06:52 PM

CAIIB – Financial Management – MODULE C – RATIO ANALYSIS

R K MOHANTY
FACULTY MEMBER, SIR SPBT COLLEGE,
CENTRAL BANK OF INDIA, MUMBAI

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 Financial Statements generally consists of the

following two types :
 Profit & Loss Account – which summarises the
expenses incurred and revenues received during
the period covered by it ; and
 Balance Sheet – which lists out the Assets and
Properties owned by the Unit and the Liabilities it
owes to outsiders and also to its owners.

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1. NET SALES : This is the key figure in the Income

Statement. Which can be arrived from the following :

Net Sales = Gross Sales – Excise Duty

Where Gross Sales = (Total Domestic Sales +

Export Sales) – (Sales Tax + Octroi + Sales Return)

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2. COST OF PRODUCTION : It is the sum of Cost of Raw

Materials consumed and all Manufacturing Expenses.
COP = Cost of R.M. + Manufacturing Expenses
Manufacturing Expenses include :
(i) Spares
(ii) Power & fuel
(iii) Wages & Salaries (Direct Labour)
(iv) Other Manufacturing Expenses
(v) Depreciation
(vi) Difference between Opening & Closing Stock of SIP

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3. COST OF SALES :

It is the sum of Cost of Production and Difference

between Opening & Closing Stock of Finished
Goods

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4. GROSS PROFIT :
Net Sales – Cost of Sales

The percentage of Gross Profit to Net sales

indicates whether the average sale price is
sufficient to cover all expenses.

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5. OPERATING EXPENSES : These are the expenses which are

required to run the business on daily basis, such as;

 Selling Expenses
 Administrative Expenses
 General Expenses
 Provision for Bad Debts
 Other Misc. Expenses

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5. OPERATING PROFIT : When you deduct all the operating

expenses from the Gross Profit you arrive at the Operating
Profit.
Operating Profit = Gross Profit - All Operating Expenses
Finally to this Operating Profit, Other incomes not arising out
from normal operations are added and other Non-operating
expenses are deducted to arrive at the figure of NET
PROFIT BEFORE TAX (NPBT).
From this NPBT so arrived, Income Tax is adjusted first and
thereafter Dividend is distributed as per Management’s
Policy.
The Balance amount is reinvested in business in the form of
RESERVES or added in the Capital Account.
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Balance Sheet is a statement of Assets & Liabilities as on a

given date. It reflects the Financial Position of a concern as
on a date. The Balance Sheet can be looked at from two
angles:

1. ASSETS as USES and LIABILITIES as SOURCES OF

FUNDS
2. ASSETS as what the Business Owns and LIABILITIES as
what the Business Owes.

LIABILITIES ASSETS
NET WORTH FIXED ASSETS
TERM LIABILITIES CURRENT ASSETS
CURRENT LIABILITIES OTHER NON CURRENT
ASSETS 12
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1. Net Worth : It is the total investment of the owners in the

Business.
For a Limited Company it comprises of a sum of Share Capital +
Reserves
Share Capital is the direct investment of the owners in the business.
This includes Equity Share Capital and Preference Share Capital.
Reserves : Profits of the business which have been reinvested in the
business. In Proprietorship and Partnership Firms they are added
to Capital and not shown separately.

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2. TERM LIABILITIES : All those borrowings made by

the concern which are repayable after One Year of the Balance
Sheet date are called Term Liabilities. These include

TERM LOANS
DEBENTURE
TERM DEPOSITS
REDEEMABLE PREFERENCE SHARE CAPITAL
(Maturing with 12 years of Balance Sheet Date)

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3. CURRENT LIABILITIES : All those borrowings

made by the concern which are expected to be repaid within 12
months of the date of the Balance Sheet. These include
CREDITORS
PROVISIONS FOR EXPENSES
BANK BORROWING FOR WORKING CAPITAL
DEPOSITS MATURING WITHIN 12 MONTHS
INSTALLMENTS OF TERM LOANS
DEBENTURES/REDEEMABLE PREFERENCE SHARES MATURING WITHIN
ONE YEAR

Total of Term Liabilities + Current Liabilities is called Outside Liabilities and is the
Total Borrowings of the Firm

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4. FIXED ASSETS: These are the assets which help in the

production of goods & services of the concern. They are tangible
in nature and have a long life. The examples of Fixed Assets are :

Land
Building
Plant & Machineries
Furniture & Fixtures etc.

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5. CURRENT ASSETS: These are the assets which are

expected to be consumed or converted into cash through the
normal business operations and usually within one year. Such as:
Cash & Bank Balances
FDs with Banks
Short Term Govt .Securities
Stocks of R.M., Semi F.G and F.G
Stores, Spares
Advance Payment for Suppliers
Prepaid Insurance
Debtors & Bills Receivables

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6. NON CURRENT ASSETS: These are the assets which

do not fall in the above two categories of assets. They are:

Corporate Investments
Loans not recoverable within 1 year
Non Consumable Spares
Deferred Receivables
Advance for Capital Expenditure
Intangible Assets [ Goodwill, Patent, Trade Mark]
Preliminary & Pre-operative Expenses

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 Does the firm has liquidity Lenders’ need it for carrying

to meet its short term out :-
obligations?
Would the firm be able to  Technical Appraisal
meet its long term
commitments?
 Commercial Appraisal
Is the firm using its assets  Financial Appraisal
efficiently?  Economic Appraisal
How profitable are the  Management Appraisal
operations of the firm?

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It is the process of identifying the financial strengths & weaknesses

of a firm by properly establishing relationships between the items
of the Balance Sheet and Profit & Loss A/c.
This is done by –
(1) The Firm’s Management
(2) Owners
(3) Creditors
(4) Investors
(5) Bankers & Others

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A. TRADE CREDITORS : They do it to know the firm’s ability

to meet their claim. [Liquidity]
B. SUUPLIERS OF LONG TERM DEBT : They need to know
the firm’s long term solvency. [Profitability over a long period
of time]
C. INVESTORS : They are concerned about the firm’s earnings.
D. BANKERS : They need to understand the soundness of the
Business so as to take a good Credit Decision.

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It’s a tool which enables the banker or lender to arrive

at the following factors :
 Liquidity position
 Profitability
 Solvency
 Financial Stability
 Quality of the Management
 Safety & Security of the loans & advances to be or
already been provided

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Ratio is the indicated quotient of two mathematical expressions i.e. the

relationship between two or more things.
Ratio Analysis involves comparison for useful interpretation of the financial
statement. A single ratio does not indicate favourable or unfavourable
condition. It should be compared with some sort of standard. Standard of
comparison may consist of :
1. Ratios calculated from the past financial statements of the same firm.
2. Ratios developed using the projected financial statements of the same firm.
3. Ratios of some selected firms, especially the most progressive and successful at
the same point of time; and
4. Ratios of the industry level to which the firm belongs.

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As Percentage - such as 25% or 50% . For example

if net profit is Rs.25,000/- and the sales is Rs.1,00,000/-
then the net profit can be said to be 25% of the sales.
 As Proportion - The above figures may be expressed
in terms of the relationship between net profit to sales as
1 : 4.
 As Pure Number /Times - The same can also be
expressed in an alternatively way such as the sale is 4
times of the net profit or profit is 1/4th of the sales.

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LIABILITIES
NET WORTH/EQUITY/OWNED FUNDS
Share Capital/Partner’s Capital/Paid up Capital/ & MACHINERIES
Owners Funds
Reserves ( General, Capital, Revaluation & Other [Net Value or Book Value or Written down value]
Reserves)
Credit Balance in P&L A/c
LONG TERM LIABILITIES/BORROWED
FUNDS : Term Loans (Banks & Institutions)
Debentures/Bonds, Unsecured Loans, Fixed
Deposits, Other Long Term Liabilities
CURRENT LIABILTIES
Bank Working Capital Limits such as
CC/OD/Bills/Export Credit
Sundry /Trade Creditors/Creditors/Bills Payable,
Short duration loans or deposits
Expenses payable & provisions against various
items
06:52 PM
ASSETS
FIXED ASSETS : LAND & BUILDING, PLANT
Original Value Less Depreciation
NON CURRENT ASSETS
Investments in quoted shares & securities
Old stocks or old/disputed book debts
Long Term Security Deposits
Other Misc. assets which are not current or fixed in
nature
CURRENT ASSETS : Cash & Bank Balance,
Marketable/quoted Govt. or other securities, Book
Debts/Sundry Debtors, Bills Receivables, Stocks &
Inventory (RM,SIP,FG) Stores & Spares, Advance
Payment of Taxes, Prepaid expenses, Loans and
Advances recoverable within 12 months
INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c,
Preliminary or Preoperative expenses 25
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Balance Sheet P&L Ratio or Balance Sheet and

Ratio Income/Revenue Profit & Loss
Statement Ratio Ratio

Financial Ratio Operating Ratio Composite Ratio

Current Ratio Gross Profit Ratio Fixed Asset Turnover
Quick Asset Ratio Operating Ratio Ratio, Return on Total
Proprietary Ratio Expense Ratio Resources Ratio,
Debt Equity Ratio Net profit Ratio Return on Own Funds
Stock Turnover Ratio Ratio, Earning per
Share Ratio, Debtors’
Turnover Ratio,

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 Liabilities have Credit balances and Assets have Debit balances

 Current Liabilities are those which have either become due for
payment or shall fall due for payment within 12 months from the
date of Balance Sheet
 Current Assets are those which undergo change in their
shape/form within 12 months. These are also called Working
Capital or Gross Working Capital
 Net Worth & Long Term Liabilities are also called Long Term
Sources of Funds
 Current Liabilities are known as Short Term Sources of Funds
 Long Term Liabilities & Short Term Liabilities are also called
Outside Liabilities
 Current Assets are Short Term Use of Funds
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 Assets other than Current Assets are Long Term Use of Funds
 Installments of Term Loan Payable in 12 months are to be taken as
Current Liability, only for Calculation of Current Ratio & Quick Ratio.
 If there is profit it shall become part of Net Worth under the head
Reserves and if there is loss it will become part of Intangible Assets
 Investments in Govt. Securities to be treated current only if these are
marketable and due. Investments in other securities are to be treated
Current if they are quoted. Investments in allied/associate/sister units or
firms to be treated as Non-current.
 Bonus Shares as issued by capitalization of General Reserves and as
such do not affect the Net Worth. But with Rights Issue, change takes
place in Net Worth and Current Ratio.

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1. Current Ratio : It is the relationship between the current assets

and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are
Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio
will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is 1.33 : 1
Current Assets : Cash & those assets which can be converted
into cash within 1 year. For example, Marketable securities,
Debtors, Inventories, Prepaid Expenses.
Current Liabilities : Creditors, Bills Payable, Accrued
Expenses, Short Term Bank Loans, Income Tax Liabilities
and long Term Liabilities maturing in the current year.

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Current Ratio measures the firm’s short term

solvency. A ratio greater than 1 means that the
firm has more current assets than current claims
against them.
As a conventional rule a Current Ratio of 2 is
considered most satisfactory. This rule is based
on the logic that in a worse situation, even if the
value of current assets become half, the firm will
be able to meet its current obligations. It
represents the “Margin of Safety’ i.e. a cushion
of protection for creditors. Higher the ratio
greater the margin of safety.
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2. Net Working Capital : This is worked out as

surplus of Long Term Sources over Long Term
Uses, alternatively it is the difference of Current
Assets and Current Liabilities. It measures the
firm’s potential reservoir of funds.
NWC = Current Assets – Current
Liabilities

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3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current

Assets and Current Liabilities.

Quick Current Assets : Quick assets are those which can be immediately
converted into cash without a loss of value. Cash & Bank balances are the most
liquid assets. Examples of quick Assets are : Cash/Bank Balances, Receivables upto
6 months, Quickly realizable securities such as Govt. Securities or quickly
marketable/quoted shares and Bank Fixed Deposits. Inventories are less liquid hence
the same is deducted from the Current Assets to arrive at Quick Assets.
Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities 1,00,000
Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3:1

Quick Ratio => 1,50,000/1,00,000 = 1.5 : 1
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4. DEBT EQUITY RATIO : It is the relationship between

borrower’s fund (Debt) and Owner’s Capital (Equity). It
represents the lender’s contribution for each Rupee of owner’s
contribution.

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 Lacs

Free Reserves & Surplus = Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 = 1.6 : 1

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5. PROPRIETARY RATIO : This ratio indicates the extent to which

Tangible Assets are financed by Owner’s Fund.
Proprietary Ratio = (Tangible Net Worth/Total Tangible
Assets) x 100
The ratio will be 100% when there is no Borrowing for
purchasing of Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to

Net Sales we can arrive at the Gross Profit Ratio which indicates the
manufacturing efficiency as well as the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus Cost of

Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ (Sales – Cost of goods sold)/ Net Sales]

x 100
A higher Gross Profit Ratio indicates efficiency in production of the unit.
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7. OPERATING PROFIT RATIO :

It is expressed as => (Operating Profit / Net Sales ) x 100

Higher the ratio indicates operational efficiency

8. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.

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9. STOCK/INVENTORY TURNOVER RATIO :It indicates the

efficiency of the firm in selling its products. It is calculated by dividing
the Cost of Goods Sold by Average Inventory. To arrive at the number
of days, weeks or months turnover the following formulas may be
applied.

(Average Inventory/Sales) x 365 for days

(Average Inventory/Sales) x 52 for weeks
(Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock + Closing

Stock)
-----------------------------------------
2
This ratio indicates the number of times the inventory is
rotated during the relevant accounting period, i.e. how
rapidly the inventory is turning into receivables through
sales. Generally a high inventory turnover is indicative of36
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10. DEBTORS TURNOVER RATIO : This is also called Debtors

Velocity or Average Collection Period or Period of Credit given .

(Average Debtors/Sales ) x 365 for days

(52 for weeks & 12 for months)

11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets

12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets

13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets

14. CREDITORS TURNOVER RATIO : This is also called Creditors

Velocity Ratio, which determines the creditor payment period.

(Average Creditors/Purchases)x365 for days

(52 for weeks & 12 for months)

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15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets

16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average Capital Employed) x 100

Average Capital Employed is the average of the equity share

capital and long term funds provided by the owners and the
creditors of the firm at the beginning and end of the accounting
period.

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Composite Ratio

17. RETRUN ON EQUITY CAPITAL (ROE) :

Net Profit after Taxes / Tangible Net Worth

18. EARNING PER SHARE : EPS indicates the quantum of net profit
of the year that would be ranking for dividend for each share of
the company being held by the equity share holders.

Net profit after Taxes and Preference Dividend/ No. of Equity

Shares

19. PRICE EARNING RATIO : PE Ratio indicates the number of times

the Earning Per Share is covered by its market price.

Market Price Per Equity Share/Earning Per Share

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20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most
important one which indicates the ability of an enterprise to
meet its liabilities by way of payment of installments of Term
Loans and Interest thereon from out of the cash accruals and
forms the basis for fixation of the repayment schedule in
respect of the Term Loans raised for a project. (The Ideal DSCR
Ratio is considered to be 2 )

PAT + Depr. + Annual Interest on Long Term Loans &

Liabilities
---------------------------------------------------------------------------------
Annual interest on Long Term Loans & Liabilities + Annual
Installments payable on Long Term Loans & Liabilities

( Where PAT is Profit after Tax and Depr. is Depreciation)

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LIQUIDITY RATIOS :
1.CURRENT RATIO = C.A / C.L
2.QUICK RATIO = (C.A –
INVENTORY)/C.L
ACTIVITY RATIOS :
1.INVENTORY TURNOVER RATIO =
(COST OF GOODS SOLD OR
SALES)/INVENTORY
2.DEBTORS TURNOVER RATIO =
(CREDIT SALES OR
SALES)/AVERAGE DEBTORS
3.INVENTORY PERIOD =
360/INVENTORY TURNOVER
4.COLLECTION PERIOD =
360/DEBTORS TURNOVER
5.ASSETS TURNOVER = SALES/NET
ASSETS OR CAPITAL EMPLOYED
6.WORKING CAPITAL TURNOVER =
SALES/NET WORKING CAPITAL
06:52 PM
PROFITABILITY RATIOS :
1.GROSS MARGIN = GROSS
PROFIT/SALES
2.NET MARGIN = PAT/SALES,
EBIT/SALES
3.PAT TO EBIT RATIO = PAT/EBIT
4.RETRUN ON INVESTMENT RATIO
= EBIT/NET ASSETS OR CAPITAL
EMPLOYED
5.RETRUN ON EQUITY = PAT/NET
WROTH
LEVERAGE RATIOS :
1.TOTAL DEBT RATIO = TOTAL
DEBT/CAPITAL EMPLOYED
2.DEBT EQUITY RATIO = NET
WORTH/TOTAL DEBT
3.CAPITAL EQUITY RATIO = C.E OR
NET ASSETS / NET WORTH
4.INTEREST COVERAGE RATIO =
(EBIT+Depr.)/INTEREST
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EXERCISE 1 06:52 PM

LIABILITES ASSETS
Capital 180 Net Fixed Assets 400
Reserves 20 Inventories 150
Term Loan 300 Cash 50
Bank C/C 200 Receivables 150
Trade Creditors 50 Goodwill 50
Provisions 50
800 800

a. What is the Net Worth : Capital + Reserve = 200

b. Tangible Net Worth is : Net Worth - Goodwill = 150
c. Outside Liabilities : TL + CC + Creditors + Provisions = 600

d. Net Working Capital : C A - C L = 350 - 250 = 50

e. Current Ratio : C A / C L = 350 / 300 = 1.17 : 1
f. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1

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 EXERCISE 2 06:52 PM

LIABILITIES 2006-07 2007-08 2006-07 2007-08

Capital 300 350 Net Fixed Assets 730 750
Reserves 140 160 Security Electricity 30 30
Bank Term Loan 320 280 Investments 110 110
Bank CC (Hyp) 490 580 Raw Materials 150 170
Unsec. Long T L 150 170 S I P 20 30
Creditors (RM) 120 70 Finished Goods 140 170
Bills Payable 40 80 Cash 30 20
Expenses Payable 20 30 Receivables 310 240
Provisions 20 40 Loans/Advances 30 190
Goodwill 50 50
Total 1600 1760 1600 1760

1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390

2. Current Ratio for 2nd Year : (170 + 30 +170+20+ 240 + 190 ) / (580+70+80+70)
820 /800 = 1.02
3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21
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Exercise 3.

LIABIITIES ASSETS
Equity Capital 200 Net Fixed Assets 800
Preference Capital 100 Inventory 300
Term Loan 600 Receivables 150
Bank CC (Hyp) 400 Investment In Govt. Secu. 50
Sundry Creditors 100 Preliminary Expenses 100
Total 1400 1400

1. Debt Equity Ratio will be : 600 / (200+100) = 2:1

2. Tangible Net Worth : Only equity Capital i.e. = 200

3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) /

200
= 11 : 2
4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1
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Exercise 4.

LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

Q. What is the Current Ratio ? Ans : (1+125 +128+1) / (38+26+9+15)

: 255/88 = 2.89 : 1

Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11

Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW

= 100 / ( 362 – 30)
= 100 / 332 = 0.30 : 1
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Exercise 4. contd…

LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

Q . What is the Proprietary Ratio ? Ans : (TNW / Tangible Assets) x 100

[ (362 - 30 ) / (550 – 30)] x 100
(332 / 520) x 100 = 64%
Q . What is the Net Working Capital ?
Ans : C. A - C L. = 255 - 88 = 167

Q . If Net Sales is Rs.15 Lac, then What would be the Stock Turnover
Ratio in Times ? Ans : Net Sales / Average Inventories/Stock
1500 / 128 = 12 times approximately 46
 06:52 PM
Exercise 4. contd…
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.

Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12

= 1 month

Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?

Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.3 months

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Exercise 5. : Profit to sales is 2% and

amount of profit is say Rs.5 Lac. Then What
is the amount of Sales ?

Answer : Net Profit Ratio =

(Net Profit / Sales ) x 100

2 = (5 x100) /Sales
Therefore Sales = 500/2 = Rs.250 Lac

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Exercise 6. A Company has Net Worth of Rs.5 Lac, Term

Liabilities of Rs.10 Lac. Fixed Assets worth RS.16 Lac and
Current Assets are Rs.25 Lac. There is no intangible Assets
or other Non Current Assets. Calculate its Net Working
Capital.

Answer

Total Assets = 16 + 25 = Rs. 41 Lac

Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac
Current Liabilities = 41 – 15 = 26 Lac

Therefore Net Working Capital = C. A – C.L

= 25 – 26 = (- )1 Lac

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Exercise 7 : Current Ratio of a

concern is 1 : 1. What will be the Net
Working Capital ?

Answer : It suggest that the Current

Assets is equal to Current Liabilities hence
the NWC would be NIL ( since NWC =
C.A - C.L )

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Exercise 8 : Suppose Current Ratio is 4

: 1. NWC is Rs.30,000/-. What is the
amount of Current Assets ?

Answer : 4a - 1a = 30,000
Therefore a = 10,000
Thus Current Liabilities is Rs.10,000
Hence Current Assets would be 4a = 4
x 10,000 = Rs.40,000/-

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Exercise 9. The amount of Term Loan

installment is Rs.10000/ per month,
monthly average interest on TL is
Rs.5000/-. If the amount of Depreciation
is Rs.30,000/- p.a. and PAT is
Rs.2,70,000/-. What would be the DSCR ?

DSCR = (PAT + Depr. + Annual Intt.) / (Annual Intt.

+ Annual Installment)
= (270000 + 30000 + 60000 ) / (60000 + 120000)
= 360000 / 180000
= 2

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Exercise 10 : Total Liabilities of a firm is Rs.100 Lac

and Current Ratio is 1.5 : 1. If Fixed Assets and Other
Non Current Assets are to the tune of Rs. 70 Lac and
Debt Equity Ratio being 3 : 1. What would be the
Long Term Liabilities?
Answer
We can easily arrive at the amount of Current Asset being Rs. 30 Lac
i.e. ( Rs. 100 L - Rs. 70 L ).

If the Current Ratio is 1.5 : 1, then Current Liabilities works out to be

Rs. 20 Lac.

That means the aggregate of Net Worth and Long Term Liabilities
would be Rs. 80 Lacs.

If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs. 60

Lacs and equity Rs. 20 Lacs.

Therefore the Long Term Liabilities would be Rs.60 Lac.

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Exercise 11 : Current Ratio is say 1.2 : 1 .

Total of balance sheet being Rs.22 Lac. The
amount of Fixed Assets + Non Current Assets
is Rs. 10 Lac. What would be the Current
Liabilities?
Answer
When Total Assets is Rs.22 Lac then Current
Assets would be (Total Assets less Fixed+Non
Current Assets)= 22 – 10 i.e Rs. 12 Lac.

Thus we can easily arrive at the Current Liabilities

figure which should be Rs. 10 Lac, since the
Curret Ratio being 1.2 : 1
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Exercise 12 : Total Sales (all credit sales) of a firm is Rs.640000. It has

gross profit margin of 15% and a Current Ratio of 2.5. The firms Current
liabilities are Rs.96000, Inventories – Rs.48000 and Cash – Rs.16000.

a)Determine the average inventory to be carried by the firm, if an inventory

turnover of 5 times is expected? Assuming a year having 360 days.

Inventory Turnover = Cost of Goods Sold / Average Inventory

Given that Gross Profit margin is 15% means the Goods sold should be 85%
of the sales. So Cost of Goods Sold = Sales x 85% = 640000 x 85% = 544000

Hence 5 = 544000 / Average Inventory

or Average Inventory = 544000/5 = 108800

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Exercise 12 : Total Sales (all credit sales) of a firm is Rs.640000. It has
gross profit margin of 15% and a Current Ratio of 2.5. The firms Current
liabilities are Rs.96000, Inventories – Rs.48000 and Cash – Rs.16000.

b) Determine the average collection period if the opening balance of debtors is

intended to be Rs.80000/-. Assume a year having 360 days.

Average Collection Period = (Average Debtors/Credit Sales) x 360

Average Debtors = (Opening Bal of Debtors + Closing Bal of Debtors)/2

Current Liabilities given is Rs.96000/-, Current Ratio is 2.5

So Current Assets = 96000 x 2.5 = 240000

If you deduct Inventory and Cash i.e. 48000 + 16000 = 64000 from Current
Assets, you get closing balance of Debtors,
So Closing Balance of Debtors is 240000 – 64000 = 176000
Therefore the average Debtors would be (80000 + 176000)/2 = 128000

Hence Average Collection Period = (128000/640000)x360

= 72 days.

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EXERCISE 13. A firm sold its stocks in CASH, in order to meet its
liquidity needs. Which of the following Ratio would be affected by this?

1.Debt Equity Ratio

2.Current Ratio
3.Debt Service Coverage Ratio
4.Quick Ratio

EXERCISE 14. A company is found to be carrying a high DEBT EQUITY

Ratio. To improve this, a bank may suggest the company to :

1.Raise long term interest free loans from friends and relatives
2.Raise long term loans from Institutions
3.Increase the Equity by way of Bonus Issue
4.Issue Rights share to existing share holders.

EXERCISE 15. Which of the following is a fictitious Asset?

1.Goodwill
2.Preliminary Expenses
3.Pre-operative expenses
4.Book Debts which have become doubtful of recovery 57
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EXERCISE 16. Under which of the following methods of depreciation on
Fixed Assets, the annual amount of depreciation decreases?

1.Written Down Value method

2.Straight Line method
3.Annuity method
4.Insurance policy method

EXERCISE 17 Debt Service Coverage Ratio (DSCR) shows :

1.Excess of current assets over current liabilities

2.Number of times the value of fixed assets covers the amount of loan
3.Number of times the company’s earnings cover the payment of interest
and repayment of principal of long term debt
4.Effective utilisation of assets

EXERCISE 18. Which of the following is not considered a Quick Asset?

1.Cash and Bank balances

2.Bank Fixed Deposits
3.Current Book Debts
4.Loans and Advances
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Questions on Fund Flow Statement

Q 19. Fund Flow Statement is prepared from the Balance sheet :

1.Of three balance sheets

2.Of a single year
3.Of two consecutive years
4.None of the above.

Q 20. Why this Fund Flow Statement is studied for ?

1.It indicates the quantum of finance required

2.It is the indicator of utilisation of Bank funds by the concern
3.It shows the money available for repayment of loan
4.It will indicate the provisions against various expenses

Q 21. In a Fund Flow Statement , the assets are represented by ?

1.Application of Funds
2.Sources of Funds
3.Surplus of sources over application
4.Deficit of sources over application 59
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Q 22. In Fund Flow Statements the Liabilities are represented by ?

1.Sources of Funds
2.Use of Funds
3.Deficit of sources over application
4.All of the above.

Q 23 . When the long term sources are more than long term uses, in the
fund flow statement, it would suggest ?

1.Increase in Current Liabilities

2.Decrease in Working Capital
3.Increase in NWC
4.Decrease in NWC

Q 24. When the long term uses in a fund flow statement are more than
the long term sources, then it would mean ?

1.Reduction in the NWC

2.Reduction in the Working Capital Gap
3.Reduction in Working Capital
4.All of the above
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Q 25. How many broader categories are there for the Sources of funds,
in the Fund Flow Statement ?

1. Only One, Source of Funds

2.Two, Long Term and Short Term Sources
3.Three , Long, Medium and Short term sources
4.None of the above.

R K MOHANTY
email ID : rajendra2411@gmail.com,
rajendra2411@hotmail.com

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