Dr.

Chandra Mohan Patnaik

Associate Professor (Accounts )
School of Management
KIIT University, Odisha
 Completed Ph.D in Finance from Bareilly University in
2005.
 Best faculty award 4 times including in 2018 from KIIT
University.
 Received Rajiv Memorial Award from Governor of Odisha in
2012 for contribution in Academics excellence.
 Successfully Completed guidance to 11 Ph.D Students and
8 are pursuing under me including 3 foreign scholars.
 Published more than 165 research papers.
 Editor -in -Chief in SAJMMR and reviewer & member of
various international journals.
 Overall I love teaching and enjoy every moment of this.
 Basics of accounting and Transaction Analysis -
Accounting process discussion-till financial
statement preparation Regulatory Framework (Indian
AS, IFRS)
 Analysis of Financial Statement - Analysis of Financial
Statements- Ratio Analysis, Balance Sheet Ratios,
Profit and loss account and Inter-statement ratio
 Financial planning- Financial planning and
forecasting, projected cash flow estimation, pro-
forma financial statement preparation
 Cash management- Cash management techniques,
Linters model etc. cash budget preparation
 Sectoral Financial statement analysis - bank FS
analysis, insurance company FS analysis, company FS
analysis, etc.)
 End semester -
40 marks

Mid semester-
20 marks

Assignment -10 Marks (

copy and case study)
Class participation-
10 Marks
4 Quiz of 5 marks each
=20 Marks
 10 % of internal marks will be given to the
students with 100% class attendance.
 This will help the students to move next
grade and increase the overall SGP and CGP.
 Gifts will be given as token of appreciation
and motivation to the students with 95% and
above in mid-semester and end- semester(
including internal evaluation).
 Income

Assets
Basics Liability

Expenses
 It refers to all the revenue receipts during the
accounting period. It includes sale proceeds,
amount received from services, rent received,
interest received , commission received and all
other receipts which will can be considered as
revenue
 • Gross sale proceeds, commission
received, discount received etc.
Operating
revenue

• Dividend and interest received

from investments, profit on sale
Non operating of assets, compensation received
revenue etc.
 Sales
 Income from services
 Rent received
 discount received
 commission received
 interest received
 bad debts recovered
 apprentice premium
 income from investment
 It includes all the revenue expenses which are
incurred to run the organization. It includes all
the day to day expenses. Like sales expenses,
administrative expenses, Financial charges etc.
This includes operating and non-operating
expenses.
 Cost of sales, selling
expenses, office expenses

Salary , commission, bank

charges, lighting

Stationery, printing ,
discount, bad debts etc.
depreciation, amortization, interest charges or
other costs of borrowing.

Expenses relating to employee benefits, such as

pension contributions, would also be considered
as a non-operating cost.
 Purchases  Stores consumed
 Carriage  Royalty
 Carriage inward  Motive Power
 Freight  Coal, coke
 Freight inward  Water
 Wages  Oil
 Factory expenses  Octroi
 Dock charges
 Custom Duty
 salary  entertainment
 rent, rate & taxes expenses
 stationary  repairs
 postage and  depreciation
telegram  interest
 audit fees  trade expenses
 legal charges  conveyance
 telephone charges  charity
 insurance premium  bank charges
 These are the economic resources of an
organization . This helps to generate the
revenue. The characteristics are
 Having a value
 It should be companies Control
 Have a recordable value.
 Cash in hand  Goods sent on
 Cash at bank consignment
 Bills receivable  Long term investments
 Sundry debtors  Trade mark
 Closing stock  Patents
 Finished goods  Vehicle
 Raw materials  Furniture
 Work in progress  Investments
 Stationary  Machinery and plant
 Tools
 Land and building
 Goodwill
Tangible assets

Intangible assets

Capital work in progress

 • Land, building, plant, furniture,
Tangible motor vehicle and tools etc

assets

• Patents, trade mark, copy rights,

Intangible goodwill and research and
development cost, computer

assets software, IPR, Customer relation

etc.
 Capital work in progress account
contains all expenses incurred on
the asset until it is
converted into working condition. All these ex
penses will become part of
the cost of that asset. Any construction which
is not completed before financial year.
 Trade Short term
Inventory
receivables advances

Cash and Other current

bank assets
Current Fixed Wasting
Assets Assets Assets

Fictitious Contingent
Assets Assets
 Assets diminish in
value when the assets
are taken out of
natural resources Mines, Ores, oil wells etc.
Which do not have
Preliminary expenses,
any concrete value
issue of shares and
debenture & formation
expenses
 The existence and
value depends upon
occurrence and non-
The undecided suit for
occurence event
property
 Liabilities represent money that organization
owes. This is money that it owes because it
was borrowed by the organization. In other
words, liabilities shows the sources of money,
where the organization has received its funds.
 Bank overdraft
 Bills payable
 Sundry creditors
 Short term loans
 Bank loans
 Long-term loans
 Incomes received in advance
 Capital
Long term liability- long term borrowings

Deferred Tax liability- provision for future taxation

Long term provision- leave encashment, gratuity and warranty provison

Short term borrowings

Trade payables

Other current liability and

short term provisions
 Depending upon
occurrence of certain event Arrears of dividend of
cumulative preference shares,
liability on bills discounted and
suit for damages by third party.
 AS

Ind
IAS GAAP AS

IFRS
 National • Ind AS (new version)
GAAP- AS • Prepared in line of
India IFRS

• IAS
International
• IFRS ( New version of
GAAP IAS)
 IFRS- Adopted- Adopted IFRS prepared by IASB (
already 120 countries adopted)
 IFRS –Convergence- Preparing own standards ( USA
and India)
 On 15th February 2015 MCA notified 39 Ind AS–
Companies ( Indian Accounting Standard Rule 2015)-
Ind AS
 Phase-I
1/4/2016
Mandatory
adoption Phase-II
Date of
1/4/2017
applicability
Voluntary
1/4/2015
adoption
 Can be adopted by any company with effect from
1/4/2015.
 Once company opts Ind AS it cannot opt out. It
means company will have to follow Ind AS in the
subsequent year.
 Comparative Financial Statement- Ind AS
applicable to previous year even if first time
applied.
 If company opts for Ind AS wef 1/4/15 , its
holding, subsidiary and associate companies will
have to follow Ind AS
 From 1/4/2016- All the company whether listed
or unlisted having net worth of Rs 500 crores or
more
 Note- Net worth = Equity share capital +
Preference Share capital + Reserves and surplus
 Comparative Financial Statement
 If Ind AS applied to any of the company its
holding , subsidiary and Associate company shall
have to mandatory adoption of Ind AS
irrespective of net worth.
 All listed company having net worth below Rs500
crore.
 All unlisted company having networh more than
equal to Rs 250 crore ( unlisted company having
net worth more than 250 crore but less than
Rs500 crore
 Comparative Financial Statement
 If Ind AS applied to any of the company its
holding , subsidiary and Associate company shall
have to mandatory adoption of Ind AS
irrespective of net worth.
 To facilitate Capital Inflow
 Get our Balance Sheet globally recognised
 To facilitate movement of learned accounting
professionals across the globe
 Facilitating consolidation of Financial
Statement of units operating in India and
abroad.
 Purpose
 Statement of Financial Position ( SOFP)
 Statement of Comprehensive Income
 Statement of Change in Equity ( SOCIE)
 Notes to Accounts
 Going concern
 Fair presentation of
financial performance
 Materiality
 Aggregate- similar
transactions should be
kept in one place
 Frequency- at least
annually/ disclosure why
not?
 Accrual Basis
 Consistency
 Matching concept
 Offsetting – An income
should not offset with the
loss.
 Comparative
 Consolidation
 No extra ordinary item
under IFRS.
 The transactions,  Goods sold for cash
where the terms on Rs1,000
cash or on cheques,  Rent paid by cash
by cash or by Rs 500
cheques, for cash  Salary paid by
or for cheques are cheque Rs 2,000
used are identified  Good are purchased
as cash for cash Rs 6000
transactions.
 The transactions  Charges paid Rs200
where in the terms  Shilpi settled her
paid, received, account of Rs1,000
settled, cleared,  Rs2,000 deposited
deposited, in the bank
withdrawn etc is  Mr. Anirban cleared
used are identified his account or
as cash Rs500 by paying
transactions. Rs450
 The transactions  Goods sold to
where both cash Sravani for Cash
and personal names Rs1,000
are mentioned are  Goods purchased
termed as cash from Suman for
transactions cash Rs6,000
 The transactions  Goods sold to
where in personal Sravani Rs1,000
names or name of a  Good returned from
firm is mentioned Sreemoti Rs5,000
are identified as  Goods returned to
credit transactions Sivani Rs1,000
 Goods purchased
from Suman
Rs6,000
 An account is summarized record of relevant
transactions relating to same activity or
particular head that has taken place during a
given period. Separate individual accounts are
opened for every head of expenses, revenue,
asset, liability and capital
1. Purchased goods for cash Cash, goods
2. Purchased plant Plant ,cash
3. Purchased furniture Furniture, cash
4. Purchased good on credit Goods, creditor
5. Sold goods on credit to X Goods, X
6. Rent received Cash, rent
7. Salary paid Salary, cash
8. Commission received
Commission, cash
9. Cash deposited in to bank
Bank ,cash
10. Started business with
capital Cash, capital

Transactions Accounts involved

 Balance
Sheet
Income Cash flow
statement statement

Accounting
equation
Adjusted Trial Balance

Income Statement

Balance Sheet
Asset= Liabilities + Equity

Asset- Liabilities = Equity

Assets – Equity = Liabilities

Transactions Assets Liability Equity
+
Cash Goods Furniture
Increase in
one asset

Decrease in
other asset
Cash brought in to
business

Increase in capital

Increase in asset
Goods purchased
on credit

Increase in Liability

Increase in assets
Increase in one
liability

Decrease in
another liability
Increase in
capital

Decrease in
liability
Increase in
liability

Decrease in
capital
 Increase in
capital

Discharge
of liability
at discount

Decrease Decrease in
in liability assets
 Increase in
assets

Amount
collected
from debtors
at discount

Decrease in Decrease in
assets capital
 Whether expenses
paid or outstanding If expenses paid it If outstanding it
both the cases the will reduce from the will increase the
capital will be cash liability
reduced
 If income
Increase the Increase the
received in
liability cash
advance
 Prepaid expenses
If any expenses column will be It will reduce from
paid in advance opened in asset the cash
side
 For accrued A separate column
income ( income will be opened in Added to the
earned but not the asset side as equity / capital
received) accrued income
Each transactions is
recorded in two
One account in the debit
places
side and other account
in the credit side
 Debit • all expenses, losses,
drawings, assets

refers to
• (left hand side of an account )

Credit • incomes, gains, capital and

liability, reserves, surplus and
provisions ( Right hand side
refers to of an account)
Increase in assets,
expenses, losses
and drawings Debit balance
Decrease in assets,
expenses, drawings
and losses
Credit balance
 Increase in
capital, liability,
income and gain Credit balance
 Decrease in
capital, liability,
gain and income Debit balance.
Primary book of
businessman Records day to day
transactions
chronologically
 Trial Final
Journal ledger
Balance Accounts
 The Balance Sheet presents an enterprise’s
assets, liabilities and equity at a point in time.
It summarizes the resources, and the claim to
those resources by owners and creditors of
the enterprise on a certain date
Liabilities +
Assets
equity
Items Details Amount
Assets
Office equipments
Stock
Bank
Cash
Building
Total of assets
Liabilities
Creditors
Outstanding expenses
Overdraft
Equity
Share capital
Retained earnings
Total equity
Total of liabilities and equity
 It is a dynamic document which shows the
results of operation of an enterprise for a
particular period of time. In this statement
revenue of a particular period are marched
with the expenses of that period. The excess
of revenue over expenses is known as net
income and excess of expenses over revenue
is known as net loss
 For business profit is like engine of a car. As
the car ends when its engine is separated
from it, similarly identity of business comes
to an end when the word profit is removed
from it. Profit is very important in any
business.
 The answer to this question is simple and
obvious . As the name suggests, this
statement is prepared to find out whether an
organization has made a profit or a loss.
Profit

Expenses

Revenue/
Income
Income

Expenses

Loss
Items Amount
Income
Sales
Income from services ____________
Other receipts
Total Income ____________
Expenses
Cost of sales
Salary
Expenses due
Depreciation
Rent
Total of Income ____________
____________
Profit ( Income – Expenses) / Loss ( Expenses- Income)
Particulars Amoun
t
Opening retained earnings
Add Profit during the year
Les Dividend paid during the
year
Closing balance of retained
earnings
 It is the amount spent to acquire the assets
not for resale them, it is for generating the
income of the business unit. The benefit of
this is not for one year, it is for the longer
period. For example purchase of land and
building, purchase of plant, brokerage or
commission paid for acquiring the long term
loan etc. These expenses are recorded in
Balance Sheet.
 Purchase of
land,
building,
plant and
machinery,
furniture,
vehicle and
any other
fixed asset.

Expenditure incurred
Cost of replacing for increasing the
petrol driven engine Capital sitting
to a diesel driven expenditure accommodation in a
engine auditorium or
restaurant.

Amount spent for

erecting of plant
It includes purchasing assets required for
resale at a profit or being made into saleable
goods, maintaining fixed assets in good
working conditions, meeting the day to day
expenses of carrying business, cost of goods,
raw materials and replacements, renewals,
repairs, depreciation of fixed assets, rent
rates, taxes, wages and salaries, carriage,
insurance etc.
 Rent,
rates,
salary,
telephon
e
expense
s
Commis
sion
paid, Cost of
Revenue goods sold,
rent
paid, expenses repairs,
stationary
advertis
ement

Discount ,
interest,
postage etc.
 Repairs to second hand
machine

Legal expenses at the time

of purchase of fixed assets

Transport charges for Plant

and Machinery
Wages paid to work man for
erecting of PM

Development expenditure for

plantation, Collieries etc,

Interest paid during

construction of building or
plant etc.
 It is the expenses which would be normally
treated as revenue expenses but it not written
off in one year as its benefit is not exhausted
in one year but over a period of year. The
nature of this is non-recurring and special
nature. It may be spread over a number of
years, a proportionate amount is charged to
profit &loss account every year and the
balance amount is treated as an asset and
shown on the balance sheet asset side
Huge advertisement
expenses for Heavy Insurance premium
business promotion paid the benefit derived
beyond the accounting
period.
 Profit from Income from
sale of goods investment

Commission received,
interest received,
discount received etc.
Capital receipts capital invested in the
business, loans and the
proceeds of sale of assets
etc
Revenue receipts cash from sales, discount
received, commission,
interest on investment,
transfer fees received etc
Capital Loss
Loss while which occurs
while selling fixed assets
or raising share capital
Revenue
loss Loss on sale
of goods
 This is a measure of gross performance of a
company with reference to its total capital
employed. As the term suggests, interest and
tax are not deducted while computing PBIT.
Interest is a reward of borrowed capital and
tax is a compulsory deduction imposed by
law. It is also known as Earnings Before
Interest and Tax ( EBIT). Generally it is used to
measure managerial Performance.
 This is a measure of net profit before
charging tax. Since tax is a compulsory and
non –discretionary charge on the company,
net profit is first presented before charging
tax. By this the users can understand profit
earning ability of the company and the tax
impact separately. This also otherwise known
as Earnings Before Tax (EBT).
 This is a measure of net profit. This is used to
understand the profit earned after tax charge.
It is otherwise known as Earnings After Tax
(EAT).
PBIT
PBT
PAT
DISTRUBUTABLE
PROFIT PAT + Previous
years undistributed
profit.
Non- operating
income Income from
investment, profit on
sale of assets etc.
Non- operating
expenses Loss on sale of
assets or loss on sale
of investments etc.
 Operating
expenses

Interest

Tax

Share holders
 Explains reasons for changes in cash position
of a concern. Transactions which increase the
cash position of the concern are known as
inflow of cash and those decreases the cash
position are known as out flow of cash.
Cash flow from OPERATION

Cash flow from INVESTMENT

Cash flow from FINANCING

 Operating
•Receipts from activities •Payments to suppliers
customers for sale of and employees
goods and services •Payment to govt. for
taxes and duties

Cash inflow Cash outflow

 Investing
•Sale of fixed assets, activity •Payment for purchase
sale of investments, of fixed assets,
collection of loans, Payment for purchased
interest and dividend of investment and for
received etc. making loans.

Cash inflow Cash outflow

 Financing
•Issue of share capital, activity •Dividend paid, interest
debentures and other paid, payment of loan,
borrowings capital .
•Debentures paid

Cash inflow Outflow of cash

 Sale of fixed assets
 Sale of investment
 Purchase of fixed asset (-)
 Purchase of investment (-)
 Interest received
 Dividend received
 Loans to subsidiaries (-)
 Net cash from investing activities
 Issue of shares and debentures
 Proceeds from long-term borrowings
 Repayment of long-term borrowings (-)
 Redemption of preference shares and
debentures (-)
 Dividend paid (-)
 Interest paid (-)
 Net cash from financing activities
Particulars Details Amount
I. Cash flow from Operating Activities

II. Cash flow from Investing Activities

III. Cash flow from Financing Activities

Net Increase (Decrease) in cash ____________

+ Beginning Balance of Cash ---
End Balance of Cash ----
 Trial Balance is a statement, prepared with
the debit and credit balances of ledger
accounts to test the arithmetical accuracy of
books of accounts.
Debit side Credit side
Cash in hand Capital
Cash at bank Bank overdraft
Bills receivable Creditors
Drawings Sales
Land and building Bills payable
Furniture Loan (credit)
Plant and machinery Mortgage (payable)
Investments Purchase return
Opening stock Discount ,rent, interest (received)
Rent ,rates and taxes Provisions for bad debts
Wages General reserve
Freight Depreciation reserve
Discount allowed Depreciation fund
Export duty Provision for depreciation
Horse and cart Apprentice premium
Goodwill Commission received
Sales tax Interest received
Allowances Miscellaneous receipts
 set aside ,before ascertaining the
net profits,

charge against profit for all

anticipated losses

reasonably necessary for the

purpose of providing for any liability
or loss, which is likely or certain to
be incurred;
 capital receipts( profit on
sale of fixed assets or issue
of shares at a premium)
upward revaluation of assets(
bringing the assets to
current value from historical
cost
Reserves are the items of
owners' equity which arise
amount of money that is set
from retention of profits (an
aside until that is required
appropriation of profits, sum
for other purpose
of money set aside from
distributable profits

Reserve
Capital Revenue
reserve reserve
General
reserve

Specific
reserve
 Due to wear
and tear

Due to out
date of
technology

Decrease in value
of an asset
 Lapse of time

Wear and tear due

to constant use

Depletion
Exhaustion of assets

Accident

Obsolescence
 In general words, a ratio is an expression of
relationship of one figure with another. It may
be defined as the relationship, or proportion
that one amount bears to another. It is found
by dividing a figure with another. A ratio may
be expressed in percentage in which the
base, is taken as equal to 100 and the
quotient is expressed as per hundred of the
base
Capital structure or leverage ratio

Liquidity ratios

Activity or turnover ratio

Profitability or profit earning capacity ratios.

 Current
•Cash in hand, cash at bank, debtors, prepaid
expenses, short term deposits, bills
receivable, money at call and short notice,
stock ,finished goods, work in progress stock

Assets of raw materials and sundry supplies

Current
•Bills payable, income tax payable, creditors.
Outstanding expenses, bank overdraft,
provision for taxation, interest due on fixed
liabilities, reserve for unbilled expenses,

Liabilities installment payable on long-term loans.

Primarily short term creditors
interested in liquidity or short
term solvency of the firm.
Since their claims are to be It is the ability of the firm to meet
met in the short term. short term obligations. This
measures concerns ability to meet
short term obligation
Current Ratio

Liquid Ratio

Absolute Liquid Ratio

 • This ratio establishes relationship between
Meaning current assets and current liability

Ratio • Current assets / Current liabilities

Standard
• 2:1
norm
 • This ratio establishes relationship between quick assets and

Meaning current liability . Quick assets refer to those current assets which
can be converted into cash immediately or at a short notice with
out a loss of value.

Ratio • Quick Assets/ Current liability or

• Quick assets / Quick liability

Standard • 1:1

norm
• Note Quick assets are current assets- stock –prepaid expenses and
quick liabilities are current liability- bank overdraft.
 •Establishes the relationship between absolute liquid assets

Meaning and absolute liquid liabilities or current liabilities .

•Absolute liquid assets = Cash in hand, cash at bank and short
term marketable securities

Ratio •Absolute liquid assets / Absolute liquid liabilities or CL

Standard
•.5:1

norm
 It measures the effectiveness with which a
firm uses its available resources.
Stock or inventory turnover ratio

Debtors or receivable turnover ratio

Average collection period or debtor velocity

Creditors or payable turnover ratio

Average payment period

Total assets turnover ratio

Fixed asset turnover ratio

Current asset turnover ratio

Working capital turnover ratio

Capital or net worth turnover ratio

Total capital turnover ratio

 This ratio is an indicator of velocity of flow of
inventory in business. This shows the rate of
conversion of stock in to sales. In fact,
inventory policy of management and liquidity
of firm both may be tested by this ratio. This
is also a measure of marketing capacity of the
firm. No any standard rate or norm can be
determined for this ratio because it based
more on nature of industry and sales policy
of the firm.
 Cost of goods sold / Average stock
 Cost of goods sold = opening stock +
purchases+ direct expenses – closing stock
 Average stock = opening stock + closing stock /
2
 Note :1. If cost of goods sold cannot be
calculated then sales will be taken as base
 2. if opening and closing stock is not given in
that case closing stock will be treated as average
stock
 3 Higher the ratio good for the organization. A
low stock turnover ratio indicates that the goods
do not sell quickly and efficiently, so the
maximum inventory remains lying in the
warehouse.
 This ratio is a qualitative analysis of a firm’s
marketing and credit policy and debtors
realizations. It is calculated to know the
uncollected portion of credit sales in the form
of debtors by establishing relationship
between trade debtors and net credit sales of
the business.
 DTR = Net credit sales / Average receivables
 Net credit sales = Total sales – cash sales –
sales return
 Avg. receivables = opening receivable
+closing receivable / 2
 Receivable = Debtors + Bills receivable
 A decrease in this ratio each year is an
indicator of efficiency of marketing and credit
policy of the firm.
 This period indicates the period taken in the
realization or collection of debtors. In other
words, it represents the average number of
days for which a firm has to wait before its
receivables are converted into cash. The
purpose of calculating this period is to find
out the ratio of cash flow from collection of
debtors
 Average collection period or average age of
receivables=
 Trade receivables/ sales per day
 Or
 Trade receivables / net credit sales X 365
days
 Or
 365/ DTR
 In this respect, the general rule is that
average collection period should not exceed
the stated credit period on trade terms plus
1/3rd of such period. If average collection
period exceeds 4/3 of stated credit period, it
will indicate either liberal credit policy or
slackness of management in realizing debts.
A higher average collection period also
implies that chances of bad debts are larger.
 The short-term creditors ( i.e, suppliers of
goods and bankers) are very much interested
in this ratio, as it shows the firm’s trend of
payment to its short-term creditors. This
ratio shows the relationship of credit
purchases and trade creditors. This ratio
indicates the velocity with which the creditors
are turned over in relation to purchases.
Higher the creditors velocity, better it is. A
fall in this ratio shows delay in payment to
creditors.
 CTR = Net credit purchases / Average
payables (creditor +BP)
 Net credit purchase = Total purchase – cash
purchase – purchase return
 Average payable = opening payable + closing
payable / 2
 Note : if opening and closing is not given
then closing will be considered as average
 While analyzing creditors, usually average
period is also calculated. This period
discloses the time taken by the firm in
making payment to its trade creditors.
 Average disbursement period is compared
with credit period allowed by suppliers of
goods to know promptness or delay in
payment
 Average payable / net credit purchase X no.
of month or weeks or days
 Or
 No. of month or week or days / CTR
 Cost of goods sold or net sales / Total assets
 Total assets = Fixed assets + current assets –
fictitious assets- depreciation on fixed assets
 This relationship indicates the efficiency of
the utilization of assets to attain the
maximum turnover on sales. A rise in the
ratio indicates more intensive utilization of
assets, while fall in the turnover suggests
under utilization of assets.
 Cost of goods sold or net sales / net fixed
assets
 Net fixed assets = Fixed assets – depreciation
 If there is an increase in this ratio, it will show
that there is better utilization of fixed assets
.If there is a fall in this ratio, it will show that
investment in fixed has not been utilized
efficiently. Ideal of this in a manufacturing
company is 5:1
 Cost of goods sold or net sales / current
assets
 This ratio measures the concern’s efficiency
in utilization of its current assets. This ratio
also indicates the over investment or under
investment position of current assets in a
concern.
 Cost of goods sold or net sales / working
capital
 The high ratio indicates efficient use of
working capital in the concern while low
working capital turnover ratio indicates under
utilization of working capital in the concern
 Net sales or cost of goods sold / net worth or
share holder’s fund
 It indicates whether the capital employed by
the shareholder’s in a business is used
efficiently or not
 Cost of goods sold or net sales / capital
employed
 Capital employed = long term and short term
capital
 By calculating this ratio, efficiency of capital
employed may be known. This ratio shows
how many times capital has been rotated for
generating the sales. The higher the ratio,
better it is for the business concerns. No
ideal standard can be fixed for this ratio.
 Debt equity ratio
 Solvency ratio
 Proprietary ratio
 Fixed asset ratio
 Capital gearing ratio
 Debt service ratio or interest coverage ratio
 Debt equity ratio = Outsider’s fund /
shareholder’s fund
 Alternative:
 Debt equity ratio = long-term debt / share
holders fund or net worth
 Note: in this case current liabilities will be
ignored.
 Standard norm: 2 : 1, however lending
institutions prefer 1:1
 A low ratio signifies a smaller claim of creditors.
More precisely, the greater the debt-equity ratio,
greater the risk to the creditor.
 • Debt, long-term or short term,
Outsiders whether in the form of mortgage,
bills or debentures
fund

• Preference share capital, equity

Share share capital, capital reserves,
retained earnings and any other
holders fund reserves representing the
accumulated profit
 This is also known as equity ratio, net worth
to total assets ratio.
 Proprietary ratio = Share holders fund / Total
assets
 Higher the ratio better is the financial
position of the firm.
 Solvency ratio = Total outside liabilities /
total assets
 If the amount is enough to pay the external
liabilities then the company is said to be
solvent.
 Fixed assets ratio = Net fixed assets /
(shareholders fund + long term liability)
 Or
 Fixed asset ratio = Net fixed assets /
Share holders fund
 Standard norm: 1 :1. It is well established
that fixed assets should be financed only out
of long-term funds. This ratio shows whether
this is so.
 CGR = Share holders fund / out sider’s fund
 Share holder’s fund = Equity capital +
reserve +surplus
 Outsider’s fund = Preference share
capital + Debentures + Other long term
loans.
 Note : If capital gearing ratio is less than 1,
we will call it high gearing of capital and if
gearing ratio is more than 1 then low gearing
of capital is assumed
 Interest coverage ratio =
 Net profit before interest and tax /Interest on
fixed long term loans or debentures.
 Note : This ratio measures the margin of
safety for the lenders. The higher the
number, more secure the lender is in respect
of his periodical interest income. Normally,
fixed interest charges should be covered six
to seven times.
 Gross profit ratio
 Operating ratio
 Expenses ratio
 Operating profit ratio
 Net profit ratio
 Gross profit / net sales X100
 Net sales = Sales – sales return
 Gross profit = net sales – cost of goods sold.
 The gross profit ratio is primarily a test of the
efficiency of purchases and sales
management. No ideal standard is fixed for
this ratio, but the gross profit ratio must be
adequate.
 Cost of sales + operating expenses / net
sales X 100
 Operating expenses = office and
administrative expenses + selling expenses +
discount allowed + bad debts etc.
Expenses ratio= Particular expenses/ nets sales X100

Operating profit ratio=Operating profit/net sales X100

Net profit ratio= Net profit/ net sales X100

 Return on gross capital employed
 Return on net capital employed
 Return on proprietors net capital
 Return on average capital employed
 Return on total assets
 EBIT / Gross capital employed X100
 Gross capital = Equity share capital +
preference share capital +reserve and surplus
+ all long and short term external loans
 Or
 All net fixed assets + current assets +
including goodwill of the firm but fictitious
assets are not included
 EBIT / Net capital employed X100
 Net capital employed = Equity share capital +
preference share capital + reserve and
surplus + long term loans
 Net profit after interest and tax / proprietor’s
net capital employed X100
 Proprietor’s net capital = Equity share capital
+ preference share capital + reserves and
surplus – accumulated losses, if any
 Net profit / average capital X100
 Average capital = Opening capital + closing
capital / 2
 Or
 Opening capital +1/2 of current year’s profit
 Or
 Closing capital – ½ of current year’s profit
 Return on capital employed reflects the
overall profitability of the business
 Net profit / Total net assets X 100
 Total net assets = Total assets – fictitious
assets
 Net profit / Proprietor’s fund X100
 Proprietor’s fund =Equity share capital +
preference share capital +reserves and
surplus+ undistributed profit – debit balance
of profit & loss if any.
 Earning per share(EPS)
 Earning Yield Ratio(EYR)
 Dividend Per share (DPS)
 Pay-out Ratio (POR)
 Dividend Yield Ratio (DYR)
 Dividend coverage ratio (DCR)
 Price earning ratio (PER)
 • Net profit after tax, interest

EPS
and preference dividend /
no of equity shares

• It indicates the amount of

Indicator
earnings that equity share
commands.
 • = EPS / Market price per

EYR
share X 100

• This ratio indicates the

Indicator
relationship between
earning per share and
market price per share
 • Dividend for equity share holders/
no. of equity shares

DPS

• Higher the ratio, the better is for

equity share holders of the concern.

Indicator This ratio shows the amount of

dividend per share paid by the
management of the company
 • dividend per equity shares/
earning per share X100
POR

• This ratio helps us to calculate the

percentage of dividend paid out of
Indicator earned incomes and
percentage of earned profits
the

retained in the business concern

 • Dividend per share / Market price
per share X100
DYR

• Dividend yield ratio helps investors

to ascertain the effective return on
Indicator the amount they invest or intend to
invest in the equity shares of a
company
 • EPS / DPS
DCR

• This ratio indicates the relationship

between dividend per share and
indicator earning per share. This ratio
calculated by dividing earning per
share by dividend per share
 •MPS /EPS
PER

•This ratio indicates relationship between

market price per equity shares and earning

Indicator per share. In other words, this ratio

indicates the number of times the earning
per share is covered by its market price.
 It is the process of identifying the financial
strengths and weakness of the firm by
properly establishing relationship between
the items of the Balance Sheet and Profit &
Loss Account and other operating data.
 • It is used to mean the
simplification of financial data by
Analysis methodical classification of the
data given in the financial
statements

• It is the explaining the meaning

and significance of the data so
Interpretation simplified.
 This statement shows the operational results
of the business for a number of accounting
periods so that changes in absolute figures
from one period to another period may be
stated in terms of money and percentage.
 Comparative Balance Sheet analysis is the
study of the trend of the same items, group
of items and computed items in two or more
balance sheets of the same business
enterprise on different dates
 Common-size statements cover up the
shortcomings of the comparative statements
by expressing each item of the statements as
a percentage of total. In common-size
statements relative values of items are
shown.
 In common-size balance sheets, various
items of assets and liabilities of balance
sheets of two or more years are shown at
their relative values. That is ,each item of the
assets is shown as percentage of total assets
and each item of liabilities as percentage of
total liabilities and capital fund.
 In this statement relationship is established
between items of income statement and
volume of sales in percentage form. In other
words, in a common –size income statement
,each item of income statement is shown in
percentage based on net sales.
Thank you