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CHAPTER-1 Introduction to Indian Dairies:

Today, India is 'The Oyster' of the global dairy industry. It offers opportunities galore to entrepreneurs worldwide, who wish to capitalize on one of the world's largest and fastest growing markets for milk and milk products. A bagful of 'pearls' awaits the international dairy processor in India. The Indian dairy industry is rapidly growing, trying to keep pace with the galloping progress around the world. As he expands his overseas operations to India, many profitable options await him. He may transfer technology, sign joint ventures or use India as a sourcing center for regional exports. The liberalization of the Indian economy beckons to MNC's and foreign investors alike. Indias dairy sector is expected to triple its production in the next 10 years in view of expanding potential for export to Europe and the West. Moreover, with WTO regulations expected to come into force in coming years all the developed countries that are among big exporters today would have to withdraw the support and subsidy to their domestic milk products sector. In addition, India today is the lowest cost producer of per liter of milk in the world, at 27 cents, compared with the U.S' 63 cents, and Japans $2.8 dollars. In addition, to take advantage of this lowest cost of milk production and increasing production in the country multinational companies are planning to expand their activities here. Some of these milk producers have already obtained quality standard certificates from the authorities. This will help them in marketing their products in foreign countries in processed form. The urban market for milk products is expected to grow at an accelerated pace of around 33% per annum to around Rs.43, 500 cores by year 2005. This growth is going to come from the greater emphasis on the processed foods sector and by increase in the conversion of milk into milk products. By 2005, the value of Indian dairy produce is expected to be Rs 10, 00,000 million. Presently the market is valued at around Rs7, 00,000mn

1.1. Background
India with 134mn cows and 125mn buffaloes has the largest population of cattle in the world. Total cattle population in the country as on October'00 stood at 313mn. More than fifty percent of the

buffaloes and twenty percent of the cattle in the world are found in India and most of these are milch cows and milch buffaloes. Indian dairy sector contributes the large share in agricultural gross domestic products. Presently there are around 70,000 village dairy cooperatives across the country. The co-operative societies are federated into 170 district milk producers unions, which is turn has 22-state cooperative dairy federation. Milk production gives employment to more than 72mn dairy farmers do. In terms of total production, India is the leading producer of milk in the world followed by USA. The milk production in 1999-00 is estimate at 78mn MT as compared to 74.5mn MT in the previous year. This production is expects to increase to 81mn MT by 2000-01. Of this total produce of 78mn cows' milk constitute 36mn MT while rest is from other cattle. While world milk production declined by 2 per cent in the last three years, according to FAO estimates, Indian production has increased by 4 per cent. The milk production in India accounts for more than 13% of the total world output and 57% of total Asia's production. The top five milkproducing nations in the world are India, USA, Russia, Germany and France. Although milk production has grown at a fast pace during the last three decades (courtesy: Operation Flood), milk yield per animal is very low. The main reasons for the low yield are

Lack of use of scientific practices in mulching Inadequate availability of fodder in all seasons Unavailability of veterinary health services

1.2. The Indian Market - A Pyramid

1.2.1. Consumer Habits and Practices Milk has been an integral part of Indian food for centuries. The per capita availability of milk in India has grown from 172 gm per person per day in 1972 to 182gm in 1992 and 203 gm in 1998-99.This is expected to increase to 212gms for 1999-00. However, a large part of the population cannot afford milk. At this per capita consumption, it is below the world average of 285 gm and even less than 220 gm recommended by the Nutritional Advisory Committee of the Indian Council of Medical Research.

There are regional disparities in production and consumption also. The per capita availability in the north is 278 gm, west 174 gm, south 148 gm and in the east only 93 gm per person per day. This disparity is due to concentration of milk production in some pockets and high cost of transportation. Also the output of the milk in cereal growing areas is much higher than elsewhere, which can be attributed to abundant availability of f odder, crop residues, etc which have a high food value for milch animals. In India about 46 per cent of the total milk produced is consumed in liquid form and 47 per cent is converted into traditional products like cottage butter, ghee, paneer, khoya, curd, malai, etc Only 7 per cent of the milk goes into the production of western products like milk powders, processed butter and processed cheese. The remaining 54% is utilizes for conversion to milk products. Among the milk products manufactured by the organized sector, some of the prominent ones are ghee, butter, cheese, ice creams, milk powders, malted milk food, condensed milk infants foods etc. Of these ghee alone accounts for 85%. It is estimate that around 20% of the total milk produced in the country is consume at producerhousehold level and remaining is marketed through various cooperatives, private dairies and vendors. In addition, cooperatives and other private dairies procure the total produce more than 50%. While for the cooperatives of the total milk procured 60% is consumed in fluid form and rest is used for manufacturing processed value added dairy products for private dairies only 45%.It is marketed in fluid form and rest is processed into value added dairy products like ghee, makhan etc.Still, Several consumers in urban areas prefer to buy loose milk from vendors due to the strong perception that loose milk is fresh. In addition, the current level of processing and packaging capacity limits the availability of packaged milk. The preferred dairy animal in India is buffalo unlike the majority of the world market, which is dominated by cow milk. As high as 98% of milk is, produce in rural India, which caters to 72% of the total population, whereas the urban sector with 28% population consumes 56% of total milk produced. Even in urban India, as high as 83% of the consumed milk comes from the unorganized traditional sector. Presently only 12% of the milk market is represents by packaged and branded pasteurized milk, valued at about Rs. 8,000 cores. Quality of milk sold by unorganized sector however is inconsistent and so is the price across the season in local areas. In addition, these vendors add water and caustic soda, which makes the milk unhygienic. India's dairy market is multi-layered. It is shaped like a pyramid with the base made up of a vast market for low-cost milk. The bulk of the demand for milk is among the poor in urban areas whose 3

individual requirement is small, maybe a glassful for use as whitener for their tea and coffee. Nevertheless, it adds up to a sizable volume - millions of liters per day. In the major cities lies an immense growth potential for the modern sector. Presently, barely 778 out of 3,700 cities and towns are serving by its milk distribution network, dispensing hygienically packed wholesome, quality pasteurized milk. According to one estimate, the packed milk segment would double in the next five years, giving both strength and volume to the modern sector. The narrow tip at the top is a small but affluent market for western type milk products. 1.2.2. Growing Volumes The effective milk market is largely confines to urban areas, inhabited by over 25 per cent of the country's population. An estimated 50 per cent of the total milk produced is consumes here. By the end of the twentieth century, the urban population is expects to increase by more than 100 million to touch 364 million in 2000 a growth of about 40 per cent. The expected rise in urban population would be a boon to Indian dairying. Presently, the organized sector both cooperative and private and the traditional sector cater to this market. The consumer access has become easier with the information revolution. The number of households with TV has increased from 23 million in 1989 to 45 million in 1995. About 34 per cent of these households in urban India have access to satellite television channel. 1.2.3. Potential for further growth Of the three A's of marketing - availability, acceptability and affordability, Indian dairying is already endowed with the first two. People in India love to drink milk. Hence, no efforts are needs to make it acceptable. Its availability is not a limitation either, because of the ample scope for increasing milk production, given the prevailing low yields from dairy cattle. It leaves the third vital marketing factor affordability. How make milk affordable for the large majority with limited purchasing power? That is essence of the challenge. One practical way is to pack milk in small quantities of 250 ml or less in polythene sachets. Already, the glass bottle for retailing milk has given way to single-use sachets, which are more economical. Another viable alternative is to sell small quantities of milk powder in mini-sachets, adequate for two cups of tea or coffee.

1.2.4. Major Players The packaged milk segment is dominates by the dairy cooperatives. Gujarat Co-operative Milk Marketing Federation (GCMMF) is the largest player. All other local dairy cooperatives have their local brands (For e.g. Gokul, Warana in Maharashtra, Saras in Rajasthan, Verka in Punjab, Vijaya in Andhra Pradesh, Aavin in Tamil Nadu, etc). Other private players include J K Dairy, Heritage Foods, Indiana Dairy, Dairy Specialties, etc. Amrut Industries, once a leading player in the sector has turned bankrupt and is facing liquidation. 1.2.5. Future Prospects India is the world's highest milk producer and all set to become the world's largest food factory. In celebration, Indian Dairy sector is now ready to invite NRIs and Foreign investors to find this country a place for the mammoth investment projects. Be it investors, researchers, entrepreneurs, or the merely curious Indian Dairy sector has something for everyone. Milk production is relatively efficient way of converting vegetable material into animal food. Dairy cows buffalos goats and sheep can eat fodder and crop by products, which are not eaten by humans. Yet the loss of nutrients energy and equipment required in milk handling inevitably make milk comparatively expensive food. In addition, if dairying is to play its part in rural development policies, the price to milk producers has to be remunerative. In a situation of increased international prices, low availabilities of food aid and foreign exchange constraints, large-scale subsidization of milk conception will be difficult in the majority of developing countries. Hence in the foreseeable future, in most of developing countries milk and milk products will not play the same roll in nutrition as in the affluent societies of developed countries. Effective demand will come mainly from middle and high-income consumers in urban areas. There are ways to mitigate the effects of unequal distribution of incomes. In Cuba where the Government attaches high priority to milk in its food and nutrition policy, all pre-school children receive a daily ration of almost a liter of milk fat the reduced price. Cheap milk and milk products are made available to certain other vulnerable groups, by milk products outside the rationing system are sold price, which is well above the cost level. Until recently, most fresh milk in the big cities of China was a reserved for infants and hospitals, but with the increase in supply, rationing has been relaxed. 5

In other countries, dairy industries have attempted to reach lower income consumers by variation of compositional quality or packaging and distribution methods or blending milk in vegetable ingredients in formula foods for vulnerable groups. For instance, pricing of products rich in butterfat or in more luxury packaging above cost level so as to enable sales of high protein milk products at a somewhat a reduced price has been widely practiced in developing countries. This policies need to be brought in Indian Dairy scenario.



The Feeder Balancing Dairy Jodhpur is located on the out skirts of Jodhpur city in Heavy Industrial Area. A uniform piece of 25 acres of land has got road on its front side two sides of this piece of land are free and at the back long way away is Central Arid Zone. Paschimi Rajasthan Dugadh Utpadak Sahakari Sangh, (Jodhpur PRDUSS) was established in the year 1972, under the Operation Flood Programmed finds from D.P.A.P. were utilized for the construction of plant at Jodhpur, and later on the established various chilling centers. Initially five districts of Jodhpur, Pali, Jaislmer, Barmer and Nagore were included under PRDUSS. However, Pali was hived off later and was made into an independent union.

Under Jodhpur Union, the production of milk is one lack per day while consumption of milk is 73 thousand liters per day. The excess of milk (60 thousand liters) is send to the central dairy Delhi and Gujarat. At present 485 co-operative societies and 347-milk collection canter are functioning where average production of milk is one lack thirty three thousand liters coming in Jodhpur dairy through 53,198 milk productions. Through increase milk, production can fight with famine. Main district of Marwar faces with famine in every year but through increase in milk production, they do earn money and get relief from famine. There is only source of earning money is selling of milk to DCS. They get payment in cash or bank account after days.

According to dairy officers whenever falling famine in western Rajasthan, in dairy collection of mill increase. During the famine in Barmer and Jaislmer district, the collection of milk is increase 45,000 liter. In the last year, December the total collection of milk was 72,000 liter while this year it is reached one, 17000 liter. Dairy provides animal food at cheap rate for maximum production of milk. In Barmer and Jaislmer village almost 24 bulk cooler through this the problem of farmer is eliminate. Whenever dairy vehicles reach late, milk keep in these bulk cooler. In the year November 2005 after setup new milk centre at Bilara, the collection of milk was between 30 to 40 thousand liters.

2.1. Milk Union Profile & Organizational Detail








SANGH LTD., JODHPUR, 35-HEAVY INDUSTRIAL AREA, Phone-- 0291-2742504, 2741913 2. 3. 4. Nature of organization & Registration Board Objective Fax0291-2741715 Cooperative-Registered under Cooperative societies Act, 1965, 1203 Q Dated: 12-07-1972 Elected Board to improve the Social & Financial Status of Milk Producers To organizing Dairy Cooperative Societies & Procure Marketable Surplus, milk. To provide remunerative price to milk producers at their doorsteps To undertake milk production enhancement activities by promoting breeding/feeding & hygienic milk production practices To undertake training & awareness programmers against milk produces. Marketing of quality processed milk & milk precuts to the consumers. Development of co-operative milk procurement system in the rural areas covered under the milk collection routes of the scheme in order to provide raw milk a channel, which is more remunerative than the tradition channel of conversion of surplus milk into un-economic ghee. 5. 6. Infrastructure available Establishment of milk processing-cum-manufacturing plant for supplying pasteurized milk primarily to Jodhpur City. Milk Shed Covers Two districts viz. Jodhpur and Jaislmer One Lac liter per day to Organization Quantity of milk handled at present in Liters per day

2.2. Three Tier Structure

The dairy co-operative movement operates on three-tier system wherein farmer members own dairy co-operative societies (DCS) which own district milk producers union. The unions collectively own the RCDF. A vertically integrated structure establishes a direct linkage between those who produce the milk and those who consume it. Federation- Provides service & support to unions. Marketing within & outside state, liaison with government and NGO agencies, mobilization of resources & coordinating & planning programmers projects Union- Develops village milk cooperative network, procures milk from DCS, processes & markets. Sale of cattle feed relates inputs, promotion of cross breeding through AI and NS, promotion of fodder development and general support & supervision to DCS. DCS- Provides input services (AH, AI) to its members and procurement of milk.

2.3. A View on all Dairy Plant of Rajasthan

Total number of plants in state is 16. Total milk collections by all plants are almost 11, 50,000 liter. Per day, the details of districts plant wise are as below: Dairy Plant Ajmer Kota Jodhpur Alwar Banswara Bharatpur Jalor/Sirohi Jodhpur Pali Sikar Tonk Udaipur Bhilwara Bikaner Churu Sriganganagar Procurement Rate (Rs/Kg Fat) 214(Highest) 200 122 205 204 193 182 198 184 199 197 213 207 203 191 206 Milk Transportation Exps. (Rs.) 0.57 1.66(Highest) 0.32 0.55 0.97 0.58 1.00 0.70 0.59 0.75 0.91 0.69 0.74 0.63 0.77 0.83 Average Milk Collection of per day 74000 22000 400000 (Maximum) 97000 8000 (Minimum) 9000 19000 74000 35000 26000 15000 46000 100000 90000 17000 100000

In state this year, the total production of milk has been 40 percent compared to last year production. Last year until December total collection of milk was only 13-lack liter while this year collection of milk is 18 lacks 56 thousand liter.15 December 2009 only in Jodhpur dairy the 9

collection of milk was, five lack 90 thousand in which three lacks 56 thousand liter supplied in city and remaining milk send to its mother dairy.

2.4. Main products of Jodhpur Dairy: Fresh Milk TONED STANDARD FULL CREAM SKIMMED COW MILK





Organizing is the structure framework of duties and responsibilities required of personal in performing various within the company; it is essentially a blueprint for action resulting in a mechanism for carrying out function to achieve the goals setup by the company. An organization structure shows the authority and responsibility relationship between various position in the organization and clarifies who reports to whom. It is a set of planned relationship between groups of related functions and between physical factors. In addition, personnel required for the achievement of organizational goals. The organizational structured is generally shown on organization chart. It represent authority

relationship between various position in the organization by showing who reports to who me. It is a 11

set of planned relationships between groups of related junctions and between physical factors and personnel required for the achievement of organizational goals. An organizational chart is a diagrammatical form, which shows important aspects of an organization including the major function and their respective relationship. It is graphic portrayal of position in the enterprise and of the formal line of accountability among them. It provides a bird eye-view of the relationship between different departments or division of an enterprise as well as the relationship between the executives and the subordinates at various levels. An organization cannot work cutting a detents structure. The first step in designing the structure of an organization is to insetting and group the activities involved, whichs expressed as departmeantation because of the intimate connection between the felonry over time and cost accounts it is necessary into which the factories are usually divided the manner in which they are linked and way in which they are managed. In Paschimi Rajasthan Dugdh Utpadak Sahakari Sangh Ltd. The managing Director (M.D.) is the key person of the company he gives all the information to direction of tech, Darnel of administration and directors of works. Purchases Officer: - Purchase officer is in- charge of purchase section that is assists by two assistants. They collect information regarding price movement in different markets for each important market they have appointed a buying agent who is authorize in advance to intake the purchase as and whos profited and supply regularly profitable and to supply regularly to the factor on the prevailing terms Sales manager: - Sales manager are lineage of sales section of marketing and discharge his duties with the help other assistant sales manager, two salespersons. They work to pass the finished products in the markets. Store In-Charge- :- Stores in charge gives the information to purchase and sales section as regards to how man quantity of raw material (raw milk) is lying in balance in stores and how many quantities of finished goods (milk & milk products) are in stores. Personnel Manager: - He is the in charge of personnel department, who is maintaining the records about costing, financial, and also assets and liabilities. Account officer: - Accounts officer is the head of the account department, who is maintain the records about costing financial, assets, and liabilities.


2.6. Departments of Saras Dairy (PRDUSS Ltd., Jodhpur)

2.6.1. Marketing Department According to Peter Duckers, The aim of marketing is to make selling superfluous. Marketing department is one the most important department in every organization. The marketing activities of the organization include providing support to the milk unions within and outside the state. The marketing department conducts various surveys to know the needs and expectations of the customers. . Various sales promotion techniques are used by marketing department to increase the sale of Saras products as if It mainly includes the management related with:A.) Sales and Marketing B.) Advertisement Hoardings Glow sign board Gift hampers Banners1 Advertisement through local cable Wall paintings

C.) Cost Fixation D.) Distribution of Product It also cares: E.) Production and distribution based on consumer needs F.) Transportation Management G.) Import Export management H.) Packaging I.) Sales Expansion etc J.) Incentive schemes to dealers 13

K.) Consultancy and hiring of marketing agency

2.6.2. Human Resource Department Human resource is the most valuable asset for any organization. A human resource manager is responsible to build up an effective workforce, handle the expectations of the employees and make sure that they perform at their best. In management, human resource management deals with people. Each, Every organization consists of people and an organization has to utilize their services, develop their skills, motivate them, and make sure that they remain committed towards the organization to achieve the goals of the organization. The human resource department manages the personnel serving the organization. The Human Resource Department performs the following functions: Creation of the post and appointments Verification of character and antecedents Pay of appointment Commencement of service Probation of appointments Certificate of health Privilege leave on retirement and encashment Postponement of retirement pending disciplinary a Appointment of experts Scale of pay

2.6.3. Operations Department The installed capacity of Jodhpur Dairy was 1.5 LLPD. The dairy plant was commissioned in the year 1981 under of one with the multiple increase in marketing of milk and milk products and in milk procurement, the capacity of the plant was increased 2.5 Lakh Lt. per day in 1998-99 with internal human and financial resources. The production facilities are available and maintained in most hygienic manner as per laid down procedures of quality management system. Considering 14

the growth in procurement and marketing, Jodhpur dairy had prepared an initiated expansion plan for expanding the capacity to five-lakh liter. Per day, with the help of NDDB Jodhpur dairy also has aseptic packing station, which is a state of Art Technology and of very few in the country. The plant has well maintained until date by our own technical staff. This fat has been well accepted and acknowledged at recently held milk seminar at Goa, when Jodhpur dairy awarded for Best machine Utilization. Jodhpur dairy has always stood to its commitment of fulfilling the demand of Indian forces posted at front in the hour of need. The condition of production facilities and production environment is been maintained in perfect conditions until date. This has resulted in 0ther sister organization like MP federation and Mother Dairy to enter in to time agreement with Jodhpur Dairy for manufacturing the products under their respective brand names. 2.6.4. Finance Department Financial Management is defined as making available the required funds at an acceptable cost and making sure that the funds are suitably invested according to the plan. The Finance Manager of the organization performs this task. 2.6.5. Services Quality Jodhpur Dairy has got a sophisticated quality control tests related with milk and milk products. The QC lab also carries quality tests for various packaging material, ingredients, and chemicals used in Jodhpur Dairy. Our consumer awareness programs like Dudh Ka Dudh pani ka pani. We also have facility for public for getting their milk/ghee samples tested in our QC lab free of cost. EngineeringThe lifeline of Jodhpur Dairy i.e. steam, water and refrigeration is provides and maintained by the Engineering section. Apart from this, this section does regular maintenance both preventive and corrective, only considering the perishable nature of milk; the engineering section has to be on its toes always.



Research methodology is a systematically solve the research problem. It has many dimensions and research methods constitute a part of the research methodology. Thus, when we talk about research methodology, we do not only talk of research methods but also consider the logic behind the methods. We use in context of our research study, so that research results are capable of being evaluated by researcher himself or by others To effectively carry out my research, I used following research process, which consists of series of actions or steps. Research comprises of following steps:-

1. Formulating the research problem:

This is the first step under which the problem is stated in general way and then ambiguities i.e. understanding and rephrasing the problem thoroughly and rephrasing the same into a meaningful terms from an analysis point of view. The research problem under the present project was to study data of various funds. For this research, process has to formulate and the execution of which would result in the desired data. 2. Preparing The Research Design: The function of research design is to provide data for the collection of relevant evidences with minimum expenditure of efforts, time and money. 3. Observation Design (Collection Of Data) : Observational design relates to the condition under which the observations are to be made. Observational design is respect to descriptive research study. Data collection is an integral part of marketing research. There are several ways of collecting the appropriate data, which differ considerable in context of money, time cost and other resources at the disposal of the researcher. 16

4. Data can be obtained from two important sources: Primary data Secondary data Primary Data Primary data is collected a fresh and for the first time. Thus happens to be in character. Primary data should collected by various methods i.e. 1. Observation 2. Interview 3. Schedules 4. Questionnaires Secondary Data Secondary data are the data that are already collected and are only analyzed by different sources these sources are as follows 1. Corporate magazine 2. Manuals of various companies Books, journals, newspaper 3. Employment exchange The secondary data would collected from financial statement, journal of national repute, books of national and international author as well as the annual report of the company. In addition to this internet, access will make the study more effective and meaningful.


Title of the StudyFinancial Statement Analysis of Saras Dairy


Duration of the ProjectThe duration for the project was 45 days, which was begin from 22nd of June to 7 August 2010. 17

3.3 Objective of the StudyConceptualTo prepare a report after analysis and interpretation of finding from Balance sheet as well profit and loss account through applying various mathematical and financial tool and techniques. Functional The present earning capacity or profitability of the Jodhpur Dairy Ltd The operational efficiency of Jodhpur Dairy Ltd The short-term and long-term solvency The financial stability of a business The possibility of development in the future by making forecast and preparing budget The main aim if study is to analyze the financial performance of Jodhpur Dairy more especially the following are the objectives of the present study. To give the growth and working of dairy industry To present the theoretical framework of working capital management in addition, the application To review the growth and working of dairy during the last 6 years i.e. from 2001 to 2007 To find the present day problems of dairy industry in India To evaluate the working capital management of JODHPUR Dairy Finally to suggest the measure for more effective financial management of the firm if any To give conclusion and meaningful suggestion to strengthen dairy Industry in general and Jodhpur Dairy in particular


Type of ResearchAnalytical Analytical research is type of research, which has to use facts or information already available, and analyze these to make a critical evaluation of the material.


Sample Size and method of selecting sample18

N/A 3.6.

Scope of the Study:

The need of started financial statement analysis has become greater in recent year proper working capital management is of special repentance in an organization of service oriental nature. Working capital is the capital that allows business to operate a day to- day business. Decision on working capital, therefore is the management of current assets and current liabilities of the company, decision like economic situation Government policies, industrial policies, Fiscal Policies, and availabilities of in visible funds etc Industries are of large scale and small scale depending of the investments input on it. Therefore, careful pre-planning is required for the proper establishment of these industries, which require huge funds, and in of their funds a study on it gives an idea about the working progress of the organization. Working capital can be required for day-to-day operations of the firm; in short, we can say that working capital is that necessity of any organization. The scope of the present study extends to analogues the working capital operations carrying out by the Jodhpur Dairy. In the next step, attempts have made to highlight the present scenario of the dairy industry in the India market in particular. The study also covers various components of working capital management like invertors cash and accounts receivables management of Jodhpur Dairy.

3.6.1 Financial Statement Analysis

Accounting process involves recording, classifying, and summarizing various business

transactions. Financial statements are the result of summarizing process. Their purpose is to determine the profitability of the firm from operations and to know about the financial position. Thus, financial statements contain systematically collection-summarized information about a firms operating results and financial strength and are means to communicate the information to various users. These financial statements are prepared from the accounting records maintained by the firm


and the generally accepted accounting principles and procedures are followed in preparing these statements. Meaning of Financial Statement Financial statements are the products of the financial process. These statements are nothing but the presentation of financial information about the firm in concise and capsule form. The financial information is that information which relates to the financial position at a moment in time and the results of a series of activities over a period. Thus, financial statements refer to the statements that show the financial position. Financial or annual report and result of business activities at the end of the Accounting period These statements reveal the gross and net profits of the business carried on during a certain period ad the financial position at the end of that period. Financial statements form part of the process of financial reporting a complete set of financial statements normally includes a balance sheet, a statement of profit and loss (also known as income statement), a cash flow statement and those notes and other statements and explanatory material that are an integral part of the financial statements. They may also include supplementary schedules and information based on or derived from, and expected to be real with such statements. Such schedules and supplementary information may deal, for example, with financial information about business and geographical segments, and disclosures about the effects of changing prices. Financial statements do not; include such items as reports by directors, statements by the chairperson, discussion, and analysis by management and similar items that may be included in financial or annual report. Objectives of Financial Statements Financial statements serve as horoscopes of a business as they enable readers to measure financial position of a concern. Such statements contain sufficient valuable information about various aspects of business that can be useful for business decisions. As stated by the Accounting Standards Board of India that, the objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. summarized below: 1. To provide financial data on economic resources and Obligations of a concern 20 The various objectives of such statements ware

2. To reveal implications of operating profit on the financial Position of a concern 3. To provide sufficient and relevant information to various Parties interested in financial statements 4. To present true and fair view 5. To serve as the basis of future operations Balance Sheet Balance sheet is one of the most significant financial statements of business firm. It is generally known by various titles such as; (1) economic or general balance sheet; (2) statement of financial position; (3) statement of assets and liabilities; (4) statement of resources and liabilities; (5) statement of assets, liabilities and owners funds etc. A balance sheet contains information about the assets, liabilities and owners interest in the business at a particular point of time. For example, a balance sheet of a firm prepared as on 31st, March 2009 reveals the firms financial position on this specific date. Thus, the balance sheet is a statement of financial position of a business firm as on a specific data, which reports assets, liabilities, capital, reserves and the balances of other accounts at their respective book values. At the end of the accounting year, after transferring all the revenue accounts to Trading, Profit & Loss Account, the balance of remaining account are shows in it. Out of these accounts, the debit balance of various assets such as land, building, investments, inventory, cash at bank, cash in hand, sundry debtors etc. are shown on the right side of the balance sheet, whereas claims against these assets i.e. liabilities and owners equity such as secured and unsecured loans, sundry creditors, capital reserve funds etc., which have credit balances, are shown in the left side of the balance sheet. Thus, the liabilities and owners fund are shows on the left side and various assets on the right side of the balance sheet. This makes the total of the both side equal. That is why the statement of assets, liabilities and owners equities generally known as balance sheet. In other words, a balance sheet is a screen picture of the financial position of a going concern at a certain moment Form of Balance Sheet Balance sheet is a statement of financial position; therefore, it contains assets, liabilities and owners equity. Balance sheet either can be prepared in horizontal/account from or in vertical/report from.Publised financial statement are prepared usually in account from as per 21

schedule 6 of Companies Act, 1956. The balance sheet has two sides. In right side, various assets are listed and on left side, liabilities and owners equities are shown in order of permanency. Previous years figures along with current year figures age also depicted. A specimen balance sheet in the account form is given be:


Balance sheet of Jodhpur Saras Dairy As on 31st March Liabilities Rs. ASSETS Rs.

Share Capital: Authorized, Issued Subscribed and Paid up----Shares of Rs each fully paid Reserve and surplus: Capital Reserve General Reserve Loans and Borrowings: Secured Loans Debentures Mortgage Loan Unsecured Loans Public Deposits Current Liabilities and Provision: I. Current LiabilitiesCreditors Bills Payable Customer Advances Taxation Proposed dividend Unclaimed Dividend II. Provisions

Fixed Assets: Land, Building, plant and machinery (-) Depreciation Investments (at Cost) Current Assets: Loans and Advances Stock Bills Receivable Debtors Advance Deposits etc. Cash and Bank Miscellaneous Expenditure

The above balance sheet in horizontal or account form is not much useful from analysis point of view. Therefore, the balance sheet is presented in vertical or report form. In the report form, stepwise balance sheet is prepared listing assets at the top followed by liabilities and owners equity. A specimen of such balance sheet is given below.


Balance sheet of Jodhpur Saras Dairy As on 31st march Particular Fixed Assets: Land, Building, Machinery, Plant etc. (-) Deprecations Investment (at cost) Current assets: Stock Bill Receivables Debtor Advance, Deposit etc Cash, Bank (-) Current liabilities & provision: Creditor Bills Payable Customer Advance Unclaimed dividend Taxation Net Current Assets (CA-CL) TOTAL CAPITAL EMPLOYED: Financed By: Share capital Reserve & Surplus Shareholders Equity : Loan Funds Secured Loans Unsecured Loans Total obligations Rs. Rs.

24 Classification of Balance Sheet Items A clear and correct understanding of the classification of balance sheet items, their meaning which they signify and the account which they represent, are very essential for the meaningful interpretation of financial statements. As per companies act, 1956, all the items of balance sheet are divided in two parts, Assets and liabilities. Again, assets have been put into (1) fixed assets, (2) investment, (3) current assets, loans and advances, (4) miscellaneous or deferred expenditures. Similarly, liabilities have classified in (1) share capital, (2) reserve and surplus, (3) secured loans, (4) unsecured loans and (5) current liabilities and provisions. However, this classification is not suitable for analysis. Therefore, for the purpose of analysis and interpretation, the various items of balance sheet should classify as follows, on the presumption that total value of assets is equal to the total liabilities and owners equity. 1) Assets A. Fixed Assets B. Current Assets C. Investments D. Miscellaneous or Deferred E. Expenditures 2. Liabilities Long-term Liabilities Current Liabilities 3. Equity or Net Worth Share Capital Reserves and Surplus Assets: Assets have been defined as a tangible objects or intangible rights owned by an enterprise and carrying future economic benefits. The future economic benefits embodied in an asset may flow to the enterprise in a number of ways. For example, an asset may be (a) used single or in combination with other assets in the production of goods or services to be sold by the enterprise, 25

(b) exchanged for other assets; (c) used to settle a liability; (d) distributed to the owners of the enterprise. These assets represent (a) purchasing power (cash); (b) money claims (receivables, stock etc.) and (c) tangible and intangible items the can be sold or used in business to generate income. All the assets in the balance sheet are listed either in order of liquidity or permanency. These assets grouped in different categories because of similar characteristics. From analysis point of view, the assets can classify in the following groups:

1. Fixed AssetsFixed assets are those assets, which are acquired for using them in the conduct of business operations and not for reselling to earn profits. In other words, fixed assets are assets of a relatively permanent nature used in the conduct of business operations and not intended for sale. These are the long-term assets held for periods longer than accounting period and known as block or Capital assets, fixed assets may be either tangible or intangible. Tangible fixed assets are those fixed assets, which have physical existence and generate goods and services. These include, land, building, plant and machinery, furniture and fixtures, trucks etc. These assets are normally, recorded at cost and this cost is allocated over their useful lives. The amount so allocated each year is called depreciation and tangible assets are reduced every year by the amount of depreciation. Intangible fixed assets are those fixed assets, which have neither physical existence nor can be seen but can be imagined. They do not represent any physical asset in the form of documents of title like bills receivable and promissory notes. They cannot be seen or touched because they are invisible. The intangible assets confer certain exclusive rights and facilities so that one firm is in a position to earn more profits earning ability of the firm. These assets include; (1) goodwill (2) patent and trade mark, (3) copyright, (4) license and franchise, brands, intellectual capital etc. Goodwill represents the excessive earning power of a firm: Patents: confer exclusive right to use an invention; trademarks represent exclusive right to use certain names, symbols, labels, designs etc.; copyright relates to production and sale of literary, musical or artistic works; franchise or license represents contracts giving exclusive right to perform certain functions or to sell certain services or products.

2. Current Assets-


Current assets are those assets, which are reasonably expected and be realized in cash, sold, or consumed during the normal operating cycle of the business. The operating cycle is the period, which is taken to complete the sequence of events right from purchase of materials or goods for cash to the realization of sales in cash, and normally it is of one year. The current assets are acquired for reselling or be converted into cash during the course of business. These are also known as short-term assets. These current assets include (1) cash in hand and at bank; (2) bills receivable; (3) sundry debtors,(4) inventory raw material, work-in-progress, finished goods; (5) marketable securities, temporary or short-term investments, (6) advance payments; (7) prepaid expensed, accrued incomes etc.

3. Quick or Liquid AssetsThose assets, which can converted into cash quickly. These are also known as, near cash assets. Cash and bank balances are the liquid assets but debtors, cash advances and marketable securities can convert into cash at short notice. Hence, they are also known as, quick assets. Inventory and prepaid expenses do not include in this category because these cannot converted into cash quickly. Therefore, when inventory and prepaid expenses deducted from current assets, the balance will represent quick or liquid assets.

4. Investments: The investments of a firm in shares, debentures and bonds of other firms or government bodies for profit or control are known as investments. The investments are purchase for long-term to hold at least for more than the accounting period. The long- term investments are show at their original cost, but the current market price is usually given in parenthesis. Trade investments mean investment by a company in share and debentures of another company for promoting the trade or business of the first company. Trade investments are long-term investments. For balance sheet purpose, the investment can classify into: (1) long-term investment and (2) marketable securities. Long- term investments are those investments, which satisfy any of following conditions: They do not meet the test of ready marketability. They required being hold by the nature and conditions of the business. For example, export house is required to subscribe to the shares of the concerned Export Promotion Council They may be made in order to promote and float a new Company 27

They are made to develop operating relationship with other Companies. For example, an automobile company may Investment in the shares of a manufacturing company.

Marketable securities are those investments that are acquired by the company by employing surplus funds or cash temporarily. These investments can be disposed off by the company at its free will and thus convert it into cash as and when need arises. Therefore, these investments are considered as cash, and are often called secondary cash resources and shown under the head current assets. Note: The interest accrued on investment should be shown under the heading current assets and not under this head.

5. Miscellaneous AssetsAll other assets, which cannot be included in any above categories, are grouped as other assets. Usually, they represent deferred expenditures, which represent, pre-payments for service and benefits for period longer than the accounting period. These include: (1) preliminary expenses; (2) discount or underwriting commission on issue of shares and debentures; (3) advertising expenditure; (4) debit balance of profit and loss account. These expenditures contribute income or benefit in future years. These are written of gradually over several years of operations, treating each years share in such expenditures as a charge against profit for the year. There are also called fictitious assets which can not be realized and not convertible into cash.

Liabilities nay are defined as the claims of outsiders against the firm. In other words, it is that amount for which the off owns to outside i.e. other than owners. Generally, liabilities are created for financing the assets form different sources. The firm can borrow money on long-term basis from financial institutions, banks and public through issue of debentures, bonds or mortgages. The short-term borrowings may be in the form of purchase of goods and services on credit. The outside sources from which a firm borrows are known as liabilities. Since, these sources finance the assets; they are in a sense claims against the assets. Because of periodicity of the funds, the liabilities can be grouped into: (1) current Liabilities; and (2) long-term liabilities as explained below: 1) Long-term Liabilities28

Long term liabilities, sometimes also called fixed liabilities, can be defined as, a liability falling due on a date later than the expiration of one completely accounting period. Such liabilities are of two types secured and unsecured based on charge on assets of the firm. A few examples of such liabilities are: (1) debentures or bonds, (2) mortgages, loans (3) long-term loans from banks or financial institutions.

2) Current LiabilitiesCurrent liabilities, from the viewpoint of an analyst are all short- term obligations generally due and payable within a year or an operating cycle. These include those parts of the long- term obligations whose liquidation is expected within one year of the balance sheet date. Such liabilities arise due to day-to-day transactions. Generally, payment of these liabilities is made either out of current assets converted into cash or by creating news current liabilities. These are also known as shortterm liabilities. The examples of current liabilities are: (1) trade Creditors, (2) bills payable, (3) dividend and tax payable, (4) bank Overdraft, (5) outstanding expenses and deferred income etc.

3) Owners EquityIn case of a company, the owners of a business are known as shareholders. Owners equity means the financial interests or claims of owners of the business against the assets of the firm. Alternatively, owners equity may be defined as the residual interest in the assets of the enterprise after deducting all its liabilities. It is also called Net Worth, Shareholders Funds, or Net Capital Employed Thus, the owners interest is residual in nature reflecting the excess of the firms assets over its liabilities, current as well as long-term. This amount is not always static, but changes with the change in the assets of the company. Shareholders or owners equity consists of two elements: (1) Capital and (2) reserves and surplus or retained earnings: 1. Paid-up share Capital: It is initial amount of funds contributed by shareholders. It includes both equity share capital and preference share capital. If shareholders pay more than per value of shares, the excess amount is shown separately as securities premium. 2. Reserves and Surplus: It represents retained earnings. It means that part of the profits belonging to the shareholders, which not paid out to them as divided, but retained or ploughed 29

back in the business. It includes: (1) revenue reserves; (2) capital reserves and surplus or undistributed profits, which are available for distribution as, divided. Relationship between Assets, Liabilities and Owners Equity: From the foregoing description, it is clear that assets are resources of the firm, which are acquired from the funds provided by outsiders (liabilities) and owners or shareholders (owners equity) of the firm. Alternatively, assets represent outsiders and owners investments. This relationship can express in the following account equations. Assets = Liabilities + Owners Equity or Liabilities = Assets Owners Equity or Owners Equity or Net Assets= Assets Liabilities From the above equations, it is clear that owners equity represents the remaining assets of the firm after meeting the outsiders claims (liabilities). Remaining assets are the net assets representing the difference between total assets and total liabilities. Thus, owners equity is he claims against the firms assets, which can be computed by ascertaining net assets. The two values i.e. owners equity and net assets are equal. Therefore, any change in net assets due to change in total assets and liabilities will produce a change in owners equity. Profit And Loss Account or Income Statement: The balance sheet, as discussed above, indicates firms financial position at a specific date. Hence, bankers and lenders consider it as a very significant statement. However, it fails to indicate whether a firm is making or losing money. Therefore, creditors and financial analysts have recently started paying more attention to the earning capacity of the firm as a measure of financial strength. The earning capacity of the firm is reflected by profit and loss account or income statement. According to ICAI, The profit and loss account is a financial statement which presents revenues and expenses of an enterprise for an accounting period and shows the excess of revenues over expenses (or vice-versa). In this account, revenues of an accounting period are matched with the expenses incurred in earning the revenues and the difference between revenues and expenses is treated as profit or loss. Thus, profit and loss account depicts the summary of revenues, expenses and net profit or loss of a business entity for a certain period. It serves as a measure of the firms 30

profitability. Various know the profit and loss account, like balance sheet names, such as income statement, statement of revenues and expenses, statement of income and earned surplus; operating statements etc.

31 Functions of Income Statement: Profit and loss account or income statement reveals the flow of revenues and expenses during a period. It also reveals the changes occurred in the balance sheet from the end of one period to the end of another period. The important functions of the profit and loss account are as follows: Accumulation of Data: Profit and loss account shows all items of revenues, expenses and

net profit of a firm for a period in a concise farm. Thus, it accumulates economic data. Measurement of Net Income: It measures the net income of or profitability of the firm is reflected by profit and loss account. Communication: It communicates information regarding the Operating results of the firm to the owners and other parties Account Interested in the firm. Form and Contents of Profit and Loss the firm by matching revenues

and expenses according to generally accepted accounting principles. Thus, earning capacity Form and Contents of Profit and Loss Account The profit and loss account is prepared in different forms due to diversity in the nature of industry and business interests. In case of proprietary and partnership firms, there is no prescribed form of profit and loss account. Even for companies, the Indian Companies Act, 1956 has not prescribed any legal Performa for profit and loss account as it has prescribed for balance sheet. Generally, profit and loss account is prepared in account form, which is divided into two parts: (1) profit and loss account, and (2) Profit and loss Appropriation Account. Such a Profit and Loss Account is not useful from analysis point of view. Therefore, the profit and loss account should be prepared in such Performa where the items of revenues and expenses of the firm could be shown classified under appropriate heads. This will prove most useful to the management in analyzing the result. Nowadays, several firms do not prepare profit and loss account in account form, but an income statement is prepared in two ways for the purpose of analysis as: (1) Single-step Income Statement and (2) Multi-step Income Statement. Single-step Income Statement:


In single-step income statement, items of revenues are recorded first and than the items of expenses are shown. The total of expense items deducted from the total of revenue items to arrive at the net profit or net loss. A specimen of such Performa is given below: JODHPUR SARAS DAIRY Income Statement For the year ended 31st March, Particulars Revenue: Sale Less Return Other Income Other Revenue Cost & Expenses: Cost Of Sales General And Administration Expenses Selling Expenses Depreciation Interest Non-Operating Expenses Provision For Tax Total Cost And Expenses Net Profit (After Tax) Proposed Dividend Income Retained In Business Total Amount

Multi-step Income Statement: Multi-step income statement provides much more useful and detailed information considering each item of revenues and expenses systematic. In this form of income statement, a distinction is made between operating revenue and non-operating revenue. Items of operating revenue (sales less return) and cost of goods sold are considers first, that gives gross profit or gross margin. Second, all operating expenses are deduces from gross profit to arrive at operating profit. After this, nonoperating incomes are added and non-operating expenses deducted to arrive at net profit before tax. Lastly, provision for tax deducted from the net profit and net profit after tax is calculated. This 33

type of income statement is very useful for the purpose of analysis and interpretation. A specimen of such income statement is given below:

JODHPUR SARAS DAIRY Income Statement For the year ended 31st March, Sales Revenue (net) Less: Cost of Goods Sold Gross Profit Less: operating Expenses General and Administrative Expenses Selling Expenses Depreciation Operating Profit Other Revenue Less: Non-operating Expenses Interest Profit Before tax Less: Provision for tax Net Profit after tax Proposed Dividend Retained Surplus Nature of Financial Statements: Financial statements are prepared for the purpose of presenting review or report on the progress made by the firm to the management. These statements deal with the status of investments in the business and the results achieved during the period under review. The American Institute of Certified Public Accountants states that, financial statements reflect a combination of recorded facts; accounting conventions and personal judgments and the judgments and conventions applied affect them materially. John N. Myer, who states that the financial statements are composed of data, which is the result of the combination of, has also expressed similar views about the nature of financial statements: Recorded facts concerning the business tradition 34

Conventions adopted to facilitate the accounting techniques Postulates or assumptions made to, and Personal judgments used in application of conventions and Postulates.

This implies that data exhibited in financial statements are affects by recorded facts, accounting conventions, postulates and personal judgments. The implications and significance of these facts are explains below: 1) Recorded FactThe term recorded facts means that data used for preparing financial statements are taken out from the accounting records. Figures relating to cash in hand, cash at bank, debtors, bills receivable, cost of fixed assets, bills payable, creditors, sales, purchases, wages, salaries, rent etc. are recorded facts. The financial statements do not disclose such facts, which are not, recorded in the accounting books whether such facts are significant or not. For example, the fixed assets purchased are show at cost price in the accounting books. The market price or replacement cost of fixed assets is not stated in the balance sheet, because the cost price of the fixed assets is a recorded fact as per accounting records. 2) Accounting Conventions and PostulatesThe financial statements are affects largely by accounting principles, concepts and conventions. On the going concern concept assets are shown at cost after deducting depreciation instead of their market value, on the assumption that these assets will not be sold. On money measurement concept, non-monetary factors such as managerial efficiency and integrity that affect firms profit largely are not show in the financial statements. Similarly, according to convention of conservatism, provisions are making for contingent liabilities and losses. Income for the period ending at certain specific date is determined according to realization postulate. The convention of materiality is follows in dealing with small items like pencils, pen, postage stamps etc. The stationery is valued at cost and not on the principle of cost or market price whichever is less. The use of accounting conventions makes financial statements comparable, simple and realistic. 3. Personal JudgmentAlthough accounting concepts and conventions provide good guidelines to the accountant, yet the application of these concepts and conventions depends upon the personal judgment of the accountant. For example, depreciation on fixed assets is charged on cost but which method (fixed installment, written down value or unit of service) and rate of depreciation are used; depend upon 35

the personal judgment of accountant. Similarly, selection of the inventory valuation method (FIFO, LIFO, Average etc.); rate of provision for bad doubtful debts, division of an item into capital and revenue, determining the amount and period for writing off the intangibles are some of the examples, where judgment of the accountant plays an important role in choosing the most appropriate course of action. Thus, combined effect of recorded facts, accounting conventions, postulates and personal judgment is that the values of various items shown in the financial statements do not indicate the current market or economic value. These are simply interim reports for the information of outsiders. Limitations of Financial Statements: The summary of accounts maintained by a business firm is presents in the form of financial statements. The amounts expressed in these statements are based on vouchers and accounting records. Hence, decisions based on this information are more true and logical. However, the conclusions drawn because of this information cannot treat as final and accurate, because there are certain limitations to the financial statements. One must, there for keep in view these limitations while studying the profit and loss account and balance sheet of a firm. Important and impactbearing limitations of financial statements are identified as below: 1) Lack of precision 2) Incomplete Information Reputation and prestige of the management Efficiency, integrity and loyalty of the employees Expected difficulties and facilities in procuring raw Materials

3) Lack of Exactness 4) Interim Reports 5) Hiding the Real Position or window Dressing 6) Lack of Comparability 7) Historical Costs .Parties Interested in Financial Statements and Their Utility: 36

Each group of society is directly or indirectly affected by the activities of a business entity. They have been interest in the profits, development and progress of the enterprise. Financial statements provide all information relating to financial position and operating strength or weakness of the enterprise. Therefore, various users require statements for different purposes, which are narrated below: 1. Management 2. Investment 3. Share holder 4. Debentures holder 5. Public 6. Customer 7. Employees 8. Stock exchange

3.6.2 Financial Appraisal

A companys financial statements are intended to summarize the results of its operations and it is ending financial condition. The information in this statement is study and related to other information by external users for several reasons. Current shareholders, for example, are concerned about their invested income, as well as the companys overall profitability and stability. Some potential investors are interested in solid companies that whose financial statements indicate stable earnings and dividends with little growth in operations. Others prefer companies whose financial statement indicate rend for rapid growth in different lines of business. Short-term creditors are interested in a companys short run solvency, its ability to pay current obligation as they become due. Long-term creditors are concerned about the safety of their interest; income and companys ability to continue earning and cash flow to meet its financial commitments and these are only few of the users and uses of financial statements. However, the numerical data in the financial statement are quite calm. They cannot speak. Analytical data are not ending in themselves, but they are meant to an end. Financial appraisal is an attempt to determine the significance and meaning of the financial statement data so that forecast may be may be made of the prospects for future earnings, ability to pay interest, debts 37

maturities both current as well as long-term profitability of a sound dividend policy. Financial appraisal involves the assessment of firms past, present and anticipated future financial condition. Financial appraisal is a scientific evaluation if the profitability and financial strength of a business concern. In fact, financial appraisal and analysis of financial statement have nearly the same meaning. Financial statement analysis is used for the purpose of financial appraisal. Financial appraisal is the process of making a scientific proper, critical and comparative evaluation of the profitability and financial health of given concern through the application of financial statement analysis. Financial statement analysis is a preliminary step towards the evaluation of result dawn by the analyst or management accountant. Appraisal or evaluation of such results is making thereafter. Financial appraisal begins where financial analysis ends and financial analysis starts where the summarization of financial data in the form of profit and loss accounts and Balance Sheet ends. In the words of Kenney and McMillan, Financial statement analysis attempts to unveil the meaning and significance of the items composed in profit and loss account ad balance sheet so as to assist the management in the formation of sound operating financial policies. The appraisal or analyses of financial statements spotlight the significant facts and relationships concerning managerial performance, corporate efficiency, financial strength or weakness and credit worthiness that would have otherwise been buries in the maze of details. The technique of financial appraisals frequently applied to the study of accounting data with a view to determining continuity or discontinuity of the operating policies and investment value of business. Everyday interested in the affairs of the company is interested in finding answer to the following searching question:

(a) Does the company earn adequate profit (b) Does the company process have enough funds to meet its obligation as and when they mature (c) Is investment in the company safe

Appraisal of financial statement alone can answer such queries. It is true that statement analysis merely reveals what has taken lace in the past, but past events given some indication of what may be expected in future unless some drastic changes take place in business it will continue to move in the same direction in the past. 38

39 Tools and Techniques of Financial Appraisal:

Financial appraisal tools and techniques are the measurement of performance of business and soundness of financial position. They are one of the inevitable steps required for financial position. They are one of the inevitable steps required for financial appraisal. They can be divided into three parts: (1)Accounting technique (2) Statistical techniques and (3) Mathematical technique In this study, ratio analysis has been used as a tool, hence only accounting technique has discussed in detail.

Accounting techniques: To appraise the financial strength as well performance of a business concern various accounting technique are applied. The object of these techniques is to simplify to collected and rearranged and data by which they can be made easy to Understand. These techniques are summarized as under: Ratio analysis Trend percentage Common size and comparative statement Fund flow analysis Break even analysis

Ratio analysis

Accounting ratios are relationship expressed in mathematical terms, between figures which have a cause and effect relationship or which are connected with each other in some manner or the other.


To quote Wixon, Keil and Bedford, A ratio is an expression of the quantitative relationship between two numbers. Ratio analysis of statements is the process of determining and presenting relationship of items and groups of items in the statements. The purpose of ratio is to anatomies and facilitates comparisons with periods, and another organization or an industry average or standard. It is very significant to know that ratios are calculated only when both the figures have some kind of relationship. If the figures are not interrelated, the ratio calculated does not convey and meaning or significance. For instance, profit is related to sales because it is an outcome or sales minus cost but not a remote relationship between lab our cost and amount of debtors, thus the ratio calculated will not have any meaning. Most important part of ratio analysis is interpretations of ratios. Computation is important as well as but it is only clerical work. Interpretation of ratios matters. It is the task of human brain requiring the art and the skill. The usefulness of ratios is wholly dependent on their Intelligence and judicious interpretation. Ratio can be classifies on two bases: (A)Structural Classification: On this basis, ratios can divide as under: Balance sheet ratio: These types of ratios are calculated by figures given in the balance sheet. Income statement ratios: Ratio calculated from figures Derived from profit and loss accounts is included in this type of ratios Inter statement ratios: The ratios, which are compute from figures of both the financial statements, are called inter-statement ratio.

(B) Functional Classification: On the basis, ratios can divide in the following: Profitability ratios: Ratios, which measure the profitability of a concern, are termed as profitability ratios. Turnover or activity ratios: Ratios used to measure the effectiveness of the use of capital or assets are called activity ratios. 41

Solvency ratios: This type of ratios denotes the financial position concern. Solvency can be divided in to two types.

(a) Short-term solvency or liquidity: The capacity of firm to meet its current obligations is called liquidity. Ratios to measure liquidity are called liquidity ratios. (b) Long-term solvency: It is a measurement of the firms overall strength. Ratios to measure this term are specifies as long-term solvency ratios.

Trend Percentage: A horizontal comparison of various items of one along with their Percentage to the total can be make to know the trend of Particular Item of over a period of years. The study of trend will indicate the direction of movement over a long time. One can get a better view of things unaffected by short-term influences by the study of long-term trend percentage. Another type of the comparison by trend percentage can be termed as index numbers. Index numbers can be compute by taking common base.

Comparative and Common Size Statements (A)Comparative Statement: Comparison of two or more years of a concern and comparison of two comparable units can be made through comparative statements. This will be facilitated if the relevant dated are lay side by side in statement in single column form. (B)Common Size Statements: The proportion, which a single Time represents within a total group or subgroup if calculated, will give an idea about the relative importance of items inter-se. The total group figure is the base and can be taken as 100. Since all other components expressed as a percentage of the total, which has common size (i.e.100), the financial statements are known as common-size statements. This is in facts a vertical financial statement. The statements are known comparative common size statements, if comparative actual data are also placed side by side. However, under this technique individual items of profit and loss account and Balance sheet are educated to common base, which we treated as equivalent to one hundred. In case of profit and loss account, sales are taken as hundred and all items are expressed with reference to sales. In a Balance sheet, the ratio of each asset to total assets and ratio of each liability and capital item to total liabilities and capital (which is the same amount as total assets) is computed. 42

Fund Flow Analysis: A statement of changes in financial position can be prepared to analysis the reason, which has laid to such changes. Fund flow statement is a statement either prospective setting out the sources and application of the funds of an enterprises. The purpose of statement is to indicate clearly the requirement of funds and how they are proposing to be raised, the efficient utilization and application of the same.

Break-Even Analysis: The narrower interpretation of the Break-even analysis tells us that it is a system of determination of that level of activity where total cost equal total revenue of selling price. The broader interpretation refers to that analysis which determines the provable profit at any level of activity, as stated by Weton and Briahman. Break-even analysis is useful in studying the relations among volume prices and cost structure, it is thus helpful in pricing, cost control and other financial decision. There, it is very crucial tool to measure profitability of business. It magnifies a set of interrelationship of fixed costs, variable costs, level of activity of the profitability of the concern, Says Kulsrestha. Thus, it is a tool of financial analysis in a specific way of presenting and studying in interrelationship among costs, volume and profits.

3.6.3 Working Capital Analysis



The funds required for financing the duration of operation cycle in business are known as working capital. It is excess of current assets over current liabilities. The term net working capital can be defined in two ways (1) the most common definition of net working capital (NWC) is the difference between currents assets and current liabilities (II) and alternate definition of NWC is that portion of a firms current assets which is financed by long-term funds. The quantitative concept or net working capital concept explains working capital as excess of current assets over current liabilities (2). Net working capital represents the amount of the current assets, which remain if all the current liabilities were paid, (3). Net working capital is commonly defines as difference between current assets and current liabilities. The term current assets may be defined as cash and other assets, which are expect to be converted in to cash in the ordinary course of business liquidation is reasonably expected to require the use of existing resource properly classifiable as current assets or the creation of other current liabilities. Need of Working Capital In business the current assets and current liabilities flows like an electric current. The working capital plays the same role in circulate, the same role in the business as the role of heart in human body. Just as hearts gets blood and circulate, the same way working capital funds are generates and these funds are circulating in the business. As and when this circulation stops, the business becomes lifeless. It is because of this reason that the working capital is known as the circulating capital as it circulates in the business just like blood in human body. The funds generated from issue of shares, borrowings and from operations are used to pay creditors, for etc., this make available stock of finished goods by sale of which either debtor is created or cash is received, thus generating profit. A portion of profit is utilized for payment of tax, interest and dividends. This cycle continues throughout the continuous throughout the life of business. Without adequate working capital no progress can he made According to Kennedy and Macmillan working capital should be sufficient in amount to enable the company to conduct its business on the most economical basis and without financial disaster. The importance of working in a business enterprise can hardly be overemphasized. It is the capital, which keeps the working of business. Working capital is a consideration major importance in determining the financial strength of an enterprise. It indicates the concerns ability to carry on its 44

normal business comfortably and without financial stringency, to expend its operation without the need of new financing and to meet emergencies and losses without disaster. Analysis of Working Capital Working capital is an essential part of financial management. If mere is an adequate amount of working capital and it utilized in the right manner, it is a great achievement for the business. The excess of working capital cause financial stringency and brines the business to a standstill. Realizing the important of working capital in financial management the analysis of working capital becomes a phenomenon. It facilitates the adequacy and management of working capital the analysis of working capital provides a careful inquiry into its components to control the working capital and to conserve it properly. It helps in determining the optimum level of working capital in the firm. The process of measurement and analysis of working capital performed based on financial statements of the business enterprise for past few years. In the present study, the present study the analysis of working capital of Jodhpur Dairy has made by two techniques viz., trend analysis and ratio analysis. Working Capital Trend Analysis The working capital trend analysis represents a picture of variation in current assets, current liabilities and working capital over a period. Such an analysis enables us to study upward and downward trend in current liabilities and its effect on the working capital position. The trend analysis is a tool of financial appraisal where the changes in the factors are comparing with the base year assuming the base year as 100. In the present, study a statement-showing trend of important study because each component of working capital has the relationship of causes and effects. Ratio Analysis of Working Capital Trend analysis shows the trend of current assets, Current Liabilities and working capital only. It do not interpret the contribution of each item of working capital in the trend, whereas, it can be done


easily by ratio analysis. The ratio analysis of working capital can use by management as a means of checking upon the efficiency in working capital management of the company.

Following ratios have been used to analyzed and interpreted working capital of SARAS DARIY

LIQUIDITY RATIO:(1) Current RatioCurrent ratio is on of the important ratios used in testing liquidity of a concern. This ratio is a good measure of the ability of a company to maintain solvency over a short nm. This ratio is compute by dividing the current assets by the total current liabilities and expressed as. Current Ratio = Current Assets / Current Liabilities The current assets of a firm represent those assets, which can be in the ordinary course of business, converted into cash within one accounting year. The current liabilities, defined as obligation maturing within a short period (usually one accounting year). Excess of current assets over current liabilities is known as working capital and since these two (current assets and current liabilities) are used in current ratio therefore, this ratio is also known as working capital ratio. With the help of this ratio, the analyst can review the extent to which company can cover such liabilities with current assets. The current ratio gives the analyst a general picture of the company to meet its day-to-day payment obligation. The current ratio is very useful as a measure of shortterm debt paying ability but it is tricky to interpret this ratio. Experts are of the view that the value of current assets should be at least double the amount of current liabilities. The higher the current ratio the better will be solvency of a company but a very high ratio indicates that the funds are idle. Idle Current Ratio: 2:1 If this ratio is higher than standards than it is assumed very good, short-term liquidity or solvency Excess stock, bad debts and idle cash under trading If this ratio is lower than standards than it is assumed Unsatisfactory short-term liquidity, Shortage of stocks, less credit sales, shortage of cash over trading

(2) Quick Ratio46

The solvency of a company is better indicated by quick ratio. The fundamental object of calculating this ratio to enable the financial management of the company to ascertain that would happen if current creditor presses for immediate payment and either not possible to push up the sales of closing or it is sold a heavy loss is likely to be suffered. These problems arise because closing stock is two-step away from the cash and their price is more or less uncertain to market demand. The term quick assets include all current assets except inventories and prepaid expense. Quick ratio indicates the relationship of quick assets and current liabilities. The ratio calculated by dividing quick assets by current liabilities. The following is the formula below: It is wise to keep liquid assets at least to current liabilities at all the time. Therefore, the standard ratio of 1:1 is regarded as norm, however this is not a hard and fast rule and not necessary to be adopted everywhere. Quick Ratio = Quick Assets / Current Liabilities (3) Absolute Liquidity RatioThe absolute liquid ratio is the ratio between absolute liquid assets and current liabilities can calculate by dividing the liquid assets by current liabilities. The formula is as follows: Absolute Liquidity Ratio= Absolute Liquid Assets / Quick Liabilities The term liquid assets includes cash, bank balance and marketable securities, if current liabilities are to paid at once, only balance of cash and bank and marketable securities will be utilized. Therefore, to measure the absolute liquidity of a business, this ratio is calculated. The standard of the ratio is .5:1 the idea behind the norm is that if all creditor demands for payment at least 50% of their claim should be satisfied at once.

ACTIVITY RATIO:(4) Stock Turnover RatioCurrent, quick and absolute liquidity ratio examine that the company would be able to discharge its current liabilities. Some of the current assets expect cash take time to convert in to cash. To measure how quickly these assets convert in to cash turnover ratio are calculated. Inventory turnover ratio indicates the number of items inventory or stock is replaced during the year. It measures relationship between cost of goods sold and inventories level. The ratio calculated as follows: Inventory Ratio = Cost of goods sold / Average Inventory 47

Cost of goods sold includes opening stock (inventory) and manufacturing cost (including purchase) minus closing inventory, cost of goods sold has been divided by Average inventory. Inventory turnover ratio is better than a low ratio. Higher ratio indicates: 1. Stock is sell- out fast 2. Same volume of sales from less stock or more sales from same stocks 3. Too high ratio shows stock outs or over trading 4. Less working capital requirement lower ratio reveals: Stock is sold at a slow speed Same volume of sales from more stocks or less sales from Same stocks More working capital requirement Too low ratios show obsolete stocks or under trading

(5) Receivable Turnover RatioThis ratio is also supplementary measure of liquidity like the inventory turnover ratio. The receivable turnover ratio revels how quickly receivable or debtor are converted into cash The receivable turnover ratio shows relationship between sales and receivables (debtors and bills receivables), this ratio is derived from the following formulaReceivable Turnover Ratio = NET Credit SALE / AVG. RECIVABLE

(6) Working Capital Turnover RatioThis ratio reveals relationship between sales and working capital of firm. This ratio test the efficiency with which the working capital has been utilize the higher the ratio the greater the use of working capital, which result in more profit. The ratio can be computed as followsWorking Capital = Sale / Working Capital

This ratio interprets about the over and under trading of the business. A very high ratio may be result of over trading i.e., increase in volume is sales without corresponding increase for working


capital. On the other hand, a very low ratio is the indication of under trading which means more funds have been utilized in the business in the form of working capital than needed.

Profitability Ratios Related To Sales

These ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales. If adequate profits are not earn on sales, there will be difficulty in meeting the operating expenses and no returns will be available to the owners. These ratios consist of profit margin and expenses ratios. These are calculating as follows:

1. Profit Margin Ratios

Gross Profit Ratio-

Gross profit ratio reveals the relationship between gross profit and net sales in terms of percentage. A net sale is obtained by deducting returns from gross sales while gross profit is calculate by subtracting direct from goods sold net sales. Gross profit ratio is also known as gross profit margin or gross margin. It is calculate through dividing gross profit by sales. The following is the formula: Gross Profit = Gross Profit / Net Sale * 100 A high ratio of gross profit to sales is a sign of good management as it implies that the cost of production of the firm is relatively low. Usually a high gross margin is result of following: Increase in selling price without a corresponding decline in cost of goods sold. A decline in cost of sales without corresponding decline in selling price Sales mix is such that product having a high gross margin are sold in high quality Over valuation of closing stock or under valuation of opening stock A relatively low gross margin is definitely a danger signal, warranting a careful and detained analysis of the factors responsible for it. The important contributory factors may be: Decrease in selling price to increase sales volume without corresponding decline in cost of goods sold. Increase in cost goods sold without corresponding change in selling price. 49

Under valuation of closing stock and over valuation of opening stock

Operating Profit Ratio-This ratio shows the profitability of sales. A business may yield high gross income but low operating profit because of high operating expense. This ratio is compute through dividing the operating profits by net sales. The formula is expressed as-

Operating Profit Ratio = Operating Profit / Net Sale * 100 The term operating profit refers so the profit of concern before adjustment of non- operating items as interest etc. in other words, operating profit equals to net sales minus all operating cost (i.e. the sum of cost of goods sold on-operating expenses). A business may earn more profit due to its nonoperating activities like purchase and sale of securities. Hence, it is essential to compute this ratio not to measure the efficiency of management but also the effectiveness of production and sales of company product in generating pre tax profit for the company. A low margin of operating profit to net sales means that a slight unfavorable change in future revenue rate without a proportionate, change in costs probably would result in loss instead of profit.

Net Profit Ratio-

This ratio is also known as net profit margin on sales. This ratio measures the relationship between net profit and net sales of a firm. Net profit is the excess of revenue over expenses during particular accounting period. Here net profit includes profit from both the operating and nonoperating activities of a concern. The ratio can be compute based on either net profit tax or net profit after tax, expressed in formula. Net Profit = Net Profit / Net Sale * 100

2. Expenses Ratio:
Cost of Goods Sold Ratio-

This ratio shows what percentage share is consume by cost of goods sold and conversely what proportion is available for meeting expense such as selling and general distribution expense as


well as financial expense consisting of taxes, interest, and dividend and so on. This ratio is compute by following formula: Cost of Goods Sold = Cost Of Goods Sold / Net Sale * 100

3. Profitability Ratios Related To Investment

Profitability measurement based upon the sales only may be wrong. Because it is quite possible that profits in relation to sales are adequate for the investment in the business. Due to this reason profitability based on sales shows good profit earning capacity of the business but in fact profit of the business are inadequate for the owners of the business as profit are not giving a good return on investment. Therefore, in present study ratios are also computed by relating profits of Jodhpur Dairy to its investment, in this study two types of ratios relating to investments in Jodhpur Dairy Ltd. has been calculated i.e. return on capital employed and return on net worth.

Return on Capital Employed-

Return on capital employed is a good measure of profitability in as much as it is extension of the input-output analysis. It aids in comparing the performance efficiency of an identical enterprises. The term capital employed may be defines as gross capital employed and net capital employed. Gross capital includes assets used in business whereas net capital employed consists of total assets of the business less its current liabilities. Return on capital employed is calculates as follows: Return on Capital Employed = Net Profit before Interest & Tax / Capital Employed * 100 Return regards the operating profits, excluding any income from assets excluded from the capital employed and eliminating adjustments such as writing off preliminary expenses etc, but the amount of interest on long- term borrowings is not deducted from net profits for this purpose. The return on capital employed indicates how well management has used the funds supplied by creditor and owner. The higher the ratio the more deficient the concern can be considered. The decision of management for the further investment depends upon this ratio. It is also important for the prospective investors. Shareholders can measure the success or failure of company in terms of profit related to capital employed. 51

Capital Structure Analysis

Meaning of capital structure Financial Structure of Jodhpur Dairy Analysis of common size balance sheet Ratio Analysis Debt to Equity Ratio Proprietary Ratio Long Term Fund to Fixed Assets Ratio Fixed Assets to Net worth Capital Gearing Ratio

Meaning of Capital Structure Capital structure implies the financial plan according to which the assets of a financed. The capital structure refers the makeup of long-term funds as represented by equity share capital, preference share capital and long-term debts. The left hand side of balance sheet represented by total liabilities is known as financial structure. That part of the financial structure, which includes long-term sources, is known as capital structure. Capital structure signifies the financial plan of the company in which various sources of capital mixed in proportion desire by the management it is often suggest that a capital structure should be determined which could maximize the long-term run value of an enterprise. Some company does not plan their capital structure. These companies may proper in the short run, but ultimate they will face considerable difficulties in rising funds to finance their activities. In common parlance, it is said that a financial manager should plan an optimum capital structure. However, until date nobody could formulate a model for ideal capital structure. It varies from industry to industry, from organization to organization and management to management and it finally depends upon the response of capital structure. Determination of model capital structure is possible for a group of companies having similar characteristics. For example, public can utilities can afford to have a geared or levered capital structure with more emphasis on borrowed capital. 52

While, trading companies have to exercise great caution in giving place to borrowed funds in their capital structure. In optimum capital structure, the market value of an equity share is maximum while the average cost of capital structure is minimum. The management of the company should try to seek the capital structure near the top of this range in order to make maximum, use of favorable advantage, subject of other requirement such as flexibility, solvency norms set by financial institution. Stock Exchange Board of India (SEBI) and exchanges control etc Ratio Analysis of Capital Structure of Jodhpur Dairy Ltd Common size balance sheet reveals the percentage of each group of items to the respective totals. However, it does not reflect the relationship between item of one side and the item of both sides assets and liabilities. To judge the long-term solvency of Jodhpur dairy certain ratios have been calculate to analyze the capital structure. These ratio may be defines as financial ratio, which, throw light on long- term solvency of the firm as reflected in its ability to assure the longterm creditors with to periodic repayment of principal on authority or in the predetermined investment as due dates a low ratio of liabilities to fixed assets or a high ratio of equity to liabilities, all expenses a relatively large cushion of security to the creditors. These ratios serve and indicate long- term solvency. The following ratios have been compute to analyze capital structure of Jodhpur dairy Ltd. Debt to Equity Ratio Proprietary Ratio Long term Debt to Fixed Assets Ratio Fixed Assets to Net worth Ratio Capital Gearing Ratio Funded Debt to Net worth Ratio

(1) Debt to Equity RatioThe relationship between borrowed funds and owners capital is a popular measure of long-term financial solvency of a firm. This relationship is shown by debt to enquiry ratio, this ratio reflects the relative, and this ratio indicated the relative proportions of debt and equity in financing the assets of 53

a concern. The word creditors or debt include all debts whether long term or short term or in the form of mortgages, bills etc. while the claims of owners consist. Debt- Equity Ratio= Debt/ Equity

(2) Proprietary RatioThis ratio brings out the extent of shareholders funds in relation to total assets. The proprietors ratio is very important in determine the long-term solvency of a company. This ratio shows what portion of the total assets is financed by the owners capital. A high proprietary ratio would suggest that the owners themselves have provided funds for plugging back of profits. The high proprietary ratio also suggests that the company is less dependent on outside sources of assets. The low ratio on the other hand, signifies a smaller amount of shareholders funds in comparison of borrowed funds invested in total assets. The term proprietors funds refer to owners equity i.e. net worth and total assets include all assets at present realizable value. The nearer or closer the ratio to 100 the greater will be financial soundness of the enterprises. Proprietors Ratio= proprietors funds/ Total assets

(3) Long Term Funds to Fixed Assets RatioThis ratio establishes relationship between long-term funds on capital employed and fixed assets of the firm and computed as follows. Long Term Funds To Fixed Assets Ratio = Long Term Funds --------------------------------------Net Assets of Fixed Assets

If fixed assets ratio is more than one, this show that long term funds are used to finance current assets. However, if this ratio is less than one, this reveals that fixed assets are financed by shortterm funds.

(4) Fixed Assets to Net worth Ratio54

Fixed assets (such as land, building, machinery etc.) are known for their permanent existence in the business, therefore these are supposed to be financed by the investment having permanent nature, the funds provided by owners of an enterprise, as their in the enterprise are also permanent. The funds provided by the owners should be sufficient so that they should finance the requirement to entire fixed assets and partly current assets. This ratio is calculated by dividing net fixed assets (i.e. fixed assets less depreciation and capital work in progress) by the net worth (i.e. owners equity funds) if the ratio is more than one assets is being financed through borrowings. Fixed Assets Fixed Assets to net worth ratio = Fixed Assets / Net Worth

(5) Capital Gearing Ratio The term capital gearing indicates the proportion of fixed cost capital as represented by preferences share capital and the debt capital to the ordinary share capital. Therefore, this ratio reflects relation of fixed charges bearing long-term obligation to the equity capital. Capital Gearing Ratio = Preference share capital + Long term debts / Equity shareholder fund

3.7. Limitations of the Study:

As the study relates to the financial management, it is quiet natural that getting exact information about the details of financial matters of the company thus it becomes difficult in getting necessary information. The practical aspects of working capital management of Jodhpur Dairy Is prepared with the available data only this study is not intended to comment on the companys efficiency Most of the figures in Ana lugged of working capital were rounded off wherever necessary to avoid ambiguities. As this study done in a very short period, information may not sufficient to give long run implications. Financial statements are not purely abjectly statements of facts they present information, which is a combination of record facts accounting convections and personal judgment. Financial accounting does not take into account the price level changes become somewhat difficult to form an overall judgment about the financial strength this and weakness of the firm. 55

When the firm has some favorable rations and some unfavorable rations its represent financial strengths and weakness of the firm

The basis to calculate ratios is historical financial statements. The financial analyst is more interested in what happens in future while the ratios indicate what happened in the past


As I found that, the main product of Saras is Milk and company firstly wants to capture maximum market share in milk market, which is approx. 66%, after it Saras is concentrating upon ghee, butter & cheese, which has market, share of approx. 88%, so it is not concentrating other products of its own. It is not using any brand ambassador in its advertisement, which attracts all age group people. AMUL is giving tough competition by introducing brand ambassadors time-by-time. Saras has introduced Vasundhara Raje (Former Chief Minister, Rajasthan) as brand ambassador once, but it cannot maintained that for long period because Vasundhara is not elected as CM again. Organization is lacking Sales Promotional Activities i.e. extra weight, toys, quiz contest etc. Not only AMUL but also the local milk sellers are also giving a tough competition. It also giving fair rate for farmers for supplying milk and is taking good care of them by providing financial assist. Hence whenever needed to them.



Condensed Balance Sheet of Jodhpur Dairy Ltd During 2004-2005 Liabilities Share capital Reserve & surplus Secured Lone Un Secured Lone Current Liabilities Provision 92016698.26 Lone & Advance 4644066.06 P&L Adjustment a/c 158271724.09 13031387.41 158271724.09 20408993.60 Rs. Assets Rs. 19259521 5497745 595026.60 99479050.48

8545600 Fixed Assets 41505751.27 Investment 11559608.50 Mortgage Current Assets

Condensed Balance Sheet of Jodhpur Dairy Ltd During 2005-2006 Liabilities Rs. Assets Rs.


Share capital Reserve & surplus Secured Lone Un Secured Lone Current Liabilities Provision

9744700 39871343.12

Fixed Assets Investment Mortgage

18674746 3956811 595026 104408899.51 17076047.5 27631209.90 172342740.06

10969536.25 104692269.18 7064891.51 172342740.06

Current Assets Lone & Advance P&L Adjustment a/c

Condensed Balance Sheet of Jodhpur Dairy Ltd During 2006-2007 Liabilities Share capital Reserve & surplus Secured Lone Un Secured Lone Current Liabilities Provision 9888554.25 84372758.05 10565160 164892683.23 Rs. 11571400 48494810.93 Assets Fixed Assets Investment Mortgage Current Assets Lone & Advance P&L Adjustment a/c Rs. 26273206 5709222 597238.60 90119074.13 17703335.75 24490606.72 164892683.23

Condensed Balance Sheet of Jodhpur Dairy Ltd During 2006-2007 Liabilities Share capital Reserve & surplus Secured Lone Un Secured Lone 48219340.25 58 Rs. 7241100 30174856.32 Assets Fixed Assets Investment Mortgage Current Assets Rs. 10701792 2994637 697238 90292221

Current Liabilities Out standing expanses

36963153.80 6774138 129372588.37

Lone & Advance P&L Adjustment a/c

12661800.70 12024899.07 129372588.37


Structure and Trend of Working Capital of Jodhpur Dairy During 2005-06 to 2008-09 Particular Current Assets Cash Bank Closing stock Debtor Lone & advance TOTAL Current Liabilities Creditor Other Bank over draft Mortgage TOTAL Working Capital (A-B) 2004-05 56632 5483157.57 66279474 27659786.91 20408993.60 119888044 41237852.38 40687973.46 2093058.29 7997814.13 92016698.26 27871345.74 2005-06 76606 2353849.61 70292731 31762318.90 17076047.5 121561553 20026672.2 68542542.05 6645120.80 9477934.13 104076669.18 17484883.9 2006-07 96550 9495103.54 58372179 22155241.59 17703335.75 107822409.8 41597604.8 30125845 4050222.12 8599086.13 84372758.05 23449651.75 2007-08 106500 6062708.4 58672179 25450833.6 12661800.70 102954021.7 8383694.46 32145698.21 3021597.21 10179552.84 43737291.80 59216729.9

INTERPRATION: In the above table, we have working capital of past 4 years. Working capital is increasing varying over year to year. In current assets inventory and debtor, balance occupied major portion. Its amount increased year to year remaining three items of current assets viz. are cash, bank and loans and advances and short term investment have been shown also increasing trend but cash balance shows fluctuating trend. In current liabilities, sundry liabilities, creditor occupied a major percentage in all the year and have arising trend in all the years. We find that current assets and current liabilities both are increase from 2004-05 to 2005-06 but after that both are decline, but working capital is decrease from 2004-05 to 2005-06 but after that it increase it means company have great amount of working capital in last two year, which can be used effectively for day to day operation work. Rate of increase in working capital is increasing in all the 60

year, in year 2006-07 and 2007-08 both current assets and current liabilities are in decreasing trend that show that current assets are used in payment of current liabilities of dairy, which liquidity of dairy very well.

Financial Structure of Jodhpur Dairy During 2004-05 to 2007-08

Years 2004-05 2005-06 2006-07 2007-08 Net Worth 370.20 219.85 355.76 253.91 Long Term Funds 616.11 605.85 699.55 856.35 Short Term Funds 79.97 94.77 85.99 101.79 Total Funds 1066.28 920.47 1141.3 1212.05

The financial structure of Jodhpur dairy indicates that the owner funds (share capital & reserve and surplus) represented on an average of 28% of total funds while the long term funds were on an average of 64% of the total funds during the period under review. It would appear from a comparative study of that the amount of owner funds recorded a flaunting trend for all the years.It indicates that comparative increase for funds was higher than that in the owners funds. The amount of long-term borrowings recorded increasing in all the years. The above analysis of financial structure shows that the dairy depending more on the long-term borrowings

1. Current Ratio of Jodhpur Dairy Ltd During 2004-05 to 2007-08 Years (A) 2004-05 2005-06 2006-07 2007-08 Current Assets (B) 1198.88 1215.84 1078.22 1029.54 61 Current Liabilities (C) 920.16 1040.76 843.7 2 437.37 Current Ratio (B)/(C) 1.30 1.16 1.27 2.35

2. Quick Ratio Jodhpur Dairy Ltd During 2005-06 to 2008-09 Years (A) 2004-05 2005-06 2006-07 2007-08 Quick Assets (B) 536.09 511.92 494.5 442.82 Current Liabilities (C) 920.16 1040.76 843.7 2 437.37 Quick Ratio (B/C) .58 .50 .58 1.01

3. Absolute Liquidity Ratio of Jodhpur Dairy Ltd During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 2007-08 Absolute Liquid Assets B 55.40 24.30 95.91 61.69 Quick Liabilities C 899.23 974.31 803.22 407.16 Absolute Liquid Ratio B/C .061 .025 .119 .151

4. Stock Turnover Ratio of Jodhpur Dairy Ltd During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 2007-08 Cost of Goods Sold B 3490.05 3741 3928.08 4309.47 Avg. Stock C 486.36 682.86 643.32 585.22 Stock Turnover (Times) D 7.18 5.48 6.11 7.36

5. Receivable Turnover Ratio of Jodhpur Dairy Ltd During 2005-06 to 2008-09 Years Net Credit Avg. Receivables 62 Receivables Turnover

A 2004-05 2005-06 2006-07 2007-08

Sales B 4383.2 4825.84 5678.18 5858.8

C 256.57 297.11 269.59 238.03

(Times) D 17.08 16.24 21.06 24.61

6. Working Capital Turnover Ratio During 2004-05 to 2007-08 Years A 2004-05 2005-06 2006-07 2007-08 Net Sales B 4383.2 4825.84 5678.18 5858.8 Net Working capital C 278.71 174.84 234.49 512.15 Ratio D ( B / C) 15.71 27.06 24.21 11.41

7. Gross profit margin ratio of Jodhpur dairy ltd During 2004-05 to 2007-08 Years A 2004-05 2005-06 2006-07 2007-08 Gross Profit B 965.55 899.53 1025.53 842.75 Sales C 4383.2 4825.84 5678.18 5858.8 Profit Margin B/C * 100 22.02 18.63 18.06 14.38

8. Operating Profit Margin of Jodhpur Dairy Ltd During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 2007-08 Operating Profits B 48.50 (103.06) 79.74 58.29 Net Sales C 4383.2 4825.84 5678.18 5858.8 Operating Profit to net sales Sales in % (b)/(c) 1.10 -2.13 1.40 1


9. Net Profit Margin to sales of Jodhpur Dairy Ltd. During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 2007-08 Net Profit B 42.88 (145.99) 31.40 28.54 Net Sales C 4383.2 4825.84 5678.18 5858.8 Ratio of net profit Sales B/C * 100 .97 -3.02 .55 .48

10. Cost of Goods Sold Ratio of Jodhpur Dairy Ltd. During 2005-06 to 2008-09 Years 2005-06 2006-07 2007-08 2008-09 Cost of Goods Sold 3490.05 3741 3928.08 4309.47 Net Sales 4383.2 4825.84 5678.18 5858.8 Cost of Goods Sold Ratio 79.64 77.52 69.17 73.55

11. Return on Capital Employed of Jodhpur Dairy During 2005-06 to 2008-09 Years 2004-05 2005-06 2006-07 2007-08 Net profit before tax 47.40 (142.69) 45.12 39.78 Capital employed 322..20 223.50 377.30 670.25 Ratio in % 14.71 (61.10) 11.95 5.93

12. Debt to Equity Ratio of Jodhpur Dairy During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 Debt B 696.08 700.62 785.54 Equity C 370.20 219.85 355.76 64 Ratio in proportion B/C 1.88 3.18 2.20





13. Proprietors Ratio of Jodhpur Dairy Ltd During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 2007-08 Proprietors Funds B 370.20 219.85 355.76 253.91 Total Assets C 1242.36 1270.40 1221.01 1039.88 Ratio in proportion B/C*100 .30 .17 .29 .24

14. Fixed Assets to Long Term Funds Ratio of Jodhpur Dairy Ltd During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 2007-08 Fixed Assets B 192.60 186.74 262.73 107.01 Long term fund C 616.11 605.85 699.55 856.35 Ratio in proportion B/C .313 .308 .375 .125

15. Fixed Assets to Net Worth During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 2007-08 Fixed Assets B 192.60 186.74 262.73 107.01 Net Worth C 370.20 219.85 355.76 253.91 Ratio in proportion B/C .52 .85 .73 .42

16. Capital Gearing Ratio 65

During 2005-06 to 2008-09 Years A 2004-05 2005-06 2006-07 2007-08 P.S. Capital +LTD B 530.6 109.69 98.88 428.12 Equity C 370.20 219.85 355.76 253.91 Ratio in proportion B/C*100 1.43 .50 .28 1.68

Current ratio
2.5 2 1.5 1 0.5 0 2004-05 2005-06
Y ear



INTERPRETATIONS: As per the financial management expert, the ideal C.R. is 2:1. When we analysis at the C.R. of past years, it was found that the current assets and current liabilities both were raised in 2004-05 in comparison to 2004-05 but after it declines, C.R. in 2004-05 to 2006-07 is not up to the mark. Dairy is not able to pay liabilities and shortage of working capital but current ratio in 2008-09 is high, Dairy has more assets than liabilities. In the last year, company has more short-term investment, debtor, and Excess stock so company can pay current liabilities


Q uick ratio
1.2 1 0.8 0.6 0.4 0.2 0 2004-05 2005-06
Y ear



INTERPRETATIONS: As per, the financial management expert, the ideal Q.R. is 1:1. When we analysis at the Q.R. of past years, we find that quick assets is in decreasing mode , and current liabilities increase in 2006-07 but it decrease after it, quick ratio is not up to the mark up to 2006-07 , but in 2007-08 this ratio is satisfactory, in this year company have immediate assets ignores inventory. It indicates company can pay current liabilities without relying on the sale of inventory. However, from 2005-06 to 2007-08 this ratio is unsatisfactory so company should increase the quick assets to meet current liabilities.

Absolute liquidity ratio

0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2004-05 2005-06
Y ear




INTER[RATATION: As per the financial management expert, the ideal A.L.R. is .5:1 When we analysis at the A.L.R., the above table shows that the company is not in position to pay off its creditors even 50%, if demanded urgently because absolute liquid assets is more less than Quick liabilities in all years. Therefore, company should increase the absolute liquid assets to meet the liabilities. Besides all, company is showing a regular increment in ratio. In year 2007-08 and 200809 dairy, have more cash and bank balance to pay liabilities in comparisons of from 2004 to 2006.

Stock Turnover
10 8 6 4 2 0 2004-05 2005-06
Y ear



INTERPRATATION: As per, the management expert, the ideal ratio of stock turnover is 8 to 10. From the above chart, it is observed that the inventory turnover ratio of the Jodhpur Dairy has been fluctuates past four years. The cost of goods sold is gradually increased to an extent of Rs. 4309.47 lakes in the year 2007-2008. The average inventory steadily increased yearly to an extent of Rs.682.86 lakes in the year 2005-2006. After it decline continually, it indicate very poor performance in sale as well as inefficient management of inventory. Therefore, the dairy should improve the efficiency of marketing function and store function and reduce the levels of stocks


INTERPRETATION: The chart as well as the table shows that the credit sales have recorded a constant increase from past four years. On the other hand, average receivables show a fluctuation. In the year 2007-08 Receivables Turnover Ratio has increased by 24.61%, which shows efficiency of marketing function done by Sales department and effectively recovered the credit from its debtors.

W rk gC p l R tio o in a ita a
3 0 2 5 2 0 1 5 1 0 5 0 2 0 -0 04 5 2 0 -0 05 6
Ya er

2 0 -0 06 7

2 0 -0 07 8

INTERPRETATION: By analyzing above table as well as graph, show working capital ratio, we find that the working capital of the organization has been effectively utilizes in 2005-06 and 2006-07 in comparison to past years. These 2-yearss ratio shows overtrading (low investment in working capital and more profits) by the organization. It is help full in making more sale of dairy. 69

Go sPoi R to r s r ft ai
3 0 2 5 2 0 1 5 1 0 5 0 20- 5 0 40 20- 6 0 50
Ya er

20- 7 0 60

20- 8 0 70

INTERPRATION: The chart as well as the table above shows that, the sale is continuously increasing but the gross profit is decreasing. The fluctuation in profit margin is due to change amount of sales price, increase in wages rate, increase in price of row material or the aim of dairy may be not to earn profits but to raise the living standard of villager so that they can live happily.

O e ain P oit R t p r t g r f aio

5 4 3 2 1 0 1 2 3
Ya er

20- 5 0 40

20- 6 0 50

20- 7 0 60

20- 8 0 70

INTERPRATION: The above table indicates that in 2005-06 operating profits ratio decreased because of operating losses but after it shows growth as well as recovered last years losses. The 70

rise in operating profit was due to curtailment of expenses. This does not mean that organization is playing on profit because the rate of operating profit is not satisfactory. It indicates the managerial in-efficiency and greater amount of operating expenses.
N tPoitR to e r f ai
5 4 3 2 1 0 1 2 3 4
Ya er

20- 5 0 40

20- 6 0 50

20- 7 0 60

20- 8 0 70

INTERPRATION: The above chart indicates that in 2005-06 net loss occurred but afterwards shows growth and recovered all losses occurred previous year. It is observe that majority of cost debited to the P&L a/c are fix in nature and any increase in sales will cause the cost per unit to decline because of spread of some fixed costs over increased no. of units sold. Firm is running on low net profit but as it is a Co-operative organization, it does not matter to the firm
C st o G o s S ld R tio o f o d o a
10 0 9 0 8 0 7 0 6 0 5 0 2 0 -0 04 5 2 0 -0 05 6
Y ear

2 0 -0 06 7

2 0 -0 07 8


INTERPRATION: It is analyzes that cost of goods sold ratio is high because of high cost incurred. It indicates the in-efficiency of performance of production and sales department. High ratio of COGS is the reason behind decreased gross profit and indirectly effects net profit also.
Return on Capital Em ployed Ratio
75 60 45 30 15 0 -15 -30 -45 -60 -75
Y ear





INTERPRATION: In the dairy, the amount of capital employed recorded a rising trend. The reason for decrease in ROCE ratio is lower margin in trading items. The ratio of ROCE recorded high fluctuations in past 4 years. The capital is not utilized in an effective and efficient manner. It indicates that comparative increase for funds was higher than that in the owners funds. The amount of long-term borrowings recorded increasing in all the years. The above analysis of financial structure shows that the dairy depending more on the long-term borrowings


Debt-Equity Ratio

0 2004-05 2005-06
Y ear



INTERPRATION: Normally debt to equity ratio is 1:1 but in the dairy, this ratio was always more than this. The high ratio shows that capital structure was not from the creditors point of view. The ratio is very high it means it leads to increased interference of creditors in management of firm. In 2005-06, 2006-07 this ratio is very high, it is not good for dairy. Therefore, company should try to decrease the debt. It show that the part of part of creditor in capital structure of saras diary is more than the equity, which show the dependency of saras dairy on outsider more than insider. Therefore, company should try to reduce the debt up to extant.

P p to R tio ro rie r's a

0 .5 0 .4 0 .3 0 .2 0 .1 0 2 0 -0 04 5 2 0 -0 05 6
Ya er

2 0 -0 06 7

2 0 -0 07 8


INTERPREATION= The main aim of this ratio is to know the percentage of owners funds invested in fixed assets. In the above table this ratio is very low, it show fixed assets are purchased on credit and creditor can ask for their money at any time for which owner will have to sell some portion of its fixed assets. It is not good for dairy point of view. In other word we can say that fixed assets will be used to pay the amount of creditor, if dairy is not able to pay the payment of creditor, than fixed assets will be sold and realized money will given to creditor.

Fixed Assets to Long Term Funds Ratio

0.5 0.4 0.3 0.2 0.1 0 2004-05 2005-06



INTERPREATION- The above chart shows that long-term funds are used to finance fixed assets. Fixed Assets ratio must be less than one so that the remaining amount of long-term funds can used in Working Capital because up to an extent, current assets are running in the business and to pay for them long term funds are used. In this table ratio is low which indicate low part of long-term fund are used in acquiring the fixed assets, which is not beneficial at the time of liquidation because low fixed assets are available for selling or to pay to creditor.


Fixed A ssets to Net W orth Ratio

1 0.8 0.6 0.4 0.2 0 2004-05 2005-06
Y ear



INTERPREATION= This ratio measures the extent to which owner's equity (capital) has been invested in plant and equipment (fixed assets). A lower ratio indicates a proportionately smaller investment in fixed assets in relation to net worth, and a better "cushion" for creditors in case of liquidation. Similarly, a higher ratio would indicate the opposite situation. From the above chart, we find that ratio in all year are lower than 1 it means owners capital are used more than lone for purchasing the fixed assets, it indicate long term redemptions efficacy of company and more part of owner capital is available for working capital when-ever required. It is beneficial for the dairy to redeemed it creditor when- ever they call for their money so that dairy can easily pay.


Capital G earing Ratio

2 1.6 1.2 0.8 0.4 0 2004-05 2005-06
Y ear



INTERPREATION= This ratio must not exceed one, if it exceed one, it means organization have excess of debts over equity, which is not good for organization because it increases creditability of firm. In year 2004-05 and year, 2007-08 are not in satisfactory conditions. Due to excess of preference shares and long-term debts, equity shareholders get very less profitable amount or in some cases, they do not get anything.

CHAPTER 6 SWOT Analysis of JODHPUR Dairy


Provide quality products with consumer satisfaction Strong foundation laid by the top management Quality and accuracy is the main strength Established Brand Name Controls a large part of the market Products perceived to be reasonable priced Easy availability of milk from other cooperative unions Established infrastructure Availability of trained manpower

High Inter unit milk purchase price Milk perceived unit by bulk buyers Weak former delivery infrastructure Improper strategic decisions Evening supply deficient

Growing Market Insignificant competition from organized sector Scope for premium product Vast in tapped rural / up country market Scope for further improvement in quality 77


Low entry barriers Flexible competitors Employee turnover Competition in market

CHAPTER 7 Conclusion
Financial statement reorganized collection of data according to logical and constituent accounting procedures. However, financial statements in their traditional form giving historical data and information are of little use to those who use them to draw certain conclusions. Financial appraisal is scientific evaluation of profitability and financial strength of any business concern. Financial appraisal techniques include ratio analysis common size analysis trend analysis, fund flow analysis etc. these techniques may be applied in the financial appraisal of any entity and Jodhpur Dairy Ltd. is no exception to it after a careful and critical analysis of Dairy. The Prologue: Today India is a biggest milk producer in the Asia. After independence and milk revolution, the production of milk increased manifolds. Milk is an essential utility in every bodys life. It is one of the basic needs of human life. Now a day, production of milk and milk products is most important in India, both in terms of generating employment opportunities and for meeting the basic requirement of people. It yields manifold returns. This industry has contributed in a significant manner to the faster and quicker economic development of this members and country. The plant of Jodhpur dairy is located at heavy industrial area. This is the biggest milk supplier in Jodhpur. Profitability: The measurement of profitability is a tool of overall measurement of efficiency. An overall study of profitability of Jodhpur Dairy Ltd. has been Dade in relation to sales, operating assets capital employed and its net worth. By analysis, the working results i.e. profit and loss account of Jodhpur Dairy Ltd., it was found that, the Dairy gained in 2004-05 and faced loss in the year 2005-06, which was recovered by Dairy 78

itself by good sales as well as by cost reduction. In next year i.e., 2007-08 firm get profit but with a bit less than last year. It shows dairys good managerial skills but firm should head towards improvement.

Capital Structure Capital structure means the financial plan of an organization. In which the various sources of capital are mixed in such a proportion that they provide a distinct capital set up more suited to the requirements of that particular organization. Capital structure of Jodhpur dairy has analyzed with the help of various ratios. The various sources of finance in the dairy are share capital and loan from different banks (The bank of Rajasthan Ltd. State Bank of Bikaner & Jodhpur, Oriental Bank of Commerce). During the last four years, the amount of net worth decreased from 370 lacs to 250 lacs. The reason behind this decrement is that equity shows constant increase in 2004-05 with a sudden decrease in 2007-08, and on the other hand, reserve &surplus shows high fluctuation & in year 2007-08, it recorded decrease of huge amount. Government subsidies have been good sources of funds those are invest in expansion and development of members and societies. Outsiders funds have a major portion with compare to net worth that is risky from lenders points of view. It would make difficult for getting more outsiders funds.

WORKING CAPITAL The concept of working capital indicates the excess of current assets over current liabilities. Working capital should be sufficient for the company to conduct its business on the most economical basis. The working capital of Jodhpur Dairy Ltd. shows as increasing trend during 2007 to 2009. It means the Jodhpur Dairy Ltd. has enough fund to operate business after analysis different components of current assets. It concluded that debtors and stock constituted a major part of the current assets. It enable said that the dairy was not having adequate control on debtors and stock. In all years, current liabilities were the major portion in all the liabilities. The current ratio of the company has been lower than the generally accepted norm of 2:1 excluding 2007-08. Throughout the period understudy, the quick ratio was below the norm for all the year excluding 2007-08. This shows that Jodhpur Dairy Ltd. with regard to meeting current liabilities from creditors point of view is not perfectly sound but in 2007-08 dairy have more current assets & quick assets so it will be good for 79

dairy to pay it current liabilities .The absolute liquidity ratio has been below the norm of 0.5:1 in all the years. However, overall the Jodhpur Dairy Ltd. has shortage of capacity to pay its entire current liabilities at once. Inventory turnover ratio is very good that reveals that dairy can increase its sales at lower profits. Proper attention should be paid by management towards this side to utilize funds blocked in stock. Number of days to collect receivable requires improvement on the part of management. However, since milks are a seasonal crop type business, stocks are complied for a few months and that is why the funds are blocked.

CHAPTER 8 Recommendations and Suggestions:It is Convenient to look into the overall conclusions and suggestions.

8.1. For Increasing Profitability of the organisation following suggestion should consider: Proper cost control is required and cost control techniques should adopt for it Operating expenses, Administrative& selling expenses should be especially considered to be reduced Inventory is the biggest item of Balance sheet that must have demanded a large amount of maintaining cost so efficient inventory management should be done Inventory should be reduced to some extent that would help to recover blocking money in inventory The service staff should be given proper training and better environment for work Proper advertisement and sales promotion is required. Dairy has to pay large fixed interest charges. Hence, long-term borrowing should be reduced so that the earnings are satisfactorily earmarked with them

8.2. For Growth of Working Capital following suggestion should consider:


It is suggested in this respect that the Jodhpur Dairy Ltd. should try to balance the proportion of cash and bank balance in current assets. The management should take steps for proper utilization dependence on equity capital, which shows bright prospects of Jodhpur Dairy Ltd.

It is considered to reduce dependency on outsiders sources of funds Unsubscribe capital should be called up for funds requirements It is very dangerous to maintain excising current assets as it impairs the firms profitability

as idle investment earns nothing but as it is a manufacturing of perishable good, it has to maintain the higher current assets to avoid any fluctuations or threats in business, the firm must maintain the optimum level of current assets. The management should be prompt to initiate and action and correct unbalances. The Dairy is also carrying excessive inventories in current assets. Even though it is

necessary to maintain the huge inventories, it always carries a cost with it like, if the product is not sold that can not be kept for longer period and sell again costs like carrying costs and ordering cash also increase. Therefore, the management must maintain the optimum level of inventors to maximize the profits. The Dairy must invest the surplus cash in short term marketable Securities, so that if there is any deficit in the future, that amount is Diverted to fill the deficit.


www.dairyindia.com Agarwal, Kiradoo, Management Accounting, Ramesh Book Depot, Jodhpur -New Delhi MY Khan, P.K.Jain (1981), Financial Management, 5th Edition, Publisher Mc grew hill companies. Income statement and financial statement of 2004-05 to 2007-08 as obtained from Jodhpur Dairy. Annual Reports of Jodhpur dairy www.sarasdairy.com