Analysis of financial Statements

Presentation of Financial StatementsI Vertical Balance Sheet

Balance Sheet as on …Particulars Rs RsI Sources of Funds 1 Owners Funds a)Capital xxx b)Reserves and Surplus xxx c)Less: Losses and Fictitious Assets (xxx) d)Net Reserves and Surplus xxx xxx2)Loan Funds a)Secured Loan xxx b)Unsecured Loan xxx xxx

Total Funds Available (1+2) xxx II Application of Funds 1)Fixed Assets a)Gross Block xxx b)Less: Depreciation (xxx) xxx2)Investments xxx3)Working Capital a)Current Assets xxx b)Less: Current Liabilities (xxx) xxx

Q. 1 Following is the Balance Sheet of Abhijeet Ltd as on 31st March 2006Liabilities Rs Assets RsEquity Share Capital 390000 Cash in hand 1500010 % Preference Share Capital 200000 Cash at bank 900009 % Debentures 250000 Preliminary Expenses 20000General Reserve 60000 Goodwill 100000Capital Reserve 50000 Building 30000011 % Bank Loan 100000 Investment 200000Creditors 125000 Furniture 250000Bank Overdraft 135000 Plant and Machinery 300000Provision for Tax 140000 Debtors 150000Proposed Dividend 30000 Prepaid Expenses 50000Profit and Loss A/c 140000 Stock 200000Depreciation Provision 80000 Calls in Arrears 10000 Commission on Issue of Shares 15000

170000

0 1700000

Present the above Balance Sheet in Vertical Form

Q.2 Following is the Balance Sheet of B Ltd as on 31 st March 2008 (Rs in Lakhs)Liabilities Rs Assets RsEquity Share Capital 1000 Trade Investments 400Dividend Equalisation Reserve 140 Patent 60General Reserve 220 Land and Building (Cost) 640Profit and Loss A/c 380 Plant and Machinery (Cost) 13006 % Debentures 500 Cash and Bank Balance 176Bank Overdraft 300 Closing Stock 620Sundry Creditors 420 Sundry Debtors 444Unpaid Dividend 20 Bills Receivable 60Proposed Dividend 120 Short Term Deposit 60Provision for Tax 340 Underwriting Commission 120Provision for Depreciation Preliminary Expenses 60 Land and Building 100 Plant and Machinery 400 Total 3940 3940

Present the above Balance Sheet in Vertical Form

II Vertical Income Statement

Income Statement for year ended…Particulars Rs RsSales Cash xxx Credit xxx Less: Sales Return (xxx) xxxLess: Cost of Goods sold Opening Stock xxx +Purchases xxx +Manufacturing Expenses xxx +Direct Expenses xxx -Closing Stock (xxx) xxxGross Profit xxxLess: Operating Expenses Administrative Expenses xxx Selling and Distribution Expenses xxx (xxx)Operating Profit before Interest xxxLess: Interest (xxx)Operating Profit after Interest xxxAdd: Non Operating Income xxx Less: Non Operating Expense (xxx) xxxProfit before Tax xxxLess: Provision for Tax (xxx)Net Profit after Tax xxxAdd: Opening balance in P&L A/c xxx

Less: Appropriations (xxx)Retained Profit xxx

Q. 3 Profit and Loss A/c of Well- balance limited for the year ended31st March 2003Particulars Rs Particulars RsTo Opening Stock 700,000 By Sales To Purchases 900,000 Cash 520000 To Wages 150,000 Credit 1500000

To Factory Expenses 350,000 Less: Returns 200002,000,00

0 To Office Salaries 25,000 By Closing Stock 600,000 To Office Rent 39,000 By Dividend 10,000 To Postage and Telegram 5,000 By Profit on Sale of Furniture 20,000 To Directors Fees 6,000 To Salesman Salaries 12,000 To Advertising 18,000 To Delivery Expenses 20,000 To Debenture Interest 20,000 To Depreciation On Office Furniture 10,000 On Plant 30,000 On Delivery Van 20,000 To Loss on Sale of Van 5,000 To Income Tax 175,000 To Net Profit 145,000

2,630,00

0 2,630,00

0

You are required to prepare Vertical Income Statement

Q.4 The accountant of Synthetic Industries Limited submits the following statements for 2003

Trading and Profit and Loss A/c for the year 2003Particulars Rs Particulars Rs

To Opening Stock 70,000 By Sales1,660,00

0 To Purchases 1530000 By Closing Stock 160,000 Less: Return 300000

1,500,000

To Gross Profit 250,000

1,820,00

0 1,820,00

0 To Depreciation 36,000 By Gross Profit 250,000 To Administrative Expenses 50,000 By Interest 10,000 To Selling and Distribution Expenses 24,000

To Provision for Income Tax 40,000 To Proposed Dividend 16,000 To Profit Balance 94,000 260,000 260,000

Balance Sheet as on 31st Dec 2003Liabilities Rs Assets RsShare Capital 300,000 Goodwill 20,000 Profit and Loss A/c 180,000 Cash in hand 8,000 Proposed Dividend 16,000 Stock in Trade 160,000 Bank Overdraft 38,000 Sundry Debtors 178,500 Sundry Creditors 26,000 Land and Building 92,150 Provision for Depreciation 55,750 Plant & Machinery 128,600 Provision for Tax 40,000 Prepaid Expenses 1,500

Expenses on Issue of Shares 7,000

Investments 60,000 655,750 655,750

Rearrange the above statements in Vertical Form

Common Techniques of Analysis of Financial Statements1.Trend Analysis2.Comparative Financial Statements3.Common-Size Financial Statements4.Ratio Analysis

1.Trend Percentage AnalysisTrend Analysis is a technique of studying several financial statements over a series of years. In this technique trend percentages are calculated for each item by taking the figure of that item for some base year as 100.Any year may be taken as base year but generally the starting/initial year is taken as base year. So each item for base year is taken as 100 and then the same item for other years is expressed as a percentage of base year.

Q. 1From the following Balance Sheet prepare vertical Balance Sheet and calculate Trend percentages taking 2003 as base yearParticulars 2005 2004 2003Share Capital 50,000 50,000 50,000 Reserves and Surplus 5,000 10,000 10,000 Secured Loan 3,000 5,000 5,000 Unsecured Loan 2,000 6,000 Current Liabilities 5,000 5,000 4,000 65,000 70,000 75,000 Fixed Assets 40,000 45,000 50,000 Investments 5,000 7,500 10,000 Stock 7,000 6,000 5,000

Debtors 10,000 9,000 7,000 Cash 3,000 2,500 3,000 65,000 70,000 75,000

Q.2 Rearrange the Balance sheet in Vertical form and calculate the trend percentage taking 2005 as base figures and briefly comment on the same Rs in Lakhs

Balance Sheet as on 31st DecemberLiabilities 2005 2006 2007 2008 Assets 2005 2006 2007 2008Share Capital 60 60 80 80 Building 50 60 55 80 Reserve 50 45 20 20 Goodwill 50 45 40 40 Surplus 13 32 31 40 Machinery 20 40 43 50 Debentures 10 20 20 30 Stock 5 15 25 Secured Loan 12 8 10 20 Debtors 20 14 15 10 Creditors 6 8 10 3 Cash 5 1 2 15 Bank O/D 1 2 8 4 Preliminary 3 2 1 Other Liabilities 1 2 2 3 Expenses 153 177 181 200 153 177 181 200 Q.3 Rearrange the data of Petrol Ltd in suitable form for analysis and calculate Trend Percentage( Rs in Lakhs) 2000 2001 2002 2003 2004Fixed Assets 20 22 24 26 28 Investments 10 9 8 7 6 Current Assets 40 30 20 30 40 Preliminary Expenses 5 4 3 2 1 Total Assets 75 65 55 65 75 Owners Fund 20 20 20 40 60 Term Loan 20 20 20 20 15 Debenture 35 25 15 5 0 Total Liabilities 75 65 55 65 75

Q4 You are furnished with the following revenue statements for the yearended March 31st 2004Particulars 2001 2002 2003 2004Sales 5,000,000 6,000,000 7,200,000 8,640,000 Less: Cost of Sales 3,200,000 3,800,000 4,600,000 5,600,000 Gross Margin 1,800,000 2,200,000 2,600,000 3,040,000 Management Expenses 300,000 350,000 400,000 450,000 Sales Expenses 500,000 600,000 720,000 864,000 Interest on Borrowings 300,000 400,000 500,000 600,000 Total Expenses 1,100,000 1,350,000 1,620,000 1,914,000 Net Profit before Depreciation 700,000 850,000 980,000 1,126,000 and Tax Depreciation 500,000 450,000 600,000 650,000 Profit before Tax 200,000 400,000 380,000 476,000 Income Tax 80,000 200,000 185,000 240,000 Profit after Tax 120,000 200,000 195,000 236,000

a)You are asked to prepare trend analysis b) Comment on the same

Comments1. Sales of the company increased from 2001 to 2004. Taking 2001 as base sales in 2002

were120 % in 2003 144% in 2004 and in 2004 172.80 %2. Gross Profit increased from 100 in 2001 to 122.22% in 2002, 144.44 % in 2003 and 168.89 %

in 20043. In year 2002, Gross Profit increased by 22.22 % when sales had increased by 20 % as against

this in 2004 Sales increased by 72.80% and Gross Profit increased by 68.89% considering 2001 as base year.

4. Operating Profit before interest went up from 100 in 2001 to 160 % in 2002, 176 % in 2003 and to 215.2 % in 2004

5. Percentage increase in operating profit was higher than % increase in sales. This was due to less than proportionate increase in operating expenses.

6. Company paid higher amount of interest every year. From 100 in 2001, interest charges went up to 133.33% in 2002, 166.67 % in 2003 and 200% in 2004. Company’s loan fund must have increased or the lenders charges higher interest rate.

7. Taxes paid increased due to increase in profits.8. Net Profit after tax increased in 2002 (166.67 % ) came down slightly in 2003 (162.5% ) and

increased again in 2004 (196.67%)

Q 5 From the following data relating to the ABC & Co. for the year 1995 to 1998 calculate trend percentagesand give comments on the same. (Taking 1995 as base year)Particulars 1995 1996 1997 1998Net Sales 200,000 190,000 240,000 260,000 Less: Cost of goods sold 120,000 117,800 139,200 145,600 Gross Profit 80,000 72,200 100,800 114,400 Less: Expenses 20,000 19,400 22,000 24,000 Net Profit 60,000 52,800 78,800 90,400

Comparative Financial StatementsIn CFS two or more Balance Sheets or Income Statements of a firm are presented simultaneously in columnar form. The financial data for two or more years are placed and presented in adjustment coloumn to facilitate comparison. A Comparative Income Statements is helpful in deriving meaningful conclusions regarding changes in sales, cost of goods sold, different expenses etc. The Consolidated Balance Sheet is helpful in analyzing and evaluating the financial position of the firm over a period of years.

Q1 Balance Sheet of Star Ltd for the year ended 31st Dec 2006 and 31st Dec 2007 are as followsLiabilities 31/12/2006 31/12/2007 Assets 31/12/2006 31/12/2007Equity Share Capital 800,000 800,000 Building 600,000 540,000 10 % Preference Share Capital 600,000 600,000 Land 200,000 200,000 General Reserves 400,000 490,000 Plant 600,000 540,000

15 % Debentures 200,000 300,000 Furniture 200,000 280,000

Creditors 300,000 400,000 Stock 400,000 600,000 Bills Payable 100,000 150,000 Debtors 400,000 600,000 Tax Payable 200,000 300,000 Cash 200,000 280,000 2,600,000 3,040,000 2,600,000 3,040,000

Prepare Comparative Balance Sheet in Vertical form

Q 2 Financial Position of Santhan Ltd as on 31st March Liabilities 2005 2006 Assets 2005 2006Equity Share Capital 200,000 250,000 Building 300,000 320,000 10 % Pref. Share Capital 200,000 150,000 Machinery 150,000 180,000 Reserve Fund 80,000 100,000 Furniture 40,000 35,000 Profit and Loss A/c 100,000 150,000 Investment 100,000 150,000 12 % Debentures 200,000 300,000 Stock 150,000 200,000 Creditors 100,000 120,000 Debtors 100,000 120,000 Bank Overdraft 50,000 20,000 Bank Balance 90,000 85,000

930,000 1,090,000 930,000 1,090,00

0

From the above information of Santhan Ltd as on 31st March 2005 and 2006 you are required to prepare comparative statement

Q 3 Following are the Income Statement and Balance sheet of ABC & Co. for the year 1999 and 2000. Prepare the Comparative Balance Sheet and Comparative Income StatementIncome Statement for the year 1999-2000 (Rs in Lakhs)Particulars 1999 2000 Particulars 1999 2000To Cost of Goods Sold 300,000 375,000 By Net Sales 400,000 500,000 To General Expenses 10,000 10,000 To Selling Expenses 15,000 20,000 To Net Profit 75,000 95,000 400,000 500,000 400,000 500,000

Balance Sheet as on Dec 31 (Rs in Lakhs)Liabilities 1999 2000 Assets 1999 2000Capital 350,000 350,000 Land 50,000 50,000 Reserves 100,000 122,500 Building 150,000 135,000 Secured Loan 50,000 75,000 Plant 150,000 135,000 Creditors 100,000 137,500 Furniture 50,000 70,000 Outstanding Expenses 50,000 75,000 Cash 50,000 70,000 Debtors 100,000 150,000 Stores 100,000 150,000 650,000 760,000 650,000 760,000

Q 4 From the following information of Mahindra Ltd for the year ended 31st March 2006 and 31st March 2007 you are required to prepare comparative statement after rearranging in Vertical form suitable for analysisParticulars 2006 2007Sales 1,520,000 2,280,000 Return Inward 20,000 30,000 Opening Stock- Raw Material 7,600 7,600 Purchases of Raw Material 390,000 585,000 Work in Progress- Opening 10,000 10,000 Work in Progress- Closing 10,000 15,000 Closing Stock- Raw Material 7,600 11,400 Power 50,400 75,600 Depreciation on Machinery 70,000 105,000 Repairs Factory Building 40,000 60,000 Direct Labour 250,500 375,750 Selling and Distribution Expenses 105,400 158,100 Finance Expenses 70,000 70,000 Administrative Expenses 73,500 73,500

Q5) Prepare a Comparative Revenue Statement in Vertical Form from the following detailsProfit and Loss A/c for year ended 31st MarchParticulars 2006 2007 Particulars 2006 2007To Opening Stock 225,000 300,000 By Sales 4,500,000 6,000,000 To Purchases 2,250,000 3,210,000 By Closing Stock 300,000 360,000 To Interest on Debentures 150,000 150,000 By Dividend 12,000 39,000 To Depreciation By Profit on Sale Furniture 15,000 15,000 of Machinery 24,000 Machinery 36,000 30,000 To Administrative Expenses 294,000 441,000 To Selling Expenses 456,000 753,000 To Carriage Outward 75,000 315,000 To Loss by fire 15,000 To Wages 195,000 300,000 To Provision for Tax 570,000 435,000 To Net Profit 570,000 435,000 4,836,000 6,399,000 4,836,000 6,399,000

Common Size StatementsThe CSS represents the relationship of different items of a financial statement with some Common item by expressing each item as a percentage of the Common Item. In Common Size Balance Sheet each item of Balance Sheet is stated as the total of the Balance Sheet. Similarly in Common Size

Income Statement each item is stated as percentage of Net Sales. The percentages for different items are computed by dividing the absolute amount of that item by the common base (i.e. the Balance Sheet or the Net Sales as the case may be) and then multiplying by 100.

Q1 Prepare the Common Size Balance Sheet and Common Size Income Statement for the years 1999 & 2000.

CommentsThe Common Size Balance Sheet reveals that the proportion of fixed assets out of total assets has reduced from 80.00% to 71.23% whereas the proportion of current assets has increased from 50.00% to 67.58%. This simply shows the increasing reliance of the firm on the current assets. Similarly out of the total liabilities the proportion of the proprietors’ funds has reduced from 90.00% to 86.3% and the proportion of loan funds has increased from 10 % to 13.70%. Since no new capital has been issued and the other liabilities have increased, the proportion of capital in the total financing of the firm has gone down from 70% to 63.93%.

From the Common Size Income Statement we come to know that the Cost of goods sold as well as the Gross Profit has remained at 75% and 25% of Net Sales. However the Net Profit has increased from 18.75% to 19% of Net Sales. This is due to decrease in operating expenses from 6.25% to 6 % of Net Sales.

Q 2Prepare Common Size Financial StatementBalance Sheet as on 31st March 2003

Liabilities Rs Assets RsSundry Creditors 10,500 Cash 6,750 Outstanding Expenses 19,500 Debtors 27,750 Loans 56,250 Prepaid Expenses 55,000

Capital 164,50

0 Stock 25,000 Reserves 25,000 Other Current Assets 2,500 Fixed Assets 158,750

275,75

0 275,750

Income Statement for the year ended 31st March 2003Expenses Rs Income Rs

To Cost of Goods sold177,75

0 By Net Sales 317,250 To Selling Overheads 90,000 By Other Income 3,000 To Administration and General 23,000 Expenses To Tax 8,500 To Loss on Sale of Investments 12,000 To Net Income 9,000

320,25

0 320,250

Q 3 Shiv Leela furnishes you the following Financial StatementsBalance Sheet as 31st March 2003

Particulars Rs Particulars RsShare Capital Building 200000

Equity 100,00

0 Less: Depreciation 15000 185,000 12 % Preference 50,000 Short Term Investment 40,000 Reserves and Surplus 35,000 Stock 35,000 10 % Debentures 50,000 Debtors 30,000 (Secured by Mortgage) Bank 10,000 Bills Payable 15,000 Creditors 20,000 Outstanding Expenses 10,000 Provision for Taxation 10,000 Proposed Dividend 10,000

300,00

0 300,000

Profit and Loss A/c for the year ended 31st March 2003Particulars Rs Particulars RsTo Opening Stock 30,000 By Sales 300,000

To Purchases180,00

0 By Closing Stock 35,000 To Expenses Administration 25,000 Selling 30,000 Financing 5,000 To Depreciation 15,000 To Provision for Tax 10,000 To Proposed Dividend 10,000 To Balance c/d 30,000

335,00

0 335,000

You are required to convert the above into common size statements in Vertical Form

Ratio Analysis

Balance Sheet Ratios1) Current Ratios= Current Assets

Current LiabiltiesCurrent Assets include Debtors (less Provision), Loose Tools, Outstanding Income, Bills Receivable, Cash and Bank Balance, Marketable Investments, Prepaid Expenses, Closing Stock, Short term loans and advances given.Current Liabilities include Creditors, Bills Payable, Outstanding Expenses, Unclaimed Dividend and Proposed Dividend, Provision for Tax, Advance Income, Bank Overdraft, Short Term Loan

2) Quick/Liquid Ratio= Quick AssetsQuick Liabilities

Quick Assets= Current Assets Less Closing Stock Less Prepaid ExpensesQuick Liabilities= Current Liabilities Less Bank Overdraft

E.g. From the following information calculate Quick Assets, Quick Liabilities, Quick Ratio

Particulars Rs Particulars RsCash 4,000 Outstanding Salaries 1,000Debtors 9,000 Bank Overdraft 7,000Creditors 4,000 Stock 13,000Pre- Paid Insurance 500 Bills Payable 6,000Bills Receivable 1,000

3) Stock Working Capita= Stock x100 Working Capital

Stock Includes Closing Stock Working Capital= Current Assets Less Current Liabilities

4) Proprietors Ratio= Proprietors Funds or Shareholders Equity x100Total Assets or Total Liabilities

Proprietors Fund= Share Capital + Reserves and Surplus – Accumulated Losses and Fictitious Assets

Total Assets= Fixed Assets+ Investments+ Current Assets

Total Liabilties= Own Funds + Loan Funds+ Current LiabilitiesE.g. From the following information calculate Proprietory ratio of A Ltd

Particulars RsEquity Share Capital 130,000Preference Share Capital 50,000Reserves 20,000Current Assets 100,000Fixed Assets 200,000

5) Debt Equity Ratio= Borrowed Funds. Proprietors Funds

Borrowed Funds include Loans taken and interest accrued and due on loans E.g. From the following information calculate Debt- Equity ratio of A Ltd

Particulars Rs5 % Debentures 600,0008 % Preference Share Capital 300,000Equity Share Capital 500,000

6) Capital Gearing Ratio = Preference Capital+ Borrowed FundsEquity Shareholders Fund

Equity Shareholders Fund= Equity Share Capital + Reserves and Surplus – Accumulated Losses and Fictitious AssetsNote: Gearing means the process of increasing the equity shareholders return through the use of debt. Shareholders earn more when the rate of return on total capital is more than the rate of interest on debts. This is also known as leverage or trading on equity.

E.g. From the following information calculate Capital Gearing Ratio of A Ltd

Particulars RsEquity Share Capital 80,000Preference Share Capital 150,000Securities Premium 10,000Capital Reserve 16,00010 % Debentures 50,000

Profit and Loss A/c Ratios1) Gross Profit Ratio= Gross Profit x100

Net SalesGross Profit = Sales- Cost of Goods SoldCost of Goods Sold= Opening Stock + Manufacturing Expenses- Closing StockNet Sales= Sales- Sales Return

2) Operating Ratio= Cost of Goods Sold+ Operating Expenses x100

Net SalesOperating Expenses= Office and Administration Expenses + Selling and Distribution Expenses

Calculate operating Ratio from the following information

Particulars Rs Particulars RsOpening Stock 75,000 Administrative Expenses 90,000Purchases 315,000 Selling and Dist Expenses 10,000Direct Expenses 10,000 Sales 500,000Closing Stock 100,000

3) Expense Ratio= Expenditure x100Net Sales

4) Operating Profit Ratio= Operating Profit x100 Net Sales

Operating Profit = Gross Profit – Operating Expenses

Calculate Net Profit Ratio from the following data

Particulars Rs Particulars Rs

Sales1,000,00

0 Gross Profit 400,000Selling Expenses 100,000 Office Expenses 150,000Dividend Received 20,000 Interest on Loan 15,000

5) Net Profit Ratio= Net Profit before Tax x100Net Sales

6) Stock Turnover Ratio= Cost of Goods Sold Average StockAverage Stock= Opening Stock + Closing Stock

7) Sock Velocity= Average Stock X12Cost of Goods Sold

Composite Ratios1) Return on Capital Employed= Profit before Interest and Tax x100

Capital EmployedCapital Employed= Proprietors Funds + Borrowed Funds

2) Return on Proprietors Fund= Net Profit after Tax x 100 Proprietors Fund

3) Return on Equity Capital= Net Profit after Tax and Preference Dividend x 100 Equity Shareholders Fund

Equity Shareholders Fund= Equity Share Capital + Reserves and Surplus- Accumulated Losses and Fictitious Assets

4) Earning Per Share= Net Profit after Tax and Preference Dividend No of Equity Shares

5) Price Earning Ratio= Market Price Per Share Earning Per Share

From the following information calculate Price Earning RatioNet Profit after Tax Rs 2,250008 % Preference Share Capital Rs 2,00,000Paid Up[ Equity Capital (Rs 100 each) Rs 10,00,000Market Price of share Rs 209

6) Dividend Payout Ratio = Dividend to Equity Shareholders x100 Net Profit after Tax and Preference Dividend

7) Debt Service Ratio= Profit before Interest and Tax Interest

8) Debt Service Coverage Ratio= Cash Profit available for debt servicing Interest + Instalment due on loans

Cash Profit Available for Debt Servicing= Profit after Interest and Tax + Non Cash Debit to P&L + Interest on LoanFind out the Debt Service Coverage Ratio from the following detailsProfit after Interest and Tax Rs 2,50,000Interest Payable Rs 25,000Depreciation Rs 15,000Loan Instalment payable during the year Rs 1, 45,000

9) Debtors Turnover Ratio = Credit Sales . Debtors + Bills Receivable

Note: Debtors and Bills Receivable should be taken at the average of opening and closing balance

10) Debt Collection Period= Debtors + Bills Receivable x 12Credit Sales

11) Creditors Turnover Ratio= Credit Purchases. Creditors + Bills Payable

Note: Creditors and Bills Payable should be taken at the average of opening and closing balance

12) Debt Payment Period= Creditors + Bills Payable x 12Credit Purchases

Objective of Analysis Ratio to be computedLiquidity Current Ratio, Quick Ratio, Stock Working Capital RatioSolvency Proprietory Ratio, Debt/ Equity RatioOperating Efficiency Gross Profit Ratio, Operating Ratio, Operating Profit Ratio, Expense Ratio, Net Profit Ratio, Overall Profitability Return on Capital Employed, Return on Proprietors Fund, Return on Equity Capital

Q 1) Arrange the following Balance Sheet of Tara Ltd in Vertical form and calculate Debt Equity, Proprietory, Capital Gearing, Stock Working Capital RatiosLiabilities Rs Assets Rs

Equity Share Capital200,00

0 Land and Building140,00

0 8 % Preference Share Capital 60,000 Plant and Machinery 80,000 Reserve 30,000 Furniture & Fixtures 20,000 Profit and Loss A/c 20,000 Debtors 80,000 9 % Debentures 40,000 Stock 70,000 Creditors 60,000 Cash in hand 30,000 Outstanding Expenses 5,000 Prepaid Expenses 10,000 Provision for Taxation 20,000 Preliminary Expenses 20,000 Proposed Dividend 15,000

450,00

0 450,00

0

Q2) X Ltd and Y Ltd are in the same line of business. Following are their Balance Sheet as on 31st Dec 2003

Liabilities X Ltd Y Ltd Assets X Ltd Y LtdEquity Share Capital 700,000 200,000 Land 100,000 80,000

Reserves and Surplus 100,000 100,000 Building 250,000 200,00

0

12 % Debentures 200,000 500,000 Plant & Machinery 500,000 300,00

0

Creditors 120,000 70,000 Debtors 210,000 110,00

0

Bills Payable 40,000 20,000 Stock 100,000 200,00

0 Proposed Dividend 20,000 20,000 Cash & Bank 55,000 40,000 Provision for Tax 35,000 20,000

1,215,000 930,000 1,215,00

0 930,00

0

You are required to rearrange the Balance Sheets (In Vertical Form) and calculate the following ratiosfor both the companies and comment thereona) Proprietory Ratio b) Capital Gearing Ratio c) Current Ratio d) Stock Working Capital Ratio

Comments1) Proprietory Ratio of X Ltd (65.84%) indicates that X Ltd depends more on its own funds. Y Ltd

depends on its own funds only to the extent of 32.26%2) Capital Gearing Ratio indicates that for every Re1 of the own funds X Ltd has 25 paise of

borrowed funds. Y Ltd for every Re1 of the own funds X Ltd has Rs 1.67 of borrowed funds. Thus considering Proprietory Ratio and Capital Gearing Ratio Long term solvency and liquidity of X Ltd is better than Y Ltd.

3) Current Ratio of X Ltd (1.7:1) is less than standard(2:1) while that of Y Ltd (2.69:1) is well above the standard

4) Stock Working Capital Ratio of X Ltd shows that 67 % of its working capital is blocked in stocks while in case of Y Ltd 91 % of its working capital is so blocked. Overall the short term liquidity and solvency of Y Ltd is better than X Ltd.

Q 3 Following are the Balance Sheets of X Ltd as on 31st March 2007 and 31st March 2008Particulars 3/31/2007 3/31/2008Liabilities Share Capital 450,000 660,000 Retained Earnings 231,000 200,000 Provision for Income Tax 84,000 Debentures 220,000 180,000 Accounts Payable 58,000 64,000 Other Current Liabilties 21,000 33,000 Total 1,064,000 1,137,000 Assets Building and Equipment 450,000 500,000 Land 80,000 80,000 Patent 55,000 65,000 Accounts Receivables 54,000 46,000 Inventories 300,000 312,000 Prepaid Expenses 6,000 4,000 Cash 119,000 130,000 Total 1,064,000 1,137,000

Prepare a Balance Sheet in Vertical form suitable for analysis and calculate the following ratios for two years and make comparisons1) Debt Equity Ratio 2) Quick Ratio 3) Stock to Working Capital Raito 4) Proprietory Ratio

1) Debt Equity Ratio has decreased due to repayment of debentures and increase in share capital

2) Quick Ratio has increased from 1.06 to 1.81 due to reduction in liabilities (mainly tax provision)

3) Stock Working Capital Ratio has decreased from 0.95 to 0.79 due to decrease in working capital from 3,16,000 to 3,95,000

4) Proprietors Ratio has increased from 0.64 to 0.76 due to increase in share capital

Q 4 Following is the Profit and Loss Account of Saurav Limited for the year ended 31st March 2003. You are required to prepare Vertical Income Statement for the purpose of analysisParticulars Rs in Lakhs Particulars Rs in LakhsTo Opening Stock 700 By Sales To Purchases 900 Cash 520 To Wages 150 Credit 1500 To Factory Expenses 350 Less: Return 20 2,000 To Office Salaries 25 By Closing Stock 600 To Office Rent 39 By Dividend on Investment 10 To Postage and Telegram 5 By Profit on Sale of 20 To Directors Fees 6 Furniture To Salesman Salaries 12 To Advertising 18 To Delivery Expenses 20 To Debenture Interest 20 To Depreciation - Office Furniture 10 - Plant 30 - Delivery Van 20 To Loss on Sale of Van 5 To Income Tax 175 To Net Profit 145

2,630 2,630

From the above Vertical Income Statement Calculate 1) Gross Profit Ratio2) Operating Ratio 3) Stock Turnover Ratio

Q 5) The following are the summarised Profit and Loss Account of S LTd for the year ended31st Dec 2005 and the Balance Sheet as on that date

Profit and Loss A/c

Particulars Rs Particulars RsTo Opening Stock 99,500 By Sales 850,000 To Purchases 545,250 By Closing Stock 149,000 To Incidental Expenses 14,250 To Gross Profit 340,000 999,000 999,000 To Operating Expenses By Gross Profit 340,000 Selling and Distribution 30,000 By Non Operating Income Administration 165,000 Interest 3,000 To Non Operating Expenses Profit on sale of Shares 6,000 Loss on Sale of Assets 4,000 To Net Profit 150,000 349,000 349,000

Balance SheetLiabilties Rs Assets RsIssued Capital Land and Building 1500002,000 Equity Shares of Rs 100 each 200000 Plant and Machinery 80000Reserves 90000 Stock in Trade 149000Current Liabilities 130000 Debtors 71000Profit and Loss A/c 60000 Cash and Bank Balance 30000 480000 480000

From the above statements you are required to calculate the following ratios 1. Current Ratio2. Operating Ratio3. Stock Turnover4. Return on Capital Employed5. Earning per equity share6. Operating Profit Ratio

Q) 6 Shown below are the comparative balance sheets and operating data f Alpha Company for the years ended 31st Dec 2004, 2005, 2006

Comparative Balance Sheet 2004 2005 2006Current Assets Cash 1,200 1,900 400Debtors 14,800 12,400 10400Stock 14,800 16,200 19800A 30,800 30,500 30600Fixed Assets Equipment 9,800 12,000 12800

Building 15,700 16,300 18000Land 5,000 5,000 5000B 30,500 33,300 35800Total Assets (A+B) 61,300 63,800 66400 Current Liabilties Bills Payable 7,500 3,000 5000Creditors 6,300 11,200 13400Accrued Liabilities 1,200 1,600 2900A 15,000 15,800 21300Long term Loan: 6 % Debentures (B) 5500Owners Equity Equity Capital (Rs 100 each) 30,000 30,000 30000Retained Earnings 16,300 18,000 9600C 46,300 48,000 39600Total Liabilities (A+B+C) 61,300 63,800 66400

Additional Information

2004 2005 2006Total Sales 100,000 105,000 93,000 Net Profit after Tax 5,000 5,700 2,400 Dividend Paid 3,000 3,000 1,000

You are required to 1) Compute the following for each of the three years

i) Current Ratioii) Acid Test Ratioiii) Proprietary Ratioiv) Return on Proprietors Fund

2) Discuss the financial position of the company as on 31st Dec 2004 and the trends shown by the comparative data and ratios

Commentsa) Short Term Financial Position: Short Term financial position is reflected in the Current

Ratio and Acid Test Ratio. The Current Ratio and Acid Test Ration of the company for 2004 are favourable. The position of the company for 2004 seems to be satisfactory. In 2005 both the ratios have declined. The position of the company for 2006 has become worst as there is a drastic decline in the ability of the company to meet its current obligations out of its current assets

b) Long Term Financial position: The proprietary Ratio in 2004 was 76% , n 2005 75 % and in 2006 60%. The financial position of the company seems to be satisfactory as the proprietors contribution to total assets is more than the contribution by outsiders. However the ratio is showing a downward tendency. This means that the interest of the proprietors is decreasing.

c) Profitability: the profitability position of the company showed improvement in 2005 as it is indicated by the increase in the return on proprietors fund as compared to the

previous year. However the ratio has declined in 20006. Return on proprietors fund has fallen from 11.88% in 2005 to 6.06% in 2006 The profitability position of the company is not satisfactory.

Q 7) From the following financial statements of S Ltd calculate the accounting ratios and offer brief comments on the company’s Financial Position and Profitability

Trading and Profit and Loss A/c for the year ended 31st March 2006Particulars Rs RsSales (Net) 600,000 Opening Stock 65,000 Purchases 335,000 Less: Closing Stock (40,000) 360,000 Gross Profit 240,000 General Expenses 136,280 Directors Emoluments 10,000 Depreciation 6,200 Audit Fees 500 Debenture Interest 2,520 155,500 84,500 Income from Investment 8,700 Profit before Tax 93,200 Less :Provision for Tax (37,280)Profit after Tax 55,920

Balance Sheet as on 31st March 2006

Rs RsFunds used in Fixed Assets Land and Building 50,000 Plant and Machinery 14,000 Motor Vehicles 7,500 Furniture and Fittings 2,400 73,900 Investments 87,000 Current Assets Prepaid Expenses 20,000 Stock 40,000 Debtors 50,000 Bills Receivable 1,100 Income Tax Refundable 16,000 Bank 39,800 166,900 Less: Current Liabilities Trade Creditors 45,000 Accrued Expenses 5,500

Provision for Taxation 39,800 Proposed Dividend 12,500 102,800 64,100 225,000 Financed by Share Capital 100, 5 % Preference Shares of Rs 100 each 10,000 40,000 Equity Shares of Re 1 each 40,000 50,000 Reserves and Surplus Securities Premium 4,000 General Reserve 90,000 Dividend Equalisaiton Reserve 5,000 Profit and Loss A/c 40,000 139,000 Shareholders Fund 189,000 7 % Debentures 36,000 225,000

Comments1) Financial Position

The Long term financial position of the company is indicated by the Proprietory Ratio and Debt Equity Ratio. The Proprietory Ratio is 57.66% which indicates that the contribution made by the proprietors to the total assets is more than that of outsiders. The Debt Equity Ratio of the company 0.19 is satisfactory. Therefore the firm can be considered financially stable in the long run. The Short term financial position of the company is indicated by the current and liquid ratio. The current ratio of the company 1.62 which is not favourable. Hence the short term financial position of the company is not strong, whereas the immediate solvency as revealed by liquid ratio 1.04 seems to be satisfactory.

2) Performance: The Gross Profit Ratio of the company is 40% and the operating profit ratio is 14.5%. The return on capital employed is 42.54% and the return on proprietors fund is 29.59%. This shows that the profitability of the company is satisfactory.

Q 8

Balance Sheet as on 31st Dec 2006Particulars Rs Particulars Rs

Equity Share Capital (Rs 10)1,00,00

0 Building 80,000 10 % Preference Share Capital 40,000 Plant 1,00,000 Profit & Loss A/c 50,000 Stock 1,00,000

Mortgage Loan1,00,00

0 Debtors 60,000 Creditors 60,000 (L.Y. Rs 80,000) Taxes Payable 50,000 Investments 20,000

Cash 40,000

4,00,00

0 4,00,000

Profit and Loss A/c for year ended 31st Dec 2006Particulars Rs Particulars RsTo Opening Stock 1,00,000 By Sales 6,00,000 To Purchases 2,00,000 By Closing Stock 1,00,000 To Gross Profit 4,00,000 7,00,000 7,00,000 To Operating Expenses 1,50,000 By Gross Profit 4,00,000 To Operating Profit 2,50,000 4,00,000 4,00,000 To Interest on Loan 65,000 By Operating Profit 2,50,000 To Provision for Tax 95,000 To Net Profit after Tax 90,000 2,50,000 2,50,000

Calculatei. Current Ratio

ii. Quick Ratioiii. Debtors Turnoveriv. Collection Periodv. Stock Turnover

vi. Debt Servicevii. Earnings Per Share

viii. Dividend Payout Ratioix. Creditors Turnover

Note: The company paid dividend on equity shares @ 20%Q9 Following information is given to you from which you are required to prepare Balance Sheet of A Ltd was on 30th September 2006:Current Ratio 1.8:1Working Capital Rs 40,000Liquid Ratio (on the basis of Current Liabilities) 1.5Fixed Assets to Share Capital 90 %Rate of Gross Profit to Turnover 25%Reserves to Share Capital 10%Share Capital Rs 4,00,000Stock Turnover Ratio on Cost of Goods Sold 10 timesAverage Rate Outstanding for the year 54 days (assume 360 days in a year)

On 30th September 2006 current assets include Stock, Debtors and Bank Balance, Liabilities include Share Capital, Reserves and Current Liabilties and Assets include Fixed Assets, Current Assets and Development Expenditure (Not written off so far)

Q 10 The following are the ratios relating to the activities of Bharat Traders LtdDebtors Velocity 3 monthsStock Velocity 8 monthsCreditors Velocity 2 monthsGross Profit Ratio 25 %Gross Profit for the year amounts to Rs 4,00,000. Closing Stock of the year is Rs 10,000 above the Opening Stock. Bills Receivable amounts to Rs 25,000 and Bills Payable to Rs 10,000Find out the following figures

1. Sales2. Sundry Debtors3. Closing Stock4. Sundry Creditors

Q 11 From the following information prepare a Balance Sheet with as many details as possibleCurrent Ratio 2.5Liquid Ratio 1.5Proprietory Ratio (Fixed Assets: Proprietors Funds) 0.75Working Capital Rs 60,000Reserves and Surplus Rs 40,000Bank O/D Rs 10,000No Long term loan or Fictitious Assets

Q 12 Using the data complete the Balance Sheet given belowGross Profit Ratio (20% of Sales) Rs 60,000Shareholders Equity Rs 50,000Credit Sales to Total Sales 80%Total Assets Turnover 3 timesInventory Turnover (to Cost of Sales) 8 timesAverage Collection Period (360 days a year) 18 daysCurrent Ratio 1.6Long term Debt to Equity 40 %

Cash Flow StatementCash Flow Statement summarises the changes in the amount of cash for a particular period. It indicates the sources from which cash was obtained and the used to which cash was put. Cash Flow Statement are prepared as per Accounting Standard 3 issued by ICAI

Classification of Cash Flow1. Cash Flow from Operating Activities

Operating Activities are the principal revenue producing activities of the enterprise and activities other than investing and financing. Eg cash received from sale of goods or rendering of services, cash paid to suppliers for goods and services, salary paid to employees

2. Cash Flow from Investing Activities Investing Activities are activities related to acquisition and disposal of long term assets and investments. E.g. payment made for purchase of fixed assets, purchase of shares debentures payment received on sale of fixed assets, sale of shares and debentures.

3. Cash Flow from Financing ActivitiesFinancing activities are the activities which result in change in size and composition of owner’s capital and borrowing of the organisation. E.g. amount received on issue of shares, debentures amount paid on redemption on shares debentures interest and dividend paid.

1)Following are the Balance Sheet of Young India Ltd

Liabilities 2002 2001 Assets 2002 2001Share Capital 700,000 600,000 Fixed Assets 650,000 400,000

General Reserve 200,000 150,000 Debtors 350,000 200,000 Profit and Loss A/c 200,000 100,000 Stock 250,000 150,000 14 % Debentures 200,000 NIL Cash 130,000 100,000

Proposed Dividend 80,000 70,000 Underwriting Commission NIL 70,000

1,380,00

0 920,000 1,380,00

0 920,000

Additional Informationi. Debentures are issued for purchase of fixed assets

ii. Depreciation for the year is Rs 50,000iii. Interim Dividend paid during the year is 5 % of the opening capital

Prepare Cash Flow Statement

2) Telestar Ltd gives you the following Balance Sheets for the year ended 31st March 2006 and 2007. Prepare a Cash Flow Statement for the year ended 31st March 2007

Liabilities31/3/2006 31/3/2007 Assets 31/3/2006 31/3/2007

Equity Share Capital 120,000 120,000 Land 210,000 270,000 5 % Preference Share Capital 90,000 60,000 Building 285,000 270,000 General Reserve 30,000 42,330 Stock 27,000 36,300 Profit and Loss A/c 15,240 28,080 Debtors 40,440 38,460 Provision for Tax 17,000 8,000 Prepaid Expenses 25,880 17,000 Creditors 337,920 381,990 Bank Balance 15,840 3,240 Misc Expenditure 6,000 5,400 610,160 640,400 610,160 640,400

Additional InformationI. The Company has paid interim Dividend of 5 % on Equity Shares

II. Preference Shares were redeemed during the year at 10% premiumIII. Income Tax paid during the year Rs 15,000

3) Following are the summarised Balance Sheets of M Ltd as on 31st March 2002 and March 2003

Liabilities 2003 2002 Assets 2003 2002Share Capital 500,000 500,000 Premises 475,000 500,000 General Reserve 150,000 125,000 Machinery 422,500 375,000 Profit and Loss A/c 76,500 76,250 Equipment 40,500 45,000

Term Loan from ICICI 155,000 175,000 Stock 74,000 100,000 Creditors 231,250 275,000 Debtors 160,000 200,000 Provision for Tax 76,250 84,250 Cash 7,000 3,000 Bank 10,000 Goodwill 12,500

1,189,00

0 1,235,50

0 1,189,00

0 1,235,50

0

Additional InformationI. Dividend Rs 25,000 was paid during the year

II. Depreciation on Premises is provided at 5 %III. Machinery of Rs 75,000 was acquired during the year IV. Income Tax Provision for the year was Rs 75,000

4) Following are summarised Balance Sheets of BDM Ltd as on 31st Dec 2004 and 2005

Liabilities 2004 2005 Assets 2004 2005Equity Share Capital 200,000 250,000 Bank 35,000 16,000 12% Debentures 100,000 80,000 Stock 40,000 75,000 10 % Pref. Share Capital 50,000 80,000 Debtors 90,000 150,000 Bank Loan 70,000 110,000 Machinery 75,000 60,000 Reserves 20,000 25,000 Furniture 10,000 8,000 Profit and Loss A/c 50,000 60,000 Land 170,000 280,000 Creditors 60,000 75,000 Building 140,000 99,000 Bills Payable 40,000 33,000 Goodwill 30,000 25,000 590,000 713,000 590,000 713,000

Additional InformationI. Depreciation charged during 2005 was Rs 4,000 on Furniture and Rs 12,000 on Machinery

and Rs 20,000 on BuildingII. Part of Machinery was sold for Rs 15,000 at a loss of Rs 4,000

III. During 2005 interim Dividend was paid Rs 10,000 and Income Tax was paid Rs 5,000IV. During the year part of the building was sold at book value

You are required to prepare Cash Flow Statement

5) You are required to prepare Cash Flow Statement as per AS 3 for the year ended 31st Dec 2004 from the following Balance Sheet as on 31st Dec and additional information of M/s Rajeshree Co. Ltd.

Balance SheetLiabilities 2003 2004 Assets 2003 2004Equity Share Capital 200,000 500,000 Fixed Assets 645,000 581,000 Preference Share Capital 300,000

Investment (Long Term) 60,000 80,000

Securities Premium 50,000 80,000 Stock 100,000 150,000 General Reserve 60,000 110,000 Debtors 140,000 150,000

Profit and Loss A/c 70,000 100,000 Bills Receivable 50,000 75,000 10 % Debentures 200,000 Prepaid Expenses 10,000 9,000 12 % Debentures 100,000 Cash 5,000 7,000 Creditors 50,000 75,000 Bank 15,000 23,000 Bills Payable 40,000 30,000 Preliminary Expenses 10,000 Proposed Dividend 30,000 50,000 Provision for Tax 35,000 30,000

1,035,00

0 1,075,00

0 1,035,00

0 1,075,00

0

Additional InformationI. Machinery worth Rs 40,000 sold for Rs 45,000/-

II. Furniture purchased during the year amounted to Rs 65,000/-III. 10 % Debentures were given option of conversion into 12% Debentures or redemption in cash.

Accordingly half of the debentures holders exercised option in favour of new 12% debentures and rest redeemed in cash.

IV. Preference Shares redeemed at 10% premium. The premium on redemption has been debited to Securities Premium account. New Equity Shares were issued at premium.

V. Provision for Tax made for the year Rs 40,000VI. Interim Dividend paid during the year Rs 25,000. Proposed Dividend for the year 2003 has been paid

during the year 2004.

6) From the following Balance Sheet of XYZ Ltd as on 31/3/2006 and 31/3/2007 prepare cash flow statement for the year ended 31/3/2007 as per AS-3 by indirect method

Liabilities 31/3/2006 31/3/2007 Assets 31/3/2006 31/3/2007Equity Share Capital 4,500,000 5,250,000 Land 1,500,000 1,150,000 General Reserve 300,000 500,000 Machinery 1,350,000 2,870,000 Capital Reserve 300,000 Investment 900,000 700,000 Profit and Loss A/c 300,000 400,000 Stock 1,400,000 1,600,000 Creditors 600,000 900,000 Debtors 900,000 1,350,000 Provision for Tax 500,000 550,000 Bills Receivable 245,000 290,000 Proposed Dividend 395,000 450,000 Cash/Bank Balance 300,000 390,000 6,595,000 8,350,000 6,595,000 8,350,000

Additional Information for the year ended 31st March 2007I. During the year Machinery was sold for Rs 2,00,000( W.D.V. Rs 2,25,000)

II. During the year depreciation provided on Machinery was Rs 3,00,000III. Profit on Sale of Land was transferred to Capital Reserve IV. Interim Dividend paid during the year Rs 2,00,000V. Profit on Sale of Investment was transferred to General Reserve

VI. Income Tax paid during the year 2007 is Rs 4, 50,000.

7) Following are the Balance Sheets of Rudraksha Ltd as on 31st Dec 2002 and 31st Dec 2003

Liabilities31/12/2002

31/12/2003 Assets

31/12/2002

31/12/2003

Equity Share Capital 1,200,000 1,600,000 Land and Building 404,000 432,000 10% Preference Share Capital 800,000 600,000 Machinery 840,000 1,020,000 12 % Debentures 100,000 50,000 Goodwill 50,000 40,000 Profit and Loss A/c 370,000 304,000 Patents 60,000 48,000 Other Reserves 104,000 190,000 Investments 802,000 802,000 Share Premium 20,000 60,000 Inventory 570,000 674,000 Creditors 180,000 200,000 Debtors 260,000 292,000 Bills Payable 24,000 70,000 Prepaid Expenses 8,000 10,000 Bank Overdraft 18,000 Cash Balance 80,000 4,000 Proposed Dividend 70,000 Equity Shares 196,000 240,000 Preference Shares 80,000 60,000 3,074,000 3,392,000 3,074,000 3,392,000

Other InformationI. Machinery having WDV of Rs 22,000 was sold at a profit of Rs 3,000 and new machinery

purchased at Rs 2,30,000II. Equity Shares are issued at 15 % premium

III. Preference Shares were redeemed at a premium of 10 %.IV. Debentures were redeemed at a premium of 10%.

You are required to prepare Cash Flow Statement for the year ended 31st Dec 2003.

8)From the following details relating to the Accounts of Grow More Ltd prepare Cash Flow Statement

Liabilities31/3/2004

31/3/2003 Assets

31/3/2004

31/3/2003

Share Capital 1,000,000 800,000 Plant and Machinery 700,000 500,000

Reserve 200,000 150,000 Land/ Building 600,000 400,000 Profit and Loss Account 100,000 60,000 Investments 100,000 Debenture 200,000 Debtors 500,000 700,000 Provision for Taxation 100,000 70,000 Stock 400,000 200,000 Proposed Dividend 200,000 100,000 Cash/Bank 200,000 200,000 Sundry Creditors 700,000 820,000 2,500,000 2,000,000 2,500,000 2,000,000

Other InformationI. Depreciation @ 25% was charged on the opening value of Plant and Machinery

II. During the year one old machine costing Rs 50,000 (WDV 20,000) was sold for Rs 35,000III. Rs 50,000 was paid towards Income Tax during the year IV. Building under construction was not subject to any depreciation

9)Following are the Balance Sheets as at 31st March 2002 and 2003

Liabilities31/3/2002

31/3/2003 Assets

31/3/2002

31/3/2003

Equity Capital 100,000 150,000 Land and Building 80,000 75,000

General Reserves 60,000 10,000 Plant and Machinery 42,000 85,000

Profit and Loss A/c 5,000 30,000 Furniture and Fittings 7,000 6,000

Bank Overdraft 65,000 Investments 6,000 12,000 Loan Against Mortgage 40,000 Stock 27,500 94,500 of Plant and Machinery Debtors 46,500 77,250 Provision for Taxation 10,000 15,000 Cash 2,000 7,250

Creditors 30,000 20,000 Preliminary Expenses 4,000 3,000

Bills Payable 10,000 30,000 215,000 360,000 215,000 360,000

During the year ended 31st March 2003 the following transactions took placeI. Bonus Shares have been issued at one for every two held out of General Reserve.

II. Company purchased Plant and Machinery for Rs 60,000 out of which Rs 20,000 paid in cash and for the rest, Plant and Machinery mortgaged to seller

III. Dividend paid Rs 15,000IV. Furniture (Book Value Rs 2,100) was sold for Rs 3,045V. Investments costing Rs 3,000 written off in the year 1997 were sold for Rs 5,000 on 12th

March 2003VI. Furniture purchased during the year for Rs 1,500

VII. Net Profit during the year after charging Depreciation on Land and Building, Plant and Machinery, Furniture and Fittings and Rs 21,000 provision for Taxation

You are required to Prepare Cash Flow Statement

Consolidated Financial Statements

Parent Company: A Parent is an enterprise that has one or more subsidiaries

Subsidiary Company: A subsidiary is an enterprise that is controlled by another Enterprise known as parent.

A parent may control a subsidiary in any one of the following ways1. By holding in the subsidiary more than half of the shares having voting power.2. By controlling the composition of the board of directors of the subsidiary3. By controlling the holding company which controls the subsidiary. For e.g. if C ltd is the

subsidiary of B ltd and B Ltd is the subsidiary of A Ltd then C ltd is deemed to be subsidiary of A Ltd.

Consolidated Financial StatementsA Group comprises of a parent and all its subsidiaries. CFS are the financial statements of the group presented as those of a single enterprise. This is done by the parent company and the consolidated statements are presented in addition to the separate financial statements of the parent.

Advantages of CFS

1. A shareholder in any one of the group companies is interested in knowing as to how the group is faring as a whole. His or her fortune are tied with the success of the group.

2. CFS facilitate the valuation of shares of the parent company.3. The shareholder would like to know the return the parent company is getting on its

investment in the subsidiary company.

Principles of ConsolidationRule1: While preparing a consolidated Balance Sheet investment of holding company in the equity shares of the subsidiary is replaced by the assets and liabilities of subsidiary1)

Balance Sheet as on 31st March 2000Liabilities H S Assets H SShare Capital 12,000 5,000 Sundry Assets 15,000 8,000 at Rs 10/share Investments Sundry Liabilities 8,000 3,000 500 shares in S Ltd 5,000 20,000 8,000 20,000 8,000

Rule 2 In order to prepare a consolidated balance sheet the share of outsiders in the net assets is shown on the liabilities side under the heading minority interestMinority Interest= Shares in Assets – Share in Liabilities or Minority Interest = Share in Capital+ Share in Reserves

2)

Balance Sheet as on 31st March 2000Liabilities H S Assets H SShare Capital 12,000 5,000 Sundry Assets 16,000 8,000 at Rs 10/share Investments Sundry Liabilities 8,000 3,000 400 shares in S Ltd 4,000 20,000 8,000 20,000 8,000

Rule 3 while preparing consolidated financial statements goodwill or capital reserve arising out of acquisition of shares in the subsidiary must be ascertained. Goodwill is the excess of price paid for investment over and above the share in equity or net assets acquired by the holding company. Conversely capital reserve is the excess of share in equity or net assets acquired by the holding company over and above the price paid for the investment. 3)

Balance Sheet as on 31st March 2000Liabilities H S Assets H SShare Capital 12000 6000 Sundry Assets 20000 12000at Rs 10/share Investments Reserve 3000 2000 600 shares in S Ltd 7500 Profit & Loss A/c 2000 1000

Sundry Liabilities 10500 3000 27500 12000 27500 12000

4)The Balance Sheet of X LTd and Y Ltd as on 31st Dec 2000 were as followsLiabilities X Y Assets X YShare Capital in Rs 10 12,000 5,000 Fixed Assets 10,000 6,000 fully paid shares Investments Profit & Loss A/c 2,500 1,000 450 shares in S Ltd 6,750 Creditors 14,000 3,000 Current Assets 11,500 2,000 Cash at Bank 250 1,000 28,500 9,000 28,500 9,000

Prepare Consolidated Financial Statements5)From the following Balance Sheet prepare consolidated Balance Sheet of X Co Ltd and Y Co. Ltd

Balance Sheet as on 31st March 2000Liabilities X Y Assets X Y

Share Capital Land and building15,200,00

0 2,00,000 shares of Rs 80 each 16,000,000 Plant & Machinery 2,240,000 320,000 20,000 shares of Rs 80each 1,600,000 Shares in Y Co Ltd 2,880,000 General Reserve 8,000,000 18000 shares of Rs 80 each Creditors 4,800,000 320,000 Stock 4,800,000 800,000 Profit & Loss Appropriation 1,600,000 2,400,000 Debtors 3,200,000 1,120,000 Cash at Bank 2,080,000 2,080,000

30,400,000 4,320,000 30,400,00

0 4,320,000

Rule4: There are certain transaction which appears in the balance sheet of both the holding and subsidiary companies on opposite sides like loan given by one company to another, bills of exchange given by one company to another, debtors and creditors. Such transactions are not shown on any side of consolidate balance sheet.

6)

The Balance Sheet of H ltd and its subsidiary S Ltd on 31st March 2001 were as underLiabilities H S Assets H SShare Capital Land & Building 600,000

Equity Shares of Rs 10 each 2,000,00

0 500,000 Plant & Machinery2,000,00

0 fully paid up Furniture and Fixtures 90,000 100,000 General Reserve 300,000 100,000 30,000 Shares in S Ltd at cost 650,000 Profit and Loss A/c 900,000 450,000 Stock 400,000 750,000 Bills Payable 150,000 Debtors 100,000 280,000 Creditors 300,000 300,000 Cash in hand 10,000 15,000 Canara Bank Overdraft 200,000 Cash at Dena Bank 105,000 Bills Receivable 100,000

3,850,00

0 1,350,00

0 3,850,00

0 1,350,00

0 Additional Points1) Bills Receivable held by S Ltd are all accepted by H Ltd 2) Included in Debtors of S Ltd is a sum of Rs 60000 owing by H Ltd in respect of goods supplied by S LTdYou are required to prepare a CFS of H Ltd as at 31st March 2001

Rule 5 when goods are sold by one company to another at a price which includes profit and such goods are unsold on the date of Balance Sheet there will be unrealized profit from the point of view of group. Such profit is eliminated from the stock valuation and profit of majority shareholder

7)

The following is the summarised balance sheet of A Ltd and C Ltd as on 31st March 2001Liabilities A Ltd C Ltd Assets A Ltd C LtdPaid up capital in Freehold premises 450,000 120,000 shares of Rs 10 each 1,000,000 300,000 Plant & Machinery 350,000 160,000 General Reserve 400,000 125,000 Furniture 80,000 30,000 Profit & Loss A/c 300,000 175,000 Debtors 300,000 170,000 Sundry Creditors 100,000 70,000 Stock 320,000 160,000 Investment in 20000 shares in C Ltd at cost 260,000 Cash Balance 40,000 30,000 1,800,000 670,000 1,800,000 670,000

You are required to prepare a CFS as on 31/3/2001 showing in detail necessary adjustments and taking into consideration the following information1) Stock of Rs 160000 held by C Ltd consists of Rs 60,000 goods purchased from A Ltd who has charged profit at 25 % on cost

Rule 6 While preparing a consolidated balance sheet at a date after acquisition there is a need to divide all the profits into pre acquisition profit and post acquisition profit. While Post acquisition profit is shown in the consolidated balance sheet, pre acquisition profits are eliminated by taking them in the computation of goodwill or capital reserve.

8 )From the Balance Sheet given below prepare a consolidated Balance sheet of M Ltd and its subsidiary C Ltd. Share were acquired on 1st Jan 1997 Balance Sheet of M Ltd & C Ltd as on 30th June 1997Liabilities M C Assets M C

Share Capital Fixed Assets140,00

0 40,000

15000 shares of Rs 10each150,00

0 Current Assets 58,000 10,000

3000 share of Rs 10 each 30,00

0 Investment

General Reserve 20,000 2000 shares of Rs 10 27,000 Profit & Loss A/c 30,000 each in CLtd Balance on 1/7/96 4,500 Add: Profit for the year 6,000 Creditors 25,000 9,500

225,00

050,00

0 225,00

0 50,000