Test your Knowledge

Assignment
Work out the ratios Current, Quick, Turn over ratio, Net working capital, Defensive interval ratio for Reliance. The balance sheet and Profit and loss are as given in Khan and Jain 2. Interpret your results 3. Collect further data for years 2009, 2010, 2011 and work out the ratios. What are your observations Is there any Change
1.

Reliance a critical look

Liquidity Ratio
1. 2. 3. 4. 5. Current Ratio = CA/CL = 40133.24/30078 = 1.33 Acid Test = Liquid Assets/ CL = 13866.02/ 30078= 0.46 Inventory Turn over = COGS/ Average FG Inventory= 107100.52/ 4008.69 = 26.71 Debtors turn over = Net credit sales / Average debtors = 139269. 46/ 4980 = 27.97 times Creditors Turn over Ratio = Total credit Purchases/ Average creditors = 94232.68/ 18 528.84 = 5.09 times assumed all purchases are credit

Solvency Ratio
6. 7. 8. 9. Debt Equity = Long term debt/ Share holders equity = 30439.23/ 81448.60= 0.37 Propriety Ratio = Proprietors fund/ Total Assets = 81448.60 / 149338.91= 0.54 Interest Coverage = EBIT/Interest = 24087.50/ 1077.36 = 22.36 Total Cash flow coverage = EBIT + Depreciation / Interest = (24087.50+6627.85)/ 1077.36 = 28.55 times

Testing on Concepts
1.

What you understand by high current and acid test ratio ? Is it relevant to whom ?
High ratio may be relevant to creditors. But it also points funds have unnecessarily accumulated and not profitably used as per the company point of view

2. What is the meaning of high inventory turn over- ?

A firm is loosing customer by failing to maintain adequate level of inventory ( COG/ Average Inventory)

3. What is the debtor turn over ratio?

Debtor Turn over Ratio = Net credit sales/ Average debtors , This indicates how faster the collection is made. High ratio shorter time lag between credit sales and cash collection. That also indicates strict credit policy

4.

Current ratio is used to asses

a. b. c. d. e.
Effective utilization of capital Application of debt Liquidity Position Levels of inventory piled up different form Prompt payment of long term liability

Testing on Concepts
5.
a. b. c.

Which of the following statements are true

All other things remaining same issue of shares for cash improve current ratio Average collection period evaluates all aspects of credit policy Ratio analysis is a technique of planning and control All of the above

d.

6. If a firm has realized its debtors and has paid off its creditors to

the same extend

a. b. c. d. e.

Current ratio will increase if it was less than 1 previously Current ratio will decrease if it was more than 1 previously Current ratio will remain same if it was equal to 1 previously Both a and c above All of a b and c above

7.

If the current ratio of Great company is 0.77 in the year 2011 and 0.67 in 2010 how the short term creditors and company share holders view
Good news for short term creditors. But CA have carrying cost in the form of cost of profit foregone and actual cost interest and insurance charges and bad debts. Not good for shareholders

Testing on Concepts
8.
a. b. c. d.

Ratio Analysis is
Not used for the interpretation of financial statements. Reduce large figures to an easily understandable relationship. Make conclusions All the above

9.

Which of the statement is true

a. b. c. d. e.

Acid test ratio is computed as a supplement to Quick ratio All current assets are taken into account The ratio should be minimum 1:1 All the above a and c

10. 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 .. Is the statement true or false
True

11.

Higher the debtor turn over ratio it is good - is the statement correct
Correct

Testing on Concepts
12.

The Unilever debtors collection period for 2011 and 2010 are 14.33 days and 16.47 days . What do you understand by this ?
Indicates improvement in debt collection . However to asses whether satisfactory we have to look at credit terms. For example n/20 the company record of collection is good. If the terms Are n/10 not good

13.

Inventory turn over ratio of Unilever is 7.38 times in 2011 as compared to 6.98 in 2010 ? What do you observe ?
This indicates number of times the inventory is turned into sales. Higher the ratio it indicates better management

EXERCISE 1 LIABILITES Capital Reserves Term Loan ASSETS 180 Net Fixed Assets 20 Inventories 300 Cash 400 150 50

Bank C/C
Trade Creditors Provisions

200 Receivables
50 Goodwill 50 800

150
50 800

a. b. c. a. b. c.

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

EXERCISE 2 LIABILITIES Capital Reserves Bank Term Loan Bank CC (Hyp) Unsec. Long T L 2005-06 300 140 320 490 150 2006-07 350 Net Fixed Assets 160 Security Electricity 280 Investments 580 Raw Materials 170 S I P 2005-06 730 30 110 150 20 2006-07 750 30 110 170 30

Creditors (RM)
Bills Payable Expenses Payable Provisions Total

120
40 20 20 1600

70 Finished Goods
80 Cash 30 Receivables 40 Loans/Advances Goodwill 1760

140
30 310 30 50 1600

170
20 240 190 50 1760

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. LIABIITIES ASSETS

Equity Capital
Preference Capital Term Loan Bank CC (Hyp) Sundry Creditors Total

200 Net Fixed Assets

100 Inventory 600 Receivables 400 Investment In Govt. Secu. 100 Preliminary Expenses 1400

800
300 150 50 100 1400

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

Exercise 4. LIABILITIES Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors 355 ASSETS Net Fixed Assets 265 1 125 128 1 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses

Provision of Tax
Proposed Dividend

9 Intangible Assets
15

30 550

550
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. contd LIABILITIES Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors 355 ASSETS Net Fixed Assets 265 1 125 128 1 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses

Provision of Tax
Proposed Dividend Q . What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100 [ (362 - 30 ) / (550 30)] x 100 (332 / 520) x 100 = 64%

9 Intangible Assets
15

30 550

550

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. contd
LIABILITIES
Capital + Reserves 355

ASSETS
Net Fixed Assets 265

P & L Credit Balance

Loan From S F C

7 Cash
100 Receivables

1
125

Bank Overdraft
Creditors

38 Stocks
26 Prepaid Expenses

128
1

Provision of Tax
Proposed Dividend

9 Intangible Assets
15 550

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

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. 2. 3. 4. Debt Equity Ratio Current Ratio Debt Service Coverage Ratio 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. 2. 3. 4.

Raise long term interest free loans from friends and relatives Raise long term loans from Institutions Increase the Equity by way of Bonus Issue Issue Rights share to existing share holders.

EXERCISE 14. Which of the following is a fictitious Asset?

1. 2. 3. 4. Goodwill Preliminary Expenses Pre-operative expenses 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. 2. 3. 4. Written Down Value method Straight Line method Annuity method 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 companys 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. 2. 3. 4. Cash and Bank balances Bank Fixed Deposits Current Book Debts 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. 2. 3. 4. Of three balance sheets Of a single year Of two consecutive years None of the above.

Q. Why this Fund Flow Statement is studied for ? 1. 2. 3. 4. It indicates the quantum of finance required It is the indicator of utilization funds by the concern It shows the money available for repayment of loan It will indicate the provisions against various expenses

Q . In a Fund Flow Statement , the assets are represented by ?

1. 2. 3. 4. Application of Funds Sources of Funds Surplus of sources over application Deficit of sources over application

Q . In Fund Flow Statements the Liabilities are represented by ? 1. 2. 3. 4. Sources of Funds Use of Funds Deficit of sources over application All of the above.

Q . When the long term sources are more than long term uses, in the fund flow statement, it would suggest ? 1. 2. 3. 4. Increase in Current Liabilities Decrease in Working Capital Increase in NWC 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. 2. 3. 4. Reduction in the NWC Reduction in the Working Capital Gap Reduction in Working Capital All of the above

Q. How many broader categories are there for the Sources of funds, in the Fund Flow Statement ?
1. 2. 3. 4. Only One, Source of Funds Two, Long Term and Short Term Sources Three , Long, Medium and Short term sources None of the above.

Vinyl Chemicals Limited

Vinyl Chemicals Ltd. is a mid sized organic chemicals manufacturer owned by the Pidilite Parekh group

23

Common Size Analysis

VCL is more fixed asset intensive VCL has less inventory levels than its competitors At VCL, there a decrease in the inventory levels and increase in the receivables At VCL, there is a decrease in the investments of the company What could be the reasons for such changes? What are the broad implications?

24

Vinyl Chemicals Limited

25

Common Size Analysis

VCL is having less leverage than competitors During the year VCL has a increase in its long-term liabilities Current Liabilities across the industries seem to be stable What could be the reasons for such changes? What are the broad implications?

26

Vinyl Chemicals Limited

27

Common Size Analysis

What could be the reasons for the companies turnaround? Is it a decrease in raw materials or increase in the sale prices or increase in the sales volumes Why is the company still lagging behind? What could be the reason for the company declaring dividend?

28

How to analyze the FS

Liquidity
Solvency Profitability Stability Quality of management Safety and security