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CHAPTER-I FINANCIAL STATEMENTS LEARNING OBJECTIVES After studying this chapter, you will be able to: ( ( ( Explain the

Explain the meaning of financial statements of a company; Describe the form and content of balance sheet of a company; Prepare the Balance Act $%&'( heet of a company as per chedule !" Part " of the #ompanies

)now the ma*or headings under which the +arious assets and liabilities can be shown( Explain the meaning, ob*ecti+es and limitations of analysis using accounting ratios #alculate +arious ratios to assess the sol+ency, li,uidity, efficiency and profitability of the firm( "nterpret the +arious ratios for inter and intra-firm comparison( define #ash .low /now its ob*ecti+es understand its uses 01ses of #ash .low explain the 3imitations of #ash .low classify the #ash .lows as cash flow from 4perating Acti+ities cash flow from 4perating cash .low from .inancing Acti+ities ma/e a format of #ash .low prepare #ash .low tatement as per 5e+ised A -6( tatement in a Prescribed .ormat( tatement2 tatements tatement

1.0 7he financial statements are the end products of the accounting process which summaries the financial position and performance of a business concern in an organi8ed manner( .inancial tatements pro+ide a summari8ed +iew of the operations of the business( 7hey ser+e as an important medium in communicating accounting information to +arious users of accounts( "f you can read a cric/et scoreboard, you can learn to read basic financial statements( 3et9s begin by loo/ing at what financial statements do( 1.1 Financial Statement !" a c!m#an$

.inancial tatements show you where a company9s money came from, where it went, and where it is now( .inancial statements are the basic and formal annual reports through which the corporate management communicates financial information to its owners and +arious other external parties which include-in+estors, tax authorities, go+ernment, employees, etc( 7here are two main financial statements( 7hey are: :$; balance sheets; :<; income statements( Balance sheets show what a company owns and what it owes at a fixed point in time( "ncome statements show how much money a company made and spent o+er a period of time( 3et9s loo/ at the Balance heet in more detail(

%SERS OF FINANCIAL STATEMENTS 1.& In'e t!( an) #!tential in'e t!(

7he present in+estors want to decide whether they should hold the securities of the company or sell them( Potential in+estors, on the other hand, want to /now whether they should in+est in the shares of the company or not( "n+estors : hareholders or owners; and potential in+estors, thus, ma/e use of the financial statements to *udge the present and future earning capacity of the business, to *udge the operational efficiency of the business and to /now the safety of in+estment and growth prospects( Len)e( *l!n+ te(m c(e)it!( .inancial statement helps lenders such as debenture holders, suppliers of loans and leases in ascertaining the long term and short term sol+ency of the business( 7hey li/e to /now the financial soundness of the business i(e( the ability of the business to repay debt on maturity and whether the enterprise earns sufficient profits so as to pay interest regularly( Mana+ement Analysis of financial statements enable the management to e+aluate the o+erall efficieny of the firm( "t helps to ascertain the sol+ency of the enterprise; to /now about its +iability as a going concern and to pro+ide ade,uate information for planning and controlling the affairs of the business( .uture forecasts can easily be made by analy8ing the past date( S,##lie( * -!(t te(m c(e)it!( #reditors=suppliers supplying goods to a business are interested to /now as to whether the business would be in a position to pay the amounts on time( 7hey are interested in shortterm sol+ency i(e( the li,uidity of the business( 7hey are more interested in current assets and current liabilities of the business( "f current assets are sufficient, say, twice the current liabilities, they are satisfied that the business would be able to discharge the short-term debts on time( Em#l!$ee an) T(a)e %ni!n Employees are interested in better emoluments, bonus and continuance of business and whether the dues li/e pro+ident fund, E " et(, ha+e been deposited with the authorities( 7hey would therefore, li/e to /now its financial performance and profitability and operating sustainability( G!'e(nment an) it a+encie .inancial statements are used by go+ernment and its agencies to formulate policies to regulate the acti+ities of business, to formulate taxation policies, to compile national income accounts(

7axation authorities such as income tax department use the financial statements for determination of income tax; sales tax department is interested in sales while the excise department is interested in production( St!c. e/c-an+e toc/ exchange uses the financial statements to analy8e and thereafter, inform its members about the performance, financial health, etc( of the company, to see whether financial statements prepared are in conformity with the specified laws and rules and to see whether they safeguard the interest of +arious concerned agencies( 4ther 5egulatory authorities :such as, #ompany 3aw Board, EB", toc/ Exchanges, 7ax Authorities etc(; would li/e that the financial statements prepared are in conformity with the specified laws and rules, and are to safeguard the interest of +arious concerned agencies( .or example, taxation authorities would be interested in ensuring proper assessment of tax liability of the enterprise as per the laws in force from time to time( C, t!me( #ustomers are interested to ascertain continuance of an enterprise( .or example, an enterprise may be supplier of a particular type of consumer goods and in case it appears that the enterprise may not continue for a long time, the customer has to find an alternate source( BALANCE SHEET- MEANING AN0 P%RPOSE Balance heet is a financial statement that summari8es a company9s assets, liabilities and shareholders9 e,uity at a specific point in time( 7hese three balance sheet segments gi+e in+estors an idea as to what the company owns and owes, as well as the amount in+ested by the shareholders( 7he balance sheet show: Assets > 3iabilities ? hareholders9 E,uity A balance sheet thus, pro+ides detailed information about a company9s assets, liabilities and shareholders9 e,uity( Assets are things that a company owns that ha+e +alue( 7his typically means they can either be sold or used by the company to ma/e products or pro+ide ser+ices that can be sold( Assets include physical property, such as plants, truc/s, e,uipment and in+entory( "t also includes things that can9t be touched but ne+ertheless exist and ha+e +alue, such as trademar/s and patents( And cash itself is an asset( o are in+estments a company ma/es( 3iabilities are amounts of money that a company owes to others( 7his can include all /inds of obligations, li/e money borrowed from a ban/ to launch a new product, money owed to suppliers for materials, payroll a company owes to its employees, taxes owed to the go+ernment( 3iabilities also include obligations to pro+ide goods or ser+ices to customers in the future( hareholders9 e,uity is sometimes called capital or net worth( "t9s the money that would be left if a company sold all of its assets and paid off all of its liabilities( 7his lefto+er money belongs to the shareholders, or the owners, of the company( A company has to pay for all the things it has :assets; by either borrowing money :liabilities; or getting it from shareholders :shareholders9 e,uity;(

7he purpose of a Balance heet is to report the financial position of a company at a certain point in time( "t is di+ided into two columns( 7he first column shows what the company owes :liabilities and net worth;( 7he second shows what the company owns :assets; on the right( At the bottom of each list is the total of that column( As the name implies, the bottom line of the balance sheet must always @balance(A "n other words, the total assets are e,ual to the total liabilities plus the net worth( 7he balance sheet is one of the most important pieces of financial information issued by a company( "t is a snapshot of what a company owns and owes at the point in time( 7he income statement, on the other hand, shows how much re+enue and profit a company has generated o+er a certain period( Beither statement is better than the other-rather, the financial statements are built to be used together to present a complete picture of a company9s finances(

CONTENTS OF BALANCE SHEET 7he prescribed form of the Balance Act, $%&'( :i; Cori8ontal form :ii; !etical form .45DA7 4. 1DDA5" ED BA3AB#E Balance CEE7:C45"E4B7A3 .45D; heet of F( #4(37D( As at F .igures for the pre+ious year 5s( $( 6( hare #apital ecured 3oans <( 5eser+es and surplus G( 1nsecured 3oans &( #urrent 3iabilities and Pro+isions :a; #urrent 3iabilities :b; Pro+isions 3iabilities .igures for the current year 5s( .igures for the pre+ious year 5s( $( .ixed Assets <( "n+estments 6( #urrent Assets, 3oans and Ad+ances :a; #urrent Assets :b; 3oans and Ad+ances G( Discellaneous Expenditure &( Profit and 3oss A=c Bote: A footnote to the Balance heet may be added to show the contingent liabilities( heet of a company in a hori8ontal form is gi+en below: Assets .igures for the current year 5s( heet is gi+en in Part " of chedule !" of the #ompanies heet /nown as :

7he #ompanies Act has laid down two forms of the Balance

#CED13E !" PA57 "

7he format of the detailed Balance

FORMAT OF THE 0ETAILE0 BLANCE SHEET IN A HORI1ONTAL FORM

H!(i2!ntal F!(m !" Balance S-eet Balance S-eet !" 3.4Name !" t-e C!m#an$5 a !n 3..
.igures for the pre+ious year 5s( S-a(e Ca#ital Authorised Fshares of 5sF( Each Preference E,uity "ssued: Preference E,uity 3ess: #alls 1npaid: Add: .orfeited hares Re e('e an) S,(#l, 6 #apital 5eser+e #apital 5edemption 5eser+e ecurities Premium 4ther 5eser+es Profit and 3oss Account Sec,(e) L!an 6 Debentures 3oans and Ad+ance from Ban/s 3oans and Ad+ance from ubsidiary #ompanies 4ther 3oans and Ad+ances %n ec,(e) L!an 6 .ixed Deposits 3oans and Ad+ances from ubsidiaries #ompanies hort 7erm 3oans and Ad+ances 4ther 3oans and Ad+ances C,((ent Lia7ilitie an) P(!'i i!n 6 A. C,((ent Lia7ilitie Acceptances Debentures undry #reditors 4utstanding Expenses B. P(!'i i!n 6 .or 7axation .or Di+idends .or #ontingencies .or Pro+ident .und chemes .or "nsurance, Pension and 4ther similar benefits 3iabilities .igures for the current year 5s( .igures for the pre+ious year 5s( Fi/e) A Hoodwill 3and Building 3easehold Premises 5ailway .urniture Patents and 7rademar/s 3i+e toc/ !ehicles In'e tment 6 Ho+ernment or 7rust ecurities, hares, Debentures, Bonds C,((ent A et 8 L!an an) A)'ance 6 4A5 C,((ent A "nterest Accrued tores and 3oose 7ools toc/ in 7rade Ior/ in Progress undry Debtors #ash and Ban/ balances 4B5 L!an an) A)'ance 6 Ad+ances and 3oans to Bills 5ecei+able Ad+ance Payments Mi cellane!, -E/#en)it,(e6 Preliminary Expenses Discount on "ssue of hares and other Deferred Expenses P(!"it an) L! Acc!,nt 4)e7it Balance6 i" an$5 ubsidiary pare parts et 6 idings Plant and Dachinery et 6 Assets .igures for the current year 5s(

F!(mat !" t-e Balance S-eet in 'e(tical "!(m Balance S-eet !" 3. A !n 33 Particulars chedule Bumber .igures as at the end of current financial year .igures as at the end of pre+ious financial year

I. S!,(ce !" F,n) 6 1. S-a(e-!l)e(9 F,n) 6 :a; hare #apital urplus :b; 5eser+es and &. L!an F,n) 6 :a; ecured loans T!tal4Ca#ital Em#l!$e)5 II. A##licati!n !" F,n) 1. Fi/e) A et 6 :a; Hross bloc/ :b; 3ess : depreciation :c; Bet bloc/ :d; #apital wor/-in-progress &. In'e tment 6 :. C,((ent A :b; et 8 L!an an) A)'ance 6 :a; "n+entories undry Debtors :c; #ash and Ban/ Balances :d; 4ther #urrent Assets :e; 3oans and Ad+ances Le 6 C,((ent Lia7ilitie an) P(!'i i!n 6 :a; #urrent liabilities :b; Pro+isions Net C,((ent A et ;. :a; Discellaneous expenditure to the extent not written-off or ad*usted( :b; Profit and 3oss account :debit balance, if any; TOTAL :b; 1nsecured loans

Bote: A footnote to the Balance

heet may be added to show the contingent liabilities(

HO< TO REA0 A COMPAN=9S BALANCE SHEET 4i5 LIABILITIES SI0E 1. S-a(e Ca#ital6 1nli/e the non corporate entities were the entire capital is brought in by the proprietors or the partners, in the case of a company, it is brought in by the promoters, their friends, relati+es as well as the general public in case of listed companies( 7he capital is /nown share capital and shareholders get di+idend out of the profits of the company as return on their in+estment( hare #apital is broadly di+ided into: Authorised #apital, "ssued #apital, #alled up and Paid up capital( ubscribed #apital,

Authorised #apital is the maximum share capital that a company is allowed to issue during its lifetime( "t is stated in the Demorandum of Association( "ssued #apital is that part of authori8ed capital, which is offered to the public for subscription, including shares offered to the +endors for subscription other than cash :i(e( issue of shares in consideration for some other asset purchased;( #alled-up capital means that part of subscribed capital which is called-up by the company for payment by the subscribers to the shares( Paid up capital 7he amount that the shareholders ha+e actually paid to the company is called as paid up capital of the company( #alls in arrears must be shown by the way of deduction from the called up capital and .orfeited shares account by the way of addition to the paid up capital( <( Re e('e an) S,(#l, 6 5eser+es represent that portion of earnings and receipts of a company which are set apart by the management for a general or a specific purpose( 7his item includes accumulated profits, reser+es and funds- such as capital reser+es, capital redemption reser+e, balance of securities premium account, general reser+e, credit balance of profit and loss account, and other reser+es specifying the nature of each reser+e and the amount in respect thereof including the additions during the current year( 6( Sec,(e) L!an 6 3ong-term loans, which are ta/en against security of one or more assets of the company, are included under this head( Debentures and secured loans and ad+ances from ban/s, subsidiary companies, etc(, fall under this category( 3i/ewise interest accrued and due on secured loans is also recorded under the same head( G( %n ec,(e) L!an 6 3oans and ad+ances which are not bac/ed by any security in the form of assets of the company are shown under this heading( 7his item includes fixed deposits, unsecured loans and ad+ances from subsidiary companies, short-term loans and ad+ances from ban/s and other sources(

&(C,((ent Lia7ilitie an) P(!'i i!n : #urrent liabilities refer to such liabilities, which mature within a period of one year( 7hey include bills payable, sundry creditors, ad+ance payments and unexpired discounts, unclaimed di+idends, "nterest accrued but not paid, and other liabilities( Pro+isions refer to the amounts set aside out of re+enue profits for some specific liabilities payable within a period of one year( 7hose include pro+ision for taxation, proposed di+idends, pro+ision for contingencies, pro+ision for pro+ident fund, pro+ision for insurance; pension and similar staff benefit schemes, etc( Both the sub headings current liabilities as well as pro+isions must be shown separately under two sub-heads- :a; #urrent liabilities :b; Pro+isions( C!ntin+ent lia7ilitie 7hese are the liabilities which may arise in future on the happening of some e+ent( #ontingent liabilities are not included in the total of the liability side( 7hese are shown as a footnote to the Balance heet( .ollowing are the usual types of contingent liabilities: :i; #laims against the company not ac/nowledged as debt( :ii; 1ncalled liability on shares partly paid( :iii; Arrears of fixed cumulati+e di+idend( :i+; Estimated amount of contracts remaining to be executed on capital account and not pro+ided for( :+; Bills discounted not yet matured( ASSETS SI0E $( Fi/e) A et : 7hese are assets which are meant for use in business and not for sale( 7hese assets pro+ide a long term economic benefit, usually for more than one year to the firm( 7hese include goodwill, land, buildings, leaseholds, plant and machinery, railway sidings, furniture and fittings, patents, li+estoc/, +ehicles, etc( 7hese assets are shown at cost less depreciation till the date( <( In'e tment 6 Business is supposed to great profit( Ihen generated, this profit in excess of what is re,uired for the business can be in+ested into say, shares or debentures of +arious companies( "n+estments thus represent assets held by an enterprise for earning income( 1nder this head, +arious in+estments made such as in+estment in go+ernment securities or trust securities; in+estment in shares, debentures, and bonds of other companies, immo+able properties, etc(, are shown( 6( C,((ent A et 8 L!an an) A)'ance : 4ne the fixed assets are in a state of readiness to produce or pro+ide goods and ser+ices, the company needs current assets to carry out business operations( 7hese assets are held for consumption of for sale and are expected to be reali8ed in cash during the normal operating cycle( #urrent assets include in+entories, debtors, cash etc( 3oans and ad+ances refer to those assets which are held for a short term and are expected to be reali8ed within one year( 7hese include ad+ance payments, loans to subsidiary companies etc( Both the sub headings- current assets as well as loans and ad+ances must be shown separately under two sub-heads- :a; #urrent Assets :b; 3oans and Ad+ances( "t includes interest accrued on in+estment, in+entories, sundry debtors, bills recei+able, cash and ban/ balances while loans and ad+ances and other ad+ances li/e prepaid expenses, etc( G( Discellaneous Expenditure: 7he expenditure which has not been fully written off shown under this heading( "t includes preliminary expenses, ad+ertisement expenditure, discount on issue of shares and debentures, share issue expenses, etc(

&( Profit and 3oss Account: Ihen the Profit and 3oss account shows a debit balance, i(e(, loss which could not be ad*usted against general reser+es, is shown on the asset side of the Balance heet( Ill, t(ati!n 1( Hi+e three examples of each of the following :$; current liabilities; :<; contingent liabilities; :6; current assets; :G; miscellaneous expenditure; :&; pro+isions( olution : Ceadings $( #urrent liabilities Examples $( undry creditors <( Bill payable 6( 1nclaimed di+idend <( #ontingent liabilities $( #laims against company not ac/nowledge as debt <( 1ncalled liability on partly paid shares 6( #urrent assets 6( Estimated executed( $( G( Discellaneous Expenditure 6( <( #ash at ban/ tores and spare parts $( Preliminary expenses <( Discount allowed on issue of shares and debentures &( Pro+isions 6( 1nderwriting commission $( Pro+ision for taxation <( Proposed di+idend 6( Pro+ident fund( amount of contract remaining to be

toc/ in trade(

Ill, t(ati!n &( 1nder which heading and sub-heading will you show the following items: :$; hare forfeited account; :<; ecurities premium account; :6; 1nclaimed di+idend :G; Proposed di+idend :&; Arrears of fixed cumulati+e di+idend on preference shares( olution : (Bo( $( <( 6( G( & "tems hare forfeited account ecurities premium account 1nclaimed di+idend Proposed di+idend Arrears of fixed cumulati+e Di+idend shares on preference Ceading hare #apital 5eser+es and surplus #urrent 3iabilities and pro+isions #urrent 3iabilities and Pro+isions #ontingent liability ub-heading --#urrent liability Pro+isions --

Ill, t(ati!n :( Hi+e the headings and sub-headings under which the following will be shown in a company9s balance sheet as per chedule !" Part " of the #ompany9s Act $%&'( :i; $JK debentures :ii; preliminary expenses :iii; Plant and Dachinery :i+; #apital reser+e :+; bills payable :+i; general reser+e :+ii; interest paid out of capital during construction :+iii; railway sidings :ix; stores L spare part :x; fixed deposits(

S!l,ti!n6 (Bo( :i; :ii; :iii; :i+; :+; :+i; :+ii; "tems $J K Debentures Preliminary expenses Plant L Dachinery #apital 5eser+e Bills Payable Heneral reser+e "nterest paid capital construction 5ailway sidings tore and spare parts .ixed deposits out of during Ceadings ecured 3oans Discellaneous Expenditure .ixed assets 5eser+es and #urrent pro+isions urplus liabilities and ub-Ceadings ----#urrent liabilities ---

5eser+es L surplus Discellaneous expenditure

:+iii; :ix; :x;

.ixed assets #urrent assets, ad+ances 1nsecured loans loans L

-#urrent assets --

Ill, t(ati!n ;( 7he following figures were extracted from the trial balance of M 3td( share capital $J,JJJ e,uity shares of 5s( $J each fully paid : ecurities premium $<K Debentures .ixed deposits #reditors 5s( $J,JJJ 5s( &J,JJJ 5s( <&,JJJ 5s( &,JJJ

Nou are re,uired to draw up the liabilities side of the balance sheet, according to the re,uirements of the #ompanies Act( olution : AB EM75A#7 4. BA3AB#E 3iabilities CA5E #AP"7A3: Authori8ed #apital FFe,uity shares of 5s( $J each "ssued and subscribed $J,JJJ e,uity shares of 5s( $J each 5E E5!E ABD 15P31 : ecurities premium E#15ED 34AB : $<K DEBEB715E 1B E#15ED 34AB : .ixed deposits #155EB7 3"AB"3"7"E :A; #urrent liabilities undry creditors :B; Pro+isions CEE7 4. M 37D( A A7 FF 5s(

$,JJ,JJJ $J,JJJ &J,JJJ $J,JJJ

ABD P54!" "4B : &,JJJ ---

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Ill, t(ati!n >. 7he following ledger balances were extracted from the boo/s of 5ushil 3td( 4n 6$st Darch, <JJO( 3and and Building 5s( <,JJ,JJJ; $<K debentures 5s( <,JJ,JJJ; hare #apital $,JJ,JJJ e,uity shares 5s( $J each fully paid; Plant and Dachinery 5s( P,JJ,JJJ; Hoodwill 5s( <,JJ,JJJ;"n+estments in shares of 5a*a 3td( 5s(<,JJ,JJJ; Bills 5ecei+able 5s &J,JJJ; Debtors 5s( $,&J,JJJ; #reditors 5s $,JJ,JJJ; Ban/ 3oan :1nsecured; 5s $,JJ,JJJ; Pro+ision for taxation 5s( &J,JJJ; Discount on issue of $<K debentures 5s( &JJJ; Proposed di+idend 5s( &&,JJJ( toc/ 5s( $,JJ,JJJ Heneral 5eser+e 5s <,JJ,JJJ( Nou are re,uired to prepare the Balance heet of the company as per schedule !" Part " of the #ompanies act $%&'( olution: BA3AB#E 3iabilities AC5E #AP"7A3: Authori8ed #apital "ssued #apital ubscribed #apital $,JJ,JJJ E,uity shares of 5s($J each 5E E5!E ABD 15P31 : Heneral reser+e E#15ED 34AB : $<K Debentures 1B E#15ED 34AB : Ban/ 3oan #155EB7 3"AB"3"7"E ABD P54!" "4B : :A; #urrent liabilities #reditors :B;Pro+isions Proposed di+idend Pro+ision for taxation 51 C"3 37D( CEE7 A A7 6$ 7 DA5#C,<JJO 5s( Assets ."MED A E7 : QQQQQQRQQQ Hoodwill $J,JJ,JJJ 3and and Building Plant and Dachinery $J,JJ,JJJ "B!E 7DEB7 : hares of 5a*a 3td( <,JJ,JJJ <,JJ,JJJ $,JJ,JJJ #155EB7 A E7 , 34AB AD!AB#E : :A; #urrent assets: toc/-in-7rade Debtors :B; 3oans and Ad+ances Bill 5ecei+ables ABD $,JJ,JJJ $,&J,JJJ &J,JJJ &,JJJ

5s( <,JJ,JJJ <,JJ,JJJ P,JJ,JJJ <,JJ,JJJ

$,JJ,JJJ

D" #E33ABE41 EMPEBD"715E: Discount on issue of $<K Debentures

&&,JJJ &J,JJJ

$O,J&,JJJ

$O,J&,JJJ

Ill, t(ati!n ?. M 3td( has an authori8ed capital of 5s( $J,JJ,JJJ di+ided into E,uity hares of 5s( $J each( 7he company in+ited applications for &J,JJJ shares( Applications for G&,JJJ shares were recei+ed( All calls were made and were duly recei+ed except the final call of 5s( < per share on $,JJJ shares( &JJ of the shares on which the final call was not recei+ed were forfeited( how how share capital will appear in the Balance heet of the #ompany as per schedule !" part " of the #ompanies Act $%&'R

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olution: BA3AB#E 3iabilities AC5E #AP"7A3: Authori8ed #apital $,JJ,JJJ E,uity hares of 5s( $J each "ssued #apital : &J,JJJ E,uity hares of 5s( $J each ubscribed #apital: GG,&JJ E,uity hares of 5s( $J each G,G&,JJJ 3ess: #alls in Arrears G,GG,JJJ Add: hare .orfeited A=c

M 37D( CEE7 A 4B FFFFFFF Amount Assets 5s( $J,JJ,JJJ &,JJ,JJJ

Amount 5s(

$,JJJ G,GP,JJJ G,JJJ

Ill, t(ati!n @. .rom the following balances ta/en from the boo/s of Hu*arat Exports 3td( prepare #ompany9s Balance heet in Cori8ontal .orm: 5s( 3and and Buildings Plant and Dachinery undry Debtors P,JJJ E,uity hares of 5s( $JJ G,JJ,JJJ $,JJ,JJJ &J,JJJ G,PJJ $,$6,JJJ $&,JJJ $,JJ,JJJ each 5s( &J called up $&K debentures Debenture 5edemption 5eser+e Prepaid "nsurance Profit L 3oss :#r(; Bills Payable Heneral 5eser+e 6,<&,JJJ <,%J,JJJ '&,JJJ Patents "n+estments Preliminary Expenses ecurities premium Pro+ision for "ncome tax #losing #ash Ad+ance "ncome 7ax undry #reditors 4utstanding expenses Proposed Di+idend toc/ 5s( O,<JJ <J,JJJ <,JJJ <J,JJJ <G,JJJ $,<P,JJJ $<,JJJ G,JJJ $&,<JJ G,PJJ $',JJJ

"n+estments are in partly-paid shares on which calls of 5s( $J,JJJ ha+e not been made(

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olution: BA3AB#E CEE7 4. H1SA5A7 EMP457 37D( As at FFFFFFin hori8ontal form 3iabilities AC5E #AP"7A3: Authori8ed #apital "ssued #apital P,JJJ E,uity shares of 5s($JJ each ubscribed #apital P,JJJ E,uity shares of 5s($JJ each, 5s( &J called up 5E E5!E ABD 15P31 : ecurities Premium Heneral 5eser+e Profit L 3oss A=c Debenture 5edemption 5eser+e E#15ED 34AB : $&K Debentures 1B E#15ED 34AB : #155EB7 3"AB"3"7"E ABD P54!" "4B : :A; #urrent liabilities Bills payable undry #reditors 4utstanding Expenses :B;Pro+isions Pro+ision for "ncome tax Proposed di+idend 5s( QQQQQQRQQQ Assets ."MED A E7 : 3and and Building Plant and Dachinery Patents "B!E 7DEB7 : #155EB7 A E7 , 34AB AD!AB#E : :A; #urrent assets: #losing toc/ undry Debtors #ash :B; 3oans and Ad+ances Prepaid "nsurance Ad+ance "ncome 7ax D" #E33ABE41 EMPEBD"715E: Preliminary Expenses ABD $,<P,JJJ '&,JJJ $<,JJJ G,PJJ G,JJJ <,JJJ 5s( 6,<&,JJJ <,%J,JJJ O,<JJ <J,JJJ

P,JJ,JJJ G,JJ,JJJ <J,JJJ $,JJ,JJJ $,$6,JJJ &J,JJJ $,JJ,JJJ $&,JJJ -$&,JJJ $&,<JJ G,PJJ

<G,JJJ $',JJJ P,&P,JJJ P,&P,JJJ

Bote: #ontingent 3iabilities: .or partly-paid shares 5s( $J,JJJ

RATIO ANAL=SIS 1.; 5atio analysis is not *ust comparing different numbers from the balance sheet, income statement and cash flow statement( "t is comparing the number against pre+ious years , other companies, the industry , or e+en the economy in general( 5atios loo/ at the relationships between indi+idual +alues and relate them to how a company has performed in the past and might perform in the future(

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.or example current assets alone don9t tell us a whole lot , but when we di+ide them by the current liabilities we are able to determine whether the company has enough money to co+er short debts( 7herefore we can say that when one figure is expressed in terms of another figure by di+iding each other the relation which is established between them is called ration( 1.> Meanin+ !" Rati! Anal$ i 5atio Analysis is the relationship between two terms of financial data expressed in the form of ratios and then interpreted with a +iew to e+aluating the financial condition and performance of a firm( 5atio Analysis can also help us to chec/ whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than similar type of business( Example : .irm A earns a profit of 5s( &J,JJJ while .irm B earns a profit of 5s( $,JJ,JJJ( Ihich of them is more efficientR Ie could tend to belie+e that firm B is more efficient than firm A( But in order to understand correctly , we need to find out their sales figure( ay firm A9s sales are 5s( &,JJ,JJJ while firm B9s sale are 5s( &J,JJ,JJJ( Bow let9s compare the percentage of profit earned by them on sales( .or A: &J,JJJ M $JJ > $J K &,JJ,JJJ .or B: $,JJ,JJJ M $JJ > < K &J,JJ,JJJ 7his clearly shows that firm A is doing better than .irm B( 7his example shows that figure assumes significance only when expressed in relation to other related figures( 1.>.1 O7Aecti'e !" Rati! Anal$ i 6 7he main ob*ecti+e of analy8ing financial statement with the help of ratios are: $( 7he analysis would enable the calculation of not only the present earning capacity of the business but would also help in the estimation of the future earning capacity( <( 7he analysis would help the management to find out the o+erall as well as the department T wise efficiency of the firm on the basis of the a+ailable financial information( 6( 7he short term as well as the long tem sol+ency of the firm can be determined with the help of ration analysis( G( "nter T firm comparison becomes easy with the help of ratios( 1.>.& A)'anta+e !" Rati!n Anal$ i 6 .inancial statement prepared at the end of the year do not always con+ey to the reader the real profitability and financial health of the business( 7hey contain +arious facts and figures and it is for the reader to conclude what these figures indicated( 5atio Analysis is an important tool for analy8ing these financial statements ( ome important ad+antage deri+ed by the firm by the use of accounting ratios are: 1. Hel# in Financial tatement anal$ i "t is east to understand the financial position of a business enterprise in respect of short term sol+ency, li,uidity and profitability with the help of ratio( "t tells us the changes ta/ing place in the financial condition of the business(

14

&. Sim#li"ie) acc!,ntin+ "i+,(e Absolute figures are not of mush use( 7hey become important when relationships are established say between gross profit and sales( :. Hel# in calc,latin+ !#e(ati!n e""icienc$ !" t-e 7, ine ente(#(i e 5atio enable the user of financial information to determine operating efficiency of a firm by relating the profit figure to the capital employed for a gi+en period( ;. Facilitie inte(- "i(m c!m#a(i !n 5atio analysis pro+ides data for inter- firm comparison( "t re+els strong and wea/ firms, o+er+alues and under+alues firms as well as successful and unsuccessful firms( >. Ma.e inte(- "i(m c!m#a(i !n #! i7le 5atio Analysis helps the firm to compare its own performance o+er a period of time a swell as the performance of different di+isions of the firm( "t helps in deciding which di+ision are more efficient than other( ?. Hel# in "!(eca tin+ 5atio Analysis helps in planning and forecasting ( 5atios pro+ides clues on trends and futures problems ( e(g if the sales of a firm during the year are 5s( $J la/hs and he a+erage stoc/ /ept during the year 5s( < la/hs, it must be ready to /eep a stoc/ of 5s( 6 la/hs which is <J K of the 5s( $& la/hs( 1.>.: Limitati!n !" Rati! Anal$ i 5atio Analysis is a useful techni,ue to e+aluate the performance and financial position of any business unit but it does suffer from a number of limitations( 7hese must be /ept in mind while analysing financial statements( 1. Hi t!(ical Anal$ i 5atio Analysis is historical in nature a the finicial statement on the basis of which ratios are calculated are historical in nature( &. P(ice Le'el C-an+e #hanges in price le+el often ma/e comparison of figures of the pre+ious years difficult( E(g ratio of sales to fixed assets in <JJ' would be much higher than in <JJJ due to rising prices, fixed assets being expressed on cost( :. N!t F(ee "(!m 7ia "n many situations, the accountant has to ma/e a choice out of the +arious alternati+es a+ailable ( e(g choice of the method depreciation, choice in the method of in+entory +aluation etc( ince there is a sub*ecti+ity inherent in the choice , ratio analysis cannot be said to be free from bias( ;. <in)!B )(e in+ Iindow dressing is slowly the position better than what it is( ome companies , in order to co+er up their bad finicial position resort to window dressing( By hiding important facts, they try to depict a better financial position(

15

>. C,alitati'e "act!( i+n!(e) 5atio Analysis is a ,uantitati+e analysis( "t ignores ,ualitati+e factors li/e debtors character, honesty, past record etc( ?. 0i""e(ent acc!,ntin+ #(actice (en)e( (ati! inc!m#a(a7le 7he result of two firms are comparable with the help of accounting ratios only if they follow the same accounting methods ( e(g( if one firm changes depreciation on straight line method while another is charging on diminishing balance method, accounting ratios will not be strictly comparable( 1.? Cla i"icati!n !" Rati!

Different types of ratios are computed depending on the purpose for which they are needed( Broadly spea/ing ,they are grouped under four heads: $( 3i,uidity ratios <( ol+ency ratios 6( 7urno+er or Acti+ity ratios G( Profitability ratios

#lassification of 5atio

3i,uidity ratios

ol+ency ratios

Acti+ity 5atios

Profitability 5atios

1. Current ratio; 2. Quick Ratio.

1.Debt equality ratio; 2. otal !""e"t to #ebt ratio; 3.$ro%rietary ratio; 4.&ntere"t Co'era(e Ratio.

1. 2. 3. 4.

)tock urno'er; Debtor" urno'er; Cre#itor" urno'er; *i+e# !""e"t urno'er; 5. ,orkin( Ca%ital urno'er.

1. 2. 3. 4.

1.?.1

LIC%I0IT= RATIOS

-ro"" $ro.it Ratio /et $ro.it Ratio 0%eratin( Ratio Return $ro.it Ratio

3i,uidity is the short term sol+ency of the enterprise( "(e( the ability of the business enterprise to meet its short term obligation as and when they are due( 7he li,uidity ratios, therefore , are also called the short- term sol+ency ratios( 7he most common ratios which measures the extent of li,uidity or the lac/ of it are: a; #urrent ratio b; Uuic/ ratio= Acid test ratio C,((ent Rati! #urrent ratio establishes the relationship between current assets and #urrent liability( "t measures the ability of the firm to meet its short term obligation as and when they become due( "t is calculated as: #urrent ratio> #urrent Assets #urrent liabilities

16

#urrent assets include cash and those assets which can be con+erted into cash within a year( #urrent assets will therefore include cash , ban/, stic/:raw materials , wor/ in progress and finished goods;, debtors:less pro+ision;, bills recei+able, mar/etable securities, prepaid expenses, short term loans and ad+ances and accrued incomes( #urrent liability include all those liabilities maturing with in one year( #urrent liabilities include creditors, bills payable, outstanding expenses, income recei+ed in ad+ance , ban/ o+erdraft, short-term loans, pro+ision for tax , proposed di+idend and unclaimed di+idend( Henerally , a current ratio of <:$ is considered satisfactory( Inte(#(etati!n: "t pro+ides a measure of degree to which current assets co+er current liabilities( 7he higher the ratio , the greater the margin of safety for the short term creditors( Cowe+er, the ratio should neither be +ery high nor +ery low( A +ery high current ratio indicates idle funds , piled up stoc/s, loc/ed amount in debtors while a low ratio puts the business in a situation where it will not be able to pay its short- term debt on time( Ill, t(ati!n 1 #alculate current ratio from the following information: toc/ 5s ('J,JJJ ; #ash GJ,JJJ; Debtors GJ,JJJ; #reditors &J,JJJ Bills 5ecei+able <J,JJJ; Bills Payable 6J,JJJ; Ad+ance 7ax G,JJJ Ban/ 4+erdraft G,JJJ; Debentures 5s( <,JJ,JJJ; Accrued interest 5s( G,JJJ( S!l,ti!n C,((ent A 5s(G,JJJ et > 5s('J,JJJ ? 5s(GJ,JJJ ? 5s(GJ,JJJ ? 5s(<J,JJJ ? 5s(G,JJJ ?

> 5s($,'P,JJJ C,((ent Lia7ilitie > 5s(&J,JJJ ? 5s(6J,JJJ ? 5s(G,JJJ > 5s( PG,JJJ C,((ent Rati! > 5s($,'P,JJJ : 5s(PG,JJJ > < : $( Ill, t(ati!n & #urrent Assets of a company are 5s( $J,JJ,JJJ and current liabilities are 5s( ',JJ,JJJ( 7he management is interested in ma/ing the ratio <:$ by ma/ing payment of certain current liabilities( Ad+ise the management as to how much of current liabilities should be paid to attain the desired ratio( S!l,ti!n 3et the current liabilities to be paid > x $J,JJ,JJJ-x > < ',JJ,JJJ-x $J,JJ,JJJ-x > <:',JJ,JJJ-x ; $J,JJ,JJJ-x > $<,JJ,JJJ-<x x > <,JJ,JJJ C,ic. Rati! * Aci) te t (ati!*LiD,i) (ati! Uuic/ ratio establishes the relationship between ,uic/= li,uid assets and current liabilities( "t measures the ability of the firm to meet its short term obligations as and when they become due without relying upon the reali8ation of stoc/( "t is calculated as: Uuic/ ratio > Uuic/ Assets #urrent 3iabilities

17

7he ,uic/ assets are defined as those assets which can be con+erted into cash immediately or reasonably soon without a loss of +alue( .or calculating ,uic/ assets we exclude the closing stoc/ and prepaid expenses from the current assets( Henerally, a li,uid ratio of $:$ is considered satisfactory( Inte(#(etati!n6 Uuic/ ratio is considered better than current ratio as a measure of li,uidity position of the business because of exclusion of in+entories( 7he idea behind this ratio is that stoc/ are sometimes a problem because they can be difficult to sell or use( 7hat is , e+en through a supermar/et has thousand of people wal/ing through its doors e+ery day, there are still items on its shel+es that don9t sell as ,uic/ly as the supermar/et would li/e( imilarly, there are some items that will sell +ery well( Be+ertheless , there are some business whose stoc/s will sell or be used slowly and if those businesses needed to sell some of their stoc/s to try to co+er an emergency, they would be disappointed( "t us a more penetrating test of li,uidity than current ratio yet it should be used cautiously as all debtors may not be li,uid or cash may be re,uired immediately for certain expenses( Ill, t(ati!n : #alculate ,uic/ ratio from the information gi+en in illustration $( S!l,ti!n Uuic/ Assets > #urrent Assets T toc/ T Ad+ance 7ax Uuic/ Assets > 5s( $,'P,JJJ T :5s( 'J,JJJ ? 5s( G,JJJ; > 5s( $,JG,JJJ #urrent 3iabilities > 5s( PG,JJJ Uuic/ ratio > Uuic/ Assets = #urrent 3iabilities > 5s( $,JG,JJJ : 5s( PG,JJJ > $(<6:$ Ill, t(ati!n ; M 3td( has a current ratio of 6(&:$ and ,uic/ ratio of <:$( "f excess of current assets o+er ,uic/ assets represented by stoc/ is 5s( $,&J,JJJ, calculate current assets and current liabilities( S!l,ti!n 3et #urrent 3iabilities > x #urrent Assets > 6(&x And Uuic/ Assets > <x toc/ > #urrent Assets T Uuic/ Assets $,&J,JJJ > 6(&x T <x $,&J,JJJ > $(&x x > 5s($,JJ,JJJ #urrent Assets > 6(&x > 6(& V $,JJ,JJJ > 5s( 6,&J,JJJ(

Ill, t(ati!n > #alculate the current ratio from the following information : Ior/ing capital 5s( %,'J,JJJ; 7otal debts 5s(<J,PJ,JJJ; 5s($',JJ,JJJ; toc/ 5s( G,JJ,JJJ; prepaid expenses 5s( PJ,JJJ( 3ong-term 3iabilities

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S!l,ti!n #urrent 3iabilities > 7otal debt- 3ong term debt > <J,PJ,JJJ T $',JJ,JJJ > G,PJ,JJJ Ior/ing capital %,'J,JJJ #urrent Assets Uuic/ Assets > #urrent Assets T #urrent liability > #urrent Assets T G,PJ,JJJ > $G,GJ,JJJ > > > > > > > > > #urrent Assets T :stoc/ ? prepaid expenses; $G,GJ,JJJ T :G,JJ,JJJ ? PJ,JJJ; %,'J,JJJ #urrent Assets = #urrent liabilities $G,GJ,JJJ=G,PJ,JJJ 6:$ Uuic/ Assets = #urrent liabilities %,'J,JJJ=G,PJ,JJJ <:$

#urrent ratio Uuic/ ratio

1.?.& S!l'enc$ Rati! ol+ency ratio are used to *udge the long term financial soundness of any business( 3ong term ol+ency means the ability of the Enterprise to meet its long term obligation on the due date( 3ong term lenders are basically interested in two things: payment of interest periodically and repayment of principal amount at the end of the loan period( 1sually the following ratios are calculated to *udge the long term financial sol+ency of the concern( $( <( 6( G( Debt e,uity ratio; 7otal Assets to Debt 5atio; Proprietary ratio; "nterest #o+erage 5atio(

0e7t-ED,it$ Rati! Debt E,uity 5atio measures the relationship between long-term debt and shareholders9 funds( "t measures the relati+e proportion of debt and e,uality in financing the assets of a firm( "t is computed as follows: Debt-E,uity ratio > 3ong-term Debt9s= hare holder funds

Ihere T 3ong- term Debt > Debentures ? 3ong T term loans hareholders .unds > E,uity hare #apital ? Preference 5eser+es and urplusT .ictitious Assets hare #apital ?

19

Inte(#(etati!n6 A low )e7t e,uity ratio reflects more security to long term creditors( .rom security point of +iew, capital structure with less debt and more e,uity is considered fa+ourable as it reduces the chances of ban/ruptcy( A high ratio, on the other hand, is considered ris/y as it may put the firm into difficulty in meeting its obligations to outsiders( Cowe+er, from the perspecti+e of the owners, greater use of debt, firm can en*oy the benefits of trading on e,uity which help in ensuring higher returns for them if the rate of earning on capital employed is higher than the rate of interest payable( But it is considered ris/y and so , with the exception of a few business , the prescribed ratio is limited to <:$( Ill, t(ati!n ? #alculate Debt E,uity , from the following information: $J,JJJ preference share of 5s( $J each 5s( $,JJ,JJJ &,JJJ e,uity shares of 5s( <J each 5s( $,JJ,JJJ #reditors 5s( G&,JJJ Debentures 5s( <,<J,JJJ Profit and 3oss accounts:#r(; 5s( OJ,JJJ S!l,ti!n Debt > Debentures > 5s( <,<J,JJJ E,uity > E,uity share capital ? Preferences hare #apital ? profit and 3oss accounts > 5s( $,JJ,JJJ ? 5s( $,JJ,JJJ ? 5s( OJ,JJJ > 5s( <,OJ,JJJ Debt E,uity 5atio > 3ong term debt= shareholders9 funds > 5s( <,<J,JJJ = 5s( <,OJ,JJJ > J(P$:$ Ill, t(ati!n @ #alculate Debt E,uity 5atio, from the following information : 7otal Debts 5s( 6,JJ,JJJ ; 7otal assets 5s( &,GJ,JJJ; #urrent liabilities 5s( OJ,JJJ( S!l,ti!n 3ong-term Debt > 7otal Debt T #urrent 3iabilities > 5s( 6,JJ,JJJ T 5s( OJ,JJJ > 5s( <,6J,JJJ

hareholders .unds > 7otal Assets T 7otal Debts > 5s( &,GJ,JJJ T 5s( 6,JJ,JJJ > 5s( <,GJ,JJJ Debt E,uity 5atio > 3ong term debt= hareholders9 funds > 5s( <,6J,JJJ=5s( <,GJ,JJJ > J(%':

T!tal A

et t! 0e7t Rati!

7his 5atio established a relationship between total assets and long debts( "t measures the extend to which debt is being co+ered by assets( "t is calculated as 7otal Assets to Debt 5atio > 7otal assets 3ong-term Debt

20

Inte(#(etati!n6 7his ratio primarily indicated the use of external funds in financing the assets and the margin of safety to long-term creditors( 7he higher ratio indicated that assets ha+e been mainly financed by owners9 funds , and the long- tem debt is ade,uately co+ered by assets( A low ratio indicated a grater ris/ to creditors as it means insufficient assets for long term obligations( Ill, t(ati!n E hareholders9 funds 5s( PJ,JJJ; 7otal debts 5s( $,'J,JJJ; #urrent liabilities 5s( <J,JJJ( #alculate 7otal assets to debt ratio( S!l,ti!n 3ong term debt > 7otal Debt - #urrent liabilities > 5s( $,'J,JJJ- 5s( <J,JJJ > 5s( $,GJ,JJJ > hareholders9 funds ? 7otal debt > 5s( PJ,JJJ ? 5s( $,'J,JJJ > 5s( <,GJ,JJJ

7otal Assets

7otal Assets to debt ratio > 7otal Assets= Debt > 5s( <,GJ,JJJ = 5s( $,GJ,JJJ > $<:O > $(O:$ P(!#(ieta($ Rati! Proprietary ratio establishes a relationship between shareholders funds to total assets ( "t measures the proportion of assets financed by e,uity( "t is calculated as follows : Proprietary 5atio > hareholders .unds= 7otal assets "nterpretation: A higher proprietary ratio indicated a larger safety margin for creditors( "t tests the ability of the shareholders9 funds to meet the outside liabilities( A low Proprietary 5atio , on the other hand , indicated a grater ris/ to the creditors( 7o *udge whether a ratio is satisfactory or not, the firm should compare it with its own past ratios or with the ratio of similar enterprises or with the industry a+erage( Based on data of "llustration P, it shall be wor/ed out as follows: 5s( PJ,JJJ = 5s( <,GJ,JJJ > J(66: $ Ill, t(ati!n F .rom the following balance sheet of a company, calculate debt e,uity ratio, total assets to debt ratio and proprietary ratio Balance S-eet !" G lt) a !n :1.1&.&00@ Preference hare #apital O,JJ,JJJ Plant and Dachinery E,uity hare #apital P,JJ,JJJ 3and and Building 5eser+es $,&J,JJJ Dotor #ar Debentures 6,&J,JJJ .urniture #urrent 3iability <,JJ,JJJ toc/ Debtors #ash and Ban/ Discount on "ssue of hares &&8008000 %,JJ,JJJ G,<J,JJJ G,JJ,JJJ <,JJ,JJJ %J,JJJ PJ,JJJ $,JJ,JJJ $J,JJJ <<,JJ,JJJ

21

S!l,ti!n Debt e,uity 5atio > 3ong-term Debt=E,uity 7otal Assets 5atio> 7otal Assets = long term Debt Proprietary 5atio > hareholders .unds=7otal assets

Debt e,uity ratio > 5s( 6,&J,JJJ=5s( $',GJ,JJJ > J(<$6 7otal Assets 5atio> 5s( <$,%J,JJJ= 5s( 6,&J,JJJ > '(<' Proprietary 5atio > 5s( $',GJ,JJJ=5s( <$,%J,JJJ > J(OG% Ill, t(ati!n 10 .rom the following information, calculate Debt E,uity 5atio, Debt 5atio,Proprietary 5atio and 5atio of 7otal Assets to Debt( Balance S-eet a !n 0ecem7e( :18 &00? E,uity share #apital Preference hare #apital 5eser+es Profit L loss A=# $$ K Dortgage 3oan #urrent liabilities 6,JJ,JJJ $,JJ,JJJ &J,JJJ '&,JJJ $,PJ,JJJ $,<J,JJJ P,$&,JJJ .ixed Assets #urrent Assets Preliminary Expenses G,&J,JJJ 6,&J,JJJ $&,JJJ

P,$&,JJJ

S!l,ti!n hareholders .unds > E,uity hares capital ? Preference hares capital ? 5eser+es ? profit K loss A=# - Preliminary Expenses > 5s( 6,JJ,JJJ ? 5s( $,JJ,JJJ ? 5s(&J,JJJ ? 5s( '&,JJJ- 5s( $&,JJJ > 5s( &,JJ,JJJ Debt E,uity 5atio > Debt = E,uity > 5s( $,PJ,JJJ=5s( &,JJ,JJJ > J(6': $ Proprietary 5atio > Proprietary funds = 7otal Assets > 5s( &,JJ,JJJ=5s( P,JJ,JJJ > J('<&:$ 7otal Assets to Debt 5atio > 7otal Assets = Debt > 5s( P,JJ,JJJ=5s( $,PJ,JJJ > G(GG:$

22

Ill, t(ati!n 11 7he debt e,uity ratio of M 3td( is $:<( Ihich of the following would increase= decrease or not change the debt e,uity ratioR :i; "ssue of new e,uity shares :ii; #ash recei+ed from debtors :iii; ale of fixed assets at a profit :i+; 5edemption of debentures :+; Purchase of goods on credit( S!l,ti!n a; 7he ratio will decrease( 7his is because the debt remains the same, e,uity increases( b; 7he ratio will not change ( 7his is because neither the debt nor e,uality is affected( c; 7he ratio will decrease ( 7his is because the debt remains unchanged while e,uity increases by the amount of profit( d; 7he ratio will decrease ( 7his is because debt decreases while e,uity remains same ( e; 7he ratio will not change ( 7his is because neither the debt nor e,uity is affected( Inte(e t C!'e(a+e Rati! "nterest #o+erage 5atio established a relationship between profit before interest on longterm debt and taxes and the interest on long term debts( "t measures the debt ser+icing capacity of the business in respect of fixed interest on long term debts( "t generally expressed as W number of times9( "t is calculated as follows: "nterest #o+erage 5atio > Bet Profit before "nterest and 7ax = "nterest on long term debt Inte(#(etati!n 6 "t re+eals the number of times interest on long-term debt is co+ered by the profits a+ailable for interest( "t is a measure of protection a+ailable to the creditors for payment of interest on long term loans( A higher ratio ensures safety of interest payment debt and it also indicates a+ailability of surplus for shareholders( Ill, t(ati!n 1& Bet Profit as per Profit L 3oss A=# 5s( &,GJ,JJJ; Pro+ision for tax 5s, <,$J,JJJ; "nterest on Debentures and other long terms loans 5s( $,&J,JJJ #alculate interest co+erage ratio( S!l,ti!n Profit before interest and tax > 5s( &,GJ,JJJ ? 5s( <,$J,JJJ ? 5s( $,&J,JJJ > 5s( %,JJ,JJJ "nterest co+erage 5atio > Bet Profit before "nterest and 7ax= interest on long term debt > 5s( %,JJ,JJJ = 5s( $,&J,JJJ > ' times( Ill, t(ati!n 1: #alculate interest co+erage ratio from the following information: Bet Profit after tax 5s( 6J,JJJ; $&K 3ong-term Debt $J,JJ,JJJ; and 7ax 5ate

23

'JK(

S!l,ti!n Bet Profit after tax > 5s( 6J,JJJ 7ax 5ate > 'JK( Bet Profit before tax > Bet Profit after tax M $JJ = :$JJ T tax rate; > 5s( 6J,JJJ M $JJ = : $JJ- 'J; > 5s( O&,JJJ "nterest on 3ong 7erm Debt > $&K of 5s( $J,JJ,JJJ > 5s( $,&J,JJJ Bet profit before interest and tax > Bet profit before tax ? "nterest > 5s( O&,JJJ ? 5s( $,&J,JJJ > 5s( <,<&,JJJ "nterest #o+erage 5atio > Bet Profit before "nterest and 7ax="nterest on long term debt > 5s( <,<&,JJJ=5s( $,&J,JJJ > $(& times( 1.?.: Acti'it$ 4!( T,(n!'e(5 Rati!

7he Acti+ity :or 7urno+er; 5atios measures how well the facilities at the disposal of the concern are being utili8ed( 7hey are /nown as turno+er ratios as they indicates the speed with which the assets are being con+erted or turned o+er into sales( A proper balanced between sales and assets generally reflects tat assets are being managed well( 7hey are expressed as Wnumber of times9( ome of the important acti+ity ratios are: $( <( 6( G( &( toc/ 7urn-o+er; Debtors :5ecei+able; 7urno+er; #reditors :Payable; 7urno+er; .ixed Assets 7urno+er; Ior/ing #apital 7urno+er(

St!c. 4!( In'ent!($5 T,(n!'e( Rati! "t establishes a relationship between cost of goods and a+erage in+entory( "t determines the efficiency with which stoc/ is con+erted into sales during the accounting period under consideration( "t is calculated as: toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/ Ihere - A+erage stoc/ > :opening ? closing stoc/; =< and #ost of goods sold > Bet ales - gross profit !( #ost of goods sold > opening stoc/ ? net purchases ? direct expenses T closing stoc/ Inte(#(etati!n : "t indicates the speed with which in+entory is con+erted into sales( A higher ratio indicated that stoc/ is selling ,uic/ly( 3ow stoc/ turno+er ratio indicates that stoc/ is not selling ,uic/ly and remaining idle resulting in increased storage cost and bloc/ing of funds( Cigh turno+er is good but it must be carefully interpreted as it may be due to buying in small lots or selling ,uic/ly at low margin to reali8e cash( 7hus , a firm should ha+e neither a +ery high nor a +et low stoc/ turno+er ratio( Ill, t(ati!n 1; .rom the following information, calculate stoc/ turno+er ratio : 4pening toc/ 5s(<J,JJJ;#losing toc/ 5s($J,JJJ;Purchases 5s( &J,JJJ Iages 5s( $6,JJJ; sales 5s( PJ,JJJ ; #arriage "nwards 5s( <,JJJ ; #arriage outwards 5s( ',JJJ

24

S!l,ti!n toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/ #ost of Hoods old > 4pening toc/ ? Purchases T #losing toc/ ? Direct Expenses > 5s( <J,JJJ? 5s(&J,JJJ? 5s($&,JJJT5s($J,JJJ > 5s( O&,JJJ A+erage toc/ > :4pening toc/ ? #losing toc/; =< > :5s( <J,JJJ ? 5s( $J,JJJ; =< > 5s( $&,JJJ

toc/ 7urno+er 5atio > 5s( O&,JJJ=5s( $&,JJJ > & 7imes( Ill, t(ati!n 1> .rom the following information, calculate stoc/ turno+er ratio( 4pening stoc/ 5s &P,JJJ; Excess of #losing stoc/ opening stoc/ 5s( G,JJJ; sales 5s( ',GJ,JJJ; Hross Profit X <& & on cost S!l,ti!n #ost of goods old > ales - Hross 3oss > 5s( ',GJ,JJJ T <&=$<&:',GJ,JJJ; > 5s( &,$<,JJJ

#losing stoc/ > 4pening stoc/ ? 5s( GJJJ > 5s( &P,JJJ ? 5s G,JJJ > 5s( '<,JJJ A+erage stoc/ > :4pening stoc/ ? #losing > :&P,JJJ ?'<,JJJ;=< > 5s( 'J,JJJ toc/ ;=<

toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/ > 5s(&,$<,JJJ=5s( 'J,JJJ > P(&6 times( Ill, t(ati!n 1? A trader carries an a+erage stoc/ of 5s( PJ,JJJ( Cis stoc/ turno+er is P times( "f he sells goods at profit of <JK on sales( .ind out the profit( S!l,ti!n toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/ > #ost of Hoods old=5s( PJ,JJJ #ost of Hoods old > 5s( PJ,JJJ V P > 5s( ',GJ,JJJ ales > #ost of Hoods old V $JJ=PJ > 5s( ',GJ,JJJ V $JJ=PJ > 5s( P,JJ,JJJ Hross Profit > ales T #ost of Hoods old > 5s( P,JJ,JJJ T 5s( ',GJ,JJJ > 5s( $,'J,JJJ(

25

0e7t!( T,(n!'e( Rati! !( Recei'a7le T,(n!'e( Rati! "t establishes a relationship between net credit sales and a+erage debtors or recei+ables( "t determine the efficiency with which the debtors are con+erted into cash( "t is calculated as follows : Debtors 7urno+er ratio > Bet #redit sales= A+erage Accounts 5ecei+able Ihere A+erage Account 5ecei+able > :4pening Debtors and Bills 5ecei+able ? #losing Debtors and Bills 5ecei+able;=< Bote: Debtors should be ta/en before ma/ing any pro+ision for doubtful debts( Inte(#(etati!n : 7he ratio indicated the number of times the recei+ables are turned o+er and con+erted into cash in an accounting period( Cigher turno+er means that the amount from debtors is being collected more ,uic/ly( Uuic/ collection from debtors increases the li,uidity of the firm( 7his ratio also helps in wor/ing out the a+erage collection period as follows: 0e7t c!llecti!n #e(i!) 7his shows the a+erage period for which the credit sales remain outstanding or the a+erage credit period en*oyed by the debtors( "t indicates how ,uic/ly cash is collected from the debtors( "t is calculates as follows: Debt collection period > $< months=&< wee/s=6'& days Debtors9 turno+er ratio Ill, t(ati!n 1@ #alculate the Debtors 7urno+er 5atio and debt collection period :in months; from the following information: 7otal sales > 5s( <,JJ,JJJ #ash sales > 5s( GJ,JJJ Debtors at the beginning of the year > 5s( <J,JJJ Debtors at the end of the year > 5s( 'J,JJJ S!l,ti!n A+erage Debtors > :5s( <J,JJJ ? 5s( 'J,JJJ;=< > 5s( GJ,JJJ Bet credit sales > 7otal sales - #ash sales > 5s(<,JJ,JJJ - 5s(GJ,JJJ > 5s( $,'J,JJJ Debtors 7urno+er 5atio > Bet #redit sales=A+erage Debtors > 5s( $,'J,JJJ=5s( GJ,JJJ > G 7imes( Debt collection period > $< months=&< wee/s=6'& days Debtors9 turno+er > $<=G > 6 months

26

C(e)it!( T,(n!'e( Rati! !( Pa$a7le T,(n!'e( Rati! 7his ratio establishes a relationship between net credit purchases and a+erage creditors or payables( "t determine the efficiency with which the #reditors are paid( "t is calculated as follows : #reditors turno+er ratio > Bet credit purchase = A+erage accounts payable( Ihere A+erage accounts payable > :4pening #reditors and Bills Payable ? #losing #reditors and Bills Payable;=< Inte(#(etati!n: "t indicated the speed with which the creditors are paid( A higher ratio indicates a shorter payment period( "n this case, the enterprise needs to ha+e sufficient funds as wor/ing capital to meet its creditors( 3ower ratio means credit allowed by the supplier is for a long period or it may reflect delayed payment to suppliers which is not a +ery good policy as it may affect the reputation of the business( 7hus , an enterprise should neither ha+e a +ery high nor a +ery low ratio( 0e7t #a$ment #e(i!)*C(e)it!( c!llecti!n #e(i!) 7his shows the a+erage period for which the credit purchases remain outstanding or the a+erage credit period a+ailed of( "t indicate how ,uic/ly cash is paid to the creditors( "t is calculated as follows: Debt collection period > $< months=&< wee/s=6'& days Debtors9 turno+er Ill, t(ati!n 1E #ash purchased ratio 5s( $,JJ,JJJ; cost of goods sold 5s( 6,JJ,JJJ; opening stoc/ 5s( $,JJ,JJJ and closing stoc/ 5s( <,JJ,JJJ( #reditors turno+er ratio 6 times( #alculate the opening and closing creditors if the creditors at the end were 6 times more than the creditors at the beginning( S!l,ti!n 7otal Purchase > #ost of goods sold ? closing stoc/ - opening stoc/ > 5s( 6,JJ,JJJ ? 5s( <,JJ,JJJ T 5s( $,JJ,JJJ > 5s( G,JJ,JJJ #redit purchases > 7otal Purchase - cash purchase > 5s( G,JJ,JJJ- 5s( $,JJ,JJJ > 5s( 6,JJ,JJJ #reditor 7urno+er 5atio > Bet #redit Purchase = A+erage #reditor A+erage #reditor > 5s( 6,JJ,JJJ= 6 > 5s( $,JJ,JJJ :opening #reditor ? #losing #reditor;=< > 5s( $,JJ,JJJ opening #reditor ? #losing #reditor > 5s( <,JJ,JJJ opening #reditor ? :opening #reditor ? 6opening #reditor; > 5s( <,JJ,JJJ opening #reditor > 5s( GJ,JJJ #losing #reditor > 5s( GJ,JJJ ?:6 M 5s( GJ,JJJ;

27

> 5s( $,'J,JJJ

Fi/e) A et T,(n!'e( Rati! 7his ratio establishes a relationship between net sales and net fixed assets( "t determined the efficiency with which the firm is utili8ing its fixed assets( "t is computed follows .ixed Assets 7urno+er> Bet sales= Bet .ixed Assets Ihere Bet .ixed Assets >.ixed Assets- Depreciation Inte(#(etati!n6 7his ratio re+eals how efficiently the fixed assets are being utilised( "t indicates the firms9 ability to sales per rupee of in+estment in fixed assets( A high ratio indicates more efficient utili8ation of fixed assets( Ill, t(ati!n 1F .rom the following information, calculate .ixed Assets 7urno+er 5atio: Hross fixed asset 5s( G,JJ,JJJ; Accumulated Depreciation 5s( $,JJ,JJJ; Dar/etable securities 5s( <J,JJJ; #urrent Assets 5s( $,6J,JJJ; Discellaneous expenditure 5s, <J,JJJ; #urrent 3iabilities 5s( &J,JJJ; Hross sales 5s( $P,6J,JJJ; sale return 5s( 6J,JJJ S!l,ti!n Bet fixed asset Bet ale > Hross fixed asset- Depreciation > 5s( G,JJ,JJJ - 5s( $,JJ,JJJ > 5s(6,JJ,JJJ > Hross sale T ale 5eturns > 5s( $P,6J,JJJ - 5s( 6J,JJJ > 5s( $P,JJJ ale= net .ixed assets > 5s( $P,6J,JJJ= 5s(6,JJ,JJJ > ' times(

.ixed Asset 7urno+er 5atio> Bet

<!(.in+ Ca#ital T,(n O'e( Rati! 7his ratio establishes the relationship between net ale and wor/ing capital( "t determines the efficiency with which the wor/ing capital is being utilised. "t is calculated as followers6 wor/ing capital 7urno+er > Bet ale= wor/ing #apital

Inte(#(etati!n6 7his ratio indicates the firms9 ability to generate sales per rupee of wor/ing ( A higher ratio would normally indicate more efficient utili8ed of wor/ing capital ; through neither a +ery high nor a +ery low ratio is desirable(

28

Ill, t(ati!n &0 .rom the following information, calculate :i; .ixed Assets 7urno+er and :ii; Ior/ing #apital 7urno+er 5atios :
Preference E,uity hares #apital ',JJ,JJJ G,JJ,JJJ <,JJ,JJJ <,JJ,JJJ 6,JJ,JJJ $,JJ,JJJ $,GJ,JJJ 6J,JJJ 6J,JJJ Plant and Dachinery 3and and Building Dotor #ar .urniture toc/ Debtors Ban/ #ash ',JJ,JJJ O,JJ,JJJ <,&J,JJJ &J,JJJ $,OJ,JJJ $,<J,JJJ %J,JJJ <J,JJJ hare #apital

Heneral 5eser+e Profit and 3oss Account $&K Debentures $GK 3oan #reditors Bills Payable 4utstanding Expenses

20,00,000
ales for the year were 5s( 'J,JJ,JJJ( S!l,ti!n ales > .ixed Assets > Ior/ing capital > #urrent Assets >

&08008000

5s 'J,JJ,JJJ 5s( ',JJ,JJJ ? 5s(O,JJ,JJJ ? 5s( <,&J,JJJ ? 5s( &J,JJJ #urrent Assets T #urrent 3iabilities toc/ ? Debtors ? ban/ ? cash 5s( $(OJ,JJJ ? 5s( $(<J,JJJ ? 5s( %J,JJJ ? 5s( <J,JJJ 5s( G,JJ,JJJ

#urrent 3iabilities > #reditors ? B"P ? 4" Exp > 5s( $,GJ,JJJ ? 5s( 6J,JJJ ? 5s( 6J,JJJ > 5s( <,JJ,JJJ Ior/ing capital > 5s( G,JJ,JJJ ? 5s( <,JJ,JJJ > 5s( <,JJ,JJJ

.ixed 7urn o+er 5atio > Bet sale = .ixed assests > 5s( 'J,JJ,JJJ= 5s( $',JJ,JJJ > 6(O& times Ior/ing capital 7urno+er > Bet ale = Ior/ing #apital > 5s( 'J,JJ,JJJ= 5s( <,JJ,JJJ > 6J times( P(!"ita7ilit$ Rati! E+ery business must earn sufficient profits to sustain the operations of the business and to fund expansion and growth( Profitability ratios are calculated to analysis the earning capacity of the business which is the outcome of utilisation of resources employed in the business( 7here is a close relationship between the profit and the efficiency with which the resources employed in the business are utilised( 7here are two ma*or types of Profitability 5atios( Profitability in relation to sales Profitability in relation to in+estment.

29

.ollowing are the important Profitability ratio $( <( 6( G( &( '( O( P( G(! Hross Profit 5atio Bet profit 5atio 4perating 5atio 4perating Profit 5atio 5eturn on "n+estment :54"; or 5eturn on #apital Employed :54#E; Earnings per hare Price Earning 5atio( Di+idend Payout 5atio P(!"it Rati! !( G(! ma(+in

Hross profit ratio establishes relationship between G(! P(!"it an) net ale. It )ete(mine t-e e""icienc$ Bit- B-ic- #(!),cti!n8 purchase and selling operations are being carried on( It i calc,late) a percentage of sales( "t is computed as follows: Hross Profit 5atio > Hross Profit=Bet ales V $JJ

Inte(#(etati!n: Hross Profit is the difference between sale and cost of good sold( Hross Profit margin reflect the efficiency with which the management produces each unit of output( "t also include the margin a+ailable to co+er operating expenses and non operating expenses( A high Hross Profit margin relati+e to the industry a+erage employees that the firm is able to produced at comparati+ely at lower cost( Ill, t(ati!n &1 .ollowing information is a+ailable for the year <JJ', calculate gross profit ratio: ales Hross Profit 5eturn inwards S!l,ti!n Bet ales > ales - 5eturn inwards > 5s( $,<J,JJJ- <J,JJJ > 5s( $,JJ,JJJ 5s( $,<J,JJJ 5s( 'J,JJJ 5s <J,JJJ

Hross Profit 5atio > Hross Profit=Bet ales V $JJ > 5s('J,JJJ=5s($,JJ,JJJ V $JJ > 'JK( Ill, t(ati!n && #alculate Hross Profit ratio from the following information: 4pening stoc/ 5s( &J,JJJ; closing stoc/ 5s( O&,JJJ; cash sale 5s( $,JJ,JJJ; credits sales 5s $,OJ,JJJ; 5eturns outwards 5s( $&,JJJ; purchased 5s( <,%J,JJJ; ad+ertisement expenses 5s( 6J,JJJ; carriage inwards 5s( $J,JJJ(

30

S!l,ti!n #ost of goods sold > 4pening stoc/ ? net purchases ? direct expenses T closing stoc/ > 5s( &J,JJJ ? :5s( <,%J,JJJ- 5s( $&,JJJ; ? 5s( $J,JJJ - 5s( O&,JJJ > 5s( <,'J,JJJ 7otal ales > #ash ales ? #redits ales > 5s( $,JJ,JJJ ? 5s $,OJ,JJJ > 5s( <,OJ,JJJ

Hross profit > 7otal ales - #ost of goods sold > 5s( <,OJ,JJJ- 5s( <,'J,JJJ > 5s( $J,JJJ Hross profit 5atio > $J,JJJ M $JJ <,OJ,JJJ H :.@0; I Net P(!"it Rati! !( Net Ma(+in 7his ratio establishes the relationship between net profit and net sale ( "t indicates managements9 efficiency in manufacturing, administering and selling the product( "t calculates as a percentage of sale( it is computed as under: Bet Profit 5atio > Bet profit = Bet ales V $JJ Henerally, net profit refers to Profit after 7ax :PA7;( Inte(#(etati!n: 7his ratio measures the firms9 ability to turn each rupee sales into net profit( A firm with high net profit margin would be in an ad+antageous position to sur+i+e in the face of falling selling prices, rising cost of production or declining demand for the product( Ill, t(ati!n &: ales 5s( ',6J,JJJ; sales 5eturns 5s( 6J,JJJ; "ndirect expenses 5s( &J,JJJ; cost of goods sold 5s(<,&J,JJJ( #alculate Bet Profit 5atio( S!l,ti!n Bet ales > 7otal ales T sales 5eturns > 5s( ',6J,JJJ T 5s( 6J,JJJ > 5s(',JJ,JJJ Hross Profit > Bet ales T #ost of goods sold > 5s( ',6J,JJJ - 5s(<,&J,JJJ > 5s( 6,&J,JJJ Bet Profit > Hross Profit - "ndirect expenses > 5s( 6,&J,JJJ T 5s( &J,JJJ > 5s( 6,JJ,JJJ Bet Profit 5atio> Bet Profit Bet sale > 5s( 6,JJ,JJJ M $JJ 5s( ',JJ,JJJ > &J K

31

Ill, t(ati!n &; Hross profit ratio is <& K ( #ost of goods sold is 5s( 6,JJ,JJJ( "ndirect expenses 5s( 'J,JJJ( #alculate Bet Profit 5atio( S!l,ti!n ales > $JJ=:$JJ T <&; M 5s( 6,JJ,JJJ > 5s( G,JJ,JJJ Hross profit > ale- cost of goods sold > 5s( G,JJ,JJJ T 5s('J,JJJ > 5s( GJ,JJJ Bet Profit 5atio > Bet profit M $JJ Bet ale H 5s( GJ,JJJ= 5s( G,JJ,JJJ x $JJ > $J K O#e(atin+ Rati! 4perating 5atio establishes relationship between operating cost and net sales( "t determine the operational efficiency with the production , purchase and selling operations are being carried on( "t is calculated as follows: 4perating 5atio > :#ost of ales ? 4perating Expenses;= Bet ales V $JJ

4perating expenses include office expenses, administrati+e expenses, selling expenses and distribution expenses( Inte(#(etati!n6 4perating 5atio indicates the 4perating cost incurred is computed to express #ost of operation excluding financial charge in relation to sales( A corollary of it is W 4perating Profit 5atio9( "t helps to analyse the performance of business and throw light on the operations efficiency of the business( "t is +ery useful for inter- firm as well as intra firm comparisons( 3ower operating ratio is a +ery healthy sign( O#e(atin+ P(!"it Rati! 4perating Profit 5atio establishes the relationship between 4perating Profit and net sales( "t can be computed directly or as a residual of operating ratio( 4perating Profit 5atio > 4perating Profit= Ihere 4perating Profit > ales V $JJ

ales T #ost of 4peration

Inte(#(etati!n6 4perating 5atio determine the operational efficiency of the management ( "t helps in /nowing the amount of profit earned from regular business transactions on a sale of 5s( $JJ( "t is +ery useful for inter firm as well as intra firm comparisons( Cigher operating ratio indicates that the firm has got enough margins to meet its non operating expenses well as to create reser+e and pay di+idends(

32

Ill, t(ati!n &> #alculate the operating ratio from gi+en the following information: ales 5s( <,JJ,JJJ; ales returns rs( 6J,JJJ; operating expenses 5s( &&,JJJ; #ost of goods sold 5s( $,OJ,JJJ S!l,ti!n 4perating 5atio > #ost of goods sold ? elling Expenses M $JJ Bet ales > 5s( $,OJ,JJJ ? &&,JJJ M $JJ 5s($,OJ,JJJ :<,JJ,JJJ- 6J,JJJ; > $6<(6& K Ill, t(ati!n &? #alculate the Hross profit 5atio, Bet Profit 5atio and 4perating 5atio from the gi+en the following information: ales #ost of Hoods old elling expenses Administrati+e Expenses S!l,ti!n Hross Profit > ales T #ost of goods sold > 5s( G,JJ,JJJ T 5s( <,<J,JJJ > 5s( $,PJ,JJJ 5s( 5s( 5s( 5s( G,JJ,JJJ <,<J,JJJ <J,JJJ 'J,JJJ

Hross Profit 5atio > Hross s Profit M $JJ ales > 5s( $ ,PJ,JJJ M $JJ 5s G ,JJ,JJJ > G& K Bet Profit > Hross Profit T "ndirect expenses > 5s( $,PJ,JJJ T :5s( <J,JJJ ? 5s( 'J,JJJ; > 5s( $,JJ,JJJ Bet Profit 5atio > Bet profit = ales V $JJ > 5s(:$,JJ,JJJ= G,JJ,JJJ; M $JJ > <& K 4perating Expenses > elling Expenses ? Administrati+e Expenses > 5s( <J,JJJ ? 'J,JJJ > 5s( PJ,JJJ 4perating 5atio > #ost of goods ? 4perating Expenses M $JJ Bet a les > 5s( < ,<J,JJJ ? 5s( PJ,JJJ M $JJ 5sG, JJ,JJJ > O& K

33

Ret,(n !n Ca#ital Em#l!$e) !( Ret,(n !n In'e tment 4ROCE !( ROI5 7his ratio establishes the relationship between net profit before "nterest and 7ax and capital employees( "t measures how efficiently the long-term funds supplied by the long-

term creditors and shareholders are being used. It is expressed as a percentage. Thus, it is computed as follows:
5eturn on "n+estment > Profit before "nterest and 7ax=#apital Employed V $JJ Ihere capital employed > Dept ? e,uity O( #apital Employed > .ixed Assets ? Ior/ing #apital Inte(#(etati!n 6 "t explains the o+erall utilisation of fund by a business( "t re+eals the efficiency of the business in utilisation of funds entrusted to it by, share holders , debentureholders and long-term liabilities( .or inter-firm comparison, it is considered good measure of profitability( Ill, t(ati!n &@

Liabilities E,uity hare #apital :$,JJ,JJJ e,uity share of 5s( $J each; 5eser+es $J K Debentures #urrent 3iability Profit for the year

Rs. $J,JJ,JJJ
<,&J,JJJ &,JJ,JJJ O,&J,JJJ <,&J,JJJ <O,&J,JJJ

Assets .ixed assets :Bet;


#urrent Assets Preliminary Expenses

Rs. $G,JJ,JJJ
$<,&J,JJJ $,JJ,JJJ

<O,&J,JJJ

Calculate Return on Capital employed Solution 5eturn on "n+estment > Profit before "nterest and 7ax=#apital Employed V $JJ
Profit before "nterest and 7ax: Profit for the year Add interest :$J K of &,JJ,JJJ; Profit before interest and tax > 5s( <,&J,JJJ > 5s( &J,JJJ > 6,JJ,JJJ

Capital Employes = NetAssets + working Capital = Rs. 14,00,000 + Rs( 12,50,000 Rs. 7,50,000) = Rs. 19,00,000 Earnings Per Share 7his ratio measures the earning a+ailable to an e,uity shareholders per share( "tb indicates the profitability of the firm on a per share basis( 7he ratio is calculated as Earning Per hare > Profit a+ailable for e,uity shareholders= Bo( of E,uity hares
"n this context, earnings refer to profit a+ailable for e,uity shareholders which

34

is wor/ed out as Profit after 7ax T Di+idend on Preference

hares(

Inte(#(etati!n : 7his ratio is +ery important from e,uity shareholders point of +iew and so also for the share price in the stoc/ mar/et( 7his also helps comparison with other firm9s to ascertain its reasonableness and capacity to pay di+idend( But increase in Earning per share does not ha+e always indicate increase in profitability because sometimes , when bonus shares are issued , earning per share would decrease ( "n these cases, the earning per share is misleading as the actual earning ha+e not decreased( Ill, t(ati!n &E #alculate earning per share from the following information: &J,JJJ e,uity shares of 5s( $J each $J K Preference share capital % K Debentures Bet Profit after tax 5s &,JJ,JJJ 5s $,JJ,JJJ 5s( <,JJ,JJJ 5s( <,JJ,JJJ

Solution
Earning per share > Profit a+ailable for e,uity shareholders= Bo( of E,uity > 5s: $,$J,JJJ T $J,JJJ; = &J,JJJ > 5s( < per share hare

Price Earning Ratio


7his ratio establishes a relationship between mar/et price per share and earning per share( 7he ob*ecti+e of this ratio is to find out the expectations of the shareholders( 7his ratio is calculated as T P=E 5atio > Dar/et price of a hare=Earnings per hare

Inte(#(etati!n : "t indicates the numbers of times of EP the share is being ,uoted in the mar/et( "t reflects in+estors9 expectation about the growth in the firms9 earning and reasonableness of the mar/et price of its shares( P=E ratios +ary from industry to industry and company to company in the same industry depending upon in+estors perception of their future(

Illustration 29
Earning per share 5s( $&J ( mar/et price per share 5s( 6JJJ( #alculate price Earning ratio( S!l,ti!n6 P=E 5atio > Dar/et price of a hare=Earnings per H 5s( 6,JJJ= 5s( $&J > 5s( <J hare

Illustration 30
#alculated price earning ratio from the following information: E,uity share capital: 5s( $J per hare; 5eser+es :including current year9s profit; $J K Preference hare #apital % K Debentures Profit before interest 5s 5s 5s 5s 5s <,&J,JJJ $,JJ,JJJ <,&J,JJJ <,JJ,JJJ 6,6J,JJJ

35

Dar/et Price per 7ax rate

hare

5s &J( &J K

S!l,ti!n P=E 5atio > Dar/et price of a

hare=Earnings per

hare hare

Earning per share > Profit a+ailable for e,uity shareholders= Bo( of E,uity Profit a+ailable for e,uity shareholders: Profit before interest > 3ess interest on debentures > 5s( 6,6J,JJJ 5s $P,JJJ 5s 6,$<,JJJ

3ess tax : &J K of 5s( 6,$<,JJJ; > 5s( $(&',JJJ 3ess preference di+idend > 5s( <&,JJJ Earning after 7ax > 5s $,6$,JJJ Earning per share > Earning after tax = Bo(of e,uity shares > 5s $,6$,JJJ= <&,JJJ > 5s( &(<G P=E 5atio > Dar/et price share = Earning per share > 5s( &J= 5s( &(<G > 5s( %(&G

0i'i)en) Pa$!,t Rati! 7his refers to the proportion of earning that are distributed against the shareholders( "t is computed as T Di+idend Payout 5atio > Di+idend Per hare Earnings Per hare Inte(#(etati!n 6 "t expresses the relationship between what is a+ailable per share and what is actually paid in the form of di+idends out of a+ailable earnings( 7his ratio reflects company9s9 di+idend policy( A higher payout ratio may mean lower retention or a deteriorating li,uidity position(

Illustration 31 #alculate di+idend payout ratio(, "f di+idend paid per share 5s( <('< per share from the information of "llustration 6J
S!l,ti!n6 .rom the abo+e "llustration , earning per share> 5s( &(<G Di+idend paid per share > 5s( <('< per o( Di+idend payout 5atio> Di+idend per share Earning per ratio > 5s( <('< 5s( &(<G > 5s( 4(&J hare

36

1.7 Meaning of Cash Flow Statement Ca"1 .lo2 i" 3a#e u% o. t2o 2or#" i.e. Ca"1 an# *lo24 21erea" Ca"1 3ean" ca"1 balance in 1an# inclu#in( ca"1 at bank balance4 an# *lo2 3ean" c1an(e" 521ic1 3ay be 6 or 7 increa"e or #ecrea"e8 in t1e ca"1 3o'e3ent" o. t1e bu"ine"". Ca"1 *lo2 )tate3ent #eal" 2it1 only "uc1 ite3"4 21ic1 are connecte# 2it1 ca"1 i.e.4 ite3" relatin( to in.lo2 an# out.lo2 o. ca"1. &n ot1er 2or#"4 it i" %re%are# to "tu#y t1e c1an(e" in ca"14 or to "1o2 i3%act o. 'ariou" tran"action" on t1e ca"1. &n "1ort4 it i" a "tate3ent4 21ic1 i" %re%are# to "1o2 t1e .lo2 o. ca"1 in t1e bu"ine"" #urin( a %articular %erio#. &t t1u"4 tell" about t1e c1an(e" in ca"1 %o"ition o. a bu"ine"". 1e c1an(e" 3ay be relate# eit1er 2it1 t1e ca"1 recei%t" or ca"1 %ay3ent" or #i"bur"e3ent" o. ca"1. 1u"4 Ca"1 *lo2 )tate3ent i" a "u33ary o. ca"1 recei%t" an# %ay3ent" 21ereby reconcilin( t1e o%enin( ca"1 balance 2it1 t1e clo"in( ca"1 inclu#in( bank balance" in #one. &t al"o e+%lain" t1e rea"on" .or t1e c1an(e" in t1e ca"1 %o"ition o. t1e bu"ine"" on account o. t1e Decrea"e in t1e ca"1 %o"ition i" ter3e# a" out.lo2 o. ca"1 an# increa"e i" ter3e# in .lo2. Ca"1 .lo2 "tate3ent al"o tell" about 'ariou" "ource" in ca"1 "uc1 a" ca"1 .ro3 o%eration"4 "ale o. current an# .i+e# !""et"4 i""ue o. "1are"9#ebenture"4 al"o ter3e# a" in.lo2 o. ca"1 21erea" lo"" .ro3 o%eration"4 %urc1a"e o. current an# .i+e# a""et"4 re#e3%tion o. %re.erence "1are"9#ebenture" an# ot1er lon( ter3 loan" etc are al"o ter3e# a" out.lo2 o. ca"1. 1e Ca"1 *lo2 )tate3ent i" %re%are# becau"e o. nu3ber o. 3erit"4 21ic1 are o..ere# by it. )uc1 3erit" are al"o ter3e# a" it" ob:ecti'e". 1e i3%ortant objectives are a" .ollo2" ; 1. To Help the Management in Ma ing F!t!"e Financial #olicies $ Ca"1 *lo2 "tate3ent i" 'ery 1el%.ul to t1e 3ana(e3ent. 1e 3ana(e3ent can 3ake it" .uture .inancial %olicie" an# i" in a %o"ition to kno2 about "ur%lu" or #e.icit o. ca"1. !ccor#in(ly4 3ana(e3ent can t1ink o. in'e"tin( "ur%lu" .un#"4 i. nay4 in eit1er "1ort ter3 or lon( ter3 in'e"t3ent". 1u"4 ca"1 i" t1e center o. all .inancial #eci"ion". Helpf!l in %ecla"ing %ivi&en&s etc. $ Ca"1 *lo2 )tate3ent i" 'ery 1el%.ul in #eclarin( #i'i#en#" etc. 1i" "tate3ent can "u%%ly in.or3ation re(ar#in( to un#er"tan# t1e liqui#ity. &t 3u"t be %ai# 2it1in 42 #ay". Cash Flow Statement is %iffe"ent than Cash '!&get () Ca"1 bu#(et i" %re%are# 2it1 t1e 1el% o. in.lo2 an# out.lo2 o. ca"1. &. t1ere i" any 'ariation4 t1e "a3e can be correcte#. Helpf!l in &evising the cash "e*!i"ement () Ca"1 .lo2 "tate3ent i" 1el%.ul in #e'i"in( t1e ca"1 require3ent .or re%ay3ent o. liabilitie" an# re%lace3ent o. .i+e# a""et". Helpf!l in fin&ing "easons fo" the &iffe"ence ) Ca"1 *lo2 )tate3ent i" al"o 1el%.ul in .in#in( rea"on" .or t1e #i..erence bet2een %ro.it"9lo""e" earne# #urin( t1e %erio# an# t1e a'ailability o. ca"1 21et1er ca"1 i" in "ur%lu" or #e.icit. +s pe" +S),, Cash Flow Statement () Ca"1 *lo2 )tate3ent i" %re%are# 2it1 a 'ie2 to 1i(1li(1t t1e ca"1 (enerate# .ro3 recurrin( acti'itie" or ca"1 lo"" i. any 21ere a" net %ro.it i" calculate# a.ter 3akin( a#:u"t3ent" on account o. non ca"1 ite3" in t1e %ro.it an# lo"" account.

2.

3. 4. 5.

6.

37

7.

Helpf!l in p"e&icting sic ness of the b!siness() Ca"1 .lo2 i" 1el%.ul in %re#ictin( "ickne"" o. t1e bu"ine"" 2it1 t1e 1el% o. #i..erent ratio". -S.S /F C+SH F0/1 ST+T.M.2T Sho"t)Te"m #lanning ( 1e Ca"1 *lo2 )tate3ent (i'e" in.or3ation re(ar#in( "ource" an# a%%lication o. ca"1 an# ca"1 equi'alent" .or a "%eci.ic %erio# "o t1at it beco3e" ea"ier to %lan in'e"t3ent"4 o%eratin( an# .inancin( nee#" o. an enter%ri"e. The Cash Flow helps !n&e"stan& 0i*!i&it3 an& Solvenc3 ( )ol'ency i" t1e ability o. t1e bu"ine"" to 3eet it" current liabilitie". Quarterly or 3ont1ly Ca"1 *lo2 )tate3ent" 1el% a"certain liqui#ity in a better 2ay. *inancial in"titution"4 like bank" %re.er t1e Ca"1 *lo2 )tate3ent to analy"e liqui#ity.

1.7.1 5i8

5ii8

5iii8 .fficient Cash Management ( 1e Ca"1 *lo2 )tate3ent %ro'i#e" in.or3ation relatin( to "ur%lu" or #e.icit o. ca"1. !n enter%ri"e4 t1ere.ore4 can #eci#e about t1e "1ort<ter3 in'e"t3ent" o. t1e "ur%lu" an# can arran(e t1e "1ort<ter3 cre#it in ca"e o. #e.icit. 5i'8 Compa"ative St!&3 ( ! co3%ari"on o. t1e Ca"1 *lo2" .or t1e %re'iou" year 2it1 t1e bu#(ete# .i(ure" o. t1e "a3e year 2ill in#icate a" to 21at e+tent t1e ca"1 re"ource" o. t1e bu"ine"" 2ere (enerate# an# a%%lie# accor#in( to t1e %lan. &t i"4 t1ere.ore4 u"e.ul .or t1e 3ana(e3ent to %re%are ca"1 bu#(et". 5'8 4easons fo" Cash #osition ( 1e Ca"1 *lo2 )tate3ent e+%lain" t1e rea"on" .or lo2er an# 1i(1er ca"1 balance" 2it1 t1e enter%ri"e. )o3eti3e"4 a lo2er ca"1 balance i" .oun# in "%ite o. 1i(1er %ro.it" or a 1i(1er ca"1 balance i" .oun# in "%ite o. lo2er %ro.it". Rea"on" .or "uc1 "ituation" can be analy"e# 2it1 t1e 1el% o. t1e Ca"1 *lo2 )tate3ent. )o3eti3e" in "%ite o. 1i(1 %ro.it" (one= !n"2er" to "uc1 que"tion" can be .oun# .ro3 t1e Ca"1 *lo2 )tate3ent.

5'i8 Test fo" the Management %ecisions ( &t i" a (eneral rule t1at .i+e# a""et" are %urc1a"e# .ro3 t1e .un#" rai"e# .ro3 lon(<ter3 "ource"4 an# t1e be"t 2ay to re%ay t1e lon(<ter3 #ebt i" out o. %ro.it". 1e Ca"1 *lo2 )tate3ent "1o2" clearly 21et1er t1e ca"1 in.lo2" .ro3 o%eration" 1a'e been u"e# .or t1e %urc1a"e o. .i+e# a""et" or 21et1er t1e"e a""et" 1a'e been %urc1a"e# .ro3 ca"1 in.lo2" .ro3 lon(<ter3 #ebt". )i3ilarly4 it al"o e+%lain" 21et1er t1e #ebenture" 1a'e been re#ee3e# out o. %ro.it" or not. 1u"4 t1e Ca"1 *lo2 )tate3ent .an be u"e# to te"t t1e cre#ibility o. t1e 3ana(e3ent #eci"ion". 1.7.2 05M5T+T5/2S /F C+SH ST+T.M.2T

1ou(1 t1e Ca"1 *lo2 )tate3ent i" a 'ery u"e.ul tool o. .inancial analy"i"4 it 1a" it" li3itation" 21ic1 3u"t be ke%t in 3in# at t1e ti3e o. it" u"e. 1e"e li3itation" are ; 6i7 2on)cash T"ansaction a"e igno"e& ( 1e Ca"1 *lo2 )tate3ent "1o2" only in.lo2" an# out.lo2" o. ca"1. &t #oe" not "1o2 non<ca"1 tran"action" like t1e %urc1a"e o. buil#in(" by t1e i""ue o. "1are" or #ebenture" to t1e 'en#or" or i""ue o. bonu" "1are". 2ot a s!bstit!te fo" an 5ncome Statement ( !n inco3e "tate3ent "1o2" bot1 ca"1 an# non<ca"1 ite3". 1e inco3e "tate3ent "1o2" t1e net inco3e o. t1e .ir3 21erea" t1e Ca"1 *lo2 )tate3ent "1o2" only t1e net ca"1 in.lo2" or out.lo2" 21ic1 #o not re%re"ent t1e net %ro.it" or lo""e" o. t1e enter%ri"e. 38

6ii7

6iii7 Histo"ical in 2at!"e ( &t rearran(e" t1e e+i"tin( in.or3ation a'ailable in t1e inco3e "tate3ent an# t1e balance "1eet. &t 2ill beco3e 3ore u"e.ul i. it i" acco3%anie# by t1e %ro:ecte# Ca"1 *lo2 )tate3ent. 6iv7 5gno"ance () &t i(nore" ba"ic accountin( conce%t4 i.e.4 accrual conce%t. 1.7., 5M#/4T+2T %.F525T5/2S +S #.4 +CC/-2T528 ST+2%+4%), 64.95S.%7 6i7 6ii7 Cash co3%ri"e" ca"1 on 1an# an# #e3an# #e%o"it" 2it1 bank". Cash .*!ivalents are "1ort<ter34 1i(1ly liqui# in'e"t3ent" t1at are rea#ily con'ertible into t1e kno2n a3ount o. ca"1 an# 21ic1 are "ub:ect to an in"i(ni.icant ri"k o. c1an(e in 'alue. !n in'e"t3ent nor3ally quali.ie" a" ca"1 equi'alent only 21en it 1a" a "1ort 3aturity o.4 "ay4 t1ree 3ont1" or le"" .ro3 t1e #ate o. acqui"ition >+a3%le" o. ca"1 equi'alent" are ; 5a8 trea"ury bill"45b8 co33ercial %a%er4 5c8 3oney 3arket .un#" an# 5#8 &n'e"t3ent" in %re.erence "1are" an# re#ee3able 2it1in t1ree 3ont1" can al"o be taken a" ca"1 equi'alent" i. t1ere i" no ri"k o. t1e .ailure o. t1e co3%any.

6iii7 Cash Flows are in.lo2" an# out.lo2" o. ca"1 an# ca"1 equi'alent". !)<3 require" a Ca"1 *lo2 )tate3ent to be %re%are# an# %re"ente# in a 3anner t1at it "1o2" ca"1 .lo2" .ro3 bu"ine"" tran"action" #urin( a %erio# cla""i.yin( t1e3 into ; 5i8 0%eratin( !cti'itie"; 5ii8 &n'e"tin( !cti'itie" ; an# 5iii8 *inancin( !cti'itie". 6iv7 /pe"ating +ctivities ( 0%eratin( acti'itie" are t1e %rinci%al re'enue<%ro#ucin( acti'itie" o. t1e enter%ri"e an# ot1er acti'itie" t1at are not in'e"tin( or .inancin( acti'itie". 6v7 5nvesting +ctivities ( &n'e"tin( acti'itie" are t1e acqui"ition an# #i"%o"al o. lon(<ter3 a""et" an# ot1er in'e"t3ent" not inclu#e# in ca"1 equi'alent".

6vi7 Financing +ctivities ( *inancin( acti'itie" are t1e acti'itie" t1at re"ult in c1an(e in t1e "i?e an# co3%o"ition o. t1e o2ner"@ ca%ital 5inclu#in( %re.erence8 "1are ca%ital in t1e ca"e o. a co3%any8 an# borro2in( o. t1e enter%ri"e. 1.: Classification of Cash Flows ( !" #i"cu""e# earlier4 t1e Ca"14 *lo2 )tate3ent "1o2" t1e ca"1 in.lo2" 5"ource"8 an# ca"1 out.lo2" 5u"e" or a%%lication"8 o. ca"1 an# ca"1 equi'alent" #urin( an accountin( %erio#. Aence4 it i" e""ential to kno2 about t1e 'ariou" ite3" o. so!"ces 6o" inflows of cash7 an& !ses 6o!tflows of cash7 of cash. !" %er the +cco!nting Stan&a"&), 6+S),8 t1e c1an(e" re"ultin( in in.lo2" an# out.lo2" ca"1 an# ca"1 equi'alent" ari"e on account o. t1ree ty%e" o. acti'itie"4 i.e.4 o%eratin(4 in'e"tin( an# .inancin( a" #i"cu""e# belo2 ; 1.:.1 6i7 /pe"ating +ctivities (

0%eratin( !cti'itie" are t1e %rinci%al re'enue %ro#ucin( acti'itie" o. t1e enter%ri"e an# ot1er acti'itie" t1at are not relate# to in'e"tin( or .inancin( acti'itie". 1e e+a3%le" are ; 5a8 Ca"1 recei%t" .ro3 t1e "ale o. (oo#" an# ren#erin( o. "er'ice". 5b8 Ca"1 recei%t" .ro3 royaltie"4 .ee"4 co33i""ion an# ot1er re'enue. 5c8 Ca"1 %ay3ent" to "u%%lier" o. (oo#" an# "er'ice". 5#8 Ca"1 %ay3ent" to an# on be1al. o. e3%loyee" .or 2a(e"4 etc. 5e8 Ca"1 recei%t" an# %ay3ent" o. an in"urance enter%ri"e .or %re3iu3" an# clai3"4 annuitie" an# ot1er %olicy bene.it".

39

5.8 5(8

Ca"1 %ay3ent" or re.un#" o. inco3e ta+e" unle"" t1ey can be "%eci.ically i#enti.ie# 2it1 .inancin( an# in'e"tin( acti'itie". Ca"1 recei%t" an# %ay3ent" relatin( to .uture contract"4 .or2ar# contract"4 o%tion contract"4 an# "2a% contract"4 21en t1e contract" are 1el# .or #ealin( or tra#in( %ur%o"e".

1e %rinci%al re'enue %ro#ucin( acti'ity o. an enter%ri"e i" t1e 3ain acti'ity 5bu"ine""8 carrie# on by it to earn %ro.it". >+a3%le" o. a .inancial enter%ri"e; (i'in( loan" an# #ealin( in "ecuritie" i" t1e %rinci%al re'enue %ro#ucin( acti'ity. )i3ilarly4 .or an in"urance co3%any acce%tin( %re3iu3 an# %ay3ent" o. clai3" i" t1e %rinci%al re'enue %ro#ucin( acti'ity. 1e net e..ect o. t1e o%eratin( acti'itie" on t1e .lo2 o. ca"1 i" re%orte# a" ca"1 .lo2 .ro3 or ca"1 u"e# in 0%eratin( !cti'itie" in t1e Ca"1 *lo2 )tate3ent. 1.:.2 6ii7 5nvesting +ctivities

&n'e"tin( acti'itie" are t1e acqui"ition an# #i"%o"al o. t1e lon(<ter3 a""et" an# ot1er in'e"t3ent"4 not inclu#e# in ca"1 equi'alent"4 1e"e acti'itie" inclu#e tran"action" in'ol'in( %urc1a"e an# "ale o. t1e lon(<ter3 %ro#ucti'e a""et" like 3ac1inery4 lan# an# buil#in("4 etc.4 21ic1 are not 1el# .or re"ale. 1e ca"1 .lo2 .ro3 in'e"tin( acti'itie" are; 5a8 5b8 5c8 Ca"1 %ay3ent" to acquire .i+e# a""et" 5inclu#in( intan(ible"8 an# al"o %ay3ent" .or ca%itali?e# re"earc1 an# #e'elo%3ent co"t" an# "el. con"tructe# .i+e# a""et". Ca"1 recei%t" .ro3 t1e #i"%o"al o. .i+e# a""et" 5inclu#in( intan(ible"8. Ca"1 %ay3ent" to %urc1a"e 5acquire8 "1are"4 2arrant"4 or #ebt in"tru3ent" o. ot1er enter%ri"e" an# intere"t" in :oint 'enture" 5ot1er t1an %ay3ent" .or t1o"e in"tru3ent" con"i#ere# to be ca"1 equi'alent" an# t1o"e 1el# .or tra#in( or #ealin( %ur%o"e"8. Ca"1 recei%t" .ro3 "ale 5#i"%o"al8 o. "1are"4 2arrant"4 or #ebt in"tru3ent" o. ot1er enter%ri"e" an# intere"t in :oint 'enture" 5ot1er t1an recei%t" .ro3 t1o"e in"tru3ent" con"i#ere# to be ca"1 equi'alent" an# t1o"e 1el# .or #ealin( or tra#in( %ur%o"e"8. Ca"1 recei%t" .ro3 "ale 5#i"%o"al8 o. "1are"4 2arrant"4 or #ebt in"tru3ent" o. ot1er enter%ri"e" an# intere"t in :oint 'enture" 5ot1er t1an recei%t" .ro3 t1o"e in"tru3ent" con"i#ere# to be ca"1 equi'alent" an# t1o"e 1el# .or #ealin( or tra#in( %ur%o"e"8. Ca"1 recei%t" .ro3 re%ay3ent" o. a#'ance" an# loan" 3a#e to t1ir# %artie" 5ot1er t1an a#'ance" an# loan" o. .inancial enter%ri"e"8. Ca"1 recei%t" relatin( to .uture contract"4 .or2ar# contract"4 o%tion contract" an# "2a% contract" e+ce%t 21en t1e contract" are 1el# .or tra#in( %ur%o"e"4 or t1e recei%t" are cla""i.ie# a" .inancin( acti'itie". Ca"1 %ay3ent" relatin( to .uture contract"4 .or2ar# contract"4 o%tion contract" an# "2a% contract" e+ce%t 21en t1e contract" are 1el# .or tra#in( %ur%o"e"4 or t1e %ay3ent" are cla""i.ie# a" .inancin( acti'itie".

5#8

5e8

5.8 5(8

518

40

1.:., 6iii7 Financing +ctivities *inancin( acti'itie" are t1e acti'itie" 21ic1 re"ult in c1an(e" in t1e "i?e an# co3%o"ition o. t1e o2ner@" ca%ital 5inclu#in( %re.erence "1are ca%ital in t1e ca"e o. a co3%any8 an# borro2in(" o. t1e enter%ri"e .ro3 ot1er "ource". 1e ca"1 .lo2 .ro3 .inancin( acti'itie" are ; 5a8 Ca"1 %rocee#" .ro3 t1e i""ue o. "1are" or ot1er "i3ilar in"tru3ent". 5b8 Ca"1 %rocee#" .ro3 t1e i""ue o. #ebenture"4 loan note"4 bon#" an# ot1er "1ort ter3 borro2in(". 5c8 Buy<back o. equity "1are". 5#8 Ca"1 re%ay3ent" o. t1e a3ount" borro2e# inclu#in( re#e3%tion o. #ebenture". 5e8 $ay3ent" o. #i'i#en#" bot1 equity an# %re.erence #i'i#en#". 5.8 $ay3ent" .or intere"t on #ebenture" an# loan". 5ll!st"ation 1. )tate a tran"action a %art o. 21ic1 i" cla""i.ie# a" an &n'e"tin( !cti'ity an# anot1er %art i" cla""i.ie# a" a *inancin( !cti'ity. Sol!tion ( $ay3ent o. in"tall3ent" o. an a""et %urc1a"e# on Aire<$urc1a"e# on Aire<$urc1a"e ba"i". 1e in"tall3ent 1a" t2o co3%onent"4 i.e.4 %rinci%al an# intere"t. $rinci%al i" cla""i.ie# a" an &n'e"tin( !cti'ity an# intere"t a" a *inancin( !cti'ity. Classification of '!siness +ctivities as pe" +S),, showing the inflow an& /!tflow of Cash /pe"ating +ctivities Cash 5nflow 5i8 5ii8 Ca"1 )ale" 5i8 Ca"1 recei'e# .ro3 #ebtor" Cash /!tflow Ca"1 $urc1a"e" 5ii8 $ay3ent to Cre#itor" 5iii8 Ca"1 0%eratin( >+%en"e" 5i'8$ay3ent o. ,a(e" 5'8 &nco3e a+ 5n the case of Financial Companies 5'8 Ca"1 recei'e# .or intere"t an# #i'i#en#" 5'i8 )ale o. "ecuritie" 5n the case of Financial Companies 5'i8Ca"1 %ai# .or intere"t 5'ii8 $urc1a"e o. )ecuritie"

5iii8 Ca"1 recei'e# .ro3 Co33i""ion an# *ee" 5i'8 Royalty

41

5nvesting +ctivities Cash 5nflow 5i8 5ii8 5iii8 5i'8 )ale" o. .i+e# !""et" )ale o. &n'e"t3ent" &ntere"t Recei'e# Di'i#en#" Recei'e# Cash /!tflow 5i8 $urc1a"e o. *i+e# !""et" 5ii8 $urc1a"e o. &n'e"t3ent"

Financing +ctivities Cash 5nflow 5i8 &""ue o. )1are" in Ca"1 5ii8 &""ue o. Debenture" in Ca"1 5iii8 $rocee#" .ro3 Con(<ter3 Borro2in(" Cash /!tflow 5i8 $ay3ent o. Coan" 5ii8 Re#e3%tion o. $re.erence )1are" 5iii8 Buy<back o. >quity )1are" 5i'8$ay3ent o. Di'i#en# 5'8 $ay3ent o. &ntere"t 5'i8Re%ay3ent o. *inance9Cea"e Ciability

1h3 is it impo"tant to &isclose the cash flows f"om each activit3 sepa"atel3; ! "tu#ent 2ill a%%reciate t1e i3%ortance o. "e%arate #i"clo"ure un#er eac1 acti'ity .ro3 t1e .ollo2in( ; 0%eratin( !cti'itie" 1e a3ount o. t1e ca"1 .lo2 ari"in( .ro3 o%eratin( acti'itie" i" a key in#icator o. t1e e+tent to 21ic1 t1e o%eration" o. t1e enter%ri"e 1a'e (enerate# ca"14 i.e.4 21et1er t1e ca"1 (eneration i" a#equate to 3aintain o%eratin( ca%ability o. t1e enter%ri"e4 %ay #i'i#en#"4 re%ay loan"4 an# 3ake ne2 in'e"t3ent". &t i" al"o 1el%.ul in .oreca"tin( .uture ca"1 .lo2" .ro3 o%eration". &n'e"tin( !cti'itie" 1e a3ount o. t1e ca"1 .lo2 ari"in( .ro3 in'e"tin( acti'itie" re%re"ent" t1e e+tent to 21ic1 e+%en#iture 1a" been incurre# to (enerate .uture inco3e an# ca"1 .lo2". *inancin( !cti'itie" 1e a3ount o. t1e ca"1 .lo2 ari"in( .ro3 .inancin( acti'itie" i" u"e.ul in a""e""in( clai3" on .uture ca"1 .lo2" by %ro'i#er" o. .un#" to t1e enter%ri"e.

42

5ll!st"ation 2. &#enti.y t1e tran"action" a" belon(in( to 5i8 0%eratin(4 5ii8 &n'e"tin(4 5iii8 *inancin( !cti'itie"4 an# 5i'8 Ca"1 >qui'alent". 1. Ca"1 )ale"; 2. &""ue o. )1are Ca%ital; 3. &""ue o. Debenture"; 4. $urc1a"e o. Dac1ine"; 5. )ale o. Dac1ine"; 6. Ca"1 recei'e# .ro3 Debtor"; 7. Co33i""ion an# Royalty recei'e#; 8. $urc1a"e o. &n'e"t3ent"; 9. Re#e3%tion o. Debenture" an# $re.erence )1are"; 10. Re%ay3ent o. a Con(<ter3 Coan; 11. &ntere"t %ai# on Debenture" or lon(<ter3 loan" by 5a8 *inance co3%any4 an# 5b8 /on<.inance co3%any; 12. 0..ice >+%en"e"; 13. Di'i#en# recei'e# on )1are" by 5a8 *inance co3%any4 an# 5b8 /on<.inance co3%any; 14. &ntere"t recei'e# on &n'e"t3ent" by 5a8 *inance co3%any4 an# 5b8 /on<.inance co3%any; 15. Danu.acturin( >+%en"e"; 16. Rent recei'e# by a co3%any 21o"e 3ain bu"ine"" i" 5a8 real e"tate bu"ine""4 5b8 3anu.acturin(; 17. )ellin( an# Di"tribution >+%en"e"; 18. )ale o. &n'e"t3ent by 5a8 *inance co3%any4 an# 5b8 /on< .inance co3%any; 19. $urc1a"e o. -oo#2ill; 20. Di'i#en#" %ai#; 21. Ca"1 $urc1a"e"; 22. Ca"1 %ai# to Cre#itor"; 23. )ale o. $atent"; 24. &nco3e a+ re.un# recei'e#; 26. Bank Balance; 27. Ca"1 Cre#it; 28. )1ort<ter3 #e%o"it" in Bank"; 29. &n'e"t3ent in Darketable )ecuritie" 5)1ort< ter38; 30. Rent %ai# an# 31. Buy<back o. >quity "1are". Sol!tion ( 0%eratin( !cti'itie" ; 1464 74 11 5a8 124 13 5a84 145a84 154 165a84 174 185a84 214 224 244 25430. &n'e"tin( !cti'itie" ; 44 54 84 135b84 145b84 165b84 204 31. *inancial !cti'itie"; 24 34 94 104 11b4 18b4 19423. Ca"1 >qui'alent" ; 264 274 284 29. 5ll!st"ation , *ro3 t1e .ollo2in( #etail"4 calculate ca"1 .ro3 o%eration" ; R". )ale" $urc1a"e" ,a(e" 24504000 14254000 304000

!""u3e t1at all t1e abo'e tran"action" 2ere in ca"1. Sol!tion ( Ca"1 .ro3 o%eration" E Ca"1 in.lo2 7 Ca"1 out.lo2 E )ale" 7 5$urc1a"e" 6 2a(e"8 E R". 24504000 7 5R". 142540006 R". 3040008 E R". 24504000 7 R". 14554000 E R". 954000

43

5ll!st"ation < 5Calculation o. Ca"1 &n.lo2 .ro3 Debtor"8. Calculate t1e Ca"1 &n.lo2 .ro3 Debtor" .ro3 t1e .ollo2in( in.or3ation ; $articular" 5a8 otal )ale" Ca"1 )ale" 0%enin( Debtor" Clo"in( Debtor" )ale" Return" R". 44004000 14204000 404000 604000 104000 24004000 154000 54000 144000 254000 104000 104000 254000 124000 154000 24404000 20F o. Cre#it )ale" 84000 104000 124000

5b8

Cre#it )ale" Ba# Debt" Di"count !llo2e# 0%enin( Debtor" Clo"in( Debtor" )ale" Return" 5c 8 0%enin( Debtor" Clo"in( Debtor" 0%enin( Bill" Recei'able" Clo"in( Bill" Recei'able" otal )ale" Ca"1 )ale" Di"count !llo2e# Ba# Debt" )ale" Return"

Sol!tion 5!8 C!)A &/*C0, *R0D D>B 0R) #a"tic!la"s 0%enin( Debtor" !## ; Cre#it )ale" 5 otal )ale" 7 Ca"1 )ale"8 5R". 44004000 7 R". 142040008 Ce"" ; )ale" Return" Clo"in( Balance o. Debtor" Cash 5nflow f"om %ebto"s 104000 604000 404000 24804000 34204000 704000 24504000 4s.

Alternative Solution : Cash Flow f"om %ebto"s = a" balancin( .i(ure by %re%arin( t1e otal Debtor" !ccount.

44

Total %ebto"s +cco!nt


Dr. #a"tic!la"s 4s. #a"tic!la"s Cr. 4s.

o o

Balance b9# Cre#it )ale" ; otal )ale" Ce"";

404000 By )ale" Return" By Ca"1 &n.lo2 .ro3 Debtor" 44004000 5Balancin( *i(ure8 14204000 24804000 By Balance c9# 34204000

104000 24504000 54000 604000 34204000

6b7

#a"tic!la"s 0%enin( Balance Debtor" !## ; Cre#it )ale" Ce"" ; Ba# Debt" Di"count !llo2e# )ale" Return" Clo"in( Balance o. Debtor" Cash 5nflow f"om %ebto"s Alternative Solution : Total %ebto"s +cco!nt
Dr. #a"tic!la"s o o Balance b9# Cre#it )ale" 4s. #a"tic!la"s 144000 By )ale" Return" 24004000 By Ba# Debt" By Di"count !llo2e# 24804000 By Ca"1 &n.lo2 .ro3 Debtor" 5Balancin( *i(ure8 By Balance c9# 24144000

4s. 144000
24004000

24144000 154000 54000 104000 254000

554000 14594000

Cr. 4s. 104000 154000 54000 14594000 254000 24144000

Total %ebto"s +cco!nt


5c 8 Dr.
Cr.

#a"tic!la"s o o Balance b9# Cre#it )ale"

4s.

#a"tic!la"s

4s. 34000 84000 104000 124000 14524000 254000 24104000

104000 By Bill Recei'able 24004000 By Di"count !llo2e# By Ba# Debt" By )ale" Return" By Ca"1 5&n.lo2 .ro3 Debtor"8 5Balancin( *i(ure8 By Balance c9# 24104000

45

5ll!st"ation > 5Calculation o. Ca"1 0ut.lo2 to Cre#itor"8. Calculate t1e Ca"1 0ut.lo2 to Cre#itor" .ro3 t1e .ollo2in( in.or3ation ; #a"tic!la"s 5a8 otal $urc1a"e Ca"1 $urc1a"e" 0%enin( Cre#itor" Clo"in( Cre#itor" $urc1a"e Return" Di"count Recei'e# Cre#it $urc1a"e" 0%enin( Balance o. Cre#itor" Clo"in( Balance o. Cre#itor" Di"count Recei'e# $urc1a"e Return" 0%enin( Balance o. Bill" $ayable !9c Clo"in( Balance o. Bill" $ayable !9c 4s. 14204000 50F o. Cre#it $urc1a"e" 64000 154000 154000 54000 24004000 154000 64000 14500 34500 184000 244000

5b8

Sol!tion ( 5a8 C!CCGC! &0/ 0* C!)A 0G *C0, 0 CR>D& 0R) $articular" 0%enin( Balance o. Cre#itor" !## ; HCre#it $urc1a"e Ce"" ; Di"count Recei'e# $urc1a"e Return" Clo"in( Balance o. Cre#itor" Cash /!tflows to C"e&ito"s 54000 154000 154000 R". 64000 804000 864000 354000

514000 + H Cet Cre#it $urc1a"e" E +; Ca"1 $urc1a"e" E 2 + otal $urc1a"e E + + E 14204000 0r + E R". 804000 2 !lternati'ely4 t1e ca"1 out.lo2 can be calculate# by %re%arin( t1e otal Cre#itor" !ccount. T/T+0 %.'T/4S +CC/-2T
Dr. Cr.

#a"tic!la"s o o o o Di"count Recei'e# $urc1a"e Return" Ca"1 0ut.lo2 to Cre#itor" 5Balancin( *i(ure8 Balance c9#

4s.

#a"tic!la"s

4s. 64000 804000

54000 By Bill Recei'able 154000 By Di"count !llo2e# 514000 154000 864000

864000

46

5b8

C!)A 0G *C0, 0 CR>D& 0R) $articular" 0%enin( Balance o. Cre#itor" 0%enin( Balance o. Bill" $ayable !## ; Cre#it $urc1a"e" Ce"" ; Di"count Recei'e# $urc1a"e Return" Clo"in( Balance o. Cre#itor" Clo"in( Balance o. Bill" $ayable Cash /!tflows to C"e&ito"s 14500 34500 64000 244000 R". 64000 184000 24004000 24334000

354000 14984000

!lternati'ely4 t1e ca"1 out.lo2 can be calculate# by %re%arin( t1e otal Cre#itor" !ccount.

T/T+0 %.'T/4S +CC/-2T


Dr. Cr.

#a"tic!la"s o o o o o Di"count Recei'e# $urc1a"e Return" Bill" $ayable 5!cce%te#8H Ca"1 0ut.lo2 to Cre#itor" 5Balancin( *i(ure8 Balance c9# 5Clo"in(8

4s.

#a"tic!la"s

4s. 154000 24004000

54000 By Balance b9# 50%enin(8 154000 By Cre#it $urc1a"e 514000 14984000 64000 24154000

24154000

H Bill" $ayable acce%te# E Clo"in( balance o. bill" %ayable 7 0%enin( balance o. bill" %ayable E R". 244000 7 R". 184000 E R". 64000 How is the amo!nt of 5ncome Ta? pai& &ete"mine&; #"ovision fo" Ta? +cco!nt
Dr. Cr.

#a"tic!la"s o o Bank !9c 5 a+ $ai#8 Balance c9#

4s.

#a"tic!la"s

4s. I.. I.. II

..I.. By Balance b9# I... By $ro.it an# Co"" !9c 5$ro'i"ion 3a#e #urin( t1e year8 II

2ote ( &. only t1e %ro'i"ion .or ta+ i" (i'en in t1e t2o Balance )1eet" an# no in.or3ation about ta+ %ai# i" (i'en4 t1e a3ount in t1e %re'iou" year@" Balance )1eet i" treate# a" t1e ta+ %ai# #urin( t1e current year. &t in'ol'e" an out.lo2 o. ca"1.

47

1e current year@" %ro'i"ion .or ta+ re%re"ent" t1e a3ount o. ta+ %ro'i#e# .or t1e current year. &t i" a##e# back to t1e current year@" %ro.it" to calculate ca"1 .ro3 o%eratin( acti'itie" 5un#er t1e in#irect 3et1o#8. &t i" 3erely a book entry an# #oe" not in'ol'e t1e out.lo2 o. ca"1. 1e %ro'i"ion .or a+ !ccount %ro'i#e" in.or3ation about t1e ta+ %ai# #urin( t1e current year a" 2ell a" t1e ta+ %ro'i#e# .or t1e current year. 1e %ro'i"ion .or a+ !ccount %ro'i#e" in.or3ation about t1e ta+ %ai# #urin( t1e current year a" 2ell a" t1e out.lo2 o. ca"1. 1e %ro'i"ion .or a+ !ccount %ro'i#e" in.or3ation about t1e ta+ %ai# #urin( t1e current year a" 2ell a" t1e ta+ %ro'i#e# .or t1e current year. 1e .ollo2in( illu"tration "1o2" 1o2 inco3e ta+ %ai# i" #eter3ine#.

5ll!st"ation @. 5Ca"1 *lo2 .ro3 0%eratin( !cti'ity 2it1 Di""in( !3ount" un#er t1e Direct Det1o#8. $re%are t1e Ca"1 *lo2 )tate3ent .ro3 0%eratin( !cti'itie" by t1e Direct Det1o# .ro3 t1e .ollo2in( (i'en in.or3ation ;< #"ofit an& 0oss +cco!nt .or t1e year en#e# 31"t Darc14 2007
Dr. Cr.

#a"tic!la"s o o 0%enin( )tock $urc1a"e ; Ca"1 Cre#it o )ellin( >+%en"e" o 0..ice >+%en"e" o Ba# Debt" o Di"count !llo2e# o De%reciation

4s.

#a"tic!la"s

4s.

254000 754000

204000 By )ale" ; Ca"1 74500 Cre#it 14254000 14004000 By Clo"in( )tock 124000 By Co33i""ion" 284000 By Royaltie" 44000 By $urc1a"e" Return" 24000 154000

24004000 264000 144000 104000 14000

o a+ $ro'i"ion" o )ale" Return o /et $ro.it +&&itional 5nfo"mation ( Debtor" Cre#itor" 0ut"tan#in( )ellin( >+%. $re%ai# 0..ice >+%en"e" !ccrue# Royaltie" !#'ance Co33i""ion a+ $ro'i"ion

304000 24000 434000 24564000 Darc1 314 2006 R". 154000 144000 34000 24000 124000 94000 404000 Darc1 314 2007 R". 104000 104000 44000 34000 114000 84000 604000

24564000

48

Sol!tion ( C+SH F0/1 F4/M /#.4+T528 +CT595T5.S #a"tic!la"s 6a7 /pe"ating Cash 4eceipts 5i8 Ca"1 )ale" 754000 5ii8 Ca"1 recei'e# .ro3 Debtor" 5/ote 18 14144000 5iii8 Ca"1 .ro3 Royaltie" 5/ote 58 114000 5i'8 Ca"1 .ro3 Co33i""ion" 5/ote 68 134000 6b7 /pe"ating Cash #a3ments 5i8 Ca"1 $urc1a"e 254000 5ii8 Ca"1 %ai# to Cre#itor" 5/ote 28 754000 5iii8 Ca"1 %ai# .or )ellin( >+%.5/ote 38 114000 5i'8 Ca"1 %ai# .or o..ice >+%. 5/ote 48 284000 5c8 Ca"1 &n.lo2" .ro3 0%eratin( !cti'itie" be.ore 5/ote<38 5#8 Ce"" ; &nco3e a+ $ai# #urin( t1e year 5/ote<78 2et Cash Flow f"om /pe"ating +ctivities 6c)&7 4s.

24134000

14374000 764000 104000 664000

2ote ( De%reciation i" a non<ca"1 e+%en#iture an#4 t1ere.ore4 it i" i(nore#. 1o" ing 2otes ( Di""in( &n.or3ation to be Calculate# T/T+0 %.'T/4S +CC/-2T
1. Dr.
Cr.

#a"tic!la"s o o Balance b9# Cre#it )ale"

#a"tic!la"s 154000 By )ale" Return" 14254000 By Di"count !llo2e# By Ba# Debt" By Ca"1 Recei'e# 5Bal. *i(.8 By Balance c9# 14404000

4s. 24000 24000 44000 14144000 184000 14404000

T/T+0 C4.%5T/4 +CC/-2T


2. Dr.
Cr.

#a"tic!la"s o $urc1a"e Return" o Di"count Recei'e# o Cash #ai& 5Balancin( *i(.8 o Balance c9#

#a"tic!la"s 14000 By Balance b9# 54000 By Cre#it $urc1a"e" 734000 104000 894000

4s. 144000 754000

894000

49

S.00528 .A#.2S.S +CC/-2T


3. Dr.
Cr.

#a"tic!la"s o o Cash +Bc 5Balancin( *i(8 0ut"tan#in( >+%. !9c

4s.

#a"tic!la"

4s. 34000 124000 154000

114000 By 0ut"tan#in( >+%en"e" !9c 5&n t1e be(innin(8 44000 By $ro.it an# Co"" !9c 154000

/FF5C. .A#.2S.S +CC/-2T


4. Dr.
Cr.

#a"tic!la"s o o $re%ai# >+%en"e" !9c 5in t1e be(innin(8 Cash +Bc 5Balancin( *i(.8

4s. 24000 294000 314000

#a"tic!la" By $ro.it an# Co"" a9c By $re%ai# >+%en"e" !9c 5!t t1e en#8

4s. 284000 34000

314000

4/C+0T5.S +CC/-2T
5. Dr.
Cr.

#a"tic!la"s o o !ccrue# Royaltie" 5in t1e be(innin(8 $ro.it an# Co"" !9c

4s. 124000 104000 224000

#a"tic!la" By Ca"1 !9c 5Balance *i(.8 By !ccrue# Royaltie" !9c 5!t t1e en#8

4s. 114000 114000

224000

C/MM5SS5/2 +CC/-2T
6. Dr.
Cr.

#a"tic!la"s o o $ro.it an# Co"" !9c !#'ance Co33i""ion !9c 5!t t1e en#8

4s. 144000

#a"tic!la"

4s. 94000 134000 224000

By !#'ance Co33i""ion !9c 5in t1e be(innin(8 84000 By Cash +Bc 5Balancin( *i(.8

224000

50

#4/95S5/2 F/4 T+A +CC/-2T


7. Dr.
Cr.

#a"tic!la"s o o Bank !9c 5 a+ $ai#8 !#'ance Co33i""ion !9c 5!t t1e en#8

4s. 104000

#a"tic!la"

4s. 404000 304000

By Balance b9# By $ro.it an# Co"" !9c 84000 5$ro'i"ion 3a#e8

704000 2. C+SH F0/1 F4/M 529.ST528 +CT595T5.S

704000

&n'e"tin( !cti'itie" o. an enter%ri"e are acqui"ition an# #i"%o"al o. t1e lon(<ter3 a""et" an# ot1er in'e"t3ent" not inclu#e# in ca"1 equi'alent". !ccor#in(ly4 t1e ca"1 in.lo2 an# out.lo2 relatin( to t1e .i+e# a""et"4 "1are an# #ebt in"tru3ent" o. ot1er enter%ri"e"4 intere"t" in :oint 'enture"4 a#'ance" an# loan" to t1ir# %artie" an# al"o t1eir re%ay3ent" are "1o2n un#er &n'e"tin( !cti'itie" in t1e Ca"1 *lo2 )tate3ent. 1e Ca"1 *lo2 .ro3 &n'e"tin( !cti'itie" i" a"certaine# by analy?in( t1e c1an(e" in *i+e# !""et" an# Con(<ter3 &n'e"t3ent" in t1e be(innin( an# at t1e en# o. t1e year. +sce"taining Missing +mo!nts "ega"&ing Fi?e& +ssets o" %ep"eciation Case 1 ( ,1en t1e .i+e# a""et i" "1o2n at t1e 2ritten #o2n 'alue. Fi?e& +ssets +cco!nt 6+t w"itten &own val!e7
Dr. Cr.

#a"tic!la"s o Balance b9# o Bank !9c 5$urc1a"e"8 o $ro.it an# Co"" !9c 5$ro.it on )ale o. *i+e# !""et8

4s. I. .I I. I. I..

#a"tic!la" By Bank !9c $ro.it an# Co"" !9c 5Co"" on )ale o. *i+e# !""et8 By De%reciation !9c By Balance c9#

4s. I. I. I. I. I. I.

2otes ( 1 -enerally4 t1e %urc1a"e o. .i+e# a""et" i" a balancin( a3ount on t1e #ebit "i#e o. t1e account an# #e%reciation or t1e "ale o. .i+e# a""et on t1e cre#it "i#e o. t1e account. 2. &n.or3ation re(ar#in( #e%reciation i" (enerally (i'en in t1e que"tion. )tu#ent" are require# to .in# out only t1e "ale or t1e %urc1a"e9"ale o. a""et. 3. &. bot1 "ale an# #e%reciation are not (i'en4 t1en a""u3e it i" eit1er "ale or #e%reciation an# (i'e your a""u3%tion. 4. &n t1e ca"e o. lan#4 it "1oul# be a""u3e# "ale a" #e%reciation i" not c1ar(e# on lan#. &n t1e ca"e o. %atent"4 (oo#2ill an# tra#e 3ark"4 it "1oul# be a""u3e# "ale a" #e%reciation i" not c1ar(e# on lan#. &n t1e ca"e o. %atent"4 (oo#2ill.

51

5ll!st"ation 7. J Ct#. 1a" %lant an# 3ac1inery 21o"e 2ritten #o2n 'alue on 1"t !%ril4 2006 2a" R".846040004 an# on 31"t Darc14 2007 2a" R". 94504000. De%reciation .or t1e year 2a" R". 404000. !t t1e be(innin( o. t1e year4 a %art o. %lant 2a" "ol# .or R". 54000 21ic1 1a# a 2ritten #o2n 'alue o. R". 204000. Calculate t1e /et Ca"1 *lo2 .ro3 &n'e"tin( !cti'itie".

Sol!tion ( C!)A *C0, *R0D &/K>) &/- !C &K& &>) $articular" R". Ca"1 $ay3ent to acquire $lant an# Dac1inery 5/ote8 14504000 Ca"1 Recei%t" .ro3 )ale o. $lant an# Dac1inery 254000 5142540008 2ote ( #0+2T +2% M+CH52.4C +CC/-2T
Dr. Cr.

%ate #a"tic!la"s 2006 !%r 1 o Balance b9# o $ro.it an# Co"" !9c 5$ro.it on )ale o. $lant8 o Bank !9c 5$urc1a"e" Balancin( *i(ure

4s.

%ate

#a"tic!la"

4s. 254000 404000 94504000 104154000

2006 84604000 !%r 1 By Bank !9c 54000 2007 By De%reciation !9c Dar 31 By Balance c9# 14504000 104154000

Case 2 ( ,1en t1e .i+e# a""et" are "1o2n at co"t an# accu3ulate# #e%reciation 5t1e %ro'i"ion .or #e%reciation8 i" "e%arately i" "e%arately 3aintaine# . Gn#er t1i" ca"e4 5in contra"t to t1e abo'e ca"e84 #e%reciation i" not #irectly c1ar(e# to t1e !""et" account. 1e #e%reciation .or t1e %erio# i" #ebite# to t1e De%reciation !ccount 5tran".er to t1e $ro.it an# Co"" !ccount8 an# cre#ite# to !ccu3ulate# De%reciation !ccount. &n t1e Balance )1eet4 a""et a%%ear" at it" ori(inal co"t an# t1e accu3ulate# #e%reciation i" "1o2n a" a #e#uction .ro3 t1e !""et" !ccount. &n "uc1 ca"e"4 2e %re%are "e%arate account" .or .i+e# a""et" an# accu3ulate# #e%reciation or %ro'i"ion" .or #e%reciation. De%reciation .or t1e year can be a"certaine# .ro3 $ro'i"ion .or t1e De%reciation !ccount. Fi?e& +ssets +cco!nt 6+t Cost7
Dr. Cr.

#a"tic!la"s o o Balance b9# $ro.it an# Co"" !9c $ro.it on )ale o. *i+e# !""et8 o Bank !9c 5$ur. o. *i+e# !""et8

4s.

#a"tic!la"

4s. I. I. I. I. I.. I.. II

I. By Bank !9c 5)ale o. *i+e# !""et8 .I By !ccu3ulate# De%. !9c I. 5!ccu3ulate# De%. on I. *i+e# !""et )ol#8 By $ro.it an# Co"" !9c 5Co"" on )ale o. *i+e# !""et8 By Balance c9# II

52

2ote ( /or3ally4 t1e %urc1a"e o. .i+e# a""et i" a balancin( a3ount on t1e #ebit "i#e o. t1e account an# t1e "ale o. .i+e# a""et on t1e cre#it "i#e o. t1e account.
+CC-M-0+T.% %.#4.C5+T5/2 +CC/-2T
Dr. Cr.

#a"tic!la"s o o *i+e# !""et !9c $ro.it an# Co"" !9c $ro.it on )ale o. *i+e# !""et8 o Bank !9c 5$ur. o. *i+e# !""et8

4s.

#a"tic!la"

4s. I. I. I. I. I.. I.. II

I. By Bank !9c 5)ale o. *i+e# !""et8 .I By !ccu3ulate# De%. !9c I. 5!ccu3ulate# De%. on I. *i+e# !""et )ol#8 By $ro.it an# Co"" !9c 5Co"" on )ale o. *i+e# !""et8 By Balance c9# II

2ote ( 1e !ccu3ulate #e%reciation on t1e .i+e# a""et "ol# or #e%reciation c1ar(e# .or t1e current accountin( year 3ay not be (i'en4 21ic1 "1all be t1e balancin( a3ount.
,. C+SH F0/1 F4/M F52+2C528 +CT595T5.S

*inancin( !cti'itie" o. an enter%ri"e are t1o"e acti'itie" t1at re"ult in c1an(e in t1e "i?e an# co3%o"ition o. o2ner"@ ca%ital an# borro2in( o. t1e enter%ri"e. &t inclu#e" %rocee#" .ro3 i""ue o. "1are" or ot1er "i3ilar in"tru3ent"4 i""ue o. #ebenture"4 loan"4 bon#"4 ot1er "1ort<ter3 or lon(< ter3 borro2in(" an# re%ay3ent" o. a3ount" borro2e#. !ccor#in(ly4 recei%t" an# %ay3ent" on account o. t1e abo'e are #i"clo"e# in t1e Ca"1 *lo2 )tate3ent a" t1e Ca"1 *lo2 .ro3 *inancin( !cti'itie". Di'i#en#" %ai# 5in all enter%ri"e"8 an# intere"t %ai# 5in t1e ca"e o. non<.inancin( enter%ri"e"8 are al"o inclu#e# in .inancin( acti'itie". &t i" i3%ortant to note t1at an increa"e in "1are ca%ital #ue to bonu" i""ue 2ill not be "1o2n in t1e ca"1 .lo2 "tate3ent4 "ince it i" a ca%itali?ation o. re"er'e". ,1en "1are" are i""ue# at a %re3iu34 t1e ca"1 .lo2 "tate3ent re.lect" t1e total ca"1 (enerate# by t1e i""ue 5i.e.4 *ace Kalue o. )1are" 6 $re3iu38. 1e Ca"1 *lo2 .ro3 *inancin( !cti'itie" i" a"certaine# by analy?in( t1e c1an(e in >quity an# $re.erence )1are Ca%ital4 Debenture" an# ot1er borro2in(". 5ll!st"ation :. !cti'itie" ; *ro3 t1e .ollo2in( in.or3ation4 calculate t1e Ca"1 *lo2 .ro3 *inancin(

$articular" >quity )1are Ca%ital 10F Debenture" )ecuritie"

31.3.2006 R"4 44004000 14504000 404000

31.3.2007 R" 54004000 14004000 504000

53

Additional Information : &ntere"t %ai# on #ebenture" R". 104000 Sol!tion ( Calculation o. /et Ca"1 *lo2 *ro3 *inancin( !cti'itie" $articular" Ca"1 $rocee#" .ro3 t1e &""ue o. )1are" 5&nclu#in( $re3iu38 &ntere"t %ai# on Debenture" Re#e3%tion o. Debenture" 2et Cash Flow f"om Financing +ctivities 14104000 51040008 55040008 504000 R".

5ll!st"ation D. JLM Ct#. %ro'i#e" t1e .ollo2in( in.or3ation. Calculate t1e /et Ca"1 *lo2 .ro3 *inancin( !cti'itie" ; $articular" >quity )1are Ca%ital 10F Debenture" 8F Debenture" 31.3.2006 R"4 104004000 14004000 III 31.3.2007 R" 154004000 II.. 24004000

Additional Information : 5i8 &ntere"t %ai# on Debenture" R". 104000 5ii8 Di'i#en# %ai# R". 504000 5iii8 Durin( t1e year 2006<20074 XZY Ct#. i""ue# bonu" "1are" in t1e ratio o. 2 ; 1 by ca%itali"in( re"er'e. Sol!tion ( Calculation o. /et Ca"1 *lo2 *ro3 *inancin( !cti'itie" $articular" Ca"1 $rocee#" .ro3 t1e &""ue 8F o. Debenture" Re#e3%tion o. 10F Debenture" &ntere"t %ai# Di'i#en# %ai# 2et Cash Flow f"om Financing +ctivities R". 24004000 5140040008 51040008 55040008 404000

2ote ( Bonu" "1are" i" not to be "1o2n in t1e Ca"1 *lo2 )tate3ent becau"e t1ere i" no ca"1 .lo2.

54

5ll!st"ation 10. *ro3 t1e .ollo2in( in.or3ation4 calculate t1e Ca"1 *lo2 .ro3 &n'e"tin( !cti'itie" an# *inancin( !cti'itie" ; #a"tic!la"s *urniture 5!t Co"t8 !ccu3ulate# De%reciation on *urniture Ca%ital Coan .ro3 Bank /pening 204000 64000 14004000 254000 Closing 284000 94000 14404000 154000

Durin( t1e year4 .urniture co"tin( R". 44000 2a" "ol# at a %ro.it o. R". 34000. De%reciation on .urniture c1ar(e# #urin( t1e year a3ounte# to R". 54000. Sol!tion ( Cash Flow f"om Financing +ctivities $articular" &n.lo2 .ro3 &""ue o. *re"1 Ca%ital 5-i'en8 5R". 14404000 7 R". 140040008 0ut.lo2 on Re%ay3ent o. Bank Coan 5-i'en8 R". 254000 7 R". 1540008 /et Ca"1 .ro3 *inancin( !cti'itie" R". 404000 51040008 304000

Cash Flow f"om 5nvesting +ctivities $articular" &n.lo2 .ro3 )ale o. *urniture 538 0ut.lo2 on $urc1a"e o. *urniture518 /et Ca"1 .ro3 &n'e"tin( !cti'itie" 548 R". 504000 51240008 74000

1.D #4.#+4+T5/2 /F C+SH F0/1 ST+T.M.2T Aa'in( #i"cu""e# 1o2 t1e Ca"1 *lo2 )tate3ent i" %re%are# .or eac1 acti'ity4 let u" no2 #i"cu"" t1e Ca"1 *lo2 )tate3ent a" a co3%lete "tate3ent a" .ollo2" ; 1. Co3%ute t1e Ca"1 *lo2" .ro3 0%eratin( !cti'itie". 2. Co3%ute t1e Ca"1 *lo2" .ro3 &n'e"tin( !cti'itie" an# *inancin( !cti'itie". 3. 1e Ca"1 *lo2" un#er eac1 acti'ity 50%eratin(9&n'e"tin(9*inancin(8 are "1o2n in t1e Ca"1 *lo2 )tate3ent. !((re(ate o. t1e"e t1ree acti'itie" 2ill be eit1er an increa"e or a #ecrea"e in ca"1 equi'alent". 4. Ca"1 an# Ca"1 >qui'alent balance at t1e be(innin( 2ill be a##e# to t1e net increa"e or #ecrea"e in Ca"1 >qui'alent" 5)te% 38. Re"ultin( .i(ure 2ill be Ca"1 an# Ca"1 >qui'alent" at t1e en#. 1e .or3at" .or calculatin( Ca"1 *lo2 .ro3 0%eratin( !cti'itie" by Direct Det1o# an# &n#irect Det1o# are (i'en belo2 ;

55

1.D.1

%54.CT M.TH/% *0RD! *0R C!)A *C0, ) ! >D>/ .or t1e year en#e# I. N !" %er !ccountin( )tan#ar#<3 5Re'i"e#8O $articular" Ca"1 *lo2 .ro3 0%eratin( !cti'itie" !. 0%eratin( Ca"1 Recei%t"4 e.(.4 7 Ca"1 )ale" 7 Ca"1 recei'e# .ro3 Cu"to3er" 7 ra#in( Co33i""ion" recei'e# 7 Royaltie" recei'e# R".

1.

I. I. I. I.

I..

5B8 0%eratin( Ca"1 $ay3ent"4 e.(.4 7 Ca"1 $urc1a"e" 7 Ca"1 $ai# to t1e )u%%lier" 7 Ca"1 $ai# .or Bu"ine"" >+%en"e" like 0..ice >+%en"e"4 Danu.acturin( >+%en"e"4 )ellin( an# Di"tribution >+%. >tc. 5C8 Ca"1 (enerate# .ro3 0%eration" 5! 7 B8 5D8 &nco3e a+ $ai# 5/et o. a+ Re.un# recei'e#8 5>8 Cash Flow befo"e .?t"ao"&ina"3 5tem 5*8 >+traor#inary &te3" 5Recei%t9$ay3ent8 5-8 /et Ca"1 .ro3 5or u"e# in8 0%eratin( !cti'itie" &&. Ca"1 *lo2 .ro3 &n'e"tin( !cti'itie" 5)a3e a" un#er &n#irect Det1o#8 &&&. Ca"1 *lo2 .ro3 *inancin( !cti'itie" 5)a3e a" un#er &n#irect Det1o#8 &K. /et &ncrea"e9Decrea"e in Ca"1 an# Ca"1 >qui'alent" 5)a3e a" un#er &n#irect Det1o# < & 6 && 6 &&&8 K. !## Ca"1 an# Ca"1 >qui'alent" in t1e be(innin( o. t1e year 5)a3e a" un#er &n#irect Det1o#8 K&. Ca"1 an# Ca"1 >qui'alent" in t1e en# o. t1e year

5I8 5I8

5I8

5...8 I 5I8 I. 569<8I. I.

I I I I I

56

1.D.2

52%54.CT M.TH/% *0RD! *0R C!)A *C0, ) ! >D>/


.or t1e year en#e# I. N !" %er !ccountin( )tan#ar#<3 5Re'i"e#8O

$articular"
1.
Cash Flow f"om /pe"ating +ctivities /et $ro.it an# Co"" !9c or Di..erence bet2een Clo"in( Balance an# 0%enin( Balance o. $ro.it an# Co"" !9c +&& ( 6+7 +pp"op"iation of f!n&s. ran".er to re"er'e $ro%o"e# #i'i#en# .or current year &nteri3 #i'i#en# %ai# #urin( t1e year $ro'i"ion .or ta+ 3a#e #urin( t1e current year >+traor#inary ite34 i. any4 #ebite# to t1e $ro.it an# Co"" !9c 0ess ( >+traor#inary ite34 i. any4 cre#ite# to t1e $ro.it an# Co"" !9c Re.un# o. ta+ cre#ite# to $ro.it an# Co"" !9c /et $ro.it be.ore a+ation an# >+traor#inary &te3" 5B8 +&& ( 2on ope"ating .?penses ( 7 De%reciation 7 $reli3inary >+%en"e" 9 Di"count on &""ue o. )1are" an# Debenture" 2ritten o.. 7 -oo#2ill4 $atent" an# ra#e Dark" !3orti?e# 7 &ntere"t on Borro2in(" an# Debenture" 7 Co"" on )ale o. *i+e# !""et" 5C8 0ess ( 2on /pe"ating 5ncomes( 7 &ntere"t &nco3e 7 Di'i#en# &nco3e 7 Rental &nco3e 7 $ro.it on )ale o. *i+e# !""et" /pe"ating #"ofit befo"e 1o" ing Capital Changes 6+E'$C7 +&& ( %ec"ease in C!""ent +ssets an& 5nc"ease in C!""ent 0iabilities 7 Decrea"e in )tock9 &n'entorie" 7 Decrea"e in Debtor"9 Bill" Recei'able" 7 Decrea"e in !ccrue# &nco3e" 7 Decrea"e in $re%ai# >+%en"e" 7 &ncrea"e in Cre#itor" 9Bill" $ayable" 7 &ncrea"e in 0ut"tan#in( >+%en"e" 7 &ncrea"e in !#'ance &nco3e" 7 &ncrea"e in $ro'i"ion .or Doubt.ul Debt". 0ess ( 5nc"ease in C!""ent +ssets an& %ec"ease in C!""ent 0iabilities 7 Decrea"e in )tock9 &n'entorie" 7 Decrea"e in Debtor"9 Bill" Recei'able" 7 Decrea"e in !ccrue# &nco3e" 7 Decrea"e in $re%ai# >+%en"e" 7 &ncrea"e in Cre#itor" 9Bill" $ayable" 7 &ncrea"e in 0ut"tan#in( >+%en"e" 7 &ncrea"e in !#'ance &nco3e" 7 &ncrea"e in $ro'i"ion .or Doubt.ul Debt". Cash 8ene"ate& f"om /pe"ations 6%E.$F7 0ess ( 5ncome Ta? #ai& 62et of Ta? 4ef!n& "eceive&7

R".
I I I I I I 5I8 5I8 I. I I I. I. I. I. I I I I

I I

6%7 5>8

I I I I I I I I I I I I I I I I I I I

6F7

687 6H7

657 6F7 6G7

0ess ( 5ncome Ta? #ai& 62et of Ta? 4ef!n& "eceive&7 6EB)7 .?t"ao"&ina"3 5tems 2et Cash f"om 6o" !se& in7 /pe"ating +ctivities

I I

57

55.

555.

Cash Flow f"om 5nvesting +ctivities 7 $rocee#" .ro3 )ale o. *i+e# !""et" 7 $rocee#" .ro3 )ale o. &n'e"t3ent" 7 $rocee#" .ro3 )ale o. &ntan(ible !""et" 7 &ntere"t an# Di'i#en# recei'e# 5*or /on<.inancial co3%anie" only8 7 Rent &nco3e 7 $urc1a"e o. *i+e# !""et" 7 $urc1a"e o. &n'e"t3ent" 7 $urc1a"e &ntan(ible !""et" like -oo#2ill /et Ca"1 .ro3 5or u"e# in8 *inancin( !cti'itie" Cash f"om Financing +ctivities 7 $rocee#" .ro3 &""ue o. )1are" an# Debenture" 7 $rocee#" .ro3 0t1er Con(<ter3 Borro2in(" 7 *inal Di'i#en# $ai# 7 &ntere"t an# Debenture" an# Coan" $ai# 7 Re%ay3ent o. Coan" 7 Re#e3%tion o. Debenture" 9 $re.erence )1are" /et Ca"1 .ro3 5or u"e# in8 *inancin( !cti'itie" 2et 5nc"ease B %ec"ease in Cash an& Cash .*!ivalents 65E55E5557 +&& ( Cash an& Cash .*!ivalents in the beginning of the 3ea" 7 Ca"1 in Aan# 7 Ca"1 at Bank 5Ce"" ; Bank 0'er#ra.t8 7 )1ort<ter3 De%o"it" 7 Darketable )ecuritie" Cash an& Cash .*!ivalents in the en& of the 3ea" 7 Ca"1 in Aan# 7 Ca"1 at Bank 5Ce"" ; Bank 0'er#ra.t8 7 )1ort<ter3 De%o"it" 7 Darketable )ecuritie"

I I I I I 5I8 5I8 5I8 I I I 5I8 5I8 5I8 5I8 I I

59. 9.

I I I I I I I

95.

2ote ( !3ount" in bracket" in#icate ne(ati'e a3ount"4 i.e.4 a3ount" t1at are to be #e#ucte#. 5ll!st"ation 11. *ro3 t1e .ollo2in( in.or3ation4 %re%are t1e Ca"1 *lo2 )tate3ent .or t1e year en#e# Darc1 314 2007 ; #a"tic!la"s 0%enin( Ca"1 Balance Clo"in( Ca"1 Balance Decrea"e in Debtor" &ncrea"e in Cre#itor" )ale o. *i+e# !""et" Re#e3%tion o. Debenture" /et $ro.it .or t1e year 4s. 104000 124000 54000 74000 204000 504000 204000

58

Sol!tion ( Cash Flow Statement .or t1e year en#e# 31"t Darc14 2007 $articular" +. Cash Flow f"om /pe"ating +ctivities /et $ro.it .or t1e year be.ore ta+ !## ; &ncrea"e in Cre#itor" Decrea"e in Debtor" /et Ca"1 %ro'i#e# by 0%eratin( !cti'itie" '. Cash Flow f"om 5nvesting +ctivities $rocee#" .ro3 )ale o. *i+e# !""et" /et Ca"1 .ro3 &n'e"tin( !cti'itie" C. Cash Flow f"om Financing +ctivities Re#e3%tion o. Debenture" /et Ca"1 u"e# in *inancin( !cti'itie" D. /et &ncrea"e in Ca"1 5! 6B6C8 !## ; Ca"1 at t1e be(innin( o. t1e %erio# Cash at the en& of the pe"io& R". 204000 74000 54000 204000 204000

124000 324000

55040008 55040008 24000 104000 124000

5ll!st"ation 12. *ro3 t1e .ollo2in( %articular" 4 %re%are t1e Ca"1 *lo2 )tate3ent .or t1e year en#e# 31"t Darc14 2007 by t1e Direct Det1o# ; 5i8 5ii8 5iii8 5i'8 5'8 Ca"1 "ale" R". 654864000. Ca"1 collecte# .ro3 #ebtor" #urin( t1e year a3ounte# to R". 334234400. Ca"1 %ai# to "u%%lier" 2a" R". 794364810. R".94 874 500 2a" %ai# to an# .or e3%loyee". *urniture o. t1e book 'alue o. R". 184500 2a" "ol# .or R". 114000 an# a ne2 .urniture co"tin( R". 834160 2a" %urc1a"e#. 5'i8 Debenture" o. t1e .ace 'alue o. R". 34004000 2ere re#ee3e# at a %re3iu3 o. 2 %er cent intere"t on #ebenture". &ntere"t on #ebenture"4 R". 844000 2a" al"o %ai#. 6vii7 Di'i#en#4 R". 44504000 .or t1e year en#e# 31"t Darc14 2007 2a" #i"tribute# in Day4 2007. 6viii7 Ca"1 in 1an# an# at bank a" on Darc1 314 2006 an# Darc1 3142007 2a" R". 514070 an# R". 54744000 re"%ecti'ely.

59

Sol!tion (

C+SH F0/1 ST+T.M.2T 6%54.CT M.TH/%7 .or t1e year en#e# 31"t Darc14 2007 $articular" Ca"1 *lo2 .ro3 0%eratin( !cti'itie" Recei%t" 7 Ca"1 )ale" Ca"1 recei%t" .ro3 cu"to3er" $ay3ent" 7$ay3ent" .or %urc1a"e" an# to "u%%lier" $ay3ent" to an# .or e3%loyee" R". 654864000 334234400 994094400 794364810 94874500 894244310 94854090

/et Ca"1 .ro3 0%eratin( !cti'itie" 5Recei%t" 7 $ay3ent"8 Cash Flow f"om 5nvesting +ctivities $urc1a"e o. *i+e# !""et" 58341608 $rocee#" .ro3 )ale o. *i+e# !""et" 114000 Cash Flow f"om Financing +ctivities Re#e3%tion o. #ebenture" at a %re3iu3 NR". 34004000 6 R". 64000O 5340640008 &ntere"t %ai# on #ebenture" 58440008 2et Cash !se& in Financing +ctivities /et increa"e in ca"1 an# ca"1 equi'alent" Ca"1 an# ca"1 equi'alent" a" on 31"t Darc14 2007 5Clo"in( Balance8 Ca"1 an# ca"1 equi'alent" a" on 31"t Darc14 2007 5Clo"in( Balance8

57241608 5349040008 5349040008 54224930 514070 54744000

2otes ( Di'i#en# .or t1e year en#e# 31"t Darc14 2007 2a" %ai# in Day 2007. Aence4 it i" not an out.lo2 o. ca"1 .or t1e year en#e# 31"t Darc14 2007. 5ll!st"ation 1,. *ro3 t1e "u33ary ca"1 account o. J Ct#. %re%are t1e Ca"1 *lo2 )tate3ent .or t1e year en#e# 31"t Darc14 2007 by Direct Det1o#. C+SH '//G Dr. .or t1e year en#e# Darc1 3142007 Cr.
#a"tic!la"s 4s. #a"tic!la" 4s.

o Balance on !%ril 142006 o &""ue o. >quity )1are" o Recei%t" .ro3 Cu"to3er" o )ale o. *i+e# !""et"

504000 34004000 284004000 14004000

By $ay3ent to )u%%lier" 204004000 By $urc1a"e# o. *i+e# !""et" 24004000 By 0'er1ea# >+%en"e" 24004000 By ,a(e" an# )alarie" 14004000 By &nco3e a+ $ai# 24504000 By PDi'i#en# $ai# 34004000 By Re %ay3ent o. Bank Coan 34004000 By Balance on Darc1 314 2007 14504000 324504000

324504000

60

Sol!tion ( C+SH F0/1 ST+T.M.2T /F A 0T%. 6%54.CT M.TH/%7 .or t1e year en#e# 31"t Darc14 2007 $articular" R". Cash Flow f"om /pe"ating +ctivities 6i7 /pe"ating Cash 4eceipts ( Ca"1 Recei'e# .ro3 Cu"to3er" 284004000 6ii7 /pe"ating Cash #a3ments ( Ca"1 $ai# to )u%%lier" 204004000 ,a(e" an# )alarie" 14004000 0'er1ea# >+%en"e" 24004000 52340040008 Ca"1 -enerate# .ro3 0%eration" Ce"" ; &nco3e a+ $ai# '. /et Ca"1 .ro3 0%eratin( !cti'itie" Cash Flow f"om 5nvesting +ctivities $urc1a"e o. *i+e# !""et" $rocee#" .ro3 )ale o. *i+e# !""et" /et Ca"1 G"e# in &n'e"tin( !cti'itie" Cash Flow f"om Financing +ctivities $rocee#" .ro3 &""ue o. >quity )1are" $ay3ent o. Bank Coan Di'i#en# $ai# Net Cash Used in Financing Activities 2et 5nc"ease in Cash an& Cash .*!ivalents 6+E'EC7 Cash an& Cash .*!ivalent at the beginning of the 3ea" Cash an& Cash .*!ivalent at the .n& of the 3ea" 54004000 24504000 24504000 5240040008 14004000 5140040008 34004000 5340040008 55040008 55040008 14004000 504000 14504000

+.

C.

%. .. F.

5ll!st"ation 1<. Dr.


0iabilities

1e .inancial %o"ition o. !BC Ct#. a" on 31"t Darc1 2a" a" .ollo2" ; Cr.
200@ 4s. 2007 4s. +ssets 200@ 4s. 2007 4s.

Current Ciabilitie" Coan .ro3 M Ct#. Coan .ro3 Bank )1are Ca%ital $ro.it an# Co"" !9c

724000 824000 I. 404000 604000 504000 24004000 24004000 964000 984000 44284000 44704000

Ca"1 Debtor" )tock Can# Buil#in(" Dac1inery $ro'i"ion .or De%.

84000 704000 504000 404000 14004000 24144000 55440008 44284000

742000 764800 444000 604000 14104000 24444000 57240008 44704000

61

Durin( t1e year. R". 524000 2ere %ai# a" #i'i#en#. $re%are Ca"1 *lo2 )tate3ent. Sol!tion ( C+SH F0/1 ST+T.M.2T for the year ended 31st March, !!" $articular" Cash Flow f"om /pe"ating +ctivities /et %ro.it be.ore ta+ an# e+traor#inary ite3" 5)ee ,orkin( /ote8 544000 !## ; De%reciation 184000 0%eratin( $ro.it be.ore ,orkin( Ca%ital C1an(e" 724000 !## ; Decrea"e in )tock" 64000 &ncrea"e in Current Ciabilitie" 104000 Ce"" ; &ncrea"e in Debtor" 5648008 /et Ca"1 .ro3 0%eratin( !cti'itie" Cash Flow f"om 5nvesting +ctivities $urc1a"e o. Buil#in( 51040008 $urc1a"e o. Can# 52040008 $urc1a"e o. Dac1inery 53040008 /et Ca"1 u"e# in &n'e"tin( !cti'itie" Cash Flow f"om Financing +ctivities $rocee#" o. Coan .ro3 M Ct#. 404000 Re%ay3ent o. Bank Coan 51040008 $ay3ent o. Di'i#en# 55240008 /et ca"1 u"e# in *inancin( !cti'itie" 2et %ec"ease in Cash an& Cash .*!ivalents Cash an& cash e*!ivalents at the beginning Cash an& cash e*!ivalents at the en& of the pe"io& 1o" ing 2ote ( Clo"in( Balance a" %er $ro.it an# Co"" !9c 5on 31"t Darc14 20078 0ess ( 0%enin( Balance a" %er $ro.it an# Co"" !9c a" on 1"t !%ril4 2006 $ro.it .or t1e year !## ; Di'i#en#" $ai# /et $ro.it be.ore a+

R".

814200

56040008

52240008 58008 84000 74200

984000 964000 24000 524000 544000

62

5ll!st"ation 1>. *ro3 t1e .ollo2in( %articular" o. JLM Ct#. %re%are t1e Ca"1 *lo2 )tate3ent. Dr.
0iabilities Darc1 31 Darc1 314 +ssets 2006 2007 R". R". 34004000 34504000 *i+e# !""et" 5/et8 24004000 14004000 10F &n'e"t3ent 14004000 24004000 Ca"1 in Aan# 14104000 24704000 Ca"1 at Bank 704000 14454000 Debtor" 5-oo#8 104000 154000 )tock Di"count on Deb. 74904000 104804000 Darc1 314 2006 R". 54104000 304000 204000 204000 14004000 14004000 104000 74904000

Cr.
Darc1 31 2007 R". 64204000 804000 354000 404000 24004000 904000 154000 104804000

>quity )1are Ca%ital 12F $re.. )1are Ca%ital 10F Debenture" $ro.it an# Co"" !9c Cre#itor" $ro'i"ion .or Doubt.ul Debt"

Lou are in.or3e# t1at #urin( t1e year ; 5i8 ! 3ac1ine 2it1 a book 'alue o. R". 404000 2a" "ol# .or 254000. 5ii8 De%reciation c1ar(e# #urin( t1e year 2a" R".704000. 5iii8 $re.erence "1are" 2ere re#ee3e# on 31"t Darc14 2007 at a %re3iu3 o. 5F. 5i'8 !n &nteri3 Di'i#en# Q 15 %er cent 2a" %ai# on equity "1are" on 31 "t Darc14 2007. $re.erence Di'i#en# 2a" al"o %ai# on 31"t 3arc14 2007. 5'8 /e2 "1are" an# #ebenture" 2ere i""ue# on 31"t Darc14 2007. Sol!tion ( C+SH F0/1 ST+T.M.2T for the year ended 31st March, !!" $articular" 6+7 Cash Flow f"om /pe"ating +ctivities Clo"in( Balance a" %er $ro.it an# Co"" !9c 0ess ( 0%enin( Balance a" %er $ro.it an# Co"" !9c +&& ( +pp"op"iation of F!n& $re.erence Di'i#en# &nteri3 Di'i#en#
&ncrea"e in $ro'i"ion .or Doubt.ul Debt" 5)ince all #ebtor" are (oo#8 5/ote 1 8

R". 24704000 14104000 14604000 244000 454000 54000

744000 24344000

2et #"ofit befo"e ta? +&& ( 2on ope"ating .?penses ( De%reciation &ntere"t on Con( er3 Borro2in(" 5Debenture"8 Co"" on )ale o. Dac1inery

704000 104000 154000

63

$re3iu3 $ayable on Re#e3%tion o. $re.erence )1are"

54000

14004000 34344000

0ess ( 2on ope"ating 5ncomes ( &ntere"t on &n'e"t3ent 0%eratin( $ro.it be.ore ,orkin( Ca%ital C1an(e" +&& ( %ec"ease in C!""ent +ssets an& 5nc"ease in C!""ent 0iabilities Decrea"e in )tock 104000 &ncrea"e in Cre#itor" 754000 0ess ( 5nc"ease in C!""ent +ssets an& %ec"ease in C!""ent 0iabilities &ncrea"e in Debtor" 2et Cash f"om /pe"ating +ctivities '. Cash Flow f"om 5nvesting +ctivities $urc1a"e o. *i+e# !""et" $rocee#" .ro3 )ale o. Dac1inery &ntere"t on &n'e"t3ent $urc1a"e o. &n'e"t3ent" /et Ca"1 G"e# in &n'e"tin( !cti'itie" 6C 7 Cash Flow f"om Financing +ctivities $rocee#" .ro3 &""ue o. )1are Ca%ital $rocee#" .ro3 lon(<ter3 borro2in(" 5Debenture"8
N R". 14004000 7 R". 54000 5Di"count on &""ue o. Debenture"8 5/ote 28O

34000 34314000

854000 44164000 14004000 34164000

5242040008 254000 34000 55040008 5244240008 504000 954000 5140540008 51040008 54540008 52440008 53940008 354000 404000 754000

Re#e3%tion o. $re.erence )1are" 5R". 14004000 6 R". 540008 &ntere"t $ai# on Con(< er3 Borro2in(" &nteri3 Di'i#en# %ai# $re.erence Di'i#en# $ai# #urin( t1e year /et Ca"1 G"e# in *inancin( !cti'itie" 2et 5nc"ease in Cash an& Cash .*!ivalents 6+E'EC7 Cash an& Cash .*!ivalents in the beginning of pe"io& 5Ca"1 in Aan# an# Ca"1 at Bank8 Cash in Cash .*!ivalents at the en& of pe"io& 5Ca"1 in Aan# an# Ca"1 at Bank8

64

1o" ing 2otes ( a. &ncrea"e in $ro'i"ion .or Doubt.ul Debt" 5i. all #ebtor" 1a'e been con"i#ere# a" (oo#8 re%re"ent" tran".er o. t1e $ro.it .ro3 $ro.it an# Co"" !ccount. &t i" a##e# back to t1e current year@" %ro.it" to .in# out ca"1 .ro3 0%eratin( !cti'itie". b. &ncrea"e in Di"count on t1e &""ue o. Debenture" 5or "1are"8 i" #e#ucte# .ro3 increa"e in Debenture" 5or "1are"8 to a"certain t1e net a3ount o. i""ue.

F5A.% +SS.TS +CC/-2T 6+T 1.%.97


3.
Dr. Cr.

#a"tic!la"s o o Balance b9# Bank !9c 5$urc1a"e8 5Balancin( *i(ure8

4s.

#a"tic!la"s

4s. 254000 154000 704000 64204000 74304000

54104000 By Bank !9c 24204000 By $ro.it an# Co"" !9c 5Co"" on )ale8 By De%reciation !9c By Balance c9# 74304000

5ll!st"ation 1@. 1e "u33ari?e# Balance )1eet" o. JLM Ct#. a" on 31 "t Darc14 2006 an# 2007 are (i'en belo2 ;< Dr. Cr.
0iabilities Darc1 31 Darc1 314 +ssets 2006 2007 R". R". 44504000 44504000 *i+e# !""et" 34004000 34104000 &n'e"t3ent 564000 684000 )tock 14684000 14344000 Debtor" 754000 104000 Bank I. 24704000 104494000 124424000 Darc1 314 2006 R". 44004000 504000 24404000 24104000 14494000 104494000 Darc1 31 2007 R". 34204000 604000 24104000 44554000 14974000 124424000

)1are Ca%ital -eneral Re"er'e $ro.it an# Co"" !9c Cre#itor" $ro'i"ion .or a+ation Dort(a(e

Additional Information : 5i8 &n'e"t3ent" co"tin( R". 84000 2ere "ol# #urin( t1e year 2006<07 .or R". 84500. 5ii8 $ro'i"ion .or ta+ 3a#e #urin( t1e year 2a" R". 94000. 5iii8 Durin( t1e year4 %art o. t1e .i+e# a""et" co"tin( R". 104000 2a" "ol# .or R". 124000 an# t1e %ro.it 2a" inclu#e# in t1e $ro.it an# Co"" !ccount. 5i'8 Di'i#en#" %ai# #urin( t1e year a3ounte# to R". 404000 Lou are require# to %re%are a Ca"1 *lo2 )tate3ent.

65

Sol!tion ( C+SH F0/1 ST+T.M.2T for the year ended 31st March, !!" $articular" 6+7 Cash Flow f"om /pe"ating +ctivities ( Clo"in( Balance a" %er $ R C !9c 531.3.20078 0ess ( 0%enin( Balance o. $ro.it an# Co"" !9c 531.3.20068 R". 684000 564000 124000 +&& ( +pp"op"iation of F!n& ( &nteri3 Di'i#en# 404000 $ro'i"ion .or a+ 94000 ran".er to Re"er'e 104000 /et $ro.it be.ore ta+ an# e+traor#inary ite3" +&&(2on /pe"ating .?penses ( 704000 De%reciation 5/ote 18 Ce"" ; 2on /pe"ating 5ncomes ( 55008 $ro.it on )ale o. &n'e"t3ent" 5240008 0%eratin( $ro.it be.ore ,orkin( Ca%ital C1an(e" +&& ( %ec"ease in C!""ent +ssets an& 5nc"ease in C!""ent 0iabilities ( Decrea"e in )tock 5R". 24404000 7 R". 241040008 0ess ( 5nc"ease in C!""ent +ssets an& &ec"ease in C!""ent 0iabilities ( &ncrea"e in Debtor" 5R". 44554000 7 R". 241040008 5244540008 Decrea"e in Cre#itor" 5R". 14684000 7 R". 143440008 53440008 Cash 8ene"ate& f"om /pe"ations Ce"" ; &nco3e ta+ $ai# /et Ca"1 u"e# in 0%eratin( !cti'itie" 5!8 6'7 Cash Flow f"om 5nvesting +ctivities $urc1a"e o. &n'e"t3ent )ale o. *i+e# !""et" )ale o. &n'e"t3ent" /et Ca"1 .ro3 &n'e"tin( !cti'itie" 5B8 6C7 Cash Flow f"om Financing +ctivities Dort(a(e Coan Di'i#en# $ai# /et Ca"1 .ro3 *inancin( !cti'itie" 5C8 6%7 2et 5nc"ease in Cash an& Cash .*!ivalents 6+E'EC7 6.7 Cash an& Cash .*!ivalents at the beginning of the 3ea" 6F7 Cash an& Cash .*!ivalents at the en& of the 3ea"

594000 714000

674500 14384500 304000

5247940008 5141045008 57440008 5148445008 51840008 124000 84500 24500 24704000 54040008 5243040008 484000 14494000 14974000

1o" ing 2otes ( 66

Dr.

Fi?e& +ssets +cco!nt


4s. #a"tic!la"s

Cr.

#a"tic!la"s o o Balance b9# $ro.it an# Co"" !9c 5$ro.it on )ale8

4s. 124000 704000 34204000 44024000


Cr.

44004000 By Bank !9c 24000 By De%reciation !9c 5Bal. *i(.8 By Balance c9# 44024000

Dr.

5nvestment +cco!nt
4s. #a"tic!la"s

#a"tic!la"s o o o Balance b9# $ro.it an# Co"" !9c 5$ro.it8 Bank !9c 5Balance *i(.8

4s. 84500 604000 684500


Cr.

44004000 By Bank !9c 24000 By De%reciation !9c 5Bal. *i(.8 184500 684500

Dr.

5nvestment +cco!nt
4s. #a"tic!la"s

#a"tic!la"s o o o Bank !9c 5Balancin( *i(.8 Balance c9#

4s. 754000 94000 844500

44004000 By Balance b9# 24000 By $ro.it an# Co"" !9c 184500 5$ro'i"ion Da#e8 844000

2et #"ofit o" %"awings ( )o3eti3e" in t1e ca"e o. a "ole tra#er or a %artner"1i% .ir34 ca%ital o. t1e %ro%rietor or %artner" i" (i'en but t1e a3ount o. #ra2in(" or net %ro.it" 3a#e 3ay be 3i""in(. 1e ca%ital account 3ay be %re%are# to .in# t1e net %ro.it" or #ra2in(". $ro.it E Ca%ital at t1e en# 6 Dra2in(" 7 Ca%ital at t1e be(innin( Dra2in(" E Ca%ital at t1e be(innin( 6 $ro.it 7 Ca%ital at t1e en# 5ll!st"ation 17. 1e "u33ari?e# Balance )1eet" o. JLM Ct#. a" on 31 "t Darc14 2006 an# 2007 are (i'en belo2 ;< Dr. Cr.
0iabilities Cre#itor" Dr". !@" Coan Coan .ro3 Bank Ca%ital o. ! an# B 200@ R". 404000 254000 404000 14254000 2007 R". 444000 I 504000 14534000 +ssets *i+e# !""et" Debtor" )tock Dac1inery Can# Buil#in(" 2006 R". 104000 304000 354000 804000 404000 354000 24304000 2007 R". 74000 504000 254000 554000 504000 604000 24474000

2.304000

24474000

Durin( t1e year4 a 3ac1ine co"tin( R". 104000 5accu3ulate# #e%reciation R". 340008 2a" "ol# .or R". 54000. 1e %ro'i"ion .or #e%reciation a(ain"t 3ac1inery a" on Darc1 3142006 an# Darc1 314 2007 2a" o. R". 254000 an# R". 404000 re"%ecti'ely. 67

1e /et $ro.it" .or t1e year a3ounte# to R". 454000. Lou are require# to %re%are t1e Ca"1 *lo2 )tate3ent. Sol!tion ( C+SH F0/1 ST+T.M.2T for the year ended 31st March, !!" $articular" R". 6+7 Cash Flow f"om /pe"ating +ctivities /et $ro.it be.ore a+ 454000 +&& ( 2on /pe"ating .?penses ( De%reciation 5)ee /ote 38 184000 Co"" on )ale o. Dac1inery 5)ee /ote 48 24000 0%eratin( $ro.it be.ore ,orkin( Ca%ital C1an(e" !## ; Decrea"e in Current !""et or &ncrea"e in Current Ciabilitie"; Decrea"e in )tock 104000 &ncrea"e in Cre#itor" 44000 Ce"" ; &ncrea"e in Current !""et or Decrea"e in Current Ciabilitie" &ncrea"e in Debtor" /et Ca"1 .ro3 0%eratin( !cti'itie"

204000 654000 144000 794000 204000 594000

5B8 Cash Flow f"om 5nvesting +ctivities $urc1a"e o. Can# 51040008 $urc1a"e o. Buil#in(" 52540008 $rocee#" .ro3 )ale o. Dac1inery 254000 /et ca"1 u"e# in &n'e"tin( acti'itie" 53040008 5C 8 Cash Flow f"om Financing +ctivities $rocee#" o. Coan .ro3 Bank 104000 $ay3ent o. Dr". !@" Coan 52540008 Dra2in(" 5/ote 18 51740008 53240008 /et Ca"1 u"e# in *inancin( !cti'itie" 6%7 2et %ec"ease in Cash an& Cash .*!ivalents 6+E'EC7 5340008 6.7 Cash an& cash e*!ivalents at the beginning of the pe"io& 51040008 6F7 Cash an& cash e*!ivalents at the en& of the pe"io& 74000 2otes ( Dra2in(" E 0%enin( Ca%ital o. ! an# B 6 /et $ro.it" 7 Clo"in( Ca%ital o. ! an# B E R". 14254000 6 R". 454000 7 R". 14534000 E R". 174000
2
Dr.

Machine"3 +cco!nt
4s. 14054000 #a"tic!la"s By Ca"1 !9c By $ro'i"ion .or De%reciation By $ro.it an# Co"" !9c 7 Co"" on )ale 5/ote 48

Cr.

#a"tic!la"s Balance b9# 5R". 8040006R". 2540008

14054000

4s. 54000 34000 24000 954000 14054000

68

H)o3eti3e"4 .i+e# a""et" are "1o2n at the w"itten &own val!e 6afte" &e&!cting &ep"eciation7 in the balance sheet an& the acc!m!late& &ep"eciation is given in the a&&itional info"mation 5a" in t1e %re"ent illu"tration8. &n "uc1 a ca"e4 t1e o%enin( an# clo"in( balance" in t1e re"%ecti'e *i+e# !""et" account 2ill be t1e total a3ount o. book 'alue "1o2n in t1e balance "1eet %lu" balance o. t1e accu3ulate# #e%reciation %ro'i#e# in a##itional in.or3ation. 3
o o

Dr.
#a"tic!la"s De%reciation on Dac1inery )ol# Balance c9#

#"ovision fo" %ep"eciation +cco!nt


4s. 34000 404000 434000 #a"tic!la"s By Balance !9c By De%reciation %ro'i#e# 5Balancin( *i(ure8

Cr.
4s. 254000 184000 434000

4. Co"" on )ale o. Dac1inery E Co"t 7 !ccu3ulate# De%reciation 7 )ellin( $rice E R". 104000 7 R". 34000 7 R". 34000 7 R". 54000 E R".24000

5ll!st"ation 1:. *ro3 t1e .ollo2in( Balance )1eet" o. D9" -u%ta R Co.4 %re%are t1e Ca"1 *lo2 )tate3ent .or t1e year en#e# Darc1 31 ;
0iabilities Cre#itor" 0ut"tan#in( >+%en"e" Coan .ro3 J Ca%ital 200@ R". 204000 54000 104000 14084000 2.304000 2007 R". 224000 14000 54000 14684000 24474000 +ssets Ca"1 Debtor" Bill" Recei'able )tock *i+e# !""et" 2006 R". 84000 154000 54000 204000 954000 24304000 2007 R". 224000 114000 I 284000 14354000 24474000

Durin( t1e year4 t1e %ro%rietor intro#uce# R". 204000 a" a##itional ca%ital. 1e net %ro.it" .or t1e year4 a.ter c1ar(in( R". 54000 a" #e%reciation on .i+e# a""et"4 2ere R". 504000.

Sol!tion ( 69

C+SH F0/1 ST+T.M.2T for the year ended 31st March, !!" $articular" 6+7 Cash Flow f"om /pe"ating +ctivities /et $ro.it be.ore a+ /on<0%. >+%en"e" ; De%reciation 0%eratin( %ro.it be.ore ,orkin( Ca%ital C1an(e" +&& ( %ec"ease in C!""ent +ssets H inc"ease in C!""ent 0iabilities ( Debtor" 44000 Bill" Recei'able" 54000 Cre#itor" 24000 0ess ( 5nc"ease in C!""ent +ssets H &ec"ease in c!""ent liabilities( )tock 84000 0ut"tan#in( >+%en"e" 44000 /et Ca"1 .ro3 0%eratin( !cti'itie" Cash Flow f"om 5nvesting +ctivities *i+e# !""et" $urc1a"e# 5)ee ,orkin( /ote 28 /et Ca"1 u"e# in &n'e"tin( !cti'itie" Cash Flow f"om Financing +ctivities Re%ay3ent o. Coan .ro3 J 5540008 !##itional Ca%ital &ntro#uce# 204000 Dra2in( 5)ee ,orkin( /ote<18 51040008 /et Ca"1 u"e# in *inancin( !cti'itie" 2et 5nc"ease in Cash an& Cash .*!ivalents 6+E'EC7 Cash 'alance on +p"il 1, 200@ Cash 'alance on Ma"ch, ,1, 2007 ing 2otes ( C+#5T+0 +CC/-2T
4s. 104000 #a"tic!la"s By Balance b9# By Ca"1 !9c 5!##itional Ca%ital8 By $ro.it an# Co"" !9c Co"" on )ale 5/ote 48 5/et $ro.it8

R". 504000 54000 554000

114000 664000

124000 544000 54540008

6'7 6C7

6%7 6.7 6F7 1o" 1


o

54000 51440008 5840008 224000

Dr.
#a"tic!la"s Ca"1 !9c 5R". 8040006R". 2540008

Cr.
4s. 14084000 504000 954000 14784000

14784000

2
o o

Dr.
#a"tic!la"s Balance b9# Bank !9c

F5A.% +CC/-2T
4s. 954000 #a"tic!la"s By De%reciation By Balance c9#

Cr.
4s. 54000 14354000

5$urc1a"e 7 Balancin( *i(ure8

454000 1.404000 14404000

70

Te(m int(!),ce) in t-e c-a#te(


$( <( 6( G( &( '( O( P( %( $J( $$( $<( $6( $G( $&( $'( $O( $P( .inancial Balance tatements heet

Profit and loss Account Preliminary expense hare #apital #ontingent liabilities Proposed di+idend Pro+ision for taxation 5atio Analysis 3i,uidity ratios ol+ency ratios 7urno+er ratios Profitability ratios 5eturn on in+estment Uuic/ Assets 5ecei+ables Earning per share Di+idend payout

19.
<J( <$( <<( <6( <G( <&( <'( <O( <P(

Ca"1 *lo2
3i,uidity #ash E,ui+alent "n+esting Acti+ities Extraordinary Accounting ol+ency 4perating Acti+ities .inancing Acti+ities Appropriation

S,mma($

71

.inancial tatements: .inancial statements are the basic and formal annual reports through which the corporate management communicates financial information to its owners and +arious other external parties which include-in+estors, tax authorities, go+ernment, employees, etc( 7here are two main financial statements( 7hey are: :$; balance sheets; :<; income statements( Balance sheet: 7he Balance point in time( heet shows what a company owns and what it owes at a fixed tatement shows how much money a company made and

"ncome statement: 7he "ncome spent o+er a period of time(

1sers of financial statements: 7hese include in+estors and potential in+estors; lenders=long term creditors; management; suppliers=short term creditors; employees and trade unions; go+ernment and its agencies; stoc/ exchange and its customers 5atio Analysis is the relationship between two items of financial data expressed in the form of ratios and then interpreted with a +iew to e+aluating the financial condition and performance of a firm( 4b*ecti+es of 5atio Analysis 7he analysis would enable the calculation of not only the present earning capacity of the business but would also help in the estimation of the future earning capacity( 7he analysis would help the management to find out the o+erall as well as the department-wise efficiency of the firm on the basis of the a+ailable financial information( 7he short term as well as the long term sol+ency of the firm can be determined w6ith the help of ratio analysis( "nter-firm comparison becomes easy with the help of ratios(

Advantages of #atio Analysis


5atio Analysis simplifies .inancial tatements, facilitates inter-firm comparison; ma/es intrafirm comparison possible and helps in forecasting Limitati!n !" Rati! Anal$ i 5atio Analysis is historical in nature; changes in price le+el often ma/e comparison of figures of the pre+ious years difficult( "t is not free from bias( ome companies, in order to co+er up their bad financial position report to window dressing( 5atio Analysis ignores ,ualitati+e factors and different accounting practices render ratios incomparable T$#e !" Rati! .inancial ratios can be classified into four important categories: $( 3i,uidity 5atios: 3i,uidity ratios help the users in /nowing the extent of shortterm debt paying ability of a firm( 7hey include current ratio and ,uic/ ratio( <( ol+ency 5atios: ol+ency ratios analyse the long-term debt paying capacity of the firm( 7hey include Debt e,uity ratio; 7otal Assets to Debt 5atio; Proprietary ratio and "nterest #o+erage 5atio(

72

6(

Acti+ity or 7urno+er 5atios: Acti+ity ratios help in commenting on the efficiency of the firm in managing it assets( 7he speed with which assets are con+erted into sales is captured by acti+ity ratios( 7hese include toc/ 7urno+er; Debtors :5ecei+able; 7urno+er; #reditors :Payable; 7urno+er; .ixed Assets 7urno+er and Ior/ing #apital 7urno+er( Profitability 5atios: Profitability ratios are calculated to measure the profitability of a business enterprise( 7hese include Hross Profit 5atio; Bet profit 5atio; 4perating 5atio; 4perating Profit ratio; return on "n+estment :54";; Earnings per hare; Price Earning 5atio and Di+idend payout ratio RATIOS AT A GLANCE

G(

5atio $( #urrent ratio

.ormulae

Current a""et"
#urrent liabilities <( Uuic/ ratio

Quick a""et"
#urrent liabilities 6( "n+entory turno+er ratio

Co"t o. (oo#" "ol#


A+erage in+entory G( Debtors :recei+ables; turno+er ratio

!nnual /et cre#it "ale"


&( Debt :recei+ables; collection period ' #reditors turno+er ratio A+erage accounts recei+ables 6'& days=&< wee/s= $< months Debtors turno+er ratio

Net Credit Purchase


O( A+erage #redit Payment period A+erage #reditor Bet 6'& days=&< wee/s= $< months

Creditor turnover ratio


P( wor/ing capital 7urno+er %( .ixed Asset 7urno+er ratio $J( #urrent assets turno+er ratio $$( Debt- e,uity ratio $<( 7otal assets to debts $6( Proprietary ratio Bet ale wor/ing #apital Bet sale or cost of sale Bet fixed assets Bet sales #urrent assets 7otal long term debt hareholders9 funds 7otal assets 3ong term debts hareholders .unds 7otal assets Hross Profit=Bet Bet profit = Bet ales V $JJ ales V $JJ

$G( Hross Profit ratio $&( Bet Profit 5atio $'( 4perating ratio

4perating cost M $JJ Bet sales

73

$O( 4perating profit ratio $P( 5eturn on capital employed :54"; $%( Earnings per share :EP ; <J( Di+idends per share <$( Price earning ratio <<( Di+idend payout ratio

4perating profit M $JJ Bet sales Bet profit before interest, tax L di+idend M $JJ #apital employed Bet income after interest,tax and preference di+idend M $JJ Bumber of e,uity shares Di+idends amount Bumbers of e,uity share Dar/et price of share EP# Di+idend per share Earning per share

Deanin( o. ca"1 .lo2 "tate3ent ; &t i" a "tate3ent 21ic1 i" %re%are# to "1o2 t1e .lo2 o. ca"1 in a bu"ine"" un#ertakin(. /'F.CT59.S ( 5i8 5ii8 1el%.ul in 3akin( .inancial %olicie" 1el%.ul in #eci"ion 3akin( to #eclare #i'i#en#.

5iii8 C*) i" #i..erent t1an eac1 Bu#(et. 5i'8 Ael%.ul in #e'i"in( t1e eac1 que"tion. 5'8

1el%.ul in tellin( rea"on" .or #i..erence bet2een %ro.it an# lo""

-S.S ( 5i8 5ii8 1el%" in 3akin( "1ort "1ort ter3 %lannin( 1el%" un#er"tan#in( liqui#ity R "ol'ency.

5iii8 1el%" in co3%arati'e "tu#y. 5i'8 te"t" .or 3ana(e3ent #eci"ion

05M5T+T5/2 ( 1. 2. 3. /on eac1 tran"action are i(nore#. /ot "uitable .or an inco3e "tate3ent Ai"torical in nature. /pe"ating +ctivities ( 0%eratin( acti'itie" are t1e %rinci%al re'enue<%ro#ucin( acti'itie" o. t1e enter%ri"e an# ot1er acti'itie" t1at are not in'e"tin( or .inancin( acti'itie". 5nvesting +ctivities ( &n'e"tin( acti'itie" are t1e acqui"ition an# #i"%o"al o. lon(<ter3 a""et" an# ot1er in'e"t3ent" not inclu#e# in ca"1 equi'alent". Financing +ctivities ( *inancin( acti'itie" are t1e acti'itie" t1at re"ult in c1an(e in t1e "i?e an# co3%o"ition o. t1e o2ner"@ ca%ital 5inclu#in( %re.erence8 "1are ca%ital in t1e ca"e o. a co3%any8 an# borro2in( o. t1e enter%ri"e.

Ve($ S-!(t an) -!(t An Be( C,e ti!n

74

$(

tate whether the following statements are true or false( :a; Pro+ision is the amount set aside or written off for any /nown liability( :b; 1nclaimed di+idend is shown on the assets side of the balance sheet of the company( : c; Preliminary expense is a current liability( :d; "n the balance sheet of a company the items goodwill, patents and trade mar/s are shown under the heading fixed assets( :e; Discount allowed on the issue of shares or debentures is shown in the assets side of the balance sheet( :f; Debentures are shown in the balance sheet under the item unsecured loans( :g; hare forfeiture account is shown in the balance sheet under share capital account( :h; 1nclaimed di+idend is shown in the balance sheet under the item current liabilities( :i; ecurities premium account is shown on the liability side of the balance sheet under the heading share capital( 0Ans( :a; 7rue :b; .alse :c; .alse :d; 7rue :e; 7rue :f; .alse :g; 7rue :h; 7rue :i; .alse2 <( "ndicate whether following items belong to the asset side or the liability side of the balance sheet of a company( :a; #alls unpaid( :b; Preliminary expenses : c; #apital redemption reser+e :d; Acceptances :e; Proposed di+idend :f; 1nexpired payments 0Ans( :a; 3iability :b; Asset :c; 3iability :d; 3iability :e; 3iability :f; Asset 2 6( Ihat is the contingent liabilityR Ihere it is shown in the Balance sheetR Hi+e three examples of contingent liabilities( G( Cow would you disclose the following items in the balance sheet of a limited company::i; 3oose tools :ii; toc/ :iii; Hoodwill :i+; Discount on issue of debentures not yet written of :+; ecurities premium( &( 5e-arrange the following assets in the proper order as per schedule !" Part " of #ompanies Act $%&'( 3oans and ad+ances Discellaneous expenditure #urrent assets "n+estments .ixed assets '( #orrect the order of assets and liabilities according to the pro+ision of schedule !" part "( 3iabilities ubscribed capital 1nsecured loans Pro+isions ecured loans 5eser+e and surplus #urrent liabilities Assets 3oans and ad+ances miscellaneous expenditure #urrent assets "n+estments .ixed assets

O( Point out whether following statement are true or falseR a; #urrent ratio impro+es increases in credit purchases(

75

b; 3i,uidity ratio impro+es with increase in credit sale( c; Ior/ing capital is the excess of current assets o+er current liability( d; #urrent ratio measures the li,uidity of the business( e;Debt e,uity ratio measures short term financial position of the business Ans- A; .alse b; 7rue c; 7rue d; 7rue e; false Assuming the current ratio is < , state in each of the following cases whether the ratio will impro+e or decline or will ha+e no change( a( Payment of a current liability b(Purchase of fixed assets c( #ash collected from customers d("ssue of new share Ans- A; impro+e b; decline c; Bo change d; "mpro+e %( 7he current ratio of a company is <&: $( Ihich of the following suggestion would impro+e , reduce or not change itR i; Payment to trade creditors ii; ale of machinery for cash iii; Purchase of goods i+; "ssue of e,uity share Ans- A; impro+e b; impro+e $J( $$( $<( c; Bo change d; "mpro+e P(

Ihat are the category under which the +arious ratios are groupedR Ihat does debt- e,uity ratio indicatesR Ihat is stoc/ T turno+er ratio, how it is calculatedR Ihat are the implications of high and low stoc/ turn o+er ratioR $6( tate the meaning and ob*ecti+e of the followinga; Proprietary ratio b; 4perating ratio $G( Ihat do you mean by the interest co+erage ratioR Explain in brief, gi+ing its formulaR $&( tate the significance and method of calculating the followinga(#urrent ratio b(4perating ratio c( 5eturn on in+estment ratio:54"; $'( Ihat are the different names of acti+ity ratiosR Bame fi+e acti+ity ratios( $O( Describe three ratio based upon sales( $P( Explain in about &J words the importance of the following ratiosa(proprietary ratio b(Debt e,uity ratio $%( Hi+e the method of computing and the purpose of the following ratiosa( Acid 7est ratio b("n+entory turno+er ratio c( Debt e,uity ratio d(5eturn on in+estment ratio Ihat will be the impact of following suggestions on the debt e,uity ratio, assuming the gi+en ratio to be $:<R a( "ssue of e,uity shares b(#ash recei+ed from debtors c( 5edemption of debentures d(Purchase of goods on credit( Ans- A; Decrease b; Bo change c; decrease d; Bo change

<J(

76

.SS+C TC#. I-.ST5/2S


1. 2. 3. 4. 5. 6. 7. 21. ,1at i" Ca"1 *lo2 )tate3ent= Ao2 it i" %re%are#= ,1at are it" u"e"= ,1at i" Ca"1 *lo2 )tate3ent= -i'e t1ree ite3" o. "ource" 5in.lo28 o. ca"1. >+%lain t1e u"e" o. ca"1 *lo2 )tate3ent. >nu3erate any t1ree 3a:or "ource" o. ca"1 in .lo2. ,1at i" 3eant by Ca"1 *lo2 )tate3ent= >+%lain brie.ly 1o2 t1e "tate3ent i" %re%are# a" %er !)<3 5re'i"e#8. >+%lain t1e ter3 PCa"1 *lo2@. -i'e t1ree ite3" o. u"e" 5out.lo28 o. ca"1. >nu3erate t1e 'ariou" "te%" in'ol'e# in t1e %re%aration o. PCa"1 *lo2 )tate3ent@. *or calculatin( Pca"1 .lo2 .ro3 o%eratin( acti'itie" .ro3 t1e (i'en .i(ure o. /et $ro.it earne# #urin( a year4 1o2 2oul# you #eal 2it1 increa"e in Debtor"4 Decrea"e in )tock4 Decrea"e in Bill" $ayable an# &ncrea"e in Cre#itor". *or calculatin( Ca"1 *lo2 .ro3 o%eratin( !cti'itie"@ .ro3 a (i'en .i(ure o. P/et $ro.it"@ earne# #urin( a year4 1o2 2oul# you #eal 2it1 t1e #ecrea"e in %reli3inary e+%en"e"4 #ecrea"e in %re%ai# e+%en"e"4 increa"e in in'entory an# increa"e in Bill" $ayable= >+%lain t1e i3%act o. increa"e in #ebtor"4 #ecrea"e in in'entorie"4 increa"e in cre#itor" an# #ecrea"e in bill" %ayable on t1e co3%utation o. ca"1 .lo2 o%eratin( acti'itie". *or calculatin( ca"1 .lo2 .ro3 o%eratin( acti'itie" .ro3 a (i'en .i(ure o. /et $ro.it earne# #urin( a year4 1o2 2ill you #eal 2it1 t1e re#e3%tion o. #ebenture"4 #ecrea"e in out"tan#in( e+%en"e"4 increa"e in ca"1 balance an# #ecrea"e in in'entorie"4 #ecrea"e in Bill" $ayable4 increa"e in cre#itor" an# increa"e in #ebtor".

22.

23.

24.

PRACTICAL C%ESTIONS

77

$( 7he following figures are extracted from the boo/s of AB# #o( Draw up the 3iabilities side according to law( 5s( 6J,JJJ shares of 5s( $J each, 5s( P paid up <,GJ,JJJ ecurities Premium <J,JJJ 5eser+es 6&,JJJ #reditors G&,JJJ .ixed deposits <&,JJJ <( 7he following balances appeared in the boo/s of 1tsa+ Publications 3td( Hoodwill Plant L Dachinery Building #ash in hand toc/ in trade $J,JJJ shares of 5s( $J each, 5s( P paid up %K debentures Preliminary expenses #reditor Di+idend Payable Prepare balance sheet of company as per the the #ompanies Act $%&'( 5s( <,JJ,JJJ $,'J,JJJ $,G&,JJJ $J,JJJ &J,JJJ PJ,JJJ <,&J,JJJ $J,JJJ &J,JJJ <&,JJJ Performa gi+en as per

chedule !" Part " of

6( 7he following ledger balances were extracted from the boo/s of A/ash 3td( on 6$ st Darch, <JJO:3and and Buildings <,JJ,JJJ; $<K Debentures 5s(<,JJ,JJJ; hares #apital 5s($,JJ,JJJ; E,uity hares of 5s($<each fully paid up; Plant and Dachinery 5s(P,JJ,JJJ; Hoodwill 5s(<,JJ,JJJ; "n+estments in shares of 5a*a 3td( 5s(<,JJ,JJJ; Heneral reser+e 5s(<,JJ,JJJ; toc/ in trade 5s($,JJ,JJJ; Bills 5ecei+able 5s(&J,JJJ; Debtors 5s($,&J,JJJ; #reditors 5s($,JJ,JJJ; Ban/ 3oan :1nsecured; 5s( $,JJ,JJJ; Pro+ision for taxation 5s(&J,JJJ; Discount on issue of $<K debentures 5s(&,JJJ; Proposed di+idend 5s(&&,JJJ( Nou are re,uired to prepare the balance sheet of the company as per schedule !" Part " of the companies Act, $%&'( G( Danu 3td( has an authori8ed capital of 5s(&J,JJ,JJJ di+ided into e,uity shares of 5s($J each( 7he company in+ited applications for 6,JJ,JJJ shares( Applications for <,O&,JJJ shares were recei+ed( All calls were made and were duly recei+ed except the final call of 5s(6 per share on &,JJJ shares( G,JJJ of the shares on which the final call was not recei+ed were forfeited( how how share capital will appear in the Balance sheet of the company as per schedule !" part " of the companies act $%&'R &( 7he following balances ha+e been extracted from the boo/s of 5ishi 3td( on 6$(6($%%'; hare capital 5s($J,JJ,JJJ, securities premium 5s($,JJ,JJJ, $<K debentures 5s(&,JJ,JJJ, creditors 5s(<, JJ,JJJ, proposed di+idend 5s(&J,JJJ, profit and loss account :Dr; 5s(&J,JJJ, discount on issue of $<K debentures 5s( $,JJ,JJJ( Prepare the balance sheet of the company as per schedule !" part " of the companies act $%&'(

78

'( 7he following balances are supplied on the basis of which you are re,uired to show the ma*or appropriate heads under which the items gi+en below will appear in the balance sheet of 5a*co 3td( as on 6$st Darch <JJO: 5s( Plant L Dachinery &,'J,JJJ Building $J,JJ,JJJ E,uity share capital :Authorised; <J,JJ,JJJ E,uity share of 5s($JJ each 5s(OJ called and paid up $G,JJ,JJJ $JK debentures &&,JJJ Discount on "ssue of $JK debentures &,JJJ .urniture and fixtures $&,JJJ 3ong 7erm Ban/ 3oan :secured; $,<&,JJJ O( Prepare a balance sheet of !i/as 3td( as on Darch 6$, <JJO as per pro+isions of Part-", chedule !", 1nder section <$$ of the companies Act $%&' from the following information( 5s( Heneral reser+e 6,JJJ Debentures 6,JJJ Profit L 3oss A=c :#r(; $,<JJ Depreciation on .ixed Assets OJJ Hross .ixed Assets %,JJJ #urrent 3iabilities <,&JJ Preliminary Expenses 6JJ Preference hare #apital &,JJJ #urrent Assets ',$JJ P( 7he following figures were extracted from the trial balance of MNE 3td(: hare #apital: $J,JJJ E,uity hares of 5s($J each fully called up and paid up( 5s( ecurities Premium $J,JJJ $<K debentures &J,JJJ .ixed Deposits :#r(; <&,JJJ #reditors &,JJJ Nou are re,uired to draw up the liabilities side of the balance sheet of the company according to the re,uirements of the companies act( %( 7he following balances appear in the boo/s of 5uia Publications 3td(: Hoodwill Plant L Dachinery Building #ash at hand toc/ in trade hare capital: $,JJJ e,uity shares of 5s($JJ each issued at Par, 5s(PJ per share called up and paid up PK debentures Preliminary expenses #reditor Di+idend Payable 5s( <J,JJJ $,'J,JJJ $,G&,JJJ $J,JJJ OJ,JJJ PJ,JJJ <,&J,JJJ &,JJJ &&,JJJ <&,JJJ chedule

howing the abo+e items under the ma*or; heads in accordance with Part " of !" of the #ompanies Act $%&', prepare a balance sheet of the company(

79

$J(

.ind out current ratio( Hross Debtors 5s( <J,JJJ; Pro+ision for Bad debts 5s( 6,JJJ; Bills recei+able 5s( $6,JJJ; toc/ twice of net debtors; #ash in hand 5s( $',JJJ; Ad+ance to suppliers 5s( $&,JJJ; #reditors for goods 5s( <O,JJJ; Bills payable 5s( P,JJJ; 4utstanding expenses 5s( $&,JJJ; Prepaid expenses 5s( &,JJJ "n+estment :3ong term; 5s( $<,JJJ; 0Ans( #urrent 5atio <:$2 .ind out current liabilities when current ration is <(&:$ and current assets are 5s( O&,JJJ( 0Ans( #urrent 3iabilities 5s( 6J,JJJ2 7he ratio of current assets :5s( ',JJ,JJJ; to current liabilities is $(&:$( 7he accountant of this firm is interested in maintaining a current ratio of <:$ by paying some part of current liabilities( Nou are re,uired to suggest him the amount of current liabilities which must be paid for this purpose( 0Ans( 5s( <,JJ,JJJ2 A firm had current liabilities of 5s( %J,JJJ( "t then ac,uired stoc/-in-trade at a cost of 5s( $J,JJJ on credit( After this ac,uisition the current ratio was <:$( Determine the si8e of current assets and wor/ing capital after and before the stoc/ was ac,uired( 0Ans( #(A( 5s( <,JJ,JJJ, 5s( $,%J,JJJ; I(#( 5s( $,JJ,JJJ, 5s( $,JJ,JJJ2 A 3td( company has a current ratio of 6(&:$ and acid test ratio of <:$( "f the in+entory is 5s( 6J,JJJ, find out its total current assets and total current liabilities( 0Ans( #urrent Assets 5s( OJ,JJJ; #urrent 3iabilities 5s( <J,JJJ2 Hi+en: #urrent ratio <(P; Acid test ratio $(&; Ior/ing capital > 5s( $,'<,JJJ( .ind out: #urrent assets;, #urrent liabilities; 3i,uid Assets( 0Ans( A; 5s( <,&<,JJJ; :b; 5s( %J,JJJ; :c; $,6&,JJJ2 .rom the following, calculate Debt-E,uity 5atio( E,uity share capital 5s( $,&J,JJJ( Preference hare capital 5s( &J,JJJ, Heneral reser+es 5s( $,JJ,JJJ, Accumulated profits 5s( 'J,JJJ, Debentures 5s( $,&J,JJJ( undry creditors 5s( PJ,JJJ, Expenses payable 5s( <J,JJJ( Preliminary Expenses not yet written off 5s( $J,JJJ( 06 :O2 #alculate Debt E,uity 5atio from the Balance 3iabilities E,uity shares of 5s( $J each $$K preference share capital ecurities premium account Heneral reser+e Profit and 3oss account $<K Debentures of 5s( $JJ each Bills payable 7rade creditors 4utstanding Expenses Pro+ision for tax heet of M 3td( as on 6$st Darch <JJO Assets 3and and Buildings Plant and Dachinery .urniture and fittings toc/ 7rade debtors #ash in hand #ash at ban/ Bills recei+able 5s( ',<J,JJJ $<,JJ,JJJ $,PJ,JJJ &,6J,JJJ G,OJ,JJJ '&,JJJ 6,JJ,JJJ $,6&,JJJ 6&,JJ,JJJ

$$(

$<(

$6(

$G(

$&(

$'(

$O(

5s( P,JJ,JJJ G,JJ,JJJ PJ,JJJ &,PJ,JJJ $,GJ,JJJ $J,JJ,JJJ PJ,JJJ $,GJ,JJJ 'J,JJJ <,<J,JJJ 6&,JJ,JJJ

0Ans( $ :<2

$P(

.rom the following calculate debt-e,uity ratio:

80

Preference share capital E,uity share capital #apital reser+es Profit L 3oss account $GK Debentures 1nsecured loans #reditors Bills payable Pro+ision for taxation Pro+ision for di+idends 0Ans( J(6O& : $2 $%(

5s( <,JJ,JJJ G,JJ,JJJ $,JJ,JJJ $,JJ,JJJ <,JJ,JJJ $,JJ,JJJ GJ,JJJ <J,JJJ $J,JJJ <J,JJJ

7he debt-e,uity ratio of a company is $:<( Ihich of the following suggestions would :i; increase, :ii; decrease, and :iii; not change it( a; "ssue of e,uity shares, b; #ash recei+ed from debtors c; 5edemption of debentures for cash, d; Purchased goods on credit, e; 5edemption of debentures by con+ersion into shares, f; "ssue of shares against the purchase of a fixed asset, g; "ssue of debentures against the purchase of a fixed asset( 0Ans(:a; :ii;, :b; :iii;, :c; :ii;, :d; :iii;, :e; :ii;, :f; :ii;, :g; :i;2

<J(

Debtors in the beginning 5s( %J,JJJ; debtors at the end 5s( %',JJJ credit sales during the year 5s( G,'&,JJJ( calculate debtors turno+er ration( 0Ans( & times2

<$(

5s( $,O&,JJJ is the net credit sales of a concern during $%P%( "f debtors turno+er is P times, calculate debtors in the beginning and at the end of the year( Debtors at the end is 5s( O,JJJ more than at the beginning( 0Ans( 5s( $P,6O& and 5s( <&, 6O&2

<<(

.rom the following figures, compute the debtors turno+er ratio: Near " 5s( Hross sales %,&J,JJJ ales returns &J,JJJ Debtors in the beginning of year P',JJJ Debtors at the end $,$O,JJJ Pro+ision for doubtful debts O,JJJ 0Ans( $ year P,PO times "" year O(6% times2

Near "" 5s( P,JJ,JJJ &J,JJJ $,$O,JJJ P',JJJ ',JJJ

<6(

4pening stoc/ 5s( O',<&J; #losing toc/ 5s( %P,&JJ; ales 5s( &,<J,JJJ; 5eturns 5s( <J,JJJ; Purchases 5s( 6,<<,<&J( #alculate stoc/ turno+er ratio( 0Ans( 6(G6 times2

ales

<G(

A+erage stoc/ carried by a trader is 5s( 'J,JJJ stoc/ turno+er ratio is $J times( Hoods are sold at a profit of $JK on cost( .ind out the profit(

81

0Ans( Profit 5s( 'J,JJJ2 <&( "f in+entory turno+er ratio is & times and a+erage stoc/ at cost is 5s( O&,JJJ, find out cost of goods sold( 0Ans( 6,O&,JJJ2 <'( Nou are gi+en the following data( Hross profit at 6JK on sales > 5s( 'J,JJJ toc/ turno+er > O times 7he opening stoc/ is &,JJJ less then the closing stoc/( Accounts payable :opening; 5s( 6J,JJJ; Accounts payable :closing; 5s( 6P,JJJ( .ind out :a; Bet purchases :b; Accounts payable turno+er :c; A+erage age of creditors( 0Ans( :a; 5s( $,G&,JJJ; :b; G(<' times :c; P&(' days2 <O( .rom the following information, calculate creditors at the beginning of the year: 7otal purchases #ash purchases :included in abo+e; #reditors turno+er ratio-G times creditor 0Ans( 6,&J,JJJ2 <P( #alculate wor/ing capital turno+er ratio from the following data: #ost of goods sold #urrent assets #urrent liabilities 0Ans( ' times2 <%( .rom the following, compute wor/ing capital turno+er; ales #urrent assets #urrent liabilities 0Ans( <(' times2 6J( .ind out the wor/ing capital turno+er ratio: #ash Bills recei+able undry debtors toc/ undry creditors #ost of sales 0Ans( & times2 5s( <&,<J,JJJ $&,'J,JJJ ',JJ,JJJ 5s( $,&J,JJJ $,JJ,JJJ O&,JJJ 5s( <<,JJ,JJJ $J,JJ,JJJ <,&J,JJJ

5s( $J,JJJ &,JJJ <&,JJJ <J,JJJ 6J,JJJ $,&J,JJJ

82

6$(

#apital employed 5s( $,JJ,JJJ, Ior/ing capital 5s( <J,JJJ, #ost of goods sold 5s( 6,<J,JJJ, Hross profit 5s( PJ,JJJ( #alculate fixed assets turno+er ratio assuming that there were no long-term in+estments( 0Ans( & times2

6<( #alculate Hross Profit ratio: ales ales return 4pening stoc/ 0Ans( 66 $=6 K2 66( .rom the following details calculate the operating ratio: :a; #ost of goods sold 4perating expenses Bet sales :b; #ost of goods sold 4perating expenses ales ales return :c; ales less 5eturn Hross Profit Administrati+e expenses elling expenses "ncome from "n+estments 3oss due to fire 5s( &,<J,JJJ $,PJ,JJJ P,JJ,JJJ P,JJ,JJJ GJ,JJJ $J,&J,JJJ &J,JJJ $,JJ,JJJ GJ,JJJ $J,JJJ $J,JJJ &,JJJ 6,JJJ $,'J,JJJ $J,JJJ 6J,JJJ Purchases Purchases returns #losing toc/ %J,JJJ $J,JJJ $J,JJJ

:d; 7rading and Profit L 3oss Account for the year ended 6$st December,<JJO Particulars 7o stoc/ $(G(%6 7o Purchase 7o Iages 7o gross profit 7o 7o 7o 7o administrati+e exp( selling L distribution exp( loss on sale of plant net profit 5s( 6&,JJJ <,<&,JJJ ',JJJ $,PG,JJJ G,&J,JJJ $J,JJJ $G,JJJ $J,JJJ $,&J,JJJ $,PG,JJJ Particulars By ales By toc/ at end 5s( G,JJ,JJJ &J,JJJ G,&J,JJJ $,PG,JJJ

By Hross Profit

$,PG,JJJ

:Ans( :a; PO(&K :b; PGK :c; PJK :d; 'JK;

83

6G( 4pening stoc/ 5s( PJ,JJJ; Purchase 5s G,6J,%JJ; Direct expenses 5s G,JJJ; #losing stoc/ 5s( $,'J,JJJ; Administrati+e expenses 5s <$,$JJ; elling and distribution expenses 5s GJ,JJJ; ales 5s $J,JJ,JJJ #alculate : :a; Hross Profit ratio :b; 4perating ratio :Ans( Hross Profit ratio > 'G(&<K, 4perating ratio > G$('K; 6&(.rom the following information, calculate stoc/ turno+er ratio, operating ratio and capital turno+er ratio( 5s( 4pening toc/ <P,JJJ #losing toc/ <<,JJJ Purchases G',JJJ ales %J,JJJ ales return $J,JJJ #arriage inwards G,JJJ 4ffice expenses G,JJJ elling and distribution expenses <,JJJ #apital employed <,JJ,JJJ : Ans( :a; <(<G times :b; OO(&K :c; (G times; 6'( #alculate :a; :b; :c; :d; the following ratios, from the details gi+en as under : #urrent ratio Acid test ratio 4perating ratio Hross profit ratio 5s( 3i,uid assets GJ,JJJ #urrent liabilities <J,JJJ toc/ $J,JJJ ales &J,JJJ 4perating expenses $&,JJJ #ost of goods sold <J,JJJ

:Ans( :i; &:< :ii; <:$ :iii; OJK :i+; 'JK; 6O( Balance sheet of WA9 3td( is gi+en below : 3iabilities Paid up e,uity hare capital : $&K debentures PL3 a=c: for the current Ear after taxes; Heneral reser+e #urrent liabilities Amount:5s(; G,JJ,JJJ <,JJ,JJJ 6,JJ,JJJ 6,JJ,JJJ &,PJ,JJJ $O,PJ,JJJ Assets Building Dachinery Debtors toc/ Ban/ Amount:5s(; ',JJ,JJJ $,<J,JJJ ',&J,JJJ 6,&J,JJJ 'J,JJJ $O,PJ,JJJ

84

Additional "nformation: Bet sales for the current year 5s( &O,'J,JJJ #ompute any three of the following ratios: :a; Bet profit ratio :b; .ixed assets turno+er ratio, :c; Debt e,uity ratio :Ans( Bet profit ratio &(<$:Approx;, #urrent ratio $(P6 :$, .ixed asset turno+er ratio P times, Debt le,uity ratio $:&; 6P( .rom the following information calculate any three of the following ratios: :a; Hross Profit ratio :b; Ior/ing capital turno+er ratio :c; Debt-e,uity ratio :d; Proprietary ratio "nformation: Bet sales 5s &,JJ,JJJ; #ost of goods sold 5s( 6,JJ,JJJ; #urrent assets 5s( <,JJ,JJJ; #urrent liabilities 5s( $,GJ,JJJ; paid up share capital 5s( <,&J,JJJ; $6K Debentures 5s $,JJ,JJJ( :Ans( H(P( 5atio GJK; Ior/ing #apital 7(4( 5atio P(P6 times; Debt E,uity 5atio GJK; Proprietary 5atio &$K; .rom the following information, calculate the stoc/ turno+er ratio and the gross profit ratio( 5s( 4pening stoc/ $P,JJJ #losing stoc/ <<,JJJ Purchases G',JJJ Iages $G,JJJ ales PJ,JJJ #arriage inwards G,JJJ 0Ans( Hross profit ratio <&K; stoc/ turno+er ratio 6 times2 A company has a loan of 5s( &J,JJ,JJJ as part of its capital employed( 7he interest payable on the loan is $JK and the 5(4("( of the company is $&K( Assuming that the rate of income tax is &JK, calculate the amount of gain to the shareholders9 because of the loan obtained by the company( 0Ans( Hian to shareholders 5s( $,<&,JJJ2 #alculate any three of the following ratios with the help of the information gi+en below:a; b; c; d; e; 4perating ratio Hross profit ratio Uuic/ ratio Ior/ing capital turno+er ratio Proprietary ratio

6%(

GJ(

G$(

"nformation: E,uity share capital 5s( $,JJ,JJJ; PK preference share capital 5s( PJ,JJJ; %K debentures 5s( 'J,JJJ; Heneral 5eser+e 5s( $J,JJJ; ales 5s( <,JJ,JJJ; 4pening stoc/ 5s( $<,JJJ; Purchases 5s( $,<J,JJJ; Iages 5s( P,JJJ; #losing toc/ 5s( $P,JJJ; selling and distribution expenses 5s( <,JJJ; other current assets 5s( &J,JJJ, fixed assets 5s( <,$<,JJJ and current liabilities 5s( 6J,JJJ 0:a; '<K; :b; 6%K; :c; $('O:$; %d; 6(<$ times; :e; 'O(P' K2

85

G<( 7he following is the Balance

heet of !inod Dills 3td( as on 6$st December, <JJ': 5s( &J,JJJ $,&J,JJJ <,JJ,JJJ 6,JJ,JJJ $6,JJ,JJJ <J,JJ,JJJ

undry #reditors Bills payable 7ax pro+ision 4utstanding expenses $<K Debentures $JK Preference share capital E,uity share capital 5eser+e .und

'J,JJJ $,JJ,JJJ $,6J,JJJ $J,JJJ O,JJ,JJJ $,JJ,JJJ &,JJ,JJJ G,JJ,JJJ <J,JJ,JJJ

Ban/ 7rade in+estments Boo/ Debts :Debtors; toc/ .ixed Assets $P,JJ,JJJ 3ess: Depreciation &,JJ,JJJ

4ther information supplied is as follows Bet sales #ost of goods sold 4perating expenses

5s( 6J,JJ,JJJ <&,PJ,JJJ <,<J,JJJ

:a; Uuic/ ratio; :b; 7otal assets to debt ratio; :c; #urrent ratio; :d; Hross profit ratio; :e; 4perating ratio :f; Bet profit ratio( 0Ans( :a; $(66:$, :b; <(P':$; :c; <(66:$; :d; $GK; :e; %6(66K; :f; '('OK2 G6( .rom the following information, calculate stoc/ turno+er ratio, operating ratio; fixed assets turno+er ratio and current assets turno+er ratio:4pening stoc/ #losing stoc/ Purchases ales ales returns #arriage inwards 4ffice Expenses elling L Distribution Expenses .ixed assets #urrent assets 5s( &',JJJ GG,JJJ %<,JJJ $,PJ,JJJ <J,JJJ P,JJJ P,JJJ G,JJJ OJ,JJJ 'J,JJJ

0Ans( toc/ 7urno+er 5atio <(<G times; 4perating 5atio OO(&K, .ixed assets 7urno+er 5atio $(' times, #urrent Assets turno+er ratio $(PO times2

86

GG

.rom the following data, calculate:a; Hross profit ratio, b; Bet profit ratio c; Ior/ing capital turno+er ratio, d; Debt-e,uity ratio, e; Proprietary ratio 5s( Bet sales 6J,JJ,JJJ #ost of sales <J,JJ,JJJ Bet profit 6,JJ,JJJ .ixed assets ',&J,JJJ #urrent assets ',JJ,JJJ #urrent liabilities <,JJ,JJJ Paid-up share capital &,JJ,JJJ Debentures <,&J,JJJ 0Ans( H(P( ratio> 66 $=6K; B(P( 5atio>$JK; Ior/ing capital turno+er ratio> & times; Debt e,uity ratio>J(6$:$, Proprietary ratio i(e( shareholder9s funds=total assets > 'GK2

G&(

Iith the help of the gi+en information, calculate any three of the following ratios: :a; :b; :c; :d; 4perating ratio Uuic/ ratio Ior/ing capital turno+er ratio Debt e,uity ratio(

"nformation: E,uity share capital 5s( &J,JJJ; $<K preference share capital 5s( GJ,JJJ; $<K debentures 5s( 6J,JJJ; Heneral 5eser+e 5s( GJ,JJJ; ales 5s( 6,JJ,JJJ; 4pening stoc/ 5s( <J,JJJ; Purchases 5s( $,GJ,JJJ; Iages 5s( 6J,JJJ; #losing stoc/ 5s( GJ,JJJ; elling and distribution expenses 5s( $P,JJJ; 4ther #urrent assets 5s( $,JJ,JJJ and current liabilities 5s( 'J,JJJ( 0Ans( :a; &'K; :b; $('O:$; :c; $(PO& times; :d; J(<6($

OBJECTIVE T=PE C%ESTIONS


"( "ndicate whether increase in debtors = current assets results in : :i; "ncrease in cash :ii; Decrease in cash :iii; Bon of the abo+e( "ndicate whether increase in current liabilities results in : :i; "ncrease in cash :ii; Decrease in cash :iii; Bone of the abo+e( tate whether the following would result in inflow or outflow of cash : :i; "ssue of shares :ii; Payment of di+idend :iii; Purchase of fixed assets :i+; #ash from operations :profits; :+; ale of fixed assets :+i; 5edemption of debentures

""(

"""(

87

"!(

.ill in the blan/s : :a; Bet profit are 5s( <J,JJJ( 7here is an increase in the amount of debtors of 5s( &,JJ( Ihat would be the amount of cash flow from operating acti+ities :5s( <J,JJJ, " 5s($&,JJJ "" 5s( <&,JJJ; """

:b; Bet profit are 5s( $<,&JJ, after debiting depreciation 5s( ,6&JJ andn there is a decrease in stoc/ worth 5s( <,OJJ( 7he cash flow from operating acti+ities would be :5s( $',JJJ, " 5s($&,<JJ "" 5s( $P,OJJ; """

Ans( "( decrease in cash :""; "ncrease in #ash :"""; i; in .low :ii; out flow :iii; out flow :i+; in flow :+; in flow :+i; outflow( :"!; :a; $&JJ :b; $POJJ

B. SHORT ANS<ER C%ESTIONS


$( <( 6( G( &( '( Ihat is W#ash .low tatement9R Explain( Irite what is inflow of each and outflow of cashR Ihat are non-operating Expenses and "ncomes( Irite about treatment of depreciation in a #ash .low tatement( Ihat do you /now about 7reatment of Di+idend declared and paid in a #ash .low tatement Irite about treatment of pro+ision for tax and tax paid in #ash .low EGERCISE 6 $( #alculate cash flow from operating acti+ities from the following information : 5s( ales Purchases Iages Assume that all the transactions were in cash( <( $,<J,JJJ OJ,JJJ <&,JJJ Ans :5s <&,JJJ; :5s(; ales #ost of ales 4pening Balance of Debtors #losing Balance of Debtors 4pening Balance of #reditors #losing Balance of #reditors 4pening Balance of 4utstanding Expenses #losing Balance of 4utstanding Expenses <,O&,JJJ <,<&,JJJ <J,JJJ <J,JJJ &,JJJ $J,JJJ $,<&J <,O&J Ans( :&$&JJ; tatement(

#alculate cash flow from operating acti+ities from the following figures :

88

6(

#alculate cash flow from operating acti+ities after calculating ad*usted profit from the following : 5s( :i; Depreciation allowed $&,JJJ :ii; 3oss on ale of Dachine <,&JJ :iii; Discount on "ssue of hares written off $,JJJ :i+; Hoodwill written off $,&JJ :+; 7ransfer to Heneral 5eser+e <,JJJ :+i; Bet Profit after abo+e ad*ustments $&,JJJ :+ii; "ncrease in #urrent Assets <,&JJ :+iii; Decrease in #urrent 3iabilities 6,&JJ Ans( :6$,JJJ; #alculate cash flow from operating acti+ities from the following : Particulars Profit and 3oss Appropriation A=c Bills 5ecei+ables Pro+isions for Depreciation 5ent 4utstanding Prepaid "nsurance Hoodwill toc/ 2004 Rs <J,JJJ $G,JJJ 6J,JJJ $,'JJ $,GJJ <J,JJJ $G,JJJ 2005 (Rs.) 6J,JJJ $P,JJJ 6<,JJJ G,JJJ $,<JJ $',JJJ $P,JJJ Ans( :5s( $J,'JJ;

&(

'(

#alculate cash flow from operating acti+ities from the following Profit and 3oss A=c of a business for the year ended on 6$(6(<JJ& : Particulars alaries Depreciation on fixed assets Preliminary Exp( w=off( Discount on issue of deb( Heneral 5eser+e Discount on ales Hoodwill Bet Profit Rs. <<,6JJ P,<JJ $,&JJ $,JJJ $<,JJJ G,$PJ 6,<<J $','JJ Particulars By Hross Profit By 5ent 5ecei+ed By Profit on ale of fixed assets Rs. &G,&JJ 6,<JJ $$,6JJ

7o 7o 7o 7o 7o 7o 7o 7o

'%,JJJ Ans( :5s( 6$,<<J; O( #alculate cash flow from operating acti+ities from the following details: Particulars
Profit and 3oss A=c Heneral 5eser+e Pro+isions for Depreciation Prepaid Expenses 1nearned "ncomes 4utstanding Expenses Hoodwill undry #reditors Bills 5ecei+able

31.3.07 Rs
G&,JJJ &,JJJ $P,JJJ <,GJJ $,&JJ PJJ $J,JJJ &,JJJ ',GJJ

31.3.08 (Rs.)
'J,JJJ $J,JJJ <P,JJJ $,PJJ <,&JJ $,<JJ O,JJJ 6,JJJ %,'JJ

!n". 5R" 2948008


P( #alculate cash flow from operating acti+ities from the following data :

89

"(

Profits made during the year 5s( $,G&,JJJ after considering the following items : :5s; a; b; c; d; Amortisation of Hoodwill Depreciation of .ixed Assets 3oss on ale of .ixed Assets 7ransfer to Heneral 5eser+e 6,JJJ $O,JJJ <,&JJ $&,JJJ

""(

7he following is the position of current assets and current liabilities : 31.3.07 Rs $<,JJJ $',<JJ <&J &,JJJ 31.3.08 (Rs.) P,<JJ $<,JJJ O&J O,JJJ

Particulars #reditors Debtors Prepaid Expenses Bills Payable %(

Ans( :5s( $,PG,GJJ; #ompute cash flow from operating acti+ities from the following Profit and 3oss A=c : Particulars 7o 7o 7o 7o 7o 7o Expenses Depreciation 3oss on ale of Dachine Discount Hoodwill Bet Profit Rs. 6,JJ,JJJ OJ,JJJ G,JJJ <JJ <J,JJJ $,$&,PJJ &,$J,JJJ Particulars By Hross Profit By Hain on ale of .ixed Assets Rs. G,&J,JJJ 'J,JJJ

&,$J,JJJ Ans( :5s( $,&J,JJJ;

$J(

#ompute cash flow from operating acti+ities from the following data : Particulars Profit and 3oss A=c Heneral 5eser+e Hoodwill Depreciation Discount on "ssue of Debenture undry Debtors undry #reditors Bills Payable 31.3.07 Rs $&,%&J $,<JJ &,JJJ G,&JJ &JJ G,$JJ $,&JJ &,6JJ 6,6JJ 31.3.08 (Rs.) <G,GJJ $,PJJ 6,JJJ ',6JJ 6&J <,PJJ <,$JJ <,%JJ <,$JJ Ans( :5s <',$JJ;

90

$$(

7he following is the position of current assets and current liabilities of M 3td( : <JJO :5s; Pro+ision for Bad debts hort term loans #reditors Bills 5ecei+able $,JJJ $J,JJJ $&,JJJ <J,JJJ $%,JJJ $J,JJJ GJ,JJJ <JJP:5s(;

7he company incurred a loss of 5s( G&,JJJ during the year( #alculate cash from operating acti+ities( Ans( :5s( '<,JJJ; $<( 7he following is the position of current assets and current liabilities : Particulars Profit L 3oss Appropriation A=c Bills 5ecei+able Pro+ision for Depreciation 4utstanding 5ent Payable Prepaid "nsurance Hoodwill toc/ $6( 2007 Rs <,JJJ $,GJJ 6,JJJ $'J $GJ <,JJJ $,GJJ 2008 (Rs.) 6,JJJ $,PJJ 6,<JJ GPJ $<J $,'JJ $,PJJ Ans( :5s( $J'J; #ompute cash flow from operating acti+ities from the following details : Particulars Profit L 3oss A=c Debtors 4utstanding 5ent Hoodwill Prepaid "nsurance #reditors $G( 2007 Rs $,$J,JJJ &J,JJJ <G,JJJ PJ,JJJ P,JJJ <',JJJ 2008 (Rs.) $,<J,JJJ '<,JJJ G<,JJJ O',JJJ G,JJJ 6P,JJJ Ans( :5s( 6',JJJ; #alculate cash flow from operating acidities during <JJO-JP from the following : Liabilities #apital Debentures Accumulated Profits 7rade #reditors 200 7 &J 'J 6J 'J <JJ 2008 OJ GJ &J %J <&J Assets #ash L Ban/ 7rade Debtors toc/ Hoodwill Dachinery 200 7 6J GJ &J 6J &J <JJ 2008 GJ 'J 'J <J OJ <&J

Ans( :5s( GJ,JJJ;

91

$&(

.rom the following information, calculate cash from operating acti+ities : Particulars toc/ Debtors #reditors Expenses 4utstanding Bills Payable Accrued "ncome Profit L 3oss A=c 2007 Rs ',JJJ <,&JJ 6,<JJ 6&J 6,&JJ PJJ P,JJJ 2008 (Rs.) &,JJJ <,6JJ <,PJJ G&J <,<JJ %JJ %,JJJ Ans( :5s( &JJ;

$'(

#alculate cash from operating acti+ities from the following Profit and 3oss account( P(!"it an) L! Dr( Acc!,nt #r( Rs. ',&JJ OJJ 'JJ

:for the year ending on 6$(6(JP;

( Particulars 7o 7o 7o 7o 7o 7o 7o 7o 7o alaries 5ent Pro+ision for Bad debts Depreciation 3oss on ale of land Hoodwill written off Proposed di+idend Pro+ision for tax Bet Profit Rs. $,PJJ $,JJJ <JJ GJJ 6JJ &JJ OJJ GJJ <,&JJ O,PJJ Particulars By Hross Profit By Profit on ale of Plant By "ncome 7ax 5efund

O,PJJ Ans( :5s( 6OJJ; tatement ::5s; $&,JJJ $%,JJJ $6,JJJ $O,JJJ 6J,JJJ $G,JJJ $P,JJJ

$O(

.rom the following information prepare a #ash .low 4perating #ash Balance #losing #ash Balance "ncrease in #reditors Decrease in Debtors .ixed assets purchase 5edemption of $<K debentures Profit for the year

Ans( #ash flow from operating in+esting and financing acti+ities > 5s( GPJJJ, 5s( 6J,JJJ 5s( $G,JJJ;(

92

1E.

.rom the following information prepare a #ash .low 4perating #ash Balance #losing #ash Balance "ncrease in #reditors Decrease in Debtors .ixed assets purchase 5edemption of $<K debentures Profit for the year

tatement ::5s; $,JJ,JJJ $,<J,JJJ &J,JJJ OJ,JJJ <,JJ,JJJ &,JJ,JJJ <,JJ,JJJ

Ans( #ash flow from operating in+esting and financing acti+ities > 5s( 6<J,JJJ 5s( <,JJ,JJJ L 5s( &,JJ,JJJ;( $%( #alculate #ash .low operating acidities from the following Profit and 3oss A=c for the year ending on 6$(6(J&: Liabilities 7o 7o 7o 7o 7o 7o alaries Depreciation 3oss on ale of Plant Hoodwill written off Pro+ision for tax Bet Profit 2007 <,&JJ <JJ $JJ GJJ $,JJJ $,$JJ &,6JJ Particulars By Hross Profit By Profit on ale of land By "ncome tax 5efund 2008 (Rs.) G,&JJ GJJ GJJ

&,6JJ Ans( :5s <,JJJ;

<J(

.rom the following Balance heets of D=s 5ahman L Bros( 3td( prepare a #ash .low tatement as per :A -6 :5e+ised; : Liabilities E,uity #apital $&K hare #apital Heneral 5eser+e Profit L 3oss A=c #reditors hare Preference 2007 (Rs.) $,&J,JJJ O&,JJJ <J,JJJ <J,JJJ 6<,&JJ <,%O,&JJ 2008 (Rs.) <,JJ,JJJ &J,JJJ 6&,JJJ <G,JJJ G%,&JJ 6,&P,&JJ Assets Hoodwill Buildings Plant Debtors toc/ #ash 2007 (Rs 6',JJJ PJ,JJJ GJ,JJJ $,$%,JJJ $J,JJJ $<,&JJ <,%O,&JJ 2008 (Rs.) <J,JJJ 'J,JJJ $,JJ,JJJ $,&G,&JJ $&,JJJ %,JJJ 6,&P,&JJ

Depreciation charged on Plant was 5s( $J,JJJ Ans( :5s( G$,&JJ 5s( OJ,JJJ L 5s( <&,JJJ;

and on building was 5s( <J,JJJ(

<$(

Prepare #ash .low tatement as per A (6 :5e+ised; from the following Balance heets of <JJO and <JJP(

93

Liabilities E,uity hare #apital 5eser+e L urplus Ban/ 3oan #reditors Ban/ 4+erdraft Proposed Di+idend

2007 (Rs.) 6J,JJJ P,&J J $J,JJJ 6$,JJJ Y G,&JJ

2008 (Rs.) GJ,JJJ $$,JJJ O,&JJ 6%,JJJ &JJ ',JJJ

Assets .ixed Assets 3ess: Accumulated Depreciation "n+estments toc/ Debtors Ban/

2007 (Rs GJ,JJJ P,JJJ 6<,JJJ P,JJJ <J,JJJ <$,JJJ 6,JJJ PG,JJJ

2008 (Rs.) '&,JJJ $6,&JJ &$,&JJ $$,JJJ <<,&JJ $%,JJJ Y $,JG,JJJ

$,JG,JJJ PG,JJJ Ans( :5s( $G,&JJ, 5s( <,&JJ, 5s( O,&JJ; <<( .ollowing are the comparati+e Balance <JJO and <JJP( Liabilities hare #apital $&K Debentures 7rade #reditors Pro+ision for doubtful debts Profit L 3oss A=c 31.3.07 (Rs.) OJ,JJJ $<,JJJ $J,6'J OJJ $J,JGJ $,J6,$JJ heets of Iashi

L Bros( 3td(( for the year

31.3.08 (Rs.) OG,JJJ ',JJJ $$,PGJ PJJ $J,&'J $,J6,<JJ

Assets #ash 7rade

Debtors :good; toc/ in trade 3and Hoodwill

31.3.07 (Rs %,JJJ $G,%JJ G%,<JJ <J,JJJ $J,JJJ $,J6,$JJ

31.3.08 (Rs.) O,PJJ $O,OJJ G<,OJJ 6J,JJJ &,JJJ $,J6,<JJ

Ans( :5s( $J,PJJ, 5s $J,JJJ L 5s( <JJJ; Additional Infor :i; :ii; :iii; :i+; ation !

Di+idends were paid totaling 5s( 6,&JJ 3and was purchased for 5s( $J,JJJ Amount pro+ided for amorti8ation of goodwill 5s &,JJJ Debenture loan was repaid 5s ',JJJ Nou are re,uired to prepare a #ash .low tatement as per A -6 :5e+ised;

<6(

7he Balance

heets of DD L 31.3.07 (Rs.) %J,JJJ $J,JJJ <J,JJJ Y 6O,GJJ $,&O,GJJ

ons 3td( as on 6$(6(JO and 6$(6(JP were as follows : 31.3.08 (Rs.) $,6J,JJJ $&,JJJ 6J,JJJ <J,JJJ G<,JJJ <,6O,JJJ Assets .ixed Assets toc/ Debtors Ban/ Preliminary Expenses 31.3.07 (Rs %6,GJJ <<,JJJ 6',JJJ G,JJJ <,JJJ $,&O,GJJ 31.3.08 (Rs.) $,'',JJJ <',JJJ 6%,JJJ &,JJJ $,JJJ <,6O,JJJ

Liabilities E,uity hare #apital Heneral 5eser+e Profit L 3oss A=c $&K Debentures #reditors

Additional Infor

ation !

94

:i; :ii;

Depreciation written off on .ixed Assets 5s( <6,GJJ Di+idend paid on E,uity Prepaid #ash .low hare #apital 5s( <J,JJJ

tatement as per A -6 :5e+ised;

Ans( :5s( &OJJJ, 5s( %',JJJ L 5s( GJ,JJJ; <G( .ollowing are the Balance Liabilities E,uity hare #apital $&K 5edeemable Preference hare #apital Heneral 5eser+e Profit L 3oss A=c C,((ent Lia7ilitie 6 Proposed Di+idend undry #reditors Bills Payable 4utstanding alary Pro+ision for 7ax heets of Ali L Bros( 3td( 31.3.08 (Rs.) O,<J,JJJ $,<J,JJJ Assets "n+estments Discount on "ssue of hares .actory Buildings Dachinery .ixed Deposits Preliminary Expenses C,((ent A et undry Debtors toc/ Ban/ #ash 31.3.07 (Rs G<,<JJ $,<J,JJJ <,JJ,JJJ <,$',JJJ <G,JJJ <G,JJJ 31.3.08 (Rs.) Y %',JJJ $,<J,JJJ G,&P,GJJ PG,JJJ $',PJJ

31.3.07 (Rs.) G,PJ,JJJ <,'J,JJJ

GP,JJJ Y

O<,JJJ 'G,PJJ

'O,<JJ OJ,JJJ $O,<JJ 6%,<JJ 'O,<JJ $J,GP,PJJ

%6,'JJ $,JJ,JJJ <O,<JJ $G,GJJ O',PJJ $<,PP,PJJ

$,PJ,JJJ <,JG,JJJ 6J,'JJ O,JJJ

<,&%,<JJ $,PO,<JJ &J,JJJ $O,<JJ

$J,GP,JJJ

$<,PP,PJJ

Ans( :5s( $,O',JJJ, 5s( $,O%,<JJ L 5s( 6<,PJJ; Prepare #ash .low <&( tatement as per A -6 :5e+ised; heets of hafi L Bros( 3td( as at 6$st Darch, <JJP Assets Hoodwill 3and Dachinery toc/ Debtors Preliminary Expenses #ash 31.3.07 (Rs &,JJJ G<,JJJ 'J,JJJ <&,JJJ 6J,JJJ 6,JJJ 6J,JJJ $,%&,JJJ 31.3.08 (Rs.) G,JJJ '',JJJ PJ,JJJ <$,JJJ <G,JJJ <,JJJ <,GJJ $,%%,GJJ .ollowing are the Balance Liabilities hare #apital $&K Debentures Heneral 5eser+e Profit L 3oss A=c Pro+( for "ncome 7ax #reditors Bills Payable Pro+( for doubtful debts

31.3.07 (Rs.) $,JJ,JJJ &J,JJJ <J,JJJ $$,JJJ G,JJJ &,JJJ <,JJJ 6,JJJ $,%&,JJJ

31.3.08 (Rs.) $,$J,JJJ 6J,JJJ <J,JJJ $%,JJJ $$,JJJ G,JJJ 6,JJJ <,GJJ $,%%,GJJ

Ans( :5s( 6&,%JJ, 5s( &6,&JJ L 5s( $J,JJJ;

Additional Infor

ation !

95

:i; :ii; :iii;

During the year <JJP, a part of Dachine costing 5s( O,&JJ :Accumulated depreciation thereon being 5s( <,&JJ; was sold for 5s( 6,JJJ( "ncome tax was paid 5s, G,JJJ during <JJP( Depreciation on Dachinery for <JJP was pro+ided at 5s( &,JJJ( Prepare #ash .low tatement as per A -6 :re+ised; .rom the following Balance heets of D=s Beyamat L Bros( 3td( for two years <JJO and <JJP, prepare cash .low tatement Liabilities 31.3.0 7 (Rs.) 6',JJJ <J,JJJ Y %,JJJ '&,JJJ 31.3.0 8 (Rs.) 6J,JJJ $G,JJJ &,JJJ $$,JJJ 'J,JJJ Assets 31.3.0 7 (Rs &,JJJ <J,JJJ $P,JJJ $%,JJJ 6,JJJ '&,JJJ 31.3.0 8 (Rs.) ',JJJ <&,JJJ $<,JJJ $&,JJJ <,JJJ 'J,JJJ

<'(

hare #apital P L 3 A=c $&K Debentures #reditors

Hoodwill Dachinery toc/ Debtors #ash

Additional Infor :i; :ii; :iii; :i+; &@.

ation !

A Dachine of the boo/ +alue of 5s ',JJJ was sold for 5s(',&JJ during <JJP( Debentures were redeemed for 5s( G,%JJ( #ash di+idend of 5s( <,&JJ was paid during <JJP( Depreciation on Dachinery was pro+ided 5s( $,JJJ Ans( :5s( <$JJ, G&JJ L 5s( G%JJ; .rom the following Balance heets tatement as per A -6 :5e+ised; of hahid L Bros( 3td( prepare #ash .low

Balance S-eet Liabilities hare #apital $&K Debentures Heneral 5eser+e P L 3 A=c #reditors Bills Payable Pro+( for tax 31.3.07 (Rs.) 6,JJ,JJJ $,&J,JJJ GJ,JJJ O<,JJJ &&,JJJ <J,JJJ GJ,JJJ ',OO,JJJ 31.3.08 (Rs.) G,JJ,JJJ $,JJ,JJJ OJ,JJJ %P,JJJ P6,JJJ $',JJJ &J,JJJ P,$O,JJJ Assets Hoodwill Buildings Debtors #ash Bills 5ecei+able toc/ 31.3.07 (Rs $,$&,JJJ <,JJ,JJJ $,'J,JJJ <&,JJJ <J,JJJ $,&O,JJJ ',OO,JJJ 31.3.08 (Rs.) %J,JJJ $,OJ,JJJ <,JJ,JJJ $P,JJJ 6J,JJJ 6,J%,JJJ P,$O,JJJ

Additional Infor :i; :ii;

ation !

Depreciation on Building is $&K( "ncome 7ax paid is 5s( GJ,JJJ( Ans( :5s( &O,JJJ, 5s B"3 L 5s( &J,JJJ;

Bote : Pro+ision for tax is to be treated as a non-current liability(

96

<P(

.ollowing are the comparati+e Balance heets of AB# #o( 3td( for the year <JJO and <JJP( Liabilities 31.3.0 31.3.08 Assets 31.3.0 31.3.08 7 7 (Rs.) (Rs.) (Rs.) (Rs E,uity hare G&,JJJ '&,JJJ .ixed Assets G',OJJ P6,JJJ #apital $J,JJJ <J,JJJ toc/ $$,JJJ $6,JJJ $&K Debentures P,OJJ $$,JJJ Debtors $P,JJJ $%,&JJ 7rade #reditors &,JJJ O,&JJ #ash <,JJJ <,&JJ Heneral 5eser+e $J,JJJ $&,JJJ Preliminary Exp( $,JJJ &JJ Profit L 3oss A=c OP,OJJ $,$P,&JJ OP,OJJ $,$P,&JJ Prepare #ash .low tatement( As per A -6 :re+ised; Ans( :5s( ',PJJ 5s( 6',&JJ L 5s( 6J,JJJ;

<%(

.rom the following Balance heets of tatement as per A -6 :re+ised; Liabilities hare #apital Depreciation 5eser+e Profit and 3oss A=c $&K Debentures #reditors 31.3.07 (Rs.) PJ,JJJ GJ,JJJ 6J,JJJ GJ,JJJ <J,JJJ <,$J,JJJ 31.3.08 (Rs.) $,JJ,JJJ G6,JJJ &J,JJJ <J,JJJ $O,JJJ <,6J,JJJ

Eia-ul-Ca,ue L #o, Prepare #ash .low

Assets Dachinery :at cost; Debtors toc/ Preliminary Expenses Ban/ Balance

31.3.07 (Rs $,<J,JJJ GJ,JJJ 6J,JJJ G,JJJ $',JJJ <,$J,JJJ

31.3.08 (Rs.) $,GG,JJJ 6&,JJJ 6<,JJJ 6,JJJ $',JJJ <,6J,JJJ

Ans( :5s( <G,JJJ, 5s( <G,JJJ, 5s( B"3; 6J( .rom the following Balance heets of Ba/hte Dunaeem #o( 3td(, prepare the #ash .low tatement( As per A -6 :re+ised; Liabilities hare #apital Depreciation 5eser+e Profit and 3oss A=c $6K Debentures Bills Payable #reditors 31.3.07 (Rs.) $,<J,JJJ %,JJJ ',JJJ 6&,JJJ $&,JJJ <&,JJJ <,$J,JJJ 31.3.08 (Rs.) <,JJ,JJJ %,&JJ %,JJJ <J,JJJ $J,&JJ &$,JJJ 6,JJ,JJJ Assets Dachinery :at cost; Debtors toc/ Ban/ Balance Preliminary Expenses 31.3.07 (Rs <J,JJJ %&,JJJ 6O,JJJ G6,JJJ $&,JJJ <,$J,JJJ 31.3.08 (Rs.) $,<&,JJJ PJ,JJJ '<,JJJ <&,JJJ P,JJJ 6,JJ,JJJ

Ans( :5s( <<,JJJ, 5s, $,J&,JJJ L 5s('&,JJJ;

97

98