Important notes about balance-sheet:

a) Liabilities have credit balance and Assets are debit balance.

b) Current Liabilities are those liabilities, which have either become due
for payment or shall fall due for payment within 12 months from the
date of balance-sheet.
c) Current Assets are those assets, which undergo change in their
shape/form within 12 months. These are also called working capital or
gross working capital.
d) Net worth and Long-term liabilities are also called Long term sources of
funds.
e) Current liabilities are also known as Short-term sources of the funds.
f) Long term liabilities and short term liabilities are also called as Outside
liabilities.
g) Current assets are Short-term use of funds.
h) Assets other than Current Assets are long-term use of funds.
i) Instalments of term loan payable in 12 months are to be taken as
current liability only for calculation of current ratio and quick ratio only.
j) If there is profit, it shall become part of net worth under the head
reserves and if there is loss it will become part of intangible assets.
k) Investment in govt. securities to be treated current only if these are
marketable and due. Investments in other securities are to be treated
as current if they are quoted. Investment in allied/associated/sister
units or firms to be treated as Non-current.
l) Bonus shares are issued by capitalisation of general reserves and as
such do not effect the net worth. With rights issue, change takes place
in net worth and current ratio.
Ratio analysis:
Financial Ratios can be classified in four broad heads.
a) Liquidity: These ratios reflect the ability to meet current dues out of
short term assets.
b) Solvency: Extent of dependence on outside liabilities and feasibility of
meeting them if need arises.
c) Activity: Efficiency of the unit in utilizing present available resources.
d) Profitability: Capacity of the unit to generate profits and its rate of
return.
e) Tangible Net Worth = Net Worth Intangible assets.
1] Liquidity ratio:
a) Current RatioCurrent assets/ Current liabilities.
b) Quick RatioQuick assets/ Quick liabilities.

2] Solvency Ratio:
a) Debit Equity RatioLong Term Liabilities/Tangible Net Worth.
b) Total Outside Liabilities/ Tangible Net Worth
= Term Liabilities + Current Liabilities/ Tangible Net Worth.
a) Proprietary RatioTangible Net Worth/Tangible Assets *100
b) Debit Service Coverage Ratio
Profit after tax + Depreciation Annual Intt. On Term Loans
Annual intt. On long term loans and liabilities + Annual instalment
On loans.
Break even point analysis:
Break even point is that level of production or sales at which unit incurs no
profit and no loss.
Break even point in term of sales = Fixed Costs/Contribution *sales.
Break even point in terms of volume = Fixed Costs/ Contribution.
Variable expenses.
Raw materials.
Packing materials.
Consumable stores and spares.
Any
other
expenses
for
production.

Fixed and semi-fixed expenses

Rent and insurances.
Wages and salaries.
Repairs and maintenance.
Depreciation.
Admn. And financial expenses.

Format of balance-sheet for ratio analysis:

Liabilities
Assets
Net worth/equity
Fixed assets
Share capital/eq. capital, paid up
Such as land and building, plant
Capital/owners funds, all types of
and machinery, etc.
Reserves.
Original value depreciation.
(These are purchased for long
term use
And depreciated every year)
Long term liabilities.
Non current assets.
Term loan, debentures and bonds, Investment in non quoted shares
Unsecured loans, fixed deposits, and
other
Securities, investment in long
Long term liabilities.
term nature associate or sister
[Those liabilities which are not due concerns. Old or disputed
for
Stock or book debts. Long term
Payment within 12 months from security deposits and other misc.
the
assets which are not

Date of balance-sheet
Current liabilities.
Working capital limits sanctioned
by
Banks such as CC,OD,Bills, export
credit. Sundry creditors, Bills
payable. Short duration loans or
deposits,
Expenses
payable,
Provision against various items.
[Those liabilities which are due for
the payment within 12 months
from the date of balance-sheet.]

Current and fixed assets.

Current assets.
Cash/bank
balance
including
FDRS.
Marketable/quoted govt and other
securities. Book debts, Sundry
creditors, Bills receivables. Stock
and inventories such as raw
material, stock in process, and
finished goods. Stores and spares
for regular consumption. Advance
payment of taxes and other
prepaid expenses.
Loans and
advances recoverable within 12
months.
Intangible assets.
Patents, good will, debit balance of
P/L account, preliminary or preoperative expenses.

Working capital management:

Methods of assessing working capital limits
a) Nayak committee

b) Tandon Committee C) Cash Budget Method.

a) Nayak Committee: Annual Projected Turn over Method.

Eligibility: Small enterprises having aggregate sanctioned working capital
fund based limits upto Rs. 5 crores and Non-SSi upto 2 crores.
Method of computation:
Working capital requirement
: 25% of annual projected turnover.
Sanction of Working capital
Limit
: 20% of the projected turnover.
Margin (Borrowers contribution) : 5% of their annual turnover.
b) Tandon committee:
1st method of lending.
Total Current Assets.
Less: Current liabilities
other than short term
bank borrowings.
Working capital gap
Less: 25% of Working
capital gap.

370
150
220
55

2nd method of lending

Total current assets.
Less: Current liabilities
other than short term
bank borrowings.
Working capital gap
Less: 25% of Total Current
Assets.

370
150
220
92

Maxi. Permissible
borrowings.
Excess borrowings.
Current Ratio

bank 165
35
1.17:1

Maxi. Permissible
borrowings.
Excess borrowings
Current ratio

bank 128
72
1.33:1