CHAPTER-I

FINANCIAL STATEMENTS
LEARNING OBJECTIVES
After studying this chapter, you will be able to:
Explain the meaning of financial statements of a company;
Describe the form and content of balance sheet of a company;
Prepare the Balance heet of a company as per chedule !" Part " of the #ompanies
Act $%&'(
)now the ma*or headings under which the +arious assets and liabilities can be shown(
Explain the meaning, ob*ecti+es and limitations of analysis using accounting ratios
#alculate +arious ratios to assess the sol+ency, li,uidity, efficiency and profitability of
the firm(
"nterpret the +arious ratios for inter and intra-firm comparison(
define #ash .low tatement
/now its ob*ecti+es
understand its uses 01ses of #ash .low tatement2
explain the 3imitations of #ash .low tatements
classify the #ash .lows as
( cash flow from 4perating Acti+ities
( cash flow from 4perating
( cash .low from .inancing Acti+ities
ma/e a format of #ash .low tatement as per 5e+ised A-6(
prepare #ash .low tatement in a Prescribed .ormat(
1.0 7he financial statements are the end products of the accounting process which
summaries the financial position and performance of a business concern in an organi8ed
manner( .inancial tatements pro+ide a summari8ed +iew of the operations of the business(
7hey ser+e as an important medium in communicating accounting information to +arious
users of accounts(
"f you can read a cric/et scoreboard, you can learn to read basic financial statements( 3et9s
begin by loo/ing at what financial statements do(
1.1 Financial Statement !" a c!m#an$
.inancial tatements show you where a company9s money came from, where it went, and
where it is now(
.inancial statements are the basic and formal annual reports through which the corporate
management communicates financial information to its owners and +arious other external
parties which include-in+estors, tax authorities, go+ernment, employees, etc(
7here are two main financial statements( 7hey are: :$; balance sheets; :<; income
statements(
Balance sheets show what a company owns and what it owes at a fixed point in time(
"ncome statements show how much money a company made and spent o+er a period of
time(
3et9s loo/ at the Balance heet in more detail(
1
%SERS OF FINANCIAL STATEMENTS
1.& In'et!( an) #!tential in'et!(
7he present in+estors want to decide whether they should hold the securities of the
company or sell them(
Potential in+estors, on the other hand, want to /now whether they should in+est in the
shares of the company or not(
"n+estors :hareholders or owners; and potential in+estors, thus, ma/e use of the financial
statements to *udge the present and future earning capacity of the business, to *udge the
operational efficiency of the business and to /now the safety of in+estment and growth
prospects(
Len)e(*l!n+ te(m c(e)it!(
.inancial statement helps lenders such as debenture holders, suppliers of loans and leases in
ascertaining the long term and short term sol+ency of the business( 7hey li/e to /now the
financial soundness of the business i(e( the ability of the business to repay debt on maturity
and whether the enterprise earns sufficient profits so as to pay interest regularly(
Mana+ement
Analysis of financial statements enable the management to e+aluate the o+erall efficieny of
the firm( "t helps to ascertain the sol+ency of the enterprise; to /now about its +iability as a
going concern and to pro+ide ade,uate information for planning and controlling the affairs of
the business( .uture forecasts can easily be made by analy8ing the past date(
S,##lie(*-!(t te(m c(e)it!(
#reditors=suppliers supplying goods to a business are interested to /now as to whether the
business would be in a position to pay the amounts on time( 7hey are interested in short-
term sol+ency i(e( the li,uidity of the business(
7hey are more interested in current assets and current liabilities of the business( "f current
assets are sufficient, say, twice the current liabilities, they are satisfied that the business
would be able to discharge the short-term debts on time(
Em#l!$ee an) T(a)e %ni!n
Employees are interested in better emoluments, bonus and continuance of business and
whether the dues li/e pro+ident fund, E" et(, ha+e been deposited with the authorities(
7hey would therefore, li/e to /now its financial performance and profitability and operating
sustainability(
G!'e(nment an) it a+encie
.inancial statements are used by go+ernment and its agencies to formulate policies to
regulate the acti+ities of business, to formulate taxation policies, to compile national income
accounts(
2
7axation authorities such as income tax department use the financial statements for
determination of income tax; sales tax department is interested in sales while the excise
department is interested in production(
St!c. e/c-an+e
toc/ exchange uses the financial statements to analy8e and thereafter, inform its members
about the performance, financial health, etc( of the company, to see whether financial
statements prepared are in conformity with the specified laws and rules and to see whether
they safeguard the interest of +arious concerned agencies(
4ther 5egulatory authorities :such as, #ompany 3aw Board, EB", toc/ Exchanges, 7ax
Authorities etc(; would li/e that the financial statements prepared are in conformity with the
specified laws and rules, and are to safeguard the interest of +arious concerned agencies(
.or example, taxation authorities would be interested in ensuring proper assessment of tax
liability of the enterprise as per the laws in force from time to time(
C,t!me(
#ustomers are interested to ascertain continuance of an enterprise(
.or example, an enterprise may be supplier of a particular type of consumer goods and in
case it appears that the enterprise may not continue for a long time, the customer has to
find an alternate source(
BALANCE SHEET- MEANING AN0 P%RPOSE
Balance heet is a financial statement that summari8es a company9s assets, liabilities and
shareholders9 e,uity at a specific point in time( 7hese three balance sheet segments gi+e
in+estors an idea as to what the company owns and owes, as well as the amount in+ested
by the shareholders(
7he balance sheet show: Assets > 3iabilities ? hareholders9 E,uity
A balance sheet thus, pro+ides detailed information about a company9s assets, liabilities and
shareholders9 e,uity(
Assets are things that a company owns that ha+e +alue( 7his typically means they can either
be sold or used by the company to ma/e products or pro+ide ser+ices that can be sold(
Assets include physical property, such as plants, truc/s, e,uipment and in+entory( "t also
includes things that can9t be touched but ne+ertheless exist and ha+e +alue, such as
trademar/s and patents( And cash itself is an asset( o are in+estments a company ma/es(
3iabilities are amounts of money that a company owes to others( 7his can include all /inds
of obligations, li/e money borrowed from a ban/ to launch a new product, money owed to
suppliers for materials, payroll a company owes to its employees, taxes owed to the
go+ernment( 3iabilities also include obligations to pro+ide goods or ser+ices to customers in
the future(
hareholders9 e,uity is sometimes called capital or net worth( "t9s the money that would be
left if a company sold all of its assets and paid off all of its liabilities( 7his lefto+er money
belongs to the shareholders, or the owners, of the company(
A company has to pay for all the things it has :assets; by either borrowing money
:liabilities; or getting it from shareholders :shareholders9 e,uity;(
3
7he purpose of a Balance heet is to report the financial position of a company at a certain
point in time( "t is di+ided into two columns( 7he first column shows what the company owes
:liabilities and net worth;( 7he second shows what the company owns :assets; on the right(
At the bottom of each list is the total of that column( As the name implies, the bottom line of
the balance sheet must always @balance(A "n other words, the total assets are e,ual to the
total liabilities plus the net worth(
7he balance sheet is one of the most important pieces of financial information issued by a
company( "t is a snapshot of what a company owns and owes at the point in time( 7he
income statement, on the other hand, shows how much re+enue and profit a company has
generated o+er a certain period(
Beither statement is better than the other-rather, the financial statements are built to be
used together to present a complete picture of a company9s finances(
CONTENTS OF BALANCE SHEET
7he prescribed form of the Balance heet is gi+en in Part " of chedule !" of the #ompanies
Act, $%&'(
7he #ompanies Act has laid down two forms of the Balance heet /nown as :
:i; Cori8ontal form
:ii; !etical form
.45DA7 4. 1DDA5"ED BA3AB#E CEE7:C45"E4B7A3 .45D;
#CED13E !" PA57 "
Balance heet of F( #4(37D(
As at F
.igures
for the
pre+ious
year
5s(
3iabilities .igures
for the
current
year
5s(
.igures
for the
pre+ious
year
5s(
Assets .igures
for the
current
year
5s(
$( hare #apital
<( 5eser+es and surplus
6( ecured 3oans
G( 1nsecured 3oans
&( #urrent 3iabilities and
Pro+isions
:a; #urrent 3iabilities
:b; Pro+isions
$( .ixed Assets
<( "n+estments
6( #urrent Assets, 3oans
and
Ad+ances
:a; #urrent Assets
:b; 3oans and Ad+ances
G( Discellaneous
Expenditure
&( Profit and 3oss A=c
Bote: A footnote to the Balance heet may be added to show the contingent liabilities(
7he format of the detailed Balance heet of a company in a hori8ontal form is gi+en below:
4
FORMAT OF THE 0ETAILE0 BLANCE SHEET IN A HORI1ONTAL FORM
H!(i2!ntal F!(m !" Balance S-eet
Balance S-eet !" 3.4Name !" t-e C!m#an$5 a !n 3..
.igures for
the
pre+ious
year
5s(
3iabilities .igures for
the
current
year
5s(
.igures for
the
pre+ious
year
5s(
Assets .igures for
the
current
year
5s(
S-a(e Ca#ital
Authorised
Fshares of 5sF( Each
Preference
E,uity
"ssued:
Preference
E,uity
3ess: #alls 1npaid:
Add: .orfeited
hares
Ree('e an)
S,(#l,6
#apital 5eser+e
#apital 5edemption 5eser+e
ecurities Premium
4ther 5eser+es
Profit and 3oss Account
Sec,(e) L!an6
Debentures
3oans and Ad+ance from
Ban/s
3oans and Ad+ance from
ubsidiary #ompanies
4ther 3oans and Ad+ances
%nec,(e) L!an6
.ixed Deposits
3oans and Ad+ances from
ubsidiaries
#ompanies
hort 7erm 3oans and
Ad+ances
4ther 3oans and Ad+ances
C,((ent Lia7ilitie an)
P(!'ii!n6
A. C,((ent Lia7ilitie
Acceptances
Debentures
undry #reditors
4utstanding Expenses
B. P(!'ii!n6
.or 7axation
.or Di+idends
.or #ontingencies
.or Pro+ident .und chemes
.or "nsurance, Pension and
4ther similar benefits
Fi/e) Aet6
Hoodwill
3and
Building
3easehold Premises
5ailway idings
Plant and Dachinery
.urniture
Patents and 7rademar/s
3i+e toc/
!ehicles
In'etment6
Ho+ernment or 7rust ecurities,
hares, Debentures, Bonds
C,((ent Aet8 L!an an)
A)'ance6
4A5 C,((ent Aet6
"nterest Accrued
tores and pare parts
3oose 7ools
toc/ in 7rade
Ior/ in Progress
undry Debtors
#ash and Ban/ balances
4B5 L!an an) A)'ance6
Ad+ances and 3oans to ubsidiary
Bills 5ecei+able
Ad+ance Payments
Micellane!,-E/#en)it,(e6
Preliminary Expenses
Discount on "ssue of hares and
other Deferred Expenses
P(!"it an) L! Acc!,nt
4)e7it Balance6 i" an$5
5
F!(mat !" t-e Balance S-eet in 'e(tical "!(m
Balance S-eet !" 3. A !n 33
Particulars chedule
Bumber
.igures as
at the end
of current
financial
year
.igures as at
the end of
pre+ious
financial year
I. S!,(ce !" F,n)6
1. S-a(e-!l)e(9 F,n)6
:a; hare #apital
:b; 5eser+es and urplus
&. L!an F,n)6
:a; ecured loans
:b; 1nsecured loans
T!tal4Ca#ital Em#l!$e)5
II. A##licati!n !" F,n)
1. Fi/e) Aet6
:a; Hross bloc/
:b; 3ess : depreciation
:c; Bet bloc/
:d; #apital wor/-in-progress
&. In'etment6
:. C,((ent Aet8 L!an an) A)'ance6
:a; "n+entories
:b; undry Debtors
:c; #ash and Ban/ Balances
:d; 4ther #urrent Assets
:e; 3oans and Ad+ances
Le6 C,((ent Lia7ilitie an) P(!'ii!n6
:a; #urrent liabilities
:b; Pro+isions
Net C,((ent Aet
;. :a; Discellaneous expenditure to the
extent not written-off or ad*usted(
:b; Profit and 3oss account
:debit balance, if any;
TOTAL
Bote: A footnote to the Balance heet may be added to show the contingent liabilities(
6
HO< TO REA0 A COMPAN=9S BALANCE SHEET
4i5 LIABILITIES SI0E
1. S-a(e Ca#ital6 1nli/e the non corporate entities were the entire capital is brought in by
the proprietors or the partners, in the case of a company, it is brought in by the promoters,
their friends, relati+es as well as the general public in case of listed companies( 7he capital is
/nown share capital and shareholders get di+idend out of the profits of the company as
return on their in+estment(
hare #apital is broadly di+ided into: Authorised #apital, "ssued #apital, ubscribed #apital,
#alled up and Paid up capital(
Authorised #apital is the maximum share capital that a company is allowed to issue during
its lifetime( "t is stated in the Demorandum of Association(
"ssued #apital is that part of authori8ed capital, which is offered to the public for
subscription, including shares offered to the +endors for subscription other than cash :i(e(
issue of shares in consideration for some other asset purchased;(
#alled-up capital means that part of subscribed capital which is called-up by the company
for payment by the subscribers to the shares(
Paid up capital 7he amount that the shareholders ha+e actually paid to the company is called
as paid up capital of the company(
#alls in arrears must be shown by the way of deduction from the called up capital and
.orfeited shares account by the way of addition to the paid up capital(
<( Ree('e an) S,(#l,6 5eser+es represent that portion of earnings and receipts of a
company which are set apart by the management for a general or a specific purpose( 7his
item includes accumulated profits, reser+es and funds- such as capital reser+es, capital
redemption reser+e, balance of securities premium account, general reser+e, credit balance
of profit and loss account, and other reser+es specifying the nature of each reser+e and the
amount in respect thereof including the additions during the current year(
6( Sec,(e) L!an6 3ong-term loans, which are ta/en against security of one or more
assets of the company, are included under this head( Debentures and secured loans and
ad+ances from ban/s, subsidiary companies, etc(, fall under this category( 3i/ewise interest
accrued and due on secured loans is also recorded under the same head(
G( %nec,(e) L!an6 3oans and ad+ances which are not bac/ed by any security in the form
of assets of the company are shown under this heading( 7his item includes fixed deposits,
unsecured loans and ad+ances from subsidiary companies, short-term loans and ad+ances
from ban/s and other sources(
7
&(C,((ent Lia7ilitie an) P(!'ii!n : #urrent liabilities refer to such liabilities, which
mature within a period of one year( 7hey include bills payable, sundry creditors, ad+ance
payments and unexpired discounts, unclaimed di+idends, "nterest accrued but not paid, and
other liabilities( Pro+isions refer to the amounts set aside out of re+enue profits for some
specific liabilities payable within a period of one year( 7hose include pro+ision for taxation,
proposed di+idends, pro+ision for contingencies, pro+ision for pro+ident fund, pro+ision for
insurance; pension and similar staff benefit schemes, etc( Both the sub headings current
liabilities as well as pro+isions must be shown separately under two sub-heads- :a; #urrent
liabilities :b; Pro+isions(
C!ntin+ent lia7ilitie
7hese are the liabilities which may arise in future on the happening of some e+ent(
#ontingent liabilities are not included in the total of the liability side( 7hese are shown as a
footnote to the Balance heet(
.ollowing are the usual types of contingent liabilities:
:i; #laims against the company not ac/nowledged as debt(
:ii; 1ncalled liability on shares partly paid(
:iii; Arrears of fixed cumulati+e di+idend(
:i+; Estimated amount of contracts remaining to be executed on capital account
and not pro+ided for(
:+; Bills discounted not yet matured(
ASSETS SI0E
$( Fi/e) Aet : 7hese are assets which are meant for use in business and not for
sale( 7hese assets pro+ide a long term economic benefit, usually for more than one year to
the firm( 7hese include goodwill, land, buildings, leaseholds, plant and machinery, railway
sidings, furniture and fittings, patents, li+estoc/, +ehicles, etc( 7hese assets are shown at
cost less depreciation till the date(
<( In'etment6 Business is supposed to great profit( Ihen generated, this profit in
excess of what is re,uired for the business can be in+ested into say, shares or debentures of
+arious companies( "n+estments thus represent assets held by an enterprise for earning
income( 1nder this head, +arious in+estments made such as in+estment in go+ernment
securities or trust securities; in+estment in shares, debentures, and bonds of other
companies, immo+able properties, etc(, are shown(
6( C,((ent Aet8 L!an an) A)'ance : 4ne the fixed assets are in a state of
readiness to produce or pro+ide goods and ser+ices, the company needs current assets to
carry out business operations( 7hese assets are held for consumption of for sale and are
expected to be reali8ed in cash during the normal operating cycle( #urrent assets include
in+entories, debtors, cash etc( 3oans and ad+ances refer to those assets which are held for a
short term and are expected to be reali8ed within one year( 7hese include ad+ance
payments, loans to subsidiary companies etc( Both the sub headings- current assets as well
as loans and ad+ances must be shown separately under two sub-heads- :a; #urrent Assets
:b; 3oans and Ad+ances( "t includes interest accrued on in+estment, in+entories, sundry
debtors, bills recei+able, cash and ban/ balances while loans and ad+ances and other
ad+ances li/e prepaid expenses, etc(
G( Discellaneous Expenditure: 7he expenditure which has not been fully written off
shown under this heading( "t includes preliminary expenses, ad+ertisement expenditure,
discount on issue of shares and debentures, share issue expenses, etc(
8
&( Profit and 3oss Account: Ihen the Profit and 3oss account shows a debit balance,
i(e(, loss which could not be ad*usted against general reser+es, is shown on the asset side of
the Balance heet(
Ill,t(ati!n 1( Hi+e three examples of each of the following :$; current liabilities; :<;
contingent liabilities; :6; current assets; :G; miscellaneous expenditure; :&; pro+isions(
olution :
Ceadings Examples
$( #urrent liabilities
<( #ontingent liabilities
6( #urrent assets
G( Discellaneous Expenditure
&( Pro+isions
$( undry creditors
<( Bill payable
6( 1nclaimed di+idend
$( #laims against company not ac/nowledge as debt
<( 1ncalled liability on partly paid shares
6( Estimated amount of contract remaining to be
executed(
$( toc/ in trade(
<( #ash at ban/
6( tores and spare parts
$( Preliminary expenses
<( Discount allowed on issue of shares and debentures
6( 1nderwriting commission
$( Pro+ision for taxation
<( Proposed di+idend
6( Pro+ident fund(
Ill,t(ati!n &( 1nder which heading and sub-heading will you show the following items:
:$; hare forfeited account; :<; ecurities premium account; :6; 1nclaimed di+idend :G;
Proposed di+idend :&; Arrears of fixed cumulati+e di+idend on preference shares(
olution :
(Bo( "tems Ceading ub-heading
$( hare forfeited account hare #apital --
<( ecurities premium account 5eser+es and surplus --
6( 1nclaimed di+idend #urrent 3iabilities and pro+isions #urrent liability
G( Proposed di+idend #urrent 3iabilities and Pro+isions Pro+isions
& Arrears of fixed cumulati+e
Di+idend on preference
shares
#ontingent liability --
Ill,t(ati!n :( Hi+e the headings and sub-headings under which the following will be shown
in a company9s balance sheet as per chedule !" Part " of the #ompany9s Act $%&'( :i; $JK
debentures :ii; preliminary expenses :iii; Plant and Dachinery :i+; #apital reser+e :+; bills
payable :+i; general reser+e :+ii; interest paid out of capital during construction :+iii;
railway sidings :ix; stores L spare part :x; fixed deposits(
9
S!l,ti!n6
(Bo( "tems Ceadings ub-Ceadings
:i; $J K Debentures ecured 3oans --
:ii; Preliminary expenses Discellaneous Expenditure --
:iii; Plant L Dachinery .ixed assets --
:i+; #apital 5eser+e 5eser+es and urplus --
:+; Bills Payable #urrent liabilities and
pro+isions
#urrent liabilities
:+i; Heneral reser+e 5eser+es L surplus --
:+ii; "nterest paid out of
capital during
construction
Discellaneous expenditure --
:+iii; 5ailway sidings .ixed assets --
:ix; tore and spare parts #urrent assets, loans L
ad+ances
#urrent assets
:x; .ixed deposits 1nsecured loans --
Ill,t(ati!n ;( 7he following figures were extracted from the trial balance of M 3td( share
capital $J,JJJ e,uity shares of 5s( $J each fully paid :
ecurities premium 5s( $J,JJJ
$<K Debentures 5s( &J,JJJ
.ixed deposits 5s( <&,JJJ
#reditors 5s( &,JJJ
Nou are re,uired to draw up the liabilities side of the balance sheet, according to the
re,uirements of the #ompanies Act(
olution :
AB EM75A#7 4. BA3AB#E CEE7 4. M 37D( A A7 FF
3iabilities 5s(
CA5E #AP"7A3:
Authori8ed #apital
FFe,uity shares of 5s( $J each
"ssued and subscribed
$J,JJJ e,uity shares of 5s( $J each
5EE5!E ABD 15P31:
ecurities premium
E#15ED 34AB:
$<K DEBEB715E
1BE#15ED 34AB:
.ixed deposits
#155EB7 3"AB"3"7"E ABD P54!""4B:
:A; #urrent liabilities
undry creditors
:B; Pro+isions
$,JJ,JJJ
$J,JJJ
&J,JJJ
$J,JJJ
&,JJJ
---
10
Ill,t(ati!n >. 7he following ledger balances were extracted from the boo/s of 5ushil 3td(
4n 6$
st
Darch, <JJO(
3and and Building 5s( <,JJ,JJJ; $<K debentures 5s( <,JJ,JJJ; hare #apital $,JJ,JJJ
e,uity shares 5s( $J each fully paid; Plant and Dachinery 5s( P,JJ,JJJ; Hoodwill 5s(
<,JJ,JJJ;"n+estments in shares of 5a*a 3td( 5s(<,JJ,JJJ; Bills 5ecei+able 5s &J,JJJ;
Debtors 5s( $,&J,JJJ; #reditors 5s $,JJ,JJJ; Ban/ 3oan :1nsecured; 5s $,JJ,JJJ;
Pro+ision for taxation 5s( &J,JJJ; Discount on issue of $<K debentures 5s( &JJJ; Proposed
di+idend 5s( &&,JJJ( toc/ 5s( $,JJ,JJJ Heneral 5eser+e 5s <,JJ,JJJ(
Nou are re,uired to prepare the Balance heet of the company as per schedule !" Part " of
the #ompanies act $%&'(
olution:
51C"3 37D(
BA3AB#E CEE7 A A7 6$
7
DA5#C,<JJO
3iabilities 5s( Assets 5s(
AC5E #AP"7A3:
Authori8ed #apital
"ssued #apital
ubscribed #apital
$,JJ,JJJ E,uity shares of
5s($J each
5EE5!E ABD 15P31:
Heneral reser+e
E#15ED 34AB:
$<K Debentures
1BE#15ED 34AB:
Ban/ 3oan
#155EB7 3"AB"3"7"E ABD
P54!""4B:
:A; #urrent liabilities
#reditors
:B;Pro+isions
Proposed di+idend
Pro+ision for taxation
QQQQQQRQQQ
$J,JJ,JJJ
$J,JJ,JJJ
<,JJ,JJJ
<,JJ,JJJ
$,JJ,JJJ
$,JJ,JJJ

&&,JJJ
&J,JJJ
."MED AE7:
Hoodwill
3and and Building
Plant and Dachinery
"B!E7DEB7:
hares of 5a*a 3td(
#155EB7 AE7, 34AB ABD
AD!AB#E:
:A; #urrent assets:
toc/-in-7rade
Debtors
:B; 3oans and Ad+ances
Bill 5ecei+ables
D"#E33ABE41 EMPEBD"715E:
Discount on issue of $<K
Debentures
<,JJ,JJJ
<,JJ,JJJ
P,JJ,JJJ
<,JJ,JJJ
$,JJ,JJJ
$,&J,JJJ
&J,JJJ
&,JJJ
$O,J&,JJJ
$O,J&,JJJ
Ill,t(ati!n ?. M 3td( has an authori8ed capital of 5s( $J,JJ,JJJ di+ided into E,uity hares
of 5s( $J each( 7he company in+ited applications for &J,JJJ shares( Applications for G&,JJJ
shares were recei+ed( All calls were made and were duly recei+ed except the final call of 5s(
< per share on $,JJJ shares( &JJ of the shares on which the final call was not recei+ed
were forfeited( how how share capital will appear in the Balance heet of the #ompany as
per schedule !" part " of the #ompanies Act $%&'R
11
olution:
M 37D(
BA3AB#E CEE7 A 4B FFFFFFF
3iabilities Amount
5s(
Assets Amount
5s(
AC5E #AP"7A3:
Authori8ed #apital
$,JJ,JJJ E,uity hares of 5s( $J each
"ssued #apital :
&J,JJJ E,uity hares of 5s( $J each
ubscribed #apital:
GG,&JJ E,uity hares of 5s( $J each

G,G&,JJJ
3ess: #alls in Arrears $,JJJ

G,GG,JJJ
Add: hare .orfeited A=c G,JJJ
$J,JJ,JJJ
&,JJ,JJJ
G,GP,JJJ
Ill,t(ati!n @. .rom the following balances ta/en from the boo/s of Hu*arat Exports 3td(
prepare #ompany9s Balance heet in Cori8ontal .orm:
5s( 5s(
3and and Buildings 6,<&,JJJ Patents O,<JJ
Plant and Dachinery <,%J,JJJ "n+estments <J,JJJ
undry Debtors '&,JJJ Preliminary Expenses <,JJJ
P,JJJ E,uity hares of 5s( $JJ ecurities premium <J,JJJ
each 5s( &J called up G,JJ,JJJ Pro+ision for "ncome tax <G,JJJ
$&K debentures $,JJ,JJJ #losing toc/ $,<P,JJJ
Debenture 5edemption 5eser+e &J,JJJ #ash $<,JJJ
Prepaid "nsurance G,PJJ Ad+ance "ncome 7ax G,JJJ
Profit L 3oss :#r(; $,$6,JJJ undry #reditors $&,<JJ
Bills Payable $&,JJJ 4utstanding expenses G,PJJ
Heneral 5eser+e $,JJ,JJJ Proposed Di+idend $',JJJ
"n+estments are in partly-paid shares on which calls of 5s( $J,JJJ ha+e not been made(
12
olution:
BA3AB#E CEE7 4. H1SA5A7 EMP457 37D(
As at FFFFFFin hori8ontal form
3iabilities 5s( Assets 5s(
AC5E #AP"7A3:
Authori8ed #apital
"ssued #apital
P,JJJ E,uity shares of
5s($JJ each
ubscribed #apital
P,JJJ E,uity shares of
5s($JJ each, 5s( &J called up
5EE5!E ABD 15P31:
ecurities Premium
Heneral 5eser+e
Profit L 3oss A=c
Debenture 5edemption 5eser+e
E#15ED 34AB:
$&K Debentures
1BE#15ED 34AB:
#155EB7 3"AB"3"7"E ABD
P54!""4B:
:A; #urrent liabilities
Bills payable
undry #reditors
4utstanding Expenses
:B;Pro+isions
Pro+ision for "ncome tax
Proposed di+idend
QQQQQQRQQQ
P,JJ,JJJ
G,JJ,JJJ

<J,JJJ
$,JJ,JJJ
$,$6,JJJ
&J,JJJ
$,JJ,JJJ
$&,JJJ
--
$&,JJJ
$&,<JJ
G,PJJ

<G,JJJ
$',JJJ
."MED AE7:
3and and Building
Plant and Dachinery
Patents
"B!E7DEB7:
#155EB7 AE7, 34AB ABD
AD!AB#E:
:A; #urrent assets:
#losing toc/
undry Debtors
#ash
:B; 3oans and Ad+ances
Prepaid "nsurance
Ad+ance "ncome 7ax
D"#E33ABE41 EMPEBD"715E:
Preliminary Expenses
6,<&,JJJ
<,%J,JJJ
O,<JJ
<J,JJJ
$,<P,JJJ
'&,JJJ
$<,JJJ
G,PJJ
G,JJJ
<,JJJ
P,&P,JJJ P,&P,JJJ
Bote: #ontingent 3iabilities: .or partly-paid shares 5s( $J,JJJ
RATIO ANAL=SIS
1.; 5atio analysis is not *ust comparing different numbers from the balance sheet, income
statement and cash flow statement( "t is comparing the number against pre+ious years ,
other companies, the industry , or e+en the economy in general( 5atios loo/ at the
relationships between indi+idual +alues and relate them to how a company has performed in
the past and might perform in the future(
13
.or example current assets alone don9t tell us a whole lot , but when we di+ide them by the
current liabilities we are able to determine whether the company has enough money to
co+er short debts( 7herefore we can say that when one figure is expressed in terms of
another figure by di+iding each other the relation which is established between them is
called ration(
1.> Meanin+ !" Rati! Anal$i
5atio Analysis is the relationship between two terms of financial data expressed in the form
of ratios and then interpreted with a +iew to e+aluating the financial condition and
performance of a firm(
5atio Analysis can also help us to chec/ whether a business is doing better this year than it
was last year; and it can tell us if our business is doing better or worse than similar type of
business(
Example : .irm A earns a profit of 5s( &J,JJJ while .irm B earns a profit of 5s( $,JJ,JJJ(
Ihich of them is more efficientR Ie could tend to belie+e that firm B is more efficient than
firm A( But in order to understand correctly , we need to find out their sales figure( ay firm
A9s sales are 5s( &,JJ,JJJ while firm B9s sale are 5s( &J,JJ,JJJ( Bow let9s compare the
percentage of profit earned by them on sales(
.or A: &J,JJJ M $JJ > $J K
&,JJ,JJJ
.or B: $,JJ,JJJ M $JJ > < K
&J,JJ,JJJ
7his clearly shows that firm A is doing better than .irm B(
7his example shows that figure assumes significance only when expressed in relation to
other related figures(
1.>.1 O7Aecti'e !" Rati! Anal$i 6
7he main ob*ecti+e of analy8ing financial statement with the help of ratios are:
$( 7he analysis would enable the calculation of not only the present earning capacity of
the business but would also help in the estimation of the future earning capacity(
<( 7he analysis would help the management to find out the o+erall as well as the
department T wise efficiency of the firm on the basis of the a+ailable financial
information(
6( 7he short term as well as the long tem sol+ency of the firm can be determined with
the help of ration analysis(
G( "nter T firm comparison becomes easy with the help of ratios(
1.>.& A)'anta+e !" Rati!n Anal$i6
.inancial statement prepared at the end of the year do not always con+ey to the reader
the real profitability and financial health of the business( 7hey contain +arious facts and
figures and it is for the reader to conclude what these figures indicated( 5atio Analysis is
an important tool for analy8ing these financial statements (ome important ad+antage
deri+ed by the firm by the use of accounting ratios are:
1. Hel# in Financial tatement anal$i
"t is east to understand the financial position of a business enterprise in respect of
short term sol+ency, li,uidity and profitability with the help of ratio( "t tells us the
changes ta/ing place in the financial condition of the business(
14
&. Sim#li"ie) acc!,ntin+ "i+,(e
Absolute figures are not of mush use( 7hey become important when relationships are
established say between gross profit and sales(
:. Hel# in calc,latin+ !#e(ati!n e""icienc$ !" t-e 7,ine ente(#(ie
5atio enable the user of financial information to determine operating efficiency of a
firm by relating the profit figure to the capital employed for a gi+en period(
;. Facilitie inte(- "i(m c!m#a(i!n
5atio analysis pro+ides data for inter- firm comparison( "t re+els strong and wea/
firms, o+er+alues and under+alues firms as well as successful and unsuccessful firms(
>. Ma.e inte(- "i(m c!m#a(i!n #!i7le
5atio Analysis helps the firm to compare its own performance o+er a period of time a
swell as the performance of different di+isions of the firm( "t helps in deciding which
di+ision are more efficient than other(
?. Hel# in "!(ecatin+
5atio Analysis helps in planning and forecasting ( 5atios pro+ides clues on trends and
futures problems ( e(g if the sales of a firm during the year are 5s( $J la/hs and he
a+erage stoc/ /ept during the year 5s( < la/hs, it must be ready to /eep a stoc/ of
5s( 6 la/hs which is <J K of the 5s( $& la/hs(
1.>.: Limitati!n !" Rati! Anal$i
5atio Analysis is a useful techni,ue to e+aluate the performance and financial position of
any business unit but it does suffer from a number of limitations( 7hese must be /ept
in mind while analysing financial statements(
1. Hit!(ical Anal$i
5atio Analysis is historical in nature a the finicial statement on the basis of which
ratios are calculated are historical in nature(

&. P(ice Le'el C-an+e
#hanges in price le+el often ma/e comparison of figures of the pre+ious years
difficult( E(g ratio of sales to fixed assets in <JJ' would be much higher than in <JJJ
due to rising prices, fixed assets being expressed on cost(
:. N!t F(ee "(!m 7ia
"n many situations, the accountant has to ma/e a choice out of the +arious
alternati+es a+ailable ( e(g choice of the method depreciation, choice in the method
of in+entory +aluation etc( ince there is a sub*ecti+ity inherent in the choice , ratio
analysis cannot be said to be free from bias(
;. <in)!B )(ein+
Iindow dressing is slowly the position better than what it is( ome companies , in
order to co+er up their bad finicial position resort to window dressing( By hiding
important facts, they try to depict a better financial position(
15
>. C,alitati'e "act!( i+n!(e)
5atio Analysis is a ,uantitati+e analysis( "t ignores ,ualitati+e factors li/e debtors
character, honesty, past record etc(
?. 0i""e(ent acc!,ntin+ #(actice (en)e( (ati! inc!m#a(a7le
7he result of two firms are comparable with the help of accounting ratios only if they
follow the same accounting methods ( e(g( if one firm changes depreciation on
straight line method while another is charging on diminishing balance method,
accounting ratios will not be strictly comparable(
1.? Clai"icati!n !" Rati!
Different types of ratios are computed depending on the purpose for which they are
needed( Broadly spea/ing ,they are grouped under four heads:
$( 3i,uidity ratios
<( ol+ency ratios
6( 7urno+er or Acti+ity ratios
G( Profitability ratios
1.?.1 LIC%I0IT= RATIOS
3i,uidity is the short term sol+ency of the enterprise( "(e( the ability of the business
enterprise to meet its short term obligation as and when they are due( 7he li,uidity ratios,
therefore , are also called the short- term sol+ency ratios(
7he most common ratios which measures the extent of li,uidity or the lac/ of it are:
a; #urrent ratio
b; Uuic/ ratio= Acid test ratio
C,((ent Rati!
#urrent ratio establishes the relationship between current assets and #urrent liability( "t
measures the ability of the firm to meet its short term obligation as and when they become
due( "t is calculated as:
#urrent ratio> #urrent Assets
#urrent liabilities
16
#lassification of 5atio
3i,uidity ratios ol+ency ratios Acti+ity 5atios
Profitability 5atios
1. Current ratio;
2. Quick Ratio.
1.Debt equality ratio;
2.otal !""e"t to #ebt
ratio;
3.$ro%rietary ratio;
4.&ntere"t Co'era(e
Ratio.
1. )tock urno'er;
2. Debtor" urno'er;
3. Cre#itor" urno'er;
4. *i+e# !""e"t
urno'er;
5. ,orkin( Ca%ital
urno'er.
1. -ro"" $ro.it
Ratio
2. /et $ro.it
Ratio
3. 0%eratin(
Ratio
4. Return $ro.it
Ratio
#urrent assets include cash and those assets which can be con+erted into cash within a
year( #urrent assets will therefore include cash , ban/, stic/:raw materials , wor/ in progress
and finished goods;, debtors:less pro+ision;, bills recei+able, mar/etable securities, prepaid
expenses, short term loans and ad+ances and accrued incomes(
#urrent liability include all those liabilities maturing with in one year(
#urrent liabilities include creditors, bills payable, outstanding expenses, income recei+ed in
ad+ance , ban/ o+erdraft, short-term loans, pro+ision for tax , proposed di+idend and
unclaimed di+idend(
Henerally , a current ratio of <:$ is considered satisfactory(
Inte(#(etati!n: "t pro+ides a measure of degree to which current assets co+er current
liabilities( 7he higher the ratio , the greater the margin of safety for the short term creditors(
Cowe+er, the ratio should neither be +ery high nor +ery low( A +ery high
current ratio indicates idle funds , piled up stoc/s, loc/ed amount in debtors while a low
ratio puts the business in a situation where it will not be able to pay its short- term debt on
time(
Ill,t(ati!n 1
#alculate current ratio from the following information:
toc/ 5s ('J,JJJ ; #ash GJ,JJJ; Debtors GJ,JJJ; #reditors &J,JJJ
Bills 5ecei+able <J,JJJ; Bills Payable 6J,JJJ; Ad+ance 7ax G,JJJ
Ban/ 4+erdraft G,JJJ; Debentures 5s( <,JJ,JJJ; Accrued interest 5s( G,JJJ(
S!l,ti!n
C,((ent Aet > 5s('J,JJJ ? 5s(GJ,JJJ ? 5s(GJ,JJJ ? 5s(<J,JJJ ? 5s(G,JJJ ?
5s(G,JJJ
> 5s($,'P,JJJ
C,((ent Lia7ilitie > 5s(&J,JJJ ? 5s(6J,JJJ ? 5s(G,JJJ > 5s( PG,JJJ
C,((ent Rati! > 5s($,'P,JJJ : 5s(PG,JJJ > < : $(
Ill,t(ati!n &
#urrent Assets of a company are 5s( $J,JJ,JJJ and current liabilities are 5s( ',JJ,JJJ( 7he
management is interested in ma/ing the ratio <:$ by ma/ing payment of certain current
liabilities( Ad+ise the management as to how much of current liabilities should be paid to
attain the desired ratio(
S!l,ti!n
3et the current liabilities to be paid > x
$J,JJ,JJJ-x > <
',JJ,JJJ-x
$J,JJ,JJJ-x > <:',JJ,JJJ-x ;
$J,JJ,JJJ-x > $<,JJ,JJJ-<x
x > <,JJ,JJJ
C,ic. Rati! * Aci) tet (ati!*LiD,i) (ati!
Uuic/ ratio establishes the relationship between ,uic/= li,uid assets and current liabilities( "t
measures the ability of the firm to meet its short term obligations as and when they become
due without relying upon the reali8ation of stoc/( "t is calculated as:
Uuic/ ratio > Uuic/ Assets
#urrent 3iabilities
17
7he ,uic/ assets are defined as those assets which can be con+erted into cash immediately
or reasonably soon without a loss of +alue( .or calculating ,uic/ assets we exclude the
closing stoc/ and prepaid expenses from the current assets(
Henerally, a li,uid ratio of $:$ is considered satisfactory(
Inte(#(etati!n6 Uuic/ ratio is considered better than current ratio as a measure of li,uidity
position of the business because of exclusion of in+entories( 7he idea behind this ratio is that
stoc/ are sometimes a problem because they can be difficult to sell or use( 7hat is , e+en
through a supermar/et has thousand of people wal/ing through its doors e+ery day, there
are still items on its shel+es that don9t sell as ,uic/ly as the supermar/et would li/e(
imilarly, there are some items that will sell +ery well( Be+ertheless , there are some
business whose stoc/s will sell or be used slowly and if those businesses needed to sell
some of their stoc/s to try to co+er an emergency, they would be disappointed( "t us a more
penetrating test of li,uidity than current ratio yet it should be used cautiously as all debtors
may not be li,uid or cash may be re,uired immediately for certain expenses(
Ill,t(ati!n :
#alculate ,uic/ ratio from the information gi+en in illustration $(
S!l,ti!n
Uuic/ Assets > #urrent Assets T toc/ T Ad+ance 7ax
Uuic/ Assets > 5s( $,'P,JJJ T :5s( 'J,JJJ ? 5s( G,JJJ; > 5s( $,JG,JJJ
#urrent 3iabilities > 5s( PG,JJJ
Uuic/ ratio > Uuic/ Assets = #urrent 3iabilities
> 5s( $,JG,JJJ : 5s( PG,JJJ
> $(<6:$
Ill,t(ati!n ;
M 3td( has a current ratio of 6(&:$ and ,uic/ ratio of <:$( "f excess of current assets o+er
,uic/ assets represented by stoc/ is 5s( $,&J,JJJ, calculate current assets and current
liabilities(
S!l,ti!n
3et #urrent 3iabilities > x
#urrent Assets > 6(&x
And Uuic/ Assets > <x
toc/ > #urrent Assets T Uuic/ Assets
$,&J,JJJ > 6(&x T <x
$,&J,JJJ > $(&x
x > 5s($,JJ,JJJ
#urrent Assets > 6(&x > 6(& V $,JJ,JJJ > 5s( 6,&J,JJJ(
Ill,t(ati!n >
#alculate the current ratio from the following information :
Ior/ing capital 5s( %,'J,JJJ; 7otal debts 5s(<J,PJ,JJJ; 3ong-term 3iabilities
5s($',JJ,JJJ; toc/ 5s( G,JJ,JJJ; prepaid expenses 5s( PJ,JJJ(
18
S!l,ti!n
#urrent 3iabilities > 7otal debt- 3ong term debt
> <J,PJ,JJJ T $',JJ,JJJ
> G,PJ,JJJ
Ior/ing capital > #urrent Assets T #urrent liability
%,'J,JJJ > #urrent Assets T G,PJ,JJJ
#urrent Assets > $G,GJ,JJJ

Uuic/ Assets > #urrent Assets T :stoc/ ? prepaid expenses;
> $G,GJ,JJJ T :G,JJ,JJJ ? PJ,JJJ;
> %,'J,JJJ
#urrent ratio > #urrent Assets = #urrent liabilities
> $G,GJ,JJJ=G,PJ,JJJ
> 6:$
Uuic/ ratio > Uuic/ Assets = #urrent liabilities
> %,'J,JJJ=G,PJ,JJJ
> <:$
1.?.& S!l'enc$ Rati!
ol+ency ratio are used to *udge the long term financial soundness of any business( 3ong
term ol+ency means the ability of the
Enterprise to meet its long term obligation on the due date( 3ong term lenders are basically
interested in two things: payment of interest periodically and repayment of principal
amount at the end of the loan period( 1sually the following ratios are calculated to *udge the
long term financial sol+ency of the concern(
$( Debt e,uity ratio;
<( 7otal Assets to Debt 5atio;
6( Proprietary ratio;
G( "nterest #o+erage 5atio(
0e7t-ED,it$ Rati!
Debt E,uity 5atio measures the relationship between long-term debt and shareholders9
funds( "t measures the relati+e proportion of debt and e,uality in financing the assets of a
firm(
"t is computed as follows:
Debt-E,uity ratio > 3ong-term Debt9s= hare holder funds
Ihere T
3ong- term Debt > Debentures ? 3ong T term loans
hareholders .unds > E,uity hare #apital ? Preference hare #apital ?
5eser+es and urplusT .ictitious Assets
19
Inte(#(etati!n6 A low )e7t e,uity ratio reflects more security to long term creditors( .rom
security point of +iew, capital structure with less debt and more e,uity is considered
fa+ourable as it reduces the chances of ban/ruptcy(

A high ratio, on the other hand, is considered ris/y as it may put the firm into difficulty in
meeting its obligations to outsiders( Cowe+er, from the perspecti+e of the owners, greater
use of debt, firm can en*oy the benefits of trading on e,uity which help in ensuring higher
returns for them if the rate of earning on capital employed is higher than the rate of
interest payable( But it is considered ris/y and so , with the exception of a few business ,
the prescribed ratio is limited to <:$(
Ill,t(ati!n ?
#alculate Debt E,uity , from the following information:
$J,JJJ preference share of 5s( $J each 5s( $,JJ,JJJ
&,JJJ e,uity shares of 5s( <J each 5s( $,JJ,JJJ
#reditors 5s( G&,JJJ
Debentures 5s( <,<J,JJJ
Profit and 3oss accounts:#r(; 5s( OJ,JJJ
S!l,ti!n
Debt > Debentures > 5s( <,<J,JJJ
E,uity > E,uity share capital ? Preferences hare #apital ? profit and 3oss accounts
> 5s( $,JJ,JJJ ? 5s( $,JJ,JJJ ? 5s( OJ,JJJ
> 5s( <,OJ,JJJ
Debt E,uity 5atio > 3ong term debt= shareholders9 funds
> 5s( <,<J,JJJ = 5s( <,OJ,JJJ
> J(P$:$
Ill,t(ati!n @
#alculate Debt E,uity 5atio, from the following information :
7otal Debts 5s( 6,JJ,JJJ ; 7otal assets 5s( &,GJ,JJJ; #urrent liabilities 5s( OJ,JJJ(
S!l,ti!n
3ong-term Debt > 7otal Debt T #urrent 3iabilities
> 5s( 6,JJ,JJJ T 5s( OJ,JJJ > 5s( <,6J,JJJ
hareholders .unds > 7otal Assets T 7otal Debts
> 5s( &,GJ,JJJ T 5s( 6,JJ,JJJ
> 5s( <,GJ,JJJ
Debt E,uity 5atio > 3ong term debt= hareholders9 funds
> 5s( <,6J,JJJ=5s( <,GJ,JJJ
> J(%':
T!tal Aet t! 0e7t Rati!
7his 5atio established a relationship between total assets and long debts( "t measures the
extend to which debt is being co+ered by assets( "t is calculated as
7otal Assets to Debt 5atio > 7otal assets
3ong-term Debt
20
Inte(#(etati!n6 7his ratio primarily indicated the use of external funds in financing the
assets and the margin of safety to long-term creditors( 7he higher ratio indicated that assets
ha+e been mainly financed by owners9 funds , and the long- tem debt is ade,uately co+ered
by assets( A low ratio indicated a grater ris/ to creditors as it means insufficient assets for
long term obligations(
Ill,t(ati!n E
hareholders9 funds 5s( PJ,JJJ; 7otal debts 5s( $,'J,JJJ; #urrent liabilities 5s( <J,JJJ(
#alculate 7otal assets to debt ratio(
S!l,ti!n
3ong term debt > 7otal Debt - #urrent liabilities
> 5s( $,'J,JJJ- 5s( <J,JJJ
> 5s( $,GJ,JJJ
7otal Assets > hareholders9 funds ? 7otal debt
> 5s( PJ,JJJ ? 5s( $,'J,JJJ
> 5s( <,GJ,JJJ
7otal Assets to debt ratio > 7otal Assets= Debt
> 5s( <,GJ,JJJ = 5s( $,GJ,JJJ
> $<:O
> $(O:$

P(!#(ieta($ Rati!
Proprietary ratio establishes a relationship between shareholders funds to total assets ( "t
measures the proportion of assets financed by e,uity( "t is calculated as follows :
Proprietary 5atio > hareholders .unds= 7otal assets
"nterpretation: A higher proprietary ratio indicated a larger safety margin for creditors( "t
tests the ability of the shareholders9 funds to meet the outside liabilities( A low Proprietary
5atio , on the other hand , indicated a grater ris/ to the creditors( 7o *udge whether a ratio
is satisfactory or not, the firm should compare it with its own past ratios or with the ratio of
similar enterprises or with the industry a+erage(
Based on data of "llustration P, it shall be wor/ed out as follows:
5s( PJ,JJJ = 5s( <,GJ,JJJ > J(66: $
Ill,t(ati!n F
.rom the following balance sheet of a company, calculate debt e,uity ratio, total assets to
debt ratio and proprietary ratio
Balance S-eet !" G lt) a !n :1.1&.&00@
Preference hare #apital O,JJ,JJJ Plant and
Dachinery
%,JJ,JJJ
E,uity hare #apital P,JJ,JJJ 3and and Building G,<J,JJJ
5eser+es $,&J,JJJ Dotor #ar G,JJ,JJJ
Debentures 6,&J,JJJ .urniture <,JJ,JJJ
#urrent 3iability <,JJ,JJJ toc/ %J,JJJ
Debtors PJ,JJJ
#ash and Ban/ $,JJ,JJJ
Discount on "ssue
of hares
$J,JJJ
&&8008000 <<,JJ,JJJ
21
S!l,ti!n
Debt e,uity 5atio > 3ong-term Debt=E,uity
7otal Assets 5atio> 7otal Assets = long term Debt
Proprietary 5atio > hareholders .unds=7otal assets
Debt e,uity ratio > 5s( 6,&J,JJJ=5s( $',GJ,JJJ > J(<$6
7otal Assets 5atio> 5s( <$,%J,JJJ= 5s( 6,&J,JJJ > '(<'
Proprietary 5atio > 5s( $',GJ,JJJ=5s( <$,%J,JJJ > J(OG%
Ill,t(ati!n 10
.rom the following information, calculate Debt E,uity 5atio, Debt 5atio,Proprietary 5atio and
5atio of 7otal Assets to Debt(
Balance S-eet a !n 0ecem7e( :18 &00?
E,uity share #apital 6,JJ,JJJ .ixed Assets G,&J,JJJ
Preference hare #apital $,JJ,JJJ #urrent Assets 6,&J,JJJ
5eser+es &J,JJJ Preliminary Expenses $&,JJJ
Profit L loss A=# '&,JJJ
$$ K Dortgage 3oan $,PJ,JJJ
#urrent liabilities $,<J,JJJ
P,$&,JJJ P,$&,JJJ
S!l,ti!n
hareholders .unds > E,uity hares capital ? Preference hares capital ?
5eser+es ? profit K loss A=# - Preliminary Expenses
> 5s( 6,JJ,JJJ ? 5s( $,JJ,JJJ ? 5s(&J,JJJ ? 5s( '&,JJJ- 5s( $&,JJJ
> 5s( &,JJ,JJJ
Debt E,uity 5atio > Debt = E,uity
> 5s( $,PJ,JJJ=5s( &,JJ,JJJ > J(6': $
Proprietary 5atio > Proprietary funds = 7otal Assets
> 5s( &,JJ,JJJ=5s( P,JJ,JJJ
> J('<&:$
7otal Assets to Debt 5atio > 7otal Assets = Debt
> 5s( P,JJ,JJJ=5s( $,PJ,JJJ
> G(GG:$
22
Ill,t(ati!n 11
7he debt e,uity ratio of M 3td( is $:<( Ihich of the following would increase=
decrease or not change the debt e,uity ratioR
:i; "ssue of new e,uity shares
:ii; #ash recei+ed from debtors
:iii; ale of fixed assets at a profit
:i+; 5edemption of debentures
:+; Purchase of goods on credit(
S!l,ti!n
a; 7he ratio will decrease( 7his is because the debt remains the same, e,uity increases(
b; 7he ratio will not change ( 7his is because neither the debt nor e,uality is affected(
c; 7he ratio will decrease ( 7his is because the debt remains unchanged while e,uity
increases by the amount of profit(
d; 7he ratio will decrease ( 7his is because debt decreases while e,uity remains same (
e; 7he ratio will not change ( 7his is because neither the debt nor e,uity is affected(
Inte(et C!'e(a+e Rati!
"nterest #o+erage 5atio established a relationship between profit before interest on long-
term debt and taxes and the interest on long term debts( "t measures the debt ser+icing
capacity of the business in respect of fixed interest on long term debts( "t generally
expressed as W number of times9(
"t is calculated as follows:
"nterest #o+erage 5atio > Bet Profit before "nterest and 7ax = "nterest on long term debt
Inte(#(etati!n 6 "t re+eals the number of times interest on long-term debt is co+ered by
the profits a+ailable for interest( "t is a measure of protection a+ailable to the creditors for
payment of interest on long term loans( A higher ratio ensures safety of interest payment
debt and it also indicates a+ailability of surplus for shareholders(
Ill,t(ati!n 1&
Bet Profit as per Profit L 3oss A=# 5s( &,GJ,JJJ;
Pro+ision for tax 5s, <,$J,JJJ;
"nterest on Debentures and other long terms loans 5s( $,&J,JJJ
#alculate interest co+erage ratio(
S!l,ti!n
Profit before interest and tax > 5s( &,GJ,JJJ ? 5s( <,$J,JJJ ? 5s( $,&J,JJJ > 5s( %,JJ,JJJ
"nterest co+erage 5atio > Bet Profit before "nterest and 7ax= interest on long term debt
> 5s( %,JJ,JJJ = 5s( $,&J,JJJ
> ' times(
Ill,t(ati!n 1:
#alculate interest co+erage ratio from the following information:
Bet Profit after tax 5s( 6J,JJJ; $&K 3ong-term Debt $J,JJ,JJJ; and 7ax 5ate
23
'JK(
S!l,ti!n
Bet Profit after tax > 5s( 6J,JJJ
7ax 5ate > 'JK(
Bet Profit before tax > Bet Profit after tax M $JJ = :$JJ T tax rate;
> 5s( 6J,JJJ M $JJ = : $JJ- 'J;
> 5s( O&,JJJ
"nterest on 3ong 7erm Debt > $&K of 5s( $J,JJ,JJJ > 5s( $,&J,JJJ
Bet profit before interest and tax > Bet profit before tax ? "nterest
> 5s( O&,JJJ ? 5s( $,&J,JJJ
> 5s( <,<&,JJJ
"nterest #o+erage 5atio > Bet Profit before "nterest and 7ax="nterest on long term debt
> 5s( <,<&,JJJ=5s( $,&J,JJJ
> $(& times(
1.?.: Acti'it$ 4!( T,(n!'e(5 Rati!
7he Acti+ity :or 7urno+er; 5atios measures how well the facilities at the disposal of the
concern are being utili8ed( 7hey are /nown as turno+er ratios as they indicates the speed
with which the assets are being con+erted or turned o+er into sales( A proper balanced
between sales and assets generally reflects tat assets are being managed well( 7hey are
expressed as Wnumber of times9( ome of the important acti+ity ratios are:
$( toc/ 7urn-o+er;
<( Debtors :5ecei+able; 7urno+er;
6( #reditors :Payable; 7urno+er;
G( .ixed Assets 7urno+er;
&( Ior/ing #apital 7urno+er(
St!c. 4!( In'ent!($5 T,(n!'e( Rati!
"t establishes a relationship between cost of goods and a+erage in+entory( "t determines the
efficiency with which stoc/ is con+erted into sales during the accounting period under
consideration( "t is calculated as:
toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/
Ihere - A+erage stoc/ > :opening ? closing stoc/; =< and
#ost of goods sold > Bet ales - gross profit !(
#ost of goods sold > opening stoc/ ? net purchases ? direct expenses
T closing stoc/
Inte(#(etati!n : "t indicates the speed with which in+entory is con+erted into sales( A
higher ratio indicated that stoc/ is selling ,uic/ly( 3ow stoc/ turno+er ratio indicates that
stoc/ is not selling ,uic/ly and remaining idle resulting in increased storage cost and
bloc/ing of funds( Cigh turno+er is good but it must be carefully interpreted as it may be
due to buying in small lots or selling ,uic/ly at low margin to reali8e cash( 7hus , a firm
should ha+e neither a +ery high nor a +et low stoc/ turno+er ratio(
Ill,t(ati!n 1;
.rom the following information, calculate stoc/ turno+er ratio :
4pening toc/ 5s(<J,JJJ;#losing toc/ 5s($J,JJJ;Purchases 5s( &J,JJJ Iages 5s( $6,JJJ;
sales 5s( PJ,JJJ ; #arriage "nwards 5s( <,JJJ ; #arriage outwards 5s( ',JJJ
24
S!l,ti!n
toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/
#ost of Hoods old > 4pening toc/ ? Purchases T #losing toc/ ? Direct Expenses
> 5s( <J,JJJ? 5s(&J,JJJ? 5s($&,JJJT5s($J,JJJ
> 5s( O&,JJJ
A+erage toc/ > :4pening toc/ ? #losing toc/; =<
> :5s( <J,JJJ ? 5s( $J,JJJ; =<
> 5s( $&,JJJ
toc/ 7urno+er 5atio > 5s( O&,JJJ=5s( $&,JJJ
> & 7imes(
Ill,t(ati!n 1>
.rom the following information, calculate stoc/ turno+er ratio(
4pening stoc/ 5s &P,JJJ; Excess of #losing stoc/ opening stoc/ 5s( G,JJJ; sales 5s(
',GJ,JJJ; Hross Profit X <& & on cost
S!l,ti!n
#ost of goods old > ales - Hross 3oss
> 5s( ',GJ,JJJ T <&=$<&:',GJ,JJJ;
> 5s( &,$<,JJJ
#losing stoc/ > 4pening stoc/ ? 5s( GJJJ
> 5s( &P,JJJ ? 5s G,JJJ
> 5s( '<,JJJ
A+erage stoc/ > :4pening stoc/ ? #losing toc/ ;=<
> :&P,JJJ ?'<,JJJ;=<
> 5s( 'J,JJJ
toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/
> 5s(&,$<,JJJ=5s( 'J,JJJ > P(&6 times(
Ill,t(ati!n 1?
A trader carries an a+erage stoc/ of 5s( PJ,JJJ( Cis stoc/ turno+er is P times( "f he sells
goods at profit of <JK on sales( .ind out the profit(
S!l,ti!n
toc/ 7urno+er 5atio > #ost of Hoods old= A+erage toc/
> #ost of Hoods old=5s( PJ,JJJ
#ost of Hoods old > 5s( PJ,JJJ V P
> 5s( ',GJ,JJJ
ales > #ost of Hoods old V $JJ=PJ
> 5s( ',GJ,JJJ V $JJ=PJ
> 5s( P,JJ,JJJ
Hross Profit > ales T #ost of Hoods old
> 5s( P,JJ,JJJ T 5s( ',GJ,JJJ
> 5s( $,'J,JJJ(
25
0e7t!( T,(n!'e( Rati! !( Recei'a7le T,(n!'e( Rati!
"t establishes a relationship between net credit sales and a+erage debtors or recei+ables( "t
determine the efficiency with which the debtors are con+erted into cash(
"t is calculated as follows :
Debtors 7urno+er ratio > Bet #redit sales= A+erage Accounts 5ecei+able
Ihere A+erage Account 5ecei+able > :4pening Debtors and Bills 5ecei+able ? #losing
Debtors and Bills 5ecei+able;=<
Bote: Debtors should be ta/en before ma/ing any pro+ision for
doubtful debts(
Inte(#(etati!n : 7he ratio indicated the number of times the
recei+ables are turned o+er and con+erted into cash in an accounting period( Cigher
turno+er means that the amount from debtors is being collected more ,uic/ly( Uuic/
collection from debtors increases the li,uidity of the firm( 7his ratio also helps in wor/ing out
the a+erage collection period as follows:
0e7t c!llecti!n #e(i!)
7his shows the a+erage period for which the credit sales remain outstanding or the a+erage
credit period en*oyed by the debtors( "t indicates how ,uic/ly cash is collected from the
debtors(
"t is calculates as follows:
Debt collection period > $< months=&< wee/s=6'& days
Debtors9 turno+er ratio
Ill,t(ati!n 1@
#alculate the Debtors 7urno+er 5atio and debt collection period :in months; from the
following information:
7otal sales > 5s( <,JJ,JJJ
#ash sales > 5s( GJ,JJJ
Debtors at the beginning of the year > 5s( <J,JJJ
Debtors at the end of the year > 5s( 'J,JJJ
S!l,ti!n
A+erage Debtors > :5s( <J,JJJ ? 5s( 'J,JJJ;=< > 5s( GJ,JJJ
Bet credit sales > 7otal sales - #ash sales
> 5s(<,JJ,JJJ - 5s(GJ,JJJ
> 5s( $,'J,JJJ
Debtors 7urno+er 5atio > Bet #redit sales=A+erage Debtors
> 5s( $,'J,JJJ=5s( GJ,JJJ
> G 7imes(
Debt collection period > $< months=&< wee/s=6'& days
Debtors9 turno+er
> $<=G
> 6 months
26
C(e)it!( T,(n!'e( Rati! !( Pa$a7le T,(n!'e( Rati!
7his ratio establishes a relationship between net credit
purchases and a+erage creditors or payables( "t determine the efficiency with which the
#reditors are paid(
"t is calculated as follows :
#reditors turno+er ratio > Bet credit purchase = A+erage accounts payable(
Ihere A+erage accounts payable > :4pening #reditors and Bills Payable ?
#losing #reditors and Bills Payable;=<
Inte(#(etati!n: "t indicated the speed with which the creditors are paid( A higher ratio
indicates a shorter payment period( "n this case, the enterprise needs to ha+e sufficient
funds as wor/ing capital to meet its creditors( 3ower ratio means credit allowed
by the supplier is for a long period or it may reflect delayed payment to suppliers which is
not a +ery good policy as it may affect the reputation of the business( 7hus , an enterprise
should neither ha+e a +ery high nor a +ery low ratio(
0e7t #a$ment #e(i!)*C(e)it!( c!llecti!n #e(i!)
7his shows the a+erage period for which the credit purchases remain outstanding or the
a+erage credit period a+ailed of( "t indicate how ,uic/ly cash is paid to the creditors(
"t is calculated as follows:
Debt collection period > $< months=&< wee/s=6'& days
Debtors9 turno+er
Ill,t(ati!n 1E
#ash purchased ratio 5s( $,JJ,JJJ; cost of goods sold 5s( 6,JJ,JJJ; opening stoc/ 5s(
$,JJ,JJJ and closing stoc/ 5s( <,JJ,JJJ( #reditors turno+er ratio 6 times( #alculate the
opening and closing creditors if the creditors at the end were 6 times more than the
creditors at the beginning(
S!l,ti!n
7otal Purchase > #ost of goods sold ? closing stoc/ - opening stoc/
> 5s( 6,JJ,JJJ ? 5s( <,JJ,JJJ T 5s( $,JJ,JJJ
> 5s( G,JJ,JJJ
#redit purchases > 7otal Purchase - cash purchase
> 5s( G,JJ,JJJ- 5s( $,JJ,JJJ
> 5s( 6,JJ,JJJ

#reditor 7urno+er 5atio > Bet #redit Purchase = A+erage #reditor
A+erage #reditor > 5s( 6,JJ,JJJ= 6
> 5s( $,JJ,JJJ
:opening #reditor ? #losing #reditor;=< > 5s( $,JJ,JJJ
opening #reditor ? #losing #reditor > 5s( <,JJ,JJJ
opening #reditor ? :opening #reditor ? 6opening #reditor; > 5s( <,JJ,JJJ
opening #reditor > 5s( GJ,JJJ
#losing #reditor > 5s( GJ,JJJ ?:6 M 5s( GJ,JJJ;
27
> 5s( $,'J,JJJ
Fi/e) Aet T,(n!'e( Rati!
7his ratio establishes a relationship between net sales and net fixed assets( "t determined
the efficiency with which the firm is utili8ing its fixed assets(
"t is computed follows
.ixed Assets 7urno+er> Bet sales= Bet .ixed Assets
Ihere Bet .ixed Assets >.ixed Assets- Depreciation
Inte(#(etati!n6 7his ratio re+eals how efficiently the fixed assets are being utilised(
"t indicates the firms9 ability to sales per rupee of in+estment in fixed assets( A high ratio
indicates more efficient utili8ation of fixed assets(
Ill,t(ati!n 1F
.rom the following information, calculate .ixed Assets 7urno+er 5atio:
Hross fixed asset 5s( G,JJ,JJJ; Accumulated Depreciation 5s( $,JJ,JJJ; Dar/etable
securities 5s( <J,JJJ; #urrent Assets 5s( $,6J,JJJ; Discellaneous expenditure 5s, <J,JJJ;
#urrent 3iabilities 5s( &J,JJJ; Hross sales 5s( $P,6J,JJJ; sale return 5s( 6J,JJJ
S!l,ti!n
Bet fixed asset > Hross fixed asset- Depreciation
> 5s( G,JJ,JJJ - 5s( $,JJ,JJJ
> 5s(6,JJ,JJJ
Bet ale > Hross sale T ale 5eturns
> 5s( $P,6J,JJJ - 5s( 6J,JJJ
> 5s( $P,JJJ
.ixed Asset 7urno+er 5atio> Bet ale= net .ixed assets
> 5s( $P,6J,JJJ= 5s(6,JJ,JJJ
> ' times(
<!(.in+ Ca#ital T,(n O'e( Rati!
7his ratio establishes the relationship between net ale and wor/ing capital( "t determines
the efficiency with which the wor/ing capital is being utilised.
"t is calculated as followers6
wor/ing capital 7urno+er > Bet ale= wor/ing #apital
Inte(#(etati!n6 7his ratio indicates the firms9 ability to generate sales per rupee of wor/ing
( A higher ratio would normally indicate more efficient utili8ed of wor/ing capital ; through
neither a +ery high nor a +ery low ratio is desirable(
28
Ill,t(ati!n &0
.rom the following information, calculate :i; .ixed Assets 7urno+er and :ii; Ior/ing #apital
7urno+er 5atios :
Preference hares #apital ',JJ,JJJ Plant and Dachinery ',JJ,JJJ
E,uity hare #apital G,JJ,JJJ 3and and Building O,JJ,JJJ
Heneral 5eser+e <,JJ,JJJ Dotor #ar <,&J,JJJ
Profit and 3oss Account <,JJ,JJJ .urniture &J,JJJ
$&K Debentures 6,JJ,JJJ toc/ $,OJ,JJJ
$GK 3oan $,JJ,JJJ Debtors $,<J,JJJ
#reditors $,GJ,JJJ Ban/ %J,JJJ
Bills Payable 6J,JJJ #ash <J,JJJ
4utstanding Expenses 6J,JJJ
20,00,000 &08008000
ales for the year were 5s( 'J,JJ,JJJ(
S!l,ti!n
ales > 5s 'J,JJ,JJJ
.ixed Assets > 5s( ',JJ,JJJ ? 5s(O,JJ,JJJ ? 5s( <,&J,JJJ ? 5s( &J,JJJ
Ior/ing capital > #urrent Assets T #urrent 3iabilities
#urrent Assets > toc/ ? Debtors ? ban/ ? cash
5s( $(OJ,JJJ ? 5s( $(<J,JJJ ? 5s( %J,JJJ ? 5s( <J,JJJ
5s( G,JJ,JJJ
#urrent 3iabilities > #reditors ? B"P ? 4" Exp
> 5s( $,GJ,JJJ ? 5s( 6J,JJJ ? 5s( 6J,JJJ
> 5s( <,JJ,JJJ
Ior/ing capital > 5s( G,JJ,JJJ ? 5s( <,JJ,JJJ
> 5s( <,JJ,JJJ
.ixed 7urn o+er 5atio > Bet sale = .ixed assests
> 5s( 'J,JJ,JJJ= 5s( $',JJ,JJJ > 6(O& times
Ior/ing capital 7urno+er > Bet ale = Ior/ing #apital
> 5s( 'J,JJ,JJJ= 5s( <,JJ,JJJ > 6J times(
P(!"ita7ilit$ Rati!
E+ery business must earn sufficient profits to sustain the operations of the business and to
fund expansion and growth(
Profitability ratios are calculated to analysis the earning capacity of the business which is the
outcome of utilisation of resources employed in the business( 7here is a close relationship
between the profit and the efficiency with which the resources employed in the business are
utilised( 7here are two ma*or types of
Profitability 5atios(

Profitability in relation to sales
Profitability in relation to in+estment.
29
.ollowing are the important Profitability ratio
$( Hross Profit 5atio
<( Bet profit 5atio
6( 4perating 5atio
G( 4perating Profit 5atio
&( 5eturn on "n+estment :54"; or 5eturn on #apital Employed :54#E;
'( Earnings per hare
O( Price Earning 5atio(
P( Di+idend Payout 5atio

G(! P(!"it Rati! !( G(! ma(+in
Hross profit ratio establishes relationship between G(! P(!"it an) net ale. It
)ete(mine t-e e""icienc$ Bit- B-ic- #(!),cti!n8 purchase and selling operations are
being carried on( It i calc,late) a percentage of sales( "t is computed as follows:
Hross Profit 5atio > Hross Profit=Bet ales V $JJ
Inte(#(etati!n: Hross Profit is the difference between sale and cost of good sold( Hross
Profit margin reflect the efficiency with which the management produces each unit of
output( "t also include the margin a+ailable to co+er operating expenses and non operating
expenses( A high Hross Profit margin relati+e to the industry a+erage employees that the
firm is able to produced at comparati+ely at lower cost(
Ill,t(ati!n &1
.ollowing information is a+ailable for the year <JJ', calculate gross profit ratio:
ales 5s( $,<J,JJJ
Hross Profit 5s( 'J,JJJ
5eturn inwards 5s <J,JJJ
S!l,ti!n
Bet ales > ales - 5eturn inwards
> 5s( $,<J,JJJ- <J,JJJ
> 5s( $,JJ,JJJ
Hross Profit 5atio > Hross Profit=Bet ales V $JJ
> 5s('J,JJJ=5s($,JJ,JJJ V $JJ
> 'JK(
Ill,t(ati!n &&
#alculate Hross Profit ratio from the following information:
4pening stoc/ 5s( &J,JJJ; closing stoc/ 5s( O&,JJJ; cash sale 5s( $,JJ,JJJ; credits sales 5s
$,OJ,JJJ; 5eturns outwards 5s( $&,JJJ; purchased 5s( <,%J,JJJ; ad+ertisement expenses
5s( 6J,JJJ; carriage inwards 5s( $J,JJJ(
30
S!l,ti!n
#ost of goods sold > 4pening stoc/ ? net purchases ? direct expenses T closing stoc/
> 5s( &J,JJJ ? :5s( <,%J,JJJ- 5s( $&,JJJ; ? 5s( $J,JJJ - 5s( O&,JJJ
> 5s( <,'J,JJJ
7otal ales > #ash ales ? #redits ales
> 5s( $,JJ,JJJ ? 5s $,OJ,JJJ
> 5s( <,OJ,JJJ
Hross profit > 7otal ales - #ost of goods sold
> 5s( <,OJ,JJJ- 5s( <,'J,JJJ
> 5s( $J,JJJ
Hross profit 5atio > $J,JJJ M $JJ
<,OJ,JJJ

H :.@0; I
Net P(!"it Rati! !( Net Ma(+in
7his ratio establishes the relationship between net profit and net sale ( "t indicates
managements9 efficiency in manufacturing, administering and selling the product( "t
calculates as a percentage of sale( it is computed as under:
Bet Profit 5atio > Bet profit = Bet ales V $JJ
Henerally, net profit refers to Profit after 7ax :PA7;(
Inte(#(etati!n: 7his ratio measures the firms9 ability to turn each rupee sales into net
profit( A firm with high net profit margin would be in an ad+antageous position to sur+i+e in
the face of falling selling prices, rising cost of production or declining demand for the
product(
Ill,t(ati!n &:
ales 5s( ',6J,JJJ; sales 5eturns 5s( 6J,JJJ; "ndirect expenses 5s( &J,JJJ; cost of goods
sold 5s(<,&J,JJJ( #alculate Bet Profit 5atio(
S!l,ti!n
Bet ales > 7otal ales T sales 5eturns
> 5s( ',6J,JJJ T 5s( 6J,JJJ
> 5s(',JJ,JJJ
Hross Profit > Bet ales T #ost of goods sold
> 5s( ',6J,JJJ - 5s(<,&J,JJJ
> 5s( 6,&J,JJJ
Bet Profit > Hross Profit - "ndirect expenses
> 5s( 6,&J,JJJ T 5s( &J,JJJ
> 5s( 6,JJ,JJJ
Bet Profit 5atio> Bet Profit
Bet sale
> 5s( 6,JJ,JJJ M $JJ
5s( ',JJ,JJJ
> &J K
31
Ill,t(ati!n &;
Hross profit ratio is <& K ( #ost of goods sold is 5s( 6,JJ,JJJ( "ndirect expenses 5s( 'J,JJJ(
#alculate Bet Profit 5atio(
S!l,ti!n
ales > $JJ=:$JJ T <&; M 5s( 6,JJ,JJJ > 5s( G,JJ,JJJ
Hross profit > ale- cost of goods sold
> 5s( G,JJ,JJJ T 5s('J,JJJ
> 5s( GJ,JJJ
Bet Profit 5atio > Bet profit M $JJ
Bet ale

H 5s( GJ,JJJ= 5s( G,JJ,JJJ x $JJ
> $J K
O#e(atin+ Rati!
4perating 5atio establishes relationship between operating cost and net sales( "t determine
the operational efficiency with the production , purchase and selling operations are being
carried on( "t is calculated as follows:
4perating 5atio > :#ost of ales ? 4perating Expenses;= Bet ales V $JJ
4perating expenses include office expenses, administrati+e expenses, selling
expenses and distribution expenses(
Inte(#(etati!n6 4perating 5atio indicates the 4perating cost incurred is computed to
express
#ost of operation excluding financial charge in relation to sales( A corollary of it is W
4perating Profit 5atio9( "t helps to analyse the performance of business and throw light on
the operations efficiency of the business( "t is +ery useful for inter- firm as well as intra firm
comparisons( 3ower operating ratio is a +ery healthy sign(
O#e(atin+ P(!"it Rati!
4perating Profit 5atio establishes the relationship between 4perating Profit and net sales(
"t can be computed directly or as a residual of operating ratio(
4perating Profit 5atio > 4perating Profit= ales V $JJ
Ihere 4perating Profit > ales T #ost of 4peration
Inte(#(etati!n6 4perating 5atio determine the operational efficiency of the management (
"t helps in /nowing the amount of profit earned from regular business transactions on a sale
of 5s( $JJ( "t is +ery useful for inter firm as well as intra firm comparisons( Cigher
operating ratio indicates that the firm has got enough margins to meet its non operating
expenses well as to create reser+e and pay di+idends(
32
Ill,t(ati!n &>
#alculate the operating ratio from gi+en the following information:
ales 5s( <,JJ,JJJ; ales returns rs( 6J,JJJ; operating expenses 5s( &&,JJJ; #ost of
goods sold 5s( $,OJ,JJJ
S!l,ti!n
4perating 5atio > #ost of goods sold ? elling Expenses M $JJ
Bet ales
> 5s( $,OJ,JJJ ? &&,JJJ M $JJ
5s($,OJ,JJJ :<,JJ,JJJ- 6J,JJJ;
> $6<(6& K
Ill,t(ati!n &?
#alculate the Hross profit 5atio, Bet Profit 5atio and 4perating 5atio from the gi+en the
following information:
ales 5s( G,JJ,JJJ
#ost of Hoods old 5s( <,<J,JJJ
elling expenses 5s( <J,JJJ
Administrati+e Expenses 5s( 'J,JJJ
S!l,ti!n
Hross Profit > ales T #ost of goods sold
> 5s( G,JJ,JJJ T 5s( <,<J,JJJ
> 5s( $,PJ,JJJ
Hross Profit 5atio > Hross s Profit M $JJ
ales
> 5s( $ ,PJ,JJJ M $JJ
5s G ,JJ,JJJ
> G& K
Bet Profit > Hross Profit T "ndirect expenses
> 5s( $,PJ,JJJ T :5s( <J,JJJ ? 5s( 'J,JJJ;
> 5s( $,JJ,JJJ
Bet Profit 5atio > Bet profit = ales V $JJ
> 5s(:$,JJ,JJJ= G,JJ,JJJ; M $JJ
> <& K
4perating Expenses > elling Expenses ? Administrati+e Expenses
> 5s( <J,JJJ ? 'J,JJJ
> 5s( PJ,JJJ
4perating 5atio > #ost of goods ? 4perating Expenses M $JJ
Bet a les
> 5s( < ,<J,JJJ ? 5s( PJ,JJJ M $JJ
5sG, JJ,JJJ
> O& K
33
Ret,(n !n Ca#ital Em#l!$e) !( Ret,(n !n In'etment 4ROCE !( ROI5
7his ratio establishes the relationship between net profit before "nterest and 7ax and capital
employees( "t measures how efficiently the long-term funds supplied by the long-
term creditors and shareholders are being used. It is expressed as a
percentage.
Thus, it is computed as follows:
5eturn on "n+estment > Profit before "nterest and 7ax=#apital Employed V $JJ
Ihere capital employed > Dept ? e,uity

O(
#apital Employed > .ixed Assets ? Ior/ing #apital
Inte(#(etati!n 6 "t explains the o+erall utilisation of fund by a business( "t re+eals the
efficiency of the business in utilisation of funds entrusted to it by, share holders , debenture-
holders and long-term liabilities( .or inter-firm comparison, it is considered good measure of
profitability(
Ill,t(ati!n &@
Liabilities Rs. Assets Rs.
E,uity hare #apital
:$,JJ,JJJ e,uity share
of 5s( $J each;
$J,JJ,JJJ .ixed assets :Bet; $G,JJ,JJJ
5eser+es <,&J,JJJ #urrent Assets $<,&J,JJJ
$J K Debentures &,JJ,JJJ Preliminary Expenses $,JJ,JJJ
#urrent 3iability O,&J,JJJ
Profit for the year <,&J,JJJ
<O,&J,JJJ <O,&J,JJJ
Calculate Return on Capital employed
Solution
5eturn on "n+estment > Profit before "nterest and 7ax=#apital Employed V $JJ
Profit before "nterest and 7ax:
Profit for the year > 5s( <,&J,JJJ
Add interest :$J K of &,JJ,JJJ; > 5s( &J,JJJ
Profit before interest and tax > 6,JJ,JJJ
Capital Employes = NetAssets + working Capital
= Rs. 14,00,000 + Rs( 12,50,000 Rs. 7,50,000)
= Rs. 19,00,000
Earnings Per Share
7his ratio measures the earning a+ailable to an e,uity shareholders per share( "tb indicates
the profitability of the firm on a per share basis(
7he ratio is calculated as -
Earning Per hare > Profit a+ailable for e,uity shareholders= Bo( of E,uity hares
34
"n this context, earnings refer to profit a+ailable for e,uity shareholders which
is wor/ed out as Profit after 7ax T Di+idend on Preference hares(
Inte(#(etati!n : 7his ratio is +ery important from e,uity shareholders point of +iew and
so also for the share price in the stoc/ mar/et( 7his also helps comparison with other firm9s
to ascertain its reasonableness and capacity to pay di+idend( But increase in Earning per
share does not ha+e always indicate increase in profitability because sometimes , when
bonus shares are issued , earning per share would decrease ( "n these cases, the earning
per share is misleading as the actual earning ha+e not decreased(
Ill,t(ati!n &E
#alculate earning per share from the following information:
&J,JJJ e,uity shares of 5s( $J each 5s &,JJ,JJJ
$J K Preference share capital 5s $,JJ,JJJ
% K Debentures 5s( <,JJ,JJJ
Bet Profit after tax 5s( <,JJ,JJJ
Solution
Earning per share > Profit a+ailable for e,uity shareholders= Bo( of E,uity hare
> 5s: $,$J,JJJ T $J,JJJ; = &J,JJJ
> 5s( < per share
Price Earning Ratio
7his ratio establishes a relationship between mar/et price per share and earning per share(
7he ob*ecti+e of this ratio is to find out the expectations of the shareholders(
7his ratio is calculated as T
P=E 5atio > Dar/et price of a hare=Earnings per hare
Inte(#(etati!n : "t indicates the numbers of times of EP the share is being ,uoted in the
mar/et( "t reflects in+estors9 expectation about the growth in the firms9 earning and
reasonableness of the mar/et price of its shares( P=E ratios +ary from industry to industry
and company to company in the same industry depending upon in+estors perception of their
future(
Illustration 29
Earning per share 5s( $&J ( mar/et price per share 5s( 6JJJ( #alculate price Earning ratio(
S!l,ti!n6
P=E 5atio > Dar/et price of a hare=Earnings per hare
H 5s( 6,JJJ= 5s( $&J
> 5s( <J
Illustration 30
#alculated price earning ratio from the following information:
E,uity share capital: 5s( $J per hare; 5s <,&J,JJJ
5eser+es :including current year9s profit; 5s $,JJ,JJJ
$J K Preference hare #apital 5s <,&J,JJJ
35
% K Debentures 5s <,JJ,JJJ
Profit before interest 5s 6,6J,JJJ
Dar/et Price per hare 5s &J(
7ax rate &J K
S!l,ti!n
P=E 5atio > Dar/et price of a hare=Earnings per hare
Earning per share > Profit a+ailable for e,uity shareholders= Bo( of E,uity hare
Profit a+ailable for e,uity shareholders:
Profit before interest > 5s( 6,6J,JJJ
3ess interest on debentures > 5s $P,JJJ
5s 6,$<,JJJ
3ess tax : &J K of 5s( 6,$<,JJJ; > 5s( $(&',JJJ
3ess preference di+idend > 5s( <&,JJJ
Earning after 7ax > 5s $,6$,JJJ
Earning per share > Earning after tax = Bo(of e,uity shares
> 5s $,6$,JJJ= <&,JJJ
> 5s( &(<G
P=E 5atio > Dar/et price share = Earning per share
> 5s( &J= 5s( &(<G
> 5s( %(&G

0i'i)en) Pa$!,t Rati!
7his refers to the proportion of earning that are distributed against the
shareholders( "t is computed as T
Di+idend Payout 5atio > Di+idend Per hare
Earnings Per hare
Inte(#(etati!n 6 "t expresses the relationship between what is a+ailable per share and
what is actually paid in the form of di+idends out of a+ailable earnings( 7his ratio reflects
company9s9 di+idend policy( A higher payout ratio may mean lower retention or a
deteriorating li,uidity position(
Illustration 31
#alculate di+idend payout ratio(, "f di+idend paid per share 5s( <('< per share from the
information of "llustration 6J
S!l,ti!n6
.rom the abo+e "llustration , earning per share> 5s( &(<G
Di+idend paid per share > 5s( <('< per hare
o( Di+idend payout 5atio> Di+idend per share
Earning per ratio
> 5s( <('<
36
5s( &(<G
> 5s( 4(&J
1.7 Meaning of Cash Flow Statement
Ca"1 .lo2 i" 3a#e u% o. t2o 2or#" i.e. Ca"1 an# *lo24 21erea" Ca"1 3ean" ca"1 balance in
1an# inclu#in( ca"1 at bank balance4 an# *lo2 3ean" c1an(e" 521ic1 3ay be 6 or 7 increa"e or
#ecrea"e8 in t1e ca"1 3o'e3ent" o. t1e bu"ine"".
Ca"1 *lo2 )tate3ent #eal" 2it1 only "uc1 ite3"4 21ic1 are connecte# 2it1 ca"1 i.e.4 ite3"
relatin( to in.lo2 an# out.lo2 o. ca"1. &n ot1er 2or#"4 it i" %re%are# to "tu#y t1e c1an(e" in ca"14
or to "1o2 i3%act o. 'ariou" tran"action" on t1e ca"1. &n "1ort4 it i" a "tate3ent4 21ic1 i"
%re%are# to "1o2 t1e .lo2 o. ca"1 in t1e bu"ine"" #urin( a %articular %erio#. &t t1u"4 tell" about
t1e c1an(e" in ca"1 %o"ition o. a bu"ine"". 1e c1an(e" 3ay be relate# eit1er 2it1 t1e ca"1
recei%t" or ca"1 %ay3ent" or #i"bur"e3ent" o. ca"1. 1u"4 Ca"1 *lo2 )tate3ent i" a "u33ary o.
ca"1 recei%t" an# %ay3ent" 21ereby reconcilin( t1e o%enin( ca"1 balance 2it1 t1e clo"in( ca"1
inclu#in( bank balance" in #one. &t al"o e+%lain" t1e rea"on" .or t1e c1an(e" in t1e ca"1 %o"ition
o. t1e bu"ine"" on account o. t1e Decrea"e in t1e ca"1 %o"ition i" ter3e# a" out.lo2 o. ca"1 an#
increa"e i" ter3e# in .lo2. Ca"1 .lo2 "tate3ent al"o tell" about 'ariou" "ource" in ca"1 "uc1 a"
ca"1 .ro3 o%eration"4 "ale o. current an# .i+e# !""et"4 i""ue o. "1are"9#ebenture"4 al"o ter3e# a"
in.lo2 o. ca"1 21erea" lo"" .ro3 o%eration"4 %urc1a"e o. current an# .i+e# a""et"4 re#e3%tion o.
%re.erence "1are"9#ebenture" an# ot1er lon( ter3 loan" etc are al"o ter3e# a" out.lo2 o. ca"1.
1e Ca"1 *lo2 )tate3ent i" %re%are# becau"e o. nu3ber o. 3erit"4 21ic1 are o..ere# by it. )uc1
3erit" are al"o ter3e# a" it" ob:ecti'e". 1e i3%ortant objectives are a" .ollo2" ;
1. To Help the Management in Maing F!t!"e Financial #olicies $ Ca"1 *lo2 "tate3ent i"
'ery 1el%.ul to t1e 3ana(e3ent. 1e 3ana(e3ent can 3ake it" .uture .inancial %olicie" an#
i" in a %o"ition to kno2 about "ur%lu" or #e.icit o. ca"1. !ccor#in(ly4 3ana(e3ent can
t1ink o. in'e"tin( "ur%lu" .un#"4 i. nay4 in eit1er "1ort ter3 or lon( ter3 in'e"t3ent". 1u"4
ca"1 i" t1e center o. all .inancial #eci"ion".
2. Helpf!l in %ecla"ing %ivi&en&s etc. $ Ca"1 *lo2 )tate3ent i" 'ery 1el%.ul in #eclarin(
#i'i#en#" etc. 1i" "tate3ent can "u%%ly in.or3ation re(ar#in( to un#er"tan# t1e liqui#ity.
&t 3u"t be %ai# 2it1in 42 #ay".
3. Cash Flow Statement is %iffe"ent than Cash '!&get () Ca"1 bu#(et i" %re%are# 2it1 t1e
1el% o. in.lo2 an# out.lo2 o. ca"1. &. t1ere i" any 'ariation4 t1e "a3e can be correcte#.
4. Helpf!l in &evising the cash "e*!i"ement () Ca"1 .lo2 "tate3ent i" 1el%.ul in #e'i"in(
t1e ca"1 require3ent .or re%ay3ent o. liabilitie" an# re%lace3ent o. .i+e# a""et".
5. Helpf!l in fin&ing "easons fo" the &iffe"ence ) Ca"1 *lo2 )tate3ent i" al"o 1el%.ul in
.in#in( rea"on" .or t1e #i..erence bet2een %ro.it"9lo""e" earne# #urin( t1e %erio# an# t1e
a'ailability o. ca"1 21et1er ca"1 i" in "ur%lu" or #e.icit.
6. +s pe" +S),, Cash Flow Statement () Ca"1 *lo2 )tate3ent i" %re%are# 2it1 a 'ie2 to
1i(1li(1t t1e ca"1 (enerate# .ro3 recurrin( acti'itie" or ca"1 lo"" i. any 21ere a" net %ro.it
37
i" calculate# a.ter 3akin( a#:u"t3ent" on account o. non ca"1 ite3" in t1e %ro.it an# lo""
account.
7. Helpf!l in p"e&icting sicness of the b!siness() Ca"1 .lo2 i" 1el%.ul in %re#ictin(
"ickne"" o. t1e bu"ine"" 2it1 t1e 1el% o. #i..erent ratio".
1.7.1 -S.S /F C+SH F0/1 ST+T.M.2T
3i4 Sho"t)Te"m #lanning ( 1e Ca"1 *lo2 )tate3ent (i'e" in.or3ation re(ar#in( "ource" an#
a%%lication o. ca"1 an# ca"1 equi'alent" .or a "%eci.ic %erio# "o t1at it beco3e" ea"ier to
%lan in'e"t3ent"4 o%eratin( an# .inancin( nee#" o. an enter%ri"e.
3ii4 The Cash Flow helps !n&e"stan& 0i*!i&it5 an& Solvenc5 ( )ol'ency i" t1e ability o. t1e
bu"ine"" to 3eet it" current liabilitie". Quarterly or 3ont1ly Ca"1 *lo2 )tate3ent" 1el%
a"certain liqui#ity in a better 2ay. *inancial in"titution"4 like bank" %re.er t1e Ca"1 *lo2
)tate3ent to analy"e liqui#ity.
3iii4 .fficient Cash Management ( 1e Ca"1 *lo2 )tate3ent %ro'i#e" in.or3ation relatin( to
"ur%lu" or #e.icit o. ca"1. !n enter%ri"e4 t1ere.ore4 can #eci#e about t1e "1ort<ter3
in'e"t3ent" o. t1e "ur%lu" an# can arran(e t1e "1ort<ter3 cre#it in ca"e o. #e.icit.
3iv4 Compa"ative St!&5 ( ! co3%ari"on o. t1e Ca"1 *lo2" .or t1e %re'iou" year 2it1 t1e
bu#(ete# .i(ure" o. t1e "a3e year 2ill in#icate a" to 21at e+tent t1e ca"1 re"ource" o. t1e
bu"ine"" 2ere (enerate# an# a%%lie# accor#in( to t1e %lan. &t i"4 t1ere.ore4 u"e.ul .or t1e
3ana(e3ent to %re%are ca"1 bu#(et".
3v4 6easons fo" Cash #osition ( 1e Ca"1 *lo2 )tate3ent e+%lain" t1e rea"on" .or lo2er an#
1i(1er ca"1 balance" 2it1 t1e enter%ri"e. )o3eti3e"4 a lo2er ca"1 balance i" .oun# in "%ite
o. 1i(1er %ro.it" or a 1i(1er ca"1 balance i" .oun# in "%ite o. lo2er %ro.it". Rea"on" .or
"uc1 "ituation" can be analy"e# 2it1 t1e 1el% o. t1e Ca"1 *lo2 )tate3ent. )o3eti3e" in
"%ite o. 1i(1 %ro.it" (one= !n"2er" to "uc1 que"tion" can be .oun# .ro3 t1e Ca"1 *lo2
)tate3ent.
3vi4 Test fo" the Management %ecisions ( &t i" a (eneral rule t1at .i+e# a""et" are %urc1a"e#
.ro3 t1e .un#" rai"e# .ro3 lon(<ter3 "ource"4 an# t1e be"t 2ay to re%ay t1e lon(<ter3 #ebt
i" out o. %ro.it". 1e Ca"1 *lo2 )tate3ent "1o2" clearly 21et1er t1e ca"1 in.lo2" .ro3
o%eration" 1a'e been u"e# .or t1e %urc1a"e o. .i+e# a""et" or 21et1er t1e"e a""et" 1a'e
been %urc1a"e# .ro3 ca"1 in.lo2" .ro3 lon(<ter3 #ebt". )i3ilarly4 it al"o e+%lain" 21et1er
t1e #ebenture" 1a'e been re#ee3e# out o. %ro.it" or not. 1u"4 t1e Ca"1 *lo2 )tate3ent .an
be u"e# to te"t t1e cre#ibility o. t1e 3ana(e3ent #eci"ion".
1.7.2 07M7T+T7/2S /F C+SH ST+T.M.2T
1ou(1 t1e Ca"1 *lo2 )tate3ent i" a 'ery u"e.ul tool o. .inancial analy"i"4 it 1a" it" li3itation"
21ic1 3u"t be ke%t in 3in# at t1e ti3e o. it" u"e. 1e"e li3itation" are ;
3i4 2on)cash T"ansaction a"e igno"e& ( 1e Ca"1 *lo2 )tate3ent "1o2" only in.lo2" an#
out.lo2" o. ca"1. &t #oe" not "1o2 non<ca"1 tran"action" like t1e %urc1a"e o. buil#in(" by
t1e i""ue o. "1are" or #ebenture" to t1e 'en#or" or i""ue o. bonu" "1are".
38
3ii4 2ot a s!bstit!te fo" an 7ncome Statement ( !n inco3e "tate3ent "1o2" bot1 ca"1 an#
non<ca"1 ite3". 1e inco3e "tate3ent "1o2" t1e net inco3e o. t1e .ir3 21erea" t1e Ca"1
*lo2 )tate3ent "1o2" only t1e net ca"1 in.lo2" or out.lo2" 21ic1 #o not re%re"ent t1e net
%ro.it" or lo""e" o. t1e enter%ri"e.
3iii4 Histo"ical in 2at!"e ( &t rearran(e" t1e e+i"tin( in.or3ation a'ailable in t1e inco3e
"tate3ent an# t1e balance "1eet. &t 2ill beco3e 3ore u"e.ul i. it i" acco3%anie# by t1e
%ro:ecte# Ca"1 *lo2 )tate3ent.
3iv4 7gno"ance () &t i(nore" ba"ic accountin( conce%t4 i.e.4 accrual conce%t.
1.7., 7M#/6T+2T %.F727T7/2S +S #.6 +CC/-2T728 ST+2%+6%), 36.97S.%4
3i4 Cash co3%ri"e" ca"1 on 1an# an# #e3an# #e%o"it" 2it1 bank".
3ii4 Cash .*!ivalents are "1ort<ter34 1i(1ly liqui# in'e"t3ent" t1at are rea#ily con'ertible into
t1e kno2n a3ount o. ca"1 an# 21ic1 are "ub:ect to an in"i(ni.icant ri"k o. c1an(e in 'alue.
!n in'e"t3ent nor3ally quali.ie" a" ca"1 equi'alent only 21en it 1a" a "1ort 3aturity o.4
"ay4 t1ree 3ont1" or le"" .ro3 t1e #ate o. acqui"ition >+a3%le" o. ca"1 equi'alent" are ; 5a8
trea"ury bill"45b8 co33ercial %a%er4 5c8 3oney 3arket .un#" an# 5#8 &n'e"t3ent" in
%re.erence "1are" an# re#ee3able 2it1in t1ree 3ont1" can al"o be taken a" ca"1 equi'alent"
i. t1ere i" no ri"k o. t1e .ailure o. t1e co3%any.
3iii4 Cash Flows are in.lo2" an# out.lo2" o. ca"1 an# ca"1 equi'alent". !)<3 require" a Ca"1
*lo2 )tate3ent to be %re%are# an# %re"ente# in a 3anner t1at it "1o2" ca"1 .lo2" .ro3
bu"ine"" tran"action" #urin( a %erio# cla""i.yin( t1e3 into ;
5i8 0%eratin( !cti'itie"; 5ii8 &n'e"tin( !cti'itie" ; an# 5iii8 *inancin( !cti'itie".
3iv4 /pe"ating +ctivities ( 0%eratin( acti'itie" are t1e %rinci%al re'enue<%ro#ucin( acti'itie" o.
t1e enter%ri"e an# ot1er acti'itie" t1at are not in'e"tin( or .inancin( acti'itie".
3v4 7nvesting +ctivities ( &n'e"tin( acti'itie" are t1e acqui"ition an# #i"%o"al o. lon(<ter3
a""et" an# ot1er in'e"t3ent" not inclu#e# in ca"1 equi'alent".
3vi4 Financing +ctivities ( *inancin( acti'itie" are t1e acti'itie" t1at re"ult in c1an(e in t1e "i?e
an# co3%o"ition o. t1e o2ner"@ ca%ital 5inclu#in( %re.erence8 "1are ca%ital in t1e ca"e o. a
co3%any8 an# borro2in( o. t1e enter%ri"e.
1.: Classification of Cash Flows (
!" #i"cu""e# earlier4 t1e Ca"14 *lo2 )tate3ent "1o2" t1e ca"1 in.lo2" 5"ource"8 an# ca"1
out.lo2" 5u"e" or a%%lication"8 o. ca"1 an# ca"1 equi'alent" #urin( an accountin( %erio#.
Aence4 it i" e""ential to kno2 about t1e 'ariou" ite3" o. so!"ces 3o" inflows of cash4 an&
!ses 3o!tflows of cash4 of cash. !" %er the +cco!nting Stan&a"&), 3+S),8 t1e c1an(e"
re"ultin( in in.lo2" an# out.lo2" ca"1 an# ca"1 equi'alent" ari"e on account o. t1ree ty%e" o.
acti'itie"4 i.e.4 o%eratin(4 in'e"tin( an# .inancin( a" #i"cu""e# belo2 ;
1.:.1 3i4 /pe"ating +ctivities (
0%eratin( !cti'itie" are t1e %rinci%al re'enue %ro#ucin( acti'itie" o. t1e enter%ri"e an# ot1er
acti'itie" t1at are not relate# to in'e"tin( or .inancin( acti'itie". 1e e+a3%le" are ;
5a8 Ca"1 recei%t" .ro3 t1e "ale o. (oo#" an# ren#erin( o. "er'ice".
5b8 Ca"1 recei%t" .ro3 royaltie"4 .ee"4 co33i""ion an# ot1er re'enue.
39
5c8 Ca"1 %ay3ent" to "u%%lier" o. (oo#" an# "er'ice".
5#8 Ca"1 %ay3ent" to an# on be1al. o. e3%loyee" .or 2a(e"4 etc.
5e8 Ca"1 recei%t" an# %ay3ent" o. an in"urance enter%ri"e .or %re3iu3" an# clai3"4 annuitie"
an# ot1er %olicy bene.it".
5.8 Ca"1 %ay3ent" or re.un#" o. inco3e ta+e" unle"" t1ey can be "%eci.ically i#enti.ie# 2it1
.inancin( an# in'e"tin( acti'itie".
5(8 Ca"1 recei%t" an# %ay3ent" relatin( to .uture contract"4 .or2ar# contract"4 o%tion
contract"4 an# "2a% contract"4 21en t1e contract" are 1el# .or #ealin( or tra#in(
%ur%o"e".
1e %rinci%al re'enue %ro#ucin( acti'ity o. an enter%ri"e i" t1e 3ain acti'ity 5bu"ine""8 carrie#
on by it to earn %ro.it". >+a3%le" o. a .inancial enter%ri"e; (i'in( loan" an# #ealin( in "ecuritie"
i" t1e %rinci%al re'enue %ro#ucin( acti'ity. )i3ilarly4 .or an in"urance co3%any acce%tin(
%re3iu3 an# %ay3ent" o. clai3" i" t1e %rinci%al re'enue %ro#ucin( acti'ity.
1e net e..ect o. t1e o%eratin( acti'itie" on t1e .lo2 o. ca"1 i" re%orte# a" ca"1 .lo2 .ro3 or ca"1
u"e# in 0%eratin( !cti'itie" in t1e Ca"1 *lo2 )tate3ent.
1.:.2 3ii4 7nvesting +ctivities
&n'e"tin( acti'itie" are t1e acqui"ition an# #i"%o"al o. t1e lon(<ter3 a""et" an# ot1er in'e"t3ent"4
not inclu#e# in ca"1 equi'alent"4 1e"e acti'itie" inclu#e tran"action" in'ol'in( %urc1a"e an#
"ale o. t1e lon(<ter3 %ro#ucti'e a""et" like 3ac1inery4 lan# an# buil#in("4 etc.4 21ic1 are not
1el# .or re"ale. 1e ca"1 .lo2 .ro3 in'e"tin( acti'itie" are;
5a8 Ca"1 %ay3ent" to acquire .i+e# a""et" 5inclu#in( intan(ible"8 an# al"o %ay3ent" .or
ca%itali?e# re"earc1 an# #e'elo%3ent co"t" an# "el. con"tructe# .i+e# a""et".
5b8 Ca"1 recei%t" .ro3 t1e #i"%o"al o. .i+e# a""et" 5inclu#in( intan(ible"8.
5c8 Ca"1 %ay3ent" to %urc1a"e 5acquire8 "1are"4 2arrant"4 or #ebt in"tru3ent" o. ot1er
enter%ri"e" an# intere"t" in :oint 'enture" 5ot1er t1an %ay3ent" .or t1o"e in"tru3ent"
con"i#ere# to be ca"1 equi'alent" an# t1o"e 1el# .or tra#in( or #ealin( %ur%o"e"8.
5#8 Ca"1 recei%t" .ro3 "ale 5#i"%o"al8 o. "1are"4 2arrant"4 or #ebt in"tru3ent" o. ot1er
enter%ri"e" an# intere"t in :oint 'enture" 5ot1er t1an recei%t" .ro3 t1o"e in"tru3ent"
con"i#ere# to be ca"1 equi'alent" an# t1o"e 1el# .or #ealin( or tra#in( %ur%o"e"8.
5e8 Ca"1 recei%t" .ro3 "ale 5#i"%o"al8 o. "1are"4 2arrant"4 or #ebt in"tru3ent" o. ot1er
enter%ri"e" an# intere"t in :oint 'enture" 5ot1er t1an recei%t" .ro3 t1o"e in"tru3ent"
con"i#ere# to be ca"1 equi'alent" an# t1o"e 1el# .or #ealin( or tra#in( %ur%o"e"8.
5.8 Ca"1 recei%t" .ro3 re%ay3ent" o. a#'ance" an# loan" 3a#e to t1ir# %artie" 5ot1er t1an
a#'ance" an# loan" o. .inancial enter%ri"e"8.
5(8 Ca"1 recei%t" relatin( to .uture contract"4 .or2ar# contract"4 o%tion contract" an# "2a%
contract" e+ce%t 21en t1e contract" are 1el# .or tra#in( %ur%o"e"4 or t1e recei%t" are
cla""i.ie# a" .inancin( acti'itie".
518 Ca"1 %ay3ent" relatin( to .uture contract"4 .or2ar# contract"4 o%tion contract" an# "2a%
contract" e+ce%t 21en t1e contract" are 1el# .or tra#in( %ur%o"e"4 or t1e %ay3ent" are
cla""i.ie# a" .inancin( acti'itie".
40
1.:., 3iii4 Financing +ctivities
*inancin( acti'itie" are t1e acti'itie" 21ic1 re"ult in c1an(e" in t1e "i?e an# co3%o"ition o. t1e
o2ner@" ca%ital 5inclu#in( %re.erence "1are ca%ital in t1e ca"e o. a co3%any8 an# borro2in(" o.
t1e enter%ri"e .ro3 ot1er "ource". 1e ca"1 .lo2 .ro3 .inancin( acti'itie" are ;
5a8 Ca"1 %rocee#" .ro3 t1e i""ue o. "1are" or ot1er "i3ilar in"tru3ent".
5b8 Ca"1 %rocee#" .ro3 t1e i""ue o. #ebenture"4 loan note"4 bon#" an# ot1er "1ort ter3
borro2in(".
5c8 Buy<back o. equity "1are".
5#8 Ca"1 re%ay3ent" o. t1e a3ount" borro2e# inclu#in( re#e3%tion o. #ebenture".
5e8 $ay3ent" o. #i'i#en#" bot1 equity an# %re.erence #i'i#en#".
5.8 $ay3ent" .or intere"t on #ebenture" an# loan".
7ll!st"ation 1. )tate a tran"action a %art o. 21ic1 i" cla""i.ie# a" an &n'e"tin( !cti'ity an#
anot1er %art i" cla""i.ie# a" a *inancin( !cti'ity.
Sol!tion (
$ay3ent o. in"tall3ent" o. an a""et %urc1a"e# on Aire<$urc1a"e# on Aire<$urc1a"e
ba"i". 1e in"tall3ent 1a" t2o co3%onent"4 i.e.4 %rinci%al an# intere"t. $rinci%al i" cla""i.ie# a"
an &n'e"tin( !cti'ity an# intere"t a" a *inancin( !cti'ity.
Classification of '!siness +ctivities as pe" +S),, showing the inflow an& /!tflow of Cash
/pe"ating +ctivities
Cash 7nflow Cash /!tflow
5i8 Ca"1 )ale" 5i8 Ca"1 $urc1a"e"
5ii8 Ca"1 recei'e# .ro3 #ebtor" 5ii8 $ay3ent to Cre#itor"
5iii8 Ca"1 recei'e# .ro3 Co33i""ion an# *ee" 5iii8 Ca"1 0%eratin( >+%en"e"
5i'8 Royalty 5i'8$ay3ent o. ,a(e"
5'8 &nco3e a+
7n the case of Financial Companies 7n the case of Financial Companies
5'8 Ca"1 recei'e# .or intere"t an# #i'i#en#" 5'i8Ca"1 %ai# .or intere"t
41
5'i8 )ale o. "ecuritie" 5'ii8 $urc1a"e o. )ecuritie"
7nvesting +ctivities
Cash 7nflow Cash /!tflow
5i8 )ale" o. .i+e# !""et" 5i8 $urc1a"e o. *i+e# !""et"
5ii8 )ale o. &n'e"t3ent" 5ii8 $urc1a"e o. &n'e"t3ent"
5iii8 &ntere"t Recei'e#
5i'8 Di'i#en#" Recei'e#
Financing +ctivities
Cash 7nflow Cash /!tflow
5i8 &""ue o. )1are" in Ca"1 5i8 $ay3ent o. Coan"
5ii8 &""ue o. Debenture" in Ca"1 5ii8 Re#e3%tion o. $re.erence )1are"
5iii8 $rocee#" .ro3 Con(<ter3 Borro2in(" 5iii8 Buy<back o. >quity )1are"
5i'8$ay3ent o. Di'i#en#
5'8 $ay3ent o. &ntere"t
5'i8Re%ay3ent o. *inance9Cea"e Ciability
1h5 is it impo"tant to &isclose the cash flows f"om each activit5 sepa"atel5;
! "tu#ent 2ill a%%reciate t1e i3%ortance o. "e%arate #i"clo"ure un#er eac1 acti'ity .ro3 t1e
.ollo2in( ;
0%eratin( !cti'itie" &n'e"tin( !cti'itie" *inancin( !cti'itie"
1e a3ount o. t1e ca"1 .lo2
ari"in( .ro3 o%eratin(
acti'itie" i" a key in#icator o.
t1e e+tent to 21ic1 t1e
o%eration" o. t1e enter%ri"e
1a'e (enerate# ca"14 i.e.4
21et1er t1e ca"1 (eneration i"
a#equate to 3aintain o%eratin(
ca%ability o. t1e enter%ri"e4
%ay #i'i#en#"4 re%ay loan"4
an# 3ake ne2 in'e"t3ent". &t
i" al"o 1el%.ul in .oreca"tin(
.uture ca"1 .lo2" .ro3
o%eration".
1e a3ount o. t1e ca"1 .lo2
ari"in( .ro3 in'e"tin(
acti'itie" re%re"ent" t1e e+tent
to 21ic1 e+%en#iture 1a" been
incurre# to (enerate .uture
inco3e an# ca"1 .lo2".
1e a3ount o. t1e ca"1 .lo2
ari"in( .ro3 .inancin(
acti'itie" i" u"e.ul in a""e""in(
clai3" on .uture ca"1 .lo2" by
%ro'i#er" o. .un#" to t1e
enter%ri"e.
42
7ll!st"ation 2. &#enti.y t1e tran"action" a" belon(in( to 5i8 0%eratin(4 5ii8 &n'e"tin(4 5iii8
*inancin( !cti'itie"4 an# 5i'8 Ca"1 >qui'alent".
1. Ca"1 )ale"; 2. &""ue o. )1are Ca%ital; 3. &""ue o. Debenture"; 4. $urc1a"e o. Dac1ine"; 5.
)ale o. Dac1ine"; 6. Ca"1 recei'e# .ro3 Debtor"; 7. Co33i""ion an# Royalty recei'e#; 8.
$urc1a"e o. &n'e"t3ent"; 9. Re#e3%tion o. Debenture" an# $re.erence )1are"; 10. Re%ay3ent o.
a Con(<ter3 Coan; 11. &ntere"t %ai# on Debenture" or lon(<ter3 loan" by 5a8 *inance co3%any4
an# 5b8 /on<.inance co3%any; 12. 0..ice >+%en"e"; 13. Di'i#en# recei'e# on )1are" by
5a8 *inance co3%any4 an# 5b8 /on<.inance co3%any; 14. &ntere"t recei'e# on &n'e"t3ent" by 5a8
*inance co3%any4 an# 5b8 /on<.inance co3%any; 15. Danu.acturin( >+%en"e"; 16. Rent recei'e#
by a co3%any 21o"e 3ain bu"ine"" i" 5a8 real e"tate bu"ine""4 5b8 3anu.acturin(; 17. )ellin( an#
Di"tribution >+%en"e"; 18. )ale o. &n'e"t3ent by 5a8 *inance co3%any4 an# 5b8 /on<.inance
co3%any; 19. $urc1a"e o. -oo#2ill; 20. Di'i#en#" %ai#; 21. Ca"1 $urc1a"e"; 22. Ca"1 %ai# to
Cre#itor"; 23. )ale o. $atent"; 24. &nco3e a+ re.un# recei'e#; 26. Bank Balance; 27. Ca"1
Cre#it; 28. )1ort<ter3 #e%o"it" in Bank"; 29. &n'e"t3ent in Darketable )ecuritie" 5)1ort<ter38;
30. Rent %ai# an# 31. Buy<back o. >quity "1are".
Sol!tion (
0%eratin( !cti'itie" ; 1464 74 11 5a8 124 13 5a84 145a84 154 165a84 174 185a84 214 224 244 25430.
&n'e"tin( !cti'itie" ; 44 54 84 135b84 145b84 165b84 204 31.
*inancial !cti'itie"; 24 34 94 104 11b4 18b4 19423.
Ca"1 >qui'alent" ; 264 274 284 29.
7ll!st"ation , *ro3 t1e .ollo2in( #etail"4 calculate ca"1 .ro3 o%eration" ;
R".
)ale" 24504000
$urc1a"e" 14254000
,a(e" 304000
!""u3e t1at all t1e abo'e tran"action" 2ere in ca"1.
Sol!tion (
Ca"1 .ro3 o%eration" E Ca"1 in.lo2 7 Ca"1 out.lo2
E )ale" 7 5$urc1a"e" 6 2a(e"8
E R". 24504000 7 5R". 142540006 R". 3040008
E R". 24504000 7 R". 14554000 E R". 954000
43
7ll!st"ation < 5Calculation o. Ca"1 &n.lo2 .ro3 Debtor"8. Calculate t1e Ca"1 &n.lo2 .ro3
Debtor" .ro3 t1e .ollo2in( in.or3ation ;
$articular" R".
5a8 otal )ale" 44004000
Ca"1 )ale" 14204000
0%enin( Debtor" 404000
Clo"in( Debtor" 604000
)ale" Return" 104000
5b8 Cre#it )ale" 24004000
Ba# Debt" 154000
Di"count !llo2e# 54000
0%enin( Debtor" 144000
Clo"in( Debtor" 254000
)ale" Return" 104000
5c 8 0%enin( Debtor" 104000
Clo"in( Debtor" 254000
0%enin( Bill" Recei'able" 124000
Clo"in( Bill" Recei'able" 154000
otal )ale" 24404000
Ca"1 )ale" 20F o. Cre#it )ale"
Di"count !llo2e# 84000
Ba# Debt" 104000
)ale" Return" 124000
Sol!tion
5!8 C!)A &/*C0, *R0D D>B0R)
#a"tic!la"s 6s.
0%enin( Debtor" 404000
!## ; Cre#it )ale" 5otal )ale" 7 Ca"1 )ale"8 5R". 44004000 7 R". 142040008 24804000
34204000
Ce"" ; )ale" Return" 104000
Clo"in( Balance o. Debtor" 604000 704000
Cash 7nflow f"om %ebto"s 24504000
Alternative Solution : Cash Flow f"om %ebto"s = a" balancin( .i(ure by %re%arin( t1e otal
Debtor" !ccount.
44
Total %ebto"s +cco!nt
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Balance b9# 404000 By )ale" Return" 104000
o Cre#it )ale" ; By Ca"1 &n.lo2 .ro3 Debtor" 24504000
otal )ale" 44004000 5Balancin( *i(ure8 54000
Ce""; 14204000 24804000 By Balance c9# 604000
34204000 34204000
3b4
#a"tic!la"s 6s.
0%enin( Balance Debtor" 144000
!## ; Cre#it )ale" 24004000
24144000
Ce"" ; Ba# Debt" 154000
Di"count !llo2e# 54000
)ale" Return" 104000
Clo"in( Balance o. Debtor" 254000 554000
Cash 7nflow f"om %ebto"s 14594000
Alternative Solution :
Total %ebto"s +cco!nt
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Balance b9# 144000 By )ale" Return" 104000
o Cre#it )ale" 24004000 By Ba# Debt" 154000
By Di"count !llo2e# 54000
24804000 By Ca"1 &n.lo2 .ro3 Debtor" 14594000
5Balancin( *i(ure8
By Balance c9# 254000
24144000 24144000
Total %ebto"s +cco!nt
5c 8 Dr. Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Balance b9# 104000 By Bill Recei'able 34000
o Cre#it )ale" 24004000 By Di"count !llo2e# 84000
By Ba# Debt" 104000
By )ale" Return" 124000
By Ca"1 5&n.lo2 .ro3 Debtor"8 14524000
5Balancin( *i(ure8
45
By Balance c9# 254000
24104000 24104000

7ll!st"ation > 5Calculation o. Ca"1 0ut.lo2 to Cre#itor"8. Calculate t1e Ca"1 0ut.lo2 to
Cre#itor" .ro3 t1e .ollo2in( in.or3ation ;
#a"tic!la"s 6s.
5a8 otal $urc1a"e 14204000
Ca"1 $urc1a"e" 50F o. Cre#it $urc1a"e"
0%enin( Cre#itor" 64000
Clo"in( Cre#itor" 154000
$urc1a"e Return" 154000
Di"count Recei'e# 54000
5b8 Cre#it $urc1a"e" 24004000
0%enin( Balance o. Cre#itor" 154000
Clo"in( Balance o. Cre#itor" 64000
Di"count Recei'e# 14500
$urc1a"e Return" 34500
0%enin( Balance o. Bill" $ayable !9c 184000
Clo"in( Balance o. Bill" $ayable !9c 244000
Sol!tion (
5a8 C!CCGC!&0/ 0* C!)A 0G*C0, 0 CR>D&0R)
$articular" R".
0%enin( Balance o. Cre#itor" 64000
!## ; HCre#it $urc1a"e 804000
864000
Ce"" ; Di"count Recei'e# 54000
$urc1a"e Return" 154000
Clo"in( Balance o. Cre#itor" 154000 354000
Cash /!tflows to C"e&ito"s 514000
H Cet Cre#it $urc1a"e" E +; Ca"1 $urc1a"e" E
2
+
otal $urc1a"e E
2
+
+ + E 14204000 0r + E R". 804000
!lternati'ely4 t1e ca"1 out.lo2 can be calculate# by %re%arin( t1e otal Cre#itor" !ccount.
T/T+0 %.'T/6S +CC/-2T
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Di"count Recei'e# 54000 By Bill Recei'able 64000
o $urc1a"e Return" 154000 By Di"count !llo2e# 804000
o Ca"1 0ut.lo2 to Cre#itor" 514000
5Balancin( *i(ure8
46
o Balance c9# 154000
864000 864000
5b8 C!)A 0G*C0, 0 CR>D&0R)
$articular" R".
0%enin( Balance o. Cre#itor" 64000
0%enin( Balance o. Bill" $ayable 184000
!## ; Cre#it $urc1a"e" 24004000
24334000
Ce"" ; Di"count Recei'e# 14500
$urc1a"e Return" 34500
Clo"in( Balance o. Cre#itor" 64000
Clo"in( Balance o. Bill" $ayable 244000 354000
Cash /!tflows to C"e&ito"s 14984000
!lternati'ely4 t1e ca"1 out.lo2 can be calculate# by %re%arin( t1e otal Cre#itor" !ccount.
T/T+0 %.'T/6S +CC/-2T
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Di"count Recei'e# 54000 By Balance b9# 50%enin(8 154000
o $urc1a"e Return" 154000 By Cre#it $urc1a"e 24004000
o Bill" $ayable 5!cce%te#8H 514000
o Ca"1 0ut.lo2 to Cre#itor" 14984000
5Balancin( *i(ure8
o Balance c9# 5Clo"in(8 64000
24154000 24154000
H Bill" $ayable acce%te# E Clo"in( balance o. bill" %ayable 7 0%enin( balance o. bill" %ayable
E R". 244000 7 R". 184000 E R". 64000
How is the amo!nt of 7ncome Ta? pai& &ete"mine&;
#"ovision fo" Ta? +cco!nt
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Bank !9c 5a+ $ai#8 ..I.. By Balance b9# I..
o Balance c9# I... By $ro.it an# Co"" !9c I..
5$ro'i"ion 3a#e #urin( t1e year8
II II
47
2ote ( &. only t1e %ro'i"ion .or ta+ i" (i'en in t1e t2o Balance )1eet" an# no in.or3ation about
ta+ %ai# i" (i'en4 t1e a3ount in t1e %re'iou" year@" Balance )1eet i" treate# a" t1e ta+ %ai# #urin(
t1e current year. &t in'ol'e" an out.lo2 o. ca"1.
1e current year@" %ro'i"ion .or ta+ re%re"ent" t1e a3ount o. ta+ %ro'i#e# .or t1e current year. &t
i" a##e# back to t1e current year@" %ro.it" to calculate ca"1 .ro3 o%eratin( acti'itie" 5un#er t1e
in#irect 3et1o#8. &t i" 3erely a book entry an# #oe" not in'ol'e t1e out.lo2 o. ca"1.
1e %ro'i"ion .or a+ !ccount %ro'i#e" in.or3ation about t1e ta+ %ai# #urin( t1e current year a"
2ell a" t1e ta+ %ro'i#e# .or t1e current year.
1e %ro'i"ion .or a+ !ccount %ro'i#e" in.or3ation about t1e ta+ %ai# #urin( t1e current year a"
2ell a" t1e out.lo2 o. ca"1.
1e %ro'i"ion .or a+ !ccount %ro'i#e" in.or3ation about t1e ta+ %ai# #urin( t1e current year a"
2ell a" t1e ta+ %ro'i#e# .or t1e current year.
1e .ollo2in( illu"tration "1o2" 1o2 inco3e ta+ %ai# i" #eter3ine#.
7ll!st"ation @. 5Ca"1 *lo2 .ro3 0%eratin( !cti'ity 2it1 Di""in( !3ount" un#er t1e Direct
Det1o#8. $re%are t1e Ca"1 *lo2 )tate3ent .ro3 0%eratin( !cti'itie" by t1e Direct Det1o# .ro3
t1e .ollo2in( (i'en in.or3ation ;<
#"ofit an& 0oss +cco!nt
.or t1e year en#e# 31
"t
Darc14 2007
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o 0%enin( )tock 204000 By )ale" ;
o $urc1a"e ; Ca"1 74500
Ca"1 254000 Cre#it 14254000 24004000
Cre#it 754000 14004000 By Clo"in( )tock 264000
o )ellin( >+%en"e" 124000 By Co33i""ion" 144000
o 0..ice >+%en"e" 284000 By Royaltie" 104000
o Ba# Debt" 44000 By $urc1a"e" Return" 14000
o Di"count !llo2e# 24000
o De%reciation 154000
o a+ $ro'i"ion" 304000
o )ale" Return 24000
o /et $ro.it 434000
24564000 24564000
+&&itional 7nfo"mation (
Darc1 314 2006 Darc1 314 2007
R". R".
Debtor" 154000 104000
Cre#itor" 144000 104000
0ut"tan#in( )ellin( >+%. 34000 44000
48
$re%ai# 0..ice >+%en"e" 24000 34000
!ccrue# Royaltie" 124000 114000
!#'ance Co33i""ion 94000 84000
a+ $ro'i"ion 404000 604000
Sol!tion (
C+SH F0/1 F6/M /#.6+T728 +CT797T7.S
#a"tic!la"s 6s.
3a4 /pe"ating Cash 6eceipts
5i8 Ca"1 )ale" 754000
5ii8 Ca"1 recei'e# .ro3 Debtor" 5/ote 18 14144000
5iii8 Ca"1 .ro3 Royaltie" 5/ote 58 114000
5i'8 Ca"1 .ro3 Co33i""ion" 5/ote 68 134000 24134000
3b4 /pe"ating Cash #a5ments
5i8 Ca"1 $urc1a"e 254000
5ii8 Ca"1 %ai# to Cre#itor" 5/ote 28 754000
5iii8 Ca"1 %ai# .or )ellin( >+%.5/ote 38 114000
5i'8 Ca"1 %ai# .or o..ice >+%. 5/ote 48 284000 14374000
5c8 Ca"1 &n.lo2" .ro3 0%eratin( !cti'itie" be.ore 5/ote<38 764000
5#8 Ce"" ; &nco3e a+ $ai# #urin( t1e year 5/ote<78 104000
2et Cash Flow f"om /pe"ating +ctivities 3c)&4 664000
2ote ( De%reciation i" a non<ca"1 e+%en#iture an#4 t1ere.ore4 it i" i(nore#.
1o"ing 2otes ( Di""in( &n.or3ation to be Calculate#
T/T+0 %.'T/6S +CC/-2T
1. Dr. Cr.
#a"tic!la"s #a"tic!la"s 6s.
o Balance b9# 154000 By )ale" Return" 24000
o Cre#it )ale" 14254000 By Di"count !llo2e# 24000
By Ba# Debt" 44000
By Ca"1 Recei'e# 5Bal. *i(.8 14144000
By Balance c9# 184000
14404000 14404000
T/T+0 C6.%7T/6 +CC/-2T
2. Dr. Cr.
#a"tic!la"s #a"tic!la"s 6s.
o $urc1a"e Return" 14000 By Balance b9# 144000
o Di"count Recei'e# 54000 By Cre#it $urc1a"e" 754000
o Cash #ai& 5Balancin( *i(.8 734000
49
o Balance c9# 104000
894000 894000
S.00728 .A#.2S.S +CC/-2T
3. Dr. Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o Cash +Bc 5Balancin( *i(8 114000 By 0ut"tan#in( >+%en"e" !9c 34000
5&n t1e be(innin(8
o 0ut"tan#in( >+%. !9c 44000 By $ro.it an# Co"" !9c 124000
154000 154000
/FF7C. .A#.2S.S +CC/-2T
4. Dr. Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o $re%ai# >+%en"e" !9c 24000 By $ro.it an# Co"" a9c 284000
5in t1e be(innin(8 By $re%ai# >+%en"e" !9c 34000
o Cash +Bc 5Balancin( *i(.8 294000 5!t t1e en#8
314000 314000
6/C+0T7.S +CC/-2T
5. Dr. Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o !ccrue# Royaltie" 124000 By Ca"1 !9c 5Balance *i(.8 114000
5in t1e be(innin(8 By !ccrue# Royaltie" !9c 114000
o $ro.it an# Co"" !9c 104000 5!t t1e en#8
224000 224000
C/MM7SS7/2 +CC/-2T
6. Dr. Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o $ro.it an# Co"" !9c 144000 By !#'ance Co33i""ion !9c 94000
5in t1e be(innin(8
o !#'ance Co33i""ion !9c 84000 By Cash +Bc 5Balancin( *i(.8 134000
5!t t1e en#8
224000 224000
50
#6/97S7/2 F/6 T+A +CC/-2T
7. Dr. Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o Bank !9c 5a+ $ai#8 104000 By Balance b9# 404000
By $ro.it an# Co"" !9c 304000
o !#'ance Co33i""ion !9c 84000 5$ro'i"ion 3a#e8
5!t t1e en#8
704000 704000
2. C+SH F0/1 F6/M 729.ST728 +CT797T7.S
&n'e"tin( !cti'itie" o. an enter%ri"e are acqui"ition an# #i"%o"al o. t1e lon(<ter3 a""et" an#
ot1er in'e"t3ent" not inclu#e# in ca"1 equi'alent". !ccor#in(ly4 t1e ca"1 in.lo2 an# out.lo2
relatin( to t1e .i+e# a""et"4 "1are an# #ebt in"tru3ent" o. ot1er enter%ri"e"4 intere"t" in :oint
'enture"4 a#'ance" an# loan" to t1ir# %artie" an# al"o t1eir re%ay3ent" are "1o2n un#er
&n'e"tin( !cti'itie" in t1e Ca"1 *lo2 )tate3ent. 1e Ca"1 *lo2 .ro3 &n'e"tin( !cti'itie" i"
a"certaine# by analy?in( t1e c1an(e" in *i+e# !""et" an# Con(<ter3 &n'e"t3ent" in t1e
be(innin( an# at t1e en# o. t1e year.
+sce"taining Missing +mo!nts "ega"&ing Fi?e& +ssets o" %ep"eciation
Case 1 ( ,1en t1e .i+e# a""et i" "1o2n at t1e 2ritten #o2n 'alue.
Fi?e& +ssets +cco!nt 3+t w"itten &own val!e4
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o Balance b9# I. By Bank !9c I.
o Bank !9c 5$urc1a"e"8 .I $ro.it an# Co"" !9c I.
o $ro.it an# Co"" !9c I. 5Co"" on )ale o. *i+e# !""et8 I.
5$ro.it on )ale o. *i+e# !""et8 I. By De%reciation !9c I.
By Balance c9# I.
I.. I.
2otes ( 1 -enerally4 t1e %urc1a"e o. .i+e# a""et" i" a balancin( a3ount on t1e #ebit "i#e o. t1e
account an# #e%reciation or t1e "ale o. .i+e# a""et on t1e cre#it "i#e o. t1e account.
2. &n.or3ation re(ar#in( #e%reciation i" (enerally (i'en in t1e que"tion. )tu#ent" are
require# to .in# out only t1e "ale or t1e %urc1a"e9"ale o. a""et.
3. &. bot1 "ale an# #e%reciation are not (i'en4 t1en a""u3e it i" eit1er "ale or #e%reciation
an# (i'e your a""u3%tion.
51
4. &n t1e ca"e o. lan#4 it "1oul# be a""u3e# "ale a" #e%reciation i" not c1ar(e# on lan#. &n
t1e ca"e o. %atent"4 (oo#2ill an# tra#e 3ark"4 it "1oul# be a""u3e# "ale a"
#e%reciation i" not c1ar(e# on lan#. &n t1e ca"e o. %atent"4 (oo#2ill.
7ll!st"ation 7. J Ct#. 1a" %lant an# 3ac1inery 21o"e 2ritten #o2n 'alue on 1
"t
!%ril4 2006 2a"
R".846040004 an# on 31
"t
Darc14 2007 2a" R". 94504000. De%reciation .or t1e year 2a" R".
404000. !t t1e be(innin( o. t1e year4 a %art o. %lant 2a" "ol# .or R". 54000 21ic1 1a# a 2ritten
#o2n 'alue o. R". 204000. Calculate t1e /et Ca"1 *lo2 .ro3 &n'e"tin( !cti'itie".
Sol!tion (
C!)A *C0, *R0D &/K>)&/- !C&K&&>)
$articular" R".
Ca"1 $ay3ent to acquire $lant an# Dac1inery 5/ote8 14504000
Ca"1 Recei%t" .ro3 )ale o. $lant an# Dac1inery 254000 5142540008
2ote (
#0+2T +2% M+CH72.6C +CC/-2T
Dr. Cr.
%ate #a"tic!la"s 6s. %ate #a"tic!la" 6s.
2006 2006
!%r 1 o Balance b9# 84604000 !%r 1 By Bank !9c 254000
o $ro.it an# Co"" !9c 54000 2007 By De%reciation !9c 404000
5$ro.it on )ale o. $lant8 Dar 31 By Balance c9# 94504000
o Bank !9c 5$urc1a"e" 14504000
Balancin( *i(ure
104154000 104154000
Case 2 ( ,1en t1e .i+e# a""et" are "1o2n at co"t an# accu3ulate# #e%reciation 5t1e %ro'i"ion
.or #e%reciation8 i" "e%arately i" "e%arately 3aintaine# .
Gn#er t1i" ca"e4 5in contra"t to t1e abo'e ca"e84 #e%reciation i" not #irectly c1ar(e# to t1e !""et"
account. 1e #e%reciation .or t1e %erio# i" #ebite# to t1e De%reciation !ccount 5tran".er to t1e
$ro.it an# Co"" !ccount8 an# cre#ite# to !ccu3ulate# De%reciation !ccount. &n t1e Balance
)1eet4 a""et a%%ear" at it" ori(inal co"t an# t1e accu3ulate# #e%reciation i" "1o2n a" a #e#uction
.ro3 t1e !""et" !ccount. &n "uc1 ca"e"4 2e %re%are "e%arate account" .or .i+e# a""et" an#
accu3ulate# #e%reciation or %ro'i"ion" .or #e%reciation. De%reciation .or t1e year can be
a"certaine# .ro3 $ro'i"ion .or t1e De%reciation !ccount.
Fi?e& +ssets +cco!nt 3+t Cost4
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o Balance b9# I. By Bank !9c 5)ale o. *i+e# !""et8 I.
o $ro.it an# Co"" !9c .I By !ccu3ulate# De%. !9c I.
$ro.it on )ale o. *i+e# !""et8 I. 5!ccu3ulate# De%. on
o Bank !9c 5$ur. o. *i+e# !""et8 I. *i+e# !""et )ol#8 I.
By $ro.it an# Co"" !9c I.
52
5Co"" on )ale o. *i+e# !""et8 I..
By Balance c9# I..
II II
2ote ( /or3ally4 t1e %urc1a"e o. .i+e# a""et i" a balancin( a3ount on t1e #ebit "i#e o. t1e
account an# t1e "ale o. .i+e# a""et on t1e cre#it "i#e o. t1e account.
+CC-M-0+T.% %.#6.C7+T7/2 +CC/-2T
Dr. Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o *i+e# !""et !9c I. By Bank !9c 5)ale o. *i+e# !""et8 I.
o $ro.it an# Co"" !9c .I By !ccu3ulate# De%. !9c I.
$ro.it on )ale o. *i+e# !""et8 I. 5!ccu3ulate# De%. on
o Bank !9c 5$ur. o. *i+e# !""et8 I. *i+e# !""et )ol#8 I.
By $ro.it an# Co"" !9c I.
5Co"" on )ale o. *i+e# !""et8 I..
By Balance c9# I..
II II
2ote ( 1e !ccu3ulate #e%reciation on t1e .i+e# a""et "ol# or #e%reciation c1ar(e# .or t1e
current accountin( year 3ay not be (i'en4 21ic1 "1all be t1e balancin( a3ount.
,. C+SH F0/1 F6/M F72+2C728 +CT797T7.S
*inancin( !cti'itie" o. an enter%ri"e are t1o"e acti'itie" t1at re"ult in c1an(e in t1e "i?e an#
co3%o"ition o. o2ner"@ ca%ital an# borro2in( o. t1e enter%ri"e. &t inclu#e" %rocee#" .ro3 i""ue
o. "1are" or ot1er "i3ilar in"tru3ent"4 i""ue o. #ebenture"4 loan"4 bon#"4 ot1er "1ort<ter3 or lon(<
ter3 borro2in(" an# re%ay3ent" o. a3ount" borro2e#. !ccor#in(ly4 recei%t" an# %ay3ent" on
account o. t1e abo'e are #i"clo"e# in t1e Ca"1 *lo2 )tate3ent a" t1e Ca"1 *lo2 .ro3 *inancin(
!cti'itie".
Di'i#en#" %ai# 5in all enter%ri"e"8 an# intere"t %ai# 5in t1e ca"e o. non<.inancin( enter%ri"e"8 are
al"o inclu#e# in .inancin( acti'itie".
&t i" i3%ortant to note t1at an increa"e in "1are ca%ital #ue to bonu" i""ue 2ill not be "1o2n in t1e
ca"1 .lo2 "tate3ent4 "ince it i" a ca%itali?ation o. re"er'e". ,1en "1are" are i""ue# at a %re3iu34
t1e ca"1 .lo2 "tate3ent re.lect" t1e total ca"1 (enerate# by t1e i""ue 5i.e.4 *ace Kalue o. )1are" 6
$re3iu38.
1e Ca"1 *lo2 .ro3 *inancin( !cti'itie" i" a"certaine# by analy?in( t1e c1an(e in >quity an#
$re.erence )1are Ca%ital4 Debenture" an# ot1er borro2in(".
7ll!st"ation :. *ro3 t1e .ollo2in( in.or3ation4 calculate t1e Ca"1 *lo2 .ro3 *inancin(
!cti'itie" ;
$articular" 31.3.2006 31.3.2007
R"4 R"
>quity )1are Ca%ital 44004000 54004000
10F Debenture" 14504000 14004000
53
)ecuritie" 404000 504000
Additional Information : &ntere"t %ai# on #ebenture" R". 104000
Sol!tion (
Calculation o. /et Ca"1 *lo2 *ro3 *inancin( !cti'itie"
$articular" R".
Ca"1 $rocee#" .ro3 t1e &""ue o. )1are" 5&nclu#in( $re3iu38 14104000
&ntere"t %ai# on Debenture" 51040008
Re#e3%tion o. Debenture" 55040008
2et Cash Flow f"om Financing +ctivities 504000
7ll!st"ation D. JLM Ct#. %ro'i#e" t1e .ollo2in( in.or3ation. Calculate t1e /et Ca"1 *lo2 .ro3
*inancin( !cti'itie" ;
$articular" 31.3.2006 31.3.2007
R"4 R"
>quity )1are Ca%ital 104004000 154004000
10F Debenture" 14004000 II..
8F Debenture" III 24004000
Additional Information :
5i8 &ntere"t %ai# on Debenture" R". 104000
5ii8 Di'i#en# %ai# R". 504000
5iii8 Durin( t1e year 2006<20074 XZY Ct#. i""ue# bonu" "1are" in t1e ratio o. 2 ; 1 by
ca%itali"in( re"er'e.
Sol!tion (
Calculation o. /et Ca"1 *lo2 *ro3 *inancin( !cti'itie"
$articular" R".
Ca"1 $rocee#" .ro3 t1e &""ue 8F o. Debenture" 24004000
Re#e3%tion o. 10F Debenture" 5140040008
&ntere"t %ai# 51040008
Di'i#en# %ai# 55040008
2et Cash Flow f"om Financing +ctivities 404000
2ote ( Bonu" "1are" i" not to be "1o2n in t1e Ca"1 *lo2 )tate3ent becau"e t1ere i" no ca"1 .lo2.
54
7ll!st"ation 10. *ro3 t1e .ollo2in( in.or3ation4 calculate t1e Ca"1 *lo2 .ro3 &n'e"tin(
!cti'itie" an# *inancin( !cti'itie" ;
#a"tic!la"s /pening Closing
*urniture 5!t Co"t8 204000 284000
!ccu3ulate# De%reciation on *urniture 64000 94000
Ca%ital 14004000 14404000
Coan .ro3 Bank 254000 154000
Durin( t1e year4 .urniture co"tin( R". 44000 2a" "ol# at a %ro.it o. R". 34000. De%reciation on
.urniture c1ar(e# #urin( t1e year a3ounte# to R". 54000.
Sol!tion (
Cash Flow f"om Financing +ctivities
$articular" R".
&n.lo2 .ro3 &""ue o. *re"1 Ca%ital 5-i'en8 5R". 14404000 7 R". 140040008 404000
0ut.lo2 on Re%ay3ent o. Bank Coan 5-i'en8 R". 254000 7 R". 1540008 51040008
/et Ca"1 .ro3 *inancin( !cti'itie" 304000
Cash Flow f"om 7nvesting +ctivities
$articular" R".
&n.lo2 .ro3 )ale o. *urniture 538 504000
0ut.lo2 on $urc1a"e o. *urniture518 51240008
/et Ca"1 .ro3 &n'e"tin( !cti'itie" 548 74000
1.D #6.#+6+T7/2 /F C+SH F0/1 ST+T.M.2T
Aa'in( #i"cu""e# 1o2 t1e Ca"1 *lo2 )tate3ent i" %re%are# .or eac1 acti'ity4 let u" no2 #i"cu""
t1e Ca"1 *lo2 )tate3ent a" a co3%lete "tate3ent a" .ollo2" ;
1. Co3%ute t1e Ca"1 *lo2" .ro3 0%eratin( !cti'itie".
2. Co3%ute t1e Ca"1 *lo2" .ro3 &n'e"tin( !cti'itie" an# *inancin( !cti'itie".
3. 1e Ca"1 *lo2" un#er eac1 acti'ity 50%eratin(9&n'e"tin(9*inancin(8 are "1o2n in t1e Ca"1
*lo2 )tate3ent. !((re(ate o. t1e"e t1ree acti'itie" 2ill be eit1er an increa"e or a #ecrea"e
in ca"1 equi'alent".
4. Ca"1 an# Ca"1 >qui'alent balance at t1e be(innin( 2ill be a##e# to t1e net increa"e or
#ecrea"e in Ca"1 >qui'alent" 5)te% 38. Re"ultin( .i(ure 2ill be Ca"1 an# Ca"1 >qui'alent"
at t1e en#.
55
1e .or3at" .or calculatin( Ca"1 *lo2 .ro3 0%eratin( !cti'itie" by Direct Det1o# an# &n#irect
Det1o# are (i'en belo2 ;
56
1.D.1 %76.CT M.TH/%
*0RD! *0R C!)A *C0, )!>D>/
.or t1e year en#e# I.
N !" %er !ccountin( )tan#ar#<3 5Re'i"e#8O
$articular" R".
1. Ca"1 *lo2 .ro3 0%eratin( !cti'itie"
!. 0%eratin( Ca"1 Recei%t"4 e.(.4
7 Ca"1 )ale" I.
7 Ca"1 recei'e# .ro3 Cu"to3er" I.
7 ra#in( Co33i""ion" recei'e# I.
7 Royaltie" recei'e# I. I..
5B8 0%eratin( Ca"1 $ay3ent"4 e.(.4
7 Ca"1 $urc1a"e" 5I8
7 Ca"1 $ai# to t1e )u%%lier" 5I8
7 Ca"1 $ai# .or Bu"ine"" >+%en"e" like 0..ice >+%en"e"4
Danu.acturin( >+%en"e"4 )ellin( an# Di"tribution
>+%. >tc. 5I8 5...8
5C8 Ca"1 (enerate# .ro3 0%eration" 5! 7 B8 I
5D8 &nco3e a+ $ai# 5/et o. a+ Re.un# recei'e#8 5I8
5>8 Cash Flow befo"e .?t"ao"&ina"5 7tem I.
5*8 >+traor#inary &te3" 5Recei%t9$ay3ent8 569<8I.
5-8 /et Ca"1 .ro3 5or u"e# in8 0%eratin( !cti'itie" I.
&&. Ca"1 *lo2 .ro3 &n'e"tin( !cti'itie"
5)a3e a" un#er &n#irect Det1o#8
&&&. Ca"1 *lo2 .ro3 *inancin( !cti'itie" I
5)a3e a" un#er &n#irect Det1o#8
&K. /et &ncrea"e9Decrea"e in Ca"1 an# Ca"1 >qui'alent" I
5)a3e a" un#er &n#irect Det1o# < & 6 && 6 &&&8 I
K. !## Ca"1 an# Ca"1 >qui'alent" in t1e be(innin( o. t1e year
5)a3e a" un#er &n#irect Det1o#8 I
K&. Ca"1 an# Ca"1 >qui'alent" in t1e en# o. t1e year I
57
1.D.2 72%76.CT M.TH/%
*0RD! *0R C!)A *C0, )!>D>/
.or t1e year en#e# I.
N !" %er !ccountin( )tan#ar#<3 5Re'i"e#8O
$articular" R".
1. Cash Flow f"om /pe"ating +ctivities
/et $ro.it an# Co"" !9c or Di..erence bet2een Clo"in( Balance an#
0%enin( Balance o. $ro.it an# Co"" !9c I
+&& ( 3+4 +pp"op"iation of f!n&s.
ran".er to re"er'e I
$ro%o"e# #i'i#en# .or current year I
&nteri3 #i'i#en# %ai# #urin( t1e year I
$ro'i"ion .or ta+ 3a#e #urin( t1e current year I
>+traor#inary ite34 i. any4 #ebite# to t1e $ro.it an# Co"" !9c I
0ess ( >+traor#inary ite34 i. any4 cre#ite# to t1e $ro.it an# Co"" !9c 5I8
Re.un# o. ta+ cre#ite# to $ro.it an# Co"" !9c 5I8
/et $ro.it be.ore a+ation an# >+traor#inary &te3" I.
5B8 +&& ( 2on ope"ating .?penses (
7 De%reciation I
7 $reli3inary >+%en"e" 9 Di"count on &""ue o. )1are"
an# Debenture" 2ritten o.. I
7 -oo#2ill4 $atent" an# ra#e Dark" !3orti?e# I.
7 &ntere"t on Borro2in(" an# Debenture" I.
7 Co"" on )ale o. *i+e# !""et" I.
I.
5C8 0ess ( 2on /pe"ating 7ncomes(
7 &ntere"t &nco3e I
7 Di'i#en# &nco3e I
7 Rental &nco3e I
7 $ro.it on )ale o. *i+e# !""et" I I
3%4 /pe"ating #"ofit befo"e 1o"ing Capital Changes 3+E'$C4 I
3.4 +&& ( %ec"ease in C!""ent +ssets an& 7nc"ease in C!""ent 0iabilities
7 Decrea"e in )tock9 &n'entorie" I
7 Decrea"e in Debtor"9 Bill" Recei'able" I
7 Decrea"e in !ccrue# &nco3e" I
7 Decrea"e in $re%ai# >+%en"e" I
7 &ncrea"e in Cre#itor" 9Bill" $ayable" I
7 &ncrea"e in 0ut"tan#in( >+%en"e" I
7 &ncrea"e in !#'ance &nco3e" I
7 &ncrea"e in $ro'i"ion .or Doubt.ul Debt". I
I
3F4 0ess ( 7nc"ease in C!""ent +ssets an& %ec"ease in C!""ent 0iabilities
7 Decrea"e in )tock9 &n'entorie" I
7 Decrea"e in Debtor"9 Bill" Recei'able" I
7 Decrea"e in !ccrue# &nco3e" I
7 Decrea"e in $re%ai# >+%en"e" I
7 &ncrea"e in Cre#itor" 9Bill" $ayable" I
7 &ncrea"e in 0ut"tan#in( >+%en"e" I
7 &ncrea"e in !#'ance &nco3e" I
7 &ncrea"e in $ro'i"ion .or Doubt.ul Debt". I
384 Cash 8ene"ate& f"om /pe"ations 3%E.$F4 I
3H4 0ess ( 7ncome Ta? #ai& 32et of Ta? 6ef!n& "eceive&4 I
374 0ess ( 7ncome Ta? #ai& 32et of Ta? 6ef!n& "eceive&4 I
3F4 3EB)4 .?t"ao"&ina"5 7tems
3G4 2et Cash f"om 3o" !se& in4 /pe"ating +ctivities I
58
77. Cash Flow f"om 7nvesting +ctivities
7 $rocee#" .ro3 )ale o. *i+e# !""et" I
7 $rocee#" .ro3 )ale o. &n'e"t3ent" I
7 $rocee#" .ro3 )ale o. &ntan(ible !""et" I
7 &ntere"t an# Di'i#en# recei'e#
5*or /on<.inancial co3%anie" only8 I
7 Rent &nco3e I
7 $urc1a"e o. *i+e# !""et" 5I8
7 $urc1a"e o. &n'e"t3ent" 5I8
7 $urc1a"e &ntan(ible !""et" like -oo#2ill 5I8
/et Ca"1 .ro3 5or u"e# in8 *inancin( !cti'itie" I
777. Cash f"om Financing +ctivities
7 $rocee#" .ro3 &""ue o. )1are" an# Debenture" I
7 $rocee#" .ro3 0t1er Con(<ter3 Borro2in(" I
7 *inal Di'i#en# $ai# 5I8
7 &ntere"t an# Debenture" an# Coan" $ai# 5I8
7 Re%ay3ent o. Coan" 5I8
7 Re#e3%tion o. Debenture" 9 $re.erence )1are" 5I8
/et Ca"1 .ro3 5or u"e# in8 *inancin( !cti'itie" I
79. 2et 7nc"ease B %ec"ease in Cash an& Cash .*!ivalents 37E77E7774 I
9. +&& ( Cash an& Cash .*!ivalents in the beginning of the 5ea"
7 Ca"1 in Aan#
7 Ca"1 at Bank 5Ce"" ; Bank 0'er#ra.t8 I
7 )1ort<ter3 De%o"it" I
7 Darketable )ecuritie" I I
97. Cash an& Cash .*!ivalents in the en& of the 5ea"
7 Ca"1 in Aan# I
7 Ca"1 at Bank 5Ce"" ; Bank 0'er#ra.t8 I
7 )1ort<ter3 De%o"it" I
7 Darketable )ecuritie" I I
2ote ( !3ount" in bracket" in#icate ne(ati'e a3ount"4 i.e.4 a3ount" t1at are to be #e#ucte#.
7ll!st"ation 11. *ro3 t1e .ollo2in( in.or3ation4 %re%are t1e Ca"1 *lo2 )tate3ent .or t1e year en#e#
Darc1 314 2007 ;
#a"tic!la"s 6s.
0%enin( Ca"1 Balance 104000
Clo"in( Ca"1 Balance 124000
Decrea"e in Debtor" 54000
&ncrea"e in Cre#itor" 74000
)ale o. *i+e# !""et" 204000
Re#e3%tion o. Debenture" 504000
/et $ro.it .or t1e year 204000
59
Sol!tion (
Cash Flow Statement
.or t1e year en#e# 31
"t
Darc14 2007
$articular" R".
+. Cash Flow f"om /pe"ating +ctivities 204000
/et $ro.it .or t1e year be.ore ta+
!## ; &ncrea"e in Cre#itor" 74000
Decrea"e in Debtor" 54000 124000
/et Ca"1 %ro'i#e# by 0%eratin( !cti'itie" 324000
'. Cash Flow f"om 7nvesting +ctivities 204000
$rocee#" .ro3 )ale o. *i+e# !""et" 204000
/et Ca"1 .ro3 &n'e"tin( !cti'itie"
C. Cash Flow f"om Financing +ctivities
Re#e3%tion o. Debenture" 55040008
/et Ca"1 u"e# in *inancin( !cti'itie" 55040008
D. /et &ncrea"e in Ca"1 5! 6B6C8 24000
!## ; Ca"1 at t1e be(innin( o. t1e %erio# 104000
Cash at the en& of the pe"io& 124000
7ll!st"ation 12. *ro3 t1e .ollo2in( %articular" 4 %re%are t1e Ca"1 *lo2 )tate3ent .or t1e year
en#e# 31
"t
Darc14 2007 by t1e Direct Det1o# ;
5i8 Ca"1 "ale" R". 654864000.
5ii8 Ca"1 collecte# .ro3 #ebtor" #urin( t1e year a3ounte# to R". 334234400.
5iii8 Ca"1 %ai# to "u%%lier" 2a" R". 794364810.
5i'8 R".94 874 500 2a" %ai# to an# .or e3%loyee".
5'8 *urniture o. t1e book 'alue o. R". 184500 2a" "ol# .or R". 114000 an# a ne2 .urniture
co"tin(
R". 834160 2a" %urc1a"e#.
5'i8 Debenture" o. t1e .ace 'alue o. R". 34004000 2ere re#ee3e# at a %re3iu3 o. 2 %er cent
intere"t on #ebenture". &ntere"t on #ebenture"4 R". 844000 2a" al"o %ai#.
3vii4 Di'i#en#4 R". 44504000 .or t1e year en#e# 31
"t
Darc14 2007 2a" #i"tribute# in Day4 2007.
3viii4 Ca"1 in 1an# an# at bank a" on Darc1 314 2006 an# Darc1 3142007 2a" R". 514070 an#
R". 54744000 re"%ecti'ely.
60
Sol!tion (
C+SH F0/1 ST+T.M.2T 3%76.CT M.TH/%4
.or t1e year en#e# 31
"t
Darc14 2007
$articular" R".
Ca"1 *lo2 .ro3 0%eratin( !cti'itie"
Recei%t" 7 Ca"1 )ale" 654864000
Ca"1 recei%t" .ro3 cu"to3er" 334234400
994094400
$ay3ent" 7$ay3ent" .or %urc1a"e" an# to "u%%lier" 794364810
$ay3ent" to an# .or e3%loyee" 94874500
894244310
/et Ca"1 .ro3 0%eratin( !cti'itie" 5Recei%t" 7 $ay3ent"8 94854090
Cash Flow f"om 7nvesting +ctivities
$urc1a"e o. *i+e# !""et" 58341608
$rocee#" .ro3 )ale o. *i+e# !""et" 114000
Cash Flow f"om Financing +ctivities 57241608
Re#e3%tion o. #ebenture" at a %re3iu3 NR". 34004000 6 R". 64000O 5340640008
&ntere"t %ai# on #ebenture" 58440008 5349040008
2et Cash !se& in Financing +ctivities 5349040008
/et increa"e in ca"1 an# ca"1 equi'alent" 54224930
Ca"1 an# ca"1 equi'alent" a" on 31
"t
Darc14 2007 5Clo"in( Balance8 514070
Ca"1 an# ca"1 equi'alent" a" on 31
"t
Darc14 2007 5Clo"in( Balance8 54744000
2otes ( Di'i#en# .or t1e year en#e# 31
"t
Darc14 2007 2a" %ai# in Day 2007. Aence4 it i" not an
out.lo2 o. ca"1 .or t1e year en#e# 31
"t
Darc14 2007.
7ll!st"ation 1,. *ro3 t1e "u33ary ca"1 account o. J Ct#. %re%are t1e Ca"1 *lo2 )tate3ent .or
t1e year en#e# 31
"t
Darc14 2007 by Direct Det1o#.
C+SH '//G
Dr. .or t1e year en#e# Darc1 3142007 Cr.
#a"tic!la"s 6s. #a"tic!la" 6s.
o Balance on !%ril 142006 504000 By $ay3ent to )u%%lier" 204004000
o &""ue o. >quity )1are" 34004000 By $urc1a"e# o. *i+e# !""et" 24004000
o Recei%t" .ro3 Cu"to3er" 284004000 By 0'er1ea# >+%en"e" 24004000
o )ale o. *i+e# !""et" 14004000 By ,a(e" an# )alarie" 14004000
By &nco3e a+ $ai# 24504000
By PDi'i#en# $ai# 34004000
By Re %ay3ent o. Bank Coan 34004000
By Balance on Darc1 314 2007 14504000
324504000 324504000
61
Sol!tion (
C+SH F0/1 ST+T.M.2T /F A 0T%. 3%76.CT M.TH/%4
.or t1e year en#e# 31
"t
Darc14 2007
$articular" R".
+. Cash Flow f"om /pe"ating +ctivities
3i4 /pe"ating Cash 6eceipts (
Ca"1 Recei'e# .ro3 Cu"to3er" 284004000
3ii4 /pe"ating Cash #a5ments (
Ca"1 $ai# to )u%%lier" 204004000
,a(e" an# )alarie" 14004000
0'er1ea# >+%en"e" 24004000 52340040008
Ca"1 -enerate# .ro3 0%eration" 54004000
Ce"" ; &nco3e a+ $ai# 24504000
/et Ca"1 .ro3 0%eratin( !cti'itie" 24504000
'. Cash Flow f"om 7nvesting +ctivities
$urc1a"e o. *i+e# !""et" 5240040008
$rocee#" .ro3 )ale o. *i+e# !""et" 14004000
/et Ca"1 G"e# in &n'e"tin( !cti'itie" 5140040008
C. Cash Flow f"om Financing +ctivities
$rocee#" .ro3 &""ue o. >quity )1are" 34004000
$ay3ent o. Bank Coan 5340040008
Di'i#en# $ai# 55040008
Net Cash Used in Financing Activities 55040008
%. 2et 7nc"ease in Cash an& Cash .*!ivalents 3+E'EC4 14004000
.. Cash an& Cash .*!ivalent at the beginning of the 5ea" 504000
F. Cash an& Cash .*!ivalent at the .n& of the 5ea" 14504000
7ll!st"ation 1<. 1e .inancial %o"ition o. !BC Ct#. a" on 31
"t
Darc1 2a" a" .ollo2" ;

Dr. Cr.
0iabilities 200@ 2007 +ssets 200@ 2007
6s. 6s. 6s. 6s.
Current Ciabilitie" 724000 824000 Ca"1 84000 742000
Coan .ro3 M Ct#. I. 404000 Debtor" 704000 764800
Coan .ro3 Bank 604000 504000 )tock 504000 444000
)1are Ca%ital 24004000 24004000 Can# 404000 604000
$ro.it an# Co"" !9c 964000 984000 Buil#in(" 14004000 14104000
Dac1inery 24144000 24444000
$ro'i"ion .or De%. 55440008 57240008
44284000 44704000 44284000 44704000
62
Durin( t1e year. R". 524000 2ere %ai# a" #i'i#en#. $re%are Ca"1 *lo2 )tate3ent.
Sol!tion (
C+SH F0/1 ST+T.M.2T
for the year ended 31
st
March, !!"
$articular" R".
Cash Flow f"om /pe"ating +ctivities
/et %ro.it be.ore ta+ an# e+traor#inary ite3"
5)ee ,orkin( /ote8 544000
!## ; De%reciation 184000
0%eratin( $ro.it be.ore ,orkin( Ca%ital C1an(e" 724000
!## ; Decrea"e in )tock" 64000
&ncrea"e in Current Ciabilitie" 104000
Ce"" ; &ncrea"e in Debtor" 5648008
/et Ca"1 .ro3 0%eratin( !cti'itie" 814200
Cash Flow f"om 7nvesting +ctivities
$urc1a"e o. Buil#in( 51040008
$urc1a"e o. Can# 52040008
$urc1a"e o. Dac1inery 53040008
/et Ca"1 u"e# in &n'e"tin( !cti'itie" 56040008
Cash Flow f"om Financing +ctivities
$rocee#" o. Coan .ro3 M Ct#. 404000
Re%ay3ent o. Bank Coan 51040008
$ay3ent o. Di'i#en# 55240008
/et ca"1 u"e# in *inancin( !cti'itie" 52240008
2et %ec"ease in Cash an& Cash .*!ivalents 58008
Cash an& cash e*!ivalents at the beginning 84000
Cash an& cash e*!ivalents at the en& of the pe"io& 74200
1o"ing 2ote (
Clo"in( Balance a" %er $ro.it an# Co"" !9c 5on 31
"t
Darc14 20078 984000
0ess ( 0%enin( Balance a" %er $ro.it an# Co"" !9c a" on 1
"t
!%ril4 2006 964000
$ro.it .or t1e year 24000
!## ; Di'i#en#" $ai# 524000
/et $ro.it be.ore a+ 544000
63
7ll!st"ation 1>. *ro3 t1e .ollo2in( %articular" o. JLM Ct#. %re%are t1e Ca"1 *lo2 )tate3ent.
Dr. Cr.
0iabilities Darc1 31 Darc1 314 +ssets Darc1 314 Darc1 31
2006 2007 2006 2007
R". R". R". R".
>quity )1are Ca%ital 34004000 34504000 *i+e# !""et" 5/et8 54104000 64204000
12F $re.. )1are Ca%ital 24004000 14004000 10F &n'e"t3ent 304000 804000
10F Debenture" 14004000 24004000 Ca"1 in Aan# 204000 354000
$ro.it an# Co"" !9c 14104000 24704000 Ca"1 at Bank 204000 404000
Cre#itor" 704000 14454000 Debtor" 5-oo#8 14004000 24004000
$ro'i"ion .or Doubt.ul Debt" 104000 154000 )tock 14004000 904000
Di"count on Deb. 104000 154000
74904000 104804000 74904000 104804000
Lou are in.or3e# t1at #urin( t1e year ;
5i8 ! 3ac1ine 2it1 a book 'alue o. R". 404000 2a" "ol# .or 254000.
5ii8 De%reciation c1ar(e# #urin( t1e year 2a" R".704000.
5iii8 $re.erence "1are" 2ere re#ee3e# on 31
"t
Darc14 2007 at a %re3iu3 o. 5F.
5i'8 !n &nteri3 Di'i#en# Q 15 %er cent 2a" %ai# on equity "1are" on 31
"t
Darc14 2007.
$re.erence Di'i#en# 2a" al"o %ai# on 31
"t
3arc14 2007.
5'8 /e2 "1are" an# #ebenture" 2ere i""ue# on 31
"t
Darc14 2007.
Sol!tion (
C+SH F0/1 ST+T.M.2T
for the year ended 31
st
March, !!"
$articular" R".
3+4 Cash Flow f"om /pe"ating +ctivities
Clo"in( Balance a" %er $ro.it an# Co"" !9c 24704000
0ess ( 0%enin( Balance a" %er $ro.it an# Co"" !9c 14104000
14604000
+&& ( +pp"op"iation of F!n&
$re.erence Di'i#en# 244000
&nteri3 Di'i#en# 454000
&ncrea"e in $ro'i"ion .or Doubt.ul Debt" 5)ince all #ebtor" are (oo#8 5/ote 18 54000 744000
2et #"ofit befo"e ta? 24344000
+&& ( 2on ope"ating .?penses (
De%reciation 704000
&ntere"t on Con( er3 Borro2in(" 5Debenture"8 104000
Co"" on )ale o. Dac1inery 154000
64
$re3iu3 $ayable on Re#e3%tion o. $re.erence )1are" 54000 14004000
34344000
0ess ( 2on ope"ating 7ncomes (
&ntere"t on &n'e"t3ent 34000
0%eratin( $ro.it be.ore ,orkin( Ca%ital C1an(e" 34314000
+&& ( %ec"ease in C!""ent +ssets an& 7nc"ease in C!""ent 0iabilities
Decrea"e in )tock 104000
&ncrea"e in Cre#itor" 754000 854000
44164000
0ess ( 7nc"ease in C!""ent +ssets an& %ec"ease in C!""ent 0iabilities
&ncrea"e in Debtor" 14004000
2et Cash f"om /pe"ating +ctivities 34164000
'. Cash Flow f"om 7nvesting +ctivities
$urc1a"e o. *i+e# !""et" 5242040008
$rocee#" .ro3 )ale o. Dac1inery 254000
&ntere"t on &n'e"t3ent 34000
$urc1a"e o. &n'e"t3ent" 55040008
/et Ca"1 G"e# in &n'e"tin( !cti'itie" 5244240008
3C 4 Cash Flow f"om Financing +ctivities
$rocee#" .ro3 &""ue o. )1are Ca%ital 504000
$rocee#" .ro3 lon(<ter3 borro2in(" 5Debenture"8 954000
N R". 14004000 7 R". 54000 5Di"count on &""ue o. Debenture"8 5/ote 28O
Re#e3%tion o. $re.erence )1are" 5R". 14004000 6 R". 540008 5140540008
&ntere"t $ai# on Con(<er3 Borro2in(" 51040008
&nteri3 Di'i#en# %ai# 54540008
$re.erence Di'i#en# $ai# #urin( t1e year 52440008
/et Ca"1 G"e# in *inancin( !cti'itie" 53940008
2et 7nc"ease in Cash an& Cash .*!ivalents 3+E'EC4 354000
Cash an& Cash .*!ivalents in the beginning of pe"io& 404000
5Ca"1 in Aan# an# Ca"1 at Bank8
Cash in Cash .*!ivalents at the en& of pe"io& 754000
5Ca"1 in Aan# an# Ca"1 at Bank8
65
1o"ing 2otes (
a. &ncrea"e in $ro'i"ion .or Doubt.ul Debt" 5i. all #ebtor" 1a'e been con"i#ere# a" (oo#8
re%re"ent" tran".er o. t1e $ro.it .ro3 $ro.it an# Co"" !ccount. &t i" a##e# back to t1e
current year@" %ro.it" to .in# out ca"1 .ro3 0%eratin( !cti'itie".
b. &ncrea"e in Di"count on t1e &""ue o. Debenture" 5or "1are"8 i" #e#ucte# .ro3 increa"e in
Debenture" 5or "1are"8 to a"certain t1e net a3ount o. i""ue.
F7A.% +SS.TS +CC/-2T 3+T 1.%.94
3. Dr. Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Balance b9# 54104000 By Bank !9c 254000
o Bank !9c 5$urc1a"e8 24204000 By $ro.it an# Co"" !9c
5Balancin( *i(ure8 5Co"" on )ale8 154000
By De%reciation !9c 704000
By Balance c9# 64204000
74304000 74304000
7ll!st"ation 1@. 1e "u33ari?e# Balance )1eet" o. JLM Ct#. a" on 31
"t
Darc14 2006 an# 2007
are (i'en belo2 ;<
Dr. Cr.
0iabilities Darc1 31 Darc1 314 +ssets Darc1 314 Darc1 31
2006 2007 2006 2007
R". R". R". R".
)1are Ca%ital 44504000 44504000 *i+e# !""et" 44004000 34204000
-eneral Re"er'e 34004000 34104000 &n'e"t3ent 504000 604000
$ro.it an# Co"" !9c 564000 684000 )tock 24404000 24104000
Cre#itor" 14684000 14344000 Debtor" 24104000 44554000
$ro'i"ion .or a+ation 754000 104000 Bank 14494000 14974000
Dort(a(e I. 24704000
104494000 124424000 104494000 124424000
Additional Information :
5i8 &n'e"t3ent" co"tin( R". 84000 2ere "ol# #urin( t1e year 2006<07 .or R". 84500.
5ii8 $ro'i"ion .or ta+ 3a#e #urin( t1e year 2a" R". 94000.
5iii8 Durin( t1e year4 %art o. t1e .i+e# a""et" co"tin( R". 104000 2a" "ol# .or R". 124000 an# t1e
%ro.it 2a" inclu#e# in t1e $ro.it an# Co"" !ccount.
5i'8 Di'i#en#" %ai# #urin( t1e year a3ounte# to R". 404000
Lou are require# to %re%are a Ca"1 *lo2 )tate3ent.
66
Sol!tion (
C+SH F0/1 ST+T.M.2T
for the year ended 31
st
March, !!"
$articular" R".
3+4 Cash Flow f"om /pe"ating +ctivities (
Clo"in( Balance a" %er $ R C !9c 531.3.20078 684000
0ess ( 0%enin( Balance o. $ro.it an# Co"" !9c 531.3.20068 564000
124000
+&& ( +pp"op"iation of F!n& (
&nteri3 Di'i#en# 404000
$ro'i"ion .or a+ 94000
ran".er to Re"er'e 104000 594000
/et $ro.it be.ore ta+ an# e+traor#inary ite3" 714000
+&&(2on /pe"ating .?penses ( 704000
De%reciation 5/ote 18
Ce"" ; 2on /pe"ating 7ncomes ( 55008
$ro.it on )ale o. &n'e"t3ent" 5240008 674500
0%eratin( $ro.it be.ore ,orkin( Ca%ital C1an(e" 14384500
+&& ( %ec"ease in C!""ent +ssets an& 7nc"ease in C!""ent 0iabilities (
Decrea"e in )tock 5R". 24404000 7 R". 241040008 304000
0ess ( 7nc"ease in C!""ent +ssets an& &ec"ease in C!""ent 0iabilities (
&ncrea"e in Debtor" 5R". 44554000 7 R". 241040008 5244540008
Decrea"e in Cre#itor" 5R". 14684000 7 R". 143440008 53440008 5247940008
Cash 8ene"ate& f"om /pe"ations 5141045008
Ce"" ; &nco3e ta+ $ai# 57440008
/et Ca"1 u"e# in 0%eratin( !cti'itie" 5!8 5148445008
3'4 Cash Flow f"om 7nvesting +ctivities
$urc1a"e o. &n'e"t3ent 51840008
)ale o. *i+e# !""et" 124000
)ale o. &n'e"t3ent" 84500
/et Ca"1 .ro3 &n'e"tin( !cti'itie" 5B8 24500
3C4 Cash Flow f"om Financing +ctivities
Dort(a(e Coan 24704000
Di'i#en# $ai# 54040008
/et Ca"1 .ro3 *inancin( !cti'itie" 5C8 5243040008
3%4 2et 7nc"ease in Cash an& Cash .*!ivalents 3+E'EC4 484000
3.4 Cash an& Cash .*!ivalents at the beginning of the 5ea" 14494000
3F4 Cash an& Cash .*!ivalents at the en& of the 5ea" 14974000
1o"ing 2otes (
67
1 Dr. Fi?e& +ssets +cco!nt Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Balance b9# 44004000 By Bank !9c 124000
o $ro.it an# Co"" !9c 24000 By De%reciation !9c 5Bal. *i(.8 704000
5$ro.it on )ale8 By Balance c9# 34204000
44024000 44024000
2 Dr. 7nvestment +cco!nt Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Balance b9# 44004000 By Bank !9c 84500
o $ro.it an# Co"" !9c 5$ro.it8 24000 By De%reciation !9c 5Bal. *i(.8 604000
o Bank !9c 5Balance *i(.8 184500
684500 684500
3 Dr. 7nvestment +cco!nt Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Bank !9c 5Balancin( *i(.8 44004000 By Balance b9# 754000
o Balance c9# 24000 By $ro.it an# Co"" !9c
o 184500 5$ro'i"ion Da#e8 94000
844000 844500
2et #"ofit o" %"awings ( )o3eti3e" in t1e ca"e o. a "ole tra#er or a %artner"1i% .ir34 ca%ital
o. t1e %ro%rietor or %artner" i" (i'en but t1e a3ount o. #ra2in(" or net %ro.it" 3a#e 3ay be
3i""in(. 1e ca%ital account 3ay be %re%are# to .in# t1e net %ro.it" or #ra2in(".
7ll!st"ation 17. 1e "u33ari?e# Balance )1eet" o. JLM Ct#. a" on 31
"t
Darc14 2006 an# 2007
are (i'en belo2 ;<
Dr. Cr.
0iabilities 200@ 2007 +ssets 2006 2007
R". R". R". R".
Cre#itor" 404000 444000 *i+e# !""et" 104000 74000
Dr". !@" Coan 254000 I Debtor" 304000 504000
Coan .ro3 Bank 404000 504000 )tock 354000 254000
Ca%ital o. ! an# B 14254000 14534000 Dac1inery 804000 554000
Can# 404000 504000
Buil#in(" 354000 604000
2.304000 24474000 24304000 24474000
Durin( t1e year4 a 3ac1ine co"tin( R". 104000 5accu3ulate# #e%reciation R". 340008 2a" "ol# .or
R". 54000. 1e %ro'i"ion .or #e%reciation a(ain"t 3ac1inery a" on Darc1 3142006 an# Darc1 314
2007 2a" o. R". 254000 an# R". 404000 re"%ecti'ely.
68
$ro.it E Ca%ital at t1e en# 6 Dra2in(" 7 Ca%ital at t1e be(innin(
Dra2in(" E Ca%ital at t1e be(innin( 6 $ro.it 7 Ca%ital at t1e en#
1e /et $ro.it" .or t1e year a3ounte# to R". 454000. Lou are require# to %re%are t1e Ca"1 *lo2
)tate3ent.
Sol!tion (
C+SH F0/1 ST+T.M.2T
for the year ended 31
st
March, !!"
$articular" R".
3+4 Cash Flow f"om /pe"ating +ctivities
/et $ro.it be.ore a+ 454000
+&& ( 2on /pe"ating .?penses (
De%reciation 5)ee /ote 38 184000
Co"" on )ale o. Dac1inery 5)ee /ote 48 24000 204000
0%eratin( $ro.it be.ore ,orkin( Ca%ital C1an(e" 654000
!## ; Decrea"e in Current !""et or &ncrea"e in Current Ciabilitie";
Decrea"e in )tock 104000
&ncrea"e in Cre#itor" 44000 144000
794000
Ce"" ; &ncrea"e in Current !""et or Decrea"e in Current Ciabilitie"
&ncrea"e in Debtor" 204000
/et Ca"1 .ro3 0%eratin( !cti'itie" 594000
5B8 Cash Flow f"om 7nvesting +ctivities
$urc1a"e o. Can# 51040008
$urc1a"e o. Buil#in(" 52540008
$rocee#" .ro3 )ale o. Dac1inery 254000
/et ca"1 u"e# in &n'e"tin( acti'itie" 53040008
5C 8 Cash Flow f"om Financing +ctivities
$rocee#" o. Coan .ro3 Bank 104000
$ay3ent o. Dr". !@" Coan 52540008
Dra2in(" 5/ote 18 51740008 53240008
/et Ca"1 u"e# in *inancin( !cti'itie"
3%4 2et %ec"ease in Cash an& Cash .*!ivalents 3+E'EC4 5340008
3.4 Cash an& cash e*!ivalents at the beginning of the pe"io& 51040008
3F4 Cash an& cash e*!ivalents at the en& of the pe"io& 74000
2otes (
Dra2in(" E 0%enin( Ca%ital o. ! an# B 6 /et $ro.it" 7 Clo"in( Ca%ital o. ! an#
B E R". 14254000 6 R". 454000 7 R". 14534000 E R". 174000
2 Dr. Machine"5 +cco!nt Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Balance b9# 14054000 By Ca"1 !9c 54000
5R". 8040006R". 2540008 By $ro'i"ion .or De%reciation 34000
By $ro.it an# Co"" !9c 7 24000
Co"" on )ale 5/ote 48 954000
14054000 14054000
69
H)o3eti3e"4 .i+e# a""et" are "1o2n at the w"itten &own val!e 3afte" &e&!cting &ep"eciation4
in the balance sheet an& the acc!m!late& &ep"eciation is given in the a&&itional
info"mation 5a" in t1e %re"ent illu"tration8. &n "uc1 a ca"e4 t1e o%enin( an# clo"in( balance" in
t1e re"%ecti'e *i+e# !""et" account 2ill be t1e total a3ount o. book 'alue "1o2n in t1e balance
"1eet %lu" balance o. t1e accu3ulate# #e%reciation %ro'i#e# in a##itional in.or3ation.
3 Dr. #"ovision fo" %ep"eciation +cco!nt Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o De%reciation on Dac1inery )ol# 34000 By Balance !9c 254000
o Balance c9# 404000 By De%reciation %ro'i#e#
5Balancin( *i(ure8 184000

434000 434000
4. Co"" on )ale o. Dac1inery E Co"t 7 !ccu3ulate# De%reciation 7 )ellin( $rice E
R". 104000 7 R". 34000 7 R". 34000 7 R". 54000 E R".24000
7ll!st"ation 1:. *ro3 t1e .ollo2in( Balance )1eet" o. D9" -u%ta R Co.4 %re%are t1e Ca"1 *lo2
)tate3ent .or t1e year en#e# Darc1 31 ;
0iabilities 200@ 2007 +ssets 2006 2007
R". R". R". R".
Cre#itor" 204000 224000 Ca"1 84000 224000
0ut"tan#in( >+%en"e" 54000 14000 Debtor" 154000 114000
Coan .ro3 J 104000 54000 Bill" Recei'able 54000 I
Ca%ital 14084000 14684000 )tock 204000 284000
*i+e# !""et" 954000 14354000
2.304000 24474000 24304000 24474000
Durin( t1e year4 t1e %ro%rietor intro#uce# R". 204000 a" a##itional ca%ital. 1e net %ro.it" .or t1e
year4 a.ter c1ar(in( R". 54000 a" #e%reciation on .i+e# a""et"4 2ere R". 504000.
Sol!tion (
70
C+SH F0/1 ST+T.M.2T
for the year ended 31
st
March, !!"
$articular" R".
3+4 Cash Flow f"om /pe"ating +ctivities
/et $ro.it be.ore a+ 504000
/on<0%. >+%en"e" ;
De%reciation 54000
0%eratin( %ro.it be.ore ,orkin( Ca%ital C1an(e" 554000
+&& ( %ec"ease in C!""ent +ssets H inc"ease in C!""ent 0iabilities (
Debtor" 44000
Bill" Recei'able" 54000
Cre#itor" 24000 114000
664000
0ess ( 7nc"ease in C!""ent +ssets H &ec"ease in c!""ent liabilities(
)tock 84000
0ut"tan#in( >+%en"e" 44000 124000
/et Ca"1 .ro3 0%eratin( !cti'itie" 544000
3'4 Cash Flow f"om 7nvesting +ctivities
*i+e# !""et" $urc1a"e# 5)ee ,orkin( /ote 28
/et Ca"1 u"e# in &n'e"tin( !cti'itie" 54540008
3C4 Cash Flow f"om Financing +ctivities
Re%ay3ent o. Coan .ro3 J 5540008
!##itional Ca%ital &ntro#uce# 204000
Dra2in( 5)ee ,orkin( /ote<18 51040008
/et Ca"1 u"e# in *inancin( !cti'itie" 54000
3%4 2et 7nc"ease in Cash an& Cash .*!ivalents 3+E'EC4 51440008
3.4 Cash 'alance on +p"il 1, 200@ 5840008
3F4 Cash 'alance on Ma"ch, ,1, 2007 224000
1o"ing 2otes (
1 Dr. C+#7T+0 +CC/-2T Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Ca"1 !9c 104000 By Balance b9# 14084000
5R". 8040006R". 2540008 By Ca"1 !9c
5!##itional Ca%ital8
By $ro.it an# Co"" !9c 504000
Co"" on )ale 5/ote 48 954000
14784000 5/et $ro.it8 14784000
2 Dr. F7A.% +CC/-2T Cr.
#a"tic!la"s 6s. #a"tic!la"s 6s.
o Balance b9# 954000 By De%reciation 54000
o Bank !9c By Balance c9# 14354000
5$urc1a"e 7 Balancin( *i(ure8 454000
1.404000 14404000
71
Te(m int(!),ce) in t-e c-a#te(
$( .inancial tatements
<( Profit and loss Account
6( Balance heet
G( Preliminary expense
&( hare #apital
'( #ontingent liabilities
O( Proposed di+idend
P( Pro+ision for taxation
%( 5atio Analysis
$J( 3i,uidity ratios
$$( ol+ency ratios
$<( 7urno+er ratios
$6( Profitability ratios
$G( 5eturn on in+estment
$&( Uuic/ Assets
$'( 5ecei+ables
$O( Earning per share
$P( Di+idend payout
19. Ca"1 *lo2
<J( 3i,uidity
<$( #ash E,ui+alent
<<( "n+esting Acti+ities
<6( Extraordinary
<G( Accounting
<&( ol+ency
<'( 4perating Acti+ities
<O( .inancing Acti+ities
<P( Appropriation
S,mma($
72
.inancial tatements: .inancial statements are the basic and formal annual reports through
which the corporate management communicates financial information to its owners and
+arious other external parties which include-in+estors, tax authorities, go+ernment,
employees, etc( 7here are two main financial statements( 7hey are: :$; balance sheets; :<;
income statements(
Balance sheet: 7he Balance heet shows what a company owns and what it owes at a fixed
point in time(
"ncome statement: 7he "ncome tatement shows how much money a company made and
spent o+er a period of time(
1sers of financial statements: 7hese include in+estors and potential in+estors; lenders=long
term creditors; management; suppliers=short term creditors; employees and trade unions;
go+ernment and its agencies; stoc/ exchange and its customers
5atio Analysis is the relationship between two items of financial data expressed in the form
of ratios and then interpreted with a +iew to e+aluating the financial condition and
performance of a firm(
4b*ecti+es of 5atio Analysis
7he analysis would enable the calculation of not only the present earning capacity of the
business but would also help in the estimation of the future earning capacity( 7he analysis
would help the management to find out the o+erall as well as the department-wise efficiency
of the firm on the basis of the a+ailable financial information( 7he short term as well as the
long term sol+ency of the firm can be determined w6ith the help of ratio analysis( "nter-firm
comparison becomes easy with the help of ratios(
Advantages of #atio Analysis
5atio Analysis simplifies .inancial tatements, facilitates inter-firm comparison; ma/es intra-
firm comparison possible and helps in forecasting
Limitati!n !" Rati! Anal$i
5atio Analysis is historical in nature; changes in price le+el often ma/e comparison of figures
of the pre+ious years difficult( "t is not free from bias( ome companies, in order to co+er
up their bad financial position report to window dressing( 5atio Analysis ignores ,ualitati+e
factors and different accounting practices render ratios incomparable
T$#e !" Rati!
.inancial ratios can be classified into four important categories:
$( 3i,uidity 5atios: 3i,uidity ratios help the users in /nowing the extent of short-
term debt paying ability of a firm( 7hey include current ratio and ,uic/ ratio(
<( ol+ency 5atios: ol+ency ratios analyse the long-term debt paying capacity of
the firm( 7hey include Debt e,uity ratio; 7otal Assets to Debt 5atio; Proprietary
ratio and "nterest #o+erage 5atio(
73
6( Acti+ity or 7urno+er 5atios: Acti+ity ratios help in commenting on the efficiency of
the firm in managing it assets( 7he speed with which assets are con+erted into
sales is captured by acti+ity ratios( 7hese include toc/ 7urno+er; Debtors
:5ecei+able; 7urno+er; #reditors :Payable; 7urno+er; .ixed Assets 7urno+er and
Ior/ing #apital 7urno+er(
G( Profitability 5atios: Profitability ratios are calculated to measure the profitability of
a business enterprise( 7hese include Hross Profit 5atio; Bet profit 5atio;
4perating 5atio; 4perating Profit ratio; return on "n+estment :54";; Earnings per
hare; Price Earning 5atio and Di+idend payout ratio
RATIOS AT A GLANCE
5atio .ormulae
$( #urrent ratio
Current a""et"
#urrent liabilities
<( Uuic/ ratio
Quick a""et"
#urrent liabilities
6( "n+entory turno+er ratio
Co"t o. (oo#" "ol#
A+erage in+entory
G( Debtors :recei+ables; turno+er ratio
!nnual /et cre#it "ale"
A+erage accounts recei+ables
&( Debt :recei+ables; collection period 6'& days=&< wee/s= $< months
Debtors turno+er ratio
' #reditors turno+er ratio
Net Credit Purchase
A+erage #reditor Bet
O( A+erage #redit Payment period 6'& days=&< wee/s= $< months
Creditor turnover ratio
P( wor/ing capital 7urno+er Bet ale
wor/ing #apital
%( .ixed Asset 7urno+er ratio Bet sale or cost of sale
Bet fixed assets
$J( #urrent assets turno+er ratio Bet sales
#urrent assets
$$( Debt- e,uity ratio 7otal long term debt
hareholders9 funds
$<( 7otal assets to debts 7otal assets
3ong term debts
$6( Proprietary ratio
hareholders .unds
7otal assets
$G( Hross Profit ratio Hross Profit=Bet ales V $JJ
$&( Bet Profit 5atio Bet profit = Bet ales V $JJ
$'( 4perating ratio 4perating cost M $JJ
Bet sales
74
$O( 4perating profit ratio 4perating profit M $JJ
Bet sales
$P( 5eturn on capital employed :54"; Bet profit before interest, tax L di+idend M $JJ
#apital employed
$%( Earnings per share :EP; Bet income after interest,tax and preference
di+idend M $JJ
Bumber of e,uity shares
<J( Di+idends per share Di+idends amount
Bumbers of e,uity share
<$( Price earning ratio Dar/et price of share
EP#
<<( Di+idend payout ratio Di+idend per share
Earning per share
Deanin( o. ca"1 .lo2 "tate3ent ; &t i" a "tate3ent 21ic1 i" %re%are# to "1o2 t1e .lo2 o.
ca"1 in a bu"ine"" un#ertakin(.
/'F.CT79.S (
5i8 1el%.ul in 3akin( .inancial %olicie"
5ii8 1el%.ul in #eci"ion 3akin( to #eclare #i'i#en#.
5iii8 C*) i" #i..erent t1an eac1 Bu#(et.
5i'8 Ael%.ul in #e'i"in( t1e eac1 que"tion.
5'8 1el%.ul in tellin( rea"on" .or #i..erence bet2een %ro.it an# lo""
-S.S (
5i8 1el%" in 3akin( "1ort "1ort ter3 %lannin(
5ii8 1el%" un#er"tan#in( liqui#ity R "ol'ency.
5iii8 1el%" in co3%arati'e "tu#y.
5i'8 te"t" .or 3ana(e3ent #eci"ion
07M7T+T7/2 (
1. /on eac1 tran"action are i(nore#.
2. /ot "uitable .or an inco3e "tate3ent
3. Ai"torical in nature.
/pe"ating +ctivities ( 0%eratin( acti'itie" are t1e %rinci%al re'enue<%ro#ucin( acti'itie"
o. t1e enter%ri"e an# ot1er acti'itie" t1at are not in'e"tin( or .inancin( acti'itie".
7nvesting +ctivities ( &n'e"tin( acti'itie" are t1e acqui"ition an# #i"%o"al o. lon(<ter3
a""et" an# ot1er in'e"t3ent" not inclu#e# in ca"1 equi'alent".
Financing +ctivities ( *inancin( acti'itie" are t1e acti'itie" t1at re"ult in c1an(e in t1e
"i?e an# co3%o"ition o. t1e o2ner"@ ca%ital 5inclu#in( %re.erence8 "1are ca%ital in t1e
ca"e o. a co3%any8 an# borro2in( o. t1e enter%ri"e.
Ve($ S-!(t an) -!(t AnBe( C,eti!n
75
$( tate whether the following statements are true or false(
:a; Pro+ision is the amount set aside or written off for any /nown liability(
:b; 1nclaimed di+idend is shown on the assets side of the balance sheet of the
company(
: c; Preliminary expense is a current liability(
:d; "n the balance sheet of a company the items goodwill, patents and trade mar/s
are shown under the heading fixed assets(
:e; Discount allowed on the issue of shares or debentures is shown in the assets side
of the balance sheet(
:f; Debentures are shown in the balance sheet under the item unsecured loans(
:g; hare forfeiture account is shown in the balance sheet under share capital
account(
:h; 1nclaimed di+idend is shown in the balance sheet under the item current
liabilities(
:i; ecurities premium account is shown on the liability side of the balance sheet
under the heading share capital(
0Ans( :a; 7rue :b; .alse :c; .alse :d; 7rue :e; 7rue :f; .alse :g; 7rue :h; 7rue :i; .alse2
<( "ndicate whether following items belong to the asset side or the liability side of the
balance sheet of a company(
:a; #alls unpaid(
:b; Preliminary expenses
: c; #apital redemption reser+e
:d; Acceptances
:e; Proposed di+idend
:f; 1nexpired payments
0Ans( :a; 3iability :b; Asset :c; 3iability :d; 3iability :e; 3iability :f; Asset 2
6( Ihat is the contingent liabilityR Ihere it is shown in the Balance sheetR Hi+e three
examples of contingent liabilities(
G( Cow would you disclose the following items in the balance sheet of a limited company:-
:i; 3oose tools :ii; toc/ :iii; Hoodwill :i+; Discount on issue of debentures not yet
written of :+; ecurities premium(
&( 5e-arrange the following assets in the proper order as per schedule !" Part " of
#ompanies Act $%&'(
3oans and ad+ances
Discellaneous expenditure
#urrent assets
"n+estments
.ixed assets
'( #orrect the order of assets and liabilities according to the pro+ision of schedule !" part "(
3iabilities Assets
ubscribed capital 3oans and ad+ances
1nsecured loans miscellaneous expenditure
Pro+isions #urrent assets
ecured loans "n+estments
5eser+e and surplus .ixed assets
#urrent liabilities
O( Point out whether following statement are true or falseR
a; #urrent ratio impro+es increases in credit purchases(
76
b; 3i,uidity ratio impro+es with increase in credit sale(
c; Ior/ing capital is the excess of current assets o+er current liability(
d; #urrent ratio measures the li,uidity of the business(
e;Debt e,uity ratio measures short term financial position of the business
Ans- A; .alse b; 7rue c; 7rue d; 7rue e; false
P( Assuming the current ratio is < , state in each of the following cases whether the
ratio will impro+e or decline or will ha+e no change(
a( Payment of a current liability
b(Purchase of fixed assets
c( #ash collected from customers
d("ssue of new share
Ans- A; impro+e b; decline c; Bo change d; "mpro+e
%( 7he current ratio of a company is <&: $( Ihich of the following suggestion would
impro+e , reduce or not change itR
i; Payment to trade creditors
ii; ale of machinery for cash
iii; Purchase of goods
i+; "ssue of e,uity share
Ans- A; impro+e b; impro+e c; Bo change d; "mpro+e
$J( Ihat are the category under which the +arious ratios are groupedR
$$( Ihat does debt- e,uity ratio indicatesR
$<( Ihat is stoc/ T turno+er ratio, how it is calculatedR Ihat are the implications of
high and low stoc/ turn o+er ratioR
$6( tate the meaning and ob*ecti+e of the following-
a; Proprietary ratio
b; 4perating ratio
$G( Ihat do you mean by the interest co+erage ratioR Explain in brief, gi+ing its
formulaR
$&( tate the significance and method of calculating the following-
a(#urrent ratio
b(4perating ratio
c( 5eturn on in+estment ratio:54";
$'( Ihat are the different names of acti+ity ratiosR Bame fi+e acti+ity ratios(
$O( Describe three ratio based upon sales(
$P( Explain in about &J words the importance of the following ratios-
a(proprietary ratio
b(Debt e,uity ratio
$%( Hi+e the method of computing and the purpose of the following ratios-
a( Acid 7est ratio
b("n+entory turno+er ratio
c( Debt e,uity ratio
d(5eturn on in+estment ratio
<J( Ihat will be the impact of following suggestions on the debt e,uity ratio, assuming
the gi+en ratio to be $:<R
a( "ssue of e,uity shares
b(#ash recei+ed from debtors
c( 5edemption of debentures
d(Purchase of goods on credit(
Ans- A; Decrease b; Bo change c; decrease d; Bo change
77
.SS+C TC#. I-.ST7/2S
1. ,1at i" Ca"1 *lo2 )tate3ent= Ao2 it i" %re%are#= ,1at are it" u"e"=
2. ,1at i" Ca"1 *lo2 )tate3ent= -i'e t1ree ite3" o. "ource" 5in.lo28 o. ca"1.
3. >+%lain t1e u"e" o. ca"1 *lo2 )tate3ent.
4. >nu3erate any t1ree 3a:or "ource" o. ca"1 in .lo2.
5. ,1at i" 3eant by Ca"1 *lo2 )tate3ent= >+%lain brie.ly 1o2 t1e "tate3ent i"
%re%are# a" %er !)<3 5re'i"e#8.
6. >+%lain t1e ter3 PCa"1 *lo2@. -i'e t1ree ite3" o. u"e" 5out.lo28 o. ca"1.
7. >nu3erate t1e 'ariou" "te%" in'ol'e# in t1e %re%aration o. PCa"1 *lo2 )tate3ent@.
21. *or calculatin( Pca"1 .lo2 .ro3 o%eratin( acti'itie" .ro3 t1e (i'en .i(ure o. /et
$ro.it earne# #urin( a year4 1o2 2oul# you #eal 2it1 increa"e in Debtor"4
Decrea"e in )tock4 Decrea"e in Bill" $ayable an# &ncrea"e in Cre#itor".
22. *or calculatin( Ca"1 *lo2 .ro3 o%eratin( !cti'itie"@ .ro3 a (i'en .i(ure o. P/et
$ro.it"@ earne# #urin( a year4 1o2 2oul# you #eal 2it1 t1e #ecrea"e in %reli3inary
e+%en"e"4 #ecrea"e in %re%ai# e+%en"e"4 increa"e in in'entory an# increa"e in Bill"
$ayable=
23. >+%lain t1e i3%act o. increa"e in #ebtor"4 #ecrea"e in in'entorie"4 increa"e in
cre#itor" an# #ecrea"e in bill" %ayable on t1e co3%utation o. ca"1 .lo2 o%eratin(
acti'itie".
24. *or calculatin( ca"1 .lo2 .ro3 o%eratin( acti'itie" .ro3 a (i'en .i(ure o. /et
$ro.it earne# #urin( a year4 1o2 2ill you #eal 2it1 t1e re#e3%tion o. #ebenture"4
#ecrea"e in out"tan#in( e+%en"e"4 increa"e in ca"1 balance an# #ecrea"e in
in'entorie"4 #ecrea"e in Bill" $ayable4 increa"e in cre#itor" an# increa"e in
#ebtor".
PRACTICAL C%ESTIONS
78
$( 7he following figures are extracted from the boo/s of AB# #o( Draw up the 3iabilities side
according to law(
5s(
6J,JJJ shares of 5s( $J each, 5s( P paid up <,GJ,JJJ
ecurities Premium <J,JJJ
5eser+es 6&,JJJ
#reditors G&,JJJ
.ixed deposits <&,JJJ
<( 7he following balances appeared in the boo/s of 1tsa+ Publications 3td(
5s(
Hoodwill <,JJ,JJJ
Plant L Dachinery $,'J,JJJ
Building $,G&,JJJ
#ash in hand $J,JJJ
toc/ in trade &J,JJJ
$J,JJJ shares of 5s( $J each, 5s( P paid up PJ,JJJ
%K debentures <,&J,JJJ
Preliminary expenses $J,JJJ
#reditor &J,JJJ
Di+idend Payable <&,JJJ
Prepare balance sheet of company as per the Performa gi+en as per chedule !" Part " of
the #ompanies Act $%&'(
6( 7he following ledger balances were extracted from the boo/s of A/ash 3td( on 6$
st
Darch, <JJO:-
3and and Buildings <,JJ,JJJ; $<K Debentures 5s(<,JJ,JJJ; hares #apital
5s($,JJ,JJJ; E,uity hares of 5s($<each fully paid up; Plant and Dachinery
5s(P,JJ,JJJ; Hoodwill 5s(<,JJ,JJJ; "n+estments in shares of 5a*a 3td( 5s(<,JJ,JJJ;
Heneral reser+e 5s(<,JJ,JJJ; toc/ in trade 5s($,JJ,JJJ; Bills 5ecei+able 5s(&J,JJJ;
Debtors 5s($,&J,JJJ; #reditors 5s($,JJ,JJJ; Ban/ 3oan :1nsecured; 5s( $,JJ,JJJ;
Pro+ision for taxation 5s(&J,JJJ; Discount on issue of $<K debentures 5s(&,JJJ;
Proposed di+idend 5s(&&,JJJ(
Nou are re,uired to prepare the balance sheet of the company as per schedule !" Part "
of the companies Act, $%&'(
G( Danu 3td( has an authori8ed capital of 5s(&J,JJ,JJJ di+ided into e,uity shares of 5s($J
each( 7he company in+ited applications for 6,JJ,JJJ shares( Applications for <,O&,JJJ
shares were recei+ed( All calls were made and were duly recei+ed except the final call of
5s(6 per share on &,JJJ shares( G,JJJ of the shares on which the final call was not
recei+ed were forfeited( how how share capital will appear in the Balance sheet of the
company as per schedule !" part " of the companies act $%&'R
&( 7he following balances ha+e been extracted from the boo/s of 5ishi 3td( on 6$(6($%%';
hare capital 5s($J,JJ,JJJ, securities premium 5s($,JJ,JJJ, $<K debentures
5s(&,JJ,JJJ, creditors 5s(<, JJ,JJJ, proposed di+idend 5s(&J,JJJ, profit and loss
account :Dr; 5s(&J,JJJ, discount on issue of $<K debentures 5s( $,JJ,JJJ( Prepare the
balance sheet of the company as per schedule !" part " of the companies act $%&'(
79
'( 7he following balances are supplied on the basis of which you are re,uired to show the
ma*or appropriate heads under which the items gi+en below will appear in the balance
sheet of 5a*co 3td( as on 6$
st
Darch <JJO:
5s(
Plant L Dachinery &,'J,JJJ
Building $J,JJ,JJJ
E,uity share capital :Authorised; <J,JJ,JJJ
E,uity share of 5s($JJ each 5s(OJ called and paid up $G,JJ,JJJ
$JK debentures &&,JJJ
Discount on "ssue of $JK debentures &,JJJ
.urniture and fixtures $&,JJJ
3ong 7erm Ban/ 3oan :secured; $,<&,JJJ
O( Prepare a balance sheet of !i/as 3td( as on Darch 6$, <JJO as per pro+isions of Part-",
chedule !", 1nder section <$$ of the companies Act $%&' from the following
information(
5s(
Heneral reser+e 6,JJJ
Debentures 6,JJJ
Profit L 3oss A=c :#r(; $,<JJ
Depreciation on .ixed Assets OJJ
Hross .ixed Assets %,JJJ
#urrent 3iabilities <,&JJ
Preliminary Expenses 6JJ
Preference hare #apital &,JJJ
#urrent Assets ',$JJ
P( 7he following figures were extracted from the trial balance of MNE 3td(:
hare #apital: $J,JJJ E,uity hares of 5s($J each fully called up and paid up(
5s(
ecurities Premium $J,JJJ
$<K debentures &J,JJJ
.ixed Deposits :#r(; <&,JJJ
#reditors &,JJJ
Nou are re,uired to draw up the liabilities side of the balance sheet of the company
according to the re,uirements of the companies act(
%( 7he following balances appear in the boo/s of 5uia Publications 3td(:
5s(
Hoodwill <J,JJJ
Plant L Dachinery $,'J,JJJ
Building $,G&,JJJ
#ash at hand $J,JJJ
toc/ in trade OJ,JJJ
hare capital: $,JJJ e,uity shares of 5s($JJ
each issued at Par, 5s(PJ per share called up and paid up PJ,JJJ
PK debentures <,&J,JJJ
Preliminary expenses &,JJJ
#reditor &&,JJJ
Di+idend Payable <&,JJJ
howing the abo+e items under the ma*or; heads in accordance with Part " of chedule
!" of the #ompanies Act $%&', prepare a balance sheet of the company(
80
$J( .ind out current ratio(
Hross Debtors 5s( <J,JJJ; Pro+ision for Bad debts 5s( 6,JJJ; Bills recei+able 5s(
$6,JJJ; toc/ twice of net debtors; #ash in hand 5s( $',JJJ; Ad+ance to suppliers 5s(
$&,JJJ; #reditors for goods 5s( <O,JJJ; Bills payable 5s( P,JJJ; 4utstanding expenses
5s( $&,JJJ; Prepaid expenses 5s( &,JJJ "n+estment :3ong term; 5s( $<,JJJ;
0Ans( #urrent 5atio <:$2
$$( .ind out current liabilities when current ration is <(&:$ and current assets are 5s(
O&,JJJ(
0Ans( #urrent 3iabilities 5s( 6J,JJJ2
$<( 7he ratio of current assets :5s( ',JJ,JJJ; to current liabilities is $(&:$( 7he accountant
of this firm is interested in maintaining a current ratio of <:$ by paying some part of
current liabilities( Nou are re,uired to suggest him the amount of current liabilities
which must be paid for this purpose(
0Ans( 5s( <,JJ,JJJ2
$6( A firm had current liabilities of 5s( %J,JJJ( "t then ac,uired stoc/-in-trade at a cost of
5s( $J,JJJ on credit( After this ac,uisition the current ratio was <:$( Determine the
si8e of current assets and wor/ing capital after and before the stoc/ was ac,uired(
0Ans( #(A( 5s( <,JJ,JJJ, 5s( $,%J,JJJ; I(#( 5s( $,JJ,JJJ, 5s( $,JJ,JJJ2
$G( A 3td( company has a current ratio of 6(&:$ and acid test ratio of <:$( "f the in+entory
is 5s( 6J,JJJ, find out its total current assets and total current liabilities(
0Ans( #urrent Assets 5s( OJ,JJJ; #urrent 3iabilities 5s( <J,JJJ2
$&( Hi+en: #urrent ratio <(P; Acid test ratio $(&; Ior/ing capital > 5s( $,'<,JJJ(
.ind out: #urrent assets;, #urrent liabilities; 3i,uid Assets(
0Ans( A; 5s( <,&<,JJJ; :b; 5s( %J,JJJ; :c; $,6&,JJJ2
$'( .rom the following, calculate Debt-E,uity 5atio(
E,uity share capital 5s( $,&J,JJJ( Preference hare capital 5s( &J,JJJ, Heneral
reser+es 5s( $,JJ,JJJ, Accumulated profits 5s( 'J,JJJ, Debentures 5s( $,&J,JJJ(
undry creditors 5s( PJ,JJJ, Expenses payable 5s( <J,JJJ( Preliminary Expenses not
yet written off 5s( $J,JJJ(
06 :O2
$O( #alculate Debt E,uity 5atio from the Balance heet of M 3td( as on 6$
st
Darch <JJO
3iabilities 5s( Assets 5s(
E,uity shares of 5s( $J each
$$K preference share capital
ecurities premium account
Heneral reser+e
Profit and 3oss account
$<K Debentures of 5s( $JJ each
Bills payable
7rade creditors
4utstanding Expenses
Pro+ision for tax
P,JJ,JJJ
G,JJ,JJJ
PJ,JJJ
&,PJ,JJJ
$,GJ,JJJ
$J,JJ,JJJ
PJ,JJJ
$,GJ,JJJ
'J,JJJ
<,<J,JJJ
3and and Buildings
Plant and Dachinery
.urniture and fittings
toc/
7rade debtors
#ash in hand
#ash at ban/
Bills recei+able
',<J,JJJ
$<,JJ,JJJ
$,PJ,JJJ
&,6J,JJJ
G,OJ,JJJ
'&,JJJ
6,JJ,JJJ
$,6&,JJJ
6&,JJ,JJJ 6&,JJ,JJJ
0Ans( $ :<2
$P( .rom the following calculate debt-e,uity ratio:
81
5s(
Preference share capital <,JJ,JJJ
E,uity share capital G,JJ,JJJ
#apital reser+es $,JJ,JJJ
Profit L 3oss account $,JJ,JJJ
$GK Debentures <,JJ,JJJ
1nsecured loans $,JJ,JJJ
#reditors GJ,JJJ
Bills payable <J,JJJ
Pro+ision for taxation $J,JJJ
Pro+ision for di+idends <J,JJJ

0Ans( J(6O& : $2
$%( 7he debt-e,uity ratio of a company is $:<( Ihich of the following suggestions would
:i; increase, :ii; decrease, and :iii; not change it(
a; "ssue of e,uity shares,
b; #ash recei+ed from debtors
c; 5edemption of debentures for cash,
d; Purchased goods on credit,
e; 5edemption of debentures by con+ersion into shares,
f; "ssue of shares against the purchase of a fixed asset,
g; "ssue of debentures against the purchase of a fixed asset(
0Ans(:a; :ii;, :b; :iii;, :c; :ii;, :d; :iii;, :e; :ii;, :f; :ii;, :g; :i;2
<J( Debtors in the beginning 5s( %J,JJJ; debtors at the end 5s( %',JJJ credit sales during
the year 5s( G,'&,JJJ( calculate debtors turno+er ration(
0Ans( & times2
<$( 5s( $,O&,JJJ is the net credit sales of a concern during $%P%( "f debtors turno+er is P
times, calculate debtors in the beginning and at the end of the year( Debtors at the end
is 5s( O,JJJ more than at the beginning(
0Ans( 5s( $P,6O& and 5s( <&, 6O&2
<<( .rom the following figures, compute the debtors turno+er ratio:
Near " Near ""
5s( 5s(
Hross sales %,&J,JJJ P,JJ,JJJ
ales returns &J,JJJ &J,JJJ
Debtors in the beginning of year P',JJJ $,$O,JJJ
Debtors at the end $,$O,JJJ P',JJJ
Pro+ision for doubtful debts O,JJJ ',JJJ
0Ans( $ year P,PO times "" year O(6% times2
<6( 4pening stoc/ 5s( O',<&J; #losing toc/ 5s( %P,&JJ; ales 5s( &,<J,JJJ; ales
5eturns 5s( <J,JJJ; Purchases 5s( 6,<<,<&J( #alculate stoc/ turno+er ratio(
0Ans( 6(G6 times2
<G( A+erage stoc/ carried by a trader is 5s( 'J,JJJ stoc/ turno+er ratio is $J times( Hoods
are sold at a profit of $JK on cost( .ind out the profit(
82
0Ans( Profit 5s( 'J,JJJ2
<&( "f in+entory turno+er ratio is & times and a+erage stoc/ at cost is 5s( O&,JJJ, find out
cost of goods sold(
0Ans( 6,O&,JJJ2
<'( Nou are gi+en the following data(
Hross profit at 6JK on sales > 5s( 'J,JJJ
toc/ turno+er > O times
7he opening stoc/ is &,JJJ less then the closing stoc/(
Accounts payable :opening; 5s( 6J,JJJ; Accounts payable :closing; 5s( 6P,JJJ(
.ind out :a; Bet purchases :b; Accounts payable turno+er :c; A+erage age of creditors(
0Ans( :a; 5s( $,G&,JJJ; :b; G(<' times :c; P&(' days2
<O( .rom the following information, calculate creditors at the beginning of the year:
5s(
7otal purchases <<,JJ,JJJ
#ash purchases :included in abo+e; $J,JJ,JJJ
#reditors turno+er ratio-G times creditor <,&J,JJJ
0Ans( 6,&J,JJJ2
<P( #alculate wor/ing capital turno+er ratio from the following data:
5s(
#ost of goods sold $,&J,JJJ
#urrent assets $,JJ,JJJ
#urrent liabilities O&,JJJ
0Ans( ' times2
<%( .rom the following, compute wor/ing capital turno+er;
5s(
ales <&,<J,JJJ
#urrent assets $&,'J,JJJ
#urrent liabilities ',JJ,JJJ
0Ans( <(' times2
6J( .ind out the wor/ing capital turno+er ratio:
5s(
#ash $J,JJJ
Bills recei+able &,JJJ
undry debtors <&,JJJ
toc/ <J,JJJ
undry creditors 6J,JJJ
#ost of sales $,&J,JJJ
0Ans( & times2
83
6$( #apital employed 5s( $,JJ,JJJ, Ior/ing capital 5s( <J,JJJ, #ost of goods sold
5s( 6,<J,JJJ, Hross profit 5s( PJ,JJJ( #alculate fixed assets turno+er ratio
assuming that there were no long-term in+estments(
0Ans( & times2
6<( #alculate Hross Profit ratio:
ales $,'J,JJJ Purchases %J,JJJ
ales return $J,JJJ Purchases returns $J,JJJ
4pening stoc/ 6J,JJJ #losing toc/ $J,JJJ
0Ans( 66 $=6 K2
66( .rom the following details calculate the operating ratio:
:a; 5s(
#ost of goods sold &,<J,JJJ
4perating expenses $,PJ,JJJ
Bet sales P,JJ,JJJ
:b;
#ost of goods sold P,JJ,JJJ
4perating expenses GJ,JJJ
ales $J,&J,JJJ
ales return &J,JJJ
:c;
ales less 5eturn $,JJ,JJJ
Hross Profit GJ,JJJ
Administrati+e expenses $J,JJJ
elling expenses $J,JJJ
"ncome from "n+estments &,JJJ
3oss due to fire 6,JJJ
:d; 7rading and Profit L 3oss Account for the year ended 6$
st
December,<JJO
Particulars 5s( Particulars 5s(
7o stoc/ $(G(%6
7o Purchase
7o Iages
7o gross profit
6&,JJJ
<,<&,JJJ
',JJJ
$,PG,JJJ
By ales
By toc/ at end
G,JJ,JJJ
&J,JJJ
G,&J,JJJ G,&J,JJJ
7o administrati+e exp(
7o selling L distribution exp(
7o loss on sale of plant
7o net profit
$J,JJJ
$G,JJJ
$J,JJJ
$,&J,JJJ
By Hross Profit $,PG,JJJ
$,PG,JJJ $,PG,JJJ
:Ans( :a; PO(&K :b; PGK :c; PJK :d; 'JK;
84
6G( 4pening stoc/ 5s( PJ,JJJ; Purchase 5s G,6J,%JJ; Direct expenses 5s G,JJJ; #losing
stoc/ 5s( $,'J,JJJ; Administrati+e expenses 5s <$,$JJ; elling and distribution
expenses 5s GJ,JJJ; ales 5s $J,JJ,JJJ #alculate :
:a; Hross Profit ratio
:b; 4perating ratio
:Ans( Hross Profit ratio > 'G(&<K, 4perating ratio > G$('K;
6&(.rom the following information, calculate stoc/ turno+er ratio, operating ratio and capital
turno+er ratio(
5s(
4pening toc/ <P,JJJ
#losing toc/ <<,JJJ
Purchases G',JJJ
ales %J,JJJ
ales return $J,JJJ
#arriage inwards G,JJJ
4ffice expenses G,JJJ
elling and distribution expenses <,JJJ
#apital employed <,JJ,JJJ
: Ans( :a; <(<G times :b; OO(&K :c; (G times;
6'( #alculate the following ratios, from the details gi+en as under :
:a; #urrent ratio
:b; Acid test ratio
:c; 4perating ratio
:d; Hross profit ratio
5s(
3i,uid assets GJ,JJJ
#urrent liabilities <J,JJJ
toc/ $J,JJJ
ales &J,JJJ
4perating expenses $&,JJJ
#ost of goods sold <J,JJJ
:Ans( :i; &:< :ii; <:$ :iii; OJK :i+; 'JK;
6O( Balance sheet of WA9 3td( is gi+en below :
3iabilities Amount:5s(; Assets Amount:5s(;
Paid up e,uity
hare capital :
$&K debentures
PL3 a=c: for the current
Ear after taxes;
Heneral reser+e
#urrent liabilities
G,JJ,JJJ
<,JJ,JJJ
6,JJ,JJJ
6,JJ,JJJ
&,PJ,JJJ
Building
Dachinery
Debtors
toc/
Ban/
',JJ,JJJ
$,<J,JJJ
',&J,JJJ
6,&J,JJJ
'J,JJJ
$O,PJ,JJJ $O,PJ,JJJ
85
Additional "nformation:
Bet sales for the current year 5s( &O,'J,JJJ
#ompute any three of the following ratios:
:a; Bet profit ratio
:b; .ixed assets turno+er ratio,
:c; Debt e,uity ratio
:Ans( Bet profit ratio &(<$:Approx;, #urrent ratio $(P6 :$, .ixed asset turno+er ratio P
times, Debt le,uity ratio $:&;
6P( .rom the following information calculate any three of the following ratios:
:a; Hross Profit ratio
:b; Ior/ing capital turno+er ratio
:c; Debt-e,uity ratio
:d; Proprietary ratio
"nformation:
Bet sales 5s &,JJ,JJJ; #ost of goods sold 5s( 6,JJ,JJJ; #urrent assets 5s( <,JJ,JJJ;
#urrent liabilities 5s( $,GJ,JJJ; paid up share capital 5s( <,&J,JJJ; $6K Debentures
5s $,JJ,JJJ(
:Ans( H(P( 5atio GJK; Ior/ing #apital 7(4( 5atio P(P6 times; Debt E,uity 5atio GJK;
Proprietary 5atio &$K;
6%( .rom the following information, calculate the stoc/ turno+er ratio and the gross profit
ratio(
5s(
4pening stoc/ $P,JJJ
#losing stoc/ <<,JJJ
Purchases G',JJJ
Iages $G,JJJ
ales PJ,JJJ
#arriage inwards G,JJJ
0Ans( Hross profit ratio <&K; stoc/ turno+er ratio 6 times2
GJ( A company has a loan of 5s( &J,JJ,JJJ as part of its capital employed( 7he interest
payable on the loan is $JK and the 5(4("( of the company is $&K( Assuming that the
rate of income tax is &JK, calculate the amount of gain to the shareholders9 because
of the loan obtained by the company(
0Ans( Hian to shareholders 5s( $,<&,JJJ2
G$( #alculate any three of the following ratios with the help of the information gi+en
below:-
a; 4perating ratio
b; Hross profit ratio
c; Uuic/ ratio
d; Ior/ing capital turno+er ratio
e; Proprietary ratio
"nformation:
E,uity share capital 5s( $,JJ,JJJ; PK preference share capital 5s( PJ,JJJ; %K
debentures 5s( 'J,JJJ; Heneral 5eser+e 5s( $J,JJJ; ales 5s( <,JJ,JJJ; 4pening
stoc/ 5s( $<,JJJ; Purchases 5s( $,<J,JJJ; Iages 5s( P,JJJ; #losing toc/ 5s(
$P,JJJ; selling and distribution expenses 5s( <,JJJ; other current assets 5s( &J,JJJ,
fixed assets 5s( <,$<,JJJ and current liabilities 5s( 6J,JJJ
0:a; '<K; :b; 6%K; :c; $('O:$; %d; 6(<$ times; :e; 'O(P' K2
86
G<( 7he following is the Balance heet of !inod Dills 3td( as on 6$
st
December, <JJ':
5s(
undry #reditors
Bills payable
7ax pro+ision
4utstanding expenses
$<K Debentures
$JK Preference share capital
E,uity share capital
5eser+e .und
'J,JJJ
$,JJ,JJJ
$,6J,JJJ
$J,JJJ
O,JJ,JJJ
$,JJ,JJJ
&,JJ,JJJ
G,JJ,JJJ
Ban/
7rade in+estments
Boo/ Debts :Debtors;
toc/
.ixed Assets $P,JJ,JJJ
3ess: Depreciation &,JJ,JJJ
&J,JJJ
$,&J,JJJ
<,JJ,JJJ
6,JJ,JJJ
$6,JJ,JJJ
<J,JJ,JJJ <J,JJ,JJJ


4ther information supplied is as follows
5s(
Bet sales 6J,JJ,JJJ
#ost of goods sold <&,PJ,JJJ
4perating expenses <,<J,JJJ
:a; Uuic/ ratio; :b; 7otal assets to debt ratio; :c; #urrent ratio; :d; Hross profit ratio;
:e; 4perating ratio :f; Bet profit ratio(
0Ans( :a; $(66:$, :b; <(P':$; :c; <(66:$; :d; $GK; :e; %6(66K; :f; '('OK2
G6( .rom the following information, calculate stoc/ turno+er ratio, operating ratio; fixed
assets turno+er ratio and current assets turno+er ratio:-
5s(
4pening stoc/ &',JJJ
#losing stoc/ GG,JJJ
Purchases %<,JJJ
ales $,PJ,JJJ
ales returns <J,JJJ
#arriage inwards P,JJJ
4ffice Expenses P,JJJ
elling L Distribution Expenses G,JJJ
.ixed assets OJ,JJJ
#urrent assets 'J,JJJ
0Ans( toc/ 7urno+er 5atio <(<G times; 4perating 5atio OO(&K, .ixed assets 7urno+er
5atio $(' times, #urrent Assets turno+er ratio $(PO times2
87
GG .rom the following data, calculate:-
a; Hross profit ratio,
b; Bet profit ratio
c; Ior/ing capital turno+er ratio,
d; Debt-e,uity ratio,
e; Proprietary ratio
5s(
Bet sales 6J,JJ,JJJ
#ost of sales <J,JJ,JJJ
Bet profit 6,JJ,JJJ
.ixed assets ',&J,JJJ
#urrent assets ',JJ,JJJ
#urrent liabilities <,JJ,JJJ
Paid-up share capital &,JJ,JJJ
Debentures <,&J,JJJ
0Ans( H(P( ratio> 66 $=6K; B(P( 5atio>$JK; Ior/ing capital turno+er ratio> & times;
Debt e,uity ratio>J(6$:$, Proprietary ratio i(e( shareholder9s funds=total assets >
'GK2
G&( Iith the help of the gi+en information, calculate any three of the following ratios:
:a; 4perating ratio
:b; Uuic/ ratio
:c; Ior/ing capital turno+er ratio
:d; Debt e,uity ratio(
"nformation: E,uity share capital 5s( &J,JJJ; $<K preference share capital 5s(
GJ,JJJ; $<K debentures 5s( 6J,JJJ; Heneral 5eser+e 5s( GJ,JJJ; ales 5s(
6,JJ,JJJ; 4pening stoc/ 5s( <J,JJJ; Purchases 5s( $,GJ,JJJ; Iages 5s( 6J,JJJ;
#losing stoc/ 5s( GJ,JJJ; elling and distribution expenses 5s( $P,JJJ; 4ther
#urrent assets 5s( $,JJ,JJJ and current liabilities 5s( 'J,JJJ(
0Ans( :a; &'K; :b; $('O:$; :c; $(PO& times; :d; J(<6($
OBJECTIVE T=PE C%ESTIONS
"( "ndicate whether increase in debtors = current assets results in :
:i; "ncrease in cash
:ii; Decrease in cash
:iii; Bon of the abo+e(
""( "ndicate whether increase in current liabilities results in :
:i; "ncrease in cash
:ii; Decrease in cash
:iii; Bone of the abo+e(
"""( tate whether the following would result in inflow or outflow of cash :
:i; "ssue of shares
:ii; Payment of di+idend
:iii; Purchase of fixed assets
:i+; #ash from operations :profits;
:+; ale of fixed assets
:+i; 5edemption of debentures
88
"!( .ill in the blan/s :
:a; Bet profit are 5s( <J,JJJ( 7here is an increase in the amount of debtors of
5s( &,JJ( Ihat would be the amount of cash flow from operating acti+ities
:5s( <J,JJJ, 5s($&,JJJ 5s( <&,JJJ;
" "" """
:b; Bet profit are 5s( $<,&JJ, after debiting depreciation 5s( ,6&JJ andn there is a
decrease in stoc/ worth 5s( <,OJJ( 7he cash flow from operating acti+ities
would be
:5s( $',JJJ, 5s($&,<JJ 5s( $P,OJJ;
" "" """
Ans( "( decrease in cash :""; "ncrease in #ash :"""; i; in .low :ii; out flow
:iii; out flow :i+; in flow :+; in flow :+i; outflow( :"!; :a; $&JJ :b; $POJJ
B. SHORT ANS<ER C%ESTIONS
$( Ihat is W#ash .low tatement9R Explain(
<( Irite what is inflow of each and outflow of cashR
6( Ihat are non-operating Expenses and "ncomes(
G( Irite about treatment of depreciation in a #ash .low tatement(
&( Ihat do you /now about 7reatment of Di+idend declared and paid in a #ash .low
tatement
'( Irite about treatment of pro+ision for tax and tax paid in #ash .low tatement(
EGERCISE 6
$( #alculate cash flow from operating acti+ities from the following information :
5s(
ales $,<J,JJJ
Purchases OJ,JJJ
Iages <&,JJJ
Assume that all the transactions were in cash( Ans :5s <&,JJJ;
<( #alculate cash flow from operating acti+ities from the following figures :
:5s(;
ales <,O&,JJJ
#ost of ales <,<&,JJJ
4pening Balance of Debtors <J,JJJ
#losing Balance of Debtors <J,JJJ
4pening Balance of #reditors &,JJJ
#losing Balance of #reditors $J,JJJ
4pening Balance of 4utstanding Expenses $,<&J
#losing Balance of 4utstanding Expenses <,O&J
Ans( :&$&JJ;
89
6( #alculate cash flow from operating acti+ities after calculating ad*usted profit from the
following : 5s(
:i; Depreciation allowed $&,JJJ
:ii; 3oss on ale of Dachine <,&JJ
:iii; Discount on "ssue of hares written off $,JJJ
:i+; Hoodwill written off $,&JJ
:+; 7ransfer to Heneral 5eser+e <,JJJ
:+i; Bet Profit after abo+e ad*ustments $&,JJJ
:+ii; "ncrease in #urrent Assets <,&JJ
:+iii; Decrease in #urrent 3iabilities 6,&JJ
Ans( :6$,JJJ;
&( #alculate cash flow from operating acti+ities from the following :
Particulars 2004
Rs
2005
(Rs.)
Profit and 3oss Appropriation A=c
Bills 5ecei+ables
Pro+isions for Depreciation
5ent 4utstanding
Prepaid "nsurance
Hoodwill
toc/
<J,JJJ
$G,JJJ
6J,JJJ
$,'JJ
$,GJJ
<J,JJJ
$G,JJJ
6J,JJJ
$P,JJJ
6<,JJJ
G,JJJ
$,<JJ
$',JJJ
$P,JJJ
Ans( :5s( $J,'JJ;
'( #alculate cash flow from operating acti+ities from the following Profit and 3oss A=c of
a business for the year ended on 6$(6(<JJ& :
Particulars Rs. Particulars Rs.
7o alaries
7o Depreciation on fixed assets
7o Preliminary Exp( w=off(
7o Discount on issue of deb(
7o Heneral 5eser+e
7o Discount on ales
7o Hoodwill
7o Bet Profit
<<,6JJ
P,<JJ
$,&JJ
$,JJJ
$<,JJJ
G,$PJ
6,<<J
$','JJ
By Hross Profit
By 5ent 5ecei+ed
By Profit on ale of fixed
assets
&G,&JJ
6,<JJ
$$,6JJ
'%,JJJ
Ans( :5s( 6$,<<J;
O( #alculate cash flow from operating acti+ities from the following details:
Particulars 31.3.07
Rs
31.3.08
(Rs.)
Profit and 3oss A=c
Heneral 5eser+e
Pro+isions for Depreciation
Prepaid Expenses
1nearned "ncomes
4utstanding Expenses
Hoodwill
undry #reditors
Bills 5ecei+able
G&,JJJ
&,JJJ
$P,JJJ
<,GJJ
$,&JJ
PJJ
$J,JJJ
&,JJJ
',GJJ
'J,JJJ
$J,JJJ
<P,JJJ
$,PJJ
<,&JJ
$,<JJ
O,JJJ
6,JJJ
%,'JJ
!n". 5R" 2948008
P( #alculate cash flow from operating acti+ities from the following data :
90
"( Profits made during the year 5s( $,G&,JJJ after considering the following
items :
:5s;
a; Amortisation of Hoodwill 6,JJJ
b; Depreciation of .ixed Assets $O,JJJ
c; 3oss on ale of .ixed Assets <,&JJ
d; 7ransfer to Heneral 5eser+e $&,JJJ
""( 7he following is the position of current assets and current liabilities :
Particulars 31.3.07
Rs
31.3.08
(Rs.)
#reditors
Debtors
Prepaid Expenses
Bills Payable
$<,JJJ
$',<JJ
<&J
&,JJJ
P,<JJ
$<,JJJ
O&J
O,JJJ
Ans( :5s( $,PG,GJJ;
%( #ompute cash flow from operating acti+ities from the following Profit and 3oss A=c :
Particulars Rs. Particulars Rs.
7o Expenses
7o Depreciation
7o 3oss on ale of Dachine
7o Discount
7o Hoodwill
7o Bet Profit
6,JJ,JJJ
OJ,JJJ
G,JJJ
<JJ
<J,JJJ
$,$&,PJJ
&,$J,JJJ
By Hross Profit
By Hain on ale of .ixed
Assets
G,&J,JJJ
'J,JJJ
&,$J,JJJ
Ans( :5s( $,&J,JJJ;
$J( #ompute cash flow from operating acti+ities from the following data :
Particulars 31.3.07
Rs
31.3.08
(Rs.)
Profit and 3oss A=c
Heneral 5eser+e
Hoodwill
Depreciation
Discount on "ssue of Debenture
undry Debtors
undry #reditors
Bills Payable
$&,%&J
$,<JJ
&,JJJ
G,&JJ
&JJ
G,$JJ
$,&JJ
&,6JJ
6,6JJ
<G,GJJ
$,PJJ
6,JJJ
',6JJ
6&J
<,PJJ
<,$JJ
<,%JJ
<,$JJ
Ans( :5s <',$JJ;
91
$$( 7he following is the position of current assets and current liabilities of M 3td( :
<JJO :5s; <JJP:5s(;
Pro+ision for Bad debts $,JJJ
hort term loans $J,JJJ $%,JJJ
#reditors $&,JJJ $J,JJJ
Bills 5ecei+able <J,JJJ GJ,JJJ
7he company incurred a loss of 5s( G&,JJJ during the year( #alculate cash from
operating acti+ities(
Ans( :5s( '<,JJJ;
$<( 7he following is the position of current assets and current liabilities :
Particulars 2007
Rs
2008
(Rs.)
Profit L 3oss Appropriation A=c
Bills 5ecei+able
Pro+ision for Depreciation
4utstanding 5ent Payable
Prepaid "nsurance
Hoodwill
toc/
<,JJJ
$,GJJ
6,JJJ
$'J
$GJ
<,JJJ
$,GJJ
6,JJJ
$,PJJ
6,<JJ
GPJ
$<J
$,'JJ
$,PJJ
Ans( :5s( $J'J;
$6( #ompute cash flow from operating acti+ities from the following details :
Particulars 2007
Rs
2008
(Rs.)
Profit L 3oss A=c
Debtors
4utstanding 5ent
Hoodwill
Prepaid "nsurance
#reditors
$,$J,JJJ
&J,JJJ
<G,JJJ
PJ,JJJ
P,JJJ
<',JJJ
$,<J,JJJ
'<,JJJ
G<,JJJ
O',JJJ
G,JJJ
6P,JJJ
Ans( :5s( 6',JJJ;
$G( #alculate cash flow from operating acidities during <JJO-JP from the following :
Liabilities 200
7
2008 Assets 200
7
2008
#apital
Debentures
Accumulated Profits
7rade #reditors
&J
'J
6J
'J
<JJ
OJ
GJ
&J
%J
<&J
#ash L Ban/
7rade Debtors
toc/
Hoodwill
Dachinery
6J
GJ
&J
6J
&J
<JJ
GJ
'J
'J
<J
OJ
<&J
Ans( :5s( GJ,JJJ;
92
$&( .rom the following information, calculate cash from operating acti+ities :
Particulars 2007
Rs
2008
(Rs.)
toc/
Debtors
#reditors
Expenses 4utstanding
Bills Payable
Accrued "ncome
Profit L 3oss A=c
',JJJ
<,&JJ
6,<JJ
6&J
6,&JJ
PJJ
P,JJJ
&,JJJ
<,6JJ
<,PJJ
G&J
<,<JJ
%JJ
%,JJJ
Ans( :5s( &JJ;
$'( #alculate cash from operating acti+ities from the following Profit and 3oss account(
P(!"it an) L! Acc!,nt
:for the year ending on 6$(6(JP;
Dr( #r(
(
Particulars Rs. Particulars Rs.
7o alaries
7o 5ent
7o Pro+ision for Bad debts
7o Depreciation
7o 3oss on ale of land
7o Hoodwill written off
7o Proposed di+idend
7o Pro+ision for tax
7o Bet Profit
$,PJJ
$,JJJ
<JJ
GJJ
6JJ
&JJ
OJJ
GJJ
<,&JJ
O,PJJ
By Hross Profit
By Profit on ale of Plant
By "ncome 7ax 5efund
',&JJ
OJJ
'JJ
O,PJJ
Ans( :5s( 6OJJ;
$O( .rom the following information prepare a #ash .low tatement :-
:5s;
4perating #ash Balance $&,JJJ
#losing #ash Balance $%,JJJ
"ncrease in #reditors $6,JJJ
Decrease in Debtors $O,JJJ
.ixed assets purchase 6J,JJJ
5edemption of $<K debentures $G,JJJ
Profit for the year $P,JJJ
Ans( #ash flow from operating in+esting and financing acti+ities > 5s( GPJJJ, 5s( 6J,JJJ 5s(
$G,JJJ;(
93
1E. .rom the following information prepare a #ash .low tatement :-
:5s;
4perating #ash Balance $,JJ,JJJ
#losing #ash Balance $,<J,JJJ
"ncrease in #reditors &J,JJJ
Decrease in Debtors OJ,JJJ
.ixed assets purchase <,JJ,JJJ
5edemption of $<K debentures &,JJ,JJJ
Profit for the year <,JJ,JJJ
Ans( #ash flow from operating in+esting and financing acti+ities > 5s( 6<J,JJJ 5s( <,JJ,JJJ
L 5s( &,JJ,JJJ;(
$%( #alculate #ash .low operating acidities from the following Profit and 3oss A=c for the
year ending on 6$(6(J&:
Liabilities 2007 Particulars 2008
(Rs.)
7o alaries
7o Depreciation
7o 3oss on ale of Plant
7o Hoodwill written off
7o Pro+ision for tax
7o Bet Profit
<,&JJ
<JJ
$JJ
GJJ
$,JJJ
$,$JJ
&,6JJ
By Hross Profit
By Profit on ale of land
By "ncome tax 5efund
G,&JJ
GJJ
GJJ
&,6JJ
Ans( :5s <,JJJ;
<J( .rom the following Balance heets of D=s 5ahman L Bros( 3td( prepare a #ash .low
tatement as per :A-6 :5e+ised; :
Liabilities 2007
(Rs.)
2008
(Rs.)
Assets 2007
(Rs
2008
(Rs.)
E,uity hare
#apital
$&K Preference
hare
#apital
Heneral 5eser+e
Profit L 3oss A=c
#reditors
$,&J,JJJ
O&,JJJ
<J,JJJ
<J,JJJ
6<,&JJ
<,%O,&JJ
<,JJ,JJJ
&J,JJJ
6&,JJJ
<G,JJJ
G%,&JJ
6,&P,&JJ
Hoodwill
Buildings
Plant
Debtors
toc/
#ash
6',JJJ
PJ,JJJ
GJ,JJJ
$,$%,JJJ
$J,JJJ
$<,&JJ
<,%O,&JJ
<J,JJJ
'J,JJJ
$,JJ,JJJ
$,&G,&JJ
$&,JJJ
%,JJJ
6,&P,&JJ
Depreciation charged on Plant was 5s( $J,JJJ and on building was 5s( <J,JJJ(
Ans( :5s( G$,&JJ 5s( OJ,JJJ L 5s( <&,JJJ;
<$( Prepare #ash .low tatement as per A(6 :5e+ised; from the following Balance
heets of <JJO and <JJP(
94
Liabilities 2007
(Rs.)
2008
(Rs.)
Assets 2007
(Rs
2008
(Rs.)
E,uity hare #apital
5eser+e L urplus
Ban/ 3oan
#reditors
Ban/ 4+erdraft
Proposed Di+idend
6J,JJJ
P,&J
J
$J,JJJ
6$,JJJ
Y
G,&JJ
PG,JJJ
GJ,JJJ
$$,JJJ
O,&JJ
6%,JJJ
&JJ
',JJJ
$,JG,JJJ
.ixed Assets
3ess: Accumulated
Depreciation
"n+estments
toc/
Debtors
Ban/
GJ,JJJ
P,JJJ
6<,JJJ
P,JJJ
<J,JJJ
<$,JJJ
6,JJJ
PG,JJJ
'&,JJJ
$6,&JJ
&$,&JJ
$$,JJJ
<<,&JJ
$%,JJJ
Y
$,JG,JJJ
Ans( :5s( $G,&JJ, 5s( <,&JJ, 5s( O,&JJ;
<<( .ollowing are the comparati+e Balance heets of Iashi L Bros( 3td(( for the year
<JJO and <JJP(
Liabilities 31.3.07
(Rs.)
31.3.08
(Rs.)
Assets 31.3.07
(Rs
31.3.08
(Rs.)
hare #apital
$&K Debentures
7rade #reditors
Pro+ision for
doubtful
debts
Profit L 3oss A=c
OJ,JJJ
$<,JJJ
$J,6'J
OJJ
$J,JGJ
$,J6,$JJ
OG,JJJ
',JJJ
$$,PGJ
PJJ
$J,&'J
$,J6,<JJ
#ash
7rade Debtors
:good;
toc/ in trade
3and
Hoodwill
%,JJJ
$G,%JJ
G%,<JJ
<J,JJJ
$J,JJJ
$,J6,$JJ
O,PJJ
$O,OJJ
G<,OJJ
6J,JJJ
&,JJJ
$,J6,<JJ
Ans( :5s( $J,PJJ, 5s $J,JJJ L 5s( <JJJ;
Additional Inforation !
:i; Di+idends were paid totaling 5s( 6,&JJ
:ii; 3and was purchased for 5s( $J,JJJ
:iii; Amount pro+ided for amorti8ation of goodwill 5s &,JJJ
:i+; Debenture loan was repaid 5s ',JJJ
Nou are re,uired to prepare a #ash .low tatement as per A-6 :5e+ised;
<6( 7he Balance heets of DD L ons 3td( as on 6$(6(JO and 6$(6(JP were as follows :
Liabilities 31.3.07
(Rs.)
31.3.08
(Rs.)
Assets 31.3.07
(Rs
31.3.08
(Rs.)
E,uity hare
#apital
Heneral 5eser+e
Profit L 3oss A=c
$&K Debentures
#reditors
%J,JJJ
$J,JJJ
<J,JJJ
Y
6O,GJJ
$,&O,GJJ
$,6J,JJJ
$&,JJJ
6J,JJJ
<J,JJJ
G<,JJJ
<,6O,JJJ
.ixed Assets
toc/
Debtors
Ban/
Preliminary
Expenses
%6,GJJ
<<,JJJ
6',JJJ
G,JJJ
<,JJJ
$,&O,GJJ
$,'',JJJ
<',JJJ
6%,JJJ
&,JJJ
$,JJJ
<,6O,JJJ
Additional Inforation !
95
:i; Depreciation written off on .ixed Assets 5s( <6,GJJ
:ii; Di+idend paid on E,uity hare #apital 5s( <J,JJJ
Prepaid #ash .low tatement as per A-6 :5e+ised;
Ans( :5s( &OJJJ, 5s( %',JJJ L 5s( GJ,JJJ;
<G( .ollowing are the Balance heets of Ali L Bros( 3td(
Liabilities 31.3.07
(Rs.)
31.3.08
(Rs.)
Assets 31.3.07
(Rs
31.3.08
(Rs.)
E,uity hare
#apital
$&K
5edeemable
Preference
hare
#apital
Heneral 5eser+e
Profit L 3oss A=c
C,((ent
Lia7ilitie6
Proposed
Di+idend
undry #reditors
Bills Payable
4utstanding
alary
Pro+ision for 7ax
G,PJ,JJJ
<,'J,JJJ
GP,JJJ
Y
'O,<JJ
OJ,JJJ
$O,<JJ
6%,<JJ
'O,<JJ
$J,GP,PJJ
O,<J,JJJ
$,<J,JJJ
O<,JJJ
'G,PJJ
%6,'JJ
$,JJ,JJJ
<O,<JJ
$G,GJJ
O',PJJ
$<,PP,PJJ
"n+estments
Discount on
"ssue of hares
.actory Buildings
Dachinery
.ixed Deposits
Preliminary
Expenses
C,((ent Aet
undry Debtors
toc/
Ban/
#ash
G<,<JJ
$,<J,JJJ
<,JJ,JJJ
<,$',JJJ
<G,JJJ
<G,JJJ
$,PJ,JJJ
<,JG,JJJ
6J,'JJ
O,JJJ
$J,GP,JJJ
Y
%',JJJ
$,<J,JJJ
G,&P,GJJ
PG,JJJ
$',PJJ
<,&%,<JJ
$,PO,<JJ
&J,JJJ
$O,<JJ
$<,PP,PJJ
Ans( :5s( $,O',JJJ, 5s( $,O%,<JJ L 5s( 6<,PJJ;
Prepare #ash .low tatement as per A-6 :5e+ised;
<&( .ollowing are the Balance heets of hafi L Bros( 3td( as at 6$
st
Darch, <JJP
Liabilities 31.3.07
(Rs.)
31.3.08
(Rs.)
Assets 31.3.07
(Rs
31.3.08
(Rs.)
hare #apital
$&K Debentures
Heneral 5eser+e
Profit L 3oss A=c
Pro+( for "ncome
7ax
#reditors
Bills Payable
Pro+( for doubtful
debts
$,JJ,JJJ
&J,JJJ
<J,JJJ
$$,JJJ
G,JJJ
&,JJJ
<,JJJ
6,JJJ
$,%&,JJJ
$,$J,JJJ
6J,JJJ
<J,JJJ
$%,JJJ
$$,JJJ
G,JJJ
6,JJJ
<,GJJ
$,%%,GJJ
Hoodwill
3and
Dachinery
toc/
Debtors
Preliminary
Expenses
#ash
&,JJJ
G<,JJJ
'J,JJJ
<&,JJJ
6J,JJJ
6,JJJ
6J,JJJ
$,%&,JJJ
G,JJJ
'',JJJ
PJ,JJJ
<$,JJJ
<G,JJJ
<,JJJ
<,GJJ
$,%%,GJJ
Ans( :5s( 6&,%JJ, 5s( &6,&JJ L 5s( $J,JJJ;
Additional Inforation !
96
:i; During the year <JJP, a part of Dachine costing 5s( O,&JJ :Accumulated depreciation
thereon being 5s( <,&JJ; was sold for 5s( 6,JJJ(
:ii; "ncome tax was paid 5s, G,JJJ during <JJP(
:iii; Depreciation on Dachinery for <JJP was pro+ided at 5s( &,JJJ( Prepare #ash .low
tatement as per A-6 :re+ised;
<'( .rom the following Balance heets of D=s Beyamat L Bros( 3td( for two years <JJO
and <JJP, prepare cash .low tatement
Liabilities 31.3.0
7
(Rs.)
31.3.0
8
(Rs.)
Assets 31.3.0
7
(Rs
31.3.0
8
(Rs.)
hare #apital
P L 3 A=c
$&K Debentures
#reditors
6',JJJ
<J,JJJ
Y
%,JJJ
'&,JJJ
6J,JJJ
$G,JJJ
&,JJJ
$$,JJJ
'J,JJJ
Hoodwill
Dachinery
toc/
Debtors
#ash
&,JJJ
<J,JJJ
$P,JJJ
$%,JJJ
6,JJJ
'&,JJJ
',JJJ
<&,JJJ
$<,JJJ
$&,JJJ
<,JJJ
'J,JJJ
Additional Inforation !
:i; A Dachine of the boo/ +alue of 5s ',JJJ was sold for 5s(',&JJ during <JJP(
:ii; Debentures were redeemed for 5s( G,%JJ(
:iii; #ash di+idend of 5s( <,&JJ was paid during <JJP(
:i+; Depreciation on Dachinery was pro+ided 5s( $,JJJ
Ans( :5s( <$JJ, G&JJ L 5s( G%JJ;
&@. .rom the following Balance heets of hahid L Bros( 3td( prepare #ash .low
tatement as per A-6 :5e+ised;
Balance S-eet
Liabilities 31.3.07
(Rs.)
31.3.08
(Rs.)
Assets 31.3.07
(Rs
31.3.08
(Rs.)
hare #apital
$&K Debentures
Heneral 5eser+e
P L 3 A=c
#reditors
Bills Payable
Pro+( for tax
6,JJ,JJJ
$,&J,JJJ
GJ,JJJ
O<,JJJ
&&,JJJ
<J,JJJ
GJ,JJJ
',OO,JJJ
G,JJ,JJJ
$,JJ,JJJ
OJ,JJJ
%P,JJJ
P6,JJJ
$',JJJ
&J,JJJ
P,$O,JJJ
Hoodwill
Buildings
Debtors
#ash
Bills 5ecei+able
toc/
$,$&,JJJ
<,JJ,JJJ
$,'J,JJJ
<&,JJJ
<J,JJJ
$,&O,JJJ
',OO,JJJ
%J,JJJ
$,OJ,JJJ
<,JJ,JJJ
$P,JJJ
6J,JJJ
6,J%,JJJ
P,$O,JJJ
Additional Inforation !
:i; Depreciation on Building is $&K(
:ii; "ncome 7ax paid is 5s( GJ,JJJ(
Bote : Pro+ision for tax is to be treated as a non-current liability(
Ans( :5s( &O,JJJ, 5s B"3 L 5s( &J,JJJ;
97
<P( .ollowing are the comparati+e Balance heets of AB# #o( 3td( for the year <JJO and
<JJP(
Liabilities 31.3.0
7
(Rs.)
31.3.08
(Rs.)
Assets 31.3.0
7
(Rs
31.3.08
(Rs.)
E,uity hare
#apital
$&K Debentures
7rade #reditors
Heneral 5eser+e
Profit L 3oss A=c
G&,JJJ
$J,JJJ
P,OJJ
&,JJJ
$J,JJJ
OP,OJJ
'&,JJJ
<J,JJJ
$$,JJJ
O,&JJ
$&,JJJ
$,$P,&JJ
.ixed Assets
toc/
Debtors
#ash
Preliminary Exp(
G',OJJ
$$,JJJ
$P,JJJ
<,JJJ
$,JJJ
OP,OJJ
P6,JJJ
$6,JJJ
$%,&JJ
<,&JJ
&JJ
$,$P,&JJ
Prepare #ash .low tatement( As per A-6 :re+ised;
Ans( :5s( ',PJJ 5s( 6',&JJ L 5s( 6J,JJJ;
<%( .rom the following Balance heets of Eia-ul-Ca,ue L #o, Prepare #ash .low
tatement as per A-6 :re+ised;
Liabilities 31.3.07
(Rs.)
31.3.08
(Rs.)
Assets 31.3.07
(Rs
31.3.08
(Rs.)
hare #apital
Depreciation
5eser+e
Profit and 3oss A=c
$&K Debentures
#reditors
PJ,JJJ
GJ,JJJ
6J,JJJ
GJ,JJJ
<J,JJJ
<,$J,JJJ
$,JJ,JJJ
G6,JJJ
&J,JJJ
<J,JJJ
$O,JJJ
<,6J,JJJ
Dachinery :at cost;
Debtors
toc/
Preliminary
Expenses
Ban/ Balance
$,<J,JJJ
GJ,JJJ
6J,JJJ
G,JJJ
$',JJJ
<,$J,JJJ
$,GG,JJJ
6&,JJJ
6<,JJJ
6,JJJ
$',JJJ
<,6J,JJJ
Ans( :5s( <G,JJJ, 5s( <G,JJJ, 5s( B"3;
6J( .rom the following Balance heets of Ba/hte Dunaeem #o( 3td(, prepare the #ash
.low tatement( As per A-6 :re+ised;
Liabilities 31.3.07
(Rs.)
31.3.08
(Rs.)
Assets 31.3.07
(Rs
31.3.08
(Rs.)
hare #apital
Depreciation
5eser+e
Profit and 3oss A=c
$6K Debentures
Bills Payable
#reditors
$,<J,JJJ
%,JJJ
',JJJ
6&,JJJ
$&,JJJ
<&,JJJ
<,$J,JJJ
<,JJ,JJJ
%,&JJ
%,JJJ
<J,JJJ
$J,&JJ
&$,JJJ
6,JJ,JJJ
Dachinery :at cost;
Debtors
toc/
Ban/ Balance
Preliminary
Expenses
<J,JJJ
%&,JJJ
6O,JJJ
G6,JJJ
$&,JJJ
<,$J,JJJ
$,<&,JJJ
PJ,JJJ
'<,JJJ
<&,JJJ
P,JJJ
6,JJ,JJJ
Ans( :5s( <<,JJJ, 5s, $,J&,JJJ L 5s('&,JJJ;
98
99