MANAGEMENT AND FINANCIAL ACCOUNTING

GROUP 9

M JASWANTH REDDY

POOJA S

PRERANA KUMBHARE

R ARJUN SESHANK

PUNEET DHILLON
1(a). As compared to the year 2019, the owners’ equity has decreased in the year 2020. What is the most
important reason for the same?

Owner’s equity refers to the owner’s right to the assets of the business. Owner’s equity= Assets-Liabilities.

From the balance sheet of Tata Motors, the owner’s equity has been decreased from the year 2019 to 2020. While in
2019, owner’s equity was Rs.22162.52 (crores) and for 2020 it has been reduced to Rs.18387.65 (crores). From the
common-size balance sheet, for the year 2019 the retained earnings and surplus was 36.3% which infers that 36% of the
money has been used from the operating profits and approx.64% has been used from the outsiders.

For the year 2020, the retained earnings and surplus was 29 %( approx.) that infers 29% of the amount has been used
from the operating profits and 71% of money is used from outsiders.

The reason for the reduction of the owner’s equity might be inferred from the liabilities section. On comparing the liabilities
between 2019 and 2020, the liabilities have been increased. The major parts of the liabilities are from borrowings and
provisions. The portions of non-current liabilities and current liabilities have increased.

1(b) Tata Motors Limited had a loss of Rs. 7,289.63 but the Cash Outflow due to operation is only Rs. 1,454.59.
Give any two reasons for such a difference between the two.

For the financial year 2019-2020, Tata motors have seen a loss of Rs.7289.63 (crores). The cash outflow from the
operating process is Rs. 1,454.59 (crores). The company has incurred losses and it increased its financial borrowings.
The cash-inflow from the long term borrowings have been increased while the cash outflow for the repayment of the long-
term borrowings has been decreased (1131 from 3823).

The net cash inflow for the year 2020 was 7749 which was much greater than the previous year, while the previous year
had an outflow from the financing activities of Rs.2529. The company might use the amount from the financing activities
for the operating process and investments.

For the year 2019 there was a cash-inflow in the operating area, while for 2020 cash-outflow of Rs.1454 has occurred.
The assets have increased in the year 2020 and the costs from operating have reduced. As the value of assets increases,
the cost from operation decreases.

1(c) Do you think that the financial position of Tata Motors Limited has deteriorated over the FY 2019-20

For the financial year 2018-2019, company had a cash-inflow from operations i.e. it is able generate good amount of
money from operations and it used the amount in the investing and financial activities.

Whereas for the financial year 2019-2020, the company had only cash-outflow from the operations and it had to raise the
funds in-order to meet the operation and investments.

Thus, the Tata motors doesn’t hold a healthy cash-position. The financial position has slightly deteriorated for 2019-2020
financial year.

1(d) Prepare a Common-Size Balance Sheet for the year 2019-20 by taking Total Assets as a base. From the
Common-Size Balance Sheet, answer the following: What is the proportion of Current Assets and Non-Current
Assets? What is the proportion of Owners’ Equity and Outsiders’ Liabilities?

From the common-size balance sheet, the proportion of current assets is 21.67% and the proportion of non- current
assets is 78.32%.

The owner equity is 29.377% and the outsider’s liabilities have been 70.621% where short term liabilities were 41.23%
and long term liabilities were 29.383%.

1(e) Prepare a Common-Size Income Statement for the year 2018-19 by using the Total Income as a base? What is
the proportion of Profit for the Year out of the Total Income?

The profit for the year from the common-size income statement is 2.81%, taking the total income as the base.
2. Calculate the Index Number Trend by taking the FY 2010-11

The index number trend is a method used for comparing the financial statements covering more than two years. In
computing a series of index numbers, a base year must be selected and consider the value 100 to it.

From the given data, considering the financial year 2010-2011 as the base year, the Index number trend has been
calculated.

S.no Particulars 2010-2011 2019-2020

1 Sales 100 193.64
2 Net profit after tax 100 202.8094
3 Net fixed assets 100 451.401
4 Shareholders’ funds 100 415.09
5 Dividend per share 100 127.27

3. Prepare a consolidated Balance Sheet

The consolidated balance sheet is a financial statement that shows the financial position of the parent company and its
subsidiary companies.

The consolidated balance sheet has been made in the excel sheet.

4(a) Can you say that Larsen & Toubro Limited is a CASH COW

From the given cash flow statement we can able to observe that during the year of 2016 and 2017 Larsen and Turbo
made more money from operations it utilized the for investment and financing. But after 2017 the cash from operations
keeps on decreasing and it started to get money from investment and in 2020 it took cash from financing in order to utilize
in operations and investment. Since it is not making enough cash from operations we can’t say that Larsen and Turbo is a
cash cow.

4(b) Give two important reasons why Larsen & Toubro Limited is having negative cash flows from Operating
Activities in spite of the fact the Company has made a positive profit during the FY 2019-20

In the cash flow statement we can able to see that the profit during the FY 2019-2020 is 7224.30 crores. Inspite of this
positive profit we can able to see that Net cash from operating activities is negative of 121.30 crores. That means we
didn’t get any cash from operations instead we used cash for operations because

1. It spend lot of cash on dividend received (1387.29 cr), increase in trade and other receivables (6572.53 cr) and
due to direct taxes paid (1736.30 cr).
2. And it spend its cash in interest income (561.48cr), profit on sales investment (503.71cr) which is increased
compared to previous years and mainly due to effect of exchange rate changes on cash and cash equivalent
(46.32cr) as in previous 4 years Larsen and Turbo generated cash from this and in FY 2019-2020 it paid a lot of
money which made net cash from operations became negative.
4(c) By studying the cash flows pattern of the Company over a period of 5 years, can you conclude that its
financial health is improving

For understanding cash flow pattern of Larsen and Turbo very clearly there is a graph has been attached

From the above graph we can able to see that during FY 2015 – 2016 and 2016 – 2017 Larsen and Turbo is able to make
net cash from its operations itself and spend that money on investment and financing and during those time Larsen and
Turbo is financially healthy. But as time passes the net cash generating from operations became not sufficient and it
started to get cash from investment also. And finally in the FY 2019 – 2020 we can able to see that Larsen and Turbo
didn’t generated any cash from operations and started to get cash from finance in order to utilize it for operations and a lot
to investment. Since it didn’t able to make cash from operations Larsen and Turbo is not financially healthy.

5(a) Is NTPC LTD. growing?

1. From Trend analysis we can able to see that the profit of the year for NTPC remains constant even though the
revenue of NTPC is increasing rapidly
2. From Common size analysis we can able to see that Profit per Rs.100 for every year is decreasing.
From these two analyses we can able to conclude that NTPC LTD is not growing.

5(b) Is NTPC LTD. having sufficient liquid resources to meet its liabilities as and when they arise

The ability of the company to meet its financial debts in the long run can be measured by the liquidity ratio. On doing the
liquidity ratio; the average collection period which includes the payment that has to be received after selling the goods,
has been growing.

The average payment period, for the goods they have procured has also increased over the years. But the payment has
been done much earlier than the collection period, which indicates the capital has been used to run the company. The
average payment period was around 47 and avg collection period was around 56.

The operating cycle has been reduced in the years, which is a good sign that indicates the goods are in a faster
progression.

Cash conversion cycle has been increasing over the years and this indicates the company is taking more time invest the
amount in inventory and other resources into cash flows from sales.
On considering all the characteristics, the firm might find difficulty in withstanding long-term liabilities.

Current ratio indicates the ability of the company to repay its short-term liabilities. The current for the company has been
reducing and good companies normally have a current ratio of 1 or 2; but NTPC has on y 0.88 which indicates the
company might face difficulties for the short term debts.

The net working capital has been negative which indicates that the short term assets are not sufficient to pay the short
term debts.

Thus, the NTPC Ltd, face difficulties in facing their liabilities.

5(c) Is NTPC LTD. making sufficient profits?

1. From the graph of Operational profit margin and Net profit margin we can able to see that all the graphs are not
following increasing pattern. Hence NTPC LTD is not making sufficient profit on sales.
2. From the graph of Return on Investment and Return on Fixed assets we can able to see that all the graphs are
not following increasing pattern. Hence NTPC LTD is not making sufficient profit on efficiency.

5(d) Is NTPC Limited using its assets – Long term as well as short term – effectively and efficiently?

1. From the activity ratio analysis given in excel we can able to see that Inventory turnover ratio, Current asset
turnover ratio are decreasing and hence NTPC LTD is not utilizing its short term assets efficiently.
2. From the activity ratio analysis given in excel we can able to see that Fixed turnover ratio, Total asset turnover
ratio are decreasing and hence NTPC LTD is not utilizing its long term assets efficiently.
5e) Is NTPC LTD. Solvent?

Solvency is the condition at which the company is able to repay its long term debts. The solvency ratio indicates whether
a company’s cash flow is sufficient to meet its long-term liabilities.

Solvency is calculated from leverage and coverage perspectives. Leverage implies the debt present in the balance sheet
for that financial year. The leverages have been increasing each year and the company’s debts are increasing each year.

Coverage implies to what extent the company is able to clear its debts. On observing the coverage values, they have
decreasing each year and company might find it difficult to repay its debts.

Higher the leverage, lower is the solvency. Therefore, the company is not solvent.

5(f) what are the driving forces behind the profitability of NTPC LTD?

The driving forces behind the profitability of NTPC LTD are Return of assets and Return of equity.

We know that

Return on Assets = Operating profit margin * Assets turnover ratio

Return on Assets = (EBIT/Sales)*(Sales/Total Assets)

2016 2017 2018 2019 2020

Operating 14.697 16.176 14.481 13.747 14.397
profit margin
(in %)
Assets 0.3347 0.3353 0.3274 0.3170 0.3066
turnover ratio
Return on 4.9195 5.4253 4.7424 4.3585 4.4148
assets
(in %)
In the above table we can able to see that the operating profit margin keeps on decreasing as well as assets turnover ratio
also keeps on decreasing and hence ROA also decreasing.

We know that

Return On Equity = Profit margin * Asset turnover ratio * Leverage

Return On Equity = (PAT/Sales) * (Sales/Total assets) * (Total assets/Leverage)

2016 2017 2018 2019 2020

Profit Margin 14.9558 11.8288 12.1387 12.7467 10.0646
(in %)
Asset 0.3347 0.3353 0.3274 0.3170 0.3066
Turnover ratio
Leverage 2.3565 2.4584 2.5564 2.7069 2.8851
Return On 11.7966 9.7528 10.1625 10.9394 8.9045
Equity
(in %)

From the above table we can able to see that due to decrease in Profit margin and Asset Turnover ratio we can able to
find that ROE is decreasing.

Since ROA and ROE are the driving forces behind the profitability of NTPC LTD and both are following decreasing pattern
and hence the profitability of the company also decreases.