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CAIIB Financial Management MODULE C RATIO ANALYSIS R K MOHANTY

FACULTY MEMBER, SIR SPBT COLLEGE, CENTRAL BANK OF INDIA, MUMBAI

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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.
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1. 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)

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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

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3. COST OF SALES :

It is the sum of Cost of Production and Difference between Opening & Closing Stock of Finished Goods

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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.

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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

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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 Managements Policy. The Balance amount is reinvested in business in the form of RESERVES or added in the Capital Account.
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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:
1.

2.

ASSETS as USES and LIABILITIES as SOURCES OF FUNDS ASSETS as what the Business Owns and LIABILITIES as what the Business Owes.
LIABILITIES NET WORTH TERM LIABILITIES CURRENT LIABILITIES ASSETS FIXED ASSETS CURRENT ASSETS OTHER NON CURRENT ASSETS
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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.
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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)

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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
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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.

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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
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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 18

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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
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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 Firms Management (2) Owners (3) Creditors (4) Investors (5) Bankers & Others

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A. TRADE CREDITORS : They do it to know the firms ability to meet their claim. [Liquidity] B. SUUPLIERS OF LONG TERM DEBT : They need to know the firms long term solvency. [Profitability over a long period of time] C. INVESTORS : They are concerned about the firms earnings. D. BANKERS : They need to understand the soundness of the Business so as to take a good Credit Decision.

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Its 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
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1.

2.

3.

4.

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.
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As

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.
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Percentage - such as 25% or 50% .

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LIABILITIES

ASSETS

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

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Balance Sheet P&L Ratio or Balance Sheet Ratio Income/Revenue and Profit & Statement Loss Ratio Ratio
Financial Ratio Operating Ratio Composite Ratio

Current Ratio Gross Profit Ratio Quick Asset Ratio Operating Ratio Proprietary Ratio Expense Ratio Debt Equity 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,
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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 27 Long Term Liabilities & Short Term Liabilities are also

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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 28 Reserves and as such do not affect the Net Worth. But

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1.

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 1.33 : 1 Current Assets : Cash & those assets which can be converted into cash within 1 year. For example, Marketable securities,

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Current Ratio measures the firms 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

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2.

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 firms potential reservoir of funds. NWC = Current Assets Current Liabilities
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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 50,000 Debtors 1,00,000 Inventories 1,50,000 1,00,000 Total Current Assets 3,00,000

Current Liabilities

Current Ratio

=>

3,00,000/1,00,000

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4. DEBT EQUITY RATIO : It is the relationship between borrowers fund (Debt) and Owners Capital (Equity). It represents the lenders contribution for each Rupee of owners 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 Free Reserves & Surplus Long Term Loans/Liabilities Debt Equity Ratio will be = Rs. 200 Lacs = Rs. 300 Lacs = Rs. 800 Lacs => 800/500 = 1.6 : 1
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5. PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owners 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 34 sold)/ Net Sales] x 100

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7. OPERATING PROFIT RATIO : It is expressed as Sales ) x 100 => (Operating Profit / Net

Higher the ratio indicates operational efficiency 8. NET PROFIT RATIO : It is expressed as x 100 => ( Net Profit / Net Sales )

It measures overall profitability.

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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 365 for days (Average Inventory/Sales) x 52 for weeks (Average Inventory/Sales) x 12 for months Average Inventory or Stocks = (Opening Stock + Closing Stock) -----------------------------------------

2
This ratio indicates the number of times the36

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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 : Sales/Tangible Assets 12. FIXED ASSET TURNOVER RATIO : Sales /Fixed Assets Net Net

13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets 14. CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the37

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15. RETRUN ON ASSETS : Taxes/Total Assets

Net Profit after

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.
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Composite Ratio
17. RETRUN ON EQUITY CAPITAL (ROE) : Net Profit after Taxes / Tangible Net Worth 18.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. 39

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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

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LIQUIDITY RATIOS : 1.CURRENT RATIO = C.A / C.L 2.QUICK RATIO = (C.A INVENTORY)/C.L ACTIVITY RATIOS : 1.INVENTORY TURNOVER RATIO = (COST OF GOODS SOLD OR SALES)/INVENTORY 2.DEBTORS TURNOVER RATIO = (CREDIT SALES OR SALES)/AVERAGE DEBTORS 3.INVENTORY PERIOD = 360/INVENTORY TURNOVER 4.COLLECTION PERIOD = 360/DEBTORS TURNOVER 5.ASSETS TURNOVER = SALES/NET ASSETS OR CAPITAL EMPLOYED 6.WORKING CAPITAL TURNOVER = SALES/NET WORKING CAPITAL

PROFITABILITY RATIOS : 1.GROSS MARGIN = GROSS PROFIT/SALES 2.NET MARGIN = PAT/SALES, EBIT/SALES 3.PAT TO EBIT RATIO = PAT/EBIT 4.RETRUN ON INVESTMENT RATIO = EBIT/NET ASSETS OR CAPITAL EMPLOYED 5.RETRUN ON EQUITY = PAT/NET WROTH LEVERAGE RATIOS : 1.TOTAL DEBT RATIO = TOTAL DEBT/CAPITAL EMPLOYED 2.DEBT EQUITY RATIO = NET WORTH/TOTAL DEBT 3.CAPITAL EQUITY RATIO = C.E OR NET ASSETS / NET WORTH 4.INTEREST COVERAGE RATIO = (EBIT+Depr.)/INTEREST

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EXERCISE 1 LIABILITES Capital Reserves Term Loan Bank C/C Trade Creditors Provisions ASSETS 180Net Fixed Assets 20Inventories 300Cash 200Receivables 50Goodwill 50 800

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400 150 50 150 50 800

a. b. c. d. e. f.

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 = 350 - 250 = 50 Current Ratio : C A / C L = 350 / 300 = 1.17 : 1 Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1
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EXERCISE 2 LIABILITIES Capital Reserves Bank Term Loan Bank CC (Hyp) Unsec. Long T L Creditors (RM) Bills Payable Expenses Payable 2006-07 2007-08 300 140 320 490 150 120 40 20 350Net Fixed Assets 160Security
Electricity

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2006-072007-08 730 30 110 150 20 140 30 310 30 750 30 110 170 30 170 20 240 190

280Investments 580Raw Materials 170S I P 70Finished Goods 80Cash 30Receivables

Provisions 20 40Loans/Advances 1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390

2. Current Ratio for 2nd Year : (170 + 30 +170+20+ 240 + 190 ) / (580+70+80+70) Goodwill 50 50 820 /800 = 1.02 Total 1600 1760 1600 1760 3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21
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Exercise 3. LIABIITIES Equity Capital Preference Capital Term Loan Bank CC (Hyp) Sundry Creditors Total ASSETS 200Net Fixed Assets 100Inventory 600Receivables 400Investment In Govt. Secu. 100Preliminary Expenses 1400 = 2:1 800 300 150 50 100 1400

1. Debt Equity Ratio will be : 600 / (200+100)

2. Tangible Net Worth : Only equity Capital i.e. = 200 3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200 = 11 : 2 4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1

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Exercise 4. LIABILITIES Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend Q. What is the Current Ratio ? Q What is the Quick Ratio ? ASSETS

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355 Net Fixed Assets 7Cash 100Receivables 38Stocks 26Prepaid Expenses 9Intangible Assets 15 550

265 1 125 128 1 30 550

Ans : (1+125 +128+1) / (38+26+9+15) : 255/88 = 2.89 : 1

Ans : (125+1)/ 88 = 1.43 : 11 Ans : LTL / Tangible NW = 100 / ( 362 30) = 100 / 332 = 0.30 : 1
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Q. What is the Debt Equity Ratio ?

Exercise 4. LIABILITIES

contd ASSETS

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Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend

355 Net Fixed Assets 7Cash 100Receivables 38Stocks 26Prepaid Expenses 9Intangible Assets 15 550

265 1 125 128 1 30 550

Q . What is the Proprietary Ratio ? Ans : (TNW / Tangible Assets) x 100 [ (362 - 30 ) / (550 30)] x 100 (332 / 520) x 100 = 64% Q . What is the Net Working Capital ? Ans : C. A - C L. = 255 - 88 = 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

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Exercise 4. LIABILITIES

contd ASSETS

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Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend

355 Net Fixed Assets 7Cash 100Receivables 38Stocks 26Prepaid Expenses 9Intangible Assets 15 550

265 1 125 128 1 30 550

Q. 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 12 = (26 / 1050) x 12 = 0.3 months
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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

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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 = 16 + 25 = Rs. 41 Lac Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac Current Liabilities = 41 15 = 26 Lac Therefore Net Working Capital = C. A C.L = 25 26 = (- )1 Lac

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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 )

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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/-

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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) = (270000 + 30000 + 60000 ) / (60000 + 120000) = 360000 / 180000 = 2

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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.
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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
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Exercise 12 : Total Sales (all credit sales) of a firm is Rs.640000. It has gross profit margin of 15% and a Current Ratio of 2.5. The firms Current liabilities are Rs.96000, Inventories Rs.48000 and Cash Rs.16000. a)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% = 640000 x 85% = 544000 Hence or 5 = 544000 / Average Inventory

Average Inventory = 544000/5 = 108800

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Exercise 12 : Total Sales (all credit sales) of a firm is Rs.640000. It has gross profit margin of 15% and a Current Ratio of 2.5. The firms Current liabilities are Rs.96000, Inventories Rs.48000 and Cash Rs.16000. 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 = 96000 x 2.5 = 240000 If you deduct Inventory and Cash i.e. 48000 + 16000 = 64000 from Current Assets, you get closing balance of Debtors, So Closing Balance of Debtors is 240000 64000 = 176000 Therefore the average Debtors would be (80000 + 176000)/2 = 128000 Hence Average Collection Period = (128000/640000)x360 = 72 days.
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EXERCISE 13. A firm sold its stocks in CASH, in order to meet its liquidity needs. Which of the following Ratio would be affected by this? 1.Debt Equity Ratio 2.Current Ratio 3.Debt Service Coverage Ratio 4.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 : 1.Raise long term interest free loans from friends and relatives 2.Raise long term loans from Institutions 3.Increase the Equity by way of Bonus Issue 4.Issue Rights share to existing share holders. EXERCISE 15. Which of the following is a fictitious Asset? 1.Goodwill 2.Preliminary Expenses 3.Pre-operative expenses 4.Book Debts which have become doubtful of recovery

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EXERCISE 16. Under which of the following methods of depreciation on Fixed Assets, the annual amount of depreciation decreases? 1.Written Down Value method 2.Straight Line method 3.Annuity method 4.Insurance policy method EXERCISE 17 Debt Service Coverage Ratio (DSCR) shows : 1.Excess of current assets over current liabilities 2.Number of times the value of fixed assets covers the amount of loan 3.Number of times the companys earnings cover the payment of interest and repayment of principal of long term debt 4.Effective utilisation of assets EXERCISE 18. Which of the following is not considered a Quick Asset? 1.Cash and Bank balances 2.Bank Fixed Deposits 3.Current Book Debts 4.Loans and Advances

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Questions on Fund Flow Statement Q 19. Fund Flow Statement is prepared from the Balance sheet : 1.Of three balance sheets 2.Of a single year 3.Of two consecutive years 4.None of the above. Q 20. Why this Fund Flow Statement is studied for ? 1.It indicates the quantum of finance required 2.It is the indicator of utilisation of Bank funds by the concern 3.It shows the money available for repayment of loan 4.It will indicate the provisions against various expenses Q 21. In a Fund Flow Statement , the assets are represented by ? 1.Application of Funds 2.Sources of Funds 3.Surplus of sources over application 4.Deficit of sources over application

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Q 22. In Fund Flow Statements the Liabilities are represented by ? 1.Sources of Funds 2.Use of Funds 3.Deficit of sources over application 4.All of the above. Q 23 . When the long term sources are more than long term uses, in the fund flow statement, it would suggest ? 1.Increase in Current Liabilities 2.Decrease in Working Capital 3.Increase in NWC 4.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 ? 1.Reduction in the NWC 2.Reduction in the Working Capital Gap 3.Reduction in Working Capital 4.All of the above
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Q 25. How many broader categories are there for the Sources of funds, in the Fund Flow Statement ? 1. Only One, Source of Funds 2.Two, Long Term and Short Term Sources 3.Three , Long, Medium and Short term sources 4.None of the above.

R K MOHANTY email ID : rajendra2411@gmail.com, rajendra2411@hotmail.com

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