mba 2012 14 presentation ii

7/28/2019 MBA 2012 14 Presentation II

1/176


2/176

Curriculum for Financial Accounting

Income statement, Balance Sheet, Assets,

Liabilities, Provisions, Capital, reserve, Cash

flow statement, Consolidated Financial

Statement, Annual Reports, Understanding

and analyzing annual reports.


3/176

Types of Organization

Trading organization

Manufacturing organization

Service organization


4/176

Understanding Business organization

Cash receiptfrom currentsales

Process startswith

Raj Ltd.

Cash paymentfor materials

Administrativeexpenses etc.

Cash left inBank


5/176

Case-2

Cash from

current sales

Advance from

customers

Collection from

debtors

Creditors

for material

and

expenses

Raj Ltd

Receivable

from

customers

Cash

payment for

materials

and

expenses

Cash left in

Bank

account


6/176

Accounting Analysis

AccountingAnalysis

Providinginformation for

Planning andControl

Audience

Internal

Investors


7/176

Financial Accounting

FinancialAccounting

Used forreporting

Audience :outside world

like governmentbodies etc.


8/176

Basics for understanding accounting

Creditors, loan,outstandingexpenses, incomereceived in advance,capital

Building, plant,furniture, cash,bank, stock etc

Salary, rent,purchases,commission,interest,advertisement etc.

Sales, interestreceived,commissionreceived, discountreceived etc.

Income expenses

LiabilitiesAssets


9/176

Accounting Information system

Input

Processing

Users

Output


10/176

Inputs

Business Transactions- purchase, sales, cash

receipts and cash payments

External events- fire, earth quake, change in

tax laws.


11/176

Processing

Accounting principles

Accounting standards

Estimates Laws and regulations etc.


12/176

Outputs

Profit & Loss Account

Balance Sheet

Cash flow statement Analysis

Tax returns etc.


13/176

Users

Share holders

Security analysts

Banks

Rating agencies

Managers

Employees

Suppliers

Customers

government

Researchers etc


14/176

Income

It refers to all the revenue receipts during the

accounting period. It includes sale proceeds,amount received from services, rent received,

interest received , commission received and all

other receipts which will can be considered as

revenue


15/176

Various Incomes

Sales

Income from services

Rent received

discount received

commission received

interest received

bad debts recovered

apprentice premium

income from investment


16/176

Expenses

It includes all the revenue expenses which are

incurred to run the organization. It includes all

the day to day expenses. Like sales expenses,

administrative expenses


17/176

Various expenses

Purchases

Carriage

Carriage inward

Freight Freight inward

Wages

Factory expenses

Stores consumed

Royalty

Motive Power

Coal, coke Water

Oil

Octroi

Dock charges

Custom Duty


18/176

Contd.

salary

rent, rate & taxes

stationary

postage and telegram audit fees

legal charges

telephone charges

insurance premium

entertainment expenses

repairs

depreciation

interest trade expenses

conveyance

charity

bank charges


19/176

Contd.

office expenses

establishment exp

stable expenses

license fees

brokerage

commission

office lighting

advertisement

export duty

discount

packing charges

traveling exp

bad debts

provision for bad debts


20/176

Assets

Assets represent something that the

organization possess, something that it owns,

and which has been obtained by spending the

money raised. In other words, assets tells uswhere the money was spent- the use of

money.


21/176

Various assets

Cash in hand

Cash at bank

Bills receivable

Sundry debtors

Closing stock

Finished goods

Raw materials

Work in progress

Stationary

Goods sent on consignment

Long term investments

Trade mark

Patents

Vehicle

Furniture

Investments

Machinery and plant

Tools

Land and building

Goodwill


22/176

Classification of Assets

Current

Assets

Fixed

Assets

Wasting

Assets

Fictitious

Assets

Contingent

Assets


23/176

Current Assets

Cash, bank, goods

Bills receivable,prepaid expenses,

Raw materials, stock,work in progress etc.


24/176

Fixed Assets

Land, building, plant,furniture, motor vehicleand tools etc.

Tangible fixedassets

Patents, trade mark, copy

rights, goodwill andresearch anddevelopment cost etc.

Intangiblefixed assets


25/176

Wasting assets

Assets diminish invalue when the

assets are taken outof natural resources

Mines, Ores, oil wellsetc.


26/176

Fictitious Assets

Which do not haveany concrete value

Preliminary expenses,Issue expenses of shares

and debentures,formation expenses


27/176

Contingent assets

An asset the existence, value and ownership

of which depend upon the occurrence or non

occurrence of a specified act.

The undecided suits for a property


28/176

Liabilities

Liabilities represent money that organization

owes. This is money that it owes because it

was borrowed by the organization. In other

words, liabilities shows the sources of money,where the organization has received its funds.


29/176

Various liabilities

Bank overdraft

Bills payable

Sundry creditors

Short term loans

Bank loans

Long-term loans

Incomes received in advance

Capital


30/176

Classification of Liabilities

Long-term liabilities-

Current liabilities

Contingent liablities


31/176

Long term liabilities

Which does not fall duefor payment in

relatively short period

( more than 12 months)

Long term loan takenfrom banks, financial

institutions anddebentures.


32/176

Current liability

Which falls due forpayment in a relativelyshort period (less than

12 months)

Bills payable, Tradecreditors, outstanding

expenses, bankoverdraft, income

received in advance etc.


33/176

Contingent Liabilities

Depending upon theoccurrence of certain event

which are uncertain

Arrears of dividend oncumulative preference

shares, Bills of exchangediscounted, suit for damages

against the company.


34/176

Transaction

Any exchange of goods or services for money

or moneys worth by the business with any

other business or person is called transaction.

It is an economic activity of the business thatchanges its financial position.


35/176

Determinants of cash transaction

The transactions, where

the terms on cash or on

cheques, by cash or by

cheques, for cash or forcheques are used are

identified as cash

transactions.

Goods sold for cash

Rs1,000

Rent paid by cash Rs

500 Salary paid by cheque

Rs 2,000

Good are purchased for

cash Rs 6000


36/176

Contd.

The transactions where

in the terms paid,

received, settled,

cleared, deposited,withdrawn etc is used

are identified as cash

transactions.

Charges paid Rs200

Shilpi settled her

account of Rs1,000

Rs2,000 deposited inthe bank

Mr. Anirban cleared his

account or Rs500 by

paying Rs450


37/176

Contd.


both cash and personal

names are mentioned

are termed as cashtransactions

Goods sold to Sravani

for Cash Rs1,000

Goods purchased from

Suman for cash Rs6,000


38/176

Credit transactions


in personal names or

name of a firm is

mentioned areidentified as credit

transactions

Goods sold to Sravani

Rs1,000

Good returned from

Sreemoti Rs5,000 Goods returned to

Sivani Rs1,000

Goods purchased from

Suman Rs6,000


39/176

Account

An account is summarized record of relevant

transactions relating to same activity or

particular head that has taken place during a

given period. Separate individual accounts areopened for every head of expenses, revenue,

asset, liability and capital


40/176

Accounts involved

Transactions

1. Purchased goods for cash

2. Purchased plant

3. Purchased furniture

4. Purchased good on credit5. Sold goods on credit to X

6. Rent received

7. Salary paid

8. Commission received

9. Cash deposited in to bank

10. Started business withcapital

Accounts involved

Cash, goods

Plant ,cash

Furniture, cash

Goods, creditor

Goods, X

Cash, rent

Salary, cash

Commission, cashBank ,cash

Cash, capital


41/176

Accounting equation

Asset= Liabilities + Equity

Asset- Liabilities = Equity

Assets Equity = Liabilities


42/176

Format of Accounting Equation

Transactions Assets Liability + Equity

Cash Goods Furniture


43/176

Impact on Accounting Equation

Decrease in asset

Decrease in ownerscapital

Cash withdrawnfor privatepurpose


44/176

Contd.

Decrease in asset

Decrease inliability

Amount paidto creditors


45/176

Furniture purchased

Increase inone asset

Decrease inother asset


46/176

Contd.

Cash brought in tobusiness

Increase in capital

Increase in asset


47/176

Contd.

Goods purchasedon credit

Increase inLiability

Increase in assets


48/176

Creditors paid by taking a fresh loan

Increase in oneliability

Decrease inanother liability

C di b h h


49/176

Creditor becomes the partner or the

contributor

Increase incapital

Decrease inliability


50/176

Capital transferred to loan

Increase inliability

Decrease incapital


51/176

Contd.

Increase incapital

Decreasein liability

Dischargeof liability

at discount

Decreasein assets


52/176

Contd.

Increase inassets

Decrease inassets

Amountcollected

from debtorsat discount

Decrease incapital


53/176

Tips for Accounting equation

Whether expensespaid or outstandingboth the cases the

capital will bereduced

If expenses paid itwill reduce from

the cash

If outstanding itwill increase the

liability


54/176

Contd.

If incomereceived in

advance

Increasethe liability

Increasethe cash


55/176

Contd.

If any expensespaid in advance

Prepaid expensescolumn will be

opened in assetside

It will reducefrom the cash


56/176

Contd.

For accruedincome ( incomeearned but not

received)

A separate columnwill be opened inthe asset side asaccrued income

Added to theequity / capital


57/176

Balance Sheet

The Balance Sheet presents an enterprises

assets, liabilities and equity at a point in time.

It summarizes the resources, and the claim to

those resources by owners and creditors ofthe enterprise on a certain date


58/176

Balance Sheet

Liabilities +equity

Assets


59/176

Format of Balance Sheet

Items Details Amount

Assets

Office equipments

Stock

Bank

CashBuilding

Total of assets

Liabilities

Creditors

Outstanding expenses

OverdraftEquity

Share capital

Retained earnings

Total equity

Total of liabilities and equity

Income Statement or Profit & Loss


60/176

Income Statement or Profit & Loss

Account

It is a dynamic document which shows the

results of operation of an enterprise for a

particular period of time. In this statement

revenue of a particular period are marchedwith the expenses of that period. The excess

of revenue over expenses is known as net

income and excess of expenses over revenueis known as net loss


61/176

Why Profit is important?

For business profit is like engine of a car. As

the car ends when its engine is separated

from it, similarly identity of business comes to

an end when the word profit is removed fromit. Profit is very important in any business.

Why Profit & Loss Account is


62/176

Why Profit & Loss Account is

prepared?

The answer to this question is simple and

obvious . As the name suggests, this

statement is prepared to find out whether an

organization has made a profit or a loss.


63/176

Profit Cycle

Profit

Expenses

Revenue/Income


64/176

Loss Cycle

Income

Expenses

Loss


65/176

Profit and Loss

Items Amount

Income

Sales

Income from services

Other receipts

Total IncomeExpenses

Cost of sales

Salary

Expenses due

Depreciation

RentTotal of Income

Profit ( Income Expenses) / Loss ( Expenses- Income)

____________

____________

____________

____________


66/176

Statement of retained earnings

Particulars Amount

Opening retained earnings

Add Profit during the year

Les Dividend paid during the yearClosing balance of retained earnings

Stake holders for Revenue generated


67/176

Stake holders for Revenue generated

in business

Stakeholders

the shareholders whoalso expect

reward

government,which

expects tocollect tax

the lendersalso need tobe rewarded.

employees,vendors,printing

stationer etc.This grouprepresentsoperatingexpenses.


68/176

Capital Expenditure

It is the amount spent to acquire the assets

not for resale them, it is for generating the

income of the business unit. The benefit of

this is not for one year, it is for the longerperiod. For example purchase of land and

building, purchase of plant, brokerage or

commission paid for acquiring the long termloan etc. These expenses are recorded in

Balance Sheet.


69/176

Contd.

Capitalexpenditure

Purchase ofland, building,

plant andmachinery,furniture,

vehicle and anyother fixed

asset.

Expenditureincurred for

increasing thesitting

accommodation ina auditorium or

restaurant.

Amount spent forerecting of plant

Cost of replacingpetrol driven

engine to a dieseldriven engine


70/176

Revenue expenditure

It includes purchasing assets required for resale

at a profit or being made into saleable goods,

maintaining fixed assets in good working

conditions, meeting the day to day expensesof carrying business, cost of goods, raw

materials and replacements, renewals, repairs,

depreciation of fixed assets, rent rates, taxes,wages and salaries, carriage, insurance etc.


71/176

Contd.

Revenueexpenses

Rent,rates,salary,

telephoneexpenses

Cost ofgoods sold,

repairs,stationary

Discount ,interest,postage

etc.

Commission paid,

rent paid,advertise

ment

Revenue expenditure becomes capital


72/176

Revenue expenditure becomes capital

expenditure

Repairs to second handmachine

Legal expenses at the timeof purchase of fixed assets

Transport charges for Plantand Machinery


73/176

Contd.

Wages paid to work manfor erecting of PM

Development expenditurefor plantation, Collieries

etc,

Interest paid during

construction of building orplant etc.


74/176

Deferred Revenue Expenditure

It is the expenditure which would be normallytreated as revenue expenditure but it notwritten off in one year as its benefit is not

exhausted in one year but over a period ofyear. The nature of this is non-recurring andspecial nature. It may be spread over anumber of years, a proportionate amount is

charged to profit &loss account every year andthe balance amount is treated as an asset andshown on the balance sheet asset side


75/176

Contd.

Huge advertisementexpenses forbusiness promotion

Heavy Insurancepremium paid the

benefit derived beyondthe accounting period.


76/176

Revenue Profit

Income from

investment

Commission received,

interest received,discount received etc.

Profit from

sale of goods


77/176

Capital receipt

Capital receipts capital invested in thebusiness, loans and the

proceeds of sale ofassets etc


78/176

Revenue receipt

Revenue receipts cash from sales, discountreceived, commission,interest on investment,

transfer fees received etc

l l


79/176

Capital loss

Capital LossLoss while which occurswhile selling fixed assetsor raising share capital

l


80/176

Revenue loss

Revenueloss Loss on sale

of goods

Profit Before Interest and Tax (PBIT)


81/176

Profit Before Interest and Tax (PBIT)

or operating profit or EBIT

This is a measure of gross performance of a

company with reference to its total capital

employed. As the term suggests, interest and

tax are not deducted while computing PBIT.Interest is a reward of borrowed capital and

tax is a compulsory deduction imposed by law.

It is also known as Earnings Before Interestand Tax ( EBIT). Generally it is used to measure

managerial Performance.

P fi B f T (PBT) EBT


82/176

Profit Before Tax (PBT) or EBT

This is a measure of net profit before charging

tax. Since tax is a compulsory and non

discretionary charge on the company, net

profit is first presented before charging tax. Bythis the users can understand profit earning

ability of the company and the tax impact

separately. This also otherwise known asEarnings Before Tax (EBT).

P fi Af T (PAT)


83/176

Profit After Tax (PAT)

This is a measure of net profit. This is used tounderstand the profit earned after tax charge.

It is otherwise known as Earnings After Tax

(EAT).

B i


84/176

Basics

PBIT

PBT

PAT

B i


85/176

Basics

DISTRUBUTABLEPROFIT PAT + Previous

years undistributedprofit.

B i


86/176

Basics

Non- operatingincome Income from

investment, profiton sale of assets etc.

B i


87/176

Basics

Non- operatingexpenses Loss on sale of assets

or loss on sale ofinvestments etc.

O d f P t


88/176

Order of Payment

Operatingexpenses

Interest

Tax

Shareholders

C h Fl A l i


89/176

Cash Flow Analysis

Explains reasons for changes in cash positionof a concern. Transactions which increase the

cash position of the concern are known as

inflow of cash and those decreases the cashposition are known as out flow of cash.

C h fl R ti


90/176

Cash flow Reporting

Cash flow from OPERATION

Cash flow from INVESTMENT

Cash flow from FINANCING

O ti A ti it


91/176

Operation Activity

Receipts from

customers for saleof goods andservices

Cash inflow

Operatingactivities Payments to

suppliers andemployees

Payment to govt. fortaxes and duties

Cash outflow

Investing Activity


92/176

Investing Activity

Sale of fixed assets,

sale of investments,collection of loans,interest and dividendreceived etc.

Cash inflow

Investingactivity Payment for purchase

of fixed assets,Payment for purchasedof investment and formaking loans.

Cash outflow

Financing Activity


93/176

Financing Activity

Issue of share

capital, debenturesand otherborrowings

Cash inflow

Financingactivity Dividend paid,

interest paid,payment of loan,capital .

Debentures paid

Outflow of

cash

Cash from investing activities


94/176

Cash from investing activities

Sale of fixed assets Sale of investment

Purchase of fixed asset (-)

Purchase of investment (-) Interest received

Dividend received

Loans to subsidiaries (-) Net cash from investing activities

Cash flow from financing activity


95/176

Cash flow from financing activity

Issue of shares and debentures Proceeds from long-term borrowings

Repayment of long-term borrowings (-)

Redemption of preference shares anddebentures (-)

Dividend paid (-)

Interest paid (-) Net cash from financing activities

Cash Flow Statement


96/176

Cash Flow Statement

Particulars Details Amount

I. Cash flow from Operating Activities

II. Cash flow from Investing Activities

III. Cash flow from Financing Activities

Net Increase (Decrease) in cash

+ Beginning Balance of Cash

End Balance of Cash

____________

---

----

Trial Balance


97/176

Trial Balance

Trial Balance is a statement, prepared with thedebit and credit balances of ledger accounts

to test the arithmetical accuracy of books of

accounts.

Items shown in the trial balance


98/176

Items shown in the trial balance

Debit side Credit side

Cash in hand

Cash at bank

Bills receivable

Drawings

Land and building

Furniture

Plant and machinery

Investments

Opening stock

Rent ,rates and taxes

WagesFreight

Discount allowed

Export duty

Horse and cart

Goodwill

Sales tax

Capital

Bank overdraft

Creditors

Sales

Bills payable

Loan (credit)

Mortgage (payable)

Purchase return

Discount ,rent, interest (received)

Provisions for bad debts

General reserveDepreciation reserve

Depreciation fund

Provision for depreciation

Apprentice premium

Commission received

Interest received

Provisions


99/176

Provisions

set aside ,before ascertaining thenet profits,

charge against profit for allanticipated losses

reasonably necessary for thepurpose of providing for any

liability or loss, which is likely orcertain to be incurred;

Reserve


100/176

Reserve

Reserve

amount of money that isset aside until that isrequired for other purpose

capital receipts( profit onsale of fixed assets or issue

of shares at a premium)upward revaluation of

assets( bringing the assetsto current value from

historical cost Reserves are the items ofowners' equity which arise

from retention of profits(an appropriation ofprofits, sum of money setaside from distributable

profits

Classification of reserve


101/176

Classification of reserve

Capitalreserve

Generalreserve

Specificreserve

Revenuereserve

Depreciation


102/176

Depreciation

Decrease in value

of an asset

Due to outdate of

technology

Due to wearand tear

Causes of Depreciation


103/176

Causes of Depreciation

Lapse of time

Wear and tear dueto constant use

Depletion

Contd


104/176

Contd.

Exhaustion of assets

Accident

Obsolescence

Ratio Analysis


105/176

Ratio Analysis

In general words, a ratio is an expression ofrelationship of one figure with another. It may

be defined as the relationship, or proportion

that one amount bears to another. It is foundby dividing a figure with another. A ratio may

be expressed in percentage in which the base,

is taken as equal to 100 and the quotient isexpressed as per hundred of the base

Various ratios


106/176

Various ratios

Capital structure or leverage ratio

Liquidity ratios

Activity or turnover ratio

Profitability or profit earning capacity ratios.

Components


107/176

Components

Cash in hand, cash at bank, debtors, prepaidexpenses, short term deposits, billsreceivable, money at call and short notice,stock ,finished goods, work in progress stockof raw materials and sundry supplies

CurrentAssets

Bills payable, income tax payable, creditors.Outstanding expenses, bank overdraft,provision for taxation, interest due on fixed

liabilities, reserve for unbilled expenses,installment payable on long-term loans.

CurrentLiabilities

Short term ratio


108/176

Short term ratio

Primarily short term creditors

interested in liquidity or shortterm solvency of the firm.Since their claims are to bemet in the short term.

It is the ability of the firm to meetshort term obligations. Thismeasures concerns ability to meetshort term obligation

Short term solvency or liquidity ratios


109/176

Short term solvency or liquidity ratios

Current Ratio

Liquid Ratio

Absolute Liquid Ratio

Current ratio or working capital ratio


110/176

Current ratio or working capital ratio

This ratio establishes relationshipbetween current assets and currentliability

Meaning

Current assets / Current liabilitiesRatio

2:1Standardnorm

Liquid Ratio or quick ratio


111/176

Liquid Ratio or quick ratio

This ratio establishes relationship between quick assets andcurrent liability . Quick assets refer to those current assetswhich can be converted into cash immediately or at a shortnotice with out a loss of value.

Meaning

Quick Assets/ Current liability or

Quick assets / Quick liabilityRatio

1:1

Note Quick assets are current assets- stockprepaid expensesand quick liabilities are current liability- bank overdraft.

Standardnorm

Absolute liquid ratio


112/176

Absolute liquid ratio

Establishes the relationship between absolute liquid assetsand absolute liquid liabilities or current liabilities .

Absolute liquid assets = Cash in hand, cash at bank andshort term marketable securities

Meaning

Absolute liquid assets / Absolute liquid liabilities or CLRatio

.5:1Standardnorm

Activity or Turnover ratio


113/176

Activity or Turnover ratio

It measures the effectiveness with which afirm uses its available resources.

Activity or Turnover ratios


114/176

Activity or Turnover ratios

Stock or inventory turnover ratio

Debtors or receivable turnover ratio

Average collection period or debtor velocity

Creditors or payable turnover ratio

Average payment period

Contd.


115/176

Contd.

Total assets turnover ratio

Fixed asset turnover ratio

Current asset turnover ratio

Working capital turnover ratio

Capital or net worth turnover ratio

Total capital turnover ratio

Stock or inventory turnover ratio


116/176

This ratio is an indicator of velocity of flow ofinventory in business. This shows the rate ofconversion of stock in to sales. In fact,inventory policy of management and liquidityof firm both may be tested by this ratio. This isalso a measure of marketing capacity of thefirm. No any standard rate or norm can be

determined for this ratio because it basedmore on nature of industry and sales policy ofthe firm.

Contd.


117/176

Contd.

Cost of goods sold / Average stock

Cost of goods sold = opening stock + purchases+ directexpenses closing stock

Average stock = opening stock + closing stock / 2

Note :1. If cost of goods sold cannot be calculated thensales will be taken as base

2. if opening and closing stock is not given in that caseclosing stock will be treated as average stock

3 Higher the ratio good for the organization. A lowstock turnover ratio indicates that the goods do notsell quickly and efficiently, so the maximum inventoryremains lying in the warehouse.

Debtors Turnover ratio or Receivable TurnoverRatio(DTR)


118/176

( )

This ratio is a qualitative analysis of a firmsmarketing and credit policy and debtors

realizations. It is calculated to know the

uncollected portion of credit sales in the formof debtors by establishing relationship

between trade debtors and net credit sales of

the business.

Contd.


119/176

Contd.

DTR = Net credit sales / Average receivables Net credit sales = Total sales cash sales

sales return

Avg. receivables = opening receivable +closingreceivable / 2

Receivable = Debtors + Bills receivable

A decrease in this ratio each year is anindicator of efficiency of marketing and creditpolicy of the firm.

Average collection period:


120/176

This period indicates the period taken in therealization or collection of debtors. In other

words, it represents the average number of

days for which a firm has to wait before itsreceivables are converted into cash. The

purpose of calculating this period is to find out

the ratio of cash flow from collection of

debtors

Contd.


121/176

Contd.

Average collection period or average age ofreceivables=

Trade receivables/ sales per day

Or

Trade receivables / net credit sales X 365

days

Or

365/ DTR

Contd.


122/176

Contd.

In this respect, the general rule is that averagecollection period should not exceed the stated

credit period on trade terms plus 1/3rd of such

period. If average collection period exceeds4/3 of stated credit period, it will indicate

either liberal credit policy or slackness of

management in realizing debts. A higher

average collection period also implies that

chances of bad debts are larger.

Creditors Turnover Ratio


123/176

The short-term creditors ( i.e, suppliers ofgoods and bankers) are very much interestedin this ratio, as it shows the firms trend ofpayment to its short-term creditors. This ratioshows the relationship of credit purchases andtrade creditors. This ratio indicates thevelocity with which the creditors are turned

over in relation to purchases. Higher thecreditors velocity, better it is. A fall in this ratioshows delay in payment to creditors.

Creditors or payable turnover ratio


124/176

p y

CTR = Net credit purchases / Average payables(creditor +BP)

Net credit purchase = Total purchase cash

purchase purchase return Average payable = opening payable + closing

payable / 2

Note : if opening and closing is not given thenclosing will be considered as average

Average payment period


125/176

g p y p

While analyzing creditors, usually averageperiod is also calculated. This period discloses

the time taken by the firm in making payment

to its trade creditors. Average disbursement period is compared

with credit period allowed by suppliers of

goods to know promptness or delay inpayment

Contd.


126/176

Average payable / net credit purchase X no. ofmonth or weeks or days

Or

No. of month or week or days / CTR

Total assets turnover ratio


127/176

Cost of goods sold or net sales / Total assets Total assets = Fixed assets + current assets

fictitious assets- depreciation on fixed assets

This relationship indicates the efficiency ofthe utilization of assets to attain themaximum turnover on sales. A rise in theratio indicates more intensive utilization of

assets, while fall in the turnover suggestsunder utilization of assets.

Fixed assets turnover ratio


128/176

Cost of goods sold or net sales / net fixedassets

Net fixed assets = Fixed assets depreciation

If there is an increase in this ratio, it willshow that there is better utilization of fixedassets .If there is a fall in this ratio, it willshow that investment in fixed has not been

utilized efficiently. Ideal of this in amanufacturing company is 5:1

Current assets turnover ratio


129/176

Cost of goods sold or net sales / current assets This ratio measures the concerns efficiency in

utilization of its current assets. This ratio also

indicates the over investment or underinvestment position of current assets in a

concern.

Working capital turnover ratio


130/176

g p

Cost of goods sold or net sales / workingcapital

The high ratio indicates efficient use of

working capital in the concern while lowworking capital turnover ratio indicates

under utilization of working capital in the

concern

Capital or net worth turnover ratio


131/176

p

Net sales or cost of goods sold / net worth orshare holders fund

It indicates whether the capital employed by

the shareholders in a business is usedefficiently or not

Total capital turnover ratio


132/176

p

Cost of goods sold or net sales / capitalemployed

Capital employed = long term and short termcapital

By calculating this ratio, efficiency of capitalemployed may be known. This ratio showshow many times capital has been rotated forgenerating the sales. The higher the ratio,

better it is for the business concerns. No idealstandard can be fixed for this ratio.

Capital Structure Ratio or longterm

solvency ratios


133/176

solvency ratios

Debt equity ratio Solvency ratio

Proprietary ratio

Fixed asset ratio

Capital gearing ratio

Debt service ratio or interest coverage ratio

Debt Equity Ratio


134/176

Debt equity ratio = Outsiders fund /shareholders fund Alternative: Debt equity ratio = long-term debt / share

holders fund or net worth Note: in this case current liabilities will be

ignored. Standard norm: 2 : 1, however lending

institutions prefer 1:1

A low ratio signifies a smaller claim of creditors.More precisely, the greater the debt-equityratio, greater the risk to the creditor.

Outsiders fund and share holders fund


135/176

Debt, long-term or short term,whether in the form of mortgage,bills or debentures

Outsidersfund

Preference share capital, equityshare capital, capital reserves,

retained earnings and any otherreserves representing theaccumulated profit

Shareholders fund

Proprietary Ratio


136/176

This is also known as equity ratio, net worth tototal assets ratio.

Proprietary ratio = Share holders fund / Total

assets Higher the ratio better is the financial

position of the firm.

Solvency Ratio or debt to total assets

ratio


137/176

ratio

Solvency ratio = Total outside liabilities / totalassets

If the amount is enough to pay the external

liabilities then the company is said to besolvent.

Fixed Asset Ratio


138/176

Fixed assets ratio = Net fixed assets /(shareholders fund + long term liability)

Or

Fixed asset ratio = Net fixed assets / Shareholders fund

Standard norm: 1 :1. It is well establishedthat fixed assets should be financed only out

of long-term funds. This ratio shows whetherthis is so.

Capital gearing ratio


139/176

CGR = Share holders fund / out siders fund Share holders fund = Equity capital +

reserve +surplus

Outsiders fund = Preference share capital+ Debentures + Other long term loans.

Note : If capital gearing ratio is less than 1,we will call it high gearing of capital and if

gearing ratio is more than 1 then low gearingof capital is assumed

Debt service ratio or interest coverage

ratio


140/176

ratio

Interest coverage ratio = Net profit before interest and tax /Interest on

fixed long term loans or debentures.

Note : This ratio measures the margin ofsafety for the lenders. The higher the number,more secure the lender is in respect of his

periodical interest income. Normally, fixed

interest charges should be covered six toseven times.

Profitability ratios:

Based on sales


141/176

Based on sales

Gross profit ratio Operating ratio

Expenses ratio

Operating profit ratio

Net profit ratio

Gross profit ratio


142/176

Gross profit / net sales X100

Net sales = Sales sales return

Gross profit = net sales cost of goods sold.

The gross profit ratio is primarily a test of theefficiency of purchases and salesmanagement. No ideal standard is fixed forthis ratio, but the gross profit ratio must be

adequate.

Operating ratio


143/176

Cost of sales + operating expenses / net salesX 100

Operating expenses = office and

administrative expenses + selling expenses +discount allowed + bad debts etc.

Other profitability ratios


144/176

Expenses ratio= Particular expenses/ nets sales X100

Operating profit ratio=Operating profit/net sales X100

Net profit ratio= Net profit/ net sales X100

Profitability ratios based on capital


145/176

Return on gross capital employed Return on net capital employed

Return on proprietors net capital

Return on average capital employed

Return on total assets

Return on gross capital employed


146/176

EBIT / Gross capital employed X100

Gross capital = Equity share capital +preference share capital +reserve and surplus+ all long and short term external loans

Or

All net fixed assets + current assets + includinggoodwill of the firm but fictitious assets are

not included

Return on net capital


147/176

EBIT / Net capital employed X100 Net capital employed = Equity share capital +

preference share capital + reserve and surplus

+ long term loans

Return on proprietors capital

employed


148/176

employed

Net profit after interest and tax / proprietorsnet capital employed X100

Proprietors net capital = Equity share capital +

preference share capital + reserves andsurplus accumulated losses, if any

Return on average capital employed


149/176

Net profit / average capital X100

Average capital = Opening capital + closing capital/ 2

Or

Opening capital +1/2 of current years profit

Or

Closing capital of current years profit

Return on capital employed reflects the overallprofitability of the business

Return on total assets


150/176

Net profit / Total net assets X 100 Total net assets = Total assets fictitious

assets

Return on proprietors fund or equity

or return on net worth


151/176

or return on net worth

Net profit / Proprietors fund X100 Proprietors fund =Equity share capital +

preference share capital +reserves and

surplus+ undistributed profit debit balanceof profit & loss if any.

Ratios showing profitability on shares


152/176

Earning per share(EPS) Earning Yield Ratio(EYR)

Dividend Per share (DPS)

Pay-out Ratio (POR)

Dividend Yield Ratio (DYR)

Dividend coverage ratio (DCR)

Price earning ratio (PER)

Earning per share(EPS)


153/176

Net profit after tax,interest and preferencedividend / no of equityshares

EPS

It indicates the amount ofearnings that equity share

commands.Indicator

Earning Yield ratio (EYR)


154/176

= EPS / Market price pershare X 100EYR

This ratio indicates therelationship between

earning per share andmarket price per shareIndicator

Dividend Per Share (DPS)


155/176

Dividend for equity share holders/no. of equity shares

DPS

Higher the ratio, the better is forequity share holders of the concern.This ratio shows the amount ofdividend per share paid by themanagement of the companyIndicator

Pay-out ratio (POR)


156/176

dividend per equity shares/earning per share X100

POR

This ratio helps us to calculate thepercentage of dividend paid out

of earned incomes and thepercentage of earned profitsretained in the business concernIndicator

Dividend Yield Ratio (DYR)


157/176

Dividend per share / Market priceper share X100

DYR

Dividend yield ratio helpsinvestors to ascertain the

effective return on the amountthey invest or intend to invest inthe equity shares of a companyIndicator

Dividend cover ratio (DCR)


158/176

EPS / DPS

DCR

This ratio indicates the relationshipbetween dividend per share andearning per share. This ratiocalculated by dividing earning pershare by dividend per shareindicator

Price Earning Ratio (PER)


159/176

MPS /EPS

PER

This ratio indicates relationshipbetween market price per equity sharesand earning per share. In other words,

this ratio indicates the number of timesthe earning per share is covered by itsmarket price.

Indicator

Analysis and Interpretation of Financial

Statements


160/176

It is the process of identifying the financialstrengths and weakness of the firm by

properly establishing relationship between the

items of the Balance Sheet and Profit & LossAccount and other operating data.

Meaning


161/176

It is used to mean thesimplification of financial data bymethodical classification of thedata given in the financialstatements

Analysis

It is the explaining the meaningand significance of the data so

simplified.Interpretation

Comparative Income Statement


162/176

This statement shows the operational resultsof the business for a number of accounting

periods so that changes in absolute figures

from one period to another period may bestated in terms of money and percentage.

Comparative Balance Sheet


163/176

Comparative Balance Sheet analysis is thestudy of the trend of the same items, group of

items and computed items in two or more

balance sheets of the same businessenterprise on different dates

Common- Size Statements


164/176

Common-size statements cover up theshortcomings of the comparative statements

by expressing each item of the statements as a

percentage of total. In common-sizestatements relative values of items are shown.

Common-Size Balance Sheet


165/176

In common-size balance sheets, various itemsof assets and liabilities of balance sheets of

two or more years are shown at their relative

values. That is ,each item of the assets isshown as percentage of total assets and each

item of liabilities as percentage of total

liabilities and capital fund.

Common-Size Income Statement


166/176

In this statement relationship is establishedbetween items of income statement and

volume of sales in percentage form. In other

words, in a common size income statement,each item of income statement is shown in

percentage based on net sales.

Consolidated Balance sheet


167/176

A Balance Sheet which is prepared bycombining holding companys balance sheet

and subsidiary companys balance sheet is

called consolidated balance sheet. Inpreparing consolidated balance sheet, the

assets and liabilities of both companies are

added together but some adjustments are

made.

Steps for preparing consolidated

balance sheet


168/176

Step-I: Share of holding and subsidiarycompany

Step-II: Capital reserve or goodwill

Step-III: Minority Interest Step-IV: Consolidate profit

Step-V: Consolidated reserve

Step-VI: Consolidated Balance Sheet

Adjustments:

Elimination of investments


169/176

The investment in shares of subsidiary is shown inthe balance sheet of holding company on theassets side and share capital of subsidiarycompany is shown in its balance sheet on the

liability side. If the holding company haspurchased the entire share capital of thesubsidiary company, the investment appearing inthe balance sheet of holding company is adjusted

with share capital appearing in the balance sheetof subsidiary company.

Goodwill or capital reserve


170/176

If the holding company has purchased sharesin subsidiary company at above par value or

below par value and the balance sheet of the

subsidiary company has pre-acquisition profitsand reserves and all the shares in subsidiary

company are held by the holding company,

the cost of investment in shares will be

adjusted to share capital + pre-acquisition

profits and reserves..

Contd.


171/176

If the cost of investment is more, thedifference will be shown as goodwill on asset

side in the balance sheet and if the cost of

investment is less the difference will be shownon the liability side of consolidated balance

sheet as capital reserve.

Minority interest


172/176

Minority interest includes nominal value ofshare held by minority share holders and

proportionate reserves and profits. In the

reserves and profits of the holding company,only. On the liability side of consolidated

balance sheet minority interest is shown as a

separate item.

Elimination of intercompany debts


173/176

Debtors and creditors

Bills receivable and bills payable

Bills discounted with the bank

Mutual loans

Unrealized profit


174/176

Percentage profit on sales :- If percentage ofprofit on sales is known, the unrealized profitwill be

stock X % /100

For example, if stock of B Ltd. includes goodsworth Rs10,000 purchased from A Ltd.charged profit of 20% on sales. Then

unrealized profit will be 10,000 X20% =Rs2,000.

Contd.


175/176

Percentage of profit on cost:- If profit charged byvendor company is a certain percent on cost,then unrealized profit will be

Stock X %/ 100 +%

For example, stock of B Ltd includes goods worthRs8,000 purchased from A Ltd. on which A Ltdearned a profit of 25% on cost. Then unrealized

Profit will be 8,000 X25/125 = Rs1,600, as goodscost Rs100 was sold at Rs125, thus profit of Rs25on goods sold of Rs125


176/176

WISH YOU ALL THE BEST

Thank you

mba 2012 14 presentation ii

Documents