Ratio Analysis - LDCE

RATIO ANALYSIS

(Frequently asking and Most Important Essay Question - 25 marks asked in Management accounting section of LDCE)

v  Definition: 

                        I.        A relationship expressed in mathematical terms between two figures having Cause and Effect relationship or connected in some way or other.

                      II.        An expression of the quantitative relationship that exists between two numbers.

v  One of the very effective tool of financial analysis.

v  It is useful for various groups of people, say creditors, investors, management etc, who are interested in financial statements.

v  Provides clues and symptoms of underlying conditions.

v  Computation of ratios is relatively an easy exercise.

v  The usefulness of ratio analysis depends on its intelligent and judicious interpretation. Ratios by themselves carry little sense.  Comparisons are essential for making inferences.

v  Comparisons can be with:

1. Past ratios of the same enterprise.  This shows a trend within the organization.

2. Ratios of other companies in the same Industry.  It gives insight into the relative financial health & performance of the Organization.

3. Comparisons with Pre-determined Standard Ratios ( say Benchmarks), which may be Company/Industry accepted general standards.

v  Accounting Ratios  - Different types.

Balance Sheet Ratios	Income Statement or Revenue Statement Ratios	Composite Ratios
Both items available in the  Balance Sheet only	Both items available in the  Profit & Loss A/c only	One item from Profit & Loss A/c and another item from Balance Sheet
Examples - a) Current Ratio - Assets & Liabilities b) Proprietorship Ratios - Proprietor's Assets & Total Assets	Examples - a) Gross Profit Ratio  - Gross Profit & Sales. b) Optg. Profit  -  Cost of Goods sold to Net Sales. c) Stock Turnover Ratio - Cost of Goods sold & Average Stock carried.	Examples - a) Turnover of Debtors  -  Debtors & Net Sales. b) ROCE - Return On Capital Employed  - Net profit & Proprietor's Capital

v  Financial Ratios - Different types.

Category	Examples
1. Liquidity	1. Current Ratio  2. Acid Test/Quick/Liquidity Ratio
2. Activity/Turnover	1. TOR/Investor Turnover Ratio 2. Capital employed Turnover Ratio. 3. Total Assets Turnover Ratio   4. Debtors Turnover Ratio.
3. Leverage	1. Debt: Equity Ratio
4. Profitability	1.ROCE-Return On Capital Employed 2. Return on Net Worth
5. Investment/Investors related	1. Dividends pay out Ratio 2. Dividends Yield Ratio

Advantages:

1. Facilitates understanding of Financial Statements.
2. Narrates the whole story of changes in financial condition of the Business.
3. Facilitates Inter-Firm comparison.
4. Helps in planning the operations of the firm.
5. Facilitates "Management by Exception" .  Higher management can concentrates only at the area where its intervention is narrated.  The promoters has better utilisation of time and resources.
6. Compares with standard benchmarks.  During the period of existence, the firm develops certain standards/norms. Any change in the norms passes on the right message to the Management for the course of action to be initiated.

Limitations:

1. Communicates only a relative interpretation. Every Organization has its own uniqueness and comparisons may not be valid.

Example: Government company with limited freedom cannot be compared with Private company having lot of freedom though both are in same Industry.

2. Ratios are only a tool.  Their ultimate use depends on the craftsmen who use it.  Hence ratios are not an end in themselves.  Rather they are means to an end.  They pass only guiding / warning signals.

3. Window Dressing :  Sometimes companies do Window Dressing by manipulates accounts to show the outside a better or gloomy picture as the case may be they required. Such things cannot be disclosed by Ratio Analysis ( as Ratios depends on figures available in Financial Statements)

4. Inflation distorts/misleads financial ratio analysis. Spectacular performance is enabled due to inflation, not by Management.

                                                However companies may use "Replacement Cost Method" to prevent/obviate the above limitation.

CONCLUSION

"In a nutshell, the advantages clearly outweighs limitations, considering over all benefits".

Important question - Book keeping

IMPORTANT QUESTIONS IN BOOK KEEPING SUBJECT

compiled by Smt Neelam Dhadse, SSO(A)/Bhusaval

Important Note:

My advice is to read and cover entire syllabus irrespective of  Important or Not Important. Subsequently put more preference for  important ones because they are repeatedly asked in previous examinations as well as for importance they associated with the working of Indian Railways.

Short notes

1) contingent liability

2 ) secret reserve

3) deferred revenue expenditure

4) good will/ valuation of good will

5) memorandum of association

6) accommodation bill

7) accounting conventions or principles

8) double entry system/ single entry system

9)business entity concept

10) money measurements concept

11) matching concept

12) accrual concept

13) going concern concept

14) revenue recognition

15) full disclosure 

16) cash book

17) petty cash book

18) equity

19) cash discount

20) trade discount

21) liquidity ratio

22) debt equity ratio

23) subsidiary records

24) endowment of fund

Distinguish between

1) single entry and double entry

2) fixed asset and current assets

3) trading a/c and profit & loss a/c

4) bad debts & doubtful debts

5) trade bill & accommodation bill

6) debit note & credit note

7) joint venture & partnership 

8) memorandum of association & article of association

9) receipt and payment a/c & income and expenditure a/c

10) sale and consignment

11) bill of exchange and promissory note and cheque

12 share and debenture

13) equity shares & preference share

14) capital expenditure & revenue expenditure

15) trial balance & balance sheet

16) journey and ledger

17) straight line & written down method

18) capital reserve & revenue reserve

19) interest and dividend

Topic to be cover 

1) trial balance :- definition, errors not disclosed by trail balance, errors disclosed by trial balance

2) depreciation :- definition, factors causing depreciation, type of depreciation

3) accounting conventions/ concept/principles

4) bank reconciliation statement:- definition, causes fir disagreement between cash book & pass book.

5) provision, types of provision.

6) reserve, types of reserve.

7) bill of exchange

8) promissory notes

9) negotiable instruments

10) trail balance

11) good will, valuation of good will, good will on dissolution

12) profitability ratios & it's types

13) shares ,types of shares

14) debenture, types of debentures.

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Book Keeping Bills of Exchange - Accommodation Bill

BILLS OF EXCHANGE

AND

ACCOMMODATION BILL

                                                                  

Bill of Exchange:

ü Meaning: A Bill of Exchange means " An instrument in writing containing an unconditional order, signed by the Drawer(maker), directing a certain person (Drawee)  to pay a certain sum of only to or to order of, a certain person or to the bearer of the Instrument."

ü Usually, bills of exchange are intended to finance only actual transaction in goods. Example: Shankar purchases goods for an amount of Rs.1000 from Ramesh on credit basis. So Ramesh (maker) makes a Bill for an amount of Rs.1000 and sent to Shankar for acceptance. On the due date, Shankar pays 1000 to Ramesh duly honouring the bill on presentation by Ramesh.

Accommodation Bill:

ü Meaning: A Bill made, drawn, accepted, or endorsed by one person for another without consideration, to enable the second person to obtain credit or raise money is called ACCOMMODATION  B ILL.

ü Example: In Accommodation Bills, though transaction of selling/buying good not takes place between Shankar and Ramesh, Ramesh (Drawer or Maker) makes/drafts a bill for an amount of Rs. 1000 and sent to Shankar(Drawee) for acceptance for the sole purpose of raising funds temporarily.(by Shankar).

ü Then Shankar discounting the Bill with the Banker for Rs. 975.  On the date of maturity,  Shankar has to pay Rs.1000 to the Ramesh, who is in order to honor the bill presented by the Banker (Payee).

ü Thus Shankar raises funds to meet his finance requirements temporarily with the help of Ramesh.

ü Some times Shankar and Ramesh (both parties) can raise funds by drawing the bills on others and get them acceptance. Later both can discount their bills at Bankers and get the requisite funds.  Like in the above example, both will be honouring the Bills on maturity date.

ü Record of journal entries regards accommodation bills as usual in other Bills of Exchange only.  There is no special treatment as far as Accommodation Bills concerned.

                                                                                      $$$$

Book keeping - Final Accounts - Tips

TIPS FOR PREPARATION OF FINAL ACCOUNTS IN 

BOOK KEEPING PAPER

ü  Each item in the Trial balance -------------------------->  Must only be entered once in Final Accounts.

ü  Adjustments at the foot of Trial balance ---------------------> posted two times in Final Accounts. 

ü  Post all Nominal accounts (such as all expenses and incomes ) in Trading and P&L Accounts.

ü  Post all Real (Assets) and Personal Accounts in the Balance Sheet.

ü  Balance Sheet is a Statement, not an Account.  Hence Dr and Cr words should not be used.

ü  Trading A/c or P&L A/c is prepared for the year 2014-15, whereas preparation of Balance Sheet as on 31st March, 2015.

ü  Because preparing Trading and P&L A/c to report their financial performance over a period of time i.e., for the year 2014-15, whereas Balance Sheet to report financial position at a specific date i.e., as on 31st March, 2015.

ü  Trading expenses should post in P&L A/c, not in Trading Account.  Here Trading expenses means expenses related to Sales.

ü  Carriage inwards --------------------> related to Purchases ----------------------> Trading A/c.

ü  Carriage outwards ------------------> related to Sales ---------------------> P&L A/c.

ü  Wages & Salaries ----------------------> Trading A/c.

ü  Salaries & Wages ------------------------>  P&L A/c.

ü  If Closing Stock appearing in Trial Balance  (instead of adjustments at the end of trial balance):

 Closing stock, under this case, will not be shown on the credit side of the Trading Account but will be shown on the assets side of  Balance Sheet only.  (Remember, any entry appearing in the Trial Balance appears only once. Closing stock is a real account, hence appears on the assets side of the balance sheet.)

MANY MORE SUCH TIPS WILL BE POSTED INTO THE WEBSITE IN COMING DAYS.  ALL THE BEST

Final Accounts - Book keeping 2015 Paper

1. The following is the Trial balance of Shri Narayan, as on 31.03.2014. You are requested to prepare Trading and Profit & Loss Account for the year ended 31.03.2014 and Balance Sheet as on that date after making the necessary adjustments.
S.N.	Particulars	Debit (Rs.)		S.N.	Particulars	Credit (Rs.)
1	Sundry Debtors	500000		1	Sundry Creditors	200000
2	Outstanding liability for expenses	55000		2	Capital Account	1443000
3	Wages	100000		3	Sales	1987500
4	Carriage outwards	110000
5	Carriage inwards	50000
6	General Expenses	70000
7	Cash Discounts	20000
8	Bad debts	10000
9	Motor car	240000
10	Printing & Stationery	15000
11	Furniture & fittings	110000
12	Advertisement	85000
13	Insurance	45000
14	Salesman's commission	87500
15	Postage & Telephone	57500
16	Salaries	160000
17	Rates & Taxes	25000
18	Drawings	20000
19	Purchases	1550000
20	Stock as on 01.04.2013	250000
21	Cash at Bank	60000
22	Cash in hand	10500
	Total	3630500			Total	3630500
	The following adjustments are to be made:
	1. Stock as on 31.03.2014 was valued at Rs.7,25,000
	2. Provision for Bad and Doubtful debts is to be created at 5 % on Sundry Debtors.
	3. Depreciate i) Furniture & Fittings by 10 %.   Ii) Motor Car by 20 %
	4. Shri Narayan had withdrawn goods worth Rs.25,000 during the year.
	5. Sales include Goods worth Rs.75,000 sent out to Om & company on approval and remaining unsold on 31.03.2014.  The cost of goods was Rs.50,000.
	6. The salesmen are entitled to a commission of 5 % on total sales.
	7.Debtors includes Rs.25,000 bad debits.
	8. Printing & Stationery expenses of Rs.55,000 related to 2012-13 had not been provided in that year but was paid in this year by debiting outstanding liabilities.
	9. Purchases include purchase of Furniture worth Rs.50,000 .
Answer:
	Trading Account
S.N.	Particulars	Amount Rs.		S.N.	Particulars	Amount (Rs.)
1	To Opening Stock	250000		1	By Sales - 1987500
2	To Purchases  - 1550000				(-) unsold - 75000	1912500
	(-) Furniture - 50000			2	By Clo stock - 725000
	(-) Drawings - 25000	1475000			(+) unsold  - 50000	775000
3	To Wages	100000
4	To Carriage Inwards	50000
5	To Gross Profit	812500
	Total	2687500			Total	2687500
	Profit & Loss Account
S.N.	Particulars	Amount Rs.		S.N	Particulars	Amount (Rs.)
1	To Carriage outwards	110000		1	By Gross Profit	812500
2	To General Expenses	70000
3	To cash discounts	20000
4	To Bad debts -10000
	(+) Bad debts (adj) -25000	35000
5	To Printint & Stationery	15000
6	To Advertisement	85000
7	To Insurance	45000
8	To Salesman's commission - 87500 + 8125 (outstanding)	95625
9	To Postage & Telephone	57500
10	To Salaries	160000
11	To Rates & Taxes	25000
12	To Depreciation on Furniture & Fittings (10 % on {110000+50000)	16000
13	To Depreciation on Motor Car @ 20 % on 240000	48000
14	To RBDD - Reserve for Bad & Doubtful Debts	20000
15	To Net Profit	10375
	Total	812500			Total	812500
	Balance Sheet
S.N.	Capital & Liabilities	Amount Rs.		S.N	Assets	Amount (Rs.)
1	Capital - 1443000			1	Sundry Debtors - 500000
	(-) Printing & Stationery of last year - 55000				(-) Bad Debts - 25000
	(-) Drawings  - 20000				(-) unsold goods - 75000
	(-) Drawings (goods) -25000				(-) RBDD - 20000	380000
	(+) Net Profit - 10375	1353375		2	Furnitures & Fittings - 110000
					(+) Adj- addition - 50000
2	Sundry Creditors	200000			(-) Depreciation - 16000	144000
3	Outstanding Salesman commission	8125		3	Motor Car - 240000
					(-) Depreciation - 48000	192000
				4	Cash at Bank	60000
				5	Cash on hand	10500
				6	Closing Stock - 725000
					(+) unsold - 50000	775000
	Grand Total	1561500			Grand Total	1561500