financial analysis for managers class presentation

7/31/2019 Financial Analysis for Managers Class Presentation

1/217

Items given in the trialbalance

Treatment in profit andloss account

Treatment in thebalance sheet

Closing stock Nil Shown in the asset side

Outstanding expenses Nil Shown in the liabilityside

Prepaid expenses Nil Shown as assets

Accrued income Nil Shown as assets

Unearned income Nil Shown as liability


2/217

s e o pro an oss

Bad debts Shown on the expenses sideof profit and loss

Nil

Provision for bad debts( ifno adjustment is given

outside the trial balance )

Nil Shown on the liability sideof the balance sheet

Provision for bad debts (ifadjustments is givenoutside the trial balance)

The amount which is givenin the trial balance will beshown on the income sideof profit and loss

The new provision which isgiven in the adjustmentswill be shown on theexpenses side of profit andloss after deducting fromdebtors

Discount allowed Shown on the expenses sideof profit and loss

Nil

Provision for discount ondebtors (if no adjustment is

given out side the trialbalance)

Nil Will be shown on theliability side

Provision for discount ondebtors (if adjustment isgiven in the outside trial

balance)

The amount which is givenin the trial balance will beshown on the income side

of profit and loss

The new provision which isgiven in the adjustmentswill be reduced from

debtors and will be shownon the debit side of profit


3/217

Discount received Shown on the income sideof profit and loss

Nil

Reserve for discount on

creditors (if no adjustmentis given outside the trialbalance)

Nil Will be shown on the

liability side of the balancesheet after deducting fromcreditors

Reserve for discount oncreditors ( if adjustment is

given outside the trialbalance)

The amount which is givenon the trial balance will be

shown on the debit side ascancellation item

The new provision which isgiven on the adjustments

will be deducted from thecreditors and will be shownon the income side of theprofit and loss

Interest on capital Shown on the expenses side

of profit and loss asseparate item

Nil

Interest on drawings Shown on the income sideof profit and loss account

Nil


4/217

Adjustments profit and loss account Treatment in thebalance sheet

Outstanding expenses Added to the respectiveaccount

On the liability side

Prepaid expenses Deducted from therespective expenses

On the asset side

Accrued income Added to the respectiveincome on the incomeside

On the assets side

Unearned income Deducted from the

respective account

On the liability side

Depreciation On the expenses side ofprofit and loss

Asset side afterdeducting from therelated assets


5/217

Interest on capital On the expenses side ofprofit and loss

On the liability side afteradding to the capital

Interest on drawings On the income side of profit

and loss

Deducted from the capital

Interest on loan ( if taken) On the expenses side ofprofit and loss

Liability side after addingto the loan amount

Interest on loan ( if given) On the income side of profitand loss

Asset side after adding tothe loan amount

Interest on investments On the income side of theprofit and loss

On the asset side afteradding to the investments

Closing stock On the income side of profitor loss

On the asset side of thebalance sheet

Bad debts On the debit side of the

profit and loss

On the asset side after

deducting from dedbtors


6/217

Provision for bad debts On the debit side of theprofit and loss

On asset side afterdeducting from the debtors

Provision for discount on

debtors

On the debit side of the

profit and loss

On the debit side after

deducting from debtors

Provision for discount oncreditors

On the credit side of theprofit and loss account

On the liability side ofbalance sheet afterdeducting from thecreditors

Loss by accident On the debit side of profitand loss

On the asset side afterdeducting from the relatedassets.

Sales tax On the expenses side ofprofit and loss On the liability side of thebalance sheet

Goods distributed as freesample and donation

Deducted from thepurchases and shown inthe expenses side of profit

and loss debit side

Nil


7/217

Drawing of goods Deducted from purchases Deducted from capital asdrawings

Provision for repairs anddonations

Shown on the expenses sideof the profit and loss

Shown on the liability sideof the balance sheet

Sale or return basis sales Sales price is reduced fromthe sales and cost price isadded to the closing stockand shown on profit andloss account credit side

Sales price is reduced fromthe debtors and cost price ofstock is added to the closingstock

Deferred expenditure Part of deferred expenseswill be written of shown onthe expenses side

Remaining amount will beshown on the assets side

Contingent liability Nil Such liability is shown outside the trial balance asnote.

Bills or cheques dishonored Bank account will bereduced and debtors

account will be increased.


8/217

Omission of entry of creditsales and purchases:Incase of credit purchases

Incase of credit sales

Purchases will beincreased in profit or lossaccount

Will be added to sales

Will be added to creditorsaccount

Will be added to debtors

Goods in transit On the income side of profit& Loss account

Will be shown on the assetside of balance sheet

Common debt Deducted from debtors andcreditors

Reserve for discount oncreditors

Shown on income side ofprofit and loss

Deducted from creditors

Managers commission onprofit Shown on the expenses sideof profit and loss Shown on the liability side

Abnormal loss of stock Total value will be reducedfrom the purchases if anyrecovery amount theadjustment will be made

If amount due from theinsurance company will beshown on the asset side ofbalance sheet.


9/217

Wages include oninstallation of PM

Will be deducted fromwages

Added to plant andmachinery

Sales includes sales tax Deducted from sales Shown on the liabilityside

Direct deposit by thecustomer in to bank

Debtors will reduce andbank will increase

Bank charges debited bythe bank

Shown on the expensesside of profit and loss

Reduced from bank

Debtors includesdrawings from

proprietor

Reduced from debtorsand reduced from capital

Purchases includesfurniture purchased

Reduce from purchaseand increase thefurniture


10/217

Items in trial balance Treatment in profit andloss

Treatment in thebalance sheet

9% loan from A Interest will be shownon the expenses side ofprofit and loss

Added to the loanaccount and shown onthe liability side

10% Deposit with the B Interest on deposit willbe shown on the incomeside of profit and loss

The interest amount willbe added to deposit andshown on the asset side

10% investments Interest on investmentwill be shown on income

side of profit and loss

Interest amount addedto investment and

shown on asset side


11/217


12/217

For business profit is like engine of a car.As the car ends when its engine isseparated from it, similarly identity of

business comes to an end when the wordprofit is removed from it. Profit is veryimportant in any business.


13/217

It is a dynamic document which shows theresults of operation of an enterprise for aparticular period of time. In this statement

revenue of a particular period are marchedwith the expenses of that period. The excess ofrevenue over expenses is known as net incomeand excess of expenses over revenue is known

as net loss.


14/217

The answer to this question is simpleand obvious . As the name suggests,

this statement is prepared to find outwhether an organisation has made aprofit or a loss.


15/217

This question is equally simple toanswer. The primary objective of startingbusiness is to earn profit. Unless the

business is making a profit, you mightwant to re-consider whether you wish tocontinue running it.


16/217

An organisation with a grand faade, high-profile clients, motivated employees and anoutstanding brand may well be bleeding dray.

At the same time, a business operating from arundown shack could just as well be highprofitable.

So the only way to conclude the profitabilityposition is if profit and loss account is preparedand studied.


17/217

SALES OTHER INCOME

Income from sale ofgoods.

Income from Services

Interest earned ondeposits.

Dividend received oninvestments.

Profit on sale of assets

Commission received

Rent received etc.


18/217

Opening stock + Purchases Closing stock

Note: Under the new approach direct expensesare shown under the head expenses.


19/217

OFFICE OR ADMINISTRATIVEEXPENSES

SELLING & DISTRIBUTIONEXPENSES

In this head salaries ofemployees, postage &

telegram, rent and tax,printing &stationary, legalexpenses auditing fees etc.are shown .Thoseexpenses which beginwith the word office,management oradministration are shownunder this head

Advertisement, salaryand commission to

agents, carriage onsales, handling, packingcharges etc. are shownin this head. Thoseexpenses with which

words selling ordistribution areassociated are shownunder this head.


20/217

FINANCIAL EXPENSESOTHER MISCELLANEOUSEXPENSES.

Expenses incurred forprocurement of money

are known as financialexpenses. For example interest on loan, bankcharges etc

Depreciation, repairs,donation loss of assets,

trade exp etc .are shownunder this head


21/217

This is a measure of gross performance of acompany with reference to its total capitalemployed. As the term suggests, interest and

tax are not deducted while computing PBIT.Interest is a reward of borrowed capital and taxis a compulsory deduction imposed by law. Itis also known as Earnings Before Interest and

Tax ( EBIT). Generally it is used to measuremanagerial Performance.


22/217

This is a measure of net profit before chargingtax. Since tax is a compulsory and non discretionary charge on the company, net profit

is first presented before charging tax. By thisthe users can understand profit earning abilityof the company and the tax impact separately.This also otherwise known as Earnings Before

Tax (EBT).


23/217

This is a measure of net profit. Thisis used to understand the profit

earned after tax charge. It isotherwise known as Earnings AfterTax (EAT).


24/217

This is given by PAT plus balance of Profit andLoss Account standing from previous years. Asmall amount is left which can be used in the

subsequent year for maintaining uniform rateof dividend.


25/217

Profit and Loss Account includes elements ofnon-operating items. For example, incomefrom investments in is non-operating income

which arises out of investment outside thebusiness. Related expenses are non-operatingexpenses. Similarly, profit or loss on sale offixed assets or investments is also categorized

non-operating income/ expenses.


26/217

Profit available to Equity Shareholders: This isdistributable profit minus dividend paid topreference shareholders.

Book Profit: It is the profit as per books ofaccounts. This includes accrued income also.

Actual Profit: The profit which is actuallyrealized.


27/217

Item s schedule 2010 2009

Income :SalesLess Excise dutyNet salesFinished goods internally capitalizedOther incomeTotal

Expenditure :Decrease ( increase) in stock of finished goodsRaw materialsPower &FuelRepairs and maintenanceOther manufacturing expenses

Employees remunerationAdministrative expensesOther expensesSelling and distribution expensesInterest and financing chargesProvisions

DepreciationTotal


28/217

Profit Before Interest and Tax (PBIT)Less InterestProfit Before Tax (PBT)Less Provision for taxation

CurrentFringe benefitDeferredEarlier yearsProfit After Tax (PAT)Balance brought forward from previous

yearTransfer from capital reserveTransfer from general reserveProvision for differential actuarialliabilityAmount available for appropriation


29/217

Appropriations:Interim DividendProposed Final dividendTax on dividend

Transfer to General reserveBalance Carried forward to Balance SheetEarnings Per Share: (EPS)Profit after taxAverage number of equity sharesBasic & Diluted earnings per share

Significant Accounting Policies


30/217

Purchases

Carriage

Carriage inward

Freight Freight inward

Wages

Factory expenses

Stores consumed

Royalty

Motive Power

Coal, coke Water

Oil

Octroi Dock charges

Custom Duty


31/217

salary

rent, rate & taxes

stationary

postage and telegram audit fees

legal charges

telephone charges insurance premium

entertainmentexpenses

repairs

depreciation interest

trade expenses

conveyance

charity

bank charges


32/217

office expenses

establishment exp

stable expenses

license fees brokerage

commission

office lighting

advertisement

export duty

discount

packing charges traveling exp

bad debts

provision for baddebts


33/217

Sales

Income from services

Rent received

discount received commission received

interest received

bad debts recovered

apprentice premium

income from investment


34/217

Cash in hand Cash at bank Bills receivable Sundry debtors

Closing stock Finished goods Raw materials Work in progress Stationary

Goods sent onconsignment

Long term investments Trade mark

Patents Vehicle Furniture Investments Machinery and plant Tools Land and building Goodwill


35/217

Bank overdraft

Bills payable

Sundry creditors

Short term loans

Bank loans

Long-term loans

Incomes received in advance Capital


36/217

One group consists of employees, vendors,printing stationer etc. This group represents

operating expenses.

Another group are the share holders whoalso expect reward

Another group is government, which expects

to collect tax Yet another group are the lenders also need to

be rewarded.


37/217

Operating Expenses

Interest

Tax Share holders


38/217

The Balance Sheet presents anenterprises assets, liabilities and

equity at a point in time. Itsummarizes the resources, and theclaim to those resources by owners

and creditors of the enterprise on acertain date.


39/217

Liabilities represent money thatorganization owes. This is money

that it owes because it was borrowedby the organization. In other words,liabilities shows the sources of money,

where the organization has receivedits funds.


40/217

Capital- Direct contribution from owners/share holders

Reserves Indirect contribution by the owners

Loan- Contribution from outsiders Creditor for goods/ services- when goods are

purchased on credit, it amounts to a loan, notin cash but in kind.


41/217

Assets represent something that theorganisation possess, something that

it owns, and which has beenobtained by spending the moneyraised. In other words, assets tells us

where the money was spent- the useof money.


42/217

Creation of infrastructure ( purchase offixed assets)

Creation of current assets componentslike inventory, cash and bank balance


43/217

AssetsOffice equipmentsStockBankCash

BuildingTotal of assets

LiabilitiesCreditorsOutstanding expensesOverdraft

EquityShare capitalRetained earningsTotal equityTotal of liabilities and equity

Schedule Amount


44/217

Items ScheduleNo

Amount

Sources of Funds:Share holders fundsCapital

Reserve and surplusLoan fundSecured loanUnsecured loanTotalApplication of funds:

Fixed assetsCurrent assets and loans and advancesLess current liabilities and provisionsTotal


45/217

Assets Liability Equity

Bank Advancerent

Customer Supplies

1,00,00020,000

(70,000)(12,000)(11,000)(14,000)

460(1,800)8,70024,400(5,000)

70,000

62,1001,800

020,000

0000

0024,400

1,00,0000

0(12,000)(11,000)(14,000)

460070,800

(5,000)


46/217

Particular Amount

INCOMERevenue from servicesBank interest

Total of Income

EXPENSESOffice RentComputer rentSubscription for data base

Secretary salaryAssistant salary

Total of Expenses

Net Profit

70,800460

_____________

71,260______________

5,00012,00011,000

9,0005,000

_____________42,000______________29,260


47/217

Particulars Amount

ASSETSBank balanceAdvance RentCustomer

Stock of supplies

Total of Assets

LIABILITIESLoan from friend

Advance service chargesEQUITY(Opening Capital + Net Profit)(1,00,000 +29,260)

Total of liabilities and Equity

39,,76070,00062,100

1,800______________1,73,660_______________

20,000

24,4001,29,260

______________1,73,660_______________


48/217

Particulars Details Amount

Cash flow from operating ActivitiesReceipt from services(24,100 +9,000)Operating expenses (5,000 +12,000

+11,000+9,000+5,000 +1,800)Cash flow from Investing ActivitiesInterest from bankAdvance rent

Cash from Financing ActivityOpening capitalLoan from friend

Net increase in cash

33,100(43,800)

__________

460(70,000)__________

1,00,00020,000

_________

(10,700)

(69,540)__________

(80,240)

1,20,000___________

39,760


49/217

Assets = Liabilities+

Capital

Bank Computer Customers Supplies

60,000(7,000)25,000

(15,000)(2,500)(9,500)

(3,810)

21,2009,800

(14,000)(340)

40,000

48,600(21,200)

3,900

(1,500)

25,000 +

25,000 +0 +0+3,900 +(3,900) +0 +0 +9,800 +(14,000) +0 +0 +450 +

60,000(7,000)0

0(2,500)(9,500)09048,600000(340)(1,500)(450)


50/217

Particulars Amount

IncomeService charges bill raisedDiscount received

48,60090

Total of Income 48,690

ExpensesSalary of managerRentSalary of assistantsInterestConsumption of suppliesOutstanding electricity bill

7,0002,5009,500

340

1,500450

Total of expenses 21,290

Net profit 27,400


51/217

Items Amount

AssetsBankComputerCustomer or debtors

Stock of supplies

63,85040,00027,400

2,400

Total of assets 1,33,650

LiabilitiesBank loan (25,000-14,000)Outstanding electricity billCreditors for computersIncome received in advance

EquityOpening Capital + Profit during the year(60,000 +27400)

11,000450

25,0009,800

87,400

Total of liabilities and equity 1,33,650


52/217

Particulars Amount

IncomeReceipt from customers from services +amount receivable- Received for next year ( 22,920 +970 -1,300) 22,590

Total of income 22,590

ExpensesRent (3,500-500)Salary (9,240 +380)Supplies (2,300+950 -1,540)Depreciation on Camera

Insurance ( 2,400-1,300)Electricity bill (910 +95)Telephone chargesHire charges of video camera

3,0009,6201,7103,000

1,1001,005

450500

Total expenses 20,,385

Net profit 2,205


53/217

Items Amount

AssetsCamera (30,000- 3,000)Prepaid rentStock of supplies

CustomersPrepaid insurance premium

27,000500

1,540

9701,300

Total of assets 31,310

LiabilitiesAdvance service charges

Outstanding salaryCreditors for suppliesCreditor for video cameraOutstanding electricityOutstanding hire chargesBank overdraft

E uit

1,300

380950

5,00095

500880


54/217

Particulars AmountIncomeRevenue from services 20,050

Total income 20,050

ExpenseSalariesSuppliesTelephone chargesRentDepreciation

9,7202,160

9702,4001,800

Total expenses 17,050

Net profit 3,000


55/217

Particulars AmountOpening retained earningsAdd profit during the year

Less Dividend paid during the year

2,1603,000_____________5,1603,800

Closing retained earnings 1,360


56/217

Particulars AmountAssetsEquipments less accumulated depreciationSuppliesDebtorsCashPrepaid rentUnbilled revenue

14,4001,9004,2102,1705,1003,020

Total of assets 30,800

Liabilities

CreditorsUnearned revenueSalary payableEquityShare capitalRetained earnings at the end

2,160970

1,310

25,0001,360


57/217

Heads of account Debit CreditSwimming poolDepreciation on swimming poolTennis courtDepreciation on tennis courtSuppliesSupplies at the endDebtors (2,910+1,200)CashInsurancePrepaid insuranceCreditorsUnearned revenueShare capitalDividendsRevenue from servicesSalaries expenses

Outstanding salaryTelephone expenses

9,6002,4008,4001,2002,0901,1904,110

940100

1,100

800

4,200

290

1,2901,800

15,000

17040

1,290


58/217

Heads of account Debit CreditBuildingDepreciation on buildingComputersDepreciation on computersSupplies consumedStock of supplies at the endDebtors (2,960 +3,100)CashPrepaid insuranceInsuranceCreditorsBills payableInterestOutstanding interestUnearned revenue (1,900-1,600)Share capital

DividendsRevenue from services(24,060 +3,100 +1,600)

18,0002,000

12,0006,0002,560

6506,0601,1902,4002,400

52

2,000

4,2002,600

52300

30,000

28,760


59/217

Heads of Account Debit Credit

Office equipmentsAccumulated depreciationDepreciation on equipmentsConsumption of office supplies(2510-930)

Stock of office suppliesCashCreditorsUnearned revenue(2,100-460)Share capitalRetained earnings

DividendRevenue from services(13,810+460+370)Revenue receivableSalary (5,940 +490)Outstanding salaryRent

Cleaning expenses

10,000

1,0001,580

9305,600

2,000

3706,430

4,800

240

2,000

1,6001,640

10,0002,340

14,640

490


60/217

Heads of account Debit Credit

BuildingDepreciation on buildingOffice equipmentsDepreciation on equipments

Stock of suppliesSupplies consumed (2140-970)Debtors (1640+900)Revenue from services (16870+900+720)Unearned revenue (1600-720)Cash

RentPrepaid rentCreditorsShare capitalDividendSalary (3,100+3,100)

Outstanding salary

14,875125

11,750250

9701,1702,540

630

6003,000

1,0006,200

18,490880

1,02020,000

3,100


61/217

Heads of account Debit Credit

ComputerDepreciation on computerOffice equipmentsDepreciation on office equipments

Supplies used (3970-1240)Stock of suppliesDebtors (1710+6,200 )Revenue (33,320 +6,200 +2,100)Unearned revenue (2,800- 2,100)Cash

Bills receivableInterest (3,400 @15% X4/12)Accrued interestRentPrepaid rentCreditors

Share capital

10,0005,0008,100

900

2,7301,2407,910

940

3,400

17011,000

1,000

41,620700

170

3,100

20,000


62/217

Particulars Amount

Retained earnings at the beginning

Add Net profit during the year

Profit available for distribution

Less dividend paid

Retained earnings at the end


63/217

Claims against the company not acknowledgedas debt

Uncalled liability on shares held as investments

Arrears of fixed cumulative dividends onpreference shares

Estimated amounts of contracts remaining tobe executed on capital account and notprovided for.

Other moneys for which the company iscontingently liable


64/217

whereas two or more companies areamalgamated on the one hand, one companypurchases more than 50% shares in other

company on the other and thus acquirescontrol on that company. The company whichpurchases shares is called holding companyand that other company is called subsidiary

company whose shares are purchased.


65/217

A Balance Sheet which is prepared bycombining holding companys balance sheetand subsidiary companys balance sheet iscalled consolidated balance sheet. By seeing the

consolidated balance sheet the share holders ofholding company can know the true value oftheir shares. Hence holding companies prepareconsolidated balance sheet also. In preparing

consolidated balance sheet, the assets andliabilities of both companies are added togetherbut some adjustments are made.


66/217

If the holding company has purchased sharesin subsidiary company at above par value orbelow par value and the balance sheet of thesubsidiary company has pre-acquisition profits

and reserves and all the shares in subsidiarycompany are held by the holding company, thecost of investment in shares will be adjusted toshare capital + pre-acquisition profits and

reserves Note- Here only Pre-acquisition profit

and reserves will be considered


67/217

. If the cost of investment is more, thedifference will be shown as goodwill on assetside in the balance sheet and if the cost of

investment is less the difference will be shownon the liability side of consolidated balancesheet


68/217

The profit before the acquisition of business.Suppose the accounting period is 1st January2010 to 31st December 2010.

The business acquired on 1st

may 2010. Here the pre-acquisition period is 1st January

2010 to 30th April 2010 and post acquisitionperiod is 1st May 2010 to 31st December 2010.


69/217

Suppose the total profit for the period isRs10,000. The pre-acquisition period is 3months and post-acquisition is 9 months. In

this case the Pre-acquisition profit is 10,000 x 3/12 =2,500

Post acquisition profit is 10,000 x 9/12= 7,500


70/217

On the liability side of consolidated balancesheet minority interest is shown as a separateitem. Minority interest includes nominal value

of share held by minority share holders andproportionate reserves and profits. In thereserves and profits of the holding company,only holding companys share in post

acquisition profits and reserves are added.


71/217

Step I: Share of holding company andminority interest

Step-II: Computation of goodwill or capital

reserve Step-III: Minority Interest

Step-IV: Consolidated General reserve

Step-V: Consolidated Profit & Loss Step-VI: Consolidated Balance Sheet


72/217

It is important fundamentals of accounting tomake proper distinction about capital and revenueas regard to expenditure, payments profits,receipts and losses. The failure of this will notpresent the accounting data accurate. This will

falsify the entire accounting data. For examplefurniture purchased may be included in thepurchases account, additions may be may be madeto premises but charged to repairs account,similarly some of the fixed assets might have been

sold and this might have been included in salesaccount. If this is the situation, then trading andprofit/ loss account and balance sheet will bemisleading and inaccurate


73/217

It is the amount spent to acquire the assets notfor resale them, it is for generating the incomeof the business unit. The benefit of this is not

for one year, it is for the longer period. Forexample purchase of land and building,purchase of plant, brokerage or commissionpaid for acquiring the long term loan etc. These

expenses are recorded in Balance Sheet.


74/217

Purchase of land, building, plant andmachinery, furniture, vehicle and any otherfixed asset.

Cost of replacing petrol driven engine to adiesel driven engine.

Expenditure incurred for increasing the sittingaccommodation in a auditorium or restaurant.

Amount spent for erecting of plant


75/217

Expenditure incurred for acquiring some rightto carry on business e.g copy right ,goodwill,trade mark, patent right etc

Expenditure incurred for reconditioning anold fixed assets.

Expenditure incurred on major repairs andreplacement of plant and machinery or anyother fixed assets which results in increasedefficiency.


76/217

It consists of expenditure incurred in one period ofaccount, the full benefit of which is derived in thatperiod only. It includes purchasing assets requiredfor resale at a profit or being made into saleable

goods, maintaining fixed assets in good workingconditions, meeting the day to day expenses ofcarrying business, cost of goods, raw materials andreplacements, renewals, repairs, depreciation offixed assets, rent rates, taxes, wages and salaries,

carriage, insurance etc. These all expenses aretaken into account in trading and profit lossaccount.


77/217

Repairs - They are usually are revenueexpenses, but if we purchase second handplant and pay for immediate repairs necessaryto make it efficient for our purpose ,then suchrepairs becomes capital expenditure.

Legal expenses They are revenue charges,but the legal expenses incurred in connection

with purchase of fixed asset must be treated asa part of the cost of the asset


78/217

Transport expenses They are usually arevenue charges but payment made fortransporting any plant and machinery isadded on as part of the cost of the plant andmachinery.

Wages They are the revenue items, but thewages paid to workman to erect and fit some

new machinery, the firm bought, must beconsidered an addition to machinery


79/217

Development expenditure - Some concernssuch as tea and rubber plantation, horticulture,collieries etc .require very long perioddevelopment before they can begin to earn any

income. All such expenditure incurred duringthe period of development is calleddevelopment expenditure and must be treatedas capital expenditure.

Interest on capital Such amount of interestwhich is paid during the construction of workor buildings or plant may be capitalized.


80/217

Interest on capital Such amount of interestwhich is paid during the construction of workor buildings or plant may be capitalized.

Carriage and freight Such expenses inconnection with acquisition of fixed assets arecapital assets


81/217

Raw material and stores They are usuallyrevenue charges but of consumed in making ofa fixed asset, must be treated as capitalexpenditure.

Advertising - The cost of special advertisingundertaken for the purpose of introducingnew line of goods may be treated as capital

expenditure as the benefit of such advertisingwill be available in future also


82/217

Preliminary expenses - All expenses incurredbefore incorporation of accompany are calledpreliminary or formation expenses .This mustbe treated as capital expenditure, as the benefitof this will be available in future also.


83/217

It is the expenditure which would be normallytreated as revenue expenditure but it notwritten off in one year as its benefit is notexhausted in one year but over a period ofyear. The nature of this is non-recurring andspecial nature. It may be spread over a numberof years, a proportionate amount is charged to

profit &loss account every year and the balanceamount is treated as an asset and shown on thebalance sheet asset side


84/217

Advertisement expenses amount of Rs1, 00,000spent and the benefit of this suppose over aperiod of 5 years. In this case, in current yearprofit loss account 20,000 will be charged andthe balance amount i.eRs80, 000 will be treatedas an asset and will be shown as asset .In thenext year again Rs 20,000 will be charged and

balance of Rs60, 000 will be shown in thebalance sheet so on, till the amount exhausted.


85/217

Revenue profit on the other hand, is profitmade by trading e.g profit on sale of goods,income from investments, discount received,commission earned ,interest received or rentreceived etc.will be taken into profits/lossaccount .


86/217

Capital Receipts in a business comprise capitalinvested in the business, loans and theproceeds of sale of assets etc. On the otherhand, revenue receipts in a business are cashfrom sales, discount received, commission,interest on investment, transfer fees receivedetc. Revenue receipts are recorded in profit

/loss account and capital receipt are recordedon the liability side of Balance sheet


87/217

Capital losses are those losses which occur onselling fixed assets or raising share capital. Forexample, if investments having original costRs30, 000, are being sold for Rs25, 000; therewill be loss of Rs5, 000.Similarly when sharesor debentures face value of Rs100 issued atdiscount of Rs10, there will be a capital loss


88/217

These capital losses should not be debited toprofit/loss account but may be shown on theasset side of Balance Sheet. As and when therewill be capital profit, this capital loss will be

adjusted. If however, the amount is large inthat case the amount can be spread over a fewyears, a proportionate amount being charged toprofit /loss account and balance being carried

forward as an asset to be written off in futureyears. But if the amount of such loss isnegligible they are debited to the profit andloss account of the year in which they occur.


89/217

Revenue losses are those losses which ariseduring the normal course of business, i.e, intrading operations of such as losses on the saleof goods. Such losses are debited to profit andloss account.


90/217

Provisions : A provision is a charge againstprofit for all anticipated losses. Therefore,provisions are the amounts set aside ,beforeascertaining the net profits, as reasonablynecessary for the purpose of providing for anyliability or loss, which is likely or certain to beincurred; but the amount or the date on which

they will arise may or may not be ascertainedwith reasonable accuracy .


91/217

Liabilities and charges (provision for taxationand provision for sales tax)

Valuation adjustment for fixed assets

(provision for depreciation) Current assets (provision for doubtful debts)


92/217

A reserve is an amount of money that is setaside until that is set aside until it is needed forsome purpose. Reserves are the items ofowners' equity which arise from retention of

profits (an appropriation of profits, sum ofmoney set aside from distributable profits),capital receipts( profit on sale of fixed assets orissue of shares at a premium) upward

revaluation of assets( bringing the assets tocurrent value from historical cost) .All reservesare credit balance and shown on the liabilityside of Balance Sheet.


93/217

Capital Reserve Revenue Reserve

(a) General Reserve

(b) Specific Reserve


94/217

These reserves are undisclosed understatementof financial position of a business unit resultingfrom the following:

Excessive writing down of assets Overstatement of provisions and liabilities

Writing off additions to fixed assets asexpenses


95/217

Funds are cash or its equivalent. Fund is usedto include securities which have a readymarket and can be quickly liquidated, that isconverted in to cash. Funds also refer to assetsfor specific purposes, which are not generallyavailable for normal operations. In fact ,fundsets aside cash or other assets to achieve

specific objectives


96/217

A sinking fund is a fund created by the regularinvestment of fixed amount to accumulate theamount of money required to pay off a debt orfor the replacement of an asset at a set date in

future. An amount equivalent to reservecreated as sinking fund is invested outside thebusiness in gilt-edged or other securities andare allowed to accumulate at compound rate of

interest so as to produce the required amountto repay the liability or replace the assets afterspecific period.


97/217

Particulars Amount Particulars AmountTo transfer toGeneral reserveDividend equalizationreserveCapital redemptionreserveDebenture redemptionfundTo dividendInterim divided

Final divided orproposed divided(On equity andpreference share)To bonus to shareholders

To balance C/d

By balance b/dBy net profit for thecurrent yearBy transfer from reservesBy adjustment of last yearmanagerial remunerationif any.


98/217

Dividend from profits only Setting off previous losses and provision for

depreciation is compulsory

Compulsory transfer to reserves Dividend to be paid cash only

Distribution of dividend out of reserves


99/217

If Articles of Association permit, the dividendcan be paid in the ratio of amount paid on eachshare (Sec.93).

Dividend will be paid in cash only but bonus

shares may be issued by capitalizing profits(Sec.205)

The cheques for dividend or dividend warrantmust be sent to the registered address of the

share holder.(Sec.206) After declaration of dividend, it must be paid

within 42 days of declaration (Sec.207)


100/217

No dividend will be paid on calls in advance. Dividend may be paid as per Articles of

Association on nominal value or called up

value or paid up values of shares. If there are no provisions in the Articles and

Table A of the Companies Act applies,dividend will be paid on paid up amount of

shares from the date of payment.


101/217

If there is no provision in articles and Table Ais applicable, the dividend will be paid on thenominal value of shares.

The articles of company may prohibit paymentof dividend on the shares on which call are inarrears.


102/217

If there is no restriction by articles of thecompany for doing so.

If profits have been actually realized either in

cash or in any other way. If capital profits remain after adjusting profit or

loss on revaluation of other assets andliabilities.

Note: Dividend cannot be paid out of securitiespremium, capital redemption reserve and profiton revaluation of assets


103/217

Out of the balance of profit and loss account. Out of general reserve or out of any other

reserve created out of profit i.e, dividend

equalization reserve or reserve fund. Out of debenture redemption fund after the

redemption of debentures (generally it istransferred to general reserve


104/217

Out of capital profits actually received ( e.gprofit prior to incorporation or profit on sale offixed assets)

Out of capital redemption reserve created onthe redemption of redeemable preferenceshares.

Out of security premium


105/217

According to these guidelines the issue ofbonus shares after the public/right issue ofshares will be made subject to the conditionthat the bonus issue will not reduce the value

of rights of the debenture holders (fully orpartly convertible debentures)

Bonus issue will be made out of reservescreated out of profits (free reserves).

The reserve created on the basis of revaluationof fixed assets will not be utilized for issue ofbonus shares.


106/217

The issue of bonus shares will not be made in placeof dividend.

If there are partly shares issued by the company,bonus shares will not be issued unless the partly

shares are made fully paid.

If the company has accepted fixed deposits fromthe public, the interest is regularly is paid by thecompany and the redemption is regularly made ondue dates. In the same way there is no mistakemade by the company in the payment ofdebentures interest and redemption of debentures.


107/217

After the declaration of bonus shares by thecompany on the recommendation of Board ofDirectors, it is necessary that the declaration isfulfilled within six months of its approval.

There must be provisions in the articles of thecompany about capitalization of reserves. If itis not so, a provision will be made in the

articles of the company by making necessarychange for the capitalization of reserves bypassing a resolution in the general meeting


108/217

As a result of bonus issue if the subscribed andpaid up capital exceeds its authorized capital,the company will pass a resolution in thegeneral meeting to increase the authorizedcapital


109/217

A Balance Sheet which is prepared bycombining holding companys balance sheetand subsidiary companys balance sheet iscalled consolidated balance sheet. In preparingconsolidated balance sheet, the assets andliabilities of both companies are added togetherbut some adjustments are made.


110/217

Step-I: Share of holding and subsidiarycompany

Step-II: Capital reserve or goodwill

Step-III: Minority Interest Step-IV: Consolidate profit

Step-V: Consolidated reserve

Step-VI: Consolidated Balance Sheet


111/217

The investment in shares of subsidiary isshown in the balance sheet of holding companyon the assets side and share capital ofsubsidiary company is shown in its balance

sheet on the liability side. If the holdingcompany has purchased the entire share capitalof the subsidiary company, the investmentappearing in the balance sheet of holding

company is adjusted with share capitalappearing in the balance sheet of subsidiarycompany.


112/217

If the holding company has purchased sharesin subsidiary company at above par value orbelow par value and the balance sheet of thesubsidiary company has pre-acquisition profitsand reserves and all the shares in subsidiarycompany are held by the holding company, thecost of investment in shares will be adjusted to

share capital + pre-acquisition profits andreserves..


113/217

If the cost of investment is more, the differencewill be shown as goodwill on asset side in thebalance sheet and if the cost of investment isless the difference will be shown on the liabilityside of consolidated balance sheet as capitalreserve.


114/217

Minority interest includes nominal value ofshare held by minority share holders andproportionate reserves and profits. In thereserves and profits of the holding company,only. On the liability side of consolidatedbalance sheet minority interest is shown as aseparate item.


115/217

Debtors and creditors Bills receivable and bills payable

Bills discounted with the bank

Mutual loans


116/217

Percentage profit on sales :- If percentage ofprofit on sales is known, the unrealized profitwill be

stock X % /100

For example, if stock of B Ltd. includes goodsworth Rs10,000 purchased from A Ltd. chargedprofit of 20% on sales. Then unrealized profit

will be 10,000 X20% = Rs2,000.


117/217

Percentage of profit on cost:- If profit chargedby vendor company is a certain percent on cost,then unrealized profit will be

Stock X %/ 100 +%

For example, stock of B Ltd includes goodsworth Rs8,000 purchased from A Ltd. on whichA Ltd earned a profit of 25% on cost. Thenunrealized

Profit will be 8,000 X25/125 = Rs1,600, asgoods cost Rs100 was sold at Rs125, thus profitof Rs25 on goods sold of Rs125


118/217

A management reporting system can bedefined as an organized method of providingeach manager with all the data and only thosedata which he needs for his decisions, when he

needs them and in a form which aids hisunderstanding and stimulates his action


119/217

Appraising the management with actualperformance

To enable the management to make scientificand sound decisions


120/217

Proper selection of financial and operating dataand other relevant facts and figures which areto be communicated.

Organization of data to put the information ina proper form that can be rapidly understoodand appreciated by the management and

Selecting the appropriate method of reporting


121/217

Evaluation of each managers area ofresponsibility

Proper flow of information

Proper form Proper time

Cost benefit analysis

Flexibility


122/217

The term Report, may be defined as a formalcommunication which moves upward. Itdiffers from the word communication. Thesuperior communicates the orders to the

subordinate. The subordinate communicatesthe results. The word Report is generally usedfor factual communication by a lower level to a

higher level of authority. Thus, orders arecommunicated, while results and reports arereported.


123/217

Written Report Graphic Reports

Oral Reports


124/217

The draft of the report should be simple. The report should be prcised, specific and

accurate.

It should bear a suitable title. It must follow the organizational lines.

Reports must contain up-to-date information.

Reports should be presented in time.

They should be specific and definite.

They should be economical


125/217

It must suit to the end-users requirements. They must comparable

They must be consistent and correct as to

information. It must be attractable.

It must distinguish between controllable anduncontrollable cost.

The report should highlight the trouble spot.

It must provide for exceptional circumstances


126/217

Good form and content Promptness

Comparability

Consistency Simplicity

Appropriateness Controllability

Accuracy Consideration of cost

Effective communication


127/217

FORM WISE PURPOSE WISE

Descriptive

Tabular

Graphical

Internal report

External report


128/217

CONTENT WISE FREQUENCY WISE

Production report

Sales report

Cost report Financial report

Operating report

Routine report

Special report


129/217

OPERATING REPORT FINANCIAL REPORT

Information report

Control report

Static report

Dynamic report


130/217

Production report. Sales report

Production cost report

Operating report Schedule of debtors

Research and development report

Different short-term budgets as cash budget etc


131/217

Effect of idle capacity on cost of production ofdifferent products.

Make or buy decisions.

Exploring new market

Cost reduction schemes

Whether to purchase or hire a fixed cost

Research and development expenditure

problems The effect of labour disputes on production

and cost of production and so on.


132/217

Formulating the basic goal of enterprise. Evolving proper plans keeping the basic

objective in view.

Proper delegation of responsibility tosubordinate executives with the objectives ofgetting efficient and effective utilization of theresources.

Promoting appropriate development schemes.


133/217

Quarterly balance sheet and profit and lossaccount.

Quarterly funds flow statement

Quarterly production cost statement. Quarterly machine and labour utilization

statement


134/217

Monthly production cost statement. Monthly machine utilization statement-

department-wise.

Monthly labour utilization statement-

department wise. Material scrap statement- department wise.

Overhead cost statement- department wise

Monthly production statement showingquantity budgeted, quantity produced andorders outstanding.


135/217

SALES DIRECTOR FINANCE DIRECTOR

Monthly report of ordersreceived, orders executed,orders kept pending-

division wise. Monthly report of finished

goods stock position. Monthly report of selling

and distribution cost-division wise.

Monthly report of creditcollection, arrears and baddebts-division-wise

Monthly Funds FlowStatement

Monthly abstract ofreceipts and payments


136/217

WORKS MANAGER SALES DIVISIONMANAGER

Weekly report of the idletime and idle capacity-department wise.

Weekly report of scrap department wise.

Weekly report ofproduction statementshowing quantity

budgeted, quantityproduced, ordersoutstanding

Fortnightly report ofbudgeted and actual sales-area wise and product wise.

Fortnightly report of creditcollections, outstanding andbad debts.

Fortnightly report of ordersbooked, orders executed andorders outstanding.

Fortnightly report of stockposition


137/217

Daily report of idle time and machine utilization. Daily scrap report

Daily report of production- budgeted and actual

Sales area supervisors

Weekly report of sales- salesman-wise

Weekly report of orders booked, executed andoutstanding.

Weekly report of credit collections, outstandingand bad debts.


138/217

Sales force progress of work Sales promotion work

Exports

Publicity and advertisement. Cost of sales

Efforts to be made to cover lower actual


139/217

PRODUCTION PERSONAL

Inventory

Work-in-progress

Capital expenditure Progress of capital

works

Direct workersemployment estimates-approved and

proposed. Other workers

employment- approvedand proposed

Approximate cost ofpresent and proposedstaff


140/217

OVERHEAD FINANCE

Estimates based on pasttrends.

New items

Accounts receivableposition and estimates.

Accounts payableposition and estimates


141/217

Fixed assets are used by a business firm for thepurpose of producing or providing goods orservices. The expense which results from theuse of fixed assets is called depreciation. In

other words it is gradual deterioration in thevalue of assets due to wear and tear passing oftime and new developments in technology. It issystematic and rational method of allocatingcosts to the period in which benefits arederived.


142/217

Depreciation is gradual diminution in the valueof assets

It decreases the book value of an asset.

Depreciation is a continuous process ofdiminution in value of fixed asset due to its useor lapse of time.


143/217

Depreciation is not a method of valuation ofassets but it is a process of spread over of costof assets over its useful life.

Change in market value of an asset is nottermed as depreciation.

The term depreciation is used only fordiminution in value of tangible fixed assets due

to its use.


144/217

Wear and tear due to constant use Lapse of time

Depletion

Obsolescence Accident

Exhaustion of assets


145/217

Depreciation Depletion

Amortization

Obsolescence


146/217

To ascertain the profit or loss properly To show a true and fair view of the financial

position

To find out correct cost of production To comply with legal requirements


147/217

To accumulate funds for replacement of assets To avoid payment of dividend from capital

To get deduction from Income Tax

Other miscellaneous reasons


148/217

Total cost of the asset Estimated useful life of the asset

Estimated residual value of the asset

Provisions for repairs and renewals Possibility of new inventions

Expansion of assets

Legal laws Interest on capital invested

Working conditions


149/217

Straight line or original or fixed cost method. Diminishing balance method or reducing

instalment method.

Depreciation fund method. Insurance policy method

Annuity method


150/217

Machine hour method Depletion method

Revaluation method

Sum of years method


151/217

Cost estimated scrap value / estimated life inyears.

Suitability: This method is suitable for thoseassets that do not require large investment andthe amount of repairs and renewals required isalso not large such assets have comparativelyshorter life, such as Furniture, Patent; Copy

right, Trade mark and Leaseholds etc.


152/217

Suitability: This method is suitable for thoseassets in relation to which the amount ofrepairs and renewals goes on increasing as theasset grows older and the possibilities of

obsolescence are more. This method is suitableforPlant & Machinery and Building.


153/217

To replace a wasting asset, for example: A mineor an oil well.

To replace a depreciable asset

To renew a Lease


154/217

Date Particulars Dr Cr1st Year atthebeginning

At the endof the 1styear

When assets purchasedAsset A/c DrTo Bank A/c

__________________________________For setting aside the amount of

depreciation:Profit & Loss a/c DrTo Depreciation Fund a/c

For investing amount outside thebusinessDepreciation Fund Investment A/c Dr

To Bank a/c


155/217

Date Particulars Dr Cr2nd andsubsequent year

For interest received:Bank A/c Dr

To Depreciation Fund a/cFor appropriation of profitProfit & Loss a/c Dr

To Depreciation Fund a/cWhen amount invested:Depreciation Fund Investment a/c Dr

To Bank a/c


156/217

Date Particulars Dr CrAt theend oflast year

For interest received:Bank A/c DrTo Depreciation Fund a/c

For appropriation of profitProfit & Loss a/c Dr

To Depreciation Fund a/cFor sale of investment:Bank a/c DrDepreciation Fund a/c Dr ( if loss)To Depreciation Fund Investment a/cTo Depreciation Fund a/c ( if profit)

For transfer of balance of depreciation fundto asset:Depreciation fund a/c DrTo Asset a/c

For purchase of new asset if anyNew asset a/c Dr


157/217

Date Particulars Dr CrFirst andsubsequent year

In the beginning when asset purchased:Asset A/c DrTo bank A/c

When the insurance premium paid:Depreciation Insurance Policy A/c Dr

To bank a/cAt the end of the year for providingdepreciation to the extent of premium.Profit & Loss A/c DrTo Provision for depreciation A/c


158/217

Date Particulars Dr Cr

At the endof the lastyear

In addition to above two entries:On realization of money from theinsurance company:Bank A/c Dr

To Depreciation Insurance Policy A/c

For transferring the profit on insurancepolicy:Depreciation Insurance Policy A/c Dr

To Provision for depreciation a/cFor transfer of accumulated depreciationto the asset:

Provision for depreciation A/c DrTo Asset A/c

On purchase of new asset:New Asset A/c Dr

To Bank A/c


159/217


160/217

Depreciation per MH= Cost of Machine ScrapValue / Life of machine (in hours)

Annual depreciation = Actual working hoursduring the year X MHR

Suitability:

Machine hour rate method is an ideal methodfor calculating depreciation where costly and

different machines are use in production.


161/217

This method is suitable for wasting assets likemines, quarries etc. from which certainquantity of output is expected to be executed.The value of mine depends upon the quantity

of minerals that can be extracted. When thewhole quantity is extracted the mine losses itvalue. Hence the mine depreciates according toquantity mined. The rate of depreciation iscalculated by simply dividing the cost of mineby the total quantity of minerals expected to beavailable.


162/217

When assets represented by large number ofsmall and diverse items having small unit cost,it is not possible to depreciate each item. Forexample, Loose Tools.

Suitability:

This method is suitable for chargingdepreciation on loose tools, live stock, trade

mark,patents etc. This method is also referredto as the appraisal system or inventory system.


163/217

Step- I At the end of each accounting period, all items

of good condition are valued at cost.

Step- II

The cost, calculated above is compared withthe opening balance and purchase /productionmade during the year. The difference is

charged as depreciation


164/217

This is the method of calculating depreciationunder which the rate of depreciation isdetermined by the fraction where thedenominator is the sum of the digits

representing the useful life of the asset and thenumerators are individual digits used in thelife of the asset taken in reverse order. Thenumerator does not change but thedenominator changes every year. The amountof depreciation goes on decreasing in thecoming years.


165/217

Meaning: - In general words, a ratio is anexpression of relationship of one figure withanother. It may be defined as the relationship,or proportion that one amount bears to

another. It is found by dividing a figure withanother. A ratio may be expressed inpercentage in which the base, is taken as equalto 100 and the quotient is expressed as perhundred of the base


166/217

Balance sheet ratios: Current ratio

Liquidity ratio

Proprietary ratio Fixed assets ratio

Capital gearing ratio

Book value per share


167/217

Operating ratio Expenses ratio

Net profit ratio

Gross profit ratio Stock turnover ratio


168/217

Return on capital employed Return on share holders fund

Current asset turnover ratio

Ratio of net sales to fixed assets


169/217

Operating ratio Return on capital employed

Stock turnover ratio

Debtors turnover ratio Solvency ratio


170/217


171/217

Return on share holders fund Capital gearing ratio

Dividend cover ratio

Yield rate Proprietary ratio

Dividend rate

Assets cover on shares


172/217

Current ratio Liquidity ratio

Absolute liquid ratio

Cash ratio


173/217

Debt equity ratio Proprietary ratio

Solvency ratio or debt to total assets ratio

Fixed assets ratio Capital gearing ratio

Debt-service ratio or interest coverage ratio


174/217

Gross profit ratio Operating ratio

Expenses ratio

Operating profit ratio Net profit ratio


175/217

Return on share holders fund Return on capital employed

Return on equity


176/217

Total assets turnover ratio Fixed assets turnover ratio

Working capital turnover ratio

Inventory turnover ratio Debtors turnover ratio

Creditors turnover ratio


177/217

Current ratio Quick or acid test ratio or liquidity ratio

Cash position ratio or absolute liquid ratio

Basic Defensive Interval Cash ratio


178/217


179/217

CURRENT ASSETS CURRENT LIABILITIES

Cash in hand, cash atbank, debtors, prepaidexpenses, short termdeposits, billsreceivable, money atcall and short notice,stock ,finished goods,

work in progress stockof raw materials andsundry supplies

Bills payable, incometax payable, creditors.Outstanding expenses,bank overdraft,provision for taxation,interest due on fixedliabilities, reserve for

unbilled expenses,installment payable onlong-term loans.


180/217

Liquid ratio = Liquid assets / Current liabilities Or

Liquid ratio = Liquid assets / Liquid liability

Liquid assets = Current assets Stock prepaidexpenses

Liquid liability = Current liability Bank overdraft

Standard norm: 1 : 1


181/217

Absolute liquid ratio = Absolute liquid assets /liquid liabilities

Absolute liquid assets = Cash in hand, cash atbank and short term marketable securities.

Standard norm: .5 :1


182/217

Cost of goods sold/ average inventory

Stock velocity ( in months)= Average stock/cost of goods sold X12


183/217

DTR= Net credit sales/ average tradereceivables

Or

net credit sales/ total trade receivables


184/217

Average collection period or average age ofreceivables=

Trade receivables/ sales per day

Or

Trade receivables / net credit sales X 365 days

Or

365/ DTR


185/217

CTR = Net credit purchases / Averagepayables (creditor +BP)

Net credit purchase = Total purchase cashpurchase purchase return

Average payable = opening payable + closingpayable / 2


186/217

Debt equity ratio = outsiders fund / share holdersfund

Outsiders fund Debt, long-term or short term, whether in the form of

mortgage, bills or debentures

Shareholders fund Preference share capital, equity share capital, capital

reserves, retained earnings and any other reservesrepresenting the accumulated profit.

Standard norm: 2 : 1, however lending institutions

prefer 1:1 A low ratio signifies a smaller claim of creditors. More

precisely, the greater the debt-equity ratio, greater therisk to the creditor


187/217

= Share holders fund / Total assets or Totalequities

Standard norm: 2 : 1, however lendinginstitutions prefer 1:1

Higher the ratio lesser the dependence forworking capital on outside sources, better thelong-term solvency and stability and greater

the protection to the creditorsof the firm


188/217

Solvency Ratio = Total Liabilities / TotalAssets

The higher this ratio, the greater is thedependence of the firm on outsiders for its

financing.


189/217

Fixed asset to net worth ratio = Fixed assets (after depreciation) /Total long

term funds

This ratio should not exceed 1:1. On thecontrary, lesser the ratio, better the positionbecause in such a case proprietors funds willbe available for working capital needs also.

Usually, a ratio of 0.67:1 ( i.e fixed assets areabout two-third of the proprietors funds) isconsidered satisfactory.


190/217

Fixed assets ratio= Fixed assets (afterdepreciation) / Total long-term funds

This ratio should not exceed 1:1. If it exceeds1:1. It implies that short-term funds of the firm

have also been applied for acquiring fixedassets which in no way be consideredappropriate. The general rule is that fixedassets should not exceed 2/3rd of total long-term funds so that rest of the long-term fundscould be utilized for meeting working capitalrequirement.


191/217

Current assets/Proprietors funds This ratio indicates the extents to which

proprietors fund are invested in current assets.This ratio indicates financial capability of the

firm. There is no rule of thumb for this ratio.


192/217

Current assets / Total liabilities This ratio is a measure of financial stability of

the firm.


193/217

This ratio indicates the relationship betweentwo main sources of financing proprietorsfund and outsides loans ( or liabilities). It iscalculated as follows:

Proprietors funds / Total liabilities Higher the ratio better is the security of

creditors.


194/217

This ratio indicates the relationship of tangibleassets to total debts.

Tangible assets / Total debt

This ratio measures the ability of the firm topay its debts, as it shows the extent to whichtotal liabilities of the firm can be repaid by itstangible assets. Higher the ratio, greater is the

security of the creditors


195/217

This ratio is calculated to evaluate the debt-servicing capacity of the firm. It is calculated bydividing the net profit before interest and taxesby fixed interest charges.

DSR = Net income (before charging interestand income tax) / Fixed charges


196/217

Preference Dividend Coverage Ratio (or No. oftimes Preference dividend earned)=

Net income after interest and tax/ PreferenceDividend

This ratio is an index of the risk accruing to thepreference share holders. Coverage of at least 2is considered standard


197/217

Gross profit / Net sales X100This ratio establishes relationship between gross profit

and net sales. This indicates gross profit marginto net sales and usually expressed in

percentage


198/217

This ratio is calculated by dividing theoperating cost ( i.e cost of goods sold plus alloperating expenses) by net sales.

Cost of goods sold + operating expenses/ Net

sales X100 Operating expenses means the sum of

administrative, selling and distribution

expenses. 100 minus operating ratio isoperating profit ratio


199/217

It is calculated to show the relationship of eachitem of manufacturing cost and operatingexpenses to net sales. These ratios help inanalyzing the causes of variation of operating

ratio. The following formula is used Particular expenses / Net sales X100


200/217

This ratio measures the rate of net profit onsales. This is calculated as follows:

Net profit after tax / Net sales X100


201/217

This ratio is calculated by dividing the netprofits available to equity share holders ( i.e netprofit after tax and preference dividend) bycapital invested by these shareholders. It is

usually expressed in percentage as below: Return on equity capital =

Net profit (after tax and preference dividend)/

equity capital X100


202/217

: It is small variation of return on equity capital.Here, earnings are expressed per share insteadof in percentage. Earnings per share arecalculated by dividing net profits after tax and

preference dividend by the total number ofequity shares.

EPS = Net profit after tax and preferencedividend / Number of equity shares


203/217

This ratio measures the profitability of theconcern in relation to total investments madeby the share holders (or proprietors) in thebusiness. It is calculated by dividing net profit

after interest and taxes by share holders fund. Return on Investments (ROI)=

Net profit (after interest and tax) / Share

holders fund X100


204/217


205/217

Gross capital employed = Equity share capital+ preference share capital +reserve and surplus+ all long and short term external loans

Or

All net fixed assets + current assets + includinggoodwill of the firm but fictitious assets arenot included


206/217

Net capital employed = Equity share capital +preference share capital + reserve and surplus +long term loans


207/217

Proprietors net capital = Equity share capital+ preference share capital + reserves andsurplus accumulated losses, if any


208/217

Net sales ( or cost of sales)/ working capital A high working capital turnover ratio shows

the efficient utilization of working capital


209/217


210/217


211/217

It expresses relationship of total long-termfunds to long-term liabilities.

Long term fund (share holders fund + Long-term liabilities)/ Long-term liabilities.

As a general rule the proportion of long-termliabilities should be very high.


212/217

This ratio determines the margin of safety ofunded debt, such as debentures. Thedebentures of a company are usually issued bymortgaging the fixed assets. Hence, higher the

ratio of fixed assets to debentures, the greaterwill be the security of debenture holders. Thisratio is calculated as follows:

Fixed assets / Funded debt


213/217

It implies the amount payable per share onliquidation of the company.

Share holders fund / Number of shares

Investors compare this value of the share with

market price. Now this ratio has lostimportance because assets shown in thebalance sheet are usually different from theircurrent values.


214/217

This ratio expresses the relationship of marketprice of the share with its rate of earnings.

Market price per share / earnings per Share

Market price per share = PE Ratio X EPS


215/217

This ratio compares the rate of dividend withthe market price of the share. This ratio iscalculated to know the effective return of theowners. This is calculates as follows:

DYR = Dividend per share / Market price pershare


216/217

This is a ratio of dividend per share to earningsper share. It indicates the extent to whichearnings per share have been used for payingdividend and what portion of earnings has

been retained in the business for growth andfuture uncertainties.

DPR = Dividend per share / Earnings per shareX100


217/217

This may be calculates as follows Cover for preference Dividend =Earnings after

tax / Preference dividend

Cover for equity Dividend = Earnings after

preference dividend / Equity dividend

Higher the cover better it is.

financial analysis for managers class presentation

Documents