BANKING MADE EASY

CHAMPARAN GURUKUL
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BALANCE SHEET ANALYSIS

Dear Colleagues,

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With a sense of great delight that,We are giving Balance sheet Analysis which includes Basic Concept on
Balance Sheet/Financial Statement Analysis, case Studies, Numericals & Recalled & Expected questions. This
Study materials prepared based on previous year question patterns, very useful for day to day branch banking as
well as knowledge based Test including Promotion Test and Interview. The details are as under :

S.no. Topics Page no.

1. Basics about Balance Sheet Analysis 1-11
2. Numericals & Case Studies 11-14
3 Recalled & Expected Questions 14-15

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BASIC CONCEPT ON BALANCE SHEET/ FINANCIAL STATEMENT ANALSIS
A Financial Statement/Balance Sheet is organized collection of information or data prepared as per certain
acceptable accounting norms & procedures. Banks require to access financial strength and the performance of
the borrowers for proposal & appraisal.
Audited balance sheet comes under Income Tax section 44AB – As Per Section 44AB of the Income Tax Act 1961,
Every person carrying on the business & maintaining books of account are required to get their books Audited from
a Chartered Accountant if the Gross receipt or Turnover from business during the previous year exceeds Rs. 1
crore (Tax Audit limit is Rs. 2 Crore in case of Presumptive Taxation u/s 44AD). In case of Profession, books of
account are required to get audited, if the Gross receipt or Turnover during the previous year exceeds Rs. 50 Lakh.
In Budget 2020, Section 44AB was amended and the threshold limit was increased from Rs.1 Crore to Rs.
5 Crore in order to ease the compliance for taxpayer & to boost non-cash transactions, subject to the condition
that:
 The Aggregate of all Cash receipts during the relevant previous year does not exceed 5% of total receipt.
 The Aggregate of all Cash payments during the relevant previous year does not exceed 5% of total payment
 In other words, more than 95% of the business transactions (both receipts & payments) shall be done through
banking channels.
 For company & other statutory body ABS always required irrespective of Quantum of limit.
From A.Y 2022-23 (FY 2021-22), The Ministry of Finance has increased the threshold limit from, Rs. 5 Crore to Rs.
10 Crore in order to ease the compliance for taxpayer & to boost non-cash transactions.
As per IT rules Form 3CB & Form 3CD also required where ever it is applicable. In case of sticky accounts S-3, a
special audit report is required. Penal Interest of 2% on the outstanding liability shall be collected if ABS is not
submitted before 31st oct. every year ( within 07 month from closing year ) or within a fortnight from the date of
Audit of financial accounts of business unit which ever is earlier.
Goods and Services Tax -All business entities whose aggregate turnover in a financial year exceeds Rs 40 lakhs has
to mandatorily register under Goods and Services Tax. This limit is set at Rs 10 lakhs for North Eastern and hilly
states flagged as special category states]The enterprise whose turnover is less than Rs. 1.50 Crore during the
Financial Year 2019-20 can file their GST Returns on Quarterly basis
Few important GST returns are as under:
 GSTR-1: Monthly return that summarizes all sales - before 10th of succeeding month.
 GSTR-2A: Monthly return that summarizes the details of purchase - before 10th of succeeding month
 GSTR-3B: Monthly return that summarizes the details of GST as well as NonGST sales during the month to be
filed along with GSTR-I and GSTR-2A before 20th of succeeding month.
 GSTR-9: Annual return containing both purchases & Sales except non taxable sales and the annual return
should match with the figures disclosed in the Books of Accounts/Balance sheet.
Balance Sheet Analysis may be defined as a process of breaking down a complex set of facts and figures into
simple items. Interpretation means the process of critically examining these elements with a viewto draw conclusion
from the simplified statements. When we talk of Balance sheet analysis, we mean analysis of financial statements.
Financial statements consist of the following: -
1. Trading or manufacturing account
2. Profit & Loss account.
3. Balance sheet
4. Cash flow statements
5. Auditors’ Report (where compulsorily required)
6. Board of Directors Report in case of corporate bodies
 Directors Report (This include the Financial results, Operations, Dividends, Achievements, Any major events of
that year, management discussion & analysis, subsidiaries & groups, Directors Responsibility Statement,
Corporate Governance, Vision for the coming year, etc.),
 Auditors Report on Financial Statement (The report include premises of their audit, the standard they have
adopted for audit, the records they have been provided to peruse, whether the company/ firm has paid the
tax as per guideline, whether the company/ firm has observed the laid down guideline for them, etc.),
Both Director’s Report & Auditor’s Report are part of financial statement & should important indicator of the
business performance of the firm / Company. The system or approach for analysing Financial Statements depends
upon the purpose for which the study is undertaken. Our purpose of analysing the financial statements is doing
credit analysis which is different from that of an investor, government authority etc.
STUDY OF BALANCE SHEET : It is a statement of assets and liabilities of a concern as of the close of business on a
particular day. In nutshell, it shows what the concern owes (liabilities) to others and what others owe to it
(assets) which should be equal. It also indicates the sources of funds and the utilisation thereof. Liabilities provide
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 1|P a g e
sources of funds which are utilized for acquiring assets. If a concern suffers a loss, it is also treated as "use of
funds". Hence loss is shown on assets side. All limited companies are required to publish their financial
statements only in the prescribed formats laid down in the Companies Act, 1956. The mode of
classification of assets and liabilities for our analysis of the balance sheet is different from the mode of
classification as per the Companies Act, e.g. term loan installments falling due within one year from the
date of the balance sheet, are to be shown as current liabilities even though the entire term loan is shown as
term liability in the printed balance sheet.
For the purpose of meaningful analysis of Balance Sheet the Liabilities should be grouped as under:
a. Liabilities
1. OWNED FUNDS:
Promoters Capital or paid up share capital, Reserves:
General Reserve also known as free reserve is created out of retained earnings after meeting all expenses
including dividend which are distributable to shareholders.
Share Premium Reserve is created when shares are issued on premium and the
premium so received is kept in this reserve whereas the face value of the share goes to paid up capital.
Revaluation Reserve is created when the book value of fixed assets is revised by the company to show the fare
market value of the assets in the Balance Sheet.
2. Long Term Liabilities:
 Term Loans raised from FIs or Banks
 Debentures or Fixed Deposits raised
 Loans raised from Friends & Relatives will be treated as long term if are repayable in over 12months.
3. Short Term Liabilities or Current Liabilities:
 Unsecured Loans payable within a period of 12 months
 Short term Bank borrowings or Working Capital Limits
 Sundry Creditors on account of purchase of raw materials, consumables etc
 Other creditors payable within 12 months.
 Expenses payable
 Provisions made for taxes and other statutory liabilities, PF & Gratuity etc
 Debentures, preference shares redeemable during 12 months period
4. Contingent liabilities, if any, should be shown as foot note of Balance sheet eg; guarantees issued, pending
suits, claims on company which have not so far been acknowledged as debts
b. ASSETS:
Fixed Assets: are those assets which are put to use for production, processing are servicing and are not disposed over
a short period. Value of these assets is reduced every year depending on the life of assets by way of depreciation eg:
land & building, plant & machinery, capital work in progress etc
Current Assets: are those assets which are acquired for manufacturing, processing, value addition or servicing for the
purpose of reselling. These assets are held temporarily and are converted into cash within a period of 12 months. These
assets should be financed by current liabilities and partly by long term funds/liabilities. Eg; Cash/Bank, Stocks,
Debtors/receivables, advances made for raw materials, investments of short term nature, prepaid expenses of all kinds
etc.
Revaluation Reserve is created when the book value of fixed assets is revised by the company to show the fare
market value of the assets in the Balance Sheet.
2. Long Term Liabilities:
 Term Loans raised from FIs or Banks
 Debentures or Fixed Deposits raised
 Loans raised from Friends & Relatives will be treated as long term if are repayable in over 12months.
3. Short Term Liabilities or Current Liabilities:
 Unsecured Loans payable within a period of 12 months
 Short term Bank borrowings or Working Capital Limits
 Sundry Creditors on account of purchase of raw materials, consumables etc
 Other creditors payable within 12 months.
 Expenses payable
 Provisions made for taxes and other statutory liabilities, PF & Gratuity etc
 Debentures, preference shares redeemable during 12 months period
4. Contingent liabilities, if any, should be shown as foot note of Balance sheet eg; guarantees issued, pending
suits, claims on company which have not so far been acknowledged as debts
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 2|P a g e
b. ASSETS:
Fixed Assets: are those assets which are put to use for production, processing are
servicing and are not disposed over a short period. Value of these assets is reduced every year depending on the life of
assets by way of depreciation eg: land & building, plant & machinery, capital work in progress etc
Current Assets: are those assets which are acquired for manufacturing, processing, value addition or servicing for the
purpose of reselling. These assets are held temporarily and are converted into cash within a period of 12 months. These
assets should be financed by current liabilities and partly by long term funds/liabilities. Eg; Cash/Bank, Stocks,
Debtors/receivables, advances made for raw materials, investments of short term nature, prepaid expenses of all kinds
etc..
Non Current Assets: are those assets which are neither current nor fixed and also may not have any relation to the
business operations of the company eg: Investments of long term nature, debtors outstanding beyond 12 months,
security deposits etc...
Intangible Assets: The assets which donot have any physical presence and appearing only as book entry for specific
purpose. These assets should be reduced from Net Worth to calculate actual Net Worth or commonly called
Tangible Net Worth. Eg; Goodwill, patents, copy rights etc, preliminary exp to the extent not written off and Loss
incurred by the business.
PROFIT & LOSS ACCOUNT : It is a statement for a specific given period which gives us the revenues earned &
expenses incurred during that period. It is also called Income statement or Operating statement. Whenever the
income earned or revenues are more than the expenses the result is profit and if vice versa it is loss.
Profit & Loss account provides figure of net result. All expenses except these already shown intrading account are
debited in this account to arrive at net result. For the purpose of our analysis, various business expenses may be
divided into following groups: a. selling & distribution expense, b.Management expenses, c. Financial expenses & d.
Maintenance & Depreciation
Gross Profit: is arrived after deducting all direct expenses relating to manufacturing and or processing/servicing
from the total revenues or sales or turnover.
Net Profit: is arrived after deducting all indirect exp like off exp, selling distribution, salaries, rent etc from the
gross profit.
Net Profit after tax: when taxes payable are reduced from net profit, we get net profit after tax.
Operating Profit: The net profit which has resulted only from the core operations of the business is called
operating profit meaning that to arrive at operating profit we should not consider any other income or exp (which
are not from the core business of the company) if such incomes/expenses are appearing in the P & L account.
Depreciation: Depending upon the life or wear and tear of a fixed asset, we reduce the value of assets to give true
& fair picture of value of asset and the similar amount known as depreciation in reduced from profit to work out
net profit. Since the amount of depreciation does not go out of the business, we should add back this amount to net
profit to work out actual cash generation of the business.
Profit is an ultimate goal of every business. No business can survive for a long time without profit.Safety of bank
advance greatly depends on this aspect. Therefore, Banker must analyse profitabilityaspect before the credit decision.
Trend about profitability can be ascertained from the abovetwo accounts, namely trading account and profit and loss
account. While studying these accounts, following points may be kept in mind.
Sales: Sales bring revenue and they are major source of earning profit. Banker desires that thereshould be reasonable
growth in sales figures physical as well as financial over a period of time. Fall in sales is unfavorable feature which
should be enquired into, before considering credit proposal favorably, it should be ensured that reasons responsible
for fall in sales do not exist anymore and the owners have taken necessary steps to improve it in future.
Sales Returns: Sizeable return is an unfavorable sign. It indicates that products sold are eitherdefective or inferior in
quality.
Closing Stock: Lot of manipulation is possible in its valuation to adjust the profit. It is un-soldstock which should
be valued at market price or cost price whichever less is.
Selling & Administrative Expenses: Large expenses under this indicate dependence onadvertisement for sale
and there is a competition in the market for its products
Management expenses: They should be more or less static and increase should be nominalwithdevelopment of
business.
Financial Expenses: It gives idea about extent of dependence on borrowed funds to run thebusiness
Maintenance & Depreciation: We may get some clue on the condition of machinery/fixedassetsby scrutinizing
expenses under repairs. Depreciation provided should be adequate considering nature and life of the concerned
asset.
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 3|P a g e
 STRUCTURE OF BALANCE SHEET
Liabilities
Net worth/Equity :
Funds brought in by the promoters as their
investment in business or generated by and
retained in business, Share capital/partner's
capital/ Paid up equity share capital,/owners
funds
Reserves & Surplus e.g. General Reserve,
CapitalReserve, Revaluation Reserve and Other
Reserves),Retained Earnings, Undistributed
Profits,Preference share capital (not redeemable
within 12 years)
Long term liabilities:
Liabilities which are not due for payment within
12 months from the date of the Balance Sheet)
Term loans from financial institutions;
Term loan from banks; Debentures/Bonds;
Deferred payment liability;Preference Shares
redeemable within 12 years;
Fixed Deposits maturing after one year;
Provision for gratuity; Unsecured Loans
Short term or CurrentyLiabilities :
Liabilities which are due for payment within 12
months from the date of the balance sheet and
are to be repaid out of proceeds of current
assets,Short term borrowings from banks (C/C,
0/D or B/P, B/D limits) for working
capital.,Sundry/trade creditors/creditors/ Account
payable,Bills Payable / trade acceptances
Fixed Deposits from public payable within one
year,Short duration loans or deposits
Provision for taxation, Proposed Dividends,
Provision for bonus, unclaimed dividend.
Deposits from dealers, selling agents etc.
Advance payments from customers,
outstanding expenses and Accruals e.g. wages &
salaries, rent; expenses payable
TOTAL
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh
Assets
Fixed Assets :
Assets which are purchased for long term and not meant
to be sold but used for production.
Land & Building,Plant & Machinery
Vehicles,Furniture & Fixture
Office equipment,Capital Work in Progress These are
represented as under:
Original value (Gross Bock) Less depreciation
Net Block or book value or written down
Value Method
Non Current Assets:
Assets which cannot be classified as current or
fixed or intangible assets Book Debts or Sundry Debtors
more than 6 months old/ Disputed Debts, Investment of
long term nature in shares,
govt. securities, associates or sister firms or
companies. Long term security deposits. Unquoted
investments; Investments in subsidiaries or sister
concerns; Loans & Advances to directors, officers;
Accounts receivables in respect of sale of plant &
machinery; Advances to concerns in which directors are
interested; Deposits with customs port trust etc
Intangible & fictitious Assets Which do not have physical
existence. For example: Goodwill, Patents, Trade Mark,
Copy Right, Preliminary or pre operative expenses, other
formation expenses, debit balance of P & L account,
accumulated losses, bad debts, Capital issue expenses
e.g. discount on issue of share & debentures, commission
on underwriting of shares & debentures; Deferred
revenue expenditure
e.g. Advertisement
Current Assets :
Cash in hand, Bank balance
including fixed ,deposits with banks. Stocks/inventory
(such as raw material, stock in process, finished goods,
consumable stores and spares),Book debts/Sundry
debtors/Bills Receivable/ Accounts receivable/ debtors,
Government and other trustee securities
(other than for long term purposes e.g. sinking funds,
gratuity funds etc.),Readily Marketable/quoted govt. or
other securities meant for sale,Interest accrued and
receivables,Advance payment of taxes,
pre-paid expenses,Advance payments for merchandise;
unexpired insurance
TOTAL
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 TERMS USED INFINANCIAL STATEMENT ANALYSIS
1 Net Sales Gross Sales minus returns, discounts, excise duty.
2 Raw Materials Opening Stock of raw materials plus purchases of raw materials less Closing stock of
consumed raw material .

3 Cost of Production Raw materials consumed, stores and spares consumed, power and fuel, direct labour,
repairs and maintenance, other manufacturing expenses and depredation plus opening
stock of stock in process minus dosing stock of stock in process.
4 Cost of Sales Cost of production (3) plus opening stock of finished goods minus dosing stock of
finished goods.
5 Gross Profit Net Sales - Cost of Sales (Item 1 minus Item 4)

6 Operating Profit Gross Profit (5) minus interest, selling general and administrative expenses.

7 Net Profit before tax Operating profit plus other incomes minus other expenses

8 Net Profit after tax Profit before taxation minus provision for taxes.
9 Retained Profit Net profit minus dividend paid / dedared
10 Cash Profit Profit before charging Depreciation (Net Profit + Depredation)
11 Cash-Loss Loss before charging Depredation (Net Loss — Depredation)
12 Assets Things owned by a business Not converted into cash in normal course of business, These
13 Fixed Assets are acquired to use them in the production of other goods and services.

14 Current Assets Assets which are meant to be converted into cash or consumed in normal course of
business say within 1 year. These are also called as gross working capital.
15 Intangible Assets Expenditure on invisible assets, likely to yield benefit to the company in future e.g.
goodwill, patent, trade marks, designs.

16 Fictitious Assets Which have notional value only e.g. losses, preliminary expenses.
17 Miscellaneous Assets Which can't be classified as current, fixed or intangible e.g. inter Corporate
or Non current assets investment

18 Tangible Assets Total asset side of balance sheet minus intangible assets.
19 Quick Assets Assets which can be converted to cash quickly. Cash, bank balances, marketable
investments, bills receivables and sundry debtors considered goal. (Current Assets
minus-Inventories & Prepaid Expenses)
20 Liabilities Things owed by the business.
21 Owners Equity (Net Paid up share capital, reserves and surplus, preference shares with more than 12 years
Worth) maturity.
22 Long term liabilities Outsiders funds, payable in more than 12 months. Term loan (exduding instalment
or Debt payable within 12 months) plus debentures maturing within more than one year,
preference shares redeemable within 12years, deposits payable beyond one year.

23 Current Liabilities Liabilities which are payable in less than one year e.g. sundry creditors, unsecured
loans, advances from customers, interest accrued but not due, dividends payable,
statutory liabilities, provisions, Bank borrowings for working capital etc
Total Outside
24 Total of the liability side of balance sheet minus net worth
Liabilities
25 Tangible Net Worth Total tangible assets minus total outside liabilities. Owner's funds minus Intangible &
Fictitious assets ; Paid up capital plus reserves minus intangible assets
Gross Working
26 Total of Current Assets
Capital
27 Net Working Capital Current assets minus total current liabilities. Long Term Sources minus long term uses

28 Working Capital gap Current Assets minus current liabilities other than Bank Borrowings.
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 5|P a g e
 29 Long term sources Paid up capital, reserves and surplus (excluding specific reserves) i.e. Net Worth and
long term liabilities.
30 Short Term Sources Current Liabilities
31 Long Term Uses Fixed Assets, Miscellaneous or Non. current assets, Intangible and Fictitious Assets
(assets other than current assets)
32 Short Term Uses Current Assets
33 Contingent Liabilities Likely liability which may or may not arise on the happening or non happening of an
event
COMPONENTS OF PROFIT AND LOSS ACCOUNT
Particulars Description
1.Gross sales and net sales Total price of goods / services including excise duty is called gross sale
and excluding excise duty is called net sales
2.Cost of goods sold It includes cost incurred on manufacturing of goods such as raw material,
wages, factory overheads etc. Cost of production is different from cost of sales in
that the cost of production is the cost of goods produced.
3.Gross profit (1-2) This is calculated as net sales minus cost of sales
4.Operating expenses These expenses include administrative, selling, distribution expenses, depreciation.
5.Operating profits (3-4) It reflects operating performance of the firm
6.Non- operating This is the income or expenditure not connected with the normal operations of the
surplus/deficit
7.Profit firm is also called Earning Before Interest and Tax (EBIT)
before interest and This
tax
8.Interest These are the financial expenses including interest paid on bank borrowing,
debentures, public deposits etc.
9.Net Profit before tax (7-8) This provides the information earning capacity of the firm
10.Tax This represents the tax, which the firm is to pay on its profits
11.Net Profit after tax(9- 10) This is the amount which is at the disposal of the firm
Note : As per RBI guidelines, installments of term loans due within 12 months are not to be treated as current
liability for calculation of Net Working Capital and Working Capital Gap. (ii) Overdue instalments and Interest on
term loan is treated as current liability. (iii) Sundry Debtors/ Book debts older than 6 months are treated as Non
current assets. (iv) Loans from friends and relations are normally treated as Long term liability but if these are
secured by Demand Promissory Note i.e. payable on demand then the same should be treated as Current Liability.
(v)Reserves except which are in the nature of provisions like Depreciation Reserve are part of net worth.
Contingent Liabilities: which may or may not arise. For example: aairns against the company not acknowledged as
debts; Arrears of fixed cumulative dividends; Bills discounted but not matured and shown in the Balance Sheet;
Letter of Credit; Guarantees given by the company on behalf of its subsidiary company, employees etc.
RATIO ANALYSIS: Ratio Analysis means the process of computing, determining and presenting the relationship of
related items and groups of items of the financial statements. Ratio analysis is a quantitative technique for
assessing the financial health of a unit from the given accounting data. It is the relationship between two variables.
It can be ex-pressed as a percentage (Profit of 20%) or as so many items or as a simple ratio (like 2:1).Ratio analysis is
a meaningful comparison between items of financial statements. A ratio can be expressed as a percentage (Profit
of 20%) or as pure number/times (ex: sale is 3 times of net profit) or as a proportion (like 2:1). Whenever we recast
the profit & loss and balance sheet, the recast figures should be taken into account for analysis.
IMPORTANT RATIOS & FORMULAE LIQUIDITY RATIOS
Current Ratio : Current assets / Current liabilities
Acid Test or Quick Ratio Quick assets / Current liabilities
Net working capital : Long term sources - long term uses OR current assets - current liabilities.
SOLVENCY or LEVERAGE RATIOS
Debt-Equity Ratio = Long term outside liabilities/Tangible net worth
Debtor service coverage ratio (DSCR) = (Net profit + depreciation + amount of interest on th long term liabilities) /
(amount of interest on the lob term liabilities + amount of instalment of long tern liabilities).
ACTIVITY RATIOS
Stock OR Inventory turnover= Sales / Stocks
Debtor turnover = Sales / sundry debtors (i.e. book debts, receivables)
Debtors' velocity or debt collection period Book-debts / sales x 12 PROFITABILITY
Return on equity = Profit / tangible net worth x 100
Return on investment or capital employed Profit / Investment (or capital employed) x 100

Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 6|P a g e
Net Profit Ratio -=Net profit / Sales x 100
BREAK-EVEN RATIOs
Costs of a business cart be classified into fixed and variable. Fixed costs are those costs which do not change with
production like rent, salaries and variable costs are those which change with production like raw material, wages,
power, repair etc.
Profit = Sale minus fixed cost minus variable cost
Contribution = Sale price per unit minus variable cost per unit or Sale-variable cost
Break Even Point in units = Fixed Cost/(Sale Price per unit — Variable Cost per unit)or
Fixed cost/contribution per unit, Break Even Point in Rupees = Fixed cost x sale/(Sale- Variable Cost)
PV Ratio = contribution/sales x 100 , Break Even Point = Fixed cost/PV Ratio
Break Even Point in terms of capacity utilization=Break even units/Installed capacityx 100
Margin of Safety =(Actual Sale — Break Even Sale)/ Actual Sale*100
Earning Per Share (EPS) : The ratio denotes per share profit of a company. It can be used to compare 2 different companies"
profitability. To calculate the ration only the no. of equity share is taken (and not of preference shares). It can be calculated as
under: Net profit after tax and preference dividend/ no. of equity shares. It help in understanding market pricing of the equity
share.
Price Earning Ratio (PER) : The ratio indicates the current market price vis-a-vis the earning per share. It can be calculated as
under: Market price of the equity share / earning per share

Different users of Ratios

Short term lenders
Long term creditors
(Banks)
Fixed charges cover = Quick ratio ---
Income before interest and tax / Quick assets / current
Interest charges liabilities
Debt service coverage ratio = Current ratio =
Cash profit for debt service / annual Current assets / current
interest and principal liabilities
Shareholders
Earning per share =
Profit available for equity holders / no. of
equity shares
Dividend Yield ratio =
Dividend per share / market price per
share

SUMMARY - WORKING CAPITAL TERMS

Particulars Classification
Working capital Current assets such as cash, stocks, book-debts, other current assets
Net capital working Current assets — current liabilities OR Long term sources — long term uses
Working gap capital Current assets — current liabilities (other than bank borrowing — i.e. OCL)
Working limits capital Bank facilities needed to purchase current assets. These facilities are cash credit,
overdraft, bills purchase/discounting, pre-shipment or post-shipment loans etc.

Debt Service Coverage Ratio (DSCR) :The relationship between the repaying capacity and the repayment
commitment is expressed in the form of Debt Service Coverage Ratio (DSCR) which indicates the coverage of
liability of the concern. The following formula for working out DSCR, is followed: " (Net profit + interest on TL +
depreciation) / (Interest on term loan + instalment of term loan)"

Term loan and Deferred Payment Guarantee (DPG)

Term Loan DPG
It Is fund based. It is non-fund based
Funds outlay instant Funds outlay contingent
It is shown as part of balance sheet It is shown as footnotes of the balance sheet
This loan is allowed by bank or financial Institution Long term credit is allowed by seller against guarantee
Common features : Purpose is purchase of capital assets. Detailed appraisal required. Repayment is from future
profits

Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 7|P a g e
IMPORTANT RATIOS & THEIR COMPUTATIONS
Item Name of the Computation Unit of Particular Purpose
No. Ratio measur
ement
1. Return on PBDIT/Total Percent To determine profitability of total as- sets employed. It provides a
Investment Assets age strong incentive for optimal utilization of assets of the company.
This encourages the company to obtain assets that will provide a
satisfactory return on investment and to dispose of assets that
are not providing an acceptablereturn. In selecting amongst
alternative long term investment proposals, ROI provides a
suitable measure for assessment of profitability of each
proposal.
2. Return on Net Profit/ Percent Net profit after interest and tax to net worth. This ratio is an
shareholder’ Total Net age importantyardstick of performance for equity shareholders since
s fund worth it indicates the return on the funds, employed by them. The
factor which motivates shareholders to invest in a company is the
expectation of an adequate rate of return on their funds and
periodically, they will desire to assess the rate of return earned
in orderto decide whether to continue with their investment.
This ratio is useful in measuring the rate of returnas a percentage
of the Book value ofshareholder’s equity.
3. Total Debt Net Sales/ A This ratio indicates the extent oftotal debt turned over in
Turnover Total Debt numberor achieving sales of the firm. This includes the long term debt as
a ratio well used for the purpose of operating current assets.

4. Asset Turn- Sales/Total A Total operating assets is the net of Total Assets less
over Ratio operating number revaluation reserve, capital work-in-progress, advance to
Assets or a suppliers of capital goods, investment in shares and share issue
ratio expenses. Amanufacturing unit should generate sales which at
least match with total funds (assets) employed. This means
that the minimum ratio in respect of manufacturing unit
should be one. But in case of trade, where the value added is
very small as compared to manufacturing industries, this
ratioshould not be less than two.

5. Fixed Assets Net Sales/ Number To determine fixed asset utilization

Turnover Operating
Ratio Fixed Assets
6. Total Assets Net Sales / Number To determine the level of assetutilization
Turnover Total
Ratio Operating
Assets
7. Gross Profit Gross Profit/Net Percent To determine the operating efficiency of the business in
Ratio Sales age keepingthe rate of gross profit stableorincreasing
8. Operating Operating Percent To determine the operating efficiency of the business in
Profit Ratio Profit/Net age keeping the rate of operating profitstable or increasing
Sales
9. Finished Cost of Period To determine the reasonableness ofstock
Goods Stock Goods Sold holding
Turnover /Finished
Ratio Goods Stock
10. Debtors’ Gross Sales/ Period To determine the saleability of the product andefficiency of
Velocity Trade the collection department
Debtors

Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 8|P a g e
11. Creditors’ Purchases/ Period To determine the ability of the firmto obtainmarket credit
Velocity Trade
Creditors

INTERPRETATION OF RATIOS
High Low
A Liquidity Ratio
a. Current Ratio High level of inventory, High level of book Unable to pay creditors, Faster
debts, Credit received is reduced & Prompt realization ofdebts, Diversion of
payment to creditors funds
b. Acid Test Ratio a) Idle funds a) Strain on Liquidity

B Solvency Ratio

a.Debt/Equity Ratio Low stake & Over trading Unable to get credit, High capital
gearing & Conservativemanagement
b.Funded debt/equity -do- -do--
c. Debt Service Coverage More liquidity available Heavy repayment
Ratio obligation
C Activity Ratio
a) Inventory turnover Brisk trading & Manufacturing unit Obsolete stock, Marketing problem &
Ratio diverted totrading activity Poor demand
a) Debtors’ velocityRatio Unable to insist on payment, Highly Weak management, Cautious trading
competitive, Poor quality of goods & Only net sales taken
d. Creditors’ velocityRatio Unable to pay the creditors & Quality of Poor management & Product in great
goods received ispoor demand
D Profitability Ratios
a) Return on Efficient utilization of assets
Idle/underutilized assets & Heavy
investment
capital investment
b) Gross Profit Ratio Some manufacturing expensesnot Increase in cost of
accounted, Sales value taken instead of production, Selling RM
cost of sales & Stocks overvalued instead of FG & Stocks
undervalued
c) Operating ProfitRatio Low turnover
High turnover & Public utility services
d) Net Profit Ratio Non-operating profit is high & Outside Low turnover & Absence of non-
investment operatingincome
COMPARATIVE ANALYSIS OF FINANCIAL STATEMENTS
SITUATION INDICATIONS GUIDELINES
Increase in Sales A favourable trend Ascertain that increase is qualitative
and not on account of
Decrease in Not a favourable trend inflation
May be on account of under- trading
Sales
Increase in favourable Indication Ascert ain t he po rt ion of profits
Profit retained in the business
Decrease in Not a favourable trend Ascertain the reasons
Profit
Increase in A favourable indication, if accompanied by a Ascertain the reasons check up
Debtors higher % of an increase in sales check-up, the the age of debtors
bad & doubtful debts, if any may indicate Delete debtors above 6 months
unsatisfactory obtain confidential report from banker.
recovery
A favourable Indication, it should be accompanied
Decrease in by a gro wt h in sa les , it indicates effective Sudden Decrease in Debtors may indicate
Debtors sales diversion of funds.
management
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 9|P a g e
Increase in Indicates better Credit A mere increase in Creditors may
Creditors terms with the suppliers, Increase should be indicate that the borrower is not in A
accompanied an proportionate increase in position to generate enough funds needed
business for the payment to trade Creditors
Increase in It indicates additional f unds bro ught in by t he Ensure that the increase is not due to
Capital unit-a favourable indication, Ascertain the capitalization of reserves.
purpose for increase & its ultimate utilization
Increase in Fixed Is it on account of replacement of Machinery in the Ensure that the capital expenditure
Assets normal business? Is it for the sake of is acceptable to the banker and there is no
expansion / diversion of funds.
Decrease in diversification
Ensure plans
that taxation & other liabilities met out
Provisions of earning for the last year
Increase in Ensure that the increase in inventory is for Ensure that increase in inventory i.e.not for
Inventory production speculative purpose
Depreciation Ensure that Depreciation has been charged Ensure that there is no change in the
depreciation method.
Reduction in It indicates a favourable position. The Ensure that repayment is not out of
Term Loan borrower has got repayment capacity working capital funds.

IMPORTANT TERMS AND RATIOS

 Ratio of wage bill to total expenses = PPE / Total expenses, Ratio of wage bill to total income = PPE / Total
income
 Ratio of burden to total assets = (Operating expenses - Other income) / Total assets
 Ratio of burden to interest income = (Operating expenses - Other income) / Interest Income
 Ratio of operating profits to total assets = Operating profit / Total assets
 Return on assets for a bank group = weighted average of return on assets of individual banks in the group, weights
being the proportion of total assets of the bank as percentage to total assets of all banks in the corresponding bank
group
 Return on Equity = Net Profit / (Capital + Reserves and Surplus)
 Cost of Deposits = IPD / Deposits, Cost of Borrowings 2-- IPB / Borrowings,
 Cost of Funds = (IPD + IPB) / (Deposits + Borrowings) ,Return on Advances = IEA / Advances
 Return on Investments = IEI / investments,
 Return on Advances adjusted to Cost of Funds = Return on Advances — Cost of Funds
 Return on Investment adjusted to Cost of Funds = Return on Investments — Cost of Funds
 Net interest margin is defined as the total interest earned less total interest paid
 Intermediation cost is defined as total operating expenses
 Operating profit is defined as total earnings less total expenses, excluding provisions and contingencies, and Burden is
defined as the total non-interest expenses less total non-interest income Whenever appropriate, denominators in the
ratios use averages of "current year" and "previous year".
 Donations by banks Profit making banks max 1% of published net profits of previous year and loss making banks
max Rs.5 lac.
 Casino Banking :A practice of commercial banks engaging in unduly speculative or risky financial activities to
record high profits.
Profit Planning Terminology in a Nutshell
 Interest Spread & Net Interest Income are one and the same. The difference between ‘non-interest
expenditure’ and non-interest income’ is defined as “Burden”. “Interest Spread’ less ‘Burden’ determines “
Operating Profit’ “
 Profit vs. Profitability: While profit represents an absolute figure, profitability, measured by a ratio,
represents the operational efficiency. As opposed to absolute profit volumes, profitability is a more
meaningful yardstick of operational efficiency as it is size-neutral.
 Return on Assets (RoA) :RoA is the ratio of Net profit to total assets. This is a standard measure of profitability
with 1% deemed as the international benchmark.
 Net Interest Margin (NIM) : NIM is the ratio of net interest income (Total Interest Income minus Total Interest
Expenditure) to average earning assets.
 Return on Capital (ROC): ROC is the ratio of net profit to share capital. It indicates the return on paid up
capital.
 Return on Net worth also known as Return on Equity (ROE): Ratio of net profit to average net worth (share
capital, plus reserves minus intangible assets). It indicates the return on equity capital.
 Book Value: Net worth divided by number of shares. Market price of share generally factors Book Value.
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 10 | P a g e
 Earning Per Share (EPS) & Price earning Ratio (P/E ratio) : EPS is the ratio of Net profit to number of shares.
 Price – Earning is the ratio of market price of a share to earning per share. EPS and P/E ratios indicate the
ability of the bank to access to the capital market and the appetite of the bank’s scrip in the market.
 Capital to Risk-weight Assets Ratio (CRAR): Total capital, consisting of Tier-I & Tier-II capital, as a ratio of
risk-weighted assets. It indicates the soundness and risk bearing ability of a bank.
 Yield on Advances: Interest income on advances divided by average advances indicates average yield on
advances.
 Yield on Investments: Interest & dividend income on investment divided by average investments indicate yield
on investments..
 Yield on Working Funds: Total interest income divided by average working funds, consisting of interest earning
and non-interest earning assets.
 Cost of Deposits: Interest paid on deposits divided by the average deposits, consisting of Current, Savings and
Term deposits. This is the comparable benchmark for liabilities management.
 Cost of Borrowings: Interest paid on borrowings, including borrowing for Tier-II capital, divided by average
borrowings.
 Cost of Interest Bearing Liabilities: Interest paid on deposits and borrowings divided by average interest
bearing liabilities (deposits and borrowings, including Tier-II bonds).
 Cost of Working Funds: Total interest expenditure divided by average working funds, consisting of interest
bearing and non-interest bearing liabilities (total of liability side of balance sheet).
 Spread: Difference between the Yield on Working Funds and Cost of Working Funds represents Spread.
 Intermediation Ratio: It measures the ratio of operating expenditure to total assets. As per international
criterion, this ratio should be less than 1 per cent.
 Cost- Income (Efficiency) Ratio: Non-interest expenditure divided by net total income (total income minus
interest expenses). It signifies movement in operating cost relative to income. Global benchmark is 40 per cent.
 Burden Ratio: Ratio of non-interest income to non-interest expenditure. As an efficiency criterion, non-interest
income should be able to cover the non-interest expenditure.
Global Benchmarks in Profitability:
Criterion Parameter International Standard
Solvency Ratio Capital Adequacy Minimum 8%
Efficiency of Assets Use Return on Assets 1%
Net NPA Ratio Net NPA Ratio to Net Advances Less than 1%
Intermediation Efficiency Operating Cost to Average Working Funds Less than 1%
Burden Ratio Other Income to Operating Expenses Minimum 100%
Cost- Income Ratio Operating Cost to Net Income Less than 40%

2. CASE STUDIES ON RATIO ANALYSIS/ FINANCIAL STATEMENT/ BALANCE SHEET ANALYSIS

QUES. : Based on following details calculate
Tangible Net Worth of the firm, 2. Current Ratio , 3. Ratio of the Total Outside Liabilities (TOL) to Tangible Net
Worth(TNW) , 4. Stock Turnover Ratio & 5. Stock Turnover Ratio if Sales are Rs 2000000, 6. Debt Collection Period
and Debtor Turnover Ratio

if Credit Sales are Rs 3000000 Capital of 200000 Preliminary expenses 80000

Reserve 230000 Dr Bal in P&L Ac (Loss) 30000
Term Loan of 180000 Advance tax paid 20000
Advance from customers 40000 Cash on hand 20000
Sundry Creditor 100000 Stock 400000
Bank CC limit balance 400000 Receivables 300000
Fixed Assets 300000

Answer: 1) Tangible Net-worth= Net-worth - Intangible assets , Net Worth = Capital + Reserve = 200000+230000 =
430000 , Intangible Assets = (Preliminary Expenses + Dr Bal in P&L Ac = 80000+30000 = 110000
TNW = NW – Intangible Assets = 430000-110000 = 320000
2) Current Ratio = Current Assets / Current Liabilities, Current Assets = Stock + Receivables + Cash on hand +
Advance Tax Paid = 400000 + 300000 + 20000 + 20000 = 740000, Cur Liabilities = Adv from Customers + CC Liability +

Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 11 | P a g e
S Creditors
= 40000 + 400000 + 100000 = 540000, CR = CA / CL = 740000 / 540000 = 1.37
3) TOL / TNW , TOL = Total Outside Liabilities
= Term Loan + Adv from Customers + S Creditors + CC Liability = 180000 + 40000 + 100000 + 400000 = 720000
TOL / TNW (as per para 1 above) = 720000 / 320000 = 2.25
4) Stock Turn over Tatio= Sales/Stock =2000000/400000 = 5 Times Page 3 of 3
5) Debtors Turnover Ratio = Credit Sales / Debtors. =3000000/300000 =10 times
6) Debt Collection period
= No. of Months in a year/Debt Turnover Ratio = 12 / 10 = 1.2

QUES. : Based on following summary of a Balance sheet of XYZ Company Find out
1. Current Ratio , 2. Acid Test Ratio (Also known as Quick Ratio), 3. Net Working Capital, 4. Working Capital Gap
5. MPBF as per Tandon Committee - Method-I, 6. MPBF as per Tandon Committee - Method-II, 7. Current Ratio as
per Tandon Committee - Method-I , 8. Current Ratio as per Tandon Committee - Method-II , 9. Borrowing compared
with Tandon Committee - Method-I & 10. Borrowing compared with Tandon Committee - Method-II

Current Liabilities (in lacs) Cash Credit 3500 Inventory 14300

Trade Creditors 9800 Debtors 4500
Other Current Liabilities 2100 Other Current Assets 2300
Total Current Liabilities 15400 Total Current Assets 26400
Current Assets (in lacs) Cash 5300
Answer:
1) Current Ratio = Current Assets / Current Liabilities = 26400 / 15400 = 1.71
2) Acid-Test Ratio = Quick Assets / CL = (CA-Inventory) / CL = (26400-14300) / 15400 =12100 / 15400 = 0.79
3) Net Working Capital = CA – CL = 26400 - 15400 = 11000
4) Working Capital Gap = CA - (CL - BB) = 26400 - (15400 - 3500(CC) =26400 - 11900 = 14500 Page 3 of 4
5) MPBF as per Tandon Committee - Method-I = WCG - 25% of WCG = 14500 - 25% of 14500 = 14500 - 3625 = 10875
6) MPBF as per Tandon Committee - Method-II = WCG - 25% of CA = 14500 - 25% of 26400 = 14500 - 6600 = 7900
7) Current Ratio as per Tandon Committee - Method-I = CA / (MPBF + Trade Creditors + Other CL)
= 26400 / (10875+9800+2100) = 26400 / 22775 = 1.16
8) Current Ratio as per Tandon Committee - Method-II = CA / (MPBF + Trade Creditors + Other CL)
= 26400 / (7900+9800+2100) = 26400 / 19800 = 1.33
9. Borrowing compared with Tandon Committee - Method-I Borrowing by the way of Cash Credit = 3500
MPBF as per Tandon Committee - Method-I = 10875
So, Borrowing by the way of Cash Credit is short by (10875 - 3500) = 7375 lacs, Page 4 of 4
10. Borrowing compared with Tandon Committee - Method-II
Borrowing by the way of Cash Credit = 3500 , MPBF as per Tandon Committee - Method-II = 7900
So, Borrowing by the way of Cash Credit is short by (7900 - 3500) = 4400 lacs
QUES. : Classify the following assets and liabilities for Balance Sheet of M/s ABC Enterprises Company for the
year as on 31.3.2021 & 31.03. 2022
31.03.21 31.03.22 31.03.21 31.03.22
Cash 15000 26400 Good will 3000 3000
Provision for Expenses 1200 1500 Capital 20000 25000
Vehicles 13000 10000 Sundry Debtors 16000 20000
Unsecured loans (Long term) 8000 2000 Term Loan 20000 25000
Investment in other firms 2000 2500 Plant and Machinery 20000 22500
Pre Operative Expenses 700 200 Sundry Creditors 12000 14000
Stocks 20000 25000 Reserves 15000 18000
Prepaid expenses 1500 2200 Expenses payable 4000 3800
Security Deposit 2000 3000 Bank Borrowings / 13000 25000
Land and building 12000 11500 cash credit
Debentures 12000 12000
Sales 100000 110000 Net profit 5000 3000
Interest on Term Loan 3000 3700 Depreciation 2000 2200
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 12 | P a g e
 Q. Calculate Current Ratio / Quick Ratio / Net working Capital / Debt Equity Ratio / Debt Service
Coverage (consider that installment during the year is 4000) Ratio / Stock turnover ratio / Debtor
Turnover ratio / Debtor velocity ratio / Net profit %.
Answer:

LIABILITIES 31.3.21 31.3.22 ASSETS 31.3.21 31.3.22

OWNERS FUNDS FIXED ASSETS
Capital 20000 25000 Land and Building 12000 11500
Reserves 15000 18000 Plant and Machinery 20000 22500
B TOTAL(Net Worth) 35000 43000 Vehicles 13000 10000
LONG TERM LIABILITIES SUB TOTAL(Fixed Assets) 45000 44000
Unsecured Loans 8000 2000 NON CURRENT ASSETS
Term Loan 20000 25000 (NCA)
Investment in Firms 2000 2500
Debentures 12000 12000 Security Deposit 2000 3000
SUB TOTAL(Term 40000 39000 SUB TOTAL (Total Non 4000 5500
Liabilities) Current Assets)
CURRENT LIABILITIES INTANGIBLE ASSETS
Provision for Expenses 1200 1500 Goodwill 3000 3000
Sundry Creditors 12000 14000 Pre Operative Expenses 700 200
Expenses Payable 4000 3800 SUB TOTAL(Total Intangible
3700 3200
Assets)
Bank Cash Credit 13000 25000 CURRENT ASSETS
SUB TOTAL(Current 30200 44300 Cash 15000 26400
Liabilities) Sundry Debtors 16000 20000
Stocks 20000 25000
Prepaid Expenses 1500 2200
Total Current Assets - 52500 73600
GRANDTOTAL 105200 Subtotal
126300 GRANDTOTAL 105200 126300
(Total of Liabilities) (Total of Assets)
Calculations:
31.3.17 31.3.18
Networth Capital + Reserves 35000 43000
Intagible assets 3700 3200
Tangible NW NW - Intangibles 31300 39800

Long Term Liabilities 40000 39000

Long Term Sources LTL + Networth 75000 82000

Current Liabilities
44300
Short Term Sources (= Current Liabilities) 30200

Outside Liabilities (= LTL + CL) 70200 83300

Long Term (= Fixed Assets+ NCA+ 43700 47200

Uses Intangible Assets
Current Assets
Gross Working (= Total CA) 52500 73600
Capital

Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 13 | P a g e
 Short Term Sources (CL) 30200 44300
Net Working Capital CA – CL 22300 29300
Quick Assets CA –Stocks& Prepaid Exp 31000 46400
Current Ratio CA ÷ CL 1.73 1.66
Quick Ratio QA ÷ CL 1.02 1.04
Debt Equity Ratio LTL ÷ TNW 1.27 0.98
DSCR (Profit + Depreciation + TL Interest) ÷ 1.71 1.16
(TL Installment + TL Interest)
Stock Turnover Sales ÷ Stocks 50 44
Ratio
Drs T/o Ratio Sales ÷ Sy Debtors 62.5 44
Debtors Velocity (Sy Drs÷Sales) x 12 0.24 0.27
Ratio
Net Profit % (NP ÷ Sales) x 100 0.50 0.27
Return on NW (NP ÷ TNW) x 100 15.97 7.54

3. RECALLED & EXPECTED QUESTIONS ON BALANCE SHEET ANALYSIS

1. Current Ratio is 1.33:1, Current Assets is 100, what will be the amount of Current Liability: 75 lakhs
2. XYZ Limited are sanctioned a CC limit of Rs.50 lac. The drawing power in the account calculated on the basis
of available security and margin, is Rs.54 lac. How much drawings in the account will be allowed?: sanctioned
limit of DP whichever is lower
3. Projected Turnover is Rs.400 lacs, margin by promoter is Rs. 20 lacs. What is maximum bank finance as per
Annual Projected Turnover method: 80 lakhs.
4. If Break Even Point is high, it can be construed that the margin of safety is ____: Low.
5. Working Capital Means_______: Current Assets.
6. If Net Working Capital is 48 and Current Liabilities are 12, what is the Current Ratio: 5:1 (Current assets 60;
Current liability 12).
7. To improve Current Ratio of 2:1, what has to be done?: a) Recover cash from Receivables b) Cash sales c)
Decrease the Bills payables*
8. Banks undertake BEP analysis to assess: Margin for safety.
9. Net working capital means: Current assets minus current liabilities.
10. Receivables 20 and sales 120. Find the Receivables turnover turnover ratio in months: 2 months (20/120 x12)
11. CC limit sanctioned is Rs 4 lacs and Stocks are valued at Rs. 6 lacs. If the margin to be maintained is 25% , what
is drawing power? : NOTIONAL - 4.5 lacs, BUT ACTUAL Rs. 4 LAC.
12. What is the operating cycle average period for turnover in Annual Projected Turnover method: 3 months of
annual sales.
13. A unit is having Current Assets of Rs.400, & the Current Ratio is 2:1, Quick Ratio 1:1. What is the level of
Inventories: 200.
14. Which of the following is the Solvency / Leverage ratio: Debt Equity Ratio (options viz., DSCR, Debtors
Turnover ratio and these 3 combined ratios were given).
15. Profit before Tax is 75, Tax is 30, Depreciation is 25, Term Loan installments is 25, Interest on Term Loan is 15.
Calculate DSCR _____: 2.12
16. Current Assets is 600, Long Term sources is 600, Total Assets is 1,000. What is NWC and Current Ratio: Current
Ratio is 1.5 : 1; NWC = 200.
17. Current liability means: Liability towards outsiders payable within 1 year.
18. Current ratio indicates: Liquidity position of the firm ability of firm to pay short term liabilities on time.
19. Current Ratio is 1.75:1, NWC is 30, what will be Current Assets and Current Liability? : 70 and 40.
20. A firm has total liabilities of 120. The long term sources are 80 and long term uses are 40. The current ratio is
2:1.
21. A firm has current assets of 200 which among others include, stocks and pre-paid expenses of 125. The current
liabilities are 160 which also include short term bank borrowing of 40. What is the amount of working capital gap
: 80 (Rs 200 minus Rs 120 i.e. current liabilities except bank borrowing)
22. Profit after tax is 60. Interest on Term Loan is 20 and depreciation 20. For a target debt service coverage ratio
of 2, what is amount of term loan instalment: 30 ( i.e. 2 = (60 + 20 + 20) / ? + 20)
23. What is a Contingent liability: Bank Guarantee, Letter of Credit and Forward Contracts
24. Which of the following is Variable cost? Raw Material, wages, power, fuel etc ( not salaries, rent which are
fixed costs)
Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 14 | P a g e
25. Accrual Accounting means: Expenses and revenues are recorded in the period they occur, whether or not
cash is paid or received.
26. Contingent liability is shown in Balance Sheet as: Footnote to the Balance sheet.
27. On which one of the following assets, depreciation is applied on Straight line method: Computers.
28. Meaning of accrual concept: Mercantile system.
29. Accrual concept means: This concept takes into account the accounting of receipt or payment or otherwise
recording a transaction (which actually might have taken place/ materilised or not), to be considered as part of
and relating to the accounting period. For example, the business may raise a loan from a bank, the interest on
which is payable to the bank immediately after the close of the accounting period. In the accounting period, a
provision on accrual basis would be required to be made irrespective of the fact that the payment would be
made after the close of accounting period.
30. Accrued expenses are recorded under which head of balance sheet? Current Liabilities.
31. Variable cost means: Which varies with level of production.
32. Break Even Point: Point of no profit no loss. ( TR-TC=Zero)
33. Operating expenses include: Expenses other than interest paid on deposits and borrowings
34. Which of the following is Variable cost? Raw Material, wages, power, fuel etc
35. Outstanding in a CC account is Rs.2.00 lakhs. One of the partner died and the operations were continued in the
account by the bank inspite of notice of the death given to the bank. Later 2.50 lakh deposited and 1 lakh was
withdrawn? What is liability of legal heirs of the deceased partner: NIL as per Claytons rule.
36. Working Capital Means_______: Current Assets.
37. If Break Even Point is high, it can be construed that the margin of safety is ____: Low.
38. On which one of the following assets, depreciation is applied on Straight line method: Computers.
39. A unit is having Current Assets of Rs.400, & the Current Ratio is 2:1, Quick Ratio 1:1. What is the level of
Inventories: 200.
40. What increases a capital of a person: a) Profit b) Loss c) Depreciation d) Sale of an asset: Profit.
41. Projected Turnover is Rs.400 lacs, margin by promoter is Rs. 20 lacs. What is max. bank finance as per Annual
Projected Turnover method: 80 lakhs.
42. Contribution= Sales price minus Variable Cost.
43. Net working Capital = Current Assets minus Current Liabilities.
44. Net working capital of a firm is Rs. 200 and its Current ratio 1.5:1. What is amount of Current assets and
Current liabilities: Rs 600 and Rs 400.
45. If Net Working Capital is 48 and Current Liabilities are 12, what is the Current Ratio: 5:1 (Current assets 60;
Current liability 12).
46. Accrual concept of Accounting: Transaction are recorded as and when they become due irrespective
whether actually received / paid or not.
47. Current ratio used for evaluating: Liquidity position.
48. Variable cost: Which varies with level of production.
49. Meaning of accrual concept: Mercantile system.
50. What is the operating cycle average period for turnover in Annual Projected Turnover method: 3 months of
annual sales.
51. What is result of over valuation of closing stock: Increase in Gross Profit.
52. Receivable Rs. 20 lacs. Sales Rs. 120 lacs. What is Debtor Collection Period? 2 Months
53. AS-2 in accounting standards is for: Valuation of Inventories.
54. Tangible Net Worth (TNW) is calculated as: Total paid up capital + Reserves – Intangible Assets.
55. Internal Rate of Return is arrived at a point where future cash flows on Net Present Value basis should be:
Zero.
56. Debt Securitization refers to: Conversion of receivables into debt instruments.
57. How much percentage of Revaluation reserves will be taken as part of Common Equity Tier I capital: 45% at
a discount of 55%.
58. If Break Even Point is high, it can be construed that the margin of safety is ____: Low.
59. Pre-operative expenses of a Unit are classified as__________: Fictitious assets
60. The Net Worth of a firm does not include: Revaluation reserves

***** ALL THE BEST & DREAM FOR THE BEST*****

Compiled by Team Canara Bank, Regional Office, Kanpur -1, Uttar Pradesh 15 | P a g e