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Financial statements are the summarized statements of accounting data produced at the
accounting information to the external users. The external users can be investors, lenders,
suppliers and trade creditors, customers, government and their agencies and employees.
i) Income Statement
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
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
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
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
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.
The analysis of the above comparative balance sheet gives the following information.
The Comparative Balance Sheet of Jindal water Infrastructure Limited reveal that
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.
have been used to acquire fixed assets as the gross block of fixed assets show an
increase of 13.53%.
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
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
Other non-Operating Expenses including selling and finance expenses have also
the profitability of the company is increasing and is a good sign for the growth of
the company.
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
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
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
85,899.48 + 13.889.30
99,798.78
110,048.30 + 8987.61
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
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
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.
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
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
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
Supplied to the concern by the proprietors and of asset “cushion” or cover available to its
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
198,500.87
102,016.76
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
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
Total assets
323,805.99
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
share capital plus reserves , surplus and retained earnings. The ratio can be calculated as
follows:
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.
2006 – 88,174.85
X 100 = 85%
103,182.02
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.
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)
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
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
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
employed. It is a primary ratio and is most widely used to measure the overall
The term capital employed refers to the total of investment made in the business.
2007- 117,121.47
X 100 = 36.17%
323,380.99
2006 – 26,333.80
X 100 = 10.58%
248,839.04
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
net profits (after interest & tax) and the proprietor’s fund. Thus,
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
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
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.
This ratio indicate the relationship between the cost of the goods sold during the year and
Average Stock
165,559.67
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.
This ratio indicates the relationship between credit sales and average debtors during the
year:
109,365.20
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.
Working Capital
151,016.99
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
81,191.23
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