Financial Accounting

By t:ed o k ic Abhay Singh - 50202 Cl Akshit Mehta - 502 Angad Khurana - 50221 Anmol Agarwal - 50226
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a tM i s er st u le tit b le ty s

Company Profile
Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. It is one of the largest and most respected companies in India's private sector. More than seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow significantly. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of the corporate vision.

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Chairmans Statement

AM NAIK (Chairman & Managing Director)

The business enterprises affect the members of public in a variety or number of ways. For example, public might be interested in the level of pollution resulting from industrial enterprises, powerhouse, oil refinery and so on. This information is available from the chairmans statement, it may contain details about the additional costs incurred to control the level of pollution, Enterprises may employ a number of people in a locality and may buy raw materials and other products from the local suppliers. The financial statements 2 assist1the public by disclosing the trends and recent / 3 developments in the prosperity of an enterprise and range of its /2 4 activities. The public is also interested about the progress of

Mr. AM Naik talks about the performance of the firm in the beginning, marking it as an impressive performance. Order Inflows for the year, though volatile from quarter to quarter, recorded a growth of 15%. Revenues, driven by a robust Order Book position in the beginning of the year, registered a 19% growth for the year which was commendable considering the challenging execution environment that all sectors witnesses throughout the fiscal. EBITDA Margins, by and large, held up to FY10 levels despite higher input prices which were mitigated through timely and cost efficient execution of orders on hand. The closing Order Book position at the end of FY11 recorded an impressive ` 130,217 crore which is in excess of two years of backlog. Profit after Tax at ` 3,676 crore excluding Exceptional and Extraordinary items, grew 15% during the year. Robust operating cash flows contributed to the healthy financial condition of the Company .The performance of the Subsidiary & Associate companies during the year was also encouraging. The Group total income for the year reached ` 52,089crore while the Group Profit after Tax excluding Exceptional and Extra ordinary items, recorded an impressive `4,238 crore, an increase of 12% year on year.

An enhanced dividend of `14.50 per equity share on a face value of `2per share for the year was announced in the Chairmans Statement.

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The chairman talks about the following topics in his statement: Gearing for Growth : The Company has taken a number of measures during the year under review to ensure that it accelerates its growth momentum going forward. Major steps include: Restructuring Business Integration Capacity Expansion Technology Talent Management Information Technology Renewable Energy: The Company believes that the seeds of growth for renewable energy planted now will, in time, bear fruit that will make these ventures viable. It has embarked on multiple initiatives including projects in Solar Photovoltaic Power and manufacture of engineered large size castings for critical applications in wind power turbines. The Company is also actively involved in setting up of Hydro Electric Power Generating stations both as an EPC contractor and as a Power developer. Sustainable Environment: The company is one of the 28 Indian companies whose 2 Sustainability Reports are available in the public domain and is the first Indian /1 3 company in the Engineering & Construction Segment to publicly report on its /2 4 sustainability performance. The Company has reported on all Core Performance

Directors Report

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What IS directors report?

Every year company directors have to prepare a report for the companys members to explain what the company has been doing and its plans for the future. The report is typically prepared on a quarterly and annual basis. It includes detailed items such as the accountant's financial analyses and management recommendations. The report is usually unaudited. A statement by a company's directors in its annual accounts giving the directors' opinion of the state of the company, and how much should be paid to people owning shares in the company. The report is intended to report, to all interested stakeholders, the directors' explanations and interpretations of the profit/loss, the state of affairs of the group and any other matters which may be material for the stakeholders' attention. Section 210 (1) of the companies act, 1956 provides that at every annual general meeting, the Board of Directors should lay before the meeting a balance sheet and profit and loss account for the financial year.

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Management Discussion and Analysis

Management Discussion and Analysisor MD&A is an integrated part of a company's annualfinancial statements. The purpose of the MD&A is to provide a narrative explanation, through the eyes of management, of how an entity has performed in the past, its financial condition, and its future prospects. In so doing, the MD&A provides investors with complete, fair, and balanced information to help them decide whether to invest or continue to invest in an entity. The section contains a description of the year gone by and some of the key factors that influenced the business of the company in that year, as well as a fair and unbiased overview of the company's past, present, and future. MD&A typically describes the corporation's liquidity position, capital resources,results of its operations, underlying causes of material changes in financial statement items (such as asset impairment and restructuring charges), events of unusual or infrequent nature (such as mergers and acquisitionsor share buybacks), positive and negative trends, effects ofinflation, domestic and international market risks,and significant uncertainties. Among other things,theMD&A provides an overview of the previous year 2 of operations and how the company fared in that time period.Management /1 3 will usually also touch on the upcoming year, outliningfuture goals and /2 4 approaches to new projects.

THE GOVERNANCE STRUCTURE

The Company has four tiers of Corporate Governance structure, viz.: (i) Strategic Supervision by the Board of Directors comprising the Executive and Non-Executive Directors. (ii) Strategy & Operational Management by the Independent Company Boards in each Independent Company (notlegal entities) (IC) comprising of representatives from the Company Board, Senior Executives from the IC andIndependent Members. (iii) Executive Management by the Executive Management comprising of the CMD/Executive Directors and fourSenior Managerial Personnel and two Advisors to the Chairman. (iv) Operational Management by the Strategic Business Unit (SBU) Heads. The four-tier governance structure, besides ensuring greater management accountability and credibility, facilitatesincreased autonomy of businesses, performance discipline and development of business leaders, leading to increased public confidence.

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FINANCIAL ANALYSIS
AIM : To find out various accounting ratios using the financial accounts of Larsen and Tourbo Ltd. For the year 2010-11 and study the significance of such ratios in the companys context.

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CURRENT RATIO
It is a measure of general liquidity and is most widely used to make the analysis forshort term financialposition or liquidity of a firm. It is calculated by dividing the total of thecurrent assetsby total of the currentliabilities. CURRENT ASSETS CURRENT RATIO = ------------------------------CURRENT LIABILITIES Current assets = 34951.14 Current liabilities =25589.82 34951.14 Current ratio = -------------25589.82 = 1.365 : 1

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SIGNIFICANCE
This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firmsfinancialstability. It is also an index of technical solvency and an index of the strength of working capital. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its currentliabilitiesin time without facing difficulties. An increase in the current ratio represents improvement in the liquidity position of the firm while a decrease in the current ratio represents that there has been a deterioration in the liquidity position of the firm. A ratio equal to or near 2 : 1 is considered as a standard or normal or satisfactory. The idea of having double the current assets as compared to currentliabilitiesis to provide for the delays and losses in the realization of current assets. However, the rule of 2 :1 should not be blindly used while making interpretation of the ratio. Firms having less than 2 : 1 ratio may be having a better liquidity than even firms having more than 2 : 1 ratio. This is because of the reason that current ratio measures the quantity of the current assets and not the quality of the current assets. If a firm's current assets include debtors which are not recoverable or 2 stocks1which are slow-moving or obsolete, the current ratio may be high / 3 but 2 does not represent a good liquidity position. / it

QUICK RATIO
Liquid ratiois also termed as "Liquidity Ratio",Acid Test Ratio" or "Quick Ratio". It is the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay itsshort termobligationsas and when they become due.

QUICK ASSETS QUICK RATIO= -----------------------------CURRENT LIABILITIES QUICK ASSETS = CURRENT ASSETS STOCK PREPAID EXPENSES = 34951.14 1577.15

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= 33373.99

SIGNIFICANCE
Thequick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It measures the firm's capacity to pay off currentobligationsimmediately and is more rigorous test of liquidity than thecurrent ratio. It is used as a complementary ratio to thecurrent ratio. Liquid ratio is more rigorous test of liquidity than thecurrent ratiobecause it eliminates inventoriesandprepaidexpensesas a part of current assets. Usually a high liquid ratios an indication that the firm is liquid and has the ability to meet its current or liquidliabilitiesin time and on the other hand a low liquidity ratio represents that the firm's liquidity position is not good. As a convention, generally, aquick ratioof "one to one" (1:1) is considered to be satisfactory. Although liquidity ratio is more rigorous test of liquidity than thecurrent ratio , yet it should be used cautiously and 1:1 standard should not be used blindly. A liquid ratio of 1:1 does not necessarily mean satisfactory liquidity position of the firm if all the debtors cannot be realized and cash is needed immediately to meet the currentobligations. In the same manner, a low liquid ratio does not necessarily mean a bad liquidity position asinventoriesare not absolutely non-liquid. Hence, a firm having a high liquidity ratio may not have a satisfactory liquidity position if it has slow-paying debtors. On the other hand, A firm having a low liquid ratio may have a good liquidity position if it has a fast 2 /1 movinginventories. Though this ratio is definitely an improvement 3 /2 overcurrent ratio, the interpretation of this ratio also suffers from the same 4

NET WORKING CAPITAL RATIO

Net Working capital is more a measure of cash flow than a ratio. It is an indication of short term financial health of a business. The result of this ratio or measure is either a positive or a negative number. A positive number indicates that the company has enough liquid assets to pay off short term obligations. Working capital ratio must be looked at over a period of time (several years). A declining ratio over several years may indicate that the companys financial position is not sound. Banks generally look at net working capital over a period of time to determine a companys financial strength. The eligibility of bank loans are also tied to minimum working capital requirements. NET WORKING CAPITAL RATIO = NET WORKING CAPITAL ----------------------------------TOTAL ASSETS

Net Working Capital = Current Assets - Current Liabilities Net working capital = 34951.14 25589.82 = 9361.32

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TOTAL ASSETS = 7458+ 14685 + 7128 + 34951.14 = 64222.14

GROSS PROFIT RATIO

It is the ratio of gross profit to net sales i.e. sales less sales returns. The ratio thus reflects the margin of profit that a concern is able to earn on its trading and manufacturing activity. It is the most commonly calculated ratio. It is employed for inter-firm and inter-firm comparison of trading results. Following formula is used to calculated gross profit ratio (GP Ratio): Gross profit / (Net sales100) Where Gross profit = Net sales - Cost of goods sold Cost of goods sold = Opening stock + Net purchases + Direct expenses Closing stock Net sales = Sales - Returns inwards GROSS PROFIT = 43886 NET PROFIT = 43496 GP RATIO = 43886 / 43496 100 = 100.89 12 3/ 2 4/

SIGNIFICANCE
Gross profit ratiomay be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products. As thegross profitis found by deducting cost of goods sold fromnet sales, higher thegross profitbetter it is. There is no standard GP ratio for evaluation. It may vary frombusiness to business. However, thegross profitearned should be sufficient to recover all operatingexpensesand to build up reserves after paying all fixed interest charges and dividends.

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NET PROFIT RATIO

It expresses the relationship between net profit after taxes and sales. This ratio is a measure of the overall profitability net profit is arrived at after taking into accounts both the operating and non-operating items of incomes and expenses. The ratio indicates what portion of the net sales is left for the owners after all expenses have been met. Following formula is used to calculate net profit ratio: Net profit ratio = (Net profit after tax / Net sales)100 It is expressed in percentage. Higher the net profit ratio, higher is the profitability of the business. Net profit after tax = 3676 Net sales = 43496 Net profit ratio = (3676 / 43496 ) * 100 = 8.451

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SIGNIFICANCE
NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if thenet profitis not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. This ratio also indicates the firm's capacity to face adverse economic conditions such as price competition, low demand, etc. Obviously, higher the ratio the better is the profitability. But while interpreting the ratio it should be kept in mind that the performance of profits also be seen in relation to investments or capital of the firm and not only in relation to sales.

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RETURN ON CAPITAL EMPOLYED

The prime objective of making investments in any business is to obtain satisfactory return on capitalinvested. Hence, the return oncapitalemployed is used as a measure of success of a business in realizing this objective. Return oncapitalemployed establishes the relationship between the profit and thecapital employed. It indicates the percentage of return oncapitalemployed in the business and it can be used to show the overallprofitabilityand efficiency of the business. Capitalemployedand operating profits are the main items.Capitalemployed may be defined in a number of ways. However, two widely accepted definitions are "grosscapitalemployed" and "netcapitalemployed". Grosscapitalemployed usually means the total assets, fixed as well as current, used in business, while netcapitalemployed refers to total assets minus liabilities.On the other hand, it refers to total ofcapital,capitalreserves, revenue reserves (including profit and loss accountbalance), debentures andlong termloans. ROCE = Net profit x 100 Capital employed

[Capital employed = Fixed Assets + Current Assets - Current Liabilities].

2 /1 3 /2 CAPITAL EMPL0YED = 15957.33 + 34951.14 - 25589.82 4

SIGNIFICANCE
Return on capital employed ratiois considered to be the best measure of profitability in order to assess the overall performance of the business. It indicates how well the management has used the investment made by owners and creditors into the business. It is commonly used as a basis for various managerial decisions. As the primary objective of business is to earn profit, higher the return on capital employed, the more efficient the firm is in using its funds. The ratio can be found for a number of years so as to find a trend as to whether the profitability of the company is improving or otherwise.

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RETURN ON PROPRIETERS FUND

RETURN ON PROPRIETERS FUND = Profit after tax Proprietor's funds PROFIT AFTER TAX = 3676 PROPRIETORS FUNDS = 21846 RETRUN ON PORPRIETORS FUND = 3676 / 21846 = 0.168

SIGNIFICANCE
This ratio is more meaningful to the equityshareholderswho are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Interpretation of the ratio is similar to the interpretation ofreturn on shareholder's investmentsand higher the ratio 2 /1 is. better 3

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EARNING PER SHARE

Earnings per shareratio (EPS Ratio)is a small variation of return on equity capital ratioand is calculated by dividing the net profit after taxes and preferencedividendby the totalnumber ofequity shares. Earnings per share(EPS) Ratio = (Net profit after tax Preferencedividend) / No. ofequity shares(common shares) Net profit after tax = 3676cr No. of equity shares = 60,88,52,126 shares of Rs 2 each EPS = 3676 Cr / 60,88,52,126 = Rs 60.37

SIGNIFICANCE
Theearnings per shareis a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparativeearningsorearningspower of the firm. EPS ratio calculated for anumberof years indicates whether or not the earning power of the company has increased.

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PRICE EARNING RATIO

Priceearningsratio (P/E ratio)is the ratio betweenmarket priceper equityshare and earning per share. The ratio is calculated to make an estimate of appreciation in the value of a share ofa companyand is widely used by investors to decide whether or not to buy shares in a particular company. PriceEarningsRatio =Market priceper equity share /Earningsper share Market price per share = 1413.25 Earning per share = 60.37 Price earning ratio = 1413.25 / 60.37 = 23.04

SIGNIFICANCE
Priceearningsratiohelps the investor in deciding whether to buy or not to buy the shares of a particular company at a particularmarket price. Generally, higher the priceearningratio the better it is. If the P/E ratio falls, 2 /1 the3management should look into the causes that have resulted into the fall of2 4/ this ratio.

STOCK TURNOVER RATIO

Stock turn over ratioandinventoryturn over ratioare the same. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of averageinventoryduring a particular period. It is expressed innumberof times.Stock turn over ratio/Inventoryturn over ratioindicates thenumberof timethe stockhas been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not. COGS STOCK TURNOVER RATIO = ---------------------------AVERAGE STOCK Average stock = opening stock + closing stock /2 Opening stock = 1415.37 Closing stock = 1577.15 Average stock = 1415.37+1577.15/2 = 1492.26 Cogs = opening stock + purchases closing stock = 1415.37 + 2064.98 1577.15 = 1903.2 1903.2 STR = ---------------- = 1.27 TIMES 1492.26

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SIGNIFICANCE
Inventory turnover ratiomeasures the velocity of conversion of stock into sales. Usually a highinventoryturnover/stock velocity indicates efficient management ofinventorybecause more frequently the stocks are sold, the lesser amount of money is required to finance the inventory. A lowinventory turnover ratioindicates an inefficient management ofinventory. A lowinventoryturnoverimplies over-investment in inventories, dull business, poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits as compared to total investment. Theinventory turnover ratiois also an index of profitability, where a high ratio signifies more profit, a low ratio signifies low profit. Sometimes, a high inventory turnover ratiomay not be accompanied by relatively a high profits. Similarly a high turnoverratio may be due to under-investment in inventories. It may also be mentioned here that there are no rule of thumb or standard for interpreting the inventory turnover ratio. The norms may be different for different firms depending upon the nature of industry and business conditions. However the study of the comparative or trend analysis ofinventoryturnoveris still useful for financial analysis.

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DEBTORS TURNOVER RATIO

Debtors turnover ratiooraccounts receivable turnover ratioindicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors Net credit sales = 45348.04 Debtors in the beginning = 12522.63 Debtors in the end = 14480.16 Average debtors = 12522.63 + 14480.16 = 13501.39 Debtors turnover ratio = 45348.04 / 13501.39 = 3.35 times

SIGNIFICANCE
Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm.

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CREDITORS TURNOVER RATIO

It compares creditors with the totalcredit purchases. It signifiesthe creditperiod enjoyed by the firm in paying creditors.Accounts payableinclude both sundry creditors and bills payable. Same as debtors turnover ratio,creditorsturnover ratiocan be calculated in two forms, creditorsturnoverratio and average payment period. CreditorsTurnoverRatio =Credit Purchase/ AverageTrade Creditors Credit purchases = 2064.98 Creditors in the beginning = 9544.71 Creditors at the end =13532.66 Average creditors = 9544.71+13532.66/2 = 11536.68 Creditors turnover ratio = 2064.98 / 11538.68 = 0.178 times

SIGNIFICANCE
The average payment period ratio represents the number of days by the firm to pay its creditors. A high creditorsturnoverratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhancesthe creditworthiness of the company. However a very favorable ratio to this effect also shows that the business is not taking the full advantageof creditfacilities allowed by the creditors.

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WORKING CAPITAL TURNOVER RATIO

Workingcapitalturnoverratioindicates the velocity of the utilization ofnet working capital. This ratiorepresentsthenumberof timesthe workingcapitalis turned over inthe courseof year WorkingCapitalTurnoverRatio = Cost of goods sold /Net Working Capital Cost of goods sold = 1903.2 Net working capital = 9361.32 Working capital turnover ratio= 1903.2 --------------- = 0.203 times 9361.32

SIGNIFICANCE
The workingcapitalturnoverratio measure the efficiency with whichthe workingcapitalis being used by a firm. A high ratio indicates efficient utilization of workingcapitaland a low ratio indicates otherwise. But a very high workingcapitalturnoverratio may also mean lack of sufficient workingcapitalwhich is not a good situation.

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