED ASSETS : LAND & BUILDING, PLANT& MACHINERIESOriginal Value Less Depreciation[Net Value or Book Value or Written down value]

LONG TERM LIABILITIES/BORROWEDFUNDS : Term Loans (Banks &Institutions)

Debentures/Bonds, Unsecured Loans, FixedDeposits, Other Long Term Liabilities

NON CURRENT ASSETSInvestments in quoted shares & securitiesOld stocks or old/disputed book debts

Long Term Security DepositsOther Misc. assets which are not current orfixed in nature

CURRENT LIABILTIESBank Working Capital Limits such as

CC/OD/Bills/Export CreditSundry /Trade Creditors/Creditors/BillsPayable, Short duration loans or depositsExpenses payable & provisions againstvarious items

CURRENT ASSETS : Cash & Bank Balance,Marketable/quoted Govt. or other

securities, Book Debts/Sundry Debtors, BillsReceivables, Stocks & Inventory(RM,SIP,FG) Stores & Spares, AdvancePayment of Taxes, Prepaid expenses,Loans and Advances recoverable within 12months

INTANGIBLE ASSETSPatent, Goodwill, Debit balance in P&L A/c,

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Balance Sheet

Ratio

P&L Ratio or

Income/RevenueStatement

Ratio

Balance Sheet

and Profit &Loss Ratio

Financial Ratio Operating Ratio Composite Ratio

Current RatioQuick Asset RatioProprietary RatioDebt Equity Ratio

Gross Profit RatioOperating RatioExpense RatioNet profit RatioStock Turnover

Ratio

Fixed AssetTurnover Ratio,Return on TotalResources Ratio,Return on Own

Funds Ratio,Earning per ShareRatio, Debtors

Turnover Ratio,

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Liabilities have Credit balances and Assets haveDebit balances

Current Liabilities are those which have eitherbecome due for payment or shall fall due forpayment within 12 months from the date of Balance

Sheet Current Assets are those which undergo change in

their shape/form within 12 months. These are alsocalled Working Capital or Gross Working Capital

Net Worth & Long Term Liabilities are also calledLong Term Sources of Funds

Current Liabilities are known as Short TermSources of Funds

Long Term Liabilities & Short Term Liabilities are also

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Assets other than Current Assets are Long Term Use ofFunds

Installments of Term Loan Payable in 12 months are to betaken as Current Liability, only for Calculation of Current

Ratio & Quick Ratio. If there is profit it shall become part ofNet Worth under

the head Reserves and if there is loss it will become partofIntangible Assets

Investments in Govt. Securities to be treated currentonly if these are marketable and due. Investments inother securities are to be treated Current if they arequoted. Investments in allied/associate/sister units orfirms to be treated as Non-current.

Bonus Shares as issued by capitalization of GeneralReserves and as such do not affect the Net Worth. But

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1. Current Ratio : It is the relationship betweenthe current assets and current liabilities of aconcern.

Current Ratio = Current Assets/CurrentLiabilities

If the Current Assets and Current Liabilities of aconcern are Rs.4,00,000 and Rs.2,00,000respectively, then the Current Ratio will be :Rs.4,00,000/Rs.2,00,000 = 2 : 1

The ideal Current Ratio preferred byBanks is 1.33 : 1

Current Assets : Cash & those assetswhich can be converted into cash within 1

year. For example, Marketable securities,

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Current Ratio measures the firms shortterm solvency. A ratio greater than 1

means that the firm has more currentassets than current claims againstthem.

As a conventional rule a Current Ratio of2 is considered most satisfactory. Thisrule is based on the logic that in aworse situation, even if the value of

current assets become half, the firmwill be able to meet its currentobligations. It represents the Margin

of Safety i.e. a cushion of protection

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2.

Net Working Capital : This isworked out as surplus of Long TermSources over Long Term Uses,alternatively it is the difference of

Current Assets and Current Liabilities.It measures the firms potentialreservoir of funds.

NWC = Current Assets Current Liabilities

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3. ACID TEST or QUICK RATIO : It is the ratio betweenQuick Current Assets and Current Liabilities.

Quick Current Assets : Quick assets are those which can be

immediately converted into cash without a loss of value. Cash & Bankbalances are the most liquid assets. Examples of quick Assets are :Cash/Bank Balances, Receivables upto 6 months, Quickly realizablesecurities such as Govt. Securities or quickly marketable/quoted sharesand Bank Fixed Deposits. Inventories are less liquid hence the same isdeducted from the Current Assets to arrive at Quick Assets.

Acid Test or Quick Ratio = Quick Current Assets/CurrentLiabilities

Example :Cash 50,000

Debtors 1,00,000Inventories 1,50,000 Current Liabilities

1,00,000Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000

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4. DEBT EQUITY RATIO : It is the relationship betweenborrowers fund (Debt) and Owners Capital (Equity). Itrepresents the lenders contribution for each Rupee of

owners contribution.

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus LessIntangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 LacsFree Reserves & Surplus = Rs. 300 LacsLong Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 = 1.6 : 1

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5. PROPRIETARY RATIO : This ratio indicates the extentto which Tangible Assets are financed by Owners Fund.Proprietary Ratio = (Tangible Net Worth/Total

Tangible Assets) x 100The ratio will be 100% when there is no Borrowing forpurchasing of Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit

percentage to Net Sales we can arrive at the Gross ProfitRatio which indicates the manufacturing efficiency as well asthe pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales )

x 100

Alternatively , since Gross Profit is equal to Sales minusCost of Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ (Sales Cost of goodssold)/ Net Sales] x 100

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7. OPERATING PROFIT RATIO :

It is expressed as => (Operating Profit / NetSales ) x 100

Higher the ratio indicates operational efficiency

8. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales )x 100

It measures overall profitability.

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9. STOCK/INVENTORY TURNOVER RATIO :It indicates

the efficiency of the firm in selling its products. It is calculatedby dividing the Cost of Goods Sold by Average Inventory. Toarrive at the number of days, weeks or months turnover the

following formulas may be applied.

(Average Inventory/Sales) x 365 for days(Average Inventory/Sales) x 52 for weeks

(Average Inventory/Sales) x 12 formonths

Average Inventory or Stocks = (OpeningStock + Closing Stock)

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

2 This ratio indicates the number of times the36

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10. DEBTORS TURNOVER RATIO : This is alsocalled Debtors Velocity or Average Collection Period orPeriod of Credit given .

(Average Debtors/Sales ) x 365 for days(52 for weeks &

12 for months)

11. ASSET TRUNOVER RATIO : NetSales/Tangible Assets

12. FIXED ASSET TURNOVER RATIO : NetSales /Fixed Assets

13. CURRENT ASSET TURNOVER RATIO : NetSales / Current Assets

14. CREDITORS TURNOVER RATIO : This is also

called Creditors Velocity Ratio, which determines the37

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15. RETRUN ON ASSETS : Net Profit after

Taxes/Total Assets

16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / AverageCapital Employed) x 100

Average Capital Employed is the average of the

equity share capital and long term fundsprovided by the owners and the creditors of the firmat the beginning and end of the accounting period.

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Composite Ratio

17. RETRUN ON EQUITY CAPITAL (ROE) :

Net Profit after Taxes / TangibleNet Worth

18.EARNING PER SHARE : EPS indicates the

quantum of net profit of the year that would beranking for dividend for each share of the companybeing held by the equity share holders.

Net profit after Taxes and Preference

Dividend/ No. of Equity Shares

19. PRICE EARNING RATIO : PE Ratio indicates thenumber of times the Earning Per Share is covered

by its market price. 39

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20. DEBT SERVICE COVERAGE RATIO :This ratio isone of the most important one which indicates theability of an enterprise to meet its liabilities by way

of payment of installments of Term Loans andInterest thereon from out of the cash accruals andforms the basis for fixation of the repaymentschedule in respect of the Term Loans raised for aproject. (The Ideal DSCR Ratio is considered to be2 )

PAT + Depr. + Annual Interest on LongTerm Loans & Liabilities

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

Annual interest on Long Term Loans &

Liabilities + Annual Installments payable on40

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LIQUIDITY RATIOS :

1.CURRENT RATIO = C.A / C.L

2.QUICK RATIO = (C.A

INVENTORY)/C.L

ACTIVITY RATIOS :

1.INVENTORY TURNOVER RATIO =

(COST OF GOODS SOLD OR

SALES)/INVENTORY

2.DEBTORS TURNOVER RATIO =

(CREDIT SALES OR

SALES)/AVERAGE DEBTORS

3.INVENTORY PERIOD =

360/INVENTORY TURNOVER

4.COLLECTION PERIOD =

360/DEBTORS TURNOVER

5.ASSETS TURNOVER = SALES/NETASSETS OR CAPITAL EMPLOYED

6.WORKING CAPITAL TURNOVER =

SALES/NET WORKING CAPITAL

PROFITABILITY RATIOS :

1.GROSS MARGIN = GROSS

PROFIT/SALES

2.NET MARGIN = PAT/SALES,

EBIT/SALES3.PAT TO EBIT RATIO = PAT/EBIT

4.RETRUN ON INVESTMENT RATIO

= EBIT/NET ASSETS OR CAPITAL

EMPLOYED

5.RETRUN ON EQUITY = PAT/NET

WROTH

LEVERAGE RATIOS :

1.TOTAL DEBT RATIO = TOTAL

DEBT/CAPITAL EMPLOYED

2.DEBT EQUITY RATIO = NET

WORTH/TOTAL DEBT3.CAPITAL EQUITY RATIO = C.E OR

NET ASSETS / NET WORTH

4.INTEREST COVERAGE RATIO =

(EBIT+Depr.)/INTEREST

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EXERCISE 1 01:15 PM


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LIABILITES ASSETS

Capital 180Net Fixed Assets 400

Reserves 20Inventories 150

Term Loan 300Cash 50

Bank C/C 200Receivables 150

Trade Creditors 50Goodwill 50

Provisions 50

800 800

a. What is the Net Worth : Capital + Reserve = 200

b. Tangible Net Worth is : Net Worth - Goodwill = 150

c. Outside Liabilities : TL + CC + Creditors + Provisions = 600

d. Net Working Capital : C A - C L = 350 - 250 = 50

e. Current Ratio : C A / C L = 350 / 300 = 1.17 : 1

f. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1

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EXERCISE 2

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LIABILITIES 2006-07 2007-08 2006-072007-08

Capital 300 350Net FixedAssets

730 750

Reserves 140 160SecurityElectricity

30 30

Bank Term Loan 320 280Investments 110 110

Bank CC (Hyp) 490 580Raw Materials 150 170

Unsec. Long T L 150 170S I P 20 30Creditors (RM) 120 70Finished Goods 140 170

Bills Payable 40 80Cash 30 20

Expenses Payable 20 30Receivables 310 240

Provisions 20 40Loans/Advances 30 190

Goodwill 50 50

Total 1600 1760 1600 1760

1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390

2. Current Ratio for 2nd Year : (170 + 30 +170+20+ 240 + 190 ) / (580+70+80+70)

820 /800 = 1.02

3. Debt Equity Ratio for 1st

Year : 320+150 / 390 = 1.21 43

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Exercise 3.

LIABIITIES ASSETS

Equity Capital 200Net Fixed Assets 800

Preference Capital 100Inventory 300

Term Loan 600Receivables 150

Bank CC (Hyp) 400Investment In Govt.Secu.

50

Sundry Creditors 100Preliminary Expenses 100Total 1400 1400

1. Debt Equity Ratio will be : 600 / (200+100) = 2 : 1

2. Tangible Net Worth : Only equity Capital i.e. = 200

3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) /

200

= 11 : 2

4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1 44

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LIABILITIES ASSETS

Capital + Reserves 355 Net Fixed Assets 265

P & L Credit Balance 7Cash 1Loan From S F C 100Receivables 125

Bank Overdraft 38Stocks 128

Creditors 26Prepaid Expenses 1

Provision of Tax 9Intangible Assets 30

Proposed Dividend 15

550 550

Q. What is the Current Ratio ? Ans : (1+125 +128+1) / (38+26+9+15)

: 255/88 = 2.89 : 1

Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11

Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW

= 100 / ( 362 30)

= 100 / 332 = 0.30 : 1

Exercise 4.

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LIABILITIES ASSETS







550 550

Q . What is the Proprietary Ratio ? Ans : (TNW / Tangible Assets) x 100

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

(332 / 520) x 100 = 64%Q . What is the Net Working Capital ?

Ans : C. A - C L. = 255 - 88 = 167

Q . If Net Sales is Rs.15 Lac, then What would be the Stock Turnover

Ratio in Times ? Ans : Net Sales / Average Inventories/Stock

1500 / 128 = 12 times approximately

Exercise 4. contd

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LIABILITIES ASSETS







550 550

Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.

Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12= 1 month

Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?

Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.3 months

Exercise 4. contd

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Exercise 5. : Profit to sales is 2% and

amount of profit is say Rs.5 Lac. Then What

is the amount of Sales ?

Answer : Net Profit Ratio =

(Net Profit / Sales ) x 100

2 = (5 x100) /Sales

Therefore Sales = 500/2 = Rs.250 Lac

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Exercise 6. A Company has Net Worth of Rs.5 Lac, Term

Liabilities of Rs.10 Lac. Fixed Assets worth RS.16 Lac and

Current Assets are Rs.25 Lac. There is no intangible Assets

or other Non Current Assets. Calculate its Net Working

Capital.

Answer

Total Assets = 16 + 25 = Rs. 41 Lac

Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac

Current Liabilities = 41 15 = 26 Lac

Therefore Net Working Capital = C. A C.L= 25 26 = (- )1 Lac

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Exercise 7 : Current Ratio of a

concern is 1 : 1. What will be the Net

Working Capital ?

Answer : It suggest that the Current

Assets is equal to Current Liabilities hencethe NWC would be NIL ( since NWC =

C.A - C.L )

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Exercise 8 : Suppose Current Ratio is

4 : 1. NWC is Rs.30,000/-. What is the

amount of Current Assets ?

Answer : 4a - 1a = 30,000

Therefore a = 10,000Thus Current Liabilities is Rs.10,000

Hence Current Assets would be 4a = 4

x 10,000 = Rs.40,000/-

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Exercise 9. The amount of Term Loan

installment is Rs.10000/ per month,

monthly average interest on TL isRs.5000/-. If the amount of Depreciation

is Rs.30,000/- p.a. and PAT is

Rs.2,70,000/-. What would be the DSCR ?

DSCR = (PAT + Depr. + Annual Intt.) / (Annual Intt.

+ Annual Installment)

= (270000 + 30000 + 60000 ) / (60000 + 120000)

= 360000 / 180000= 2

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Exercise 10 : Total Liabilities of a firm is Rs.100 Lac

and Current Ratio is 1.5 : 1. If Fixed Assets and Other

Non Current Assets are to the tune of Rs. 70 Lac and

Debt Equity Ratio being 3 : 1. What would be theLong Term Liabilities?

Answer

We can easily arrive at the amount of Current Asset being Rs. 30 Lac

i.e. ( Rs. 100 L - Rs. 70 L ).

If the Current Ratio is 1.5 : 1, then Current Liabilities works out to be

Rs. 20 Lac.

That means the aggregate of Net Worth and Long Term Liabilities

would be Rs. 80 Lacs.

If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs. 60

Lacs and equity Rs. 20 Lacs.

Therefore the Long Term Liabilities would be Rs.60 Lac.53

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Exercise 11 : Current Ratio is say 1.2 : 1 .

Total of balance sheet being Rs.22 Lac. Theamount of Fixed Assets + Non Current Assets

is Rs. 10 Lac. What would be the Current

Liabilities?

AnswerWhen Total Assets is Rs.22 Lac then Current

Assets would be (Total Assets less Fixed+Non

Current Assets)= 22 10 i.e Rs. 12 Lac.

Thus we can easily arrive at the Current Liabilities

figure which should be Rs. 10 Lac, since the

Curret Ratio being 1.2 : 1 54

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Exercise 12 : Total Sales (all credit sales) of a firm is Rs.640000. It has

gross profit margin of 15% and a Current Ratio of 2.5. The firms Current

liabilities are Rs.96000, Inventories Rs.48000 and Cash Rs.16000.

a)Determine the average inventory to be carried by the firm, if an inventoryturnover of 5 times is expected? Assuming a year having 360 days.

Inventory Turnover = Cost of Goods Sold / Average Inventory

Given that Gross Profit margin is 15% means the Goods sold should be 85%

of the sales. So Cost of Goods Sold = Sales x 85% = 640000 x 85% = 544000

Hence 5 = 544000 / Average Inventory

or Average Inventory = 544000/5 = 108800

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E ercise 12 Total Sales (all credit sales) of a firm is Rs 640000 It has


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Exercise 12 : Total Sales (all credit sales) of a firm is Rs.640000. It has

gross profit margin of 15% and a Current Ratio of 2.5. The firms Current

liabilities are Rs.96000, Inventories Rs.48000 and Cash Rs.16000.

b) Determine the average collection period if the opening balance of debtors isintended to be Rs.80000/-. Assume a year having 360 days.

Average Collection Period = (Average Debtors/Credit Sales) x 360

Average Debtors = (Opening Bal of Debtors + Closing Bal of Debtors)/2

Current Liabilities given is Rs.96000/-, Current Ratio is 2.5

So Current Assets = 96000 x 2.5 = 240000

If you deduct Inventory and Cash i.e. 48000 + 16000 = 64000 from Current

Assets, you get closing balance of Debtors,

So Closing Balance of Debtors is 240000 64000 = 176000Therefore the average Debtors would be (80000 + 176000)/2 = 128000

Hence Average Collection Period = (128000/640000)x360

= 72 days.

EXERCISE 13 A fi ld it t k i CASH i d t t it li idit

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EXERCISE 13. A firm sold its stocks in CASH, in order to meet its liquidity

needs. Which of the following Ratio would be affected by this?

1.Debt Equity Ratio

2.Current Ratio3.Debt Service Coverage Ratio

4.Quick Ratio

EXERCISE 14. A company is found to be carrying a high DEBT EQUITY

Ratio. To improve this, a bank may suggest the company to :

1.Raise long term interest free loans from friends and relatives

2.Raise long term loans from Institutions

3.Increase the Equity by way of Bonus Issue

4.Issue Rights share to existing share holders.

EXERCISE 15. Which of the following is a fictitious Asset?

1.Goodwill

2.Preliminary Expenses

3.Pre-operative expenses

4.Book Debts which have become doubtful of recovery 57

EXERCISE 16 Under which of the following methods of depreciation on

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EXERCISE 16. Under which of the following methods of depreciation on

Fixed Assets, the annual amount of depreciation decreases?

1.Written Down Value method

2.Straight Line method3.Annuity method

4.Insurance policy method

EXERCISE 17 Debt Service Coverage Ratio (DSCR) shows :

1.Excess of current assets over current liabilities

2.Number of times the value of fixed assets covers the amount of loan

3.Number of times the companys earnings cover the payment of interest

and repayment of principal of long term debt

4.Effective utilisation of assets

EXERCISE 18. Which of the following is not considered a Quick Asset?

1.Cash and Bank balances

2.Bank Fixed Deposits

3.Current Book Debts

4.Loans and Advances 58

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Questions on Fund Flow Statement

Q 19. Fund Flow Statement is prepared from the Balance sheet :

1.Of three balance sheets

2.Of a single year

3.Of two consecutive years

4.None of the above.

Q 20. Why this Fund Flow Statement is studied for ?

1.It indicates the quantum of finance required

2.It is the indicator of utilisation of Bank funds by the concern

3.It shows the money available for repayment of loan

4.It will indicate the provisions against various expenses

Q 21. In a Fund Flow Statement , the assets are represented by ?

1.Application of Funds

2.Sources of Funds

3.Surplus of sources over application

4.Deficit of sources over application 59

Q 22 I F d Fl St t t th Li biliti t d b ?

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Q 22. In Fund Flow Statements the Liabilities are represented by ?

1.Sources of Funds

2.Use of Funds

3.Deficit of sources over application4.All of the above.

Q 23 . When the long term sources are more than long term uses, in the

fund flow statement, it would suggest ?

1.Increase in Current Liabilities2.Decrease in Working Capital

3.Increase in NWC

4.Decrease in NWC

Q 24. When the long term uses in a fund flow statement are more than

the long term sources, then it would mean ?

1.Reduction in the NWC

2.Reduction in the Working Capital Gap

3.Reduction in Working Capital

4.All of the above60

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Q 25. How many broader categories are there for the Sources of funds,

in the Fund Flow Statement ?

1. Only One, Source of Funds

2.Two, Long Term and Short Term Sources3.Three , Long, Medium and Short term sources

4.None of the above.

R K MOHANTY

email ID : [email protected],

[email protected]
mailto:[email protected]:[email protected]

caiib_fmmodcbsa_nov08

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