FINANCIAL ANALYSIS

PROJECT REPORT
2020- 2021

Submitted for the partial fulfillment of the

requirement for the award
Of

Master of Commerce (Business Innovations)

SUBMITTED BY

MANAV
39840

UNDER THE SUPERVISION OF

Prof. Ashwani Bhalla

Prof. Parminder Kaur

Post Graduate Department of Commerce and Business

Innovations

S.C.D GOVERNMENT COLLEGE

LUDHIANA
DECLARATION

I hereby Declare that the project entitled Financial Analysis submitted for

the practical fulfilment of degree of Master of Commerce (Business

Innovations) of S.C.D Government College, Ludhiana affiliated to

Punjab University, Chandigarh is my original work and the Project Report

has not formed the basis for award of any other degree, associateship or

other similar titles.

Date:- 19th September,2021

Place:- Ludhiana
 POST GRADUATE
DEPARTMENT OF COMMERCE AND BUSINESS
INNOVATIONS

CERTIFICATE

This is to certify that the Summer Training Project titled

Financial Analysis submitted by Manav 39840 for the partial fulfillment
of the requirements of M.Com (BI), embodies the bonafide work done by
her under my supervision.

Signature of the Guide

Place: Ludhiana
 ACKNOWLEDGEMENT

This is a matter of pleasure for me to acknowledge my deep sense of

gratitude to Panjab University for giving me an opportunity to explore my

abilities via this study program. I wish to express my gratitude to my study

superviso for their valuable guidance and advice in completing this project.

I would like to express my sincere appreciation and gratitude towards all

the officials and employees of Chemistar India Pvt. Ltd. without whose

kind assistance, my study program would not have succeed. The facts and

other vital information provided by them have contributed towards making

this project as comprehensive as possible.

I am also very thankful and grateful towards my seniors, colleagues and

authorities of SCD Government College, Ludhiana especially our

faculty mentor Prof. Parminder Kaur for their support, encouragement,

and valuable suggestions for the completion of this project as well as for

their generosity and cooperation. Last but not the least, I would like to

express my sincere thanks to all my family members, friends and well-

wishers for their immense support and best wishes throughout the study

duration and the preparation of this report.

 Abstract

POST GRADUATE DEPARTMENT OF COMMERCE AND BUSINESS

INNOVATIONS
S.C.D GOVERNMENT COLLEGE LUDHIANA

ROLL No. :
___________________________39840____________

NAME OF THE STUDENT :

___________________________Manav____________

EMAIL ADDRESS :
_______________________________________

ORGANISATION NAME AND ADDRESS :

________________________________Chemistar India Pvt. Ltd.__

SUPERVISOR’S NAME(Internal/External): Prof. Parminder Kaur

___________________________________________________________

SUPERVISOR’S EMAIL ADDRESS (Internal/External):

____________________________________________________________

PROJECT REPORT TITLE : Financial Analysis

_______________________________________

ABSTRACT : The success of every business enterprise is directly related to the

competencies of business management. The business enterprise can, as a result,
create variations of how to approach the new complex and changing situations of
success in the market.

Therefore managers are trying during negative times to change their management
approach, to ensure long-term and stable running of the business enterprise. They
are forced to continuously maintain and obtain customers and suppliers. By
implementing these measures they have the opportunity to achieve a competitive
advantage over other business enterprises.

Financial ratios are an important technique of the financial analysis of a business

organization. Effective financial management is the key to running a financially
successful business.

Ratio analysis is critical for helping you understand financial statements, for identifying
trends over time, and for measuring the overall financial health of your business.
Lenders and potential investors often rely on ratio analysis for making lending and
investing decisions.
This study aims to not only develop an understanding of the concepts of financial ratios
but also to provide the students a practical insight into the application of financial ratios
for decision making and control. It analyzes the financial statements of corporate
enterprises

____________________
(Signature of the Student)

Name: Manav

Date: 19th September, 2021

Signature of the Supervisor

Internal External

Name: Prof. Parminder Kaur Name: _____________

Date: 19th September,2021 Date: ______________

 EXECUTIVE SUMMARY

Formed over 2 decades ago, Chemistar Intermediates has emerged as a premier

provider of textile dyes, speciality textile chemicals and textile processing

products. The company finds its roots in the acumen of its founders, who

between them share profound industry experience and a vision for innovation.

Today, Chemistar is a name to reckon with in the textile industry. The

company is known for its superior quality products, exemplary service and

above all commitment towards delivering on the needs of its clients on time.

Here I discussed about the “Financial Performance Analysis of Chemistar India

Pvt. Ltd.” To discuss this I have also given information about the vision,

mission, goal, objectives, core values and all related information of Chemistar

India Pvt. Ltd.” The main focus of this report is on the Financial Statement

Analysis and Performance Evaluation.

By doing this report I am able to gain a vast knowledge how to calculate all

financial ratios and evaluate the performance of an organisation. In order to

focus on the financial performance and evaluation of Chemistar India Pvt. Ltd.,

the study focuses on the financial statements and ratio analysis, liquidity ratio,

Efficiency ratio, Debt Management and Profitability and also analyze the market

position

7
The study has been conducted mainly based on secondary data. Moreover, on

the study describe the internship experience and objectives of the study. FCL’s

results of the study shows that, increasing trend of inventory turnover ratio,

gross profit margin ratio.

TABLE OF CONTENTS

SERIAL CONTENT PAGE NUMBER

NUMBER
CHAPTER PLANS
CHAPTER- 1 Introduction to the topic and the company 1
1.1 Introduction 2
1.1.1 Objectives of the study 2-3
1.1.2 Data Analysis and Reporting 3
1.1.3 Scope of the report 3-4
1.1.4 Limitations 4
1.2 Introduction to the Company 5-6
1.2.1 Company’s Philosophy 6-7
1.2.2 Customer Services 7
1.2.3 Infrastructure 7-8
1.2.4 Quality 8-9
1.2.5 R&D 9
1.2.6 They Care 10
1.2.7 Network 10
1.2.8 SWOT Analysis 10-12
CHAPTER- 2 Need and Scope of Study 13
2.1 Background of Study 14
2.2 Significance of Study 14

8
2.3 Objectives of Study 14
2.4 Scope of Study 15
2.5 Methodology of Study 15-16
2.6 Limitations of the study 16-17
CHAPTER- 3 Review of Literature 18-23
CHAPTER- 4 Detailed Description of the study 24
4.1 Introduction 25-27
4.2 Objectives of Financial Statements 27-28
4.3 Meaning and Concept of Financial Analysis 28-29
4.4 Types of Financial Analysis 29-31
4.5 Procedure of Financial Statement Analysis 31-33
4.6 Methods of Financial Analysis 33
4.7 Tools for analyzing financial statements 33-34
4.7.1 Comparative Financial Statements 34-39
4.7.2 Common Size Statements 39-45
4.7.3 Trend Analysis 45-48
4.7.4 Funds Flow Statements 48-49
4.7.5 Cash Flow Statement 49-63
4.7.6 Ratio Analysis 64-78
CHAPTER- 5 Analysis and Interpretation
5.1 Comparative Statements 79-84
5.2 Common Size Statements 84-86
5.3 Ratio Analysis 87-100
5.4 Cash Flow Statement 101-104
CHAPTER- 6 Conclusions, Suggestions and Limitations of the 105
Study
6.1 Findings of the Study 106
6.2 Suggestions 106-107
6.3 Limitations of the Study 107

9
6.4 Conclusion 108
Bibliography 109
Checklist of Items for the Final Project Report 110-111

10
Chapter 1 –
Introduction
of the Topic
and the
Company
11
1.1 Introduction

As a student of M.Com (BI), I had to complete a 60 days attachment with any

organization. My attachment was with Chemistar India Pvt. Ltd. and I worked as

an intern from August 2, 2021 to September 17, 2021. And that period, I

collected information that enables me to prepare the report on financial analysis

of Chemistar India Pvt. Ltd.

1.1.1 Objectives of the study

The objectives of the study are:

1. To get an overall idea about the financial performance of the

respective organization.

2. To analyze the financial statements of the respective organization by

using financing tools i.e. ratio analysis.

3. To understand the working capital management (credit management,

liquidity position, speedy recovery of cash) of the respective

organization.

4. To identify the macro-economic factors affecting the respective

organizations.

12
5. To identify the strengths and weaknesses of the respective

organization & determine the competitor analysis of the respective

organizations.

6. To relate the theoretical learnings with the real life situation.

7. Finally, to make some recommendations and suitable conclusions

regarding financial performance of Chemistar India Pvt Ltd.

1.1.2 Data Analysis and Reporting:

To analyze the gathered data I have done forecasting based on the past data

and have used specific financial tools i.e. ratio analysis. Some necessary

number of charts and graphs are used to present the report. MS word and MS

Excel are used to process the data.

1.1.3 Scope of the report

There is a certain boundary to cover the report. To achieve the objective of the

report it is not possible to cover each and every activity performed in an

organization. The report has covered only the data which are published in the

annual reports. Moreover, Chemistar India Pvt. Ltd have got some confidential

information which is not possible to disclose publicly so those data and

information had to be ignored for this report.

13
Here Forecasting has been done on the basis of past financial information and

there is no connection with the actual forecast made by Chemistar India Pvt. Ltd.

Forecasting has been made based on the assumptions.

1.1.4 Limitations

I tried my level best to enrich and complete this report although there are some

limitations:

1. Time is not enough for such an extensive study.

2. Information relating to the survey is very sensitive that is why secondary data

have been used in some extent.

3. Sometimes it is difficult to understand a few accounting or financial term

which could otherwise be incorporated sufficiently in preparing the report.

4. I have to be aware that ratio analysis is widely used as a performance

indicator but it does have its limitations too. For instance, accounts show

only the monetary aspects of the business. They do not show management or

staff strengths or weaknesses. So ratio analysis ignores this aspect of the

performance as well.

5. Lack of experience has acted as constraints in the way of meticulous

exploration in the topic.

14
1.2 Introduction to the Company

Formed over 2 decades ago, Chemistar Intermediates has emerged as a premier

provider of textile dyes, speciality textile chemicals and textile processing products. The

company finds its roots in the acumen of its founders, who between them share profound

industry experience and a vision for innovation. Today, Chemistar is a name to reckon

with in the textile industry. The company is known for its superior quality products,

exemplary service and above all commitment towards delivering on the needs of its

clients on time.

Chemistar's strength stems from its cutting-edge industrial campus that has the

capacity to process over 10000 MT of Dyestuffs annually. Equipped with the latest and

upgraded machinery, Chemistar has been able to satisfy varied requirements of clients in

different states of India.

Chemistar strives for excellence in providing quality products as well as superior

customer services. To offer its clients in-depth proprietary solutions the company has

deployed experienced professionals with knowledge in fibre/yarn/fabric/garment

processing.

15
Chemistar also works closely with its clients to develop a wide range of customized

dyestuff and application methods, that make the company a one-stop solution for all

textile propriety requirements.

By constantly harnessing advances in technology, Chemistar is expanding its reach farther

not only in domestic markets but also in the international arena. The company, along with

its strong and energetic team is always looking for the Best Solutions that Add Value to

its Client's Business.

1.2.1 Company's Philosophy

Vision: To become one of the most trusted suppliers of textile proprieties that add value

to clients' business.

Chemistar Believes in:

16
  Consistent Quality

 Focus On Performance

 Transparent Dealings

 Continuous Innovation

 Customer Oriented Approach to Business

1.2.2 Company's Services

Chemistar strives for excellence in providing quality products as well as superior

customer services. We have well qualified and experienced service executives to provide

all our customers with, in-depth proprietary solutions for fibre/yarn/fabric/garment

processing. By working in close interaction with our customers, we develop a wide

variety of customized dyestuff and application methods, keeping the specific need and

cost factor in mind.

1.2.3 Infrastructure

Chemistar has established a strong industrial campus, with the latest technology that

allows the company to produce superior quality products. Spread across a vast area in the

GIDC industrial estate, Chemistar's industrial campus includes the latest equipments like:

 Latest Plant & Machinery

 Well-equipped Laboratory

 Regularly maintained Boilers

 In-house Effluent Treatment Plant

17
  Latest reaction vessels

 R.O unit for salt free dyes

 Ball mills/blenders

 Modern Spray Dryer

This makes the company highly scalable in meeting the diverse industrial needs of its

clients on time and with efficiency as well as consistency.

1.2.4 Quality

At Chemistar, Quality is the Essence of the Company's Business. Right from sourcing

of materials, to production all the way to dispatch, Chemistar has a thorough, globally

compliant Quality Control Process in place to ensure that its products are supreme. The

company's quality department is well equipped with all the latest testing and dyeing

equipments required for consistent production of quality products.

Chemistar also has an in-house laboratory to ensure that all products are consistent in

washing, wet rubbing, light and perspiration fastness values as well as consistent

strength and shade. Chemistar's processes are in perfect compliance with all global as

well as domestic standards.

18
 GOTS Certificate

1.2.5 R&D

Chemistar strongly believes that quality products and superior services form a base to

high levels of customer satisfaction. Therefore, the company invests definite time, energy

and resources in to research and development. R & D supports a strong foothold in

innovation of the company and provides inspiration to serve better with every given

project. A complete and well-equipped Research Department is a key contributor to the

leadership of the company in the industry.

The in-house research department has full-fledged functions with latest technology,

upgraded equipments and a proficient team of chemists. This enables the company to

introduce innovative and technically superior products, meeting ever changing

requirements of modern textile processing units. Moreover, R & D also facilitates

Chemistar to lay down progressive organization strategies and approach for further

product development and better functioning.

19
1.2.6 They Care

All products manufactured by Chemistar are eco-friendly and meet the most stringent

international eco specifications including OEKOTEX STD-100 and REACH. Also all

these products are GOTS certified.

Chemistar takes utmost care in discharging of process effluent. Chemistar is fully

equipped with infrastructure to safeguard the environment, health & safety of people

working in the company. The company has well-designed effluent treatment plant for

eco-friendly functioning. Chemistar Discharges Treated Effluent to CETP and is a

member of the Green Environment Services Cooperative Society Ltd. for disposal of

liquid effluent and solid waste. Dedicated team monitors all parameters on daily basis.

Chemistar adheres to the limits specified by controlling authorities while discharging

liquid effluent, solid waste and air.

1.2.7 Network

Textile industry in India, very much like India itself, is vast and offers a lot of business

potential for quality dyestuff and chemical manufacturers. Growing at rapid pace and

offers challenging business environment, Today Chemistar markets its products in all

major textile markets of India.

1.2.8 SWOT Analysis

20
Strengths of Chemistar India Pvt. Ltd.:-

The Chemistar India Pvt. Ltd.Is one of the leading companies in Garments industry for

their strategy and strengths, followings are their strengths:

 The well trained, skilled and qualified employees are strength of The Chemistar

India Pvt. Ltd. as well. These employees lead this organization to its goal.

 The Chemistar India Pvt. Ltd.. has been serving the country since many years. So it

has gathered huge experience in the Garments market which is now acting as

strength for the company.

Weaknesses of Chemistar India Pvt. Ltd:-

 The chain of command of Chemistar India Pvt. Ltd. is elongated, which takes long

time to take any decision.

 Need more smooth distribution Sectors.

Opportunities of Chemistar India Pvt. Ltd.:-

 The garments market is booming rapidly, so The Chemistar India Pvt. Ltd... has a

huge scope to do better.

 Today technology is more advanced and sophisticated which opens the door of the

new generation of Export quality Products.

21
Threats of Chemistar India Pvt. Ltd.:-

 There are lots of big garments companies established in market in the country,

which create more competition. So that is a threat for Chemistar India Pvt. Ltd.

 As there is a huge opportunity in the Garments sector, the number of garments

company is increasing and Chemistar India Pvt. Ltd.. has to compete with these

companies for keeping its in the market.

22
Chapter 2-

Need and

Scope of the

Study
23
2.1 Background of study

This is true to say that the Educational environment in our whole world and is very much

competitive. Present market creates a lot of critical conditions. Only theoretical

knowledge cannot solve or define all the problems. So, simply theoretical is not enough

for a person or student to play operations or to do job in a competitive market. He needs

practical knowledge about the present organizational field. This report is prepared to

cover the assigned internship topic on "Financial Statement Analysis ".

2.2 Significance of the Study

Internship is a part of M.Com (BI) program as it provides knowledge to the outgoing

student as they are going to operate a different organizational activity which helps to

increase their practical knowledge. Through this internship a student can compare his

practical knowledge with theoretical knowledge.

2.3 Objectives of the Study

Every report has some objectives. There are two objectives of this report the primary

objective and the secondary objective.

The primary purpose of the report is the fulfillment of the study is to conduct Financial &

business analysis.

The secondary purpose is to gather practical knowledge about how to calculate different

types of ratio to know financial position of a company.

24
2.4 Scope of the Study

This report will provide information about the financial positions of Chemistar India Pvt.

Ltd. This report will also help to know about the performance and owners position.

2.5 Methodology of the study

Nature of the Research

In this study Analytical research has been undertaken to gain insights and understanding

on the overall procedures and guidelines to conduct Financing system and also determine

the order attitudes regarding activities and services performed.

To identify the financial performance of Chemistar India Pvt Ltd. Four Analytical tools

for financial Statement analysis are taken in to consideration. This are

1. Ratio Analysis.

2. Statement of changes in Equity.

3. Cash flow Statement.

The data for this report have been collected both from primary sources & secondary

sources of information. These are on the following way:-

The primary sources of Data

 No Primary data are used for analysis.

25
 The secondary sources of Data

I also used secondary data for preparing this report. Data are collected from published

materials like:

 Annual Audit Report.

 Internet.

 Relevant book

2.6 Limitations of the Study

In every report work there exist some Limitations that report writer faces while

conducting it. Chemistar India Pvt. Ltd. is a private company and belongs to such an

industry where secrecy of information is vital for the company’s success. All along my

internship period I worked in the Finance department that deals with numbers and is kept

confidential within the company.

One of the reasons is that they do not want any information leaked out that conflict with

the declared financial statements. For this I got the minimum help from my supervisor as

he was not permitted to distribute any information that is daunting for Chemistar India

Pvt. Ltd. Chemistar India Pvt. Ltd. is a huge company where everything is done by

customized software. On the other hand-

 Lack of information.

 Limitation of time.

26
  Unavoidable condition.

I am doing my internship at the accounts and finance department of Chemistar India Pvt.

Ltd. The accounts and finance department of Chemistar India Pvt. Ltd. is divided into 3

sections. These are –

1. Financial Accounting.

2. Cost Accounting.

3. Auditing.

27
Chapter 2-

Literature

Review

28
The review of literature guides the researchers for getting better understanding of

methodology used, limitations of various available estimation procedures and data base

and lucid interpretation and reconciliation of the conflicting results. Besides this, the

review of empirical studies explores the avenues for future and present research efforts

related with the subject matter. In case of conflicting and unexpected results, the

researcher can take the advantage of knowledge of other researchers simply through the

medium of their published works.

3.1 Muhammad Rafiqul Islam (2001) "Working Capital Management of Paper Mills in

Bangladesh-An Overall View" concluded that all the units of the paper industry had failed

to manage their working capital requirements properly. The reasons for working capital

crisis were improper use of short-term funds, operating losses, over stocking to stores and

spares, and non-availability of raw materials

3.2 Harris (2003) analyses the link between market orientation and performance has been

claimed largely on the basis of the analysis of subjective measures of performance.

Consequently, the aim of this study is to examine the links between market orientation

and objectively measured financial performance. The paper begins with a brief

examination of the definition and components of market orientation. Thereafter, extant

research into the consequences of developing market orientation is reviewed critically,

leading to the development of a number of research hypotheses.

3.3 Sahu (2005) in his article titled "A Simplified Model for Liquidity Analysis of Paper

Industry" has examined the liquidity of paper industry. The model developed by him has
29
been based on the assumption that the liquidity management of a company in a particular

year is effective if its" earnings before depreciation is positive and not effective if its

earnings before depreciation is negative. The findings have revealed a very high

predictive ability of the estimated discriminant function.

3.4 Sukudev Singh & et al. (2006) undertook a study entitled "Status and Growth of

Paper Pulp Board Industry in North India - A Case study. The study has revealed that due

te the availability of raw materials and labour, eighty per cent of the mills are running

with the optimum capacity utilization. The authors have observed that more than three

thousand people have got employment in ten paper and paper board mills with proportion

of thousand eight hundred skilled workers and thousand two hundred unskilled labours.

3.5 Alovsat Muslumov (2007) "The Financial and Operating Performance of

Privatization Companies in Turkish Cement Industry. This paper examines the

postprivatization performance of privatized companies in the Turkish cement industry.

The findings indicate that, when performance criteria for both the state and private

enterprises are considered, privatization in the cement industry results in significant

performance deterioration. Total value added and the return on investment declines

significant after privatization. This decrease mainly stems from deterioration in asset

productivity.

3.6 Sudarsana Reddy & et al. (2008) Examined the internal funds availability for

financing fixed assets in paper industry in Andhra Pradesh. The study found that the

30
owner funds were insufficient to finance fixed assets and observed that fixed assets did

not have significant relationship with the sales.

3.7 Vishnani and Shah (2009) investigated the impact of working capital management

policies on the corporate performance of the India consumer electronics industry. They

noted that inventory holding period, debtors" collection period and net working capital

cycle had negative relationship on the profitability of firms.

3.8 Krishnaveni (2010) studied the performance appraisal might be said that the adoption

of liberalization measure and above suggestions would doubtlessly help the Indian

chemical industry to improve their performance individually and other industry as a

whole. This study also suggests that the policy of liberalization should further be

strengthened. Thus, dreams of our planners to accelerate the economic growth in the

country are still possible to be translated into reality.

3.9 Ramachandran and Janakiraman (2011) analyzed the relationship between

working capital management efficiency and earnings before interest and tax of the paper

industries in India. The study revealed that cash conversion cycle and inventory days had

negative correlation with earning before interest and tax. While 94 accounts payable days

and accounts receivable days correlated positively with earning before interest and tax.

3.10 Dharmendra Mistry (2012) in his study "A Comparison of Financial Performance

of Major Gujarat Pharma" players through value added and economic value added". The

purpose of this study is to classify major Gujarat pharmacy players in cohesive categories

31
on the basis of their financial characteristic revealed by the financial statements. The

study also revealed that economic value added has also positive correlation with firm size,

funds of proprietors, and funds of money lenders and have significant impact on economic

value added.

3.11 Neha Mittal (2013) studies the determination of capital structure choice of the

selected Indian industries. The main objective is to investigate whether and to what extent

the main structure theories can explain the capital structure choice of Indian firms. It has

applied multiple regression models on the selected industries by taking data for the period

20012008 It examines the relevance of capital structure in selected Indian industries based

on a regression analysis and data study. It concludes that the main variables determining

capital structure of industries in India are agency cost, assets structure, non debt tax shield

and size.

3.12 Kartik Chandra Nandi (2015) in his study "Trends in Liquidity Management and

Their Impact on Profitability: A Case Study". Made an attempt to 95 observe the trend

values of liquidity position of the company and study the correlation between liquidity

and profitability. An attempt has also been made to establish the linear relationship

between liquidity and profitability with the help of a multiple regression model. The study

used various statistical tests viz. t-test, F-test and DurbinWatson test and has been applied

in order to test the significance of the results obtained.

3.13 Vivek Kumar and Major Singh (2017) conducted a study on "Profitability of

Indian Banks - A Comparative Study of SBI and HDFC". The study revealed that the
32
various profitability ratios of two banks as the measure of profitability. The common

denominator used for developing the various profitability ratios is business volume

(deposits plus advances). The study analyses the published five-year data from 2007-08

onwards for the two largest banks, i.e., SBI- the largest public sector bank and HDFC the

largest private sector bank.

33
 Chapter 4-

Detailed

Description of

the Topic
34
4.1 Introduction

Financial analysis involves the process of identifying, measuring and communicating

economic information contained in financial statements. A financial statement is an

organized collection of data according to logical and consistent accounting procedures. It

involves recording, classifying and summarizing various business transactions. The end

products of business transactions are the financial statements comprising primarily the

position statement or balance sheet and income statement or profit and loss account.

These sources of information on the basis of which conclusions are drawn about the

profitability and financial position of a concern, Financial statements are the basis for

decision making by the management as well as other outsiders such as investors,

creditors, customers, suppliers, financial institutions, employees, potential investors,

government and general public.

According to the American Institute Of Certified Public Accountants "Financial statement

are prepared for the purpose of presenting a periodical review of report on progress by the

management and deal with the status of investment in the business and results achieved

during under review. They reflect a combination of recorded facts, accounting principles

and personal judgments.

“Financial statements' generally refers to two statements:

35
1. The position statement or the balance sheet.

2. The income statement or profit and loss account. These statements are used to convey

to management and other interested outsiders the profitability and financial position of a

firm. Other then these two a business can also make a statement of changes in financial

position, and a statement of retained earnings in addition to above two statements. But this

project is restricted to the analysis of three statements only which are as follows:

4.1.1 Balance sheet:-

Balance sheet is one of the important statements depicting the financial strength of the

concern. Its purpose is to show the resources that the company has ic. its assets, and from

where those resources come i.e. its liabilities and investments by owner's od outsiders The

balance sheet shows all the assets owned by the concern and all the liabilities and claims it

owes to owners and outsiders. The balance sheet is prepared on a particular date. The

right hand shows properties and assets. The Companies act 1956 has prescribed a

particular form for showing various assets and liabilities in balance sheet for companies

registered under this act. These companies are also required to give figures for previous

year along with current year's figures.

According to the American Institute of Certified Public Accountants balance sheet is "A

tabular balance sheet is statement of summary of balances (debits and credits) carried

forward after an actual and constructive closing of books of account and kept according to

principles of accounting"

36
 1. Income statement (or profit and loss account):- Income statement is prepared to

determine the operational position of the concern. It is a statement of revenues

earned and the expenses incurred for camping that revenue. If there is excess of

revenue over expenditure it will show a profit and if expenditures are more than the

income then there will be a loss.

The income statement is prepared for a particular period generally a year and all revenues

and expenditures fulling due in that year will be taken into account irrespective of their

receipts or payments. The income statement may be prepared in the form of a

Manufacturing Account to find out cost of production, in the form of Trading Account to

determine gross profit or gross loss.

2. Statements of changes in financial position:- This is to be prepared to show the

changes in assets and liabilities from the end of one period to the end of another point of

time. The objective of this statement is to show the movement of funds (working capital

or cash) during a particular period. The statement of changes in financial position may

take any of the following form:

4.2 Objectives of Financial Statements :-

Financial statements are the sources of information on the basis of which conclusions are

drawn about the profitability and financial position of a concern. They are the major

means employed by firms to present their financial situation of owners, creditors and

general public. The primary objective of financial statements is to assist in decision

37
making. The Accounting Principles Board of America (APB) states the following

objectives of financial statements:

1) To provide reliable financial information about economic resources and obligations of

a business firm.

2) To provide other needed information about changes in such economic resources and

obligations.

3) To provide reliable information about in net resources (resources less obligations)

arising out of business activity.

4) To provide financial information that assists in estimating the earning potentials of

business.

5) To disclose to the extent possible, other information related to financial statements that

is relevant to the needs of the users of these Statements

4.3 Meaning and Concept of Financial Analysis

The term 'financial analysis' which is also known as 'analysis and interpretation of

financial statements' refers to the process of determining financial strengths and

weaknesses of the firm by establishing strategic relationship between the items of the

balance sheet a profit and loss account and other operative data. In the words of Myers,

"Financial statements analysis is largely a study of relationship among the various

38
financial factors in a business as disclosed by a single set-of statements, and a study of the

trend of these factors as shown in a series of statements. The purpose of financial analysis

is to diagnose the information contained in financial statements so as to judge the

profitability and financial soundness of the firm. A financial analyst analysis the financial

statements with various tools of analysis before commenting upon the financial health or

weakness of an enterprise. The analysis and interpretation of financial statements is

essential to bring out the mystery behind the figures in financial statements. Financial

statements analysis is an attempt to determine the significance and meaning of the

financial statements data so that forecast may be made of the future earnings, ability to

pay interest and debt maturities (both current and long term) and profitability of a sound

dividend policy. The term 'financial statement analysis includes both analysis and

interpretation.

4.4 Types of Financial Analysis :-

Financial analysis can be categorized depending upon:

1) The material used

2) On the basis of objective

3) The method of operation followed in the analysis or the modus operandi of analysis

4.4.1 On the basis of material used:-

According to this, financial analysis can be of following two types:

39
a) External Analysis: This analysis is done by outsiders who do not have access to the

detailed internal accounting records of the business firm. They include investors, potential

investors, creditors, potential creditors, government agencies and general public. For

financial analysis, these external parties to the firm depend almost entirely on published

financial statement.

b) Internal Analysis: The analysis is considered by persons who have access to the

internal accounting records of a business firm is known as internal analysis. Such an

analysis can therefore be performed by executives and employees of the organization as

well as government agencies which have statutory powers vested in them.

4.4.2 On the basis of Objective

i. Long term analysis:- To study the long term financial stability, liquidity, solvency and

profitability of the business long term analysis is made. The main purpose of long term

analysis is to meet the cost of capital, to provide fund requirements for growth and the

development of the business. This type of financial analysis also helpful for the survival

and continuity of the business with proper long run financial planning.

ii. Short term analysis: Such type of analysis is useful for short term solvency, stability

and the liquidity of the business. Even to analyse the adequate funds availability of the

business for short run requirements, borrowing capital to meet contingencies if arises in

the near future. Such analysis is related with the current assets and current liabilities of the

40
business to know about the current position of the business which ultimately helpful for

short run financial planning of the business.

4.4.3 On the basis of modus operandi:-

According to this method of operation followed in the analysis, financial analysis can also

be of two types:

a) Horizontal Analysis:- Horizontal analysis refers to the comparison of several years in

which figures of various years are compared with standard or base year These figures are

presented horizontally over a number of columns. A base year chosen as a beginning

point. This type of analysis is also called dynamic Analysis' as it is based on data from

year to year rather than on data of any one year. Comparison of an item once several

periods with a base year may show a trend developing

b) Vertical Analysis:- Vertical analysis refers to the study of relationship of the various

items in the financial statements of one accounting period. It includes figures of financial

statement of a year, which are compared with a base selected from same year's statement.

It is also known as static Analysis since vertical analysis considers data for one time

period only, it is not very conducive to a proper analysis of financial statements.

4.5 Procedure of Financial statement Analysis

In the procedure of financial statement analysis, there are mainly three steps involved.

These are:

41
1) Selection

2) Classification

3) Interpretation

The first step involves selection of information relevant to the purpose of analysis of

financial statements. The second step involves methodical classification of the data and

third step includes drawing of inferences and conclusions. The following procedure is

adopted for the analysis and interpretation of financial statements:

1) The analyst should acquaint himself with the principles and postulates of accounting.

He should know the plans and policies of the management so that he may be able to find

out whether theses plans are properly executed or not.

2) The extent of analysis should be determined so that the sphere of work may be decided.

If the aim is to find out the earning capacity of the enterprise then analysis of income

statement will be undertaken. On the other hand, if financial position is to be studied then

balance sheet analysis will be necessary.

3) The financial data given in the statement should be re-organized and rearranged. It will

involve the grouping of similar data under same hands, breaking down of individual

components of statements according to nature. The data is reduced to a standard form.

4) A relationship is established among financial statements with the help of tools and

techniques of analysis such as ratios, trends, funds flow etc.

42
5) The information is interpreted is a simple and understandable way. The significance

and utility of financial data is explained for helping decision taking.

6) The conclusions drawn from interpretation are presented to the management in the

form of reports.

4.6 Methods or Devices of Financial analysis

The analysis and interpretation of financial statement is used to determine the financial

position and results of operations as well. A numbers of methods or devices are used to

study the relationship between different statements. An effort is made to use those

devices, which clearly analyses the position of the enterprise. The following methods of

analysis are generally used:

1. Ratio Analysis

2. Comparative statements

3. Trend Analysis

4. 7 TOOLS FOR ANALYSE THE FINANCIAL STATEMENTS

1. Comparative Financial Statements

2. Common Size Statements

3. Trend Analysis

4. Ratio Analysis
43
5. Fund Flow Analysis

6. Cash Flow Analysis

4.7.1 Comparative Financial Statements

Statements showing financial data for two or more years, placed side by side to facilitate

the comparison are called Comparative Financial Statements. It captures changes in all

items of financial statements in absolute and percentage term over a period of time for a

firm or between two firms. It is generally used to get the knowledge of trends of

profitability, performance and financial position. Comparative Financial Statements

involve the comparative study of components of profit and loss account and the balance

sheet. Over a period of two or more years known as Intra firm comparison or comparison

with data of another firm known as Inter-firm comparison ; or comparison of actual

figures with the budget or comparison with the data of industry. According to

Faulke,"Comparative Analysis is the study of trend of the same item, group of items and

computed items in two or more Balance Sheets of the same business enterprise on

different dates."

Utility/Purpose of Comparative Financial Statements

Comparative financial statements are very useful for a business concern they provide

information necessary for study of financial and operative trends over a period of years.

44
The purpose of comparative financial statements is as :

➢ To simplify the complex data so that it can be understood easily and conclusions about

change in operative results and financial position can be drawn. ➢ To compare financial

performance of one year to other year or of one firm to other fin same industry.

➢ To indicate strength and weakness of the firm by comparison.

➢ To facilitate forecasting on the basis of analysed past performance.

➢ To indicate trends in different items of profit and loss account and balance sheet over a

period of time.

➢ To analyse expenses whether these are increasing or decreasing.

➢ To understand trend of profitability whether in favour or not.

I. COMPARATIVE BALANCE SHEET

Comparative Balance Sheet shows balances of accounts of assets and liabilities in

different de and increase or decrease in them in absolute terms as well as percentages.

According to Faulke,"Comparative Balance Sheet Analysis is the study of the trend of the

items or group of items and computed items in two or more balance sheets of the same me

enterprise of different dates."

Procedure to Prepare Comparative Balance Sheet

45
Steps to prepare Comparative Balance Sheet:

Step 1. Record various assets and liabilities in first column.

Step 2. Place previous years Balance Sheets figures in second column

Step 3. Place current year's Balance Sheet's figures in third column

Step 4. Enter the absolute change in fourth column

(Absolute change is difference between figures of current year and previous year)

Step 5. Enter the proportionate change in fifth column

(Proportionate change is expressing absolute change as percentage of figures of previous

your To Percentage change is worked out as under:

Percentage Change = Absolute Change x 100

Base Year Figure
Finally the relative changes are interpreted, conclusions are drawn and decisions are

taken.

Format of Comparative Balancesheet :

46
 

II. COMPARATIVE INCOME STATEMENT

It is the statement which is prepared to reflect the operating activities of a firm for two or

more accounting periods. It shows the amount, level and direction of change in

components of ne costs and expenses and to It also measures the efficiency of the

management to lower down the costs and expense increase the sales.

Procedure to prepare comparative income statement

Steps to prepare Comparative Income Statement:

Step 1. Record various items of income and expenditure in first column.

47
Step 2. Record previous year's figures in second column.

Step 3. Record current year's figures in third column.

Step 4. Enter the absolute change in fourth column.

(Absolute change in the difference between figures of current year and previous year.)

Step 5. Enter the proportionate change in fifth column.

(Proportionate change is expressing absolute change as percentage of figures of previous

year.

Purpose/Objectives/Utility of Comparative Income Statement

i. To analyse the increase or decrease in the Profits of the enterprise.

ii. To facilitate comparison of various items of income and expenditure for two or

more year.

iii. To analyse the increase or decrease in the income and expenditure in terms of

rupee and in percentage from one year to another.

iv. To help in forecasting the profitability of the business concern.

v. To analyse the rate of increase or decrease in cost of material consumed.

Format of Comparative Statement of Profit and Loss S.

2016 (Amount 2017 (Amount Absolute Percentage

Particulars
in USD) in USD) Change Change

Net Sales 200000 250000 50000 25%

48
 2016 (Amount 2017 (Amount Absolute Percentage
Particulars
in USD) in USD) Change Change

Less: Cost of Goods Sold 150000 180000 30000 20%

Gross Profit 50000 70000 20000 40%

Less: Selling, General and

25000 30000 5000 20%
Administrative Expenses

Net Operating Profit 25000 40000 15000 60%

Add: Other Income 12000 18000 6000 50%

Earnings before Interest and Taxes 37000 58000 21000 56.76%

Less: Interest 17000 18000 1000 5.88%

Earnings before Taxes 20000 40000 20000 100%

Less: Taxes 8000 16000 8000 100%

Net Profit 12000 24000 12000 100%

4.7.2 Common Size Statements

Comparative financial statements do not present the change in relationship of various

items to total assets, total liabilities and net sales. This drawback is overcome by Common

Size Statement Common Size Financial Statements are those in which every figure of

financial statements are expressed in the percentage to some common base of the

statement. In the income statement sales are taken as base ie 100 and all relevant figures

49
are expressed as percentage of sales. Likewise in balance sheet, assets or liabilities are

taken as base i.e. 100 and all relevant figures are expressed as percentage of their base.

Purpose/Advantages/Utility of Common Size Statements

i. To establish a relationship: Over a period, a relationship is established

between various items of the statements of profit and loss to revenue from

operations and various items of balance sheet to total assets or total equity &

liabilities. Significant conclusions can be drawn by studying the change in such

a relationship.

ii. To present the change in various items in relation to revenue from

operation : The major drawback of comparative financial statement is removed

by the preparation of common Ge statement, that is to present the change in

various items in relation to revenue from operation, total assets or total

liabilities.

iii. To provide for a common base for comparison : Common size statement

provide a on base for comparison. This statement facilitate the comparison of

profitability and financial position of two or more businesses over a period of

time

Types of Common Size Statements:

50
 i. Common Size Position Statement (Balance Sheet)

ii. Common Size Income Statement

I. COMMON SIZE BALANCE SHEET

A common size balance sheet is a statement in which total of assets or equity and

liabilities is assumed to be equal to 100 and all the figures are expressed as percentage of

the total.

In other words, each asset is expressed as percentage to total assets and each item of

equity and liability is expressed as percentage to total equity and liabilities

Objectives/Purpose/Utility of Common Size Balance Sheet

i. To analyse change in individual items of balance sheet.

ii. To establish the trend in various items of assets and liabilities.

iii. To assess the financial strategy adopted by different enterprises belonging to the

same industry.

iv. To judge the relative financial soundness for different enterprises belonging to

the same balance sheet for different periods.

Steps to Prepare Common Size Balance Sheet

i. Place the two Balance sheets in vertical form side by side with current year on

the right hand side and previous year on the left hand side.

ii. First write the sources (liabilities) followed by the applications (Assets).

51
iii. Find out the percentage of each individual asset as compared to the total assets

using the following formula.

Individual assets x 100

Total assets
iv. Similarly percentage of each individual item of liabilities to total liabilities for

both years, way the following formula:

Individual liabilities x 100

Total liabilities
v. Compare these percentages and comment on them.

II. COMMON SIZE INCOME STATEMENT

52
There are different items of revenue and expenses in an income statement. The major item

is Revenue from operation i.e. Sales. Every other item of the income statement, i.e., an

expense or a non- operating revenue or a non-operating expense is expressed as a

percentage of sales revenue. The sales revenue is assumed as hundred and relative

percentage of each item is worked out.

Steps to prepare Common Size Income Statement

1. First column for items of statement of Profit and Loss.

2. Place the income statement of two years side by side vertically. The current year should

be on right and the previous year on the left.

3. Further column for percentage of different items (income/expenses) of statement of

Profit & Los for the previous year to revenue from operations of the previous year, which

are taken as 100.

4. The formula to be utilize is as follows:

Each individual item x 100

Revenue from operation (Net Sales)

5. Fifth column for percentage of different items of statement of profit and loss for the

current year to revenue from operations of the current year, which are taken at 100.

Objective/Purpose & Utility of Common Size Income Statement:

53
a) To establish relationship between individual items of statement of Profit & Loss and

revenue from operations.

b) The relationship established between revenue from operations and other items of the

statement of profit and loss and such a relationship is helpful in analysing the increase or

decrease in the percentage of each item.

c) To judge the relative efficiency of cost items of the two or more firms belonging to the

same industry.

Period 2018 2017 2016 2018 2017 2016

Total Revenue $2,65,595 $2,29,234 $2,15,639 100.00% 100.00% 100.00%

Cost of Revenue $1,63,756 $1,41,048 $1,31,376 61.70% 61.50% 60.90%

Gross Profit $1,01,839 $88,186 $84,263 38.30% 38.50% 39.10%

Operating Expenses

Research & Development $14,236 $11,581 $10,045 5.40% 5.10% 4.70%

Sales, General & Admin $16,705 $15,261 $14,194 6.30% 6.70% 6.60%

Operating Income $70,898 $61,344 $60,024 26.70% 26.80% 27.80%

Add Income and Expense Items $2,005 $2,745 $1,348 0.80% 1.20% 0.60%

Earnings Before Interest and Tax $72,903 $64,089 $61,372 27.40% 28.00% 28.50%

Interest Expense $0 $0 $0 0.00% 0.00% 0.00%

Earnings Before Tax $72,903 $64,089 $61,372 27.40% 28.00% 28.50%

54
 Period 2018 2017 2016 2018 2017 2016

Income Tax $13,372 $15,738 $15,685 5.00% 6.90% 7.30%

Net Income $59,531 $48,351 $45,687 $22.40% 21.10% 21.20%

4.7.3 TREND ANALYSIS

‘Trend’ in general means "tendency'. Trend analysis is a time series analysis to determine

the trend of financial data over a number of years. It helps in making comparative study of

financial statements for several years. It indicates direction of movement whether upward

or downward over a long period of time

Steps for calculations of Trend Analysis :

Step 1. Select base year.

Step 2. Assign index number of 100 to each item of base year.

Step 3. Calculate trend ratio of each item in statement with reference to same item in base

statement

Absolute Value of item in the statement (under study) x 100

Absolute value of the same item in the base statement

Notes:

55
➢ Various accounting principles and practices followed should be constant throughout

the period of analysis.

➢ Base year should be chosen carefully. It should be normal and representative of all

items shown in statement.

➢ Trend percentage should be calculated for logically connected items

➢ If calculated trend value is more than 100, it is upward moving otherwise it is

downward sliding.

Utility of Trend Analysis

➢ It is easy to calculate. It does not require trained experts for calculation. Even a layman

can use this method.

➢ It is easy to understand as complex data is converted into percentages and presented in

brief.

➢ It reduces possibility of mistakes because percentage changes can be compared with

changes in absolute figures.

➢ It helps in future forecasting.

56
Precautions are to be taken while using trend percentage :

While using trend percentage, following precautions should be taken.

1. Base year should be the normal year i.e. unaffected by the abnormalities such as floods,

earthquakes, fire accident etc.

2. Accepted accounting principles have to be followed constantly.

3. It should be ensured that comparability of data is not adversely affected when the price

level has changed materially during the year.

Limitations of Trend Analysis:

1. It ignores changes in price level.

2. Selection of normal base year is difficult.

3. It ignores non financial factors like economic condition, government policies,

management policies etc.

4.7.4 FUND FLOW STATEMENT

Definition of Fund

A question arises as to the definition of "FUND”. It means :

➢ Funds may mean change in cash only

57
➢ Funds may mean change in working capital the difference between current assets and

current liabilities) only

A more comprehensive definition of funds may be given as follows

➢ Funds may men change in financial resources, arising from changes in working capital

items and from financing and investing activities of the enterprise, which may involve

only non-current items.

The funds flow statement analysis only the causes of changes in the firm's working capital

position. The cash flow statement is prepared to analyse changes in the flow of cash only.

These statements fail to consider the changes in the firm's total financial resources. They

do not reveal some significant items that do not affect the firm's cash or working capital

position, but considerably influence the financing position and asset mix of the firm.

The statement of changes in financial position is an extension of the funds flow statement

or the cash flow statement. Therefore, to get better insights, a firm may prepare

comprehensive, all inclusive, statement of changes in financial position incorporating

changes in the firm's cash and working capital positions involving

➢ Changes in the firm's working capital position,

➢ Changes in the firm's cash position.

4.7.5Cash Flow Statement

INTRODUCTION
58
Cash plays a very important role in the entire economic life of business. A firm needs

cash to meet its day to day obligations and to pay salaries, wages, interest, dividend etc.

So it is essential that every business should maintain adequate balance of cash according

to its needs. It should neither be too excessive nor too small because in case of excessive

cash it remains useless after meeting the requirements of business and in case of small

amount of cash business is unable to meet day to day requirements. But sometimes inspite

of high Profits there may not be adequate cash for paying taxes, dividends and other

expenses. This may be because

1) though there are profits but firm has not received cash or

2) Cash received has been used for some other purpose or invested somewhere etc

Financial statements i.e. Profit and Loss A/c and Balance Sheet which provide the

essential basic information about financial activities of business fail to disclose the

reasons for shortage of cash inspite of positive net income. Therefore cash flow statement

is prepared to express the reasons of ne in cash balance of business between two dates.

MEANING OF CASH FLOW STATEMENT

Changes in the position of cash from one period to another is called Cash Flow. The ich

shows flow of cash is called Cash Flow Statement Thus, it is a statement that summarises

the s of changes in the cash position of a business enterprise between dates of two balance

sheets.

59
IMPORTANT DEFINITIONS AS PER ACCOUNTING STANDARD-3 (REVISED)

Accounting Standard (AS-3) Revised issued by the Institute of Chartered

Accountants of India (ICAD on Cash Flow statement in March, 1997 has defined

cash flow statement “as a statement which shows in flow (receipt) and flow (payments)

of cash and its equivalent in an enterprise during specified period of time. Where, inflows

(sources) of cash result from cash profit care by the organisation, issue of shares and

debentures for cash, borrowings sale of assets or investment etc. The outflows (uses) of

cash result from purchase of assets investments, redemption of debentures or preference

shares repayment of loans, payment of tax dividend, interest etc.”

According to the Institute of Cost and Works Accountants of India, "Cash Flow

Statement is metering out the flow of cash under distinct heads of sources of funds und

their utilization to determine the requirements of cash during the given period and to

prepare for its adequate provision.”

It can be prepared daily, weekly, monthly, quarterly, annually or for any fixed time gap.

The terms cash, cash equivalent and Cash Flow used in preparation of Cash Flow

Statement are described follow :

Cash:- It comprises of Cash in hand and demand deposits with banks

Cash Equivalent:- Cash Equivalent are short term highly liquid investments that are

readily convertible into known amounts of cash and which are subject to an insignificant

risk of changes in value. Therefore an investment normally qualifies as a cash equivalent

60
only when it has a short maturity of say, three months or less from the date of acquisition.

Examples of cash equivalents Treasury Bills Commercial Paper, Money Market Funds,

Investment in Preference Shares redeemable within three months (provided there is only

an insignificant risk of failure of the company to repay the amount at maturity).

Cash Flow:- Cash Flows are inflows and outflows of cash and cash equivalents. The

difference between cash inflow and cash outflow is known as net cash flow which may be

net cash inflow or net cash outflow.

NEED OF CASH FLOW STATEMENT

There was a need for cash flow statement prepared in standard format. The Financial

Accounting Standard Board. U.S.A has emphasised the need for cash flow statement as

"Financial Reporting should provide information to help present and potential investors,

creditors and other users assessing the amounts, timing and uncertainty of prospective

cash receipts from dividends or interest and proceeds from sales, redemption or maturity

of securities or loans. The prospects for the receipts are affected by an enterprise's ability

to generate enough cash to meet the obligation when due and its other operating needs to

reinvest in operations and to pay cash dividends."

In June, 1995, the Securities and Exchange Board of India (SEBI) amended clause 32 of

the listing Agreement requiring every listed company to give along with the balance sheet

and profit and loss account a cash flow statement prepared in the prescribed format

61
showing separately cash flow from operating activities, investing activities and financing

activities.

According to revised (AS-3) published in March, 1997 by ICAI an enterprise should

prepare cash flow statement and should present it for cash period for which financial

statements are prepared.

OBJECTIVES OF CASH FLOW STATEMENT

According to AS-3 (Revised) the objectives of cash flow statement are as follows: “

Information about the cash flow of an enterprise is useful in providing users of financial

statements with a base assess the ability of the enterprise to generate cash and cash

equivalents and the needs of the enterprise to utilise these cash flow. The economic

decision that are taken by were require evaluation of the ability of an enterprise to

generate cash and cash equivalents and the timing and the certainty of their generation.

The statement deals with the provision of information about the historical changes in cash

and cash equivalents of an enterprise by means of cash flow statement which classifier

cash flows during the period from operating, investing and financing activities.”

Thus the objectives of Preparing Cash Flow Statement can be summarised as under

1. To ascertain the specific sources (ie operating/Investing/financing activities) from

which cash and cash equivalents were generated by an enterprise.

2. To ascertain the specific uses (i.e. operating/investing/financing activities) for which

cash and cash equivalent were used by an enterprise.

62
3. To reveal good and bad points relating to the management of cash by ascertaining the

change in cash and cash equivalent (difference between total sources and total use

between the dates of two balance sheet.

4. To provide information for planning for short term cash needs of the enterprise.

5. To assess whether enterprise would be able to meet its current obligations or not.

6. To decide the speed at which cash is being generated from current assets such as

debtors, bills receivables, stock etc.

7. To disclose the speed as which current liabilities such as creditors, bills payable etc.

being paid.

8. To assess the true position of cash in future.

9. To help management to prepare cash budget.

10. To facilitate formulation of financial policies such as dividend policy etc.

11. To ascertain the liquidity of the enterprise

IMPORTANCE/ADVANTAGES OF CASH FLOW STATEMENT

Preparation of Cash Flow Statement has following advantages:

1) Helps in Short term planning: Business Enterprise will have to pay cash to its

creditors, for purchase of fixed assets and payment of its loan. Thus, Cash Flow statement

63
with short term analysis helps the management in planning for cash by looking into past

cash flow.

2) Discloses the movement of cash: Cash Flow discloses the cash movement relating to

operating, investing or financing activities. The reason for increase or decrease in cash

can be known from it. It helps the Finance manager to explain shortage of cash despite

high profits and vice versa.

3) Helpful to decide dividend policies and repayment of loan: Cash Flow from

operating activities help the manager to know the cash generated from operating activities

and helps in deciding payment of dividends and loans etc.

4) Helps in efficient cash management: It helps the management to know how much

cash it ted and from what sources it will come how much is generated internally and how

much to take from outside.

5) Helps in Financial Planning: It is useful for the projection of Future investing and

Financing plans of an enterprise by the management. On the basis of information from

cash flow statement payment of long term loan, expansion and modernisation of plant and

payment of interest and dividend can be planned.

6) Helpful to take corrective action: A comparison of historical and projected Cash

Flow statement can help to find changes in performance and thus helpful to locate weak

spots for which corrective action can be taken.

64
7) Helpful in Comparative Study: A comparison of cash flow statement with the

budgetary figures of same year will help to determine as to what extent the cash resources

of business were generated and applied according to plan. It also helps in interfirm and

intra firm comparison.

LIMITATIONS / DISADVANTAGES OF CASH FLOW STATEMENT

Cash flow statement is very useful tool of financial analysis but it also has certain

limitations which are as follows :

1) No disclosure of net income: Cash Flow statements cannot replace income statement.

Net increase or decrease in cash does not mean net income of the business.

2) Ignores non cash transactions: Cash Flow statement does not take into consideration

those transactions which do not affect the cash. For example Purchase of fixed assets by

issue of shares or debentures to vendors.

3) Based on Secondary data: Cash Flow statement is based on secondary data. Ii only

rearranges the primary data already appearing in other statements i.e. Income statement

and Balance Sheet Weaknesses of primary data will also effect it.

4) Historical in nature: Cash flow statements are basically historical in nature as it

rearranges the information available in income statement and Balance Sheet. It will not be

historical and become more useful if projected cash flow statements are prepared to plan

for Future

65
5) Ignores basic accounting concept: As cash flow statement is based on cash basis of

accounting, it ignores the basic concept of accounting ie accrual basis.

6) Misleading Comparison: Increase in Cash Flow shown by Cash Flow statement does

not always mean increase in profit. So it provides a misleading comparison over a period

of time. It is not suitable for interfirm or intrafirm comparison.

7) Subjectivity: Cash balance shown by Cash Flow statement may not represent the real

position of business as it can be easily influenced by sales postponing purchases and other

payments etc. Thus it gives a misleading picture of cash position. Thus these can easily be

influenced by management policies. So there is subjectivity in them

CLASSIFICATION OF CASH FLOWS

According to AS-3 (Revised) the Cash Flow statement classifies cash receipts and cash

payments under the following three parts :

1. Cash Flow from Operating Activities

2. Cash Flow from Investing Activities

3. Cash Flow from Financing Activities.

1. CASH FLOW FROM OPERATING ACTIVITIES

Cash Flow from the operating activities are the principal revenue producing activities of

the enterprise. Therefore the cash flows resulting from sale and purchase of goods and

payment for salaries, wages and expenses are shown under this head. The amount of cash
66
flows arising from operating activities is a key indicator of the extent to which the

operations of the enterprise have generated sufficient cash flow to maintain the operating

capability of the enterprise.

Items included in Operating activities:

➢ Cash receipts from sale of goods and rendering of services.

➢ Cash receipts from Royalties, Fees Commission and other revenues

➢ Cash Payment to suppliers for goods and services.

➢ Cash payment to and on behalf of employees.

➢ Cash receipts and Cash payments of an insurance enterprise for provisions and claims

annuities and other policy benefits.

➢ Cash payment or refund of income tax unless they can be specifically identified with

financing and investing activities.

➢ Cash receipt or payments relating to future contracts forward contracts, option

contracts and swap contracts when the contracts are held for dealing or trading purposes.

2. CASH FLOW FROM INVESTING ACTIVITIES

Investing activities are those activities which are related with purchase and sale of fixed

assets and r long term investments. The separate disclosure of cash flow arising from
67
investing activities is important because the cash flow represent the extent to which

expenditures have been made for resources intended to generate future income and cash

flow.

Items included in Investing activities:

➢ Cash Payment for purchase of fixed assets and intangible assets.

➢ Cash Receipts from sale of fixed assets and intangible assets.

➢ Cash payment to acquire shares debentures of other companies.

➢ Cash receipt from sale of shares/debentures of other companies.

➢ Cash receipts from dividends and other income an above investment.

➢ Cash advantages and loans made to third party (other than advances and loans made by

a financial enterprise).

➢ Cash receipts from repayment of advances and loans made to third party (other than

advances and loans of a financial enterprise)

3. CASH FLOW FROM FINANCING ACTIVITIES

Cash Flow from Financing activities mean change in cash from change in capital and

borrowings (loans) of the organisations.

Items included in Financing activities :

68
➢ Cash proceeds from issuing shares Both equity and preference.

➢ Cash proceeds from issue of debentures, loans, notes, bonds and other short or long

term borrowings.

➢ Cash payment for redemption of preference shares.

➢ Cash payment for redemption of debentures and repayment of loans.

➢ Cash payment for dividends and interest on long term loans.

PREPARATION OF THE CASH FLOW STATEMENT

Cash Flow statement is not a substitute of income statement or Balance Sheet. It provides

additional information relating to changes in cash and cash equivalents. Preparation of

Cash Flow statement requires following three

➢ Balance Sheet of the beginning and of end.

➢ Income statement or Profit and loss A/c of current accounting period.

➢ Additional information (to extract the hidden transactions)

STEPS FOR PREPARATION OF CASH FLOW STATEMENT

The preparation of a cash flow statement involves the following steps :

69
 Step 1. Compute the net increase or decrease in the cash and cash equivalents by making

comparison of opening and closing balance of cash and cash equivalents and other

relevant information in two balance sheets.

Step 2. Compute the net cash provided (used) by operating activities (by analysing the

profit and kos account, Balance sheet and additional information either by direct method

or by indirect method.)

Step 3. Calculate net cash provided (used) by Investing Activities

Step 4. Calculate net cash provided (used) by Financing Activities.

Step 5. Make a formal cash Flow statement highlighting the net cash flow provided (used)

by operating, investing and financing activities separately

Step 6. Make an aggregate of net cash flow from the three activities and ensure that
total net cash equal to net increase or net decrease in cash and cash equivalent as
calculated in Step 1.

Illustration of Indirect method:

Net profit before Tax and extra ordinary Items xxx

Cash flow from Operating activities

Add: Non-cash and non-operating Items which have already been debited to profit and Loss
Account like;

Depreciation xxx

70
Illustration of Indirect method:

Amortisation of intangible assets xxx

Loss on the sale of Fixed assets xxx

Loss on the sale of Long-term Investments xxx

Provision for tax xxx

Dividend paid xxx xxx

Less: Non-cash and Non-operating Items which have already been credited to Profit and Loss
Account like

Profit on sale of fixed assets (xxx)

Profit on sale of Long term investment (xxx) (xxx)

Operating profit before working Capital changes (A) xxx

Changes in working capital:

Add: Increase in current liabilities xxx

Decrease in current assets xxx xxx

Less: Increase in current assets (xxx)

Decrease in current liabilities (xxx) (xxx)

Net increase / decrease in working capital (B) xxx

71
Illustration of Indirect method:

Cash generated from operations (C) = (A+B) xxx

Less: Income tax paid (Net tax refund received) (D) (xxx)

Cash flow from before extraordinary items (C-D) = (E) xxx

Adjusted extraordinary items (+/–) (F) xxx

Net cash flow from operating activities (E+F) = (G) xxx

Cash flow from Investing activities

Proceeds from sale of fixed assets xxx

Proceeds from sale of investments xxx

Purchase of shares/debentures/fixed assets (xxx)

Net cash from investing activities (H) xxx

Cash flow from Financing activities

Proceeds from issue of shares xxx

Proceeds from issue of debentures xxx

Payment of dividend (xxx)

Net cash flow from financing activities (I) xxx

72
Illustration of Indirect method:

Net increase in cash and cash equivalents (G+H+I) = (J) xxx

Cash and cash equivalents and the beginning of the period (K) xxx

Cash and cash equivalents and the end of the period (J+K) xxx

4.7.6 RATIO ANALYSIS

MEANING OF RATIO

A ratio is a simple arithmetical expression of the relationship of one number to another

According to Accountant's Handbook by Wixon, Kell and Bedford, a ratio "is an

expression of quantitative relationship between two numbers" According to Kohler, a

ratio is the relation of the amount a, to another, b, expressed as the ratio of a to b, a (a is to

b), or as a simple fraction, integer, decimal, fraction or percentage.

A financial ratio is the relationship between two accounting figures expressed

mathematically. A ratio can also be expressed as percentage by simply multiplying the

ratio by 100. Ratios provide clues to the financial strength, soundness position or

weakness of an enterprise. One can draw conclusions about the exact financial position of

a concern with the help of ratios

MEANING AND CONCEPT OF RATIO ANALYSIS

73
Ratio analysis is a technique of analysis and interpretation of financial statements It is the

process of establishing and interpreting various ratios for helping in making certain

decisions. However, ratio analysis is not an end itself. It is only a means of better

understanding of financial strength and weakness of a firm. Calculation of ratios does not

serve any purpose, unless several appropriate ratios are analyzed and interpreted. There

are a number of ratios which can be calculated from the information given in the financial

statements, but the analyst has to select the appropriate data and calculate only a few

appropriate ratios from the same keeping in mind the objective of analysis. The following

are four steps involved in the ratio analysis:

➢ Selection of relevant data from financial statement depending upon objective of

analysis.

➢ Calculation of the appropriate ratios from the above data.

➢ Comparison of the calculated ratios with the ratio of same firm in the past, or the ratios

developed from projected financial statements or the ratios of some other firms or the

comparisons with ratios of the industry to which the firm belongs.

Interpretation of the Ratios:-

Ratio analysis is one of the most powerful tools of financial analysis. It is as device to

analyse and interpret the financial health of enterprise. It is with help of ratios that the

financial statements can be analysed more clearly and decisions made from such analysis.

The use of ratios in not confined to financial managers only. There are different parties

74
interested in the ratio analysis for knowing the financial position of a film for different

purposes. The supplier of goods on credit, bank, financial institutions, investors,

shareholders and management all make use of ratio analysis as tool in evaluating the

financial position and performance of a film for ting credit providing loans or making

investments in the film. With the use of ratio analysis, one can more the performance of

the firm is improving or deteriorating. This, Ratios have wide applications and are of

immense use today.

Guidelines or precautions for use of ratio

1. Accuracy of financial statements. The ratios are calculated from the data available in

financial statements. Before calculating ratios one should see whether proper concepts and

conventions have been used for preparing financial statements or not. These statements

should also be properly audited by competent auditors. The precautions will establish the

reliability of data given in financial statements.

2. Objective or purpose of analysis: The type of tattoos to be calculated will depend

upon the purpose for which these are required. The purpose or object for which rations are

required to be studied should always be kept in mind for studying various ratios. Different

objects may require the study of different ratios.

3. Selection of ratios: Another precaution in ratio analysis is the proper selection of

appropriate ratios. The ratios should match the purpose for which these are required. Only

these ratios should be selected which can throw proper light on the matter to be discussed.

75
4. Use of standards: The ratios will give on indications of financial position only when

discussed with reference to certain standard. These standard may be rule of thumb as in

case of current ratio (2:1)and acid test ratio:1), may he industry standards, may budgeted

or projected ratios etc.

5. Calibre of the analyst: The ratios are the only tools of analysis and their interpretation

will depend upon the calibre and competence of the analyst. He should be familiar with

various financial statements and the significance of changes etc.

6. Ratios provide only a base: The ratios are only guidelines for the analyst he should

not base his decision entirely on them. He should study any other relevant information,

situation in the concern, general economic environment etc. before reaching final

conclusions.

Functional classification or classification according to tests

In view of financial management or according to tests satisfied, various ratios have been

classified as below:

(I) Liquidity ratios: These are the ratios, which measure the short term solvency or

financial position of the firm and are calculated to comment upon the short term

paying capacity of concern or firm's ability to meet its current obligations. The

various liquidity ratios are: current ratio, liquid ratio and absolute ratio.

➢ Current Ratio: The current ratio is calculated by dividing current assets by current

liabilities, Current assets include cash and those assets which can be converted into
76
cash within a year such as marketable securities, debtors and inventories, prepaid

expenses are also included in current assets as they represent the payments that will

have not to be made by the firms in near future.

All obligations maturing within a year are included in current liabilities. Thus, current

liabilities include creditors, short term, bank loan, income tax liability and long-term

debt maturing in the current year. The current ratio is a measure of the firm's short-

term solvency. The current ratio represents a margin of safety.

Current ratio = current assets/current liabilities

➢ Quick Ratio: This ratio establishes a relationship between quick or liquid assets

and current liabilities. An asset is liquid if it can be converted into cash immediately or

reasonably soon without a loss of value. Cash is the most liquid asset. Other assets are

book debts and marketable securities. Inventories are considered to be less liquid

Inventories normally require sometime of realizing into cash; their value also has a

tendency to fluctuate. Dividing the total of the quick assets by total current liabilities

forms the quick ratio.

Quick Ratio = Quick assets/current Liabilities

➢ Cash (or) Absolute Liquid Ratio: The absolute liquid ratio shows the relationship

between absolute liquid assets and current liabilities. The components of the ratio are

highly liquid assets and current liabilities. Absolute liquid assets include cash and near

77
 cash assets. It indicates the ability of the firm to meet the short-term obligations

immediately without any loss in realization of assets.

Absolute liquid ratio = Absolute liquid assets/current liabilities

(II) LEVERAGE RATIOS: The short-term creditors like bankers and suppliers of

raw materials are more concerned with the firm's current debt-paying ability. On

the other hand, long-term creditors, like debenture holders, financial institutions

etc are more concerned with the firm's longterm financial strength. To fudge the

long-term financial position of the firm. financial leverage ratios are calculated.

These ratios indicate mix funds provided by owners and lenders. As a general

rule, these should be an appropriate mix of debt and owner's equity financing the

firm's assets. The firm has a legal obligation to pay interest to debtholders,

irrespective of the profits made or losses incurred by the firm Employment of

debt is advantageous for shareholders. The process of magnifying the

shareholders return through the employment of debt is called "financial

leverage".

➢ Debt-Equity Ratio: Total debt ratio i used to know the proportion of the interest-

bearing debt in capital structure. One can compute debt ratio by capital employed or total

net assets.

Debt ratio = Total debt + Net worth

78
➢ Proprietary Ratio: Proprietary ratio establishes the relationship between shareholders'

funds to total assets of the firm. indicates what part of the total assets financed by

shareholders funds.

Proprietary ratio = shareholders fund (or) Net worth/Total assets

The components of net worth include share capital, reserves and surplus excluding

miscellaneous expenditure not written off and accumulated losses. The components of

total assets include fixed assets and current assets.

➢ Capital Gearing Ratio: The capital-gearing ratio indicates the relationship between

fixed income bearing funds to equity shareholders fund. It indicates about sources

available to raise funds.

Capital gearing ratio = Fixed Income bearing funds / Equity shareholder fund.

Capital gearing ratio = Secured loans + unsecured loans / Equity shareholders funds

➢ Interest Coverage Ratio: Interest coverage ratio is used to test the firm's debt-

servicing capacity. The interest coverage ratio is computed by dividing earnings before

interest and taxes (EBIT) by interest charges.

Interest coverage ratio = EBIT / Interest

The interest coverage ratio shows the number of times, the interest charges are covered by

funds that are ordinarily available for their payment.

79
➢ Debt to Total Capital Ratio: The relationship between creditors funds and owners'

capital can be expressed in terms of another leverage rates. This is the debt to total capital

ratio. The outside liabilities are related to the total capitalization of the firm and not

merely to the shareholders equity.

Debt to total capital ratio=Long-term debt Permanent capital

➢ Dividend Coverage Ratio: It measures the ability of a firm to pay dividend on

preference shares, which carry a stated rate of return. This ratio of net profit after tax

(EAT) and the amount of preference dividend.

Debt to total capital ratio Earnings after tax Preference dividend

(III) ACTIVITY RATIOS:

Activity ratios also referred as turnover ratios measure how efficiently a firm employs the

assets. These ratios are based on the relationship between the level of activity.

Represented by the sales or cost of goods sold, and levels of various assets. A proper

balance between sales and assets generally reflects that assets are managed properly.

➢ Inventory Turnover Ratio: This ratio indicates the efficiency of the firm in selling its

products. It is calculated by dividing the cost of goods sold by the 86 average inventory.

The higher the ratio, the more efficient the management of inventories and vice versa.

Inventory turnover = Cost of goods sold / Average Inventory

80
➢ Debtors Turnover Ratio: This ratio shows how many times accounts receivable turns

over during the year. Book debts are expected to be converted into cash over a short

period and they included in current assets. The liquidity position of the firm depends on

the quality of debtors to a great extent

Debtors turnover ratio = Net Sales / Average debtors

The debtor's turnover indicates the number of times on the average of debtors turnover

each year. Generally, the higher the value of the debtor's turnover, the more efficient is the

management of credit.

➢ Debtors Average Collection Period: The average collection period represents the

number of days' worth of credit sales that is locked in debtors. It is defined as:

Average collection period = Average debtors / Average daily credit sales

➢ Total Assets Turnover Ratio: This ratio measures sales per rupee of investment in

total assets. A high rate indicates a high degree of efficiency in asset utilization and low

ratio reflects inefficient use of asset.

Total asset turnover = Net sales/Average total assets

➢ Net Working Capital Ratio: The difference between current assets and current

liabilities is called net working capital (NWO) Net working capital is used as a measure of

a firm's liquidity. Net working capital measures the firm's potential reservoir of funds. It

can be related to net assets or capital employed.

81
 Net working capital ratio = Net working capital/Net assets

(IV) PROFITABILITY RATIOS:

The management of the firm is naturally eager to measure its operating efficiency

Similarly, the owners invest their funds in the expectation of reasonable returns. The

operating efficiency of a firm and its ability to ensure adequate returns to its

shareholders/owners depends on the profits earned by it. The profitability of a firm can be

measured by its profitability ratios.

1. Profitability ratios in relation to sales.

2. Profitability ratios in relation to investment

1. PROFITABILITY RATIOS IN RELATION TO SALES:

➢ Gross Profit Ratio: The first profitability ratio in relation to sales in the gross profit

margin.

Gross profit ratio = Gross Profit/Sales x 100

A high ratio of gross profit to sales is a sign of good management as it implies that the

cost of production of the firm is relatively low. A relatively low gross margin is a danger

sign warranting a careful detailed analysis of the factors.

82
➢ Net Profit Ratio: It is known as a net margin. This measures the relationship between

net profits and sales of a firm.

Net profit ratio = Earnings after interest and taxes/Net sales x 100

The net profit margin is indicative or management's ability to operate the business with

sufficient success not only to recover from revenues of the period, 88 the cost of

merchandise of services, but also to leave a margin of reasonable compensation to the

owners for providing their capital at risk.

➢ Operating Expenses Ratio: The operating expenses ratio is an important ratio that

explains the changes in the profit margin (EBIT to sales). This ratio is computed by

dividing operating expenses by sales.

Operating expense ratio = Operating expenses/Sales x 100

2. PROFITABILITY RATIOS IN RELATION TO INVESTMENT:

➢ Return on Assets (ROA): The profitability ratio is measured in terms of the

relationship between net profits and assets. The ROA may be called profit to-asset ratio.

ROA = Net profit after taxes/Average total assets x 100

➢ Return on Equity: Return on equity shows the relationship between net profit after

tax (excluding preference dividend) and equity shareholders fund. It is an indicator of the

efficiency with which the equity capital is employed in concern. Return on equity = Net

profit after tax / Equity shareholders fund x 100

83
 ➢ Earnings per Share: The earning per share shows the relationship between profit and

after tax (excludes preference dividend) and number of equity shares. It is an indicator of

the per share profitability.

Earnings per share = Net profit after tax/No. Of equity shares x 100

 Return on Capital Employed (ROCE): The profits are related to the total capital

employed in the return on capital employed. Thus, the capital employed basis

provides test of profitability related to the sources of long-term funds. A

comparison of this ratio with similar firms with the industry average and over time

would provide sufficient insight into how efficiently the longterm funds of owners

and lenders are being used. The higher the ratio, the more efficient is the use of

capital employed.

ROCE= Earnings before interest and taxes/Average total capital employed x 100

➢ Return on Shareholders Equity: This profitability ratio carries the relationship of

return to the sources of funds yet another step further. The return on shareholder's

equity measures exclusively the return on the owner's funds.

4.8 Balance Sheet of Chemistar India Pvt. Ltd.

Particulars Note No. 2019-2020 2018-2019

I. Equity and Liabilities

84
1.Shareholders fund

(a) Share Capital 39.95 39.95

(b) Reserves and Surplus 14096.45 12817.17

2.Non-Current Liabilities

(a). Long Term Borrowings - -

(b). Long Term Provisions 268.93 176.23

3. Current Liabilities 4344.00 4607.84

Total 18749.33 17641.19

II. Assets

1.Non-Current Assets

(a). Fixed Assets 6043.78 4618.58

(b).Non-Current Investments 8222.65 5968.61

(c) Long-Term Loans & 1545.93 2481.74

Advances

2. Current Assets

(a) Inventories 1091.97 1072.37

(b) Trade Receivables 1603.14 2821.57

(c) Cash and Cash 241.86 136.46

Equivalents

Total 18749.33 17641.19

4.9 Income Statement of Chemistar India Pvt. Ltd.

Particulars Note Current Previous

No. Year(Rs) Year(Rs)

85
Revenue from Operations 29253.97 33970.82

Add: Other

Income 1407.93 668.30

Stock Adjustment 173.34 59.04

Total Revenue 30835.24 34698.16

Less Expenses : Raw Materials 20004.29 24813.79

Power & Fuel Cost - 158.12

Employee Cost ‘ 1889.32 1778.03

Selling & Administration Expenses - 831.06

Miscellaneous
3472.78 1430.43
Expenses

Total Expenses 25366.39 29011.43

PBDIT 5468.85 5686.73

Interest 46.64 37.18

Depreciation 845.76 624.44

86
Profit before tax 4576.45 5025.11

Tax 951.67 1637.95

Profit after tax 3624.78 3383.33

Chapter 5-

Data Analysis
87
 and

Interpretaion
5.1 COMPARATIVE STATEMENTS :

5.1.1 Comparative Balancesheet

Particulars Note Current Previous Absolute Percentage

No. Year Year Change Change

(Rs.) (Rs.) (Rs.) (%)

1 2 3 (3-2) = 4 (-x100)=5*

I. Equity and Liabilities

1.Shareholders fund

(a) Share Capital 39.95 39.95 - -

(b) Reserves and Surplus 14096.45 12817.17 1279.28 9.98

2.Non-Current Liabilities

88
(a). Long Term Borrowings - - - -

(b). Long Term Provisions 268.93 176.23 92.7 52.6

3. Current Liabilities 4344.00 4607.84 -263.84 -5.73

Total 18749.33 17641.19 1108.14 6.282

II. Assets

1.Non-Current Assets

(a). Fixed Assets 6043.78 4618.58 1425.2 30.86

(b).Non-Current Investments 8222.65 5968.61 2254.04 37.76

(c) Long-Term Loans & 1545.93 2481.74 -935.81 37.71

Advances

2. Current Assets

(a) Inventories 1091.97 1072.37 19.6 1.83

(b) Trade Receivables 1603.14 2821.57 -1218.43 - 43.18

89
(c) Cash and Cash 241.86 136.46 105.40 77.24

Equivalents

Total 18749.33 17641.19 1108.14 6.282

Interpretation :

 The company’s current liabilities during FY20 stood at Rs.4344 billion as

compared to Rs.4607.84 billion in FY19, thereby witnessing decrease of

5.73%.

 Long term provisions during FY20, stood at Rs.268.93 billion as compared

to Rs.176.23 billion during FY19, increase of 52.6%.

 Current Assets falls 37.23% and stood at Rs.2936.97 billion, while fixed

assets rose 30.86% and stood at Rs.6043.78 billion in FY20.

 Overall, the total assets and liabilities for FY20 stood at Rs.18749.33

billion as against Rs.17641.19 billion during FY19, thereby witnessing a

growth of 6.282%.

90
5.1.2 Comparative Income Statement :

S. Particulars Note Current Previous Absolute Percentage

No. No. Year(Rs) Year(Rs) Change(Rs) change(%)

I. Revenue from 29253.97 33970.82 -4716.85 -13.89

Operations

II. Add: Other 1407.93 668.30 739.63 110.67

Income

Stock 173.34 59.04 114.3 193.60

Adjustment

III. Total 30835.24 34698.16 -3862.92 -11.13

Revenue

IV. Less

Expenses : 20004.29 24813.79 - 480.95 -19.38

Raw - 1889.32 158.12 - 158.12 -100

-
Materials 1778.03 111.29 6.26

Power & Fuel 831.06 -831.06 -100

Cost 3472.78

Employee
1430.43 2042.35 142.78
Cost Selling

&

91
 Administratio

n Expenses

Miscellaneous

Expenses

Total 25366.39 29011.43 -3645.04 -12.56

Expenses

V. PBDIT 5468.85 5686.73 -217.88 -3.83

Interest 46.64 37.18 9.46 25.44

Depreciation 845.76 624.44 221.31 35.44

VI. Profit before 4576.45 5025.11 - 448.66 - 8.93

tax

VII. Tax 951.67 1637.95 - 686.28 - 41.90

VIII. Profit after 3624.78 3383.33 241.45 7.14

tax

92
Interpretations :

 Operating Income during the year falls 13.89 % on a year-on-year basis.

 The company’s operating profit decreased by 3.83 % YOY during the fiscal.

 Depreciation charges increased by 35.44%.

 Other income grew by 110.67%.

5.2 Common size statements

5.2.1 Common Size Balance Sheet

Particulars Note Current Year Previous Year

No. Amount Percentage Amount Percentage

I. Equity and Liabilities

Shareholders Fund

(a) Share Capital 39.95 0.21 39.95 0.23

(b) Reserves and Surplus 14096.45 75.18 12817.17 72.65

Non-Current Liabilities

(a) Long-Term Provisions 268.93 1.43 176.23 0.99

Current Liabilities 4344.0 23.17 4607.84 26.12

Total 18749.33 100 17641.19 100

II.Assets
93
 Non-Current Assets

(a) Fixed Assets 6043.78 32.23 4618.58 26.18

(b) Non-Current 8222.65 43.86 5968.61 33.83

Investments

(c) Long-Term Loans & 1545.93 8.25 2481.74 14.07

Advances

Current Assets

(a) Inventories 1091.97 5.82 1072.37 6.08

(b) Trade Receivables 1603.14 8.55 2821.57 15.99

(c) Cash and Cash 241.86 1.29 136.46 0.77

Equivalents

Interpretations :

 The company’s current liabilities during FY20 stood at Rs.4344 billion i.e.

increased by 23.17% as compared to Rs.4607.84 billion i.e. 26.12 % in

FY19.

 Long term provisions during FY20, stood at Rs.268.93 billion i.e.

increased by 1.43 % as compared to Rs.176.23 billion i.e. 0.99 % during

FY19.

 Current Assets falls 37.23% and stood at Rs.2936.97 billion, while fixed

assets rose 30.86% and stood at Rs.6043.78 billion in FY20.

 Overall, the total assets and liabilities for FY20 stood at Rs.18749.33

billion as against Rs.17641.19 billion during FY19, thereby witnessing a

94
 growth of 6.282%.

5.2.2 Common Size Income Statement

Particulars Note Previous year Current year

No. Amount Percentage Amount Percentage

1 2 3 4 5

(i)Revenue from Operations - - - -

- Sales 29253.97 100 33970.82 100

(ii) Other Income 1407.93 4.81 668.30 1.97

-Stock Adjustment 173.34 0.59 59.04 0.17

Total Revenue (I + ii) 30835.24 105.40 34698.16 102.14

(iv) Expenses:

Raw Material 20004.29 68.38 24813.79 73.04

Power & Fuel Cost - - 158.12 0.47
Employee Cost 1889.32 6.46 1778.03 5.23
Selling & Administration - - 831.06 2.45
Expenses
Miscellaneous Expenses 3472.78 11.87 1430.43 4.21
Total Expenses 25366.39 86.71 29011.43 85.40

PBDIT 5468.85 18.70 5686.73 16.74

Interest Depreciation
46.64 0.16 37.18 0.11

845.76 2.89 624.44 1.84

(v) Profit before tax 4576.45 15.64 5025.11 14.79

(vi) Tax 951.67 3.25 1637.95 4.82

(vii) Profit after tax (v-vi) 3624.78 12.39 3383.33 9.96

Interpretations :

 Operating Income during the year falls 13.89 % on a year-on-year basis.

95
 The company’s operating profit decreased by 3.83 % YOY during the fiscal.

96
5.3 Ratio Analysis

1. Current Ratio

A current ratio of 2:1 is considered to be deal. The ratio is an indicator of

firm's commitment to meet its short-term liabilities. It indicates the rupees

if current assets available for each rupee of current liability. The higher is

current ratio the higher the funds available for a rupee of current liability.

As a convention rule, a current ratio of 2:1 or more is considered

satisfactory.

The higher is the current ratio the higher the funds available for a firm :

Year Current assets Current liabilities Current Ratio

2013-14 408201 3998. 79 1.02

2014-15 4083.58 3699.99 1.10

2015-16 4237.60 3808.72 1.11

2016-17 1370189 5453.66 2.51

2017-18 3696244 6768.78 5.46

Current Ratio = Current Assets / Current Liabilities

INTERPRETATION:

The current ratio was 1.02 in the year 2013-14 where in the year 2014- 15
it was increased to 1.10. It finally reached to 5.46 in the year 2017-18.
97
 CURRENT RATIOS IN VARIOUS YEARS :

2. Quick Ratio:

Quick Ratio = Quick Assets / Current Liabilities

Year wise Quick Assets & Current Liabilities (Rs. in lakhs)

Year Quick Assets Current Liabilities Ratio

2013-14 826.01 512.8 1.6

2014-15 1003.95 730.57 1.37

2015-16 978.59 878.23 1.11

2016-17 829.84 677.73 1.22

2017-18 1795.56 878.89 2.04

98
INTERPRETATION:

The quick ratio of was favourable in the years of 2013-14 as 1.61. where as in the

year of 2014-15. it was in decreased to 1.37 and in the year of 2016-17. it was

increased to 2.04 in the year 2017-18.

3. Sales to Net Working Capital Ratio:

Sales to Net Working Capital Ratio = Sales / Net Working Capital

Year wise Net Sales & Net Working Capital (Rs. in lakhs)

Year Sales(Rs. in Lakhs) Net Working Capital Ratio

2013-14 5214.83 1020.05 5.11

2014-15 6553.88 1264.25 5.18

2015-16 8746.55 1511.32 5.79

2016-17 6497.69 1316.70 4.93

2017-18 10157.83 1954.74 5.19

99
Interpretation :

The ratio indicates the relationship between the sales and the net working capital.

The Company has increased over the years. It has decreased to 4.93 in the year

of 2012-13.

4. Working Capital Turnover Ratio:

Working Capital Turnover Ratio = Net Sales / Net working capital

Year wise Net Sales & Net Working Capital (Rs. in lakhs)

YEAR NET SALES NET WORKING CAPITAL Ratio

2012-13 12716 1877.53 6.77

2013-14 16619.65 2562.24 6.48

2014-15 24362.28 8060.06 3.02

2015-16 26102.74 9660.47 2.70

2016-17 26935.09 8222.72 3.27

100
 2017-18 39901.34 11448.58 3.49

Interpretation :

This ratio helps to know as many times the working capital is used in its business. It is

6.77 in the year 2012-13. It come down slowly during the years 2013-14 & 2015-

16 and 2017 2018. It again decreases to 2.70 in 2012-13. Again up high to 3.49 in

the year 2017.18. It shows that the investment in net working capital is not

satisfactory.

5. Inventory Turnover Ratio: Inventory Turnover Ratio= Net Sales / Inventories

Year wise Net Sales & Net Current Assets (Rs. in lakhs)

Year NET SALES INVENTORIES RATIO

2012-13 12716 1891.03 6.72:1

2013-14 16619.65 1714.77 9.69:1

101
 2014-15 24362.28 2231.30 10.92:1

2015-16 26102.74 2408.82 10.52:1

2016-17 26935.09 2312.71 11.65:1

2017-18 39901.34 5312.22 751.1:1

Interpretation :

It is also called stock turnover ratio. It indicates the number of times the average

stock is being sold during a given account period. The higher the inventory

turnover ratio, the better is the performance of the firm in selling its stocks. The

inventory turnover ratio in the year 2012-13 is 6.72:1 and it was increased yearly

as shown. It was as high as 11.65 in 2016-17. It came down to 7.51 in 2017-18.

As a whole, the inventory ratio is satisfactory.

102
 6. Fixed Assets Turnover Ratio:

Fixed Assets Turnover Ratio = Net Sales / Fixed Assets

Year wise Net Sales & Fixed Assets (Rs. in lakhs)

YEAR NET SALES FIXED ASSETS RATIO

2012-13 12716 1950.87 6:52:1

2013-14 1661965 1728.23 9.62: 1

2014-15 2436228 110512 22.04:1

2015-16 2610274 1856 99 14.06:1

2016-17 2693509 1715.75 15.09.1

2017-18 3990134 3070.92 12.99:1

INTERPRETATION:

This ratio is used to highlight the extent of utilization of the company's plant

machinery. The ratio is 6.52 in 2013-14. It went up to 9.62 & 22.04 in the two

years 2014-15 and 2015-16. But again it came down to 14.06 and 15.09 in 2016-

17-&2016-17. But come down a little to 12.99 in 2017-18. As a whole, it shows a

good utilization of fixed assets (Plant & Machinery),

103
 7. Current assets to fixed assets ratio:

This ratio helps in understanding firm's investment in current assets and

fixed assets and its liquidity preference.

Year Current assets Fixed assets Ratio

2013-14 4082.01 7857.85 0.51

2014-15 4083.58 9112.24 0.44

2015-16 4237.60 9865.05 0.42

2016-17 13701.89 11040.56 1.24

2017-18 36962.44 12623.56 2.92

INTERPRETATION:

By analyzing the above data we can say that the organizations current assets are

increasing constantly. Whereas the fixed assets of the organization is decreasing

gradually this affects the ratio to increase year by year.

104
 8. Current assets to fixed assets ratio:

This ratio helps in understanding firm's investment in current assets and fixed

assets and its liquidity preference.

Year Current assets Fixed assets Ratio

2013-14 4082.01 7857.85 0.51

2014-15 4083.58 9112.24 0.44

2015-16 4237.60 9865.05 0.42

2016-17 13701.89 11040.56 1.24

2017-18 36962.44 12623.56 2.92

INTERPRETATION:

By analyzing the above data we can say that the organizations current assets are

increasing constantly. Whereas the fixed assets of the organization is decreasing

gradually this affects the ratio to increase year by year.

105
 9. Proprietary Ratio

Proprietary Ratio = Shareholders Fund*100 / Total Assets

Year wise Shareholders Fund Total Assets (Rs. in lakhs)

YEAR SHAREHOLDERS FUND TOTAL ASSETS RATIO

2012-13 14030.94 1984.50 707

2013-14 14030.65 1761.89 796

2014-15 13323.51 1138.70 1170

2015-16 13323.51 1877.13 709

2016-17 13323.51 3285.63 405

2017-18 13819.88 4946.93 279

INTERPRETATION:

The idle ratio is 1:3. Here it is more than 13. It is 707 in 2012-13 and it increased

to 1170 in 2014-15 and it decreased to 709 & 405 and 279 in 2015-16 to 2017-

2018.It means it using a major portion of shareholders funds for purchase of total

assets.

106
 10.Fixed Assets Ratio

Fixed Assets Ratio =Fixed Assets*100 / Shareholders Fund

Year wise Fixed Assets & Shareholders Fund (Rs. in lakhs)

YEAR FIXED ASSETS SHAREHOLDERS FUND RATIO

2012-13 1950.87 14030.94 13.90

2013-14 1728.23 14030.65 12.32

2014-15 1105.12 13323.51 8.29

2015-16 1856.99 13323.51 13.94

2016-17 1715.75 13323.51 12.88

2017-18 3070.92 13819.88 22.22

INTERPRETATION:

This ratio shows if percentage of proprietor's funds locked up in fixed assets

namely for in detail establishment, this can be 22 percent of the proprietors funds.

It is 13.90 in 2014-15. Even though it is ratio to 12.32 in the year 2015-16 but

came down drastically in next 3 year. It’s almost touched 22.22 in the year 2017-

18. So steps should be taken to improve this position.

107
 11.Current Assets to Fixed Assets Ratio

Current Assets to Fixed Assets Ratio = Current Assets / Fixed Assets

Year wise Current Assets & Fixed Assets (Rs. in lakhs)

YEAR CURRENT ASSETS FIXED ASSETS RATIO

2012-13 4179.18 1950.87 2.14

2013-14 5496,83 1728.23 3.18

2014-15 1163621 1105.12 10.53

2015-16 1327541 1856.99 7.16

2016-17 14029 31 1715.75 8.18

2017-18 2037392 3070.92 6.63

INTERPRETATION:

There is no standard ratio for this. It differs from one industry to another. It is

2.14 in the year 2012131 went up slowly during the year 2013-14 and 2014-

15.Again it fall down to 818 and 6.63 during two years 2016-17 and 2017-18. It

indicates that business is grip on average or mechanization is introduced rapidly.

108
109
 11. Return on Investments

Return on Capital Employed Ratio = Net Profit*100/ shareholders fund

Year wise Net Profit & Capital Employed (Rs. in lakhs)

YEAR NET PROFIT Shareholders fund RATIO

2005-06 794.78 1403094 5.66

2006-07 1296.58 1403065 9.24

2007-08 7698.43 1332351 57.78

2008-09 3814.70 1332351 28.63

2009-10 1403.11 1332351 10.53

2010-11 3311.78 1381988 23.96

INTERPRETATION:

This ratio shows overall performance of a corporate investments. It is 5.66 in

2012-13. Even though it went up in its next there year. again it came down to

10.53 in 2015-17 and then again to 23.96 in 2010-18. It represents a better

investments.

110
111
 12. Return on Total Assets Ratio

Return on Total Assets Ratio = Net Profit 100 / Total Assets

Year wise Net Profit & Total Assets (Rs. in lakhs)

YEAR NET PROFIT TOTAL ASSETS RATIO

2012-13 794.78 1984.50 40.05

2013-14 1296.58 1761.89 73.59

2014-15 7698.43 1138.70 676.07

2015-16 3814.70 1877.13 203.21

2016-17 1403.11 3285.63 42.70

2017-18 331178 4946.93 66.94

INTERPRETATION:

This ratio shows how best if company's total assets are used to get net profit. It is

40.05 in the year 2012-13. It gradually went up from 2014-15 to 2015-17. But

again it came down to 10.53 in 2015-16 and then again to 23.96 in 2010-18. It

represents better investments.

112
5.4Cash Flow Statement

Particulars (Rs.) (Rs.)

113
A.CASH FLOW FROM OPERATING

ACTIVITIES

Profit after tax and share in profit/(loss) of associates 3,466.35

Adjustments for:

Add: Depreciation and amortisation 624.44

Income tax expense 1,637.95

Loss on property, plant and equipment 6.47

sold/discarded Finance cost 37.18

Employee Stock Compensation Cost 6.55

2,312.61

Less: Interest income on financial assets carried at 288.03

amortised cost Dividend income 71.76

Profit on sale of investments 144.61

Gain on investments carried at fair value through profit 175.11

or loss Share of profit in associates 60.19

Profit on sale of property, plant and equipment 0.66

Foreign currency translation (net) (9.91)

730.45

Operating profit before working 5,048.51

capital Changes in working capital:

Adjustment for (increase)/decrease in operating assets:

Inventories (286.86)

Trade receivables 124.78 (1,318.14)

Loans-Current 3.42

114
Loans-Non-Current (14.28)

Other financial assets-current (111.04)

Other current assets (49.41)

Other non-current assets 46.88

(1,729.43)

Adjustment for increase/decrease in operating liabilities:

Trade payables 62.98

Other financial liabilities-Current 2.07

Other current liabilities (264.13)

Short-term provisions (19.01)

Long-term provisions 1.76

(216.34)

Cash generated from operations 3,102.74

Less: Direct tax paid 2,070.46

Net cash generated from operating activities 1,032.27

B. CASH FLOW FROM INVESTING

ACTIVITIES

Capital expenditure on property, plant & equipment and (979.56)

intangible assets including capital advances

Proceeds from sale of property, plant & equipment 4.17

Deposits more than 12 months and other than cash and (22.65)

cash equivalents

Sale of investments 42,020.45

Purchase of investments (39,456.26)

115
Investment in associates (net of dividend received) (628.30)

Interest income on financial assets carried at amortised 288.03

cost

Dividend income 71.76

Net cash generated from / (used) in investing 1,297.63

activities

C. CASH FLOW FROM FINANCING

ACTIVITIES

Interest paid (36.93)

Dividends paid (1,928.60)

Tax on dividend (390.01)

Additions to minority interest 17.55

Proceeds from issue of equity share capital (including 1.98

securities premium)

Proceeds/ repayment of non current borrowings and (24.79)

finance lease obligation

Proceeds/ repayment of current borrowings 108.40

Net cash (used) in financing activities (2,252.40)

D. INCREASE/(DECREASE) IN CASH AND 77.51

CASH EQUIVALENTS (A+B+C)

Cash and cash equivalents at the beginning of the year 130.61

Cash and cash equivalents at the end of the year 208.12

116
 Chapter 5-

Conclusions,

Suggestions and

Limitations of the

Study
117
6.1Findings

1. Company's is utilizing long term loans to finance fixed assets and

investments but it has started relying on own funds.

2. There is decrease in gross profit of the company due to increase

in cost of goods sold but there is increase in net profits due to

increase in sales.

3. Debtors are also increasing which is not good sign for the

company in long run.

4. Current liabilities are increasing by 20.61 %. Where as cash

decreases very much by 68.14%.

5. There is stability in equity share capital.

6.2 Suggestions

The Company is enjoying a good current position. It should take steps to further

improve its position by repositioning the composition of current assets as large

amount has been block in debtors and inventories.

1. Large amounts of funds are blocked in debtors. Company should reduce its

debtors so that the blocked amount is properly utilized.

2. Inventory control is not proper. The Company has not defined the

minimum and the maximum stock level scientifically.

118
Therefore there is blockage of funds. Moreover, the safety stock level is also not

defined. So the company should apply the proper Inventory Control System so

that there is no wastage of funds.

3. Company's should increase its share capital instead of raising loans to

finance fixed assets.

6.3 Limitations

Financial analysis is a powerful mechanism of determining financial

strength and weakness of a firm. But the analysis is based on the

information available in the financial statements. Thus the financial

analysis suffers from some serious inherent limitation of financial

statements, which are as follows:

1. It is only a study of interim reports

2. Financial analysis is based only upon monetary information & non monetary

factors are ignored.

3. It does not consider changes in price level.

4. As financial statement are prepared on the basis of a going concern, it does not give

exact position.

5. Changes in accounting procedure by a firm may often make financial analysis

misleading.

6. Analysis is only a mean not an end in itself. The analyst has to make interpretation

and draw his own conclusion.

119
6.4 Conclusion

Even though company is utilizing its own funds there is very need that company

should improve its liquidity position, debtors collection period and proper

management of its current assets and current liabilities.

The external debt of the company decreased gradually. This is mainly due to

repayment of a portion of term loans. Another reason for decrease in external debt

is due to increase in reserves and surplus.

The year was 356.24crores this indicates there is possible growth of the company

in the market during 2011-2012.

Chemistar India Pvt. Ltd. has undertaken research program, modernization and

technology up gradation, for the above said expansion programs it has made use

of surplus funds only and did not go for outsider's debts, which is one of the good

long- term financial policy of Chemistar India Pvt. Ltd.

120
 BIBLIOGRAPHY

Books References:

1. Annual Reports of Chemistar India Pvt. Ltd. of the past 5 years.

2. I.M.Pandey - "Financial Management. Theory & Practice"- Kalyani

Publishers, New Delhi, 2003.

3. M.Y.Khan PK Jain "Financial management- Theory & Problem".

McGraw-Hill Publication Company Limited, New Delhi. 2007

4. Financial Accounting-1. book relating to School of Distance Education.

5. Cost & Management accounting, book relating to School of Distance

Education.

Internet:

Official website of Chemistar India Pvt. Ltd.-

https://www.chemistar.net/

121
Checklist of items for the Final Project Report

1. Is the report properly hard bound. Yes

2. Is the Cover page in proper format as given in Annexure A? Yes

3. Is the Title page (Inner cover page) in proper format? Yes

4. (a) Is the Certificate from the Supervisor in proper format? Yes

(b) Has it been signed by the Supervisor? Yes

5. Is the Abstract included in the report properly written within one page? Yes

Have the keywords been specified properly? Yes

6. Is the title of your report appropriate? The title should be adequately Yes

descriptive, precise and must reflect scope of the actual work done.

7. Have you included the List of abbreviations / Acronyms? Uncommon Yes

abbreviations / Acronyms should not be used in the title.

8. Does the Report contain a summary of the literature survey? Yes

9. Does the Table of Contents include page numbers? Yes

(i). Are the Pages numbered properly? Yes

(ii). Are the Figures numbered properly? (Figure Numbers and Figure Yes
Titles at the bottom of the figures)
Yes
(iii). Are the Tables numbered properly? (Table Numbers and Table
Yes
Titles at the top of the tables)

122
 (iv). Are the Captions for the Figures and Tables proper? Yes

(v). Are the Appendices numbered properly? Yes

10. Is the conclusion of the Report based on discussion of the work? Yes

11. Are References or Bibliography given at the end of the Report? Yes

Have the References been cited properly inside the text of the Report? Yes

Is the citation of References in proper format? Yes

12. Have you written your report according to the guidelines? Yes

The report should not be a mere printout of a Power Point Presentation.

source code need not be included in the report.

13. A Compact Disk (CD) containing the softcopy of the Final Report and a copy Yes
of the Final Seminar Presentation made to the Supervisor / Examiner
(both preferably in PDF format only) has been placed in a protective
jacket securely fastened to the inner back cover of the Final Report.
Please write your name and Roll No with a marker on the CD as
well as the CD Jacket.

123