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Balance Sheet and Profit & Loss Account

(1)

Into How many sets the Liabilities are grouped into


Ans The Liability is classified into 3
(a)
Networth
(b)
Term Liability
(c)
Current Liability

(2)

What is Net worth


N W= Equity Capital + Free Reserve

(3)

Into howmany sets the Asset side of the Balance Sheet are mainly classified into
Ans
(a)
Fixed Asset
(b)
Intangible Assets
(c)
Non Current Asset
(d)
Current Assets

(4)

Preference Share Capital may be classified as Networth if the same is


redeemable
Ans After 12 years as on the date of balance sheet.

(5)

Reserves are mainly classified as


Ans (a)
Free Reserve

(b)

Non free reserve

(6)

Free Reserve include


Ans
(a)
Revenue Reserve (other than kept for specific payment etc)
(b)
Capital Reserve (other than Revaluation Reserve)

(7)

Capital Redemption Reserve is a


Ans

(8)

Free Revenue Reserve.

Dividend Equalisation Reserve is a


Ans Free Revenue Reserve.

(9)

Premium on issue of share is a


Ans Capital Reserve (free reserve)

(10)

Margin Money assistance for small industries, can be treated as


Ans Quasi Equity otherwise it is a Term Liability.

(11)

Unsecured Loans from friends & Relatives if pegged in business can be treated
as
Ans

(12)

Quasi Equity, for general classification it is Term Liability.

Liability under LCs, LGs issued by Bank on behalf of the concern is referred to
as
Ans Contingent Liabilities.

(13)

Old Receivables outstanding beyond a certain period say 12 months is classified


as
Ans Non Current Assets.

(14)

Bad Debts not provided for to be treated as


Ans Intangible Asset.

(A)

How is Raw Material Consumption Is calculated


Ans Opening Stock of Raw Material
Plus: Purchase of Raw Material
Less: Closing Stock of Raw Material
Equal: Raw Material Consumption.

(B)
Ans

How is Cost of Production arrived at


Raw Material Consumption
Add: Manufacturing Expenses
Add: Depreciation
Add: Opening Stock of WIP (Sfg)
Less:Closing Stock of WIP (Sfg) is equal to cost of production.

(C)

How is Cost of Sale calculated


Ans
Cost of Production
Plus: Opening Stock of Finished goods
Less: Clearing Stock of Finished goods
Equal:Cost of Sales

(D)

Gross Profit is
Ans
Gross Sales
Less: Excise Duty
Equal: Net Sales
Net Sales Less: Cost of Sales = Gross Profit

(E)

Operating Profit is arrived at by


Ans
Gross Profit Less: Operating expenses = Operating Profit.

(F)

Net Profit After Tax is arrived at as


Ans
Operating Profit
Add: Other Income
Less: Other Expenses
Less: Income Tax
Equal: to Net Profit after tax

(1) What is Solvency Ratio


Ans
1) Tangible Net worth = Networth Intangible Asset

(2)

2) Solvency Ratio

= Total Tangible Asset


--------------------------Total Outside Liability

3) Solvency Measure

= Tangible Networth

What are the Liquidity Ratios


Ans
(1)

Networking Capital = Current Asset Current Liabilities

(2)

Networking Capital = Long term source Long term use

(3)

Current Ratio= Current Asset


-----------------Current Liability

(4)

Quick Ratio =

Quick Asset
----------------Quick Liability

(5)

Quick Asset = Current Asset Inventory

(6)

Acid Test Ratio is the same as Quick Ratio

3) What is a Leverage Ratio How it is arrived at


Ans : It is the benefit in Profit available to a unit by Borrowing
(1)

Debt Equity Ratio

= Long Term Debt


---------------------TNW

(2)Total Debt Equity Ratio = Long Term Liability + Current Liability


-----------------------------------------------TNW
(3)Total Debt Equity Ratio is the same as Total Indebtness Ratio
4)Capital Gearing Ratio = Fixed Charge bearing Long term fund
-------------------------------------------------Total Long Term Fund
5) Proprietory Ratio = Share Holding Fund
--------------------------Total Tangible Asset

x 100

6) Debt Equity Ratio for SSI unit upto Rs.10 lacs can be 3:1.
7) Debt Equity Ratio for MLI unit can be 2:1.
8). What are the different Profitability Ratio
Ans
(1)

Gross Profit Ratio

= Gross Profit
------------------ x 100
Net Sales

(2)

Operating Profit Ratio

= Operating Profit
------------------------ x 100
Net Sales

(3)

Net Profit Ratio

= Net Profit
--------------- x 100
Net Sale

(4)

Return on Networth = Net Profit After Tax


-------------------------Tangible Networth

(9) Return on Capital Employed


= Profit Before Interest & Tax
------------------------------------Capital Employed
= PAT + Int TL + Int WC + Tax
-------------------------------------TNW + TL + CL
(10) Return on Investment
= PAT + Int on TL + Int WC + Tax
------------------------------------------Total Tangible Asset
OR
PBIT
-------------------------Total Tangible Asset
11)

What are the different Turnover Ratio

Ans
(1)

Debtors Velocity
in Number of days

(2)

Debtors Velocity
in months

= Average Debtors
--------------------------- x 365
Credit Sales
= Average Debtors
---------------------------- x 12
Credit Sales

(3)

Creditors Velocity in days = Average Creditors


------------------------ x 12
Credit Purchase

(4)

Creditors Velocity in months = Average Creditors


------------------------ x 12
Credit Purchase

(5)

Inventory Turnover Ratio

(6)

Raw Material Turnover Ratio

(7)

WIP Turnover

(8)

Finished Goods Turnover = Cost of Sales


-----------------Average Fg
What do you know by the term Over Trading

(9)

= Cost of Sales
--------------------Average Inventory
= Raw Material Consumption
-----------------------------------Average Raw Material
= Cost of Product
---------------------Average WIP

Ans
A Unit is said to be overtrading when it accepts sale orders disportionate to its
working capital
10) How BEP is Worked out
Ans

Break Even Point in no. of units =

BEP in Value =

Fixed Cost
-----------------------------------------(Unit Selling Price = Unit VP)

Fixed Cost
-------------------------------------------------- x SP
Unit Selling Price Unit Variable Cost

12) What you Know By Contribution


Ans
Contribution =
Unit Selling Price Unit Variable Cost

13) What isPV Ratio


Ans

PV RATIO

Unit Contribution
------------------------- x 100
Unit Selling Price

14)How Margin of Safety is arrived


Ans
Margin of safety = Capital Utilisation BEP Capacity
--------------------------------------------- x 100
Capital Utilisation
15)

How DSCR Is Calculated


Ans

DSCR =

16)

PAT + Int TL + Dep. + Other Cash exp


--------------------------------------------------Int TL + Instalment of TL

ExpandDSCR
Ans

Debt Service Coverage Ratio

17)What is Woking Capital Gap


Ans
Working Capital Group
18)

= Total CA Other Current Liabilities

MPBF Under Tandon II Method of Lending is


Ans
MPBF =
PBF1 or PBF2 whichever is lower
PBF1 =
WCG 25% TCA
PBF2 =
WCG - Projected NWC.

BALANCE SHEET ANALYSIS AND WORKING CAPITAL


1.

While deciding on a Credit Proposal, what all Important aspects, you will
look into

a.

We have to assess the Person or Persons behind the Proposal like


Character
Capacity
Capital
Credit Worthiness of the Propreitor, Directors etc., etc.,

b.

We have to assess the Viability of the Proposal


viz.,

2.

Economic Viability
Technical Feasibility
Financial Viability
Managerial Efficiency

What are the important factors to be looked into while assessing the
financial Viability.
We assess the most important financial indicators like
a.
b.
c.
d.
e.

3.

Liquidity Ratio
Debt Equity Ratio
Solvency Ratio
Profitability Ratio
Break Even Point and Debt Service Coverage Ratio

What is meant by Liquidity Ratio?


Liquidity Ratio measures the capacity of a firm/unit to meet its Current Liability
out of the Current Asset. Liquidity of a firm gives popularity among the creditors
etc as the same represent the promptness of the firm with which pressing
liabilities can be met on its due dates/ or when demanded

The most important ratio include


NWC = Current Asset - Current Liability
Current Ratio = Current Asset
------------------Current Liability
Quick Ratio = Current Asset - Stock or Inventory
=====================
Current Liability
4.

What according to you is the best Current Ratio?


Current Ratio = Current Asset 1.33 is ideal. This is the minimum
------------------Current Liability

required Current Ratio as per Tandon Second Method of Lending. However,


Turnover Method considers the Current Ratio of 1.25 satisfactory after the
implementation of Nayak Committee for fixing working capital requirement.
Some industries like Sugar, CR of "1" is also accepted.
5. What is Tandon Second Method of Lending?
According to Tandon any Industry or system normally undergoes a cycle of operation
of Conversion of Cash into Raw Materials into Work In Progress into Finished
Goods into Debtors and into Cash.
RM
WIP
CASH
FG
DEBTORS
Naturally, for the smooth running of the unit, the unit requires certain level of
holding under RM, WIP, FG and Debtors.
The total of the Working funds is known as Total Current Asset or Gross Working
Capital. Normally a part of the money required for Procuring Raw Material etc.,
is provided by Creditors which is known as Other Current Liability. Thus,
Working Capital Gap (WCG) = TCA - OCL. A portion of this WCG is met by the
party by bringing his margin and the other part is financed by Bank.
As per Tandon Second Method of Lending
PBF1 = WCG - 25% of TCA
OR
PBF2 = WCG - Projected NWC.
Maximum Permissible Bank Finance = PBF1 or PBF2 whichever is lower.
Naturally if projected NWC is more the PBF2 will be lower and that will be MPBF.

6.

What is Working Capital Gap?


Out of the total requirement of funds required for the normal working of the unit
which is known as TCA a portion is available by way of other current liabilities. So
the gap or short fall in Working Capital is the difference between the total current
asset and other current liabilities.
WCG = TCA - OCL

6. What is the difference between Working Capital Gap and Net Working Capital.
WCG = TCA - Other Current Liability
NWC = TCA - TCL
Effectively
WCG - NWC = Bank Borrowings
7. What is the measure of solvency of a firm?
Solvency = Tangible Net worth
8.

What is the Total Debt Equity Ratio


Total Outside Liability
Total Debt to Equity Ratio = -------------------------Tangible Net Worth
This ratio can be 4.

9.

What is Tangible Net Worth?


Tangible Net Worth = Equity Capital + Free Reserve - Intangible Asset
Net Worth

10.

= Equity Capital + Free Reserve

What is meant by Free Reserve?

Free Reserve means, any money retained in the business created out of
Revenue or profit created out of Capital Issue by way of Premium or forfeiture of
share and credited to Reserve Account.
11. What do you know about contribution in respect of BEP?
Fixed Cost
BEP in numbers = --------------Unit selling Price - Unit Variable cost
The unit selling price - unit variable cost is called Contribution
12. Can you tell me what is P-V Ratio?
Profit Value Ratio is

PV Ratio =

Unit Contribution
=========== x 100
Unit Selling Price

Unit Selling Price - Unit Variable Cost


-------------------------------------------------- x 100
Unit Selling price

13. When do we use DSCR as a financial indicator?


While assessing Term Loan we work out DSCR. The acceptable DSCR is "2". The
average is "1.5".
14. What is meant by diversion of Funds?
Normally the Current Asset is created by current liability and also a portion of Long
Term Finance. Thus in a healthy balance sheet, Long Term Source will be partially
used for creating Long Term Use and also Short Term Use. Short Term Sources
should never be used for Long Term use as it will affect the liquidity which is
measured by NWC. The NWC should increase year by year, for a healthy unit.
When however, NWC in a year declines over that available in the previous year, we
say there is diversion. The reason for diversion is utilisation of Short Term Source,
towards acquiring long terms use or for repayment of Long Term Liability.

15. What do you know about Nayak Committee Recommendations on Working


Capital.
Nayak Committee Recommended for arriving at PBF based on Sales Turn Over. He
recommended PBF can be 20% of Acceptable Projected Sales Turn Over and the
Party should bring 5% of Sales Turn over as Margin. He also suggested that this
should be the Minimum PBF.

16. What is VAz Committee Recommendations?


IT Vaz Committee Recommended that the turn over method of arriving at PBF
should be extended to Trading and MLI accounts besides SSI advance with
enhanced limit upto Rs.100 Crores.
17. Who suggested the Introduction of Cash Flow Method for arriving at PBF.
Kannan Committee suggested that, the best method of arriving at need based
working capital facility is cash flow.
18. What is the norms prescribed RBI for assessing working capital facility for
SSI units.
1. For SSI unit, Permissible Bank Finance can be assessed under Turn over
method for credit facility upto 500 lacs.
2. For facilities in excess over Rs.500 lacs to 1000lacs. Tandon Second method of
Lending
3. For facilities of Rs.1000 lacs and above either Cash Flow or Tandon Second
Method as desired by the party.
19. What is the norm for assessment of WC in respect of parties other than SSI.
1. Upto Rs.200 lacs by way of Turn over method.
2. 200 lacs and above upto 1000 lacs by way of Tandon Second method of
Lending.

3. 1000 lacs and above either by Cash Flow Method or Tandon Second Method as
desired by the Party.
20. Can you brief the system of assessment of working capital facility under cash
flow.
The firms will be having Cash Flow under
a. Operational activities
b. Financing Activities
c. Investment Activities
The firm will be advised to submit the cash flow statement for all the three activities
referred above on a monthly basis over a period of 12 months.
The surplus or deficit under cash flow under each activity will be arrived at. Then the
net position is arrived at on a monthly basis. Limit will be sanctioned based on the Peak
net deficit. The party has to then submit the cash flow statement on a monthly basis
before the beginning of every month and accordingly the operating limit is fixed.
21. What do you know about the Loan delivery system for Loans for Rs.10 Crores
and above.
As per Rashid Jilani Committees Recommendations Loan Delivery System for
Advances of WC of Rs.10 Cores and above from Banking System was introduced.
As per the norms Banks can extend 80% of the sanctioned WC limit by way of DL
and 20% by way of Cash Credit.
The portion of Bill Purchase/Discounted facilities can be out of the 80% portion.
Recently, however, RBI have relaxed the norms and gave freedom to Bank. Our
Bank accordingly, have decided to give flexibility under the delivery norms. As per
C.O. guidelines, we can have a flexibility between 70% DL, 30% C/C to 90% DL and
10% C/C. The Loan delivery system is not applicable to Export Credit.
22. What do you know on the Line of credit for Exporters.
This is a Credit Facility extended to Exporters where the sanction is extended for a
period of 36 months. The outer limit is fixed. The scheme also envisages flexibility
by way of interchange between say PC and Bills Purchase facility etc.,

23. What is the difference between Adhoc facility and excess.


Excess facilities are allowed to meet very urgent contingency needs and any excess
sanctioned has to be adjusted in 30 days time and requires reporting to sanctioning
authorities.
Adhoc facility on the other hand is for meeting (executing) urgent large value orders
and has to be brought down to the original limit within a period of 3 months.
24. What do you know about Renewal of credit facilities.
Renewal of Credit facility is an exercise to be carried an annually for all borrowal
accounts where working capital facility are sanctioned.
The Renewal is a full exercise where besides analysis of the Audited financial
statements, the operation in the Accounts are studied including rectification of
irregularities in the Inspection Reports etc.,
In our Bank it has been decided to Review, large borrowal of RS.5 Crore and above
on a half yearly basis.
25. What do you know about Review of TL facility.
As per the latest guidelines TL sanctioned for more than Rs.50,000/- including those
under PMRY, Shubagruha etc., have to be reviewed annually.
26 In Securitisation there are two terms used MBS and ABS. What are they?
Ans. MBS - Mortgage Backed Securities
ABS - Asset Backed Securities
27 What is Securitisation?
Ans. It is a process of converting illquid assets into liquid assets and distributed
to broad range of investors through capital markets.
28 What is known as SPV?
Ans. An SPV is the Special Purpose vehicle which issue the securtised assets to
the investors through
PTC Pay Through Certificates
PTC Pass Through Certificates
IOC Interest Only Certificates

29.

What is meant by Forfeiting?

Ans. Forfeiting is a NON RECOVERABLE discounting of long term export


receivables.
30.

A forfeiting agency usually a foreign bank in the buyers country usually


agrees to forfeit export only on an important condition. What is that?

Ans. The export bill should be Co-accepted by a bank in the buyers country and
the process is called "AVAILYSING".
31.

What are all the advantages in FORFEITING?

Ans

1.
2.
3.
4.
5.
6.

32

What are all the functions of a Factor?

Ans. 1.
2.
3.
4.
5.
33.

Conversion of Deferred payment into cash


Cross border risk eliminated
Hedging against interest rate and exchange rate
No necessity for export insurance
Interest in transaction specific
It is non-recourse payment by the forfeiting agent

Administration of sales ledger


of collection facility of receivable
Financing of trade debts
Credit control and credit protection
Advisory services

What is the main difference between a Bill Finance and Factoring?

Ans. Bill Finance gives only finance


Factoring gives additional services like sales ledger
Administration, Collection Facility, Credit Convertible.
34.

What were the main causes for the South East Asian Crisis?

Ans. 1.
2.
3.

Banks for South East Asian took the exchange rate stability for
granted.
External Debt was much more than the reserves.
Central Banks started to step up monitoring

35.

In country risk analysis what is meant by SOVERIGN BANK?

Ans. If the borrower belongs to Public Sector the risk is usually referred to as
the Sovereign Risk. That means it may be the failure of the State.
36.

What is a forward rate agreement (FRA)?

Ans. It is an agreement whereby interest rates is fixed now for a future period.
37.

In an FRA, what is the quantum of amount that is settled?

Ans. In an FRA, only the difference between the agreed rate and the actual
rate on the specified date/period alone will be made good by are party to
others.
38.

What is the basic difference between the buying of a Forward Contract


and Options?

Ans. In Forward Contract the buyer has the obligation where as in option Q
contract the buyer has the right what he may or may not exercise.