Inventory MGMT

All About ACCOUNTING..!!
ACCOUNTING
What is ACCOUNTING?
What is accounting? The language of business. A means to communicate financial information. A way to convey information about a business to users.
What is Need of ACCOUNTING?
Managers, investors, and other internal groups want the answers to two important questions:
How well did the organization perform? Where does the organization stand?
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What is Need of ACCOUNTING?
Accountants answer these questions with two major financial statements:
Income Statement
Balance Sheet
What is Balance Sheet?
Balance Sheet
The balance sheet (also called statement of financial position or statement of financial condition) is a snapshot of the financial status of an organization at a point in time.
What is Balance Sheet?
Balance Sheet
Assets = Equities
Assets are economic resources that are expected to benefit future activities of the organization. Equities are the claims against, or interests in, the assets of the organization.
What is Income Statement?
Income Statement
The income statement measures the performance of an organization by matching its accomplishments (revenue from customers, which is usually called sales) and its efforts (cost of goods sold and other expenses).
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What is Revenue?
Revenues
Revenues are increases in ownership claims arising from the delivery of goods or services. Revenues must be earned. Revenues must be realized.
What is Expenses
Expenses
Expenses are decreases in ownership claims arising from delivering goods or services or using up assets.
What is Profit
Profits
Profits (or earnings or income) are the excess of revenues over expenses.
Who are Users of Accounting?

Who users accounting information?
Owners
Managers Investors (including potential) Analysts on their behalf Creditors (including potential)
Government (tax assessment)

Regulators Customers
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Types of ACCOUNTING?
Accounting has two main divisions:
Financial accounting
Primarily prepared for users external to the company. Revenues, earnings, assets, etc.
Management accounting
Primarily for internal purposes
Costing, budgeting, net present value, etc.
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What is MANAGEMENT ACCOUNTING?
Management Accounting is comprised of two words Management and Accounting. It is the study of managerial aspects of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formulation of policy, control of execution and appreciation of effectiveness. Management accounting is a system that helps management in carrying out their functions more efficiently.
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GAAP
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What is GAAP?
General Accepted Accounting Principle is a technical term that encompasses the conventions, rules and procedures necessary to define accepted accounting practices at a particular time. GAAP are common set of accounting principles, standards and procedures that companies use while preparing their financial statement. Accounting Principle can be classified into two categories:
1.
2.
Accounting Concepts
Accounting Conventions
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What is Accounting Conventions?
Accounting Concepts may be considered as traditions which guide the accountants while preparing the accounting statements Accounting Conventions:1. 2. 3. 4. Consistency Full Disclosure Conservation Materiality
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What is Accounting Concept?
Accounting Concepts may be considered basic assumptions or conditions upon which the science of accounting is based. Accounting Concepts:1. 2. 3. 4. 5. Separate Legal Entity Money Measurement Going Concern Cost Concept Accounting Period 9.Realisation Concept.
6.
7. 8.
Dual Aspect
Matching Concept Accrual concept
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Inventory Valuation
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What is Inventory ?
Inventory is stock of goods, its includes raw material, work in progress, consumables, finished goods, spares. The investment in inventory is very high in a undertaking. About 90% of the working capital is invested in inventory. Therefore a proper planning is required for purchase, issue & vendor selection. The purpose of inventory management is that neither there should be overstocking nor there should be under-stocking of inventory. Overstocking=Reduction in liquidity Under stocking = Stoppage in production cycle.
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Inventory
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Example of Inventory Valuating
Mueller Hardware has a storage barrel full of nails. The barrel was restocked three times with 100 pounds of nails being added at each restocking.
The first batch cost Mueller 100/-, the second batch cost Mueller 110/-, and the third batch cost Mueller 120/-.
The barrel was never allowed to empty completely and

customers have picked all around in the barrel as they bought nails from Mueller
At the end of the accounting period, Mueller weighs the barrel and decides that 140 pounds of nails are on hand
What is the cost of the ending inventory?

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Example of Inventory Valuating
The methods from which to choose are varied, generally consisting of one of the following: First-in, first-out (FIFO) Last-in, first-out (LIFO) Weighted-average
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FIFO
CALCULATIONS: With first-in, first-out, the oldest cost is matched against revenue and assigned to cost of goods sold. Conversely, the most For recent purchases are assigned to units in ending inventory.
Mueller's nails the FIFO calculations would look like this:
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LIFO
CALCULATIONS: Last-in, first-out is just the reverse of FIFO; recent costs are assigned to goods sold while the oldest costs remain in inventory:
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Average Cost
CALCULATIONS:
The weighted-average method relies on average unit
cost to calculate cost of units sold and ending inventory
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What is Inventory Valuation
Valuation of inventory bears direct relation on the determination of income of the company. If all the material are purchased at same rate there will be no problem in valuation of inventory. But because of different market condition the valuation of inventory can be done in different ways. There are many methods of valuing inventory, the most important being; 1. FIFO 2. LIFO
3. AVERAGE COST
4. BASE STOCK
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What is FIFO?
First In First Out
This method assumes that oldest material is issued first and at its original rate at which it is received.
Ie. Unit cost are apportioned to cost of production according to their chronological order.
This method is beneficial in case of falling price
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Advantages of FIFO?
First In First Out- Advantages 1. Rational
2. Material cost correctly ascertained

3. Useful when price are falling 4. Simple to understand 5. Closing stock value in balance sheet is more realistic
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Disadvantages of FIFO?
First In First Out- Disadvantages 1. Possibility of more clerical error
2. Sometimes more than one price has to be use to value one issue
3. In case of frequent price fluctuation the pricing becomes different
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What is LIFO?
Last In First Out
In this method issue is done in the reverse order of purchase.
Material received last in the stores is issued first

More appropriate in rising price Also known as replacement cost method
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What is LIFO?
Last In First Out (Advantage) No profit No loss as material are issued at cost price
Production Cost represents recent cost

Suitable in rising price
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What is LIFO?
Last In First Out (Disadvantage)
May result in clerical error as every time issue is made price may be revised
Comparison between different jobs is difficult The stock in hand is valued at price which is not current market price More than one price can be used for valuing issue of material of single requisitions.
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Example
Discuss the effect of adopting LIFO and FIFO on profit with the help of following figures Jan-1 Opening Balance-10 units @ 30/Jan 10 Purchased 10 unit @ 33/Jan 12 Issued 10 Jan 31 Closing Balance-10 unit Feb-3 Purchase-10 unit @36/Feb-12 Issued-10 units Feb-28 Purchased-10 units @ 40/-
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Average Method
The principle on which average method is based is that all of the material in the stores is mixed up and cannot be issued
from any particular lot

Types of Average Stock Method 1. Simple Average method 2. Weighted average method
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Simple Average Method

Simple Average method
Price is calculated by dividing total of the prices of material in
the stock with the number of prices used in the total

Eg 1000units purchased @ 10/-
2000units purchased @ 11/3000units purchased @ 12/-
Then the issue price of next issue will be

10+11+12/3 = 11
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Weighted Average Method

Weighted Average method
Price is calculated by dividing total cost of material in the stock

with the total quantity of material Eg 1000units purchased @ 10/2000units purchased @ 11/3000units purchased @ 12/Then the issue price of next issue will be (1000*10)+(2000*11)+(3000*12)/(1000+2000+3000) = 11.33/35
Inventory Management
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What is Inventory Management?

Inventory Management:The investment in inventory in most
of the manufacturing, wholesale,
retail trade is very high. In industries like sugar, the raw material cost is as high as 68.75% and in steel industry also it count to about 65.33%. About 90% of working capital is invested in inventory management.
Inventory Management will determine
What to purchase How much to purchase From where to purchase When to purchase
Where to store
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Objective of Inventory Management?

Objectives of Inventory Management:1.
To ensure continuous supply of materials, spares & finished goods so that
production should not suffer at any time & customer demand should also be
met. 2. To avoid over-stocking & under-stocking of inventory.
3.
4. 5.
To maintain investment in inventory at optimum level

To maintain material cost at minimum, so that cost of production is minimum. To eliminate duplication in ordering or replenishing stock.
6.
7. 8.
To minimize losses due to wastage & damage.

To ensure perpetual inventory control To facilitate furnishing of data for short-term & long-term planning & control of
inventory
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Tools of Inventory Management?

Tools of Inventory Management:1. Determination of stock level. 2. Determination of safety stock. 3. Determination of EOQ.
4. A.B.C Analysis.
5. Preparation of inventory report 6. Perpetual Inventory system 7. JIT Control System
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Determination of Inventory level?

Determination of Inventory level:-
An efficient inventory management requires that a firm should maintain an optimum level of inventory where inventory cost is minimum, at the same time there should be no stock out. Various stock level are fixed for this. (a) Minimum Level :- This represent the quantity which must be maintained in
hand at all times. Minimum level depends on: Lead time Rate of consumption] Nature of material LEVEL-(NORMAL CONSUMPTION
MINIMUM STOCK LEVEL=REORDER *NORMAL REORDER LEVEL)
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Re-order level -When the quantity of the material reaches a certain figure then fresh order is sent to get the material again. The order is sent
before the material reaches the minimum level. Reorder level is fixed
between minimum & maximum level. It depends on following factors : Rate of consumption
Lead time
Maximum quantity of material required in a day. Nature of material LEVEL= (MAXIMUM CONSUMPTION * MAXIMUM
RE-ORDER
REORDER PERIOD)
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Maximum level It is that quantity of the material beyond which a firm should not exceed its stock. If stock reaches beyond this level it is over
stocking. Maximum level depends on following factors : Rate of consumption Lead time Maximum quantity of material required in a day. Nature of material
Availability of capital for purchase of material.

Availability of space for storing the material Cost of maintaining the stores.
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Availability of material at any point of time. Restrictions imposed by the government.
This possibility of change in fashions will also affect the maximum level.
MAXIMUM STOCK LEVEL = RE-ORDER LEVEL + RE-ORDER QUANTITY (MINIMUM CONSUPTION * MINIMUM RE-ORDERING PERIOD) Average stock level- The average stock level is average of minimum stock & maximum stock. Danger level-It is that level beyond which the material should not fall in any case.
DANGER LEVEL= (AVERAGE CONSUMPTION * MAXIMUM RE-ORDER

PERIOD FOR EMERGENCY PURCHASE)
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Determination of Safety Stock?
Safety Stock Safety stock is a buffer to meet some unanticipated increase in usage. The usage of inventory cannot be perfectly
forecasted. It fluctuates over a period of time. The demand for

material may fluctuate & delivery of inventory may also be delayed & in such a situation the firm can face a problem of stock-out. The stock out can prove costly by effecting in smooth working of
concern.
In order to protect against this situation firm usually maintains some stock this stock is known as safety stock.
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Inventory Order Cycle

Order quantity, Q Inventory Level
Demand rate
Reorder point, R
Lead time Order Order placed receipt
Lead time Order Order placed receipt
Time
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Determination levels?
From the following information, calculate minimum stock level, maximum stock level and reorder level : Max Consumption-200 units per day Min Consumption-150 units per day Normal Consumption-160 units per day Re-order period-10-15 days Re-order quantity-1600 units Normal re-order period-12 days
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Determination of EOQ?
Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs. The framework
used to determine this order quantity is also known as Wilson EOQ

Model. The model was developed by F. W. Harris in 1913. But still R. H. Wilson is given credit for his early in-depth analysis of the model. Ordering cost are the cost which is associated with the purchasing or ordering of material. E.g. Cost of staff posted for ordering of goods, transportation expenses, inspection cost. This cost is also called buying cost. The planning commission of India has estimated these
cost between 10% to 20%.

Carrying cost are the cost of holding the inventory. E.g. Cost of capital invested, storage cost, insurance cost, loss if material due to
deterioration, cost of spoilage

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Determination of EOQ?
Underlying assumptions (a) The ordering cost is constant. (b) The rate of demand is constant (c) The lead time is fixed
(d) The purchase price of the item is constant i.e. no discount is

available
EOQ is the level of the inventory where ordering cost and carrying cost remains equal.
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EOQ Cost Model
Annual cost ($) Slope = 0 Minimum total cost
Total Cost
CcQ Carrying Cost = 2
CoD Ordering Cost = Q Optimal order Qopt

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Order Quantity, Q
Determination of Total Cost?
cost function: EOQ is the level of the inventory where ordering cost and carrying cost remains equal.
Total Cost = purchase cost + ordering cost + holding cost

Purchase cost=(purchase unit price annual demand quantity.) Purchase cost =(PD) Ordering cost: This is the cost of placing orders: each order has a fixed cost C, and we need to order D/Q times per year. Ordering cost=C D/Q
Holding cost: the average quantity in stock (between fully replenished and
empty) is Q/2, Holding cost = H Q/2
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Determine EOQ
Find out EOQ from following information
Annual usage-6000units
Cost of material per unit-20/Cost of receiving and placing order-60/Annual carrying cost of one unit- 10% of inventory value
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EOQ Analysis
A manufacturing company uses 6400unit of material per year. The unit cost is 6/-, and the carrying cost is 25% of unit cost. If the cost of procurement is 75/- determine 1. EOQ
2. Number of order per annum

3. Time period between two consecutive order.
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EOQ Analysis
X ltd produces a product which has a monthly demand of 4000 units. The product requires a component X which is purchased at 20/-.For every finished product, one unit of the component is required. The ordering cost is 120/per order and the holding cost is 10%p.a You are required to calculate 1. EOQ 2. If the minimum lot size to be supplied is 4000unit, what is extra cost, the company has to incur
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EOQ Analysis (Decision making)
An Enterprise requires 90000 units of a component in a year. The cost per unit is 3/-.Ordering cost id 6/- per unit 1. What is EOQ 2. What should the firm do if the supplier offers discount as
below
At 4500 units Discount offered is 2%
At 6000 units Discount offered is 3 %
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ABC Analysis
Usually a firm has to maintain several types of inventories. It is not desirable to keep the same degree of control on all the items. The
firm should pay maximum attention to those items whose value is

the highest. The firm should, therefore, classify inventories to identify which items should receive the most effort in controlling. The firm should be selective in its approach to control investment in
various types of inventories. This analytical approach is called the

ABC analysis and tends to measure the significance of each item of inventories in terms of its value.
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ABC Analysis
ABC analysis helps to concentrate more effort on category A since greatest monetary advantage will come by controlling these items. The control on C category items are kept under minimum control. The control on B category items are moderate. Like ABC control VED analysis is also used in few industries for controlling inventory V Vital without which production will stop.
E Essential Which is essential for production.

D Desirable Without which there will be no effect on production but is desirable for production.
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Perpetual Inventory System
Perpetual Inventory System may be defined as a system of records maintained by the controlling department, which reflects the physical movement of stock & their current balance. Procedure of Perpetual Inventory System 1. The up to date position in stores ledger and bin cards should be made to know the current balances of the stores. 2. 3. The stores are selected in rotation for checking the items physically. The stores which are not checked are marked.
4.
5.
Physical stock checking is done & tallied with the records.

Final report is signed by cost accountant.
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Analysis of
Financial Statement
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What is Analysis of Financial Statement?
FINANCIAL ANALYSIS is the process of critically examining in detail accounting information given in the financial statement. FINANCIAL ANALYSIS is largely a study of relationship among the various financial factor in a business as disclosed by a single set of statement and a study of trend of these factors. FINANCIAL INTERPRETATION is closely related to financial analysis.
Interpretation is thus drawing of inference & stating what the figures in the financial
statement really mean. The analysis & interpretation of financial statement is to determine the significance & meaning of the financial statement data.
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Objective of Financial Analysis.!
(1)To assess the present & future earning capacity or profitability of the concern
(2)To assess the operating efficiency of the concern as a whole & various departments.
(3)To assess the short term & long term solvency of the concern. (4) To have a comparative study in regard to one firm with another or one department with another. (5) For forecasting & preparation of budget. (6)To assess the stability of the firm (7) For decision making.
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What is Ratio Analysis ?
RATIO is the arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expression.
FINANCIAL RATIO is the relationship between two accounting figures expressed mathematically.
FINANCIAL RATIO ANALYSIS is a technique of analysis & interpretation of the financial figures in the financial statement. It is the process of establishing & interpretation various ratios for decision making.
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What is Ratio Analysis ?
A single ratio in itself does not convey much of sense. To make ratio useful it ha s to be further interpreted. The interpretation of ratio can be made in following ways:

Single absolute ratio Group ratio Historical Comparison Inter-firm Comparison
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3. Classification of Ratios!!
Ratios
Traditional
Functional
Significance
Balance sheet
P&L A/c
Mixed
Liquidity
Solvency
Turnover
Profitability
Primary
Secondary
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What is Traditional Classification?
Balance sheet Ratio deals with the relationship between two balance sheet figures. e.g. Current ratio, Liquidity ratio, Debt-equity ratio, Capital Gearing ratio.
Profit & Loss Account Ratio deals with the relationship between two profit & loss figures. e.g. Gross Profit Ratio, Operating Ratio, Net Profit Ratio.
Mixed Ratio exhibit the relationship between the figures of profit & loss account and balance sheet. E.g. Stock turnover ratio, Debtors Turnover ratio, Creditor Turnover ratio.
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What is Functional Classification?
Liquidity Ratio deals with the ratios which measures the short-term solvency or financial position of a firm. This ratio are calculated upon the short-term paying capacity of a concern. E.g. Current ratio, Liquid ratio, Absolute liquid ratio. Solvency or Leverage Ratio Long-term solvency ratio conveys a firms ability to meet the interest cost & repayment schedules of its long-term obligations .e. g. Debt-Equity Ratio, Coverage Ratio, Capital Gearing ratio, Proprietary Ratio.
Activity or Turnover Ratio are calculated to measure the efficiency with which
the resources of a firm are employed. They indicate the speed with which assets are being converted into sales. E.g. Stock turnover ratio, Debtors turnover ratio, Creditor turnover ratio.
Profitability Ratio measures the result of the business operations or overall

performance & effectiveness of the firm. E.g. Gross profit ratio, Net profit ratio, Return on capital
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What is Significance Classification?
Primary Ratio deals with the ratios which are of prime importance to a concern. E.g. Return on capital.
Secondary Ratio are ratio which support the primary ratio. E.g. the relationship of operating profit to sales or the relationship of sales to total assets of the firm.
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Liquidity Ratio
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What is Liquidity ratio?
Liquidity Ratio deals with the ratios which test the ability of a concern to meet its current obligation as & when due. The short term obligation are met by realizing amounts from current, floating or circulating assets. To measure liquidity following ratios should be calculated:1. 2. 3. Current Ratio Liquid Ratio Absolute Liquid Ratio
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What is Current ratio?

Current Ratio
may be defined as the relationship between current assets &
current liability. This ratio is also known as working capital ratio. Current ratio is current assets to current liability Interpretation of current ratio: A relatively high current ratio indicate that the firm is liquid & has ability to pay its current liability. Where as a relatively low current ratio indicate that the firm is
not liquid. A ratio of 2:1 is referred as s bankers rule of thumb or a standard

for the current ratio.
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Calculate Current ratio?

Stock-60000/Cash-20000/Debtors-70000/Bills Receivables-30000/-
Prepaid Expenses-10000/Goodwill-50000/Bills Payable-15000/-
Land & Building-100,000/Creditors-20000/Tax Payable-18000/-
Outstanding Expenses- 7000/Debenture-75000/-
Bank Overdraft-25000/-
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What is Liquidity ratio?
Liquidity Ratio is a more rigorous test of liquidity than the current ratio. Current assets include inventory & prepaid expenses which are not easily convertible into cash within a short period. Quick ratio is Liquid assets to Current liability Interpretation of Quick ratio: A relatively high liquid ratio indicate that the firm is liquid & has ability to pay its
current liability. Where as a relatively low liquid ratio indicate that the firm is not
liquid. A ratio of 1:1 is referred a standard for the liquid ratio.
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What is Absolute Liquidity ratio?
Absolute Liquidity Ratio is the most rigorous test of liquidity.
Quick ratio is Absolute liquid assets to Current liability
Interpretation of Quick ratio:
A relatively high ratio indicate that the firm is liquid & has ability to pay its current
liability. Where as a relatively low ratio indicate that the firm is not liquid. A ratio of .50:1 is referred a standard for the absolute liquid ratio.
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Solvency Ratio
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What is Solvency Ratio?
Solvency Ratio may be defined as the ratio which test the ability of concern to meet long-term obligation. The following ratio serve the purpose of determining the solvency of the concern: 1. 2. 3. Debt-Equity Fixed Asset to Net worth Capital Gearing Ratio
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What is Debt-Equity Ratio?
Debt-Equity Ratio , also known as External-Internal Ratio measure the relative claims of the outsider Debt-Equity Ratio is Outsiders Fund to Shareholder Fund
is calculated to
Outsiders Fund is external equity & includes all debt & liability to the outsiders, whether long term or short term. E.g. Debenture, Bank loan, Mortgages or other current liability.
Shareholders Fund consist of equity share capital , Preference share capital,

Capital reserve, Revenue reserve and reserves representing accumulated profit & surplus like reserves for contingencies, sinking fund etc. IF CURRENT LIABILITY IS NOT INCLUDED IN DEBT-EQUITY, THE RATIO IS NAMED AS LONG-TERM DEBT TO SHAREHOLDERS FUND.
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Interpretation of Debt-Equity Ratio
The debt-Equity ratio is calculated to measure the extent to which debt financing has been used in the business. The ratio indicate the proportionate claims of owner & the outsider against the firms assets. A ratio of 1:1 is considered as a satisfactory ratio although there cannot be any rule of thumb
A low ratio is considered as favorable from the long-term creditors point of view
because a high proportion of owners fund provide more margin. A high ratio provide a less margin of safety for them at the time of liquidation.
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The following figure relate to the liability side of a company:
50000, Equity share of 10/-each, fully paid-500000/20000, 9% Preference Shares of 10/- each, fully paid-200000/General Reserve-50000/Share Premium-25000/Profit & Loss A/c-125000/7% Debenture-140000/Montage Loan-60000/Creditor-129000/Bills Payable-74500/Find Debt-Equity & Comment on this ratio
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What is Fixed Asset to Net Worth Ratio?
Fixed Asset to Net Worth Ratio, is calculated to measure the relationship between Fixed assets of the company & shareholders Fund. Fixed Asset to Net Worth Ratio is Fixed Assets (After Depreciation) to Shareholders Fund. Shareholder's fund is same as net worth. INTERPRETATION OF THE RATIO: This ratio indicates the extent to which shareholders fund are sunk into Fixed asset. Generally the fund for fixed assets should be financed from shareholders fund. If the ratio is less than 100% that implies that the owner has put part of his fund in
working capital & if the ratio is more than 100% it implies that owner has not
got sufficient fund to finance fixed asset. 60% to 65% is considered satisfactory.
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What is Capital Gearing Ratio?
Capital Gearing Ratio, establishes the relationship between fixed interest bearing security & Shareholders fund. Capital Gearing Ratio is Fixed Interest Bearing Security to Shareholders Fund. INTERPRETATION OF THE RATIO: A Company is said to be highly geared if the major shares of the total capital is in
the form of fixed interest bearing securities or if this ratio is more than 1.
If this ratio is less than 1, it is said to be low geared. If it is exactly 1, it is said to be evenly geared.
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Profitability Ratio
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What is Profitability Ratio?

Profitability Ratio
may be defined as the ratio which test the profit making
capacity of the company and indicates overall performance of the company The following ratio serve the purpose of determining the profitability of the concern Net Profit Ratio Gross Profit Ratio Return on Capital Employed Return on Fixed Assets Earning Per Share Price Earning Ratio
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What is G.P & N.P Ratio?
Gross-Profit Ratio measures the relationship of gross profit to net sales. The ratio should be expressed in percentage. Interpretation of G.P ratio This ratio indicates the extent to which selling price of goods per unit may decline without resulting in losses on operations of a firm. It reflects the efficiency with which a firm produces its products. Net-Profit Ratio measures the relationship of net profit to net sales. The ratio
should be expressed in percentage.

Interpretation of N.P ratio This ratio indicates the firms capacity to face adverse economic conditions such as price competition ,low demand etc. Higher the ratio better the profitability.
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What is Operating Ratio?
Operating Ratio measures the relationship between cost of goods sold and other operating expenses on the one hand and sales on the other. In other words, it measures the cost of operations per rupee of sales. The ratio should be
expressed in percentage.
OPERATING RATIO IS OPERATING COST DIVIDED BY NET SALES OPERATING COST IS COST OF GOODS SOLD PLUS OPERATING EXPENSES.
Operating expense consist of:1. 2. Administrative & office expenses. Selling & Distribution expense
Operating ratio indicate the percentage of net sales that is consumed by operating cost. Higher the ratio less favorable it is for the company.
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What is Return on capital?
Return on Capital also known ROI is the relationship between net profit before tax and the proprietors fund. The ratio should be expressed in percentage.
INTERPRETATION OF THE RATIO: This ratio is one of the most important ratios used for measuring the overall efficiency of a firm. This ratio indicates how well the resources of a firm are
used, higher the ratio better it is for the firm. This ratio should be used for
trend analysis & inter-firm comparison.
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What is Return on Equity capital?
Return on equity Capital :Equity shareholders are the real owner of the company. The rate of dividend varies with the availability of profit. Therefore return on capital employed is the relationship between profit of the company
available to equity shareholders and equity share capital.
This ratio is more meaningful to the equity shareholders who are interested to know
the profit earned by the company
Higher the ratio better it is for the company.
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Turnover Ratio
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What is Turnover Ratio?
Turnover Ratio may be defined as the ratio which measures the efficiency or effectiveness with which a firm manager its resources & assets. This ratio is also known as activity ratio. The following ratio serve the purpose of determining the activity level of the concern 1. Inventory Turnover ratio
2.
3. 4.
Debtor Turnover ratio

Creditor Turnover ratio Fixed Asset Turnover ratio
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What is Stock Turnover Ratio?
Stock Turnover Ratio also known as stock velocity. It would indicate whether inventory has been efficiently used or not. Inventory turnover ratio indicates the number of times the stock has turned over during a period of time & evaluate the efficiency with which the firm is able to manage the inventory.
INVENTORY TURNOVER RATIO IS COST OF GOODS SOLD TO AVERAGE INVENTORY

Inventory turnover ratio measures the velocity of conversion of stock into sales. Higher ratio indicates efficient management, as it indicates stock is converted into sales in less time & hence less capital is blocked in inventory. Low ratio indicates high investment in inventory. Accumulated , obsolete & slow stock.
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What is Debtor Turnover Ratio?
Debtor Turnover Ratio indicates the velocity of debt collection by a firm. Also it indicates the number of times debtors are turned over during a year.
Debtor turnover ratio is Credit Sales to Average Debtor.

Trade Debtor is Sundry Debtors & Bills Receivable. Debtor velocity indicates the number of times the debtors are turned over during a year. Higher the value of debtor turnover the more efficient is the management of debtors. But a very high ratio ratio indicates inability of firm to sell. Average collection period represent the number of days for which a firm has to wait
before receivables are converted into cash.
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What is Creditor Turnover Ratio?
Creditor Turnover Ratio indicates the velocity of debt payment by a firm. Also it indicates the number of times Creditors are turned over during a year.
Creditor turnover ratio is Credit Purchase to Average Creditor.

Trade Creditor is Sundry Creditors & Bills Payable. Creditor velocity indicates the number of times the creditor are turned over during a year.
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Reverse Journey to balance sheet

From the following information, Draw up the balance sheet Current Ratio=2.5
Liquid ratio=1.5
Net working capital=300,000/Stock turnover ratio (Cost of sales/closing stock) =6 times
Gross profit ratio=20%

Fixed asset ratio=2 times Average debt collection period=2 month Fixed assets : Shareholders Net worth=1:1 Reserve: Share Capital= 0.5 : 1
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Accounting for
Transportation undertaking
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Transportation companies may be divided into (a) Railway
(b) Roadways
(c) Shipping (d) Airways
Transportation companies carry goods & passengers for one place to another
against some fare which they collect either at the point of boarding or on the way or at the point of unloading or destination
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Railway Transportation ?
The station master or the booking clerk of each station prepares a statement showing the total number of tickets sold to different station which must agree with the opening & closing balances of tickets. A summary is made at the end of each week with the total amount of sales so realized which will be forwarded to the cashier of the respective division. Total collection are added up to find out total of each division & zone.
The divisional cashier deposits the total collection into bank

For Income from other sources like advertisement a separate account is prepared
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For purchase & issue of coal, petrol, diesel etc separate account is prepared. At the same time account for wages & salary, lubricants, engineering goods, tyres etc separate account is prepared. At the end of the year, after making distinction between revenue & capital expenditure, Final account is prepared. Capital and Revenue Accounts.- The accounts of a railway presented in such a
form as to facilitate a review of the finances of the railway as a commercial

undertaking are known as "Capital and Revenue Accounts". The Capital and Revenue Accounts of a railway are compiled every year and included in the Annual Report of the railway. The various processes of accounting followed in
Railway Accounts Offices lead up to these accounts.
95
After the books for a financial year have been closed and after the final accounts c urrent have been submitted, the following accounts and returns should be comp iled
(a) The Capital and Revenue Accounts (Section II of the Annual Report-Financial Sta tements).
(b) The Finance Accounts.
(e) The Debt Head Report.

(d) Statement of Voted and Charged Expenditure. (e) Appropriation Accounts and connected Returns
96
Airways Transportation ?
After the books for a financial year have been closed and after the final accounts c urrent have been submitted, the following accounts and returns should be comp iled
(a) The Capital and Revenue Accounts (Section II of the Annual Report-Financial Sta tements).
(b) The Finance Accounts.
(e) The Debt Head Report.

(d) Statement of Voted and Charged Expenditure. (e) Appropriation Accounts and connected Returns
97

Inventory MGMT

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All About ACCOUNTING..!!

All About ACCOUNTING..!!

What is Need of ACCOUNTING?

All About ACCOUNTING..!!

What is Need of ACCOUNTING?

All About ACCOUNTING..!!

Accountants answer these questions with two major financial statements:

What is Balance Sheet?

All About ACCOUNTING..!!

What is Balance Sheet?

All About ACCOUNTING..!!

What is Income Statement?

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

Who are Users of Accounting?

All About ACCOUNTING..!!

Government (tax assessment)

All About ACCOUNTING..!!

Primarily for internal purposes

Costing, budgeting, net present value, etc.

What is MANAGEMENT ACCOUNTING?

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

What is Accounting Conventions?

All About ACCOUNTING..!!

What is Accounting Concept?

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

Example of Inventory Valuating

All About ACCOUNTING..!!

The barrel was never allowed to empty completely and

What is the cost of the ending inventory?

Example of Inventory Valuating

All About ACCOUNTING..!!

All About ACCOUNTING..!!

Mueller's nails the FIFO calculations would look like this:

All About ACCOUNTING..!!

All About ACCOUNTING..!!

The weighted-average method relies on average unit

cost to calculate cost of units sold and ending inventory

What is Inventory Valuation

All About ACCOUNTING..!!

All About ACCOUNTING..!!

This method is beneficial in case of falling price

All About ACCOUNTING..!!

2. Material cost correctly ascertained

All About ACCOUNTING..!!

All About ACCOUNTING..!!

In this method issue is done in the reverse order of purchase.

Material received last in the stores is issued first

All About ACCOUNTING..!!

Production Cost represents recent cost

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

from any particular lot

Simple Average Method