Page 1
1 1
INTRODUCTION TO MANAGEMENT
ACCOUNTING
Unit Structure :
1.0 Objectives
1.1 Introduction
1.2 Meaning and Nature of Management Accounting
1.2.1 Meaning and Definition
1.2.2 Nature of Management Accounting
1.3 Function of Management Accounting
1.4 Scope of Management Accounting
1.5 Difference between Management Accounting and Financial
Accounting
1.6 Exercise
1.0 OBJECTIVES
After studying the unit the students will be able to:
Define the term Management accounting.
Explain the nature and functions of Management Accounting
Discuss the role of management accountant.
Explain the difference between Management accounting and financial
accounting.
Understand the limitations of MA.
1.1 INTRODUCTION
Management accounting can be viewed as Management -oriented
Accounting. Basically it is the study of managerial aspect of financial
accounting, "accounting in relation to management function”. It shows
how the accounting function can be re -oriented so as to fit it within the
framework of management activity. The pr imary task of management
accounting is, therefore, to redesign the entire accounting system so that it
may serve the operational needs of the firm. If furnishes definite
accounting information, past, present or future, which may be used as a
basis for mana gement action. The financial data are so devised and
systematically development that they become a unique tool for
management decision. munotes.in
Page 2
Management Accounting
2 1.2 MEANING AND NATURE OF MANAGEMENT
ACCOUNTING
1.2.1 Meaning and Definition :
The term "Management Accounting”, observe s Broad and Carmichael
covers all those services by which the accounting department can assist
the top management and other departments in the formation of policy,
control of execution and appreciation of effectiveness.
The Report of the Anglo -American Co uncil of Productivity (1950) has
also given a definition of management accounting, which has been widely
accepted. According to it, "Management accounting is the presentation of
accounting information in such a way as to assist the management in
creation o f policy and the day to day operation of an undertaking". The
reasoning added to this statement was, "the technique of accounting is of
extreme importance because it works in the most nearly universal medium
available for the expression of facts, so that f acts of great diversity can be
represented in the same picture. It is not the production of these pictures
that is a function of management but the use of them." An analysis of the
above definition shows that management needs information for better
decisio n-making and effectiveness. The collection and presentation of
such information come within the area of management accounting. Thus,
accounting information should be recorded and presented in the form of
reports at such frequent intervals, as the managemen t may want. These
reports present a systematic review of past events as well as an analytical
survey of current economic trends. Such reports are mainly suggestive in
approach and the data contained in them are quite up to date. The
accounting data so supp lied thus provide the informational basis of action.
The quality of information so supplied depends upon its usefulness to
management in decision -making.
1.2.2 Nature of Management Accounting :
Following points explains the nature of Management Accounting:
1. The term management accounting is composed of 'management' and
'accounting'. The word 'management' here does not signify only the top
management but the entire personnel charged with the authority and
responsibility of operating an enterprise.
2. The task o f management accounting involves furnishing accounting
information to the management, which may base its decisions on it.
3. It is through management accounting that the management gets the
tools for an analysis of its administrative action and can lay suita ble
stress on the possible alternatives in terms of costs, prices and profits,
etc. but it should be understood that the accounting information
supplied to management is not the sole basis for managerial decisions.
4. Along with the accounting information, m anagement takes into
consideration or weighs other factors concerning actual execution. For
reaching a final decision, management has to apply its common sense,
foresight, knowledge and experience of operating an enterprise, in
addition to the information that is already has. munotes.in
Page 3
Introduction to
Manage ment Accounting
3 5. The word 'accounting' used in this phrase should not lead us to believe
that it is restricted to a mere record of business transactions i.e., book
keeping only.
6. Management accounting has no set principles such as the double entry
system of bookkeeping. In place of generally accepted accounting
principles, the philosophy of cost benefit analysis is the core guide of
this discipline. It says that no accounting system is good or bad but is
can be considered desirable so long as it brings incremental benefits in
excess of its incremental costs.
1.3 FUNCTIONS OF MANAGEMENT ACCOUNTING
The basic function of management accounting is to assist the management
in performing its functions effectively. The functions of the management
are planning, organizing, directing and controlling. Management
accounting helps in the performance of each of these functions in the
following ways:
1. Provides data: Management accounting serves as a vital source of
data for management planning. The accounts and document s are a
repository of a vast quantity of data about the past progress of the
enterprise, which are a must for making forecasts for the future.
2. Modifies data: The accounting data required for managerial decisions
is properly compiled and classified. For exa mple, purchase figures for
different months may be classified to know total purchases made
during each period product -wise, supplier -wise and territory -wise.
3. Analyses and interprets data: The accounting data is analyzed
meaningfully for effective planning and decision -making. For this
purpose the data is presented in a comparative form. Ratios are
calculated and likely trends are projected.
4. Serves as a means of communicating: Management accounting
provides a means of communicating management plans upward,
downward and outward through the organization. Initially, it means
identifying the feasibility and consistency of the various segments of
the plan. At later stages it keeps all parties informed about the plans
that have been agreed upon and their roles in t hese plans.
5. Facilitates control: Management accounting helps in translating given
objectives and strategy into specified goals for attainment by a
specified time and secures effective accomplishment of these goals in
an efficient manner. All this is made p ossible through budgetary control
and standard costing which is an integral part of management
accounting.
6. Uses also qualitative information: Management accounting does not
restrict itself to financial data for helping the management in decision
making b ut also uses such information which may not be capable of
being measured in monetary terms. Such information may be collected
form special surveys, statistical compilations, engineering records, etc.
munotes.in
Page 4
Management Accounting
4 1.4 SCOPE OF MANAGEMENT ACCOUNTING
Management accounting is concerned with presentation of accounting
information in the most useful way for the management. Its scope is,
therefore, quite vast and includes within its fold almost all aspects of
business operations. However, the following areas can rightly be ide ntified
as falling within the ambit of management accounting:
1. Financial Accounting: Management accounting is mainly concerned
with the rearrangement of the information provided by financial
accounting. Hence, management cannot obtain full control and
coord ination of operations without a properly designed financial
accounting system.
2. Cost Accounting: Standard costing, marginal costing, opportunity
cost analysis, differential costing and other cost techniques play a
useful role in operation and control of the business undertaking.
3. Revaluation Accounting: This is concerned with ensuring that
capital is maintained intact in real terms and profit is calculated with
this fact in mind.
4. Budgetary Control: This includes framing of budgets, comparison of
actual perfor mance with the budgeted performance, computation of
variances, finding of their causes, etc .
5. Inventory Control: It includes control over inventory from the time
it is acquired till its final disposal.
6. Statistical Methods: Graphs, charts, pictorial presenta tion, index
numbers and other statistical methods make the information more
impressive and intelligible.
7. Interim Reporting: This includes preparation of monthly, quarterly,
half-yearly income statements and the related reports, cash flow and
funds flow sta tements, scrap reports, etc.
8. Taxation: This includes computation of income in accordance with
the tax laws, filing of returns and making tax payments.
9. Office Services: This includes maintenance of proper data processing
and other office management services , reporting on best use of
mechanical and electronic devices.
10. Internal Audit: Development of a suitable internal audit system for
internal control.
CHECK YOUR PROGRESS
1. “The basic function of management accounting is to assist the
management in performing i ts functions effectively”. Discuss.
2. Enlist the points explaining the scope of Management Accounting.
munotes.in
Page 5
Introduction to
Manage ment Accounting
5 1.5 DIFFERENCE BETWEEN MANAGEMENT
ACCOUNTING AND FINANCIAL ACCOUNTING
Financial accounting and management accounting are closely interrelated
since manage ment accounting is to a large extent rearrangement of the
data provided by financial accounting. Moreover, all accounting is
financial in the sense that all accounting systems are in monetary terms
and management is responsible for the contents of the fina ncial accounting
statements. In spite of such a close relationship between the two, there are
certain fundamental differences. These differences can be laid down as
follows:
Financial Accounting Management Accounting
1. Objectives
Financial accounting is de signed
to supply information in the form
of profit and loss account and
balance sheet to external parties
like shareholders, creditors, banks,
investors and Government.
Information is supplied
periodically and is usually of such
type in which management is not
much interested. Management Accounting is
designed principally for providing
accounting information for internal
use of the management. Thus,
financial accounting is primarily an
external reporting process while
management accounting is
primarily an i nternal reporting
process.
2. Analyzing performance
Financial accounting portrays the
position of business as a whole.
The financial statements like
income statement and balance
sheet report on overall
performance or statues of the
business.
Financial acco unting deals with
the aggregates and, therefore,
cannot reveal what part of the
management action is going wrong
and why. Management accounting directs its
attention to the various divisions,
departments of the business and
reports about the profitability,
performance, etc., of each of them.
Management accounting provides
detailed analytical data for these
purposes.
3. Data used
Financial accounting is concerned
with the monetary record of past
events. It is a post -mortem
analysis of past activity and,
therefore, out the date for
management action. Management accounting is
accounting for future and,
therefore, it supplies data both for
present and future duly analyzed in
detail in the 'management
language' so that it becomes a base
for management action. munotes.in
Page 6
Management Accounting
6 4. Monetary measurement
In financial accounting only such
economic events find place, which
can be described in money. Management is equally interested
in non -monetary economic events,
viz., technical innovations,
personnel in the organization,
changes in th e value of money, etc.
These events affect management's
decision and, therefore,
management accounting cannot
afford to ignore them.
5. Periodicity of reporting
The period of reporting is much
longer in financial accounting as
compared to management
account ing. The Income Statement
and the Balance Sheet are usually
prepared yearly or in some cases
half-yearly.
Management requires information
at frequent intervals and, therefore,
financial accounting fails to cater
to the needs of the management. In managemen t accounting there is
more emphasis on furnishing
information quickly and at
comparatively short intervals as
per the requirements of the
management.
6. Nature
Financial accounting is more
objective.
Management accounting is more
subjective because manage ment
accounting is fundamentally based
on judgment rather than on
measurement.
7. Legal compulsion
Financial accounting has more or
less become compulsory for every
business on account of the legal
provisions of one or the other Act. A business is free to i nstall or not
to install system of management
accounting.
1.6 EXERCISE
1. What are the functions of a management accounting? Elaborate each
one of them.
2. Distinguish management accounting from financial accounting.
3. Objective Type Questions:
munotes.in
Page 7
Introduction to
Manage ment Accounting
7 a. Match Group A With Group B
Group A Group B
a) Financial Accounting 1. Function of management
accounting
b) Reports of Management 2. Mandatory
c) Management Accounting 3. Technique of management
d) Collection of data 4. Future oriented
e) Reports of Financial
Accounting 5. Optional
f) Budgetary Control 6. Historical Data
Ans. a – 6 ,b –5 , c- 4 , d -1 , e – 2 , f -3
b. Fill in the Blanks with proper words / phase.
1. Inventory control is ________ in management accounting.
2. Financial accounting deals with ___ ________ data.
3. Management accounting is ________ oriented.
4. There is no legal format for management accounting____________.
5. In management accounting publication of reports is ______________.
6. Management account is __________in nature.
(Answer: 1. Included, 2. Historical, 3. Future, 4. Reports, 5.
Optional, 6. Analytical)
c. State whether following statement are True or False.
1. Management accounting is analytical in nature.
2. Management accounting is dynamic.
3. Management accounting provides decisions to the management.
4. Management accounting is future oriented.
5. Management accounting includes Standard Costing.
6. Financial Accounting is future oriented.
(Answer: 1. True 2.True 3. False 4. True 5. True 6. False)
d. Multiple Choice Questions.
1. Financial accou nting records only
a) Actual Figures
b) Budgeted figures munotes.in
Page 8
Management Accounting
8 c) Standard Figures
d) All of the above
2. The use of management accounting is
a) Mandatory
b) Optional
c) Compulsory
d) All of the above
3. Management Accounting includes
a) Financial Accounting
b) Cost Accounting
c) Budgetary control
d) All of the above
4. Management Accounting is
a) Analytical
b) Future oriented
c) Dynamic
d) All of the above
5. Financial Accounting deals with
a) Determination of cost
b) Determination of profit
c) Determination of prices
d) None of the above
6. Management accounting relates to
a) Recordi ng of accounting data
b) Recording of costing data
c) Presentation of accounting data
d) None of the above
(Answer: 1. a, 2. b, 3.d, 4.d, 5. b, 6.c)
munotes.in
Page 9
9 2
ANALYSIS OF FINANCIAL STATEMENTS
Unit Structure :
2.0 Learning Objectives
2.1 The Financial Statements
2.2 Need and Importance of Financial Statement
2.3 Analysis and Interpretation
2.4 Balance Sheet
2.5 Income Statement
2.0 LEARNING OBJECTIVES
After stud ying the unit, the students will be able to:
Understand the objectives and nature of Financial Statements.
Know the characteristics of Financial Statements.
Discuss about the qualities of Ideal Financial Statements.
Interpret the financial statements.
2.1 THE FINANCIAL STATEMENTS
( i ) "Financial Statements” is a set of documents consisting of:
(a) Balance Sheet as on date - shows position of assets and liabilities as
on date.
(b) Profit and loss account - shows profit or loss for the period.
(c) Cash Flow Stateme nt- wherever applicable
(d) Statements and Explanatory Notes – part of balance sheet
(e) Supplementary Schedule and Information
(ii) The financial statements help one to realize,
the progress made by a business,
the resources utilized by the business or
the failure suffered by a business.
munotes.in
Page 10
Management Accounting
10 (iii) Financial statement does not include
Report by directors
Statement by the chairman
Management discussion & analysis report (MDAR)
2.2 NEED AND IMPORTANCE OF FINANCIAL
STATEMENT
The users of these financial statements need to have an honest assurance
that the statements have been properly
a. Compiled,
b. Prepared, and
c. Presented.
They want a reasonable degree of assurance as regards the reliability and
accuracy of the financial statement.
Limitations of Financial statements :
The company releases financial statements, and hence the obvious
limitation is that the information an analyst gets is limited to what the
company wants to show and how it plans to manipulate the information.
Limi tations of Financial Statements:
Interim
1. Only Interim Reports :
The data in financial statements is based on approximation and do not give
a clear picture. The actual results can only be known in condition of sale
or liquidation of business. Generally statements are prepared for different
account ing period say yearly, during the lifetime of concern. Cost and
income be apportioned to different periods with a view to determine
profits etc.
Accountant, on his personal judgement do allocation of income and
expenses. The existence of contingent assets and liabilities also make
statements imprecise. So financial statements do not actual picture and at
the most they are interim reports
2. Exact position not known :
The financial statements are expressed in monetary terms, so they tend to
give final and a ccurate position. The fixed asset value in the balance sheet
neither represents the value for which fixed assets can be sold nor the
amount which will be required to replace these assets. The balance sheet is
prepared on the presumption of a going concern. munotes.in
Page 11
Analysis o f Financial
Statements
11 So, fixed assets are shown at cost less accumulated depreciation. There are
certain assets in the balance sheet such as preliminary expenses, goodwill,
discount on issue of shares which will realize nothing at the time of
liquidation though they are shown in the balance sheet.
3. Historical cost :
The financial statements are prepared on the basis of historical costs or
original costs. The diminishing value in asset is not accounted for. The
statements are not prepared keeping in view the present economic
conditions.
The balance sheet loses the significance of being an index of current
economic realities. Similarly, the profitability shown by the income
statement may not represent the earning capacity of the concern. The
increase in profits may be due to an increase in prices or due to some
abnormal causes and not due to increase in efficiency. The conclusions
drawn from financial statements may not give a fair picture of the concern
4. Non -monetary factors impact left unseen :
There are certain factors whic h have a relevance on the financial position
and operating results of the business but they do not become a part of
these statements because they cannot be measured in monetary terms.
Such factors may include the management reputation credit worthiness of
the concern, sources and commitments for purchases and sales, co -
operation of the employees, etc. The financial statements only show the
position of the financial accounting for business and not the financial
position.
5. No precision in Financial Statemen ts:
There is no possibility in precision of financial statements because the
statements deal with matters which cannot be precisely stated. The data
are recorded by conventional procedures followed over the years. Various
conventions, postulates, personal judgments etc. are used for developing
the data.
munotes.in
Page 12
Management Accounting
12 USERS AND THEIR PURPOSE
2.3 ANALYSIS AND INTERPRETATION
(1) Need for Analysis and Interpretation : A typical Financial Statement
of a company may run into many pages. It normally contains a huge mass
of data and figures. A common user would be at a loss to understand
which figures are important and what is the exact significance of all the
figures shown in the Financial Statements. The Financial Statements are
basically prepared for the ow ners or managers and outsiders such as
Creditors, Lenders or researchers have re -organise the figures appearing in
the Financial Statements for the purpose of their study.
(2) Meaning of Analysis: 'Analysis' means : to resolve something into
its elements o r components, For an outside user, the details in the
Financial Statements signify only raw data or 'raw material'!
This raw material' needs to be re -organised, processed and converted into
an easy to understand form. The process of breaking up a large mas s of
raw data into manageable form is called "analysis' of the Financial
Statements.
(3) Financial Statement Analysis : Financial statement analysis is a
process of evaluating the relationship between the component parts of a
financial statement to obtain a better understanding of a firm's financial
position and performance (Metcalf and Tigard). Analysis of Profit and
Loss Account, therefore, means breaking down the Profit and Lo ss
Account into its various components or segments i.e. Gross Sales, Net
Sales, Cost of Goods Sold, Operating Profit and so on. This is done by
converting the T Form Profit and Loss Account into a Vertical Income
Statement. Analysis of Balance Sheet means breaking down or "analysing'
the Funds into Total Funds Available and Total Fund s Employed. The
Total Funds Available are further broken down into Owners' Funds and
Loan Funds. The Total Funds employed are broken down into Fixed Government OWNERS
Evaluating
performance &
profitability Lenders and
creditors
Establish degree of
safety of
money Investors Making
investment
decisions Workers Financial
analysts
Assess
performance of
entity
Management
Decision making purpose Levy taxes & providing
relief to business
organization
munotes.in
Page 13
Analysis o f Financial
Statements
13 Assets and Working Capital. This is done by converting the T Form
Balance Sheet into a Vertical Balance She et.
2.4 BALANCE SHEET
ASSETS
Definitions
(1) Expenditure means a payment made by a business to obtain some
benefit i.e., assets, goods or services (Guidance Note - ICAI). While an
expenditure on obtaining goods or services by a concern in the course of
its business activity is known as revenue expenditure, an expenditure in
the course of its investing activity (obtaining an asset) is known as capital
expenditure.
(2) Capital expenditure means an expenditure carrying probable future
benefits (Guidance Note. ICAl. Capital expenditure gives rise to 'assets'.
Types and Valuation :
Following are the different types of assets as defined by the ICAI in its
Guidance Note, and the mode of valuation:
1. 'Assets" are tangible objects or intangible rights, owned by a conc ern,
carrying probable future benefits. Thus, assets include tangible items
(capital assets, current assets) and intangible rights (intangible assets).
2. 'Capital assets' means assets including investments not held for sale,
con version or consumption in the ordinary course of business.
Capital assets thus include fixed assets and investments.
3. 'Capital work -in-progress means expenditure on capital assets which
are under construction or completion. It is valued at cost incurred till
date.
4. Current assets are ca sh and other assets that are (i) expected to be
converted into cash or (in) consumed in the production of goods or
rendering of services in the normal course of business. Thus, current
assets, as opposed to capital assets, are short -term assets (debtors,
stock etc.. Debtors and stocks are shown at their Net Realisable
Value, if and only if, it is lower than cost.
5. Fixed asset is an asset held for the purpose of providing or producing
goods or services, and which is not held for resale in the normal
course of business. Fixed assets may be either depreciable assets
(machinery etc.) or wasting assets (mines etc.). Fixed assets are
valued at cost incurred upto installation, i.e. Invoice price + Tax +
Delivery charges + Installation cost + Cost of trial runs + Ini tial
spares.
6. Depreciable asset' is a fixed asset which has a limited useful life.
These are valued at the WDV (Cost less Depreciation). munotes.in
Page 14
Management Accounting
14 7. Wasting assets' are natural resources like mine, oil -well etc. which are
exhausted or depleted due to extraction or use. These are valued at
WDV (Cost less amount amortised).
8. Investment' is expenditure on assets held, not for business operations,
but to earn interest, income, profit or other benefits e.g. shares,
debentures, immovable properties etc. Investments are normall y
valued at cost.
9. Intangible asset' is an asset which does not have a physical identity
e.g. goodwill, patent, copyright etc. Intangible assets are valued at
WDV (cost less amount amortised).
10. 'Fictitious asset' is an item shown under assets in the balance sheet
which has no real value (e.g. debit balance of profit and loss account
which indicates accumulated losses) (In) Hidden assets do not appear
on the balance sheet. Examples are : self created good will, assets
Written off in books but still in use, opt ions on lease, exclusive
trading agreements, secret process or designs and so on. Hidden assets
are like 'secret reserves'
Deferred Revenue Expenditure :
1. Meaning: Deferred Revenue Expenditure' is that expenditure which is
carried forward on the presumption that it will be of benefit over
subsequent period(s) (Guidance Note -ICAl. It is also known as
"deferred expenditure'. To defer' means to postpone. Deferred revenue
expenditure has a mixed nature and has some features of both revenue
and capital expenditur e. It may be either a basically revenue
expenditure whose benefits can be enjoyed for a number of years; or a
capital expenditure not represented by any real asset.
2. Accounting : The items of expenditure having medium term benefits
(say 3 years) are treated as deferred revenue expenditure. The
proportionate cost (1/3 cost) related to current year is charged as
expenses. The balance (unexpired) cost (2/3) is carried forward as
"fictitious asset' in the balance sheet and written off in next years. Such
gradual and systematic writing off is known as 'amortisation' (Guidance
Note -ICAL).
3. Applicable Only to Companies : Earlier, research expenses, heavy
advertisement expenditure, preliminary expenses, expenses on shifting
the business etc. used to be treated as def erred revenue expenditure and
written off over 3 to 5 years. However, Accounting Standard 26
(Intangible Assets) requires that such items should be treated as
revenue expenses. However, according to the ICAI Guidance Note on
Revised Schedule VI to the Comp anies Act, a Limited Company may
treat the following as deferred revenue expenditure - (1) Share issue
expenses (2) Discount on issue of Shares (3) Debenture issue expenses
(4) Discount on issue of debentures, and (5) Premium payable on
redemption of deben tures. Many companies amortize share issue
expenses, discount on shares etc. over the period of benefit, i.e., munotes.in
Page 15
Analysis o f Financial
Statements
15 normally 3 to 5 years. Expenses on issue, discount or premium relating
to debentures can be amortized over the period of debentures.
Proportionat e amount related to current year is charged as expenses in
the profit and loss statement of the company. Balance amount not yet
written off is shown as Unamortized Expenditure' on the Assets side of
the company balance sheet.
LIABILITIES :
Definitions :
Capi tal means the amounts in vested in the concern by its owners e.g.
paid-up capital in a corporate enterprise. It is also used to refer to the
interests of the owners in the assets of the enterprise (ICAI). Capital is
refunded to the owners only when the con cern finally stops its business
and is closed .
Liability means the financial obligation of an enterprise other than owner's
funds (ICAN).
Long term (Non -current) Liability is a liability which does not fall due for
payment in a short period i.e. twelve m onths (ICAI) Current Liability is a
liability including loans, deposits and bank overdraft which falls due for
payment in a relatively short period, normally not more than 12 months
(ICAL).
Disclosure in Final Accounts :
Capital and Liabilities are shown in Balance Sheet. Capital receipt from
sale of asset or
Investment is deducted from the concerned fixed asset or investment
shown on the Assets side in the balance
CONVENTIONAL OR T'FORM :
The conventional form of Balance Sheet (also called the T form or t he
Account form), shows the Assets on the right hand side and the Liabilities
on the left hand side.
In this form the Assets are normally shown in order of Permanence. The
least Liquid asses, i.e. -the fixed Assets are shown First, followedloy the
most Liqu id assets, ie. the current asses: [Even under cash head, items of
assets are arranged in the order of Permanance e.g. under Current A sos
stace spears first and Cash & Bank balance which is the most liquid,
appears last]. The Liabilities are shown in order of priority of e -amont.
Permanent Liabilities (e.g. Capital) are shown first followed by long term
Loans and short term Loans. Current Liabilities appear last. This form is
used by non. corporates e.g. sole trader or firm. Thus, the Balance Sheet in
conv entional form appears like this:
munotes.in
Page 16
Management Accounting
16 EXHIBIT 1 : BALANCE SHEET IN 'T' FORM
Liabilities ` Assets `
Capital XX Fixed Assets XX
Reserves & Surplus XX Investments XX
Long term Loans XX Current Assets XX
Short term Loans XX Loans and Advances XX
Current Li abilities XX
Provisions XX
XX XX
Note: If the items are shown in order of liquidity, the above sequence is
reversed. On the assets side, current assets are shown first, followed by
fixed assets. On the liabilities side, current liabilities ar e shown first,
followed by short term loans, long term loans and capital.
NEED FOR VERTICAL FORMAT :
The horizontal format of Balance Sheet is designed from the point of view
of the owner of a concern It enables the owner to know at a glance the
amount of T otal Funds Owned (Total Assets) and the amount of Total
Funds Owed (Total Liabilities). It also enables the owner to know which
assets will take time to sell (Fixed Assets) and which assets can be realised
quickly (Current Assets). The order of payment of liabilities in the event
of Liquidation can also be ascertained from such a Balance Sheet in
conventional form.
However, the Conventional Form of Balance Sheet is not suitable for
financial analysis, precisely because.
(1) It is designed for the owner. It doe s not serve the purpose of the other
users such as a potential investor or lender.
(2) Its presentation and sequence or order of items is relevant only in the
event of Liquidation; it is unsuitable for financial analysis of a 'going
concern'.
Hence, a user or Financial Analyst, generally converts the horizontal
Balance Sheet, into a Vertical Format, which is more suitable for financial
analysis especially in Ratio Analysis. Even the vertical financial
statements for a limited company prepared under Schedule VI of the
Companies Act need to be converted into the following format for
financial analysis. The Balance Sheet in Vertical Format for financial
analysis will appear as follows : -
munotes.in
Page 17
Analysis o f Financial
Statements
17 VERTICAL FORMAT :
WORKSHEET 2 : VERTICAL BALANCE SHEET (DETAILED
ITEMS)
Part iculars ` ` ` I SOURCES OF FUNDS
1 Owner's Funds
A Capital
i Equity Share Capital / Capital of Proprietor or
Partner XX
ii Preference Share Capital Amount Subscribed /
Called -up XX
iii Less : Unpaid Calls / Drawings of Propr ietor
or Partner XX
iv Add : Forfeited Shares / Fresh Capital by
Prop. / Partner XX
v Add : Received Against Share Warrants XX XX
B. Reserves and Surplus
i Capital Reserve XX
ii Capital Redemption Reserve XX
iii Share Premium XX
iv General Reserve XX
v Other Reserve XX
vi Profit & Loss A/c - Cr. balance XX
vii Sinking Funds / Other Funds XX XX
C. Less : Losses & Fictitious Assets
i Profit & Loss A/c - Dr. balance XX
ii (in) Misc. Expenditure not written off XX
iii Share Issue Expenses XX
iv Discount on Issue of Shares XX
v Debenture Issue Expenses XX
vi Discount on Issue of Debentures XX
vii Premium Payable on Redemption of
Debentures XX XX
Own Funds or Net Worth (1) (A+B -C) XX
(Capital + Reserves & Surplus - Losses &
Fictitious Assets) munotes.in
Page 18
Management Accounting
18 2 Loan Funds/Borrowed Funds
D. Secured Loans / Long Term Borrowings
Debentures or bonds XX
Loans from Banks XX
Loans from Financial Insti tutions XX XX
E. Unsecured Loans
Public Deposits XX
Loan from Directors XX XX
Owed Funds (D + E) (Secured Loans +
Unsecured Loans) XX
Total Funds Available / Capital Employed XX
(Own Funds + Owed Funds) (1 + 2)
II APPLICATION OF FUNDS
3 Net Fixed / Non -Current Assets
F. Tangible XX
Land and building XX
Leaseholds XX
Plant and Machinery XX
Furniture and Fittings XX
Vehicles XX XX
G. Intangible
Goodwill XX
Patents, copyrights, trademarks and designs XX XX
Total Fixed Assets (F + G) XX
(Net Tangible Assets + Intangible Assets)
4 Long Term / Non -current Investments
Investments in Government Securities XX
Shares, Debentures etc. XX
Less: Sinking Funds / Other Funds /
Investments XX
Investments in immovable properties XX
Investments in Capital of Partnership Firms XX
Long Term Loans given XX XX munotes.in
Page 19
Analysis o f Financial
Statements
19
5 Working Capital
H. Quic k Assets
a Cash and Bank XX
b Debtors (Net) / Trade Receivables XX
c Bills Receivable XX
d Short Term Loans & Advances Given XX
e Accrued Income XX
f Short -term or Marketable Investments XX
Total Quick or Liquid Asset s (a to f) XX
I Non-Current Assets XX
g Inventory XX
h Pre-payments (pre -paid expenses, advance for
goods, advance tax) XX XX
Current Assets (a to h)
Les
s:
J. Quick Liabilities
a Creditors / Trade Payables XX
b Bills Payable XX
c Advances Received XX
d Outstanding Expenses XX
e Accrued Interest XX
f Provision for Tax XX
g Unclaimed Dividend XX
h Short Term Loans XX
Total Quick Liabilities (a to h) XX
K. Non-Quick Liabi lities
i Bank Overdraft XX
j Cash Credit XX
k Incomes received in advance XX
Current Liabilities (a to k) (XX
)
Net Current Assets or Working Capital (A -
B) XX
Total Assets or Total Funds Employed XX
(Fixed Asse ts + Investments + Working
Capital)
(3 + 4 + 5)
munotes.in
Page 20
Management Accounting
20 Notes :
(1) Thus, a Vertical Analytical Balance Sheet differs from a Horizontal
Balance Sheet in following respects
(a) Current Liabilities are deducted from the Current Assets;
(b) Fictitious Asset s are ded ucted from the Owners' Funds.
This should be kept in mind while converting a Horizontal Balance
Sheet into a Vertical Balance Sheet.
(2) At times, Application of Funds (FA and WC) is shown first, followed
by Sources of Funds (OF and LF).
EXPLANATION (MAIN HEADINGS) :
The vertical form has two parts - I. Source of Funds and II. Application of
Funds.
I. SOURCES OF FUNDS :
A concern has two main sources of funds - 1. Own Funds and 2. Loan
Funds.
1. Proprietors' or Own Funds of:
Proprietors' or Own Funds (or inte rnal sources) mean (a) capital of the
owners (proprietor, partners, or shareholders) and (b) Retained Earnings
(or Reserves & Surplus). To arrive at the Net Worth or Owners' Funds,
Capital and Reserves are added and the accumulated losses and fictitious
assets are deducted. The accumulated losses (Profit and Loss A/c - Dr.
balance) and fictitious assets (Misc. Expenditure Not Written off) reduce
the amount of funds available or attributable to the owners and hence have
to be deducted to ascertain the owners ' net worth.
2. Borrowed or Loan Funds [LF] :
Borrowed or Loan Funds (Long Term Borrowings) constitute another
major source of funds. Loan funds may be (a) Secured Loans like
Debentures, bonds, Loans from banks, loans from financial
institutions, or (b) Uns ecured Loans e.g. public deposits. The total of
Secured Loans and Unsecured Loans give the total amount of Loan Funds
or 'Owed' funds.
Total Funds Available : The total of Own Funds and Owed Funds is the
total amount of Funds Available to the concern as on date of the Balance
Sheet. How these funds were actually employed or used is shown in the
second part of vertical Balance Sheet, viz. Application of Funds.
II. APPLICATION OF FUNDS :
The Total Funds Available are used to finance 1. Fixed Assets and 2. Net
Current Assets (called Working capital). munotes.in
Page 21
Analysis o f Financial
Statements
21 1. Fixed Assets [FA] :
The Fixed Assets (also known as Non -Current Assets) may be classified
into Tangible, Intangible and Investments.
A. Tangible Assets have definite physical existence. ('Tangible' means
that which can be 'touched'). Thus Land, Building, Machinery, Vehicle are
tangible fixed assets. These are shown at net cost, i.e. cost less
depreciation.
B. Intangible Assets cannot be seen (or 'touched'), but do earn income for
the concern -such as Goodwill, Trad e-mark etc.
Net Fixed Assets mean Fixed Assets less accumulated depreciation
thereon till date (ICAN).
2. Long Term or Trade Investments
Long term or trade investments are those investments which are intended
to be held for a long term (such as investments in immovable properties)
or those which are held in the normal course of business (e.g. investment
in the capital of a partnership firm). Investments in Government Securities
shares, bonds, etc. may be Long Term or Short Term depending upon the
circumstan ces.
3. Working Capital [WC] :
Working Capital is represented by. the excess of current assets over
current liabilities including short -term loans (ICAD). It means the funds
available for conducting the day -to-day operations of the enterprise.
A. Current A ssets [CA] : Investments in Fixed Assets is a permanent or
long-term investment. A concern also has circulating funds, i.e. short -term
assets like stock, debtors, etc. called current assets. These assets keep
getting converted into cash. Those current asse ts which can be quickly
converted into cash are called Liquid or Quick Assets.
B. Current Liabilities [CL]: Current Liabilities, on the other hand, are
short -term liabilities payable within a year. These arise out of purchase of
goods on credit, outstandin g expenses etc. The excess of current assets
over current liabilities is called Net Current Assets or Working Capital.
Total Fund or Capital Employed [CE] :
Capital Employed means the finances deployed by an enterprise in its Net
Fixed Assets, Investments a nd Working Capital (ICAI).
The amount of Total Funds used or employed is equal to Net Fixed Assets
+ Working Capital.
(a) Vertical Balance Sheet structure can be analysed through the following
equations:
munotes.in
Page 22
Management Accounting
22 (1) Own Funds + Loan Funds = Fixed Assets + Investments + Working
Capital or OF + LF= FA + Inv. + WC
(2) TA (Total Assets) = FA + Inv. + CA = TL (Total Liabilities) = OF +
LF+ CL
(3) CE (Capital Employed) = F A + WC = FA+ (CA - CL) = OF+ LE
(4) OF (Owners' Funds) = TA - CL - LF
The items to be included under each of th e above main headings are
described in detail below.
EXPLANATION (DETAILED ITEMS)
I. SOURCES OF FUNDS
1. Proprietors' Funds :
A. Capital :
Capital refers to the amount invested in an enterprise by its owner. It also
refers to the interest of the owners in th e assets of an enterprise (Guidance
Note on Terms used in Financial Statements -ICAl henceforth mentioned
as "GN by ICAI".)
In case of a Proprietor, Capital would be equal to
Opening Balance
Add Profit during year
Additional Capital brought in during year
Less Loss during year
Drawing during year
Closing Balance.
In case of a firm, capital would be the total of the closing balances of the
Capital Accounts, determined as above, for all partners.
In case of a Limite d Company; Capital would include (i) Equity Share
Capital and (ii) Preference Share Capital. Under each type of share capital,
the amount paid -up is shown. The paid -up amount is equal to Called up
Amount Less Unpaid Calls Plus Forfeited Shares. Money recei ved against
share warrants (to be converted into shares) is also part of shareholders’
funds.
B. Reserves & Surplus:
Reserves means the profit retained or ploughed back in business and not
distributed as dividends. Reserves are defined as the portion of t he
earnings receipts or other surplus of an enterprise (whether capital or
revenue appropriated by the management for a general or specific purpose
(GN by ICAI).
(i) Capital Reserves : Capital Reserves are those reserves of a company
which are not available for distribution as dividend (GN by ICAN. These
are not created out of normal business profits of the company. They are munotes.in
Page 23
Analysis o f Financial
Statements
23 created out of premium received on issue of shares, profit on sale of fixed
assets. Capital redemption reserve (reserve created on rede mption of
preference shares), profit on forfeiture of shares etc. These are not
available for payment of dividends.
(ii) General Reserve : General Reserve is a Revenue Reserve not
earmarked for any specific purpose (GN by ICAD. This represents
undistributed normal profits of the company. Profits may be distributed by
way of dividends or retained by way of reserves.
(iii) Funds : Fund is a Reserve or a Provision represented by specifically
earmarked asset (GN by ICAD. A Fund as Sinking Fund, Provident Fund,
or Staff Benefit Fund denotes that the amount shown under that Fund has
been invested in specific (earmarked) securities. In a vertical balance
sheet, the amount of such earmarked investments is adjusted against the
amount of Fund and only the net amount (Fu nd less Investment), is shown
under 'reserves
C. Losses and Fictitious Assets : The accumulated losses (Profit & Loss
Account - Dr. balance) and Fictitious Assets, i.e. Misc Expenditure Not
Written off are shown on the Assets side of the conventional balanc e
sheet. However, in the Vertical balance sheet, these are deducted from the
total of (a) Capital and (b) Reserves & Surplus to determine the net Equity
or net Worth. These include - (i) Profit & Loss A/c - Dr. balance
(ii) Miscellaneous expenses not writte n off (also known as Unamortized
Expenses) –
(1) Share issue expenses
(2) Discount on issue of Shares
(3) Debenture issue expenses
(4) Discount on issue of debentures, and
(5) Premium payable on redemption of debentures.
Net Worth , also known as Shareholde rs Funds, means the excess of the
book value of the assets (other than fictitious assets) of an enterprise over
its liabilities (ICAI). Net worth is the same as Owners Funds or
Proprietors Funds. Owners' Funds = Capital + Reserves & Surplus -
Losses & Fict itious Assets
2. Loan Funds :
Loan or Liability means the financial obligation of an enterprise other than
owner's funds (GN by ICAl). This are the long -term Borrowings.
This is the Second Source of finance for a concern. The distinction
between the Proprie tors Funds (own Funds) and the Loan Funds (owed
Funds) is as follows:
munotes.in
Page 24
Management Accounting
24 EXHIBIT 2: OWN FUNDS VS. OWED FUNDS
No. Own Funds Owed Funds
1 Internal source of finance External source of finance.
2 Represents claim of outsiders
on the assets of the concern. Represents claims of owners on the assets of the concern.
3 Own Funds i.e. Capital earns
dividends. Owed Funds, i.e. Loans earn
interest
4 Dividends are paid out of
profits ("appropriations out
of profits') and the rate may
vary. Interest is charged again st profits (i.e. paid irrespective of profit or
loss), at a fixed rate
5 In liquidation, own funds are
returned
last. Hence Own Funds are
called "Permanent Funds.' In Liquidation, Owed Funds are
repaid before capital. Even
otherwise, loans have to be
repaid according to the terms of the agreement. Hence,
Owed Funds are called
"Semipermanent Funds."
6 Own Funds are not 'secured'
by
charge on assets. Loans may be secured by charge
on Fixed or Current Assets.
A. Secured Loans:
Loans may be for Secured or U nsecured.
Secured loans (also called Fixed Liabilities) consist of:
(i) Debentures or Bonds repayable after a fixed period.
(ii) Bank Loans
(iii) Loans from Financial Institutions
B. Unsecured Loans:
Public Deposits are deposits kept by public for a fixed period which are
unsecured.All Loans, other than Secured Loans, would be shown as
Unsecured Loans.
(1) Total Owed Funds = Secured Loans + Unsecured Loans
(2) Total Funds Available = Own Funds + Owed Funds
munotes.in
Page 25
Analysis o f Financial
Statements
25 I. APPLICATION OF FUNDS
1. Fixed Assets:
Followin g items are included under Fixed Assets (also known as Non -
Current Assets):
A. Tangible Assets (at cost less depreciation)
(i) Land and Buildings
(ii) Leasehold Property
(iii) Railway Sidings
(iv) Plant & Machinery
(v) Furniture & Fittings
(vi) Development of Property
(vii) Live Stock
(viii) Vehic les etc.
B. Intangible Assets :
(i) Goodwill
(ii) Patents, Copyrights, Trade -marks and designs
Fixed Assets = Tangible Assets (net cost) + Intangible Assets
2. Long Term Investments :
Investments may be long -term or short -term. If for example, bonds of an
Electricit y Undertakinghave to be compulsorily purchased so as to obtain
power connection, these will be held as long as the concern exists. Hence
these will be Long Term Investments. If any investment represents a Fund
shown under Reserves (e.g., Provident Fund Inv estment), it is adjusted
against the balance of the Fund. If the net balance is Debit (i.e.,
Investment exceeds Fund), only the net Dr. is shown as Investment; if the
Fund exceeds Investment the net Cr. balance is shown under Reserves.
Short Term Investmen ts are shown as a part of Current Assets.
3. Working Capital :
Working Capital means the net current assets or the excess of Current
Assets over Current Liabilities.
A. Current Assets:
Current Assets (or Floating Assets) mean those assets which move through
the operating cycle of the business viz. through the stages of purchase of
raw materials (Stock) production of finished goods (Stock) sales of goods
(Cash/Debtors) Realisation of Debtors (cash) and so on. Current assets
mean the assets like stock, debtors and cash which move in a cycle. Thus
stock is converted by sales into debtors, debtors get converted by munotes.in
Page 26
Management Accounting
26 realisation of dues into cash, cash is used for buying goods and again the
cycle is repeated. Current assets are short term assets unlike fixed assets
which are long term assets.
The following item are included under Current Assets:
(a) Stock
1. Stores and spare parts
2. Stock -in-trade
(Raw Materials - Finished Goods + Packing Materials)
3. Work -in-progress.
(b) Debtors
Gross amount
Less : Provision for bad & doubtful debts
(c) Cash and Bank
1. Cash on hand
2. Bank balances
3. Cash Equivalents e.g. liquid deposits
(d) Loans & Advances Given
1. to subsidiaries
2. to firms etc.
(e) Marketable Investments i.e. temporary investments made out of
surplus funds.
(f) Other Current Assets
1. Interest accrued on investments
2. Loose tools
3. Bills of exchange
4. Pre -payments (pre - paid expenses, advance for goods, advance tax paid)
5. Balances with customs. Port trust etc. (Payable on demand).
Thus,
Current Assets = Stock + Debtors + Cash and Bank + Loans & Advances+
Marketable Investments + Other Current Assets
munotes.in
Page 27
Analysis o f Financial
Statements
27 Quick Assets :
Quick assets are the following items of Current Assets, which are 'quickly
realisable' -
(a) Cash & Bank
(b) Debtors (net) / Trade Receivables
(c) Bills Receivable
(d) Loans
(e) Marketable (Current / Short -term) Investments
(f) Other e.g. Accrued Income
Or
Quick Assets = Current Assets Less Inventories & Pre -payments
(Note: Pre -payments : Pre -paid Expenses, Advances for Goods &
Advance tax)
B. C urrent Liabilities:
Current Liabilities include the following items
(a) Sundry creditors for supply of goods or services (Trade Payables).
(b) Bills Payable
(c) Advances Received
(d) Outstanding expenses
(e) Accrued Interest
(f) Provision for tax
(g) Uncla imed Dividends
(h) Short Term Loans
Notes :
(1) Current maturities of long -term debts e.g. Debentures / Loans
(whether Secured or Unsecured) repayable within 1 year should be
shown as Current Liabilities
(2) Dividends proposed but not yet approved by shareholders are shown
by way of a Note toAccounts. No provision is made for proposed
dividends w.e.f. FX. 2016 -17 (vide MCA/ICAIAmended Accounting
Standard 4)
munotes.in
Page 28
Management Accounting
28 Quick Liabilities :
Quick Liabilities are those current liabilities which are payable in a short
period of ti me. Bank Overdraft is not, in practice, immediately payable.
So,
Quick Liabilities = Current Liabilities - Bank Overdraft
Working Capital = Current Assets - Current Liabilities
Total Funds Applied = Net Fixed Assets + Investments + Working Capital
This is always equal to Total Funds Available.
2.5 INCOME STATEMENT
Vertical Income Statement of ………… for the year ended
………….
Particulars Amount Amount Amount I. Sales
Cash Sales XX
Credit Sales XX
Gross Sales XX
Less: Returns and Allowanc es (XX)
Net Sales XX
Less:
II. Cost of Goods Sold
Opening Stock XX
Add:
Purchases XX
Direct Expenses XX
Carriage Inward/Freight Inward XX
Octoroi Duties/Import Duties XX
Direct Wages XX
Factory lightin g XX
Fuel, coal, oil XX
Depreciation on Plant and
Machinery XX
Depreciation on Factory Premises XX XX munotes.in
Page 29
Analysis o f Financial
Statements
29
Less:
Closing Stock (XX)
Goods Damaged by fire (XX)
Goods lost by theft (XX) (XX)
Cost of Goods Sold (XX)
III. Gros s Margin (III = I - II) XX
Add:
IV. Operating Incomes
Discount received (on Purchases) XX
Bad Debts Recovered XX XX
Less:
V. Operating Expenses
A. Office and Administrative
Expenses
Salaries XX
Rent, Rates and Taxes XX
Office Lighting XX
Printing and Stationery XX
Insurance premium XX
Postage XX
Depreciation on Furniture XX
Depreciation on Office Premises XX
Depreciation on
Computers/Laptops XX
Miscellaneous expenses/ General
Expenses XX XX
B. Selling and Distribution
Expenses
Salary sales staff XX
Commission charges XX
Advertising expenses XX
Carriage outward XX
Packing expenses XX
Depreciation on delivery vans XX
*Bad Debts XX XX munotes.in
Page 30
Management Accounting
30 C. Finance Expenses
Interest on bank overdraft XX
Interest on cash credit XX
Discount allowed XX
Bank charges XX
Bank commission XX
**Bad Debts XX XX
Total Operating Expenses (XX)
VI. Net Operating Profit (VI = III
+ IV - V) XX
Less:
VII. Interest on Long Term
Borrowings
Interest on Loans XX
Interest on Debentures XX
Interest on Public Deposits XX (XX)
VIII. Net Profit (VIII = VI - VII) XX
Add:
IX. Non -Operating Income
Dividend and interest on
investments XX
Rent received XX
Profit on Sale of Investments/Fixed
Assets XX XX
Less:
X. Non -Operating Expenses
Loss on Sale of Investments/Fixed
Assets XX
Preliminary Expenses written off XX
Loss by fire/Theft/Accident XX (XX)
XI. Net Profit Before Tax (XI =
VIII + IX - X) XX
Less: Provision for Tax (XX)
XII. Net Profit After Tax XX
Add: Opening Balance of Retained
Earnings/P&L A/c (XX) munotes.in
Page 31
Analysis o f Financial
Statements
31
XIII. Net Profit Available for
Appropriations XX
Less:
XIV. Appropriations
Transfer to General Reserve XX
Transfer to Reserves XX
Dividend on Preference
Shares/Equity Shares XX
Interim Dividend XX (XX)
XV. Closing Retained Earnings
(XV = XIII - XIV) XX
Bad Debts can be alternatively treated as Financial Expenses.
From the above rearrangement of operating statements, thefollowing
accounting equations may be given:
1. Net Sales = Cost of sales + operating expenses + Nonoperating
expenses
2. Gross Profit = Net sales – Cost of goods sold
3. Net operating profit = Gross profit – operating expenses
4. Gross Sales: Gross sales also called ‘ Turnover’ is the amountof total
sales of goods and services. This includes both cashand credit sales.
Gross sales = Cr edit sales + cash sales
5. Cost of Goods Sold: This is the cost of purchases or cost
ofmanufacturing the goods, which are sold during the year.
Cost of Goods Sold = Opening stock + Purchases + Direct
Expenses + Depreciation – less closing stock
6. Gross Profit :
This is the major source of operating income of anorganization. This is the
amount of profit earned on purchases,manufactures and sales of goods and
services.
Gross Profit = Net Sales – Cost of goods sold
7. Operating Expenses: These are the expenses incurr ed in the course of
normalconduct of business, which are related to the business
activities.Broadly, operating expenses areclassified into the following
categories. munotes.in
Page 32
Management Accounting
32 a) Administrative Expenses: These are the expenses pertainingto
general office administrative of an organization.
b) Selling and Distribution Expenses: These are the expensesincurred
for the purpose of increasing and maintaining thesales, distributing
and delivering the goods.
c) Finance Charges: This includes: Cash discount, Bad debts
(Abnormal), Bank c harges, bank Commission.
Operating Expenses = Administrative Expenses + Selling & Distribution
Expenses + Finance Expenses
8. Operating Profit: Excess of operating income over operating expenses
is called net operating profit. This is the amount of profit ear ned during
the normal course of business.
Operating profit may be:
a) Operating Profit before Interest: Gross Profit - Operating
expenses (Before Interest)
b) Operating Profit After Interest : Operating profit (before Interest)
– Interest
9. Non-operating Income: Income not related to the ordinary course of
business i.e., Interest on investment is not an operating income to a
company, which is engaged in buying and selling of goods and services
of goods. But for an investment company, interest will be considered as
an operating income.
10. Non-Operating Expenses: These are the expenses, which do not
relate to day -to-day conduct of business operations. These expenses
arise due to certain unusual events and unexpected occurrences.
11. Net Profit: This is the excess of total op erating and nonoperating
income over the total operating and non -operating expenses. It is
therefore, ultimate profit earned by the organization.
a) Net Profit before Tax = Net operating profit + Net non -operating
Income
b) Net profit After Tax =Net profit befor e tax - Income tax
12. Retained Earnings: Net profit after tax - dividend
munotes.in
Page 33
Analysis o f Financial
Statements
33 Illustration 01:
Following is the Profit & Loss Account of Leena Ltd. for the year ended
31s March 2020. You are required to prepare Vertical Income Statement
for the purpose of ana lysis.
Particulars Amount Particulars Amount Amount
To Opening
Stock 14,00,000 By Sales:
To Purchases 18,00,000 Cash 10,40,000 To Wages 3,00,000 Credit 30,00,000 To Factory
Expenses 7,00,000 (-) Return &
Allowance 40,40,000 To Office
Salaries 1,00,000 (20,000) 40,20,000 To Office
Rent, Rates &
Taxes 78,000 To Postage and
Telegram 40,000 To Audit Fees 12,000 To Salesman
Salaries 24,000 By Dividend
on
Investment 1,00,000 To Promotion
Expenses 76,000 By Closing
Stock 14,00,000 To Delivery
Expenses 40,000 By Profit on
sale of
Machinery 80,000 To Debenture
Interest 60,000 To
Depreciation: - On Office
Furniture 1,00,000 On Plant 1,20,000 On Delivery
Van 80,000 To Loss on
Sale of Van 10,000 To Income Tax 3,50,000 To Net Profit 3,10,000 56,00,000 56,00,000
munotes.in
Page 34
Management Accounting
34 In the books of Leena Limited
Vertical Income / Revenue Statement as on 31 March 2020
Particulars Amount Amount Amount
SALES Cash 10,40,000 Credit 30,00,000 40,40,000
Less : R eturns (20,000)
Net sales 40,20,000
Less : Cost of goods Sold Opening stock 14,00,000 Add: purchase 18,00,000 Add: Wages 3,00,000 Add: Factory Expenses 7,00,000 Add: Depreciation on plant 1,20,000 43,20,000 Less: Closing stock (14,00,000) (29,20,000) Gross margin / Gross profit 11,00,000
Add: Operating Income Less: Operating expenses (1) Office & administrative Exp Office salary 1,00,000 Office Rent, Rate & Taxes 78,000 Postage & telegram 40,000 Directo rs fees 12,000 Depreciation on office furniture 1,00,000 3,30,000 (2) Selling & Distribution Salesmen salary 24,000 Promotion Expenses 76,000 Delivery Expenses 40,000 Dep. On Delivery van 80,000 2,20,000 (3) Finance Expenses - Total Operating Expenses (5,50,000)
Operating Profit 5,50,000
Debenture Interest (60,000)
Net Profit 4,90,000
Add:Non -operating Income Dividend on investment 1,00,000 Profit on sale of furniture 80,000 1,80,000 6,70,000
Less: Non -opera ting exp Loss in Sale of Van (10,000)
Net profit before tax 6,60,000
Less: taxation (3,50,000)
Net profit after tax 3,10,000
munotes.in
Page 35
Analysis o f Financial
Statements
35 Illustration 02:
Profit & Loss account of Dani Ltd. For the year ended 31st October 2020
Particulars Amount Part iculars Amount
To Opening Stock 1,98,250 By Sales: 13,26,000 To Purchases 8,19,650 Less Returns (26,000) 13,00,000
To Wages 18,200 By Closing Stock 2,56,100
To Staff Salaries 52,000 To Sales Salaries 39,780
To Interest 3,120 By Interest on
Debenture 3,900
To Office Rent 7,020 By Dividend on Shares 15,860
To Printing and
Stationery 6,500 By Profit on sales of
shares 10,140
To Carriage Outward 12,220 To Discount 6,240 To Depreciation 24,180 To Insurance 2,600 To Motor Bill 910 To Salesmen's
Travelling Exp. 5,200
To Bad Debts 8,840 To Telephone Expenses 1,950 To Legal Charges 5,200 To Director's Fees 11,440 To Income Tax 1,24,800 To Loss on Sale of
Bond 9,100
To Provision for claim
for damages 10,400
To Net Profit 2,18,400 15,86,000 15,86,000
munotes.in
Page 36
Management Accounting
36 Convert the above profit & loss A/c. of a company into a vertical revenue
statement.
Solution:
In the books of Dani Limited
Vertical Income / Revenue
Statement as on 31 March 2020
Particulars Amount Amount Amount
Sales 13,26,000 Less: Returns (26,000) Net sales 13,00,000 Less: Cost of goods Sold Opening stock 1,98,250 Add: Purchase 8,19,650 Add: Wages 18,200 10,36,100 Less: Clo sing stock (2,56,100) (7,80,000) Gross margin / Gross profit 5,20,000 Add: Operating Income - 5,20,000 Less: Operating expenses (1) Office & administrative Exp Staff salaries 52,000 Office Re nt 7,020 Printing & Stationery 6,500 Depreciation 24,180 Insurance 2,600 Motor bill 910 Telephone Expenses 1,950 Legal Charges 5,200 Directors Fees 11,440 Carriage outward 12,220 1,24,020 (2) Selling & D istribution Sales salaries 39,780 Salesmen's traveling exp 5,200 44,980 (3) Finance Expenses Interest 3,120 Discount 6,240 Bad Debts 8,840 18,200 (1,87,200) Operating Net profit 3,32,800 Add: Non operating Inco me Interest on debenture 3,900 Dividend on shares 15,860 Profit on sale of shares 10,140 29,900 3,62,700 munotes.in
Page 37
Analysis o f Financial
Statements
37
Less: Non operating expenses Loss in sale of Bonds 9,100 Provision for Claim for Damages 10,400 (19,50 0) Net profit before tax 3,43,200 Less: taxation (1,24,800)
Net profit after tax 2,18,400
Illustration 03:
The following information regarding Speed Car Ltd, for the year ended 31
March, 2020 is given to you
Particulars Amount Rs.
Sales 37,50,000 Purchases 25,00,000 Opening Stock (1 -4-2014) 2,50,000 Closing Stock (31 -3-2015) 3,75,000 Return Inward 37,500 Carriage Outward 28,500 Carriage Inward 25,000 Return Outward 25,000 Salesman Salary 37,500 Advertising and Publicity 1,26,000 Salesman Traveling Allowance 3,750 Office Salary 2,00,000 Computer Repairs & Maintenance 42,000 Rent, Rates, Taxes 2,000 Printing & Stationery 200 Bad Debts 37,875 Purchases of Computer 20,000 Dividend on Shares (Cr.) 5,000 Staff Welfare Expenses 22,000 Interest (Dr.) 25,000 Loss on Sales of Shares 62,500
Rearrange above information in Vertical Form suitable for analysis.
munotes.in
Page 38
Management Accounting
38 Solution 03:
Vertical Revenue Statement for the year ending 31st March, 2015
Particulars Amount Amount
Gross Sales 37,50,000 Less: Return Inward (37,500) Net Sales 37,12,500 Less: Cost of Goods Sold Opening Stock 2,50,000 Purchases 25,00,000 Less: Return Outward (25,000) Carriage Inward 25,000 Less: Closing Stock (3,75,000) (23,75,000) Gross Profit 13,37,500 Less: Operating Expenses Administration Expenses Office salaries 2,00,000 Rent, rates and taxes 2,000 Staff Welfare 22,000 Printing & Stationery 200 Computer Repairs & Maintenance 42,000 2,66,200 Sellin g & Distribution Expenses Salaries to salesmen 37,500 Advertisement and Publicity 1,26,000 Traveling Allowances 3,750 Carriage Outward 28,500 Bad Debts 37,875 2,33,625 Total Operating Expenses (4,99,825) Operating Profit before I nterest 8,37,675 Less: Interest Paid (25,000) Net Profit after Interest 8,12,675 Net Non -operating Income Dividends on shares 5,000 Less: Non -Operating Expenses Loss on Sale -Shares (62,500) Net Non -Operating Income (57,500) Net Profit 7,55,175 munotes.in
Page 39
Analysis o f Financial
Statements
39 Illustration 04
Balance sheet of Tanu Ltd. For the year ended 31st March 2020.
(` in '000)
Liabilities Amount Assets Amount
4,200 Trade Investments 1,680 Dividend Equilisation
Reserve 588 Patent 252 General Reserve 924 Land and Building
(Cost) 2,688 Profit and Loss
Account 1,596 Plant and Machinery
(Cost) 5,460 6% Debentures 2,100 Cash and Bank Balance 739 Cash Credit 1,260 Closing Stock 2,604 Sundry Creditors 1,764 Sundry Debtors 1,865 Unpaid Dividend 84 Bills Re ceivable 252 Bills Payable 504 Short Term Deposit
with Customers 252 Provision for Tax 1,428 Underwriting
Commission 504 Provision for
Depreciation Preliminary Expenses 252 Land and Building 420 Plant and Machinery 1,680 16,548 16,548
Soluti on 04:
Vertical Balance sheet of Tanu Ltd. For the year ended 31st March 2020.
(` in ‘000)
Particulars Amount Amount Amount
SOURCES OF
FUND/EQUITY AND
LIABILITY
1 Shareholders’ Funds
Equity Share Capital 4,200
Reserves & Surplu s
Dividend Equalisation
Reserve 588 munotes.in
Page 40
Management Accounting
40 General Reserve 924
P & LA/ c 1,596 3,108
Less: Fictitious Assets
Underwriting Commission 504
Preliminary Expenses 252 (756)
Networth 6,552
2 Loan Funds
Secured Loans
6% Debentures 2,100
Total Sources of Funds 8,652
APPLICATION OF
FUNDS/ ASSETS
3 Fixed Assets
Tangible Fixed Assets
Land & Building 2,688
Less Provision for
Depreciation (420) 2,268
Plant & Machinery 5,460
Less Provision for
Depreciation (1,680) 3,780
Total Tangible Assets 6,048
Intangible Fixed Assets
Patents 252
Total Fixed Assets 6,300
4 INVESTMENTS
Trade Investments 1,680
5 CURRENT ASSETS,
LOANS & ADVANCES
Closing Stock 2,604
Liquid Assets
Sundry Debtors 1,865
Cash & Bank 739
Bills Receivable 252
Short Term Deposits 252
Total Current Assets 5,712 munotes.in
Page 41
Analysis o f Financial
Statements
41 Less: CURRENT
LIABILITIES &
PROVISIONS
Cash Credit 1,260
Quick Liabilities
Sundry Creditors 1,764
Unpaid Dividend 84
Bills Payable 504
Provision for Tax 1,428
Total Current Liabilities (5,040)
Working Capital 672
Total Application of Funds 8,652
Illustration 05
The following balances appear in the books of M/s. Krushna & Sons. As
on 31st March, 2020. You are required to prepare a Vertical Balance Sheet
for financial analysis .
Particulars Amount (Rs.)
Provision for Income Tax 26,000 Advance Tax 29,250 Marketable Investments 16,250 Profit & Loss Account - Credit Balance 26,000 Equity Share Capital 1,30,000 Bank Overdraft 29,250 Loan from Bank 56,875 Machinery 84,500 Preliminary Expenses 4,875 Sundry Debtors 29,250 General Reserve 22,750 Sundry Creditors 13,000 Stock 48,750 Building at Cost Less Depreciation 65,000 Cash and Bank 26,000
munotes.in
Page 42
Management Accounting
42 Solution 05:
in the books of M/s. Krushna & Sons Balance Sheet as at 31st Mar ch,
2014
Particulars Amount Amount Amount
A Sources of Funds
Shareholders Funds
Share Capital
Equity Share Capital 1,30,000
(+) Reserves & Surplus
Profit & Loss A/c 26,000
General Reserve 22,750 48,750
(-) Fictitious Assets
Preliminary Expenses (4,875)
Networth 1,73,875 B Borrowed Funds
Loan from Bank 56,875 Net Borrowings 2,30,750 Application of Funds
C Fixed Assets
Building (Less : D epreciation) 65,000
Machinery 84,500 1,49,500 D Investments NIL
E Working Capital
Current Assets
Advance Tax 29,250
Marketable Investments 16,250
Sundry Debtors 29,250
Stock 48,750
Cash at Bank 26,000
Total Current Assets (A) 1,49,500
Less : Current Liabilities
Provision for Income Tax 26,000
Bank Overdraft 29,250
Sundry Creditors 13,000
Total Current Liability (B) (68,250)
Working Cap ital (A -B) 81,250 Total 2,30,750 munotes.in
Page 43
Analysis o f Financial
Statements
43 Illustration 06
Following are the balances in the books of Hattrick Ltd., for the year
ended 31st March,2020.
Particulars Amount Rs.
11% Preference Share Capital 7,50,000 Administrative Expenses 4,50,000 Cash and Bank 37,500 Marketable Investments 3,00,000 Depreciation 2,62,500 Direct Labour 2,81,250 Equity Share Capital 11,25,000 Fixed Assets 52,50,000 Income Tax 6,63,750 Interest Paid 5,40,000 Inventories 22,50,000 Long Term Investments 1,50,000 Other Current Liabilities 75,000 Other Direct Expenses 1,80,000 Provision for Expenses 2,43,750 Raw Materials Consumed 29,25,000 Reserves and Surplus 2,62,500 Sales 60,00,000 Secured Term Loans 45,00,000 Selling Expenses 97,500 Trade Payables 12,56,250 Trade Receivables 13,87,500 Unsecured Term Loans 5,62,500
You are required to prepare vertical Income Statement for the year ended
31st March, 2020 and vertical Balance Sheet as on that date for analysis.
munotes.in
Page 44
Management Accounting
44 Solution 06:
Hattrick Ltd. Vertical I ncome Statement for the year ended 31st March
2020
Particulars Amount Amount
Sales 60,00,000 60,00,000 Less: Cost of Goods Sold a) Raw Material Consumed 29,25,000 b) Other Direct Expenses 1,80,000 c) Direct Labour 2,81,250 Cost of Goods Sold (33,86,250) Gross Profit 26,13,750 Less: Operating Expenses a) Administration Expenses 4,50,000 b) Depreciations 2,62,500 c) Selling Expenses 97,500 Total Operating Expenses (8,10,000) Operating Profit Before Interest 18,03,750 Less: Interest - Net Profit before tax 18,03,750 Less: Income Tax - Net Profit After Tax 18,03,750
munotes.in
Page 45
Analysis o f Financial
Statements
45 Particulars Amount Amount
SOURCES OF FUND/EQUITY
AND LIABILITY
1 Shareholders Funds
Equity Share Capital 11,25,000
11% Prof. Share Capital 7,50,000 18,75,000 Add : Reserve Supluses 2,62,500 P/LA/c (N.P.) 6,00,000 Share Holders Fund 27,37,500 2 Loan Funds
a) Secured Terms Loan 45,00,000
b) Unsecured Term Loan 5,62,500 50,62,500 Total Sou rces of Funds 78,00,000 APPLICATION OF FUNDS/
ASSETS
I. Fixed Assets 52,50,000 II. Investment 1,50,000 III. Working Capital
A Current Assets
Cash and Bank 37,500
Marketable Investmen t 3,00,000
Inventories 22,50,000
Trade Receivable 13,87,500 39,75,000 B. Less : Current Liabilities
Other Current Liabilities 75,000
Provision for Expenses 2,43,750
Trade Payabl es 12,56,250 (15,75,000) Working Capital (A - B) 24,00,000 Total Application of Funds 78,00,000
munotes.in
Page 46
Management Accounting
46 Illustration 07(Adjustment based sum)
The following figures are related to the Sara Ltd. for the year ended 31st
March, 2020.
Particulars Amount Particulars Amount
Sales 14,40,000 Staff Salaries 24,000 Net Block 6,00,000 Advertisement Expenses 36,000 Bills
Receivable 2,40,000 Warehouse Rent 18,000 Bills Payable 1,20,000 Depreciation on Plant 30,000 Cash Balance 51,000 Interest on Overdraft 18,000 Bank Overdraft 1,20,000 Share Capital 4,80,000 Purchases 10,80,000 Reserves (1 -04-2017) 2,19,000 Other
Administrative
Exp. 24,000 Stock (1 -04-2017) 2,16,00 0 Legal Charges
(Paid) 18,000 Lap Top Repairs 15,000 Direct Expenses 9,000
Other Information:
i) Make a provision for Income Tax of ` 1,44,000.
ii) Provide final dividend ` 48,000.
iii) Closing stock on 31st March, 2020 is ` 2,40,000.
You are required to prepare Balance Sheet and Income Statement in
vertical form suitable for analysis for the year ended 31" March, 2020.
munotes.in
Page 47
Analysis o f Financial
Statements
47 Solution 07:
Sara Ltd. Vertical Income Statement for the year ended 31st March 2020
Particulars Amount Amo unt
Sales 14,40,000 Less: Cost of Goods Sold Opening Stock 2,16,000 Add: Purchases 10,80,000 12,96,000 Less: Closing Stock (2,40,000) 10,56,000 Direct Expenses 9,000 Depreciation on Plant 30,000 Cost of Goods Sold (10,95,000) Gross Profit 3,45,000 Less: Administrative Expenses Legal Charges 18,000 Staff Salaries 24,000 Lap Top Repairs 15,000 Other Administrative Expenses 24,000 81,000 Less: Selling and Distribution Expenses Advertising 36,000 Warehouse Rent 18,000 54,000 Total Operating Expenses (1,35,000) Net Profit before Interest 2,10,000 Less: Interest on Overdraft (18,000) Net Profit before Tax 1,92,000 Less: Income Tax (1,44,000) Net Profit after Tax 48,000
munotes.in
Page 48
Management Accounting
48 Vertical Balance Sheet as on 31st March 2020
Particulars Amount Amount
SOURCES OF FUND/EQUITY AND
LIABILITY
1. Shareholders Funds Share Capital 4,80,000 Add: Reserve &Surpluses 2,19,000 6,99,000 Total Sources of Fund 6,99,000 APPLICAT ION OF FUNDS/ ASSETS I. Fixed Assets Net Block 6,00,000 A. Current Assets Bill Receivable 2,40,000 Closing Stock 2,40,000 Cash 51,000 5,31,000 B. Less: Current Liabilities Bills Payable 1,20,000 Bank Overdraft 1,20,000 Provision for Tax 1,44,000 Bills Payable 48,000 (4,32,000) Net Current Assets (A - B) 99,000 Total Application of Funds 6,99,000
Note: Contingent liability
Proposed dividend ` 48,000
Illustration 08:
From the following balances from the books of Account of Chika Ltd. for
the year ended 31 -03-2020 you are required to prepare vertical Income
statement and vertical Balance Sheet.
munotes.in
Page 49
Analysis o f Financial
Statements
49 Particulars Amount Particulars Amount Advertising 31,250 Sales Return 12,500 Interest Received 7,500 Bills Payable 53,750 Sales 15,00,000 10% Pref. Share Capital 1,87,500 Equity Share Capital 11,25,000 Debenture Interest 30,000 Salaries 2,25,000 Wages 2,31,250 Furniture and Fixture 2,50,000 Cash and Bank Balance 1,00,000 Outstanding Expenses 31,250 Debtors 2,50,000 P/LA/c (Credit Balance) 4,86,250 Opening Stock 62,500 Bad Debts 6,250 General Reserve 63,750 Purchases 7,50,000 Creditors 1,25,000 Machinery 9,37,500 8% Debentures 5,00,000 Preliminary Expenses 12,500 Income Tax 12,500 Closing Stock on 31 -03-
2020 1,87,500 Land & Building 8,75,000
Solution 08
Vertical Income Statement for the year ended 31st March, 2020
Particulars Amount Amount
Sales 15,00,000 Less: Returns (12,500) Net Sales 14,87,500 Less: Cost of Goods Sold Opening Stock 62,500 Purchases 7,50,000 Wages 2,31,250 Less: Closing Stock (1,87,500) 8,56,250 GROSS PROFIT 6,31,250 Less: OPERATING EXPENSES a) Administration Expenses Salaries 2,25,000 b) Selling & Distribution Expenses Advertising 31,250 Bad Debts 6,250 37,500 Total Operating Expenses (2,62,500) munotes.in
Page 50
Management Accounting
50 Operating Profit Before Interest 3,68,750 Less: Interest on Debentures (WN) (40,000) Net Profit After Interest 3,28,750 Add: Non -operating Income Interest received 7,500 Net Profit Before Tax 3,36,250 Less: Income Tax (12,500) Net Profit After Tax 3,23,750
Vertical Balance Sheet as on 31st March 2020
Particulars Amount Amount
SOURCES OF FUND/EQUITY AND
LIABILITY
1 Shareholders Funds
A Share Capital Equity Share Capital 11,25,000 10% Pref. Share Capital 1,87,500 13,12,500 B Reserve & Surplus General Reserve 63,750 Profit & Loss A/c - Cr. Balance 4,86,250 5,50,000 C Less: Fictitious Assets Preliminary Expenses (12,500) Own Fund/Net Worth 18,50,000 2 Loan Funds 8% Debentures 5,00,000 Add: Interest Accrued 40,000 5,40,000 Total Sources of Funds 23,90,000 APPLICATION OF FUNDS 1 Fixed Assets Tangible Assets Land & Buildings 8,75,000 Machinery 9,37,500 Furniture & Fixtures 2,50,000 20,62,500 munotes.in
Page 51
Analysis o f Financial
Statements
51 2 Working Capital A) Current Assets a) Quick Assets Cash and Bank 1,00,000 Debtors 2,50,000 b) Non -Quick Assets Inventory 1,87,500 Total Current Assets (A) 5,37,500 B. Less: Current Liabilities a) Quick Liabilities Creditors 1,25,000 Bills Payable 53,750 Outstanding Expenses 31,250 Quick / Current Liabilities (2,10,000) Working Capital (A - B) 3,27,500 Total 23,90,000
W.N. 1.
Intere st on Debentures: 5,00,000 x 8% = 40,000
Illustration 09:
The following balances are extracted from the financial statements of
Nano Products Ltd.
Balances as on 31st March, 2020
Particulars Amount Particulars Amount
Bank Loan 4,00,000 Preliminary Expens es
(Not yet w/0) 50,000 9% Preference Share
Capital (R 100) 10,00,000 Stock (Closing) 8,00,000 Investments 5,00,000 10% Debentures 10,00,000 Trade Receivables 8,00,000 Bills Payable 2,00,000 Trade Payables 6,00,000 Land and Building 20,00,000 Goodwill 5,00,000 Equity Share Capital
(R 10 each) 20,00,000 Bills Receivable 5,50,000 Bank Overdraft 1,00,000 munotes.in
Page 52
Management Accounting
52 Plant and Machinery 12,00,000 Cash and Bank
Balance 1,50,000 Profit and Loss A/c
(Cr.) 8,00,000 Furniture 8,00,000 Unclaimed Dividen d 40,000 General Reserve 8,50,000 Prepaid Expenses 1,00,000 Advance Tax 4,00,000 Provision for Taxation 6,60,000 Cash Credit 2,00,000
You are required to prepare Balance Sheet in vertical form suitable for
analysis.
Vertical Balance Sheet of Nano Products Ltd.
Particulars Amount Amount Amount
SOURCES OF FUNDS
1 Owner's Funds A. Capital Equity Share Capital (R 10 each) 20,00,000 9% Preference Share Capital (R
100) 10,00,000 30,00,000 B. Reserves and Surplus General Reserve 8,50,000 Profit and Loss A/c (Cr.) 8,00,000 16,50,000 Less : Preliminary Expenses (not
w/o) (50,000) Own Funds or Net Worth 46,00,000 II Loan Funds 10% Debentures 10,00,000 Bank Loan 4,00,000 14,00,000 Capital Employed [1 + 2] 60,00,000 APPLICATION OF FUNDS I Fixed Assets A Tangible Land and building 20,00,000 Plant and Machinery 12,00,000 Furniture 8,00,000 Net Tangible Assets 40,00,000 munotes.in
Page 53
Analysis o f Financial
Statements
53 B. Intangible Goodwill 5,00,000 45,00,000 Total Fixed Assets II Investments 5,00,000 III Working Capital A Current Assets Quick Assets Cash and Bank 1,50,000 Trade Receivables 8,00,000 Bills Receivable 5,50,000 Total Liquid Assets 15,00,000 Non-Quick Assets Stock (closing) 8,00,000 Prepaid expenses 1,00,000 Advance tax 4,00,000 Total Illiquid Assets 13,00,000 Total Current Assets (A) 28,00,000 B. Less: Current Liabilities Quick Liabilities Trade Payables 6,00,000 Bills Payable 2,00,000 Provision for Taxation 6,60,000 Unclaimed Dividend 40,000 Total Quick Liabilities 15,00,000 Non-Quick Liabilities Bank Overdraft 1,00,000 Cash Credit 2,00,000 Total Non -Quick Liabilities 3,00,000 Total Current Liabilities (B) (18,00,000) Working Capital (A - B) 10,00,000 Capital Employed [1 + 2] 60,00,000
munotes.in
Page 54
Management Accounting
54 Illustration 10:
Balances as on 31st March, 2020
Liab ilities Amount Assets Amount
Bills Payable 32,500 Fixed Assets 1,62,500 Sundry Creditors 65,000 Sundry Debtors 65,000 Debentures 1,30,000 Bank Balance 32,500 Reserves 65,000 Inventory 1,62,500 Equity Share Capital 65,000 Preference Share Capital 65,000 4,22,500 4,22,500
Profit and Loss A/c for the year ended 31 -3-2020
Particulars Amount Particulars Amount
To Opening Inventories 97,500 By Sales 6,50,000
To Purchases 1,95,000 By Closing Inventories 1,62,500
To Manufacturing Expenses 65,000 By Profit on Sale of Shares 32,500
To Direct Wages 1,30,000 To Administration Expenses 32,500 To Selling Expenses 32,500 To Loss on Sale of Asset 35,750 To Interest on Debentures 6,500 To Net Profit 2,50,250 8,45,000 8,45,000
Solution 10:
In the Books of Srivalli Ltd.
Vertical Income Statement for the Year Ended on 31 -3-2020
Particulars Amount Amount Amount
1 Net Sales 6,50,000 2 Less: Cost of Goods Sold : Opening Stock 97,500 Add : Purchases 1,95,000 Manufac turing Expenses 65,000 Direct Wages 1,30,000 munotes.in
Page 55
Analysis o f Financial
Statements
55 Less : Closing Stock (1,62,500) Cost of Goods Sold (3,25,000) Gross Profit (1 - 2) 3,25,000 3 Less : Operating Expenses Administration Expenses 32,500 Selling and Dist ribution
Expenses 32,500 (65,000) 4 Operating Profit 2,60,000 5 Less : Interest Paid Interest on Debentures (6,500) 6 Net Profit After Interest 2,53,500 7 Add: Non -operating Income Profit on Sale of Shares 32,500 8 Less: Non -operating
Expenses Loss on Sale of Asset (35,750) 9 Net Profit befor Tax 2,50,250
Balance Sheet as on 31st March, 2020
Particulars Amount Amount Amount
SOURCES OF FUNDS
1 Owner's Funds
A Capital Equit y Share Capital 65,000 Preference Share Capital 65,000 1,30,000 B Reserves and Surplus General Reserve 65,000 Own Funds / Net Worth 1,95,000 2 Loan Funds Debentures or Bonds 1,30,000 Capital Employed 3,25, 000 APPLICATION OF FUNDS 1 Fixed Assets 1,62,500 2 Working Capital munotes.in
Page 56
Management Accounting
56 A Current Assets Cash and Bank 32,500 Debtors 65,000 Quick Assets 97,500 Stock 1,62,500 Total Current Assets (A) 2,60,000 B Le ss : Current Liabilities Creditors 65,000 Bills Payable 32,500 Total Current/Quick
Liabilities (B) (97,500) Working Capital (A - B) 1,62,500 Capital Employed 3,25,000
Exercise:
True and False
1. Balance sheet shows r esult of activities F
2. Subscribed capital is the capital subscribed by the investors. T
3. Goodwill is shown under fictitious assets. F
4. Working capital is equal to capital employed. F
5. All current liabilities are quick liabilities. T
6. Fictitious a ssets can be converted in cash. F
7. For a petrol company, stock of petrol is liquid asset. F
8. Owed funds comes under internal source of Finance. T
9. Unclaimed Dividends are classified as Quick liabilities in vertical
financial statements. F
10. Advance to suppliers for stock classified as current assets in vertical
statements. T
SHORT NOTES :
1. Financial statement’s objectives
2. Users of financial statements
3. Own funds munotes.in
Page 57
Analysis o f Financial
Statements
57 4. Quick liabilities
5. Working capital
6. Limitations of financial statements
7. Cost of goods sold
8. Operating expenses.
9. Operating profit
Unsolved Illustration
Problem 01:
Following Trial Balance was extracted from the books of M/s. Aisha Pvt.
Limited for the year ended 31st Dec 2020.
Particulars Amount Particulars Amount
Land an d Building 1,35,000 Sundry Creditors 45,900
Plant and Machinery 2,48,400 Reserves 22,500
Furniture and fittings 5,400 Profit and Loss A/c - 1/1/2020 37,950
Preliminary Expenses 7,350 Creditors for goods 16,770
Calls in Arrears (20per
share) 3,750 Retur n Outwards 7,500
Cash in hand 750 Sales 4,61,700
10% Govt. bonds
(F.V.10,000) 14,820 Share Capital 3,00,000
Bills Receivable 34,500 8% Debentures 1,50,000
Delivery Van 4,500 Goodwill 24,000 Sundry Debtors 31,200 Purchases 3,60,000 Free samp le distributed 3,810 Sales return 10,500 Legal Fees 1,500 Carriage Inwards 5,550 Wages 34,800 Rent Rates and
Insurance 4,350
Stock 71,400 Prepaid Expenses 4,200 Require to Furniture 2,250 Repairs to plant and
Machinery 1,290
Inteim Dividend Paid 30,000 Salaries 3,000 10,42,320 10,42,320 munotes.in
Page 58
Management Accounting
58 Additional Notes:
You are requied to prepare Profit and Loss A/c and the Balance Sheet in
Vertical Format as per Management Accounting after taking into
consideration the following stat ements.
(1) Charge 5% depreciation on Plant and Machinery, 7.5% on Furniture
and Fittings and 20% on delivery van.
(2) Closing Stock was Rs.81,300 as on 31st March,2020
(3) The directors have proposed a final dividend of 6% on paid up share
capital.
(4) Interest on Govt. Bonds and Debentures in due for the year 2020.
Problem 02:
Following information regarding M/s. Savita Ltd. for the year ended 31st
March, 2020 is given.
Particular Amount Particular Amount
Sales 15,00,000 Return Inwards 37,500 Opening stock of Raw
mate rial 82,500 Purchases of Raw
material 3,75,000 Staff Salaries 1,12,500 Commission
Allowed 3,750 Salesmen Salaries 18,750 Proposed Dividend 1,12,500 Bank Charges 7,500 Exhibition
Expenses 26,250 Freight Inwards 30,000 Repairs of
Computer 3,750 Office R ent & Insurance 33,750 Closing stock of
work -in-progress 30,000 Debenture Interest 37,500 Wages 52,500 Loss on sale of
machinery 7,500 Purchases of
Finished goods 60,000 Printing & Stationery 3,750 Interest received on
Investment 30,000 Direct Expenses 37,500 Provision for
Income Tax 1,50,000 Profit & Loss A/c
(Credit) 1,80,000 Closing stock of
Raw Material 60,000 Depreciation on patterns 7,500 Sale of scrap 15,000 Depreciation on
machinery 15,000 munotes.in
Page 59
Analysis o f Financial
Statements
59 You are required to Rearrange the above informatio n and prepare vertical
income statement, suitable for analysis.
Problem 03:
The following balances appear in the books of M/s. Bhavana Ltd. for the
year ended 31st March, 2020, you are required to prepare a Revenue
statement in vertical form
Dr. Cr.
Particular Amount Particular Amount
Opening Stock 1,06,250 Sales Return 42,500 Net Profit b/f from P.Y. 1,27,500 Profit on Sale of Investment 10,625 Office Rent 10,625 Loss by Fire 10,625 Carriage Inward 42,500 Closing Stock 85,000 General Reserve 85,000 Purchases 4,25,000 Wages 1,53,000 Postage and Telegram 10,625 Octroi 10,625 Provision for Tax 63,750 Office Staff Salaries 85,000 Sales 13,17,500 Audit Fees 42,500 Dividend on Shares Held 53,125 Advertisement 53,125 Carriage Outward 10,625 Finance Expenses 53,125 Warehouse Expenses 10,625 Loss on Sale of Asset 63,750 Import Duty 6,375 Depreciation on: Proposed Dividend 74,375 Plant and Machinery 31,875
Furniture 34,000
Delivery Van 29,750
Problem 04:
Following is the Profit and Loss Account of Gehna Limited for the year
ended 31st March, 2011.
Particular ` ` Particular ` `
To Opening Stock 7,91,000 By Sales To Purchase 10,17,000 Cash 5,87,600 To Wages 1,69,500 Credit 16,95,000 To Factory
Expenses
3,95,500
22,82,600
To Office Salaries 28,250 Less:
Returns &
Allowance (22,600) 22,60,000
To Office Rent 44,070 To Postage &
Telegram 5,650 munotes.in
Page 60
Management Accounting
60
To Directors Fees 6,780 By Closing
Stock 6,78,000
To Salesman
Salaries 13,560 By
Dividend
on
Investment 11,300
To Advertising 20,340 By Profit
on sale of
Furniture 22,600
To Delivery
Expenses 22,600
To Debenture
Interest 22,600
To Depreciation On Office
Furniture 11,300
On Plant 33,900 On Delivery V an 22,600 67,800 To Loss on Sale
of Van 5,650
To Income Tax 1,97,750 To Net Profit 1,63,850 29,71,900 29,71,900
You are required to prepare Vertical Income Statement for purpose of
analysis.
Problem 05:
The following balances are ex tracted from the financial statements of
Sameer Products Ltd.
Balance Sheet as on 31st March, 2020
Liabilities Amount Assets Amount
Bank Loan 1,50,000 Preliminary Expenses 18,750
(10% preference Share) (Net yet written off) Capital (R 100) 3,75,000 Stock (closing) 3,00,000
Investments 1,87,500 10% Debentures 3,75,000
Trade Receivables 3,00,000 Bills Payable 75,000
Trade Payables 2,25,000 Land & Building 7,50,000
Goodwill 1,87,500 Equity Share Capital « 10 each) 7,50,000
Bills Receivable 2,06,250 Bank Overdraft 1,12,500
Plant & Machinery 4,50,000 Cash & Bank Balance 56,250
Profit & Loss A/c (Cr.) 3,00,000 Furniture 3,00,000
Unclaimed Dividend 15,000 General Reserve 3,18,750
Prepaid Expenses 37,500 Advance Tax 1,50,000
Provision for Taxation 1,72,500 Proposed Dividend 75,000
munotes.in
Page 61
Analysis o f Financial
Statements
61 You are required to Prepare Balance Sheet in vertical form suitable for
analysis.
Problem 06:
From the information given below prepare a Balance Sheet in a vertical
form suitable for analysis.
Particulars Amount ( `) Curren t Account with IDFC Bank 60,000 Land and Building 9,60,000 Advance Payments 74,400 Stock 3,27,600 Creditors 4,87,200 Debtors 6,27,600 Bills Receivable 25,200 Plant and Machinery 6,52,800 8% Debentures 3,00,000 Loan from a Director 62,400 Equity S hare Capital 12,00,000 Profit and Loss Account 2,60,400 Trade Investments 24,000 Proposed Dividend 1,03,200 Advance Tax 1,20,000 Provision for Taxation 3,16,800 Bills Payable 21,600 General Reserve 1,20,000
Problem 07:
The balance sheet of Diana L td. is given for the year 2020. Convert them
into vertical balance sheet.
munotes.in
Page 62
Management Accounting
62 Balance Sheet as on 31st March, 2004
Liabilities Amount Assets Amount
Equity Shares 4,39,300 Building 4,60,000 Capital Reserve 1,61,000 Plant and Machinery 1,26,500 Revenue Reserve
and Surplus 69,000 Furniture 46,000 Trade Creditors 92,000 Freehold Property 27,600 Bills Payable 1,38,000 Goodwill 69,000 Bank Overdraft 1,84,000 Cash Balance 46,000 Provisions 46,000 Sundry Debtors 80,500 Inventories 1,31,100 Investmen t (Temporary) 96,600 Bills Receivable 46,000 11,29,300 11,29,300
Problem 08:
Following is the Trial balance of M/s. Vanraj Ltd. as on 31" March, 2020.
Trial Balance
Particulars Amount ( `) Amount
(`)
Sales - 2,40,000 Fixed Assets 1,20,000 - Bills Receivable & Bills Payable 24,000 18,000 Cash and Bank Balance 6,000 - Opening Stock 12,000 - Bank overdraft - 12,000 Purchases 1,50,000 - Administrative Expenses 3,600 - Legal Expenses 2,400 - Salaries 6,000 - Advertisement 4,800 - Warehouse Ren t 2,400 - Depreciation on machinery 6,000 - Interest on Bank overdraft 1,200 - munotes.in
Page 63
Analysis o f Financial
Statements
63 Equity share capital - 72,000 General Reserve - 12,000 Lap Top Repairs 2,400 - Direct Expenses 2,400 - Investment 4,800 - Debtors and creditors 12,000 6,000 Total 3,60, 000 3,60,000
Additional Information:
Closing stock on 31st March 2020 was valued at Rs.6,000
Cash sales were 1/3 of credit sales.
You are required to prepare vertical income statement for the year ended
31st March 2020 and
Vertical balance sheet as on th at date for financial analysis.
Problem 09:
From the following Trial Balance of Urmila Ltd. as on 31st March, 2020.
Particulars Amount Rs. Amount Rs.
Equity Share Capital - 25,74,000 Plant and Machinery 28,08,000 - Sales - 86,58,000 Purchases 39,78,000 - Sundry Debtors 21,06,000 - Sundry Creditors - 19,89,000 Wages 8,19,000 - Opening Stock 2,80,800 - Salaries 4,21,200 - Advertisement 1,75,500 - Telephone Charges 81,900 - Furniture 4,68,000 - Investment (Long Term) 11,70,000 - Interest Received - 93,600 Loss on Sale of Furniture 46,800 - Commission 1,40,400 - munotes.in
Page 64
Management Accounting
64 Profit and Loss A/c - 2,80,800 Interim Dividend 1,17,000 - General Reserve - 2,34,000 Cash At Bank 7,48,800 - Bills Receivable 4,68,000 - 1,38,29,400 1,38,29,400
Prepare vertical Revenue statement for the year ended 31st March, 2020
and vertical Balance sheet as on that date after making the necessary
adjustments.
munotes.in
Page 65
65 3
COMPARATIVE STATEMENTS,
COMMON SIZE STATEMENTS & TREND
ANALYSIS COMPARATIVE BALANCE
SHEET
Unit Structure :
3.0 Learning Objectives
3.1 Introduction to Comparative Statement
3.0 LEARNING OBJECTIVES
After studying this unit, the learners will be able to:
Analyses the financial statements.
Understand the limitations of financial statements.
Solve the practical problems of analyses.
3.1 INTRODUCTION TO COMPARATIVE
STATEMENT
A comparative balance sheet is a statement that shows the financial
position of an organization over different periods for which comparison is
made or required. The financial position is compared with 2 or more
periods to portray the trend, direction of change, analyse and take suitable
actions.
Advantages of Comparative Balance Sheet
1. Easy Comparison : It is easy to compare the figures for the current
year with the previous years as it gives both the years’ figures in one
place. It also help in analysing the data of two or more companies or
subsidiaries of one company.
2. Indicates Trend : It shows the company’s trend by putting several
years’ financial figures at one place like an Increase or decrease in
current assets, current liabilities, profit, loans, reserves & surplus, or
any other items that help investors make decision.
3. Ratio Analysi s: Financial ratio is obtained from the balance sheet
items. The comparative balance sheet’s financial ratio of two years of
two companies can be derived to analyse the company’s financial
status. For example, the current ratio is obtained with the help of
current assets and current liabilities. If the current ratio of the current munotes.in
Page 66
Management Accounting
66 year is more than the last year, it shows the company’s liabilities have
been reduced from last year against the existing assets.
4. Comparison with Industry Performance : Helps to co mpare one
company’s performance with another company or the industry’s
average performance.
5. Helps in Forecasting : It also helps in forecasting because it provides
the past trend of the company based on which the management can
forecast the company’s financ ial position.
Limitation/Disadvantages :
1. 1.Uniformity in Principles and Policy : If two companies have
adopted different policies and accounting principles while preparing the
balance sheet ,Comparative balance sheet will not give the correct
comparison.
2. Inflationary Effect is not Considered : The inflation effect is not
considered, while preparing the comparative balance sheet. Therefore,
only a comparison with other balance sheets will not give the correct
picture of the company’s trend.
3. Market Situation an d Political Conditions not Considered : While
preparing the comparative balance sheet, marketing conditions,
political environment, or any factor affecting the company’s business
are not considered. Therefore, it does not give the correct picture every
time. For example, suppose the overall economy is going down in the
current year, or the political condition is unstable compared to last year.
In that case, it will decrease the demand, and general company sales
will experience de -growth, not because of its p erformance but due to
external factors.
4. Misleading Information : Sometimes, it gives misleading information,
thus, misguiding the person who reads the comparative balance sheet.
Illustration 01: Following is the Balance Sheet of M/s Rohan Ltd.
Liabilities 2019 ` 2020 ` Assets 2019 ` 2020 `
Share
Capital 5,55,000 5,85,000 Fixed Assets 5,70,000 5,25,000 Reserve and
Surplus 1,50,000 2,10,000 Investment 1,35,000 1,80,000 Current
Liabilities 1,50,000 1,98,600 Current Assets 2,70,000 4,35,000 13 %
Debentures 1,20,000 1,46,400
9,75,000 11,40,000 9,75,000 11,40,000
Prepare comparative balance sheet from the above in vertical form. munotes.in
Page 67
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
67 Solution 01
In the books of M/s Rohan Ltd.
Comparative Balance Sheet
Particulars 2019 2020 Absolute
Increase/
Decrease %
Increase/
Decrease
I SOURCES OF FUNDS 1. Owner's Funds Capital Equity Share Capital 5,55,000 5,85,000 30,000 5.41
Reserves and Surplus General Reserve 1,50,000 2,10,000 60,000 40.00
Own Funds or Net Worth 7,05,000 7,95,000 90,000 12.77
2. Loan Funds 13% Debentures 1,20,000 1,46,400 26,400 22.00
Capital Employed (1 + 2) 8,25,000 9,41,400 1,16,400 14.11
ll. APPLICATION OF FUNDS 1 Fixed Assets 5,70,000 5,25,000 (45,000) (7.89)
2 Investments 1,35,000 1,80, 000 45,000 32B.33
3 Working Capital A Current Assets 2,70,000 4,35,000 1,65,000 61.11
B Less: Current Liabilities 1,50,000 1,98,600 48,600 32.40
Working Capital (A - B) 1,20,000 2,36,400 1,16,400 97.00
Capital Employed (1 + 2+3) 8,25,000 9,41,400 1,16,400 14.11
Illustration 02:
Following are the Balance Sheet of Helly Ltd. as on 31st March 2019 and
2020
Liabilities 2020 ` 2019 ` Assets 2020 ` 2019 `
Equity Share
Capital 1,68,000 1,68,000 Fixed Assets
2,16,000
1,92,000
11 % Preference
share capital 1,44,000 1,20,000 Investment
96,000
1,20,000
General Reserve 57,600 52,800 Current Assets
76,800
1,36,800
10 %
Debentures - 72,000 Preliminary Expenses
19,200
24,000
Current
Liabilities 38,400 60,000
Total 4,08,000 4,72,800 Total 4,08,000
4,72,800 munotes.in
Page 68
Management Accounting
68 Solution 02:
Particulars 2019 2020 Absolute
Increase/
Decrease %
Increase/
Decrease
I. SOURCES OF FUNDS 1. Shareholder's Fund (a) Equity Share Capital 1,68,000 1,68,000 - -
(b) 1 1% Preference Share
Capital 1,20,000 1,44,000 24,000 20.00 2,88,000 3,12,000 24,000 8.33
(c) Reserve and Surplus: General Reserve 52,800 57,600 4,800 9.09
Owners Funds 3,40,800 3,69,600 28,800 8.45
Less: Preliminary Expenses 24,000 19,200 (4,800) (20.00)
Net Worth 3,16,800 3,50,400 33,600 10.61
2. Loan Fund (a) Secured Loans 10% Debenture 72,000 0 (72,000) (100.00)
TOTAL FUNDS
AVAILABLE (A) 3,88,800 3,50,400 (38,400) (9.88)
B APPLICATION OF
FUNDS:
1. Fixed Assets 1,92,000 2,16,0 00 24,000 12.50
2. Investments 1,20,000 96,000 (24,000) (20.00)
2B. Working Capital 3,12,000 3,12,000 0 0
(i) Current Assets 1,36,800 76,800 (60,000) (42B.86)
(ii) Current Liabilities 60,000 38,400 (21,600) (36.00)
Working Capital (i - ii) 76,800 38,400 (38,400) (50.00)
APPLICATION OF FUNDS
(B)
(a + b + c) 3,88,800 3,50,400 (38,400) (9.88)
Illustration 03:
Following are the Profit and Loss Accounts of M/s Pari Enterprises for the
years ended 31st
Profit & Loss Account for the year ended 31st March 2 019 and 2020
Particular 2019 ` 2020 ` Particular 2019 ` 2020 `
To Cost of sales 2,70,000 4,05,000 By Sales 4,05,000 5,40,000
To Salaries 27,000 27,000 By Interest 13,500 27,000
To Office Rent 13,500 20,250 To Advertisement Expenses 40,500 16,200 To Travelling Expenses 20,250 40,500 To Income Tax 6,750 13,500 To Net Profit c/d 40,500 44,550 Total 4,18,500 5,67,000 Total 4,18,500 5,67,000 munotes.in
Page 69
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
69 Prepare a comparative Income statement from the above, in vertical form.
Solution 03:
In the books of Helly Ltd.
Comparative Balance Sheet for the year ended:
Particulars 2019 2020 Absolute
Increase/
Decrease %
Increase/
Decrease I SOURCES OF FUNDS 1 Shareholder's Fund (a) Equity Share Capital 1,68,000 1,68,000 - -
(b) 11% Preference
Share Capital 1,20,000 1,44,000 24,000 20.00 2,88,000 3,12,000 24,000 8.33
(c) Reserve and Surplus: General Reserve 52,800 57,600 4,800 9.09
Owners Funds 3,40,800 3,69,600 28,800 8.45
Less: Preliminary
Expenses 24,000 19,200 (4,800) (20.00)
Net Worth 3,16,800 3,50,400 33,600 10.61
2 Loan Fund (a) Secured Loans 10% Debenture 72,000 0 (72,000) (100.00)
TOTAL FUNDS
AVAILABLE (A) 3,88,800 3,50,400 (38,400) (9.88)
B APPLICATION OF
FUNDS:
(a) Fixed Assets 1,92,000 2,16,000 24,000 12.50
(b) Investments 1,20,000 96,000 (24,000) (20.00)
(c) Working Capital 3,12,000 3,12,000 0 0
(i) Current Assets 1,36,800 76,800 (60,000) (42B.86)
(il) Current Liabilities 60,000 38,400 (21,600) (36.00)
Working Capital (i - ii) 76,800 38,400 (38,400) (50.00)
APPLICATION OF
FUNDS (B) (a + b + c) 3,88,800 3,50,400 (38,400) (9.88)
munotes.in
Page 70
Management Accounting
70 Illustration 04:
From the following Profit and Loss Account prepare a vertical
comparative income statement of Ritesh Ltd.
Particular 2017 2018
Opening Stock of Raw Materials 1,60,000 2,40,000 Purchases 6,00,000 16,00,000 Wages 2,00,000 3,20,000 Factory Expenses 1,60,000 2,00,000 Closing Stock of Raw Materials 2,40,000 6,00,000 Salaries 20,000 24,000 Rent 16,000 20,000 Carriage Outward 24,000 20,000 Delivery Expenses 12,000 6,000 Advertisement Expenses 30,000 20,000 Interest Paid 2,000 6,000 Loss on Sale of Asset 26,000 20,000 Tax Paid 76,000 56,000 Sales 12,00,000 20,00,000 Interest Received on Investment 1,000 1,000
Solution 04:
Comparative Vertical Profit & Loss S tatement
Particulars as on
2017 ` as on
2018 ` Absolute
Increase/
Decrease %
Increase/
Decrease 1 Net Sales 12,00,000 20,00,000 8,00,000 66.67 2 Less: Cost of Goods
Sold Opening Stock 1,60,000 2,40,000 80,000 50.00 Purchases 6,00,000 16,00,000 10,00,000 166.67 Factory Expenses 1,60,000 2,00,000 40,000 25.00 Wages 2,00,000 3,20,000 1,20,000 60.00 Less: Closing Stock (2,40,000) (6,00,000) (3,60,000) 150.00 8,80,000 17,60,000 8,80,000 100.00 3 Gross Profit 3,20,000 2,40,000 (80,000) (25.00) munotes.in
Page 71
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
71
4 Operating Expenses I. Administration
Expenses
Salaries 20,000 24,000 4,000 20.00 Rent 16,000 20,000 4,000 25.00 II. Selling and
Distribution Expenses Carriage Outward 24,000 20,000 (4,000) (16.67) Delivery Expenses 12,000 6,000 (6,000) (50.00) Advertisement
Expenses 30,000 20,000 (10,000) (32B.33) 5 Add: Operating
Expenses 1,02,000 90,000 (12,000) (11.76) 6 Profit Before
Interest 2,18,000 1,50,000 (68,000) (31.19) 7 Less: Interest Paid 2,000 6,000 4,000 200.00 8 Net Profit After
Inter est 2,16,000 1,44,000 (72,000) (32B.33) 9 Non -Operating
Income
Interest received on
Investments 1,000 1,000 - - 10 Less: Non -
Operating Expenses Loss on Sale of Asset 26,000 20,000 (6,000) (22B.08) 11 Net Profit Before
Tax 1,91,000 1,25,000 (66,000) (34.55) 12 Income Tax 76,000 56,000 (20,000) (26.32) 13 Profit After Tax 1,15,000 69,000 (46,000) (40.00)
munotes.in
Page 72
Management Accounting
72 Illustration 05
CIRCLE and SQUARE are carrying on partnership business. Their
position as on 31st March 2020 and 2019 is as follows:
(i) The Summarised Balance Sheet
Liabilities 2020 ` 2019 ` Assets 2020 ` 2019 `
Capital
Accounts 1,21,975 1,01,150 Fixed Assets 89,250 74,375
Bank Loans 23,800 17,850 Investments 5,950 2,975
Sundry
Creditors 65,450 59,500 Stock in Trade 35,700 29,750 Sundry Debtors 53,550 44,625
Loans and
Advances 23,800 23,800 Cash and Bank 2,975 2,975
Total 2,11,225 1,78,500 Total 2,11,225 1,78,500
ii) Summarised Income Statement
Particulars 2020 ` 2019 `
Net Sales 71,400 65,450 Less: Cost of sales 53,550 50,575 Gross Margin 17,850 14,875 Operating Expenses 14,875 11,900 Net Profit before Tax 2,975 2,975
Solution 05:
Comparative Balance Sheet
Particulars as on 2019
` as on 2020
` Absolute
Increase/
Decrease %
Increase/
Decrease
I S OURCES OF
FUNDS
1 Owner's Funds 1,01,150 1,21,975 20,825 20.59 2 Loan Funds 17,850 23,800 5,950 32B.33 Total Funds Available
(1 + 2) 1,19,000 1,45,775 26,775 22.50 II APPLICATION OF
FUNDS 1 Fixed Assets 74,375 89,250 14,875 20.00 2 Investment s 2,975 5,950 2,975 100.00 3 Working Capital (A) Current Assets munotes.in
Page 73
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
73 Stock 29,750 35,700 5,950 20.00 Debtors 44,625 53,550 8,925 20.00 Loans & Advances 23,800 23,800 - - Cash/Bank 2,975 2,975 - - (A) 1,01,150 1,16,025 14,875 14.71 (B) Less: Curr ent
Liabilities Creditors 59,500 65,450 5,950 10.00 (B) 59,500 65,450 5,950 10.00 (A - B) 41,650 50,575 8,925 21.43 Total Funds Employed
(1 + 2 + 3) 1,19,000 1,45,775 26,775 22.50
Comparative Income Statement
Particulars as on 2019
` as on 2 020
` Absolute
Increase/
Decrease %
Increase/
Decrease
1 Sales 65,450 71,400 5,950 9.09 2 Less: Cost of Sales 50,575 53,550 2,975 5.88 3 Gross Profit (1 - 2) 14,875 17,850 2,975 20.00 4 Less: Operating
Expenses 11,900 14,875 2,975 25.00 5 Net Profit ( 3 - 4) 2,975 2,975 - -
Illustration 06:
Complete the following Comparative Statement of Barkha Products by
ascertaining the missing figures.
Particular Year
Ended
31-03-16 ` Year
Ended
31-03-17 ` Increase/
(Decrease) ` % Increase/
(Decrease)
Gross Profi t ? ? ? ? Less:
Expenses -
Administrative 1,12,000 ? 22,400 20.00 - Selling 56,000 67,200 11,200 ? - Financial ? 28,000 5,600 25.00 Operating Net
Profit ? 2,24,000 1,12,000 100.00
munotes.in
Page 74
Management Accounting
74 Solution 06:
Comparative Statement of Barkha Product
Parti cular Year
Ended
31-03-16 ` Year Ended
31-03-17 ` Increase/
(Decrease) ` %
Increase/
(Decrease)
Gross Profit 3,02,4006 4,53,6005 1,51,2007 50.00 Less: Expenses - Administrative 1,12,000 1,34,4001 22,400 20.00 - Selling 56,000 67,200 11,200 20.002 - Financial 22,4003 28,000 5,600 25.00 Operating Net
Profit 1,12,0004 2,24,000 1,12,000 100.00
Working Note:
1. 1,12,000 + 22,400 = 1,34,400
2. 11,200 ÷ 56,000 x 100 = 20.00
3. 5,600 ÷ 25% or 28,000 – 5,600 = 22,400
4. 1,12,000 ÷ 100% or 2,24,000 - 1,12,000 = 1,12, 000
5. 2,24,000 + (1,34,400+67,200+28,000) = 4,53,600
6. 1,12,0004 + (1,12,000+56,000+22,400) = 3,02,400
7. 4,53,600 – 3,02,400 = 1,51,200
8. 1,51,200 ÷ 3,02,400 = 50.00%
Illustration 07:
Particular 2019 ` 2020 ` Absolute
Increase/
(Decrease) %
Increase/
(Decrease)
Sales ? ? (+) 4,60,000 (+) 25.00% Cost of Goods Sold Opening Stock 92,000 1,38,000 ? ? Purchases ? ? (+) 2,30,000 (+) 20.00% Wages 2,76,000 5,06,000 ? ? Less: Closing Stock ? 1,84,000 ? ? Cost of Goods Sold ? ? ? ? Gross Profit (A - B) ? ? ? ? munotes.in
Page 75
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
75
Operating Expenses (a) Administrative ? ? (+) 23,000 (+) 20.00% (b) Selling 57,500 69,000 - ? (c) Finance ? ? (+) 5,175 (+) 22.5% Total Operating
Expenses ? ? ? ? Net Operating Profit
(C - D) ? ? ? ? Add: Non -Operating
Income 23,000 1,15,000 ? ? Net Profit Before
Tax ? ? ? ? Less: Provision for
Tax ? ? ? ? Net Profit After Tax 2,41,500 2,70,825 ? ?
Solution 07:
Particulars 2019 ` 2020 ` Absolute
Increase/
(Decrease) %
Increase/
(Decrease)
Sales 18,40,0001 23,00,0002 (+) 4,60,000 (+) 25%
Cost of Goods Sold Opening Stock 92,000 1,38,000 46,0003 50.00%4
Purchases 11,50,0005 13,80,0006 (+) 2,30,000 (+) 20.00%
Wages 2,76,000 5,06,000 2,30,0007 82B.33%8
Less: Closing Stock 1,38,0009 1,84,000 46,00010 32B.33%11
Cost of Goods Sold 13,80,000 18,40,000 4,60,000 32B.33%
Gross Profit (A - B) 4,60,000 4,60,000 - 0.00%
Operating Expenses (a) Administrative 1,15,00012 1,38,00013 (+) 23,000 (+) 20.00%
(b) Selling 57,500 69,000 11,50014 20.00%15
(c) Finance 23,00016 28,17517 (+) 5,175 (+) 22 .5%
Total Operating Expenses 1,95,500 2,35,175 39,675 20.29%
Net Operating Profit (C -
D) 2,64,500 2,24,825 (39,675) (15.00%)
Add: Non -Operating
Income 23,000 1,15,000 92,000 400.00%
Net Profit Before Tax 2,87,500 3,39,825 52,325 18.20%
Less: Provisio n for Tax 46,000 69,000 23,000 50.00%
Net Profit After Tax 2,41,500 2,70,825 29,325 12.14%
munotes.in
Page 76
Management Accounting
76 Working Notes:
1. 4,60,000 ÷ 25% = 18,40,000
2. 1,840,000 + 4,60,000 = 23,00,000
3. 1,38,000 – 92,000 = 46,000
4. 46,000 ÷ 92,000 = 50%
5. 2,30,000 ÷ 20% = 11,50,000
6. 11,50,000 + 13,80,000
7. 5,06,000 – 2,76,000 = 2,30,000
8. 2,30,000 ÷ 2,76,000 = 8 2B.33%
9. Opening Stock of 2020 is closing stock of 2019.
10. 1,84,000 – 1,38,000 = 46,000
11. 46,000 ÷ 1,38,000 = 3 2B.33 12. 23,000 ÷ 20% = 1,15,000
13. 1,15,000 + 23,000 = 1,38,000
14. 69,000 – 57,500 = 11,500
15. 11,500 ÷ 57,500 = 20.00%
16. 5,175 ÷ 22.50% = 23,000
17. 23,000 + 5,175 = 28,175
Figures in Bracket indicates negative numbers.
Illustration 08
Complete the following Comparative Statement of Hina Products by
ascertaining the missing figures.
Particular Year
Ended
31-03-16 Year
Ended
31-03-17 Increase/
(Decrease)
` %
Increase/
(Decrease)
`
Share Capital 16,25,000 ? 1,00,000 ? Reserve and
Surplus 6,25,000 5,00,000 ? ? Debentures 3,75,000 ? (1,25,000) ? Current Assets ? 7,50,000 1,00,000 ? Long Term
Investmen t ? ? 25,000 10 Current
Liabilities ? 5,00,000 (25,000) ? Fixed Assets ? ? ? ?
Solution 08:
Particulars 2019 2020 Absolute
Increase/
Decrease %
Increase/
Decrease
I SOURCES OF FUNDS 1 Shareholder's Fund a Share Capital 16,25,000 17,25 ,000 1,00,000 6.15
b Reserves and Surplus 6,25,000 5,00,000 (1,25,000) (20.00) 56,25,000 55,62,500 (62,500) (1.11)
2 Loan Fund Debentures 3,75,000 2,50,000 (1,25,000) (32B.33) munotes.in
Page 77
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
77 3 Capital Employed 60,00,000 58,12,500 (1,87,500) (2B.13)
II APPLICAT ION OF FUNDS 1 Fixed Assets
(CE - Invt. - WC) 22,50,000 19,50,000 (3,00,000) (12B.33)
Investments 2,50,000 2,75,000 25,000 10.00
2 Working Capital A Current Assets 6,50,000 7,50,000 1,00,000 15.38
B Less: Current Liabilities 5,25,000 5,00,000 (25,000) (4.76)
Working Capital (A - B) 1,25,000 2,50,000 1,25,000 100.00
3 Capital Employed 26,25,000 24,75,000 (1,50,000) (5.71)
Common Size Statement:
A common size income statement is an income statement in which each
line item is expressed as a pe rcentage of the value of revenue or sales. It is
used for vertical analysis, in which each line item in a financial statement
is represented as a percentage of a base figure within the statement.
Use of Common Size Income Statement:
It helps the business o wner in understanding the following points
1. Whether profits are showing an increase or decrease in relation to the
sales obtained.
2. Percentage change in cost of goods that were sold during the accounting
period.
2B. Variation that might have occurred i n expense.
4. If the increase in retained earnings is in proportion to the increase in
profit of the business.
5. Helps to compare income statements of two or more periods.
6. Recognises the changes happening in the financial statements of the
organisation , which will help investors in making decisions about
investing in the business.
Limitations of Common Size Statement:
1. It is not helpful in the decision -making process as it does not have any
approved benchmark.
2. For a business that is impacted by fluctuati ons due to seasonality, it can
be misleading.
Illustration 09:
Following is the Balance Sheet of Priyanka Ltd. as on 31st March, 2020.
Balance Sheet as on 31st March 2020 munotes.in
Page 78
Management Accounting
78 Liabilities ` Assets `
Equity Share Capital 1,50,000 Fixed Assets 2,00,000 8% Pre ference Share
Capital 1,00,000 Investments 75,000 General Reserve 10,000 Stock 12,500 Profit and Loss Account 25,000 Debtors ` 37,500 10% Debentures 50,000 Bills Receivable 15,000 Creditors 10,000 Cash 7,500 Bills Payable 3,500 Preliminary E xpenses 2,500 Outstanding Expenses 1,500 3,50,000 3,50,000
Prepare a Common -size Balance Sheet from the above in vertical form.
Solution 09:
Priyanka LTD.
Particulars 2020 % Increase/ Decrease I SOURCES OF FUNDS 1 Owner's Funds A Cap ital Equity Share Capital 1,50,000 45.11 8% Preference Share Capital 1,00,000 30.08 2,50,000 75.19 B. Reserves and Surplus 0.00 General Reserve 10,000 2B.01 Profit and Loss A/c 25,000 7.52 35,000 10.53 Less: Preliminary Expenses (2,500) (0.75) Net Reserves and Surplus 32,500 9.77 Own Funds or Net Worth 2,82,500 84.96 2 Loan Funds 0.00 10% Debentures 50,000 15.04 Capital Employed [1 + 2] 3,32,500 100.00 II APPLICATION OF FUNDS 1 Fixed Assets 2,00,000 60.15 munotes.in
Page 79
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
79 2 Investments 75,000 22.56 3 Working Capital A Current Assets Cash 7,500 2.26 Debtors 37,500 11.28 Bills Receivable 15,000 4.51 Total Liquid Assets 60,000 18.05 Stock 12,500 2B.76 Total Current Assets 72,500 21.80 B. Less: Current Liabilities 0.00 Creditors 10,000 2B.01 Bills Payable 3,500 1.05 Outstanding Expenses 1,500 0.45 Total Current Liabilities (15,000) (4.51) Working Capital [A - B] 57,500 17.29 Capital Employed [1 + 2 + 3] 3,32,500 100.00
Illustration 10:
Following is the Summarised Balance Sheet of M/s. Sana Ltd. as on 31st
March, 2020, prepare a Common Size Balance Sheet in vertical form.
Balance Sheet as at 31st March, 2020
Liabilities ` Assets `
Equity Share Capital 2,55,000 Fixed Assets 1,95,000 Reserve Fund 81,000 Investment 85,200 Creditors 42,000 Inventory 42,000 Tax Provision 27,000 Debtors 48,000 Cash 34,800 4,05,000 4,05,000
Prepare a Common -size Balance Sheet from the above in vertical form.
Solution 10:
Sana Ltd.
munotes.in
Page 80
Management Accounting
80 Common -Size Balance Sheet
Particulars Amount Amount %
Increase/
Decrease
I SOURCES OF FUNDS 1 Owner's Funds A Capital Equity Share Capital 2,55,000 75.89 B. Reserves and Surplus Reserve Fund 81,000 24.11 Own Funds or Net Worth 3,36,000 100.00 2 Loan Funds 3 Capital Employed 3,36,000 100.00 II APPLICATION OF FUNDS 1 Net Fixed Assets Net Tangible Assets 1,95,000 58.04 2. Long Term Investments Trade Investments 85,200 25.36 2B. Working Capital Current Assets Cash 34,800 10.36 Debtors (Net) 48,000 14.29 Total Liquid Assets 82,800 24.64 Inventory 42,000 12.50 a Current Assets 1,24,800 37.14 Less: Current Liabilities - Creditors 42,000 12.50 Provision for Tax 27,000 8.04 b Total Quick/Current Liabilities (69,000) (20.54) c Working Capital (a - b) 55,800 16.61 4. Capital Employed 3,36,000 100.00
Illustration 11:
Dr. Trading and Profit and Loss Account for the Year Ended 31st
March, Cr. munotes.in
Page 81
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
81 Particular ` Particular `
To Opening Stock 2,25,000 By Sales 45,00,000 To Purchases 24,07,500 By Closing Stock 2,70,000
To Interest on Debentures 1,12,500 By Dividend 29,250
To Depreciation on Furniture 11,250 To Depreciation on Machinery 22,500 To Administration Expenses 3,30,750 To Selling Expenses 5,64,750 To Carriage Outward 2,36,250 To Loss by Fi re 11,250 To Wages 2,25,000 To Provision for Tax 3,26,250 To Net Profit 3,26,250 47,99,250 47,99,250
Solution 11:
Commonsize Income Statement For the Year Ended 31st March 2018
Particulars 2018 Percentage 1 Net Sales 45,00,000 100.00 2 Less: Cost of Goods sold A Opening Stock 2,25,000 5.00 B Add: Purchases 24,07,500 52B.50 Wages 2,25,000 5.00 Depreciation - Machinery 22,500 0.50 28,80,000 64.00 C Less: Closing Stock (2,70,000) (6.00) D Cost of Sales 26,10,000 58.00 3 Gross Profit (1 - 2) 18,90,000 42.00 4 Less: Operating Expenses I. Administration Expenses Depreciation on Furniture 11,250 0.25 Other 3,30,750 7.35 Total Administration Expenses 3,42,000 7.60 I. Selling and Distribution E xpenses munotes.in
Page 82
Management Accounting
82 Carriage Outward 2,36,250 5.25 Other 5,64,750 12.55 Total selling and distribution expenses 8,01,000 17.80 Total Operating Expenses (I + I1) 11,43,000 25.40 5 Operating Profit Before Interest (3 - 4) 7,47,000 16.60 6 Less : I nterest Paid Interest on Debentures (1,12,500) (2.50) 7 Net Profit After Interest (5 - 6) 6,34,500 14.10 8 Add : Non -Operating Income Dividends 29,250 0.65 9 Less: Non -Operating Expense Loss by Fire (11,250) (0.25) 10 Net Profit B efore Tax (7 + 8 - 9) 6,52,500 14.50 11 Less: Income Tax (3,26,250) (7.25) 12 Net Profit After Tax (10 - 11) 3,26,250 7.25 Illustration 12
Following is the Trading and Profit & Loss Account of Daya Ltd. &
Radha Ltd. for the year ended 31st March 202 0
Trading and Profit and Loss Account for the Year Ended 31st March,
2020 ``++
Particular Daya Radha Particular Daya Radha
To Opening
Stock 25,920 1,03,680 By Sales 1,44,000 7,20,000 To Purchases 1,05,120 3,15,360 By Closing
Stock 43,200 2,16,000 To Wage s 15,840 95,040 To Carriage
Inward 5,760 21,240
To Gross
Profit c/d 34,560 4,00,680 1,87,200 9,36,000 1,87,200 9,36,000 To Operating
Expenses 28,800 2,01,600 By Gross
Profit b/d 34,560 4,00,680 To Loss on
Sale of Asset 7,200 43,200 By Inter est
on
Investment 18,720 29,980 munotes.in
Page 83
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
83 To Income
Tax
Provision 2,880 28,240
To Net Profit
c/f 14,400 1,74,340
Total 53,280 4,30,660 Total 53,280 4,30,660
Solution 12:
Commonsize Income Statement For the Year Ended 31st March 2020
Particulars Daya Radha
Amount % Amount %
1 Net Sales 1,44,000 100.00 7,20,000 100.00 2 Less : Cost of
Goods sold A Opening Stock 25,920 18.00 1,03,680 14.40 B Add: Purchases 1,05,120 72B.00 3,15,360 42B.80 Wages 15,840 11.00 95,040 12B.20 Carriage Inward 5,760 4.00 21,240 2.95 1,52,640 106.00 5,35,320 74.35 C Less : Closing
Stock (43,200) (30.00) (2,16,000) (30.00) D Cost of Sales 1,09,440 76.00 3,19,320 44.35 3 Gross Profit (1 -
2) 34,560 24.00 4,00,680 55.65 4 Less : Operating
Expenses (28,800) (20.00) (2,01,600) (28.00) 5 Operating Profit 5,760 4.00 1,99,080 27.65 6 Add : Non -
operating Income Interest on
Investment 18,720 12B.00 29,980 4.16 7 Less : Non -
operating Expe nse 24,480 17.00 2,29,060 31.81 Loss on Sale of
Asset (7,200) (5.00) (43,200) (6.00) 8 Net Profit Before
Tax 17,280 12.00 1,85,860 25.81 9 Less : Income
Tax (2,880) (2.00) (28,240) (2B.92) 10 Net Profit After
Tax 14,400 10.00 1,57,620 21.89
munotes.in
Page 84
Management Accounting
84 Illustration 13:
Prepare common size Financial Statement in a form suitable for analysis
Summary Balance Sheet as on 31st March, 2020
Liabilities ` Assets `
13,650 Cash 8,775 Oustanding expenses 25,350 Debtors 36,075 Loans 73,125 Prepaid Expenses 71,500 Capital 2,13,850 Stock 32,500 Reserves 32,500 Other Current Assets 3,250 Fixed Assets 2,06,375 3,58,475 3,58,475 Summary Income Statement for the Year Ending on 31st March, 2020
Particulars Amount Particulars Amount
To Cost of goods sold 2,31,075 By Net Sales 4,12,425 To Selling Overheads 1,17,000 By Other Income 3,900 To Administration and
General Expenses 29,900
To Tax 11,050 To Loss on sale of
Investments 15,600
To Net Income 11,700 4,16,325 4,16,325
Solution 13:
Partic ulars Amount Percentage
I SOURCES OF FUNDS
1 Shareholders Funds
Capital 2,13,850 66.94 Reserves 32,500 10.17 Networth 2,46,350 77.11 2 Loan Funds 73,125 22.89 Total Funds Available 3,19,475 100.00 II APPLICATION OF FUNDS 1 Fixed Assets 2,06,375 64.60 2 Working Capital A Current Assets munotes.in
Page 85
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
85 Cash 8,775 2.75 Debtors 36,075 11.29 Other Current Assets 3,250 1.02 Stock 32,500 10.17 Prepaid Expenses 71,500 22.38 Total (A) 1,52,100 47.61 B Less: Cu rrent Liabilities 0.00 Creditors 13,650 4.27 Outstanding Expenses 25,350 7.93 Total (B) (39,000) (12.21) (A-B) 1,13,100 35.40 Total Funds Employed (1+2) 3,19,475 100.00
Particulars Amount Percentage
1 Net Sales 4,12,425 100.00 2 Less: Cost of goods sold (2,31,075) (56.03) 3 Gross Profit (1 - 2) 1,81,350 42B.97 4 Less: Operating Expenses: (a) Admin & General Expenses (29,900) (7.25) (b) Selling Overheads (1,17,000) (28.37) Total (4) (1,46,900) (35.62) 5 Other operating Income 3,900 0.95 6 Net Operating Profit (3 - 4 + 5) 38,350 9.30 7 Less: Non -operating Expenses Loss on sale of Investments (15,600) (2B.78) 8 Net Profit before Tax (6 - 7) 22,750 5.52 9 Less: Taxes (11,050) (2.68) 10 Net Profit After Tax (8 - 9) 11,700 2.84
Illustration 14:
Complete the following Common Size Income Statement of Babita Ltd.
by ascertaining the missing figures / percentages
munotes.in
Page 86
Management Accounting
86 Common Size Income Statement as on 31st March, 2020
Particular ` ` % %
Net Sales 5,00,000 Less : Cost of Goods
Sold Opening Stock ? 20.00 Purchases ? 60.00 Wages 62,500 ? Factory Overheads ? 12.50 ? 105.00 Less : Closing Stock 1,50,000 ? 30.00 75.00 Gross Profit 1,25,000 25.00 Less : Operating
Expenses (a) Administrative
Expenses ? 7.00 (b) Selling Expenses 12,500 2.50 (c) Finance Expenses ? 52,500 ? 10.50 Operating Profit ? ? Add : Non -Operating
Income 12,500 2.50 Less : Non -Operating
Expenses ? 1.00 Net Profit Before Tax 80,000 ?
Solution 14:
Common Size Income Statement as on 31st March, 2020
Particular ` ` % %
Net Sales 5,00,000 100.00 Less: Cost of Goods Sold Opening Stock 1,00,000 20.00 Purchases 3,00,000 60.00 Wages 62,500 12.50 Factory Overheads 62,500 12.50 5,25,000 105.00 Less: Closing Stock (1,50,000) (3,75,000) 30.00 75.00 munotes.in
Page 87
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
87 Gross Profit 1,25,000 25.00 Less: Operating Expenses (a) Administrative
Expenses 35,000 7.00 (b) Selling Expenses 12,500 2.50 (c) Finance Expenses 5,000 (52,500) 1.00 (10.50) Operating Profit 72,500 14.50 Add: Non -Operating
Income 12,500 2.50 Less: Non -Operating
Expenses (5,000) (1.00) Net Profit Before Tax 80,000 16.00
Illustration 15:
From the following information of G abbar Ltd. prepare Common Size
Balance Sheet in Vertical Form as on 31st March 2020.
Particulars `
Fixed Assets 510000
Net Worth 510000
Loan Fund ?
Working Capital 340000
Total Capital Employed 850000
Current Liabilities 340000
Solution 15:
In the books of Gabbar Ltd.
Commonsize Balance Sheet as on 31st March 2020
Particulars as on 2020 ` %
I SOURCES OF FUNDS 1 Shareholders Funds 5,10,000 60.00 2 Loan Fund 3,40,000 40.00 Total Funds Available (1 + 2) 8,50,000 100.00 II APPLICATION OF FUNDS 1 Fixed Assets 5,10,000 60.00 munotes.in
Page 88
Management Accounting
88 2 Working Capital - A Current Assets 6,80,000 80.00 B Less : Current Liabilities (3,40,000) (40.00) Working Capital (A -B) 3,40,000 40.00 2 Total Funds Employed (1 + 2 ) 8,50,000 100.00
Trend Analysis :
Meaning: Trend Analysis treats year 1 as the base year and compares the
figures of all the (year 2/year 3) with those of the base year to find out the
trend in figures. Thus trend analysis ofpurchase will reveal whether as
compared to the base year, i.e. Year 1, the purchase show atrend increase
or decrease in subsequent years, i.e. Year 2, Year 2, Year 3 ..... and so on.
Use: It is useful because: (1) It shows the direction(up or down)of the
changes. (2) Trends areeasy to ca lculate and interpret. (3) It is a quick
method of analysis.
Advantages:
(1) Trend Analysis helps in analysing the growth in the financial
activities of the firm with abrief look.
(2) Graphical presentation of trend line helps the management to take a
quick decisi on matter.
(3) Trend values also help the management in the controlling process as
well.
(4) Trend analysis proves to be very useful for taking rational investment
decisions.
Disadvantages:
(1) Choice of Base Year & No. of Years: If different year is chosen as the
base year, the trend may be different. Further, the total number of
years covered should not be too large (say 30 years) or too small (say
3 years). Data for a large number of years show large variationsdue to
inflation and figures for a few years are not rep resentative.
(2) Different Accounting Policies: The trend will give a distorted figure,
or a wrong picture ifthe accounting policies in respect of depreciation,
valuation of closing stock etc. have changed.
munotes.in
Page 89
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
89 Illustration 16:
M/s. Henry Ltd. Carrying on business , furnished their position as on 31st
March, 2018, 2019 and 2020.
Particulars 2018 (Amount in `) 2019(Amount in`) 2020 (Amount in`)
Assets
Fixed Assets 60,000 51,000 87,600 Investment 26,000 26,000 36,800 Current Assets 54,000 66,400 37,800 1,40,000 1,43,400 1,62,200 Liabilities
Share Capital 66,000 62,700 82,000 Debentures 54,000 56,700 19,000 Liabilities for
expenses 20,000 24,000 61,200 1,40,000 1,43,400 1,62,200
Solution:
In the books of Henry Ltd.
Trend Analy sis of Balance Sheet
Particulars Amount Trend %
2018 ` 2019 ` 2020 ` 2018 2019 2020
I SOURCES OF
FUNDS
Share Capital 66,000 62,700 82,000 100.00 95.00 124.00 Debentures 54,000 56,700 19,000 100.00 100.00 35.00 Capital Employed 1,20,000 1,19,400 1,01,000 100.00 99.50 84.00 II APPLICATION
OF FUNDS 1 Fixed Assets 60,000 51,000 87,600 100.00 85.00 146.00 2 Investments 26,000 26,000 36,800 100.00 100.00 142.00 3 Current Assets 54,000 66,400 37,800 100.00 122B.00 70.00 4 Current Liabilities (20,000) (24,000) (61,200) 100.00 120.00 306.00 5 Working Capital
(3 - 4) 34,000 42,400 (23,400) 100.00 125.00 (69.00) 6 Capital Employed 1,20,000 1,19,400 1,01,000 100.00 99.50 84.00
munotes.in
Page 90
Management Accounting
90 Illustr ation 17:
From the following balance sheet of Sunny Ltd., prepare Trend Percentage
Statement in Vertical form:
Balance Sheet as on 31st March
Particulars 2018
(Amount in `) 2019
(Amount in `) 2020 (Amount in Rs) Equity and
Liability
Equity Share
Capital 2,40,000 2,40,000 2,40,000 8% Preference
Share Captial 1,20,000 1,80,000 1,20,000 General Reserve 24,000 26,400 50,400 Debentures 90,000 1,20,000 1,08,000 Bills Payable 6,000 8,400 12,000 Creditors 18,000 12,000 28,800 Total 4,98,000 5,86,800 5,59,200 Assets Fixed Assets 1,80,000 2,40,000 2,40,000 Investment 1,20,000 1,80,000 1,20,000 Cash 60,000 30,000 48,000 Debtors 84,000 72,000 75,600 Stock 48,000 60,000 72,000 Preliminary
Expenses 6,000 4,800 3,600 Total 4,98,000 5,86,800 5,59,200
Solution 17:
In the books of Sunny Ltd.
Trend Analysis of Balance Sheet
Particulars Amount Trend % Base year 2018
2018 ` 2019 ` 2017 ` 2,018 2,019 2,017
I SOURCES OF FUNDS 1 Shareh olders' Funds a Capital munotes.in
Page 91
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
91 Equity Share Capital 2,40,000 2,40,000 2,40,000 100.00 100.00 100.00
8% Pref. Share Capital 1,20,000 1,80,000 1,20,000 100.00 150.00 100.00
Capital 3,60,000 4,20,000 3,60,000 100.00 116.67 100.00
b Reserves and Surp lus General Reserve 24,000 26,400 50,400 100.00 110.00 210.00 3,84,000 4,46,400 4,10,400 100.00 116.25 106.88
c Less: Preliminary
Expenses. 6,000 4,800 3,600 100.00 80.00 60.00
2 Own Funds 3,78,000 4,41,600 4,06,800 100.00 116.83 107.62
3 Loan Funds Debentures 90,000 1,20,000 1,08,000 100.00 132B.33 120.00
Capital Employed (2 + 3) 4,68,000 5,61,600 5,14,800 100.00 120.00 110.00
II APPLICATION OF
FUNDS
1 Fixed Assets 1,80,000 2,40,000 2,40,000 100.00 132B.33 132B.33
2 Investments 1,20,000 1,80,000 1,20,000 100.00 150.00 100.00
3 Working Capital a Current Assets: Cash 60,000 30,000 48,000 100.00 50.00 80.00
Debtors 84,000 72,000 75,600 100.00 85.71 90.00
Stock 48,000 60,000 72,000 100.00 125.00 150.00
Current Asse ts (a) 1,92,000 1,62,000 1,95,600 100.00 84.38 101.88
Less: Current Liabilities Bills Payable 6,000 8,400 12,000 100.00 140.00 200.00
Creditors 18,000 12,000 28,800 100.00 66.67 160.00
Current Liabilities (b) 24,000 20,400 40,800 100.00 85.00 170.00
Working Capital(a - b) 1,68,000 1,41,600 1,54,800 100.00 84.29 92.14
Capital Employed
(1+2+3) 4,68,000 5,61,600 5,14,800 100.00 120.00 110.00
Illustration 18
Following balances are extracted from the books of Naman Ltd.
Balance Sheet as on 31st Mar ch
Particulars 2018 (Amount in Rs) 2019 (Amount in Rs) 2020 (Amount in Rs)
Net Sales 1,00,500 1,34,000 1,67,500 Opening Stock 10,050 16,750 23,450 Purchases 56,950 63,650 67,000 Wages 5,025 10,050 6,700 Carriage Inward 6,700 13,400 13,40 0 Closing Stock 16,750 23,450 20,100 Office Expenses 3,350 4,020 5,025 Selling Expenses 2,345 3,015 3,350 munotes.in
Page 92
Management Accounting
92 Finance
Expenses 2,010 3,350 6,700 Non-Operating
Income 2,680 3,015 3,350 Non-Operating
Expenses 1,675 1,005 1,675 Tax 40% 40% 40%
You are required to prepare vertical trend analysis Income Statement from
the above.
Solution 18:
In the books of Naman Ltd.
Vertical Trend Analysis Income Statement
Particulars Amount Trend % Base year 2015 2015 ` 2016 ` 2017 ` 2015 2016 2017
1 Net Sales 1,00,500 1,34,000 1,67,500 100.00 132B.33 166.67 2 Less: Cost of Goods Sold
Opening Stock 10,050 16,750 23,450 100.00 166.67 232B.33 Purchases 56,950 63,650 67,000 100.00 111.76 117.65 Wages 5,025 10,050 6,700 100.00 200.00 132B.33 Carriage Inward 6,700 13,400 13,400 100.00 200.00 200.00 Less: Closing Stock 16,750 23,450 20,100 100.00 140.00 120.00 Cost of Goods sold 61,975 80,400 90,450 100.00 129.73 145.95 3 Gross Profit I1 - 2] 38,525 53,600 77,050 100.00 139.13 200.00 4 Less: Operating
Expenses
Office Expenses 3,350 4,020 5,025 100.00 120.00 150.00 Selling Expenses 2,345 3,015 3,350 100.00 128.57 142.86 Finance Expenses 2,010 3,350 6,700 100.00 166.67 332B.33 Operating Expenses 7,705 10,385 15,075 100.00 134.78 195.65 5 Net Profit [3 - 4] 30,820 43,215 61,975 100.00 140.22 201.09 6 Non -operating Income 2,680 3,015 3,350 100.00 112.50 125.00 7 Non -operating Expenses 1,675 1,005 1,675 100.00 60.00 100.00 8 Net Profit Before Tax
(5+6 -7) 31,825 45,225 63,650 100.00 142.11 200.00 9 Less: Income Tax (40%) 12,730 18,090 25,460 100.00 142.11 200.00 10 Net Profit after Tax [8 -
9] 19,095 27,135 38,190 100.00 142.11 200.00
munotes.in
Page 93
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
93 Illustration 19:
Calculate Trend Percentage from the following information extracted from
financial statement of M/s. Lalita Ltd., after arranging in vertical from.
Balance Sheet as on 31st March
Particulars 2018 (Amount in Rs) 2019 (Amount in Rs) 2020 (Amount in Rs)
Assets
Fixed Assets
32,400
34,020
40,500
Investment
2,700
1,350
2,700
Current Assets
36,450
45,306
52,785
71,550
80,676
95,985
Liabilities
Share Capital
39,150
45,900
55,350
Bank Loan
8,100
8,100
10,935
Current
Liabilities
24,300
26,676
29,700
71,550
80,676
95,985
Income Statements for the year ended 31st March
Particulars 2018 (Amount in Rs) 2019 (Amount in Rs) 2020
(Amount in Rs)
Net Sales 30,000 33,000 36,000 Less Cost of
Sales 22,500 27,000 27,000 Gross Margin 7,500 6,000 9,000 Less: Operating
Expenses 3,000 1,500 2,700 Operating Profit 4,500 4,500 6,300
munotes.in
Page 94
Management Accounting
94 Solution 19
In the books of Lalita Ltd.
Trend Analysis of Balance Sheet
Particulars Amount Trend % Ba se year 2018
2018 ` 2019 ` 2020 ` 2018 ` 2019 ` 2020 `
I SOURCES OF FUNDS
Share Capital 39,150 45,900 55,350 100.00 117.24 141.38 Bank Loan 8,100 8,100 10,935 100.00 100.00 135.00 Capital Employed 47,250 54,000 66,285 100.00 114.29 140.29 II APPLICATION OF
FUNDS
1 Fixed Assets 32,400 34,020 40,500 100.00 105.00 125.00 2 Investments 2,700 1,350 2,700 100.00 50.00 100.00 3 Working Capital
a. Current Assets 36,450 45,306 52,785 100.00 124.30 144.81 b Less: Current
Liabilities (24,300) (26,676) (29,700) 100.00 109.78 122.22 c Working Capital (a - b) 12,150 18,630 23,085 100.00 152B.
33 190.00 4 Capital Employed (1 +
2 + 3) 47,250 54,000 66,285 100.00 114.29 140.29
Income Statements for the year ended 31st March
Particulars Amount Trend % Base year 2018
2018 ` 2019 ` 2020 ` 2018 2,019 2,020
Net Sales 30,000 33,000 36,000 100.00 110.00 120.00 Less Cost of Sales 22,500 27,000 27,000 100.00 120.00 120.00 Gross Margin 7,500 6,000 9,000 100.00 80.00 120.00 Less : Operating
Expenses 3,000 1,500 2,700 100.00 50.00 90.00 Operating Profit 4,500 4,500 6,300 100.00 100.00 140.00
Illustration 20:
From the following informatio n prepare Vertical Balance Sheet for
financial analysis and Trend analysis of Fenny Products Ltd. For all the
years.
munotes.in
Page 95
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
95 Balance Sheet as on 31st March
Particulars 2018 (Amount in Rs) 2019
Trend % 2020 (Amount
in Rs)
Share Capital 1,12,500 120 1,57,500 Reserve and Surplus 22,500 150 45,000 Secured Loans 22,500 100 22,500 Current Liabilities 22,500 150 45,000 Fixed Assets 90,000 110 1,12,500 Investment (Long
Term) 22,500 160 45,000 Stock and Debtors 56,250 120 78,750 Bank Balance 11,250 200 33,750
Solution:
Trend Analysis of Balance Sheet
Particulars Amount Trend % Base year 2018
2018 ` 2019 ` 2020 ` 2018 2019 2020
I SOURCES OF FUNDS
Share Capital 1,12,500 1,35,000 1,57,500 100.00 120.00 140.00 Reserves and Surplus 22,500 33,750 45,000 100.00 150.00 200.00 1 Own Funds 1,35,000 1,68,750 2,02,500 100.00 125.00 150.00 2 Loan Funds
Secured Loan 22,500 22,500 22,500 100.00 100.00 100.00 3 Capital Employed (1 + 2) 1,57,500 1,91,25 0 2,25,000 100.00 121.43 142.86 II APPLICATION OF FUNDS
1 Fixed Assets 90,000 99,000 1,12,500 100.00 110.00 125.00 2 Long Term Investments 22,500 36,000 45,000 100.00 160.00 200.00 3 Working Capital
a Current A ssets
Stock and Debtors 56,250 67,500 78,750 100.00 120.00 140.00 Bank 11,250 22,500 33,750 100.00 200.00 300.00 Current Assets 67,500 90,000 1,12,500 100.00 132B.33 166.67 b. Less: Current Liabilities 22,500 33,750 45,000 100.00 150.00 200.00 C. Working Capital (a - b) 45,000 56,250 67,500 100.00 125.00 150.00 4 Capital Employed (1 + 2 + 3) 1,57,500 1,91,250 2,25,000 100.00 121.43 142.86
munotes.in
Page 96
Management Accounting
96 Exercise:
TRUE AND FALSE
1. Comparative statement includes comparat ive income statement and
balance sheet. T
2. Common size statement is horizontal analysis. F
3. In Vertical Income Statement, preliminary expenses written off will be
shown under Operating Expenses. F
4. Own funds is internal source of finance, whereas Owed funds i s an
external source of finance. T
5. Comparative financial statements in which each amount is expresses as
a percent of a base amount are called Trend statements. F
6. The managerial accounting system produces information for external
users. F
7. Vertical analysis is a tool to evaluate each financial item or group of
items in terms of a specific base amount.
8. Using the common size statement, a company’s net income as a
percentage of sales is 20%therefore , the cost of goods sold as a
percentage of sale must be 80%. F
9. Liquidity is ability of firm to pay, as and when the debts fall dure for
payment. T
10. Currents assets and liabilities are listed in alphabetical order , in
vertical balance sheet for financial analysis. F
SHORT NOTES.
Write short note on -
1. Trend anal ysis.
2. Inter -firm comparisons
2B. Inter -period comparisons
4. Advantages of comparative statements
5. Limitations of comparative statements
6. Common size statements
7. Advantages of trend analysis
8. Use of common size statements
9. Disadvantages of tr end analysis
10. Limitations of common size statements. munotes.in
Page 97
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
97 (1) Rearrange the Balance Sheets in Vertical form and calculate the trend
percentage taking 2017 figures as 100 and briefly comment on the
same.
Liabilities 2017 ` 2018 ` 2019 ` 2020 ` Assets 2017 ` 2018 ` 2019 ` 2020 `
Equity
Share
Capital 145.00 159.50 174.00 174.00 Land &
Building 58.00 58.00 50.75 65.25
12% Pref.
Share
Capital 29.00 14.50 7.25 7.25 Plant &
Machiner y 202B.00 181.25 159.50 166.75
Reserve
& Surplus 108.75 130.50 174.00 188.50 Furniture &
Fixture 36.25 42B.50 36.25 29.00
13%
Debentur
es 87.00 72.50 36.25 22.00 Current
Assets 145.00 166.75 232.00 224.75
Current
Liabilities 72.50 72.50 87.00 94.00
442.25 449.50 478.50 485.75 442.25 449.50 478.50 485.75
Calculate Trend % to full integer (without decimal points - Figures to be
rounded)
2. Rearrange the following summary Balance Sheet in vertical form
suitable for analysis and calculate the trend percentage taking 2017
figures as 100 and briefly com ment on the same.
Balance Sheet as on 31st December
Liablilities 2017 ` 2018 ` 2019 ` 2020 ` Assets 2017 ` 2018 ` 2019 ` 2020 `
Share
Capital 300 300 400 400 Building 250 300 275 400
Reserve 250 225 100 100 Goodwill 250 225 200 200
Surplus 65 160 155 200 Machinery 100 200 215 250
Debentures 50 100 100 150 Stock 25 75 125 25
Secured
Loans 60 40 50 100 Debtors 100 70 75 50
Creditors 30 40 50 15 Cash 25 5 10 75
Bank O/D 5 10 40 20 Preliminary
Expenses 15 10 5 -
Other
Liabilities 5 10 10 15
765 885 905 1,000 765 885 905 1,000
munotes.in
Page 98
Management Accounting
98 3. You are furnished with the following revenue statements of Piya Ltd.
for the year ended March 31st 2020
Particulars 2017 ` 2018 ` 2019 ` 2020 `
Sales 37,50,000 45,00,000 54,00,000 64,80,000
Less : Cost of Sales (24,0 0,000) (28,50,000) (34,50,000) (42,00,000)
Gross Margin 13,50,000 16,50,000 19,50,000 22,80,000
Management Expenses 2,25,000 2,62,500 3,00,000 3,37,500
Sales Expenses 3,75,000 4,50,000 5,40,000 6,48,000
Interest on Borrowings 2,25,000 3,00,000 3,75,000 4,50,000
Total Expenses (8,25,000) (10,12,500) (12,15,000) (14,35,500)
Net Profit before
Depreciation and Taxation 5,25,000 6,37,500 7,35,000 8,44,500
Depreciation (3,75,000) (3,37,500) (4,50,000) (4,87,500)
Profit before Taxation 1,50,000 3,00,000 2,85,000 3,57,000
Income Tax (60,000) (1,50,000) (1,38,750) (1,80,000)
Profit after Tax 90,000 1,50,000 1,46,250 1,77,000
(a) You are asked to prepare trend analysis.
(b) Comment on the same.
4. From the following prepare income statement in vertical form s howing
trend percentages of M/S Lakhan Traders and comment on gross profit
trend.
Particulars 2017 ` 2018 ` 2019 ` 2020 `
Sales 5,88,000 7,14,000 7,56,000 8,40,000 Cost of Sales 2,69,500 3,27,250 3,45,800 3,85,000 Administrative
Expenses 94,500 94,500 1,05,000 1,05,000 Selling and Distribution
Expenses 58,800 71,400 75,600 84,000 Finance Expenses 28,000 28,000 28,000 28,000 Income tax Provision 41,160 57,855 60,270 71,400
munotes.in
Page 99
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
99 5. Hammu and Pammu are partners of a firm carrying on business
(i) Their pos ition as on 31st December 2018, 2019 and 2020 is as follows
Liabilities 2020 ` 2019 ` 2018 ` Assets 2020 ` 2019 ` 2018 `
Partners
Capitals 8,80,000 7,48,000 6,60,000 Fixed
Assets 8,80,000 7,92,000 6,16,000
General
Reserve 2,20,000 2,20,000 2,20,000 Curre nt
Assets - - -
Secured
Loans 1,32,000 1,32,000 1,10,000 Stock 3,52,000 3,30,000 2,97,000
Unsecured
Loans 3,52,000 3,96,000 3,08,000 Debtors 4,40,000 3,52,000 3,08,000
Sundry
Creditors 3,52,000 1,98,000 99,000 Loans
and
Advances 2,20,000 1,76,000 1,32,0 00
Cash &
Bank
Balances 44,000 44,000 44,000 19,36,000 16,94,000 13,97,000 19,36,000 16,94,000 13,97,000
(ii) Summarised Income Statement for the year ended
Particulars 2020 ` 2019 ` 2018 `
Sales 88,00,000 79,20,000 66,00,000 Less: Cost of Sales 61,60,000 52,80,000 44,00,000 Gross Profit 26,40,000 26,40,000 22,00,000 Less: Expenses 17,60,000 17,60,000 15,40,000 Net Profit 8,80,000 8,80,000 6,60,000
Prepare Trend Statement
6. Calculat e Trend Percentage from the following information extracted
from Financial Statementsof Vinayak Limited Company. Give your
appropriate comments
Particulars 2020 ` 2019 ` 2018 ` 2017 `
Sales 32,802 27,290 19,768 18,224 Cost of Sales 29,956 24,982 17,626 14,864 Expenses 178 268 116 90 Interest 1,006 758 412 202 Profit Before Tax 1,662 1,282 1,614 3,068 Tax 788 396 910 1,640 Profit After Tax 874 886 704 1,428 Fixed Assets (Net) 10,978 10,222 9,554 8,972 Working Capital 10,170 9,774 6,596 5,546 Loans ? ? ? ? Net Worth 13,382 12,034 11,714 11,908 munotes.in
Page 100
Management Accounting
100 7. From the following prepare income statement in vertical form showing
trendpercentages of M/S Ferry Traders and comment on gross profit
trend.
Particul ars 2017 ` 2018 ` 2019 ` 2020 `
Profit and Loss Accounts
Sales 30,000 33,000 36,000 39,000 Cost of Sales 22,500 24,525 26,550 28,575 Expenses 2,400 2,805 3,420 3,861 Interest 675 900 1,125 1,350 Profit Before Tax ? ? ? 5,214 TaX 1,770 1,908 1,962 2,085 Profit After Tax 2,655 ? ? ?
Balance Sheets
Fixed Assets ? ? ? ? Current Assets 45,000 ? 53,400 ? Current Liabilities ? 32,700 ? 38,400 Net Working Capital 15,000 16,500 17,850 19,350 Net Worth 3,00,000 32,100 33,300 34,800 Loans (Lia bilities) 15,000 18,000 21,000 24,000
8. Prepare a Comparative Revenue Statement in Vertical Form from the
following details
Particular 2019 ` 2020 ` Particular 2019 ` 2020 `
To Opening Stock 3,60,000 4,80,000 By Sales 72,00,000 96,00, 000
To Purchases 36,00,000 51,36,000 By Closing Stock 4,80,000 5,76,000
To Interest on
Debenture 2,40,000 2,40,000 By Dividend 39,200 62,400
To Depreciation :
By Profit on Sale of
Machinery 18,400
Furniture 24,000 24,000 Machinery 57,600 48,000 To Administrative
Exp. 4,70,400 7,05,600
To Selling Expenses 7,29,600 12,04,800 To Carriage
Outward 1,20,000 5,04,000
To Loss by Fire - 24,000 To Wages 3,12,000 4,80,000 To Provision for
Tax 9,12,000 6,96,000
To Net Profit 9,12, 000 6,96,000 Total 77,37,600 1,02,38,400 Total 77,37,600 1,02,38,400
munotes.in
Page 101
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
101 9. The income statements of a Nisha Ltd. are given for the years ending
on 31st March, 2019 and2020. You are required to prepare a
comparative income statement and interpret the change s.
Income Statements for the year ending 2019 and 2020
Particulars 2019 ` 2020 `
Sales 487500 543750 Cost of Sales 318750 375000 Gross Profit 1,68,750 1,68,750 Operating Expenses Selling & Distribution Expenses 45000 56250 General Expenses 18750 30000 Total Operating Expenses 63,750 86,250 Net Profit during the year 1,05,000 82,500
10. From the following balance sheet as on 31 st March, 2019 and 31st
March, 2020 of M/sYahvi Ltd. Prepare Comparative balance sheet for
analysis purpose in vertical form .
Particular 31st March 2019 ` 31st March 2020 `
Assets Cash and Bank balance 8,40,000 2,80,000 Short term investments 2,80,000 12,60,000 Accounts receivable 18,20,000 14,00,000 Inventories 21,00,000 7,00,000 Prepaid Income Tax 3,50,000 2,80,000 Other Current Assets 4,20,000 3,50,000 58,10,000 42,70,000 Land and Building 5,60,000 3,50,000 Machinery 8,40,000 7,00,000 Furniture 2,10,000 1,40,000 Leasehold Land 3,50,000 3,50,000 19,60,000 15,40,000 77,70,000 58,10,000 munotes.in
Page 102
Management Accounting
102
Liabilities: Bills payable 16,80,000 11,20,000 Accounts payable 14,00,000 7,00,000 Accrued compensation
and employee benefit 7,00,000 2,80,000 Income tax payable 2,80,000 1,40,000 40,60,000 22,40,000 Equity Capital 28,00,000 28,00,000 Reserve 9,10,000 7,70,000 37,10,000 35,70,000 77,70,000 58,10,000
11. From the following financial statements of Tappu Limited, prepare
financial statements in Vertical Form.
Balance Sheets as at 31st December
Liabilities 31st March
2019 ` 31st March
2020 ` Assets 31st
March
2019 ` 31st
March
2020 `
Equity Share Capital 6,00,000 6,00,000 Land 3,00,000 3,60,000
9% Preference Share
Capital 4,50,000 4,50,000 Factory Plant
& Buildings 9,00,000 8,10,000
General Reserves 3,00,000 3,67,500 Stocks 3,00,000 4,50,000
Tax Payable 1,50,000 2,25,000 Debtors 3,00,000 4,50,000
Creditors 3,00,000 4,12,500 Cash 1,50,000 2,10,000
17% Debentures 1,50,000 2,25,000 19,50,000 22,80,000 19,50,000 22,80,000
Income Statement for Year Ended 31st December
Expenses 31st March
2019 ` 31st March
2020 ` Income 31st March
2019 ` 31st March
2020 `
Cost of goods
sold 9,00,000 11,25,000 Sales 12,00,000 15,00,000
Admn. Expenses 45,000 60,000 Selling Expenses 30,000 30,000 Net Profit 2,25,000 2,85,000 12,00,000 15,00,000 12,00,000 15,00,000
munotes.in
Page 103
Comparative Statements,
Common Size Statements &
Trend Analysis Comparative
Balance Sheet
103 Briefly comment on the difference between the stated net profit of 2020
and the increment inGeneral Reserves on 31 -12-2020 assuming that no
amount is paid towards tax in 2020.Also ascertain the quantum of cash
gross profit of 2020 assuming that no depreciat ion is provided on Land.
12. From the following Financial statements of Grishma Limited prepare
a common size financialstatement and give your comments on them.
Profit and Loss Account for the year ended 31st March 2020
Particular ` Particular `
To Opening St ock 4,68,000 By Sales 23,40,000 To Purchases 14,04,000 By Closing Stock 7,02,000 To Wages 2,92,500 To Factory Overheads 2,92,500 To G.P. c/d 5,85,000 30,42,000 30,42,000 To Administrative
Expenses 87,750 By G.P. b/d 5,85,000 To Selling &
Distribution Expenses 58,500 By Dividend 35,100 To Depreciation 76,050 To Interest on
Debentures 23,400 To Net Profit c/d 3,74,400 6,20,100 6,20,100 To Preference Dividend
Paid 17,550 By Balance b/d 2,34,000 To Provision for Tax 1,22,8 50 By Net Profit b/d 3,74,400 To Surplus to Balance
Sheet 4,68,000 6,08,400 6,08,400
munotes.in
Page 104
Management Accounting
104 Balance Sheet as on 31st March 2013
Liabilities ` Assets `
Equity Share Capital 11,70,000 Goodwill 5,85,000 Preference Share Capital 5,85,000 Plant and Machinery 5,85,000 General Reserve 1,17,000 Land and Building 9,36,000 P and LA/c Balance 4,68,000 Furniture 1,17,000 Provision for Tax 1,22,850 Stock 5,85,000 Bill Payabl e 2,28,150 Bill Receivable 93,600 Bank Overdraft 1,17,000 Debtors 2,34,000 Creditors 5,85,000 Bank 2,57,400 33,93,000 33,93,000
13. From the following information of Sahani Enterpr ises prepare the
Common size Revenue Statement with Amountand % for the year
ended on 31st March, 2020 in a vertical form suitable for analysis
Particulars % on net sales of Rs.500000
Opening Stock 2
Closing Stock 2.25
Purchases 51
Office Expenses 4.5
Other Administrative Expenses 6.2
Distribution Expenses 5.7
Selling Expenses 4.65
Interest (Dr.) 1.80
Direct Wages 2B.30
Provision for Income tax is to be made @25% on net profit before tax.
munotes.in
Page 105
105 4
RATIO ANALYSIS
Unit structure:
4.0 Objectives
4.1 Introduction
4.2 Definition and Meaning
4.3 Importance and limitation of Accounting Ratios
4.4 Classification of Ratios -
4.5 Balance Sheet Ratios
4.6 Revenue Statement Ratios
4.7 Combined Ra tios
4.0 OBJE CTIVES
After studying the unit the students will be able to understand:
Meaning and definition of ratios
Advantages of preparing ratios
Importance of Ratio Analysis
Limitaions of Ratio Analysis
Calculate various ratios to assess solvency,liqu idity,efficiency and
profitability of the firm.
Apply ratio analysis to evaluate a company’s liquidity, performance &
risks.
Standardize financial information for comparision.
Compare present performance with past performance.
Evaluate current operations
4.1 INTRODUCTION
The basis for financial analysis, planning and decision making the
financial statements which mainly consist of Balance sheet and profit and
loss account.
The profit & loss account shows the operating activites of the concern
over a peri od of time and the balance sheet shows balance activites of
assets and liabilities in other words financial position of an organization at
a particular point of time.
However, the above statements do not disclose all of the necessary and
relevant informat ion. For the purpose of obtaining the material and munotes.in
Page 106
Management Accounting
106 relevant information necessary for ascertaining the financial strengths and
weeknesses of an enterprise, it is necessary to analyse the data depicted in
the financial statement.
The financial manager has certain analytical tools which helps in financial
analysis and planning . One of the main tool is Ratio Analysis let us
discuss the Ratio Analysis in this chapter.
4.2 RATIO DEFINITION & MEANING
Definition of Ratio
A ratio is defined as “the indicated qu otient of two mathematical
expressions and as the relationship between two or more things.” Here,
ratio means financial ratio or accounting ratio which is a mathematical
expression of the relationship between two accounting figures.
According to Myers,”Ra tio Analysis of financial statements is a study of
relationship amoung various financial factors in a business as disclosed by
a single set of statements and a study of trend of these factors as shown in
a series of statements.”
According to James C. Van H arne“Ratio is a yardstick used to evaluate
the financial condition andperformance of a firm, relating two pieces of
financial data to each other.”
According to Kohler “The relation of one amountA to another B expressed
as the ratioof A to B”.
“Ratio is the relationship or proportion that one amount bears to another,
the first number being the numerator and the later denominator.”
From the above definations we conclude that ratio analysis is gives us idea
about company or firms financial position. It is help ful for investors as
well as company also for future better performance also they can use it.
Meaning of Ratio analysis :
Ratio -Analysis means the process of computing, determining and
presenting the relationship of related items and groups of items of t he
financial statements. They providein a summarized and consise form of
fairly good idea about the financial position of a unit. They are important
tool for financial analysis.
Ratio is the numericl or as arithmatical relationship between two figures.
Ratio is simply one number expressed in terms of another.It is poweful
tools of the financial analysis.
The data given in the financial statement does not have any importance
unless a relationship is established among them . The ratio used to reveal
the re lationship of accounting data is called accounting ratio or ratio
analysis. munotes.in
Page 107
Ratio Analysis
107
Ratio may be expressed in terms of :
1) Proportion , pure, simple ratio E.g. Current asset:Current liabilities 2:1
2) Rate or times or days or coefficient e.g 5 times
3) In perc entage e.g. %
4) In fraction e.g.1/4th
Sources required for the Ratio analysis -
1) Annual Report
2) Financial statement
3) notes to accounts
4) statement of cash flow statement
Importance of accounting ratios :
Understanding financial statements are impor tant for stakeholders of the
company. Ratio analysis helps in understanding the comparison of these
numbers: furthermore it helps in estimating numbers from income
statements and balance sheets for the future. For e.g. equity shareholders
looks into the P/ E ratio, the dividend payout ratio etc. while creditors
observe debt to equity ratio, gross margine ratio, debt to asset ratio etc.
1. Ratio analysis is important in understanding the compamy’s ability to
generate profit. Return of asset, return on equity te lls us how much
profit the company is able to generate over assets of the firm. While
gross margin and operating margin ratios tell us the company’s ability
to generate profit from sales and operating efficiency.
2. From a managemetn and investor point of vi ew ratio analysis helps to
understand and estimate the company’s future finacials and
operations. Ratios formed from past finacial statement analysis helps
in estimating future fianacials, budgeting and planning for the future
operation of the company.
3. The company operates under various business,market,operations
related risks. Ratio analysis help in understanding these risks and
helps management to prepare and take necessary actios. Leverage
ratios help in preforming sensitivity analysis of various factor s
affecting the company’s profitability like sales, cost, debt, financial
leverage ratios like interest coverage ratio and debt coverage ratio tell
how much the company is dependant on external capital source.
4. Investor as well as the company’s management, makes a comparison
with competitiors company to understand efficiency, profitability and
market share, ratio analysis is helpful for companies to perfromn
SWOT (strengths, weakness,opportunities and threats) analysis in the
market. It also tells whether th e company is able to perform growth or
not over a period from past financials and whether the company’s
financials and whether the company’s financial position is improving
or not.
munotes.in
Page 108
Management Accounting
108 5. A better source of communication with customers, stakeholders, and
other o utsider who want to invest in the company.
6. Helps in understanding the profitability of the company for decision
making purpose.
7. Helps in identifying the business risks of the firm to protrect from
furture threats or any losses.
8. Helps in identifying the financial risks of the company for better
performance of the company or firm.
9. For planning and future forecasting of the firm ratio analysis helps
more.
10. To compare the performance of the firms ratio analysis give brief idea
about current position of the company.
11. Ratio analysis makes comparison easy for the user.one ratio is
compared with another ratio as it shows efficiecy or utilisation of
assets etc.
12. Ratio analysis helps the mangement for future best performance with
help of past performance experienc e.
Limitations of Accounting Ratios -
The limitaions of ratio analysis which arise primarily from the nature of
financial statements are as under:
1. Financial statements provide historical information. They do not
reflect current conditions. Hence, it is no t useful in predicting the
future.
2. Correct and standard ratio can be obtained only if we have true,
comparable or correct data. Lack of true comparison give false
results.
3. Different companies may have differnt accounting methods if two
forms follow diffe rnent accounting policies.Different accounting
policies regarding valuation of inventories, charging depreciation etc.
make the accounting ratios of two firms non -comparable.
4. It is essential to have information about the company regarding its
past as well as future transactions to have purposeful analysis. But
ratios give informations only about the past
5. Fixed assets show the position statement at cost only. Hence, it does
not reflcet the changes in price level. Thus, it makes comparison
difficult.
6. Accoun ting ratios are tools of quantitative analysis only. But it is
quite possible that qualitative aspect may be over quantitative aspects.
So in this case analysis may get distorted.
munotes.in
Page 109
Ratio Analysis
109 7. No fixed standards can be laid down for ideal ratios. Some times
ratios may be worked out for insignificant and unrelated figures. Such
ratios will be misleading.e.g. current ratio 2:1
8. It might possible that some firms may manipulate the data to bring
about changes to the ratio for displaying a better picture of the firn,
thus i n the ratio analysis there are scope of window dressing.
9. Ratio analysis may be missinterpret at a time because Profit and loss
acconut is based on actual numbers and balance sheet data is base on
historical so Due to mix of historical and actual numbers i t may not
give desired results.
10. Ratios are subject to arithmatical accuracy of the financial statements.
Moreover, financial statements also include estimated data like
provision for depreciation, for bad and doubtful debts etc. hence
results revealed by ratios are subject to such estimates.
11. Knowledge of ratios alone is meaningless unless their composition is
ascertained.
12. A ratio is a comparison of two figures, a numerator and a
denominator. In comparing ratios, it may be difficult to determine
whether difference are due to changes in the numerator, or in the
denominator or in both.
CLASSIFICATION OF RATIOS
The ratios are used for different purposes, for different users and for
different analysis. The ratios can be classified as under:
1. Traditional cl assification
2. Functional classification
3. Classification from the point of view of users
The above classifications can be elaborated as follows:
TRADITIONAL CLASSIFICATION
Form this point of view the ratios are classifited as follows:
1. Balance sheet rat ios:
This ratio is also known as financial ratios. The ratios which express
relationship between two items or group of items mentioned in the balance
sheet at the end of the year, Some examples of balance sheet ratios are as
follows:
Current ratio
Quick ratio
Propretary ratio
Stock to working capital munotes.in
Page 110
Management Accounting
110 Debt equity ratio
Capital gearing ratio
2. Income statement ratios:
This ratio is also known as Revenue statement ratios which expressed in
relationship between two items or two groups of items which are found i n
the income statement of the year.
Some examples of income statement ratios are as follows:
Gross profit ratio
Operating cost ratio
Operating profit ratio
Net profit ratio
Stock tournover ratio
3. Inter statement ratios:
These ratios shows the relationshi p between two items or two groups of
items of which one is from balance sheet and another from income
statement(trading a/c and profit & loss a/c and balance sheet)
Somr examples of inter statement ratios are as follows:
Return on investment
Return on equi ty capital ratio
Trade receivable turnover ratio
Trade payabeles turnover ratio
Fixed assets turnover ratio
Earning per share
FUNCTIONAL CLASSIFICATION :
The accounting ratios can also be classified according to their functions as
follows:
1. Liquidity Ra tios:
These ratios shows relationship between current assets and current
liabilities:
Some examples of liquidity ratios:
Current Ratio
Quick Ratio
2. Leverage R atios/Long term solvency ratios:
These ratios shows relationship between proprietor’s fund an d debts used
in finanacing the assets of the business organization.
Some examples of leverage ratios:
Debt equity ratio
Proprietary ratio
Capital gearing ratio
4. Activity Ratios/Turnover ratios :
This ratio is also known as turnover or productivity ratio or efficiency and
performance ratio. These ratio shows relationship between the sales and
the assets. These are designed to indicate the efficiency of the firm or munotes.in
Page 111
Ratio Analysis
111 company in using funds, degress of efficiency, and its standard of
performance of the organi zation.
Some examples of Activity ratios are as follows:
Stock turnover ratio
Trade receivables turnover ratio
Trade payables turnover ratio
Fixed assets turnover ratio
5. Profitability ratios:
These ratios show relationship between profits and sales a nd profit and
investments. It reflects overall performance of the organizations, its ability
to earn return on capital employed and effectiveness of investment policies
Some example of profitability ratios are as follows:
Gross profit ratio
Operating cost ratio
Operating cost ratio
Net proft ratio
Return on investment
6. Coverage ratios:
These ratios show relationship between profit in hand and claims of
outsiders to be paid out of profits.
Some examples of coverage ratios are as follows:
Dividend payout ratio
Debt service ratio
Debt service coverage ratio
CLASSIFICATION FROM THE POINT OF VIEW OF USERS :
Ratios from the users point of view are classified as follows:
1. Shareholder’s point of view :
These ratios are serve the purpose of shareholders. Sha reholders, generally
expect the reasonable return on their capital.They are interested in the
safety of shareholders investments and interest on it.
Some examples it as follows:
Return of proprietor’s fund
Return on capital
Earning per share
2. Long term creditors :
This ratio provides useful information to the long term creditors which
include debenture holders,vendors of fixed assets etc. The creditors
interested know the ability of repayment of principle sum and periodical
interest payments as and when they become due.
Some examples of it are as follows:
Debt equity ratio munotes.in
Page 112
Management Accounting
112 Return on capital employed
Proprietary ratio
3. Short term creditors :
The short term creditors are basically interested to know their repayment
ability of the firm. Therefore, the cr editors has important place on the
liquidity aspects of the company’s assets.
Some examples of it are as follows:
Current ratio
Debtor’s turnover ratio
Stock working capital ratio
4. Management :
Management is interested to use borrowed funds to improve t he earnings.
Some examples of its are as follows:
Return on capital employed
Turnover ratio
Operating ratio
Expense ratio
Balance sheet Ratios/ Liquidity Ratios/ Short term solvency Ratios :
The term ‘liquidity’ and ‘short -term solvency’ are used synonymou sly.
Liquidity or short -term solvency means ability of the business to pay its
short -term liabiliites.Inability to pay -off short -term liabilities affects its
credibility as well as its credit rating. Continuous default on the part the
business leads to com mercial bankruptcy. Eventually such commercial
bankruptcy may lead to its sickness and dissolution. Short -term lenders
and creditors of a business are very much intersted to know its state of
liquidity because of their finaicial stake. Both lack of suffic ient liquidity
and excess liquidity is bad for the organization.
1. Current Ratio : The Currrent Ratio is one of the best known measures
of short term solvency. It is the most common measures of short term
liquidity.
Current ratio measures whether a firm had enough resources to meet its
current obligations.
Formula:
Current Ratio = Current Assets
Current Liabilities
Current Assets= Inventories+Sundry Debtors+Cash and Bank
Balances+Receivables/Accruals+Loans and advances+Disposable
investment+any other current asset.
munotes.in
Page 113
Ratio Analysis
113 Current Liabilities= Creditor for goods and services+Short term
loans+bank overdraft+cash credit+outstanding expenses+provision for
taxation+proposed divided+unclaimed dividend+any other current
liabilites.
A generally accepted current rat io is 2:1 But whether or not a specific ratio
is satisfactory depends on the nature of the business and the
characteristics of its current assets and liabilities.
Example:
Calculate Current Ratio from the following information
Particulaers Rs.
Inven tories 50,000 Trade Receivables 50,000 Advance tax 4,000 Cash and cash equivalent 30,000 Trade payables 1,00,000 Short term borrowings(bank overdraft) 4,000
Solution:
Current Ratio = Current Assets /Current Liabilities
Current Assets = Inventories+T rade re ceivables+Advance
tax+Cash and cash equivalents
= Rs. 50,000+Rs.50,000+Rs.4,000+Rs.30,000
= Rs.1,34,000
Current liabilities = Trade payables+short -term borrowings
= Rs.1,00,000+Rs.4,000
= Rs.1,04,000
Current Ratio = Rs.1,34,000 / Rs.1,04,000 =1.29:1
Since, excess of current asset over current liabilities provide a measures of
safety margin available against uncertainty in realisation of current assets
and flow of funds.The ratio should b e reasonable.It should be neither be
very high or very low. Both the situations have their inherent
disadvantages. A very high current ratio implies heavy investment in
current assets which is not a good sign as it reflects under utilisation or
improper ut ilisation of resources. A low ratio dagerous for business and
put it at risk of facing a situation where it will not be able to pay its short -
term debt on time.Normally, it is safe to have this ratio within range
of 2:1
munotes.in
Page 114
Management Accounting
114 2. Quick or Liquid r atio-
It is the ratio of quick(or liquid) asset to current liabilities. It is expressed
as :
Quick ratio = Quick Asset:Current Liabilities
Or
Quick Assets
Current Liabilites
Quick assets means those assets which are quickly convertible into cash.
While calculating quick assets we exclude the inventories at the end and
other current assets such as prepaid expenses,advance tax etc. from the
current assets. Due to exclusion of non -liquid current assets it is better
than current ratio as a measur e of liquididty position of the business. It is
calculated to serve as a supplimentary check on liquidity position of the
business and is therefore,also known as ‘Acid -Test Ratio’.
Illustration:
Calculate quick ratio from the information given in illustr ation 1
Solution :
Quick Ratio = Quick Assets
Quick Liabilities
Quick Assets = Current Assets - (Inventories+Advance tax)
= Rs1,34,000 - (Rs.50,000+Rs.4,000)
= Rs 80,000
Quick Liabilities = Rs 1,04,000 – 4,000
Quick Ratio = Rs.80,000 = 0.80:1
Rs. 1,00,000
This Ratio Provides a measures of capacity of the business to meet its
short term obligation without any flaw. Normally, it is advovated to be
safe to have a ratio of 1:1 as unnecessarily low ratio will be very risky and
high ratio suggests unnecessarily deployment of resources in otherwise
less profitable short term investments.
3. Proprietary Ratio:
Proprietary ratio express relationship of properietors fund to net assets and
its calculated a s follows:
Properietary ratio = Shareholders fund
Capital employed/ Net assets
OR
Properietary ratio = Proprietary fund
Total Assets
munotes.in
Page 115
Ratio Analysis
115 Properietary fund includes equity share capital, preference s hare capital
and reserves and surplus
Total assets exludes fictitious assets and losses
This ratio indicates that the proportion of total assets financed by
shareholders. Higher the ratio less risky scenario it shall be
4. Stock Working Capital Ratio:
This ratio is calculated as follows:
Stock Working capital ratio = Closing Stock
Working Capital
This ratio indicates the extent of working capital turned over in achieving
sale of the firm
5. Capital Gearing Ratio:
Capital Gearing ratio is calcu lated to show the proportion of fixed interest
(Dividend) bearing capital to funds belonging to equity shareholders i.e
equity funds or net worth again higher ratio may indicate more risk
Capital Gearing ratio =
Preference share capital + Debentures+Ot her borrowed funds
_____________ ____________________ _________ ____
Equity Share Capital+ Reserves and surplus - Losses
6. Debt Equity Ratio:
Debt Equity ratio = Long Term Debt
Shareholder’s Fund
OR
= Total Outsid e liabilities
Shareholder’s Equity
OR
= Total Debt
Shareholder’s Equity
Where:
Shareholder’s Funds (Equity) = Share capital+ Reserves an d Surplus+
Money received against share warrants + Share application money
pending allotment
munotes.in
Page 116
Management Accounting
116 Share capital = Equity Share capital+ Preference Share capital
OR
Shareholder’s Fund(Equity) = Non Curren t assets + Working capital –
Non current liabilities
Working Capital = Current Assets - Current liabilities
Not merely Long term debt i.e both current and non current liabilities
Some times only interest bearing, Long term debt used instead of total
liabilities (exclusive of current liabilities)
A high debt to equity ratio means less protection for creditors, a low ratio
on the other hand indicates a wider safety for creditors. The ratio indicates
the proportion of debt fund in relation to equity. The r atio is used for
making capital strucrture decisions such as issue of shares and debentures,
lenders are also very eager to know this ratio since it shows relative
weights of debt and equity. Debt equity ratio is the indicator of firms
financial leaverage.
This ratio measures the degree of indebtedness of an enterprise and gives
an idea to the long term lenders regarding extend of security of the debt.
Illustration :
From the following balance sheet of ABC Co. Ltd as on March 31, 2022
Calculate debt equ ity ratio
Particulars Amount (Rs)
I. Equity and Liabilities
1. Shareholder’s Fund
(a) Share capital
(b) Reserves and surplus
(c) Money received against share warrants
2. Non current liabilities
(a) Lonag term borrowings
(b) other long term liabilities
(c) long t erm provisions
3. Current liabilites
(a) Short term borrowings
(b) Trade Payables
(c) Other Current Liabilities 12,00,000 2,00,000 1,00,000 4,00,000 40,000 60,000 2,00,000 1,00,000 50,000 munotes.in
Page 117
Ratio Analysis
117 (d) Short Term Provisions
II. Assets
1. Non current Assets
(a) Fixed Assets
(b) Non Current Investments
(c) Long Term Loans and advances
2. Current Assets
(a) Current Investment
(b) Inventories
(c) Trade Receivables
(d) Cash and cash Equivalents
(e) Short term loans and advances 1,50,000 25,00,000 15,00,000 2,00,000 1,00,000 1,50, 000 1,50,000 1,00,000 2,50,000 50,000 25,00,000 Solution:
Debt Equity Ratio = Debts
Equity
Debt = Long term borrowings+other long term liabilities+long term
Provisons
= Rs.4,00,000+Rs.40,000+Rs.60,000
= Rs.5,00,000
Equity = Share capital+Reserves and surplus+Money received against
share warrants
= Rs.12,00,000+Rs.2,00,000+Rs.1,00,000
= Rs.15,00,000
Alternatively,
Equity = Non current assets+working capital -non current liabilities
= Rs.18,00,000+Rs.2,00,000 -Rs.5,00,000
= Rs.15,00,000
Working Capital = Current assets -current liabilites
= Rs.7,00,000 -Rs.5,00,000
= Rs.2,00,000
Debt Equity Ratio = 50,000 = 0.33:1
1,50,000
munotes.in
Page 118
Management Accounting
118 Revenue Statement Ratio
1. Gross P rofit Ratio/Gross profit margin:
Gross profit ratio as a percentage of revenu from operations is computed
to have an idea about gross proft. It measures the percentage of each sale
in rupees remaining after payment for the goods sold.It is calculated as
follows:
Gross profit ratio = Gross profit × 100
Net Revenue of operations
Or
= Gross Profit × 100
Sales
Gross profit margin depends on the relationship between sales price,
volume and costs. A high Gr oss profit margin is a favourable sign of good
management.
2. Operating Ratio :
It is computed to analyse cost of operation in relation to revenun from
operations. Is is calculated as follow:
Operating Ratio = Cost of Revenue from operation+Operating
Expenses
_______ ________________________ ×100
Net Revenue from operation
Operating expenses include office expenses, administrative expenses,
selling expenses, distribution expeses, Depreciation and employee benefit
expens es etc.
Cost of operation is determined by excluding non -operating incomes and
expesnses such as loss on sale of assets, interest paid, dividend received,
loss by fire, speculation gain and so on.
Operating Profit Ratio
Operating profit ratio is also ca lculated to evaluate operating performance
of business or organisation.
Operating Profit Ratio = Operating profit ×100
Sales
Or
= Earning before interest and taxes(EBIT) ×100
Sales
Where as,
Operating profit=Sales -Cost of Goods Sold (COGS) - Operating expenses munotes.in
Page 119
Ratio Analysis
119 Operating profit ratio measures the percentage of each sale in rupees that
remains after the payment of all costs and expenses except for interest and
taxes. The ratio is followed closely by analysts because i t focuses on
operating results.operating profit is often referred to as earning before
interest and taxes or EBIT
3. Expense ratios:
Based on different concepts of expenses it can be expressed in different
variants as below:
I. Cost of goods sold(COGS)Ratio = COGS × 100
sales
II. Operating expenses ratio = Administrative exp+selling &
distribution OH × 100
Sales
III. Operating Ratio = COGS+ Operarting expenses × 100
Sales
IV. Financial Expenses Ratio = Financial expenses × 100
Sales
It excludes taxes, loss due to theft, goods destroyed by fire etc.
4. Net profit ratio:
Net profit ratio is based on all inclusive concept of profit .It relates
revenue from operations to net profit after operational as well as non -
operati onal expenses and incomes. It is calculated as under:
Net profit ratio= Net profit/Revene from operations × 100
Or
= Net profit/sales × 100
Or
= Earnings after taxes(EAT)/Sales × 100
Or
Pre-Tax Profit Ratio= Earnings before taxes (EBT) /Sales × 100
Generally, net profit refers to profit after tax (PAT)
It is a measures of net profit margin in relation to revenue from operations.
Besides revealing profitability. It is the main variable in computaion of
return on investment. It reflects the overall efficiency of the
business,assumes great significance from the point of view of investors.
Net profit ratio finds the proportion of revenue that find its way into
profits after meeting all expenses. A high net profit ratio indicates positive
returns from the business.
5. Stock turnover ratio :
This ratio is a considerable amount of a company’s capital may be tied up
in the financing of raw materials, work -in-progress and finsihed goods. It munotes.in
Page 120
Management Accounting
120 is important to ensure that the level of stocks is kept as low as possible ,
consistent with the need to fulfill customer’s orders in time.
Stock turnover ratio = COGS or Sales
Average Inventory
Average inventory = (Opening Stock+Closing Stock)/2
The highest the stock turnover rate or the lower the stock turnover period
the better, although the ratios will vary between companies.This ratio
measures that how many times stock has been sold during the year.
Combined Ratios :
1. Return on capital employed (ROCE) - It is another variation of ROI
the ROCE is calculated as follow.
ROCE(before tax)= Earnings before interest and taxes(EBIT) ×100
Capital Employed
ROCE (after tax) = EBIT(1 -t) × 100
Capital Employed
Sometimes it also calculated as
= Net profit after t axes (PAT/EAT) × 100
Capital Employed
Where as ,
Capital Employed = Total assets - Current liabilities
Or
= Fixed assets+Working capital
Or
= Equity+Long term debt
The return on capital employed should be always higher than the rate at
which the company borrows.
Intangible assets should be included in the capital employed.
No fictitious assets should be included in within capital employed.
If there is information available regarding average capital employed shall
be taken.
2. Return on proprietor’s Fund:
This ratio is important from shareholders point of view in assessing
whether their investment in the firm generates a reasonable return or not.
It should be higher than the return on investment otherwise it would imply
that company’s funds have not been employed profitability. munotes.in
Page 121
Ratio Analysis
121
A better measure of profitability from shareholders point of view is
obtained by determining return on total shareholder’s funds,it is also
termed as return on shareholder’s fund
Formula:
Return on proprieto r’s fund = Profit After Tax × 100
Shareholders funds
3. Return on equity share capital :
Return on equity measures the profitability of equity funds invested in the
firm or company. This ratio shows how profitability of the shareholder s
have been utilised by the company. This ratio also measures the
percentage of return generated to equity shareholders
ROE = Net profit after taxes -prefernce dividend(if any) × 100
Net worth/ equity shareholdre’s funds
4. Debtor’s Tu rnover Ra tio(Debtor’s Velocity):
This ratio measures whether the amount or resources tied up in debtors, is
reasonable and whether the company has been efficient in converting
debtors into cash.
Formula:
Debtor’s Turnover ratio = Credit Sales × 100
Average Debtores
Debtor’s Velocity Ratio = Average Debtors × 365 days
Credit sales
Average debtors collection period measures how long it takes to collect
amounts from this ratio
5. Earning Per share (EPS) :
The profitability of a firm fr om the point of view of ordinar y
shareholder’s can be measured in term of e arnings per share basis. It is
calculated as follow:
EPS = Net profit available to equity shareholders
Number of equity shares outstanding
This ratio is very important from equity shareholders point of view and
also for the share price in the stock market. This also helps comparision
with other to ascertain its reasonableness and capacity to pay dividend.
6. Dividend Payout ratio:
This ratio measures the dividend paid in r elation to net earnings. It is
determined to see to how much extent earnings per share have been
reatined by the management for the business.it is calculated as follows: munotes.in
Page 122
Management Accounting
122
Dividend payout ratio = Dividend per equity share (DPS)
Earning per share (EP S)
7. Price earning ratio:
The price earning ratio indicates the expectation of equity investors about
the earnings of the firm. It relates earnings to market price and is generally
taken as a summary measure of growth potential of an investment, risk
chara cteristics, shareholders orientation,coperate image and degree of
liquidity. It is calculated as
Price -Earnings per share (P/E Ratio ) = Market price per share (MPS)
Earning per share(EPS)
It indicates the payback period of the investor or pros pective investors. A
higher P/E ratio could either mean that a company’s stock is over -valued
or the investors are expecting high growth rate in future
Ratios at a glance :
Sr.
no Ratio Formula Interpretation
1 Current Ratio Current Asset
Current Liabil ities A simple measure that estimates
whether the business can pay short
term debts. Ideal ratio is 2:1
2 Quick Ratio Quick Assets
Current Liabilities It measures the ability to meet
current debt immediately. Ideal
ratio is 1:1
3 Proprietary
Ratio Proper ietary Fund
Total Assets It measures the proportion of total
assets financed by shareholders.
4 Stock working
capital ratio Closing Stock
Working Capital This ratio indicates the extent of
working capital turned over in
achieving sale of the firm
5 Capit al gearing
ratio (Preference+Debent
ures+other borowed
funds
(Equity share
capital+Reserves &
Surplus -losses) It shows the proportion of fixed
interest bearing capital to equity
shareholder’s fund. It also signifies
the advantage of financial leverage
to the equity shareholders.
6 Debt equity
ratio Long Term Debt
Shareholder’s Fund
OR
Total Outside
Liabilities This ratio measures the degree of
indebtedness of an enterprise and
gives an idea to the long term
lenders regarding extend of security
of the debt. munotes.in
Page 123
Ratio Analysis
123 Shareholder’s Equity
OR
Total Debt
Shareholder’s Equity
7 Gross profit
ratio Gross profit × 100
Sales This ratio tells us something about
the business’s ability & consistancy
to control its production costs or to
manage the margins it makes on
products i t buys and sells.
8 Operating ratio COGS+Operating
Expenses × 100
Sales It measures portion of a particular
expenses in comparison to sales
9 Operating
Profit ratio Operating profit × 100
Sales
OR
Earning before
interestand taxes
(EBIT) × 100
Sales
The ratio is followed closely by
analysts becauseit focuses operating
results. Operating profitis often
referred to as earning before
interest and taxes or EBIT
10 Expense ratio Administrative
exp+se lling & Distribution OH × 100
Sales It measures portion of a particular
expenses in comparison to sales
11 Net profit ratio Net Profit × 100
Sales It measures the relationship
between net profit and sales of the
business
12 Stock turnover
ratio COGS
Average inventory This ratio measures that how many
times stock has been sold during
the year.
13 Return on
capital
employed Before tax=
EBIT × 100
Capital Employed
Afer Tax =
EBIT (1 -t) × 100
Capital Employed It measures overall earnings(ei ther
before or after tax) on total capital
employed. munotes.in
Page 124
Management Accounting
124 14 Return on
Proprietor’s
Funds Profit after tax×100
Shareholder’s fund A better measure of profitability
from shareholders point of view is
obtained by determining return on
total shareholder’s funds.
15 Return on
equity share
capital Net profit after
taxes -prefernce
dividend (if any) ×
100
Net worth/ equity
shareholdre’s funds
It indicates earnings available to
equity shareholder’s in comparison
to equity shareholder’s net worth.
16 Debtor’s
Turnover ratio Credit sales × 100
Average Debtor’s It measures the efficiency at which
firm is managing its receivables.
17 Debtor’s
velocity Average Debtor’s
× 365days
Credit Sales It measures the velocity of
collection of receivables.
18
Earning p er
share Net profit available
to equity
shareholders
Number of equity
shares outstanding EPS measures the overall profit
generated for each share in
existence over a particular period.
19 Dividend
payout ratio Dividend per equity
share(DPS)
Equity per
share(EPS) It measures dividend paid based on
market price of shares.
20 Price Earning
ratio Market Price Per
Share (MPS)
Earning Per Share
(EPS) At any time, the P/E ratio is an
indication of how highly the market
“rates” or “values” a business. A
P/E ratio is best viewed in the
context of a sector or market
average to get a feel for relative
value and stock market pricing.
Exercise with solution
1) The following information available for the year 2021 -2022 calculate
GP ratio:
Revenue from the operatios: Cash 25000 Credit 75000 Purchases Cash 15000 Credit 60000 munotes.in
Page 125
Ratio Analysis
125 Carrigae inwards 2000 Salaries 25000 Decrease in inventory 10000 Return outwards 2000 Wages 5000
Solution:
Revenue from operations= Cash revenue from operat ions+Credit revenue
from operation
= Rs.25,000+Rs.75,000=Rs1,00,00
Net purchases = Cash purchases+credit purchases -Return outwards
= Rs15000+Rs.60000 -Rs.2000=Rs.73000
Cost of revenue from = Purchases+(opening inventory -closing
inventory)+Direct o perations expenses
= Purchases+Decrease in inventory+Direct Expenses
= Rs.73000+Rs10000+(Rs2000+Rs5000)
= Rs 90000
Gross profit = Revenue from operations -Cost of revenue from operations
= Rs100000 -Rs90000
= Rs10000
Gross profit ratio = Gross profit/Net revenue from operations 100
= Rs 10000/Rs100000 100
=10%
2) A trader carries an average stock of Rs.80,000. His stock turnover is 8
times. If he sells goods at profit of 20% on sales. Find out the profit.
Solution :
Stock turnover ratio = Cost of goods sold/Average stock
= Cost of goods sold/Rs.80,000
Cost of goods sold = Rs.80,000×8
= Rs.6,40,000
Sales= Cost of goods sold×100/80 munotes.in
Page 126
Management Accounting
126 = Rs.6,40,000×100/80
= Rs.8,00,000
Gross profit= Sales -Cost of goods sold
= Rs.8,00,000 -Rs.6,40,000
= Rs.1,60,000
3) The total sales (all credit) of a firm are Rs.6,40,000. It has a gross profit
margin of 15 per cent and a current ratio of 2.5 . The firm’s current
liabilities are Rs.96000 ; inventories Rs.48,000 and cash Rs.16,000.
a) Determine the average inventory to be carried by the firm, if an
inventory turnover of 5 times is expected?(Assume 360 days a year)
b) Determine the average collection period if the opening balance of
debtors is intended to be of Rs.80,000?(Assume 360 days a year).
Solution:
a) Inventory turnover = Cost of goods sold
Average inventory
Since gross profit margin is 15 per cent, the cost of goods sold should be
85 per cent of the sales.
Cost of goods sold=0.8 5×Rs.6,40,000=Rs.5,44,000
Thus, Average inventory = COGS/Inventory Turnover
= 5,44,000 /5
Average inventory = Rs.1,08,000
b) Average collection period = Average receivables ×360 days
Credit sales
Averagte receivables= (opening rec eivables+closing receivables) /2
Closing balance of receivables is found as follows:
Particulars Rs. Rs.
Current assets(2.5 of current
liabilities) 2,40,000 Less: Inventories 48,000 Cash 16,000 64,000 Closing Receivables 1,76,000
Average receivables = (Rs.1,76,000+Rs.80,000 )/2
= Rs.1,28,000
munotes.in
Page 127
Ratio Analysis
127 So, average collection period = Rs.1,28,000 ×360 days
Rs.6,40,000
= 72 days.
4) The following Trading and profit and loss account of fantasy ltd. For
the year 3 1/03/2022 is given below.
Particulars Rs. Particulars Rs.
To Opening stock 76,250 By Sales 5,00,000 To Purchases 3,15,250 By Closing stock 98,500 To Carriage and Freight 2,000 To Wages 5,000 To Gross profit c/d 2,00,000 5,98,000 5,98,000 To Administration
Expenses 1,01,000 By Gross profit b/d 2,00,000 To selling and dist
expenses 12,000 By non operating
incomes: Non operating expenses 2,0000 Interest on securities 1,500 Financial expenses 7,000 Dividend on shares 3,750 Net profit c/d 84,000 Profit on sale of
shares 750 2,06,000 2,06,000
Calculate:
1) Gross profit Margin 2) Expenses ratio 3) Operating ratio 4) Net profit
ratio 5) Operating (net ) profit ratio 6) stock turnover ratio
Solution:
1) Gross profit margin = Gross pr ofit × 100
Sales
= 2,00,000 × 100
5,00,000
= 40%
2) Expenses ratio = Op. Expenses ×100
Net sales
= 1,13,000 × 100
5,00,000
= 22.60%
3) Operating ratio = Cost of goods sold+op. expenses × 100
Net sales
= 3,00,000+1,13,000 × 100
5,00,000
= 82.60%
munotes.in
Page 128
Management Accounting
128 Cost of goods sold = Op. stock+purchases+carriage and freight+wages -
Closing stock
= 76,250+3,15,250+2,000+5,000 -98,500
= Rs.3,00,000
4) Net profit ratio = Net profit × 100
Net sales
= 84,000 × 100
5,00,000
= 16.8%
5) Operating profit ratio = Operating profit × 100
Net sales
Operating profit= sales -(op exp+admin exp)
87,000 × 100
5,00,000
= 17.40%
6) Stock Turnover ratio = Cost of goods sold
Avg stock
3,00,000
87,375
5) The Balance Sheet of Punjab Auto Limited as on 31 -12-2002 was as
follows
Particular Rs. Particular Rs.
Equity Share Capital 40,000 Plant and Machinery 24,000 Capital Reserve 8,000 Land and Building 40,000 Capital Reserve 8,000 Furniture & Fixtures 16,000 8% Loan on Mortage 32,000 Stock 12,000 Creditors 16,000 Debtors 12,000 Bank overdraft 4,000 Investment (Short -term) 4,000 Taxation: Cash in hand 12,000 Current 4,000 Future 4,000 Profit and Loss A/c 12,000 1,20,000 1,20,000 munotes.in
Page 129
Ratio Analysis
129 From the above, compute (a) the Current Ratio, (b) Quick Ratio, (c) Debt -
Equity Ra tio, and (d) Proprietary Ratio.
Solution:
(Problem related to Balance Sheet Ratio)
1. Current Ratio = Current Assets
Current Liabilities
Current Assets= Stock+debtors+Inve stment (Short term)+ Cash in hand
Current Liabilities=Creditors+bank overd raft+Provision for taxation
(Current & Future)
CA =12,000+12,000+4,000+12,000 = 40,000
CL=16,000+4,000+4,000+4,000 = 28,000
= 40,000
28,000
= 1.43:1
2. Quick Ratio = Quick Assets
Quick Liabilities
Quick Assets = Current Assets -Stock
Quick Liabilities = Current Liabilities - (BOD+PFT future)
QA= 40,000 -12,000
= 28,000
QL = 28,000 -(4,000+4,000)
= 20,000
= 28,000
20,000
= 1.40:1
3. Debt -Equity Ratio = Long Term Debt (Liabilities)
Shareholders Fund
LTL = Debentures + Long term loans
SHF = Eq.Sh.Cap.+ Reserves & Surplus+Preference Sh.
Cap. – Fictitious Assets
LTL = 32,000
SHF = 40,000+8,000+12,000
= 60,000
= 32,000
60,000
= 0.53:1
4. Proprietary Ratio = Shareholder’s Funds
Total Assets
SHF = Eq.Sh. Cap.+ Reserves & Surplus + Preference Sh.
Cap.-Fictitous Assets
Total Assets = Total Assets -Fictitious Assets
SHF = 40,000+8,000+12,000
= 60,000
TA = 1,20,000
= 60,000
1,20,000
= 0.5:1 munotes.in
Page 130
Management Accounting
130 6) Cash Purchased ratio Rs.1,00,000 cost of goods sold Rs. 3,00,000
opening stock Rs.1,00, 000 and closing stock Rs.2,00,000. Creditors
turnover ratio 3 times. Calculate the opening and closing creditors if the
creditors at the end were 3 times more than the creditors at the
begining.
Solution :
Total Purchase = Cost of goods sold + closing stock -opening stock
= Rs.3,00,000+2,00,000 – Rs.1,00,000
= Rs.4,00,000
Credit purchase = Total purchase -cash purchase
= Rs.4,00,000 -1,00,000
= Rs.3,00,0 00
Creditor Turnover Ratio = Net Credit Purchase / Average Creditor
Average Creditor = Rs. 3,00,000/ 3
= Rs.1,00,000
(Opening Creditor + Closing Creditor)/2=Rs.1,00,000
Opening Creditor + Closing Creditor ) = Rs.2,00,000
(Open ing Creditor + (Opening Creditor+3 Opening Creditor)
= Rs.2,00,000
Opening Creditor = Rs.40,000
Closing Creditor = Rs.40,000+(3×Rs.40,000)
= Rs.1,60,000
7) Calculate Gross Profit ratio from the following information:
Openin g stock Rs. 50,000; closing stock Rs.75,000; cash sale
Rs.1,00,000; credits sales Rs.1,70,000; Returns outwards Rs.15,000;
purchased Rs.2,90,000; advertisement expenses Rs.30,000; carriage
inwards Rs.10,000
Solution :
Cost of goods sold = Opening stock+ net purchase + direct expenses -
closing stock
= Rs. 50,000 + (Rs. 2,90,000 – Rs. 15,000) + Rs. 10,000 -Rs.75,000
= Rs. 2,60,000
Total Sales = Cash Sales + Credits Sales
= Rs.1,00,000+Rs.1,70,000
= Rs. 2,70,000
Gross profit = Total Sales -Cost of goods sold
= Rs.2,70,000 -Rs.2,60,000
= Rs. 10,000
Gross profit Ratio = 10,000×100
2,70,00 0
= 4.704%
munotes.in
Page 131
Ratio Analysis
131 8) M/s. Vinay Ltd. Presents the following Trading and Profit & Loss A/c
for the year ended 31. 4.2014 and balance sheet as on that date.
Trading and Profit and Loss account for the year ended 31. 4.2014
Particulars Amt Particulars Amt
To opening stock 2,00,000 By sales 12,00,000 To purchases 5,00,000 By closing Stock 4,00,000 To Wages 3,00,000 To Gross Profit c/d 6,00,000 16,00,000 16,00,000 To Salaries 1,50,000 By Gross Profit b/d 6,00,000 To Rent 60,000 By Profit on sale of
Machinery 5,000 To Commission 12,000 By Interest 15,000 To Advertising 20,000 To Interest 83,000 Depreciation 30,000 To Provision for tax 50,000 To Net Proft c/d 2,15,000 6,20,000 6,20,000 To Proposed 80,000 By bala nce b/f 1,85,000 To Preference 16,000 By Net profit b/d 2,15,000 To Balance c/d 3,04,000 4,00,000 4,00,000
Balance sheet as on 31. 4.2014
Liabilities Amt Assets Amt
Equity share capital
(Rs.100) 8,00,000 Land and Building 6,00,000 8% Pref. Sh.Capital 2,00,000 Plant and
Machinery 5,50,000 Reserve and surplus 3,04,000 Furniture 4,00,000 7% Debentures 5,00,000 Investment 2,70,000 Loan from IDBI 6,00,000 Stock 4,00,000 Creditors 1,50,000 Debtors 2,00,000 Bills Payable 50,000 Bills receivabl e 1,60,000 Provision for tax 50,000 Advance tax 30,000 Dividend Payable 96,000 Prepaid expenses 40,000 Cash in Hand 20,000 Bank Balance 60,000 Dis. On issue of
Debentures 20,000 27,50,000 27,50,000
munotes.in
Page 132
Management Accounting
132 Additional information :
1) The Market Pric e of equally shares as on 31.0 4.2014 was Rs. 90.
2) Out of total sales, 30% are cash sales and out of total Purchases,50%
are credit purhases. You are required to calculate the following Ratios:
a) Return on Capital employed
b) Price earning Ratio
c) Debt Service Ratio
d) Creditors Turnover Ratio
e) Retu rn of equity capital 208000
Solution:
Return on capital
employed NOPBIT
Capital Employed ×100
NOPBIT
Capital Employed 3,28,000 x 100
24,04,000
6,00,000 -1,50,000 -60,000 -
12,000 -20,000 -30,000
8,00,000+2,00,000+3 ,04,000+5
,00,000+6,00.000 14.64%
Creditors Turnover
Ratio Credit Purchase
Avg Creditors + Bills
payable 2,50,000
2,00,000
1.25 Time
Price Earning Ratio
EPS MPS
EPS
Net Profit -Pref. Div
No.of Equity Shares 90
24.88
2,15,000 -16,000
8,000 4.62
24.88
Return on Equity
Capital NPAT - Pref. Div
Eq.Sh Cap 2,15,000 - 16,000 × 100
8,00,000 24.875%
Debit Equity Ratio NPBIT
Interest 2,15,000+50,000+83,000
83,000 4.19 Times
9) X Co. has made plans for the next year. It is estimated that the
company will employ total assets of Rs.8,00,000; 50% of the assets
being financed borrowed capital at an interest cost of 8% per year. The
direct costs for the year are estimated at Rs. 4,80,000 and al l the
operating expenses are estimated at Rs.80,000. The goods will be sold
to customers at 150% of the direct costs. Tax rate is assumed to be
50%.
munotes.in
Page 133
Ratio Analysis
133 You are required to CALCULATE; (i) Operating profit margin (before
tax) (ii) net profit margin (after tax) (iii) return an assets (an operating
profit after tax); (iv) asset turnover and (v) return on owner’s equity.
Solution:
The net profit is calculated as follows:
Particulars Rs.
Sales (150% of Rs.4,80,000) 7,20,000 Direct costs (4,80,000) Gross profit 2,40,000 Operating expenses (80,000) Profit before interest and Tax (EBIT) 1,60,000 Interest changes (8% of Rs. 4,00,000) (32,000) Profit before taxes 1,28,000 Taxes (@) 50% (64,000) Net profit after taxes 64,000
(i) Operating profit margin = EBIT = Rs. 1,60,000 =0.2222 or 22.22%
Sales Rs. 7,20,000
(ii) Net profit margin = Net Profit after taxes = Rs.64,000 = 0.089 or 8.9%
Sales Rs.7,20,000
(iii) Return on assets = EBIT (1 -T) = Rs.1,60,000(1 -0.5) = 0.10 or 10%
Assets 8,00,000
(iv) Asset turnover = Sales = Rs.7,20,000 = 0.90x
Assets Rs.8,00,000
(v) Return on equity = Net Profit after taxes = Rs.64,000
Owner’s equity 50% of Rs.8,00,000
= Rs. 64,000 = 0.16 or 16%
Rs 4,00,000
10) From the following ratios and information given below, prepare
Trading Account, Profit and Loss Account and Balance Sheet of
Hibacus Company.
Fixed Assets Rs. 40,00,000
Closing Stock Rs. 4,00,000
Stock turnover ratio 10
Gross profit ratio 25%
Net profit ratio 20%
Net profit to capital 1/5
Capital to total liabilities 1/2
Fixed assets to capital 5/4
Fixed assets/Total cuurent assets 5/7 munotes.in
Page 134
Management Accounting
134 Solution:
Workings:
i. Fixed assets = 5
Total current assets 7
Or, Total current assets= Rs 40,00,000×7 =Rs.56,00,000
5
ii. Fixed assets = 5
Capital 4
Or, Capital= Rs.40,00,000×4 = Rs.32,00,000
5
iii. Capital = 1
Total liabili ties* 2
Or,Total liabilities = Rs.32,00,000×2 =Rs 64,00,000
*It is assumed that total liabilities do not include capital.
iv. Net profit = 1
Capital 5
Or, Net profit= Rs.32,00,000×1/5=Rs.6,40,000
v. Net profit = 1
Sales 5
Or, sales =Rs.6,40,000×5= Rs.32,00,000
vi. Gross profit=25% of Rs.32,00,000
vii. Stock Turnover = Cost of goods sold(i.e Sales -Gross profit)
Average Stock
10 = Rs.32,00,000 -Rs.8,00,000
Average Stock
Or, Average stock =Rs.2,40,000
Or, opening stock+Rs.4,00,000 =Rs.2,40,000
2
Or,Opening stock =Rs.80,000
munotes.in
Page 135
Ratio Analysis
135 Trading Account
Particulars Rs. Particulars Rs.
To opening Stock 80,000 By Sales 32,00,000 To Manufactuing
exp/purchases 27,20,000 To Gross profit b/d 8,00,000 By closing stock 4,00,000 36,00,000 36,00,000
Profit and loss account
Particulars Rs. Particulars Rs.
To opening
expenses
(Balancing figure) 1,60,000 By Gross profit c/d 8,00,000 To Net Profit 6,40,000 8,00,000 8,00,000
Balance sh eet
Capital and liabilities Rs. Assets Rs.
Capital 32,00,000 Fixed assets 40,00,000 Liabilities 64,00,000 Current assets: Closing stock 4,00,000 Other current
assets(bal figure) 52,00,000 96,00,000 96,00,000
Theory Questions :
1) Explain what is the ratio analysis?
2) What is the purpose of liquid ratio?
3) “Ratio analysis is the only tool and not a final decision.” Discuss.
4) Whar are the limitations of ratio analysis?
5) Discuss the benefits of ratios.
6) How are the ratio classified from the point of view o f users.
7) Write short notes on munotes.in
Page 136
Management Accounting
136 i. Quick ratio
ii. Debtors turnover ratio
iii. Earning per share
iv. Return on equity
Practice Problems
1) From the following balance sheet and other information, calculate
following ratios:
(i) Debt equity ratio
(ii) Working capital turnover ratio
(iii) Trade receivables turnover ratio
Balance sheet as a march 31, 2021
Particulars Rs.
1) Equity and liabilities
1) Shareholder’ s fund
(a) Share capital
(b) Reserves and surplus
(c) Money received against share warrants
2) Non-current Liabilities
Long term borrowings
3) Current liabilities
Trade payables
2) Assets
1) Non current assets
Fixed assets
-tangible assets
2) Current assets
(a)Inventori es
(b)Trade receivable
(c)Cash and cash equivalents 10,00,000 7,00,000 2,00,000 12,00,000 5,00,000 36,00,000 18,00,000 4,00,000 9,00,000 5,00,000 Total 36,00,000 munotes.in
Page 137
Ratio Analysis
137 1) Additional information:Revenue from operation Rs. 18,00,000
(Ans. Debt -Equity Ratio 0.63:1,Working capital turnover ratio 1.38 times,
trade receivables turnover ratio 2 times)
2) Cost of revenue from operations is Rs 1 ,50,000.Operating expenses are
Rs.60,000.Revenue from operations is Rs2,50,000.Calculate operating
ratio.
(Ans. Operating Ratio 84%)
3) From the following information calculate Gross profit ratio, inventory
turnover ratio and trade receivable turnover rat io.
Revenue from operations
Rs.3,00,000
Cost of revenue from operations Rs.2,40,000
Inventory at the end
Rs.62,000
Gross profit Rs.60,000
Inventory in the beginning Rs.58,000
Trade receivables Rs.32,000
(Ans:Gross pro fit ratio 20%, Inventory turnover ratio 4 times, Trade
receivables turnover ratio 9.375 times.)
4) Compute working capital turnover ratio, debt equity ratio and
proprietary ratio from the following information.
Paid up share capital
Rs.5,00,0 00
Current assets
Rs.4,00,000
Revenue from operations
Rs.10,00,000
13% Debentures Rs.2,00,000
Current liabilities Rs.2,80,000
(Ans: Working capital ratio 8.33 times, Debt –Equity ratio 0.4:1, and
proprietary ratio 0.71:1)
5)Ca lculate Debt equity ratio from the following information:
Total assets Rs.15,00,000
Current liabilities Rs.6,00,000
Total debts Rs.12,00,000
(Ans: Debt -Equity Ratio 2:1)
munotes.in
Page 138
Management Accounting
138 Multiple choice questions
1. Ratio of net sales to net workin g capital is a:
(a) Profitability ratio
(b) Liquidity ratio
(c) Current ratio
(d) Working capital turnover ratio
2. Long term solvency is indicated by
(a) Debt -equity ratio
(b) Current ratio
(c) Operating ratio
(d) Net profit ratio
3. Ratio of net profit befo re interest and tax to sales is:
(a) Gross profit ratio
(b) Net profit ratio
(c) Operating ratio
(d) Interest coverage ratio
4. Oberving changes in the financial variables across the year is:
(a) Verticle analysis
(b) Horizontal analysis
(c) Peer-firm anal ysis
(d) Industry analysis
5. The Receivables -turnover ratio helps management to:
(a) Managing resources
(b) Managing inventory
(c) Managing customer relationship
(d) Managing working capital
6. Which of the following is liquidity ratio?
(a) Equity ratio
(b) Proprietory ratio
(c) Net working capital
(d) Capital gearing ratio
7. Which of the following is not a part of Quick assets?
(a) Disposable investments
(b) Receivables
(c) Cash and cash equivalents
(d) Prepaid expenses
munotes.in
Page 139
Ratio Analysis
139 8. Capital gearing ratio is the fraction of:
(a) Preference share capital and debentu res to equity share capital and
reserves and surplus
(b) Equity share capital and reserves and surplus to prefernece share
capital and debentures
(c) Equity share capital to total assets
(d) Total assets to equi ty share capital
9. From the following information calculate P/E ratio:
Equity share capital of Rs.10 each
Rs.8,00,000
9% Preference share capital of Rs. 10 each
Rs.3,00,000
Profit (after 35% tax)
Rs.2,67,000
Depreciation
Rs.67,000
Market price of equity share Rs.48
(a)15 times
(b)16 times
(c)17 times
(d)18 times
10. A company has average accounts receivable of Rs.10,00,000 and
annual credit sales of Rs.60,00,000. Its average collection period
would be:
(a) 60.83 days
(b) 6.00 days
(c) 1.67 days
(d) 0.67 days
(Ans: 1 (d) 2(a) 3(c) 4(b) 5(d) 6(c) 7(d) 8(a) 9(b) 10(a)
munotes.in
Page 140
140 5
SOURCES OF FINANCE AND CASH FLOW
ANALYSIS
Unit Structure:
5.0 Objective
5.1 Introduction to Business Finance
5.2 Classification of Sources of Finance
5.3 Cash Flow Statement
5.4 Classification of Cash Flow Statement
5.5 Uses of Cash Flow statement
5.6 Preparation of Cash Flow Statement Direct and Indirect
5.7 Summary
5.8 Exercise
5.0 LEARNING OBJECTIVES
After studying this section learners will be able to:
State the purpose of business finance and classification of business
finance
State the aim for preparation ofstatement of cash flow statement;
Differentiate the operating activities,investing activities and financing
activities;
Make the statementof cash flows usingdirect method;
Make the cashflow statement usingindirect method.
5.1 BUSINESS FINANCE
Business Finance refers to the capital funds and the credit funds
capitalized in any type of organization. Business Finance refers to the
funds and credit involved in in any type of organization. Finance is the
basis of a corporate. Finance supplies are to acquisition assets, goods, raw
materials and for the other movement of financial activities . Let us
comprehend in -depth importance of Trade Finance.AS per the opinion of
Wheeler , “Finance is that business actions which is concerned with
achievement and preservation of capital fund in meeting the
monetaryrequirements and over all purposes of corporate” munotes.in
Page 141
Sources o f Finance and
Cash Flow Analysis
141 The monetary needs of a firm can be classified into two groups.
(i) Fixed capital requirement
(ii) Working capital requirement
5.2 CLASSIFICATION OF SOURCES OF FINANCE
(A) Period Basis :
On the basis of time period, a business finance can be categorized in to the
following three sections.
(a) Long Term Finance :
Funds which are essential to be invested in a business for a long period of
time that is more than five years are known as long term finance.
(b) Medium Term Finance :
The finance is very for business more than one year but less than five
years is recognized as medium term finance.
(c) Short Term Finance :
The finance necessary for a short period up to one year is known as short
term finance.
(B) Ownership Basis:
On the foundation of ownership, the bases can be categorized into
‘owner’s fund’ and ‘borrowed fund’ ,
Owner Fund :
It denotes to the funds donated by owners as well as the accrued profit of
the corporate this fund remains with the company and it has no liability to
return this fund. e.g., equity shares.
Borrowed Fund :
It mentions to the bor rowing of the corporate. It comprises all funds
obtainable by way of loans and by the way of credit.
(C) Source of Generation Basis :
Another basis of categorizing the sources of funds can be whether the
funds are generated from within the organization interna l or from
outsidebases.
(D) Sources of Finance :
Corporates can raise finance from the subsequent methods.
munotes.in
Page 142
Management Accounting
142 Retained Earning :
Retained earnings means undistributed profits after sum earning refers to
of dividend and taxes. It provides the basis of development and growth of
a firm.
Specifications of Retained Earnings :
(a) Cushion of safety
(b) Funds for o riginal and pioneering projects
(c) Intermediate and long term finance
(d) Conversion into possession fund
Trade Credit :
It refers to a groundwork whereby a producer is gran ted credit from the
dealer of raw materials, inputs spare parts etc. The dealer allow their
customers to pay their unsettled balance, with in a credit period. The
obtainability of trade credit depends upon
(i) Nature of the firm
(ii) Size of the firm
(iii) Status of the firm
(E) Factoring :
Factoring is a monetary service under which factor condenses the
following services
(i) Discounting of Bills of Exchange :
When goods are sold on credit then a dealer generally draws bills of
exchange upon consumers who are essential to accept t he same.
(ii) Providing Information Regarding the Creditworthiness of Future
Clients :
Factors gather detailed evidence regarding the financial history of
dissimilar companies which can used by the financier who may lend
money to these corporations.
(F) Lease Financ ing:
Leasing is a contract among lessor and lessee. Whereby the lessor permits
the lessee to use the asset attained by the lessor in return of a payment
named rent. Lessor is titled the owner of the assets and lessee hires the
assets by giving rent. With l easing contract the lessee can use the assets
without capitalizing a high amount of fund for purchasing it.
munotes.in
Page 143
Sources o f Finance and
Cash Flow Analysis
143 (G) Public Deposits :
Public deposits refers to loose deposits requested from the public. A
company wanting to invite public deposit places an announcem ent in
newspapers. Any member of the public can fill up the arranged form and
deposit money with the company. Dissimilar features of public deposits
are as under.
(i) Unsecured
(ii) Finance of working capital
(iii) Time age
(iv) Simple procedure to raise
(v) Refund
(H) Commercial Papers :
Commercial paper is a one type of good source of short finance. The
commercial paper was presented in India for the rust time in 1990. It is an
unsafe promissory note issued by public or private sector Company with a
fixed maturity date, which dif fers from 3 to 12 months. Since these are
unsecured that is why these are generally issued by companies having a
good repute.
(I) Issue of Shares :
Share is the minimum unit in which owner’s capital of the business is
divided. A share may also be defined as a unit of measure of a
shareholder’s interest in the firm.
According to Companies Act, a public company can issue two categories
of shares.
(i) Equity shares
(ii) Preference shares
Equity Shares :
Equity shares is a joint security issued under permanent or owner’s fun d
capital. Equity shares are the utmost important source of nurturing long
term capital.In Companies Act authorizing companies to issue two
categories of equity shares.
(i) Equity shares with equal rights.
(ii) Equity shares with differential rights as to divide.
Preference Shares :
Preference shares are those shares which get favorite over equity shares in
addition to munotes.in
Page 144
Management Accounting
144 (i) The payment of dividend.
(ii) The refund of inves tment amount during winding up.
(J) Debentures :
Debentures are common securities issued below borro wed fund capital.
Debentures are devices for elevating long time debt capital. Debentures
are called creditor deliver securities because debenture holder are known
as creditors of a company. Different functions of debentures are borrowed
fund
(i) Fixed rate of interest
(ii) Compulsory payment of interest
(iii) Security
(iv) Redeemable
(v) No, voting right
(vi) Appointment of trustee
(K) Commercial Banks :
Commercial banks occupy a completely crucial role as they offer price
range for exclusive purposes and distinctive durations. Companies o f all
sizes can approach commercial banks. Generally, industrial banks offer
short and medium time period loans but now -a-days they've began giving
long term loans in opposition to protection.
(L) Financial Institutions :
Public monetary establishments are call ed lending establishments.
Improvement banks or financial institutions, after independence the
government of India found out that for economic development of a rustic
only business banks are not enough. There should be financial institutions
to provide fin ancial help and steering to industries and business
corporations.
(M) International Source of Finance :
After the new financial policy of liberalization or globalization. The doors
of foreign corporations and buyers were opened to make investments
inside the I ndian companies. After 1991. The Indian groups tap
international resources of finance for each debt and fairness. The main
securities used by Indian agencies to tap international assets of finance are
given underneath
(i) Loans from Commercial Bank!’;
(ii) International Agencies and Development Bank
(iii) International Capital Market munotes.in
Page 145
Sources o f Finance and
Cash Flow Analysis
145 (a) GDR
(b) ADR
(c) lDR
5.3 CASH FLOW STATEMENT
Introduction:
The cash flow is the inflow i.e. receipt of cash and the outflow means
payment of Cash. Here the Cash means Cash and Cash equivalents. The
cash equivalents include Cash balance, Bank Balance, and the different
types of Marketable Securities. Cash Flow Statement means a statement
that indicates the inflows of cash and the outflows of Cash during the
particular pe riod. Inflows of cash means those transactions that rises the
Cash and Cash Equivalents. The Cash outflows are those transactions that
reduces the Cash and Cash Equivalents. This statement is arranged in
accordance with the Accounting Standard -3 on Cash Fl ow Statement. As
per the Accounting Standard -3, cash flows are obtainable under the three
heads i.e. Cash Flow from the Operating Activities, Cash Flow from the
Investing Activities and the Cash Flow from Financing Activities.
Cash plays a really imperati ve part within the financial life of a business .
A firm needs cash to make payments for suppliers, daily operations, to
make payment of salaries, wages, dividend and interest. In short it can be
said that as blood is important in the human body like that c ash is
important in the business life. Thus, it is exceptionally fundamental for a
business to preserve an adequate balance of cash. For instance , a concern
works beneficially but it does not have adequate cash balance to make
payment of dividend , what m essage does it pass on to the shareholders and
open in common . In this way , managing of cash is remarkably important .
There ought to be focus on drive of cash and its equals . Cash implies , cash
in hand and demand deposits. Cash equals comprises of bank ove rdraft,
cash credit, short term bank deposits .
Cash Flow Statement compacts with stream of cash which incorporates
cash reciprocals as well as cash. This explanation is an extradata to the
clients of Money related Statements. The articulation appears the
approaching and active of cash. The explanation surveys the capability of
the endeavor to produce cash and utilize it.Thus a Cash -Flow statement
may be characterized as aoutline of receipts and payment of cash for a
particular period of time. It moreover clarifies reasons for the changes in
cash position of the firm. Cash streams are cash inflows and outpourings .
Exchanges which increment the cash position of the substance are called
as inflows of cash and those which diminish the cash position as
outpouring s of cash.
munotes.in
Page 146
Management Accounting
146 5.4 CLASSIFICATION OF CASH FLOW STATEMENT
1. Cash Flow -Operating Activities:
The operating activities related to the vitalincome making exercises to a
business which comes under this category. Money Inflows for operating
activities in corporates Cash Deals , Collection from Indebted individuals
and the receipts of Commission and Eminence . Whereas Cash
Outpourings from the operating activities in corporates Cash Buys ,
Installment to lenders and pay of wages etc.
2. Cash Flow -Investing Activities:
The Investing events incorporates deal and buy of long -term fixed
resources as well as ventures . Money Inflows from the Contributing
Exercises comprises Pay from deal of fixed assets , Deal of investment ,
Wage from Interest and profit . Money Surges from the Contributing
Exercises incorporates the Buy of long term fixed resources i.e. Building,
Plant & Machineries, Furniture and fixtures and Investment etc.
3. Cash Flow from the Financing Activities:
The Financing e xercises incorporates capital and the other long term fund
generation activities of the venture. Money Inflows from the Financing
Exercises incorporates the continues from Issue of shares , Issue of
Debentures and the Long -term Borrowings i.e. Bonds, Loans, etc. Where
as money Surges from the Financing e xercises comprises Reimbursement
of loan and a dvances , Reimbursement of shares, Reimbursement of
Debentures, The buy -back of the equity shares . The payment of the
interest and the dividend.
Objectives -Cash Flow Statement:
To define the bases of Cash and Cash Equivalents under operating,
investing and financing doings of the organization.
To define the uses of Cash and Cash Equivalents for operating,
investing and financing doings of the organization.
To define the net alteration in Cash and Cash equival ents due to cash
arrivals and discharges for operating, investing and financing doings of
the organization that take place among the two balance sheet dates.
5.5 Uses of Cash Flow statement
To helpful for the Short -term Planning and forecasting:
It assis ts in planning of savings and assessing the financial supplies of the
enterprise based on evidence provided in the declaration about the inflow
and the outflow of Cash and Cash Equivalents.
To measure Liquidity and Solvency of the organization:
It assist s in recognizing the capability of the organization to meet its
responsibilities on time. munotes.in
Page 147
Sources o f Finance and
Cash Flow Analysis
147 To accomplish Cash Efficiently:
It delivers material about the cash location by reflecting whichever
anexcess of cash or a shortfall of cash in the report. This ass ists the
organization to take decisions about the investment of excess cash and the
preparation for deficit funds.
To simplifythe Relative Study:
It simplify the evaluation of actual cash flows with the planned cash flows
to recognize whether the arrival s and discharges of cash are moving as per
the schedule or not. Such assessment will also reproduce deviations of the
realarrivals and discharges from the budgeted cash flows for which
essential actions are then occupied by the initiative.
To validate Cas h Situation:
The Cash flow statement is arranged to record all the arrivals and
discharges which effect in the extra or deficit of cash for an organization.
Since, all the cash dealings are accessible in the report, it becomes easy to
recognize the items which increase or reductionin the cash balances.
To assessAdministration Decisions:
This statement categorizes the cash dealings under three separate heads
viz., operating, investing and financing cash. Such arrangement assist the
operators of the statem ent to evaluate whether the decisions taken by the
organization are suitable from investing and financing fact of view or not.
For payment of dividend :
To approve the dividends, every organization must comply with the
approved provisions for the payment of dividend. I also helps in
determining how much dividend the organization should pay in a specific
year.
Limitations -Cash Flow Statement:
Non-cash transactions are not shown:
This statement always takes into consideration merely cash arrivals and
cash discharges. Non -cash dealings are not measured for preparation of
cash flow statement.
Not analternative for a profit and loss statement :
This statement cannot be used as analternative for a profit and loss
statementbecause profit and loss statementi s prepared on accrual basis of
accounting while cash flow statement is prepared on the cash basis. It is
not imaginable to calculate net profit or loss from the statement of cash
flow.
munotes.in
Page 148
Management Accounting
148 Not an alternative for Balance Sheet:
This statement cannot be used a s an alternative for a financial position
showing statement i.e. the Balance Sheet. Therefore, this statement cannot
be taken as a substitute for Balance Sheet.
Historicby Nature:
This statement is prepared grounded on the cash arrivals and discharges
that have already taken place during the year and hence, it is pastby
nature.
Valuation of Liquidness:
The Cash flow statement takes into deliberation all the dealings of cash
and cash equivalents. This is just one of the mechanisms in the current
assets w hich regulate the liquidness position of the organization.
Therefore, cash flow statement alone cannot help in defining the
liquidness position of the organization.
Correctness of Cash Flow Statement:
The cash flow statement is arranged from the financial statements of an
organization, correctness of the same will depend upon how correctly the
monetary statements of the enterprise are arranged.
Expressions used in the Cash Flow Statement:
Cash:
It comprises Cash in hand and deposit with banks.
Cash Equi valents:
It comprises extremely liquid short -term investments that are freely
convertible into cash and that are subject to an unimportant risk of change
in value. It includes bill of exchange, commercial papers, investments etc.
Disclosure in Cash Flow Statement:
Cash and Cash Equivalent is calculated as under:
` Cash in Hand + Cash at Bank + Cheques + Drafts on Hand + Short -term
Investments (Marketable Securities) + Short -term Deposits in Banks
Classification of the Cash Flows for Cash Flow Statement :
Classification of Cash Flows as per Accounting Standard -3:
This standard on Cash Flow Statement needs that all the inflows and
outflows of the cash and cash equivalent during a specific period should
be categorized under 3 different heads as per the na ture of dealings. These
3 heads are explained as below:
munotes.in
Page 149
Sources o f Finance and
Cash Flow Analysis
149 (a) Fund from Operating Activities:
These are the principal revenue making activities of an entity. It comprises
all non -investing and non -financing doings. In a cash flow statement, net
result of all the inflows and outflows from functioning activities is shown
as Cash Flow from Operating Activities. Subsequent is the list of
operating doings for:
(I) Financial Companies:
It comprises all dealingsconnected to: a. acquisition of securities; b. sale of
securities; c. interest on loans; d. interest on loans occupied; e. dividends
on securities; f. salaries and bonus g. income tax paid.
(II) Non-Financial Companies:
It comprises all dealings connected to: a. acquisition of goods; b. sale of
goods c. amounts recei ved from trade receivables; d. Trade payables; e.
commission, etc.; f. wages and salaries g. payment of claims h. income
tax
(b) Fund from Investing Activities:
These include all doings related to the purchase and clearance of Long -
term Assets and other inv estments which are not categorized as cash
equivalents. Subsequent is the list of investing activities: a. acquisition of
fixed assets; b. sale of fixed assets; c. acquisition of securities; d. disposal
of securities; e. loans and advances
(c) Fund from Finan cing Activities:
These are that type of activities that alteration the size and composition of
the owner’s capital as well as borrowings of the firm. Subsequent is the
list of financing doings: a. issue of shares; b. issue of debentures c. loans
and bo nds d. short -term borrowings; e. bank overdraft as well as cash
credit.
Transactions not regarded as Cash Flow:
These are the dealings that are mere actions in between the items of Cash
and Cash Equivalents. This comprises cash deposited in bank, cash
withdrawn from the bank etc.
Non-cash transactions:
These are the dealings in which the inflow or outflow of Cash does not
take place. So, these non -cash dealings are not deliberated while making
the Cash Flow Statements. These dealings comprise depreciatio n, issue of
bonus, etc.
munotes.in
Page 150
Management Accounting
150 Significance of separate expose of cash flows under each activity:
Operating Activities:
It acts a pointer of the extent to which the business processes successfully
generate cash.
It controls operating efficiency of the bus iness.
It helps in taking dynamic decisions with connection with cash for
payment of dividends to shareholders, make new investments, expand
projects, etc.
It helps in predicting and projecting upcoming cash flows.
Investing Activities:
It signifies th e extent to which expenditure has been experienced to
generate future revenue
Financing Activities:
It contributes in assessing claims on future cash flows by contributors of
funds to the business.
Format of Cash Flow Statement
Extraordinary Items:
All the incomes and expenses that arise from events or transactions that
are clearly separate from the ordinary course of business of the enterprise
are termed as extraordinary items. All such items are not expected to recur
frequently or regularly. It compri ses items such as payment to
shareholders in the event of buy back of shares, claim for damages
received, etc.
5.6 PREPARATION OF CASH FLOW STATEMENT
DIRECT AND INDIRECT
Cash Flow from Operating Activities
(A) Cash Flow from Operating Activities:
Indirect M ethod:
In this method, Cash Flow from Operating Activity is considered from
statement of Profit and Loss and Balance Sheet with the help of following
steps:
Step 1:
Calculate the Net Profit before Tax and Extraordinary Items.
munotes.in
Page 151
Sources o f Finance and
Cash Flow Analysis
151 Step 2:
Calculate the Op erating Profit before Working Capital Changes.
Step 3:
Compute the Cash generated from Operating Activities.
Step 4:
Compute the Cash flow from Operating Activities before Extraordinary
Items.
Step 5:
Compute the Cash flow from (or used in) Operating Activity.
(B) Cash Flow from Investing Activities:
These comprise all activities related to the acquisition and disposal of
Long -term Assets and other investments which are not categorized as cash
equivalents. All cash inflows and outflows connecting to the f ixed assets,
shares and related instruments of other enterprise including loans and
advances to third parties and their repayments are classified under
Investing Activities.It shows the degree to which investments have been
made for resources that produce revenue and cash flows in future. It is
determined by analyzing the deviations in fixed assets, long -term
investments in the start and at the end of the year for which particular
accounts can be prepared using the values that are available.
(C ) Financing Activities:
These are those doings that change the size and composition of the
owner’s capital and borrowings of the firm. It is beneficial in estimating
claims on cash flows by lenders of funds in future and therefore, are
shown distinctly. It is calcul ated by analyzing change in Equity and
Preference Share Capital, Debentures and other borrowings. It also takes
into deliberation the amounts paid on account of interest and dividend. If
shares or debentures are delivered at a premium, Cash Flow Statement
shows total cash received from the issue that comprises both insignificant
value and the premium. Any amount of share issue expenditures and
underwriting commission is a cash outflow from financing activities. o It
does not take into consideration bonus is sue as it is just a capitalization of
reserves for which the company does not receive any cash for it. Similarly,
conversion of debentures into new debentures or shares involves no cash
flow and consequently not considered in a cash flow statement.
Prepara tion of Cash Flow Statement
Steps for Preparing Cash Flow Statement:
Step 1:
Compute cash flow from Operating Activities. munotes.in
Page 152
Management Accounting
152 Step 2:
Compute cash flow from Investing Activities.
Step 3:
Compute cash flow from Financing Activities.
Step 4:
Adding Step 1, Step 2 and Step 3 above, compute the net increase or
decrease in Cash and Cash Equivalents.
Step 5:
Amount computed in Step 4 is to be added to the balance of Cash and
Cash Equivalents in the start of the year.
Step 6:
Adding Step 4 and Step 5 wil l give the balance of Cash and Cash
Equivalents at the end of the year which will match the balance as per
Balance Sheet.
Precautions for preparing Cash Flow Statement:
Balance in Statement of Profit and Loss:
Identify whether the balance in the Stateme nt of Profit and Loss is positive
or negative. When the opening balance is negative, it is to be added to the
closing balance and when the opening balance is positive, it is to be
deducted from the closing balance.
Balance of Other Reserves:
Identify whe ther the balances of other reserves have increased or
decreased. When the increase is due to appropriation from Surplus, i.e.,
Balance in Statement of Profit and Loss, it is to be added to compute Net
Profit before tax and Extraordinary Items.
Interest on borrowings:
Identify if the percentage of interest on borrowings is given and add the
amount of interest paid to compute Net Profit before Working Capital
Changes and show it as an ‘Outflow’ under Cash Flow from Financing
Activities.
Interest on Investme nt:
Identify if the percentage of interest on Investment is given and deduct the
amount of interest received to compute Net Profit before Working Capital
Changes and show it as an ‘Inflow’ under cash Flow from Investing
Activities
munotes.in
Page 153
Sources o f Finance and
Cash Flow Analysis
153 Non-cash Expenses:
Identify if non -cash expenses are given and add them to compute Net
Profit before Working Capital Changes.
Non-operating Expenses:
Identify if non -operating expenses are given and add them to compute Net
Profit before Working Capital Changes. It will be sh own as an outflow
under appropriate head.
Non-operating Incomes:
Identify if non -operating incomes are given and deduct them to compute
Net Profit before Working Capital Changes.
5.6 PRACTICAL PROBLEMS
Problem No. 1
Prepare a Cash - Flow Statement from t he following Balance Sheet of
Narayan Industries Ltd. Mumbai.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 2,50,000 2,00,000 b) Reserve & Surplus 1 1,83,000 82,000 2) Non-Current Liabilities : Long term Borrowings 2 80,000 50,000 3) Current Liabilities : Trade Payable 1,62,000 1,30,000 Total 6,75,000 4,62,000 II Assets : 1) Non - Current Assets : a) Fixed Assets 2,74,000 1,17,000 b) Long-term investments 68,000 55,000 2) Current Assets : a) Inventory 3 2,06,000 1,50,000 b) Trade Receivables 32,000 70,000 c) Cash & Cash Equivalents 95,000 70,000 Total 6,75,000 4,62,000 munotes.in
Page 154
Management Accounting
154 Note : 31.03.2018 31.03.2017
1) Reserve &Su rplus : Profit & Loss
Balance 1,83,000 82,000
7,00,000 7,50,000
2) Long -term Borrowings : 15%
Debentures 8,000 50,000
3) Trade Receivables :
S. Debentures 20,000 60,000
Bills Receivables 12,000 10,000
32,000 70,000
Solution :
Cash Flows from Operating Activities
for the year ended 31st March, 2016
Particulars Details Amount
A) Cash Flows from Operating Activities : Net Profit before Tax : 101000 Adjustment for non -cash & non -operating
items : Add : Interest paid 9000 Operating Profit before working capital
charges 110000 Add : Decrease in Current Assets : Sundry Debtors 40000 Add : Increase in Current Liabilities : Trade Payables 32000 72000 182000 Less : Increase in Current Assets : Inventory 56000 Bills Receivable 2000 (58000) Net Cash from Operating Activities 124000 B) Cash Flow from investing Activities : Purchase of Fixed Assets (157000) munotes.in
Page 155
Sources o f Finance and
Cash Flow Analysis
155 Purchases of Non -current Investments (13000) (1,70,000) Net Cash used in investing Activities (1,70,000) C) Cash Flow from Financing Activities : Issue of Shares 50000 Proceeds from 15% Debentures 30000 Interest Paid (9000) 71,000 Net Cash from Financing Activities 71,000 Net Increase in Cash & Cash equivalents
(124000 - 170000 + 71000) Add : Cash in the beginning of the year 70,000 Cash & Cash equivalents at the end of the
period 95,000
Working Note :
Profit & Loss balance on 31.03.2018 1,83,000
Less : Profit & Loss Balance on 31.03.2 017 82,000
Net Profit 101000
Problem No. 2
Following is the balance sheet of Ashok Industries Ltd. Nagpur prepare
cash flow.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 3,20,000 2,50,000 b) Reserve & Surplus 23,000 10,000 2) Current Liabilities : Trade Payables 45,000 70,000 Total 3,88,000 8,30,000 munotes.in
Page 156
Management Accounting
156
II Assets :
1) Non - Current Assets :
a) Fixed Assets 65,000 50,000 b) Long -term investmen ts 62,000 40,000 2) Current Assets : a) Current Investments 8,000 10,000 b) Inventory 90,000 80,000 c) Trade Receivables 1,15,000 1,20,000 d) Cash & Cash Equivalents 47,000 32,000 Total 3,88,000 3,30,000
Solution :
Cash Flows from Operating Activities for the year ended 31st March,
2016
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Profit before Tax : 13000 Add : Decrease in current Assets : Trade Receivables 5000 5000 1800 0 Less : Increase in Current Assets : Inventory 10000 72000 Less : Decrease in Current Liabilities : Trade Payables 25000 (35000) Net Cash from Operating Activities (17000) B) Cash Flow from investing Activities : Purch ase of Fixed Assets (16000) Purchases of Non -current Investments (22000) (38,000) Net Cash used in investing Activities (38,000) munotes.in
Page 157
Sources o f Finance and
Cash Flow Analysis
157
C) Cash Flow from Financing Activities :
Issue of Shares 70000 70000
Net Cash from Financing Activities (70,00 0)
Net Increase in Cash & Cash equivalents
(17000) - (38000) + 70000 15000
Add : Cash in the equivalent in the beginning
of the period 40,000
Cash & Cash equivalents of the end of the
period 55,000
Working Note :
Reserve and Surplus on 31.03.2018 23,000
Less : Reserve & Surplus on 31.03.2017 10,000
Net Profit 13,000
Problem No. 3
Following are the Balance sheets of Ajay Company Ltd. Solapur.
Particulars Note
No. 31.03.2018 31.03.2017
I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 4,00,000 3,00,000 b) Reserve & Surplus 1 60,000 50,000 2) Non-current Liabilities : Long - Term Borrowings 2 1,40,000 1,70,000 3) Current Liabilities : Trade Payables 3 1,48,000 1,25,000 Total 7,48,000 6,45, 000 munotes.in
Page 158
Management Accounting
158
II Assets : 1) Fixed Assets : a) Tangible Assets 2,96,000 1,72,000 b) Long -term investments 45,000 60,000
2) Current Assets :
a) Inventory 2,80,000 2,00,000 b) Trade Receivables 94,000 1,23,000 c) Cash & Cash Equivale nts 18,000 80,000 d) Other Current Assets 15,000 10,000 Total 7,48,000 6,45,000
Note : 31.03.2018 31.03.2017
1) Reserve &Surplus :
Retained Farming 60,000 50,000 2) Long -term Borrowings : 15% Mortage Loan 1,30,000 1,00,000 Public Deposi ts 10,000 70,000 1,40,000 1,70,000 3) Trade Receivables : S. Debtors 1,40,000 1,10,000 Bills Receivables 8,000 15,000 1,48,000 1,25,000 4) Other Current Assets : Prepaid Insurance 15,000 10,000
Interest paid on Mortgage loan amounted to `18,000. You are required to
prepare a Cash Flow Statements.
munotes.in
Page 159
Sources o f Finance and
Cash Flow Analysis
159 Solution :
Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities : Net Profit before Tax : 10000 Adjustments for non -cash &non operating
items Add : Intangible Assets written off Trade Receivables 15000 38000 Operating profit before working capital 48000 Add : Decrease in Current Assets : Trade Receivables 2900 0 72000 Add : Increase in Current Liabilities : Sundry Creditors 30000 59000 102000 Less : Decrease in Current Liabilities Bills Payables 7000 Less : Increase in Current Assets Inventory 80000 Prepaid Insurance 5000 (90000) Net Cash from Operating Activities 10000 B) Cash Flow from investing Activities : Purchase of Tangible Assets (16000) Net Cash used in investing Activities (124000) (124000) (124000) C) Cash Flow fro m Financing Activities : Issue of Shares 100000 Proceeds from Mortgage Loan 30000 Repayments of Public Deposits (60000) Interest Paid (18000) (52000) Net Cash from Financing Activities 52,000 Net Decrease in Cash & Cash Equivalents
(10000) + (124000) + (52000) (62000) Add : Cash and Cash equivalents in the
beginning of the period 80000 Cash & Cash equivalents of the end of period 18000
munotes.in
Page 160
Management Accounting
160 Working Note :
Reserve Earnings on 31.03.2018 60,000
Less : Retained Earnings on 31.03.2017 50,00 0
Net Profit 10,000
Problem No. 4
Following are the Balance Sheet of Krishna Industries Ltd. Pune.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 12,00,000 8,00,000 b) Reserve & Surplus 3,50,000 4,00,000 2) Non-Current Liabilities : Long term Borrowings 4,40,000 3,50,000 3) Current Liabilities : Trade Payable 60,000 50,000 Total 20,50,000 16,00,000 II Assets : 1) Non - Current Assets : a) Fixed Assets 12,00,000 9,00,000 2) Current Assets : a) Inventory 2,00,000 1,00,000 b) Trade Receivables 3,10,000 2,30,000 c) Cash & Cash Equivalents 3,40,000 3,70,000 Total 20,50,000 16,00,000
Prepare a Cash Flow Statements aft er taking into account the following
adjustments.
a) The company paid interest `36,000 on its long term borrowings.
b) Deprecation charged on tangible fixed assets was `1,20,000.
munotes.in
Page 161
Sources o f Finance and
Cash Flow Analysis
161 Solution :
Cash Flows from Operating Activities for the year ended 31st Mar ch,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Profit before Tax : (50000) Adjustment for non -cash & non -operating
items : Add : Depreciation on Fixed Tangible Assets 1,20,000 Interest on long -term Borrowings 36000 156000 Operating Profit before working capital
changes 106000 Add : Increase in Current Liabilities : Trade Payables 10000 10000 116000 Less : Increase in Current Assets : Inventory (100000) Trade Receivable (80000) (180000) Net Cash from Operating Activities 64000 B) Cash Flow from investing Activities : Purchase of Tangible Assets (420000) (420000) Net Cash from investing Activities (420000) C) Cash Flow from Financing Activitie s : Proceeds from issue of Equity share Capital 400000 Proceeds from long term borrowing 90000 Payments of interest on long -term Borrowing (36000) 454000 Net Cash from Financing Activities 454000 Net Decrease in Cash & Cash equivalents
(64000) + (420000) + 454000 (30000) Add : Cash & Cash equivalents in the
beginning 370000 Cash & Cash equivalents at the end period 340000
munotes.in
Page 162
Management Accounting
162 Working Note :
Date Particulars ` Date Particulars ` To Balance b/d 900000 By
Depreciation
A/c 120000
To Bank A/ c (B/f) 420000 By Balance c/d 1200000 1320000 1320000
Problem No. 5
Following are the Balance Sheet of Maya Industries Ltd. Kolhapur.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 2,00,000 2,00,000 b) Reserve & Surplus 1,25,000 20,000 2) Non-Current Liabilities : Long term Borrowings 75,000 50,000 3) Current Liabilities : a) Trade Payable 64,000 90,000 b) Short Term Provisions 15,000 10,000 Total 4,79,000 3,70,000 II Assets : 1) Non - Current Assets : a) Fixed Assets 3,23,000 1,84,000 2) Current Assets : a) Inventory 72,000 50,000 b) Trade Receivables 51,000 75,000 c) Cash & Cash
Equivalents 33,000 59,000 d) Other Current Assets 1,000 Total 4,79,000 3,70,000 munotes.in
Page 163
Sources o f Finance and
Cash Flow Analysis
163 Working Note :
31.03.2018 31.03.2017
1) Fixed Assets : 3,75,000 2,20,000
Less : Accumulated Depreciation 52,000 36,000
3,23,000 1,84,000
2) Other Current Assets :
Prepaid Expenses 2000
Additional Information :
31.03.2018 31.03.2017
1) Contingent Liability
Proposed Dividend 28000 20000
2) Interest paid on long - term
borrowings amount to Rs. 800
You are required to prepare a Cash Flow Statements.
Solution :
Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Profit before Tax : 140000 Adjustment for non -cash & non -operating
items : Add : Depreciation on F ixed Assets 16,000 Interest paid on long -term Borrowings 8000 24000 Operating Profit before working capital
changes 164000 Add : Increase in Current Assets : Trade Receivables 24000 Prepaid Expenses 2000 26000 190000 munotes.in
Page 164
Management Accounting
164
Less : Increase in Current Assets : Inventory 22000 Less : Current Liabilities : Trade Payables 26000 48000 142000 Less : Payment of Tax 10000 Net Cash from Operating Activities 132000 B) Cash Flow from investi ng Activities : Purchase of Fixed Assets 155000 155000 Net Cash used investing Activities 155000 C) Cash Flow from Financing Activities : Proceeds from Long Term Borrowings 25000 Payments of Dividends (20000) Payments of interest (8000) (3000) Net Cash from Financing Activities (3000) Net Decrease in Cash & Cash equivalents
(1,32,000) + (1,55000) + (3000) (26000) Add : Cash & Cash equivalents in the
beginning period 59000 Cash & Cash equivalents at the end of the
period 33000
Wor king Note :
Fixed A/c
Date Particulars Date Particulars `
To Balance b/d 220000 By Balance c/d 375000
To Bank A/c (B/f) 155000
375000 375000
munotes.in
Page 165
Sources o f Finance and
Cash Flow Analysis
165 Accumulated Depreciation A/c
Date Particulars ` Date Particulars `
To Balance b/d 52000 By Bal ance c/d 36000
By Statement Profit
& Loss A/c 16000
52000 52000
Calculation of Net Profit before Tax
Reserve & Surplus balance on 31st March 2018 `125000
Less : Reserve & Surplus Balance 31st March 2017 `70000
`105000
Add : Proposed Divid end for previous year `20000
Add : Provision for Tax & mad during the year `15000
Net Profit before Tax `140000
Problem No. 6
Prepare a Cash - Flow Statement from the following Balance Sheet of
Mohan Industries Ltd. Mumbai.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds : a) Share Capital 2,80,000 2,50,000 b) Reserve & Surplus 1 1,92,000 1,20,000 2) Non-Current Liabilities : Long term Borrowings 2 -- 30,000 3) Current Liabilitie s : a) Short term Borrowings 3 40,000 70,000 b) Trade Payables 93,000 1,76,000 c) Short term Provisions 4 30,000 22,000 Total 6,35,000 6,68,000 munotes.in
Page 166
Management Accounting
166
II Assets : 1) Non - Current Assets : a) Fixed Assets 5 3,65,000 3,50,000 b) Tangible Assets 42,000 60,000 Intangible Assets 30,000 62,000 2) Current Assets : a) Inventory 80,000 1,20,000 b) Trade Receivables 1,00,000 66,000 c) Cash & Cash Equivalents 18,000 10,000 Total 6,35,000 6,68,000
Note : 31.03.2018 31.03.2017
1) Reserve &Surplus :
General Reserve 1,25,000 1,00,000 Profit & Loss Balance 67,000 20,000 1,92,000 1,20,000 2) Long -term Borrowings : 12%
Debentures -- 30,000 3) Short -term Provision : Provisions for Tax 30,000 22,000 4) Short term Borrowing : Bank Overdraft 40,000 70,000 5) Tangible Assets : Land & Building 50,000 2,00,000 Plant and Machinery 3,15,000 1,50,000 3,65,000 3,50,000
munotes.in
Page 167
Sources o f Finance and
Cash Flow Analysis
167 Debentures were redeemed on 1st April 2017.
Cash Flows from Operating A ctivities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating systems :
Profit before Tax : 102000 Adjustment for non -cash & non -operating items : Add : Interest paid on long -term borrowings 18000 18000 Operating Profit before working capital changes 120000 Add : Decrease in Current Assets : Inventory 40000 40000 160000 Less : Increase in Current Assets : Trade Receivables 34000 Less : Decrease in current liabilities : Trade Payables 83000 117000 43000 Less : Payment of Tax 22000 Net Cash from Operating Activities 21000 B) Cash Flow from investing Activities : Sale of Land Building 150000 Purchases of Plant & Machinery (165000) (1,70,000) Sale of Non -Current Investment 32000 17000 Net Cash used in investing Activities (17,000) C) Cash Flow from Financing Activities : Issue of Shares 30000 Redemption of Debentures (30000) Repayment of Bank Overdraft (30000) (30000) Net Cash from Financing Activities (30,000) Net Decrease in Cash & Cash equivalents 21000 +
17000 + (30000) 8000 Add : Cash and Cash equivalents in the beginning
of the Period 10,000 Cash & Cash equivalents at the end period 18,000 munotes.in
Page 168
Management Accounting
168 Working Note :
Calculation of Net Profit before Tax :
Profit & Loss balance on 31.03.2018 `67,000
Less : Profit & Loss Balance on 31.03.2017 `20,000
`47,000
Add : Transfer to General Reserve `25,000
Add : Provision for Tax made during the current
year `30,000
Net Profit befo re Tax `1,02,000
Problem No. 7
From the following balance sheet of Shah Ltd. as 31.03.2017 prepare a
Cash Flow.
Particulars Note
No. 31.03.2018 31.03.2017
I Equity &Liabilities :
1) Share holder’sFunds :
a) Equity Share Capital 10,80,000 10,00,000 b) Reserve & Surplus 1 2,40,000 1,20,000 2) Non-Current Liabilities : Long term Borrowings - 9%
debt 3,20,000 2,40,000 3) Current Liabilities : a) Trade payables 2 1,80,000 2,40,000 b) Short term provisions 3 1,80,000 1,60,000 Total 19,20,000 17,60,000 II Assets : 1) Non - Current Assets : a) Fixed Assets i) Tangible Assets 4 13,40,000 12,00,000 b) Non-Current investments 2,40,000 1,60,000 2) Current Assets : a) Inventory 1,20,000 1,60,000 b) Trade Receivables 1,60,000 1,60,000 c) Cash & Cash Equivalents 60,000 80,000 Total 19,20,000 17,60,000 munotes.in
Page 169
Sources o f Finance and
Cash Flow Analysis
169 Note : 31.03.2018 31.03.2017
1) Reserve &Surplus :
General Reserve 1,20,000 1,20,000 Balance in State Profit & Loss Bal. 1,20,000 -- 2,40,000 1,20,000 2) Trade Payables Creditors 1,40,000 1,20,000 Bills Payables 40,000 1,20,000 1,80,000 2,40,000 3) Other Current Liabilities Outstanding Rent 1,80,000 1,60,000 4) Tangible Assets : Plant & Machinery 14,90,000 1,30,000 Accumulated Depreciation (1,50,000) (1,00,000) (13,40,000) (12,00,000) 5) Non-Current investments : Shares in XYZ Limited 2,40,000 1,60,000
Additional Information :
a) During the year 2016 -17, a machinery costing `50,000 and accu mulated
depreciation thereon `15,000 was sold for `32,000/ -
b) 9% Debentures `80,000 were issued on April 1, 201 5.
Cash Flows from Operating Activities for the year ended 31st March,
2017
Particulars Details Amount
A) Cash Flows from Operating systems : Net Profit before Tax : 120000 Adjustment for non -cash & non -operating
items : Add : Depreciation 65000 Loss on sale of Machinery 3000 Interest on Debentures 28800 96800 Operating Profit before working capital
changes 216800 Add : Decrease in Current Assets : Inventory 40000 Add : Increase in Current Assets : Outstanding Rent 20000 Creditors 20000 80000 munotes.in
Page 170
Management Accounting
170 296800 Less : Decrease in current liabilities : Bills Payabl es 80000 80000 Net Cash from Operating Activities 216800 B) Cash Flow from investing Activities : Purchases of Machinery (240000) Sale of Machinery 32000 Purchase of shares in XYZ Ltd. (80000) 288000 Net Cash from investing Activities 51,200) C) Cash Flow from Financing Activities : Issue of 9% Debentures 80000 Interest on Debentures 28800 Net Decrease in Cash & Cash equivalents
216800 + 288000 + 51200 (20000) Add : Cash and Cash equivalents in the
beginning Period 80,000 Cash & Cash equivalents at the end period 60,000
Working Note :
Plant & Machinery A/c
Date Particulars ` Date Particulars `
To Balance b/d 1300000 By Bank A/c 32000 To Bank A/c (B/f) 240000 By Acc.
Depreciation
A/c 15000 By Statement
of Prof it &
Loss A/c 3000 By Balance
c/d 1490000 1540000 1540000
Accumulated A/c
Date Particulars ` Date Particulars `
To Plant &
Machinery A/c 15000 By Balance c/d 100000 To Balance b/d 150000 By Depreciation
A/c 650000 165000 165000 munotes.in
Page 171
Sources o f Finance and
Cash Flow Analysis
171 Problem No. 8
From the following Balance sheet of Rama Company Ltd. prepare Cash
Flow Statement.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 1 2,90,000 2,50,000 b) Reserve & Surplus 1,52,000 50,000 2) Current Liabilities : a) Trade payables 5,000 23,000 b) Short term Provisions 2 35000 27,000 Total 4,82,000 3,50,000 II Assets :
1) Non - Current Assets :
a) Fixed Assets
1) Tangible Asset s 3 1,50,000 1,40,000 2) Intangible Assets 20,000 30,000 2) Current Assets : a) Inventories 95,000 45,000 b) Trade Receivables 2,00,000 1,20,000 c) Cash & Cash Equivalents 17,000 15,000 Total 4,82,000 3,50,000
Additional Inf ormation :
1) Depreciation charged on plant was Rs. 30,000 and on Building Rs.
50,000.
2) Income Tax paid during the year amounted to Rs. 25,000
Note to Accounts :
1) Share Capital :
Equity Share Capital 2,50,000 2,00,000 Preference Share Capital 40,000 50,000 2,90,000 2,50,000 2) Short term provision : Provision for Tax 35,000 27,000 3) Tangible Assets : Building 80,000 10,00,000 Plant 70,000 40,000 1,50,000 1,40,000 munotes.in
Page 172
Management Accounting
172 Working Note :
Building Account
Date Particulars ` Date Particulars `
To Balance b/d 100000 By Depreciation
A/c 50000
To Bank A/c (B/f) 30000 By Balance c/d 80000
130000 130000
Plant Account
Date Particulars ` Date Particulars `
To Balance b/d 40000 By Depreciation
A/c 30000
To Bank A/c
(B/f) 60000 By Balance c/d 70000
100000 100000
Calculation of Net Profit before Tax :
Reserve and Surplus Balance on 31.03.2018 `1,52,000
Less : Reserve & Surplus balance 31.03.2017 `50,000
`1,02,000
Add : Transfer to General Reserve `33,000
Add : Pr ovision for Tax made during the current
year `1,35,000
Net Profit before Tax `1,02,000
Cash Flows from Operating Activities for the year ended 31st March,
2017
Particulars Details Amount A) Cash Flows from Operating Activities :
Net Pro fit before Tax : 135000 Adjustment for non -cash & non -operating
items : Add : Depreciation on plant 30000 Loss on sale of Machinery 50000 Interest on Debenture 10000 90000 Operating profit before working capital
changes : 225000 Less : Increase in current Assets : munotes.in
Page 173
Sources o f Finance and
Cash Flow Analysis
173 Trade Receivable 80000 Inventory 50000 Less : Decrease in Current Liabilities : Trade Payable 18000 (148000) 77000 Less : Income Tax paid for the year 2017 25000 Net Cash from operating 52000 B) Cash Flow from investing Activities : Purchase of Building (30000) Purchases of Plant (60000) (80,000) Net Cash used in investing Activities 90,000) C) Cash Flow from Financing Activities : Issue of Equity Share s Capital 50000 Redemption of preference share capital (10000) 40000 Net Cash from Financing Activities 40,000 Net Decrease in Cash & Cash equivalents
52000 + (90000) + 40000 (2000) Add : Cash and Cash equivalents in the
beginning of the period 15,000 Cash & Cash equivalents at the end of the
period 17,000
Problem No. 9
From the following Balance sheet of Tarun Fashion Ltd. prepare a Cash
Flow Statement.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share hol der’sFunds :
a) Share Capital 1,50,000 1,20,000 b) Reserve & Surplus 1,78,000 75,000 2) Non-Current Liabilities Long -term Borrowings 1 - 50000 3) Current Liabilities : a) Trade payables 31,500 67,000 b) Short term Provisi on 42,000 30,000 Total 4,01,500 3,42,000 II Assets : 1) Non - Current Assets : a) Fixed Assets munotes.in
Page 174
Management Accounting
174 1) Tangible Assets 2 2,08,000 1,40,000 2) Intangible Assets 3 35,000 20,000 2) Current Assets : a) Inventories 1,05,000 1,20,000 b) Trade Receivables 33,500 37,000 c) Cash & Cash Equivalents 20,000 25,000 Total 4,01,500 3,42,000
Note : 31.03.2018 31.03.2017
1) Long term Borrowing :
15% Debentures -- 50,000 2) Tangible Assets : Building 80,000 1,00,000 Plant & Machinery 1,28,000 40,000 2,08,000 1,40,000 3) Tangible Assets : Goodwill 35,000 20,000
Additional Information :
31.03.2018 31.03.2017
1) Proposed Dividend 15000 12000
2) Depreciation of Rs. 10000 was provided on Plant & Machinery.
3) Gain on sale of a part of Building Rs. 25000.
4) Debentures were redeemed on 1st April 2017.
5) Provision for Tax made during the year Rs. 50000.
Working Note :
Building Account
Date Particulars ` Date Particulars `
To Balance b/d 100000 By Bank A/c 45000
To Bank A/c 25000 By Balance c/d 80000
125000 125000
munotes.in
Page 175
Sources o f Finance and
Cash Flow Analysis
175 Plant and Machinery Account
Date Particulars ` Date Particulars `
To Balance b/d 40000 By Depreciation
A/c 12000
To Bank A/c
(B/f) 98000 By Balance c/d 128000
138000 138000
Calculation of Net Profit before Tax :
Reserve and Surplus Balance on 31.03.2018 `1,78,000 Less : Reserve & Surplus balance 31.03.2017 `75,000 `1,03,000 Add : Proposed Dividend for previous year `12,000 Provision for Tax made during the current year `50,000 Net Profit before Tax `1,65,000 Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Profit before Tax : 165000 Adjustment for non -cash & non -operating
items : Add : Depreciation on plant & machinery 10000 Less : Gain on Sale of Building (25000) (15000) Operating Profit before Working Capital
changes 150000 Add : Decrease in Current Assets Trade Receivabl es 3500 Inventory 15000 (18500) 168000 Less : Decrease in current Liabilities : Trade Payables 35000 (35000) 133000 Less : Income Tax paid for the year 2017 38000 Net Cash from Operating Activity 95000) B) Cash Flow f rom Inventories Activities : Issue of Share Capital 30000 munotes.in
Page 176
Management Accounting
176 Redemption of Debentures (50000) (80,000) Payment of Dividend for 2017 (12000) (32000) Net Cash From Financing Activities (32,000) Net Decrease in Cash & Cash equivalents
95000 + (68000) + 32000 5000 Add : Cash and Cash equivalents in the
beginning of the period 25,000 Cash & Cash equivalents at the end of the
period 20,000
Problem No. 10
Prepare a Cash - Flow Statement from the following Balance Sheet of
Shree Industries Ltd. P une.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 2,00,000 2,00,000 b) Reserve & Surplus 1 84,000 (8,000) 2) Non-Current Liabilities : Long term Borrowings 2 1,35,000 1,00,000 3) Current Liabilities : Trade Payables 68,000 62,000 Total 4,87,000 3,54,000 II Assets : 1) Non - Current Assets : Fixed Assets 3 1,20,000 1,30,000 2) Current Assets : a) Current Investment
(Marketable secti on) 22,000 15,000 b) Inventories 61,000 80,000 c) Trade Receivables 40,000 29,000 d) Cash & Cash Equivalents 2,44,000 1,00,000 Total 4,87,000 3,54,000
munotes.in
Page 177
Sources o f Finance and
Cash Flow Analysis
177 Note : 31.03.2018 31.03.2017
1) Long -term Borrowing :
General Reserve 24,000 Profit & Loss Balance 60,000 (8,000) 2) Long -term Borrowings : 12% Mortage
Loan 135000 1,00,000 3) Fixed Assets : Machinery 1,45,000 1,60,000 Less : Accumulated Depreciation 25,000 30,000 1,20,000 1,30,000
Additional Information :
1) Interest paid on mortage loan amounted to Rs. 14,100.
2) Interim Dividend paid during the year Rs. 20,000.
3) Machinery costing Rs. 40,000
(Accumulated depreciation thereon being Rs. 18,000) was sold for Rs.
5,000.
Working Note :
Machinery Account
Date Particul ars ` Date Particulars `
To Balance b/d 160000 By Bank A/c
(sale) 5000 To Bank A/c 25000 By Accumulated
Dep. 18000 By Statement of
Profit & Loss 17000 By Balance C/d 145000 185000 185000
Calculation of Net Profit before Tax :
Profit & Loss Balance on 31st March, 2018 `60,000 Less : Profit & Loss Balance on 31st March, 2017 `8,000 `68,000 Add : Transfer to General Reserve `24,000 Interim Dividend Paid `20,000 Net Profit before Tax `1,12,000 munotes.in
Page 178
Management Accounting
178 Cash Flows from Operating Acti vities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Profit before Tax : 112000
Adjustment for non -cash & non -operating
Add : Interest paid on mortage loan
Loss on sa le of Machinery
Depreciation 14100
17000
13000
44100
Operating Profit before working capital 156100
Add : Decrease in Current Assets :
Inventory 19000
Add : Increase in current Liabilities
Trade Payable 6000 25000
181100
Less : Increase in Current Assets :
Trade Receivables (11000) (11000)
Net Cash from Operating Activities 170100
B) Cash Flow from investing Activities :
Purchases of Machinery (25000)
Sale of Building 5000 (20000)
Net Cash from investing Activities (20,000)
C) Cash Flow from Financing Activities :
Proceeds of 12% mortage loan 35000
Interest paid on mortage loan (14100)
Interim Dividend paid (20000) 900
Net Cash from Financing Activities 900
Net Decrease in Cash & Cash equivalents
170000 + (20000) + 900
151000
Add : Cash and Cash equivalents in the
beginning of the Period 115000
Cash & Cash equivalents at the end period 260000
munotes.in
Page 179
Sources o f Finance and
Cash Flow Analysis
179 Problem No. 11
Prepare a Cash Flow Statement from the following inform ation of Jay
Industries Ltd. Mumbai.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 300000 200000 b) Reserve & Surplus 65000 50000 2) Current Liabilities : a) Trade payables 105000 52000 b) Other Current Liabilities -- 16000 c) Short Term Provision 20000 2000 Total 490000 320000 II Assets : 1) Non - Current Assets : a) Fixed Assets 225000 110000 b) Non-Current Investments 55000 60000 2) Current Assets : a) Inventories 26000 50000 b) Trade Receivables 180000 92000 c) Cash & Cash Equivalents 4000 8000 Total 490000 320000
Note : 31.03.2018 31.03.2017
1) Reserve &Surplus :
Securities premium Reserve 20000 -- Profit & Loss Balance 45000 50000 65000 50000 2) Trade Payables Sundry Creditors 95000 52000 Bills Payables 10,000 -- 1,05,000 52000 3) Other Current Liabilities o/s Salary -- 16000 4) Short term provision for Doubtful
debts 20000 2000 munotes.in
Page 180
Management Accounting
180 Additional Information :
a) During the year, company said 60% of its original non -current
investments at a profit of 25%.
b) Depreciation provided during the year was `35,000.
Working Note :
Fixed Assets Account
Date Particulars ` Date Particulars `
To Ba lance b/d 110000 By Depreciation
A/c 35000 To Bank A/c 150000 By Balance c/d 15000 260000 260000
Calculation of Net Profit before Tax :
Profit & Loss Balance on 31st March, 2018 Rs. 45000
Less : Profit & Loss Balance 31st March 2017 Rs. 50000
Net Profit before Tax Rs. (5000)
Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Loss during the year (5000) Adjustment for non -cash & non -operating items Add : Provision for doubtful debts
Depreciation 18000 35000 53000 Operating Profit before working capital change 48000 Add : Decrease in Current Assets : Inventory 24000 Add : Increase in current Liabilities Sundry Creditors 43000 Trade payable 10000 77000 11600 munotes.in
Page 181
Sources o f Finance and
Cash Flow Analysis
181 Less : Increase in Current Assets : Trade Receivables 88000 Less : Decrease in current Liabilities Outstanding salaries 16000 (104000) Net Cash from Operating Activities 12000 B) Cash Flow from investing Activities : Purchases of Fixed Assets 150000 Purchase of non -current investments 31000 Sale of non -current investments 45000 (136000) Net Cash from investing Activities (1360 00) C) Cash Flow from Financing Activities : Issue of Share Capital 100000 Securities premium received on issue share 20000 120000 Net Cash from Financing Activities 120000 Net Decrease in Cash & Cash equivalents 12000
+ (186000) + 120000 4000 Add : Cash and Cash equivalents in the beginning 8000 Cash & Cash equivalents at the end 4000
Problem No. 12
Prepare a Cash -Flow Statement from the following Balance Sheet of
Malhar Industries Ltd. Pandharpur.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 200000 200000 b) Reserve and Surplus 107000 25,000 2) Non-Current Liabilities : a) Long -term Borrowings 1,20,000 -- 3) Current Liabilities : munotes.in
Page 182
Management Accounting
182 a) Trade payables 1,39,000 90,000 b) Short term provisions 40,000 30,000 Total 6,06,000 3,45,000 II Assets : 1) Non - Current Assets : a) Fixed Assets i) Tangible Assets 1,80,000 1,20,000 ii) Intangible Assets 34,000 50,000 2) Current Assets : a) Inventories 2,10,000 1,00,000 b) Trade Receivables 1,20,000 50,000 c) Cash & Cash Equivalents 52,000 13,000 d) Other Current Assets 10,000 12,000 Total 6,06,000 3,45,000
Note : 31.03.2018 31.03.2017
1) Long term Borrowing 12%
Debentures 1,20,000 - 2) Short -term Provision Provision for Taxation 40,000 30,000
Additional Information :
1) Debentures were issued on 1st October, 2017. Interest has paid -up to
date.
2) Machinery whose original cost was R s. 50,000 (accumulated
depreciation there on being Rs. 27,000) was sold for Rs. 35,000.
3) Depreciation on Machinery charged during the year Rs. 15,000.
4) Interim Dividend paid during the year was @ 15% on Share Capital.
munotes.in
Page 183
Sources o f Finance and
Cash Flow Analysis
183 Working Note :
Calculation of N et Profit before Tax :
Reserve and Surplus on 31st March, 2018 107000 Less : Reserve and Surplus on 31st March, 2017 25000 82000 Add : Provision for Taxation for 2018 40000 Interim Dividend 30000 152000
Calculation of Profit on Sale of Machinery :
Cost of Machinery sold 50000 Less : Accurate Depreciation 27000 Written down value of Machinery 23000 Sale of Amount of Machine 35000 Profit on Sale of Machinery 12000
Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating systems : Net Profit before Tax : 152000 Adjustment for non -cash & non -operating Add : Intangible Assets Written off 16000 Interest on Debentures 7200 Depreciation on Machinery 15000 Less : Profit Sale of Machinery (12000) 26200 Operating Profit before working capital
charge 178200 Add : Decrease in current Assets Other Current Assets 2000 Add : Increase in Current Liabilities Trade payables 49000 51000 229200 munotes.in
Page 184
Management Accounting
184 Less : Decrease in current Assets : Trade Receivables 70000 Inventory 110000 (1800000) 49200 Less : Income Tax paid for 2017 30000 Net Cash from Operating Activities 19200 B) Cash Flow Investing Activities : Sale of Machinery 35000 Purchase of Tangible Assets (98000) (63000) Net Cash from Investing Activities (63000) C) Cash Flow from Financing Activities : Proceeds from issue of Debentures 120000 Interim Dividend paid (30000) Interest on Debentures (7200) 82800 Net cash from Financing Activities 82800 Net Increase in Cash & Cash equivalents
19200 + (163000) + 82800 39000 Add : Cash and Cash equivalents in beginning Period 13,000 Cash & Cash e quivalents at end period 52,000
Problem No. 13
From the following Balance sheet of Krishna Industries Ltd. Pune. You
are required to prepare Cash Flow.
Particulars Note
No. 31.03.2018 31.03.2017
I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 8,00,000 6,75,000 b) Reserve & Surplus 1,70,000 91,000 2) Current Liabilities : a) Short term borrowings 1 88,000 66,000 b) Trade Payables 1,00,000 70,000 c) Short term provision 2 34,000 26,000 Total 11,92,500 9,28,000 munotes.in
Page 185
Sources o f Finance and
Cash Flow Analysis
185
II Assets : 1) Non - Current Assets : a) Fixed Assets 1) Tangible Assets 3 3,75,000 5,00,000 2) Current Assets : a) Inventories 4,00,000 2,50,000 b) Trade Receivables 3,82,000 1,55,000 c) Cash & Cash E quivalents 10,000 3,000 d) Other Current Assets 25,000 20,000 Total 11,92,500 9,28,000
Note : 31.03.2018 31.03.2017
1) Short term Borrowing :
Bank Overdraft 88,000 66,000 2) Short Term Provisions : Taxation Provisions 34,000 26,000 3) Other Current Liabilities 1,50,000 2,00,000 Land 2,25,000 3,30,000 3,75,000 5,00,000
Additional Information :
1) Interim Dividend paid during the year Rs. 60,000
2) Land was sold at a profit of Rs. 30,000.
3) Plant costing Rs. 20,000 was sold d uring the year at a loss of Rs. 8,000.
Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Profit before Tax : 173000 Adjustment for non -cash & non-operating items : Add : Depreciation on plant 55000 Loss on sale of plant 8000 63000 236000 Less : Profit on Sale of Land 30000 Operating Profit before Working Capital changes 206000 Add : Increase in Current Liabilities : Trade Payables 30000 30000 236000 munotes.in
Page 186
Management Accounting
186 Less : Increase in Current Assets : Trade Receivables 227000 Inventory 150000 Other Current Assets 5000 382000 (146000) Less : Income tax paid for 2017 (26000) Net C ash from operating activities (172000) B) Cash Flow from Investing Activities : Sale of Land (50000 + 30000) 80000 Sale of Plant (20000 - 8000) 12000 92,000 Net Cash From investing Activities 92,000 C) Cash flow from Financing Activities : Issue of share capital 125000 Increase in Bank Overdraft 22000 Interim Dividend Paid (60000) 87000 Net Cash from Financing Activities 87000 Net increase in Cash & Cash equivalents
(1,72,000) + 92,000 + 87,000 7000 Add : Cash and C ash equivalents in the beginning
of the period 3,000 Cash & Cash equivalents at the end of the period 10,000
Working Note :
Calculation of Net Profit before Tax :
Reserve and Surplus on 31st March, 2018 170000 Less : Reserve and Surplus on 31st March, 2017 91000 79000 Add : Provision for Taxation for 2018 34000 Interim Dividend 60000 173000
munotes.in
Page 187
Sources o f Finance and
Cash Flow Analysis
187 Problem No. 14
From the following Balance Sheet of Alka Industries Ltd. prepare a Cash
Flow Statement.
Particulars Note
No. 31.03.2018 31.03.2017
I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 65000 45000 b) Reserve and Surplus 1 42500 25000 2) Current Liabilities : a) Trade payables 11000 8700 Total 118500 78700 II Assets : 1) Non - Current Assets : a) Fixed Assets 83000 46700 2) Current Assets : a) Inventory 13000 11000 b) Trade Receivables 20000 19000 c) Cash & Cash Equivalents 2500 2000 Total 118500 78700
Note : 31.03.2018 31.03.2017
1) Reserve & Surplu s General Reserve 27500 15000 Profit & Loss Balance 15000 10000 42500 25000
Additional Information :
1) Depreciation an fixed Assets for the year 2017 -2018 was `14700
2) An interim dividend Rs. 7000 has been paid to the shareholder during
the year.
3) Depreciation on Machinery charged during the year Rs. 15,000.
4) Interim Dividend paid during the year was @ 15% on Share Capital.
munotes.in
Page 188
Management Accounting
188 Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating systems : Net Profit before Tax : 24500 Adjustment for non -cash & non -operating items Add : Dep. on Machinery 80000 Loss on Sale Machinery 12000 92000 Operating Profit before working capital changes 312000 Add : Increase in current Assets Trade Payables 62000 62000 Less : Increase in current Assets : 374000 Trade Receivables 80000 Inventory 110000 190000 Net Cash from Operating Activities : 184000 B) Cash Flow from In vesting Activities : Purchase of Machinery (510000) Sale of Machinery 18000 (492000) Net Cash from Investing Activities (492000) C) Cash Flow from Financing Activities : Issue of Share Capital 200000 Payment of proposed dividend (60000) 1400 00 Net cash from Financing Activities 140000 Net Increase in Cash & Cash equivalents 38000 +
(492000) + 13000 (168000) Add : Cash and Cash equivalents in beginning of
the Period 2000 Cash & Cash equivalents at end of the period 2500
Working Not e :
Calculation of Net Profit before Tax :
Net Profit as per Profit & Loss Statement 5000 Less : Transfer to General Reserve 12000 Interim Dividend 7000 24500 munotes.in
Page 189
Sources o f Finance and
Cash Flow Analysis
189 Problem No. 15
The Balance sheet of Jindal Industries Ltd. Aurangabad. Prepare the cash
flow statement.
Particulars Note
No. 31.03.2018 31.03.2017
I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 12,00,000 8,00,000 b) Reserve & Surplus 1 (1,70,000) (2,15,000) 2) Non-Current Liabilities : Long term Borrowings 2 3,00,000 2,50,000 3) Current Liabilities Trade Payable 1,90,000 2,70,000 Total 15,20,000 11,05,000 II Assets : 1) Non - Current Assets : a) Fixed Assets 6,90,000 5,00,000 b) Non - Current
Investments 3 1,20,000 2,00,000 2) Current Assets : a) Inventory 4,60,000 2,80,000 b) Trade Receivables 1,80,000 65,000 c) Cash & Cash
Equivalents 70,000 60,000 Total 15,20,000 11,05,000
Note : 31.03.2018 31.03.2017
1) Reserve &Surplus :
Profit & Loss Balance (1,70,000) (2,15,000) 2) Short Term Provisions : 12% Public Deposits 3,00,000 2,50,000 3) Other Current Liabilities Sundry Debtors 1,80,000 50,000 Bills Receivables -- 15,000 1,80,000 65,000
munotes.in
Page 190
Management Accounting
190 Additional Information :
1) New Public deposits were accepted on 1st January, 2018.
2) Machinery Costing Rs. 2,00,000 on which Dep. charged was Rs.
70,000 was sold for Rs. 1,50,000.
3) New Machinery purchased during the year amounted to Rs. 4,00,000.
4) Non-Current Investments we re sold at profit of 25%.
Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities : Net Profit before Tax : 45000 Adjustment for non -cash & non -operating
items : Add : Depreciation on plant & machinery 80000 Loss on sale of machinery 31500 1,11,500 156500 Less : Profit on Sale of Machinery 20000 30000 Profit on sale of non -current investments 20000 (40000) Operating profit before working cap ital
changes 116500 Add : Decrease in Current Assets : Bills Receivable 15000 15000 131500 Less : Increase in Current Assets : Sundry Debtors 130000 Inventory 180000 Less : Decrease in Current Liabilities : Trade payables 80000 (390000) Net Cash from operating activities (258000) B) Cash Flow from Investing Activities : Sale of Machinery 150000 Purchase of Fixed Assets 400000 Sale of Non -Current Investments 100000 (150000 ) munotes.in
Page 191
Sources o f Finance and
Cash Flow Analysis
191 Net Cash from investing Activities (150000) C) Cash flow from Financing Activities : Issue of share capital 400000 Proceeds of Public Deposits 50000 Interest paid on Public Deposits (31500) 418000 Net Cash from Financing Activ ities 418000 Net increase in Cash & Cash equivalents
(2,58,500) + (1,50,000) + 4,18,000 10000 Add : Cash and Cash equivalents in the
beginning of the period 60,000 Cash & Cash equivalents at the end of the
period 70,000
Working Note :
1) Calcul ation of Net Profit before Tax :
Profit & Loss Balance on 31.03.2018 (170000) Profit & Loss Balance on 31.03.2017 (215000) Net Profit before Tax 45000 2) Interest paid on Public Deposits 2,50,000 x 12% for 1 year 30000 50,00 0 x 12% for 3 months 1500 31500 Problem No. 16
The Balance sheet of Mamta Company Ltd. Mumbai. Prepare the cash
flow statement.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 14,00,000 12,00,000 b) Reserve & Surplus 1 7,40,000 5,80,000 munotes.in
Page 192
Management Accounting
192
2) Current Liabilities : Trade Payables 2,72,000 2,10,000 Total 24,12,000 19,90,000 II Assets : 1) Non - Current Assets : Fixed Assets 12,00,000 8,00,000 2) Current Assets : a) Inventory 3,10,000 2,00,000 b) Trade Receivables 5,80,000 5,00,000 c) Cash & Cash Equivalents 3,22,000 4,90,000 Total 24,12,000 19,90,000
Note : 31.03.2018 31.03.2017
1) Reserve &Surplus :
General Reserve 4,50,00 0 4,00,000)
Profit & Loss Balance 2,90,000 1,80,000
7,40,000 5,80,000
Additional Information :
31.03.2018 31.03.2017
i) Contingent Liability proposed
Dividend 72000 60000
ii) Depreciation change during the year on plant & machinery amounted to
Rs. 80,000.
ii) Machinery costing Rs. 80,000 (Book Value Rs. 30,000) was sold at a
loss of 40% on book value.
munotes.in
Page 193
Sources o f Finance and
Cash Flow Analysis
193 Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Profit before Tax : 220000 Adjustment for non -cash & non -operating
items : Add : Depreciation on machinery 80000 Loss on sale of machinery 12000 92,000 Operating profit before working capital
changes 312000 Add : Increase in Current Assets : Trade Payables 62000 62000 374000 Less : Increase in Current Assets : Trade Receivables 80000 Inventory 110000 (1,90,000) Net Cash from operating activities (184000) B) Cash Flow from Inves ting Activities : Purchase of Machinery 510000 Sale of Machinery 18000 (492000) Net Cash from investing Activities (492000) C) Cash flow from Financing Activities : Issue of share capital 200000 Payment of proposed Divid end 60000 140000 Net Cash from Financing Activities 140000 Net increase in Cash & Cash equivalents
1,84,000) + (4,92,000) + 1,40,000 10000 Add : Cash and Cash equivalents in the
beginning of the period 1,68,000 Cash & Cash equivalents at the end o f the
period 4,90,000 3,22,000 munotes.in
Page 194
Management Accounting
194 Problem No. 17
From the following Balance sheet of Rama Ltd. Prepare a cash flow
statement.
Particulars Note
No. 31.03.2018 31.03.2017 I Equity &Liabilities :
1) Share holder’sFunds :
a) Share Capital 10,00,000 8,00,000 b) Reserve & Surplus 1 6,40,000 5,59,000 2) Non-Current Liabilities : Long term Borrowings 2 1,50,000 1,00,000 3) Current Liabilities Trade Payable 60,000 40,000 Total 18,50,000 14,99,000 II Assets : 1) Non - Current Assets : a) Fixed Assets i) Tangible Assets 7,50,000 ii) Intangible Assets 15,000 b) Non-Current Investments 3 1,00,000 2) Current Assets : a) Inventory 6,30,000 4,20,000 b) Trade Receivables 3,20,000 4,94, 000 c) Cash & Cash Equivalents 28,000 20,000 d) Other current assets 7,000 5,000 Total 18,50,000 14,99,000 Note : 31.03.2018 31.03.2017
1) Reserve &Surplus :
General Reserve 5,20,000 4,00,000 Profit & Loss balance 1,20,000 1,59,000 6,40,000 5,59,000 munotes.in
Page 195
Sources o f Finance and
Cash Flow Analysis
195
2) Long Term Provisions : 8% Debentures 1,50,000 1,00,000 3) Rate of interest on Non -current investment is10% p.a.
4) Other current Liabilities Prepaid Expenses 4000 -- Bills Receivables 3000 5,000 7,000 5,000
Addit ional Information :
1) Depreciation of Rs. 30,000 has been charged on Machinery.
2) Non-current Investments costing Rs. 30,000 were sold for Rs. 40,000
at the end of the year.
3) New Debentures were issued on 1st October, 2017.
4) During the year share issued expenses amounted to Rs. 10,000 & these
were written off from statement of profit & loss.
Cash Flows from Operating Activities for the year ended 31st March,
2018
Particulars Details Amount
A) Cash Flows from Operating Activities :
Net Pr ofit before Tax : 81000 Adjustment for non -cash & non -operating
items : Add : Intangible Assets written off 5000 Depreciation on machinery 30000 Interest on debentures 10000 Share issue Expenses 10000 55000 136000 Less : Profit on Sale of Non -Current
Investments 10000 30000 Interest on non -current investments 3000 (13000) Operating profit before working capital
changes 123000 Add : Decrease in Current Assets : Trade Receivable 174000 Accrued income 2000 munotes.in
Page 196
Management Accounting
196
Add : Increase in current liabilities : Trade payable 20000 196000 319000 Less : Increase in Current Assets : Prepaid Expenses 4000 Inventory 210000 (214000) Net Cash from Operating Activities (105000) B) Cash Flow from Investing Activities : Purchase of tangible fixed assets 270000 Purchase of Non -Current Investments (100000) Sale of non -current investments 40000 Interest on Non -current Investments 3000 327000 Net Cash from investing Activities 327000 C) Cash flow from Financing Activities : Issue of share capital 200000 Issue of Debentures 50000 Interest paid on Debentures (10000) Share issue Expenses (10000) 2,30,0 00 Net Cash from Financing Activities 2,30,000 Net increase in Cash & Cash equivalents
(1,05,000) + (3,27,000) + 2,30,000 8000 Add : Cash and Cash equivalents in the
beginning of the period 20,000 Cash & Cash equivalents at the end of the
period 28,000
Working Note :
1) Calculation of Net Profit before Tax :
Profit & Loss Balance on 31.03.2018 120000 Less : Profit & Loss Balance on 31.03.2017 159000 (39000) Add : Transfer to General Reserve 1,20,000 Net Profit before Tax 81000
munotes.in
Page 197
Sources o f Finance and
Cash Flow Analysis
197 5.7 SUMMA RY
Business finance , Raising and managing of funds by business
organizations. Such activities are usually the concern of senior managers,
who must use financial forecasting to develop a long -term plan for the
firm. Shorter -term budgets are then devised to meet the plan’s goals.
When a company plans to expand, it may rely on cash reserves, expected
increases in sales, or bank loans and trade credits extended by suppliers.
Managers may also decide to raise long -term capital in the form of either
debt (bonds) or equity (stock). The value of the company’s stock is a
constant concern, and managers must decide whether to reinvest profits or
to pay dividends. Other duties of financial managers include managing
accounts receivable and fixing the optimum level of in ventories. When
deciding how to deploy corporate assets to increase growth, financial
managers must also consider the benefits of mergers and acquisitions,
analyzing economies of scale and the ability of businesses to complement
each other.
A cash flow sta tement provides data regarding all cash inflows a company
receives from its ongoing operations and external investment sources. The
cash flow statement includes cash made by the business through
operations, investment, and financing —the sum of which is cal led net cash
flow. The first section of the cash flow statement is cash flow from
operations, which includes transactions from all operational business
activities. Cash flow from investment is the second section of the cash
flow statement, and is the resul t of investment gains and losses. Cash flow
from financing is the final section, which provides an overview of cash
used from debt and equity.
5.8 EXERCISE
(A) MCQ type questions:
1. Statement of cash flows includes
A) Financing Activities
B) Operating Activities
C) Investing Activities
D) All of the Above
2. In cash flows, when a firm invests in fixed assets and short -term
financial investments results in ------------
A) Increased Equity
B) Increased Liabilities
C) Decreased Cash
D) Increased Cash
3. A firm that issues stocks and bond s to raise funds results in --------
A) Decreases Cash
B) Increases Cash
C) Increases Equity
D) Increases Liabilities munotes.in
Page 198
Management Accounting
198 5. The purchase value of assets over its serviceable life is categorized
as -------------
A) A ppreciated Liabilities
B) Appreciated Assets
C) Depreciation
D) Appreciation
5. The basic financial statements include
A) Statement of Cash Flows
B) Statement of Retained Earnings
C) Balance Sheet and Income Statement
D) None of the Above
5. The statement of cash flow clarifies cash flows according to
A) Operating and Non -operating Flows
B) Inflow and Outflow
C) Investing and Non -operating Flows
D) Operating, Investing, and Financing Activities
7. Cash flow example from a financial activity is
A) Payment of Dividend
B) Receipt of Dividend on Investment
C) Cash Received from Customers
D) Purchase of Fixed Asset
8. Cash flow example from an investing activity is
A) Issue of Debenture
B) Repayment of Long -term Loan
C) Purchase of Raw M aterials for Cash
D) Sale of Investment by Non -Financial Enterprise
9. Cash flow example from an operating activity is
A) Purchase of Own Debenture
B) Sale of Fixed Assets
C) Interest Paid on Term -deposits by a Bank
D) Issue of Equity Share Capital
10. Which item comes under financial activities in cash flow?
A) Redemption of Preference Share
B) Issue of Preference Share
C) Interest Paid
D) All of the above
11. As per AS -3, Cash Flow Statement is mandatory for
A) All enterprises
B) Companie s listed on a stock exchange
C) Companies with a turnover of more than Rs 50 crores
a) Both A and B
b) Both A and C
c) Both C and B munotes.in
Page 199
Sources o f Finance and
Cash Flow Analysis
199 12. Listed Enterprises need to prepare Cash Flow Statement only
under indirect method.
a) True
b) False
13. In the case of financial enterprises, the cash flow resulting from
interest and dividend received and interest paid should be classified
as cash flow from -------------
a) Operating activities
b) Financing activities
c) Investing activities
d) None of the ab ove
15. In case of other enterprises cash flow arising from interest paid
should be classif ied as cash flow from ----------- while dividends and
interest received should b e stated as cash flow from ------------- .
a) Operating activities, financing act ivities
b) Financing activities, investing activities
c) Investing activities, operating activities
d) None of the above
15. Issue of bonus shares and conversion of debentures into equity are
shown as a footnote to the Cash Flow Statement.
a) True
b) False
15. When a fixed asset is bought as hire purchase, interest element is
classified under ______ and loan element is classified under________.
a) Operating activities, financing activities
b) Financing activities, investing activities
c) Invest ing activities, operating activities
d) None of the above
17. Which of the following statements are false?
A) Old Furniture written off doesn’t affect cash flow.
B) Cash flow statement is a substitute for cash account.
C) Appropriation of retained earnings is not shown in Cash flow
statement.
D) Net cash flow during a period can never be negative.
a) A, B, C
b) B, C, D
c) C, D, A
d) None of the above
18. Which of the following is not a cash inflow?
a) Decrease in debtors
b) Issue of shar es
c) Decrease in creditors
d) Sale of fixed assets
munotes.in
Page 200
Management Accounting
200 19. Which of the following is not a cash outflow?
a) Increase in Prepaid expenses
b) Increase in debtors
c) Increase in stock
d) Increase in creditors
20. Which of the following is a conventiona l method of ascertaining
cost?
a) Absorption costing
b) Full Costing
c) Both a & b
d) None of the above
Answers
1. D) All of the Above
2. C) Decreased Cash
3. B) Increases Cash
5. C) Depreciation
5. D) None of the Above
5. D) Operating, Investi ng and Financing Activities
7. D) Purchase of Fixed Asset
8. D) Sale of Investment by Non -Financial Enterprise
9. C) Interest Paid on Term -deposits by a Bank
10. D) All of the above
11. c) Both C and B
12. a) True
13. a) Operating activities
15. b) Financing activities, investing activities
15. a) True
15. b) Financing activities, investing activities
17. b) B, C, D
18. c) Decrease in creditors
19. d) Increase in creditors
20. c) Both a & b
munotes.in
Page 201
Sources o f Finance and
Cash Flow Analysis
201 (B) Short Answer Questions
1. What is meant by ‘Cash F lows?
2. Give the meaning of ‘Cash Equivalents’ for the purpose of preparing
Cash Flow Statement.
3. How is ‘dividend paid’ treated by a financial enterprise for the
purpose of preparing cash flow statement?
4. When can ‘Receipt of Dividend’ be classified as an operating
activity State. Also give reason in support of your answer.
5. Give any two examples of cash flows from operating activities.
6. What is meant by ‘Financing Activities’ for preparing Cash Flow
Statement?
7. Give any two examples of cash flows from oper ating activities.
8. What is meant by ‘Financing Activities’ for preparing Cash Flow
Statement?
9. What is mean by investing activities for preparing Cash Flow
Statement? State the primary objective of preparing Cash Flow
Statement.
10. Interest received and paid is considered as which type of activity by
a finance company while preparing the cash flow statement.
(C) Long Answer Questions :
Question 1.
From the following Balance Sheet prepare a Cash Flow Statement:
munotes.in
Page 202
Management Accounting
202
Additional Information:
12% debe ntures were issued on 1st September, 2017.
(D) Question 2.
From the following Balance Sheet prepare cash flow statement
munotes.in
Page 203
Sources o f Finance and
Cash Flow Analysis
203
Additional Information: Machinery of the book value of 80,000
(accumulated depreciation ` 20,000) was sold at a loss of ` 18,000.
munotes.in
Page 204
204 6
WORKING CAPITAL MANAGEMENT - I
Unit Structure:
6.0 Objectives
6.1 Introduction
6.2 Meaning and Definition of Working Capital
6.2.1 Meaning
6.2.1 Definition
6.3 Types of working capital
6.4 Factors Determining Working Capital Requirement
6.5 Sources of working capital
6.6 Projection of Working Capital Requirements
6.6.1 Methods of projecting working capital requirements
6.6.2 Projection of working capital requirements
6.7 Exercise
6.0 OBJECTIVES
After studying the unit the students will be able to :
Define Working Capital.
Explain types of working capital.
Elaborate the determinants of working capital.
Know the sources of working capital.
Understand the concept projection of working capital
6.1 INTRODUCTION
Capital required for a business can be div ided into two categories i.e.
Fixed Capital and Working Capital. Fixed capital is the part of total
capital which is used for purchasing permanent a fixed asset like land,
Buildings, Plant and machinery, furniture and fixtures, vehicles, etc. This
capita l is invested by organization in the beginning of running the
business. In addition to fixed capital an organization requires additional
capital for financing day to day activities like purchase of Raw materials, munotes.in
Page 205
Working Capital
Management - I
205 payment of direct and indirect expenses, c arrying out production,
investment in stocks and stores, receivables and assets to be maintained in
the form of cash is generally known as working capital (fluctuating
capital). In other words, this capital refers to the investment in current
assets such as cash inventory, receivables, etc. All such assets are likely to
be convertible into cash within one a year.
6.2 MEANING AND DEFINITION OF WORKING
CAPITAL
6.2.1 Meaning
The capital used for performing day to day activities i.e. purchases of Raw
mater ial, making payment of direct and indirect expenses, carrying out of
production of goods and services, investment in stocks, stores, etc is called
as working capital. All assets consisting of working capital revolve
around cash. Firstly, cash is used to purchase of raw materials, which
when certain expenses are in carried on it gets itself converted into semi
finished goods and finally into inventory of finished products. Inventory
(finished goods), after adding certain profit margin to it, is sold to th e
customers, which may take the form of cash or receivables or debtors.
Receivables or debtors when realized again take the form of cash and the
cycle goes on. The revolving nature of current assets consisting of
working capital has been cleared with the help of following chart:
Because of this revolving nature of the assets consisting working capital,
later is also known as 'fluctuating' or 'floating' or ' circulating' capital.
6.2.2 Definition :
J.M. Mill: "The sum of the current assets is the wo rking capital of the
business"
Shubin: "Working capital is the amount of funds necessary to cover cost
of operating the enterprise."
Hoaglandi: "Working capital is descriptive of that capital which is not
fixed. But the more common use of the working c apital is to consider it as
the difference between the block value of the current assets and current
liabilities."
Receivables Sales Cash Finished Raw materials Work in progress munotes.in
Page 206
Management Accounting
206 Gerestenberg: “Circulating capital wears current assets of a company that
are changed in the ordinary course of business from one to anothe r, as for
example, from cash to inventories, inventories to receivables, and
receivables to cash."
The accounting principles of board of American institute of Certified
Public Accountants has defined the working capital as: “Working capital
is represented by the excess of current assets or current liabilities and
identifies the relatively liquid portion of the total enterprise capital which
constitutes a margin or buffer for maturing obligations within the ordinary
operating cycle of the business."
Thus wo rking capital means investment made by a business organization
in short -term current assets like cash, debtors, etc.
6.3 TYPES OF WORKING CAPITAL
The working capital is classified as under:
1. Gross Working Capital: Gross working capital means the total
curre nt assets without deducting current liabilities. This equal to the
cash balance and the amount blocked in debtors and stocks, etc.
2. Net Working Capital: Net working capital means total current assets
minus total current liabilities. It means net current as sets. This capital
indicates the amount available to meet short term liabilities or debt of
the business organizations.
3. Permanent or Fixed Working Capital: This capital represents the
value of the current assets required on continuing basis over the entire
year and for several years. Permanent working capital is the minimum
amount of current assets which is needed to conduct business even
during the dullest season of the year. Thus, the minimum level of
current assets is called permanent or fixed working ca pital is the part
of capital permanently blocked in current assets. This amount changes
from year to year depending on growth of the company and the stage
of the business cycle in which it operates. It is used to produce goods
necessary to satisfy the cu stomer's demand.
It has the following characteristics:
a) It is classified on the basis of time.
b) It constantly changes from one asset to another and continuously
remains in the business.
c) Size of this capital increases with the growth of business operations .
4. Temporary or Variable Working Capital: This component
represents a certain amount of fluctuations in current assets during a
short period. These fluctuations are increases or decreases in current
assets. Generally these are in cyclical nature. This is ca lled as
additional capital required at different times during the operating year. munotes.in
Page 207
Working Capital
Management - I
207 This capital is used to meet seasonal needs of a firm or organization is
called seasonal or variable working capital. Additional funds or
capital specifically used to meet extraordinary needs or contingencies
arising due to strikes, fire, unexpected competition, rising price
tendencies launching of advertisement campaigns.
It has the following features:
a) It is not always gainfully employed, though it may change from one
asset to another, as permanent working capital does.
b) It is particularly suited to business of a seasonal or cyclical nature.
c) It is arranged from temporary source i.e. short term loan, deposits,
bank over drafts etc.
5. Balance Sheet Working Capital: Usually this capital is determined
on the basis of current assets and current liabilities shown in closing
balance sheet of the concern. It means the net current assets as on last
date of the balance sheet.
6. Cash Working Capital: This capital is the net current a ssets if
realized at its book value. The cash realized from current assets is
really less than the book value because i) Debtors includes profit
margin ii) Depreciation included in over valuation of stock of finished
goods. The concept of this capital make s proper adjustment in balance
sheet working capital for the items to arrival at cash working capital.
The cash working capital indicates the working capital at cost because
stocks and debtors are at cost.
7. Positive Working Capital: When a net current asset is in positive
figure, it is called as positive working capital. It means the current
assets are more than the current liabilities. This working capital shows
favorable liquidity solvency position of the company.
8. Negative Working Capital: In this case, di fference between current
assets and current liabilities is negative figure. Therefore, it is called
are negative working capital. It means current liabilities are more than
the current assets. This capital indicates lack of liquidity and adverse
solvency p osition of the company.
6.4 FACTORS DETERMIN ING WORKING CAPITAL
REQUIREMENT
Normally following factors determines the need of working capital:
1. Nature of business: Working capital requirements of an enterprise
are basically related to conduct of the busi ness. Public utility
undertakings like electricity, water supply, Railways, etc need very
limited working capital because they offer cash sales only and supply
services, not products, and as such no funds are tied up in inventories
and receivables. But a t the same time, trading firm need large amount
of working capital in current assets like inventories, cash, receivables
etc but they have less investment in fixed assets. munotes.in
Page 208
Management Accounting
208 2. Terms of purchases and sales: Credit terms granted by the concerns
to its customers as well as credit terms granted by its supplier also
affect the working capital. If credit terms of purchases are more
favorable and those sales less liberal, less cash will be invested in the
inventory. Working capital requirement can be reduced if term s of
credit are more. The ratio of credit and cost purchases or sales affects
the level of working capital. If firm purchases on credit and sales on
cash then it requires less working capital and if firm purchases on cash
and sales on credit, then it requi res large working capital. This means
funds are tied up in debtors and bills receivables.
3. Manufacturing cycle: The quantum of work capital needed is
influenced by the length of manufacturing cycle. The manufacturing
process always involves time lag betwe en the time when raw materials
are fed into the production line and finished products are finally turned
out by it. The length of period of manufacture in turn needs on the
nature of product as well as production technology used by a concern.
4. Size of busi ness unit: Amount of working capital requirement
depends on the scale of operation of the business organization. Large
business organization performs large business activities which require
huge working capital than small scale organization.
5. Turno ver of i nventories: A business organization having low
turnover of inventory would need more working capital where as high
turnover of inventory need small or limited working capital.
6. Turnover of circulating capital: The speed with which circulating
capital comple tes its cycle if conversion of cash into inventory of raw
material, raw material into finished goods, finished goods into debts
and debts into cash, which decides need of working capital in the
organization. Slow movement of working capital cycle necessita tes
large provision of working capital.
7. Seasonal variations production: In case of seasonal production in the
industries like sugar, oil mills, etc need more working capital during
peak seasons.
8. Degree of mechanization: In highly mechanized concerns having low
degree of independence on labour, requires less working capital.
Conversely, in labour intensive industries greater sum of working shall
be required to pay wages and related facilities.
9. Growth and expansion: Every firm wants to grow over a period of
time and with the increase in its size, the working capital requirements
are bound to increase. The growing company would need therefore,
larger amount of working capital.
10. Policy regarding dividend: Dividend policy of a firm will also
influence the working capital position. The company which declares
large amount of dividends in the form of cash requires large working
capital to pay off such dividends. But sometimes, companies’ issues munotes.in
Page 209
Working Capital
Management - I
209 bonus shares by way of dividend in such cases working capital
requiremen ts will be comparatively less. This is depending on
Psychology of shareholders i.e. whether they prefer cash income or
capital appreciation.
11. Inflation: A business concern requires more working capital during
the inflation period. This factor may be comp ensated to some extent
by rise in selling price of inventory.
12. Changes in technology: Changes in production technology have an
impact on the need of more working capital.
13. Depreciation policy: Charges of depreciation on assets do not involve
any cash outflow s. Depreciation affects tax liability and retention
profits. It is allowable expenditure while calculating net profits. Higher
depreciation will mean lower disposal of profit and therefore dividend
will be paid in smaller amount. Thus cash will be preserve d.
6.5 SOURCES OF WORKING CAPITAL
Sources of working capital
6.6 PROJECTION OF WORKING CAPITAL
REQUIREMENTS
6.6.1 Methods of projecting working capital requirements
1. Conventional method: In this method cash flow i.e. inflow and out
flow are matched with each other. Greater emphasis is laid down on
liquidity of a business organization.
2. Operating cycle method: This method refers to working capital in a
realistic way. The working capital is decided on the basis of l ength of
the operating cycle. It is calculated by dividing operating expenditures
by the number of operating cycle. Short -term source Long term source Internal source External source 1) Issue of shares
2) Issue of Debentures
3) Plugging back of
profit
4) Loans from banks
5) Public deposits 1) Depreciation
2) Taxation provision
3) Accrued expenses 1) Trade credit
2) Credit paper
3) Bank credit
4) Customer's credit
5) Govt. Assistance
6) Loan from directors
7) Security of employees munotes.in
Page 210
Management Accounting
210 6.6.2 Projection of working capital requirements
The businessman mainly faces the problem of determination of working
capital requirements f or financing particular level of activity. The finance
manager has to perform the activities of forecasting working capital
requirements. This process involves the following aspects.
1. Level of activity: Estimation of working capital begins with the lev el
of activity. Therefore the finance manager has to ascertain the
required quantum of production in advance on the basis of past
experience, installed and utilized capacity of the factory and demand.
2. Raw materials: The finance manager has to estimate th e quantity and
cost of raw materials. Lengths of time of raw materials remain in the
store before issue for production is considered longer period of stay of
raw material need greater working capital. This must be valued at
cost.
3. Labour and overheads: Expenses incurred on wages and overheads
are considered while ascertaining raw materials.
4. Work -in-progress: While ascertaining work -in-progress the ‘period
of processing' or 'period of production cycle' has to be considered.
Longer the production cycle, g reater the working capital requirement.
Therefore, the finance manager has to consider the amount required
for raw materials, wages and overheads while estimating volume of
production.
5. Finished Goods: The period of storing finished goods before sale has
to be taken into consideration. This is depending on season, sales
forecasting, etc. If the sales are seasonable and production is
throughout the year, then working capital requirement would be the
higher during the slack seasons.
6. Sundry Debtors: While calculating amount of sundry debtors, period
credit allowed to customers is to be taken into consideration. This
period is known as "time lag in payment by debtors". If this period is
longer, required working capital will be higher in the absence of
similar time lag in payment to creditors. The sundry debtors are value
at sales price while calculating working capital.
7. Cash and bank balance: As per past experience every businessman is
suppose to know the amount cash float or bank balance necessary to
pay day is day payments. This amount is given in the information and
added in the amount of working capital required.
8. Prepaid Expenses: There may be some expenses i.e. insurance, sales
promotion would be paid in advance and in this case working capital
requi rement would be higher is that extent.
9. Sundry Creditors: The period of credit allowed by supplier has to be
taken in to consideration while estimating required amount of working
capital. It longer the period credit from suppliers, lower will be the
worki ng capital requirements. munotes.in
Page 211
Working Capital
Management - I
211 10. Creditors for expenses: Time lag in payment of wages and overheads
also should be considered while deciding amount of working capital
requirements. If there is no time lag in payment of wages and
overheads, more working capital wi ll be required and there will be less
requirement of working capital when there is time -lag in payment of
wages and overheads.
11. Advance from customers: If and when advance required from
customers then there will be lower working capital requirements.
12. Contin gencies: After calculating the amount of working capital as
discussed above, a provision for contingencies may be made to make
allowances for likely variations. This is the sort of cushion against
uncertainties involved in estimating working capital.
6.7 EXERCISE
1. Define Working Capital. Explain the types of Working Capital.
2. Which are the Determinants of Working Capital?
3. Write short note on Projection of Working Capital Requirements.
4. Objective type questions:
A. Rewrite the following sentences by selecting cor rect choice -
1) The period required for the whole operation starting with cash and
ending up with Cash plus –
i) Operating cycle ii) Trading Cycle
iii) Working Cycle iv) Main Cycle
2) Cross working Capital is equal to –
i) Total Current Assets ii) Tot al fixed assets
iii) Total Assets iv) Net Assets
3) The cost to be excluded from the cost of goods sold for the purpose of
determining working in process and finished goods is –
i) Interest ii) Depreciation
iii) Taxation iv) Dividend
4) The primary obj ective of Working Capital Management is to manage –
i) Current Assets ii) Current Liabilities
iii) Current Assets and Current Liabilities iv) Fixed Assets
5) It Is a normal principles that current assets should be valued at cost or
market value whichever is
i) Higher ii) Lower iii) More iv) earlier
(Answer: . 1) - i, 2) - iii, 3) - ii, 4) - iii, 5) – ii)
munotes.in
Page 212
Management Accounting
212 B. Fill in the blanks
1) Advances received from customer will --------------- the working
capital requirements.
2) Provision for contingencies may be made to make allowances for
likely variations or for ------- expenses.
3) In valuation of world in progress labor & overhead are assumed to be
incurred to the extent of --------------
4) It would be more practical if investment in debtors is a cetined at cost
of sales, not as -------- price.
5) The Capital required to meet seasonal requirements is called as --------
working capital.
Answer: 1) – Reduce 2) –unforeseen 3) – 50% 4) – selling 5) -
circulating
C. Match the following
Group A Group B
1) Gross working capital a. Receivables
2) Negative working capital b. Excess of current Assets
3) Debtors c. Total current Assets
4) Bank Balance d. Excess of current liabilities
5) Net working capital e. Quick Assets
(Answer: 1) – c 2) – d 3) – a 4) – e 5) - b )
D. State whether the following statements are true or false
a) Closing stock of raw material is a liquid asset.
b) Profit included in debtors is an expense hence; it is a part of current
asset.
c) Finished goods stock should be valued at FIFO basis.
d) Working capital management aims to strike a judicious balance
between current assets & current liberalities.
e) Prepaid e xpenses increase the amount of working capital.
(Answer: a – False, b – False, c – False, d – True, e - True)
munotes.in
Page 213
213 7
WORKING CAPITAL MANAGEMENT - II
Unit Structure:
7.0 Objectives
7.1 Introduction
7.2 Calculation of Figures Required for Working Capital Projection
7.2.1 Calculations
7.2.2 Proforma of Working Capital Statement
7.3 Solves Problems
7.4 Exercise
7.0 OBJE CTIVES
After studying the unit the students will be able to:
Calculate the figures required for Working Capital Projection.
Draw the statement of Working Capital.
Solve the practical problems on Working Capital requirement.
7.1 INTRODUCTION
In the previou s unit we have studied the concept Working Capital in
detail. That unit have already explained the types of working capital,
elaborate the determinants and sources of working capital. That unit also
explained the concept projection of working capital. In this unit we are
going to study how to estimate the requirement of working capital and
related calculations.
7.2 CALCULATION OF FIGURES REQUIRED FOR
WORKING CAPITAL PROJECTION
7.2.1 Calculations
1. Stock of raw materials: - The cost of raw materials ascertai ned as
under.
Raw material
Budgeted production x cost of material x holding period
(units) p.a per unit (365 days or 52
Weeks or 12 months)
munotes.in
Page 214
Management Accounting
214 2. Work -in-progress: The value of work -in-progress is decided as
follows:
Budgeted production x per unit cost x Process period
p.a (units) material 100% + (365 days or 52
Labour 50% + weeks or 12 months)
overhead 50%
3. Stock of finished goods: The investment in finished stock by a firm is
decided as follows:
Budget production Cost of goods Finished goods
p.a (units) x Produced p.u. x holding period
(365 days or 52weeks
or 12 months)
4. Investment in deb tors: Debtors are calculated at sales prices as well as
at cost price as follows:
At sales price :
At sales price
Budgeted credit sales x Selling Price x Debtors collections period
p.a units per unit (365 days or 12 months
or 52 weeks )
At Cost Price
Budgeted credit sales Cost of sale Debtors collections period
p.a units x per unit x 365 days or 12 months
5. Cost and bank balance: - Required amount of cash & bank can be
determined on the basis of cash budget. This budgeted cash and bank
balance should be enough to meet day to day expenses. This is readily
given in the proble m and included in the list of current assets.
6. Advance payment: - The payment of expenses for the period which is
not expired. It is calculated as follows.
Expenses
(365 days or 52 weeks x Period o f prepayment
or 12 months)
munotes.in
Page 215
Working Capital
Management - II
215 7. Sundry Creditors: - The amount of creditors depends on the credit
purchases and the period of credit allowed by supplier is calculated as
follows:
Budgeted production Cost per unit Period of credit allowed
p.a units x of raw material x 365 days or 52 weeks or
a) 12 months
8. Creditors for wage s & overheads: - It is not necessary to pay
wages and expenses immediately which will ease working capital
requirements. This amount is calculated as follows:
Budgeted production x Wages or expenses x Lag in payment
p.a. unit per unit 365 days or 52
Weeks or 12 months
9. Advance from customer: - The amount received f rom customer in
advance along with purchases result into less working capital requirement.
This amount is given in the problem.
7.2.2 Proforma of Working Capital Statement :
XYZ Co. Ltd.
Statement of Working Capital Requirement for the period ____
Particu lars Working Rs. Rs.
A. Current Asset
1. Stock of Raw Material
2. Stock of WIP
a) Raw Material Labour
b) Labour
c) Overheads
3. Stock of Finished
Goods
a) Raw Material
b) Labour
c) Overheads
4. Debtors at S.P.
(Units x Rate x Period
of holding)
(Units x Rate x
Processing period)
(Units x Rate x
Processing period x
1/2)
(Units x Rate x
Process ing Period x
1/2)
(Units x Rate x Period
of holding)
(Units x Rate x Period
of holding)
Units x Rate x Period
of holding)
(Units X S.P. x Period
of Credit)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
munotes.in
Page 216
Management Accounting
216
OR
Debtors at Cost
a) Raw Materials
b) Labour
c) Overhead
5. Prepaid Expenses
6. Advance to Supplier
7. Cash & Bank
Total Current Assets
(Unit x Rate x Period
of credit)
(Unit x Rate x Period
of credit)
(Unit x Rate x Period
of credi t)
Units x Rate x Period
of Payment
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxxx
B. Less: Current
Liabilities
1. Creditors for
Materials
2. Lag in payment
Wages
a) Wage s
b) Overheads
3. Advance from
Customers
Total Current Liabilities
(Units x Rate X period
of credit)
(Units x Rate x Lag in
Payment)
(Units x Rate x Lag in
Payment)
xxx
xxx
xxx
xxx
xxxx
C. Net Current Assets
Add: - Margin of Safety
D. Workin g Capital
(A - B) xxxx
xxx
xxxx
munotes.in
Page 217
Working Capital
Management - II
217 7.3 SOLVED PROBLEMS
Illustration 1.
Sanket Ltd. had an annual sale of 50,000 units, at Rs.100 per unit. The
company works for 50 weeks in the year.
The cost details of the company are as follows:
Elements of c ost Cost per unit Rs.
Raw Materials 30
Labour 10
Overheads 20
60
Profit per unit 40
Sales price per unit 100
The company has to practice of storing raw materials for 4 week's
requirements. Wages and other expenses are paid after a lag of 2 weeks.
Further the debtors enjoy a credit of 10 weeks and company gets a credit
of 4 weeks from the suppliers. The processing time is 2 weeks and
finished goods inventory is maintained for 4 weeks. From the ab ove
information prepare a working capital estimates, allowing for a 15%
contingency.
Solution: -
Working notes:
a) Sales per week 50,0001,00050 units per week.
b) Debtors are valued at selling price and finished goods at
sales loss profits.
c) It has been assumed that the labour and overheads accrue on an
average, so half the labour and overheads would be included in work in
progress.
munotes.in
Page 218
Management Accounting
218 Statement Showing Estimation of Working Capital.
Particulars Working (unit x Rate x
Period) Rs. Rs.
A. C urrent Assets
I. Stock
Raw Materials
Work -in-progress
Raw materials
Labour
Overheads
Finished goods
II. Debtors
(1000 x 80 Rs. x 4 week)
(1000 x 30 Rs. x 2 week)
(1000 x 10 x 2 weeks x
1/2)
(1000 x 20 x 2 weeks x
1/2)
(1000 x 60 x 4 weeks)
(1000 x Rs. 100 x 10
week) 60,000 10,000 20,000 1,20,000 90,000 2,40,000 10,00,000 Total Current Assets 14,50,000 B. Less: - Current Liabilities
I) Creditors
II) Outstanding wages
III) Outstanding
Overheads (1000 x 30 Rs. x 4
weeks)
(1000 x Rs.10 x 2
week)
(1000 x 20 x 2 weeks) 1, 20,000 20,000 40,000 1, 80,000
Working Capital (A -B)
Add. 15% Con. Reserve
Net working capital 1, 27,000 1, 90,500 14,60,500
Illustration 2.
A factory produces 48,000 units during the year and sells them for Rs. 50
per unit. The cost structure of a product is as follows.
Raw Materials 60%
Labour 15%
Overheads 10%
85%
Profit 15%
Selling price 100%
munotes.in
Page 219
Working Capital
Management - II
219 The following additional information is available.
a) The activities of purchasing pr oducing and selling occur evenly through
and the year.
b) Raw materials equivalent to 1 months supply is stored in godown.
c) The production process takes are month.
d) Finished goods equal to three month's production are carried in stock.
e) Debtors get two month's c redit.
f) Time lag in payment of wages and overheads in 1/2 months.
g) Cash and bank balance is to be maintained at 10% of the working
capital.
h) 10% of sales are made at 10% above the normal selling price.
Draw the statement showing working capital requirement of the factory.
Solution:
Statement showing working capital requirement.
Particulars Working (units x Rate x
period) Rs. Rs.
A. Current Assets
I. Stock
Raw Materials
Work -in-progress
- Raw Materials
- Labour
- Overheads
Finished Goods at cost
II. Debtors at selling
price
Normal
Higher S.P.
B. Current Liabilities
I. Sundry Creditors
II. O/S wages
III. O/S Overheads
C. Working capital (A -
B)
Add : 10% for cash &
Bank balance
i.e. 10% of cost
Required working
capital
(48,000 x 112 x Rs.30 x 1m)
(48,000 x 112x Rs.30 x 1m)
(48,000 x 112x Rs. 7.5 x 12m)
(48,000 x 112x Rs.5 x 12m)
(48,000 x112x Rs.42.5 x 3 m)
(48,000 x 112x 90% x Rs.50 x
2m)
(48,000 x 112x 10% x Rs.55 x
2m)
Total
(48,000 x 112 x Rs.30 x 1.5m)
(48,000 x112x Rs. 7.50 x 12m)
(48,000 x112x Rs.5 x 12m)
(90%)
(10%)
(100%)
1,20,000
15,000
10,000
3,60,000
44,000
1,80,000
15,000
10,000
1,20,000
1,45,000
5,10,000
4,04,000
11,79,000
2,05,000
9,74,000
1,08,222
10,82,222
munotes.in
Page 220
Management Accounting
220 Working notes .
1) Cost Structure %age Cost per unit
Raw material 60 30.00
Labour/Wages 15 7.50
Overheads 10 5.00
85 42.50
Add. Profits 15 7.50
Selling price 50.00
2) Sundry debtors
Normal selling price Rs.50.00
10% above normal selling price Rs.55.00
515 50 5 5510
3) Cash & Bank balance
974000 1090 Rs. 1, 08,222
= 10,8, 222.222
4) M = Months
Illustration 3.
The Board of Directors of Century Rayon Ltd. requests you to prepare a
statement showing requirements of working capital for a forecast level of
activity of 52,000 units in the ensuring year (52 weeks) from the following
information made available.
Cost per unit
Rs.
Raw Material 40.00
Labour 15.00
Overheads Manufacturing 20.00
Overheads Selling & Distribution 10.00
85.00
munotes.in
Page 221
Working Capital
Management - II
221 Additional Information:
a) Selling price - Rs. 100/ - per unit.
b) Raw mate rial in stock - average 4 weeks.
c) Work -in-progress - average 4 weeks.
d) Finished goods in stock - average 4 weeks.
e) Credit allowed to debtors - average 8 weeks.
f) Credit allowed by supplier - average 4 weeks.
g) Cash at bank is expected to be Rs. 50,000.
h) All sales are a credit basis.
i) All the activities are evenly spread out during the year.
j) Debtors are to be valued at sales.
Solution:
Statement of working capital requirement.
Particulars Working (units x Rate x
period) Rs. Rs.
A. Current Assets
I. Stock
Raw Mat erials
Work -in-progress
Raw Materials
Labour
Overheads
Finished Goods at
cost
II. Debtors at selling
price
III. Bank Balance
B.Less Current
Liabilities
Sundry Creditors
C. Working Capital
(A-B)
(52,000 x 152 x Rs. 40 x 4
weeks)
(52,00052 x Rs.40 x 4
weeks)
(52,00052 x Rs.15 x 4
weeks x12)
(52,00052 x Rs.20 x 4
weeks x12)
(52,000 52 x Rs.75 x 4
weeks)
(52,000 52 x Rs.100 x 8
weeks)
(52,00052 x Rs.40 x 4
weeks )
1,60,000 30,000
40,000
1,60,000
2,30,000
3,00,000
8,00,000
50,000
15,40,000
1,60,000
13,80,000
munotes.in
Page 222
Management Accounting
222 Working Notes:
1) Particulars Cost per unit
Rs.
Raw materials 40.00
Labour 15.00
Manufacturing overheads 20.00
Cost of goods produced 75.00
Add: Se lling & Distribution Expenses 10.00
Cost of goods so ld 85.00
Add: Profit 15.00
Sales price 100.00
2) W= weeks
Illustration 4.
From the following data, prepare a statement showing working capital
requirement for the year 2009:
a) Estimated activity for the year 1, 95,000 units (52 weeks) .
b) Stock of raw material 2 weeks and material in progress 2 weeks,
50% of wages and overheads are incurred.
c) Finished goods 3 weeks storage.
d) Creditors 2 weeks.
e) Debtors 4 weeks.
f) Outstanding wages and overheads 2 weeks each.
g) Selling price per unit Rs. 30.
h) Cost analysis per unit is as follows.
I. Raw materials 1/3 of sales.
II. Labour and overheads in the ratio of 3:2 per unit.
III. Profit per unit is Rs. 10
i) Cash balance Rs.50,000
Assume that operations are evenly spread throughout the year.
munotes.in
Page 223
Working Capital
Management - II
223 Solution :
Working notes
1) Cost structure
Rs. Cost per unit Rs.
for 195000 unit
Raw Materials 19,50,000 10.00
Labour 11,70,000 7.00
Overheads 7,80,000 4.00
Total Cost Profit 39,00,000 20.00
Profit 19,50,000 10.00
Sales price 58,50,000 30.00
2) After deducting profit we get total cost per unit Rs.20.
3) Total cost Rs.20 includes Rs.10 cost of raw materials.
4) Balance Rs.10 per unit will be divided in the ratio of 3:2 i.e.
Rs.6 labour and Rs.4 overheads.
5) W = week
Statement of working capital requirements for the year 2009.
Particulars Working (units x Rate
x period) Rs. Rs.
A. Current Assets
I. Raw Materials
II. Work -in-progress
Raw Materials
Labour
Overheads
III. Finished Goods
IV. Debtors
V. Cash
Total
B. Less Current Liabilities
I. Creditors
II. Outstanding wages
III. Outstanding overheads
Total
C. Working Capital (A -B)
(19,5,000 52 x 10 x 2w)
(19,5,000 52 x 10 x 2w)
(19,5,00052 x 6 x 2w x
50%)
(19,5,000 52 x 4 x 2w x
50%)
(19,5,000 52 x 20 x 2w)
(19,5,000 52 x 30 x 4w)
Given
(19,5,000 52 x 10 x 2w)
(19,5,000 52 x 6 x 2w)
(19,5,000 52 x 4 x 2w)
75,000
22,500
15,000
75,000
45,000
30,000
75,000
11, 2,500
1, 50,000
4, 50,000
50,000
8, 37,500
1, 50,000
6, 87,500 munotes.in
Page 224
Management Accounting
224 Illustration 5.
Sangeet Swapna Ltd. Furnisher in the following information and request
you to prepare a statement showing the requirement of working capital for
the year ended 31st March 2009.
Budgeted for 2009
Production capacity for the year 10,000 units
Production 90%
Cost structure
Crude material Rs. 30 per unit
Other direct material Rs. 20 per unit
Wages Rs. 25 per unit
Overheads Fixed Rs. 9000 p.m.
and Rs. 15 variable
per unit
Profit 25% on sales
Other info rmation: -
a) Crude oil material remains in the stock for 2 months.
b) Other direct material remains stock for 1 month.
c) Finished goods remain in stock for 2 month. (to be valued at direct
cost)
d) Production process takes place 1 month work -in-progress valuation to
be made crude material plus direct material at cost; plus 50% of
wages and variable overheads.
e) Time lag in payment of wages 1 month and variable overhead half
month.
f) Fixed overhead payable quarterly in advance.
g) Crude material purchased from suppliers agai nst advance payment of
two months and other direct material suppliers allow credit of 1
month.
h) Credit allowed to customers as under at sales price.
a) 50% of invoice price against acceptance of bill for 4 months.
b) 25% of invoice of time lag 2 months.
i) Bank bala nce to be maintained Rs. 50,000.
j) Production and sales takes place evenly throughout the year.
munotes.in
Page 225
Working Capital
Management - II
225 Solution : -
Working notes : -
1) Estimated production 90% of 10,000 = 9000 units.
2) Cost structure Rs.
Crude material 30.00
Other direct material 20.00
Wages 25.00
Fixed overhead (9000 x 12) 108000 9000 12.00
Variable overheads 15.00
Total Cost 102.00
Profit 25% on sales (Means 331/3 of cost) 34.00
Selling price 137.00
3) M = months
Statement of working capital
Particulars Working (units x Rate
x period) Rs. Rs.
A. Current Assets
a) I. Stock:
Crude Material
Other direct material
II. Work -in-progress
Crude material
Other direct material
Wages
Overhe ads
III. Finished goods
b. Debtors
c. Bills receivables
d. Advance to suppliers
e. Prepaid fixed overhead
f. Bank balance
(900012 Rs.30 2 m)
(900012 20 1 m)
(900012 30 1 m)
(900012 20 1 m)
(900012 25 1 m 50%)
(900012 15 1 m 50%)
(900012 102 2 m)
(900012 136 1 m 50%)
(900012 136 4 50%)
(900012 30 2 m)
(9000 x 3 x 1)
Given
45,000
15,000
75,00 0
60,000
52,500
1,53,000
51,000
2,04,000
45,000
27,000
50,000
22,500
15,000
9,375
5,625
Total 6,42,500
B.Less Current Liabilities I. Creditors
II. Outstanding wages
III.Outstanding overheads
(9,000 12 x 20 x 1 m)
(9,000 12 x 25 x 1 m)
(9,000 12 x 15 x 0.5 m)
15,000
18,750
5,625
Total 39,375
C. Working Capital (A-B) 6,03,125
munotes.in
Page 226
Management Accounting
226 Illustration 7.
From the books of The Board of KEM Ltd . Pune prepare a statement of
working capital requirement to meet the programme planned for the year
2011.
1) Issued share capital Rs. 4,00,000
5% Debentures Rs. 1,00,000
Fixed assets at cost Rs. 2,50,000
2) The expected ratio of the cost to selling price are:
Material 60%
Labour 10%
Overheads 20%
Profit 10%
3) Raw materials are in stores for an average of 2 months. Finished
goods are kept in warehouse for approximately three months.
4) Production during the previous yea r was 1,20,000 units and it is
planned to maintain this level of activity in the current year also.
5) Each unit of production is exp ected to be in process for one month.
6) Credit given by supplier s is two months and allowed to customers is
3 months.
7) Selling price is Rs. 10 per unit.
8) There is regular production and sales cycle.
9) It is decided to maintain Rs. 30,000 cash balance.
Solution: -
a) Budgeted output 1, 20,000 units (given).
b) Budgeted sales - 1, 20,000 x 10 = Rs. 12, 00,000
c) Cost Structure:
R. M. 60% of Rs. 10 = Rs. 7.00 per unit
Labour 10% of Rs. 10 = Rs. 1.00 per unit.
Overheads 20% of Rs. 10 = Rs. 2.00 per unit.
munotes.in
Page 227
Working Capital
Management - II
227 d) Annual expenditure
Raw material (1, 20,000 x Rs. 6) = 7,20,000
Labour (1, 20,000 x Rs. 1) = 1,20,000
Overheads (1, 2 0,000 x Rs. 2) = 2,40,000
Total 10, 80,000
Profit (1,20,000 x Rs.1) 1,20,000
Selling price 12, 00,000
e) M = months
Statement of working capital requirements
Particulars Working (units x Rate
x Period) Rs. Rs.
A. Current Assets
I. Stock of Raw materials
II. Work -in-progress
Raw Materials
Labour
Overheads
III. Finished goods
IV. Debtors
a) Raw materials
b) Labour
c) Overheads
V. Cash
1,20,000 6212m
1,20,000 6112m
1,20,000 1 1
12 2m
1,20,000 2 1
12 2m
1,20,000 9312m
1,20,000 6312m
1,20,000 1312m
1,20,000 2312m
60,000
5,000
10,000
1, 80,000
30,000
60,000
1, 20,000
21,000
2, 70,000
2,70,000
30,000
Total 7, 11,000
B. Less: Current liabilities
Creditors
1,20,0006212m
1, 20,000
1, 20,000
C. Working Capital (A – B) 5, 91,000
munotes.in
Page 228
Management Accounting
228 7.4 EXERCISES
1. You are required to p repare a statement showing the working capital
required to finance the level of activity of 27,000 units per year from the
following information.
Per unit
Rs.
Raw materials 24.00
Direct labour 7.00
Overheads 18.00
Total Cost 48.00
Profit 12.00
Selling price 60.00
Information:
I. Raw materials are in stock an average for two months.
II. Materials are in process on an average for half a month.
III. Finished goods are in stock on an average for two months.
IV. Credit all owed by creditors is two months of raw materials supplied.
V. Credit allowed to debtors is three months.
VI. Lag in payment a wages is half month.
VII. Cash on hand Rs. 4,000 and bank balance Rs. 10,000
(Ans. Raw materials - Rs. 1,08,000; work in progress - Rs. 40,500 ;
Finished stock - Rs. 2, 16,000; Debtors Rs. 4, 05,000; Creditors Rs. 10,
8,000; Labour/wages Rs. 6,750; working capital Rs. 6, 23,750)
2. From the following data provided by M/s Alfa Ltd. estimate working
capital requirements for the year ended 31st Marc h 200 7.
a) Estimate activity of operation for the year 2, 60,000 units (52 weeks)
b) Raw materials remain in stock for 2 weeks and production cycle takes
two weeks.
c) Finished goods remain in stock for two weeks.
d) Two weeks credit is allowed by supplier. munotes.in
Page 229
Working Capital
Management - II
229 e) Four weeks credit is allowed to debtors.
f) Time lag in payment of wages and overheads is two weeks.
g) Cash and bank balance to be maintained Rs. 25,000
h) Selling price per unit is Rs. 15
i) Analysis of cost per unit as follows:
i. Raw material 133 %3 of sal es
ii. Labour and overheads in the ratio of 6:4 per unit.
iii. Profit is at Rs. 5 per unit.
Assume that operations are evenly throughout the year; wages and
overheads accrue similarly. Manufacturing process required feeding a
material fully at the beginning. Deg ree of work -in-progress is 50%.
Debtors are to be estimated as selling price.
(T.Y.B.Com March 2006)
(Ans. Stock Rs. 50,000 work -in-progress Rs. 75,000 debtors
Rs.1,00,000, creditors Rs. 50,000, outstanding wages Rs. 30, 000,
outstanding overheads Rs. 20, 000, working capital Rs. 4, 50,000)
3. From the following details, prepare a statement showing working
capital requirement for the year ended 31st March 2009.
Production 90,000 units
Selling price per unit Rs. 10.00
Raw Materials 60% of selling pr ice
Direct wages 10% of selling price
Overheads 20% of selling price
Materials in hand 2 months requirement
Production time 1 month
Finished goods in stores 4 month
Credit for material 2 month
Credit allowed to customers 3 month
Average c ash balance Rs. 30,000
Average bank balance Rs. 20,000 munotes.in
Page 230
Management Accounting
230 Wages and overheads are paid at the beginning of the month following. In
Production all the required materials are charged in the initial stage and
wages and overheads accrue evenly.
(Ans. Raw mate rials Rs. 90,000, WIP - Rs. 56,250, Finished goods Rs.
2,70,000, Debtors - Rs. 2, 25,000, Creditors - 90,000, O/s wages Rs.
7,500, O/s overheads Rs. 15,000 - working capital 6, 78,750)
4. From the following data, prepare a statement of working capital
requi rement for the year 2009
Rs. Rs.
Budgeted sales 3, 60,000
Less: cost of materials 1, 08,000
Direct labour 1, 44,000
Overheads 72,000 3, 24,000
Net profit 36,000
It is estimated that:
a) Raw materials are carried in s tock for one months and finished goods
for 15 days only.
b) The production cycle take one month.
c) One month's credit is granted both for purchase of raw materials and
sales of finished goods.
d) Production and overheads are even through the year.
(Ans. Raw materi als Rs, 9,000, WIP Rs. 18,000 finished goods Rs.
13,500, Debtors Rs. 30,000, Creditors Rs. 9,000, working capital Rs.
61,500)
5. The management of Fast and Thin Ltd. desires to know the working
capital required with effect from 1st January, 2010 to finance . the
production programme. Percentage cost structure of selling price is as
follows.
Raw Materials 50%
Labour 20%
Overheads 10%
You are further informed that:
a) Raw materials remain in the stores on an average for one month
before issue to productio n.
b) Finished goods remain in the godown for 2 months before sales.
c) Each unit of production will be in process for one month. munotes.in
Page 231
Working Capital
Management - II
231 d) Credit allowed by creditors is one month and allowed to debtors is 2
months.
e) Selling price per unit is Rs. 9.00
f) Production in 2010 i s expected to be 1, 00,000 units.
(Ans. Raw materials - Rs. 37,500, work -in-progress - Rs. 48,750,
Finished goods - Rs. 1, 20,000, Debtors - Rs. 1, 20,000, Creditors - Rs.
37,500, working capital - Rs. 2, 88,750)
munotes.in