Pan African Enetwork Project: Masters of Business Administration (Ib)

PAN African eNetwork
Project
Masters of Business Administration (IB)
Accounting and Finance
Semester - I
Dr. N N Sen Gupta
Copyright Amity University
1
FINANCIAL STATEMENTS
ANALYSIS
Presented By
Dr. N. N. Sengupta
FINANCIAL STATEMENTS ANALYSIS

In the words of Myers,
Financial statement analysis is largely a study of
relationship among the various financial factors
in a business as disclosed by a single set of statements, and a study of the trend of these
factors as shown in a series of statements.
The Purpose of financial Statement Analysis
The analysis and interpretation of financial statement

is essential to bring out the mystery behind the figures
in financial statements. Financial statements analysis
is an attempt to determine the significance and
meaning of the financial statement data so that
forecast may be made of the future earnings, ability to
pay interest and debt maturities (both current and
long-term) and profitability of a sound dividend policy
Distinction Between Financial Statement Analysis & Interpretation
The term financial statement analysis

includes
both
analysis
and
interpretation. A distinction should,
therefore, be made between the two
terms.
Distinction Between Financial Statement Analysis & Interpretation
The term Analysis is used to mean the

simplification of financial data by the
methodical classification of the data given
in the financial statements,
Interpretation means, explaining the
meaning and significance of the data so
simplified.
Types of Financial Analysis

Types
Financial Analysis
Types
ofofFinancial
Analysis
On the basis of material used
External
Analysis
Internal
Analysis
On the basis of modus operandi
Horizontal
Analysis
Vertical
Analysis
Procedure of Financial Statements Analysis
Broadly speaking there are three steps

involved in the analysis of financial
statements. These are:
Selection,
Classification, and
Interpretation.
The analyst should acquaint himself with the principles

and postulates of accounting.
The extent of analysis should be determined so that

the sphere of work may be decided.
The financial data given in the statements should be

re-organised and re-arranged.

A relationship is established among financial statements
with the help of tools and techniques of analysis such as
rations, trends, common size, funds flow etc.
the information is interpreted in a simple and
understandable way.
the conclusions drawn from interpretation are presented
to the management in the form of reports.
Methods or Devices of Financial Analysis

The following methods of analysis are generally used:
Comparative statements
Trend analysis
Common size statements
Duo-point analysis
Funds Flow Analysis
Cash Flow Analysis

Ratio Analysis
Cost-Volume-Profit Analysis
Comparative Statements
The comparative financial statements are statements
of the financial position at different periods; of time.
The elements of financial position are shown in a
comparative form so as to give an idea of financial
position at two or more periods.
The comparative statement may show:
Absolute figures (rupee amounts)
Changes in absolute figures i.e. increase or

decrease in absolute figures.
Absolute data in terms of percentages.
Increase or decrease in terms of percentages.
Comparative Statements
The two comparatives statements are
(i) Balance sheet and
(ii) Income Statement
Comparative Balance Sheet

Guidelines for Interpretation of Comparative Balance
Sheet
While interpreting Comparative Balance Sheet the
interpreter is expected to study the following aspects:
Current financial position and liquidity position
Long term financial position.
Profitability of the concern.
Comparative Financial Statement
In the comparative statement balance sheet

figures are provided for more than one year.
The comparative financial statement provides
time perspective to the balance sheet figures.
The annual data are compared with similar data
of previous years, either in absolute terms or in
percentages.
Common size Balance Sheet

Particulars
As on 31.03.1999
As on 31.03.1998
Amount
% Total
Amount
% Total
Capital and Reserves
---
---
---
---
Share capital
---
---
---
---
Preference capital
---
---
---
---
Reserves
---
---
---
---
P/L Account
---
---
---
---
xxx
xxx
xxx
xxx
@% debentures
---
---
---
---
Term loans
---
---
---
---
xxx
xxx
xxx
xxx
Bills payable
---
---
---
---
Sundry creditors
---
---
---
---
Other current liabilities
---
---
---
---
xxx
xxx
xxx
xxx
xxx
100%
xxx
100%
Long term debt:
Current liabilities
Total
cont..
Common size Balance Sheet
Assets:
Current Assets:
Cash
---
---
---
---
Investment
---
---
---
---
Debtors
---
---
---
---
Inventory
---
---
---
---
Total current assets
xxx
xxx
xxx
xxx
Fixed assets
Gross fixed assets
---
---
Less: Accumulated depreciation
---
---
Total
---
---
---
---
xxx
100%
xxx
100%
Trend Analysis
Here percentages are calculated with a base

year. This would provide insight into the growth
or decline of the sale or profit over the years.
Common Size Statement

Common size balance sheet shows the
percentage of each asset item to the total assets
and each liability item to the total liabilities.
A common size income statement shows each
item of expense as a percentage of net sales.
With common size statements comparison can
be made between two different size firms
belonging to the same industry.
Fund Flow Analysis

The balance sheet gives a static picture of the
companys position on a particular date. It does
not reveal the changes that have occurred in the
financial position of the unit over a period of
time. The investor should know,
How are the profits utilized?
Financial source of dividend.
Source of finance for capital expenditures.
cont.
Fund Flow Analysis

Source of finance for repayment of debt.
The destiny of the sale proceeds of the fixed
assets and
Use of the proceeds of the share or debenture
issue or fixed deposits raised from public.
Fund Flow Analysis

These items of information are provided in the
funds flow statement. It is a statement of the
sources and applications of funds. It highlights
the changes in the financial condition of a
business enterprise between two balance sheet
dates.
Cash Flow Statement

The investor is interested in knowing the cash inflow and outflow of
the enterprise. The cash flow statement is prepared with the help of;
Balance sheet,
Income statement and
Some additional information.
It can be either prepared in the

vertical form or in the
Horizontal form.
Cash flows related to operations and other transactions are
calculated. The statement shows the causes of changes in cash
balance sheet dates.
Meaning of Ratio
According to Accountants Handbook by
Wixon, Kell and Bedford, a ratio is an
expression
of
the
quantitative
relationship between two numbers
Nature of Ratio Analysis

The ratios may be used as a symptom like blood pressure, the
pulse rate or the body temperature and their interpretation
depends upon the caliber and competence of the analyst. The
following are the four steps involved in the ration analysis:
1.
2.
3.
4.
Selection of relevant data from the financial statements

depending upon the objective of the analysis.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios of the same firm in the past,
or the ratios developed from projected financial statements or the
ratios of some other firms or the comparison with the ratios of the
industry to which the firm belongs.
Interpretation of the ratios.
Interpretation of the Ratios

The interpretation of ratios is an important factor. Though
calculation of ratios is also important but it is only a clerical task
whereas
interpretation
needs
skill
intelligence
and
foresightedness.
The interpretation of the ratios can be made in the following ways:
1.
2.
3.
4.
5.
Single absolute ratio

Group of ratios
Historical comparison
Projected ratios
Inter-firm comparison
Guidelines or precautions for use of Ratios

Following guidelines or factors may be kept in mind
while interpreting various ratios:
1.
2.
3.
4.
5.
6.
Accuracy of Financial Statements

Objective or purpose of Analysis
Selection of Ratios
Use of Standards
Calibre of the Analyst
Ratios Provide only a base
Use and Significance of Ratio Analysis

The ratio analysis is one of the most powerful tools of
financial analysis. It is used as a device to analyze and
interpret the financial health of enterprise. The use of
ratios is not confined to financial managers only. The
supplier of goods on credit, banks financial institutions,
investors, shareholders and management all make use
of ratio analysis as a tool in evaluating the financial
position and performance of a firm for granting credit,
providing loans or making investments in the firm.
A. Managerial Uses of Ratio Analysis
1.
2.
3.
4.
Helps in decision-making
Helps in financial forecasting and planning
Helps in communicating
Helps in control
B. Utility to Shareholders/Investors
An investor in the company will like to assess the
financial position of the concern where he is going to
invest. His first interest will be the security of his
investment and then a return in the form of dividend or
interest.
C. Utility to Creditors
The creditors or suppliers extend short-term credit to the

concern. They are interested to know whether financial
position of the concern warrants their payments at a
specified time or not.
D. Utility to Employees
The employees are also interested in the financial
position of the concern especially profitability. Their
wage increases and amount of fringe benefits are related
to the volume of profits earned by the concern.
Utility to Government
Government may base its future policies on the basis of industrial
information available from various units. The ratios may be used as
indicators of overall financial strength of public as well as private
sector. In the absence of the reliable economic information,
governmental plans and policies may not prove successful.
Limitations of Ratio Analysis

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Limited use of a single ratio

Lack of adequate standards
Inherent limitations of accounting
Change of accounting procedure
Window dressing
Personal bias
Incomparable
Absolute figures distortive
Price level changes
Ratios no substitutes
Analysis of short term financial position or test of liquidity
1.
2.
Two types of ratios can be calculated for measuring

short-term financial position or short term solvency of a
firm.
Liquidity ratios
Current assets movement or efficiency ratios
Liquidity Ratios: Liquidity refers to the ability of a

concern to meet its current obligations as and when
these become due. To measure the liquidity of a firm,
the following ratios can be calculated:
1. Current Ratio
2. Quick or Acid Test or Liquid Ratio
3. Absolute Liquid Ratio or Cash Position Ratio
Current Ratio: Current ration may be defined as the relationship

between current assets and current liabilities. This ratio, also
known as working capital ratio.
Thus,
Current Assets
Current Ratio = Current Assets/Current Liabilities
Cash in hand.
Or
Current Assets : Current Liabilities.
Outstanding
expenses
Accrued expenses
Cash at bank
Bills payable
Marketable securities (short term)
Sundry creditors
Short term investment
Short term advances
Bills receivable
Income tax payable
Sundry debtors
Dividends payable
Inventories (stocks)
Bank overdraft (if not a

permanent arrangement)
Work-in-process
Prepaid expenses
Current Liabilities
Interpretation of Current Ratio
A relatively high current ratio is as indication that the firm

is liquid and has the ability to pay its current obligations
in time as and when they become due. On the other
hand a relatively low current ration represents that the
liquidity position of the firm not good and the firm shall
not be able to pay its current liabilities in time without
facing difficulties. As a convention the minimum of two
to one ratio is referred to as a bankers rule of thumb or
arbitrary standard of liquidity for a firm.
1.
2.
3.
A high current ration may not be favourable due to the

following reasons:
There may be slow moving stocks. The stocks will pile
up due to poor sale.
The figures of debtors may go up because debt
collection is not satisfactory.
The cash or bank balances may be lying idle because
of insufficient investment opportunities.
On the other hand a low current ratio may be to the

following reasons:
1. There may not be sufficient funds to pay off
liabilities.
2. The business may be trading beyond its capacity.
The resources may not warrant the activities.
Important factors for reaching a conclusion
1.
2.
3.
4.
5.
Type of Business
Types of products
Reputation of the concern
Seasonal influence
Type of assets available
All the above mentioned factors should be taken into mind while
interpreting current ratio.
Significance and Limitations of Current Ratio
One has to be careful while using current ratio as a measure of

liquidity because it suffers from the following limitations:
1. Crude Ratio
2. Window dressing
a. Over-valuation of closing stock
b. Obsolete worthless stocks are shown in the closing inventory at their
cost instead of writing them off.
c. Recording in advance cash receipts applicable to the next years sales.
d. Omission of a liability for merchandise included in inventory.
e. Treating a short term obligation as a long liability.
f. Inadequate provision for bad and doubtful debts.
g. Inclusion in debtors advance payment for purchase of fixed assets.
Quick/Liquid or Acid Test Ratio= Quick or Liquid Assets/Current Liabilities

Quick/Liquid Assets
Current Liabilities
Cash in hand
Outstanding expenses / Accrued

expenses
Cash at bank
Bills payable
Marketable securities
Sundry creditors
Temporary investments
Short term advances (payable

shortly)
Bills receivable
Income tax payable
Sundry debtors
Dividends payable
Bank overdraft
Quick assets can also be calculated as:

Current assets (inventories + prepaid expenses).
Investment here will mean all types of stocks i.e.
finished, work-in-process, and raw materials.
Interpretation of Quick Ratio

Usually, a high acid test ratio is an indication that the firm
is liquid and has the ability to meet its current or liquid
liabilities in time and on the other hand a low quick ration
represents that the firms liquidity position is not good.
As a rule of thumb or as a convention quick ratio of 1:1 is
considered satisfactory.
Significance of Quick Ratio

It measures the firms capacity to pay off current
obligations immediately and is a more rigorous test of
liquidity than the current ratio. It is used a
complementary ratio to the current ratio.
Absolute Ratio
Absolute ratio: although receivables, debtors and bills
receivables are generally more liquid than inventories,
yet there may be doubts regarding their realization into
cash immediately or in time. Hence, some authorities are
of the opinion that the absolute liquid ratio should also be
calculated together with current ratio and acid test ratio
so as to exclude even receivables from the current
assets and find out the absolute liquid assets.
Absolute Liquid Ratio = Absolute liquid assets/Current Liabilities
Absolute liquid assets include cash in hand and the bank

and marketable securities or temporary investments.
The acceptable norm for this ratio is 50% or 0.5 : 1 or 1:2
i.e. Rs. 1 worth absolute liquid assets are considered
adequate to pay Rs. 2 worth current liabilities in time as
all the creditors are no expected to demand cash at the
same time and then cash may also be realized from
debtors and inventories.
Current assets movement or efficiency/activity ratios

Activity ratios measure the efficiency or effectiveness with which a firm
manages its resources or assets. These ratios are also called turnover
ratios because they indicate the speed with which assets are converted or
turned over into sales.
Liquidity Ratios
Current Assets Movement or

Efficiency Ratios
Current ratio
Inventory/stock turnover ratio
Quick or acid test or liquid ratio
Debtors turnover ratio
Absolute liquid ratio
Creditors/payable turnover ratio
Working capital turnover ratio
Inventory Turnover Ratio (I.T.R.) indicated the number of times the

stock has been turned over during the period and evaluates the
efficiency with which a firm is able to manage its inventory.
Inventory Turnover Ratio = Cost of goods sold/Average inventory at
cost
Inventory Turnover Ratio = Net Sales/Average inventory at cost]
Inventory Turnover Ratio = Net Sales/Average inventory at selling
price
Inventory Turnover Ratio = Net Sales/Inventory
Inventory Conversion Period
It may also be interest to see average time taken for

clearing the stocks.
Inventory Conversion Period = Days in a year/Inventory
turnover ratio.
Interpretation of Inventory Turnover Ratio

Inventory turnover ratio measures the velocity of conversion of stock
into sales. Usually a high inventory turnover/Stock velocity indicates
efficient management of inventory because more frequently the
stocks are sold, the lesser amount of money is required to finance
the inventory. A very high turnover of inventory does not necessarily
imply higher profits. The profits may be low due to excessive cot
incurred in replacing stocks in small lots, stock-out situations, selling
inventories at very low prices, etc. Hence, in cases of too high or
too low inventory turnover further investigation should be made
before interpreting the final results. It may also be mentioned here
that there are no rules of thumb or standard inventory turnover
ratio (generally acceptable norms) for interpreting the inventory
turnover ratio. The norms may be different for different firms
depending upon the nature of industry and business conditions.
Debtors or Receivable Turnover Ratio and Average Collection Period
Two kinds of ratios can be computed to evaluate the quality of

debtors:
Debtors/Receivable turnover or debtors velocity: Debtors turnover
ratio indicated the velocity of debt collection of firm. In simple
words, it indicates the number of times average debtors
(receivables) are turned over during a year, thus
Debtors (receivables) turnover/velocity = Net credit annual
sales/Average trade debtors
= No. of times
Trade debtors = Sundry debtors + Bills receivables and accounts
receivables
Average Trade Debtors = (Opening trade debtors + Closing trade
debtors)/2
Note: Debtors should always be taken at gross value. No provision
for bad and doubtful debts be deducted from them.
Interpretation of Debtors Turnover/Velocity

Debtors velocity indicated the number of times the
debtors are turned over during a year. Generally the
higher the value of debtors turnover the more efficient is
the management of debtors/sales or more liquid are the
debtors. But a precaution is needed while interpreting a
very high debtors turnover ratio because a very high
ratio may imply a firms inability due to lack of resources
to sell on credit thereby losing sales and profits. There is
no rule of thumb which may be used as a norm to
interpret the ratio as it may be different from firm to firm,
depending upon the nature of business.
Average Collection Period Ratio

The average collection period represents the average
number of days for which a firm has to wait before its
receivables are converted into cash.
1.
2.
Average Collection Period = Average trade debtors

(Drs + B/R)/Sales per day
Sales per day = Net sales/No. of working days.
Interpretation of Average Collection Period Ratio

Interpretation of Average Collection Period Ratio represents the
average number of days for which a firm has to wait before its
receivables are converted into cash. It measures the quality of
debtors. Generally the shorter the average collection period the
better is the quality of debtors as a short collection period implies
quick payment by debtors. There is no rule of thumb or standard
which may be used as a norm which interpreting this ratio as the
ratio may be different from firm to firm depending upon the credit
policy, nature of business and business conditions.
Creditors/Payables Turnover Ratio

In the course of business operations a firm has to make net
purchases and incur short term liabilities. A supplier of goods, i.e.
creditor, is naturally interested in finding out how much them the firm
is likely to take in repaying its trade creditors.
a) Creditors/Payable Turnover Ratio = Net Credit Annual
Purchases/Average Trade Creditors
b) Average payment period ratio = [Average trade creditors
(Creditors + Bills Payable)]/Average daily purchases
Average Daily Purchases = Annual Purchases/No. of working days
in a year
Or Average payment period = Trade creditors x No. of working
days/Net annual purchases
Or Average payment period = No. of Working Days/Creditors
turnover ratio
Interpretation of Average Payment Period Ratio

The average payment period ration represents the average number
of days taken by the firm to pay its creditors. Generally lower the
ration the better is the liquidity position of the firm and higher the
ratio, less liquid is the position of the firm. But higher payment
period also implies greater credit period enjoyed by the firm and
consequently larger the benefit reaped from credit suppliers.
Working Capital Turnover Ratio

Working capital = Current assets Current Liabilities
Working capital turnover ratio indicates the velocity of the utilization

of net working capital. This ratio indicates the number of times the
working capital is turned over in the course of a year.
Working Capital Turnover Ratio = Cost of sales/Average working
capital
Average working capital = (Opening working capital + Closing
working capital)/2
Analysis of Long-Term Financial Position or test of solvency: The

term Solvency refers to ability of a concern to meet its long term
obligations. The following ratios serve the purpose of determining
the solvency of the concern:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Debt-Equity Ratio
Funded debt to total capitalization ratio
Proprietary ratio or equity ratio
Solvency ratio or Ratio of total liabilities to total assets
Fixed Assets to net worth or proprietors funds ratio
Fixed assets to long term funds or fixed assets ratio
Ration of current assets to proprietors funds
debt service ratio or interest coverage ratio
Cash to debt-service ratio.
Debt-Equity Ratio
Debt-Equity ratio also know as External-Internal equity ratio is calculated to

measure the relative claims of outsiders and the owners (i.e., shareholders)
against the firms assets.
Debt Equity Ratio = Outsiders Funds/Shareholders Funds
Or Debt to Equity Ratio = External Equities/Internal Equities
The outsiders funds included all debts/liabilities to outsiders, whether longterm or short-term or whether in the form of debentures bonds, mortgages
or bills. The shareholders funds consist of equity share capital preference
share capital, capital reserves, revenues reserves and reserves
representing accumulated profits and surpluses like reserves for
contingencies sinking fund etc. The accumulated losses and deferred
expenses, if any, should be deducted from the total to find out shareholders
funds. When the accumulated losses and deferred expenses are deducted
from the shareholders funds, it is called net worth and the ratio may be
termed as debt to net worth ratio.
Interpretation of Debt-equity Ratio

A ratio of 1 : 1 may be usually considered to be a satisfactory ratio
although there cannot be any rule of thumb or standard norm for all
types of businesses. In some business a high ratio 2 : 1 or even
more may even be considered satisfactory, say, for example in the
case of contractors business. Generally speaking a low ratio (debt
being low in comparison to shareholders funds) is considered as
favourable from the long-term creditors point of view because a high
proportion of owners funds provide a larger margin of safety for
them.
Funded debt to total capitalization ratio
The ratio establishes a link between the long-term funds raised from
outsiders and total long-term funds available in the business. The two
words used in this ration are (i) Funded Debt and (ii) Total Capitalization
Funded Debt = Debentures + Mortgage loans + Bonds + Other long-term
loans
Total Capitalization = Equity Share Capital + Preference Share Capital +
Reserves and Surplus + Other Undistributed Reserves + Debentures +
Mortgage Loans + Bonds +Other long-term loans.
Funded debt is that part of Total Capitalization which is financed by
outsiders.
Funded debt to Total Capitalization Ratio = (Funded Debt/Total
Capitalization) x 100
Though there is no rule of thumb but still the lesser the reliance on
outsiders the better it will be. If this ratio is smaller, better it will be up to
50% or 55% this ratio may be to tolerable and not beyond.
Proprietary Ratio or Equity Ratio
A variant to the debt-equity ratio is the proprietary ratio which is also

known as Equity Ratio or Shareholders to Total Equities Ratio or
Net worth to Total Assets Ratio. This ratio establishes the
relationship between shareholders funds to assets of the firm.
Proprietary Ratio or Equity Ratio = Shareholders Funds/Total

Assets
Interpretation of Equity Ratio
As equity ratio represents the relationship of owners funds to total

assets, higher the ratio or the share of the shareholders in the total
capital of the company better is the long-term solvency position of
the company. This ratio indicated the extent to which the assets of
the company can be lost without affecting the interest of creditors of
the company.
Solvency ratio or the ratio of total liabilities to total assets

This ratio is a small variant of equity ratio and can be simply
calculated as 100 equity ratio. The ration indicated the relationship
between the total liabilities to outsiders to total assets of a firm and
can be calculated as follows:
Solvency Ratio = Total Liabilities to Outsiders/Total Assets
Fixed assets to net worth ratio or ratio of fixed

assets to proprietors funds
The ratio establishes the relationship between fixed
assets and shareholders funds i.e. share capital plus
reserves, surpluses and retained earnings. The ration
can be calculated as follows:
Fixed assets to net worth ratio = Fixed assets (After
depreciation)/Shareholders funds.
Fixed assets to total long term funds or fixed

asset ratio
A variant to the ratio of fixed assets to net worth is the
ratio of fixed assets to total long-term funds which is
calculated as:
Calculation of RATIOS
Ratio
Components
1. Current Ratio/Working Capital Ratio .
Current Assets
Current Liabilities
2. Liquid Ratio/ Quick Assets Ratio/Acid

Test Ratio
Liquid (Quick) Assets

Quick Liabilities
3. Stock to Working Capital Ratio.
Stock on Hand
Working Capital
4. Proprietary Ratio
Proprietors Equity
Total Assets
5. Assets-Proprietorship Ratio
Current Assets .
Proprietors Equity
Fixed Assets .
Proprietors Equity
6. Debt Equity Ratio/LiabilitiesProprietorship Ratio
(a)
External Liabilities
Proprietors Equity
(b)
Current Liabilities
Proprietors Equity
(c) Long-term Liabilities
Proprietors Equity
7. Capital Gearing Ratio
Pref. Share Hldr Equity +Debt Hldr Equity

Ordinary Shareholders Equity
8. Equity capital Ratio
Equity Capital and Reserves

Net Worth And Debentures
9. Preference Capital Ratio
Preference Capital
Net Worth And Debentures
10. Gross Profit Ratio/Margin Ratio/

Turnover Ratio
Gross Profit
Net Sales
11. Stock Turnover/Stock Velocity
Cost of Sales
Avg Stock Carried
12. Net Profit Ratio
Net Profit
Net Sales
13. Return on Investment/ ROI
Net Profit
.
Capital Employed
14. Interest Coverage Ratio
EBIT
.
Annual Fixed Interest Charges
15. Dividend Yield
Dividend Per Equity Share .

Market value Per Equity Share
A. Solvency and Liquidity Position

(i) Current Ratio
(ii) Liquid Ratio
(iii) Stock to working Capital Ratio
(iv) Turnover of Debtors
(v) Turnover of Creditors, etc.
B. profitability Position
(i) Gross Profit Ratio,
(ii) Operating Ratio,
(iii) Net Profit Ratio,.
(iv) ROI
(v) Return on Proprietors Equity,
(vi) Return on Ordinary Share Capital,
(vii) Fixed Assets Turnover and
(viii) Turnover of Total Assets.
C. Coverage Position
Total Coverage Ratio=
Net Profit Before Interest and Taxes
Pr incipal Payments
Interest
1- t
Where, t= tax rate.

D. Stability Position
(i) Proprietary Ratio
(ii) Assets Proprietorship Ratio
(iii) Debt Equity Ratio
E. Capital Structure
(i) Capital Gearing Ratio
(ii) Equity Capital Ratio
(iii) Long-term Loan to Net Worth and Debentures, etc.
F. Measure of Sickness
Profitability Indicators
a)
Cash from operatios

Sales
b)
Net Generated Cash

Net Worth
c)
Net Gererated Cash

Gross Fixed Assets Goss Current Assets
Some Questions
for Practice
Q1. From the following Balance Sheet of Utopia Ltd., Calculatea.Current Ratio
b.Liquid Ratio
c.Proprietary Ratio
d.Debt Equity Ratio
e.Gearing Ratio
Balance Sheet Of Utopia Ltd.
Rs. Assets
Rs.
Liabilities
Eq. Share Capital
50,000 Land & Building
90000
Pref. Share Capital
70,000 Plant & Machinery
155000
Reserves and Surplus
25,000 Stock
100000
6% Debentures
1,00,000 Sundry Debtors
60000
Bank Overdraft
80,000 Bills Receivable
10000
Sundry Creditors
70,000 Cash
Bills Payable
25,000
420000
5000
420000
Q2. Based on the above information you are required to prepare

the Balance Sheet of the Company as on 31.12.1992.
Current ratio
2.5
Acid test ratio
1.5
Net Working Capital
Rs.3,00,000
Stock turnover ratio
6 times
(Cost of sales to closing stock )

Gross Profit ratio
Average debt collection period
20%
----
2 months
Fixed Assets / Shareholders Net

Worth
0.80
Reserve/Share Capital
0.50
Q3. From the following information of Punjab

Traders Ltd. prepare the Statement of Proprietary
Fund of the Company.
(i) Capital Turnover Ratio 2,
(ii) Fixed Assets Turnover Ratio 3,
(iii) Gross Profit Ratio 25 %,
(iv) Stock Velocity 6,
(v) Debtors Velocity 4 months, and
(vi) Creditors Velocity 2 months.
The Gross Profit is Rs. 60,000 Reserves and
Surplus are Rs. 20,000. Closing stock is Rs. 6,000
less than the Opening Debtors. Make necessary
assumptions that you think appropriate.
Q 4. From the following particulars prepare a summarized Balance

Sheet in details as at 31st December, 2006.
Fixed Assets to Net Worth

Current Ratio
Reserve included in Proprietors
Fund
Fixed Assts
Cash and Bank Balances

Current Liabilities
The firm has no Bank Overdraft.
0.8:1
3:1
25%
Rs. 8,00,000
Rs. 15,000
Rs. 1,50,000
Q 5. From the following particulars prepare the

balance sheet of the firm concerned:
Stock Velocity
Capital turnover ratio
Fixed assets turnover ratio
Gross profit ratio

Debt collection period
Creditors payment period
20%
2 months
73 days
The gross profit was Rs. 60,000 Closing stock was

Rs. 5,000 in excess of the opening stock
1. Operating Cost is equal to:

(a) Cost of Goods sold +
Operating Cost
(b) Cost of Goods sold
Operating Expenses
(c) Sales Gross Profit
(d) Sales Operating Profit
1. Operating Cost is equal to:

(a) Cost of Goods sold +
Operating Cost
(b) Cost of Goods sold
Operating Expenses
(c) Sales Gross Profit
(d) Sales Operating Profit
2. Trading & Profit & Loss Account

is the result of posting of:
(a) Opening entries
(b) Closing entries
(c) Adjusting entries
(d) Transfer entries
2. Trading & Profit & Loss Account

is the result of posting of:
(a) Opening entries
(b) Closing entries
(c) Adjusting entries
(d) Transfer entries
3. Trading and Profit & Loss A/c is

based on:
(a) Personal Accounts

(b) Real Accounts
(c) Nominal Accounts

(d) All of (a), (b), (c)
3. Trading and Profit & Loss A/c is

based on:
(a) Personal Accounts

(b) Real Accounts
(c) Nominal Accounts

(d) All of (a), (b), (c)
4. Contingent Liability is
(a)
An ascertained liability but its
amount and due date
are indeterminate
(b)
amount and due date
are determinate.
(c)
An unascertained liability but its
amount
and
amount
and
due date are determinate

(d)
due date are indeterminate.
4. Contingent Liability is
(a)
amount and due date
are indeterminate
(b)
amount and due date
are determinate.
(c)
amount
and
amount
and

(d)
5. Provision is
(a)
An
unknown
amount
and
liability
due
but
date
its
are
determinate.
(b)
An
amount
unknown
and
liability
due
determinate
(c) A known liability and its amount and
(d)
A known liability but its amount and
and
date
its
are
5. Provision is
(a)
An
unknown
amount
and
liability
due
but
date
its
are
determinate.
(b)
An
amount
unknown
and
liability
due
and
date
determinate
(c) A known liability and its amount and due date are
determinate
(d)
A known liability but its amount and due date are
indeterminate.
its
are
6.
While marshalling
(a)
The
most
urgent
payment
to
be
made
is shown last in order of liquidity

(b)
The
least
liquid
asset
is
shown
first
in order of liquidity
(c)
The
is
least
urgent
shown
payment
first
in
to
be
made
order
of
permanence.
(d)
The
most
liquid
in order of permanence
(e) None of the above
asset
is
shown
first
6.
While marshalling
(a)
The
most
urgent
payment
to
be
made
is shown last in order of liquidity

(b)
The
least
liquid
asset
is
shown
first
in order of liquidity
(c)
The
is
least
shown
urgent
first
payment
to
in
be
made
order
of
permanence.
(d)
The
most
liquid
in order of permanence
(e)
None of the above
asset
is
shown
first
7. Provision is:
(a) An appropriation out of

profits
(b) A charge against the
profits
(c) A reserve
(d) None of these
7. Provision is:
(a) An appropriation out of

profits
(b) A charge against the
profits
(c) A reserve
(d) None of these
8.
Balance Sheet shows

(a)
The financial performance at a
particular date
(b)
The financial position at a particular date
(c)
The
financial
position
for an accounting period

(d)
The
financial
accounting period
performance
for
an
8.
Balance Sheet shows

(a)
The financial performance at a
particular date
(b)
The financial position at a particular date
(c)
The
financial
position
for an accounting period

(d)
The
financial
accounting period
performance
for
an
9. If opening entry is not passed

(a) Trial Balance will not be tallied
(b)
Balance
Sheet
will
not
tallied
(c) Both trial balance & Balance Sheet will be
tallied
(d) None of these
be
9. If opening entry is not passed

(a) Trial Balance will not be tallied
(b)
Balance
Sheet
will
not
tallied
(c) Both trial balance & Balance Sheet will be
tallied
(d) None of these
be
10.
Closing Entries are required to

be
passed
before
the
preparation of:
(a)
Trial Balance
(b)
Trading &
Account
(c)
Balance Sheet
(d)
Cash Flow Statement
Profit
&
Loss
10.
Closing Entries are required to

be
passed
before
the
preparation of:
(a)
Trial Balance
(b)
Trading &
Account
(c)
Balance Sheet
(d)
Cash F00low Statement
Profit
&
Loss
11. The effect of Closing entries is

the closure of:
(a)
Personal Accounts
(b) Real Accounts
(c)
Nominal Accounts
(d) All of above
11. The effect of Closing entries is

the closure of:
(a)
Personal Accounts
(b) Real Accounts
(c)
Nominal Accounts
(d) All of above
12.
The effect of opening entry is the

opening of:
(a)
Personal Accounts and Real

Accounts
(b)
Real Accounts and Nominal

Accounts
(c)
Personal
Account
Nominal Accounts
(d)
Personal
Account
Accounts.
and
Account,
Real
and
Nominal
12.
The effect of opening entry is the

opening of:
(a)
Personal Accounts and Real

Accounts
(b)
Real Accounts and Nominal

Accounts
(c)
Personal
Account
Nominal Accounts
(d)
Personal
Account
Accounts.
and
Account,
Real
and
Nominal
13. If adjusting entries are not

passed
(a) Trial Balance will not be
tallied
(b) Balance Sheet will not be
tallied
(c) Both trial balance &
Balance Sheet will be
tallied
(d) None of these
13. If adjusting entries are not

passed
(a) Trial Balance will not be
tallied
(b) Balance Sheet will not be
tallied
(c) Both trial balance &
Balance Sheet will be
tallied
(d) None of these
14. Which Reserve has debit

balance?
(a) General Reserve
(b) Contingency Reserve
(c) Joint Life Policy Reserve
(d) Investment Fluctuation
Reserve
(e) Reserve for Discount on
Creditors
14.
Which
Reserve
balance?
has
debit
(a)
General Reserve
(b)
Contingency Reserve
(c)
Joint Life Policy Reserve
(d)
(e)
Investment Fluctuation
Reserve
Reserve for
Creditors
Discount
on
15.
The Provision for discount on

debtors is calculated
(a)
Before deducting additional

Bad Debts
(b)

discount
(c)
Before deducting provision

for doubtful debts from
debtors
(d)
After deducting provision for

doubtful debts from debtors
15.
The Provision for discount on

debtors is calculated
(a)

Bad Debts
(b)

discount
(c)
Before deducting provision

for doubtful debts from
debtors
(d)
After deducting provision for

doubtful debts from debtors
16. Provision for doubtful debts

is
(a) Debited to Sundry
Debtors Account
(b) Credited to Sundry
Debtors Account
(c) Debited to Bad Debts
Account
(d) Debited to Profit & Loss
Account
16. Provision for doubtful debts

is
(a) Debited to Sundry
Debtors Account
(b) Credited to Sundry
Debtors Account
(c) Debited to Bad Debts
Account
(d) Debited to Profit & Loss
Account
17. The gain from sale of capital

assets need not be added to
revenue to ascertain the
(a) Gross profit of a business
(b) Net profit of a business
(c) Operating profit of a
business
(d) All of above
17. The gain from sale of capital

assets need not be added to
revenue to ascertain the
(a) Gross profit of a business
(b) Net profit of a business
(c) Operating profit of a
business
(d) All of above
Thank You
Please forward your query
To: Nnsengupta@gmail.com
CC: manoj.amity@panafnet.com
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FINANCIAL STATEMENTS ANALYSIS

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The Purpose of financial Statement Analysis

The analysis and interpretation of financial statement

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Distinction Between Financial Statement Analysis & Interpretation

The term financial statement analysis

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Distinction Between Financial Statement Analysis & Interpretation

The term Analysis is used to mean the

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Types of Financial Analysis

On the basis of material used

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On the basis of modus operandi

Procedure of Financial Statements Analysis

Broadly speaking there are three steps

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Procedure of Financial Statements Analysis

The analyst should acquaint himself with the principles

The extent of analysis should be determined so that

The financial data given in the statements should be

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Procedure of Financial Statements Analysis

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Methods or Devices of Financial Analysis

Cash Flow Analysis

Absolute figures (rupee amounts)

Changes in absolute figures i.e. increase or

Absolute data in terms of percentages.

Increase or decrease in terms of percentages.

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Comparative Balance Sheet

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Comparative Financial Statement

In the comparative statement balance sheet

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Common size Balance Sheet

Capital and Reserves

Other current liabilities

Long term debt:

Common size Balance Sheet

Total current assets

Less: Accumulated depreciation

Here percentages are calculated with a base

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Common Size Statement

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Fund Flow Analysis

Fund Flow Analysis

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Fund Flow Analysis

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Cash Flow Statement

It can be either prepared in the

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Nature of Ratio Analysis

Selection of relevant data from the financial statements

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Interpretation of the Ratios