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Analysis of financial Statements Presentation of Financial Statements I Vertical Balance Sheet Balance Sheet as on Particulars I Sources of Funds 1 Owners

s Funds a)Capital b)Reserves and Surplus c)Less: Losses and Fictitious Assets d)Net Reserves and Surplus 2)Loan Funds a)Secured Loan b)Unsecured Loan Total Funds Available (1+2) II Application of Funds 1)Fixed Assets a)Gross Block b)Less: Depreciation 2)Investments 3)Working Capital a)Current Assets b)Less: Current Liabilities

Rs

Rs

xxx xxx (xxx) xxx xxx xxx

xxx

xxx xxx

xxx (xxx)

xxx xxx

xxx (xxx)

xxx

Q. 1 Following is the Balance Sheet of Abhijeet Ltd as on 31st March 2006 Liabilities Rs Assets Equity Share Capital 390000 Cash in hand 10 % Preference Share Capital 200000 Cash at bank 9 % Debentures 250000 Preliminary Expenses General Reserve 60000 Goodwill Capital Reserve 50000 Building 11 % Bank Loan 100000 Investment Creditors 125000 Furniture Bank Overdraft 135000 Plant and Machinery Provision for Tax 140000 Debtors Proposed Dividend 30000 Prepaid Expenses Profit and Loss A/c 140000 Stock Depreciation Provision 80000 Calls in Arrears Commission on Issue of Shares 1700000 Present the above Balance Sheet in Vertical Form

Rs 15000 90000 20000 100000 300000 200000 250000 300000 150000 50000 200000 10000 15000 1700000

Q.2 Following is the Balance Sheet of B Ltd as on 31 st March 2008 (Rs in Lakhs) Liabilities Rs Assets Equity Share Capital 1000 Trade Investments Dividend Equalisation Reserve 140 Patent General Reserve 220 Land and Building (Cost) Profit and Loss A/c 380 Plant and Machinery (Cost) 6 % Debentures 500 Cash and Bank Balance Bank Overdraft 300 Closing Stock Sundry Creditors 420 Sundry Debtors Unpaid Dividend 20 Bills Receivable Proposed Dividend 120 Short Term Deposit Provision for Tax 340 Underwriting Commission Provision for Depreciation Preliminary Expenses Land and Building 100 Plant and Machinery 400 Total 3940 Present the above Balance Sheet in Vertical Form II Vertical Income Statement Income Statement for year ended Particulars Sales Cash Credit Less: Sales Return Less: Cost of Goods sold Opening Stock +Purchases +Manufacturing Expenses +Direct Expenses -Closing Stock Gross Profit Less: Operating Expenses Administrative Expenses Selling and Distribution Expenses Operating Profit before Interest Less: Interest Operating Profit after Interest Add: Non Operating Income Less: Non Operating Expense Profit before Tax Less: Provision for Tax Net Profit after Tax Add: Opening balance in P&L A/c Less: Appropriations Rs xxx xxx (xxx) xxx xxx xxx xxx (xxx) Rs

Rs 400 60 640 1300 176 620 444 60 60 120 60

3940

xxx

xxx xxx

xxx xxx

(xxx) xxx (xxx) xxx xxx xxx (xxx) xxx xxx (xxx)

xxx (xxx)

Retained Profit

xxx

Q. 3 Profit and Loss A/c of Well- balance limited for the year ended31st March 2003 Particulars Rs Particulars Rs To Opening Stock 700,000 By Sales To Purchases 900,000 Cash 520000 To Wages 150,000 Credit 1500000 To Factory Expenses 350,000 Less: Returns 20000 2,000,000 To Office Salaries 25,000 By Closing Stock 600,000 To Office Rent 39,000 By Dividend 10,000 To Postage and Telegram 5,000 By Profit on Sale of Furniture 20,000 To Directors Fees 6,000 To Salesman Salaries 12,000 To Advertising 18,000 To Delivery Expenses 20,000 To Debenture Interest 20,000 To Depreciation On Office Furniture 10,000 On Plant 30,000 On Delivery Van 20,000 To Loss on Sale of Van 5,000 To Income Tax 175,000 To Net Profit 145,000 2,630,000 2,630,000 You are required to prepare Vertical Income Statement Q.4 The accountant of Synthetic Industries Limited submits the following statements for 2003 Trading and Profit and Loss A/c for the year 2003 Particulars Rs Particulars Rs To Opening Stock 70,000 By Sales 1,660,000 To Purchases 1530000 By Closing Stock 160,000 Less: Return 300000 1,500,000 To Gross Profit 250,000 1,820,000 1,820,000 To Depreciation To Administrative Expenses To Selling and Distribution Expenses To Provision for Income Tax To Proposed Dividend To Profit Balance 36,000 By Gross Profit 50,000 By Interest 24,000 40,000 16,000 94,000 260,000 250,000 10,000

260,000

Liabilities Share Capital Profit and Loss A/c Proposed Dividend Bank Overdraft Sundry Creditors Provision for Depreciation Provision for Tax

Balance Sheet as on 31st Dec 2003 Rs Assets 300,000 Goodwill 180,000 Cash in hand 16,000 Stock in Trade 38,000 Sundry Debtors 26,000 Land and Building 55,750 Plant & Machinery 40,000 Prepaid Expenses Expenses on Issue of Shares Investments 655,750

Rs 20,000 8,000 160,000 178,500 92,150 128,600 1,500 7,000 60,000 655,750

Rearrange the above statements in Vertical Form Common Techniques of Analysis of Financial Statements 1. Trend Analysis 2. Comparative Financial Statements 3. Common-Size Financial Statements 4. Ratio Analysis 1. Trend Percentage Analysis Trend Analysis is a technique of studying several financial statements over a series of years. In this technique trend percentages are calculated for each item by taking the figure of that item for some base year as 100.Any year may be taken as base year but generally the starting/initial year is taken as base year. So each item for base year is taken as 100 and then the same item for other years is expressed as a percentage of base year. Q. 1From the following Balance Sheet prepare vertical Balance Sheet and calculate Trend percentages taking 2003 as base year Particulars 2005 2004 2003 Share Capital 50,000 50,000 50,000 Reserves and Surplus 5,000 10,000 10,000 Secured Loan 3,000 5,000 5,000 Unsecured Loan 2,000 6,000 Current Liabilities 5,000 5,000 4,000 65,000 70,000 75,000 Fixed Assets 40,000 45,000 50,000 Investments 5,000 7,500 10,000 Stock 7,000 6,000 5,000 Debtors 10,000 9,000 7,000 Cash 3,000 2,500 3,000 65,000 70,000 75,000

Q.2 Rearrange the Balance sheet in Vertical form and calculate the trend percentage taking 2005 as base figures and briefly comment on the same Rs in Lakhs Balance Sheet as on 31st December Liabilities 2005 2006 2007 2008 Assets 2005 2006 2007 2008 Share Capital 60 60 80 80 Building 50 60 55 80 Reserve 50 45 20 20 Goodwill 50 45 40 40 Surplus 13 32 31 40 Machinery 20 40 43 50 Debentures 10 20 20 30 Stock 5 15 25 5 Secured Loan 12 8 10 20 Debtors 20 14 15 10 Creditors 6 8 10 3 Cash 5 1 2 15 Bank O/D 1 2 8 4 Preliminary 3 2 1 Other Liabilities 1 2 2 3 Expenses 153 177 181 200 153 177 181 200 Q.3 Rearrange the data of Petrol Ltd in suitable form for analysis and calculate Trend Percentage( Rs in Lakhs) 2000 2001 2002 2003 2004 Fixed Assets 20 22 24 26 28 Investments 10 9 8 7 6 Current Assets 40 30 20 30 40 Preliminary Expenses 5 4 3 2 1 Total Assets 75 65 55 65 75 Owners Fund 20 20 20 40 60 Term Loan 20 20 20 20 15 Debenture 35 25 15 5 0 Total Liabilities 75 65 55 65 75 Q4 You are furnished with the following revenue statements for the year ended March 31st 2004 Particulars 2001 2002 2003 Sales 5,000,000 6,000,000 7,200,000 Less: Cost of Sales 3,200,000 3,800,000 4,600,000 Gross Margin 1,800,000 2,200,000 2,600,000 Management Expenses 300,000 350,000 400,000 Sales Expenses 500,000 600,000 720,000 Interest on Borrowings 300,000 400,000 500,000 Total Expenses 1,100,000 1,350,000 1,620,000 Net Profit before Depreciation 700,000 850,000 980,000 and Tax Depreciation 500,000 450,000 600,000 Profit before Tax 200,000 400,000 380,000 Income Tax 80,000 200,000 185,000 Profit after Tax 120,000 200,000 195,000 a)You are asked to prepare trend analysis b) Comment on the same

2004 8,640,000 5,600,000 3,040,000 450,000 864,000 600,000 1,914,000 1,126,000 650,000 476,000 240,000 236,000

Comments 1. Sales of the company increased from 2001 to 2004. Taking 2001 as base sales in 2002 were120 % in 2003 144% in 2004 and in 2004 172.80 % 2. Gross Profit increased from 100 in 2001 to 122.22% in 2002, 144.44 % in 2003 and 168.89 % in 2004 3. In year 2002, Gross Profit increased by 22.22 % when sales had increased by 20 % as against this in 2004 Sales increased by 72.80% and Gross Profit increased by 68.89% considering 2001 as base year. 4. Operating Profit before interest went up from 100 in 2001 to 160 % in 2002, 176 % in 2003 and to 215.2 % in 2004 5. Percentage increase in operating profit was higher than % increase in sales. This was due to less than proportionate increase in operating expenses. 6. Company paid higher amount of interest every year. From 100 in 2001, interest charges went up to 133.33% in 2002, 166.67 % in 2003 and 200% in 2004. Companys loan fund must have increased or the lenders charges higher interest rate. 7. Taxes paid increased due to increase in profits. 8. Net Profit after tax increased in 2002 (166.67 % ) came down slightly in 2003 (162.5% ) and increased again in 2004 (196.67%) Q 5 From the following data relating to the ABC & Co. for the year 1995 to 1998 calculate trend percentages and give comments on the same. (Taking 1995 as base year) Particulars 1995 1996 1997 1998 Net Sales 200,000 190,000 240,000 260,000 Less: Cost of goods sold 120,000 117,800 139,200 145,600 Gross Profit 80,000 72,200 100,800 114,400 Less: Expenses 20,000 19,400 22,000 24,000 Net Profit 60,000 52,800 78,800 90,400 Comparative Financial Statements In CFS two or more Balance Sheets or Income Statements of a firm are presented simultaneously in columnar form. The financial data for two or more years are placed and presented in adjustment coloumn to facilitate comparison. A Comparative Income Statements is helpful in deriving meaningful conclusions regarding changes in sales, cost of goods sold, different expenses etc. The Consolidated Balance Sheet is helpful in analyzing and evaluating the financial position of the firm over a period of years. Q1 Balance Sheet of Star Ltd for the year ended 31st Dec 2006 and 31st Dec 2007 are as follows Liabilities 31/12/2006 31/12/2007 Assets 31/12/2006 31/12/2007 Equity Share Capital 800,000 800,000 Building 600,000 540,000 10 % Preference Share Capital 600,000 600,000 Land 200,000 200,000 General Reserves 400,000 490,000 Plant 600,000 540,000 15 % Debentures 200,000 300,000 Furniture 200,000 280,000 Creditors 300,000 400,000 Stock 400,000 600,000 Bills Payable 100,000 150,000 Debtors 400,000 600,000 Tax Payable 200,000 300,000 Cash 200,000 280,000 2,600,000 3,040,000 2,600,000 3,040,000

Prepare Comparative Balance Sheet in Vertical form Q 2 Financial Position of Santhan Ltd as on 31st March Liabilities 2005 2006 Equity Share Capital 200,000 250,000 10 % Pref. Share Capital 200,000 150,000 Reserve Fund 80,000 100,000 Profit and Loss A/c 100,000 150,000 12 % Debentures 200,000 300,000 Creditors 100,000 120,000 Bank Overdraft 50,000 20,000 930,000 1,090,000

Assets Building Machinery Furniture Investment Stock Debtors Bank Balance

2005 300,000 150,000 40,000 100,000 150,000 100,000 90,000 930,000

2006 320,000 180,000 35,000 150,000 200,000 120,000 85,000 1,090,000

From the above information of Santhan Ltd as on 31st March 2005 and 2006 you are required to prepare comparative statement Q 3 Following are the Income Statement and Balance sheet of ABC & Co. for the year 1999 and 2000. Prepare the Comparative Balance Sheet and Comparative Income Statement Income Statement for the year 1999-2000 (Rs in Lakhs) Particulars 1999 2000 Particulars 1999 2000 To Cost of Goods Sold 300,000 375,000 By Net Sales 400,000 500,000 To General Expenses 10,000 10,000 To Selling Expenses 15,000 20,000 To Net Profit 75,000 95,000 400,000 500,000 400,000 500,000 Balance Sheet as on Dec 31 Liabilities Capital Reserves Secured Loan Creditors Outstanding Expenses (Rs in Lakhs) 1999 2000 350,000 350,000 100,000 122,500 50,000 75,000 100,000 137,500 50,000 75,000

Assets Land Building Plant Furniture Cash Debtors Stores

650,000

760,000

1999 50,000 150,000 150,000 50,000 50,000 100,000 100,000 650,000

2000 50,000 135,000 135,000 70,000 70,000 150,000 150,000 760,000

Q 4 From the following information of Mahindra Ltd for the year ended 31st March 2006 and 31st March 2007 you are required to prepare comparative statement after rearranging in Vertical form suitable for analysis Particulars 2006 2007 Sales 1,520,000 2,280,000 Return Inward 20,000 30,000 Opening Stock- Raw Material 7,600 7,600 Purchases of Raw Material 390,000 585,000 Work in Progress- Opening 10,000 10,000 Work in Progress- Closing 10,000 15,000 Closing Stock- Raw Material 7,600 11,400 Power 50,400 75,600 Depreciation on Machinery 70,000 105,000 Repairs Factory Building 40,000 60,000 Direct Labour 250,500 375,750 Selling and Distribution Expenses 105,400 158,100 Finance Expenses 70,000 70,000 Administrative Expenses 73,500 73,500 Q5) Prepare a Comparative Revenue Statement in Vertical Form from the following details Profit and Loss A/c for year ended 31st March Particulars 2006 2007 Particulars 2006 2007 To Opening Stock 225,000 300,000 By Sales 4,500,000 6,000,000 To Purchases 2,250,000 3,210,000 By Closing Stock 300,000 360,000 To Interest on Debentures 150,000 150,000 By Dividend 12,000 39,000 To Depreciation By Profit on Sale Furniture 15,000 15,000 of Machinery 24,000 Machinery 36,000 30,000 To Administrative Expenses 294,000 441,000 To Selling Expenses 456,000 753,000 To Carriage Outward 75,000 315,000 To Loss by fire 15,000 To Wages 195,000 300,000 To Provision for Tax 570,000 435,000 To Net Profit 570,000 435,000 4,836,000 6,399,000 4,836,000 6,399,000 Common Size Statements The CSS represents the relationship of different items of a financial statement with some Common item by expressing each item as a percentage of the Common Item. In Common Size Balance Sheet each item of Balance Sheet is stated as the total of the Balance Sheet. Similarly in Common Size Income Statement each item is stated as percentage of Net Sales. The percentages for different items are computed by dividing the absolute amount of that item by the common base (i.e. the Balance Sheet or the Net Sales as the case may be) and then multiplying by 100.

Q1 Prepare the Common Size Balance Sheet and Common Size Income Statement for the years 1999 & 2000. Comments The Common Size Balance Sheet reveals that the proportion of fixed assets out of total assets has reduced from 80.00% to 71.23% whereas the proportion of current assets has increased from 50.00% to 67.58%. This simply shows the increasing reliance of the firm on the current assets. Similarly out of the total liabilities the proportion of the proprietors funds has reduced from 90.00% to 86.3% and the proportion of loan funds has increased from 10 % to 13.70%. Since no new capital has been issued and the other liabilities have increased, the proportion of capital in the total financing of the firm has gone down from 70% to 63.93%. From the Common Size Income Statement we come to know that the Cost of goods sold as well as the Gross Profit has remained at 75% and 25% of Net Sales. However the Net Profit has increased from 18.75% to 19% of Net Sales. This is due to decrease in operating expenses from 6.25% to 6 % of Net Sales. Q 2Prepare Common Size Financial Statement Balance Sheet as on 31st March 2003 Liabilities Rs Assets Sundry Creditors 10,500 Cash Outstanding Expenses 19,500 Debtors Loans 56,250 Prepaid Expenses Capital 164,500 Stock Reserves 25,000 Other Current Assets Fixed Assets 275,750 Income Statement for the year ended 31st March 2003 Expenses Rs Income To Cost of Goods sold 177,750 By Net Sales To Selling Overheads 90,000 By Other Income To Administration and General 23,000 Expenses To Tax 8,500 To Loss on Sale of Investments 12,000 To Net Income 9,000 320,250

Rs 6,750 27,750 55,000 25,000 2,500 158,750 275,750

Rs 317,250 3,000

320,250

Q 3 Shiv Leela furnishes you the following Financial Statements Balance Sheet as 31st March 2003 Particulars Rs Particulars Share Capital Building 200000 Equity 100,000 Less: Depreciation 15000 12 % Preference 50,000 Short Term Investment Reserves and Surplus 35,000 Stock 10 % Debentures 50,000 Debtors (Secured by Mortgage) Bank Bills Payable 15,000 Creditors 20,000 Outstanding Expenses 10,000 Provision for Taxation 10,000 Proposed Dividend 10,000 300,000 Profit and Loss A/c for the year ended 31st March 2003 Particulars Rs Particulars To Opening Stock 30,000 By Sales To Purchases 180,000 By Closing Stock To Expenses Administration 25,000 Selling 30,000 Financing 5,000 To Depreciation 15,000 To Provision for Tax 10,000 To Proposed Dividend 10,000 To Balance c/d 30,000 335,000 Rs 185,000 40,000 35,000 30,000 10,000

300,000

Rs 300,000 35,000

335,000

You are required to convert the above into common size statements in Vertical Form

Ratio Analysis Balance Sheet Ratios 1) Current Ratios= Current Assets Current Liabilties Current Assets include Debtors (less Provision), Loose Tools, Outstanding Income, Bills Receivable, Cash and Bank Balance, Marketable Investments, Prepaid Expenses, Closing Stock, Short term loans and advances given. Current Liabilities include Creditors, Bills Payable, Outstanding Expenses, Unclaimed Dividend and Proposed Dividend, Provision for Tax, Advance Income, Bank Overdraft, Short Term Loan 2) Quick/Liquid Ratio= Quick Assets Quick Liabilities Quick Assets= Current Assets Less Closing Stock Less Prepaid Expenses Quick Liabilities= Current Liabilities Less Bank Overdraft E.g. From the following information calculate Quick Assets, Quick Liabilities, Quick Ratio Particulars Cash Debtors Creditors Pre- Paid Insurance Bills Receivable Rs 4,000 9,000 4,000 500 1,000 Particulars Rs Outstanding Salaries 1,000 Bank Overdraft 7,000 Stock 13,000 Bills Payable 6,000

3) Stock Working Capita=

Stock x100 Working Capital Stock Includes Closing Stock Working Capital= Current Assets Less Current Liabilities

4) Proprietors Ratio= Proprietors Funds or Shareholders Equity x100 Total Assets or Total Liabilities Proprietors Fund= Share Capital + Reserves and Surplus Accumulated Losses and Fictitious Assets Total Assets= Fixed Assets+ Investments+ Current Assets Total Liabilties= Own Funds + Loan Funds+ Current Liabilities E.g. From the following information calculate Proprietory ratio of A Ltd Particulars Equity Share Capital Preference Share Capital Reserves Current Assets Fixed Assets Rs 130,000 50,000 20,000 100,000 200,000

5) Debt Equity Ratio=

Borrowed Funds. Proprietors Funds Borrowed Funds include Loans taken and interest accrued and due on loans E.g. From the following information calculate Debt- Equity ratio of A Ltd Particulars 5 % Debentures 8 % Preference Share Capital Equity Share Capital Rs 600,000 300,000 500,000

6) Capital Gearing Ratio = Preference Capital+ Borrowed Funds Equity Shareholders Fund Equity Shareholders Fund= Equity Share Capital + Reserves and Surplus Accumulated Losses and Fictitious Assets Note: Gearing means the process of increasing the equity shareholders return through the use of debt. Shareholders earn more when the rate of return on total capital is more than the rate of interest on debts. This is also known as leverage or trading on equity. E.g. From the following information calculate Capital Gearing Ratio of A Ltd Particulars Equity Share Capital Preference Share Capital Securities Premium Capital Reserve 10 % Debentures Rs 80,000 150,000 10,000 16,000 50,000

Profit and Loss A/c Ratios 1) Gross Profit Ratio= Gross Profit x100 Net Sales Gross Profit = Sales- Cost of Goods Sold Cost of Goods Sold= Opening Stock + Manufacturing Expenses- Closing Stock Net Sales= Sales- Sales Return 2) Operating Ratio= Cost of Goods Sold+ Operating Expenses x100 Net Sales Operating Expenses= Office and Administration Expenses + Selling and Distribution Expenses Calculate operating Ratio from the following information Particulars Opening Stock Purchases Direct Expenses Closing Stock Rs 75,000 315,000 10,000 100,000 Particulars Administrative Expenses Selling and Dist Expenses Sales Rs 90,000 10,000 500,000

3) Expense Ratio=

Expenditure x100 Net Sales

4) Operating Profit Ratio= Operating Profit x100 Net Sales Operating Profit = Gross Profit Operating Expenses Calculate Net Profit Ratio from the following data Particulars Sales Selling Expenses Dividend Received Rs 1,000,000 100,000 20,000 Particulars Gross Profit Office Expenses Interest on Loan Rs 400,000 150,000 15,000

5) Net Profit Ratio=

Net Profit before Tax x100 Net Sales

6) Stock Turnover Ratio= Cost of Goods Sold Average Stock Average Stock= Opening Stock + Closing Stock 7) Sock Velocity= Average Stock X12 Cost of Goods Sold Composite Ratios 1) Return on Capital Employed= Profit before Interest and Tax x100 Capital Employed Capital Employed= Proprietors Funds + Borrowed Funds 2) Return on Proprietors Fund= Net Profit after Tax x 100 Proprietors Fund 3) Return on Equity Capital= Net Profit after Tax and Preference Dividend x 100 Equity Shareholders Fund Equity Shareholders Fund= Equity Share Capital + Reserves and Surplus- Accumulated Losses and Fictitious Assets 4) Earning Per Share= Net Profit after Tax and Preference Dividend No of Equity Shares 5) Price Earning Ratio= Market Price Per Share Earning Per Share From the following information calculate Price Earning Ratio Net Profit after Tax Rs 2,25000 8 % Preference Share Capital Rs 2,00,000 Paid Up[ Equity Capital (Rs 100 each) Rs 10,00,000

Market Price of share Rs 209

6) Dividend Payout Ratio = Dividend to Equity Shareholders x100 Net Profit after Tax and Preference Dividend 7) Debt Service Ratio= Profit before Interest and Tax Interest

8) Debt Service Coverage Ratio= Cash Profit available for debt servicing Interest + Instalment due on loans Cash Profit Available for Debt Servicing= Profit after Interest and Tax + Non Cash Debit to P&L + Interest on Loan Find out the Debt Service Coverage Ratio from the following details Profit after Interest and Tax Rs 2,50,000 Interest Payable Rs 25,000 Depreciation Rs 15,000 Loan Instalment payable during the year Rs 1, 45,000 9) Debtors Turnover Ratio = Credit Sales . Debtors + Bills Receivable Note: Debtors and Bills Receivable should be taken at the average of opening and closing balance

10) Debt Collection Period= Debtors + Bills Receivable x 12 Credit Sales 11) Creditors Turnover Ratio= Credit Purchases. Creditors + Bills Payable Note: Creditors and Bills Payable should be taken at the average of opening and closing balance

12) Debt Payment Period= Creditors + Bills Payable x 12 Credit Purchases Objective of Analysis Liquidity Solvency Operating Efficiency Overall Profitability Ratio to be computed Current Ratio, Quick Ratio, Stock Working Capital Ratio Proprietory Ratio, Debt/ Equity Ratio Gross Profit Ratio, Operating Ratio, Operating Profit Ratio, Expense Ratio, Net Profit Ratio, Return on Capital Employed, Return on Proprietors Fund, Return on Equity Capital

Q 1) Arrange the following Balance Sheet of Tara Ltd in Vertical form and

calculate Debt Equity, Proprietory, Capital Gearing, Stock Working Capital Ratios Liabilities Rs Assets Rs Equity Share Capital 200,000 Land and Building 140,000 8 % Preference Share Capital 60,000 Plant and Machinery 80,000 Reserve 30,000 Furniture & Fixtures 20,000 Profit and Loss A/c 20,000 Debtors 80,000 9 % Debentures 40,000 Stock 70,000 Creditors 60,000 Cash in hand 30,000 Outstanding Expenses 5,000 Prepaid Expenses 10,000 Provision for Taxation 20,000 Preliminary Expenses 20,000 Proposed Dividend 15,000 450,000 450,000

Q2) X Ltd and Y Ltd are in the same line of business. Following are their Balance Sheet as on 31st Dec 2003 Liabilities Equity Share Capital Reserves and Surplus 12 % Debentures Creditors Bills Payable Proposed Dividend Provision for Tax X Ltd Y Ltd Assets 700,000 200,000 Land 100,000 100,000 Building 200,000 500,000 Plant & Machinery 120,000 70,000 Debtors 40,000 20,000 Stock 20,000 20,000 Cash & Bank 35,000 20,000 1,215,000 930,000 X Ltd 100,000 250,000 500,000 210,000 100,000 55,000 Y Ltd 80,000 200,000 300,000 110,000 200,000 40,000

1,215,000 930,000

You are required to rearrange the Balance Sheets (In Vertical Form) and calculate the following ratios for both the companies and comment thereon a) Proprietory Ratio b) Capital Gearing Ratio c) Current Ratio d) Stock Working Capital Ratio Comments 1) Proprietory Ratio of X Ltd (65.84%) indicates that X Ltd depends more on its own funds. Y Ltd depends on its own funds only to the extent of 32.26% 2) Capital Gearing Ratio indicates that for every Re1 of the own funds X Ltd has 25 paise of borrowed funds. Y Ltd for every Re1 of the own funds X Ltd has Rs 1.67 of borrowed funds. Thus considering Proprietory Ratio and Capital Gearing Ratio Long term solvency and liquidity of X Ltd is better than Y Ltd. 3) Current Ratio of X Ltd (1.7:1) is less than standard(2:1) while that of Y Ltd (2.69:1) is well above the standard

4) Stock Working Capital Ratio of X Ltd shows that 67 % of its working capital is blocked in stocks while in case of Y Ltd 91 % of its working capital is so blocked. Overall the short term liquidity and solvency of Y Ltd is better than X Ltd. Q 3 Following are the Balance Sheets of X Ltd as on 31st March 2007 and 31st March 2008 Particulars 3/31/2007 3/31/2008 Liabilities Share Capital 450,000 660,000 Retained Earnings 231,000 200,000 Provision for Income Tax 84,000 Debentures 220,000 180,000 Accounts Payable 58,000 64,000 Other Current Liabilties 21,000 33,000 Total 1,064,000 1,137,000 Assets Building and Equipment Land Patent Accounts Receivables Inventories Prepaid Expenses Cash Total

450,000 80,000 55,000 54,000 300,000 6,000 119,000 1,064,000

500,000 80,000 65,000 46,000 312,000 4,000 130,000 1,137,000

Prepare a Balance Sheet in Vertical form suitable for analysis and calculate the following ratios for two years and make comparisons 1) Debt Equity Ratio 2) Quick Ratio 3) Stock to Working Capital Raito 4) Proprietory Ratio 1) Debt Equity Ratio has decreased due to repayment of debentures and increase in share capital 2) Quick Ratio has increased from 1.06 to 1.81 due to reduction in liabilities (mainly tax provision) 3) Stock Working Capital Ratio has decreased from 0.95 to 0.79 due to decrease in working capital from 3,16,000 to 3,95,000 4) Proprietors Ratio has increased from 0.64 to 0.76 due to increase in share capital

Q 4 Following is the Profit and Loss Account of Saurav Limited for the year ended 31st March 2003. You are required to prepare Vertical Income Statement for the purpose of analysis Particulars Rs in Lakhs Particulars Rs in Lakhs To Opening Stock 700 By Sales To Purchases 900 Cash 520 To Wages 150 Credit 1500 To Factory Expenses 350 Less: Return 20 2,000 To Office Salaries 25 By Closing Stock 600 To Office Rent 39 By Dividend on Investment 10 To Postage and Telegram 5 By Profit on Sale of 20 To Directors Fees 6 Furniture To Salesman Salaries 12 To Advertising 18 To Delivery Expenses 20 To Debenture Interest 20 To Depreciation - Office Furniture 10 - Plant 30 - Delivery Van 20 To Loss on Sale of Van 5 To Income Tax 175 To Net Profit 145 2,630 2,630

From the above Vertical Income Statement Calculate 1) Gross Profit Ratio 2) Operating Ratio 3) Stock Turnover Ratio Q 5) The following are the summarised Profit and Loss Account of S LTd for the year ended31st Dec 2005 and the Balance Sheet as on that date Particulars To Opening Stock To Purchases To Incidental Expenses To Gross Profit Profit and Loss A/c Rs Particulars 99,500 By Sales 545,250 By Closing Stock 14,250 340,000 999,000 Rs 850,000 149,000

999,000

To Operating Expenses Selling and Distribution Administration To Non Operating Expenses Loss on Sale of Assets To Net Profit

By Gross Profit 30,000 By Non Operating Income 165,000 Interest Profit on sale of Shares 4,000 150,000

340,000 3,000 6,000

349,000 Balance Sheet Rs Assets Land and Building 200000 Plant and Machinery 90000 Stock in Trade 130000 Debtors 60000 Cash and Bank Balance 480000

349,000

Liabilties Issued Capital 2,000 Equity Shares of Rs 100 each Reserves Current Liabilities Profit and Loss A/c

Rs 150000 80000 149000 71000 30000 480000

From the above statements you are required to calculate the following ratios 1. Current Ratio 2. Operating Ratio 3. Stock Turnover 4. Return on Capital Employed 5. Earning per equity share 6. Operating Profit Ratio Q) 6 Shown below are the comparative balance sheets and operating data f Alpha Company for the years ended 31st Dec 2004, 2005, 2006 Comparative Balance Sheet 2004 Current Assets Cash Debtors Stock A Fixed Assets Equipment Building Land B Total Assets (A+B) Current Liabilties Bills Payable Creditors Accrued Liabilities A Long term Loan: 6 % Debentures (B) Owners Equity Equity Capital (Rs 100 each) Retained Earnings 1,200 14,800 14,800 30,800 9,800 15,700 5,000 30,500 61,300 2005 1,900 12,400 16,200 30,500 12,000 16,300 5,000 33,300 63,800 2006 400 10400 19800 30600 12800 18000 5000 35800 66400

7,500 6,300 1,200 15,000

3,000 11,200 1,600 15,800

5000 13400 2900 21300 5500 30000 9600

30,000 16,300

30,000 18,000

C Total Liabilities (A+B+C) Additional Information Total Sales Net Profit after Tax Dividend Paid

46,300 61,300

48,000 63,800

39600 66400

2004 100,000 5,000 3,000

2005 105,000 5,700 3,000

2006 93,000 2,400 1,000

You are required to 1) Compute the following for each of the three years i) Current Ratio ii) Acid Test Ratio iii) Proprietary Ratio iv) Return on Proprietors Fund 2) Discuss the financial position of the company as on 31st Dec 2004 and the trends shown by the comparative data and ratios Comments a) Short Term Financial Position: Short Term financial position is reflected in the Current Ratio and Acid Test Ratio. The Current Ratio and Acid Test Ration of the company for 2004 are favourable. The position of the company for 2004 seems to be satisfactory. In 2005 both the ratios have declined. The position of the company for 2006 has become worst as there is a drastic decline in the ability of the company to meet its current obligations out of its current assets b) Long Term Financial position: The proprietary Ratio in 2004 was 76% , n 2005 75 % and in 2006 60%. The financial position of the company seems to be satisfactory as the proprietors contribution to total assets is more than the contribution by outsiders. However the ratio is showing a downward tendency. This means that the interest of the proprietors is decreasing. c) Profitability: the profitability position of the company showed improvement in 2005 as it is indicated by the increase in the return on proprietors fund as compared to the previous year. However the ratio has declined in 20006. Return on proprietors fund has fallen from 11.88% in 2005 to 6.06% in 2006 The profitability position of the company is not satisfactory. Q 7) From the following financial statements of S Ltd calculate the accounting ratios and offer brief comments on the companys Financial Position and Profitability Trading and Profit and Loss A/c for the year ended 31st March 2006 Particulars Rs Rs Sales (Net) 600,000 Opening Stock 65,000 Purchases 335,000 Less: Closing Stock (40,000) 360,000

Gross Profit General Expenses Directors Emoluments Depreciation Audit Fees Debenture Interest Income from Investment Profit before Tax Less :Provision for Tax Profit after Tax Balance Sheet as on 31st March 2006

240,000 136,280 10,000 6,200 500 2,520

155,500 84,500 8,700 93,200 (37,280) 55,920

Rs Funds used in Fixed Assets Land and Building Plant and Machinery Motor Vehicles Furniture and Fittings Investments Current Assets Prepaid Expenses Stock Debtors Bills Receivable Income Tax Refundable Bank Less: Current Liabilities Trade Creditors Accrued Expenses Provision for Taxation Proposed Dividend 50,000 14,000 7,500 2,400

Rs

73,900 87,000

20,000 40,000 50,000 1,100 16,000 39,800 166,900 45,000 5,500 39,800 12,500 102,800

64,100 225,000

Financed by Share Capital 100, 5 % Preference Shares of Rs 100 each 40,000 Equity Shares of Re 1 each Reserves and Surplus Securities Premium General Reserve

10,000 40,000 50,000 4,000 90,000

Dividend Equalisaiton Reserve Profit and Loss A/c Shareholders Fund 7 % Debentures

5,000 40,000 139,000 189,000 36,000 225,000

Comments 1) Financial Position The Long term financial position of the company is indicated by the Proprietory Ratio and Debt Equity Ratio. The Proprietory Ratio is 57.66% which indicates that the contribution made by the proprietors to the total assets is more than that of outsiders. The Debt Equity Ratio of the company 0.19 is satisfactory. Therefore the firm can be considered financially stable in the long run. The Short term financial position of the company is indicated by the current and liquid ratio. The current ratio of the company 1.62 which is not favourable. Hence the short term financial position of the company is not strong, whereas the immediate solvency as revealed by liquid ratio 1.04 seems to be satisfactory. 2) Performance: The Gross Profit Ratio of the company is 40% and the operating profit ratio is 14.5%. The return on capital employed is 42.54% and the return on proprietors fund is 29.59%. This shows that the profitability of the company is satisfactory. Q8 Balance Sheet as on 31st Dec 2006 Particulars Rs Particulars Equity Share Capital (Rs 10) 1,00,000 Building 10 % Preference Share Capital 40,000 Plant Profit & Loss A/c 50,000 Stock Mortgage Loan 1,00,000 Debtors Creditors 60,000 (L.Y. Rs 80,000) Taxes Payable 50,000 Investments Cash 4,00,000 Profit and Loss A/c for year ended 31st Dec 2006 Particulars Rs Particulars To Opening Stock 1,00,000 By Sales To Purchases 2,00,000 By Closing Stock To Gross Profit 4,00,000 7,00,000 Rs 80,000 1,00,000 1,00,000 60,000 20,000 40,000 4,00,000

Rs 6,00,000 1,00,000 7,00,000

To Operating Expenses To Operating Profit

1,50,000 By Gross Profit 2,50,000 4,00,000

4,00,000 4,00,000

To Interest on Loan To Provision for Tax To Net Profit after Tax

65,000 By Operating Profit 95,000 90,000 2,50,000

2,50,000

2,50,000

Calculate i. Current Ratio ii. Quick Ratio iii. Debtors Turnover iv. Collection Period v. Stock Turnover vi. Debt Service vii. Earnings Per Share viii. Dividend Payout Ratio ix. Creditors Turnover Note: The company paid dividend on equity shares @ 20% Q9 Following information is given to you from which you are required to prepare Balance Sheet of A Ltd was on 30th September 2006: Current Ratio 1.8:1 Working Capital Rs 40,000 Liquid Ratio (on the basis of Current Liabilities) 1.5 Fixed Assets to Share Capital 90 % Rate of Gross Profit to Turnover 25% Reserves to Share Capital 10% Share Capital Rs 4,00,000 Stock Turnover Ratio on Cost of Goods Sold 10 times Average Rate Outstanding for the year 54 days (assume 360 days in a year) On 30th September 2006 current assets include Stock, Debtors and Bank Balance, Liabilities include Share Capital, Reserves and Current Liabilties and Assets include Fixed Assets, Current Assets and Development Expenditure (Not written off so far) Q 10 The following are the ratios relating to the activities of Bharat Traders Ltd Debtors Velocity 3 months Stock Velocity 8 months Creditors Velocity 2 months Gross Profit Ratio 25 % Gross Profit for the year amounts to Rs 4,00,000. Closing Stock of the year is Rs 10,000 above the Opening Stock. Bills Receivable amounts to Rs 25,000 and Bills Payable to Rs 10,000 Find out the following figures 1. Sales 2. Sundry Debtors 3. Closing Stock 4. Sundry Creditors

Q 11 From the following information prepare a Balance Sheet with as many details as possible Current Ratio 2.5 Liquid Ratio 1.5 Proprietory Ratio (Fixed Assets: Proprietors Funds) 0.75 Working Capital Rs 60,000 Reserves and Surplus Rs 40,000 Bank O/D Rs 10,000 No Long term loan or Fictitious Assets Q 12 Using the data complete the Balance Sheet given below Gross Profit Ratio (20% of Sales) Rs 60,000 Shareholders Equity Rs 50,000 Credit Sales to Total Sales 80% Total Assets Turnover 3 times Inventory Turnover (to Cost of Sales) 8 times Average Collection Period (360 days a year) 18 days Current Ratio 1.6 Long term Debt to Equity 40 %

Cash Flow Statement Cash Flow Statement summarises the changes in the amount of cash for a particular period. It indicates the sources from which cash was obtained and the used to which cash was put. Cash Flow Statement are prepared as per Accounting Standard 3 issued by ICAI Classification of Cash Flow 1. Cash Flow from Operating Activities Operating Activities are the principal revenue producing activities of the enterprise and activities other than investing and financing. Eg cash received from sale of goods or rendering of services, cash paid to suppliers for goods and services, salary paid to employees 2. Cash Flow from Investing Activities Investing Activities are activities related to acquisition and disposal of long term assets and investments. E.g. payment made for purchase of fixed assets, purchase of shares debentures payment received on sale of fixed assets, sale of shares and debentures. 3. Cash Flow from Financing Activities Financing activities are the activities which result in change in size and composition of owners capital and borrowing of the organisation. E.g. amount received on issue of shares, debentures amount paid on redemption on shares debentures interest and dividend paid. 1)Following are the Balance Sheet of Young India Ltd Liabilities Share Capital General Reserve Profit and Loss A/c 14 % Debentures Proposed Dividend 2002 2001 700,000 600,000 200,000 150,000 200,000 100,000 200,000 NIL 80,000 70,000 1,380,000 920,000 Assets Fixed Assets Debtors Stock Cash Underwriting Commission 2002 2001 650,000 400,000 350,000 200,000 250,000 150,000 130,000 100,000 NIL 70,000 1,380,000 920,000

Additional Information i. Debentures are issued for purchase of fixed assets ii. Depreciation for the year is Rs 50,000 iii. Interim Dividend paid during the year is 5 % of the opening capital Prepare Cash Flow Statement

2) Telestar Ltd gives you the following Balance Sheets for the year ended 31st March 2006 and 2007. Prepare a Cash Flow Statement for the year ended 31st March 2007 Liabilities Equity Share Capital 5 % Preference Share Capital General Reserve Profit and Loss A/c Provision for Tax Creditors 31/3/2006 31/3/2007 120,000 120,000 90,000 60,000 30,000 42,330 15,240 28,080 17,000 8,000 337,920 381,990 Assets Land Building Stock Debtors Prepaid Expenses Bank Balance Misc Expenditure 31/3/2006 31/3/2007 210,000 270,000 285,000 270,000 27,000 36,300 40,440 38,460 25,880 17,000 15,840 3,240 6,000 5,400 610,160 640,400

610,160

640,400

Additional Information I.The Company has paid interim Dividend of 5 % on Equity Shares II.Preference Shares were redeemed during the year at 10% premium III.Income Tax paid during the year Rs 15,000 3) Following are the summarised Balance Sheets of M Ltd as on 31st March 2002 and March 2003 Liabilities Share Capital General Reserve Profit and Loss A/c Term Loan from ICICI Creditors Provision for Tax 2003 2002 500,000 500,000 150,000 125,000 76,500 76,250 155,000 175,000 231,250 275,000 76,250 84,250 Assets Premises Machinery Equipment Stock Debtors Cash Bank Goodwill 2003 2002 475,000 500,000 422,500 375,000 40,500 45,000 74,000 100,000 160,000 200,000 7,000 3,000 10,000 12,500 1,189,000 1,235,500

1,189,000 1,235,500 Additional Information I.Dividend Rs 25,000 was paid during the year II.Depreciation on Premises is provided at 5 % III.Machinery of Rs 75,000 was acquired during the year IV.Income Tax Provision for the year was Rs 75,000

4) Following are summarised Balance Sheets of BDM Ltd as on 31st Dec 2004 and 2005 Liabilities Equity Share Capital 12% Debentures 10 % Pref. Share Capital Bank Loan Reserves 2004 2005 200,000 250,000 100,000 80,000 50,000 80,000 70,000 110,000 20,000 25,000 Assets Bank Stock Debtors Machinery Furniture 2004 2005 35,000 16,000 40,000 75,000 90,000 150,000 75,000 60,000 10,000 8,000

Profit and Loss A/c Creditors Bills Payable

50,000 60,000 40,000 590,000

60,000 Land 75,000 Building 33,000 Goodwill 713,000

170,000 140,000 30,000 590,000

280,000 99,000 25,000 713,000

Additional Information I.Depreciation charged during 2005 was Rs 4,000 on Furniture and Rs 12,000 on Machinery and Rs 20,000 on Building II.Part of Machinery was sold for Rs 15,000 at a loss of Rs 4,000 III.During 2005 interim Dividend was paid Rs 10,000 and Income Tax was paid Rs 5,000 IV.During the year part of the building was sold at book value You are required to prepare Cash Flow Statement 5) You are required to prepare Cash Flow Statement as per AS 3 for the year ended 31st Dec 2004 from the following Balance Sheet as on 31st Dec and additional information of M/s Rajeshree Co. Ltd. Balance Sheet 2004 Assets 500,000 Fixed Assets Investment (Long Term) 80,000 Stock 110,000 Debtors 100,000 Bills Receivable Prepaid Expenses 100,000 Cash 75,000 Bank 30,000 Preliminary Expenses 50,000 30,000 1,075,00 0

Liabilities Equity Share Capital Preference Share Capital Securities Premium General Reserve Profit and Loss A/c 10 % Debentures 12 % Debentures Creditors Bills Payable Proposed Dividend Provision for Tax

2003 200,000 300,000 50,000 60,000 70,000 200,000 50,000 40,000 30,000 35,000 1,035,00 0

2003 645,000 60,000 100,000 140,000 50,000 10,000 5,000 15,000 10,000

2004 581,000 80,000 150,000 150,000 75,000 9,000 7,000 23,000

1,035,00 0

1,075,00 0

Additional Information I. Machinery worth Rs 40,000 sold for Rs 45,000/II. Furniture purchased during the year amounted to Rs 65,000/III. 10 % Debentures were given option of conversion into 12% Debentures or redemption in cash. Accordingly half of the debentures holders exercised option in favour of new 12% debentures and rest redeemed in cash. IV. Preference Shares redeemed at 10% premium. The premium on redemption has been debited to Securities Premium account. New Equity Shares were issued at premium. V. Provision for Tax made for the year Rs 40,000

VI. Interim Dividend paid during the year Rs 25,000. Proposed Dividend for the year 2003 has been paid during the year 2004. 6) From the following Balance Sheet of XYZ Ltd as on 31/3/2006 and 31/3/2007 prepare cash flow statement for the year ended 31/3/2007 as per AS-3 by indirect method Liabilities Equity Share Capital General Reserve Capital Reserve Profit and Loss A/c Creditors Provision for Tax Proposed Dividend 31/3/2006 31/3/2007 4,500,000 5,250,000 300,000 500,000 300,000 300,000 400,000 600,000 900,000 500,000 550,000 395,000 450,000 6,595,000 8,350,000 Assets Land Machinery Investment Stock Debtors Bills Receivable Cash/Bank Balance 31/3/2006 31/3/2007 1,500,000 1,150,000 1,350,000 2,870,000 900,000 700,000 1,400,000 1,600,000 900,000 1,350,000 245,000 290,000 300,000 390,000 6,595,000 8,350,000

Additional Information for the year ended 31st March 2007 I.During the year Machinery was sold for Rs 2,00,000( W.D.V. Rs 2,25,000) II.During the year depreciation provided on Machinery was Rs 3,00,000 III.Profit on Sale of Land was transferred to Capital Reserve IV.Interim Dividend paid during the year Rs 2,00,000 V.Profit on Sale of Investment was transferred to General Reserve VI.Income Tax paid during the year 2007 is Rs 4, 50,000. 7) Following are the Balance Sheets of Rudraksha Ltd as on 31st Dec 2002 and 31st Dec 2003 Liabilities Equity Share Capital 10% Preference Share Capital 12 % Debentures Profit and Loss A/c Other Reserves Share Premium Creditors Bills Payable Bank Overdraft Proposed Dividend Equity Shares Preference Shares 31/12/2002 31/12/2003 Assets 1,200,000 1,600,000 Land and Building 800,000 600,000 Machinery 100,000 50,000 Goodwill 370,000 304,000 Patents 104,000 190,000 Investments 20,000 60,000 Inventory 180,000 200,000 Debtors 24,000 70,000 Prepaid Expenses 18,000 Cash Balance 196,000 80,000 3,074,000 240,000 60,000 3,392,000 31/12/2002 31/12/2003 404,000 432,000 840,000 1,020,000 50,000 40,000 60,000 48,000 802,000 802,000 570,000 674,000 260,000 292,000 8,000 10,000 80,000 4,000 70,000

3,074,000

3,392,000

Other Information I.Machinery having WDV of Rs 22,000 was sold at a profit of Rs 3,000 and new machinery purchased at Rs 2,30,000 II.Equity Shares are issued at 15 % premium III.Preference Shares were redeemed at a premium of 10 %.

IV.Debentures were redeemed at a premium of 10%. You are required to prepare Cash Flow Statement for the year ended 31st Dec 2003. 8)From the following details relating to the Accounts of Grow More Ltd prepare Cash Flow Statement 31/3/200 31/3/200 31/3/200 31/3/200 Liabilities 4 3 Assets 4 3 Share Capital 1,000,000 800,000 Plant and Machinery 700,000 500,000 Reserve 200,000 150,000 Land/ Building 600,000 400,000 Profit and Loss Account 100,000 60,000 Investments 100,000 Debenture 200,000 Debtors 500,000 700,000 Provision for Taxation 100,000 70,000 Stock 400,000 200,000 Proposed Dividend 200,000 100,000 Cash/Bank 200,000 200,000 Sundry Creditors 700,000 820,000 2,500,000 2,000,000 2,500,000 2,000,000 Other Information I. Depreciation @ 25% was charged on the opening value of Plant and Machinery II. During the year one old machine costing Rs 50,000 (WDV 20,000) was sold for Rs 35,000 III. Rs 50,000 was paid towards Income Tax during the year IV. Building under construction was not subject to any depreciation 9)Following are the Balance Sheets as at 31st March 2002 and 2003 Liabilities Equity Capital General Reserves 31/3/2002 31/3/2003 Assets 100,000 150,000 Land and Building 60,000 10,000 Plant and Machinery Furniture and Profit and Loss A/c 5,000 30,000 Fittings Bank Overdraft 65,000 Investments Loan Against Mortgage 40,000 Stock of Plant and Machinery Debtors Provision for Taxation 10,000 15,000 Cash Preliminary Creditors 30,000 20,000 Expenses Bills Payable 10,000 30,000 215,000 360,000 31/3/2002 31/3/2003 80,000 75,000 42,000 85,000 7,000 6,000 27,500 46,500 2,000 4,000 6,000 12,000 94,500 77,250 7,250 3,000

215,000

360,000

During the year ended 31st March 2003 the following transactions took place I. Bonus Shares have been issued at one for every two held out of General Reserve. II. Company purchased Plant and Machinery for Rs 60,000 out of which Rs 20,000 paid in cash and for the rest, Plant and Machinery mortgaged to seller III. Dividend paid Rs 15,000 IV. Furniture (Book Value Rs 2,100) was sold for Rs 3,045

Investments costing Rs 3,000 written off in the year 1997 were sold for Rs 5,000 on 12th March 2003 VI. Furniture purchased during the year for Rs 1,500 VII. Net Profit during the year after charging Depreciation on Land and Building, Plant and Machinery, Furniture and Fittings and Rs 21,000 provision for Taxation You are required to Prepare Cash Flow Statement V.

Consolidated Financial Statements Parent Company: A Parent is an enterprise that has one or more subsidiaries Subsidiary Company: A subsidiary is an enterprise that is controlled by another Enterprise known as parent. A parent may control a subsidiary in any one of the following ways 1. By holding in the subsidiary more than half of the shares having voting power. 2. By controlling the composition of the board of directors of the subsidiary 3. By controlling the holding company which controls the subsidiary. For e.g. if C ltd is the subsidiary of B ltd and B Ltd is the subsidiary of A Ltd then C ltd is deemed to be subsidiary of A Ltd. Consolidated Financial Statements A Group comprises of a parent and all its subsidiaries. CFS are the financial statements of the group presented as those of a single enterprise. This is done by the parent company and the consolidated statements are presented in addition to the separate financial statements of the parent. Advantages of CFS 1. A shareholder in any one of the group companies is interested in knowing as to how the group is faring as a whole. His or her fortune are tied with the success of the group. 2. CFS facilitate the valuation of shares of the parent company. 3. The shareholder would like to know the return the parent company is getting on its investment in the subsidiary company. Principles of Consolidation Rule1: While preparing a consolidated Balance Sheet investment of holding company in the equity shares of the subsidiary is replaced by the assets and liabilities of subsidiary 1) Liabilities Share Capital at Rs 10/share Sundry Liabilities Balance Sheet as on 31st March 2000 H S Assets 12,000 5,000 Sundry Assets Investments 8,000 3,000 500 shares in S Ltd 20,000 8,000 H S 15,000 8,000 5,000 20,000

8,000

Rule 2 In order to prepare a consolidated balance sheet the share of outsiders in the net assets is shown on the liabilities side under the heading minority interest Minority Interest= Shares in Assets Share in Liabilities or Minority Interest = Share in Capital+ Share in Reserves

2) Liabilities Share Capital at Rs 10/share Sundry Liabilities Balance Sheet as on 31st March 2000 H S Assets 12,000 5,000 Sundry Assets Investments 8,000 3,000 400 shares in S Ltd 20,000 8,000 H S 16,000 8,000 4,000 20,000

8,000

Rule 3 while preparing consolidated financial statements goodwill or capital reserve arising out of acquisition of shares in the subsidiary must be ascertained. Goodwill is the excess of price paid for investment over and above the share in equity or net assets acquired by the holding company. Conversely capital reserve is the excess of share in equity or net assets acquired by the holding company over and above the price paid for the investment. 3) Liabilities Share Capital at Rs 10/share Reserve Profit & Loss A/c Sundry Liabilities Balance Sheet as on 31st March 2000 H S Assets 12000 6000 Sundry Assets Investments 3000 2000 600 shares in S Ltd 2000 1000 10500 3000 27500 12000 H S 20000 12000 7500

27500

12000

4)The Balance Sheet of X LTd and Y Ltd as on 31st Dec 2000 were as follows Liabilities X Y Assets X Y Share Capital in Rs 10 12,000 5,000 Fixed Assets 10,000 6,000 fully paid shares Investments Profit & Loss A/c 2,500 1,000 450 shares in S Ltd 6,750 Creditors 14,000 3,000 Current Assets 11,500 2,000 Cash at Bank 250 1,000 28,500 9,000 28,500 9,000 Prepare Consolidated Financial Statements 5)From the following Balance Sheet prepare consolidated Balance Sheet of X Co Ltd and Y Co. Ltd Balance Sheet as on 31st March 2000 Liabilities X Y Assets X Y Share Capital Land and building 15,200,000 2,00,000 shares of Rs 80 each 16,000,000 Plant & Machinery 2,240,000 320,000 20,000 shares of Rs 80each 1,600,000 Shares in Y Co Ltd 2,880,000 General Reserve 8,000,000 18000 shares of Rs 80 each Creditors 4,800,000 320,000 Stock 4,800,000 800,000 Profit & Loss Appropriation 1,600,000 2,400,000 Debtors 3,200,000 1,120,000 Cash at Bank 2,080,000 2,080,000 30,400,000 4,320,000 30,400,000 4,320,000

Rule4: There are certain transaction which appears in the balance sheet of both the holding and subsidiary companies on opposite sides like loan given by one company to another, bills of exchange given by one company to another, debtors and creditors. Such transactions are not shown on any side of consolidate balance sheet. 6) The Balance Sheet of H ltd and its subsidiary S Ltd on 31st March 2001 were as under Liabilities H S Assets H S Share Capital Land & Building 600,000 Equity Shares of Rs 10 each 2,000,000 500,000 Plant & Machinery 2,000,000 fully paid up Furniture and Fixtures 90,000 100,000 General Reserve 300,000 100,000 30,000 Shares in S Ltd at cost 650,000 Profit and Loss A/c 900,000 450,000 Stock 400,000 750,000 Bills Payable 150,000 Debtors 100,000 280,000 Creditors 300,000 300,000 Cash in hand 10,000 15,000 Canara Bank Overdraft 200,000 Cash at Dena Bank 105,000 Bills Receivable 100,000 3,850,000 1,350,000 3,850,000 1,350,000 Additional Points 1) Bills Receivable held by S Ltd are all accepted by H Ltd 2) Included in Debtors of S Ltd is a sum of Rs 60000 owing by H Ltd in respect of goods supplied by S LTd You are required to prepare a CFS of H Ltd as at 31st March 2001 Rule 5 when goods are sold by one company to another at a price which includes profit and such goods are unsold on the date of Balance Sheet there will be unrealized profit from the point of view of group. Such profit is eliminated from the stock valuation and profit of majority shareholder 7) The following is the summarised balance sheet of A Ltd and C Ltd as on 31st March 2001 Liabilities A Ltd C Ltd Assets Paid up capital in Freehold premises shares of Rs 10 each 1,000,000 300,000 Plant & Machinery General Reserve 400,000 125,000 Furniture Profit & Loss A/c 300,000 175,000 Debtors Sundry Creditors 100,000 70,000 Stock Investment in 20000 shares in C Ltd at cost Cash Balance 1,800,000 670,000 A Ltd C Ltd 450,000 120,000 350,000 160,000 80,000 30,000 300,000 170,000 320,000 160,000 260,000 40,000 1,800,000

30,000 670,000

You are required to prepare a CFS as on 31/3/2001 showing in detail necessary adjustments and taking into consideration the following information 1) Stock of Rs 160000 held by C Ltd consists of Rs 60,000 goods purchased from A Ltd who has charged

profit at 25 % on cost Rule 6 While preparing a consolidated balance sheet at a date after acquisition there is a need to divide all the profits into pre acquisition profit and post acquisition profit. While Post acquisition profit is shown in the consolidated balance sheet, pre acquisition profits are eliminated by taking them in the computation of goodwill or capital reserve. 8) From the Balance Sheet given below prepare a consolidated Balance sheet of M Ltd and its subsidiary C Ltd. Share were acquired on 1st Jan 1997 Balance Sheet of M Ltd & C Ltd as on 30th June 1997 Liabilities M C Assets M C Share Capital Fixed Assets 140,000 40,000 15000 shares of Rs 10each 150,000 Current Assets 58,000 10,000 3000 share of Rs 10 each 30,000 Investment General Reserve 20,000 2000 shares of Rs 10 27,000 Profit & Loss A/c 30,000 each in CLtd Balance on 1/7/96 4,500 Add: Profit for the year 6,000 Creditors 25,000 9,500 225,000 50,000 225,000 50,000