FINANCIAL STATEMENTS

The financial statements are the end products of the accounting process which summaries the financial position and performance of a business concern in an organized manner. Financial Statements provide a summarized view of the operations of the business. They serve as an important medium in communicating accounting information to various users of accounts.

If you can read a cricket scoreboard, you can learn to read basic financial statements. Let s begin by looking at what financial statements do.

1.1 Financial Statements of a company Financial Statements show you where a company s money came from, where it went, and where it is now. Financial statements are the basic and formal annual reports through which the corporate management communicates financial information to its owners and various other e!ternal parties which include"investors, ta! authorities, government, employees, etc. There are two main financial statements. They are# $%& balance sheets' $(& income statements. )alance sheets show what a company owns and what it owes at a fi!ed point in time. Income statements show how much money a company made and spent over a period of time. Let s look at the )alance Sheet in more detail.

USERS OF FINANCIAL STATEMENTS

1.2 Investo s an! potential investo s

The present investors want to decide whether they should hold the securities of the company or sell them. *otential investors, on the other hand, want to know whether they should invest in the shares of the company or not.

Investors $Shareholders or owners& and potential investors, thus, make use of the financial statements to +udge the present and future earning capacity of the business, to +udge the operational efficiency of the business and to know the safety of investment and growth prospects.

Len!e s"lon# te m c e!ito s Financial statement helps lenders such as debenture holders, suppliers of loans and leases in ascertaining the long term and short term solvency of the business. They like to know the financial soundness of the business i.e. the ability of the business to repay debt on maturity and whether the enterprise earns sufficient profits so as to pay interest regularly.

Mana#ement

,nalyses of financial statements enable the management to evaluate the overall efficiency of the firm. It helps to ascertain the solvency of the enterprise' to know about its viability as a going concern and to provide ade-uate information for planning and controlling the affairs of the business. Future forecasts can easily be made by analyzing the past date.

S$pplie s"s%o t te m c e!ito s .reditors/suppliers supplying goods to a business are interested to know as to whether the business would be in a position to pay the amounts on time. They are interested in short"term solvency i.e. the li-uidity of the business.

They are more interested in current assets and current liabilities of the business. If current assets are sufficient, say, twice the current liabilities, they are satisfied that the business would be able to discharge the short"term debts on time.

Employees an! T a!e Unions 0mployees are interested in better emoluments, bonus and continuance of business and whether the dues like provident fund, 0SI et., have been deposited with the authorities.

They would therefore, like to know its financial performance and profitability and operating sustainability.

&ove nment an! its a#encies Financial statements are used by government and its agencies to formulate policies to regulate the activities of business, to formulate ta!ation policies, to compile national income accounts.

Ta!ation authorities such as income ta! department use the financial statements for determination of income ta!' sales ta! department is interested in sales while the e!cise department is interested in production.

Stoc' e(c%an#e Stock e!change uses the financial statements to analyze and thereafter, inform its members about the performance, financial health, etc. of the company, to see whether financial statements prepared are in conformity with the specified laws and rules and to see whether they safeguard the interest of various concerned agencies.

1ther 2egulatory authorities $such as, .ompany Law )oard, S0)I, Stock 0!changes, Ta! ,uthorities etc.& would like that the financial statements prepared are in conformity with the specified laws and rules, and are to safeguard the interest of various concerned agencies. For e!ample, ta!ation authorities would be interested in ensuring proper assessment of ta! liability of the enterprise as per the laws in force from time to time. C$stome s .ustomers are interested to ascertain continuance of an enterprise. For e!ample, an enterprise may be supplier of a particular type of consumer goods and in case it appears that the enterprise may not continue for a long time, the customer has to find an alternate source.

)ALANCE S*EET+ MEANIN& AN, -UR-OSE

)alance Sheet is a financial statement that summarizes a company s assets, liabilities and shareholders e-uity at a specific point in time. These three balance sheet segments give investors

an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet show# ,ssets 4 Liabilities 5 Shareholders 0-uity , balance sheet thus, provides detailed information about a company s assets, liabilities and shareholders e-uity. ,ssets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. ,ssets include physical property, such as plants, trucks, e-uipment and inventory. It also includes things that can t be touched but nevertheless e!ist and have value, such as trademarks and patents. ,nd cash itself is an asset. So are investments a company makes.

Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, money owed to suppliers for materials, payroll a company owes to its employees, ta!es owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.

Shareholders e-uity is sometimes called capital or net worth. It s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.

, company has to pay for all the things it has $assets& by either borrowing money $liabilities& or getting it from shareholders $shareholders e-uity&.

The purpose of a )alance Sheet is to report the financial position of a company at a certain point in time. It is divided into two columns. The first column shows what the company owes $liabilities and net worth&. The second shows what the company owns $assets& on the right. ,t the bottom of each list is the total of that column. ,s the name implies, the bottom line of the balance sheet must always 6balance.7 In other words, the total assets are e-ual to the total liabilities plus the net worth.

The balance sheet is one of the most important pieces of financial information issued by a company. It is a snapshot of what a company owns and owes at the point in time. The income statement, on the other hand, shows how much revenue and profit a company has generated over a certain period.

9either statement is better than the other"rather, the financial statements are built to be used together to present a complete picture of a company s finances.

CONTENTS OF )ALANCE S*EET

The prescribed form of the )alance Sheet is given in *art I of Schedule :I of the .ompanies ,ct, %;<=. The .ompanies ,ct has laid down two forms of the )alance Sheet known as # $i& >orizontal form $ii& :etical form

F12?,T 1F S@??,2IS0A ),L,9.0 S>00T$>12IB19T,L F12?& S.>0A@L0 :I *,2T I )alance Sheet of C. .1.LTA. ,s at C

Figures for year 2s. the previous

Liabilities

Figures for year 2s. current

Figures the previous year 2s.

,ssets

Figures for year 2s. the current

the for

%. Share .apital (. 2eserves and surplus 3. Secured Loans 8. @nsecured Loans

%. Fi!ed ,ssets (. Investments 3. .urrent ,ssets, Loans and

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<. .urrent Liabilities and *rovisions $a& .urrent Liabilities $b& *rovisions 8.

,dvances $a& .urrent ,ssets $b& Loans and ,dvances ?iscellaneous 0!penditure <. *rofit and Loss ,/c

9ote# , footnote to the )alance Sheet may be added to show the contingent liabilities.

The format of the detailed )alance Sheet of a company in a horizontal form is given below#

FORMAT OF T*E ,ETAILE, )LANCE S*EET IN A *ORI.ONTAL FORM *o i/ontal Fo m of )alance S%eet )alance S%eet of 0.1Name of t%e Company2 as on 0.. Figures for year 2s. S%a e Capital ,uthorised Cshares of 2sC. 0ach *reference 0-uity Issued# *reference 0-uity Less# .alls @npaid# ,dd# Forfeited Shares the previous Liabilities Figures for year 2s. current Figures the previous year 2s. Fi(e! Assets3 Doodwill Land )uilding Leasehold *remises 2ailway Sidings *lant and ?achinery Furniture *atents and Trademarks Live Stock :ehicles ,ssets Figures for year 2s. the current

the for

Rese ves an! S$ pl$s3 .apital 2eserve .apital 2edemption 2eserve Securities *remium 1ther 2eserves *rofit and Loss ,ccount Sec$ e! Loans3 Aebentures Loans and ,dvance from )anks Loans and ,dvance from Subsidiary .ompanies 1ther Loans and ,dvances Unsec$ e! Loans3 Fi!ed Aeposits Loans and ,dvances from Subsidiaries .ompanies Short Term Loans and ,dvances 1ther Loans and ,dvances C$ ent Lia4ilities an! - ovisions3 A. C$ ent Lia4ilities ,cceptances Aebentures Sundry .reditors 1utstanding 0!penses ). - ovisions3

Investments3 Dovernment )onds C$ ent Assets5 Loans an! A!vances3 1A2 C$ ent Assets3 Interest ,ccrued Stores and Spare parts Loose Tools Stock in Trade Eork in *rogress Sundry Aebtors .ash and )ank balances 1)2 Loans an! A!vances3 ,dvances Subsidiary )ills 2eceivable ,dvance *ayments Miscellaneo$s+E(pen!it$ e3 *reliminary 0!penses Aiscount on Issue of Shares and other Aeferred 0!penses - ofit an! Loss Acco$nt 1!e4it )alance3 if any2 and Loans to or Trust

Securities, Shares, Aebentures,

For Ta!ation For Aividends For .ontingencies For *rovident Fund Schemes For Insurance, *ension and 1ther similar benefits Fo mat of t%e )alance S%eet in ve tical fo m

)alance S%eet of 0. As on 00

*articulars

Schedule 9umber

Figures as at Figures as at the end of the current financial year end of previous financial year

I. So$ ce of F$n!s3 1. S%a e%ol!e 6s F$n!s3 $a& Share .apital $b& 2eserves and Surplus 2. Loan F$n!s3 $a& Secured loans $b& @nsecured loans Total1Capital Employe!2 II. Application of F$n!s 1. Fi(e! Assets3 $a& Dross block $b& Less # depreciation $c& 9et block $d& .apital work"in"progress 2. Investments3

7. C$ ent Assets5 Loans an! A!vances3 $a& Inventories $b& Sundry Aebtors $c& .ash and )ank )alances $d& 1ther .urrent ,ssets $e& Loans and ,dvances Less3 C$ ent Lia4ilities an! - ovisions3 $a& .urrent liabilities $b& *rovisions Net C$ ent Assets 8. $a& ?iscellaneous e!penditure to the e!tent not written"off or ad+usted. $b& *rofit and Loss account $debit balance, if any& TOTAL

9ote# , footnote to the )alance Sheet may be added to show the contingent liabilities.

*O9 TO REA, A COM-AN:6S )ALANCE S*EET

1i2 LIA)ILITIES SI,E 1. S%a e Capital3 @nlike the non corporate entities were the entire capital is brought in by the proprietors or the partners, in the case of a company, it is brought in by the promoters, their friends, relatives as well as the general public in case of listed companies. The capital is known ;

share capital and shareholders get dividend out of the profits of the company as return on their investment. Share .apital is broadly divided into# ,uthorised .apital, Issued .apital, Subscribed .apital, .alled up and *aid up capital.

,uthorised .apital is the ma!imum share capital that a company is allowed to issue during its lifetime. It is stated in the ?emorandum of ,ssociation.

Issued .apital is that part of authorized capital, which is offered to the public for subscription, including shares offered to the vendors for subscription other than cash $i.e. issue of shares in consideration for some other asset purchased&.

.alled"up capital means that part of subscribed capital which is called"up by the company for payment by the subscribers to the shares.

*aid up capital The amount that the shareholders have actually paid to the company is called as paid up capital of the company.

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

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

(. Rese ves an! S$ pl$s3 2eserves represent that portion of earnings and receipts of a company which are set apart by the management for a general or a specific purpose. This item includes accumulated profits, reserves and funds" such as capital reserves, capital redemption reserve, balance of securities premium account, general reserve, credit balance of profit and loss account, and other reserves specifying the nature of each reserve and the amount in respect thereof including the additions during the current year.

3. Sec$ e! Loans3 Long"term loans, which are taken against security of one or more assets of the company, are included under this head. Aebentures and secured loans and advances from

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banks, subsidiary companies, etc., fall under this category. Likewise interest accrued and due on secured loans is also recorded under the same head.

8. Unsec$ e! Loans3 Loans and advances which are not backed by any security in the form of assets of the company are shown under this heading. This item includes fi!ed deposits, unsecured loans and advances from subsidiary companies, short"term loans and advances from banks and other sources.

<.C$ ent Lia4ilities an! - ovisions # .urrent liabilities refer to such liabilities, which mature within a period of one year. They include bills payable, sundry creditors, advance payments and une!pired discounts, unclaimed dividends, Interest accrued but not paid, and other liabilities. *rovisions refer to the amounts set aside out of revenue profits for some specific liabilities payable within a period of one year. Those include provision for ta!ation, proposed dividends, provision for contingencies, provision for provident fund, provision for insurance' pension and similar staff benefit schemes, etc. )oth the sub headings current liabilities as well as provisions must be shown separately under two sub"heads" $a& .urrent liabilities $b& *rovisions.

Contin#ent lia4ilities These are the liabilities which may arise in future on the happening of some event. .ontingent liabilities are not included in the total of the liability side. These are shown as a footnote to the )alance Sheet.

Following are the usual types of contingent liabilities#

$i& .laims against the company not acknowledged as debt. $ii& @ncalled liability on shares partly paid. $iii& ,rrears of fi!ed cumulative dividend.

$iv& 0stimated amount of contracts remaining to be e!ecuted on capital account and not provided for. $v& )ills discounted not yet matured.

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ASSETS SI,E %. Fi(e! Assets # These are assets which are meant for use in business and not for sale. sidings,

These assets provide a long term economic benefit, usually for more than one year to the firm. These include goodwill, land, buildings, leaseholds, plant and machinery, railway depreciation till the date. (. Investments3 )usiness is supposed to great profit. Ehen generated, this profit in e!cess furniture and fittings, patents, livestock, vehicles, etc. These assets are shown at cost less

of what is re-uired for the business can be invested into say, shares or debentures of various companies. Investments thus represent assets held by an enterprise for earning income. @nder this head, various investments made such as investment in government securities or trust securities' investment in shares, debentures, and bonds of other companies, immovable properties, etc., are shown. 3. C$ ent Assets5 Loans an! A!vances # 1ne the fi!ed assets are in a state of readiness to

produce or provide goods and services, the company needs current assets to carry out business operations. These assets are held for consumption of for sale and are e!pected to be realized in cash during the normal operating cycle. .urrent assets include inventories, debtors, cash etc. Loans and advances refer to those assets which are held for a short term and are e!pected to be realized within one year. These include advance payments, loans to subsidiary companies etc. )oth the sub headings" current assets as well as loans and advances must be shown separately under two sub"heads" $a& .urrent ,ssets $b& Loans and ,dvances. It includes interest accrued on investment, inventories, sundry debtors, bills receivable, cash and bank balances while loans and advances and other advances like prepaid e!penses, etc.

8.

?iscellaneous 0!penditure# The e!penditure which has not been fully written off shown

under this heading. It includes preliminary e!penses, advertisement e!penditure, discount on issue of shares and debentures, share issue e!penses, etc.

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*rofit and Loss ,ccount# Ehen the *rofit and Loss account shows a debit balance, i.e.,

loss which could not be ad+usted against general reserves, is shown on the asset side of the )alance Sheet.

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Ill$st ation 1. Dive three e!amples of each of the following $%& current liabilities' $(& contingent liabilities' $3& current assets' $8& miscellaneous e!penditure' $<& provisions. Solution # >eadings %. .urrent liabilities 0!amples %. Sundry creditors (. )ill payable 3. @nclaimed dividend (. .ontingent liabilities %. .laims against company not acknowledge as debt (. @ncalled liability on partly paid shares 3. 0stimated amount of contract remaining to be e!ecuted. 3. .urrent assets %. Stock in trade. (. .ash at bank 3. Stores and spare parts 8. ?iscellaneous 0!penditure %. *reliminary e!penses (. Aiscount allowed on issue of shares and debentures 3. @nderwriting commission <. *rovisions %. *rovision for ta!ation (. *roposed dividend 3. *rovident fund.

Ill$st ation 2. @nder which heading and sub"heading will you show the following items# $%& Share forfeited account' $(& Securities premium account' $3& @nclaimed dividend $8& *roposed dividend $<& ,rrears of fi!ed cumulative dividend on preference shares. Solution # S.9o. %. (. 3. 8. < Items Share forfeited account Securities premium account @nclaimed dividend *roposed dividend ,rrears of fi!ed cumulative Aividend on preference >eading Share .apital 2eserves and surplus .urrent Liabilities and provisions .urrent Liabilities and *rovisions .ontingent liability Sub"heading "" "" .urrent liability *rovisions ""

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shares

Ill$st ation 7. Dive the headings and sub"headings under which the following will be shown in a company s balance sheet as per Schedule :I *art I of the .ompany s ,ct %;<=. $i& %HI debentures $ii& preliminary e!penses $iii& *lant and ?achinery $iv& .apital reserve $v& bills payable $vi& general reserve $vii& interest paid out of capital during construction $viii& railway sidings $i!& stores J spare part $!& fi!ed deposits.

Sol$tion3 S.9o. $i& $ii& $iii& $iv& $v& $vi& $vii& $viii& $i!& $!& Items %H I Aebentures *reliminary e!penses *lant J ?achinery .apital 2eserve )ills *ayable Deneral reserve Interest paid out of capital during construction 2ailway sidings Store and spare parts Fi!ed deposits >eadings Secured Loans ?iscellaneous 0!penditure Fi!ed assets 2eserves and Surplus .urrent liabilities and provisions 2eserves J surplus ?iscellaneous e!penditure Fi!ed assets .urrent assets, loans J advances @nsecured loans Sub">eadings "" "" "" "" .urrent liabilities "" "" "" .urrent assets ""

Ill$st ation 8. The following figures were e!tracted from the trial balance of K Ltd. share capital %H,HHH e-uity shares of 2s. %H each fully paid # Securities premium %(I Aebentures Fi!ed deposits .reditors 2s. %H,HHH 2s. <H,HHH 2s. (<,HHH 2s. <,HHH

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Lou are re-uired to draw up the liabilities side of the balance sheet, according to the re-uirements of the .ompanies ,ct. Solution # ,9 0KT2,.T 1F ),L,9.0 S>00T 1F K LTA. ,S ,T CC Liabilities S>,20 .,*IT,L# ,uthorized .apital CCe-uity shares of 2s. %H each Issued and subscribed %H,HHH e-uity shares of 2s. %H each 20S02:0S ,9A S@2*L@S# Securities premium S0.@20A L1,9S# %(I A0)09T@20S @9S0.@20A L1,9S# Fi!ed deposits .@2209T LI,)ILITI0S ,9A *21:ISI19S# $,& .urrent liabilities Sundry creditors $)& *rovisions <,HHH """ %H,HHH 2s.

%,HH,HHH

%H,HHH

<H,HHH

Ill$st ation ;. The following ledger balances were e!tracted from the books of 2ushil Ltd. 1n 3%st ?arch, (HHF. Land and )uilding 2s. (,HH,HHH' %(I debentures 2s. (,HH,HHH' Share .apital %,HH,HHH e-uity shares 2s. %H each fully paid' *lant and ?achinery 2s. G,HH,HHH' Doodwill 2s. (,HH,HHH'Investments in shares of 2a+a Ltd. 2s.(,HH,HHH' )ills 2eceivable 2s <H,HHH' Aebtors 2s. %,<H,HHH' .reditors 2s %,HH,HHH' )ank Loan $@nsecured& 2s %,HH,HHH' *rovision for ta!ation

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2s. <H,HHH' Aiscount on issue of %(I debentures 2s. <HHH' *roposed dividend 2s. <<,HHH. Stock 2s. %,HH,HHH Deneral 2eserve 2s (,HH,HHH. Lou are re-uired to prepare the )alance Sheet of the company as per schedule :I *art I of the .ompanies act %;<=. Solution# 2@S>IL LTA. ),L,9.0 S>00T ,S ,T 3%ST ?,2.>,(HHF Liabilities S,>20 .,*IT,L# ,uthorized .apital Issued .apital Subscribed .apital %,HH,HHH 0-uity shares of 2s.%H each 20S02:0S ,9A S@2*L@S# Deneral reserve S0.@20A L1,9S# %(I Aebentures @9S0.@20A L1,9S# )ank Loan .@2209T LI,)ILITI0S ,9A *21:ISI19S# $,& .urrent liabilities .reditors $)&*rovisions *roposed dividend *rovision for ta!ation <<,HHH <H,HHH %F,H<,HHH %F,H<,HHH %,HH,HHH (,HH,HHH (,HH,HHH .@2209T ,SS0TS, L1,9S ,9A ,A:,9.0S# $,& .urrent assets# Stock"in"Trade Aebtors %,HH,HHH $)& Loans and ,dvances )ill 2eceivables ?IS.0LL,901@S 0K*09AIT@20# Aiscount on issue of %(I Aebentures <,HHH <H,HHH %,HH,HHH %,<H,HHH %H,HH,HHH I9:0ST?09TS# Shares of 2a+a Ltd. (,HH,HHH 2s. MMMMMMNMMM %H,HH,HHH ,ssets FIK0A ,SS0TS# Doodwill Land and )uilding *lant and ?achinery 2s. (,HH,HHH (,HH,HHH G,HH,HHH

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Ill$st ation <. K Ltd. has an authorized capital of 2s. %H,HH,HHH divided into 0-uity Shares of 2s. %H each. The company invited applications for <H,HHH shares. ,pplications for 8<,HHH shares were received. ,ll calls were made and were duly received e!cept the final call of 2s. ( per share on %,HHH shares. <HH of the shares on which the final call was not received were forfeited. Show how share capital will appear in the )alance Sheet of the .ompany as per schedule :I part I of the .ompanies ,ct %;<=N

Solution# K LTA. ),L,9.0 S>00T ,S 19 CCCCCCC Liabilities S,>20 .,*IT,L# ,uthorized .apital %,HH,HHH 0-uity Shares of 2s. %H each Issued .apital # <H,HHH 0-uity Shares of 2s. %H each Subscribed .apital# 88,<HH 0-uity Shares of 2s. %H each 8,8<,HHH Less# .alls in ,rrears ,dd# Share Forfeited ,/c %,HHH 8,88,HHH 8,HHH 8,8G,HHH %H,HH,HHH ,mount 2s. ,ssets ,mount 2s.

<,HH,HHH

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Ill$st ation =. From the following balances taken from the books of Du+arat 0!ports Ltd. prepare .ompany s )alance Sheet in >orizontal Form# 2s. Land and )uildings *lant and ?achinery Sundry Aebtors G,HHH 0-uity Shares of 2s. %HH each 2s. <H called up %<I debentures Aebenture 2edemption 2eserve *repaid Insurance *rofit J Loss $.r.& )ills *ayable Deneral 2eserve 8,HH,HHH %,HH,HHH <H,HHH 8,GHH %,%3,HHH %<,HHH %,HH,HHH 3,(<,HHH (,;H,HHH =<,HHH *atents Investments *reliminary 0!penses Securities premium *rovision for Income ta! .losing Stock .ash ,dvance Income Ta! Sundry .reditors 1utstanding e!penses *roposed Aividend 2s. F,(HH (H,HHH (,HHH (H,HHH (8,HHH %,(G,HHH %(,HHH 8,HHH %<,(HH 8,GHH %=,HHH

Investments are in partly"paid shares on which calls of 2s. %H,HHH have not been made.

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Solution# ),L,9.0 S>00T 1F D@O,2,T 0K*12TS LTA. ,s at CCCCCCin horizontal form Liabilities S,>20 .,*IT,L# ,uthorized .apital Issued .apital G,HHH 0-uity shares of 2s.%HH each Subscribed .apital G,HHH 0-uity shares of 2s.%HH each, 2s. <H called up 20S02:0S ,9A S@2*L@S# Securities *remium Deneral 2eserve *rofit J Loss ,/c Aebenture 2edemption 2eserve S0.@20A L1,9S# %<I Aebentures @9S0.@20A L1,9S# .@2209T LI,)ILITI0S ,9A %; %,HH,HHH %<,HHH "" ?IS.0LL,901@S 0K*09AIT@20# (,HHH (H,HHH %,HH,HHH %,%3,HHH <H,HHH 8,HH,HHH .@2209T ,SS0TS, L1,9S ,9A ,A:,9.0S# $,& .urrent assets# .losing Stock Sundry Aebtors .ash $)& Loans and ,dvances *repaid Insurance ,dvance Income Ta! 8,GHH 8,HHH %,(G,HHH =<,HHH %(,HHH G,HH,HHH I9:0ST?09TS# (H,HHH 2s. MMMMMMNMMM ,ssets FIK0A ,SS0TS# Land and )uilding *lant and ?achinery *atents 2s. 3,(<,HHH (,;H,HHH F,(HH

*21:ISI19S# $,& .urrent liabilities )ills payable Sundry .reditors 1utstanding 0!penses $)&*rovisions *rovision for Income ta! *roposed dividend (8,HHH %=,HHH %<,HHH %<,(HH 8,GHH

*reliminary 0!penses

G,<G,HHH 9ote# .ontingent Liabilities# For partly"paid shares 2s. %H,HHH

G,<G,HHH

Financial Statement Analysis

, firm s financial statements can be used to analyze how well a firm is performing in key aspects of operation. They can also be used to identify the effect of operations on the availability of funds to pay dividends and meet debt obligations. This lecture note introduces using the balance sheet and income statement to analyze a firm s performance. It presents two methods for evaluation# financial ratio analysis and tracing the cash sources and uses.

Financial Ratio Analysis

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P Financial ratio analysis looks at various ratios calculated from data taken from the financial statements. P Financial ratios should be e!amined in the conte!t of# o o the firm s own financial history, known as trend analysis, and the industry in which the firm operates, known as cross"section analysis.

Listed below are several common ratios used to analyze a company. 2atios can be used to look at a firm s profitability, how efficiently it is managed, if it has ade-uate li-uidity, and if it has too much debt.

RATIO ANAL:SIS

1.8 2atio analysis is not +ust comparing different numbers from the balance sheet, income statement and cash flow statement. It is comparing the number against previous years , other companies, the industry , or even the economy in general. 2atios look at the relationships between individual values and relate them to how a company has performed in the past and might perform in the future. For e!ample current assets alone don t tell us a whole lot , but when we divide them by the current liabilities we are able to determine whether the company has enough money to cover short debts. Therefore we can say that when one figure is e!pressed in terms of another figure by dividing each other the relation which is established between them is called ration.

1.; Meanin# of Ratio Analysis 2atio ,nalysis is the relationship between two terms of financial data e!pressed in the form of ratios and then interpreted with a view to evaluating the financial condition and performance of a firm. 2atio ,nalysis can also help us to check whether a business is doing better this year than it was last year' and it can tell us if our business is doing better or worse than similar type of business.

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0!ample # Firm , earns a profit of 2s. <H,HHH while Firm ) earns a profit of 2s. %,HH,HHH. Ehich of them is more efficientN Ee could tend to believe that firm ) is more efficient than firm ,. )ut in order to understand correctly , we need to find out their sales figure. Say firm , s sales are 2s. <,HH,HHH while firm ) s sale are 2s. <H,HH,HHH. 9ow let s compare the percentage of profit earned by them on sales. For ,# <H,HHH <,HH,HHH For )# %,HH,HHH <H,HH,HHH This clearly shows that firm , is doing better than Firm ). This e!ample shows that figure assumes significance only when e!pressed in relation to other related figures. 1.;.1 O4>ective of Ratio Analysis 3 The main ob+ective of analyzing financial statement with the help of ratios are# %. The analysis would enable the calculation of not only the present earning capacity of the business but would also help in the estimation of the future earning capacity. (. The analysis would help the management to find out the overall as well as the department Q wise efficiency of the firm on the basis of the available financial information. 3. The short term as well as the long tem solvency of the firm can be determined with the help of ration analysis. 8. Inter Q firm comparison becomes easy with the help of ratios. 1.;.2 A!vanta#es of Ration Analysis3 Financial statement prepared at the end of the year do not always convey to the reader the real profitability and financial health of the business. They contain various facts and figures and it is for the reader to conclude what these figures indicated. 2atio ,nalysis is an important tool for analyzing these financial statements .Some important advantage derived by the firm by the use of accounting ratios are# K %HH 4 ( I K %HH 4 %H I

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1. *elp in Financial statement analysis It is east to understand the financial position of a business enterprise in respect of short term solvency, li-uidity and profitability with the help of ratio. It tells us the changes taking place in the financial condition of the business.

2. Simplifie! acco$ntin# fi#$ es ,bsolute figures are not of mush use. They become important when relationships are established say between gross profit and sales.

7. *elps in calc$latin# ope ation efficiency of t%e 4$siness ente p ise 2atio enable the user of financial information to determine operating efficiency of a firm by relating the profit figure to the capital employed for a given period.

8. Facilities inte + fi m compa ison 2atio analysis provides data for inter" firm comparison. It revels strong and weak firms, overvalues and undervalues firms as well as successful and unsuccessful firms.

;. Ma'es inte + fi ms compa ison possi4le 2atio ,nalysis helps the firm to compare its own performance over a period of time a swell as the performance of different divisions of the firm. It helps in deciding which division are more efficient than other.

<. *elps in fo ecastin# 2atio ,nalysis helps in planning and forecasting . 2atios provides clues on trends and futures problems . e.g if the sales of a firm during the year are 2s. %H lakhs and he average stock kept during the year 2s. ( lakhs, it must be ready to keep a stock of 2s. 3 lakhs which is (H I of the 2s. %< lakhs.

1.;.7 Limitations of Ratio Analysis

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2atio ,nalysis is a useful techni-ue to evaluate the performance and financial position of any business unit but it does suffer from a number of limitations. These must be kept in mind while analysing financial statements.

1. *isto ical Analysis 2atio ,nalysis is historical in nature a the finicial statement on the basis of which ratios are calculated are historical in nature.

2. - ice Level C%an#e .hanges in price level often make comparison of figures of the previous years difficult. 0.g ratio of sales to fi!ed assets in (HH= would be much higher than in (HHH due to rising prices, fi!ed assets being e!pressed on cost.

7. Not F ee f om 4ias In many situations, the accountant has to make a choice out of the various alternatives available . e.g choice of the method depreciation, choice in the method of inventory valuation etc. Since there is a sub+ectivity inherent in the choice , ratio analysis cannot be said to be free from bias.

8. 9in!o? ! essin# Eindow dressing is slowly the position better than what it is. Some companies , in order to cover up their bad finicial position resort to window dressing. )y hiding important facts, they try to depict a better financial position.

;. @$alitative facto s i#no e! 2atio ,nalysis is a -uantitative analysis. It ignores -ualitative factors like debtors character, honesty, past record etc.

<. ,iffe ent acco$ntin# p actices en!e

atios incompa a4le

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The result of two firms are comparable with the help of accounting ratios only if they follow the same accounting methods . e.g. if one firm changes depreciation on straight line method while another is charging on diminishing balance method, accounting ratios will not be strictly comparable.

1.< Classification of Ratios

Aifferent types of ratios are computed depending on the purpose for which they are needed. )roadly speaking ,they are grouped under four heads# %. Li-uidity ratios (. Solvency ratios 3. Turnover or ,ctivity ratios 8. *rofitability ratios
Classification of Ratio

Liquidity ratios

Solvency ratios

Activity Ratios

Profitability Ratios

%. .urrent ratio' (. Ruick 2atio.

%.Aebt e-uality ratio' (.Total ,ssest to debt ratio' 3.*roprietary ratio' 8.Interest .overage 2atio.

%. (. 3. 8.

Stock Turnover' Aebtors Turnover' .reditors Turnover' Fi!ed ,ssest Turnover' <. Eorking .apital Turnover.

%. (. 3. 8.

Dross *rofit 2atio 9et *rofit 2atio 1perating 2atio 2eturn *rofit 2atio

1.<.1 LI@UI,IT: RATIOS

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Li-uidity is the short term solvency of the enterprise. I.e. the ability of the business enterprise to meet its short term obligation as and when they are due. The li-uidity ratios, therefore , are also called the short" term solvency ratios. The most common ratios which measures the e!tent of li-uidity or the lack of it are# a& .urrent ratio b& Ruick ratio/ ,cid test ratio C$ ent Ratio .urrent ratio establishes the relationship between current assets and .urrent liability. It measures the ability of the firm to meet its short term obligation as and when they become due. It is calculated as# .urrent ratio4 .urrent ,ssets .urrent liabilities

.urrent assets include cash and those assets which can be converted into cash within a year. .urrent assets will therefore include cash , bank, stick$raw materials , work in progress and finished goods&, debtors$less provision&, bills receivable, marketable securities, prepaid e!penses, short term loans and advances and accrued incomes. .urrent liability include all those liabilities maturing with in one year. .urrent liabilities include creditors, bills payable, outstanding e!penses, income received in advance , bank overdraft, short"term loans, provision for ta! , proposed dividend and unclaimed dividend. Denerally , a current ratio of (#% is considered satisfactory. Inte p etation# It provides a measure of degree to which current assets cover current liabilities. The higher the ratio , the greater the margin of safety for the short term creditors. >owever, the ratio should neither be very high nor very low. , very high current ratio indicates idle funds , piled up stocks, locked amount in debtors while a low ratio puts the business in a situation where it will not be able to pay its short" term debt on time.

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Ill$st ation 1 .alculate current ratio from the following information# Stock 2s .=H,HHH ' .ash 8H,HHH' Aebtors 8H,HHH' .reditors <H,HHH )ills 2eceivable (H,HHH' )ills *ayable 3H,HHH' ,dvance Ta! 8,HHH )ank 1verdraft 8,HHH' Aebentures 2s. (,HH,HHH' ,ccrued interest 2s. 8,HHH. Sol$tion C$ ent Assets 4 2s.=H,HHH 5 2s.8H,HHH 5 2s.8H,HHH 5 2s.(H,HHH 5 2s.8,HHH 5 2s.8,HHH 4 2s.%,=G,HHH C$ ent Lia4ilities 4 2s.<H,HHH 5 2s.3H,HHH 5 2s.8,HHH 4 2s. G8,HHH C$ ent Ratio 4 2s.%,=G,HHH # 2s.G8,HHH 4 ( # %. Ill$st ation 2 .urrent ,ssets of a company are 2s. %H,HH,HHH and current liabilities are 2s. =,HH,HHH. The management is interested in making the ratio (#% by making payment of certain current liabilities. ,dvise the management as to how much of current liabilities should be paid to attain the desired ratio. Sol$tion Let the current liabilities to be paid 4 ! %H,HH,HHH"! =,HH,HHH"! %H,HH,HHH"! %H,HH,HHH"! ! 4 ($=,HH,HHH"! & 4 %(,HH,HHH"(! 4 (,HH,HHH 4(

@$ic' Ratio " Aci! test atio"LiA$i! atio

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Ruick ratio establishes the relationship between -uick/ li-uid assets and current liabilities. It measures the ability of the firm to meet its short term obligations as and when they become due without relying upon the realization of stock. It is calculated as# Ruick ratio 4 Ruick ,ssets .urrent Liabilities

The -uick assets are defined as those assets which can be converted into cash immediately or reasonably soon without a loss of value. For calculating -uick assets we e!clude the closing stock and prepaid e!penses from the current assets. Denerally, a li-uid ratio of %#% is considered satisfactory. Inte p etation3 Ruick ratio is considered better than current ratio as a measure of li-uidity position of the business because of e!clusion of inventories. The idea behind this ratio is that stock are sometimes a problem because they can be difficult to sell or use. That is , even through a supermarket has thousand of people walking through its doors every day, there are still items on its shelves that don t sell as -uickly as the supermarket would like. Similarly, there are some items that will sell very well. 9evertheless , there are some business whose stocks will sell or be used slowly and if those businesses needed to sell some of their stocks to try to cover an emergency, they would be disappointed. It us a more penetrating test of li-uidity than current ratio yet it should be used cautiously as all debtors may not be li-uid or cash may be re-uired immediately for certain e!penses.

Ill$st ation 7 .alculate -uick ratio from the information given in illustration %. Sol$tion Ruick ,ssets 4 Ruick ,ssets 4 Ruick ratio 4 4 .urrent ,ssets Q Stock Q ,dvance Ta! 2s. %,=G,HHH Q $2s. =H,HHH 5 2s. 8,HHH& 4 2s. %,H8,HHH Ruick ,ssets / .urrent Liabilities 2s. %,H8,HHH # 2s. G8,HHH

.urrent Liabilities 4 2s. G8,HHH

(G

%.(3#%

Ill$st ation 8 K Ltd. has a current ratio of 3.<#% and -uick ratio of (#%. If e!cess of current assets over -uick assets represented by stock is 2s. %,<H,HHH, calculate current assets and current liabilities. Sol$tion Let .urrent Liabilities 4 ! .urrent ,ssets ,nd Ruick ,ssets Stock %,<H,HHH %,<H,HHH ! .urrent ,ssets 4 3.<! 4 (! 4 .urrent ,ssets Q Ruick ,ssets 4 3.<! Q (! 4 %.<! 4 2s.%,HH,HHH 4 3.<! 4 3.< S %,HH,HHH 4 2s. 3,<H,HHH.

Ill$st ation ; .alculate the current ratio from the following information # Eorking capital 2s. ;,=H,HHH' Total debts 2s.(H,GH,HHH' Long"term Liabilities 2s.%=,HH,HHH' Stock 2s. 8,HH,HHH' prepaid e!penses 2s. GH,HHH.

Sol$tion .urrent Liabilities 4 Total debt" Long term debt

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4 (H,GH,HHH Q %=,HH,HHH 4 8,GH,HHH Eorking capital 4 .urrent ,ssets Q .urrent liability ;,=H,HHH .urrent ,ssets Ruick ,ssets 4 .urrent ,ssets Q 8,GH,HHH 4 %8,8H,HHH 4 .urrent ,ssets Q $stock 5 prepaid e!penses& 4 4 .urrent ratio %8,8H,HHH Q $8,HH,HHH 5 GH,HHH& ;,=H,HHH

4 .urrent ,ssets / .urrent liabilities 4 %8,8H,HHH/8,GH,HHH 4 3#%

Ruick ratio

4 Ruick ,ssets / .urrent liabilities 4 ;,=H,HHH/8,GH,HHH 4 (#%

1.<.2 Solvency Ratios Solvency ratio are used to +udge the long term financial soundness of any business. Long term Solvency means the ability of the 0nterprise to meet its long term obligation on the due date. Long term lenders are basically interested in two things# payment of interest periodically and repayment of principal amount at the end of the loan period. @sually the following ratios are calculated to +udge the long term financial solvency of the concern. %. Aebt e-uity ratio' (. Total ,ssets to Aebt 2atio' 3. *roprietary ratio' 8. Interest .overage 2atio. ,e4t+EA$ity Ratio

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Aebt 0-uity 2atio measures the relationship between long"term debt and shareholders funds. It measures the relative proportion of debt and e-uality in financing the assets of a firm. It is computed as follows# Aebt"0-uity ratio 4 Long"term Aebt s/ Share holder funds Ehere Q Long" term Aebt 4 Aebentures 5 Long Q term loans Shareholders Funds 4 0-uity Share .apital 5 *reference Share .apital 5 2eserves and SurplusQ Fictitious ,ssets

Inte p etation3 , low !e4t e-uity ratio reflects more security to long term creditors. From security point of view, capital structure with less debt and more e-uity is considered favourable as it reduces the chances of bankruptcy. , high ratio, on the other hand, is considered risky as it may put the firm into difficulty in meeting its obligations to outsiders. >owever, from the perspective of the owners, greater use of debt, firm can en+oy the benefits of trading on e-uity which help in ensuring higher returns for them if the rate of earning on capital employed is higher than the rate of interest payable. )ut it is considered risky and so , with the e!ception of a few business , the prescribed ratio is limited to (#%. Ill$st ation < .alculate Aebt 0-uity , from the following information# %H,HHH preference share of 2s. %H each 2s. %,HH,HHH

3%

<,HHH e-uity shares of 2s. (H each .reditors Aebentures *rofit and Loss accounts$.r.& Sol$tion Aebt 4 Aebentures 4 2s. (,(H,HHH

2s. %,HH,HHH 2s. 8<,HHH 2s. (,(H,HHH 2s. FH,HHH

0-uity 4 0-uity share capital 5 *references Share .apital 5 profit and Loss accounts 4 2s. %,HH,HHH 5 2s. %,HH,HHH 5 2s. FH,HHH 4 2s. (,FH,HHH Aebt 0-uity 2atio 4 Long term debt/ shareholders funds 4 2s. (,(H,HHH / 2s. (,FH,HHH 4 H.G%#%

Ill$st ation = .alculate Aebt 0-uity 2atio, from the following information # Total Aebts 2s. 3,HH,HHH ' Total assets 2s. <,8H,HHH' .urrent liabilities 2s. FH,HHH. Sol$tion Long"term Aebt 4 Total Aebt Q .urrent Liabilities 4 2s. 3,HH,HHH Q 2s. FH,HHH 4 2s. (,3H,HHH Shareholders Funds 4 Total ,ssets Q Total Aebts 4 2s. <,8H,HHH Q 2s. 3,HH,HHH 4 2s. (,8H,HHH Aebt 0-uity 2atio 4 Long term debt/ Shareholders funds 4 2s. (,3H,HHH/2s. (,8H,HHH 4 H.;=# Total Assets to ,e4t Ratio

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This 2atio established a relationship between total assets and long debts. It measures the e!tend to which debt is being covered by assets. It is calculated as Total ,ssets to Aebt 2atio 4 Total assets Long"term Aebt

Inte p etation3 This ratio primarily indicated the use of e!ternal funds in financing the assets and the margin of safety to long"term creditors. The higher ratio indicated that assets have been mainly financed by owners funds , and the long" tem debt is ade-uately covered by assets. , low ratio indicated a grater risk to creditors as it means insufficient assets for long term obligations. Ill$st ation B Shareholders funds 2s. GH,HHH' Total debts 2s. %,=H,HHH' .urrent liabilities 2s. (H,HHH. .alculate Total assets to debt ratio. Sol$tion Long term debt 4 Total Aebt " .urrent liabilities 4 2s. %,=H,HHH" 2s. (H,HHH 4 2s. %,8H,HHH Total ,ssets 4 Shareholders funds 5 Total debt 4 2s. GH,HHH 5 2s. %,=H,HHH 4 2s. (,8H,HHH Total ,ssets to debt ratio 4 Total ,ssets/ Aebt 4 2s. (,8H,HHH / 2s. %,8H,HHH 4 %(#F 4 %.F#%

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- op ieta y Ratio *roprietary ratio establishes a relationship between shareholders funds to total assets . It measures the proportion of assets financed by e-uity. It is calculated as follows # *roprietary 2atio 4 Shareholders Funds/ Total assets Interpretation# , higher proprietary ratio indicated a larger safety margin for creditors. It tests the ability of the shareholders funds to meet the outside liabilities. , low *roprietary 2atio , on the other hand , indicated a grater risk to the creditors. To +udge whether a ratio is satisfactory or not, the firm should compare it with its own past ratios or with the ratio of similar enterprises or with the industry average. )ased on data of Illustration G, it shall be worked out as follows# 2s. GH,HHH / 2s. (,8H,HHH 4 H.33# % Ill$st ation C From the following balance sheet of a company, calculate debt e-uity ratio, total assets to debt ratio and proprietary ratio )alance S%eet of D lt! as on 71.12.2EE= *reference Share .apital 0-uity Share .apital 2eserves Aebentures .urrent Liability F,HH,HHH G,HH,HHH %,<H,HHH 3,<H,HHH (,HH,HHH *lant and ;,HH,HHH 8,(H,HHH 8,HH,HHH (,HH,HHH ;H,HHH GH,HHH %,HH,HHH %H,HHH ((,HH,HHH ?achinery Land and )uilding ?otor .ar Furniture Stock Aebtors .ash and )ank Aiscount on Issue of Shares 225EE5EEE

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Sol$tion Aebt e-uity 2atio 4 Long"term Aebt/0-uity Total ,ssets 2atio4 Total ,ssets / long term Aebt *roprietary 2atio 4 Shareholders Funds/Total assets Aebt e-uity ratio 4 2s. 3,<H,HHH/2s. %=,8H,HHH 4 H.(%3 Total ,ssets 2atio4 2s. (%,;H,HHH/ 2s. 3,<H,HHH 4 =.(= *roprietary 2atio 4 2s. %=,8H,HHH/2s. (%,;H,HHH 4 H.F8; Ill$st ation 1E From the following information, calculate Aebt 0-uity 2atio, Aebt 2atio,*roprietary 2atio and 2atio of Total ,ssets to Aebt. )alance S%eet as on ,ecem4e 715 2EE< 0-uity share .apital *reference Share .apital 2eserves *rofit J loss ,/. %% I ?ortgage Loan .urrent liabilities 3,HH,HHH %,HH,HHH <H,HHH =<,HHH %,GH,HHH %,(H,HHH G,%<,HHH Fi!ed ,ssets .urrent ,ssets *reliminary 0!penses 8,<H,HHH 3,<H,HHH %<,HHH

G,%<,HHH

Sol$tion Shareholders Funds 4 0-uity Shares capital 5 *reference Shares capital 5 2eserves 5 profit I loss ,/. " *reliminary 0!penses

3<

4 2s. 3,HH,HHH 5 2s. %,HH,HHH 5 2s.<H,HHH 5 2s. =<,HHH" 2s. %<,HHH 4 2s. <,HH,HHH Aebt 0-uity 2atio 4 Aebt / 0-uity 4 2s. %,GH,HHH/2s. <,HH,HHH 4 H.3=# %

*roprietary 2atio 4 *roprietary funds / Total ,ssets 4 2s. <,HH,HHH/2s. G,HH,HHH 4 H.=(<#% Total ,ssets to Aebt 2atio 4 Total ,ssets / Aebt 4 2s. G,HH,HHH/2s. %,GH,HHH 4 8.88#%

Ill$st ation 11 The debt e-uity ratio of K Ltd. is %#(. Ehich of the following would increase/ decrease or not change the debt e-uity ratioN $i& Issue of new e-uity shares $ii& .ash received from debtors $iii& Sale of fi!ed assets at a profit $iv& 2edemption of debentures $v& *urchase of goods on credit. Sol$tion

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a& The ratio will decrease. This is because the debt remains the same, e-uity increases. b& The ratio will not change . This is because neither the debt nor e-uality is affected. c& The ratio will decrease . This is because the debt remains unchanged while e-uity increases by the amount of profit. d& The ratio will decrease . This is because debt decreases while e-uity remains same . e& The ratio will not change . This is because neither the debt nor e-uity is affected. Inte est Cove a#e Ratio Interest .overage 2atio established a relationship between profit before interest on long"term debt and ta!es and the interest on long term debts. It measures the debt servicing capacity of the business in respect of fi!ed interest on long term debts. It generally e!pressed as T number of times . It is calculated as follows# Interest .overage 2atio 4 9et *rofit before Interest and Ta! / Interest on long term debt Inte p etation 3 It reveals the number of times interest on long"term debt is covered by the profits available for interest. It is a measure of protection available to the creditors for payment of interest on long term loans. , higher ratio ensures safety of interest payment debt and it also indicates availability of surplus for shareholders.

Ill$st ation 12 9et *rofit as per *rofit J Loss ,/. 2s. <,8H,HHH' *rovision for ta! 2s, (,%H,HHH' Interest on Aebentures and other long terms loans 2s. %,<H,HHH .alculate interest coverage ratio. Sol$tion *rofit before interest and ta! 4 2s. <,8H,HHH 5 2s. (,%H,HHH 5 2s. %,<H,HHH 4 2s. ;,HH,HHH Interest coverage 2atio 4 9et *rofit before Interest and Ta!/ interest on long term debt

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4 2s. ;,HH,HHH / 2s. %,<H,HHH 4 = times. Ill$st ation 17 .alculate interest coverage ratio from the following information# 9et *rofit after ta! 2s. 3H,HHH' %<I Long"term Aebt %H,HH,HHH' and Ta! 2ate =HI.

Sol$tion 9et *rofit after ta! Ta! 2ate 4 2s. 3H,HHH 4 =HI. 4 2s. 3H,HHH K %HH / $ %HH" =H& 4 2s. F<,HHH Interest on Long Term Aebt 4 %<I of 2s. %H,HH,HHH 4 2s. %,<H,HHH 9et profit before interest and ta! 4 9et profit before ta! 5 Interest 4 2s. F<,HHH 5 2s. %,<H,HHH 4 2s. (,(<,HHH Interest .overage 2atio 4 9et *rofit before Interest and Ta!/Interest on long term debt 4 2s. (,(<,HHH/2s. %,<H,HHH 4 %.< times. 1.<.7 Activity 1o T$ nove 2 Ratios The ,ctivity $or Turnover& 2atios measures how well the facilities at the disposal of the concern are being utilized. They are known as turnover ratios as they indicates the speed with which the assets are being converted or turned over into sales. , proper balanced between sales and assets generally reflects tat assets are being managed well. They are e!pressed as Tnumber of times . Some of the important activity ratios are#

9et *rofit before ta! 4 9et *rofit after ta! K %HH / $%HH Q ta! rate&

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%. Stock Turn"over' (. Aebtors $2eceivable& Turnover' 3. .reditors $*ayable& Turnover' 8. Fi!ed ,ssets Turnover' <. Eorking .apital Turnover. Stoc' 1o Invento y2 T$ nove Ratio It establishes a relationship between cost of goods and average inventory. It determines the efficiency with which stock is converted into sales during the accounting period under consideration. It is calculated as# Stock Turnover 2atio 4 .ost of Doods Sold/ ,verage Stock Ehere " ,verage stock 4 $opening 5 closing stock& /( and .ost of goods sold 4 9et Sales " gross profit o .ost of goods sold 4 opening stock 5 net purchases 5 direct e!penses Q closing stock Inte p etation # It indicates the speed with which inventory is converted into sales. , higher ratio indicated that stock is selling -uickly. Low stock turnover ratio indicates that stock is not selling -uickly and remaining idle resulting in increased storage cost and blocking of funds. >igh turnover is good but it must be carefully interpreted as it may be due to buying in small lots or selling -uickly at low margin to realize cash. Thus , a firm should have neither a very high nor a vet low stock turnover ratio. Ill$st ation 18 From the following information, calculate stock turnover ratio # 1pening Stock 2s.(H,HHH'.losing Stock 2s.%H,HHH'*urchases 2s. <H,HHH Eages 2s. %3,HHH' sales 2s. GH,HHH ' .arriage Inwards 2s. (,HHH ' .arriage outwards 2s. =,HHH

Sol$tion

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Stock Turnover 2atio 4 .ost of Doods Sold/ ,verage Stock .ost of Doods Sold 4 1pening Stock 5 *urchases Q .losing Stock 5 Airect 0!penses 4 2s. (H,HHH5 2s.<H,HHH5 2s.%<,HHHQ2s.%H,HHH 4 2s. F<,HHH ,verage Stock 4 $1pening Stock 5 .losing Stock& /( 4 $2s. (H,HHH 5 2s. %H,HHH& /( 4 2s. %<,HHH Stock Turnover 2atio 4 2s. F<,HHH/2s. %<,HHH 4 < Times. Ill$st ation 1; From the following information, calculate stock turnover ratio. 1pening stock 2s <G,HHH' 0!cess of .losing stock opening stock 2s. 8,HHH' sales 2s. =,8H,HHH' Dross *rofit U (< < on cost Sol$tion .ost of goods Sold 4 Sales " Dross Loss 4 2s. =,8H,HHH Q (</%(<$=,8H,HHH& 4 2s. <,%(,HHH .losing stock 4 1pening stock 5 2s. 8HHH 4 2s. <G,HHH 5 2s 8,HHH 4 2s. =(,HHH ,verage stock 4 $1pening stock 5 .losing Stock &/( 4 $<G,HHH 5=(,HHH&/( 4 2s. =H,HHH Stock Turnover 2atio 4 .ost of Doods Sold/ ,verage Stock 4 2s.<,%(,HHH/2s. =H,HHH 4 G.<3 times.

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Ill$st ation 1< , trader carries an average stock of 2s. GH,HHH. >is stock turnover is G times. If he sells goods at profit of (HI on sales. Find out the profit. Sol$tion Stock Turnover 2atio 4 .ost of Doods Sold/ ,verage Stock 4 .ost of Doods Sold/2s. GH,HHH .ost of Doods Sold 4 2s. GH,HHH S G 4 2s. =,8H,HHH Sales 4 .ost of Doods Sold S %HH/GH 4 2s. =,8H,HHH S %HH/GH 4 2s. G,HH,HHH Dross *rofit 4 Sales Q .ost of Doods Sold 4 2s. G,HH,HHH Q 2s. =,8H,HHH 4 2s. %,=H,HHH. ,e4to s T$ nove Ratio o Receiva4les T$ nove Ratio It establishes a relationship between net credit sales and average debtors or receivables. It determine the efficiency with which the debtors are converted into cash. It is calculated as follows # Aebtors Turnover ratio 4 9et .redit sales/ ,verage ,ccounts 2eceivable Ehere ,verage ,ccount 2eceivable 4 $1pening Aebtors and )ills 2eceivable 5 .losing Aebtors and )ills 2eceivable&/( 9ote# Aebtors should be taken before making any provision for doubtful debts. Inte p etation # The ratio indicated the number of times the

8%

receivables are turned over and converted into cash in an accounting period. >igher turnover means that the amount from debtors is being collected more -uickly. Ruick collection from debtors increases the li-uidity of the firm. This ratio also helps in working out the average collection period as follows# ,e4t collection pe io! This shows the average period for which the credit sales remain outstanding or the average credit period en+oyed by the debtors. It indicates how -uickly cash is collected from the debtors. It is calculates as follows# Aebt collection period 4 %( months/<( weeks/3=< days Aebtors turnover ratio

Ill$st ation 1= .alculate the Aebtors Turnover 2atio and debt collection period $in months& from the following information# Total sales 4 2s. (,HH,HHH .ash sales 4 2s. 8H,HHH Aebtors at the beginning of the year 4 2s. (H,HHH Aebtors at the end of the year 4 2s. =H,HHH

Sol$tion ,verage Aebtors 4 $2s. (H,HHH 5 2s. =H,HHH&/( 4 2s. 8H,HHH 9et credit sales 4 Total sales " .ash sales 4 2s.(,HH,HHH " 2s.8H,HHH 4 2s. %,=H,HHH Aebtors Turnover 2atio 4 9et .redit sales/,verage Aebtors 4 2s. %,=H,HHH/2s. 8H,HHH 4 8 Times.

8(

Aebt collection period 4 %( months/<( weeks/3=< days Aebtors turnover 4 %(/8 4 3 months

C e!ito s T$ nove Ratio o -aya4le T$ nove Ratio This ratio establishes a relationship between net credit purchases and average creditors or payables. It determine the efficiency with which the .reditors are paid. It is calculated as follows # .reditors turnover ratio 4 9et credit purchase / ,verage accounts payable. Ehere ,verage accounts payable 4 $1pening .reditors and )ills *ayable 5 .losing .reditors and )ills *ayable&/( Inte p etation# It indicated the speed with which the creditors are paid. , higher ratio indicates a shorter payment period. In this case, the enterprise needs to have sufficient funds as working capital to meet its creditors. Lower ratio means credit allowed by the supplier is for a long period or it may reflect delayed payment to suppliers which is not a very good policy as it may affect the reputation of the business. Thus , an enterprise should neither have a very high nor a very low ratio. ,e4t payment pe io!"C e!ito s collection pe io!

83

This shows the average period for which the credit purchases remain outstanding or the average credit period availed of. It indicate how -uickly cash is paid to the creditors. It is calculated as follows# Aebt collection period 4 %( months/<( weeks/3=< days Aebtors turnover Ill$st ation 1B .ash purchased ratio 2s. %,HH,HHH' cost of goods sold 2s. 3,HH,HHH' opening stock 2s. %,HH,HHH and closing stock 2s. (,HH,HHH. .reditors turnover ratio 3 times. .alculate the opening and closing creditors if the creditors at the end were 3 times more than the creditors at the beginning. Sol$tion Total *urchase 4 .ost of goods sold 5 closing stock " opening stock 4 2s. 3,HH,HHH 5 2s. (,HH,HHH Q 2s. %,HH,HHH 4 2s. 8,HH,HHH .redit purchases 4 Total *urchase " cash purchase 4 2s. 8,HH,HHH" 2s. %,HH,HHH 4 2s. 3,HH,HHH .reditor Turnover 2atio 4 9et .redit *urchase / ,verage .reditor ,verage .reditor 4 2s. 3,HH,HHH/ 3 4 2s. %,HH,HHH $opening .reditor 5 .losing .reditor&/( 4 2s. %,HH,HHH opening .reditor 5 .losing .reditor opening .reditor 4 2s. 8H,HHH .losing .reditor 4 2s. 8H,HHH 5$3 K 2s. 8H,HHH& 4 2s. %,=H,HHH 4 2s. (,HH,HHH opening .reditor 5 $opening .reditor 5 3opening .reditor& 4 2s. (,HH,HHH

88

Fi(e! Assets T$ nove Ratio This ratio establishes a relationship between net sales and net fi!ed assets. It determined the efficiency with which the firm is utilizing its fi!ed assets. It is computed follows Fi!ed ,ssets Turnover4 9et sales/ 9et Fi!ed ,ssets Ehere 9et Fi!ed ,ssets 4Fi!ed ,ssets" Aepreciation Inte p etation3 This ratio reveals how efficiently the fi!ed assets are being utilised. It indicates the firms ability to sales per rupee of investment in fi!ed assets. , high ratio indicates more efficient utilization of fi!ed assets. Ill$st ation 1C From the following information, calculate Fi!ed ,ssets Turnover 2atio# Dross fi!ed asset 2s. 8,HH,HHH' ,ccumulated Aepreciation 2s. %,HH,HHH' ?arketable securities 2s. (H,HHH' .urrent ,ssets 2s. %,3H,HHH' ?iscellaneous e!penditure 2s, (H,HHH' .urrent Liabilities 2s. <H,HHH' Dross sales 2s. %G,3H,HHH' sale return 2s. 3H,HHH Sol$tion 9et fi!ed asset4 Dross fi!ed asset" Aepreciation 4 2s. 8,HH,HHH " 2s. %,HH,HHH 4 2s.3,HH,HHH 9et Sale 4 Dross sale Q Sale 2eturns 4 2s. %G,3H,HHH " 2s. 3H,HHH 4 2s. %G,HHH Fi!ed ,sset Turnover 2atio4 9et Sale/ net Fi!ed assets 4 2s. %G,3H,HHH/ 2s.3,HH,HHH 4 = times.

8<

9o 'in# Capital T$ n Ove Ratio This ratio establishes the relationship between net Sale and working capital. It determines the efficiency with which the working capital is being utilised. It is calculated as followers3 working capital Turnover 4 9et Sale/ working .apital

Inte p etation3 This ratio indicates the firms ability to generate sales per rupee of working . , higher ratio would normally indicate more efficient utilized of working capital ' through neither a very high nor a very low ratio is desirable.

Ill$st ation 2E From the following information, calculate $i& Fi!ed ,ssets Turnover and $ii& Eorking .apital Turnover 2atios # *reference Shares .apital 0-uity Share .apital Deneral 2eserve *rofit and Loss ,ccount %<I Aebentures %8I Loan .reditors =,HH,HHH 8,HH,HHH (,HH,HHH (,HH,HHH 3,HH,HHH %,HH,HHH %,8H,HHH *lant and ?achinery Land and )uilding ?otor .ar Furniture Stock Aebtors )ank =,HH,HHH F,HH,HHH (,<H,HHH <H,HHH %,FH,HHH %,(H,HHH ;H,HHH

8=

)ills *ayable 1utstanding 0!penses

3H,HHH 3H,HHH 2E5EE5EEE

.ash

(H,HHH 2E5EE5EEE

Sales for the year were 2s. =H,HH,HHH. Sol$tion Sales 4 2s =H,HH,HHH 2s. =,HH,HHH 5 2s.F,HH,HHH 5 2s. (,<H,HHH 5 2s. <H,HHH .urrent ,ssets Q .urrent Liabilities Stock 5 Aebtors 5 bank 5 cash 2s. %.FH,HHH 5 2s. %.(H,HHH 5 2s. ;H,HHH 5 2s. (H,HHH 2s. 8,HH,HHH .urrent Liabilities 4 .reditors 5 )I* 5 1IS 0!p 4 2s. %,8H,HHH 5 2s. 3H,HHH 5 2s. 3H,HHH 4 2s. (,HH,HHH Eorking capital 4 2s. 8,HH,HHH 5 2s. (,HH,HHH 4 2s. (,HH,HHH Fi!ed Turn over 2atio 4 9et sale / Fi!ed assests 4 2s. =H,HH,HHH/ 2s. %=,HH,HHH 4 3.F< times

Fi!ed ,ssets 4 Eorking capital 4 .urrent ,ssets 4

Eorking capital Turnover 4 9et Sale / Eorking .apital 4 2s. =H,HH,HHH/ 2s. (,HH,HHH 4 3H times. - ofita4ility Ratios 0very business must earn sufficient profits to sustain the operations of the business and to fund e!pansion and growth. *rofitability ratios are calculated to analysis the earning capacity of the business which is the outcome of utilisation of resources employed in the business. There is a close relationship

8F

between the profit and the efficiency with which the resources employed in the business are utilised. There are two ma+or types of *rofitability 2atios. *rofitability in relation to sales *rofitability in relation to investment.

Following are the important *rofitability ratio %. Dross *rofit 2atio (. 9et profit 2atio 3. 1perating 2atio 8. 1perating *rofit 2atio <. 2eturn on Investment $21I& or 2eturn on .apital 0mployed $21.0& =. 0arnings per Share F. *rice 0arning 2atio. G. Aividend *ayout 2atio

& oss - ofit Ratio o & oss ma #in

Dross profit ratio establishes relationship between & oss - ofit an! net sale. It !ete mines t%e efficiency ?it% ?%ic% p o!$ction5 purchase and selling operations are being carried on. It is calc$late! as percentage of sales. It is computed as follows# Dross *rofit 2atio 4 Dross *rofit/9et Sales S %HH

Inte p etation# Dross *rofit is the difference between sale and cost of good sold. Dross *rofit margin reflect the efficiency with which the management produces each unit of output. It also

8G

include the margin available to cover operating e!penses and non operating e!penses. , high Dross *rofit margin relative to the industry average employees that the firm is able to produced at comparatively at lower cost. Ill$st ation 21 Following information is available for the year (HH=, calculate gross profit ratio# Sales Dross *rofit 2eturn inwards 2s. %,(H,HHH 2s. =H,HHH 2s (H,HHH

Sol$tion 9et Sales 4 Sales " 2eturn inwards 4 2s. %,(H,HHH" (H,HHH 4 2s. %,HH,HHH Dross *rofit 2atio 4 Dross *rofit/9et Sales S %HH 4 2s.=H,HHH/2s.%,HH,HHH S %HH 4 =HI.

Ill$st ation 22 .alculate Dross *rofit ratio from the following information# 1pening stock 2s. <H,HHH' closing stock 2s. F<,HHH' cash sale 2s. %,HH,HHH' credits sales 2s %,FH,HHH' 2eturns outwards 2s. %<,HHH' purchased 2s. (,;H,HHH' advertisement e!penses 2s. 3H,HHH' carriage inwards 2s. %H,HHH.

8;

Sol$tion .ost of goods sold 4 1pening stock 5 net purchases 5 direct e!penses Q closing stock 4 2s. <H,HHH 5 $2s. (,;H,HHH" 2s. %<,HHH& 5 2s. %H,HHH " 2s. F<,HHH 4 2s. (,=H,HHH Total Sales 4 .ash Sales 5 .redits Sales 4 2s. %,HH,HHH 5 2s %,FH,HHH 4 2s. (,FH,HHH Dross profit 4 Total Sales " .ost of goods sold 4 2s. (,FH,HHH" 2s. (,=H,HHH 4 2s. %H,HHH Dross profit 2atio 4 %H,HHH K %HH (,FH,HHH F 7.=E8 G Net - ofit Ratio o Net Ma #in This ratio establishes the relationship between net profit and net sale . It indicates managements efficiency in manufacturing, administering and selling the product. It calculates as a percentage of sale. it is computed as under# 9et *rofit 2atio 4 9et profit / 9et Sales S %HH Denerally, net profit refers to *rofit after Ta! $*,T&. Inte p etation# This ratio measures the firms ability to turn each rupee sales into net profit. , firm with high net profit margin would be in an advantageous position to survive in the face of falling selling prices, rising cost of production or declining demand for the product. Ill$st ation 27

<H

Sales 2s. =,3H,HHH' sales 2eturns 2s. 3H,HHH' Indirect e!penses 2s. <H,HHH' cost of goods sold 2s.(,<H,HHH. .alculate 9et *rofit 2atio. Sol$tion 9et Sales 4 Total Sales Q sales 2eturns 4 2s. =,3H,HHH Q 2s. 3H,HHH 4 2s.=,HH,HHH Dross *rofit 4 9et Sales Q .ost of goods sold 4 2s. =,3H,HHH " 2s.(,<H,HHH 4 2s. 3,<H,HHH 9et *rofit 4 Dross *rofit " Indirect e!penses 4 2s. 3,<H,HHH Q 2s. <H,HHH 4 2s. 3,HH,HHH 9et *rofit 2atio4 9et *rofit 9et sale 4 2s. 3,HH,HHH K %HH 2s. =,HH,HHH 4 <H I

Ill$st ation 28 Dross profit ratio is (< I . .ost of goods sold is 2s. 3,HH,HHH. Indirect e!penses 2s. =H,HHH. .alculate 9et *rofit 2atio. Sol$tion Sales 4 %HH/$%HH Q (<& K 2s. 3,HH,HHH 4 2s. 8,HH,HHH Dross profit 4 Sale" cost of goods sold

<%

4 2s. 8,HH,HHH Q 2s.=H,HHH 4 2s. 8H,HHH 9et *rofit 2atio 4 9et profit K %HH 9et Sale F 2s. 8H,HHH/ 2s. 8,HH,HHH ! %HH 4 %H I Ope atin# Ratio 1perating 2atio establishes relationship between operating cost and net sales. It determine the operational efficiency with the production , purchase and selling operations are being carried on. It is calculated as follows# 1perating 2atio 4 $.ost of Sales 5 1perating 0!penses&/ 9et Sales S %HH 1perating e!penses include office e!penses, administrative e!penses, selling e!penses and distribution e!penses. Inte p etation3 1perating 2atio indicates the 1perating cost incurred is computed to e!press .ost of operation e!cluding financial charge in relation to sales. , corollary of it is T 1perating *rofit 2atio . It helps to analyse the performance of business and throw light on the operations efficiency of the business. It is very useful for inter" firm as well as intra firm comparisons. Lower operating ratio is a very healthy sign. Ope atin# - ofit Ratio 1perating *rofit 2atio establishes the relationship between 1perating *rofit and net sales. It can be computed directly or as a residual of operating ratio. 1perating *rofit 2atio 4 1perating *rofit/ Sales S %HH Ehere 1perating *rofit 4 Sales Q .ost of 1peration

<(

Inte p etation3 1perating 2atio determine the operational efficiency of the management . It helps in knowing the amount of profit earned from regular business transactions on a sale of 2s. %HH. It is very useful for inter firm as well as intra firm comparisons. >igher operating ratio indicates that the firm has got enough margins to meet its non operating e!penses well as to create reserve and pay dividends.

Ill$st ation 2; .alculate the operating ratio from given the following information# Sales 2s. (,HH,HHH' Sales returns rs. 3H,HHH' operating e!penses 2s. <<,HHH' .ost of goods sold 2s. %,FH,HHH Sol$tion 1perating 2atio 4 .ost of goods sold 5 Selling 0!penses K %HH 9et Sales 4 2s. %,FH,HHH 5 <<,HHH K %HH 2s.%,FH,HHH $(,HH,HHH" 3H,HHH& 4 %3(.3< I

Ill$st ation 2< .alculate the Dross profit 2atio, 9et *rofit 2atio and 1perating 2atio from the given the following information# Sales .ost of Doods Sold 2s. 8,HH,HHH 2s. (,(H,HHH

<3

Selling e!penses ,dministrative 0!penses Sol$tion Dross *rofit

2s. (H,HHH 2s. =H,HHH

4 Sales Q .ost of goods sold 4 2s. 8,HH,HHH Q 2s. (,(H,HHH 4 2s. %,GH,HHH

Dross *rofit 2atio 4 Dross s *rofit K %HH Sales 4 2s. % ,GH,HHH K %HH 2s 8 ,HH,HHH 4 8< I 9et *rofit 4 Dross *rofit Q Indirect e!penses 4 2s. %,GH,HHH Q $2s. (H,HHH 5 2s. =H,HHH& 4 2s. %,HH,HHH 9et *rofit 2atio 4 9et profit / Sales S %HH 4 2s.$%,HH,HHH/ 8,HH,HHH& K %HH 4 (< I 1perating 0!penses 4 Selling 0!penses 5 ,dministrative 0!penses 4 2s. (H,HHH 5 =H,HHH 4 2s. GH,HHH 1perating 2atio 4 .ost of goods 5 1perating 0!penses K %HH 9et Sa les 4 2s. ( ,(H,HHH 5 2s. GH,HHH K %HH 2s8, HH,HHH 4 F< I

<8

Ret$ n on Capital Employe! o Ret$ n on Investment 1ROCE o ROI2 This ratio establishes the relationship between net profit before Interest and Ta! and capital employees. It measures how efficiently the long"term funds supplied by the long"term creditors and shareholders are being used. It is e!pressed as a percentage. Thus, it is computed as follows#

2eturn on Investment 4 *rofit before Interest and Ta!/.apital 0mployed S %HH Ehere capital employed 4 Aept 5 e-uity O .apital 0mployed 4 Fi!ed ,ssets 5 Eorking .apital Inte p etation 3 It e!plains the overall utilisation of fund by a business. It reveals the efficiency of the business in utilisation of funds entrusted to it by, share holders , debenture"holders and long"term liabilities. For inter"firm comparison, it is considered good measure of profitability.

Ill$st ation 2= Lia4ilities 0-uity Share 2s. %H each& 2eserves %H I Aebentures .urrent Liability *rofit for the year Rs. .apital %H,HH,HHH Assets Fi!ed assets $9et& Rs. %8,HH,HHH

$%,HH,HHH e-uity share of (,<H,HHH <,HH,HHH F,<H,HHH (,<H,HHH (F,<H,HHH .urrent ,ssets *reliminary 0!penses %(,<H,HHH %,HH,HHH (F,<H,HHH

.alculate 2eturn on .apital employed

<<

Sol$tion 2eturn on Investment 4 *rofit before Interest and Ta!/.apital 0mployed S %HH *rofit before Interest and Ta!# *rofit for the year ,dd interest $%H I of <,HH,HHH& *rofit before interest and ta! .apital 0mployes 4 2s. (,<H,HHH 4 2s. <H,HHH 4 3,HH,HHH

4 9et,ssets 5 working .apital 4 2s. %8,HH,HHH 5 2s$ %(,<H,HHH Q 2s. F,<H,HHH& 4 2s. %;,HH,HHH

Ea nin#s -e S%a e This ratio measures the earning available to an e-uity shareholders per share. Itb indicates the profitability of the firm on a per share basis. The ratio is calculated as " 0arning *er Share 4 *rofit available for e-uity shareholders/ 9o. of 0-uity Shares In this conte!t, earnings refer to profit available for e-uity shareholders which is worked out as *rofit after Ta! Q Aividend on *reference Shares. Inte p etation # This ratio is very important from e-uity shareholders point of view and so also for the share price in the stock market. This also helps comparison with other firm s to ascertain its reasonableness and capacity to pay dividend. )ut increase in 0arning per share does not have always indicate increase in profitability because sometimes , when bonus shares are issued , earning per share would decrease . In these cases, the earning per share is misleading as the actual earning have not decreased. Ill$st ation 2B .alculate earning per share from the following information# <H,HHH e-uity shares of 2s. %H each 2s <,HH,HHH %H I *reference share capital 2s %,HH,HHH

<=

; I Aebentures 9et *rofit after ta! Sol$tion 0arning per share

2s. (,HH,HHH 2s. (,HH,HHH

4 *rofit available for e-uity shareholders/ 9o. of 0-uity Share 4 2s$ %,%H,HHH Q %H,HHH& / <H,HHH 4 2s. ( per share

- ice Ea nin# Ratio This ratio establishes a relationship between market price per share and earning per share. The ob+ective of this ratio is to find out the e!pectations of the shareholders. This ratio is calculated as Q */0 2atio 4 ?arket price of a Share/0arnings per Share Inte p etation # It indicates the numbers of times of 0*S the share is being -uoted in the market. It reflects investors e!pectation about the growth in the firms earning and reasonableness of the market price of its shares. */0 ratios vary from industry to industry and company to company in the same industry depending upon investors perception of their future. Ill$st ation 2C 0arning per share 2s. %<H . market price per share 2s. 3HHH. .alculate price 0arning ratio. Sol$tion3 */0 2atio 4 ?arket price of a Share/0arnings per Share F 2s. 3,HHH/ 2s. %<H 4 2s. (H Ill$st ation 7E

<F

.alculated price earning ratio from the following information# 0-uity share capital$ 2s. %H per Share& 2eserves $including current year s profit& %H I *reference Share .apital ; I Aebentures *rofit before interest ?arket *rice per Share Ta! rate 2s (,<H,HHH 2s %,HH,HHH 2s (,<H,HHH 2s (,HH,HHH 2s 3,3H,HHH 2s <H. <H I

Sol$tion */0 2atio 4 ?arket price of a Share/0arnings per Share 0arning per share 4 *rofit available for e-uity shareholders/ 9o. of 0-uity Share *rofit available for e-uity shareholders# *rofit before interest 4 2s. 3,3H,HHH 2s 3,%(,HHH Less ta! $ <H I of 2s. 3,%(,HHH& 4 2s. %.<=,HHH Less preference dividend 0arning after Ta! 4 2s. (<,HHH 4 2s %,3%,HHH

Less interest on debentures 4 2s %G,HHH

0arning per share 4 0arning after ta! / 9o.of e-uity shares 4 2s %,3%,HHH/ (<,HHH 4 2s. <.(8

<G

*/0 2atio

4 ?arket price share / 0arning per share 4 2s. <H/ 2s. <.(8 4 2s. ;.<8

,ivi!en! -ayo$t Ratio This refers to the proportion of earning that are distributed against the shareholders. It is computed as Q Aividend *ayout 2atio 4 Aividend *er Share 0arnings *er Share Inte p etation 3 It e!presses the relationship between what is available per share and what is actually paid in the form of dividends out of available earnings. This ratio reflects company s dividend policy. , higher payout ratio may mean lower retention or a deteriorating li-uidity position. Ill$st ation 71 .alculate dividend payout ratio., If dividend paid per share 2s. (.=( per share from the information of Illustration 3H Sol$tion3 From the above Illustration , earning per share4 2s. <.(8 Aividend paid per share 4 So. Aividend payout 2atio4 Aividend per share 0arning per ratio 4 2s. (.=( 2s. <.(8 4 2s. 1.<H 2s. (.=( per Share

<;

1.= Meanin# of Cas% Flo? Statement .ash flow is made up of two words i.e. .ash and Flow, whereas .ash means cash balance in hand including cash at bank balance, and Flow means changes $which may be 5 or Q increase or decrease& in the cash movements of the business. .ash Flow Statement deals with only such items, which are connected with cash i.e., items relating to inflow and outflow of cash. In other words, it is prepared to study the changes in cash, or to show impact of various transactions on the cash. In short, it is a statement, which is prepared to show the flow of cash in the business during a particular period. It thus, tells about the changes in cash position of a business. The changes may be related either with the cash receipts or cash payments or disbursements of cash. Thus, .ash Flow Statement is a summary of cash receipts and payments whereby reconciling the opening cash balance with the closing cash including bank balances in done. It also e!plains the reasons for the changes in the cash position of the business on account of the Aecrease in the cash position is termed as outflow of cash and increase is termed in flow. .ash flow statement also tells about various sources in cash such as cash from operations, sale of current and fi!ed ,ssets, issue of shares/debentures, also termed as inflow of cash whereas loss from operations, purchase of current and fi!ed assets, redemption of preference shares/debentures and other long term loans etc are also termed as outflow of cash. The .ash Flow Statement is prepared because of number of merits, which are offered by it. Such merits are also termed as its ob+ectives. The important o4>ectives are as follows # %. To *elp t%e Mana#ement in Ma'in# F$t$ e Financial -olicies H .ash Flow statement is very helpful to the management. The management can make its future financial policies and is in a position to know about surplus or deficit of cash. ,ccordingly, management can think of investing surplus funds, if nay, in either short term or long term investments. Thus, cash is the center of all financial decisions. (. *elpf$l in ,ecla in# ,ivi!en!s etc. H .ash Flow Statement is very helpful in declaring dividends etc. This statement can supply information regarding to understand the li-uidity. It must be paid within 8( days.

=H

3.

Cas% Flo? Statement is ,iffe ent t%an Cas% )$!#et 3+ .ash budget is prepared with the help of inflow and outflow of cash. If there is any variation, the same can be corrected.

8.

*elpf$l in !evisin# t%e cas% eA$i ement 3+ .ash flow statement is helpful in devising the cash re-uirement for repayment of liabilities and replacement of fi!ed assets.

<.

*elpf$l in fin!in# easons fo t%e !iffe ence + .ash Flow Statement is also helpful in finding reasons for the difference between profits/losses earned during the period and the availability of cash whether cash is in surplus or deficit.

=.

As pe AS+75 Cas% Flo? Statement 3+ .ash Flow Statement is prepared with a view to highlight the cash generated from recurring activities or cash loss if any where as net profit is calculated after making ad+ustments on account of non cash items in the profit and loss account.

F.

*elpf$l in p e!ictin# sic'ness of t%e 4$siness3+ .ash flow is helpful in predicting sickness of the business with the help of different ratios.

1.=.1 $i&

USES OF CAS* FLO9 STATEMENT S%o t+Te m -lannin# 3 The .ash Flow Statement gives information regarding sources and application of cash and cash e-uivalents for a specific period so that it becomes easier to plan investments, operating and financing needs of an enterprise.

$ii&

T%e Cas% Flo? %elps $n!e stan! LiA$i!ity an! Solvency 3 Solvency is the ability of the business to meet its current liabilities. Ruarterly or monthly .ash Flow Statements help ascertain li-uidity in a better way. Financial institutions, like banks prefer the .ash Flow Statement to analyse li-uidity.

$iii& Efficient Cas% Mana#ement 3 The .ash Flow Statement provides information relating to surplus or deficit of cash. ,n enterprise, therefore, can decide about the short"term investments of the surplus and can arrange the short"term credit in case of deficit. $iv& Compa ative St$!y 3 , comparison of the .ash Flows for the previous year with the budgeted figures of the same year will indicate as to what e!tent the cash resources of the

=%

business were generated and applied according to the plan. It is, therefore, useful for the management to prepare cash budgets. $v& Reasons fo Cas% -osition 3 The .ash Flow Statement e!plains the reasons for lower and higher cash balances with the enterprise. Sometimes, a lower cash balance is found in spite of higher profits or a higher cash balance is found in spite of lower profits. 2easons for such situations can be analysed with the help of the .ash Flow Statement. Sometimes in spite of high profits goneN ,nswers to such -uestions can be found from the .ash Flow Statement. $vi& Test fo t%e Mana#ement ,ecisions 3 It is a general rule that fi!ed assets are purchased from the funds raised from long"term sources, and the best way to repay the long"term debt is out of profits. The .ash Flow Statement shows clearly whether the cash inflows from operations have been used for the purchase of fi!ed assets or whether these assets have been purchased from cash inflows from long"term debts. Similarly, it also e!plains whether the debentures have been redeemed out of profits or not. Thus, the .ash Flow Statement fan be used to test the credibility of the management decisions.

1.=.2

LIMITATIONS OF CAS* STATEMENT

Though the .ash Flow Statement is a very useful tool of financial analysis, it has its limitations which must be kept in mind at the time of its use. These limitations are # 1i2 Non+cas% T ansaction a e i#no e! 3 The .ash Flow Statement shows only inflows and outflows of cash. It does not show non"cash transactions like the purchase of buildings by the issue of shares or debentures to the vendors or issue of bonus shares. 1ii2 Not a s$4stit$te fo an Income Statement 3 ,n income statement shows both cash and non"cash items. The income statement shows the net income of the firm whereas the .ash Flow Statement shows only the net cash inflows or outflows which do not represent the net profits or losses of the enterprise. 1iii2 *isto ical in Nat$ e 3 It rearranges the e!isting information available in the income statement and the balance sheet. It will become more useful if it is accompanied by the pro+ected .ash Flow Statement. 1iv2 I#no ance 3+ It ignores basic accounting concept, i.e., accrual concept.

=(

1.=.7 IM-ORTANT ,EFINITIONS AS -ER ACCOUNTIN& STAN,AR,+7 1REIISE,2 1i2 1ii2 Cas% comprises cash on hand and demand deposits with banks. Cas% EA$ivalents are short"term, highly li-uid investments that are readily convertible into the known amount of cash and which are sub+ect to an insignificant risk of change in value. ,n investment normally -ualifies as cash e-uivalent only when it has a short maturity of, say, three months or less from the date of ac-uisition 0!amples of cash e-uivalents are # $a& treasury bills,$b& commercial paper, $c& money market funds and $d& Investments in preference shares and redeemable within three months can also be taken as cash e-uivalents if there is no risk of the failure of the company. 1iii2 Cas% Flo?s are inflows and outflows of cash and cash e-uivalents. ,S"3 re-uires a .ash Flow Statement to be prepared and presented in a manner that it shows cash flows from business transactions during a period classifying them into # $i& 1perating ,ctivities' $ii& Investing ,ctivities ' and $iii& Financing ,ctivities.

1iv2 Ope atin# Activities 3 1perating activities are the principal revenue"producing activities of the enterprise and other activities that are not investing or financing activities. 1v2 Investin# Activities 3 Investing activities are the ac-uisition and disposal of long"term assets and other investments not included in cash e-uivalents. 1vi2 Financin# Activities 3 Financing activities are the activities that result in change in the size and composition of the owners capital $including preference& share capital in the case of a company& and borrowing of the enterprise.

1.B

Classification of Cas% Flo?s 3 ,s discussed earlier, the .ash, Flow Statement shows the cash inflows $sources& and cash outflows $uses or applications& of cash and cash e-uivalents during an accounting period. >ence, it is essential to know about the various items of so$ ces 1o inflo?s of cas%2 an! $ses 1o$tflo?s of cas%2 of cas%. ,s per t%e Acco$ntin# Stan!a !+7 1AS+7& the changes resulting in inflows and outflows cash and cash e-uivalents arise on account of three types of activities, i.e., operating, investing and financing as discussed below #

1.B.1 1i2

Ope atin# Activities 3

=3

1perating ,ctivities are the principal revenue producing activities of the enterprise and other activities that are not related to investing or financing activities. The e!amples are # $a& $b& $c& $d& $e& .ash receipts from the sale of goods and rendering of services. .ash receipts from royalties, fees, commission and other revenue. .ash payments to suppliers of goods and services. .ash payments to and on behalf of employees for wages, etc. .ash receipts and payments of an insurance enterprise for premiums and claims, annuities and other policy benefits.

$f&

.ash payments or refunds of income ta!es unless they can be specifically identified with financing and investing activities.

$g&

.ash receipts and payments relating to future contracts, forward contracts, option contracts, and swap contracts, when the contracts are held for purposes. dealing or trading

The principal revenue producing activity of an enterprise is the main activity $business& carried on by it to earn profits. 0!amples of a financial enterprise' giving loans and dealing in securities is the principal revenue producing activity. Similarly, for an insurance company accepting premium and payments of claims is the principal revenue producing activity. The net effect of the operating activities on the flow of cash is reported as cash flow from or cash used in 1perating ,ctivities in the .ash Flow Statement.

1.B.2 1ii2

Investin# Activities

Investing activities are the ac-uisition and disposal of the long"term assets and other investments, not included in cash e-uivalents, These activities include transactions involving purchase and sale of the long"term productive assets like machinery, land and buildings, etc., which are not held for resale. The cash flow from investing activities are# $a& .ash payments to ac-uire fi!ed assets $including intangibles& and also payments for capitalized research and development costs and self constructed fi!ed assets. $b& .ash receipts from the disposal of fi!ed assets $including intangibles&.

=8

$c&

.ash payments to purchase $ac-uire& shares, warrants, or debt instruments of other enterprises and interests in +oint ventures $other than payments for those instruments considered to be cash e-uivalents and those held for trading or dealing purposes&.

$d&

.ash receipts from sale $disposal& of shares, warrants, or debt instruments of other enterprises and interest in +oint ventures $other than receipts from those instruments considered to be cash e-uivalents and those held for dealing or trading purposes&.

$e&

.ash receipts from sale $disposal& of shares, warrants, or debt instruments of other enterprises and interest in +oint ventures $other than receipts from those instruments considered to be cash e-uivalents and those held for dealing or trading purposes&.

$f&

.ash receipts from repayments of advances and loans made to third parties $other than advances and loans of financial enterprises&.

$g&

.ash receipts relating to future contracts, forward contracts, option contracts and swap contracts e!cept when the contracts are held for trading purposes, or the receipts are classified as financing activities.

$h&

.ash payments relating to future contracts, forward contracts, option contracts and swap contracts e!cept when the contracts are held for trading purposes, or the payments are classified as financing activities.

1.B.7 1iii2 Financin# Activities

Financing activities are the activities which result in changes in the size and composition of the owner s capital $including preference share capital in the case of a company& and borrowings of the enterprise from other sources. The cash flow from financing activities are # $a& .ash proceeds from the issue of shares or other similar instruments.

=<

$b&

.ash proceeds from the issue of debentures, loan notes, bonds and other short term borrowings.

$c& $d& $e& $f&

)uy"back of e-uity shares. .ash repayments of the amounts borrowed including redemption of debentures. *ayments of dividends both e-uity and preference dividends. *ayments for interest on debentures and loans.

Ill$st ation 1. State a transaction a part of which is classified as an Investing ,ctivity and another part is classified as a Financing ,ctivity.

Sol$tion 3 *ayment of installments of an asset purchased on >ire"*urchased on >ire"*urchase basis. The installment has two components, i.e., principal and interest. *rincipal is classified as an Investing ,ctivity and interest as a Financing ,ctivity.

Classification of )$siness Activities as pe AS+75 s%o?in# t%e inflo? an! O$tflo? of Cas% Ope atin# Activities Cas% Inflo? $i& $ii& .ash Sales $i& .ash received from debtors Cas% O$tflo? .ash *urchases $ii& *ayment to .reditors $iii& .ash 1perating 0!penses

$iii& .ash received from .ommission and Fees $iv& 2oyalty

$iv&*ayment of Eages $v& Income Ta!

In t%e case of Financial Companies $v& .ash received for interest and dividends

In t%e case of Financial Companies $vi&.ash paid for interest $vii& *urchase of Securities

$vi& Sale of securities

==

Investin# Activities Cas% Inflo? $i& $ii& Sales of fi!ed ,ssets Sale of Investments Cas% O$tflo? $i& *urchase of Fi!ed ,ssets $ii& *urchase of Investments

$iii& Interest 2eceived $iv& Aividends 2eceived

Financin# Activities Cas% Inflo? $i& $ii& Issue of Shares in .ash Issue of Aebentures in .ash Cas% O$tflo? $i& *ayment of Loans $ii& 2edemption of *reference Shares $iii& )uy"back of 0-uity Shares $iv&*ayment of Aividend $v& *ayment of Interest $vi&2epayment of Finance/Lease Liability

$iii& *roceeds from Long"term )orrowings

9%y is it impo tant to !isclose t%e cas% flo?s f om eac% activity sepa atelyJ , student will appreciate the importance of separate disclosure under each activity from the following # 1perating ,ctivities Investing ,ctivities Financing ,ctivities The amount of the cash flow The amount of the cash flow The amount of the cash flow arising the have from to operating arising which cash, from investing arising from financing activities is a key indicator of activities represents the e!tent activities is useful in assessing e!tent the to which e!penditure has been claims on future cash flows by i.e., income and cash flows. enterprise. operations of the enterprise incurred to generate future providers of funds to the generated whether the cash generation is ade-uate to maintain operating

=F

capability of the enterprise, pay dividends, repay loans, and make new investments. It is also helpful in forecasting future cash flows from operations.

Ill$st ation 2. Identify the transactions as belonging to $i& Financing ,ctivities, and $iv& .ash 0-uivalents. %.

1perating, $ii& Investing, $iii&

.ash Sales' (. Issue of Share .apital' 3. Issue of Aebentures' 8. *urchase of ?achines' <.

Sale of ?achines' =. .ash received from Aebtors' F. .ommission and 2oyalty received' G. *urchase of Investments' ;. 2edemption of Aebentures and *reference Shares' %H. 2epayment of a Long"term Loan' %%. Interest paid on Aebentures or long"term loans by $a& Finance company, and $b& 9on"finance company' %(. 1ffice 0!penses' %3. Aividend received on Shares by $a& Finance company, and $b& 9on"finance company' %8. Interest received on Investments by $a& Finance company, and $b& 9on"finance company' %<. ?anufacturing 0!penses' %=. 2ent received by a company whose main business is $a& real estate business, $b& manufacturing' %F. Selling and Aistribution 0!penses' %G. Sale of Investment by $a& Finance company, and $b& 9on" finance company' %;. *urchase of Doodwill' (H. Aividends paid' (%. .ash *urchases' ((. .ash paid to .reditors' (3. Sale of *atents' (8. Income Ta! refund received' (=. )ank )alance' (F. .ash .redit' (G. Short"term deposits in )anks' (;. Investment in ?arketable Securities $Short" term&' 3H. 2ent paid and 3%. )uy"back of 0-uity shares.

Sol$tion 3 1perating ,ctivities # %,=, F, %% $a& %(, %3 $a&, %8$a&, %<, %=$a&, %F, %G$a&, (%, ((, (8, (<,3H. =G

Investing ,ctivities # 8, <, G, %3$b&, %8$b&, %=$b&, (H, 3%. Financial ,ctivities# (, 3, ;, %H, %%b, %Gb, %;,(3. .ash 0-uivalents # (=, (F, (G, (;. Ill$st ation 7 From the following details, calculate cash from operations # 2s. Sales *urchases Eages (,<H,HHH %,(<,HHH 3H,HHH

,ssume that all the above transactions were in cash.

Sol$tion 3 .ash from operations 4 .ash inflow Q .ash outflow 4 Sales Q $*urchases 5 wages& 4 2s. (,<H,HHH Q $2s. %,(<,HHH5 2s. 3H,HHH& 4 2s. (,<H,HHH Q 2s. %,<<,HHH 4 2s. ;<,HHH

Ill$st ation 8 $.alculation of .ash Inflow from Aebtors&. .alculate the .ash Inflow from Aebtors from the following information # *articulars $a& Total Sales .ash Sales =; 2s. 8,HH,HHH %,(H,HHH

1pening Aebtors .losing Aebtors Sales 2eturns

8H,HHH =H,HHH %H,HHH

$b&

.redit Sales )ad Aebts Aiscount ,llowed 1pening Aebtors .losing Aebtors Sales 2eturns

(,HH,HHH %<,HHH <,HHH %8,HHH (<,HHH %H,HHH %H,HHH (<,HHH %(,HHH %<,HHH (,8H,HHH (HI of .redit Sales G,HHH %H,HHH %(,HHH

$c & 1pening Aebtors .losing Aebtors 1pening )ills 2eceivables .losing )ills 2eceivables Total Sales .ash Sales Aiscount ,llowed )ad Aebts Sales 2eturns

Sol$tion $,& .,S> I9FL1E F21? A0)T12S

-a tic$la s 1pening Aebtors 8H,HHH 3,(H,HHH Less # Sales 2eturns .losing )alance of Aebtors %H,HHH =H,HHH FH,HHH

Rs.

,dd # .redit Sales $Total Sales Q .ash Sales& $2s. 8,HH,HHH Q 2s. %,(H,HHH&(,GH,HHH

FH

Cas% Inflo? f om ,e4to s

(,<H,HHH

Alternative Solution : Cas% Flo? f om ,e4to s K as balancing figure by preparing the Total Aebtors ,ccount.

Total ,e4to s Acco$nt Ar. -a tic$la s To To )alance b/d .redit Sales # Total Sales Less# 8,HH,HHH Rs. -a tic$la s .r. Rs. %H,HHH (,<H,HHH <,HHH =H,HHH 3,(H,HHH

8H,HHH )y Sales 2eturns )y .ash Inflow from Aebtors $)alancing Figure& %,(H,HHH (,GH,HHH )y )alance c/d 3,(H,HHH

142

-a tic$la s 1pening )alance Aebtors ,dd # .redit Sales Less # )ad Aebts Aiscount ,llowed Sales 2eturns .losing )alance of Aebtors %<,HHH <,HHH %H,HHH (<,HHH <<,HHH %8,HHH (,HH,HHH (,%8,HHH

Rs.

F%

Cas% Inflo? f om ,e4to s

%,<;,HHH

Alternative Solution : Total ,e4to s Acco$nt Ar. -a tic$la s To To )alance b/d .redit Sales Rs. -a tic$la s .r. Rs. %H,HHH %<,HHH <,HHH %,<;,HHH (<,HHH

%8,HHH )y Sales 2eturns (,HH,HHH )y )ad Aebts )y Aiscount ,llowed (,GH,HHH )y .ash Inflow from Aebtors $)alancing Figure& )y )alance c/d

(,%8,HHH

(,%8,HHH

Total ,e4to s Acco$nt $c & Ar. -a tic$la s To To )alance b/d .redit Sales Rs. -a tic$la s .r. Rs. 3,HHH G,HHH %H,HHH %(,HHH

%H,HHH )y )ill 2eceivable (,HH,HHH )y Aiscount ,llowed )y )ad Aebts )y Sales 2eturns $)alancing Figure& )y )alance c/d (,%H,HHH

)y .ash $Inflow from Aebtors& %,<(,HHH

(<,HHH (,%H,HHH

F(

Ill$st ation ; $.alculation of .ash 1utflow to .reditors&. .alculate the .ash 1utflow to .reditors from the following information # -a tic$la s Rs.

$a&

Total *urchase .ash *urchases 1pening .reditors .losing .reditors *urchase 2eturns Aiscount 2eceived

%,(H,HHH <HI of .redit *urchases =,HHH %<,HHH %<,HHH <,HHH (,HH,HHH %<,HHH =,HHH %,<HH 3,<HH %G,HHH (8,HHH

$b&

.redit *urchases 1pening )alance of .reditors .losing )alance of .reditors Aiscount 2eceived *urchase 2eturns 1pening )alance of )ills *ayable ,/c .losing )alance of )ills *ayable ,/c

Sol$tion 3 $a& *articulars 1pening )alance of .reditors ,dd # V.redit *urchase Less # Aiscount 2eceived *urchase 2eturns .losing )alance of .reditors Cas% O$tflo?s to C e!ito s <,HHH %<,HHH %<,HHH 3<,HHH <%,HHH .,L.@L,TI19 1F .,S> 1@TFL1E T1 .20AIT12S 2s. =,HHH GH,HHH G=,HHH

F3

V Let .redit *urchases 4 !' .ash *urchases 4 Total *urchase 4 ! +

! (

! 4 %,(H,HHH 1r ! 4 2s. GH,HHH (

,lternatively, the cash outflow can be calculated by preparing the Total .reditors ,ccount. TOTAL ,E)TORS ACCOUNT Ar. -a tic$la s To To To Aiscount 2eceived *urchase 2eturns .ash 1utflow to .reditors $)alancing Figure& To )alance c/d %<,HHH G=,HHH G=,HHH Rs. -a tic$la s .r. Rs. =,HHH GH,HHH

<,HHH )y )ill 2eceivable %<,HHH )y Aiscount ,llowed <%,HHH

$b& *articulars

.,S> 1@TFL1E T1 .20AIT12S 2s. =,HHH %G,HHH (,HH,HHH (,33,HHH Less # Aiscount 2eceived *urchase 2eturns .losing )alance of .reditors .losing )alance of )ills *ayable Cas% O$tflo?s to C e!ito s %,<HH 3,<HH =,HHH (8,HHH 3<,HHH %,;G,HHH

1pening )alance of .reditors 1pening )alance of )ills *ayable ,dd # .redit *urchases

F8

,lternatively, the cash outflow can be calculated by preparing the Total .reditors ,ccount.

TOTAL ,E)TORS ACCOUNT Ar. -a tic$la s To To To To Aiscount 2eceived *urchase 2eturns )ills *ayable $,ccepted&V Rs. -a tic$la s .r. Rs.

<,HHH )y )alance b/d $1pening& %<,HHH )y .redit *urchase <%,HHH (,HH,HHH

%<,HHH

.ash 1utflow to .reditors %,;G,HHH $)alancing Figure&

To

)alance c/d $.losing&

=,HHH (,%<,HHH (,%<,HHH

V )ills *ayable accepted 4 .losing balance of bills payable Q 1pening balance of bills payable 4 2s. (8,HHH Q 2s. %G,HHH 4 2s. =,HHH

*o? is t%e amo$nt of Income Ta( pai! !ete mine!J - ovision fo Ta( Acco$nt Ar. -a tic$la s To To )ank ,/c $Ta! *aid& )alance c/d Rs. -a tic$la s .r. Rs. C.. C..

..C.. )y )alance b/d C... )y *rofit and Loss ,/c $*rovision made during the year& CC

CC

F<

Note 3 If only the provision for ta! is given in the two )alance Sheets and no information about ta! paid is given, the amount in the previous year s )alance Sheet is treated as the ta! paid during the current year. It involves an outflow of cash. The current year s provision for ta! represents the amount of ta! provided for the current year. It is added back to the current year s profits to calculate cash from operating activities $under the indirect method&. It is merely a book entry and does not involve the outflow of cash. The provision for Ta! ,ccount provides information about the ta! paid during the current year as well as the ta! provided for the current year. The provision for Ta! ,ccount provides information about the ta! paid during the current year as well as the outflow of cash. The provision for Ta! ,ccount provides information about the ta! paid during the current year as well as the ta! provided for the current year. The following illustration shows how income ta! paid is determined.

Ill$st ation <. $.ash Flow from 1perating ,ctivity with ?issing ,mounts under the Airect ?ethod&. *repare the .ash Flow Statement from 1perating ,ctivities by the Airect ?ethod from the following given information #"

- ofit an! Loss Acco$nt for the year ended 3%st ?arch, (HHF Ar. -a tic$la s To To 1pening Stock *urchase # .ash .redit To Selling 0!penses To 1ffice 0!penses To )ad Aebts To Aiscount ,llowed To Aepreciation (<,HHH F<,HHH Rs. -a tic$la s .r. Rs.

(H,HHH )y Sales # .ash .redit %,HH,HHH )y .losing Stock %(,HHH )y .ommissions (G,HHH )y 2oyalties 8,HHH )y *urchases 2eturns (,HHH %<,HHH F= F,<HH %,(<,HHH (,HH,HHH (=,HHH %8,HHH %H,HHH %,HHH

To Ta! *rovisions To Sales 2eturn To 9et *rofit

3H,HHH (,HHH 83,HHH (,<=,HHH (,<=,HHH

A!!itional Info mation 3 ?arch 3%, (HH= 2s. Aebtors .reditors 1utstanding Selling 0!p. *repaid 1ffice 0!penses ,ccrued 2oyalties ,dvance .ommission Ta! *rovision %<,HHH %8,HHH 3,HHH (,HHH %(,HHH ;,HHH 8H,HHH ?arch 3%, (HHF 2s. %H,HHH %H,HHH 8,HHH 3,HHH %%,HHH G,HHH =H,HHH

Sol$tion 3 CAS* FLO9 FROM O-ERATIN& ACTIIITIES -a tic$la s 1a2 Ope atin# Cas% Receipts $i& $ii& .ash Sales .ash received from Aebtors $9ote %& F<,HHH %,%8,HHH %%,HHH %3,HHH (<,HHH F<,HHH %%,HHH (G,HHH %,3F,HHH F=,HHH %H,HHH (,%3,HHH Rs.

$iii& .ash from 2oyalties $9ote <& $iv& .ash from .ommissions $9ote =& 142 Ope atin# Cas% -ayments $i& $ii& .ash *urchase .ash paid to .reditors $9ote (&

$iii& .ash paid for Selling 0!p.$9ote 3& $iv& .ash paid for office 0!p. $9ote 8& $c& $d& .ash Inflows from 1perating ,ctivities before $9ote"3& Less # Income Ta! *aid during the year $9ote"F&

FF

Net Cas% Flo? f om Ope atin# Activities 1c+!2

==,HHH

Note 3 Aepreciation is a non"cash e!penditure and, therefore, it is ignored. 9o 'in# Notes 3 ?issing Information to be .alculated

TOTAL ,E)TORS ACCOUNT %. Ar. .r. -a tic$la s To To )alance b/d .redit Sales -a tic$la s %<,HHH )y Sales 2eturns %,(<,HHH )y Aiscount ,llowed )y )ad Aebts )y .ash 2eceived $)al. Fig.& %,%8,HHH )y )alance c/d %,8H,HHH %G,HHH %,8H,HHH Rs. (,HHH (,HHH 8,HHH

TOTAL CRE,ITOR ACCOUNT (. Ar. .r. -a tic$la s To To *urchase 2eturns Aiscount 2eceived -a tic$la s %,HHH )y )alance b/d <,HHH )y .redit *urchases Rs. %8,HHH F<,HHH

FG

To To

Cas% -ai! $)alancing Fig.& )alance c/d %H,HHH

F3,HHH

G;,HHH

G;,HHH

SELLIN& ED-ENSES ACCOUNT 3. Ar. .r. -a tic$la s To To Cas% A"c $)alancing Fig& 1utstanding 0!p. ,/c Rs. -a tic$la Rs. 3,HHH %(,HHH

%%,HHH )y 1utstanding 0!penses ,/c $In the beginning& 8,HHH )y *rofit and Loss ,/c

%<,HHH OFFICE ED-ENSES ACCOUNT 8. Ar. .r. -a tic$la s To To *repaid 0!penses ,/c $in the beginning& Cas% A"c $)alancing Fig.& Rs. (,HHH -a tic$la )y *rofit and Loss a/c )y *repaid 0!penses ,/c (;,HHH $,t the end&

%<,HHH

Rs. (G,HHH 3,HHH

F;

3%,HHH

3%,HHH

RO:ALTIES ACCOUNT <. Ar. .r. -a tic$la s To ,ccrued 2oyalties %%,HHH $in the beginning& To *rofit and Loss ,/c %H,HHH )y ,ccrued 2oyalties ,/c $,t the end& %%,HHH Rs. %(,HHH -a tic$la )y .ash ,/c $)alance Fig.& Rs.

((,HHH

((,HHH

COMMISSION ACCOUNT =. Ar. .r. -a tic$la s To To *rofit and Loss ,/c ,dvance .ommission ,/c $,t the end& ((,HHH ((,HHH Rs. %8,HHH -a tic$la )y ,dvance .ommission ,/c $in the beginning& G,HHH)y Cas% A"c $)alancing Fig.&%3,HHH Rs. ;,HHH

GH

-ROIISION FOR TAD ACCOUNT F. Ar. .r. -a tic$la s To To )ank ,/c $Ta! *aid& ,dvance .ommission ,/c $,t the end& FH,HHH FH,HHH Rs. %H,HHH -a tic$la )y )alance b/d )y *rofit and Loss ,/c G,HHH $*rovision made& Rs. 8H,HHH 3H,HHH

2.

CAS* FLO9 FROM INIESTIN& ACTIIITIES

Investing ,ctivities of an enterprise are ac-uisition and disposal of the long"term assets and other investments not included in cash e-uivalents. ,ccordingly, the cash inflow and outflow relating to the fi!ed assets, share and debt instruments of other enterprises, interests in +oint ventures, advances and loans to third parties and also their repayments are shown under Investing ,ctivities in the .ash Flow Statement. The .ash Flow from Investing ,ctivities is ascertained by analyzing the changes in Fi!ed ,ssets and Long"term Investments in the beginning and at the end of the year. Asce tainin# Missin# Amo$nts e#a !in# Fi(e! Assets o ,ep eciation

Case 1 3 Ehen the fi!ed asset is shown at the written down value. Fi(e! Assets Acco$nt 1At ? itten !o?n val$e2

G%

Ar. -a tic$la s To To To C. $*rofit on Sale of Fi!ed ,sset& C. )y Aepreciation ,/c )y )alance c/d C.. )alance b/d )ank ,/c $*urchases& *rofit and Loss ,/c Rs. C. -a tic$la )y )ank ,/c

.r. Rs. C. C.

.C *rofit and Loss ,/c C. $Loss on Sale of Fi!ed ,sset&

C. C. C.

Notes 3 % Denerally, the purchase of fi!ed assets is a balancing amount on the debit side of the account and depreciation or the sale of fi!ed asset on the credit side of the account. (. Information regarding depreciation is generally given in the -uestion. Students are re-uired to find out only the sale or the purchase/sale of asset. 3. If both sale and depreciation are not given, then assume it is either sale or depreciation and give your assumption. 8. In the case of land, it should be assumed sale as depreciation is not charged on land. In the case of patents, goodwill and trade marks, it should be assumed sale as depreciation is not charged on land. In the case of patents, goodwill.

Ill$st ation =. K Ltd. has plant and machinery whose written down value on %st ,pril, (HH= was 2s.G,=H,HHH, and on 3%st ?arch, (HHF was 2s. ;,<H,HHH. Aepreciation for the year was 2s. 8H,HHH. ,t the beginning of the year, a part of plant was sold for 2s. <,HHH which had a written down value of 2s. (H,HHH. .alculate the 9et .ash Flow from Investing ,ctivities.

Sol$tion 3 .,S> FL1E F21? I9:0STI9D ,.TI:ITI0S

G(

*articulars .ash *ayment to ac-uire *lant and ?achinery $9ote& .ash 2eceipts from Sale of *lant and ?achinery Note 3 -LANT AN, MAC*INER: ACCOUNT Ar. ,ate -a tic$la s (HH= ,pr % To )alance b/d To *rofit and Loss ,/c 8H,HHH $*rofit on Sale of *lant& To )ank ,/c $*urchases )alancing Figure %H,%<,HHH %,<H,HHH ?ar 3% )y )alance c/d Rs. ,ate (HH= G,=H,HHH ,pr % )y )ank ,/c <,HHH (HHF )y Aepreciation ,/c -a tic$la %,<H,HHH

2s.

(<,HHH $%,(<,HHH&

.r. Rs.

(<,HHH

;,<H,HHH

%H,%<,HHH

Case 2 3 Ehen the fi!ed assets are shown at cost and accumulated depreciation $the provision for depreciation& is separately is separately maintained . @nder this case, $in contrast to the above case&, depreciation is not directly charged to the ,ssets account. The depreciation for the period is debited to the Aepreciation ,ccount $transfer to the *rofit and Loss ,ccount& and credited to ,ccumulated Aepreciation ,ccount. In the )alance Sheet, asset appears at its original cost and the accumulated depreciation is shown as a deduction from the ,ssets ,ccount. In such cases, we prepare separate accounts for fi!ed assets and accumulated depreciation or provisions for depreciation. Aepreciation for the year can be ascertained from *rovision for the Aepreciation ,ccount.

Fi(e! Assets Acco$nt 1At Cost2 Ar. -a tic$la s Rs. -a tic$la .r. Rs.

G3

To To

)alance b/d *rofit and Loss ,/c *rofit on Sale of Fi!ed ,sset&

C.

)y )ank ,/c $Sale of Fi!ed ,sset&

C. C.

.C )y ,ccumulated Aep. ,/c C. $,ccumulated Aep. on C. Fi!ed ,sset Sold&

To )ank ,/c $*ur. of Fi!ed ,sset& C.

)y *rofit and Loss ,/c $Loss on Sale of Fi!ed ,sset& C.. )y )alance c/d CC

C.

C.. CC

Note 3 9ormally, the purchase of fi!ed asset is a balancing amount on the debit side of the account and the sale of fi!ed asset on the credit side of the account.

ACCUMULATE, ,E-RECIATION ACCOUNT Ar. -a tic$la s To To Fi!ed ,sset ,/c *rofit and Loss ,/c *rofit on Sale of Fi!ed ,sset& To )ank ,/c $*ur. of Fi!ed ,sset& C. )y *rofit and Loss ,/c $Loss on Sale of Fi!ed ,sset& C.. )y )alance c/d CC C.. CC C. Rs. C. -a tic$la )y )ank ,/c $Sale of Fi!ed ,sset& .r. Rs. C. C.

.C )y ,ccumulated Aep. ,/c C. $,ccumulated Aep. on C. Fi!ed ,sset Sold&

G8

Note 3 The ,ccumulate depreciation on the fi!ed asset sold or depreciation charged for the current accounting year may not be given, which shall be the balancing amount. 7. CAS* FLO9 FROM FINANCIN& ACTIIITIES Financing ,ctivities of an enterprise are those activities that result in change in the size and composition of owners capital and borrowing of the enterprise. It includes proceeds from issue of shares or other similar instruments, issue of debentures, loans, bonds, other short"term or long" term borrowings and repayments of amounts borrowed. ,ccordingly, receipts and payments on account of the above are disclosed in the .ash Flow Statement as the .ash Flow from Financing ,ctivities. Aividends paid $in all enterprises& and interest paid $in the case of non"financing enterprises& are also included in financing activities. It is important to note that an increase in share capital due to bonus issue will not be shown in the cash flow statement, since it is a capitalization of reserves. Ehen shares are issued at a premium, the cash flow statement reflects the total cash generated by the issue $i.e., Face :alue of Shares 5 *remium&. The .ash Flow from Financing ,ctivities is ascertained by analyzing the change in 0-uity and *reference Share .apital, Aebentures and other borrowings. Ill$st ation B. ,ctivities # From the following information, calculate the .ash Flow from Financing

*articulars

3%.3.(HH= 2s,

3%.3.(HHF 2s <,HH,HHH %,HH,HHH <H,HHH

0-uity Share .apital %HI Aebentures Securities

8,HH,HHH %,<H,HHH 8H,HHH

G<

Additional Information : Interest paid on debentures 2s. %H,HHH

Sol$tion 3 .alculation of 9et .ash Flow From Financing ,ctivities *articulars .ash *roceeds from the Issue of Shares $Including *remium& Interest paid on Aebentures 2edemption of Aebentures Net Cas% Flo? f om Financin# Activities %,%H,HHH $%H,HHH& $<H,HHH& <H,HHH 2s.

Ill$st ation C. KLB Ltd. provides the following information. .alculate the 9et .ash Flow from Financing ,ctivities #

*articulars

3%.3.(HH= 2s,

3%.3.(HHF 2s %<,HH,HHH CC.. (,HH,HHH

0-uity Share .apital %HI Aebentures GI Aebentures Additional Information : $i& $ii& $iii& Interest paid on Aebentures 2s. %H,HHH Aividend paid 2s. <H,HHH

%H,HH,HHH %,HH,HHH CCC

Auring the year (HH="(HHF, XZY Ltd. issued bonus shares in the ratio of ( # % by capitalising reserve.

Sol$tion 3 .alculation of 9et .ash Flow From Financing ,ctivities

G=

*articulars .ash *roceeds from the Issue GI of Aebentures 2edemption of %HI Aebentures Interest paid Aividend paid Net Cas% Flo? f om Financin# Activities

2s. (,HH,HHH $%,HH,HHH& $%H,HHH& $<H,HHH& 8H,HHH

Note 3 )onus shares is not to be shown in the .ash Flow Statement because there is no cash flow.

Ill$st ation 1E.

From the following information, calculate the .ash Flow from Investing

,ctivities and Financing ,ctivities #

-a tic$la s Furniture $,t .ost& ,ccumulated Aepreciation on Furniture .apital Loan from )ank

Openin# (H,HHH =,HHH %,HH,HHH (<,HHH

Closin# (G,HHH ;,HHH %,8H,HHH %<,HHH

Auring the year, furniture costing 2s. 8,HHH was sold at a profit of 2s. 3,HHH. Aepreciation on furniture charged during the year amounted to 2s. <,HHH.

Sol$tion 3 Cas% Flo? f om Financin# Activities *articulars Inflow from Issue of Fresh .apital $Diven& $2s. %,8H,HHH Q 2s. %,HH,HHH& GF 2s. 8H,HHH

1utflow on 2epayment of )ank Loan $Diven& 2s. (<,HHH Q 2s. %<,HHH& 9et .ash from Financing ,ctivities

$%H,HHH& 3H,HHH

Cas% Flo? f om Investin# Activities *articulars Inflow from Sale of Furniture $3& 1utflow on *urchase of Furniture$%& 9et .ash from Investing ,ctivities $8& 2s. <H,HHH $%(,HHH& F,HHH

1.C

-RE-ARATION OF CAS* FLO9 STATEMENT

>aving discussed how the .ash Flow Statement is prepared for each activity, let us now discuss the .ash Flow Statement as a complete statement as follows # %. (. 3. .ompute the .ash Flows from 1perating ,ctivities. .ompute the .ash Flows from Investing ,ctivities and Financing ,ctivities. The .ash Flows under each activity $1perating/Investing/Financing& are shown in the .ash Flow Statement. ,ggregate of these three activities will be either an increase or a decrease in cash e-uivalents. 8. .ash and .ash 0-uivalent balance at the beginning will be added to the net increase or decrease in .ash 0-uivalents $Step 3&. 2esulting figure will be .ash and .ash 0-uivalents at the end. The formats for calculating .ash Flow from 1perating ,ctivities by Airect ?ethod and Indirect ?ethod are given below #

GG

1.C.1

,IRECT MET*O,

F12?,T F12 .,S> FL1E ST,T0?09T for the year ended C. W ,s per ,ccounting Standard"3 $2evised&X *articulars %. .ash Flow from 1perating ,ctivities ,. 1perating .ash 2eceipts, e.g., Q Q Q Q .ash Sales .ash received from .ustomers Trading .ommissions received 2oyalties received C. C. C. C. C.. 2s.

$)& 1perating .ash *ayments, e.g., Q Q Q .ash *urchases .ash *aid to the Suppliers .ash *aid for )usiness 0!penses like 1ffice 0!penses, ?anufacturing 0!penses, Selling and Aistribution 0!p. 0tc. $.& .ash generated from 1perations $, Q )& $A& Income Ta! *aid $9et of Ta! 2efund received& $0& Cas% Flo? 4efo e E(t ao !ina y Item $F& 0!traordinary Items $2eceipt/*ayment& $C& $...& C $C& C. $5/"&C. C. $C& $C&

$D& 9et .ash from $or used in& 1perating ,ctivities II. .ash Flow from Investing ,ctivities $Same as under Indirect ?ethod& III. .ash Flow from Financing ,ctivities $Same as under Indirect ?ethod& I:. 9et Increase/Aecrease in .ash and .ash 0-uivalents $Same as under Indirect ?ethod " I 5 II 5 III& :. ,dd .ash and .ash 0-uivalents in the beginning of the year

C C

G;

$Same as under Indirect ?ethod& :I. .ash and .ash 0-uivalents in the end of the year

C C

;H

1.C.2 for the year ended C.

IN,IRECT MET*O,

F12?,T F12 .,S> FL1E ST,T0?09T W ,s per ,ccounting Standard"3 $2evised&X *articulars %. Cas% Flo? f om Ope atin# Activities 9et *rofit and Loss ,/c or Aifference between .losing )alance and 1pening )alance of *rofit and Loss ,/c A!! 3 1A2 App op iation of f$n!s. Transfer to reserve *roposed dividend for current year Interim dividend paid during the year *rovision for ta! made during the current year 0!traordinary item, if any, debited to the *rofit and Loss ,/c Less 3 0!traordinary item, if any, credited to the *rofit and Loss ,/c 2efund of ta! credited to *rofit and Loss ,/c 9et *rofit before Ta!ation and 0!traordinary Items $)& A!! 3 Non ope atin# E(penses 3 Q Q Q Q Q Aepreciation *reliminary 0!penses / Aiscount on Issue of Shares and Aebentures written off Doodwill, *atents and Trade ?arks ,mortized Interest on )orrowings and Aebentures Loss on Sale of Fi!ed ,ssets C C. C. C. C. $.& Less 3 Non Ope atin# Incomes3 Q Q Q Q Interest Income Aividend Income 2ental Income *rofit on Sale of Fi!ed ,ssets C C C C C C C C C C C C C $C& $C& C. C 2s.

1,2 Ope atin# - ofit 4efo e 9o 'in# Capital C%an#es 1AL)HC2 $0& A!! 3 ,ec ease in C$ ent Assets an! Inc ease in C$ ent Lia4ilities Q Aecrease in Stock/ Inventories

;%

Q Q Q Q Q Q Q

Aecrease in Aebtors/ )ills 2eceivables Aecrease in ,ccrued Incomes Aecrease in *repaid 0!penses Increase in .reditors /)ills *ayables Increase in 1utstanding 0!penses Increase in ,dvance Incomes Increase in *rovision for Aoubtful Aebts.

C C C C C C C C

1F2 Less 3 Inc ease in C$ ent Assets an! ,ec ease in C$ ent Lia4ilities Q Q Q Q Q Q Q Q Aecrease in Stock/ Inventories Aecrease in Aebtors/ )ills 2eceivables Aecrease in ,ccrued Incomes Aecrease in *repaid 0!penses Increase in .reditors /)ills *ayables Increase in 1utstanding 0!penses Increase in ,dvance Incomes Increase in *rovision for Aoubtful Aebts. C C C C C C C C C C C C

1&2 Cas% &ene ate! f om Ope ations 1,LEHF2 1*2 Less 3 Income Ta( -ai! 1Net of Ta( Ref$n! eceive!2 1I2 1M2 Less 3 Income Ta( -ai! 1Net of Ta( Ref$n! eceive!2 1L"+2 E(t ao !ina y Items

1N2 Net Cas% f om 1o $se! in2 Ope atin# Activities

II.

Cas% Flo? f om Investin# Activities Q Q Q *roceeds from Sale of Fi!ed ,ssets *roceeds from Sale of Investments *roceeds from Sale of Intangible ,ssets C C C

;(

Q Q Q Q Q

Interest and Aividend received $For 9on"financial companies only& 2ent Income *urchase of Fi!ed ,ssets *urchase of Investments *urchase Intangible ,ssets like Doodwill C C $C& $C& $C& C C C $C& $C& $C& $C& C C

9et .ash from $or used in& Financing ,ctivities III. Cas% f om Financin# Activities Q Q Q Q Q Q *roceeds from Issue of Shares and Aebentures *roceeds from 1ther Long"term )orrowings Final Aividend *aid Interest and Aebentures and Loans *aid 2epayment of Loans 2edemption of Aebentures / *reference Shares

9et .ash from $or used in& Financing ,ctivities II. Net Inc ease " ,ec ease in Cas% an! Cas% EA$ivalents 1ILIILIII2 I. A!! 3 Cas% an! Cas% EA$ivalents in t%e 4e#innin# of t%e yea Q Q Q Q Q Q Q Q .ash in >and .ash at )ank $Less # )ank 1verdraft& Short"term Aeposits ?arketable Securities .ash in >and .ash at )ank $Less # )ank 1verdraft& Short"term Aeposits ?arketable Securities C C C C C C C

II. Cas% an! Cas% EA$ivalents in t%e en! of t%e yea

Note 3 ,mounts in brackets indicate negative amounts, i.e., amounts that are to be deducted.

;3

Ill$st ation 11. From the following information, prepare the .ash Flow Statement for the year ended ?arch 3%, (HHF # -a tic$la s 1pening .ash )alance .losing .ash )alance Aecrease in Aebtors Increase in .reditors Sale of Fi!ed ,ssets 2edemption of Aebentures 9et *rofit for the year Rs. %H,HHH %(,HHH <,HHH F,HHH (H,HHH <H,HHH (H,HHH

;8

Sol$tion 3 Cas% Flo? Statement for the year ended 3%st ?arch, (HHF *articulars A. Cas% Flo? f om Ope atin# Activities 9et *rofit for the year before ta! ,dd # Increase in .reditors Aecrease in Aebtors 9et .ash provided by 1perating ,ctivities ). Cas% Flo? f om Investin# Activities *roceeds from Sale of Fi!ed ,ssets 9et .ash from Investing ,ctivities C. Cas% Flo? f om Financin# Activities 2edemption of Aebentures 9et .ash used in Financing ,ctivities A. 9et Increase in .ash $, 5)5.& ,dd # .ash at the beginning of the period Cas% at t%e en! of t%e pe io! $<H,HHH& $<H,HHH& (,HHH %H,HHH %(,HHH (H,HHH (H,HHH F,HHH <,HHH %(,HHH 3(,HHH 2s. (H,HHH

Ill$st ation 12. From the following particulars , prepare the .ash Flow Statement for the year ended 3%st ?arch, (HHF by the Airect ?ethod #

$i& $ii&

.ash sales 2s. =<,G=,HHH. .ash collected from debtors during the year amounted to 2s. 33,(3,8HH.

$iii& .ash paid to suppliers was 2s. F;,3=,G%H. $iv& 2s.;, GF, <HH was paid to and for employees.

;<

$v&

Furniture of the book value of 2s. %G,<HH was sold for 2s. %%,HHH and a new furniture costing 2s. G3,%=H was purchased.

$vi& Aebentures of the face value of 2s. 3,HH,HHH were redeemed at a premium of ( per cent interest on debentures. Interest on debentures, 2s. G8,HHH was also paid. 1vii2 Aividend, 2s. 8,<H,HHH for the year ended 3%st ?arch, (HHF was distributed in ?ay, (HHF. 1viii2 .ash in hand and at bank as on ?arch 3%, (HH= and ?arch 3%,(HHF was 2s. <%,HFH and 2s. <,F8,HHH respectively.

Sol$tion 3 CAS* FLO9 STATEMENT 1,IRECT MET*O,2 for the year ended 3%st ?arch, (HHF *articulars .ash Flow from 1perating ,ctivities 2eceipts Q .ash Sales .ash receipts from customers =<,G=,HHH 33,(3,8HH ;;,H;,8HH *ayments Q*ayments for purchases and to suppliers *ayments to and for employees F;,3=,G%H ;,GF,<HH G;,(8,3%H 9et .ash from 1perating ,ctivities $2eceipts Q *ayments& Cas% Flo? f om Investin# Activities *urchase of Fi!ed ,ssets ;= $G3,%=H& ;,G<,H;H 2s.

*roceeds from Sale of Fi!ed ,ssets Cas% Flo? f om Financin# Activities 2edemption of debentures at a premium W2s. 3,HH,HHH 5 2s. =,HHHX Interest paid on debentures Net Cas% $se! in Financin# Activities 9et increase in cash and cash e-uivalents .ash and cash e-uivalents as on 3%st ?arch, (HHF $.losing )alance& .ash and cash e-uivalents as on 3%st ?arch, (HHF $.losing )alance&

%%,HHH $F(,%=H& $3,H=,HHH& $G8,HHH& $3,;H,HHH& $3,;H,HHH& <,((,;3H <%,HFH <,F8,HHH

Notes 3 Aividend for the year ended 3%st ?arch, (HHF was paid in ?ay (HHF. >ence, it is not an outflow of cash for the year ended 3%st ?arch, (HHF. Ill$st ation 17. From the summary cash account of K Ltd. prepare the .ash Flow Statement for the year ended 3%st ?arch, (HHF by Airect ?ethod. CAS* )OON Ar. -a tic$la s To )alance on ,pril %,(HH= To Issue of 0-uity Shares To 2eceipts from .ustomers To Sale of Fi!ed ,ssets for the year ended ?arch 3%,(HHF Rs. -a tic$la .r. Rs. (H,HH,HHH (,HH,HHH (,HH,HHH %,HH,HHH (,<H,HHH 3,HH,HHH 3,HH,HHH

<H,HHH )y *ayment to Suppliers 3,HH,HHH )y *urchased of Fi!ed ,ssets (G,HH,HHH )y 1verhead 0!penses %,HH,HHH )y Eages and Salaries )y Income Ta! *aid )y TAividend *aid )y 2e payment of )ank Loan

)y )alance on ?arch 3%, (HHF %,<H,HHH 3(,<H,HHH 3(,<H,HHH

;F

Sol$tion 3 CAS* FLO9 STATEMENT OF D LT,. 1,IRECT MET*O,2 for the year ended 3%st ?arch, (HHF *articulars A. Cas% Flo? f om Ope atin# Activities 1i2 Ope atin# Cas% Receipts 3 (G,HH,HHH 2s.

.ash 2eceived from .ustomers 1ii2 Ope atin# Cas% -ayments 3 (H,HH,HHH %,HH,HHH

.ash *aid to Suppliers Eages and Salaries 1verhead 0!penses

(,HH,HHH $(3,HH,HHH&

.ash Denerated from 1perations Less # Income Ta! *aid

<,HH,HHH (,<H,HHH

9et .ash from 1perating ,ctivities ). Cas% Flo? f om Investin# Activities *urchase of Fi!ed ,ssets *roceeds from Sale of Fi!ed ,ssets 9et .ash @sed in Investing ,ctivities C. Cas% Flo? f om Financin# Activities *roceeds from Issue of 0-uity Shares *ayment of )ank Loan Aividend *aid Net Cash Used in Financing Activities ,. E. F. Net Inc ease in Cas% an! Cas% EA$ivalents 1AL)LC2 Cas% an! Cas% EA$ivalent at t%e 4e#innin# of t%e yea Cas% an! Cas% EA$ivalent at t%e En! of t%e yea 3,HH,HHH $3,HH,HHH& $<H,HHH& $(,HH,HHH& %,HH,HHH

(,<H,HHH

$%,HH,HHH&

$<H,HHH& %,HH,HHH <H,HHH %,<H,HHH

Ill$st ation 18. The financial position of ,). Ltd. as on 3%st ?arch was as follows #

;G

Ar. Lia4ilities 2EE< Rs. .urrent Liabilities Loan from B Ltd. Loan from )ank Share .apital *rofit and Loss ,/c F(,HHH C. =H,HHH ;=,HHH 2EE= Rs. G(,HHH 8H,HHH <H,HHH ;G,HHH

.r. Assets 2EE< Rs. .ash Aebtors Stock Land )uildings ?achinery *rovision for Aep. 8,(G,HHH 8,FH,HHH G,HHH FH,HHH <H,HHH 8H,HHH %,HH,HHH (,%8,HHH $<8,HHH& 8,(G,HHH 2EE= Rs. F,(HHH F=,GHH 88,HHH =H,HHH %,%H,HHH (,88,HHH $F(,HHH& 8,FH,HHH

(,HH,HHH (,HH,HHH

Auring the year. 2s. <(,HHH were paid as dividend. *repare .ash Flow Statement. Sol$tion 3 CAS* FLO9 STATEMENT for the year ended 31st March, !!" *articulars Cas% Flo? f om Ope atin# Activities 9et profit before ta! and e!traordinary items $See Eorking 9ote& ,dd # Aepreciation 1perating *rofit before Eorking .apital .hanges ,dd # Aecrease in Stocks Increase in .urrent Liabilities ;; <8,HHH %G,HHH F(,HHH =,HHH %H,HHH 2s.

Less # Increase in Aebtors 9et .ash from 1perating ,ctivities Cas% Flo? f om Investin# Activities *urchase of )uilding *urchase of Land *urchase of ?achinery 9et .ash used in Investing ,ctivities Cas% Flo? f om Financin# Activities *roceeds of Loan from B Ltd. 2epayment of )ank Loan *ayment of Aividend 9et cash used in Financing ,ctivities Net ,ec ease in Cas% an! Cas% EA$ivalents Cas% an! cas% eA$ivalents at t%e 4e#innin# Cas% an! cas% eA$ivalents at t%e en! of t%e pe io!

$=,GHH& G%,(HH

$%H,HHH& $(H,HHH& $3H,HHH& $=H,HHH&

8H,HHH $%H,HHH& $<(,HHH& $((,HHH& $GHH& G,HHH F,(HH

9o 'in# Note 3 .losing )alance as per *rofit and Loss ,/c $on 3%st ?arch, (HHF& ;G,HHH

Less 3 1pening )alance as per *rofit and Loss ,/c as on %st ,pril, (HH= ;=,HHH *rofit for the year ,dd # Aividends *aid 9et *rofit before Ta! (,HHH <(,HHH <8,HHH

Ill$st ation 1;. From the following particulars of KLB Ltd. prepare the .ash Flow Statement.

%HH

Ar. Lia4ilities ?arch 3% ?arch 3%, (HH= 2s. 0-uity Share .apital %(I *ref. Share .apital %HI Aebentures *rofit and Loss ,/c .reditors *rovision for Aoubtful Aebts 3,HH,HHH (,HH,HHH %,HH,HHH %,%H,HHH FH,HHH %H,HHH (HHF 2s. 3,<H,HHH Fi!ed ,ssets $9et& %,HH,HHH %HI Investment (,HH,HHH .ash in >and (,FH,HHH .ash at )ank %,8<,HHH Aebtors $Dood& %<,HHH Stock Aiscount on Aeb. F,;H,HHH %H,GH,HHH Assets ?arch 3%, (HH= 2s. <,%H,HHH 3H,HHH (H,HHH (H,HHH %,HH,HHH %,HH,HHH %H,HHH F,;H,HHH

.r. ?arch 3% (HHF 2s. =,(H,HHH GH,HHH 3<,HHH 8H,HHH (,HH,HHH ;H,HHH %<,HHH %H,GH,HHH

Lou are informed that during the year # $i& $ii& , machine with a book value of 2s. 8H,HHH was sold for (<,HHH. Aepreciation charged during the year was 2s.FH,HHH.

$iii& *reference shares were redeemed on 3%st ?arch, (HHF at a premium of <I. $iv& ,n Interim Aividend U %< per cent was paid on e-uity shares on 3% st ?arch, (HHF. *reference Aividend was also paid on 3%st march, (HHF. $v& 9ew shares and debentures were issued on 3%st ?arch, (HHF.

Sol$tion 3 CAS* FLO9 STATEMENT for the year ended 31st March, !!" *articulars 1A2 Cas% Flo? f om Ope atin# Activities .losing )alance as per *rofit and Loss ,/c Less 3 1pening )alance as per *rofit and Loss ,/c (,FH,HHH %,%H,HHH %,=H,HHH 2s.

%H%

A!! 3 App op iation of F$n! *reference Aividend Interim Aividend (8,HHH 8<,HHH

Increase in *rovision for Aoubtful Aebts $Since all debtors are good& $9ote %&<,HHH F8,HHH

Net - ofit 4efo e ta( A!! 3 Non ope atin# E(penses 3 Aepreciation Interest on Long Term )orrowings $Aebentures& Loss on Sale of ?achinery FH,HHH %H,HHH %<,HHH

(,38,HHH

*remium *ayable on 2edemption of *reference Shares

<,HHH

%,HH,HHH 3,38,HHH

Less 3 Non ope atin# Incomes 3 Interest on Investment 1perating *rofit before Eorking .apital .hanges A!! 3 ,ec ease in C$ ent Assets an! Inc ease in C$ ent Lia4ilities Aecrease in Stock Increase in .reditors %H,HHH F<,HHH G<,HHH 8,%=,HHH Less 3 Inc ease in C$ ent Assets an! ,ec ease in C$ ent Lia4ilities Increase in Aebtors Net Cas% f om Ope atin# Activities %,HH,HHH 3,%=,HHH 3,HHH 3,3%,HHH

).

Cas% Flo? f om Investin# Activities *urchase of Fi!ed ,ssets $(,(H,HHH&

%H(

*roceeds from Sale of ?achinery Interest on Investment *urchase of Investments 9et .ash @sed in Investing ,ctivities 1C 2 Cas% Flo? f om Financin# Activities *roceeds from Issue of Share .apital *roceeds from long"term borrowings $Aebentures&

(<,HHH 3,HHH $<H,HHH& $(,8(,HHH&

<H,HHH ;<,HHH

W 2s. %,HH,HHH Q 2s. <,HHH $Aiscount on Issue of Aebentures& $9ote (&X 2edemption of *reference Shares $2s. %,HH,HHH 5 2s. <,HHH& Interest *aid on Long"Term )orrowings Interim Aividend paid *reference Aividend *aid during the year 9et .ash @sed in Financing ,ctivities Net Inc ease in Cas% an! Cas% EA$ivalents 1AL)LC2 Cas% an! Cas% EA$ivalents in t%e 4e#innin# of pe io! $.ash in >and and .ash at )ank& Cas% in Cas% EA$ivalents at t%e en! of pe io! $.ash in >and and .ash at )ank& F<,HHH $%,H<,HHH& $%H,HHH& $8<,HHH& $(8,HHH& $3;,HHH& 3<,HHH 8H,HHH

9o 'in# Notes 3 a. Increase in *rovision for Aoubtful Aebts $if all debtors have been considered as good& represents transfer of the *rofit from *rofit and Loss ,ccount. It is added back to the current year s profits to find out cash from 1perating ,ctivities. b. Increase in Aiscount on the Issue of Aebentures $or shares& is deducted from increase in Aebentures $or shares& to ascertain the net amount of issue.

%H3

FIDE, ASSETS ACCOUNT 1AT 9.,.I2 3. .r. -a tic$la s To To )alance b/d )ank ,/c $*urchase& $)alancing Figure& Rs. -a tic$la s Rs. (<,HHH %<,HHH FH,HHH =,(H,HHH F,3H,HHH Ar.

<,%H,HHH )y )ank ,/c (,(H,HHH )y *rofit and Loss ,/c $Loss on Sale& )y Aepreciation ,/c )y )alance c/d F,3H,HHH

Ill$st ation 1<. The summarized )alance Sheets of KLB Ltd. as on 3% st ?arch, (HH= and (HHF are given below #" Ar. Lia4ilities ?arch 3% ?arch 3%, (HH= 2s. Share .apital Deneral 2eserve *rofit and Loss ,/c .reditors *rovision for Ta!ation ?ortgage 8,<H,HHH 3,HH,HHH <=,HHH %,=G,HHH F<,HHH C. (HHF 2s. 8,<H,HHH Fi!ed ,ssets 3,%H,HHH Investment =G,HHH Stock %,38,HHH Aebtors %H,HHH )ank (,FH,HHH %H,8;,HHH %(,8(,HHH Assets ?arch 3%, (HH= 2s. 8,HH,HHH <H,HHH (,8H,HHH (,%H,HHH %,8;,HHH .r. ?arch 3% (HHF 2s. 3,(H,HHH =H,HHH (,%H,HHH 8,<<,HHH %,;F,HHH

%H,8;,HHH %(,8(,HHH

Additional Information : $i& $ii& Investments costing 2s. G,HHH were sold during the year (HH="HF for 2s. G,<HH. *rovision for ta! made during the year was 2s. ;,HHH.

%H8

$iii& Auring the year, part of the fi!ed assets costing 2s. %H,HHH was sold for 2s. %(,HHH and the profit was included in the *rofit and Loss ,ccount. $iv& Aividends paid during the year amounted to 2s. 8H,HHH Lou are re-uired to prepare a .ash Flow Statement.

Sol$tion 3 CAS* FLO9 STATEMENT for the year ended 31st March, !!" *articulars 1A2 Cas% Flo? f om Ope atin# Activities 3 .losing )alance as per * J L ,/c $3%.3.(HHF& Less 3 1pening )alance of *rofit and Loss ,/c $3%.3.(HH=& =G,HHH <=,HHH %(,HHH A!! 3 App op iation of F$n! 3 Interim Aividend *rovision for Ta! Transfer to 2eserve 9et *rofit before ta! and e!traordinary items A!!3Non Ope atin# E(penses 3 Aepreciation $9ote %& Less # Non Ope atin# Incomes 3 *rofit on Sale of Investments 1perating *rofit before Eorking .apital .hanges A!! 3 ,ec ease in C$ ent Assets an! Inc ease in C$ ent Lia4ilities 3 Aecrease in Stock $2s. (,8H,HHH Q 2s. (,%H,HHH& Less 3 Inc ease in C$ ent Assets an! !ec ease in C$ ent Lia4ilities 3 Increase in Aebtors $2s. 8,<<,HHH Q 2s. (,%H,HHH& Aecrease in .reditors $2s. %,=G,HHH Q 2s. %,38,HHH& Cas% &ene ate! f om Ope ations $(,8<,HHH& $38,HHH& $(,F;,HHH& $%,%H,<HH& 3H,HHH $<HH& $(,HHH& =F,<HH %,3G,<HH FH,HHH 8H,HHH ;,HHH %H,HHH <;,HHH F%,HHH 2s.

%H<

Less # Income ta! *aid 9et .ash used in 1perating ,ctivities $,& 1)2 Cas% Flo? f om Investin# Activities *urchase of Investment Sale of Fi!ed ,ssets Sale of Investments 9et .ash from Investing ,ctivities $)& 1C2 Cas% Flo? f om Financin# Activities ?ortgage Loan Aividend *aid 9et .ash from Financing ,ctivities $.& 1,2 Net Inc ease in Cas% an! Cas% EA$ivalents 1AL)LC2 1E2 Cas% an! Cas% EA$ivalents at t%e 4e#innin# of t%e yea 1F2 Cas% an! Cas% EA$ivalents at t%e en! of t%e yea

$F8,HHH& $%,G8,<HH&

$%G,HHH& %(,HHH G,<HH (,<HH

(,FH,HHH $8H,HHH& $(,3H,HHH& 8G,HHH %,8;,HHH %,;F,HHH

9o 'in# Notes 3 % Ar. -a tic$la s To To )alance b/d *rofit and Loss ,/c $*rofit on Sale& 8,H(,HHH Fi(e! Assets Acco$nt Rs. -a tic$la s .r. Rs. %(,HHH 3,(H,HHH 8,H(,HHH

8,HH,HHH )y )ank ,/c )y )alance c/d

(,HHH )y Aepreciation ,/c $)al. Fig.& FH,HHH

%H=

Ar. -a tic$la s To To To )alance b/d

Investment Acco$nt Rs. -a tic$la s

.r. Rs. G,<HH

8,HH,HHH )y )ank ,/c %G,<HH =G,<HH

*rofit and Loss ,/c $*rofit& )ank ,/c $)alance Fig.&

(,HHH)y Aepreciation ,/c $)al. Fig.& =H,HHH

=G,<HH

Ar. -a tic$la s To To To

Investment Acco$nt Rs. -a tic$la s 8,HH,HHH )y )alance b/d (,HHH )y *rofit and Loss ,/c %G,<HH G8,HHH $*rovision ?ade&

.r. Rs.

)ank ,/c $)alancing Fig.& )alance c/d

F<,HHH ;,HHH G8,<HH

Net - ofit o , a?in#s 3

Sometimes in the case of a sole trader or a partnership firm, capital

of the proprietor or partners is given but the amount of drawings or net profits made may be missing. The capital account may be prepared to find the net profits or drawings. *rofit 4 .apital at the end 5 Arawings Q .apital at the beginning Arawings 4 .apital at the beginning 5 *rofit Q .apital at the end

Ill$st ation 1=. The summarized )alance Sheets of KLB Ltd. as on 3% st ?arch, (HH= and (HHF are given below #" Ar. Lia4ilities 2EE< 2EE= Assets (HH= .r. (HHF

%HF

2s. .reditors ?rs. , s Loan Loan from )ank .apital of , and ) 8H,HHH (<,HHH 8H,HHH %,(<,HHH

2s. 88,HHH Fi!ed ,ssets C Aebtors <H,HHH Stock %,<3,HHH ?achinery Land )uildings

2s. %H,HHH 3H,HHH 3<,HHH GH,HHH 8H,HHH 3<,HHH (,3H,HHH

2s. F,HHH <H,HHH (<,HHH <<,HHH <H,HHH =H,HHH (,8F,HHH

(.3H,HHH

(,8F,HHH

Auring the year, a machine costing 2s. %H,HHH $accumulated depreciation 2s. 3,HHH& was sold for 2s. <,HHH. The provision for depreciation against machinery as on ?arch 3%,(HH= and ?arch 3%, (HHF was of 2s. (<,HHH and 2s. 8H,HHH respectively. The 9et *rofits for the year amounted to 2s. 8<,HHH. Lou are re-uired to prepare the .ash Flow Statement. Sol$tion 3 CAS* FLO9 STATEMENT for the year ended 31st March, !!" *articulars 1A2 Cas% Flo? f om Ope atin# Activities 9et *rofit before Ta! A!! 3 Non Ope atin# E(penses 3 Aepreciation $See 9ote 3& Loss on Sale of ?achinery $See 9ote 8& 1perating *rofit before Eorking .apital .hanges ,dd # Aecrease in .urrent ,sset or Increase in .urrent Liabilities# Aecrease in Stock Increase in .reditors %H,HHH 8,HHH %8,HHH F;,HHH Less # Increase in .urrent ,sset or Aecrease in .urrent Liabilities Increase in Aebtors 9et .ash from 1perating ,ctivities (H,HHH <;,HHH %G,HHH (,HHH (H,HHH =<,HHH 8<,HHH 2s.

%HG

$)& Cas% Flo? f om Investin# Activities *urchase of Land *urchase of )uildings *roceeds from Sale of ?achinery 9et cash used in Investing activities $. & Cas% Flo? f om Financin# Activities *roceeds of Loan from )ank *ayment of ?rs. , s Loan Arawings $9ote %& 9et .ash used in Financing ,ctivities 1,2 Net ,ec ease in Cas% an! Cas% EA$ivalents 1AL)LC2 1E2 Cas% an! cas% eA$ivalents at t%e 4e#innin# of t%e pe io! 1F2 Cas% an! cas% eA$ivalents at t%e en! of t%e pe io! Notes 3 Arawings 4 1pening .apital of , and ) 5 9et *rofits Q .losing .apital of , and ) 4 2s. %,(<,HHH 5 2s. 8<,HHH Q 2s. %,<3,HHH 4 2s. %F,HHH ( Ar. -a tic$la s To )alance b/d $2s. GH,HHH52s. (<,HHH& 3,HHH )y *rofit and Loss ,/c Q Loss on Sale $9ote 8& %,H<,HHH (,HHH ;<,HHH %,H<,HHH Mac%ine y Acco$nt Rs. %,H<,HHH -a tic$la s )y .ash ,/c )y *rovision for Aepreciation .r. Rs. <,HHH $3,HHH& $%H,HHH& F,HHH %H,HHH $(<,HHH& $%F,HHH& $3(,HHH& $%H,HHH& $(<,HHH& (<,HHH $3H,HHH&

VSometimes, fi!ed assets are shown at t%e ? itten !o?n val$e 1afte !e!$ctin# !ep eciation2 in t%e 4alance s%eet an! t%e acc$m$late! !ep eciation is #iven in t%e a!!itional info mation $as in the present illustration&. In such a case, the opening and closing balances in

%H;

the respective Fi!ed ,ssets account will be the total amount of book value shown in the balance sheet plus balance of the accumulated depreciation provided in additional information.

Ar. -a tic$la s

- ovision fo ,ep eciation Acco$nt Rs. -a tic$la s 3,HHH 8H,HHH )y )alance ,/c

.r. Rs.

To To

Aepreciation on ?achinery Sold (<,HHH )alance c/d

)y Aepreciation provided $)alancing Figure& %G,HHH 83,HHH

83,HHH

8.

Loss on Sale of ?achinery 4 .ost Q ,ccumulated Aepreciation Q Selling *rice 4

2s. %H,HHH Q 2s. 3,HHH Q 2s. 3,HHH Q 2s. <,HHH 4 2s.(,HHH

Ill$st ation 1B. From the following )alance Sheets of ?/s Dupta J .o., prepare the .ash Flow Statement for the year ended ?arch 3% #

Lia4ilities

2EE< 2s.

2EE= 2s.

Assets

(HH= 2s. G,HHH Aebtors <,HHH (H,HHH ;<,HHH (,3H,HHH

(HHF 2s. ((,HHH %<,HHH C (G,HHH %,3<,HHH (,8F,HHH

.reditors 1utstanding %%,HHH Loan from K .apital

(H,HHH 0!penses %H,HHH %,HG,HHH

((,HHH .ash <,HHH %,HHH <,HHH )ills 2eceivable %,=G,HHH Stock Fi!ed ,ssets

(.3H,HHH

(,8F,HHH

%%H

Auring the year, the proprietor introduced 2s. (H,HHH as additional capital. The net profits for the year, after charging 2s. <,HHH as depreciation on fi!ed assets, were 2s. <H,HHH.

Sol$tion 3 CAS* FLO9 STATEMENT for the year ended 31st March, !!" *articulars 1A2 Cas% Flo? f om Ope atin# Activities 9et *rofit before Ta! 9on"1p. 0!penses # Aepreciation 1perating profit before Eorking .apital .hanges A!! 3 ,ec ease in C$ ent Assets O inc ease in C$ ent Lia4ilities 3 Aebtors )ills 2eceivables .reditors 8,HHH <,HHH (,HHH %%,HHH ==,HHH Less 3 Inc ease in C$ ent Assets O !ec ease in c$ ent lia4ilities3 Stock 1utstanding 0!penses %%% G,HHH 8,HHH %(,HHH <,HHH <<,HHH <H,HHH 2s.

9et .ash from 1perating ,ctivities 1)2 Cas% Flo? f om Investin# Activities Fi!ed ,ssets *urchased $See Eorking 9ote (& 9et .ash used in Investing ,ctivities 1C2 Cas% Flo? f om Financin# Activities 2epayment of Loan from K ,dditional .apital Introduced Arawing $See Eorking 9ote"%& 9et .ash used in Financing ,ctivities 1,2 Net Inc ease in Cas% an! Cas% EA$ivalents 1AL)LC2 1E2 Cas% )alance on Ap il 15 2EE< 1F2 Cas% )alance on Ma c%5 715 2EE= 9o 'in# Notes 3 $<,HHH& (H,HHH $%H,HHH&

<8,HHH

$8<,HHH&

<,HHH $%8,HHH& $G,HHH& ((,HHH

Ar. -a tic$la s

CA-ITAL ACCOUNT Rs. %H,HHH -a tic$la s )y )alance b/d )y .ash ,/c $,dditional .apital& )y *rofit and Loss ,/c Loss on Sale $9ote 8& %,FG,HHH $9et *rofit&

.r. Rs. %,HG,HHH

To

.ash ,/c $2s. GH,HHH52s. (<,HHH&

<H,HHH ;<,HHH %,FG,HHH

Ar. -a tic$la s

FIDE, ACCOUNT Rs. ;<,HHH 8<,HHH %.8H,HHH -a tic$la s )y Aepreciation )y )alance c/d

.r. Rs. <,HHH %,3<,HHH

To To

)alance b/d )ank ,/c $*urchase Q )alancing Figure&

%,8H,HHH

%%(

Te ms int o!$ce! in t%e c%apte %. (. 3. 8. <. =. F. G. ;. %H. %%. %(. %3. %8. %<. %=. %F. %G. %;. (H. (%. ((. (3. (8. (<. (=. (F. (G. Financial Statements *rofit and loss ,ccount )alance Sheet *reliminary e!pense Share .apital .ontingent liabilities *roposed dividend *rovision for ta!ation 2atio ,nalysis Li-uidity ratios Solvency ratios Turnover ratios *rofitability ratios 2eturn on investment Ruick ,ssets 2eceivables 0arning per share Aividend payout .ash Flow Li-uidity .ash 0-uivalent Investing ,ctivities 0!traordinary ,ccounting Solvency 1perating ,ctivities Financing ,ctivities ,ppropriation

%%3

S$mma y Financial Statements# Financial statements are the basic and formal annual reports through which the corporate management communicates financial information to its owners and various other e!ternal parties which include"investors, ta! authorities, government, employees, etc. There are two main financial statements. They are# $%& balance sheets' $(& income statements. )alance sheet# The )alance Sheet shows what a company owns and what it owes at a fi!ed point in time. Income statement# The Income Statement shows how much money a company made and spent over a period of time. @sers of financial statements# These include investors and potential investors' lenders/long term creditors' management' suppliers/short term creditors' employees and trade unions' government and its agencies' stock e!change and its customers

2atio ,nalysis is the relationship between two items of financial data e!pressed in the form of ratios and then interpreted with a view to evaluating the financial condition and performance of a firm.

1b+ectives of 2atio ,nalysis

The analysis would enable the calculation of not only the present earning capacity of the business but would also help in the estimation of the future earning capacity. The analysis would help the management to find out the overall as well as the department"wise efficiency of the firm on the %%8

basis of the available financial information. The short term as well as the long term solvency of the firm can be determined w3ith the help of ratio analysis. Inter"firm comparison becomes easy with the help of ratios.

Advantages of #atio Analysis

2atio ,nalysis simplifies Financial Statements, facilitates inter"firm comparison' makes intra" firm comparison possible and helps in forecasting Limitations of Ratio Analysis 2atio ,nalysis is historical in nature' changes in price level often make comparison of figures of the previous years difficult. It is not free from bias. Some companies, in order to cover up their bad financial position report to window dressing. 2atio ,nalysis ignores -ualitative factors and different accounting practices render ratios incomparable

Types of Ratios

Financial ratios can be classified into four important categories# %. (. Li-uidity 2atios# Li-uidity ratios help the users in knowing the e!tent of short"term debt paying ability of a firm. They include current ratio and -uick ratio. Solvency 2atios# Solvency ratios analyse the long"term debt paying capacity of the firm. They include Aebt e-uity ratio' Total ,ssets to Aebt 2atio' *roprietary ratio and Interest .overage 2atio.

3.

,ctivity or Turnover 2atios# ,ctivity ratios help in commenting on the efficiency of the firm in managing it assets. The speed with which assets are converted into sales is captured by activity ratios. These include Stock Turnover' Aebtors $2eceivable&

%%<

Turnover' .reditors $*ayable& Turnover' Fi!ed ,ssets Turnover and Eorking .apital Turnover. 8. *rofitability 2atios# *rofitability ratios are calculated to measure the profitability of a business enterprise. These include Dross *rofit 2atio' 9et profit 2atio' 1perating 2atio' 1perating *rofit ratio' return on Investment $21I&' 0arnings per Share' *rice 0arning 2atio and Aividend payout ratio

RATIOS AT A &LANCE 2atio %. .urrent ratio Formulae .urrent assets .urrent liabilities (. Ruick ratio Ruick assets .urrent liabilities 3. Inventory turnover ratio .ost of goods sold ,verage inventory 8. Aebtors $receivables& turnover ratio ,nnual 9et credit sales ,verage accounts receivables 3=< days/<( weeks/ %( months Aebtors turnover ratio = .reditors turnover ratio 9et .redit *urchase ,verage .reditor 9et 3=< days/<( weeks/ %( months .reditor turnover ratio 9et Sale working .apital ;. Fi!ed ,sset Turnover ratio %H. .urrent assets turnover ratio %%. Aebt" e-uity ratio 9et sale or cost of sale 9et fi!ed assets 9et sales .urrent assets Total long term debt

<. Aebt $receivables& collection period

F. ,verage .redit *ayment period

G. working capital Turnover

%%=

%(. Total assets to debts %3. *roprietary ratio

Shareholders funds Total assets Long term debts Shareholders Funds Total assets Dross *rofit/9et Sales S %HH 9et profit / 9et Sales S %HH 1perating cost K %HH 9et sales 1perating profit K %HH 9et sales 9et profit before interest, ta! J dividend K %HH .apital employed 9et income after interest,ta! and preference dividend K %HH 9umber of e-uity shares Aividends amount 9umbers of e-uity share ?arket price of share 0*. Aividend per share 0arning per share

%8. Dross *rofit ratio %<. 9et *rofit 2atio %=. 1perating ratio %F. 1perating profit ratio %G. 2eturn on capital employed $21I& %;. 0arnings per share $0*S&

(H. Aividends per share (%. *rice earning ratio ((. Aividend payout ratio

?eaning of cash flow statement # It is a statement which is prepared to show the flow of cash in a business undertaking.

O)MECTIIES 3 $i& $ii& helpful in making financial policies helpful in decision making to declare dividend.

$iii& .FS is different than each )udget. $iv& >elpful in devising the each -uestion. $v& helpful in telling reasons for difference between profit and loss

USES 3

%%F

$i& $ii&

helps in making short short term planning helps understanding li-uidity J solvency.

$iii& helps in comparative study. $iv& tests for management decision LIMITATION 3 %. (. 3. 9on each transaction are ignored. 9ot suitable for an income statement >istorical in nature. Ope atin# Activities 3 1perating activities are the principal revenue"producing activities of the enterprise and other activities that are not investing or financing activities. Investin# Activities 3 Investing activities are the ac-uisition and disposal of long"term assets and other investments not included in cash e-uivalents. Financin# Activities 3 Financing activities are the activities that result in change in the size and composition of the owners capital $including preference& share capital in the case of a company& and borrowing of the enterprise.

Ie y S%o t an! s%o t Ans?e @$estions %. State whether the following statements are true or false. $a& *rovision is the amount set aside or written off for any known liability. $b& @nclaimed dividend is shown on the assets side of the balance sheet of the company. $ c& *reliminary e!pense is a current liability. $d& In the balance sheet of a company the items goodwill, patents and trade marks are shown under the heading fi!ed assets. $e& Aiscount allowed on the issue of shares or debentures is shown in the assets side of the balance sheet. $f& Aebentures are shown in the balance sheet under the item unsecured loans. $g& Share forfeiture account is shown in the balance sheet under share capital account. $h& @nclaimed dividend is shown in the balance sheet under the item current liabilities. $i& Securities premium account is shown on the liability side of the balance sheet under the heading share capital. %%G

W,ns. $a& True $b& False $c& False $d& True $e& True $f& False $g& True $h& True $i& FalseX (. Indicate whether following items belong to the asset side or the liability side of the balance sheet of a company. $a& .alls unpaid. $b& *reliminary e!penses $ c& .apital redemption reserve $d& ,cceptances $e& *roposed dividend $f& @ne!pired payments W,ns. $a& Liability $b& ,sset $c& Liability $d& Liability $e& Liability $f& ,sset X 3. Ehat is the contingent liabilityN Ehere it is shown in the )alance sheetN Dive three e!amples of contingent liabilities. 8. >ow would you disclose the following items in the balance sheet of a limited company#" $i& Loose tools $ii& Stock $iii& Doodwill $iv& Aiscount on issue of debentures not yet written of $v& Securities premium. <. 2e"arrange the following assets in the proper order as per schedule :I *art I of .ompanies ,ct %;<=. Loans and advances ?iscellaneous e!penditure .urrent assets Investments Fi!ed assets

=. .orrect the order of assets and liabilities according to the provision of schedule :I part I. Liabilities Subscribed capital ,ssets Loans and advances

%%;

@nsecured loans *rovisions Secured loans 2eserve and surplus .urrent liabilities

miscellaneous e!penditure .urrent assets Investments Fi!ed assets

F. *oint out whether following statement are true or falseN a& .urrent ratio improves increases in credit purchases. b&Li-uidity ratio improves with increase in credit sale. c& Eorking capital is the e!cess of current assets over current liability. d&.urrent ratio measures the li-uidity of the business. e& Aebt e-uity ratio measures short term financial position of the business ,ns" ,& False b& True c& True d& True e& false G. ,ssuming the current ratio is ( , state in each of the following cases whether the ratio will improve or decline or will have no change. a. *ayment of a current liability b. *urchase of fi!ed assets c. .ash collected from customers d. Issue of new share ,ns" ,& improve b& decline c& 9o change d& Improve ;. i& The current ratio of a company is (<# %. Ehich of the following suggestion would improve , reduce or not change itN *ayment to trade creditors ii& Sale of machinery for cash iii& *urchase of goods iv& Issue of e-uity share ,ns" ,& improve b& improve c& 9o change d& Improve %H. %%. Ehat are the category under which the various ratios are groupedN Ehat does debt" e-uity ratio indicatesN

%(H

%(. %3.

Ehat is stock Q turnover ratio, how it is calculatedN Ehat are the implications of high and low stock turn over ratioN State the meaning and ob+ective of the following" a& *roprietary ratio b& 1perating ratio

%8. %<.

Ehat do you mean by the interest coverage ratioN 0!plain in brief, giving its formulaN State the significance and method of calculating the following" a. .urrent ratio b. 1perating ratio c. 2eturn on investment ratio$21I&

%=. %F. %G.

Ehat are the different names of activity ratiosN 9ame five activity ratios. Aescribe three ratio based upon sales. 0!plain in about <H words the importance of the following ratios" a. proprietary ratio b. Aebt e-uity ratio

%;.

Dive the method of computing and the purpose of the following ratios" a. ,cid Test ratio b. Inventory turnover ratio c. Aebt e-uity ratio d. 2eturn on investment ratio

(H.

Ehat will be the impact of following suggestions on the debt e-uity ratio, assuming the given ratio to be %#(N a. Issue of e-uity shares b. .ash received from debtors c. 2edemption of debentures d. *urchase of goods on credit. ,ns" ,& Aecrease b& 9o change c& decrease d& 9o change

ESSA: T:-E @UESTIONS %. Ehat is .ash Flow StatementN >ow it is preparedN Ehat are its usesN

%(%

(. 3. 8. <.

Ehat is .ash Flow StatementN Dive three items of sources $inflow& of cash. 0!plain the uses of cash Flow Statement. 0numerate any three ma+or sources of cash in flow. Ehat is meant by .ash Flow StatementN 0!plain briefly how the statement is prepared as per ,S"3 $revised&.

=. F. (%.

0!plain the term T.ash Flow . Dive three items of uses $outflow& of cash. 0numerate the various steps involved in the preparation of T.ash Flow Statement . For calculating Tcash flow from operating activities from the given figure of 9et *rofit earned during a year, how would you deal with increase in Aebtors, Aecrease in Stock, Aecrease in )ills *ayable and Increase in .reditors.

((.

For calculating .ash Flow from operating ,ctivities from a given figure of T9et *rofits earned during a year, how would you deal with the decrease in preliminary e!penses, decrease in prepaid e!penses, increase in inventory and increase in )ills *ayableN

(3.

0!plain the impact of increase in debtors, decrease in inventories, increase in creditors and decrease in bills payable on the computation of cash flow operating activities.

(8.

For calculating cash flow from operating activities from a given figure of 9et *rofit earned during a year, how will you deal with the redemption of debentures, decrease in outstanding e!penses, increase in cash balance and decrease in inventories, decrease in )ills *ayable, increase in creditors and increase in debtors.

%((

-RACTICAL @UESTIONS

%. The following figures are e!tracted from the books of ,). .o. Araw up the Liabilities side according to law. 2s. 3H,HHH shares of 2s. %H each, 2s. G paid up Securities *remium 2eserves .reditors Fi!ed deposits (,8H,HHH (H,HHH 3<,HHH 8<,HHH (<,HHH

(. The following balances appeared in the books of @tsav *ublications Ltd. 2s. Doodwill *lant J ?achinery )uilding .ash in hand Stock in trade %H,HHH shares of 2s. %H each, 2s. G paid up (,HH,HHH %,=H,HHH %,8<,HHH %H,HHH <H,HHH GH,HHH

%(3

;I debentures *reliminary e!penses .reditor Aividend *ayable .ompanies ,ct %;<=.

(,<H,HHH %H,HHH <H,HHH (<,HHH

*repare balance sheet of company as per the *erforma given as per Schedule :I *art I of the

3. The following ledger balances were e!tracted from the books of ,kash Ltd. on 3% st ?arch, (HHF#" Land and )uildings (,HH,HHH' %(I Aebentures 2s.(,HH,HHH' Shares .apital 2s.%,HH,HHH' 0-uity Shares of 2s.%(each fully paid up' *lant and ?achinery 2s.G,HH,HHH' Doodwill 2s.(,HH,HHH' Investments in shares of 2a+a Ltd. 2s.(,HH,HHH' Deneral reserve 2s.(,HH,HHH' Stock in trade 2s.%,HH,HHH' )ills 2eceivable 2s.<H,HHH' Aebtors 2s.%,<H,HHH' .reditors 2s.%,HH,HHH' )ank Loan $@nsecured& 2s. %,HH,HHH' *rovision for ta!ation 2s.<H,HHH' Aiscount on issue of %(I debentures 2s.<,HHH' *roposed dividend 2s.<<,HHH. Lou are re-uired to prepare the balance sheet of the company as per schedule :I *art I of the companies ,ct, %;<=. 8. ?anu Ltd. has an authorized capital of 2s.<H,HH,HHH divided into e-uity shares of 2s.%H each. The company invited applications for 3,HH,HHH shares. ,pplications for (,F<,HHH shares were received. ,ll calls were made and were duly received e!cept the final call of 2s.3 per share on <,HHH shares. 8,HHH of the shares on which the final call was not received were forfeited. Show how share capital will appear in the )alance sheet of the company as per schedule :I part I of the companies act %;<=N <. The following balances have been e!tracted from the books of 2ishi Ltd. on 3%.3.%;;=' Share capital 2s.%H,HH,HHH, securities premium 2s.%,HH,HHH, %(I debentures 2s.<,HH,HHH, creditors 2s.(, HH,HHH, proposed dividend 2s.<H,HHH, profit and loss account $Ar& 2s.<H,HHH, discount on issue of %(I debentures 2s. %,HH,HHH. *repare the balance sheet of the company as per schedule :I part I of the companies act %;<=.

%(8

=. The following balances are supplied on the basis of which you are re-uired to show the ma+or appropriate heads under which the items given below will appear in the balance sheet of 2a+co Ltd. as on 3%st ?arch (HHF# 2s. *lant J ?achinery )uilding 0-uity share capital $,uthorised& 0-uity share of 2s.%HH each 2s.FH called and paid up %HI debentures Aiscount on Issue of %HI debentures Furniture and fi!tures Long Term )ank Loan $secured& <,=H,HHH %H,HH,HHH (H,HH,HHH %8,HH,HHH <<,HHH <,HHH %<,HHH %,(<,HHH

F. *repare a balance sheet of :ikas Ltd. as on ?arch 3%, (HHF as per provisions of *art"I, Schedule :I, @nder section (%% of the companies ,ct %;<= from the following information. 2s. Deneral reserve Aebentures *rofit J Loss ,/c $.r.& Aepreciation on Fi!ed ,ssets Dross Fi!ed ,ssets .urrent Liabilities *reliminary 0!penses *reference Share .apital .urrent ,ssets 3,HHH 3,HHH %,(HH FHH ;,HHH (,<HH 3HH <,HHH =,%HH

G. The following figures were e!tracted from the trial balance of KLB Ltd.# Share .apital# %H,HHH 0-uity Shares of 2s.%H each fully called up and paid up. 2s. Securities *remium %H,HHH

%(<

%(I debentures Fi!ed Aeposits $.r.& .reditors

<H,HHH (<,HHH <,HHH

Lou are re-uired to draw up the liabilities side of the balance sheet of the company according to the re-uirements of the companies act. ;. The following balances appear in the books of 2uia *ublications Ltd.# 2s. Doodwill *lant J ?achinery )uilding .ash at hand Stock in trade Share capital# %,HHH e-uity shares of 2s.%HH each issued at *ar, 2s.GH per share called up and paid up GI debentures *reliminary e!penses .reditor Aividend *ayable GH,HHH (,<H,HHH <,HHH <<,HHH (<,HHH (H,HHH %,=H,HHH %,8<,HHH %H,HHH FH,HHH

Showing the above items under the ma+or' heads in accordance with *art I of Schedule :I of the .ompanies ,ct %;<=, prepare a balance sheet of the company.

%H.

Find out current ratio. Dross Aebtors 2s. (H,HHH' *rovision for )ad debts 2s. 3,HHH' )ills receivable 2s. %3,HHH' Stock twice of net debtors' .ash in hand 2s. %=,HHH' ,dvance to suppliers 2s. %<,HHH' .reditors for goods 2s. (F,HHH' )ills payable 2s. G,HHH' 1utstanding e!penses 2s. %<,HHH' *repaid e!penses 2s. <,HHH Investment $Long term& 2s. %(,HHH' W,ns. .urrent 2atio (#%X

%%.

Find out current liabilities when current ration is (.<#% and current assets are 2s. F<,HHH. %(=

W,ns. .urrent Liabilities 2s. 3H,HHHX %(. The ratio of current assets $2s. =,HH,HHH& to current liabilities is %.<#%. The accountant of this firm is interested in maintaining a current ratio of (#% by paying some part of current liabilities. Lou are re-uired to suggest him the amount of current liabilities which must be paid for this purpose. W,ns. 2s. (,HH,HHHX %3. , firm had current liabilities of 2s. ;H,HHH. It then ac-uired stock"in"trade at a cost of 2s. %H,HHH on credit. ,fter this ac-uisition the current ratio was (#%. Aetermine the size of current assets and working capital after and before the stock was ac-uired. W,ns. ..,. 2s. (,HH,HHH, 2s. %,;H,HHH' E... 2s. %,HH,HHH, 2s. %,HH,HHHX %8. , Ltd. company has a current ratio of 3.<#% and acid test ratio of (#%. If the inventory is 2s. 3H,HHH, find out its total current assets and total current liabilities. W,ns. .urrent ,ssets 2s. FH,HHH' .urrent Liabilities 2s. (H,HHHX %<. Diven# .urrent ratio (.G' ,cid test ratio %.<' Eorking capital 4 2s. %,=(,HHH. Find out# .urrent assets', .urrent liabilities' Li-uid ,ssets. W,ns. ,& 2s. (,<(,HHH' $b& 2s. ;H,HHH' $c& %,3<,HHHX %=. From the following, calculate Aebt"0-uity 2atio. 0-uity share capital 2s. %,<H,HHH. *reference Share capital 2s. <H,HHH, Deneral reserves 2s. %,HH,HHH, ,ccumulated profits 2s. =H,HHH, Aebentures 2s. %,<H,HHH. Sundry creditors 2s. GH,HHH, 0!penses payable 2s. (H,HHH. *reliminary 0!penses not yet written off 2s. %H,HHH. W3 #FX %F. .alculate Aebt 0-uity 2atio from the )alance Sheet of K Ltd. as on 3%st ?arch (HHF Liabilities 0-uity shares of 2s. %H each %%I preference share capital Securities premium account Deneral reserve 2s. G,HH,HHH 8,HH,HHH GH,HHH <,GH,HHH %(F ,ssets Land and )uildings *lant and ?achinery Furniture and fittings Stock 2s. =,(H,HHH %(,HH,HHH %,GH,HHH <,3H,HHH

*rofit and Loss account %(I Aebentures of 2s. %HH each )ills payable Trade creditors 1utstanding 0!penses *rovision for ta!

%,8H,HHH %H,HH,HHH GH,HHH %,8H,HHH =H,HHH (,(H,HHH 3<,HH,HHH

Trade debtors .ash in hand .ash at bank )ills receivable

8,FH,HHH =<,HHH 3,HH,HHH %,3<,HHH

3<,HH,HHH

W,ns. % #(X

%G.

From the following calculate debt"e-uity ratio# 2s. *reference share capital 0-uity share capital .apital reserves *rofit J Loss account %8I Aebentures @nsecured loans .reditors )ills payable *rovision for ta!ation *rovision for dividends W,ns. H.3F< # %X (,HH,HHH 8,HH,HHH %,HH,HHH %,HH,HHH (,HH,HHH %,HH,HHH 8H,HHH (H,HHH %H,HHH (H,HHH

%;.

The debt"e-uity ratio of a company is %#(. Ehich of the following suggestions would $i& increase, $ii& decrease, and $iii& not change it. a& b& c& d& Issue of e-uity shares, .ash received from debtors 2edemption of debentures for cash, *urchased goods on credit,

%(G

e& f& g&

2edemption of debentures by conversion into shares, Issue of shares against the purchase of a fi!ed asset, Issue of debentures against the purchase of a fi!ed asset.

W,ns.$a& $ii&, $b& $iii&, $c& $ii&, $d& $iii&, $e& $ii&, $f& $ii&, $g& $i&X (H. Aebtors in the beginning 2s. ;H,HHH' debtors at the end 2s. ;=,HHH credit sales during the year 2s. 8,=<,HHH. calculate debtors turnover ration. W,ns. < timesX (%. 2s. %,F<,HHH is the net credit sales of a concern during %;G;. If debtors turnover is G times, calculate debtors in the beginning and at the end of the year. Aebtors at the end is 2s. F,HHH more than at the beginning. W,ns. 2s. %G,3F< and 2s. (<, 3F<X ((. From the following figures, compute the debtors turnover ratio# Lear I 2s. Dross sales Sales returns Aebtors in the beginning of year Aebtors at the end *rovision for doubtful debts W,ns. % year G,GF times II year F.3; timesX (3. 1pening stock 2s. F=,(<H' .losing Stock 2s. ;G,<HH' Sales 2s. <,(H,HHH' Sales 2eturns 2s. (H,HHH' *urchases 2s. 3,((,(<H. .alculate stock turnover ratio. W,ns. 3.83 timesX ;,<H,HHH <H,HHH G=,HHH %,%F,HHH F,HHH Lear II 2s. G,HH,HHH <H,HHH %,%F,HHH G=,HHH =,HHH

%(;

(8.

,verage stock carried by a trader is 2s. =H,HHH stock turnover ratio is %H times. Doods are sold at a profit of %HI on cost. Find out the profit. W,ns. *rofit 2s. =H,HHHX

(<.

If inventory turnover ratio is < times and average stock at cost is 2s. F<,HHH, find out cost of goods sold. W,ns. 3,F<,HHHX

(=.

Lou are given the following data. Dross profit at 3HI on sales 4 2s. =H,HHH Stock turnover 4 F times The opening stock is <,HHH less then the closing stock. ,ccounts payable $opening& 2s. 3H,HHH' ,ccounts payable $closing& 2s. 3G,HHH. Find out $a& 9et purchases $b& ,ccounts payable turnover $c& ,verage age of creditors. W,ns. $a& 2s. %,8<,HHH' $b& 8.(= times $c& G<.= daysX

(F.

From the following information, calculate creditors at the beginning of the year# 2s. Total purchases .ash purchases $included in above& .reditors turnover ratio"8 times creditor W,ns. 3,<H,HHHX ((,HH,HHH %H,HH,HHH (,<H,HHH

(G.

.alculate working capital turnover ratio from the following data# 2s. .ost of goods sold .urrent assets .urrent liabilities %,<H,HHH %,HH,HHH F<,HHH

%3H

W,ns. = timesX (;. From the following, compute working capital turnover' 2s. Sales .urrent assets .urrent liabilities W,ns. (.= timesX (<,(H,HHH %<,=H,HHH =,HH,HHH

3H.

Find out the working capital turnover ratio# 2s. .ash )ills receivable Sundry debtors Stock Sundry creditors .ost of sales W,ns. < timesX %H,HHH <,HHH (<,HHH (H,HHH 3H,HHH %,<H,HHH

3%.

.apital employed 2s. %,HH,HHH, Eorking capital 2s. (H,HHH, .ost of goods sold 2s. 3,(H,HHH, Dross profit 2s. GH,HHH. .alculate fi!ed assets turnover ratio assuming that there were no long"term investments. W,ns. < timesX

3(. .alculate Dross *rofit ratio# Sales %,=H,HHH *urchases ;H,HHH

%3%

Sales return 1pening stock W,ns. 33 %/3 IX

%H,HHH 3H,HHH

*urchases returns .losing Stock

%H,HHH %H,HHH

33.

From the following details calculate the operating ratio# $a& .ost of goods sold 1perating e!penses 9et sales $b& .ost of goods sold 1perating e!penses Sales Sales return $c& Sales less 2eturn Dross *rofit ,dministrative e!penses Selling e!penses Income from Investments Loss due to fire %,HH,HHH 8H,HHH %H,HHH %H,HHH <,HHH 3,HHH G,HH,HHH 8H,HHH %H,<H,HHH <H,HHH 2s. <,(H,HHH %,GH,HHH G,HH,HHH

$d& Trading and *rofit J Loss ,ccount for the year ended 3%st Aecember,(HHF *articulars To stock %.8.;3 To *urchase To Eages To gross profit To administrative e!p. 2s. 3<,HHH (,(<,HHH =,HHH %,G8,HHH 8,<H,HHH %H,HHH 8,<H,HHH %,G8,HHH *articulars )y Sales )y Stock at end 2s. 8,HH,HHH <H,HHH

)y Dross *rofit

%3(

To selling J distribution e!p. To loss on sale of plant To net profit

%8,HHH %H,HHH %,<H,HHH %,G8,HHH %,G8,HHH

$,ns. $a& GF.<I $b& G8I $c& GHI $d& =HI&

38. 1pening stock 2s. GH,HHH' *urchase 2s 8,3H,;HH' Airect e!penses 2s 8,HHH' .losing stock 2s. %,=H,HHH' ,dministrative e!penses 2s (%,%HH' Selling and distribution e!penses 2s 8H,HHH' Sales 2s %H,HH,HHH .alculate # $a& $b& Dross *rofit ratio 1perating ratio

$,ns. Dross *rofit ratio 4 =8.<(I, 1perating ratio 4 8%.=I& 3<.From the following information, calculate stock turnover ratio, operating ratio and capital turnover ratio. 2s. 1pening Stock .losing Stock *urchases Sales Sales return (G,HHH ((,HHH 8=,HHH ;H,HHH %H,HHH

%33

.arriage inwards 1ffice e!penses Selling and distribution e!penses .apital employed $ ,ns. $a& (.(8 times $b& FF.<I $c& .8 times&

8,HHH 8,HHH (,HHH (,HH,HHH

3=. .alculate the following ratios, from the details given as under # $a& $b& $c& $d& .urrent ratio ,cid test ratio 1perating ratio Dross profit ratio 2s. Li-uid assets .urrent liabilities Stock Sales 1perating e!penses .ost of goods sold $,ns. $i& <#( $ii& (#% $iii& FHI $iv& =HI& 3F. )alance sheet of T, Ltd. is given below # Liabilities *aid up e-uity Share capital # %<I debentures *JL a/c$ for the current 0ar after ta!es& Deneral reserve .urrent liabilities 3,HH,HHH 3,HH,HHH <,GH,HHH %F,GH,HHH %F,GH,HHH ,mount$2s.& 8,HH,HHH (,HH,HHH ,ssets )uilding ?achinery Aebtors Stock )ank ,mount$2s.& =,HH,HHH %,(H,HHH =,<H,HHH 3,<H,HHH =H,HHH 8H,HHH (H,HHH %H,HHH <H,HHH %<,HHH (H,HHH

%38

,dditional Information# 9et sales for the current year 2s. <F,=H,HHH .ompute any three of the following ratios# $a& 9et profit ratio $b& Fi!ed assets turnover ratio, $c& Aebt e-uity ratio $,ns. 9et profit ratio <.(%$,ppro!&, .urrent ratio %.G3 #%, Fi!ed asset turnover ratio G times, Aebt le-uity ratio %#<&

3G.

From the following information calculate any three of the following ratios# $a& Dross *rofit ratio $b& Eorking capital turnover ratio $c& Aebt"e-uity ratio $d& *roprietary ratio Information# 9et sales 2s <,HH,HHH' .ost of goods sold 2s. 3,HH,HHH' .urrent assets 2s. (,HH,HHH' .urrent liabilities 2s. %,8H,HHH' paid up share capital 2s. (,<H,HHH' %3I Aebentures 2s %,HH,HHH. $,ns. D.*. 2atio 8HI' Eorking .apital T.1. 2atio G.G3 times' Aebt 0-uity 2atio 8HI' *roprietary 2atio <%I&

3;.

From the following information, calculate the stock turnover ratio and the gross profit ratio. 2s. 1pening stock .losing stock *urchases Eages Sales .arriage inwards %G,HHH ((,HHH 8=,HHH %8,HHH GH,HHH 8,HHH

W,ns. Dross profit ratio (<I' stock turnover ratio 3 timesX

%3<

8H.

, company has a loan of 2s. <H,HH,HHH as part of its capital employed. The interest payable on the loan is %HI and the 2.1.I. of the company is %<I. ,ssuming that the rate of income ta! is <HI, calculate the amount of gain to the shareholders because of the loan obtained by the company. W,ns. Dian to shareholders 2s. %,(<,HHHX

8%.

.alculate any three of the following ratios with the help of the information given below#" a& b& c& d& e& 1perating ratio Dross profit ratio Ruick ratio Eorking capital turnover ratio *roprietary ratio

Information# 0-uity share capital 2s. %,HH,HHH' GI preference share capital 2s. GH,HHH' ;I debentures 2s. =H,HHH' Deneral 2eserve 2s. %H,HHH' Sales 2s. (,HH,HHH' 1pening stock 2s. %(,HHH' *urchases 2s. %,(H,HHH' Eages 2s. G,HHH' .losing Stock 2s. %G,HHH' selling and distribution e!penses 2s. (,HHH' other current assets 2s. <H,HHH, fi!ed assets 2s. (,%(,HHH and current liabilities 2s. 3H,HHH W$a& =(I' $b& 3;I' $c& %.=F#%' ;d& 3.(% times' $e& =F.G= IX

8(. The following is the )alance Sheet of :inod ?ills Ltd. as on 3%st Aecember, (HH=# 2s. <H,HHH %,<H,HHH (,HH,HHH 3,HH,HHH %G,HH,HHH

Sundry .reditors )ills payable Ta! provision 1utstanding e!penses %(I Aebentures

=H,HHH %,HH,HHH %,3H,HHH %H,HHH F,HH,HHH %3=

)ank Trade investments )ook Aebts $Aebtors& Stock Fi!ed ,ssets

%HI *reference share capital 0-uity share capital 2eserve Fund

%,HH,HHH <,HH,HHH 8,HH,HHH (H,HH,HH H

Less# Aepreciation

<,HH,HHH

%3,HH,HHH

(H,HH,HHH

1ther information supplied is as follows 2s. 9et sales .ost of goods sold 1perating e!penses 3H,HH,HHH (<,GH,HHH (,(H,HHH

$a& Ruick ratio' $b& Total assets to debt ratio' $c& .urrent ratio' $d& Dross profit ratio' $e& 1perating ratio $f& 9et profit ratio. W,ns. $a& %.33#%, $b& (.G=#%' $c& (.33#%' $d& %8I' $e& ;3.33I' $f& =.=FIX 83. From the following information, calculate stock turnover ratio, operating ratio' fi!ed assets turnover ratio and current assets turnover ratio#" 2s. 1pening stock .losing stock *urchases Sales Sales returns .arriage inwards 1ffice 0!penses Selling J Aistribution 0!penses Fi!ed assets .urrent assets =H,HHH <=,HHH 88,HHH ;(,HHH %,GH,HHH (H,HHH G,HHH G,HHH 8,HHH FH,HHH

W,ns. Stock Turnover 2atio (.(8 times' 1perating 2atio FF.<I, Fi!ed assets Turnover 2atio %.= times, .urrent ,ssets turnover ratio %.GF timesX

%3F

88

From the following data, calculate#" a& Dross profit ratio, b&9et profit ratio c& Eorking capital turnover ratio, d&Aebt"e-uity ratio, e& *roprietary ratio 2s. 9et sales .ost of sales 9et profit Fi!ed assets .urrent assets .urrent liabilities *aid"up share capital Aebentures 3H,HH,HHH (H,HH,HHH 3,HH,HHH =,<H,HHH =,HH,HHH (,HH,HHH <,HH,HHH (,<H,HHH

W,ns. D.*. ratio4 33 %/3I' 9.*. 2atio4%HI' Eorking capital turnover ratio4 < times' Aebt e-uity ratio4H.3%#%, *roprietary ratio i.e. shareholder s funds/total assets 4 =8IX 8<. Eith the help of the given information, calculate any three of the following ratios# $a& $b& $c& $d& 1perating ratio Ruick ratio Eorking capital turnover ratio Aebt e-uity ratio.

%3G

Information# 0-uity share capital 2s. <H,HHH' %(I preference share capital 2s. 8H,HHH' %(I debentures 2s. 3H,HHH' Deneral 2eserve 2s. 8H,HHH' Sales 2s. 3,HH,HHH' 1pening stock 2s. (H,HHH' *urchases 2s. %,8H,HHH' Eages 2s. 3H,HHH' .losing stock 2s. 8H,HHH' Selling and distribution e!penses 2s. %G,HHH' 1ther .urrent assets 2s. %,HH,HHH and current liabilities 2s. =H,HHH. W,ns. $a& <=I' $b& %.=F#%' $c& %.GF< times' $d& H.(3.%

O)MECTIIE T:-E @UESTIONS I. Indicate whether increase in debtors / current assets results in # $i& $ii& Increase in cash Aecrease in cash

$iii& 9on of the above. II. Indicate whether increase in current liabilities results in # $i& $ii& Increase in cash Aecrease in cash

$iii& 9one of the above. III. State whether the following would result in inflow or outflow of cash # $i& $ii& Issue of shares *ayment of dividend

$iii& *urchase of fi!ed assets $iv& .ash from operations $profits& $v& Sale of fi!ed assets $vi& 2edemption of debentures

I:. Fill in the blanks #

%3;

$a&

9et profit are 2s. (H,HHH. There is an increase in the amount of debtors of 2s. <,HH. Ehat would be the amount of cash flow from operating activities $2s. (H,HHH, I 2s.%<,HHH II 2s. (<,HHH& III

$b& 9et profit are 2s. %(,<HH, after debiting depreciation 2s. ,3<HH andn there is a decrease in stock worth 2s. (,FHH. The cash flow from operating activities would be $2s. %=,HHH, I 2s.%<,(HH II $III& i& in Flow 2s. %G,FHH& III $ii& out flow $iii& out

,ns. I. decrease in cash $II& Increase in .ash

flow $iv& in flow $v& in flow $vi& outflow. $I:& $a& %<HH

$b& %GFHH

). S*ORT ANS9ER @UESTIONS %. (. 3. 8. <. Ehat is T.ash Flow Statement N 0!plain. Erite what is inflow of each and outflow of cashN Ehat are non"operating 0!penses and Incomes. Erite about treatment of depreciation in a .ash Flow Statement. Ehat do you know about Treatment of Aividend declared and paid in a .ash Flow Statement =. Erite about treatment of provision for ta! and ta! paid in .ash Flow Statement.

EDERCISE 3 %. .alculate cash flow from operating activities from the following information # 2s. Sales *urchases Eages ,ssume that all the transactions were in cash. %,(H,HHH FH,HHH (<,HHH ,ns $2s (<,HHH&

%8H

(.

.alculate cash flow from operating activities from the following figures # $2s.& Sales .ost of Sales 1pening )alance of Aebtors .losing )alance of Aebtors 1pening )alance of .reditors .losing )alance of .reditors 1pening )alance of 1utstanding 0!penses .losing )alance of 1utstanding 0!penses (,F<,HHH (,(<,HHH (H,HHH (H,HHH <,HHH %H,HHH %,(<H (,F<H

,ns. $<%<HH&

3.

.alculate cash flow from operating activities after calculating ad+usted profit from the following # $i& $ii& $iii& $iv& $v& $vi& $vii& $viii& Aepreciation allowed Loss on Sale of ?achine Aiscount on Issue of Shares written off Doodwill written off Transfer to Deneral 2eserve 9et *rofit after above ad+ustments Increase in .urrent ,ssets Aecrease in .urrent Liabilities 2s. %<,HHH (,<HH %,HHH %,<HH (,HHH %<,HHH (,<HH 3,<HH

,ns. $3%,HHH& <. .alculate cash flow from operating activities from the following #

Particulars *rofit and Loss ,ppropriation ,/c )ills 2eceivables *rovisions for Aepreciation

2004 Rs (H,HHH %8,HHH 3H,HHH

2005 (Rs. 3H,HHH %G,HHH 3(,HHH

%8%

2ent 1utstanding *repaid Insurance Doodwill Stock ,ns. $2s. %H,=HH& =.

%,=HH %,8HH (H,HHH %8,HHH

8,HHH %,(HH %=,HHH %G,HHH

.alculate cash flow from operating activities from the following *rofit and Loss ,/c of a business for the year ended on 3%.3.(HH< #

Particulars To Salaries To Aepreciation on fi!ed assets To *reliminary 0!p. w/off. To Aiscount on issue of deb. To Deneral 2eserve To Aiscount on Sales To Doodwill To 9et *rofit ,ns. $2s. 3%,((H& F.

Rs. ((,3HH G,(HH %,<HH %,HHH %(,HHH 8,%GH 3,((H %=,=HH

Particulars )y Dross *rofit )y 2ent 2eceived )y *rofit on Sale of fi!ed assets

Rs. <8,<HH 3,(HH %%,3HH

=;,HHH

.alculate cash flow from operating activities from the following details# Particulars *rofit and Loss ,/c Deneral 2eserve *rovisions for Aepreciation *repaid 0!penses @nearned Incomes 1utstanding 0!penses Doodwill Sundry .reditors )ills 2eceivable !".!.0# Rs 8<,HHH <,HHH %G,HHH (,8HH %,<HH GHH %H,HHH <,HHH =,8HH !".!.0$ (Rs. =H,HHH %H,HHH (G,HHH %,GHH (,<HH %,(HH F,HHH 3,HHH ;,=HH

,ns. $2s (;,GHH& G. .alculate cash flow from operating activities from the following data # %8(

I.

*rofits made during the year 2s. %,8<,HHH after considering the following items # $2s& a& b& c& d& ,mortisation of Doodwill Aepreciation of Fi!ed ,ssets Loss on Sale of Fi!ed ,ssets Transfer to Deneral 2eserve 3,HHH %F,HHH (,<HH %<,HHH

II.

The following is the position of current assets and current liabilities #

Particulars .reditors Aebtors *repaid 0!penses )ills *ayable ,ns. $2s. %,G8,8HH& ;.

!".!.0# Rs %(,HHH %=,(HH (<H <,HHH

!".!.0$ (Rs. G,(HH %(,HHH F<H F,HHH

.ompute cash flow from operating activities from the following *rofit and Loss ,/c #

Particulars To 0!penses To Aepreciation To Loss on Sale of ?achine To Aiscount To Doodwill To 9et *rofit

Rs. 3,HH,HHH FH,HHH 8,HHH (HH (H,HHH %,%<,GHH <,%H,HHH

Particulars )y Dross *rofit

Rs. 8,<H,HHH

)y Dain on Sale of Fi!ed =H,HHH ,ssets

<,%H,HHH

,ns. $2s. %,<H,HHH&

%H.

.ompute cash flow from operating activities from the following data #

Particulars

!".!.0#

!".!.0$

%83

*rofit and Loss ,/c Deneral 2eserve Doodwill Aepreciation Aiscount on Issue of Aebenture Sundry Aebtors Sundry .reditors )ills *ayable

Rs %<,;<H %,(HH <,HHH 8,<HH <HH 8,%HH %,<HH <,3HH 3,3HH

(Rs. (8,8HH %,GHH 3,HHH =,3HH 3<H (,GHH (,%HH (,;HH (,%HH

,ns. $2s (=,%HH&

%%.

The following is the position of current assets and current liabilities of K Ltd. # (HHF $2s& *rovision for )ad debts Short term loans .reditors )ills 2eceivable %,HHH %H,HHH %<,HHH (H,HHH %;,HHH %H,HHH 8H,HHH (HHG$2s.&

The company incurred a loss of 2s. 8<,HHH during the year. .alculate cash from operating activities. ,ns. $2s. =(,HHH&

%(.

The following is the position of current assets and current liabilities #

Particulars *rofit J Loss ,ppropriation ,/c )ills 2eceivable *rovision for Aepreciation

200# Rs (,HHH %,8HH 3,HHH

200$ (Rs. 3,HHH %,GHH 3,(HH

%88

1utstanding 2ent *ayable *repaid Insurance Doodwill Stock ,ns. $2s. %H=H& %3.

%=H %8H (,HHH %,8HH

8GH %(H %,=HH %,GHH

.ompute cash flow from operating activities from the following details #

Particulars *rofit J Loss ,/c Aebtors 1utstanding 2ent Doodwill *repaid Insurance .reditors ,ns. $2s. 3=,HHH& %8.

200# Rs %,%H,HHH <H,HHH (8,HHH GH,HHH G,HHH (=,HHH

200$ (Rs. %,(H,HHH =(,HHH 8(,HHH F=,HHH 8,HHH 3G,HHH

.alculate cash flow from operating acidities during (HHF"HG from the following #

%ia&ilities .apital Aebentures ,ccumulated *rofits Trade .reditors

200# <H =H 3H =H

200$ FH 8H <H ;H

Assets .ash J )ank Trade Aebtors Stock Doodwill ?achinery

200 # 3H 8H <H 3H <H (HH

200$ 8H =H =H (H FH (<H

(HH ,ns. $2s. 8H,HHH&

(<H

%<.

From the following information, calculate cash from operating activities #

%8<

Particulars Stock Aebtors .reditors 0!penses 1utstanding )ills *ayable ,ccrued Income *rofit J Loss ,/c ,ns. $2s. <HH&

200# Rs =,HHH (,<HH 3,(HH 3<H 3,<HH GHH G,HHH

200$ (Rs. <,HHH (,3HH (,GHH 8<H (,(HH ;HH ;,HHH

%=.

.alculate cash from operating activities from the following *rofit and Loss account.

- ofit an! Loss Acco$nt $for the year ending on 3%.3.HG& Ar. . Particulars To Salaries To 2ent To *rovision for )ad debts To Aepreciation To Loss on Sale of land To Doodwill written off To *roposed dividend To *rovision for ta! To 9et *rofit Rs. %,GHH %,HHH (HH 8HH 3HH <HH FHH 8HH (,<HH F,GHH ,ns. $2s. 3FHH& %F. From the following information prepare a .ash Flow Statement #" F,GHH Particulars )y Dross *rofit )y *rofit on Sale of *lant )y Income Ta! 2efund Rs. =,<HH FHH =HH .r.

%8=

$2s& 1perating .ash )alance .losing .ash )alance Increase in .reditors Aecrease in Aebtors Fi!ed assets purchase 2edemption of %(I debentures *rofit for the year %<,HHH %;,HHH %3,HHH %F,HHH 3H,HHH %8,HHH %G,HHH

,ns. .ash flow from operating investing and financing activities 4 2s. 8GHHH, 2s. 3H,HHH 2s. %8,HHH&.

1B.

From the following information prepare a .ash Flow Statement #" $2s& 1perating .ash )alance .losing .ash )alance Increase in .reditors Aecrease in Aebtors Fi!ed assets purchase 2edemption of %(I debentures *rofit for the year %,HH,HHH %,(H,HHH <H,HHH FH,HHH (,HH,HHH <,HH,HHH (,HH,HHH

,ns. .ash flow from operating investing and financing activities 4 2s. 3(H,HHH 2s. (,HH,HHH J 2s. <,HH,HHH&.

%;.

.alculate .ash Flow operating acidities from the following *rofit and Loss ,/c for the year ending on 3%.3.H<# %8F

%ia&ilities To Salaries To Aepreciation To Loss on Sale of *lant To Doodwill written off To *rovision for ta! To 9et *rofit

200# (,<HH (HH %HH 8HH %,HHH %,%HH

Particulars )y Dross *rofit )y *rofit on Sale of land )y Income ta! 2efund

200$ (Rs. 8,<HH 8HH 8HH

<,3HH ,ns. $2s (,HHH&

<,3HH

(H.

From the following )alance Sheets of ?/s 2ahman J )ros. Ltd. prepare a .ash Flow Statement as per $,S"3 $2evised& #

%ia&ilities 0-uity Share .apital %<I Share .apital Deneral 2eserve *rofit J Loss ,/c .reditors

200# (Rs. %,<H,HH

200$ (Rs. (,HH,HH H

Assets Doodwill )uildings *lant

200# (Rs 3=,HHH GH,HHH 8H,HHH %,%;,HH H %H,HHH %(,<HH

200$ (Rs. (H,HHH =H,HHH %,HH,HHH %,<8,<HH %<,HHH ;,HHH

*reference H

F<,HHH (H,HHH (H,HHH 3(,<HH

<H,HHH 3<,HHH (8,HHH 8;,<HH

Aebtors Stock .ash

3,<G,<HH (,;F,<H H 3,<G,<H H (,;F,<H H and on building was 2s. (H,HHH.

Aepreciation charged on *lant was 2s. %H,HHH ,ns. $2s. 8%,<HH 2s. FH,HHH J 2s. (<,HHH&

%8G

(%.

*repare .ash Flow Statement as per ,S.3 $2evised& from the following )alance Sheets of (HHF and (HHG.

%ia&ilities 0-uity Share .apital 2eserve J Surplus )ank Loan .reditors )ank 1verdraft *roposed Aividend

200# (Rs. 3H,HH H H %H,HH H 3%,HH H Y 8,<HH

200$ (Rs. 8H,HHH %%,HHH

Assets Fi!ed ,ssets Less# ,ccumulated Aepreciation

200# (Rs 8H,HH H

200$ (Rs. =<,HHH

G,<H F,<HH 3;,HHH <HH =,HHH

%3,<HH G,HHH <%,<HH %%,HHH ((,<HH %;,HHH Y %,H8,HHH 3(,HH H G,HHH (H,HH H (%,HH H 3,HHH

Investments Stock Aebtors )ank

%,H8,HH H

G8,HH H ,ns. $2s. %8,<HH, 2s. (,<HH, 2s. F,<HH&

G8,HH H

((.

Following are the comparative )alance Sheets of Eashi J )ros. Ltd.. for the year (HHF and (HHG.

%ia&ilities Share .apital %<I Aebentures Trade .reditors *rovision doubtful debts

!".!.0# (Rs. FH,HHH %(,HHH %H,3=H for FHH

!".!.0$ (Rs. F8,HHH =,HHH %%,G8H GHH

Assets .ash Trade Aebtors $good& Stock in trade Land Doodwill

!".!.0# (Rs ;,HHH %8,;HH 8;,(HH (H,HHH %H,HHH

!".!.0$ (Rs. F,GHH %F,FHH 8(,FHH 3H,HHH <,HHH

%H,H8H

%H,<=H

%8;

*rofit J Loss ,/c

%,H3,%H

%,H3,(H

%,H3,%H H

%,H3,(HH

H H ,ns. $2s. %H,GHH, 2s %H,HHH J 2s. (HHH&

Additional Information : $i& $ii& $iii& $iv& Aividends were paid totaling 2s. 3,<HH Land was purchased for 2s. %H,HHH ,mount provided for amortization of goodwill 2s <,HHH Aebenture loan was repaid 2s =,HHH

Lou are re-uired to prepare a .ash Flow Statement as per ,S"3 $2evised&

(3.

The )alance Sheets of ?A J Sons Ltd. as on 3%.3.HF and 3%.3.HG were as follows #

%ia&ilities 0-uity Share .apital Deneral 2eserve *rofit J Loss ,/c %<I Aebentures .reditors

!".!.0# (Rs. ;H,HHH %H,HHH (H,HHH Y 3F,8HH

!".!.0$ (Rs. %,3H,HH H %<,HHH 3H,HHH (H,HHH 8(,HHH

Assets Fi!ed ,ssets Stock Aebtors )ank *reliminary 0!penses

!".!.0# (Rs ;3,8HH ((,HHH 3=,HHH 8,HHH (,HHH

!".!.0$ (Rs. %,==,HHH (=,HHH 3;,HHH <,HHH %,HHH

%,<F,8H H (,3F,HH H Additional Information :

%,<F,8H H

(,3F,HHH

$i& $ii&

Aepreciation written off on Fi!ed ,ssets 2s. (3,8HH Aividend paid on 0-uity Share .apital 2s. (H,HHH *repaid .ash Flow Statement as per ,S"3 $2evised& ,ns. $2s. <FHHH, 2s. ;=,HHH J 2s. 8H,HHH&

%<H

(8.

Following are the )alance Sheets of ,li J )ros. Ltd.

%ia&ilities 0-uity .apital %<I 2edeemable *reference Share .apital Deneral 2eserve *rofit J Loss ,/c C$ ent Lia4ilities3

!".!.0# (Rs. Share 8,GH,HHH (,=H,HHH

!".!.0$ (Rs. F,(H,HHH %,(H,HHH

Assets Investments Aiscount on Issue of Shares Factory )uildings

!".!.0# (Rs 8(,(HH

!".!.0$ (Rs. Y

%,(H,HHH (,HH,HHH (,%=,HHH (8,HHH (8,HHH

;=,HHH %,(H,HHH 8,<G,8HH G8,HHH %=,GHH

8G,HHH Y

F(,HHH =8,GHH

?achinery Fi!ed Aeposits *reliminary 0!penses C$ ent Assets

*roposed Aividend =F,(HH Sundry .reditors )ills *ayable FH,HHH %F,(HH

;3,=HH %,HH,HHH (F,(HH %8,8HH F=,GHH

Sundry Aebtors Stock )ank .ash

%,GH,HHH (,H8,HHH 3H,=HH F,HHH

(,<;,(HH %,GF,(HH <H,HHH %F,(HH

1utstanding Salary 3;,(HH *rovision for Ta! =F,(HH

%H,8G,GH

%(,GG,GH

%H,8G,HH H

%(,GG,GHH

H H ,ns. $2s. %,F=,HHH, 2s. %,F;,(HH J 2s. 3(,GHH& *repare .ash Flow Statement as per ,S"3 $2evised& (<.

Following are the )alance Sheets of Shafi J )ros. Ltd. as at 3%st ?arch, (HHG

%ia&ilities Share .apital %<I Aebentures Deneral 2eserve *rofit J Loss ,/c

!".!.0# (Rs. %,HH,HH H <H,HHH (H,HHH

!".!.0$ (Rs. %,%H,HH H 3H,HHH (H,HHH %;,HHH %%,HHH

Assets Doodwill Land ?achinery Stock Aebtors *reliminary 0!penses

!".!.0# (Rs <,HHH 8(,HHH =H,HHH (<,HHH 3H,HHH 3,HHH

!".!.0$ (Rs. 8,HHH ==,HHH GH,HHH (%,HHH (8,HHH (,HHH

*rov. for Income Ta! %%,HHH .reditors 8,HHH

%<%

)ills *ayable debts

<,HHH

8,HHH 3,HHH (,8HH %,;;,8H

.ash

3H,HHH

(,8HH

*rov. for doubtful (,HHH 3,HHH %,;<,HH

%,;<,HH H

%,;;,8HH

H H ,ns. $2s. 3<,;HH, 2s. <3,<HH J 2s. %H,HHH&

Additional Information : $i& Auring the year (HHG, a part of ?achine costing 2s. F,<HH $,ccumulated depreciation thereon being 2s. (,<HH& was sold for 2s. 3,HHH. $ii& $iii& Income ta! was paid 2s, 8,HHH during (HHG. Aepreciation on ?achinery for (HHG was provided at 2s. <,HHH. *repare .ash Flow Statement as per ,S"3 $revised&

(=.

From the following )alance Sheets of ?/s 9eyamat J )ros. Ltd. for two years (HHF and (HHG, prepare cash Flow Statement

%ia&ilities

!".!.0 # (Rs. 3=,HHH (H,HHH Y ;,HHH

!".!.0 $ (Rs. 3H,HHH %8,HHH <,HHH %%,HHH

Assets

!".!.0 # (Rs <,HHH (H,HHH %G,HHH %;,HHH 3,HHH =<,HHH

!".!.0 $ (Rs. =,HHH (<,HHH %(,HHH %<,HHH (,HHH =H,HHH

Share .apital * J L ,/c %<I Aebentures .reditors

Doodwill ?achinery Stock Aebtors .ash

=<,HHH Additional Information : $i& $ii& $iii&

=H,HHH

, ?achine of the book value of 2s =,HHH was sold for 2s.=,<HH during (HHG. Aebentures were redeemed for 2s. 8,;HH. .ash dividend of 2s. (,<HH was paid during (HHG.

%<(

$iv&

Aepreciation on ?achinery was provided 2s. %,HHH ,ns. $2s. (%HH, 8<HH J 2s. 8;HH&

2=. From the following )alance Sheets of Shahid J )ros. Ltd. prepare .ash Flow Statement as per ,S"3 $2evised& )alance S%eet

%ia&ilities Share .apital %<I Aebentures Deneral 2eserve * J L ,/c .reditors )ills *ayable *rov. for ta!

!".!.0# (Rs. 3,HH,HH H %,<H,HH H 8H,HHH F(,HHH <<,HHH (H,HHH 8H,HHH =,FF,HH H

!".!.0$ (Rs. 8,HH,HH H %,HH,HH H FH,HHH ;G,HHH G3,HHH %=,HHH <H,HHH G,%F,HH H

Assets Doodwill )uildings Aebtors .ash )ills 2eceivable Stock

!".!.0# (Rs %,%<,HH H (,HH,HH H %,=H,HH H (<,HHH (H,HHH %,<F,HH H

!".!.0$ (Rs. ;H,HHH %,FH,HHH (,HH,HHH %G,HHH 3H,HHH 3,H;,HHH

G,%F,HHH

=,FF,HH H Additional Information : $i& $ii& Aepreciation on )uilding is %<I. Income Ta! paid is 2s. 8H,HHH.

9ote # *rovision for ta! is to be treated as a non"current liability. ,ns. $2s. <F,HHH, 2s 9IL J 2s. <H,HHH&

%<3

(G.

Following are the comparative )alance Sheets of ,). .o. Ltd. for the year (HHF and (HHG. %ia&ilities !".!.0 # 0-uity Share .apital %<I Aebentures Trade .reditors Deneral 2eserve *rofit J Loss ,/c (Rs. 8<,HHH %H,HHH G,FHH <,HHH %H,HHH FG,FHH !".!.0$ (Rs. =<,HHH (H,HHH %%,HHH F,<HH %<,HHH %,%G,<H H *repare .ash Flow Statement. ,s per ,S"3 $revised& ,ns. $2s. =,GHH 2s. 3=,<HH J 2s. 3H,HHH& Fi!ed ,ssets Stock Aebtors .ash *reliminary 0!p. Assets !".!.0 # (Rs 8=,FHH %%,HHH %G,HHH (,HHH %,HHH FG,FHH !".!.0$ (Rs. G3,HHH %3,HHH %;,<HH (,<HH <HH %,%G,<HH

(;.

From the following )alance Sheets of Bia"ul">a-ue J .o, *repare .ash Flow Statement as per ,S"3 $revised&

%ia&ilities Share .apital Aepreciation 2eserve *rofit and Loss ,/c %<I Aebentures .reditors

!".!.0# (Rs. GH,HHH 8H,HHH 3H,HHH 8H,HHH (H,HHH

!".!.0$ (Rs. %,HH,HH H 83,HHH <H,HHH (H,HHH %F,HHH

Assets ?achinery $at cost& Aebtors Stock

!".!.0# (Rs %,(H,HH H 8H,HHH

!".!.0$ (Rs. %,88,HHH 3<,HHH 3(,HHH 3,HHH %=,HHH

*reliminary 0!penses 3H,HHH )ank )alance 8,HHH %=,HHH

(,%H,HH H ,ns. $2s. (8,HHH, 2s. (8,HHH, 2s. 9IL& (,3H,HH H (,%H,HH H

(,3H,HHH

%<8

3H.

From the following )alance Sheets of )akhte ?unaeem .o. Ltd., prepare the .ash Flow Statement. ,s per ,S"3 $revised&

%ia&ilities Share .apital Aepreciation 2eserve *rofit and Loss ,/c %3I Aebentures )ills *ayable .reditors

!".!.0# (Rs. %,(H,HH H ;,HHH =,HHH 3<,HHH %<,HHH (<,HHH (,%H,HH

!".!.0$ (Rs. (,HH,HH H ;,<HH ;,HHH (H,HHH %H,<HH <%,HHH 3,HH,HH

Assets ?achinery $at cost& Aebtors Stock )ank )alance

!".!.0# (Rs (H,HHH ;<,HHH 3F,HHH 83,HHH

!".!.0$ (Rs. %,(<,HHH GH,HHH =(,HHH (<,HHH G,HHH

*reliminary 0!penses %<,HHH

(,%H,HH H

3,HH,HHH

H H ,ns. $2s. ((,HHH, 2s, %,H<,HHH J 2s.=<,HHH&

%<<

%<=