Q.

Answer

Introduction: Financial analysis involves using financial reports prepared by

companies to evaluate their past, present and future performance and financial
position for the purpose of making investment, credit and other economic decisions.

In order to understand the fundamentals of any listed company on exchange, it is

very important to figure out the financial strengths and weaknesses of the firm.
Financial Analysis helps understand the stability, solvency and liquidity of a firm and
helps make better economic decisions.

Financial analysis can also be termed as a systematic process of critical evaluation

of financial information in financial statements to understand the managerial
efficiency of a firm.

There are different techniques to perform financial analysis; however I am outlining

here the five fundamental techniques that are must to understand the financial health
of a listed company.

 Ratio Analysis
 Trend Analysis
 Cash flow Analysis
 Common-Size Analysis
 Percentage change Analysis

Let’s go through each one of them one by one with the help of Examples :

1) Ratio Analysis: It is a tool that helps analyse financial statements of any

company.

It is a quick indicator of a company’s financial health. Absolute numbers are not

enough to understand the performance. Ratio analysis helps put financial numbers in
their context by expressing one number in relation to another.

Ratio analysis can be divided in to two types :

a) Time Series Analysis: It Compares the Present performance of a company with
its Past performance.

For Example- Let say there is a company ABC LTD. We need to compare the
financial data of ABC LTD for the year 2021 with the past few years that is Year
2020, 2019, 2018 and so on. Then time series analysis can used to perform this
analysis.

b) Cross Sectional Analysis: It helps compare performance of a company against

other firms or industry Standard.

For Example- If the performance of ABC LTD company needs to be compared with
its competitors then we can use the Cross Sectional Analysis.

2) Common-Size Analysis: Common-Size Analysis also known as Vertical

Analysis. To put it simple it involves Common Factors which can be used as a base
for Calculating Ratios and Comparison between two companies.

If we need to analyse two companies for example Company A and Company and
find out which Company is better, Company A is more profitable or Company B is
more profitable B then we can simply take the Income Statement of both the
Companies and make Analysis using Common-size analysis. Let’s understand it with
the help of a following illustration.

Now we can see that revenue of Company b is much higher than company A but can
we say that company B is more profitable?

No, as we have used Common size analysis above by taking revenue as a base and
express rest of the components like COGS as a percentage to revenue we can state
the though company B has less revenue but has Higher Net income when analysed
in terms of Percentage by using Common-size technique.

3) Trend Analysis: It is a technique of studying the operational results and

financial position over a series of years. Trend analysis is important because, with its
long run view, it may point to basic changes in the nature of the business.
Procedure for Calculating Trend Percentage: One year is taken as the base year.
Generally, the first year is taken as the base year. The figure of base year is taken
as 100. The trend percentages are calculated in relation to this base year. If a figure
in other year is less than the figure in base year, the trend percentage will be less
than 100 and it will be more than 100 if figure is more than the base year figure.
Each year’s figure is divided by the base year figure.

How to Calculate the trend percentages from the following figures of sales, stock and
profit of X Ltd., taking 2010 as the base year and interpret them .

Interpretation:

A. The sales have continuously increased in all the years up to 2014, though
indifferent proportions. The percentage in 2014 is 200 as compared to 100 in
2010. The increase in sales is quite satisfactory.
B. The figures of stock have also increased over a period of five years. The
increase
in stock is more in 2013 and 2014 as compared to earlier years .
C. Profit has substantially increased. The profits have increased in greater
proportion than sales which implies that the company has been able to reduce
their cost of goods sold and control the operating expenses.

4) Percentage change: A percent change analysis shows how two items changed
as a percentage from one period to another period. Used on a balance sheet, a
percent change analysis shows how a balance sheet account changes from year to
year, or quarter to quarter. The balance sheet accounts are assets, liabilities and
stockholder’s equity. Percent change analysis is important for managers and
investors to see how a company is growing or retracting from year-to-year. Find the
balance sheet accounts you want to analyze and find the beginning and ending
results of the account.
5) Cash flow Analysis: It refers to the analysis of actual movement of cash into and
out of an organisation. The flow of cash into the business is called as cash inflow or
positive cash flow and the flow of cash out of the firm is called as cash outflow or a
negative cash flow. The difference between the inflow and outflow of cash is the net
cash flow. Cash flow statement is prepared to project the manner in which the cash
has been received and has been utilised during an accounting year as it shows the
sources of cash receipts and also the purposes for which payments are made. Thus,
it summarises the causes for the changes in cash position of a business enterprise
between dates of two balance sheets
Conclusion: The above outlined techniques are super important to understand the
financial performance and financial position of any firm listed on exchange. During
this pandemic when a lot of people are actively watching and participating in the
Indian financial market it is of utmost important for every individuals to read the
Financials of companies they would like to invest in so they get better returns on
their investment.

Q 2 Answer

Introduction: Journal is the first step in the preparation of a financial statement.

Every financial transaction that takes place in the business is first recorded in journal
by an accountant. Journal is the Original entry for all transactions. It is a first book of
entry that records the transaction as an when they occur.
The following journal entries need to be passed in Journal if Mahesh starts a
business with a total capital of Rs 10,000,00.Rs 7 Lakhs borrowed from bank and the
rest Rs 3 lakhs is taken from his personal Savings.

1 Mahesh borrows Rs 700,000 from the Bank of Baroda.

Cash is coming in to the business in the form of bank loan and liabilityis incurred as
Mahesh has borrowed cash from the Bank of Baroda.

Journal Entries
Dat Particulars LF Debit (Rs) Credit (Rs)
e
1 Cash A/C Dr 700,000
To Bank Loan A/C Cr 700,000
(Being loan taken from Bank of
Baroda)

The Key Concept behind Accounting

Accounting Equation: Assets = Liabilities + Owner’s Equity.

This represent the position statement at any given point of time called
“Balance Sheet”

: 700,000 = 700,000 + 0

2 Mahesh also uses his saving Rs 300,000 t start a business.

Again Cash is coming in to the business and Capital is created in the business.
Business now owes Rs 300,000 to Mahesh.

As per business Entity Concept Business and owner are two separate Entities.

Business is an artificial person

And owner is another person who is not a business.

Journal Entries
Dat Particulars LF Debit (Rs) Credit (Rs)
e
2 Cash A/C Dr 300,000
To Mahesh Capital A/C Cr 300,000
(Being started business with Cash)

Accounting Equation: Assets = Liabilities + Owner’s Equity

: 300,000 = 0 + 300,000
The Above accounting equation shows that every business Transaction of the
business will have Two effects on the accounting equation, and thus, LHS = RHS

How the above two transactions will reflect in the Financial Statement is shown using
the balance sheet.

Balance Sheet of Mahesh as on

Liabilities Amount Amount Assets Amount Amount
Share Capital Fixed Assets - -
Mahesh’s Capital - 300,000

Non Current Liab

Bank Loan - 700,000 Current Assets
Cash 10,000,00
Current Liab - -
Total - 10,00,000 Total - 10,000,00

The Above balance sheet is prepared using the accounting equation:

Asset = Liabilities + Owner’s Equity

As per Double Entry system each transaction will have two effects

- By Accounting Equation
- One Debit Transaction
- One Credit transaction

“Debiting an account” or “Crediting an Account” .

“Debit Amount” will always be equal to “Credit Amount”

To determine Debit or credit, first we need to determine the accounts involved and
follow some thumb rules.

Now Let me conclude the my Answer by Stating the applicability of the

Accounting Assumptions by using which the above journal entries have been
Passed and Accounting treatment.

The Above journal entries have been passed by using the Thumb-Rules for
Debit and Credit.

Account Type Increase Decrease

Assets Debit Credit
Liabilities Credit Debit
Capital Credit Debit
Expense Debit Credit
Income Credit Debit

Analysing Accounting Transactions

1 Mahesh borrows Rs 700,000 from the Bank of Baroda

 Identify the Accounts Involved: The very first thing is that we need to figure
out two types of Accounts involved. For Example : Cash A/C, Bank A/C,
Debtors A/c, Creditors A/c, Bank Loan A/c, Accrued Expense A/c, Owner’s
Capital A/c, Reserves A/C, etc.
 Determine the category of Accounts: Secondly, We need to determine the
category of Accounts such as Assets A/c or Liabilities A/C,or Income A/C or
Expenditure A/C or Owner’s Capital A/C.
 Increase or Decrease in Accounts: Last but not least, after identifying the
type of accounts and determining the category of accounts, we need perform
the posting in journal by using the thumb rules of Debit and Credit.
 For Example: Assets: Debit when increase and Credit when decrease.
 Liability: Credit when increase and debit when decrease.
 Capital: Credit when increase and Debit when Decrease.
 Cash Account – Assets – Increase – Hence Debited while posting the
Journal entry
 Bank Loan Account – Liability – Increase – Hence Credited while posting
the Journal Entry.

2 Mahesh also uses his saving Rs 300,000 t start a business.

 Cash Account – Assets – Increase – Hence debited while posting the

Journal entry.
 Cash is increasing in the Business as business is receiving Cash.
 Mahesh Capital Account: Capital A/C- Increase hence credited while
posting the journal entry.
 Mahesh capital account is increasing as Mahesh given cash to the
business and business owe Rs 300,000 to Mahesh.

Note: The Above equation can also been solved by using traditionally Golden rules
techniques.

Personal Account Nominal Account Real Account

Debtors Expenses Assets Account
Creditors Incomes
Debit – The Receiver Debit – All Expenses & Debit – What Comes In
Credit – The giver Losses Credit – What Goes Out
Credit – All Incomes and
Gains

Q3: (b) Answer: Profitability Ratio

Introduction: The major topic in Ratio analysis is Profitability Ratios. Profitability
ratios are the one that every Investor, Lender, Stakeholder, Institutional Investor and
Government would be looking for.

There is also a misconception that when we say profitability ratios, it is only in

relation with Profit and Sales. There are two Major Classification of Profitability
ratios.

Profitability
Ratios

Sales Investment

Overall Profiltability
Gernaral Profitability Ratio Ratio or Investment
Ratio

Return on Return on
Gross Profit Operating Operating Expense Net Profit Return on
Capital Shareholders
Ratio Ratio Profit Ratio Ratio Ratio Asset
Employed Equity

Now let’s discuss the three Profitability ratios that are important that are important to
access the profitability of the company. In this case Britannia Industries LTD.
1) Gross Profit Ratio: It measures how efficiently a company uses its material and
labour to produce and sell products profitably.

Gross Margin = Gross Profit/Net Sales.

What does it indicate?

Higher the gross profit ratios, better the results. A higher gross profit margin
indicates that you have more money left over to cover operating expenses, taxes,
depreciation, and other business costs.

In Britannica Case, Gross Profit Margin was 13.16% in the year 2017 which has
increased to 17.64% in the year 2021.So it did pretty good as we can see G.P
margin has substantially increased.

Uses of gross profit ratio:

 Gross Profit Ratio measures a company’s manufacturing and distribution

efficiency during the production process.
 Investors use the gross profit ratio to compare companies in the same
industry and also in different industries to determine what are the most
profitable
  A company that boasts a higher gross profit ratio than its competitors and
industry is more efficient.

2) Operating Profit margin ratio: It demonstrates how much revenues are left over,
after all the variables and operating costs have been paid.

Operating profit = Operating Profit/Net Sales

It Shows the Proportion of revenue is available to cover non-operating Costs like

interest Expense.

In Britannia Case, Operating Margin is 18.99% in the year 2021 which is a good
indicator as the operating margin is good enough to cover the operating
expense.

Uses of operating ratios:

 It helps Investors take a closer look at how strong and Profitable the
company’s operations are.
 It is used to analyse a particular project within a company, not only the
company itself.
 Projects can vary widely in size, but operating margin may still be used to
investigate a particular project or compare multiple projects within a company.

3 Return on Equity: The return on Equity ratio or ROE is a profitability ratio that
measures the ability of a firm to generate profits from its shareholders investments in
a company.

Return on Equity = Net Profit (PAT)/Equity Share Capital

Most of the time, ROE is computed for common shareholders.

Preferred dividends are then taken out of net income for the calculation.

The Net-worth of Britannia industries is pretty good which is 53.47%. It

indicates that management is efficient enough at using equity financing to
fund operations and grow the company.

Conclusion: Overall Britannia Industries is doing as we can analyse it with the help
of Profitability Margin. The Above margins is a good indicator for company’s long
success and Sustainability as well as a good sign for Investors and stakeholder.

Q3: (a) Answer:

Introduction: Concept of Dividend: For corporations, there are several reasons to

consider sharing some of their earnings with investors in the form of dividends. Many
investors view a dividend payment as a sign of a company’s financial health and are
more likely to purchase its stock. In addition, corporations use dividends as a
marketing tool to remind investors that their stock is a profit generator.
Britannia Industries LTD Dividends for the financial year 2020-2021

The total dividend payout for the financial year 2020-21 stands at ` 3,491.41 Crores.
The Board has not recommended a final dividend for the financial year 2020-21.

The Dividend Distribution Policy of the Company aims at rewarding the shareholders
through payment of dividend. Pursuant to the Policy, the Board of Directors have
declared interim dividends of:

- 8300% i.e. Rs 83 per Equity Share of Rs1/- each at their Meeting held on 17
August 2020 and

- 6200% i.e. Rs 62 per Equity Share of Rs 1/- each at their Meeting held on 2 April
2021.

Scheme of the Arrangement for Payment of Dividend: Payment of the dividend of Rs

12.50 (Rupees Twelve and Fifty Paise) per every 1 (one) fully paid-up equity share
of face value of Rs 1 (Rupee One) each by utilizing accumulated profits of the
Company.

Interim Dividend: The Board of Directors at their Meeting held on 17 August 2020
declared Interim Dividend @ 8300% i.e.Rs 83 per Equity Share of Rs1/- each. The
Interim Dividend was paid to the shareholders holding shares as on Record Date i.e.,
Thursday, 27 August 2020. The Board of Directors at their Meeting held on 2 April
2021 declared another Interim Dividend @ 6200% i.e.Rs 62 per Equity Share of Rs
1/- each. The Interim Dividend was paid to the shareholders holding shares as on
Record Date i.e., Saturday, 10 April 2021. The total dividend payout for financial year
2020-21 stands at Rs 3,491.41 Crores.
It can be seen that dividend payout ratio for Britannia Industries has increased
significantly. Although Britannia is the leader in in FMCG Industry but recently their
borrowing has Increased Significantly which is shown in their balance sheet. So
instead of paying huge Dividends company can reinvest it in their Business or use it
to clear the borrowings that are increasing.

So company needs to reduce their dividend payout and transfer more to Capital
Reserve which will increase their Share Capital.

Balance sheet Snapshot to show the Borrowings of Britannia.

Conclusion: Britannia should balance out their dividend policy. This is not to say
that they should not pay dividend but balancing it out will help the company reduce
the borrowing which has increased in the last two year.