Module 4 Financial Reporting, - PowerPoint Presentation

1. Module 4Financial Reporting,Statements and AnalysisFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

2. Module 4 – Ratio AnalysisLearning OutcomeAble to analyse financial health through ratiosContentIntroduction to RatiosTypes of RatiosLiquidity RatiosSolvency RatiosActivity RatiosProfitability Ratios and,Market Test RatiosFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

3. Introduction to Ratio A ratio is a mathematical number calculated as a reference to relationship of two or more numbers and can be expressed as a fraction, proportion, percentage and a number of times.Definition of RatioA ratio is defined as “the indicated quotient of two mathematical expressions and as the relationship between two or more things.” Here ratio means financial ratio or accounting ratio which is a mathematical expression of the relationship between accounting figures.FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

4. Introduction to Ratio Objectives of Ratio Analysis1. To know the areas of the business which need more attention; 2. To know about the potential areas which can be improved with the effort in the desired direction; 3. To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels in the business;4. To provide information for making cross-sectional analysis by comparing the performance with the best industry standards; and5. To provide information derived from financial statements useful for making projections and future estimations.FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

5. Introduction to Ratio Advantages of Ratio Analysis1. Helps to understand efficiency of decisions2. Simplify complex figures and establish relationships3. Helpful in comparative analysis4. Identification of problem areas5. Enables SWOT analysis6. Various comparisonsFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

6. Introduction to Ratio Limitations of Ratio Analysis1. Limitations of Accounting Data2. Ignores Price-level Changes3. Ignore Qualitative or Non-Monetary Aspects4. Variations in Accounting Practices5. ForecastingFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

7. Types of Ratios Liquidity Ratios - Liquidity or short-term solvency means ability of the business to pay its short-term liabilities.Activity Ratios - These ratios indicate the speed at which, activities of the business are being performed. Profitability Ratios - Profitability ratios are calculated to analyze the earning capacity of the business which is the outcome of utilization of resources employed in the business. Solvency Ratios - Solvency ratios are calculated to determine the ability of the business to service its debt in the long runMarket Test Ratios – Theses ratios indicate the firms performance level to the investors of the stock market.FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

8. Liquidity Ratios Liquidity ratios are calculated to measure the short-term solvency of the business, i.e. the firm’s ability to meet its current obligations. Various Liquidity Ratios are:Current RatioQuick Ratio or Acid Test RatioCash Ratio or Absolute Liquidity RatioBasic Defense Interval or Interval Measure RatiosNet Working Capital RatioFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

9. Liquidity Ratios Current Ratio = Current Assets / Current LiabilitiesQuick Ratio or Acid Test Ratio = (Current Assets – Inventories-Prepaid Exp.) Current LiabilitiesCash Ratio or Absolute Liquidity Ratio = Cash + Bank + Short Term Marketable Securities Current LiabilitiesNet Working Capital Ratio = Current Assets - Current Liabilities (Excluding Short term bank borrowing)FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

10. Liquidity Ratios FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

11. Liquidity Ratios FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK 3

12. Liquidity Ratios FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

13. Q5: Current ratio 2.5.Working capital Rs.60,000. Calculate the amount of Current Assets and Current Liabilities.Q6: Current ratio = 4.5Quick ratio = 3Working Capital = Rs. 90,000. Calculate the Current Assets, Current Liabilities and Stock.FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

14. Liquidity Ratios - Practice FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

15. Liquidity Ratios Basic Defense Interval or Interval Measure RatiosBDI is a financial metric that indicates the number of days that a company can operate without needing to access noncurrent assets, long-term assets whose full value cannot be obtained within the current accounting year, or additional outside financial resources. BDI or IMR (expressed as number of days) = current assets / daily operational expensesCurrent assets = cash + marketable securities + net receivablesDaily operational expenses = (annual operating expenses – non cash charges) / 365FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

16. DIR For example, A company has Rs. 100,000 cash on hand, Rs. 50,000 worth of marketable securities, and Rs.50,000 in accounts receivables, it has a total of Rs.200,000 in defensive assets. If the company's daily operational expenses equal Rs.5,000.The DIR value is = current assets / daily operational expenses = Rs.200,000 / Rs. 5,000. = 40 Days FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

17. DIRHammer Industries is suffering through a cyclical decline in the heavy equipment industry, but the cycle appears to be turning up. The company expects a cash-in-advance payment from a major customer in 60 days. In the meantime, the CEO wants to understand the ability of the company to stay in business at its current rate of expenditure. The following information applies to the analysis:Cash = Rs.1,200,000; Marketable securities = Rs.3,700,000; Trade receivables = Rs. 4,100,000Average daily expenditures = Rs. 138,500 The calculation of the defensive interval ratio is:($1,200,000 Cash + $3,700,000 Marketable securities + $4,100,000 Receivables) ÷ $138,500 Average daily expenditures = 65 daysFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

18. Activity RatiosActivity Ratios - These ratios indicate the speed at which, activities of the business are being performed. Various Types:Debtors Turnover RatioAverage Collection PeriodCreditors Turnover RatioAverage Payment PeriodTotal Assets Turnover RatioInventory Turnover RatioFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

19. Activity Ratios Debtors Turnover Ratio = Credit Sales / Average DebtorsAverage Collection Period = No. of days in a year or months / DTRCreditors Turnover Ratio = Credit Purchases / Average CreditorsAverage Payment Period = No. of days in a year or months/ CTRInventory Turnover Ratio = Net Sales or Cost of Goods Sold / Average InventoryTotal Assets Ratio = Net Sales / Total AssetsFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

20. Activity Ratios 1. Calculate the Debtors Turnover Ratio and Average Collection Period from the following information:Total sales = Rs. 4,00,000Cash sales = 20% of total salesDebtors on 1.1.2004 = Rs. 40,000Debtors on 31.12.2004 = Rs. 1,20,0002. From the following details, Calculate (a) Debtors Turnover Ratio and (b) Debtors Average Collection Period:Total Sales - Rs.4,00,000 Sales Returns - Rs.25,000Cash Sales - Rs. 30,000 Debtors – Rs.10,000Bills Receivables - Rs. 25,000FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

21. Activity Ratios 3. Calculate the Creditor’s Turnover Ratio from the following figures.Credit purchases during 2005 = Rs. 12,00,000Creditors + Bills Payables on 1.1.2005 = Rs. 4,00,000Creditors + Bills Payables on 31.12.2005 = Rs. 2,00,0004. From the following information, calculate –(i) Payable Turnover Ratio(ii) Average Payment PeriodTotal Purchases - Rs.80,000; Cash Purchases – Rs.20,000Purchase returns - Rs. 5,000; Sales returns – Rs.10,000Bills Receivables - Rs.12,000; Creditors – Rs.20,000Bills Payables - Rs. 15,000; Debtors – Rs.40,000FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

22. Activity Ratios 5. From the following information, calculate stock turnover ratio :Opening Stock Rs. 18,000 Wages Rs. 14,000Closing Stock Rs. 22,000 Sales Rs. 80,000Purchases Rs. 46,000 Carriage Inwards Rs. 4,0006. From the following information, calculate stock turnover ratio. Sales: Rs. 4,00,000, Gross Profit Ratio : 10% on SalesOpening stock = Rs. 38,500 Closing stock = Rs.41, 500Note: Cost of Goods Sold = Sales – Gross ProfitFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

23. Activity Ratios The data extracted from the books of the two cement companies are provided below:Required: Compute the Following Ratios:(i) Debtors Turnover Ratio (ii) Creditors Turnover Ratio and (iii) Stock Turnover RatioFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK ParticularsAmbuja Cements (Rs.)Acc Limited (Rs.)Sales25002250Purchases14501125Opening Stock450225Closing Stock275145Creditors120130Debtors240220Bills Payable85115Bills Receivable115135Rs. In Crore

24. Activity Ratios 7. From the following information, calculate (i) Total Assets Turnover (ii) Fixed Assets Turnover and (iii) Working Capital Turnover Ratios: (Rs.) (Rs.)Preference Shares Capital 4,00,000 Plant and Machinery 8,00,000Equity Share Capital 6,00,000 Land and Building 5,00,000General Reserve 1,00,000 Motor Car 2,00,000Profit and Loss Account 3,00,000 Furniture 1,00,00015% Debentures 2,00,000 Stock 1,80,00014% Loan 2,00,000 Debtors 1,10,000Creditors 1,40,000 Bank 80,000Bills Payable 50,000 Cash 30,000Outstanding Expenses 10,000 Sales for the year 2018 were Rs. 30,00,000.FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

25. Profitability Ratios Gross Profit Ratio = Gross Profit / Net Sales x 100Net Profit Ratio = Net Profit / Net Sales x 100Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales x 100Operating Profit Ratio = Operating Profit / Net Sales x 100Operating Profit = Earnings before Interest and TaxesOperating Profit = Operating Revenue - COGS - Operating Expenses - Depreciation and AmortizationFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

26. Profitability Ratios FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK ParticularsNestle (Rs.)HUL (Rs.)Sales800000650000Other Income5000025000Cost of Goods Sold350000300000Employee Benefit Cost12000085000Finance Cost3000015000Other Expenses5000015000The data extracted from the books of the two FMCG companies are provided below:Required: Compute the Following Ratios:(i) Gross Profit Ratio (ii) Net Profit Ratio (iii) Operating Ratio and (iv) Operating Profit Ratio

27. Profitability Ratios FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK ParticularsNestle (Rs.)HUL (Rs.)Sales800000650000Other Income5000025000Cost of Goods Sold350000300000Employee Benefit Cost12000085000Finance Cost3000015000Other Expenses5000015000The data extracted from the books of the two FMCG companies are provided below:Required: Compute the Following Ratios:(i) Gross Profit Ratio (ii) Net Profit Ratio (iii) Operating Ratio and (iv) Operating Profit Ratio

28. Profitability Ratios ROI ( Return on Investment)/ROCE = Profit before Interest and Tax Capital Employed x 100Capital Employed = FA + CA - CL ROE (Return on Equity) = PAT / Net worth X 100Net worth = Share Capital + Reserves and SurplusROTA (Return on Total Assets) = PAT / Total AssetsFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK

29. FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK Profitability Ratios

30. EPS = PAT – Preference Dividend / Number of Equity SharesPrice to Earnings Ratio = Market Price of the share/ EPSDividend Yield Ratio = Dividend per share / Market price of the Share x 100Book Value per share = Net Assets / Number of sharesPrice to Book Value = Market price of the share/ Book Value per shareFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK Market Ratios

31. Market Ratios

32. Debt to Equity Ratio = Total Debt (Long Term Debt) / EquityCapital Gearing Ratio = Total Debt / Total Capital Employed or Total AssetsSolvency Ratio = PAT + Depreciation / Total LiabilitiesEquity or Proprietary Ratio = Shareholders Funds (or) Net worth Total Capital Employed or Total AssetsInterest Coverage Ratio = Net Profit before Interest and Taxes / Total InterestFRSA – Module 4 – 2019-20 SV/GS/PSR/SKK Solvency Ratios

33. Solvency Ratios

34. Balance Sheet Construction FRSA – Module 4 – 2019-20 SV/GS/PSR/SKK Future Retail Limited provides the following information as on 31.3.2018Required: Prepare a summarized Balance Sheet as at 31.03.2018ParticularsRs.Working Capital2,40,000Bank Overdraft40,000Fixed Assets to Proprietary Funds ratio0.75Reserves and Surplus1,60,000Current ratio2.5Liquid ratio1.5