RATIO ANALYSIS

R K MOHANTY FACULTY MEMBER, SIR SPBT COLLEGE,

CENTRAL BANK OF INDIA, MUMBAI

Ratio-analysis is a concept or technique

which is as old as accounting concept.

Financial analysis is a scientific tool. It has

assumed important role as a tool for

appraising the real worth of an enterprise, its

performance during a period of time and its pit

falls. Financial analysis is a vital apparatus for

the interpretation of financial statements. It

also helps to find out any cross-sectional and

time series linkages between various ratios.

RATIO ANALYSIS

Unlike in the past when security was considered to

be sufficient consideration for banks and financial

institutions to grant loans and advances, nowadays

the entire lending is need-based and the emphasis is

on the financial viability of a proposal and not only

on security alone. Further all business decision

contains an element of risk. The risk is more in the

case of decisions relating to credits. Ratio analysis

and other quantitative techniques facilitate

assessment of this risk.

RATIO ANALYSIS

Ratio-analysis means the process of

computing, determining and presenting the

relationship of related items and groups of

items of the financial statements. They

provide in a summarized and concise form

of fairly good idea about the financial

position of a unit. They are important tools

for financial analysis.

RATIO ANALYSIS

WHY FINANCIAL ANALYSIS

Lenders’ need it for carrying out the following

� Technical Appraisal

� Commercial Appraisal

� Financial Appraisal

� Economic Appraisal

� Management Appraisal

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

Before looking at the ratios there are a number of cautionary

points concerning their use that need to be identified :

a. The dates and duration of the financial statements being

compared should be the same. If not, the effects of seasonality may cause erroneous conclusions to be drawn.

b. The accounts to be compared should have been prepared

on the same bases. Different treatment of stocks or

depreciations or asset valuations will distort the results.

c. In order to judge the overall performance of the firm a

group of ratios, as opposed to just one or two should be

used. In order to identify trends at least three years of

ratios are normally required.

The utility of ratio analysis will get further

enhanced if following comparison is

possible.

1.Between the borrower and its competitor

2.Between the borrower and the best

enterprise in the industry

3.Between the borrower and the average

performance in the industry

4.Between the borrower and the global

average

HOW A RATIO IS EXPRESSED?

� AsAsAsAs PercentagePercentagePercentagePercentage - 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.

� AsAsAsAs ProportionProportionProportionProportion ---- The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4.

� AsAsAsAs PurePurePurePure NumberNumberNumberNumber /Times/Times/Times/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.

CLASSIFICATION OF RATIOS

Balance Sheet Balance Sheet Balance Sheet Balance Sheet

RatioRatioRatioRatio

P&L Ratio or P&L Ratio or P&L Ratio or P&L Ratio or

Income/RevenueIncome/RevenueIncome/RevenueIncome/Revenue

Statement RatioStatement RatioStatement RatioStatement Ratio

BalanceBalanceBalanceBalance Sheet and Sheet and Sheet and Sheet and

Profit & Loss RatioProfit & Loss RatioProfit & Loss RatioProfit & Loss Ratio

Financial Ratio Operating Ratio Composite Ratio

Current Ratio

Quick Asset Ratio

Proprietary Ratio

Debt Equity Ratio

Gross Profit Ratio

Operating 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,

FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS LIABILITIESLIABILITIESLIABILITIESLIABILITIES ASSETSASSETSASSETSASSETS

NETNETNETNET WORTH/EQUITY/OWNEDWORTH/EQUITY/OWNEDWORTH/EQUITY/OWNEDWORTH/EQUITY/OWNED FUNDSFUNDSFUNDSFUNDS

Share Capital/Partner’s Capital/Paid up Capital/

Owners Funds

Reserves ( General, Capital, Revaluation & Other

Reserves)

Credit Balance in P&L A/c

FIXEDFIXEDFIXEDFIXED ASSETSASSETSASSETSASSETS :::: LAND & BUILDING, PLANT &

MACHINERIES

Original Value Less Depreciation

Net Value or Book Value or Written down value

LONGLONGLONGLONG TERMTERMTERMTERM LIABILITIES/BORROWEDLIABILITIES/BORROWEDLIABILITIES/BORROWEDLIABILITIES/BORROWED FUNDSFUNDSFUNDSFUNDS :

Term Loans (Banks & Institutions)

Debentures/Bonds, Unsecured Loans, Fixed

Deposits, Other Long Term Liabilities

NONNONNONNON CURRENTCURRENTCURRENTCURRENT ASSETSASSETSASSETSASSETS

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

CURRENTCURRENTCURRENTCURRENT LIABILTIESLIABILTIESLIABILTIESLIABILTIES

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

CURRENTCURRENTCURRENTCURRENT ASSETSASSETSASSETSASSETS : 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 ASSETSINTANGIBLE ASSETSINTANGIBLE ASSETSINTANGIBLE ASSETS

Patent, Goodwill, Debit balance in P&L A/c,

Preliminary or Preoperative expenses

SOME IMPORTANT NOTES

� Liabilities have Credit balance and Assets have Debit balance

� 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 LongLongLongLong TermTermTermTerm

SourcesSourcesSourcesSources ofofofof FundsFundsFundsFunds

� Current Liabilities are known as ShortShortShortShort TermTermTermTerm SourcesSourcesSourcesSources ofofofof FundsFundsFundsFunds

� Long Term Liabilities & Short Term Liabilities are also called

OutsideOutsideOutsideOutside LiabilitiesLiabilitiesLiabilitiesLiabilities

� Current Assets are ShortShortShortShort TermTermTermTerm UseUseUseUse ofofofof FundsFundsFundsFunds

SOME IMPORTANT NOTES

� Assets other than Current Assets are LongLongLongLong TermTermTermTerm UseUseUseUse ofofofof FundsFundsFundsFunds

� 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 profitprofitprofitprofit it shall become part of NetNetNetNet WorthWorthWorthWorth under the head

Reserves and if there is losslosslossloss it will become part of IntangibleIntangibleIntangibleIntangible AssetsAssetsAssetsAssets

� Investments in Govt. Securities to be treated currentcurrentcurrentcurrent only if these are

marketable and due. Investments in other securities are to be

treated CurrentCurrentCurrentCurrent if they are quoted. Investments in

allied/associate/sister units or firms to be treated as NonNonNonNon----currentcurrentcurrentcurrent....

� Bonus Shares as issued by capitalization of General reserves and as

such do not affect the Net Worth. With Rights Issue, change takes

place in Net Worth and Current Ratio.

1.1.1.1. CurrentCurrentCurrentCurrent RatioRatioRatioRatio : It is the relationship between the current

assets and current liabilities of a concern.

CurrentCurrentCurrentCurrent RatioRatioRatioRatio ==== CurrentCurrentCurrentCurrent Assets/CurrentAssets/CurrentAssets/CurrentAssets/Current LiabilitiesLiabilitiesLiabilitiesLiabilities

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

TheTheTheThe idealidealidealideal CurrentCurrentCurrentCurrent RatioRatioRatioRatio preferredpreferredpreferredpreferred bybybyby BanksBanksBanksBanks isisisis 1111....33333333 :::: 1111

2.2.2.2. NetNetNetNet WorkingWorkingWorkingWorking CapitalCapitalCapitalCapital :::: This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the

difference of Current Assets and Current Liabilities.

NWCNWCNWCNWC ==== CurrentCurrentCurrentCurrent AssetsAssetsAssetsAssets –––– CurrentCurrentCurrentCurrent LiabilitiesLiabilitiesLiabilitiesLiabilities

Current Assets : Raw Material, Stores, Spares, Work-in Progress. Finished Goods, Debtors, Bills Receivables, Cash.

Current Liabilities : Sundry Creditors, Installments of Term Loan, DPG etc.

payable within one year and other liabilities payable within one year.

This ratio must be at least 1.33 : 1 to ensure minimum margin of 25% of current

assets as margin from long term sources.

� Current Ratio measures short term liquidity of the concern and its ability to meet its short term obligations within a time span of a year.

� It shows the liquidity position of the enterprise and its ability to meet current obligations in time.

�Higher ratio may be good from the point of view of creditors. In the long run

very high current ratio may affect profitability ( e.g. high inventory carrying cost) � Shows the liquidity at a particular point of time. The position can change

immediately after that date. So trend of the current ratio over the years to be analyzed.

� Current Ratio is to be studied with the changes of NWC. It is also necessary to

look at this ratio along with the Debt-Equity ratio.

3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities. The should be at least equal to 1.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example : Cash 50,000 Debtors 1,00,000 Inventories 1,50,000 Current Liabilities 1,00,000 Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3 : 1 Quick Ratio = > 1,50,000/1,00,000 = 1.5 : 1

4. DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s Capital (Equity).

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 i.e. 1.6 : 1

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.

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

9. STOCK/INVENTORY TURNOVER RATIO :

(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 the inventory is

rotated during the relevant accounting period

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

(52 for weeks & 12 for months)

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.

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.

Market Price Per Equity Share/Earning Per Share

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)

LIABILITESLIABILITESLIABILITESLIABILITES ASSETSASSETSASSETSASSETS

Capital 180 Net Fixed Assets 400

Reserves 20 Inventories 150

Term Loan 300 Cash 50

Bank C/C 200 Receivables 150

Trade Creditors 50 Goodwill 50

Provisions 50

800 800

EXERCISE 1

a. What is the Net Worth : Capital + Reserve = 200

b. Tangible Net Worth is : Net Worth - Goodwill = 150

c. Outside Liabilities : TL + CC + Creditors + Provisions = 600

d. Net Working Capital : C A - C L = 350 - 250 = 50

e. Current Ratio : C A / C L = 350 / 300 = 1.17 : 1

f. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1

EXERCISE 2

LIABILITIESLIABILITIESLIABILITIESLIABILITIES 2005200520052005----06060606 2006200620062006----07070707 2005200520052005----06060606 2006200620062006----07070707

Capital 300 350 Net Fixed Assets 730 750

Reserves 140 160 Security Electricity 30 30

Bank Term Loan 320 280 Investments 110 110

Bank CC (Hyp) 490 580 Raw Materials 150 170

Unsec. Long T L 150 170 S I P 20 30

Creditors (RM) 120 70 Finished Goods 140 170

Bills Payable 40 80 Cash 30 20

Expenses Payable 20 30 Receivables 310 240

Provisions 20 40 Loans/Advances 30 190

Goodwill 50 50

TotalTotalTotalTotal 1600160016001600 1760176017601760 1600160016001600 1760176017601760

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) 820 /800 = 1.02

3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21

Exercise 3.

LIABIITIESLIABIITIESLIABIITIESLIABIITIES ASSETSASSETSASSETSASSETS

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 100 Preliminary Expenses 100

TotalTotalTotalTotal 1400140014001400 1400140014001400

1. Debt Equity Ratio will be : 600 / (200+100) = 2 : 1

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

LIABILITIESLIABILITIESLIABILITIESLIABILITIES ASSETSASSETSASSETSASSETS

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 1

Provision of Tax 9 Intangible Assets 30

Proposed Dividend 15

550550550550 550550550550

Q. What is the Current Ratio ? Ans : (1+125 +128+1) / (38+26+9+15) : 255/88 = 2.89 : 1

Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11

Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW = 100 / ( 362 – 30)

= 100 / 332 = 0.30 : 1

Exercise 4.

LIABILITIESLIABILITIESLIABILITIESLIABILITIES ASSETSASSETSASSETSASSETS

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 1

Provision of Tax 9 Intangible Assets 30

Proposed Dividend 15

550550550550 550550550550

Q . What is the Proprietary Ratio ? Ans : (T NW / 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

Exercise 4. contd9

LIABILITIESLIABILITIESLIABILITIESLIABILITIES ASSETSASSETSASSETSASSETS

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 1

Provision of Tax 9 Intangible Assets 30

Proposed Dividend 15

550550550550 550550550550

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

Exercise 4. contd9

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

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

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 )

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 i.e. Current Liabilities is Rs.10,000

Hence Current Assets would be 4a = 4 x 10,000 = Rs.40,000/-

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

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?

Ans : 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.

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?

Ans : When Total Assets is Rs.22 Lac then Current Assets would be 22 – 10

i.e Rs. 12 Lac. Thus we can easily arrive at the Current Liabilities figure which should be Rs. 10 Lac

EXERCISE 12. 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 13. 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 14. 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

EXERCISE 15. 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 16 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 company’s earnings cover the payment of

interest and repayment of principal of long term debt 4. Effective utilisation of assets

EXERCISE 17. 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

Exercise 18. From the following financial statement calculate (i) Current Ratio (ii) Acid test Ratio (iii) Inventory Turnover (iv) Average Debt Collection Period (v)

Average Creditors’ payment period. C.Assets

Sales 1500 Inventories 125

Cost of sales 1000 Debtors 250 Gross profit 500 Cash 225

C. Liabilities Trade Creditors 200

(i) Current Ratio : 600/200 = 3 : 1 (ii) Acid Test Ratio : Debtors+Cash /Trade creditors = 475/200 = 2.4 : 1

(iii) Inventory Turnover Ratio : Cost of sales / Inventories = 1000/125 = 8 times (iv) Average Debt collection period : (Debtors/sales) x 365 = (250/1500)x365 =

61 days

(v) Average Creditors’ payment period : (Trade Creditors/Cost of sales) x 365 (200/100) x 365 = 73 days

Questions on Fund Flow Statement

Q . 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. 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 . 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

Q . 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 . 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 . 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

Q. 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