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FINANCIAL STATEMENTS OF A COMPANY

Financial statements are the summarized statements of accounting data produced at the

end of the accounting process by an enterprise through which it communicates

accounting information to the external users. The external users can be investors, lenders,

suppliers and trade creditors, customers, government and their agencies and employees.

A set of financial statements includes: -

i) Income Statement

ii) Fund Flow Statement

iii) Balance Sheet

Financial information, which is the information relating to the financial position of any

enterprise, when presented in a concise and capsule form, is known as the Financial

Statement.

1. BALANCE SHEET

In the simplest form, a balance sheet may be defined to be a statement of company’s asset

and liabilities as on a particular date. It necessarily means the amounts and values stated

against each asset and liabilities are historical meaning, they do not reflect the current

values. The assets of the company, fixed assets and current assets, are represented by the

liabilities, long term liabilities and short term liabilities, and shareholders’ equity, i.e.,

paid-up share capital and reserves. The form of balance sheet of a company is prescribed

in schedule VI of the Companies Act, 1956.


The main principle is that the Balance Sheet must exhibit a true and fair view of financial

position of the company at the close of the year concerned.

2. INCOME STATEMENT (PROFIT AND LOSS ACCOUNT)

Income statement is a report o carrying on the business during a period, usually a year.

Income Statement is prepared to calculate the net profit or net loss of the business for a

given accounting period.

According to Prof. Carter, “Profit and Loss Account is an account into which all gains

and losses are collected in order to ascertain the excess of gains over the losses or vice

versa.”

The Income Statement must exhibit a true and fair view of the profit or loss of the

company during the year under reference.

3. CASH FLOW STATEMENT

The Balance Sheet discloses the financial position of the business on a particular date. It

is merely a statement of the assets and liabilities. The Balance Sheet at the end of the

period is generally quite different from the balance sheet at the beginning of the year. But

how the changes have come about is not reflected in the balance sheet.

The Analysis method, which discloses these changes, is called “Cash Flow Statement”. In

short, cash flow statement is a statement, which is prepared to disclose the changes in

financial operations, i.e., changes, flow or movements during the period.


Cash flow refers to movement both, inflow an outflow, of cash and cash equivalent

during a period of time. Cash Flow Statement is prepared with an objective to highlight

the sources and uses of the cash and cash equivalents for the period.

COMPARISON OF BALANCE SHEET

The analysis of the above comparative balance sheet gives the following information.

 The Comparative Balance Sheet of Jindal water Infrastructure Limited reveal that

the shareholders’ funds have increased by 92.32%. This increase happens to be

result of an increase in share capital (1.82%) and reserve and surplus (110.35%).

 The secured and unsecured loans have been decreased by 17.96% and 13.82%

respectively.

 The total increase in Sources of fund is 30.11%, which is the sign of growth of the

company.

 Assets side of Comparative Balance Sheets shows application of funds. Funds

have been used to acquire fixed assets as the gross block of fixed assets show an

increase of 13.53%.

 Investments have increased by Rs. 114.45 crores (71.06%).

 Current Assets – book debts and cash and bank balance have increased by 60.23%

and 91.69% respectively, signifying that considerable funds have been put in

current assets.
 Current Liabilities have gone up by 73.89%, it means that company has more

liabilities to pay in one year.

COMPARASION OF INCOME STATEMENT

The analysis of the above comparative income statement gives the following information.

 In 2007, sales have been increased by Rs.245,678lakhs (58.70%), and the Cost of

Goods Sold has also increased by Rs.154,001.32 lakhs (56.76%), as a result of

which gross profit has also been increased by Rs.91,676.79(62.29%).

 Total Operating Expenses has been increased by Rs.43,998.14 lakhs (53.91%).

Administrative and Manufacturing expenses, included in operating expenses have

alone increased heavily and this must be a cause of concern.

 Other non-Operating Expenses including selling and finance expenses have also

increased by Rs. 16,301.99 (41.55%).


 Net Profit has been increased by Rs.80,515.71 lakhs (219.23%) which means that

the profitability of the company is increasing and is a good sign for the growth of

the company.

SHORT TERM SOLVENCY RATIO

1. CURRENT RATIO
Current Ratio is a relationship of current assets to current liabilities. The ratio is

computed to assess the short-term financial position of the enterprise. It means current

ratio is an indicator of the enterprise’s ability to meet its short-term obligations. “Current

Asset” means the assets that are either in the form of cash or cash equivalents or can be

converted into cash or cash equivalents in short time and “Current Liabilities” means

liabilities repayable in the short time. The ratio is calculated as follows :

Current Asset
Current Ratio =
Current Liabilities

It is generally accepted that current assets should be 2 times the current liabilities, then

only will realization from the current assets be sufficient to pay he current liabilities on

time and enable the firm to meet day-to-day expenses.


OBJECTIVE: The objective of calculating current ratio is to assess the ability of the

enterprise to meet its short-term liabilities promptly. It is used to assess the short-term

solvency of the business enterprise since the ratio assumes that current assets can be

converted into cash to meet current liabilities.

Current Ratio = Current Asset and Cash & Bank balance

Current Liabilities and Bank borrowings

 2007 : 116,559.67 + 109,365.26 + 26946.94 + 25,534.49

85,899.48 + 13.889.30

= 278,406.36 = 2.78 times

99,798.78

 2006 : 137,412.79 + 75,262.92 + 39098.30 + 18,278.89

110,048.30 + 8987.61

= 270,052.90 = 2.26 times

119035.91
Current Ratio

3
2.5
2
Current
1.5
Ratio
1
0.5
0
2006 2007
Years

The Current Ratio has increased from 2.26 times in 2006 to 2.78 times in 2007. This ratio

is slightly higher than the standard. This position is very confortable for the creditors but

the company must try to invest its idle funds in good investment so as to earn interest and

increase the profitability.

2. LIQUID RATIO/ QUICK ACID RATIO

Liquid Ratio is a relationship of liquid assets with current liabilities and is computed to

assess the short term liquidity of the enterprise in its correct form. Liquid assets are the

assets which are either in the form of cash or cash equivalents or can be converted into

cash within a very short period. Liquid assets are computed by deducting stock and

prepaid expenses from total current assets.

Liquid Ratio = Liquid Assets


Current Liabilities

Liquid assets include cash, bill receivables, marketable securities and debtors(excluding

bad and doubtful debts), etc. Stock is excluded from liquid assets because it may take

some time before it is converted into cash. Similarly, prepaid expenses do not provide

cash at all and are thus, excluded from liquid assets. A quick Ratio of 1:1 is usually

considered favorable, since for every rupee for current liabilities there is a rupee of quick

assets. This ratio is also an indicator of short-term debt paying capacity of an enterprise.

 2007 – 161,846,69 = 1.62 times


9,798.78

 2006 - 132,640.11 = 1.11 times


119,035.91

Liquid Ratio

2
1.5
Liquid
1
Ratio
0.5
0
2006 2007
Years

The Liquid Ratio has been increased from 1.11 times in 2006 to 1.62 times in 2007. This

position is comfortable to creditors and indicates that the short term planning of the

company is good.
LONG TERM SOVENCY RATIO

1. DEBT EQUITY RATIO


The Debt equity ratio is computed to ascertain soundness of the long-term financial

policies of the firm. This ratio expresses a relationship between debt (external equities)

and the equity (internal equities). Debt means long-term loans, i.e., debentures, loans

(long term) from financial institutions. Equity means shareholders’ funds, i.e., preference

share capital, equity share capital, reserves less losses and fictitious assets like

preliminary expenses. The Ratio is ascertained as follows:

Debt (Long-Term Loans)


Debt Equity Ratio=
Equity (Shareholders’ Funds)

Debt-equity ratio indicates the proportion between shareholders’ funds and the long-term

borrowed funds. A higher ratio indicates a risky financial position while a lower ratio

indicates safer financial position.

OBJECTIVE: The objective of debt-equity ratio is to arrive at an idea of capital

Supplied to the concern by the proprietors and of asset “cushion” or cover available to its

Creditors on liquidation. This ratio is sufficient to assess the soundness of long-term

Financial position. It also indicates the extent to which the firm the firm depends upon
Outsiders for its existence. In other words, it potrays the proportion of total acquired by a

Firm by way of loan.

Gearing ratio = Short term Loan + Long term loan

Share capital + Reserves and Surplus

 2007 - 115,938.51 = .58:1

198,500.87

 2006 - 137,995.38 = 1.35:1

102,016.76

Debt Equity Ratio

1.5

Debt 1
Equity
Ratio 0.5

0
2006 2007
Years

The debt equity ratio has been decreased from 1.35: 1 in 2006 to .58:1 in 2007. It means

the company has sharply reduce the outsiders fund which shoes the long term finanacial

of the company is sound.


2. PROPREITORY RATIO
The objective of computing the Proprietory Ratio is to establish the relationship between

proprietor’s fund and the total assets. Proprietor’s funds means share capital plus reserves

and surplus, both of capital and revenue nature. Loss if any, is deducted. Amount

payables to other are not added. This ratio shows the extent to which the shareholders

owns the business. The difference between this ratio and 100 represents the ratio of total

liabilities to total assets. It is computed as follows:

Proprietor Ratio: Proprietor’s fund or Shareholder’s fund

Total assets

 2007 – 198,500.87 = .61:1

323,805.99

 2006- 103,182.02 = .41: 1

248,839.04

Proprietor Ratio

0.8
0.6
Proprietor
0.4
Ratio
0.2
0
2006 2007
Years
The ratio has been increased from .41:1 in 2006 to .61:1 in 2007. It means 61% of the

total assets of the company are funded by equity which indicates that the long term

financial position of the company in very sound.

3. FIXED ASSET TO PROPRIETORY RATIO


The ratio establishes the relationship between fixed assets and shareholders fund i.e.

share capital plus reserves , surplus and retained earnings. The ratio can be calculated as

follows:

Fixed Assets to Net Worth Ratio : Fixed Assets (after Depreciation)

Shareholders fund

The ratio of fixed assets to net worth indicates the extent to which shareholders funds are

sunk into the fixed assets. If the ratio os less than 100%. It implies the owners funds are

more than total fixed assets and a part of working capital is provided by the shareholders.

When the ratio is more than 100%, it means that the owners fund is not sufficient to

finance the fixed assets and the firm has to depend upon outsiders to finance the fixed

assets.

When this ratio lies between 60% to 65%, it is considered as satisfactory.


 2007 – 122,501.24
X 100 = 61.1%
198,500.97

 2006 – 88,174.85
X 100 = 85%
103,182.02

Fixed Asset to Proprietory Ratio

100%
80%
Fixed
Asset to 60%
Proprietor 40%
Ratio 20%
0%
2006 2007
Years

This ratio has been decreased from 85% in 2006 to 61.1% in 2007. It indicates the extent

to which the fixed assets have been purchased by proprietor’s funds. The ratio is

decreasing, which means that the company is employing outsiders fund to purchase fixed

assets.

4. DEBT SERVICE COVERAGE RATIO/


INTEREST COVERAGE RATIO
Net income to debt service ratio or simplay debt service ratio is used to test the debt

serving capacity of the firm. This ratio is also known as Interest Coverage Ratio. This

ratio is calculated by dividing the net profit before interest and taxes by fixed interest

charges.
Debt Service Ratio : Net Profit (before interest and taxes)

Fixed Charge Expenses

Interset Coverage ratio indicates the number of times interest is covered by the profits

available to pay the interest charges. Generally, higher the ratio, more safe are the long

term creditors because even if the earning of the firm fall, the firm shall be able to meet

its commitment of fixed charges.

 2007 – 117,121.47 = 3.37 times


29,483.30

 2006 – 26,333.8 = 3.02 times


8,713.71

Interest Coverage Ratio

3.4
3.3
Interest 3.2
Coverage 3.1
Ratio 3
2.9
2.8
2006 2007
Years

The ratio has been increased from 3.2 times in 2006 to 3.37 in 2007.
PROFITABILTIY RATIO

1. NET PROFIT

Net Profit shows the percentage of Net Profit earned on the sales. Net Profit is computed

by deducting all direct costs, i.e., cost of good sold and indirect costs,i.e., administrative

and marketing expenses, finance charges and making adjustment for non-operating

expenses from net sales and adding non-operating incomes.

Net Profit Ratio = Net Profit


X 100
Net Sales

The Net Profit Ratio indicates the overall efficiency of the business. Higher the ratio,

better the business. This ratio helps in determining the operational efficiency of the

business.

 2007 – 117,243.04
X 100 = 16.70%
701,712.53

 2008 - 26,888.80
X 100 = 6.82%
385,566.57
Net Profit Ratio

20.00%
15.00%
Net Profit
10.00%
Ratio
5.00%
0.00%
2006 2007
Years

The Net Profit Ratio has been increased from 6.82% in 2006 to 16.70% in 2007. The

increase in the ratio over the previous year shows improvement in the overall efficiency

and profitability of the business.

2. RETURN ON CAPITAL EMLPOYED


Return on Capital employed establishes the relationship between profits and capital

employed. It is a primary ratio and is most widely used to measure the overall

profitability and efficiency of the business.

The term capital employed refers to the total of investment made in the business.

Return on Capital Employed = Profit before Interest and taxes


X 100
Capital Employed

 2007- 117,121.47
X 100 = 36.17%
323,380.99
 2006 – 26,333.80
X 100 = 10.58%
248,839.04

Return on Capital Employed

40.00%

Return on 30.00%
Capital 20.00%
Employed
10.00%
0.00%
2006 2007
Years

This ratio has also been increased from 10.58% in 2006 to 36.17% in 2007. It means that

the profit earned on the capital employed in increasing.

3. RETURN ON SHAREHOLDERS FUND


Return on shareholders investment popularly known as ROI is the relationship between

net profits (after interest & tax) and the proprietor’s fund. Thus,

Return on Shareholders Fund = Net Profit (after interest and tax)


X 100
Share holders Fund
This ratio is one of the most important ratios used for measuring the overall efficiency of

a firm. This ratio is of great importance to the present and prospective shareholders as

well as management of the company. Higher the ratio, the better are the result.

 2007 - 117,243.04
X 100 = 59.06%
198,500.87

 2008 - 36,727.33
X 100 = 35.59%
103,182.02

Return on Shareholder's fund

60.00%
50.00%
Return on 40.00%
Sharehold 30.00%
er's fund 20.00%
10.00%
0.00%
2006 2007
Years

This ratio has also been increased from 35.59% in 2006 to 59.06% in 2007. The higher

the ratio the better it is, as this ratio reveals that how well the resources of a firm are

being used.
TURNOVER RATIO

These ratio measures how well the facilities at the disposal of the concern are being

utilized. These ratio are known as turnover ratio as they indicate the rapidity with which

the resources available to the concern are being used to produce sales. In other words,

these ratios measure the efficiency and rapidity of the resources of the company, like

stock, fixed assets, working capital, debtors etc. These ratios are generally calculated on

the basis of sales or cost of sales.

Turover Ratio for each type of assets should be calculated separately. Higher turnover

ratio means, better use of capital or resources, means better profitability ratio.

The various ratio being discussed are :

1. Stock Turnover Ratio

2. Debtors Turnover Ratio

3. Working Capital Turnover Ratio

4. Fixed Assets Turnover Ratio


1. STOCK TURNOVER RATIO

This ratio indicate the relationship between the cost of the goods sold during the year and

average stock kept during the year.

Stock Turnover Ratio : Cost of Goods Sold

Average Stock

 2006 : 271,318.23 = 1.97 times


137,412.79

 2007 : 425,319.55 = 2.56 times

165,559.67

Stock Turnover Ratio

3
Stock 2
Turnover
Ratio 1
0
2006 2007
Years
The stock turnover ratio has been increased by 1.97 times in 2006 to 2,56 times in 2007.

As the ratio is increasing over the period of time, it is indicating that the stock is selling

quickly. It shows that the speed in which the stock is rotated into sales or the number of

times the stock is turned into the sales during the year in increasing.

2. DEBTORS TURNOVER RATIO

This ratio indicates the relationship between credit sales and average debtors during the

year:

Debtor Turnover Ratio : Net Credit Sales

Average Debtors + Average Bills Receivable

 2006 : 125,551.24(30% of total sales) = 1.14 times

109,365.20

 2007 : 199,224.64 (30% of total sales) = 2.64 times

75,262.92
Debtors Turnover Ratio

10
Debtors
Turnover 5
Ratio
0
2006 2007
Years

The Debtors Turnover Ratio has been increased by 1.14 times in 2006 to 2.64 times in

2007. It means the speed with which the amount is collected from debtors is increasing.

The higher the ratio, the better it is, since it indicated the amount from debtors is being

collected more quickly. The more quickly the debtors pay, the less the risk from bad

debts, and so lower the expenses of collection and increase in the liquidity of the firm.

3. WORKING CAPITAL TURNOVER RATIO

Working Capital turnover Ratio : Net Sales

Working Capital

 2006 : 418,504.05 = 2.76 times

151,016.99

 2007 : 664,182.46 = 6.65 times


99,798.78
Working Capital Turnover Ratio

8
Working
6
Capital
4
Turnover
2
Ratio
0
2006 2007
Years

The Working Capital Turnover Ratio has been increased from 2.76 times in 2006 to 6.65

times in 2007. It means that the working capital is efficiently utilized in making sales i.e.,

the number of times working capital has been rotated in producing sales is increasing. A

high turnover ratio shows efficient use of working capital and quick turn over of current

assets like stock and debtors.

4. FIXED ASSET TURNOVER RATIO

The formula for calculating this ratio is as follows:

Fixed Asset Turover Ratio : Net Sales

Net Fixed Assets

 2006 : 418,504.05 = 5.85 times


715,10.97
 2007 : 664,182.46 = 8.18 times

81,191.23

Fixed Asset Turnover Ratio

10
Fixed 8
Asset 6
Turnover 4
Ratio 2
0
2006 2007
Years

The Fixed Assets Turnover Ratio has been increased from 5.85 times in 2006 to 8.18

times in 2007. This ratio is increasing it means that the fixed assets are being efficiently

utilized. There is a better utilization of fixed assets over a period of time.

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