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a. Investments in Govt. or Trust securities.
b. Investmentsin shares, debentures or bonds.
c. Investment in Capital of Partnership firm
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Raw materials, work-in-progress, finished goods,
spares and consumables
Sundry debtors and receivables < 6 mths Advances paid to suppliers of raw materials
Cashand bank balances
Interest receivables
Other current assets such as Governmentsecurities, Bank deposits ..etc
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Tax disputes
Legal litigations
Bills and cheques discounted with banks Claims against the company not
acknowledged
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Ratio analysis is one of the powerfultools of financial analysis. It indicates aquantitative relationship between the figuresand group of figures which are used for
Evaluation And Decision Making.
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Ratio is a simple mathematical expression of
relationship between two related items in quantitative
form. It may be a number expressed in terms of another
number.
The relationship between two figures may be expressed as
Quotient
A Rate
Percentage
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In assessingthe financial stability of a firm, a management
should, apart from profitability, be interested in relative figures rather
than in absolute figures.
Ratioscan be directly helpful as a basis for making predictions.
A ratio is a mathematical relationship between two quantities.
To evaluate financial condition and the purposes of a firm, the
financial analyst needs certain yardsticks.Such yardsticks frequently
used is a ratio.
The ratios are not only helpful to those who manage companybut
also its shareholders and creditorsto knowabout financial position
and the earning capacity of that concern.
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A) ON THE BASIS OF STATEMENTS PREPARED
The Classification is based on financial statements prepared i.e. Profit and Loss
and Balance Sheet, where from the information is obtained for calculation ratios.
The ratios under this classification are grouped into three categories, namely :
1. Balance Sheet Ratios:
Those ratios which are calculated to establish relationship between two balance
sheet items. They are-
a) Current Ratio b) Liquid Ratio
c)) Proprietary Ratio d) Debt-Equity Ratio
e) Capital Gearing Ratio
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Current Assets
Current Ratio = -----------------------------
Current Liabilities
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2. Income Statement Ratios:
Those ratios calculated to establish relationship between two P&L a/c items.
They are:
a) Gross Profit Ratio b) Operating Ratio
c) Operating Profit Ratio d) Net Profit Ratio
e) Interest Coverage Ratio
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Gross Profit
Gross Profit Ratio = --------------------------- X 100Net Sales
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3. Composite or Mixed Ratios
Those ratios are calculated to establish relationship between a
P&L a/c item and Balance Sheet item. They are
a) Inventory Turn-Over Ratio b) Debtors Turn-Over Ratio
c) Creditors Turn-Over Ratio d) Working Capital Turn-Over
Ratio
e) Fixed Assets Turn-Over Ratio f) Return on Equity
g) Return on Capital Employed
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Net Sales
Total Asset Turnover Ratio = --------------------------
Total Assets
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a) Liquidity Ratios:
i) Current Ratio ii) Liquid Ratioiii) Absolute Liquid Ratio
b) Deficiency or Activity Ratios :a) Inventory Turn-Over Ratio b) Debtors Turn-Over Ratio
c) Creditors Turn-Over Ratio d) Working Capital Turn-Over Ratio
e) Fixed Assets Turn-Over Ratio
c) Profitability Ratios:a) Gross Profit Ratio b) Operating Ratio
c) Operating Profit Ratio d) Net Profit Ratio
d) Solvency Ratios:a) Debt-Equity Ratio b) Proprietary Ratio c) Solvency Ratio
d) Fixed assets to Net-Worth Ratio e) Current Assets to Net-
Worth Ratio
f) Interest Coverage Ratio g) Capital Gearing Ratio
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Trade Creditors-- Focus on the liquidity of the
firm.
Bondholders-- Focus on the long-term cash
flow of the firm.
Shareholders-- Focus on the profitability and
long-term health of the firm.
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Plan-- Focus on assessing the current financial
position and evaluating potential firm
opportunities.
Control -- Focus on return on investment for
various assets and asset efficiency.
Understand -- Focus on understanding how
suppliers of funds analyze the firm.
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Balance Sheet
A summary of a firms financial position on a
given date that shows total assets = total
liabilities + owners equity.
Income Statement
A summary of a firms revenues and expenses
over a specified period, ending with net income
or loss for the period.
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Reynolds Balance Sheet (Asset Side)
Reynolds Balance Sheet (thousands) Dec. 31, 2007
a. How the firm stands on aspecific date.
b. What Renolds owned.
c. Amounts owed by
customers.d. Future expense items
already paid.
e. Cash/likely convertible tocash within 1 year.
f. Original amount paid.
g. Acc. deductions for wearand tear.
Cash and C.E. $ 90
Acct. Rec. 394
Inventories 696
Prepaid Exp 5
Accum Tax Prepay 10Current Assets $ 1,195
Fixed Assets (@Cost) 1030
Less: Acc. Depr. (329)
Net Fix. Assets $ 701
Investment, LT 50Other Assets, LT 223
Total Assets $ 2,169
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Reynolds Balance Sheet (Liability Slide)
Reynolds Balance Sheet (thousands) Dec. 31, 2007
a. Note, Assets = Liabilities + Equity.
b. What Renolds owed and
ownership position.
c. Owed to suppliers for goods and
services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.
f. Debts payable > 1 year.
g. Original investment.
h. Earnings reinvested.
Notes Payable $ 290
Acct. Payable 94
Accrued Taxes 16
Other Accrued Liab. 100
Current Liab. $ 500Long-Term Debt 530
Shareholders Equity
Com. Stock ($1 par) 200
Add Pd in Capital 729
Retained Earnings 210
Total Equity $ 1,139
Total Liab/Equity $ 2,169
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Reynolds Income StatementReynolds Statement of Earnings (in thousands) for Year Ending December 31, 2007
a. Measures profitability over atime period.
b. Received, or receivable, from
customers.
c. Sales comm., adv., officerssalaries, etc.
d. Operating income.
e. Cost of borrowed funds.
f. Taxable income.g. Amount earned for
shareholders.
Net Sales $ 2,211
Cost of Goods Sold 1,599
Gross Profit $ 612
SG&A Expenses 402
EBIT $ 210
Interest Expense 59
EBT $ 151
Income Taxes 60
EAT $ 91Cash Dividends 38
Increase in RE $ 53
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Use of Financial Ratios
A Financial Ratio is an index that relates two
accounting numbers and is obtained by dividingone number by the other.
Types of Comparisons
Internal Comparisons
External Comparisons