Section: B

Management accounting
 Management Accounting
Management Accounting is concerned with accounting
information that is useful to management.
R. N. Anthony
Management Accounting is the application of
appropriate techniques and concepts in processing
historical and projected economic data of an entity to
assist management in establishing plans for
reasonable economic objectives and in making of
rational decisions with a view towards these
objectives.
American Accounting Association
Scope of Management Accounting
• Information provided by Financial Accounting
• Information provided by Cost Accounting
• Budgeting or Forecasting
• Cost Control Procedures
• Reporting
• Methods and Procedures
• Tax Accounting
• Internal Financial Control
• Interpretation
 Objectives (Role) of Management
Accounting
• Assistance in planning and formulation of future policies
• Assistance in interpretation f financial information
• Assistance in controlling
• Assistance in organizing
• Assistance in strategic decision-making
• Assistance in coordinating operations
• Assistance in motivating employees
• Assistance in evaluating efficiency and effectiveness of
policies
• Communicating information
Functions of Management Accounting
• Forecasting and Planning
• Organizing
• Coordinating
• Controlling
• Financial Analysis and Interpretation
• Communication
• Assistance in Pricing decisions etc.
 Difference between Financial and
Management Accounting
• Objective
• Nature
• Compulsion
• Interested Parties
• Methodology
• Precision
• Publication
• Audit
• Description
 Difference between Cost and
Management Accounting
• Objective
• Inter-relation
• Role
• Outlook
• Tools and Techniques
• Scope
• Period of Planning
• Approach
• Dependence
 Financial Statements
Financial Statements are the organized summaries of
detailed information about operating results and
financial position of the concern. These are prepared at
the end of accounting period and include:
• P & L and Balance Sheet
• Board’s Report with respect to company’s affairs,
reserve, proposed dividend, any material change etc.
• Director’s Responsibility Statement (regarding
authenticity and due compliance of accounting norms)
• Management Discussion and Analysis (covering SWOT
analysis for company)
Continued

• Report on Corporate Governance (covering

composition of board of director, details of
meeting, shareholder information, auditor’s
certificate on corporate governance etc.)
• Auditor’s Report
• Cash Flow Analysis
• Notes and Annexure related to financial
statement
Types: Annual Financial Statements, Quarterly
Financial Reports and Segment Reports
 Financial Analysis
Financial analysis concerns with the use of
financial data in the evaluation of current and
past performance of an enterprise and to
assess its sustainability in future.
Importance: It is primarily used for taking
decisions regarding security analysis, analysis
of credit worthiness, credit analysis, debt
analysis, dividend decision, mergers, take-over,
amalgamation and general business analysis.
Continued
Limitations:
• Ignorance of Qualitative Aspect and non-financial
information
• Based on Historic data
• Possibility of manipulation
• Ignores inflation/ deflation
• Intuitive Decisions
• Lack of Objectivity
• Costly
• Psychological Resistance
• Not a substitute of administration
 Tools of Financial Analysis

• Common-size Statements
• Comparative or Indexed Statements
• Trend Analysis
• Ratio Analysis
• Fund Flow Analysis
• Cash Flow Analysis
 Common-size Analysis
An analysis of percentage financial statements
where all balance sheet items are divided
by total assets and all income statement
items are divided by net sales or revenues.
 Common Size Balance Sheets
Regular (thousands of $) Common-Size (%)
Assets 2005 2006 2007 2005 2006 2007
Cash 148 100 90 12.10 4.89 4.15
AR 283 410 394 23.14 20.06 18.17
Inv 322 616 696 26.33 30.14 32.09
Other CA 10 14 15 0.82 0.68 0.69
Tot CA 763 1,140 1,195 62.39 55.77 55.09
Net FA 349 631 701 28.54 30.87 32.32
LT Inv 0 50 50 0.00 2.45 2.31
Other LT 111 223 223 9.08 10.91 10.28
Tot Assets 1,223 2,044 2,169 100.0 100.0 100.0
 Common Size Balance Sheets
Regular (thousands of $) Common-Size (%)
Liab+Equity 2005 2006 2007 2005 2006 2007
Note Pay 290 295 290 23.71 14.43 13.37
Acct Pay 81 94 94 6.62 4.60 4.33
Accr Tax 13 16 16 1.06 0.78 0.74
Other Accr 15 100 100 1.23 4.89 4.61
Tot CL 399 505 500 32.62 24.71 23.05
LT Debt 150 453 530 12.26 22.16 24.44
Equity 674 1,086 1,139 55.11 53.13 52.51
Tot L+E 1,223 2,044 2,169 100.0 100.0 100.0
 Common Size Income Statements
Regular (thousands of $) Common-Size (%)
2005 2006 2007 2005 2006 2007
Net Sales 1,235 2,106 2,211 100.0 100.0 100.0
COGS 849 1,501 1,599 68.7 71.3 72.3
Gross Profit 386 605 612 31.3 28.7 27.7
Adm. 180 383 402 14.6 18.2 18.2
EBIT 206 222 210 16.7 10.5 9.5
Int Exp 20 51 59 1.6 2.4 2.7
EBT 186 171 151 15.1 8.1 6.8
EAT 112 103 91 9.1 4.9 4.1
Cash Div 50 50 50 4.0 2.4 2.3
 Index Analyses

An analysis of percentage financial statements

where all balance sheet or income statement
figures for a base year equal 100.0 (percent)
and subsequent financial statement items are
expressed as percentages of their values in the
base year.
 Indexed Balance Sheets
Regular (thousands of $) Indexed (%)
Assets 2005 2006 2007 2005 2006 2007
Cash 148 100 90 100.0 67.6 60.8
AR 283 410 394 100.0 144.9 139.2
Inv 322 616 696 100.0 191.3 216.1
Other CA 10 14 15 100.0 140.0 150.0
Tot CA 763 1,140 1,195 100.0 149.4 156.6
Net FA 349 631 701 100.0 180.8 200.9
LT Inv 0 50 50 100.0 inf. inf.
Other LT 111 223 223 100.0 200.9 200.9
Tot Assets 1,223 2,044 2,169 100.0 167.1 177.4
 Indexed Balance Sheets
Regular (thousands of $) Indexed (%)
Liab+Equity 2005 2006 2007 2005 2006 2007
Note Pay 290 295 290 100.0 101.7 100.0
Acct Pay 81 94 94 100.0 116.0 116.0
Accr Tax 13 16 16 100.0 123.1 123.1
Other Accr 15 100 100 100.0 666.7 666.7
Tot CL 399 505 500 100.0 126.6 125.3
LT Debt 150 453 530 100.0 302.0 353.3
Equity 674 1,086 1,139 100.0 161.1 169.0
Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4
 Indexed Income Statements
Regular (thousands of $) Indexed (%)
2005 2006 2007 2005 2006 2007
Net Sales 1,235 2,106 2,211 100.0 170.5 179.0
COGS 849 1,501 1,599 100.0 176.8 188.3
Gross Profit 386 605 612 100.0 156.7 158.5
Adm. 180 383 402 100.0 212.8 223.3
EBIT 206 222 210 100.0 107.8 101.9
Int Exp 20 51 59 100.0 255.0 295.0
EBT 186 171 151 100.0 91.9 81.2
EAT 112 103 91 100.0 92.0 81.3
Cash Div 50 50 50 100.0 100.0 100.0
Cash Flow Analysis
 Cash Flow Statement
Particulars Amount

Cash Flow from Operating Activities

Net Cash from Operating activities (A)

Cash Flow from Investing Activities

Net Cash from Investing activities (B)

Cash Flow from Financing Activities

Net Cash from Financing activities (C)

Total Cash inflow (A + B + C)

Opening Cash

Closing Cash
Particulars Amount
Cash Flow from Operating Activities
Net Profit during the year
Add : Goodwill or Preliminary expenses written off
Add: Discount on shares / debentures written off
Add: Depreciation on assets
Add: Loss on sale of assets
Add: Transfer to general reserve
Add: Provision for Tax made / provided during the year
Add: Dividend
Less: Transfer from general reserve
Less: Excess Depreciation
Less: Profit on sales of assets
Add: Decrease in current assets (except cash..)
Less: Increase in current assets (except cash..)
Add: Increase in current liability
Less: Decrease in current liability
Net Cash from Operating activities (A)
 Continued
Particulars Amount
Cash Flow from Investing Activities
Sale of Fixed assets
Less: Purchase of Fixed assets
Net Cash from Investing activities (B)
Cash Flow from Financing Activities
Issue of share or Debentures
Less: Redemption of Shares / Debentures
Add: Loan raised
Less: Loan paid
Less: Dividend paid
Less: Tax paid during the year
Net Cash from Financing activities (C)
 Cash Flow Statement
• From Handouts
Ratio Analysis
 Classification of Ratios
Balance Sheet P&L Ratio or Balance Sheet and
Ratio Income/Revenue Profit & Loss Ratio
Statement Ratio

Financial Ratio Operating Ratio Composite Ratio

Current Ratio Gross Profit Ratio Fixed Asset Turnover
Quick Asset Ratio Operating Ratio Ratio, Return on Total
Proprietary Ratio Expense Ratio Resources Ratio,
Debt Equity Ratio Net profit Ratio Return on Own Funds
Stock Turnover Ratio Ratio, Earning per
Share Ratio, Debtors’
Turnover Ratio,
 Format of balance sheet for ratio analysis
LIABILITIES ASSETS
NET WORTH/EQUITY/OWNED FUNDS FIXED ASSETS : LAND & BUILDING, PLANT &
Share Capital/Partner’s Capital/Paid up Capital/ MACHINERIES
Owners Funds Original Value Less Depreciation
Reserves ( General, Capital, Revaluation & Other Net Value or Book Value or Written down value
Reserves)
Credit Balance in P&L A/c

LONG TERM LIABILITIES/BORROWED FUNDS : NON CURRENT ASSETS

Term Loans (Banks & Institutions) Investments in quoted shares & securities
Debentures/Bonds, Unsecured Loans, Fixed Old stocks or old/disputed book debts
Deposits, Other Long Term Liabilities Long Term Security Deposits
Other Misc. assets which are not current or fixed in
nature

CURRENT LIABILTIES CURRENT ASSETS : Cash & Bank Balance,

Bank Working Capital Limits such as Marketable/quoted Govt. or other securities, Book
CC/OD/Bills/Export Credit Debts/Sundry Debtors, Bills Receivables, Stocks &
Sundry /Trade Creditors/Creditors/Bills Payable, inventory (RM,SIP,FG) Stores & Spares, Advance
Short duration loans or deposits Payment of Taxes, Prepaid expenses, Loans and
Expenses payable & provisions against various Advances recoverable within 12 months
items

INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c,
Preliminary or Preoperative expenses
1. Current Ratio : It is the relationship between the current
assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are
Rs.4,00,000 and Rs.2,00,000 respectively, then the Current
Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is 1.33 : 1

2. Net Working Capital : This is worked out as surplus of Long

Term Sources over Long Tern Uses, alternatively it is the
difference of Current Assets and Current Liabilities.
NWC = Current Assets – Current Liabilities
Current Assets : Raw Material, Stores, Spares, Work-in Progress. Finished Goods,
Debtors, Bills Receivables, Cash.

Current Liabilities : Sundry Creditors, Installments of Term Loan, DPG etc. payable within
one year and other liabilities payable within one year.

This ratio must be at least 1.33 : 1 to ensure minimum margin of 25% of current assets as
margin from long term sources.

 Current Ratio measures short term liquidity of the concern and its ability to meet its
short term obligations within a time span of a year.
 It shows the liquidity position of the enterprise and its ability to meet current
obligations in time.
Higher ratio may be good from the point of view of creditors. In the long run very high
current ratio may affect profitability ( e.g. high inventory carrying cost)
 Shows the liquidity at a particular point of time. The position can change immediately
after that date. So trend of the current ratio over the years to be analyzed.
 Current Ratio is to be studied with the changes of NWC. It is also necessary to look at
this ratio along with the Debt-Equity ratio.
3. ACID TEST or QUICK RATIO : It is the ratio between
Quick Current Assets and Current Liabilities. The should be at
least equal to 1.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6

months + Quickly realizable securities such as Govt. Securities or
quickly marketable/quoted shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current

Liabilities

Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities
1,00,000
Total Current Assets 3,00,000

Current Ratio => 3,00,000/1,00,000

4. DEBT EQUITY RATIO : It is the relationship
between borrower’s fund (Debt) and Owner’s Capital
(Equity).

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less

Intangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 Lacs

Free Reserves & Surplus = Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

5. PROPRIETARY RATIO : This ratio indicates the
extent to which Tangible Assets are financed by
Owner’s Fund.
Proprietary Ratio = (Tangible Net Worth/Total
Tangible Assets) x 100
The ratio will be 100% when there is no Borrowing
for purchasing of Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit

percentage to Net Sales we can arrive at the Gross Profit
Ratio which indicates the manufacturing efficiency as well
as the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales )

x 100

Alternatively , since Gross Profit is equal to Sales

minus Cost of Goods Sold, it can also be interpreted as
below :
7. OPERATING PROFIT RATIO :

It is expressed as => (Operating Profit / Net

Sales ) x 100

Higher the ratio indicates operational efficiency

8. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales )

x 100

It measures overall profitability.

 9. STOCK/INVENTORY TURNOVER RATIO :

(Average Inventory/Sales) x 365 for days

(Average Inventory/Sales) x 52 for weeks
(Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock + Closing Stock)

-----------------------------------------

2
. This ratio indicates the number of times the
inventory is rotated during the relevant
accounting period
 10. DEBTORS TURNOVER RATIO : This is also called Debtors Velocity
or Average Collection Period or Period of Credit given .

(Average Debtors/Sales ) x 365 for days

(52 for weeks & 12 for months)

11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets

12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets

13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets

14. CREDITORS TURNOVER RATIO : This is also called Creditors

Velocity Ratio, which determines the creditor payment period.

(Average Creditors/Purchases)x365 for days

(52 for weeks & 12 for months)
15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets

16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average Capital Employed) x 100

Average Capital Employed is the average of the equity share

capital and long term funds provided by the owners and the
creditors of the firm at the beginning and end of the accounting
period.
 Composite Ratio

17. RETRUN ON EQUITY CAPITAL (ROE) :

Net Profit after Taxes / Tangible Net Worth

18. EARNING PER SHARE : EPS indicates the quantum of net profit
of the year that would be ranking for dividend for each share of
the company being held by the equity share holders.

Net profit after Taxes and Preference Dividend/ No. of Equity

Shares

19. PRICE EARNING RATIO : PE Ratio indicates the number of times

the Earning Per Share is covered by its market price.

Market Price Per Equity Share/Earning Per Share

20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most
important one which indicates the ability of an enterprise to
meet its liabilities by way of payment of installments of Term
Loans and Interest thereon from out of the cash accruals and
forms the basis for fixation of the repayment schedule in
respect of the Term Loans raised for a project. (The Ideal DSCR
Ratio is considered to be 2 )

PAT + Depr. + Annual Interest on Long Term Loans & Liabilities

---------------------------------------------------------------------------------
Annual interest on Long Term Loans & Liabilities + Annual
Installments payable on Long Term Loans & Liabilities

( Where PAT is Profit after Tax and Depr. is Depreciation)

 Market Value Measures
• Market Capitalization = Market Value of
Common Equity
• Enterprise Value= MV equity + MV debt – Cash
– Marketable securities. Measures value of
firm’s underlying business
 The Du Pont System
The Du Pont system focuses on:
• Expense control (PM)
• Asset utilization (TATO)
• Debt utilization (EM)
It shows how these factors combine to determine the ROE.
Profit TA Equity
margin turnover multiplier
NI Sales TA = ROE
Sales x TA x CE

41
 Return on Equity and
the Du Pont Approach
Return On Equity = Net profit margin X
Total asset turnover X
Equity Multiplier
Total Assets
Equity Multiplier =
Shareholders’ Equity

ROE2007 = .041 x 1.02 x 1.90 = .080

ROEIndustry = .082 x 1.17 x 1.88 = .179
 Return on Investment and the
Du Pont Approach
Earning Power = Sales profitability X
Asset efficiency
ROI = Net profit margin X
Total asset turnover
ROI2007 = .041 x 1.02 = .042 or 4.2%
ROIIndustry = .082 x 1.17 = .098 or 9.8%
EXERCISE 1
LIABILITES ASSETS
Capital 180 Net Fixed Assets 400
Reserves 20 Inventories 150
Term Loan 300 Cash 50
Bank C/C 200 Receivables 150
Trade Creditors 50 Goodwill 50
Provisions 50
800 800

a. What is the Net Worth : Capital + Reserve = 200

b. Tangible Net Worth is : Net Worth - Goodwill = 150
c. Outside Liabilities : TL + CC + Creditors + Provisions = 600
d. Net Working Capital : C A - C L = 350 - 250 = 50
e. Current Ratio : C A / C L = 350 / 300 = 1.17 : 1
f. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1
 EXERCISE 2
LIABILITIES 2005-06 2006-07 2005-06 2006-07
Capital 300 350 Net Fixed Assets 730 750
Reserves 140 160 Security Electricity 30 30
Bank Term Loan 320 280 Investments 110 110
Bank CC (Hyp) 490 580 Raw Materials 150 170
Unsec. Long T L 150 170 S I P 20 30
Creditors (RM) 120 70 Finished Goods 140 170
Bills Payable 40 80 Cash 30 20
Expenses Payable 20 30 Receivables 310 240
Provisions 20 40 Loans/Advances 30 190
Goodwill 50 50
Total 1600 1760 1600 1760

1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390

2. Current Ratio for 2nd Year : (170 + 30 +170+20+ 240 + 190 ) / (580+70+80+70)
820 /800 = 1.02
3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21
Exercise 3.

LIABIITIES ASSETS
Equity Capital 200 Net Fixed Assets 800
Preference Capital 100 Inventory 300
Term Loan 600 Receivables 150
Bank CC (Hyp) 400 Investment In Govt. Secu. 50
Sundry Creditors 100 Preliminary Expenses 100
Total 1400 1400

1. Debt Equity Ratio will be : 600 / (200+100) = 2 : 1

2. Tangible Net Worth : Only equity Capital i.e. = 200

3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200

= 11 : 2

4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1

 Exercise 4.
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

Q. What is the Current Ratio ? Ans : (1+125 +128+1) / (38+26+9+15)

: 255/88 = 2.89 : 1

Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11

Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW

= 100 / ( 362 – 30)
= 100 / 332 = 0.30 : 1
 Exercise 4. contd…
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

Q . What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100

[ (362 - 30 ) / (550 – 30)] x 100
(332 / 520) x 100 = 64%
Q . What is the Net Working Capital ?
Ans : C. A - C L. = 255 - 88 = 167

Q . If Net Sales is Rs.15 Lac, then What would be the Stock Turnover Ratio in
Times ? Ans : Net Sales / Average Inventories/Stock
1500 / 128 = 12 times approximately
 Exercise 4. contd…
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.

Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12

= 1 month

Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?

Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.3 months
Exercise 5. : Profit to sales is 2% and amount of profit is say Rs.5 Lac.
Then What is the amount of Sales ?

Answer : Net Profit Ratio = (Net Profit / Sales ) x 100

2 = (5 x100) /Sales
Therefore Sales = 500/2 = Rs.250 Lac
Exercise 6. A Company has Net Worth of Rs.5 Lac, Term Liabilities of
Rs.10 Lac. Fixed Assets worth RS.16 Lac and Current Assets are Rs.25
Lac. There is no intangible Assets or other Non Current Assets.
Calculate its Net Working Capital.
Answer
Total Assets = 16 + 25 = Rs. 41 Lac
Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac
Current Liabilities = 41 – 15 = 26 Lac

Therefore Net Working Capital = C. A – C.L

= 25 – 26 = (- )1 Lac
Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net Working
Capital ?

Answer : It suggest that the Current Assets is equal to Current Liabilities hence the
NWC would be NIL ( since NWC = C.A - C.L )

Exercise 8 : Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What is the

amount of Current Assets ?

Answer : 4a - 1a = 30,000
Therefore a = 10,000 i.e. Current Liabilities is Rs.10,000
Hence Current Assets would be 4a = 4 x 10,000 = Rs.40,000/-

Exercise 9. The amount of Term Loan installment is Rs.10000/ per month,

monthly average interest on TL is Rs.5000/-. If the amount of Depreciation is
Rs.30,000/- p.a. and PAT is Rs.2,70,000/-. What would be the DSCR ?

DSCR = (PAT + Depr + Annual Intt.) / Annual Intt + Annual Installment

= (270000 + 30000 + 60000 ) / 60000 + 120000
= 360000 / 180000 = 2
Exercise 10 : Total Liabilities of a firm is Rs.100 Lac and Current Ratio is 1.5 : 1. If
Fixed Assets and Other Non Current Assets are to the tune of Rs. 70 Lac and Debt
Equity Ratio being 3 : 1. What would be the Long Term Liabilities?

Ans : We can easily arrive at the amount of Current Asset being Rs. 30 Lac i.e. ( Rs.
100 L - Rs. 70 L ). If the Current Ratio is 1.5 : 1, then Current Liabilities works out to
be Rs. 20 Lac. That means the aggregate of Net Worth and Long Term Liabilities
would be Rs. 80 Lacs. If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs.
60 Lacs and equity Rs. 20 Lacs. Therefore the Long Term Liabilities would be Rs.60
Lac.

Exercise 11 : Current Ratio is say 1.2 : 1 . Total of balance sheet being Rs.22 Lac.
The amount of Fixed Assets + Non Current Assets is Rs. 10 Lac. What would be the
Current Liabilities?

Ans : When Total Assets is Rs.22 Lac then Current Assets would be 22 – 10 i.e Rs.
12 Lac. Thus we can easily arrive at the Current Liabilities figure which should be Rs.
10 Lac
EXERCISE 12. A firm sold its stocks in CASH, in order to meet its liquidity needs.
Which of the following Ratio would be affected by this?

1. Debt Equity Ratio

2. Current Ratio
3. Debt Service Coverage Ratio
4. Quick Ratio

EXERCISE 13. A company is found to be carrying a high DEBT EQUITY Ratio. To

improve this, a bank may suggest the company to :

1. Raise long term interest free loans from friends and relatives
2. Raise long term loans from Institutions
3. Increase the Equity by way of Bonus Issue
4. Issue Rights share to existing share holders.

EXERCISE 14. Which of the following is a fictitious Asset?

1. Goodwill
2. Preliminary Expenses
3. Pre-operative expenses
4. Book Debts which have become doubtful of recovery
EXERCISE 15. Under which of the following methods of depreciation on Fixed Assets,
the annual amount of depreciation decreases?

1. Written Down Value method

2. Straight Line method
3. Annuity method
4. Insurance policy method

EXERCISE 16 Debt Service Coverage Ratio (DSCR) shows :

1. Excess of current assets over current liabilities

2. Number of times the value of fixed assets covers the amount of loan
3. Number of times the company’s earnings cover the payment of interest and
repayment of principal of long term debt
4. Effective utilisation of assets

EXERCISE 17. Which of the following is not considered a Quick Asset?

1. Cash and Bank balances

2. Bank Fixed Deposits
3. Current Book Debts
4. Loans and Advances
Exercise 18. From the following financial statement calculate (i) Current Ratio (ii) Acid test
Ratio (iii) Inventory Turnover (iv) Average Debt Collection Period (v) Average Creditors’
payment period.
C.Assets
Sales 1500 Inventories 125
Cost of sales 1000 Debtors 250
Gross profit 500 Cash 225
C. Liabilities
Trade Creditors 200

(i) Current Ratio : 600/200 = 3 : 1

(ii) Acid Test Ratio : Debtors+Cash /Trade creditors = 475/200 = 2.4 : 1
(iii) Inventory Turnover Ratio : Cost of sales / Inventories = 1000/125 = 8 times
(iv) Average Debt collection period : (Debtors/sales) x 365 = (250/1500)x365 = 61 days
(v) Average Creditors’ payment period : (Trade Creditors/Cost of sales) x 365
(200/100) x 365 = 73 days