1. 7:58 AM
RATIO ANALYSIS
CAIIB – Financial Management – MODULE C – RATIO ANALYSIS
R K MOHANTY
FACULTY MEMBER, SIR SPBT COLLEGE,
CENTRAL BANK OF INDIA, MUMBAI

2. 7:58 AM
FINANCIAL STATEMENTS
Financial Statements generally consists of the following two types :
Profit & Loss Account – which summarises the expenses incurred and revenues received during the period covered by it ; and
Balance Sheet – which lists out the Assets and Properties owned by the Unit and the Liabilities it owes to outsiders and also to its owners.

3. Who are interested in financial statements ?
7:58 AM
Who are interested in financial statements ?
Management of the Company :
They want to know
The Financial position of the concern
How far the targets of production, sales and profits have been achieved?
To determine the Tax liabilities
What is the amount available for dividends, bonus payments?
Planning the future activities of the concern

4. Who are interested in financial statements ?
7:58 AM
Who are interested in financial statements ?
Workers & Unions : They want to know the profits made by the concern and the share the workers claim as bonus etc.
Government : To know the profits of the concern and the Tax liability thereon.

5. Who are interested in financial statements ?
7:58 AM
Creditors , Bankers & Financial Institutions :
General financial position to determine if the concern is worth lending to.
Whether the sales, production, profitability are increasing or decreasing?
The liquidity position of the concern i.e. meeting the liabilities in time.
The assets that are available to secure their advances.
The stake of the owners of the concern as compared to the amount lent.
How the amount lent to the concern has been utilised, and so on?

6. Major Components of Profit & Loss Statement
7:58 AM
Major Components of Profit & Loss Statement
NET SALES : This is the key figure in the Income Statement. Which can be arrived from the following :
Net Sales = Gross Sales – Excise Duty
Where Gross Sales = (Total Domestic Sales + Export Sales) – (Sales Tax + Octroi + Sales Return)

7. Major Components of Profit & Loss Statement
7:58 AM
Major Components of Profit & Loss Statement
2. COST OF PRODUCTION : It is the sum of Cost of Raw Materials consumed and all Manufacturing Expenses.
COP = Cost of R.M. + Manufacturing Expenses
Manufacturing Expenses include :
(i) Spares
(ii) Power & fuel
(iii) Wages & Salaries (Direct Labour)
(iv) Other Manufacturing Expenses
(v) Depreciation
(vi) Difference between Opening & Closing Stock of SIP

8. Major Components of Profit & Loss Statement
7:58 AM
Major Components of Profit & Loss Statement
3. COST OF SALES :
It is the sum of Cost of Production and Difference between Opening & Closing Stock of Finished Goods

9. Net Sales – Cost of Sales
7:58 AM
Major Components of Profit & Loss Statement
4. GROSS PROFIT :
Net Sales – Cost of Sales
The percentage of Gross Profit to Net sales indicates whether the average sale price is sufficient to cover all expenses.

10. Major Components of Profit & Loss Statement
7:58 AM
Major Components of Profit & Loss Statement
5. OPERATING EXPENSES : These are the expenses which are required to run the business on daily basis, such as;
Selling Expenses
Administrative Expenses
General Expenses
Provision for Bad Debts
Other Misc. Expenses

11. Major Components of Profit & Loss Statement
7:58 AM
Major Components of Profit & Loss Statement
5. OPERATING PROFIT : When you deduct all the operating expenses from the Gross Profit you arrive at the Operating Profit. Operating Profit = Gross Profit - All Operating Expenses Finally to this Operating Profit, Other incomes not arising out from normal operations are added and other Non-operating expenses are deducted to arrive at the figure of NET PROFIT BEFORE TAX (NPBT). From this NPBT so arrived, Income Tax is adjusted first and thereafter Dividend is distributed as per Management’s Policy. The Balance amount is reinvested in business in the form of RESERVES or added in the Capital Account.

12. Major Components of balance sheet
7:58 AM
Major Components of balance sheet
Balance Sheet is a statement of Assets & Liabilities as on a given date. It reflects the Financial Position of a concern as on a date. The Balance Sheet can be looked at from two angles:
ASSETS as USES and LIABILITIES as SOURCES OF FUNDS
ASSETS as what the Business Owns and LIABILITIES as what the Business Owes.
LIABILITIES
ASSETS
NET WORTH
FIXED ASSETS
TERM LIABILITIES
CURRENT ASSETS
CURRENT LIABILITIES
OTHER NON CURRENT ASSETS

13. 7:58 AM
Major Components of balance sheet
1. Net Worth : It is the total investment of the owners in the Business.
For a Limited Company it comprises of a sum of Share Capital + Reserves
Share Capital is the direct investment of the owners in the business. This includes Equity Share Capital and Preference Share Capital.
Reserves : Profits of the business which have been reinvested in the business. In Proprietorship and Partnership Firms they are added to Capital and not shown separately.

14. 7:58 AM
Major Components of balance sheet
2. TERM LIABILITIES : All those borrowings made by the concern which are repayable after One Year of the Balance Sheet date are called Term Liabilities. These include
TERM LOANS
DEBENTURE
TERM DEPOSITS
REDEEMABLE PREFERENCE SHARE CAPITAL
(Maturing with 12 years of Balance Sheet Date)

15. 7:58 AM
Major Components of balance sheet
3. CURRENT LIABILITIES : All those borrowings made by the concern which are expected to be repaid within 12 months of the date of the Balance Sheet. These include
CREDITORS
PROVISIONS FOR EXPENSES
BANK BORROWING FOR WORKING CAPITAL
DEPOSITS MATURING WITHIN 12 MONTHS
INSTALLMENTS OF TERM LOANS
DEBENTURES/REDEEMABLE PREFERENCE SHARES MATURING WITHIN ONE YEAR
Total of Term Liabilities + Current Liabilities is called Outside Liabilities and is the Total Borrowings of the Firm

16. 7:58 AM
Major Components of balance sheet
4. FIXED ASSETS: These are the assets which help in the production of goods & services of the concern. They are tangible in nature and have a long life. The examples of Fixed Assets are :
Land
Building
Plant & Machineries
Furniture & Fixtures etc.

17. 7:58 AM
Major Components of balance sheet
5. CURRENT ASSETS: These are the assets which are expected to be consumed or converted into cash through the normal business operations and usually within one year. Such as:
Cash & Bank Balances
FDs with Banks
Short Term Govt .Securities
Stocks of R.M., Semi F.G and F.G
Stores, Spares
Advance Payment for Suppliers
Prepaid Insurance
Debtors & Bills Receivables

18. 7:58 AM
Major Components of balance sheet
6. NON CURRENT ASSETS: These are the assets which do not fall in the above two categories of assets. They are:
Corporate Investments
Loans not recoverable within 1 year
Non Consumable Spares
Deferred Receivables
Advance for Capital Expenditure
Intangible Assets [ Goodwill, Patent, Trade Mark]
Preliminary & Pre-operative Expenses

19. FINANCIAL Statements are studied to know
7:58 AM
FINANCIAL Statements are studied to know
Does the firm has liquidity to meet its short term obligations?
Would the firm be able to meet its long term commitments?
Is the firm using its assets efficiently?
How profitable are the operations of the firm?
Lenders’ need it for carrying out :-
Technical Appraisal
Commercial Appraisal
Financial Appraisal
Economic Appraisal
Management Appraisal

20. What is Financial analysis?
7:58 AM
What is Financial analysis?
It is the process of identifying the financial strengths & weaknesses of a firm by properly establishing relationships between the items of the Balance Sheet and Profit & Loss A/c. This is done by – (1) The Firm’s Management (2) Owners (3) Creditors (4) Investors (5) Bankers & Others

21. Why Financial analysis?
7:58 AM
Why Financial analysis?
TRADE CREDITORS : They do it to know the firm’s ability to meet their claim. [Liquidity]
SUUPLIERS OF LONG TERM DEBT : They need to know the firm’s long term solvency. [Profitability over a long period of time]
INVESTORS : They are concerned about the firm’s earnings.
BANKERS : They need to understand the soundness of the Business so as to take a good Credit Decision.

22. 7:58 AM
Ratio Analysis
It’s a tool which enables the banker or lender to arrive at the following factors :
Liquidity position
Profitability
Solvency
Financial Stability
Quality of the Management
Safety & Security of the loans & advances to be or already been provided

23. 7:58 AM
Ratio Analysis
Ratio is the indicated quotient of two mathematical expressions i.e. the relationship between two or more things.
Ratio Analysis involves comparison for useful interpretation of the financial statement. A single ratio does not indicate favourable or unfavourable condition. It should be compared with some sort of standard. Standard of comparison may consist of :
Ratios calculated from the past financial statements of the same firm.
Ratios developed using the projected financial statements of the same firm.
Ratios of some selected firms, especially the most progressive and successful at the same point of time; and
Ratios of the industry level to which the firm belongs.

24. How a Ratio is expressed?
7:58 AM
How a Ratio is expressed?
As Percentage - such as 25% or 50% . For example if net profit is Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales.
As Proportion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4.
As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.

25. Format of balance sheet for ratio analysis
7:58 AM
LIABILITIES
ASSETS
NET WORTH/EQUITY/OWNED FUNDS
Share Capital/Partner’s Capital/Paid up Capital/ Owners Funds
Reserves ( General, Capital, Revaluation & Other Reserves)
Credit Balance in P&L A/c
FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES
Original Value Less Depreciation
[Net Value or Book Value or Written down value]
LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions)
Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities
NON CURRENT ASSETS
Investments in quoted shares & securities
Old stocks or old/disputed book debts
Long Term Security Deposits
Other Misc. assets which are not current or fixed in nature
CURRENT LIABILTIES
Bank Working Capital Limits such as CC/OD/Bills/Export Credit
Sundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or deposits
Expenses payable & provisions against various items
CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & Inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 months
INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses

26. Classification of Ratios
7:58 AM
Balance Sheet Ratio
P&L Ratio or Income/Revenue Statement Ratio
Balance Sheet and Profit & Loss Ratio
Financial Ratio
Operating Ratio
Composite Ratio
Current Ratio
Quick Asset Ratio
Proprietary Ratio
Debt Equity Ratio
Gross Profit Ratio
Expense Ratio
Net profit Ratio
Stock Turnover Ratio
Fixed Asset Turnover Ratio, Return on Total Resources Ratio,
Return on Own Funds Ratio, Earning per Share Ratio, Debtors’ Turnover Ratio,

27. 7:58 AM
Some important notes
Liabilities have Credit balances and Assets have Debit balances
Current Liabilities are those which have either become due for payment or shall fall due for payment within 12 months from the date of Balance Sheet
Current Assets are those which undergo change in their shape/form within 12 months. These are also called Working Capital or Gross Working Capital
Net Worth & Long Term Liabilities are also called Long Term Sources of Funds
Current Liabilities are known as Short Term Sources of Funds
Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities
Current Assets are Short Term Use of Funds

28. 7:58 AM
Some important notes
Assets other than Current Assets are Long Term Use of Funds
Installments of Term Loan Payable in 12 months are to be taken as Current Liability, only for Calculation of Current Ratio & Quick Ratio.
If there is profit it shall become part of Net Worth under the head Reserves and if there is loss it will become part of Intangible Assets
Investments in Govt. Securities to be treated current only if these are marketable and due. Investments in other securities are to be treated Current if they are quoted. Investments in allied/associate/sister units or firms to be treated as Non-current.
Bonus Shares as issued by capitalization of General Reserves and as such do not affect the Net Worth. But with Rights Issue, change takes place in Net Worth and Current Ratio.

29. Current Ratio = Current Assets/Current Liabilities
7:58 AM
Current Ratio : It is the relationship between the current assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is : 1
Current Assets : Cash & those assets which can be converted into cash within 1 year. For example, Marketable securities, Debtors, Inventories, Prepaid Expenses.
Current Liabilities : Creditors, Bills Payable, Accrued Expenses, Short Term Bank Loans, Income Tax Liabilities and long Term Liabilities maturing in the current year.

30. 7:58 AM
Current Ratio measures the firm’s short term solvency. A ratio greater than 1 means that the firm has more current assets than current claims against them. As a conventional rule a Current Ratio of 2 is considered most satisfactory. This rule is based on the logic that in a worse situation, even if the value of current assets become half, the firm will be able to meet its current obligations. It represents the “Margin of Safety’ i.e. a cushion of protection for creditors. Higher the ratio greater the margin of safety.

31. NWC = Current Assets – Current Liabilities
7:58 AM
Net Working Capital : This is worked out as surplus of Long Term Sources over Long Term Uses, alternatively it is the difference of Current Assets and Current Liabilities. It measures the firm’s potential reservoir of funds.
NWC = Current Assets – Current Liabilities

32. Current Ratio = > 3,00,000/1,00,000 = 3 : 1
7:58 AM
3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.
Quick Current Assets : Quick assets are those which can be immediately converted into cash without a loss of value. Cash & Bank balances are the most liquid assets. Examples of quick Assets are : Cash/Bank Balances, Receivables upto 6 months, Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits. Inventories are less liquid hence the same is deducted from the Current Assets to arrive at Quick Assets.
Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities
Example :
Cash ,000
Debtors ,00,000
Inventories ,50, Current Liabilities 1,00,000
Total Current Assets 3,00,000
Current Ratio = > ,00,000/1,00, = 3 : 1
Quick Ratio = > ,50,000/1,00, = 1.5 : 1

33. 7:58 AM
DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s Capital (Equity). It represents the lender’s contribution for each Rupee of owner’s contribution.
Long Term Outside Liabilities / Tangible Net Worth
Liabilities of Long Term Nature
Total of Capital and Reserves & Surplus Less Intangible Assets
For instance, if the Firm is having the following :
Capital = Rs. 200 Lacs
Free Reserves & Surplus = Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs
Debt Equity Ratio will be => 800/500 = 1.6 : 1

34. Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100
7:58 AM
5. PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owner’s Fund.
Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100
The ratio will be 100% when there is no Borrowing for purchasing of Assets.
6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to Net Sales we can arrive at the Gross Profit Ratio which indicates the manufacturing efficiency as well as the pricing policy of the concern.
Gross Profit Ratio = (Gross Profit / Net Sales ) x 100
Alternatively , since Gross Profit is equal to Sales minus Cost of Goods Sold, it can also be interpreted as below :
Gross Profit Ratio = [ (Sales – Cost of goods sold)/ Net Sales] x 100
A higher Gross Profit Ratio indicates efficiency in production of the unit.

35. 7. OPERATING PROFIT RATIO :
7:58 AM
7. OPERATING PROFIT RATIO :
It is expressed as => (Operating Profit / Net Sales ) x 100
Higher the ratio indicates operational efficiency
NET PROFIT RATIO :
It is expressed as => ( Net Profit / Net Sales ) x 100
It measures overall profitability.

36. 2 (Average Inventory/Sales) x 52 for weeks
9. STOCK/INVENTORY TURNOVER RATIO :It indicates the efficiency of the firm in selling its products. It is calculated by dividing the Cost of Goods Sold by Average Inventory. To arrive at the number of days, weeks or months turnover the following formulas may be applied.
(Average Inventory/Sales) x for days
(Average Inventory/Sales) x for weeks
(Average Inventory/Sales) x for months
Average Inventory or Stocks = (Opening Stock + Closing Stock) 2
This ratio indicates the number of times the inventory is rotated during the relevant accounting period, i.e. how rapidly the inventory is turning into receivables through sales. Generally a high inventory turnover is indicative of good inventory management and vice versa.
7:58 AM

37. (Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months)
10. DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given .
(Average Debtors/Sales ) x 365 for days
(52 for weeks & 12 for months)
11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets
12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets
13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets
14. CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the creditor payment period.
(Average Creditors/Purchases)x365 for days
7:58 AM

38. 15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets
16. RETRUN ON CAPITAL EMPLOYED :
( Net Profit before Interest & Tax / Average Capital Employed) x 100
Average Capital Employed is the average of the equity share capital and long term funds provided by the owners and the creditors of the firm at the beginning and end of the accounting period.
7:58 AM

39. 17. RETRUN ON EQUITY CAPITAL (ROE) :
Composite Ratio
17. RETRUN ON EQUITY CAPITAL (ROE) :
Net Profit after Taxes / Tangible Net Worth
EARNING PER SHARE : EPS indicates the quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders.
Net profit after Taxes and Preference Dividend/ No. of Equity Shares
19. PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price.
Market Price Per Equity Share/Earning Per Share
7:58 AM

40. PAT + Depr. + Annual Interest on Long Term Loans & Liabilities
20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most important one which indicates the ability of an enterprise to meet its liabilities by way of payment of installments of Term Loans and Interest thereon from out of the cash accruals and forms the basis for fixation of the repayment schedule in respect of the Term Loans raised for a project. (The Ideal DSCR Ratio is considered to be 2 )
PAT + Depr. + Annual Interest on Long Term Loans & Liabilities
Annual interest on Long Term Loans & Liabilities + Annual Installments payable on Long Term Loans & Liabilities
( Where PAT is Profit after Tax and Depr. is Depreciation)
7:58 AM

41. QUICK RATIO = (C.A – INVENTORY)/C.L
7:58 AM
LIQUIDITY RATIOS :
CURRENT RATIO = C.A / C.L
QUICK RATIO = (C.A – INVENTORY)/C.L
ACTIVITY RATIOS :
INVENTORY TURNOVER RATIO = (COST OF GOODS SOLD OR SALES)/INVENTORY
DEBTORS TURNOVER RATIO = (CREDIT SALES OR SALES)/AVERAGE DEBTORS
INVENTORY PERIOD = 360/INVENTORY TURNOVER
COLLECTION PERIOD = 360/DEBTORS TURNOVER
ASSETS TURNOVER = SALES/NET ASSETS OR CAPITAL EMPLOYED
WORKING CAPITAL TURNOVER = SALES/NET WORKING CAPITAL
PROFITABILITY RATIOS :
GROSS MARGIN = GROSS PROFIT/SALES
NET MARGIN = PAT/SALES, EBIT/SALES
PAT TO EBIT RATIO = PAT/EBIT
RETRUN ON INVESTMENT RATIO = EBIT/NET ASSETS OR CAPITAL EMPLOYED
RETRUN ON EQUITY = PAT/NET WROTH
LEVERAGE RATIOS :
TOTAL DEBT RATIO = TOTAL DEBT/CAPITAL EMPLOYED
DEBT EQUITY RATIO = NET WORTH/TOTAL DEBT
CAPITAL EQUITY RATIO = C.E OR NET ASSETS / NET WORTH
INTEREST COVERAGE RATIO = (EBIT+Depr.)/INTEREST

42. What is the Net Worth : Capital + Reserve = 200
EXERCISE 1
7:58 AM
LIABILITES
ASSETS
Capital
180
Net Fixed Assets
400
Reserves 20
Inventories
150
Term Loan
300
Cash 50
Bank C/C
200
Receivables
Trade Creditors
Goodwill
Provisions
800
What is the Net Worth : Capital + Reserve = 200
Tangible Net Worth is : Net Worth - Goodwill = 150
Outside Liabilities : TL + CC + Creditors + Provisions = 600
Net Working Capital : C A - C L = = 50
Current Ratio : C A / C L = / 300 = : 1
Quick Ratio : Quick Assets / C L = 200/300 = : 1

43. 1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390
EXERCISE 2
7:58 AM
LIABILITIES
Capital
300
350
Net Fixed Assets
730
750
Reserves
140
160
Security Electricity 30
Bank Term Loan
320
280
Investments
110
Bank CC (Hyp)
490
580
Raw Materials
150
170
Unsec. Long T L
S I P 20
Creditors (RM)
120 70
Finished Goods
Bills Payable 40 80
Cash
Expenses Payable
Receivables
310
240
Provisions
Loans/Advances
190
Goodwill 50
Total
1600
1760
1. Tangible Net Worth for 1st Year : ( ) = 390
2. Current Ratio for 2nd Year : ( ) / ( )
820 /800 =
3. Debt Equity Ratio for 1st Year : / 390 = 1.21

44. Investment In Govt. Secu. 50 Sundry Creditors Preliminary Expenses
7:58 AM
Exercise 3.
LIABIITIES
ASSETS
Equity Capital
200
Net Fixed Assets
800
Preference Capital
100
Inventory
300
Term Loan
600
Receivables
150
Bank CC (Hyp)
400
Investment In Govt. Secu. 50
Sundry Creditors
Preliminary Expenses
Total
1400
1. Debt Equity Ratio will be : / ( ) = 2 : 1
2. Tangible Net Worth : Only equity Capital i.e. = 200
3. Total Outside Liabilities / Total Tangible Net Worth : ( ) / 200
= 11 : 2
4. Current Ratio will be : ( ) / ( ) = 1 : 1

45. What is the Current Ratio ? Ans : (1+125 +128+1) / (38+26+9+15)
7:58 AM
Exercise 4.
LIABILITIES
ASSETS
Capital + Reserves
355
Net Fixed Assets
265
P & L Credit Balance 7
Cash 1
Loan From S F C
100
Receivables
125
Bank Overdraft 38
Stocks
128
Creditors 26
Prepaid Expenses
Provision of Tax 9
Intangible Assets 30
Proposed Dividend 15
550
What is the Current Ratio ? Ans : ( ) / ( )
: 255/88 = : 1
Q What is the Quick Ratio ? Ans : (125+1)/ 88 = : 11
Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW
= 100 / ( 362 – 30)
= / 332 = : 1

46. Q . What is the Net Working Capital ?
7:58 AM
Exercise contd…
LIABILITIES
ASSETS
Capital + Reserves
355
Net Fixed Assets
265
P & L Credit Balance 7
Cash 1
Loan From S F C
100
Receivables
125
Bank Overdraft 38
Stocks
128
Creditors 26
Prepaid Expenses
Provision of Tax 9
Intangible Assets 30
Proposed Dividend 15
550
Q . What is the Proprietary Ratio ? Ans : (TNW / Tangible Assets) x 100
[ ( ) / (550 – 30)] x 100
(332 / 520) x 100 = 64%
Q . What is the Net Working Capital ?
Ans : C. A - C L. = = 167
Q . If Net Sales is Rs.15 Lac, then What would be the Stock Turnover Ratio in Times ? Ans : Net Sales / Average Inventories/Stock
1500 / 128 = 12 times approximately

47. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.
7:58 AM
Exercise contd…
LIABILITIES
ASSETS
Capital + Reserves
355
Net Fixed Assets
265
P & L Credit Balance 7
Cash 1
Loan From S F C
100
Receivables
125
Bank Overdraft 38
Stocks
128
Creditors 26
Prepaid Expenses
Provision of Tax 9
Intangible Assets 30
Proposed Dividend 15
550
What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.
Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12
= 1 month
Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?
Ans : (Average Creditors / Purchases ) x = (26 / 1050) x 12 = 0.3 months

48. Answer : Net Profit Ratio = (Net Profit / Sales ) x 100
7:58 AM
Exercise 5. : Profit to sales is 2% and amount of profit is say Rs.5 Lac. Then What is the amount of Sales ?
Answer : Net Profit Ratio =
(Net Profit / Sales ) x 100
2 = (5 x100) /Sales
Therefore Sales = 500/2 = Rs.250 Lac

49. Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac
7:58 AM
Exercise 6. A Company has Net Worth of Rs.5 Lac, Term Liabilities of Rs.10 Lac. Fixed Assets worth RS.16 Lac and Current Assets are Rs.25 Lac. There is no intangible Assets or other Non Current Assets. Calculate its Net Working Capital.
Answer
Total Assets = = Rs. 41 Lac
Total Liabilities = NW + LTL + CL = CL = 41 Lac
Current Liabilities = 41 – 15 = 26 Lac
Therefore Net Working Capital = C. A – C.L
= 25 – 26 = (- )1 Lac

50. 7:58 AM
Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net Working Capital ?
Answer : It suggest that the Current Assets is equal to Current Liabilities hence the NWC would be NIL ( since NWC = C.A - C.L )

51. Thus Current Liabilities is Rs.10,000
7:58 AM
Exercise 8 : Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What is the amount of Current Assets ?
Answer : 4a - 1a = 30,000
Therefore a = 10,000
Thus Current Liabilities is Rs.10,000
Hence Current Assets would be 4a = 4 x 10,000 = Rs.40,000/-

52. 7:58 AM
Exercise 9. The amount of Term Loan installment is Rs.10000/ per month, monthly average interest on TL is Rs.5000/-. If the amount of Depreciation is Rs.30,000/- p.a. and PAT is Rs.2,70,000/-. What would be the DSCR ?
DSCR = (PAT + Depr. + Annual Intt.) / (Annual Intt. + Annual Installment)
= ( ) / ( )
= /
= 2

53. 7:58 AM
Exercise 10 : Total Liabilities of a firm is Rs.100 Lac and Current Ratio is 1.5 : 1. If Fixed Assets and Other Non Current Assets are to the tune of Rs. 70 Lac and Debt Equity Ratio being 3 : 1. What would be the Long Term Liabilities?
Answer
We can easily arrive at the amount of Current Asset being Rs. 30 Lac i.e. ( Rs. 100 L - Rs. 70 L ).
If the Current Ratio is 1.5 : 1, then Current Liabilities works out to be Rs. 20 Lac.
That means the aggregate of Net Worth and Long Term Liabilities would be Rs. 80 Lacs.
If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs. 60 Lacs and equity Rs. 20 Lacs.
Therefore the Long Term Liabilities would be Rs.60 Lac.

54. 7:58 AM
Exercise 11 : Current Ratio is say 1.2 : 1 . Total of balance sheet being Rs.22 Lac. The amount of Fixed Assets + Non Current Assets is Rs. 10 Lac. What would be the Current Liabilities?
Answer
When Total Assets is Rs.22 Lac then Current Assets would be (Total Assets less Fixed+Non Current Assets)= 22 – 10 i.e Rs. 12 Lac.
Thus we can easily arrive at the Current Liabilities figure which should be Rs. 10 Lac, since the Curret Ratio being 1.2 : 1

55. Inventory Turnover = Cost of Goods Sold / Average Inventory
7:58 AM
Exercise 12 : Total Sales (all credit sales) of a firm is Rs It has gross profit margin of 15% and a Current Ratio of 2.5. The firms Current liabilities are Rs.96000, Inventories – Rs and Cash – Rs
Determine the average inventory to be carried by the firm, if an inventory turnover of 5 times is expected? Assuming a year having 360 days.
Inventory Turnover = Cost of Goods Sold / Average Inventory
Given that Gross Profit margin is 15% means the Goods sold should be 85% of the sales. So Cost of Goods Sold = Sales x 85% = x 85% =
Hence = / Average Inventory
or Average Inventory = /5 =

56. Average Collection Period = (Average Debtors/Credit Sales) x 360
7:58 AM
Exercise 12 : Total Sales (all credit sales) of a firm is Rs It has gross profit margin of 15% and a Current Ratio of 2.5. The firms Current liabilities are Rs.96000, Inventories – Rs and Cash – Rs
b) Determine the average collection period if the opening balance of debtors is intended to be Rs.80000/-. Assume a year having 360 days.
Average Collection Period = (Average Debtors/Credit Sales) x 360
Average Debtors = (Opening Bal of Debtors + Closing Bal of Debtors)/2
Current Liabilities given is Rs.96000/-, Current Ratio is 2.5
So Current Assets = x 2.5 =
If you deduct Inventory and Cash i.e = from Current Assets, you get closing balance of Debtors,
So Closing Balance of Debtors is – =
Therefore the average Debtors would be ( )/2 =
Hence Average Collection Period = (128000/640000)x360
= 72 days.

57. Debt Service Coverage Ratio Quick Ratio
7:58 AM
EXERCISE A firm sold its stocks in CASH, in order to meet its liquidity needs. Which of the following Ratio would be affected by this?
Debt Equity Ratio
Current Ratio
Debt Service Coverage Ratio
Quick Ratio
EXERCISE 14. A company is found to be carrying a high DEBT EQUITY Ratio. To improve this, a bank may suggest the company to :
Raise long term interest free loans from friends and relatives
Raise long term loans from Institutions
Increase the Equity by way of Bonus Issue
Issue Rights share to existing share holders.
EXERCISE 15. Which of the following is a fictitious Asset?
Goodwill
Preliminary Expenses
Pre-operative expenses
Book Debts which have become doubtful of recovery

58. Written Down Value method Straight Line method Annuity method
7:58 AM
EXERCISE 16. Under which of the following methods of depreciation on Fixed Assets, the annual amount of depreciation decreases?
Written Down Value method
Straight Line method
Annuity method
Insurance policy method
EXERCISE 17 Debt Service Coverage Ratio (DSCR) shows :
Excess of current assets over current liabilities
Number of times the value of fixed assets covers the amount of loan
Number of times the company’s earnings cover the payment of interest and repayment of principal of long term debt
Effective utilisation of assets
EXERCISE 18. Which of the following is not considered a Quick Asset?
Cash and Bank balances
Bank Fixed Deposits
Current Book Debts
Loans and Advances

59. Questions on Fund Flow Statement
7:58 AM
Questions on Fund Flow Statement
Q 19. Fund Flow Statement is prepared from the Balance sheet :
Of three balance sheets
Of a single year
Of two consecutive years
None of the above.
Q 20. Why this Fund Flow Statement is studied for ?
It indicates the quantum of finance required
It is the indicator of utilisation of Bank funds by the concern
It shows the money available for repayment of loan
It will indicate the provisions against various expenses
Q 21. In a Fund Flow Statement , the assets are represented by ?
Application of Funds
Sources of Funds
Surplus of sources over application
Deficit of sources over application

60. Q 22. In Fund Flow Statements the Liabilities are represented by ?
7:58 AM
Q 22. In Fund Flow Statements the Liabilities are represented by ?
Sources of Funds
Use of Funds
Deficit of sources over application
All of the above.
Q When the long term sources are more than long term uses, in the fund flow statement, it would suggest ?
Increase in Current Liabilities
Decrease in Working Capital
Increase in NWC
Decrease in NWC
Q 24. When the long term uses in a fund flow statement are more than the long term sources, then it would mean ?
Reduction in the NWC
Reduction in the Working Capital Gap
Reduction in Working Capital
All of the above

61. Only One, Source of Funds Two, Long Term and Short Term Sources
7:58 AM
Q 25. How many broader categories are there for the Sources of funds, in the Fund Flow Statement ?
Only One, Source of Funds
Two, Long Term and Short Term Sources
Three , Long, Medium and Short term sources
None of the above.
R K MOHANTY
ID :