(ANALYSIS OF FINANCIAL STATEMENTS)

Q) When does flow of funds take place? Explain briefly? (Marks 3)
Ans) Flow of funds takes place when there is a change in the working capital. The journal entry is passed for the transaction. The accounts of the entry are classified as current assets or current liabilities or non-current assets and non-current liabilities. If all the account of the transaction are of current category, there will be no flow of funds. Similarly no flow of funds will take place if all the accounts are of non-current category. If one account of transaction belongs to current category of the other to non-current category. There will be flow of fund.

Q) A company earns a gross profit of 20% on cost. Its credit sales are twice its cash sales. If the credit sales are Rs. 4,00,000, calculate the gross profit ratio of the company. (Marks 4)
Ans) Credit sales = 400000
Gross profit = 20% on Cost
Credit sales = 2 (cash sales)
.^..Cash sales = 200000
Total sales = Cash sale + Credit sale
= 200000 + 400000
= 600000
Let cost = 100, Profit = 20
.^..Sale = 120
Hence, when sale = 120, cost = 100
Sales = 600000, Cost = 100/120 x 600000 = 500000
Gross profit ratio = (Gross profit/Net sales) x 100 = 100000/600000 x 100
= 16.6% 
Gross profit = Sales - Cost
= 600000 - 500000
= 100000

Q) Find out the sources and application of funds from the details given below extracted from the Balance Sheet of Arun Ltd :

Additional Information :
During the year a piece of machinery costing Rs. 30,000 on which accumulated depreciation was Rs.10,000 was sold for Rs. 25,000 (Marks 5)
Ans. ) 

Machinery A/C

Thus, the sources of fund = Rs. 25000
Application of funds = Rs. 630000

Q) Briefly explain the meaning and significance of any two of the following ratios :
(i) Return on Investment,
(ii) Debt - Equity Ratio and
(iii) Stock Turnover Ratio. (Marks 5)

Ans) (i) Return on Investment :
The overall performance of a business is judged by this ratio which is a measure of relationship between profit earned and capital employed. It ascertains how much income the use of Rs. 100 of capital generates. The ratio is expressed as %.
It is calculated as:
Profit before interest and tax x 100
       Capital employed
Where capital employed = Share capital + Reserve + Long term loan - Fictitious assets and non-operating assets.
ROI is a fair measure of the profitability of any concern which also helps in comparing performance efficiency of different industries.

(ii) Debt Equity Ratio :
This ratio indicates the relationship between shareholders funds and long term liabilities. Shareholders funds include equity and preference share capital, reserves less fictitious assets. It is computed as :
Long term debts
Shareholders funds
The ratio is calculated to ascertain the long term financial soundness of business. It indicates the extent to which business depends upon outsiders. It discloses the firms ability to meet its long term obligations. The lower the ratio, the better for the firm.

(iii) Stock Turnover Ratio :
This ratio gives the relationship between cost of goods sold during a given period and the average amount of inventory during that period :
Cost of Goods Sold
Average stock
where, cost of goods sold = Opg stock + Purchase + Direct Exp. - Cl. stock
The ratio indicates whether stock has been efficiently used or not. The purpose is to keep only the required minimum invested in stock. Higher the ratio the better as it indicates that more sales are produced by a rupee of Invest in stock. In directs the management attention to control excess investment in stock and helps reduce storage cost.

Q) Prepare a comparative income statement of X Ltd., with the help of the following information:

(Marks 5)
Ans). 

X LTD.
Comparative Income Statement for the year eneded 1997 and 1998

Q) What is meant by analysis of financial statements? Briefly explain horizontal analysis.? (Marks 6)

Ans) Analysis of financial statement is a systematic process of evaluating and establishing relationships between different components of financial statements to better understand the performance of the firm. It determines the meaning of the information disclosed in the financial statement of have complete results regarding profitability and financial position of the firm.
Horizontal analysis is a technique of financial analyses to depict the trends of financial characteristics of an enterprise over the years. It involves :
(i) Analysis of financial statement of a firm for a number of years.
(ii) Analysis of financial statement of different enterprises for the same year.

Q) Calculate any three of the following ratio with the help of he following information:

(i) Operating ratio, (ii) Current ratio, (iii) Capital turnover ratio and (iv) Debt to total funds ratio.

Information: Equity Share Capital Rs. 5,00,000; 12% Debentures Rs. 6,00,000; 9% Preference Share Capital Rs. 3,00,000; General Reserve Rs. 1,00,000; Sales Rs. 10,00,000; Opening stock Rs. 80,000; Purchases Rs. 6,00,000; Wages Rs. 1,00,000; Closing Stock Rs. 1,00,000; Selling and distribution expenses Rs. 20,000; Other current assets Rs. 5,00,000 and Current liabilities Rs.3,00,000 (Marks 6)

Ans) (i) Operating Ratio = Operating Cost/Net Sales x 100
Operating cost = cost of Goods Sold* + Selling & Distribution Expenses
Cost of Goods Sold = Opening stock + Purchases + Wages - Closing stock
= 80000 + 600000 + 100000 - 100000
= Rs. 6,80,000
.^.. Operating cost = 680000 + 20000
= 700000
Hence, operating ratio = 700000/10,00,000 x 100 = 70%
(ii) Current Ratio = Current assets/Current liabilities
Current assets = Closing stock + other current assets
= 100000 + 500000
.^.. Current ratio = 600000/300000
= 2 : 1
(iii) Capital turnover ratio = Net sales/Capital employed
Capital Employed = Equity share capital + 12% Debentures + Preference Share Capital + General Reserve.
= 500000 + 600000 + 300000 + 100000
.^.. Capital Turnover Ratio = 10,00,000/15,00,000
= .67 times
(iv) Debt. to total funds Ratio = Long term debts/(Long term funds + Shareholders funds)
Long term funds + Shareholders funds
= 600000 + 500000 + 300000 + 100000
= 1500000
.^.. Debt to total funds ratio = 600000/1500000
= 2 : 5

Q) Prepare a cash budget of Rama Ltd. for the months of January to March 1999 from the following information :

Ans)  

Cash Budget for the period Jan - March ' 99

Q) From the following Balance Sheets of Rajan Ltd., prepare Cash Flow Statement :

Ans) 

Cash Flow Statement for the period ended 1998

Working Notes :

Dr.                           Adjusted P/L A/C                                    Cr.

Cash from Operation :

Building A/C