T.s. grewal book part 3

Financial Statements of a Company
1
C H A P T E R
MEANING OF KEY TERMS USED IN THIS CHAPTER
BALANCE SHEET
EQUITY AND LIABILITIES
1. Shareholders’ Funds Shareholders’ Funds are the funds belonging to the
shareholders of the company. They consist of Share Capital;
Reserves and Surplus and Money received against Share
Warrants.
(a) Share Capital It is the amount received by the company as capital. It includes
both Equity Share Capital and Preference Share Capital.
(b) Reserves and Surplus:
Reserves It is the amount set aside out of Surplus, i.e., Balance
in Statement of Profit and Loss or amount received as
Securities Premium. A reserve may be free reserve or
committed reserve.
Surplus It is the amount of accumulated profit which may be appropriated
towards reserve or for payment of dividend.
(c) Money Received against It is the amount received against Share Warrants. Share

Share Warrants Warrants are the financial instruments which give the holder the
right to acquire Equity Shares in the company at a specified
date and at a specified rate.
2. Share Application Money It is the amount received as share application and against

Pending Allotment which the company will make allotment.
3. Non-Current Liabilities Non-current Liabilities are defined in Schedule III of the
Companies Act, 2013 as those liabilities which are not current
liabilities. These are sub-classified into: Long-term Borrowings;
Deferred Tax Liabilities (Net); Other Long-term Liabilities; and
Long-term Provisions.
(a) Long-term Borrowings Long-term borrowings are the borrowings which as on the date
of borrowing are repayable after more than 12 months from
the date of Balance Sheet or after the period of Operating
Cycle.
(b) Deferred Tax Liabilities It is the amount of tax on the temporary difference between

(Net) the accounting income and taxable income. It is only a book
entry and not an actual liability. It arises when accounting
income is more than the taxable income.
(c) Other Long-term Liabilities They are the Long-term Liabilities other than Long-term
Borrowings of the company.
(d) Long-term Provisions These are the provisions for liabilities that will be payable
after 12 months from the date of Balance Sheet or after the
period of Operating Cycle.

1.2 Analysis of Financial Statements—CBSE XII
4. Current Liabilities Current Liabilities are those liabilities which are:
(a) expected to be settled in company’s normal Operating
Cycle; or
(b) due to be settled within 12 months after the reporting date.
(Reporting date is the date on which financial statements
are prepared); or
(c) held primarily for the purpose of being traded; or
(d) there is no unconditional right to defer settlement for at least
12 months after the reporting date.
5. Operating Cycle It is the time between the acquisition of assets for processing
and their realisation into Cash and Cash Equivalents. Where
the Operating Cycle cannot be identified, it is assumed to be
a period of 12 months.
Operating Cycle can be different for different businesses.
Current Liabilities are classified into Short-term Borrowings; Trade Payables; Other Current
Liabilities; and Short-term Provisions.
(a) Short-term Borrowings These are the borrowings that are repayable within 12 months
from the date of Balance Sheet or within the period of Operating
Cycle.
(b) Trade Payables These are the amounts payable within the period of 12 months
from the date of Balance Sheet or within the period of Operating
Cycle for goods purchased or services taken in the ordinary
course of business. It includes Bills Payable and Sundry Creditors.
(c) Other Current Liabilities These are short-term liabilities, other than short-term borrowings,
trade payables and short-term provisions.
(d) Short-term Provisions These are provisions for liabilities that will be payable within
12 months from the date of Balance Sheet or within the period
of Operating Cycle.
ASSETS
6. Non-Current Assets Non-current assets are those assets which are not current
assets. These are sub-classified into: Fixed Assets; Non-current
Investments; Deferred Tax Assets (Net); Long-term Loans and
Advances; and Other Non-current Assets.
(a) Fixed Assets
(i) Tangible Assets These are the assets which have physical existence, i.e., can
be seen and touched. Examples are: land, building, machinery
and computers, etc.
(ii) Intangible Assets These are the assets which do not have physical existence, i.e.,
cannot be seen and touched. Examples are: patents, trademarks
and computer software, etc.
(iii) Capital Work-in- Capital Work-in-Progress means expenditure incurred on

Progress construction or development of tangible assets not yet complete.
(iv) Intangible Assets Intangible Assets Under Development means expenditure

Under Development incurred on development of intangible assets not yet complete.
(b) Non-Current Non-current Investments are those investments that are

Investments invested to be held for a period of more than 12 months from
the date of Balance Sheet or for a period that is more than
the period of Operating Cycle.

Financial Statements of a Company 1.3
A trade investment is an investment made by the company in another
company for the furtherance of its own business. It is
non-current investment when it is invested to be held for more
than 12 months from the date of Balance Sheet or for a period
that is more than the period of Operating Cycle.
(c) Deferred Tax Assets (Net) It is the amount of tax on the temporary difference between the
accounting income and taxable income. It is only a book entry
and not an actual asset. It arises when accounting income is
less than the taxable income.
(d) Long-term Loans and Long-term Loans and Advances are loans and advances

Advances given by the company that are repayable or adjustable after
12 months from the date of Balance Sheet or after the period
of Operating Cycle.
(e) Other Non-Current All non-current assets that are not shown or classified under

Assets the above heads are Other Non-current Assets.
7. Current Assets Current assets are those assets which are:
(a) expected to be realised in or intended for sale or consumption in
normal Operating Cycle of the company; or
(b) held primarily for the purposes of trading; or
(c) expectedtoberealisedwithin12monthsfromthereportingdateor
closing date. (Reporting date is the date for which financial
statements are prepared.); or
(d) Cash and Cash Equivalent unless it is restricted from being
exchanged or used to settle a liability for at least
12 months after the reporting date.
Current Assets are classified into Current Investments; Inventories; Trade Receivables; Cash
and Cash Equivalents; Short-term Loans and Advances; and Other Current Assets.
(a) Current Investments Current Investments are those investments that are invested
to be held for a period of less than 12 months from the date
of Balance Sheet or within the period of Operating Cycle.
(b) Inventories Inventories (stock) is a tangible asset held:
(i) for the purpose of sale in the normal course of business; or
(ii) for the purpose of using it in the production of goods meant for
sale or service to be rendered.
In case of trading company, it comprises of stock of goods
traded in.
In case of a manufacturing company, it comprises of raw materials,
work-in-progress and finished goods.
Inventories are valued at lower of cost or net realisable
value, i.e., market price.
(c) Trade Receivables Trade receivables are the amounts receivable within 12 months
from the reporting date or within the period of Operating Cycle
for sale of goods or services rendered in the normal course of
business. It includes Bills Receivable and Sundry Debtors.
(d) Cash and Cash It includes cash in hand and balance with bank.
Equivalents
(e) Short-term Loans and Short-term Loans and Advances are loans and advances

Advances given by the company that are receivable or adjustable within
12 months from the date of Balance Sheet or within the period
of Operating Cycle.
(f) Other Current Assets All other current assets that are not shown or classified under
the above heads are shown as Other Current Assets.


STATEMENT OF PROFIT AND LOSS
8. Revenue from Operations It is the revenue earned by the company from its operating
activities, i.e., business activities carried on by the company
to earn profit.
9. Other Income It is the revenue earned by the company from the sources
other than its operating activities.
10. Cost of Materials Consumed It is the aggregate of cost of raw materials and other materials
used in manufacture of goods.

11. Purchase of Stock-in-Trade It means purchases of goods for resale, i.e., goods purchased
on which no further process is carried before sale.

12. Changes in Inventories of It is the sum of difference between the opening inventories and
Finished Goods, WIP and closing inventories of Finished Goods, WIP and Stock-in-Trade.
Stock-in-Trade It is shown separately in the Notes to Accounts as single amount
on the face of the Statement of Profit and Loss.
13. Employees Benefit Expenses These are the expenses incurred for the benefit of employees.
Examples are: wages, salaries, bonus, staff welfare and
medical reimbursement, etc.

14. Finance Costs These are the expenses of the company incurred to borrow, i.e.,
loans taken by it and cost incurred to service the borrowings.
15. Depreciation and Amortisation Depreciation is allocation of cost of fixed asset over its useful

Expenses life. In other words, it is the fall in the value of fixed assets due
to its usage or efflux of time or obsolescence. Amortisation is
the term associated with writing off intangible assets.
16. Other Expenses Expenses that do not fall in the above classifications are
shown as Other Expenses.
Expenses shown under Employees Benefit Expenses and Other Expenses may be further
shown as Direct and Indirect Expenses. Other Expenses may be shown under different heads,
say Administrative Expenses, Selling and Distribution Expenses and General Expenses, etc.
CHAPTER SUMMARY
• The annual accounts of a company consist of Balance Sheet as at the end of the financial year, Statement
of Profit and Loss for the financial year, Notes to Accounts giving details of items in the Balance Sheet
and Statement of Profit and Loss and Cash Flow Statement. These are collectively known as Financial
Statements.
• The form and content of Balance Sheet and Statement of Profit and Loss are prescribed in Part I and
Part II of Schedule III of the Companies Act, 2013 respectively.
• A single amount is shown against each line item of the Balance Sheet and Statement of Profit and Loss
while the details are given in the Notes to Accounts of the line item.
• Balance Sheet is a statement which shows the financial position of the company as at the end of the
financial year.
• Statement of Profit and Loss is a statement which shows the profit earned or loss incurred during the
financial year.
• Appropriation of Profit: Profit is appropriated out of ‘Surplus, i.e., Balance in Statement of Profit and Loss’
under Reserves and Surplus. Profit for the year (as per Statement of Profit and Loss) is added to the
opening balance of Surplus, i.e., Balance in Statement of Profit and Loss and thereafter appropriation is
made towards other reserves (say Debentures Redemption Reserve) or Dividend declared (approved) by
the shareholders. The appropriations made towards other reserves are added to that reserve. Proposed
Dividend for the Current Year is not provided (accounted) in the books but is shown in the Notes
to Accounts as Contingent Liability.

NOTE
The AS-4 Revised, Contingencies and Events Occurring After the Balance Sheet Date
prescribes that dividend proposed by the Board of Directors, i.e., Proposed Dividend for the
Current Year is not to be provided in the books of account but is to be disclosed (shown)
in the Notes to Accounts. Proposed dividend of the current year is shown in the Notes
to Accounts and proposed dividend of the previous year, if declared (approved) by the
shareholders in the AGM, is shown as appropriation from Surplus, i.e., Balance in Statement
of Profit and Loss.
• Provision means amount written off or retained by way of depreciation or for known liabilities, amount
of which cannot be determined with accuracy.
• Reserve means amount set aside out of profit and other surpluses for specific or general purposes.
IMPORTANT NOTE
According to CBSE Circular No. Acad-43/2013 dated 2nd July, 2013 on Schedule VI of
the Companies Act, 1956 (Now Schedule III of the Companies Act, 2013) accounting
treatment of certain items is not to be evaluated in the examination. The circular
clarifies that although accounting treatment of certain items will not be evaluated but,
their presentation in the Balance Sheet as per Schedule VI of the Companies Act, 1956
(now Schedule III of the Companies Act, 2013) can be examined.
According to the circular accounting treatment of following will not be evaluated:
(i) Reserves and Surplus: (Revaluation Reserve, Share Options Outstanding and Other
Reserves are not to be evaluated. However, General Reserve can be evaluated);
(ii) Money Received against Share Warrants;
(iii) Share Application Money Pending Allotment;
(iv) Deferred Tax Liabilities (Net);
(v) Other Long-term Liabilities;
(vi) Intangible Assets: (Masthead and Publishing Titles, Copyrights and Patents and
Other Intellectual Property Rights, Services and Operating Rights and Licences and
Franchise are not to be evaluated);
(vii) Capital Work-in-Progress;
(viii) Intangible Assets Under Development;
(ix) Deferred Tax Assets (Net);
(x) Other Non-current Assets;
(xi) Cash and Cash Equivalents: (Earmarked Balance with Banks, Balances with Banks held
as Margin Money or Security against borrowings, guarantees, other commitments
and Bank Deposits with more than 12 months maturity are not to be evaluated); and
(xii) Treatment of Unamortised Expenses.
Also note: Accounting Treatment of Other Current Assets is restricted to Prepaid Expenses,
Accrued Incomes and Advance Tax only.
The expression ‘Not to be evaluated’ used in the circular, means that a student will not be
examined for the above items in the examination in the topics of Comparative Statements,
Common-size Statements, Accounting Ratios and Cash Flow Statement. In simple words,
questions on Comparative Statements, Common-size Statements, Accounting Ratios and
Cash Flow Statement will not have entries or items from above heads.
Thus, these items have not been included in the illustrations and questions in this chaper.

Format of the Balance Sheet
The format of Balance Sheet as prescribed in Part I of Schedule III of the Companies Act,
2013, is as follows:
Name of the Company...
BALANCE SHEET as at... (` in ...)
Particulars Note Figures as at the Figures as at the
No. end of the Current end of the Previous
Reporting Period Reporting Period
(1) (2) (3) (4)
I. EQUITY AND LIABILITIES
1. Shareholders’Funds
(a) Share Capital ... ...
(b) Reserves and Surplus ... ...
(c) Money Received against Share Warrants ... ...
2. Share Application Money Pending Allotment ... ...
3. Non-Current Liabilities
(a) Long-term Borrowings ... ...
(b) Deferred Tax Liabilities (Net) ... ...
(c) Other Long-term Liabilities ... ...
(d) Long-term Provisions ... ...
4. Current Liabilities
(a) Short-term Borrowings ... ...
(b) Trade Payables ... ...
(c) Other Current Liabilities ... ...
(d) Short-term Provisions ... ...
Total ... ...
II. ASSETS
1. Non-Current Assets
(a) Fixed Assets:
(i) Tangible Assets ... ...
(ii) Intangible Assets ... ...
(iii) Capital Work-in-Progress ... ...
(iv) Intangible Assets under Development ... ...
(b) Non-current Investments ... ...
(c) Deferred Tax Assets (Net) ... ...
(d) Long-term Loans and Advances ... ...
(e) Other Non-current Assets ... ...
2. Current Assets
(a) Current Investments ... ...
(b) Inventories ... ...
(c) Trade Receivables ... ...
(d) Cash and Cash Equivalents ... ...
(e) Short-term Loans and Advances ... ...
(f ) Other Current Assets ... ...
Total ... ...

Format of Statement of Profit and Loss
Format of the Statement of Profit and Loss is prescribed in Part II of Schedule III of the
Companies Act, 2013, as follows:
for the year ended ...
Particulars Note Figures Figures
No. for the Current for the Previous
Reporting Period Reporting Period
I. Revenue from Operations ... ...
II. Other Income ... ...
III. Total Revenue (I + II) ... ...
IV. Expenses
Cost of Materials Consumed ... ...
Purchases of Stock-in-Trade ... ...
Changes in Inventories of Finished Goods,
Work-in-Progress and Stock-in-Trade ... ...
Employees Benefit Expenses ... ...
Finance Costs ... ...
Depreciation and Amortisation Expenses ... ...
Other Expenses ... ...
Total Expenses ... ...
V. Profit before Tax (III – IV) ... ...
VI. Less: Tax ... ...
VII. Profit or Loss for the Period (V – VI) ... ...
The column for Note No. is prescribed for the purpose of cross reference to the Note No. in the
Notes to Accounts where detail of the line item is given.
IMPORTANT NOTE
CBSE has prescribed that Exceptional Items, Extraordinary Items and Discontinued
Operations are excluded. Therefore, these items have not been shown in the format.

Definition of Authorised Capital [Section 2(8) of the Companies Act, 2013] “Authorised
Capital” or “Nominal Capital” means such capital as is authorised by the memorandum
of a company to be the maximum amount of share capital of the company.

Definition of Issued Capital [Section 2(50) of the Companies Act, 2013] “Issued
Capital” means such capital as the company issues from time to time for subscription.

Definition of Subscribed Capital [Section 2(86) of the Companies Act, 2013]
“Subscribed Capital” means such part of the capital which is for the time being
subscribed by the members of a company.
Definition of Called-up Capital [Section 2(15) of the Companies Act, 2013] “Called-up
Capital” means such part of the capital, which has been called for payment.
Definition of Paid-up Share Capital or Share Capital Paid-up [Section 2(64) of the Companies
Act, 2013] “Paid-up Share Capital” or “Share Capital Paid-up” means such aggregate of
money credited as paid-up as is equivalent to the amount received as paid-up in respect
of shares issued and also includes any amount credited as paid-up in respect of shares of
a company, but does not include any other amount received in respect of such shares,
by whatever name called.

Capital Reserve
A reserve created out of the capital profit is known as Capital Reserve. It is created
out of the profit earned from transactions of capital nature and is not available for the
distribution to the shareholders as dividend. The examples of capital profit from which
capital reserve is created are:
• Gain (Profit) on sale of fixed assets; • Gain (Profit) on sale of investment;
• Gain (Profit) on reissue of forfeited shares; and
• Gain (Profit) on purchase of an existing business.
Capital Redemption Reserve
Capital Redemption Reserve is a reserve created when a company buys its owns shares
out of free reserves or Securities Premium Reserve. Section 69(1) of the Companies
Act, 2013, requires that a sum equal to nominal value of shares so purchased shall be
transferred to Capital Redemption Reserve. The reserve may be used by the company
to issue fully-paid bonus shares.
Section 55 of the Companies Act, 2013, requires that where preference shares are
redeemed out of profits which would be otherwise available for declaration of dividend
a sum equal to Nominal (face) Value of the shares redeemed must be transferred to
‘Capital Redemption Reserve’.
Securities Premium Reserve
Securities Premium Reserve is a reserve to which amount received in excess of the
nominal (face) value of securities (shares, debentures, etc.) is credited. It can be used
by a company for the purposes stated in Section 52(2) of the Companies Act, 2013.
Debentures Redemption Reserve (DRR)
Debentures Redemption Reserve is a reserve credited by the amount prescribed under
Section 71(4) of the Companies Act, 2013 and Rule 18(7)(b) of the Companies (Share
Capital and Debentures) Rules, 2014 by a company before redemption of debentures
commences. In respect of partly convertible debentures, DRR is created only for non-
convertible portion of debentures.
DRR is not required for debentures issued by Banking Companies and All India Financial
Institutions (AIFIs) regulated by Reserve Bank of India.
Revaluation Reserve
Revaluation Reserve is a reserve which is credited by the upward revision of the book
value of an asset. It is debited when the value of that asset is revised downward or the
asset is sold or discarded. The amount standing to the credit of Revaluation Reserve
Account cannot be used for payment of dividend or issuing bonus shares.
Shares Options Outstanding Account
Shares Options Outstanding Account is a reserve to which difference between the market
value and issue price of shares issued to employees is credited over the vesting period.
For example, the market price of the share is ` 75 and is to be issued to employees at
` 50. The difference, ` 25 (i.e., ` 75 – ` 50) should be credited to this reserve.

Disclosure of Important Items in the Company’s Balance Sheet as per Schedule III
S.No. Items Main Head Sub-head
1. Debentures Non-current Liabilities Long-term Borrowings
2. Public Deposits Non-current Liabilities Long-term Borrowings
3. Securities Premium Reserve Shareholders’Funds Reserves and Surplus
4. Capital Reserve Shareholders’Funds Reserves and Surplus
5. Forfeited Shares Account Shareholders' Funds SubscribedCapital(Shownbywayofaddition)
6. Interest Accrued and due Current Liabilities Other Current Liabilities
on Debentures
7. Interest Accrued but not due Current Liabilities Other Current Liabilities
on Debentures
8. Bills Payable Current Liabilities Trade Payables
9. Advances Received from Current Liabilities Other Current Liabilities
Customers
10. Sundry Creditors Current Liabilities Trade Payables
11. Unclaimed Dividend Current Liabilities Other Current Liabilities
12. Calls-in-Arrears Shareholders’Funds Subscribed Capital (shown by way of deduction
from subscribed but not fully paid-up)
13. Calls-in-Advance and Interest Current Liabilities Other Current Liabilities
thereon
14. Interest Accrued but not due Current Liabilities Other Current Liabilities
on Unsecured Loans
15. Debentures Redemption Reserve Shareholders’Funds Reserves and Surplus
16. Capital Redemption Reserve Shareholders’Funds Reserves and Surplus
17. Advances from Customers Non-current Liabilities Other Long-term Liabilities
(Long-term)
18. Trade Payables Current Liabilities Trade Payables
19. Provision forTax Current Liabilities Short-term Provisions
20. Surplus,i.e.,Balance in Statement Shareholders’Funds Reserves and Surplus
of Profit and Loss (Dr.) (As negative amount)
21. Surplus,i.e.,Balance in Shareholders’Funds Reserves and Surplus
Statement of Profit and Loss
22. Mortgage Loan Non-current Liabilities Long-term Borrowings
23. Patents Non-current Assets Fixed Assets—Intangible Assets
24. Investments Non-current Assets Non-current Investments
25. General Reserve Shareholders’Funds Reserves and Surplus
26. Bills Receivable Current Assets Trade Receivables
27. Debentures Repayable after 3 yrs. Non-current Liabilities Long-term Borrowings
28. LooseTools Current Assets Inventories
29. Current Maturities of Long-term Current Liabilities Other Current Liabilities
Debts

30. Premium on Redemption of Non-current Liabilities Other Long-term Liabilities
Debentures
31. Balances with Banks Current Assets Cash and Cash Equivalents
32. Tax Reserve Shareholders’Funds Reserves and Surplus
33. Stores and Spares Current Assets Inventories
34. Mining Rights Non-current Assets Fixed Assets—Intangible Assets
35. EncashmentofEmployeesEarned Non-current Liabilities Long-term Provisions
Leave Payable on Retirement
36. Subsidy Reserve Shareholders’Funds Reserves and Surplus
37. Copyrights Non-current Assets Fixed Assets—Intangible Assets
38. Accrued Incomes Current Assets Other Current Assets
39. ProvisionforEmployeesBenefits Non-Current Liabilities Long-term Provisions
40. Unpaid/unclaimed Dividend Current Liabilities Other Current Liabilities
41. Short-term Loans Current Liabilities Short-term Borrowings
42. Long-term Loans Non-Current Liabilities Long-term Borrowings
43. Share Options Outstanding Account Shareholders’Funds Reserves and Surplus
44. Computers Non-current Assets Fixed Assets—Tangible Assets
45. Goodwill Non-current Assets Fixed Assets—Intangible Assets
46. Sundry Debtors Current Assets Trade Receivables
47. Long-term Investments Non-current Assets Non-current Investments
48. Prepaid Insurance Current Assets Other Current Assets
49. Building Non-current Assets Fixed Assets—Tangible Assets
50. General Reserve Shareholders’Funds Reserves and Surplus
51. Bonds Non-current Liabilities Long-term Borrowings
52. Loans repayable on demand Current Liabilities Short-term Borrowings
53. Income received in advance Current Liabilities Other Current Liabilities
54. Office Equipments Non-current Assets Fixed Assets—Tangible Assets
55. Trademarks Non-current Assets Fixed Assets—Intangible Assets
56. AdvanceTax Current Assets Other Current Assets
57. Bank Overdraft Current Liabilities Short-term Borrowings
58. Cheques/Drafts in Hand Current Assets Cash and Cash Equivalents
59. Stock-in-Trade Current Assets Inventories
60. Long-term Provisions Non-current Liabilities Long-term Provisions
61. Stock of Finished Goods Current Assets Inventories
62. Computer software Non-current Assets Fixed Assets—Intangible Assets
63. Work-in-Progress (Building) Non-current Assets Fixed Assets—CapitalWork-in-Progress
64. Intellectual Property Rights Non-current Assets Fixed Assets—Intangible Assets under under
under Development Development
65. Proposed Dividend ... As Contingent Liability in Notes to Accounts
66. Provision for Expenses Current Liabilities Short-term Provisions
67. Capital Advances Non-current Assets Long-term Loans and Advances
68. Designs Non-current Assets Fixed Assets—Intangible Assets
69. Shares in Companies Non-current Assets Non-current Investments

Disclosure of Important Items in Company’s Statement of Profit and Loss as per Schedule III
S.No. Item Major Head Sub-head
1. Sale of Products Revenue Revenue from Operations
2. Sale of Services Revenue Revenue from Operations
3. Trading Commission Revenue Revenue from Operations
4. Interest Income Revenue Other Income
5. Interest Income of a Finance Company Revenue Revenue from Operations
6. Dividend Income of a Finance Company Revenue Revenue from Operations
7. Dividends from Companies Revenue Other Income
8. Rental Income Revenue Other Income
9. Selling and Marketing Expenses Other Expenses
Expenses
10. Opening Inventories of Expenses Changes in Inventories of
Finished Goods,Work-in- Finished Goods,Work-in-
progress and Stock-in-trade progress and Stock-in-trade
11. Discount/Loss on Issue of Expenses Finance Costs
Debentures written off
12. Salary Expenses Employees Benefit Expenses
13. Excess Provision written Revenue Other Income
back
14. Rent of Factory Expenses Other Expenses
15. Audit Fee Expenses Other Expenses
16. Purchase of Material Expenses Cost of Materials Consumed
17. Rent of Office Building Expenses Other Expenses
18. Carriage Outwards Expenses Other Expenses
19. Wages Expenses Employees Benefit Expenses
20. Leave Encashment Expenses Employees Benefit Expenses
21. Gain (Profit) on Sale of Building Revenue Other Income
22. Goodwill Amortised Expenses Depreciation and
Amortisation Expenses
23. Carriage Inwards Expenses Other Expenses
24. Miscellaneous Expenses Expenses Other Expenses
25. Cash Discount Received Revenue Other Income
26. Interest on Loans Expenses Finance Costs
27. Bonus to Employees Expenses Employees Benefit Expenses
28. Interest on Fixed Deposits Revenue Other Income
29. Gratuity Paid Expenses Employees Benefit Expenses
30. Depreciation on Expenses Depreciation and
Computers/Furniture Amortisation Expenses
31. Electricity Expenses Expenses Other Expenses
32. Bank Charges Expenses Other Expenses
33. Repair to Machinery Expenses Other Expenses

Illustration 1.
Under what heads and sub-heads the following items will appear in the Balance Sheet of
a company as per Schedule III, Part I of the Companies Act, 2013:
(i) Mining Rights;
(ii) Encashment of Employees Earned Leave Payable on Retirement;
(iii) Vehicles. (AI 2013, Modified)
Solution:
S.No. Items Main Head Sub-head
(i) Mining Rights Non-current Assets Fixed Assets—Intangible Assets
(ii) Encashment of Employees Earned Non-current Liabilities Long-term Provisions
Leave Payable on Retirement
(iii) Vehicles Non-current Assets Fixed Assets—Tangible Assets
Illustration 2.
From the following Trial Balance of West Coast Ltd. for the year ended 31st March, 2018, prepare
Statement of Profit and Loss as per Part II of Schedule III of the Companies Act, 2013:
Particulars Debit Balance (`) Credit Balance (`)
Share Capital ... 10,00,000
Securities Premium Reserve ... 2,50,000
9% Debentures ... 5,00,000
Bank Overdraft ... 2,00,000
Dividend Payable ... 1,00,000
Provision for Tax ... 1,50,000
Fixed Assets 17,50,000 ...
Investments 4,50,000 ...
Sales ... 42,50,000
Sale of Scrap ... 50,000
Dividend on Investments ... 7,500
Opening Inventory of Materials 1,50,000 ...
Purchase of Materials 21,00,000 ...
Opening Inventory of WIP 75,000 ...
Opening Inventory of Finished Goods 1,25,000 ...
Wages 6,00,000 ...
Salaries 7,20,000 ...
Staff Welfare 60,000 ...
Interest on Debentures 50,000 ...
Interest on Bank Overdraft 20,000 ...
Depreciation 1,50,000 ...
Carriage Inwards 21,000 ...
Audit Fee 42,500 ...
Advertisement Expenses 75,000 ...
Telephone and Internet Expenses 24,000 ...
Courier Expenses 12,000 ...
Power and Electricity Expenses 30,000 ...
Bank Charges 3,000 ...
Administrative Expenses 30,000 ...
Marketing and Selling Expenses 20,000 ...
Total 65,07,500 65,07,500
Solved Questions

Additional Information:
Closing Inventory: Materials ` 1,25,000; Work-in-Progress ` 65,000; Finished Goods
` 1,40,000. Provide for Tax @ 35%.
Solution: West Coast Ltd.
STATEMENT OF PROFIT AND LOSS for the year ended 31st March, 2018
Particulars Note Year Ended
No. 31st March,
2018 (`)
I. Revenue from Operations 1 43,00,000
II. Other Income 2 7,500
III. Total Revenue (I + II) 43,07,500
IV. Expenses
Cost of Materials Consumed 3 21,25,000
Changes in Inventories of Finished Goods and Work-in-Progress 4 (5,000)
Employees Benefit Expenses 5 13,80,000
Finance Costs 6 70,000
Depreciation and Amortisation Expenses 1,50,000
Other Expenses 7 2,57,500
Total Expenses 39,77,500
V. Profit beforeTax (III – IV)
3,30,000
VI. Less: Tax @ 35%
1,15,500
VII. Profit afterTax (V –VI)
2,14,500
Notes to Accounts
Note Particulars Year Ended
No. 31st March,
2018 (`)
1. Revenue from Operations
Sales 42,50,000
Sale of Scrap 50,000
43,00,000
2. Other Income
Dividend on Investments 7,500
3. Cost of Materials Consumed
Opening Inventory of Materials 1,50,000
Add: Purchases of Materials 21,00,000
22,50,000
Less: Closing Inventory of Materials 1,25,000
21,25,000
4. Changes in Inventories of Finished Goods andWork-in-Progress
(a) Finished Goods
Opening Inventory 1,25,000

Less: Closing Inventory 1,40,000
(15,000)
(b) Work-in-Progress
Opening Inventory 75,000

Less: Closing Inventory 65,000
10,000
Total (a + b) (5,000)

5. Employees Benefit Expenses
Wages 6,00,000
Salaries 7,20,000
Staff Welfare 60,000
13,80,000
6. Finance Costs
Interest on Debentures 50,000
Interest on Bank Overdraft 20,000
70,000
7. Other Expenses
Carriage Inwards 21,000
Audit Fee 42,500
Advertisement Expenses 75,000
Telephone and Internet Expenses 24,000
Courier Expenses 12,000
Power and Electricity Expenses 30,000
Bank Charges 3,000
Administrative Expenses 30,000
Marketing and Selling Expenses 20,000
2,57,500
1. Give the heads under which the following items will be shown in a company’s Balance Sheet:
(i) Debentures; (ii) Interest Accrued on Investments; (iii) Goodwill; and (iv) Bills of Exchange.
[Ans.: Head: Sub-head, if any: (i) Non-current Liabilities: Long-term Borrowings;
(ii) Current Assets: Other Current Assets; (iii) Non-current Assets:
Fixed Assets—Intangible Assets; (iv) Current Assets: Trade Receivables.]
2. Calculate Cost of Materials Consumed from the following:

Opening Inventory of: Materials ` 4,50,000; Finished Goods ` 75,000; Stock-in-Trade ` 2,00,000; Closing
Inventory of: Materials ` 4,00,000; Finished Goods ` 65,000; Stock-in-Trade ` 1,75,000; Opening WIP
` 10,000; Closing WIP ` 15,000; Purchases during the year: Raw Material ` 20,00,000; Stock-in-Trade
` 9,00,000. [Ans.: ` 20,50,000.]
3. Under which line item of the financial statements following items will be shown:
(i) Sale of Scrap; (ii) Gain (Profit) on Sale of Vehicle; (iii) Deposits; (iv) Loss on Issue of Debentures
Written off; (v) Gratuity Payable at the Time of Retirement; (vi) Workmen Compensation Reserve;
(vii) Carriage paid on Sales; and (viii) Selling and Distribution Expenses?
[Ans.: Revenue from Operations: (i); Other Income: (ii); Long-term Borrowings: (iii);
Other Expenses: (iv); Long-term Provisions: (v); Reserves and Surplus: (vi);
Other Expenses: (vii) and (viii).]
4. Under which head following revenue items of financial company will be classified or shown:
(i) Gain (Profit) on Sale of Fixed Asset; (ii) Fee Received for Arranging Loans; (iii) Interest on Loans
Given; (iv) Gain (Profit) on Sale of Investments; and (v) Sale of Miscellaneous Items?
[Ans.: Revenue from Operations: (ii) Fee Received for Arranging Loans;
(iii) Interest on Loans Given; (iv) Gain (Profit) on Sale of Investments;
Other Income: (i) Gain (Profit) on Sale of Fixed Asset; (v) Sale of Miscellaneous Items.]
Unsolved Questions

5. From the following information of Manchur Ltd. for the year ended 31st March, 2019, calculate amount
that will be shown in the Note to Accounts on Changes in Inventories of Finished Goods, WIP and
Stock-in-Trade:
Particulars Opening Inventory (`) Closing Inventory (`)
Finished Goods 15,00,000 12,50,000
Work-in-Progress 10,50,000 9,25,000
Stock-in-Trade 9,50,000 8,00,000
[Ans.: Change in Inventories of: Finished Goods—` 2,50,000; Work-in-Progress—` 1,25,000;
Stock-in-Trade—` 1,50,000; Net Change—` 5,25,000.]

Financial Statement Analysis
MEANING OF FINANCIAL STATEMENT ANALYSIS
Analysis of Financial Statements is a systematic process of analysing the financial information in
the financial statements to understand and make decisions regarding the operations of the enterprise.
TOOLS OR TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS
Comparative Statements
Comparative Statements or Comparative Financial Statements mean a comparative study of
individual items or components of financial statements, i.e., Balance Sheet and Statement
of Profit and Loss of two or more years of the enterprise itself.
Common-size Statements
Common-size Statements or Common-size Financial Statements mean statements in
which individual items of financial statements of two or more years are placed side
by side and thereafter converted into percentage taking a common base. Common
base normally taken is Total Assets or Total of Equity and Liabilities, in the case of Common-
size Balance Sheet and Revenue from Operations, in the case of Common-size Statement of
Profit and Loss.
Ratio Analysis
Ratio is an arithmetical expression of relationship between two related or interdependent
components of financial statements of an accounting period.
Cash Flow Statement
Cash Flow Statement is a statement showing flow of Cash and Cash Equivalents during the
accounting period, classified under Operating Activities, Investing Activities and Financing
Activities.
TYPES OF FINANCIAL STATEMENT ANALYSIS
External Analysis
Internal Analysis
External analysis is carried out by outsiders such as creditors, bankers, debentureholders
and government agencies. Internal analysis is meant for management.
2
C H A P T E R

Horizontal (or Dynamic) Analysis
Vertical (or Static) Analysis
Dynamic or Horizontal Analysis is a time series analysis. Static or Vertical Analysis is
carried out at one particular point of time, generally when the accounts are closed.
Intra-firm Comparison and Inter-firm Comparison
Intra-firm Comparison: A comparison of financial variables of an enterprise over a period of
time is known as Intra-firm Comparison. It is also called Time Series Analysis or Trend
Analysis. It analyses the performance of a business over a number of years and shows
trend of financial factors.
Inter-firm Comparison: A comparison of two or more enterprises or firms is known as Inter-
firm Comparison. It analyses and compares financial variables of two or more enterprises
or firms to determine their competitive position. When single set of statements of two
firms is compared, it is known as Cross-sectional Analysis.
PROCESS OF FINANCIAL STATEMENT ANALYSIS
Rearrangement of Financial Statements
Comparison
Analysis
Interpretation
PURPOSES (OBJECTIVES) AND SIGNIFICANCE OF FINANCIAL ANALYSIS
Assessing the Earning Capacity or Profitability
Assessing the Managerial Efficiency
Assessing the Short-term and Long-term Solvency of the Enterprise
Inter-firm Comparison
Forecasting and Preparing Budgets
Explainable and Understandable
USES OF FINANCIAL ANALYSIS
Security Analysis
Credit Analysis
Debt Analysis
Dividend Decision
General Business Analysis

Financial Statement Analysis 2.3
PARTIES INTERESTED IN FINANCIAL ANALYSIS
Management
Employees and Trade Unions
Shareholders or Owners or Investors
Potential Investors
Suppliers or Creditors
Bankers and Lenders
Researchers
Tax Authorities
Customers
LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS
Historical Analysis
Ignores Price Level Changes
Qualitative Aspect Ignored
Suffers from the Limitations of Financial Statements
Not Free from Personal Bias
Variation in Accounting Practices
Window Dressing
Identifies Symptoms
CHAPTER SUMMARY

• Analysis of Financial Statements is a systematic process of identifying the financial strengths and
weaknesses of a firm by properly establishing relationships between the items of the Balance Sheet and
Statement of Profit and Loss.

• Tools or Techniques of Financial Statement Analysis
1. Comparative Statements
2. Common-size Statements
3. Ratio Analysis
4. Cash Flow Statement

• Types of Financial Statement Analysis
1. External Analysis
2. Internal Analysis
3. Horizontal or Dynamic Analysis
4. Vertical or Static Analysis


• Purposes or Objectives of Financial Analysis
1. To assess an enterprise’s operating efficiency and profitability.
2. To assess financial stability of an enterprise.
3. To assess an enterprise’s short-term and long-term solvency.
4. To compare intra-firm position, inter-firm position and pattern position within the industry.
5. To assess the future prospects of an enterprise.

• Uses of Financial Analysis
1. Security Analysis
2. Credit Analysis
3. Debt Analysis
4. Dividend Decision
5. General Business Analysis

• Parties Interested in Financial Statements Analysis
1. Management
2. Employees and Trade Unions
3. Shareholders or Owners or Investors
4. Potential Investors
5. Suppliers or Creditors
6. Bankers and Lenders
7. Researchers
8. Tax Authorities
9. Customers

• Limitations of Analysis of Financial Statements
1. Historical Analysis.
2. Ignores the price-level changes.
3. Qualitative Aspect is ignored.
4. Limitations of Financial Statements are also the limitations of Financial Statement Analysis.
5. Not free from bias.
6. Financial analysis identifies the symptoms but does not arrive at the diagnosis.
7. Variation in Accounting Practices.
8. Window Dressing.

Comparative Statements and Common-Size Statements 3.1
MEANING OF KEY TERMS USED IN THE CHAPTER
1. Financial Statements These are the final accounts prepared at the end of the accounting
period and include Balance Sheet and Statement of Profit and
Loss along with Notes to Accounts.
2. Comparative Statement It is the statement prepared to compare individual items or
components of the financial statements of two or more years
of a company. The amount of each component of financial
statements is placed side by side and difference is ascertained,
which is shown as a percentage of the base year.
3. Comparative Balance Sheet It is the statement prepared to compare individual items or
components of Balance Sheet of two or more years of a company.
4. Comparative Statement of It is the statement prepared to compare individual items or

Profit and Loss (Income components of Statement of Profit and Loss (Income

Statement) Statement) of two or more years of a company.
5. Common-size Statement It is the statement prepared to compare components of financial
statements (Balance Sheet and Statement of Profit and Loss) of
two years by converting them into percentages taking a common
base.
6. Common-size Statement of It is the statement prepared to compare components of

Profit and Loss (Income Statement of Profit and Loss of two years by converting them

Statement) into percentages taking a common base, i.e., Revenue from
Operations.
7. Common-size It is the statement prepared to compare components of Balance

Balance Sheet Sheet of two years by converting them into percentages taking
a common base, i.e., Total Assets or Total of Equity and Liabilities.
Tools of Financial Statement Analysis
—Comparative Statements and
Common-Size Statements
3
C H A P T E R

CHAPTER SUMMARY
• Comparative Financial Statement is a tool of financial analysis that shows change in each item of
the financial statement in both absolute amount and percentage terms, taking the item in preceding
accounting period as base.
• Objectives or Purposes of Comparative Financial Statements
1. To know the nature of changes influencing financial position.
2. To know the weaknesses and soundness about liquidity, profitability and solvency of the enterprise.
3. To forecast and plan.
4. To know the movements of key financial statistics.
• Tools for Comparison of Financial Statements
1. Comparative Balance Sheet.
2. Comparative Statement of Profit and Loss (Income Statement).
3. Common-size Statement of Profit and Loss.
4. Common-size Balance Sheet.
• Comparative Balance Sheet
“Comparative Balance Sheet analysis is the study of the trend of same items, group of items and computed
items in two or more Balance Sheets of the same business enterprise on different dates.” —Foulka
• Comparative Statement of Profit and Loss (Income Statement)
Comparative Statement of Profit and Loss shows the operating results for a number of accounting periods
so that changes in data in terms of money and percentage from one period to another may be known.
• Common-size Statement of Profit and Loss (Income Statement)
Common-size Statement of Profit and Loss is a statement in which amounts of individual items of
Statement of Profit and Loss for two or more years are written. These amounts are further converted
into percentage of common base which is Revenue from Operations.
• Common-size Balance Sheet
Common-size Balance Sheet is a statement in which amounts of individual items of Balance Sheet for
two or more years are written. These amounts are further converted into percentage of a common base,
which is Total Assets or Total of Equity and Liabilities of the Balance Sheet.

FORMAT OF COMPARATIVE BALANCE SHEET
COMPARATIVE BALANCE SHEET
as at ...
Particulars Note Previous Current Absolute Change Percentage Change
No. Year Year (Increase/Decrease) (Increase/Decrease)
` ` ` %
(A) (B) (C = B – A) ( )
= ¥
C
D 100
A
(a) Share Capital:
(i) Equity Share Capital ... ... ... ...
(ii) Preference Share Capital ... ... ... ...
(b) Reserves and Surplus ... ... ... ...
(a) Long-term Borrowings ... ... ... ...
(b) Long-term Provisions ... ... ... ...
(a) Short-term Borrowings ... ... ... ...
(b) Trade Payables ... ... ... ...
(c) Other Current Liabilities ... ... ... ...
(d) Short-term Provisions ... ... ... ...
Total ... ... ... ...
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets ... ... ... ...
(ii) Intangible Assets ... ... ... ...
(b) Non-current Investments ... ... ... ...
(c) Long-term Loans and Advances ... ... ... ...
2. Current Assets
(a) Current Investments ... ... ... ...
(b) Inventories ... ... ... ...
(c) Trade Receivables ... ... ... ...
(d) Cash and Cash Equivalents ... ... ... ...
(e) Short-term Loans and Advances ... ... ... ...
(f ) Other Current Assets ... ... ... ...
Total
... ... ... ...
Note: If current year’s figure has decreased, show the absolute change and percentage change in brackets so as to
reflect negative item.

FORMAT OF COMPARATIVE STATEMENT OF PROFIT AND LOSS
COMPARATIVE STATEMENT OF PROFIT AND LOSS
for the years ended...
Particulars Note Previous Current Absolute Percentage
No. Year Year Change (Increase Change (Increase
` ` or Decrease) (`) or Decrease) (%)
(A) (B) (C = B – A) ( )
= ¥
C
D 100
A
I. Revenue from Operations ... ... ... ...
II. Other Income ... ... ... ...
III. Total Revenue (I + II) ... ... ... ...
IV. Expenses
(a) Cost of Materials Consumed ... ... ... ...
(b) Purchases of Stock-in-Trade ... ... ... ...
(c) ChangesinInventoriesofFinishedGoods,
Work-in-Progress and Stock-in-Trade ... ... ... ...
(d) Employees Benefit Expenses ... ... ... ...
(e) Finance Costs ... ... ... ...
(f) Depreciation and Amortisation Expenses ... ... ... ...
(g) Other Expenses ... ... ... ...
Total Expenses ... ... ... ...
V. Profit beforeTax (III – IV) ... ... ... ...

Less: Income Tax ... ... ... ...
VI. Profit afterTax ... ... ... ...
Note: If current year’s figure has decreased, show the Absolute change and Percentage change in brackets so
as to reflect negative item.
FORMAT OF COMMON-SIZE STATEMENT OF PROFIT AND LOSS (INCOME STATEMENT)
COMMON-SIZE STATEMENT OF PROFIT AND LOSS
for the years ended...
Particulars Note Absolute Amounts Percentage of Revenue from
No. Operations (Net Sales)
PreviousYear CurrentYear PreviousYear CurrentYear
` ` % %
I. Revenue from Operations (Net Sales) ... ... 100 100

II.
Other Income ... ... ...
...
III. Total Revenue (I + II) ... ... ...
...
IV. Expenses

(a) Cost of Materials Consumed ... ... ... ...
(b) Purchases of Stock-in-Trade ... ... ... ...
(c) ChangesinInventoriesofFinishedGoods,
Work-in-Progress and Stock-in-Trade ... ... ... ...
(d) Employees Benefit Expenses ... ... ... ...
(e)
Finance Costs ... ... ... ...
(f) Depreciation and Amortisation Expenses ... ... ... ...
(g)
Other Expenses ... ... ... ...

Total Expenses ... ... ... ...
V. Profit beforeTax (III – IV) ... ... ... ...
VI. Less: Income Tax ... ... ... ...
VII. Profit afterTax (V –VI) ... ... ... ...

FORMAT OF COMMON-SIZE BALANCE SHEET
COMMON-SIZE BALANCE SHEET
as at...
Particulars Note Absolute Amounts Percentage of
No. Balance SheetTotal
Figuresasattheend Figures as at the end PreviousYear CurrentYear
of PreviousYear (`) of CurrentYear (`) % %
(a) Share Capital:
(i) Equity Share Capital ... ... ... ...
(ii) Preference Share Capital ... ... ... ...
(b) Reserves and Surplus ... ... ... ...
(a) Long-term Borrowings ... ... ... ...
(b) Long-term Provisions ... ... ... ...
(a) Short-term Borrowings ... ... ... ...
(b) Trade Payables ... ... ... ...
(c) Other Current Liabilities ... ... ... ...
(d) Short-term Provisions ... ... ... ...
Total ... ... 100 100
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets ... ... ... ...
(ii) Intangible Assets ... ... ... ...
(b) Non-current Investments ... ... ... ...
(c) Long-term Loans and Advances ... ... ... ...
2. Current Assets
(a) Current Investments ... ... ... ...
(b) Inventories ... ... ... ...
(c) Trade Receivables ... ... ... ...
(d) Cash and Cash Equivalents ... ... ... ...
(e) Short-term Loans and Advances ... ... ... ...
(f) Other Current Assets ... ... ... ...
Total ... ... 100 100
Note: It does not include line items of Balance Sheet, accounting treatment of which are not to be evaluated.

Illustration 1.
From the following Statement of Profit and Loss, prepare Comparative Statement of Profit
and Loss of Exe Ltd.:
Particulars 31st March, 31st March,
2019 (`) 2018 (`)
I. Income
Revenue from Operations 33,00,000 30,00,000
Other Income 60,000 60,000
Total 33,60,000 30,60,000
II. Expenses
Purchases of Stock-in-Trade 24,00,000 23,00,000
Change in Inventories of Stock-in-Trade 1,20,000 1,00,000
Employees Benefit Expenses 90,000 70,000
Finance Costs 60,000 60,000
Other Expenses 90,000 80,000
Total Expenses 27,60,000 26,10,000
Profit (I – II) 6,00,000 4,50,000
Tax is payable @ 30%
Solution: Exe Ltd.
for the years ended 31st March,2018 and 2019
Particulars Note 31st March, 31st March, Absolute Change Percentage Change
No. 2018 2019 (Increase or (Increase or
` ` Decrease) (`) Decrease) (%)
I. Revenue from Operations 30,00,000 33,00,000 3,00,000 10.00
II. Other Income 60,000 60,000 ... ...
III. Total Revenue (I + II) 30,60,000 33,60,000 3,00,000 9.80
IV. Expenses
(a) Purchases of Stock-in-Trade 23,00,000 24,00,000 1,00,000 4.35
(b) Change in Inventories of
Stock-in-Trade 1,00,000 1,20,000 20,000 20.00
(c) Employees Benefit Expenses 70,000 90,000 20,000 28.57
(d) Finance Costs 60,000 60,000 ... ...
(e) Other Expenses 80,000 90,000 10,000 12.50
Total Expenses 26,10,000 27,60,000 1,50,000 5.75
V. Profit beforeTax (III – IV) 4,50,000 6,00,000 1,50,000 33.33

Less: Income Tax 1,35,000 1,80,000 45,000 33.33
VI. Profit afterTax 3,15,000 4,20,000 1,05,000 33.33
Illustration 2.
From the following Statement of Profit and Loss of Moontrack Ltd., for the years ended
31st March, 2011 and 2012, prepare Comparative Statement of Profit and Loss:
Particulars Note No. 2011–12 (`) 2010–11 (`)
Other Income 24,00,000 18,00,000
Expenses 16,00,000 14,00,000
(Outside Delhi 2013)
Solved Questions

Solution: COMPARATIVE STATEMENT OF PROFIT AND LOSS
II. Other Income 18,00,000 24,00,000 6,00,000 33.33
IV. Expenses 14,00,000 16,00,000 2,00,000 14.29
V. Profit (III – IV) 28,00,000 48,00,000 20,00,000 71.43
Illustration 3. Prepare Common-size Statement of Profit and Loss from the following
Statement of Profit and Loss:
Particulars Note 31st March, 31st March,
No. 2019 (`) 2018 (`)
I. Income
Revenue from Operations (Net Sales) 10,00,000 10,00,000
Total 10,11,000 10,10,000
II. Expenses
Change in Inventories of Stock-in-Trade 48,000 50,000
Employees Benefit Expenses 98,000 80,000
Other Expenses 90,000 1,17,500
Total 9,36,000 8,97,500
III. Profit (I – II) 75,000 1,12,500
Other Expenses include ` `
Provision for Tax 75,000 1,12,500
Solution: COMMON-SIZE STATEMENT OF PROFIT AND LOSS
No. Operations (Net Sales)
31st March, 31st March, 31st March, 31st March,
2018 (`) 2019 (`) 2018 (%) 2019 (%)
I. Revenue from Operations (Net Sales) 10,00,000 10,00,000 100.00 100.00
II. Other Income 10,000 11,000 1.00 1.10
III. Total Revenue (I + II) 10,10,000 10,11,000 101.00 101.10
IV. Expenses
(a) Purchases of Stock-in-Trade 6,50,000 7,00,000 65.00 70.00
(b) Change in Inventories of Stock-in-Trade 50,000 48,000 5.00 4.80
(c) Employees Benefit Expenses 80,000 98,000 8.00 9.80
(d) Other Expenses 5,000 15,000 0.50 1.50

Total Expenses 7,85,000 8,61,000 78.50 86.10
V.
Profit beforeTax (III – IV) 2,25,000 1,50,000 22.50 15.00
VI. Less: Tax 1,12,500 75,000 11.25 7.50
VII. Profit afterTax (V –VI) 1,12,500 75,000 11.25 7.50

Illustration 4.
Revenue and expense data for the year ended 31st March, 2019 of Star Paper Mills Limited
and for the Paper Industry are as follows:
Star Paper Mills Limited data is expressed in rupees, the Paper Industry data is expressed
in percentage.
Particulars Note No. `
I. Income
Revenue from Operations 1 70,00,000
Other Income 35,000
Total 70,35,000
II. Expenses
Cost of Materials Consumed 48,00,000
Changes in Inventories of Finished Goods and WIP 2 2,40,000
Employees Benefit Expenses 5,74,000
Total 65,38,000
III. Profit (I – II) 4,97,000
Notes to Accounts
1. Revenue from Operations `
Gross Sales 70,70,000

Less: Returns 70,000
70,00,000
2. Changes in Inventories of Finished Goods andWIP

WIP: Opening Inventory 4,50,000

A. 50,000

Finished Goods: Opening Inventory 4,00,000

B. 1,90,000

Total (A + B) 2,40,000
3. Other Expenses

General Expenses 4,34,000
Miscellaneous Expenses 84,000
Provision for Tax 4,06,000
9,24,000
Revenue and Expense data of Paper Industry is as follows:
Cost of Materials Consumed 67.00%
Changes in Inventories of Finished Goods and WIP 3.00%
Employees Benefit Expenses 9.20%
Other Income 0.60%
Other Expenses 9.40%
Income Tax 5.50%
(i) Prepare Common-size Statement of Profit and Loss (Income Statement) comparing
the results of operations of Star Paper Mills Limited with the industry average.
(ii) Analyse the data and comment on significant relationships revealed by the
comparisons.

Solution:
COMMON-SIZE STATEMENT OF PROFIT AND LOSS OF STAR PAPER MILLS LIMITED
for the Current CalendarYear
Particulars Absolute Amount Percentage of Industry Average
Net Sales
` % %
I. Revenue from Operations (Net Sales) 70,00,000 100.00 100.00
II. Other Income 35,000 0.50 0.60
III. Total Revenue (I + II) 70,35,000 100.50 100.60
IV. Expenses
(a) Cost of Materials Consumed 48,00,000 68.57 67.00
(b) ChangesinInventoriesofFinishedGoodsandWIP 2,40,000 3.43 3.00
(c) Employees Benefit Expenses 5,74,000 8.20 9.20
(d) Other Expenses 5,18,000 7.40 9.40
Total Expenses 61,32,000 87.60 88.60
V. Profit beforeTax (III – IV) 9,03,000 12.90 12.00
VI. Less: Provision for Tax 4,06,000 5.80 5.50
VII. Profit afterTax (V –VI) 4,97,000 7.10 6.50
Comments: The above table reveals that profit after tax of the company is more than the
industry percentage. The reason for this is better control on expenses resulting in lower
expenses. Expenses other than cost of merchandise sold (i.e., Employees Benefit Expenses
+ Other Expenses) 15.6% are also less than industry average, i.e., 18.6%.
Note: Analysis of Common-Size Statement of Profit and Loss is not in Syllabus. It is given for better understanding.
Illustration 5.
From the following Balance Sheet of Y Ltd., prepare Comparative Balance Sheet:
Particulars Note No. 31st March, 31st March,
2019 (`) 2018 (`)

(a) Share Capital 25,00,000 25,00,000
(b) Reserves and Surplus 6,00,000 5,00,000

Long-term Borrowings 15,00,000 15,00,000


(a) Short-term Borrowings 2,40,000 2,25,000

(b) Trade Payables 2,25,000 2,00,000

(c) Other Current Liabilities 55,000 50,000

(d) Short-term Provisions 30,000 25,000

Total 51,50,000 50,00,000
II. ASSETS


(a) Fixed Assets—Tangible Assets 36,00,000 30,00,000

(b) Non-current Investments 5,00,000 5,00,000

2. Current Assets

(a) Inventories 5,50,000 7,50,000

(b) Trade Receivables 3,00,000 5,00,000

(c) Cash and Cash Equivalents 1,75,000 1,50,000

(d) Other Current Assets 25,000 1,00,000

Total 51,50,000 50,00,000

Solution: COMPARATIVE BALANCE SHEET as at 31st March,2018 and 2019

(A) (B) (C = B – A) ( )
= ¥
C
D 100
A
(a) Share Capital 25,00,000 25,00,000 ... ...
(b) Reserves and Surplus 5,00,000 6,00,000 1,00,000 20.00

Long-term Borrowings 15,00,000 15,00,000 ... ...

(a) Short-term Borrowings 2,25,000 2,40,000 15,000 6.67
(b) Trade Payables 2,00,000 2,25,000 25,000 12.50
(c) Other Current Liabilities 50,000 55,000 5,000 10.00
(d) Short-term Provisions 25,000 30,000 5,000 20.00
Total 50,00,000 51,50,000 1,50,000 3.00
II. ASSETS

(a) Fixed Assets (Tangible) 30,00,000 36,00,000 6,00,000 20.00
(b) Non-current Investments 5,00,000 5,00,000 ... ...

2. Current Assets
(a) Inventories 7,50,000 5,50,000 (2,00,000)* (26.67)
(b) Trade Receivables 5,00,000 3,00,000 (2,00,000) (40.00)
(c) CashandCashEquivalents 1,50,000 1,75,000 25,000 16.67
(d) Other Current Assets 1,00,000 25,000 (75,000) (75.00)
Total 50,00,000 51,50,000 1,50,000 3.00
*If current year’s figure has decreased,show the Absolute Change and Percentage Change in brackets.
Illustration 6.
From the following summarised Balance Sheet of Green Ltd. as at 31st March, 2019,
prepare Comparative Balance Sheet:
(` in Lakhs)
2019 (`) 2018 (`)
(a) Share Capital:
(i) Equity Share Capital 60.00 60.00
(ii) Preference Share Capital 15.00 15.00
(b) Reserves and Surplus 18.00 15.00
(a) Long-term Borrowings 1 45.00 45.00
(b) Long-term Provisions 2.30 2.00
(a) Trade Payables 2 13.20 12.00
(b) Short-term Provisions 1.00 1.00
Total 154.50 150.00

II. ASSETS
(a) Fixed Assets (Tangible) 108.00 90.00
(b) Non-Current Investments 15.00 15.00
2. Current Assets
(a) Trade Receivables 3 29.50 40.00
(b) Cash and Cash Equivalents 2.00 5.00

Total 154.50 150.00
Notes to Accounts
2019 (`) 2018 (`)
1. Long-term Borrowings
From: Loan from Bank 27.00 30.00
Loan from Others 18.00 15.00
45.00 45.00
2. Trade Payables

Sundry Creditors 13.20 12.00
3. Trade Receivables

Sundry Debtors 29.50 40.00
Solution: COMPARATIVE BALANCE SHEET as at 31st March,2018 and 2019 (` in Lakhs)
No. 2018 2019 (Increase/Decrease) (Increase/Decrease)
` ` ` %
(A) (B) (C = B – A) ( )
= ¥
C
D 100
A
(a) Share Capital:
(i) Equity Share Capital 60.00 60.00 ... ...
(ii) Preference Share Capital 15.00 15.00 ... ...
(b) Reserves and Surplus 15.00 18.00 3.00 20.00
(a) Long-term Borrowings
(i) Loan from Bank 30.00 27.00 (3.00) (10.00)
(ii) Loan from Others 15.00 18.00 3.00 20.00
(b) Long-term Provisions 2.00 2.30 0.30 15.00
(a) Trade Payables (Creditors) 12.00 13.20 1.20 10.00
(b) Short-term Provisions 1.00 1.00 ... ...
Total 150.00 154.50 4.50 3.00
II. ASSETS
(a) Fixed Assets (Tangible) 90.00 108.00 18.00 20.00
(b) Non-Current Investments 15.00 15.00 ... ...
2. Current Assets
(a) Trade Receivables (Debtors) 40.00 29.50 (10.50) (26.25)
(b) Cash and Cash Equivalents 5.00 2.00 (3.00) (60.00)
Total
150.00 154.50 4.50 3.00

Illustration 7.
Following information is extracted from the Statement of Profit and Loss of Gold Star
Ltd. for the years ended 31st March, 2019 and 2018. Prepare Comparative Statement of
Profit and Loss.
2019 2018
Revenue from Operations ` 40,00,000 ` 32,00,000
Employees Benefit Expenses ` 20,00,000 ` 16,00,000
Depreciation and Amortisation Expenses ` 50,000 ` 40,000
Other Expenses ` 1,50,000 ` 3,60,000
Tax Rate 30% 30%
Solution:
Particulars Note 31st March, 31st March, Absolute Change Percentage
No. 2018 2019 (Increase/ Change (Increase/
(A) (B) (C = B – A) ( )
= ¥
C
D 100
A
II. Expenses
(a) Employees Benefit Expenses 16,00,000 20,00,000 4,00,000 25.00
(b) Depreciation and Amortisation
Expenses 40,000 50,000 10,000 25.00
(c) Other Expenses 3,60,000 1,50,000 (2,10,000) (58.33)

Total Expenses 20,00,000 22,00,000 2,00,000 10.00
III. Profit before Tax (I – II) 12,00,000 18,00,000 6,00,000 50.00
IV. Less: Tax @ 30% 3,60,000 5,40,000 1,80,000 50.00
V. Profit afterTax (III – IV) 8,40,000 12,60,000 4,20,000 50.00

Unsolved Questions
1. Prepare Comparative Balance Sheet of Deepankur Ltd.:
2019 (`) 2018 (`)


(a) Share Capital 9,00,000 7,50,000

Long-term Borrowings: 12% Debentures,Secured 3,00,000 4,50,000



(b) Trade Payables 2,00,000 1,50,000


(d) Short-term Provisions 20,000 10,000

Total 19,50,000 18,60,000
II. ASSETS


(a) Fixed Assets 9,55,000 10,45,000
(b) Non-Current Investments 2,00,000 2,00,000

2. Current Assets

(a) Inventories 2,50,000 2,00,000
(d) Other Current Assets 1,00,000 80,000

Total 19,50,000 18,60,000
[Change in Percentage: Share Capital 20%; Reserves and Surplus 15.79%; Debentures (33.33%);
Current Liabilities 12%; Non-Current Assets (7.23%); Current Assets 29.27%.]
2. From the following Statement of Profit and Loss, prepare Comparative Statement of Profit and Loss
(Income Statement):
2019 (`) 2018 (`)
I. Income

Revenue from Operations (Sales) 19,20,000 16,00,000
II. Expenses
Change in Inventories of Stock-in-Trade (10,000) 50,000
Employees Benefit Expenses 3,80,000 2,80,000
Other Expenses 1,50,000 2,00,000

Total 16,90,000 14,80,000
III. Net Profit (I – II) 2,30,000 1,20,000
[
Particulars Revenue from Purchases of Change in Employees Other Total Net
Operations Stock-in-Trade Inventories of Benefits Expenses Expenses Profit
Stock-in-Trade Expenses
Absolute Change (`) 3,20,000 2,20,000 (60,000) 1,00,000 (50,000) 2,10,000
1,10,000
Percentage Change (%) 20.00 23.16 (120.00) 35.71 (25.00) 14.19 91.67
]

3. From the following Balance Sheet of Usha Chemicals Ltd. as at 31st March, 2019, prepare Comparative
Balance Sheet:
2019 (`) 2018 (`)


(a) Share Capital 7,00,000 4,00,000

Long-term Borrowings (12% Loan) 13,00,000 10,00,000


(a) Trade Payables 5,60,000 3,75,000

(b) Short-term Provisions 40,000 25,000

Total 31,00,000 24,00,000
II. ASSETS

1. Non-Current Assets 31.3.2019 (`) 31.3.2018 (`)
(a) Fixed Assets (Tangible Assets) 18,00,000 20,00,000
(b) Less: Accumulated Depreciation 6,00,000 8,00,000
12,00,000 12,00,000 12,00,000 12,00,000

2. Current Assets

(a) Trade Receivables 16,50,000 10,00,000
(b) Cash and Cash Equivalents 2,50,000 2,00,000

Total 31,00,000 24,00,000
[
Particulars Shareholders’Funds Non-Current Liabilites Current Liabilities Current Assets
Absolute Change (`) 2,00,000 3,00,000 2,00,000 7,00,000
Percentage Change (%) 20.00 30.00 50.00 58.33
]
4. From the following Statement of Profit and Loss, prepare Comparative Statement of Profit and Loss:
2019 (`) 2018 (`)
I. Income


Total 10,10,000 7,57,500
II. Expenses
Change in Inventories of Stock-in-Trade 1,00,000 75,000
Depreciation and Amortisation Expenses 10,000 12,000
Other Expenses 25,000 14,000

Total 6,79,000 5,45,000
III. Profit beforeTax (I – II) 3,31,000 2,12,500
IV. Tax @ 30% 99,300 63,750
V. Profit afterTax (III – IV) 2,31,700 1,48,750

[
Particulars Revenue Other Purchases Change in Depreciation Other Profit Tax Profit
from Income of Inventories of and Expenses before after
Operations Stock-in-Trade Stock-in-Trade Amortisation Tax Tax
Expenses
Absolute
Change (`) 2,50,000 2,500 1,00,000 25,000 (2,000) 11,000 1,18,500 35,550 82,950
Percentage
Change (%) 33.33 33.33 33.33 33.33 (16.67) 78.57 55.76 55.76 55.76
]
5. From the following Statement of Profit and Loss, prepare Comparative Statement of Profit and Loss:
2019 (`) 2018 (`)
I. Income

Revenue from Operations 1 60,00,000 75,00,000
Other Income 1,50,000 3,00,000

Total 61,50,000 78,00,000
II. Expenses
Change in Inventories of Stock-in-Trade 2 (1,00,000) 2,00,000
Other Expenses 3 18,75,000 21,00,000

Total 50,75,000 69,00,000
Notes to Accounts
2019 (`) 2018 (`)
Sale 59,80,000 74,50,000
Sale of Waste 20,000 50,000
60,00,000 75,00,000
2. Change in Inventories of Stock-in-Trade
Opening Inventory 1,00,000 3,00,000

Less: Closing Inventory 2,00,000 1,00,000
(1,00,000) 2,00,000
3. Other Expenses
Administrative and General Expenses 8,00,000 12,00,000
Marketing Expenses 10,75,000 9,00,000
18,75,000 21,00,000
[
Particulars Revenue Other Purchases Change in Employees Other Expenses Profit before
from Income of Inventories of Benefit Expenses Tax
Operations Stock-in-Trade Stock-in-Trade Expenses
Absolute Amount (`) (15,00,000) (1,50,000) (12,00,000) (3,00,000) (1,00,000) (2,25,000) (18,25,000) 1,75,000

Percentage (%) (20.00) (50.00) (27.91) (150.00) (33.33) (10.71) (26.45) 19.44
]

6. Prepare Comparative Statement of Profit and Loss of Advance Marketing Ltd. from the following
Statement of Profit and Loss and Additional Information:
Particulars Note No. 31 March, 31 March,
2019 (`) 2018 (`)
I. Income
Total 30,40,000 25,40,000
II. Expenses
Cost of Materials Consumed 18,00,000 15,00,000
Changes in Inventories of Finished Goods and WIP (15,000) 10,000
Other Expenses 1 3,02,000 2,66,000
Total 24,39,500 21,11,000
III. Profit (I – II) 6,00,500 4,29,000
Note to Accounts
2019 (`) 2018 (`)
1. Other Expenses
Power and Fuel 40,000 36,000
Carriage Outwards 9,500 7,500
Licence Fee 2,500 2,500
Selling and Distribution Expenses 1,90,000 1,70,000
Provision for Tax 60,000 50,000
3,02,000 2,66,000
[
Particulars Revenue Cost of Changes in Finance Depreciation and Other Profit before Profit after
from Materials Inventories of Costs Amortisation Expenses Tax Tax
Operations Consumed FG and WIP Expenses
Absolute Amount (`)
5,00,000 3,00,000 (25,000) 20,000 (2,500) 26,000 1,81,500 1,71,500

Percentage (%) 20.00 20.00 (250.00)
28.57 (10.00) 12.04
37.89 39.98
]
7. Given below is the information extracted from the books of Shyam Ltd.:
Particulars 31st March,2019 31st March,2018
Revenue from Operations (Net Sales) ` 20,00,000 ` 17,50,000
Purchases of Stock-in-Trade ` 10,00,000 ` 8,25,000
Change in Inventories of Stock-in-Trade ` 1,70,000 ` 1,50,000
Other Expenses ` 11,500 ` 7,700
Income Tax 40% 40%
Prepare Comparative Statement of Profit and Loss on the basis of the above information.
[
Particulars Revenue Purchases of Change in Other Total Net Profit Tax Net Profit
from Stock-in-Trade Inventories of Expenses Expenses before after
Operations Stock-in-Trade Tax Tax
Absolute Change (`) 2,50,000 1,75,000 20,000 3,800 1,98,800 51,200 20,480 30,720
Percentage Change (%) 14.29 21.21 13.33 49.35 20.23 6.67 6.67 6.67
]


8. Prepare Comparative Statement of Profit and Loss from the following Statement of Profit and Loss:
2019 (`) 2018 (`)
I. Income

Other Income 3,00,000 2,00,000

Total 53,00,000 42,00,000
II. Expenses
Change in Inventories of Stock-in-Trade 1,00,000 (2,00,000)
Other Expenses 1 3,25,000 3,00,000

Total 40,00,000 34,75,000
Note to Accounts
2019 (`) 2018 (`)
1. Other Expenses
Administrative and Selling Expenses 2,00,000 2,00,000
Miscellaneous Expenses (Non-operative) 1,25,000 1,00,000
3,25,000 3,00,000
[
Particulars Revenue from Other Purchase of Change in Finance Dep.& Other Net
Operations Income Stock-in-Trade Inventories Cost Amortisation Expenses Profit
Absolute Change (`) 10,00,000 1,00,000 2,00,000 3,00,000 (5,000) 5,000 25,000 5,75,000
Percentage Change (%) 25.00 50.00 6.25 150.00 (10.00) 20.00 8.33 79.31
]
9. Convert the following Statement of Profit and Loss into Common-size Statement of Profit and Loss:
2019 (`) 2018 (`)
I. Income

Revenue from Operations 1 18,01,000 15,00,000

Total Revenue 18,21,000 15,15,000
II. Expenses
Change in Inventories of Stock-in-Trade (10,000) 10,000
Other Expenses 2 2,00,000 1,70,000

Total 15,42,500 13,80,000

Notes to Accounts

2019 (`) 2018 (`)
Sales 18,36,000 15,30,000

Less: Returns 35,000 30,000
18,01,000 15,00,000
2. Other Expenses
Administrative Expenses 1,70,000 1,50,000
Miscellaneous Expenses (Non-operative) 30,000 20,000
2,00,000 1,70,000
[
Year Ended Other Income Purchases of Change in Employees Other Net Profit
Stock-in-Trade Inventories of Benefit Expenses
Stock-in-Trade Expenses
31st March,2018 (%) 1.00 60.00 0.67 20.00 11.33 9.00
31st March,2019 (%) 1.11 56.77 (0.55) 18.32 11.10 15.46
]
10. Prepare Common-size Balance Sheet of X Ltd. as at 31st March, 2019 and 2018:
No. 2019 (`) 2018 (`)


(a) Share Capital:
(i) Equity Share Capital 6,00,000 8,00,000
(ii) Preference Share Capital 2,00,000 4,00,000

Long-term Borrowings (Debentures) 2,00,000 2,00,000


(a) Short-term Borrowings 90,000 1,50,000
(b) Trade Payables (Creditors) 1,00,000 1,25,000

(c) Short-term Provisions 20,000 25,000

Total 14,10,000 19,00,000
II. ASSETS


(a) Fixed Assets:
(i) Tangible Assets 6,00,000 8,00,000
(ii) Intangible Assets 2,00,000 2,00,000

2. Current Assets

(a) Inventories 1,75,000 2,50,000

(c) Cash and Cash Equivalents 90,000 1,75,000

Total 14,10,000 19,00,000

(In % age)
[Equity and Liabilities 2019 2018 Assets 2019 2018
Equity Share Capital 42.57 42.10 Fixed Assets:
Preference Share Capital 14.18 21.05 (a) Tangible Assets 42.56 42.10
Reserves and Surplus 14.18 10.53 (b) Intangible Assets 14.18 10.53
Long-term Borrowings (Debentures) 14.18 10.53 Non-current Investments 14.18 10.53
Current Liabilities 14.89 15.79 Current Assets 29.08 36.84
100.00 100.00 100.00 100.00
]

1. Ratio It is an arithmetical expression of relationship between two
interdependent or related items.
2. Accounting Ratio Accounting Ratio means ratio calculated on the basis of
accounting information.
3. Pure Ratio It is a ratio expressed as quotient. For example, 2 : 1.
4. Percentage It is a ratio expressed in percentage. For example, 25%.
5. Times It is a ratio expressed in number of times. For example, 3 Times.
6. Fraction It is a ratio expressed as fraction. For example,
3
4
or .75.
7. Liquidity Ratios These ratios measure the ability of the enterprise to meet its
short-term financial commitments. These include: Current Ratio
and Quick Ratio/Liquid Ratio/Acid Test Ratio.
8. Solvency Ratios These ratios measure long-term financial position of the enterprise.
These include: Debt to Equity Ratio; Total Assets to Debt Ratio;
Proprietary Ratio and Interest Coverage Ratio.
9. Activity or Turnover Ratios These ratios measure efficiency in use of assets of the enterprise
in generating sales. These include: Inventory Turnover Ratio;
Trade Receivables Turnover Ratio; Trade Payables Turnover
Ratio, Working Capital Turnover Ratio.
10. Profitability Ratios These ratios show the profitability of the enterprise. These include:
Gross Profit Ratio; Operating Ratio; Operating Profit Ratio;
Net Profit Ratio and Return on Investment (ROI).
Accounting Ratios
4
C H A P T E R

CHAPTER SUMMARY
• Accounting Ratio is a mathematical expression of the relationship between two related or interdependent
items or group of items shown in the financial statements.
• Ratio Analysis is the process of computing, determining and presenting the relationship of related or
interdependent items or group of items in the financial statements. It is an important technique of financial
analysis.
• Objectives of Ratio Analysis
1. To assess the earning capacity, financial soundness and operating efficiency of an enterprise.
2. To simplify the accounting information.
3. To help in comparative analysis.
• Uses of Ratio Analysis: Ratio Analysis is useful in:
1. Analysis of financial statements.
2. Assessing the profitability of the business.
3. Assessing the liquidity or short-term solvency of the business.
4. Assessing the long-term solvency of the business.
5. Assessing the operating efficiency of the business.
6. Intra-firm and inter-firm comparison.
7. Locating the weak areas of the business.
• Limitations of Ratio Analysis
1.
Qualitative Factors are Ignored: Ratio analysis is a technique of quantitative analysis and thus, ignores
qualitative factors, which may be important in decision-making.
2.
Lack of Standard Ratio: There is almost no single standard ratio against which the actual ratio may be
measured and compared.
3.
False Results if Based on Incorrect Information: Conclusions drawn may be misleading if ratios are based
on incorrect accounting information.
4.
May not be Comparable: Ratios may not be comparable if different firms follow different accounting
policies and procedures.
• Classification of Accounting Ratios
1.
Liquidity Ratios: (i) Current Ratio; and (ii) Quick Ratio.
2.
Solvency Ratios: (i) Debt to Equity Ratio; (ii) Proprietary Ratio; (iii) Total Assets to Debt Ratio; and
(iv) Interest Coverage Ratio.
3.
Activity Ratios: (i) Inventory Turnover Ratio; (ii) Trade Receivables Turnover Ratio; (iii) Trade Payables
Turnover Ratio; and (iv) Working Capital Turnover Ratio.
4.
Profitability Ratios: (i) Gross Profit Ratio; (ii) Operating Ratio; (iii) Operating Profit Ratio; (iv) Net Profit
Ratio; and (v) Return on Investment.

Accounting Ratios 4.3
Table
Showing
Summary
of
Accounting
Ratios
Remarks

Current
Assets
=
Current
Investments
+
Inventories
(Ex-
cluding
Stores
and
Spares
and
Loose
Tools)
+
Trade
Receivables
(Net
of
Pro-
vision
for
Doubtful
Debts)
+
Cash
and
Cash
Equivalents
+
Short-term
Loans
and
Advances
+
Other
Current
Assets

Current
Liabilities
=
Short-term
Borrowings
+
Trade
Payables
+
Other
Current
Liabilities
+
Short-term
Provisions.
Quick
Assets
=
Current
Assets
–
Inventories
–
Prepaid
Expenses
Current
Liabilities
as
per
Current
Ratio.
Note:
Inventories
and
prepaid
expenses
are
not
considered
as
Quick
Assets.
Debt
=
Long-term
Borrowings,
(i.e.,
debentures,
mortgage,

public
deposits)
+
Long-term
Provisions
Shareholders’
Funds
=
Share
Capital
+
Reserves
and
Surplus
Or
Non-current
Assets
(Tangible
Assets
+
Intangible
Assets
+
Non-current
Investments
+
Long-term
Loans
and
Advances)
+
Working
Capital
–
Non-current
Liabilities
(Long-term
Borrowings
+
Long-term
Provisions).
Working
Capital
=
Current
Assets
–
Current
Liabilities
Total
Assets
=
Non-current
Assets
(Tangible
Assets
+
Intangible
Assets
+
Non-current
Investments
+
Long-term
Loans
and
Advances)
+
Current
Assets
[Current
Investments
+
Inventories
(including
Stores
and
Spares
and
Loose
Tools)
+
Trade
Receivables
+
Cash
and
Cash
Equivalents
+
Short-term
Loans
and
Advances
+
Other
Current
Assets]
Debt
=
Long-term
Borrowings
+
Long-term
Provisions
Description
of
the
Ratio
1.

Current
Ratio

2.

Liquid
Ratio/Acid
Test
Ratio/Quick
Ratio
1.

Debt
to
Equity
Ratio
2.
Total
Asset
to
Debt
Ratio
Formula
Current
Assets
Current
Liabilities
Liquid
Assets
or
Quick
Assets
Current
Liabilities
Debt
Equity
(Shareholders’
Funds)
Total
Assets
Debt
How
Expressed
Pure
Ratio
Pure
Ratio
Pure
Ratio
Pure
Ratio,
e.g.,
2
:
1
II.
SOLVENCY
RATIOS
I.
LIQUIDITY
RATIOS
Significance
This
ratio
shows
short-term
financial
soundness
of
the
business.
Higher
ratio
means
better
capa
c
ity
to
meet
its
current
obligation.
The
ideal
current
ratio
is
2
:
1.
In
case
it
is
very
high
it
shows
the
idleness
of
funds.
Liquid
Ratio
is
a
fairly
stringent
measure
of
liquidity.
It
is
based
on
those
current
assets
which
are
highly
liquid,
i.e.,
can
be
converted
into
Cash
and
Cash
Equiva-
lents
quickly.
Quick
Ratio
of
1
:
1
is
considered
as
ideal.
Higher
the
Quick
Ratio
better
the
short-term
financial
position.
This
ratio
assesses
the
long-term
financial
position
and
soundness
of
enter
p
rises.
In
general,
lower
the
Debt
to
Equity
Ratio
higher
the
degree
of
protection
enjoyed
by
the
lenders.
This
ratio
measures
the
safety
margin
available
to
lenders
of
long-term
debts.
It
measures
the
extent
to
which
debt
is
being
covered
by
assets.

Fraction
Times
Times
Times
Times
Times
3.
Proprietary
Ratio
4.
Interest
Coverage
Ratio
1.
Inventory
(Stock)
Turnover
Ratio
2.
Trade
Receivables
or
Debt-
ors’
Turnover
Ratio
3.
Trade
Payables
or
Creditors’
Turnover
Ratio
4.
Working
Capital
Turnover
Ratio
Shareholders’
Funds
or
Proprietors’
Funds
or
Equity
Total
Assets
Profit
before
Interest
and
Tax
Interest
on
Long-term
Debt
Cost
of
Revenue
from
Operations
or
Cost
of
Goods
Sold
Average
Inventory
(Stock)
Credit
Revenue
from
Operations
Average
Trade
Receivables
Net
Credit
Purchases
Average
Trade
Payables
Revenue
from
Operations
Working
Capital
III.
ACTIVITY
RATIOS/TURNOVER
RATIOS
Shareholders’
Funds
=
Share
Capital
+
Reserves
and
Surplus
Shareholders’
Funds
=
Non-Current
Assets
+
Working
Capital

–
Non-Current
Liabilities
Total
Assets
as
per
Total
Assets
to
Debt
Ratio.
Profit
before
Interest
and
Tax
=
Profit
after
Tax
+
Tax
+
Interest
Average
Inventory
or
Stock
=
Opening
Inventory
or
Stock
+
Closing
Inventory
or
Stock
2
Trade
Receivables
means
debtors
plus
bills
receivable.
Provision
for
Doubtful
Debts
is
not
deducted.
Average
Trade
Receivables
=
Trade
Payables
means
creditors
plus
bills
payable.
Average
Trade
Payables
=
Opening
Trade
Payables
+
Closing
Trade
Payables
2
.
Working
Capital
=
Current
Assets
–
Current
Liabilities
Current
Assets
=
As
per
Current
Ratio
Current
Liabilities
=
As
per
Current
Ratio.
This
ratio
shows
the
extent
to
which
total
assets
have
been
financed
by
the
propri-
etor.
Higher
the
ratio,
higher
the
safety
margin
for
lenders
and
creditors.
This
ratio
shows
how
many
times
the
interest
charges
are
covered
by
the
profits
available
to
pay
interest.
Higher
the
ratio,
more
secure
the
lender
is
in
respect
of
payment
of
interest
regularly.
This
ratio
measures
how
fast
Inventory
is
moving
and
generating
sales.
Higher
the
ratio,
more
efficient
management
of
inventories
and
vice
versa.
This
ratio
shows
efficiency
in
the
col-
lection
of
amount
due
from
trade
receivables.
Higher
the
ratio,
better
it
is
since
it
indicates
that
debts
are
being
collected
more
quickly.
It
shows
the
number
of
times
the
creditors
are
turned
over
in
relation
to
purchases.
A
high
turnover
ratio
or
shorter
payment
period
shows
the
availability
of
less
credit
or
early
payments.
This
ratio
shows
the
number
of
times
working
capital
has
been
employed
in
the
process
of
carrying
on
business.
Higher
the
ratio,
better
the
efficiency
in
the
utilisation
of
working
capital.
Opening
Trade
Receivables
+
Closing
Trade
Receivables
2

IV.
PROFITABILITY
RATIOS
This
ratio
indicates
the
relationship
between
gross
profit
and
net
sales.
Higher
the
Ratio,
lower
the
cost
of
goods
sold.
This
ratio
is
calculated
to
assess
the
operational
efficiency
of
the
business.
A
decline
in
the
operating
ratio,
is
better
because
it
means
higher
margin,
and
thus,
more
profit.
The
objective
of
computing
this
ratio
is
to
determine
the
operational
efficiency
of
management.
It
indicates
overall
efficiency
of
the
business.
Higher
the
net
profit
ratio,
better
the
business.
It
assesses
the
overall
performance
of
the
enterprise.
It
measures,
how
efficiently
the
resources
entrusted
to
the
business
are
used.
Cost
of
Revenue
from
Operations
+
Operating
Expenses
×
100
Revenue
from
Operations
%
%
%
%
%
Gross
Profit
=
Revenue
from
Operations
–
Cost
of
Revenue
from
Operations
Cost
of
Revenue
from
Operations
=
Opening
Inventory
(excluding
Stores
and
Spares
and
Loose
Tools)
+
Net
Purchases
+
Direct
Expenses
–
Closing
Inventory
(excluding
Stores
and
Spares
and
Loose
Tools)
Or

Revenue
from
Operations
–
Gross
Profits
Or

Cost
of
Materials
Consumed
+
Purchases
of
Stock-in-Trade
+
Changes
in
Inventories
of
Finished
Goods,
WIP
and
Stock-in-Trade
+
Direct
Expenses.

If
direct
expenses
are
not
given,
assume
them
to
be
nil.
Cost
of
Revenue
from
Operations
=
Opening
Inventory
(excluding
Stores
and
Spares
and
Loose
Tools)
+
Net
Purchases
+
Direct
Expenses
–
Closing
Inventory
(excluding
Stores
and
Spares
and
Loose
Tools)
Or

Revenue
from
Operations
–
Gross
Profit
Or

Cost
of
Revenue
from
Operations
=
Cost
of
Materials
Consumed
+
Purchases
of
Stock-in-Trade
+
Changes
in
Inventories
of
Finished
Goods,
WIP
and
Stock-in-Trade
+
Direct
Expenses.
If
Direct
Expenses
are
not
given,
assume
them
to
be
nil.
Operating
Expenses
=
Employees
Benefit
Expenses
+
Other
Expenses
(Other
than
Non-operating
Expenses)
Revenue
from
Operations
=
Sales
–
Sales
Return
Operating
Profit
= Net
Profit
(Before
Tax)
+
Non-operating
Expenses
–
Non-operating
Income
Or

=
Gross
Profit
+
Operating
Income
–
Operating
Expenses
Non-operating
Expenses
=
Interest
on
Long-term
Borrowings
+
Loss
on
Sale
of
Fixed
Assets
or
Non-current
Assets
Non-operating
Income
=
Interest
received
on
investments
+
Profit
on
Sale
of
Fixed
Assets
or
Non-current
Assets
Profit
after
Tax
=
Gross
Profit
+
Other
Income
–
Indirect
Expenses
–
Tax
Capital
Employed:
Liabilities
Approach:
Share
Capital
+
Reserves
and
Surplus
+
Long-term
Borrowings
+
Long-term
Provisions
Assets
Approach:
Non-Current
Assets
(Tangible
Assets
+
Intangible
Assets)
+
Non-current
Investments
+
Long-term
Loans
and
Advances)
+
Working
Capital.
Working
Capital
=
Current
Assets
–
Current
Liabilities
(Assume
that
all
Non-current
Investments
are
Trade
Investments)
1.
Gross
Profit
Ratio
2.
Operating
Ratio
3.
Operating
Profit
Ratio
4.
Net
Profit
Ratio
5.
Return
on
Investment

or
Return
on
Capital
Employed
¥
Gross
Profit
100
Revenue
from
Operations
¥
Profit
before
Interest,
Tax
and
Dividend
100
Capital
Employed
¥
Profit
after
Tax
100
Revenue
from
Operations
¥
Operating
Profit
100
Revenue
from
Operations
Note:
1.
Non-operating
Assets
do
not
form
part
of
Capital
Employed,
e.g.,
Non-
Trade
Investments,
Capital
Work-in-progress,
etc.

2.
Interest
on
Non-trade
Investments
should
be
deducted
from
Profit
before
Interest,
Tax
and
Dividend.

Solved Questions
Illustration 1.
From the following Balance Sheet of Warmex Ltd. as at 31st March, 2019, calculate Current Ratio:


(a) Share Capital 5,00,000

(b) Reserves and Surplus (50,000)

Long-term Borrowings 2,75,000


(a) Short-term Borrowings 2,50,000

(b) Trade Payables 50,000

(c) Short-term Provisions 75,000
Total 11,00,000
II. ASSETS


(a) Fixed Assets:

(i) Tangible Assets 4,50,000

(ii) Intangible Assets 50,000

(b) Non-current Investments 50,000

2. Current Assets

(a) Current Investments 1,00,000

(b) Inventories 1,50,000

(c) Trade Receivables 1,75,000

(d) Cash and Cash Equivalents 1,25,000
Total 11,00,000
Solution:
Current Ratio =
Current Assets
Current Liabilities
=
5,50,000
3,75,000
`
`
= 1.47 : 1.
Current Assets = Current Investments + Inventories + Trade Receivables + Cash and
Cash Equivalents
= ` 1,00,000 + ` 1,50,000 + ` 1,75,000 + ` 1,25,000 = ` 5,50,000.
Current Liabilities = Short-term Borrowings + Trade Payables + Short-term Provisions
= ` 2,50,000 + ` 50,000 + ` 75,000 = ` 3,75,000.

Illustration 2.
From the following Balance Sheet of Galaxy Ltd., compute Debt to Equity Ratio:
BALANCE SHEET as at 31st March, 2019



(b) Reserves and Surplus 2,00,000


(a) Long-term Borrowings 15,00,000

(b) Long-term Provisions 57,500

(a) Trade Payables 2,50,000

(b) Other Current Liabilities 55,000

Total 27,87,500
II. ASSETS

Fixed Assets:

Tangible Assets 17,47,500

2. Current Assets

(a) Inventories 5,00,000

(b) Trade Receivables 3,50,000

(c) Cash and Cash Equivalents 1,75,000

(d) Other Current Assets 1 15,000
Total 27,87,500
Note to Accounts
Particulars `
1. Other Current Assets
Accrued Income 10,000
Prepaid Expenses 5,000
15,000
Solution:
Debt to Equity Ratio =
Debt
Equity (Shareholders’ Funds)
=
15,57,500
9,00,000
`
`
= 1.73 : 1.
Debt = Long-term Borrowings + Long-term Provisions
= ` 15,00,000 + ` 57,500 = ` 15,57,500.
Equity or Shareholders’ Funds = Share Capital + Reserves and Surplus
= ` 7,00,000 + ` 2,00,000 = ` 9,00,000.

Illustration 3.
From the following Balance Sheet, calculate Total Assets to Debt Ratio:
BALANCE SHEET OF GOOD LUCK LTD. as at 31st March, 2019



(b) Reserves and Surplus (90,000)



(b) Long-term Provisions 50,000



(b) Short-term Provisions 10,000
Total 8,50,000
II. ASSETS


(a) Fixed Assets:

(b) Non-current Investments 1 50,000

2. Current Assets



(c) Cash and Cash Equivalents 70,000

(d) Other Current Assets 10,000
Total 8,50,000
Note to Accounts
Particulars `
1. Non-Current Investments
Government Securities 40,000
Shares in Listed Companies 10,000
50,000
Solution: Total Assets to Debt Ratio =
8,50,000
Total Assets
=
Debt 5,00,000
`
`
= 1.70 : 1.
Total Assets =
Non-current Assets (i.e., Fixed Assets + Non-current Investments) + Current
Assets (i.e., Inventories + Trade Receivables + Cash and Cash Equivalents
+ Other Current Assets)
=
` 4,80,000 + ` 50,000 + ` 1,14,000 + ` 1,26,000 + ` 70,000 + ` 10,000
=
` 8,50,000.
=
` 4,50,000 + ` 50,000 = ` 5,00,000.

Illustration 4.
From the following Balance Sheet of Channel Ltd., compute Shareholders’ Funds by
following Liabilities Side Approach and Assets Side Approach:








Total 16,00,000
II. ASSETS

Fixed Assets:

(a) Tangible Assets 9,68,000

(b) Intangible Assets 90,000

2. Current Assets



Total 16,00,000
Solution:
Particulars `
Shareholders’Funds under Liabilities Side Approach:
Share Capital 5,00,000
Reserves and Surplus 4,00,000
Shareholders’Funds
9,00,000
Shareholders’Funds under Assets Side Approach:
Fixed Assets (Tangible + Intangible) 10,58,000
Add: Working Capital (Note) 3,42,000
14,00,000
Less: Non-current Liabilities (Long-term Borrowings) 5,00,000
9,00,000
Working Note: Current Assets ` Current Liabilities `
Inventories 3,00,000 Trade Payables 1,50,000
Trade Receivables 1,60,000 Other Current Liabilities 50,000
Cash and Cash Equivalents 82,000
5,42,000 2,00,000
Working Capital = Current Assets – Current Liabilities = ` 5,42,000 – ` 2,00,000 = ` 3,42,000.

Illustration 5.
From the following Balance Sheet of XYZ Ltd., calculate:
(i) Debt to Equity Ratio; (ii) Proprietary Ratio, and (iii) Total Assets to Debt Ratio.
BALANCE SHEET OF XYZ LTD. as at 31st March,2019


(a) Equity Share Capital 15,00,000




(a) Short-term Borrowings 2,00,000

(b) Trade Payables 11,00,000
Total 40,00,000
II. ASSETS


(a) Fixed Assets: Tangible Assets 16,50,000

(b) Long-term Investments 1,60,000

2. Current Assets



Total 40,00,000
Solution:
(i) Debt to Equity Ratio =
Debt (WN 1)
Equity (Shareholders’ Funds) (WN 2)
=
9,00,000
18,00,000
`
`
= 0.50 : 1.
Working Notes:

1. Debt = Long-term Borrowings = ` 9,00,000.

2. Equity (Shareholders’ Funds) = Equity Share Capital + Reserves and Surplus
= ` 15,00,000 + ` 3,00,000 = ` 18,00,000.
(ii) Proprietary Ratio =
Shareholders’ Funds
Total Assets
=
18,00,000
40,00,000
`
`
= 0.45 : 1.
(iii) Total Assets to Debt Ratio =
Total Assets
Debt
=
40,00,000
9,00,000
`
`
= 4.44 : 1.

Illustration 6.
Following is the Statement of Profit and Loss of Hindustan Products Limited for the year
ended 31st March, 2019 and the Balance Sheet of the company as at that date:
STATEMENT OF PROFIT AND LOSS for the year ended 31st March,2019
I. Revenue from Operations 8,00,000
II. Expenses:
Purchases of Stock-in-Trade 5,45,000
Change in Inventories of Stock-in-Trade 1 (1,00,000)
Other Expenses 2,95,000
III. Profit for the Period (I – II) 60,000
Note: Other expenses include direct expenses of ` 15,000.
BALANCE SHEET as at 31st March,2019



(b) Reserves and Surplus 60,000


(a) Trade Payables (Creditors) 1,15,000

(b) Other Current Liabilities (Outstanding Expenses) 15,000

Total 4,80,000
II. ASSETS


Fixed Assets:


2. Current Assets

(a) Inventories (Stock) 1,99,000

(b) Trade Receivables (Debtors) 21,000


Total 4,80,000
Note to Accounts
Particulars `
(1,00,000)
Calculate the following ratios:
(i) Quick Ratio and (ii) Inventory Turnover Ratio.
Solution:
(i) Quick Ratio =
Quick Assets
Current Liabilities
=
+
+
Cash and Cash Equivalents Trade Receivables (Debtors)
Trade Payables Outstanding Expenses
=
30,000 21,000
1,15,000 15,000
` `
` `
51,000
= = .
1,30,000
`
`
0.39 : 1

(ii) Inventory Turnover Ratio
=
Cost of Revenue from Operations, . ., Cost of Goods Sold
Average Inventory
i e
= =
4,60,000
.
1,49,000
`
`
3.09 Times
Working Notes:
1. Cost of Revenue from Operations,i.e.,Cost of Goods Sold
= Purchases of Stock-in-Trade + Change in Inventories of
Stock-in-Trade + Direct Expenses
= ` 5,45,000 – ` 1,00,000 + ` 15,000 = ` 4,60,000.
2. Average Inventory = (Opening Inventory + Closing Inventory)/2
= (` 99,000 + ` 1,99,000)/2 = ` 1,49,000.
Illustration 7.
From the following Statement of Profit and Loss, calculate Inventory Turnover Ratio:
I. Revenue from Operations (Sale) 5,00,000
II. Expenses:
Change in Inventories of Stock-in-Trade 1 60,000
Employee Benefit Expenses 2 40,000
Finance Costs 10,000
Depreciation and Amortisation 20,000
Other Expenses 3 20,000

Total 4,50,000
III. Profit before Tax (I – II) 50,000
IV. Tax Expenses: Current Tax 17,500
V. Profit after Tax (III – IV) 32,500
Notes to Accounts
Particulars `
60,000
2. Employee Benefit Expenses
Wages 10,000
Salaries 30,000
40,000
3. Other Expenses
Carriage Inwards 5,000
Carriage Outwards 5,000
Miscellaneous Expenses 10,000
20,000

Solution: Inventory Turnover Ratio =
Cost of Revenue from Operations
Average Inventory
=
3,75,000
70,000
`
`
= 5.36 Times.
Cost of Revenue from Operations = Purchases of Stock-in-Trade + Change in
Inventories of Stock-in-Trade + Direct Expenses
(i.e., Wages + Carriage Inwards)
=
` 3,00,000 + ` 60,000 + ` 10,000 + ` 5,000 = ` 3,75,000.
Average Inventory =
Opening Inventory + Closing Inventory
2
=
+
=
1,00,000 40,000
70,000
2
` `
` .
Illustration 8.
From the following Statement of Profit and loss, calculate Inventory Turnover Ratio:
II. Other Income 1,00,000
IV. Expenses:
Cost of Materials Consumed 18,00,000
Changes in Inventories of Finished Goods and Work-in-Progress 1 (1,00,000)
Employee Benefit Expenses 7,00,000
Finance Costs 1,00,000

V. Profit before Tax (III – IV) 19,00,000
VI. Tax Expenses: Current Tax 5,00,000
VII. Profit after Tax (V – VI) 14,00,000
Notes to Accounts
Particulars `
1. Changes in Inventories of Finished Goods andWork-in-Progress
Opening 2,00,000
Less: Closing 3,00,000
(1,00,000)
2. Other Expenses
Direct Carriage Inwards,Octroi,etc. 3,00,000
Indirect General and Administration Expenses 3,50,000
6,50,000

Solution: Inventory Turnover Ratio =
Cost of Revenue from Operations
Average Inventory
= =
20,00,000
.
2,50,000
`
`
8 Times
Working Notes:

1. Cost of Revenue from Operations = Cost of Materials Consumed + Changes in Inventories of
Finished Goods and Work-in-Progress + Direct Expenses

=
` 18,00,000 – ` 1,00,000 + ` 3,00,000 = ` 20,00,000.
2. Average Inventory =
Opening Inventory + Closing Inventory
2

=
1
2
(` 2,00,000 + ` 3,00,000) = ` 2,50,000.
Illustration 9.
From the following Balance Sheet of Sure Success Ltd. as at 31st March, 2019, calculate
Return on Investment:
Particulars 31st March,
2019
`
I. Equity and Liabilities

(a) Share Capital:
50,000 Equity Shares of ` 10 each 5,00,000
5,000;9% Preference Shares of ` 10 each 50,000
Surplus,i.e.,Balance in Statement of Profit and Loss 1,25,000

Long-term Borrowings (12% Debentures) 4,00,000

3. Current Liabilities (Trade Payables) 1,70,000

Total 12,45,000
II. Assets

(a) Fixed Assets 11,50,000
Less: Accumulated Depreciation 2,00,000 9,50,000
(b) Non-current Investment:
10% Trade Investment 50,000
10% Other Investment (Face Value ` 35,000) 25,000

2. Current Assets 2,20,000

Total 12,45,000
Net Profit after Interest and Tax for the year ended 31st March, 2019 was ` 1,21,500;
Tax Rate: 40%.
Solution:
Return on Investment (ROI) = ¥
Net Profit before Interest, Tax and Dividend (WN 1)
100
Capital Employed
= ¥
2,47,000
100
10,50,000
`
`
= 23.52%.

Working Notes:
1. Calculation of Net Profit before Interest and Tax:

Let the Net Profit before Tax = ` 100
Tax = 40%

So, Net Profit after Tax = ` 100 – ` 40 = ` 60.
If Net Profit after Tax is ` 60, then Net Profit before Tax = ` 100.
If Net Profit after Tax is ` 1, then Net Profit before Tax =
`
`
100.
60
If Net Profit after Tax is ` 1,21,500, then Net Profit before Tax =
`
`
100
60
× ` 1,21,500 = ` 2,02,500. `
Net Profit before Tax 2,02,500

Add: Interest on Debentures (` 4,00,000 × 12/100) 48,000
2,50,500

Less: Interest on Non-trade Investment
È ˘
¥
Í ˙
Î ˚
`
10
35,000
100
3,500
Net Profit before Interest and Tax 2,47,000
2. Calculation of Capital Employed:

A. Liabilities Side Approach

Capital Employed = Equity Share Capital + Preference Share Capital + Reserves and Surplus
+ Long-term Borrowings – Non-trade Investment
= ` 5,00,000 + ` 50,000 + ` 1,25,000 + ` 4,00,000 – ` 25,000 = ` 10,50,000.

B. Assets Side Approach
Capital Employed = Net Fixed Assets + Trade Investment + Working Capital*
= ` 9,50,000 + ` 50,000 + ` 50,000 = ` 10,50,000.
*Working Capital = Current Assets – Current Liabilities
= ` 2,20,000 – ` 1,70,000 = ` 50,000.
Illustration 10.
Mr. Vijay owns a business and gives the following information:
2018 (`) 2019 (`)
Net Sales 9,00,000 18,00,000
Gross Profit 2,25,000 3,60,000
Current Assets 3,00,000 4,50,000
Current Liabilities 1,50,000 2,50,000
He is of the opinion that his manager Rajeev is very efficient as there is an increase in
profit from ` 2,25,000 to ` 3,60,000 by his efforts.
Again his current assets have increased from ` 3,00,000 to ` 4,50,000 whereas current
liabilities have increased only by ` 1,00,000 and thus his short-term financial position is
also becoming strong.
Do you agree with him? State yes/no. Give reasons for your answer.
Solution:
Undoubtedly, there is an increase in gross profit from ` 2,25,000 to ` 3,60,000, i.e.,
` 1,35,000. But this is not the test of efficiency of the manager. There is an increase in
Net Sales also.

Therefore, we have to calculate Gross Profit Ratio to check the efficiency of the manager.

Gross Profit Ratio for the year ended 31st March, 2018 = ¥
Gross Profit
100
Net Sales
= ¥
2,25,000
100
9,00,000
`
`
= 25%.

Gross Profit Ratio for the year ended 31st March, 2019 = ¥
3,60,000
100
18,00,000
`
`
= 20%.
Gross Profit Ratio has decreased from 25% to 20%, which shows that margin of profit has
decreased in the year ended 31st March, 2019 and Vijay is wrong in his decision.
To test the short-term financial position of the company, we have to calculate Current Ratio.

Current Ratio for the year ended 31st March, 2018 =
Current Assets
Current Liabilities
= =
3,00,000
1,50,000
`
`
2 : 1 .

Current Ratio for the year ended 31st March, 2019 =
4,50,000
2,50,000
`
`
= 9 : 5 or 1.80 : 1.
Since, Current Ratio has decreased from 2 in 2018 to 1.8 in 2019, financial position of
the company has become weak. So Vijay is again wrong in his decision that short-term
financial position of the company is becoming strong.
Illustration 11.
From the following information, calculate Operating Ratio:
II. Other Income 1,00,000
III. Total Revenue 51,00,000
IV. Expenses:
Change in Inventories of Stock-in-Trade (2,00,000)
Employee Benefit Expenses 3,10,000
Depreciation 90,000
Finance Cost 1,00,000

Note to Accounts
Particulars `
1. Other Expenses
Office Expenses 1,20,000
Selling and Distribution Expenses 80,000
Loss on Sale of Fixed Assets 50,000
2,50,000

Solution:
Operating Ratio = ¥
Operating Cost
100
Revenue from Operations
= ¥
31,00,000
100
50,00,000
`
`
= 62%.
Note: Operating Cost = Purchases of Stock-in-Trade + Change in Inventories of Stock-in-Trade
+ Employee Benefit Expenses + Depreciation + Office Expenses
+ Selling and Distribution Expenses
= ` 27,00,000 – ` 2,00,000 + ` 3,10,000 + ` 90,000 + ` 1,20,000 + ` 80,000
= ` 31,00,000.
Total Assets to Debt Ratio
Illustration 12.
Following is the Balance Sheet of Hyatt Ltd. as at 31st March, 2019. You are required to
calculate Total Assets to Debt Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 1 10,00,000 7,50,000
(a) Long-term Borrowings 24,00,000 8,00,000
(b) Long-term Provisions 2,00,000 1,00,000
(b) Short-term Provisions 1,00,000 ...
Total 42,00,000 21,00,000
II. ASSETS
Fixed Assets 20,00,000 11,50,000
2. Current Assets
(a) Inventories 9,00,000 4,00,000
Total 42,00,000 21,00,000
Note to Accounts
2019 (`) 2018 (`)
1. Share Capital
Equity Share Capital 7,50,000 5,00,000
Preference Share Capital 2,50,000 2,50,000
10,00,000 7,50,000

Solution:
Total Assets to Debt Ratio 31st March, 2019 31st March, 2018
=
Total Assets
Debt (Long-term Debts) =
42,00,000
26,00,000
`
`
=
21,00,000
9,00,000
`
`
= 1.62 : 1 = 2.33 : 1
Working Note: 31st March, 2019 (`) 31st March, 2018 (`)
Total Assets = ` 42,00,000 ` 21,00,000
Debt = Long-term Borrowings + Long-term Provisions = ` 26,00,000 ` 9,00,000
Debt to Equity Ratio
Illustration 13.
Following is the Balance Sheet of Zee Ltd. as at 31st March, 2019. You are required to
calculate Debt to Equity Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 10,00,000 7,50,000
(b) Trade Payables 3,50,000 1,50,000
(c) Short-term Provisions 1,50,000 50,000
Total 46,00,000 22,50,000
II. ASSETS
Fixed Assets 20,00,000 11,50,000
2. Current Assets
(a) Inventories 10,00,000 4,50,000
Total 46,00,000 22,50,000
Solution:
Debt to Equity Ratio 31st March, 2019 31st March, 2018
=
Debt
=
26,00,000
13,00,000
`
`
=
9,00,000
10,00,000
`
`
= 2 : 1 = 0.90 : 1

Working Note: ` `
2019 = ` 24,00,000 + ` 2,00,000 26,00,000
2018 = ` 8,00,000 + ` 1,00,000 9,00,000
2019 = ` 10,00,000 + ` 3,00,000 13,00,000
2018 = ` 7,50,000 + ` 2,50,000 10,00,000
Alternatively:
Equity = Non-current Assets + Current Assets – (Non-current Liabilities – Current Liabilities)
2019 = ` 20,00,000 + ` 26,00,000 – ` 24,00,000 – ` 2,00,000 – ` 7,00,000 13,00,000
2018 = ` 11,50,000 + ` 11,00,000 – ` 8,00,000 – ` 1,00,000 – ` 3,50,000 10,00,000
Illustration 14.
Following is the Balance Sheet of Exe Ltd. as at 31st March, 2019. You are required to
calculate Debt to Equity Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 10,00,000 7,50,000
(b) Trade Payables 3,50,000 1,50,000
(c) Short-term Provisions 1,50,000 50,000
Total 32,00,000 18,50,000
II. ASSETS
Fixed Assets 14,00,000 9,50,000
2. Current Assets
(a) Inventories 7,50,000 4,50,000
Total 32,00,000 18,50,000
Solution:
Debt to Equity Ratio 31st March, 2019 31st March, 2018
=
Debt

10,00,000
15,00,000
=
`
`
=
5,00,000
10,00,000
`
`
= 0.67 : 1 = 0.50 : 1

Working Note: ` `
2019 = ` 8,00,000 + ` 2,00,000 10,00,000
2018 = ` 4,00,000 + ` 1,00,000 5,00,000
2019 = ` 10,00,000 + ` 5,00,000 15,00,000
2018 = ` 7,50,000 + ` 2,50,000 10,00,000
Alternatively:
Equity = Non-current Assets + Current Assets – (Non-current Liabilities – Current Liabilities)
2019 = ` 14,00,000 + ` 18,00,000 – ` 8,00,000 – ` 2,00,000 – ` 7,00,000 15,00,000
2018 = ` 9,50,000 + ` 9,00,000 – ` 4,00,000 – ` 1,00,000 – ` 3,50,000 10,00,000
Illustration 15.
Following is the Balance Sheet of Financial Services Ltd. as at 31st March, 2019. You are
required to calculate Current Ratio and Liquid Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 7,50,000 7,50,000
(b) Trade Payables 4,50,000 3,50,000
(c) Other Current Liabilities 1 1,50,000 1,00,000
Total 23,00,000 20,00,000
II. ASSETS
(a) Fixed Assets 7,50,000 7,00,000
2. Current Assets
(a) Inventories 2 4,50,000 3,50,000
(d) Other Current Assets 3 2,00,000 1,00,000

Total 23,00,000 20,00,000
Notes to Accounts
2019 (`) 2018 (`)
1. Other Current Liabilities
Expenses Payable 1,00,000 1,00,000
Current Maturities of Long-term Debt 50,000 ...
1,50,000 1,00,000
2. Inventories
Raw Materials 3,00,000 2,25,000
WIP 1,00,000 75,000
Stores and Spares 50,000 50,000
4,50,000 3,50,000
Prepaid Expenses 50,000 25,000
Advances to Staff 1,50,000 75,000
2,00,000 1,00,000

Solution:
Current Ratio 31st March, 2019 31st March, 2018
=
Current Assets
Current Liabilities
=
13,00,000
8,00,000
`
`
=
10,50,000
5,50,000
`
`
= 1.63 : 1 = 1.91 : 1
Working Note: ` `
Current Assets = Inventories (Excluding Stores and Spares) + Trade
Receivables + Cash and Cash Equivalents + Other
Current Assets
2019 = ` 4,00,000 + ` 5,00,000 + ` 2,00,000 + ` 2,00,000 13,00,000
2018 = ` 3,00,000 + ` 4,50,000 + ` 2,00,000 + ` 1,00,000 10,50,000
Current Liabilities = Short-term Borrowings + Trade Payables + Other Current Liabilities
2019 = ` 2,00,000 + ` 4,50,000 + ` 1,50,000 8,00,000
2018 = ` 1,00,000 + ` 3,50,000 + ` 1,00,000 5,50,000
Liquid Ratio 31st March, 2019 31st March, 2018
=
Liquid or Quick Assets
Current Liabilities
=
8,50,000
8,00,000
`
`
=
7,25,000
5,50,000
`
`
= 1.06 : 1 = 1.32 : 1
Working Note: ` `
Liquid Assets = Trade Receivables + Cash and Cash Equivalents +
Other Current Assets (Advances to Staff)
2019 = ` 5,00,000 + ` 2,00,000 + ` 1,50,000 8,50,000
2018 = ` 4,50,000 + ` 2,00,000 + ` 75,000 7,25,000
Current Liabilities = Short-term Borrowings + Trade Payables + Other Current Liabilities
2019 = ` 2,00,000 + ` 4,50,000 + ` 1,50,000 8,00,000
2018 = ` 1,00,000 + ` 3,50,000 + ` 1,00,000 5,50,000
Illustration 16.
Following is the Balance Sheet of Financial Services Ltd. as at 31st March, 2019. You are
required to calculate Liquid Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 5,00,000 5,00,000
(a) Short-term Borrowings 1 1,00,000 75,000
(b) Trade Payables 2,50,000 2,00,000
Total 18,50,000 14,75,000

II. ASSETS
(a) Fixed Assets 6,00,000 5,50,000
2. Current Assets
(a) Inventories 3,50,000 2,75,000
Total 18,50,000 14,75,000
Notes to Accounts
2019 (`) 2018 (`)
1. Short-term Borrowings
Bank Overdraft 60,000 50,000
Loan Against Fixed Deposit 40,000 25,000
1,00,000 75,000
Advances for Purchases of Goods 1,50,000 75,000
2,00,000 1,00,000
Solution:
=
Current Liabilities
=
7,50,000
3,50,000
`
`
=
5,25,000
2,75,000
`
`
= 2.14 : 1 = 1.91 : 1
Working Note: ` `
Liquid Assets = Trade Receivables + Cash and Cash Equivalents +
Other Current Assets (Advances for Purchases)
2019 = ` 4,00,000 + ` 2,00,000 + ` 1,50,000 7,50,000
2018 = ` 2,50,000 + ` 2,00,000 + ` 75,000 5,25,000
Current Liabilities = Short-term Borrowings + Trade Payables
2019 = ` 1,00,000 + ` 2,50,000 3,50,000
2018 = ` 75,000 + ` 2,00,000 2,75,000
Always Remember: While calculating Current Ratio and Liquid (Quick) Ratio
‘Provision for Doubtful Debts’ and ‘Provision for Discount on Debtors’ are deducted
from Trade Receivables.

Illustration 17.
Following is the Balance Sheet of Computers India Ltd. as at 31st March, 2019. You are
required to calculate Liquid Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 10,00,000 7,50,000
(a) Short-term Borrowings 1 2,00,000 1,50,000
(b) Trade Payables 3,50,000 1,50,000
(c) Short-term Provisions 2 1,50,000 50,000
Total 37,00,000 18,00,000
II. ASSETS
(a) Fixed Assets 14,00,000 7,50,000
2. Current Assets
(a) Inventories 3 7,50,000 4,50,000
(b) Trade Receivables 4 7,50,000 2,50,000
Total 37,00,000 18,00,000
Notes to Accounts
2019 (`) 2018 (`)
Bank Overdraft 1,50,000 1,00,000
Loan from Directors 50,000 50,000
2,00,000 1,50,000
2. Short-term Provisions
Provision for Expenses 50,000 25,000
Provision for Tax 1,00,000 25,000

1,50,000 50,000
3. Inventories
Materials 3,25,000 1,50,000
Stock-in-trade 1,75,000 1,00,000
Finished Goods 1,50,000 1,50,000
Loose Tools 1,00,000 50,000

7,50,000 4,50,000
Sundry Debtors 6,00,000 2,25,000
Bills Receivable 1,50,000 25,000
7,50,000 2,50,000
Solution:
=
Current Liabilities
=
10,50,000
7,00,000
`
`
=
4,50,000
3,50,000
`
`
= 1.50 : 1 = 1.29 : 1

Working Note: ` `
Liquid Assets = Trade Receivables + Cash and Cash Equivalents
2019 = ` 7,50,000 + ` 3,00,000 10,50,000
2018 = ` 2,50,000 + ` 2,00,000 4,50,000
2019 = ` 2,00,000 + ` 3,50,000 + ` 1,50,000 7,00,000
2018 = ` 1,50,000 + ` 1,50,000 + ` 50,000 3,50,000
Illustration 18.
Following is the Balance Sheet of Daily Needs Ltd. as at 31st March, 2019. You are required
to calculate Current Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 10,00,000 7,50,000
(a) Short-term Borrowings 1 2,00,000 1,50,000
(b) Trade Payables 3,50,000 1,50,000
(c) Short-term Provisions 2 1,50,000 50,000
Total 37,00,000 18,00,000
II. ASSETS
(a) Fixed Assets 14,00,000 7,50,000
2. Current Assets
(a) Inventories 3 7,50,000 4,50,000
Total 37,00,000 18,00,000
Notes to Accounts
2019 (`) 2018 (`)
Bank Overdraft 1,50,000 1,00,000
Loan from Directors 50,000 50,000
2,00,000 1,50,000
Provision for Expenses 50,000 25,000
Provision for Tax 1,00,000 25,000

1,50,000 50,000

3. Inventories
Materials 3,25,000 1,50,000
Stock-in-trade 1,75,000 1,00,000
Loose Tools 1,00,000 50,000

7,50,000 4,50,000
7,50,000 2,50,000
Solution:
=
Current Assets
Current Liabilities
=
17,00,000
7,00,000
`
`
=
8,50,000
3,50,000
`
`
= 2.43 : 1 = 2.43 : 1
Working Note: ` `
Current Assets = Inventories (Excluding Loose Tools) +
Trade Receivables + Cash and Cash Equivalents
2019 = ` 6,50,000 + ` 7,50,000 + ` 3,00,000 17,00,000
2018 = ` 4,00,000 + ` 2,50,000 + ` 2,00,000 8,50,000
2019 = ` 2,00,000 + ` 3,50,000 + ` 1,50,000 7,00,000
2018 = ` 1,50,000 + ` 1,50,000 + ` 50,000 3,50,000
Illustration 19.
Following is the Balance Sheet of Total Care Ltd. as at 31st March, 2019. You are required
to calculate Current Ratio for the two years.
BALANCE SHEET
as at 31st March,2019
No. 2019 (`) 2018 (`)
(a) Share Capital 5,00,000 5,00,000
(a) Short-term Borrowings 1 1,00,000 75,000
(b) Trade Payables 2 2,50,000 2,00,000
Total 18,50,000 14,75,000

II. ASSETS
(a) Fixed Assets 6,00,000 5,50,000
2. Current Assets
(a) Inventories 3 4,50,000 3,75,000
Total 18,50,000 14,75,000
Notes to Accounts
2019 (`) 2018 (`)
Loan Against Fixed Deposit 40,000 25,000
1,00,000 75,000
2. Trade Payable
Sundry Creditors 2,00,000 1,65,000
Bills Payable 50,000 35,000
2,50,000 2,00,000
3. Inventories
Materials 2,25,000 1,75,000
Loose Tools 1,00,000 25,000

4,50,000 3,75,000

5,00,000 2,50,000
Solution:
=
Current Assets
Current Liabilities
=
10,50,000
3,50,000
`
`
=
8,00,000
2,75,000
`
`
= 3 : 1 = 2.91 : 1
Working Note:
Current Assets = Inventories (Excluding Loose Tools) + Trade Receivables +
Cash and Cash Equivalents
2019 = ` 3,50,000 + ` 5,00,000 + ` 2,00,000 = ` 10,50,000
2018 = ` 3,50,000 + ` 2,50,000 + ` 2,00,000 = ` 8,00,000
Current Liabilities = Short-term Borrowings + Trade Payables
2019 = ` 1,00,000 + ` 2,50,000 = ` 3,50,000
2018 = ` 75,000 + ` 2,00,000 = ` 2,75,000.

Illustration 20.
Current Assets of a company are ` 17,00,000. Its Current Ratio is 2.5 and Liquid Ratio is
0.95. Calculate Current Liabilities and Inventory.
Solution: Current Ratio =
Current Assets
Current Liabilities
2.5 =
17,00,000
Current Liabilities
`
Current Liabilities = ` 6,80,000
Quick Ratio =
Quick Assets
Current Liabilities
0.95 =
Quick Assets
6,80,000
`
Quick Assets = ` 6,46,000
Inventory = Current Assets – Quick Assets
= ` 17,00,000 – ` 6,46,000 = ` 10,54,000
Thus, Current Liabilities = ` 6,80,000 and Inventory = ` 10,54,000.
Illustration 21.
Following is the Balance Sheet of X Ltd. as at 31st March, 2019:



(b) Reserves and Surplus 1 9,00,000

Long-term Borrowings (10% Loan) 10,00,000

3. Current Liabilities 15,00,000

Total 54,00,000
II. ASSETS

Fixed Assets:

(a) Tangible 25,00,000

(b) Intangible 4,00,000

2. Current Assets

Total 54,00,000
Note to Accounts
Particulars `
1. Reserves and Surplus
(a) General Reserve 3,00,000
(b) Surplus,i.e.,Balance in Statement of Profit and Loss 6,00,000
9,00,000
Surplus, i.e., Balance in Statement of Profit and Loss includes profit of ` 5,00,000 for the
current year.
Compute Return on Capital Employed.

Solution: Return on Capital Employed = ¥
Profit before Interest
100
Capital Employed
= ¥
6,00,000 (WN 1)
100
39,00,000 (WN 2)
`
`
= 15.38%.
Working Notes: `
1. Profit before Interest: Profit 5,00,000
Add: Interest (10% of ` 10,00,000) 1,00,000
Net Profit before Interest 6,00,000
2. Capital Employed: Fixed Assets (Tangible Assets + Intangible Assets) 29,00,000
Working Capital,i.e., Current Assets – Current Liabilities 10,00,000
(` 25,00,000 – ` 15,00,000)
Capital Employed (Assets Side Approach) 39,00,000
Or
Reserves and Surplus 9,00,000
Capital Employed (Liabilities Side Approach) 39,00,000
Always Remember: Capital Employed can be computed from the assets side as well
as the liabilities side of the Balance Sheet. Result in both the workings will be same.
Illustration 22.
Current Assets of a company are ` 9,00,000. Its Current Ratio is 3 and Liquid Ratio is 1.2.
Calculate Current Liabilities, Liquid Assets and Inventory. (Foreign 2005)
Solution:
(i) Current Ratio =
Current Assets
Current Liabilities
3 =
9,00,000
Current Liabilities
`
Current Liabilities =
9,00,000
3
`
= ` 3,00,000.
(ii) Liquid Ratio =
Liquid Assets
Current Liabilities
1.2 =
Liquid Assets
3,00,000
`
Liquid Assets = ` 3,60,000.
(iii) Inventory = Current Assets – Liquid Assets
= ` 9,00,000 – ` 3,60,000 = ` 5,40,000.
Illustration 23.
Calculate Debt to Equity Ratio from the following data:
(i) Total Assets ` 1,25,000 (ii) Total Debts ` 1,00,000 (iii) Short-term Loans ` 50,000.
Solution: Calculation of Debt to Equity Ratio:
Debt to Equity Ratio =
Debt/Long-term Debt
Equity/Shareholders’ Funds
=
50,000
25,000
`
`
= 2 : 1.
Working Notes:
1. Long-term Debt
= Total Debts – Current Liabilities (Short-term Loans)
= ` 1,00,000 – ` 50,000 = ` 50,000.
2. Shareholders’ Funds
= Total Assets – Total Debts = ` 1,25,000 – ` 1,00,000 = ` 25,000.

Illustration 24.
From the following information compute:
(i) Debt to Equity Ratio; (ii) Total Assets to Debt Ratio; (iii) Proprietary Ratio.
Particulars `
Long-term Provisions 2,50,000

Current Liabilities 1,25,000

Non-Current Assets 9,00,000

Current Assets 2,25,000
Solution:
(i) Debt to Equity Ratio =
Debt/Long-term Debt
=
7,50,000
2,50,000
`
`
= 3 : 1.
(ii) Total Assets to Debt Ratio =
Total Assets
Debt
=
11,25,000
7,50,000
`
`
= 1.5 : 1.
(iii) Proprietary Ratio =
Total Assets
= =
2,50,000
.
11,25,000
`
`
0.22 : 1
Working Notes:

1. Debt = Long-term Borrowings + Long-term Provisions = ` 5,00,000 + ` 2,50,000 = ` 7,50,000.

2. Shareholders’ Funds = Total Assets – Non-Current Liabilities – Current Liabilities
= (Non-Current Assets + Current Assets) – (Long-term Borrowings

+ Long-term Provisions) – Current Liabilities

= (` 9,00,000 + ` 2,25,000) – (` 5,00,000 + ` 2,50,000) – ` 1,25,000

= ` 11,25,000 – ` 7,50,000 – ` 1,25,000 = ` 2,50,000.

3. Total Assets = Non-Current Assets + Current Assets = ` 9,00,000 + ` 2,25,000 = ` 11,25,000.
Illustration 25.
The data given below is of SKC Ltd. for 3 years. The company has a loan of ` 360 (lakhs)
repayable in next 5 years. You are required to calculate Interest Coverage Ratio for each year.
(` in Lakhs)
Particulars Year-1 Year-2 Year-3
Profit after Tax (`) 480 575 635
Tax (`) 125 203 254
Interest on Loan (`) 162 125 87
Solution: Interest Coverage Ratio =
Profit before Interest and Tax
Interest on Long-term Debt
Profit before Interest and Tax (`) 767 903 976
Interest Coverage Ratio = 767/162 = 903/125 = 976/87
= 4.73 Times = 7.22 Times = 11.22 Times
Note: Profit before Interest and Tax = Profit after Tax + Tax + Interest on Loan.

Illustration 26.
From the following Statement of Profit and Loss of Business Machines Ltd., calculate
Inventory Turnover Ratio:
for the year ended 31st March,2019
II. Other Income 50,000
IV. Expenses:
Change in Inventory of Stock-in-Trade 1 25,000
Employees Benefit Expenses 1,20,000
Depreciation and Amortisation Expenses 5,000
Other Expenses 20,000
Note to Accounts
Particulars `
1. Change in Inventory of Stock-in-Trade
25,000
Solution: Inventory Turnover Ratio
=
Cost of Revenue from Operations (Cost of Goods Sold)
Average Inventory
=
5,25,000
87,500
`
`
= 6 Times.
= Purchases of Stock-in-Trade + Change in Inventories of Stock-in-Trade
= ` 5,00,000 + ` 25,000 = ` 5,25,000.
Average Inventory =
+
Opening Inventory Closing Inventory
2
=
+
1,00,000 75,000
2
` `

= ` 87,500.
Note: Direct Expenses are not given, hence they are presumed to be nil.
Illustration 27.
A trader carries an Average Inventory of ` 75,000. His Inventory Turnover Ratio is 12 times.
Find out his profit, if he sells at a profit of 20% on sales. (Foreign 2004)
Solution:
Profit = Sales – Cost of Revenue from Operations (Cost of Goods Sold)
= ` 11,25,000 – ` 9,00,000 = ` 2,25,000.

Inventory Turnover Ratio =
Average Inventory
12 =
75,000
`

= ` 75,000 × 12 = ` 9,00,000.
Let Selling Price be ` 100,
Profit = ` 20
Cost = ` 100 – ` 20 = ` 80

If Cost is ` 80, then Sales
= ` 100.

If Cost is ` 9,00,000, then Sales = ¥
100
9,00,000
80
`
`
`
= ` 11,25,000.
Illustration 28.
From the following data, calculate Gross Profit Ratio, Current Ratio, Quick Ratio and
Debt to Equity Ratio:
Revenue from Operations ` 3,00,000; Cost of Revenue from Operations (Cost of Goods
Sold) ` 2,00,000; Net Profit ` 30,000; Current Assets ` 60,000; Inventory ` 10,000; Current
Liabilities ` 20,000; Share Capital ` 50,000 and Debentures ` 25,000.
Solution:
(i) Gross Profit Ratio = ¥
Gross Profit
100
Gross Profit
= Revenue from Operations
– Cost of Revenue from Operations (Cost of Goods Sold)
= ` 3,00,000 – ` 2,00,000 = ` 1,00,000.
Gross Profit Ratio =
1,00,000
3,00,000
`
`
× 100 = 33.33%.
(ii) Current Ratio =
Current Assets
Current Liabilities
=
60,000
20,000
`
`
= 3 : 1.
(iii) Quick Ratio =
Quick Assets
Current Liabilities
=
60,000 – 10,000 (Inventory)
20,000
` `
`
= 2.5 : 1.
(iv) Debt to Equity Ratio =
Debt
=
Debentures
Share Capital + Profit
= =
+
25,000 25,000
50,000 30,000 80,000
` `
` ` `
= 0.31 : 1.

Illustration 29.
Grow More Ltd.
COMPARATIVE BALANCE SHEET as at 31st March,2018 and 2019
Particulars Note 31st March, 31st March, Absolute Percentage
No. 2018 2019 Change Change
(Increase or (Increase or
(a) Share Capital 2,00,000 3,00,000 1,00,000 50.00
(b) Reserves and Surplus 2,00,000 2,00,000 ... ...
Long-term Borrowings 40,000 1,60,000 1,20,000 300.00
Trade Payables 60,000 1,00,000 40,000 66.67
Total 5,00,000 7,60,000 2,60,000 52.00
II. ASSETS
(a) Fixed Assets 3,60,000 5,60,000 2,00,000 55.55
(b) Non-Current Investments 40,000 40,000 ... ...
2. Current Assets
(a) Trade Receivables 80,000 1,20,000 40,000 50.00
(b) Cash and Cash Equivalents 20,000 40,000 20,000 100.00
Total 5,00,000 7,60,000 2,60,000 52.00
1. Trade Receivables as at 31st March, 2017 were ` 60,000.
2. Revenue from Operations (Net Sales) for the year ended 31st March, 2018 and
31st March, 2019 is ` 20,00,000 and ` 30,00,000 respectively. Net Credit Revenue
from Operations being 70% of Revenue from Operations in both the years.
From the above Comparative Balance Sheets and additional information, compute Trade
Receivables Turnover Ratio.
Solution:
Trade Receivables Turnover Ratio 31st March, 2018 31st March, 2019
Credit Revenue from Operations
Average Trade Receivables
=
+
14,00,000
60,000 80,000
2
`
` `
= +
21,00,000
80,000 1,20,000
2
`
` `
= 20 Times = 21 Times
Credit Revenue from Operations = 70% of ` 20,00,000 = 70% of ` 30,00,000
= ` 14,00,000 = ` 21,00,000
Illustration 30.
Current Ratio of a company is 2.5 : 1. State, giving reasons, which of the following would
improve, decline or not change the ratio:
(i) Repayment of long-term loans;
(ii) Goods purchased on credit of 3 months;

(iii) Purchase of computer on credit of 2 months;
(iv) Purchase of building by issuing debentures;
(v) Revenue from Operations, i.e., Sale of goods for ` 20,000 on credit of 1 month
(Cost of Goods Sold ` 15,000);
(vi) Cash collected from debtors;
(vii) Cash paid to creditors;
(viii) Payment of outstanding liabilities;
(ix) Sale of goods for cash ` 20,000 (Cost ` 24,000);
(x) Issue of shares for cash;
(xi) Bills receivable drawn on debtors for 2 months; and
(xii) Bills receivable collected at maturity.
Solution: Statement Showing the Effect of Different Items on Current Ratio
Transactions Effect on Current Ratio Reason
(i) Improve Repayment of long-term loans will reduce Cash and Cash Equivalents, i.e.,
current assets and, current liabilities with the amount paid. Therefore, Current
Ratio will improve.
(ii) Decline Goods purchased on credit will increase inventory, i.e., current assets and also
current liabilities by the same amount. In effect, Current Ratio will decline.
(iii) Decline Purchase of computer on credit which will be paid within 2 months will
increase current liabilities. However, current assets will not change. Therefore,
Current Ratio will decline.
(iv) No change Purchase of building by issuing debentures will not affect current assets or
current liabilities. Therefore, Current Ratio will not change.
(v) Improve Credit Sale of goods at a profit will increase current assets. However, current
liabilities will remain same. Therefore, Current Ratio will improve.
(vi) No change Cash collected from debtors will not change current assets because one current
asset will be replaced by another. Besides, current liabilities will remain same.
Therefore, Current Ratio will not change.
(vii) Improve Cash paid to creditors will reduce current assets and current liabilities by the
same amount. Therefore, Current Ratio will improve.
(viii) Improve Payment of outstanding liabilities will reduce current assets and current
liabilities. Therefore, Current Ratio will improve.
(ix) Decline Sale of goods at a loss will reduce current assets but current liabilities will
remain same. Therefore, Current Ratio will decline.
(x) Improve Issue of shares for cash will increase current assets but current liabilities will
remain same. Therefore, Current Ratio will improve.
(xi) No change Bills receivable drawn on debtors will not change current assets because
one current asset will be replaced by another. Therefore, it will not change
the Current Ratio.
(xii) No change Bills receivable collected at maturity will not change current assets because
one current asset will be replaced by another. Therefore, Current Ratio will
not change.

Illustration 31.
Compute Total Assets to Debt Ratio from the following information:
` `
Total Assets 7,50,000 Bills Payable 30,000
Total Debts 8,00,000 Bank Overdraft 37,500
Creditors 75,000 Outstanding Expenses 17,500
Solution:
Total Assets to Debt Ratio =
Total Assets
Debt
=
7,50,000
6,40,000
`
`
= 1.17 : 1.

Debt = Total Debts – Creditors – Bills Payable – Bank Overdraft – Outstanding Expenses
= ` 8,00,000 – ` 75,000 – ` 30,000 – ` 37,500 – ` 17,500 = ` 6,40,000.

Note: Creditors, Bills Payable, Bank Overdraft and Outstanding Expenses are Current Liabilities. Hence,
these are deducted.
Illustration 32.
From the following information, calculate Total Assets to Debt Ratio:
` `
Total Debt 4,50,000 Short-term Bank Loan 50,000
Sundry Creditors 75,000 Total Assets 5,50,000
Expenses Payable 25,000 Surplus, i.e., Balance in Statement of
Bills Payable 25,000 Profit and Loss (Debit) 20,000
Solution:
Total Assets to Debt Ratio =
Total Assets
Debt
=
5,50,000
2,75,000
`
`
= 2 : 1.
Note: Debt = Total Debt – Short-term Bank Loan – Trade Payables (Sundry Creditors + Bills Payable)
– Other Current Liabilities (Expenses Payable).
= ` 4,50,000 – ` 50,000 – (` 75,000 + ` 25,000) – ` 25,000 = ` 2,75,000.
Illustration 33.
From the following Balance Sheet of Y Ltd. for the year ended 31st March, 2019, calculate
Total Assets to Debt Ratio:
Particulars `



Trade Payables 5,00,000

Total 35,00,000

II. ASSETS

Fixed Assets: Tangible Assets 22,00,000

2. Current Assets




(d) Short-term Loans and Advances 50,000

Total 35,00,000
Solution: Total Assets to Debt Ratio =
Total Assets
Debt
=
35,00,000
10,00,000
`
`
= 3.5 : 1.
Illustration 34.
From the following Balance Sheet of Times Ltd. as at 31st March, 2019, compute Return
on Capital Employed or Return on Investment:



(b) Reserves and Surplus (2,50,000)





Total 17,50,000
II. ASSETS


(a) Fixed Assets 11,20,000

(b) Non-current Investments (Trade) 2,00,000

2. Current Assets



Total 17,50,000
Note: Net Profit for the year before interest and tax is ` 4,65,000.
Solution:
Return on Capital Employed = ¥
Net Profit before Interest and Tax
100
Capital Employed
= ¥
4,65,000
100
15,50,000
`
`
= 30%.

Capital Employed:

1. Liabilities Approach = Share Capital + Reserves and Surplus + Long-term Borrowings
= ` 13,00,000 – ` 2,50,000 + ` 5,00,000 = ` 15,50,000.
2. Assets Approach = Fixed Assets + Non-current Investments (Trade) +
Working Capital (i.e., Current Assets – Current Liabilities)
= ` 11,20,000 + ` 2,00,000 + (` 1,70,000 + ` 1,40,000
+ ` 1,20,000 – ` 1,00,000 – ` 70,000 – ` 30,000) = ` 15,50,000.
Illustration 35.
Matrix Ltd.
COMMON-SIZE STATEMENT OF PROFIT AND LOSS for the years ended 31st March, 2018 and 2019
No. Operations
31st March, 31st March, 31st March, 31st March,
2018 (`) 2019 (`) 2018 (`) 2019 (`)
I. Revenue from Operations 16,00,000 20,00,000 100.00 100.00
II. Employees Benefit Expenses 8,00,000 10,00,000 50.00 50.00
Other Expenses 2,00,000 1,00,000 12.50 5.00
III. Total Expenses 10,00,000 11,00,000 62.50 55.00
IV. Profit beforeTax (I – III) 6,00,000 9,00,000 37.50 45.00
From the above, compute Operating Ratio.
Solution:
Operating Ratio 31st March, 2018 31st March, 2019
¥
Operating Cost
100
= ¥
10,00,000
100
16,00,000
`
`
= ¥
11,00,000
100
20,00,000
`
`
= 62.50% = 55%
Illustration 36.
From the following Balance Sheet of Moon Ltd. as at 31st March, 2019, prepare a
Common-size Balance Sheet and compute Proprietary Ratio:
Particulars Note No. 31st March,

2019 (`)





Short-term Borrowings 12,00,000

Total 1,00,00,000

II. ASSETS


Fixed Assets:
(i) Tangible Assets 60,00,000
(ii) Intangible Assets 12,00,000
2. Current Assets


(b) Cash and Cash Equivalents 8,00,000

Total 1,00,00,000
Solution:
COMMON-SIZE BALANCE SHEET
as at 31st March, 2019
Particulars Note No. Absolute % of Balance

Amount (`) Sheet Total


(a) Share Capital 60,00,000 60

(b) Reserves and Surplus 8,00,000 8

Long-term Borrowings 20,00,000 20

Short-term Borrowings 12,00,000 12

Total 1,00,00,000 100
II. ASSETS


Fixed Assets:
(i) Tangible Assets 60,00,000 60
(ii) Intangible Assets 12,00,000 12
2. Current Assets

(a) Inventories 20,00,000 20

(b) Cash and Cash Equivalents 8,00,000 8

Total 1,00,00,000 100
Proprietary Ratio =
Total Assets
=
68,00,000
1,00,00,000
`
`
= 0.68 : 1.
Shareholders’ Funds = Share Capital + Reserves and Surplus
= ` 60,00,000 + ` 8,00,000 = ` 68,00,000.

Unsolved Questions
1. Current Assets and Current Liabilities of Times Ltd. are as follows:
Current Assets ` Current Liabilities `
Cash and Cash Equivalents 50,000 Creditors 3,00,000
Debtors 3,10,000
Bills Payables 1,20,000
Bills Receivable 30,000 Short-term Borrowings 1,00,000
Marketable Securities 1,50,000
Inventories 5,00,000
10,40,000 5,20,000
Calculate Current Ratio and Liquid Ratio. [Current Ratio = 2 : 1; Liquid Ratio = 1.04 : 1.]
2. From the following Balance Sheet of Star Ltd., calculate Current Ratio:
Particulars `


(a) Share Capital 63,000


(a) Short-term Borrowings 6,000


Total 99,000
II. ASSETS

Fixed Assets (Tangible Assets) 51,000

2. Current Assets

(a) Inventories 18,600

(b) Trade Receivables 9,600

Total 99,000
[Current Ratio = 2 : 1.]
3. Following is the Balance Sheet of Bright Co. Ltd. as at 31st March, 2019:
Particulars `




(i) General Reserve 80,000

(ii) Surplus,i.e.,Balance in Statement of Profit and Loss 20,000 1,00,000

Long-term Borrowings (12% Debentures) 2,00,000


(a) Trade Payables 50,000

Total 11,00,000

II. ASSETS

Fixed Assets (Tangible Assets) 6,00,000

2. Current Assets



Total 11,00,000
Calculate Total Assets to Debt Ratio.
[Total Assets to Debt Ratio = 5.5 : 1.]
4. Following is the Balance Sheet of XYZ Ltd. as at 31st March, 2019:
Particulars `






(b) Short-term Provisions: Provision for Tax 10,000

Total 5,80,000
II. ASSETS


2. Current Assets

(a) Trade Receivables 1,70,000
(b) Cash and Cash Equivalents 30,000

Total 5,80,000
Calculate Return on Investment.
[Return on Investment = 13.75%.]

5. Following is the Balance Sheet of ABC Limited as at 31st March, 2019:






(a) Short-term Borrowings 68,000

(b) Trade Payables (Creditors) 4,00,000


Total 13,80,000
II. ASSETS


2. Current Assets

(a) Inventories (Stock) 2,40,000

(b) Trade Receivables (Debtors) 1,80,000


Total 13,80,000
Notes:
1. Long-term Borrowings are 3,000,10% Debentures of ` 100 each.
2. Short-term Provisions is towards Provision for Tax.

Calculate the following Ratios:
(i) Current Ratio,and (ii) Liquid Ratio.
What conclusions do you draw about the Company on the basis of these Ratios?
[Current Ratio = 1 : 1; Liquid Ratio = 0.50 : 1.]
6. From the following Balance Sheet of Ramji Ltd., calculate Current Ratio:
(a) Short-term Borrowings (Bank Overdraft)
20,000
Total 4,30,000
II. ASSETS

Fixed Assets (Tangible) 2,60,000
2. Current Assets
(a) Inventory (Including Loose Tools ` 10,000) 72,000
(d) Other Current Assets (Accrued Income) 10,000
Total 4,30,000
[Current Ratio = 2 : 1.]

7. From the following Balance Sheet of M and S Ltd., compute Debt to Equity Ratio:



(b) Reserves and Surplus (1,15,000)


(
b) Long-term Provisions 1,42,500



Total 16,25,000
II. ASSETS


(a) Fixed Assets—Tangible 6,15,000

(b) Non-current Investments 1,00,000

(c) Other Non-current Assets 1 30,000

2. Current Assets




(d) Other Current Assets 2 95,000
Total 16,25,000
Notes to Accounts
Particulars `
1. Other Non-Current Assets
Unamortised Loss on Issue of Debentures 30,000
Unamortised Share Issue Expenses 75,000
Interest Receivables 10,000
95,000
[Debt to Equity Ratio = 1.68 : 1.]
8. From the following Balance Sheet, calculate (i) Proprietary Ratio; (ii) Debt to Equity Ratio; and (iii) Total
Assets to Debt Ratio:
BALANCE SHEET OF A LTD. as at 31st March,2019



General Reserve 10,000


Long-term Borrowings 60,000




Total 2,17,000

II. ASSETS

Fixed Assets:

(i) Tangible Assets 95,000

(ii) Intangible Assets 57,000

2. Current Assets
(a) Trade Receivables 25,000

(b) Cash and Cash Equivalents 40,000

Total 2,17,000
[(i) Proprietary Ratio = 0.51 : 1; (ii) Debt to Equity Ratio = 0.55 : 1; (iii) Total Assets to Debt Ratio = 3.62 : 1.]
9. From the following Statement of Profit and Loss for the year ended 31st March, 2019 of Matrix Ltd.,
calculate Inventory (Stock) Turnover Ratio:
I. Revenue from Operations (Net Sales) 25,00,000
IV. Expenses:
(a) Cost of Materials Consumed 1 10,00,000
(b) Changes in Inventories of Finished Goods and WIP 2 1,25,000
(c) Employees Benefit Expenses 3,00,000
(d) Other Expenses 75,000

Notes to Accounts
Particulars `
1. Cost of Materials Consumed
Add: Purchases 9,50,000
11,00,000
10,00,000
2. Changes in Inventories of Finished Goods andWIP
Work-in-Progress
A 25,000
Finished Goods
B 1,00,000
Total (A + B) 1,25,000
[Ans.: Inventory Turnover Ratio = 3.6 Times.]

[Hint: Average Inventory =
OpeningInventory of Materials, WIP andFinished Goods
+ClosingInventory of Materials, WIP andFinished Goods
2
]

10. From the following Balance Sheet of Z Ltd., Calculate:
(i) Debt to Equity Ratio (ii) Total Assets to Debt Ratio
(iii) Proprietary Ratio (iv) Interest Coverage Ratio.
Particulars `

(a) Share Capital:

(i) Equity Share Capital 8,00,000

(ii) 10% Preference Share Capital 2,08,000



12% Mortgage Loan 3,60,000


(a) Short-term Loan 30,000

(b) Trade Payables 1,71,600

Total 17,37,600
II. ASSETS

Fixed Assets
Tangible Assets:
(i) Land and Building 4,80,000
(ii) Furniture 3,60,000
(iii) Machinery 2,52,000 10,92,000

2. Current Assets
(a) Inventory (Stock) 3,00,000

(b) Trade Receivables:

(i) Debtors 1,05,600

(ii) Bills Receivables 2,40,000 6,45,600

Total 17,37,600
Net Profit after Interest and Tax = ` 3,00,000. Rate of Income Tax = 40%.
[(i) Debt to Equity Ratio = 0.31 : 1; (ii) Total Assets to Debt Ratio = 4.83 : 1;
(iii) Proprietary Ratio = 0.68 : 1; (iv) Interest Coverage Ratio = 12.57 Times.]
11. Following is the Statement of Profit and Loss of Sham Ltd. for the year ended 31st March, 2019 and
the Balance Sheet of the company as at that date:
Particulars `
Revenue from Operations (Net Sales) 2,00,000
Expenses:
Changes in Inventories (Opening Stock – Closing Stock) (` 25,000 – ` 30,000) (5,000)
Employees Benefit Expenses (Salaries) 17,000
Other Expenses: Direct Expenses 8,000
Loss on Sale of Furniture 10,000 18,000 1,30,000
Net Profit 70,000

BALANCE SHEET
Particulars `







Total 3,00,000
II. ASSETS


2. Current Assets



Total 3,00,000
Calculate following ratios:
(i) Quick Ratio; (ii) Inventory Turnover Ratio; and (iii) Return on Investment (ROI). (OD 1997, Modified)
[(i) Quick Ratio = 0.54 : 1; (ii) Inventory Turnover Ratio = 3.74 Times;
(iii) ROI = 47.06%.]
[Hint: For ROI, Net Profit = ` 70,000 + ` 10,000 (Loss on Sale of Furniture; being Non-operating) = ` 80,000.]
12. From the following information, calculate any three of the following ratios:
(i) Operating Ratio; (ii) Current Ratio; (iii) Inventory or Stock Turnover Ratio; and (iv) Debt to Equity Ratio.
Particulars `
Equity Share Capital 5,00,000
9% Preference Share Capital 4,00,000
12% Debentures 2,40,000
General Reserve 40,000
Revenue from Operations (Net Sales) 8,00,000
Purchases 5,00,000
Wages 30,000
Closing Inventory 52,000
Other Current Assets 2,00,000
(Foreign 2000, 2003)
[(i) Operating Ratio = 66.5%; (ii) Current Ratio = 1.68 : 1; (iii) Inventory or Stock
Turnover Ratio = 10.52 Times; and (iv) Debt to Equity Ratio = 0.26 : 1.]

13. Following is the Statement of Profit and Loss of Rajasthan Product Limited for the year ended
31st March, 2019 and Balance Sheet as at that date:
I. Revenue from Operations (Sales) 10,00,000

Total Revenue 10,50,000
IV. Expenses:
Cost of Materials Consumed 1 2,00,000
Employees Benefit Expenses 2 2,00,000
Finance Costs 10,000

V. Profit for the Period (III – IV) 3,85,000





Trade Payables 1,50,000

Total 6,50,000
II. ASSETS


2. Current Assets




Total 6,50,000
Notes to Accounts
Particulars `
1. Cost of Materials Consumed:
Opening Stock 1,50,000
Add: Purchases 3,00,000
4,50,000
Less: Closing Stock 2,50,000
2,00,000
2. Employees Benefit Expenses:
Wages 2,00,000
3. Other Expenses:
(a) Manufacturing Expenses 1,00,000
(b) Administrative Expenses 50,000
(c) Selling and Distribution Expenses 50,000
(d) Loss on Sale of Fixed Assets 55,000
2,55,000

There was no Opening and Closing Inventory of Finished Goods and WIP.
Examine the Statement of Profit and Loss and Balance Sheet given above and calculate following ratios:
(i) Gross Profit Ratio (ii) Current Ratio
(iii) Debt to Equity Ratio (iv) Inventory or Stock Turnover Ratio
(v) Liquid Ratio (vi) Proprietary Ratio
(vii) Total Assets to Debt Ratio (viii) Working Capital Turnover Ratio
(ix) Trade Receivables Turnover Ratio (x) Operating Ratio
[(i) Gross Profit Ratio = 50%; (ii) Current Ratio = 2.67 : 1;
(iii) Debt to Equity Ratio = 0.67 : 1; (iv) Inventory or Stock Turnover Ratio = 2.5 Times;
(v) Liquid Ratio = 1 : 1; (vi) Proprietary Ratio = 46.15%; (vii) Total Assets to
Debt Ratio = 3.25 : 1; (viii) Working Capital Turnover Ratio = 2 Times
(based on Cost of Sales), Alternatively = 4 Times (based on Sales);
(ix) Trade Receivables or Debtors’ Turnover Ratio = 10 Times;
(x) Operating Ratio = 60%.]
14. Following is the Balance Sheet of Raddisson Ltd. as at 31st March, 2019. You are required to calculate
Total Assets to Debt Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 7,50,000 6,50,000
(a) Long-term Borrowings 1 15,00,000 5,00,000
(b) Short-term Provisions 1,50,000 50,000
Total 31,00,000 17,00,000
II. ASSETS
Fixed Assets 18,00,000 9,00,000
2. Current Assets
(a) Inventories 5,00,000 3,00,000
Total 31,00,000 17,00,000
Note to Accounts
2019 (`) 2018 (`)
10% Debentures 7,50,000 5,00,000
Term loan from Bank 7,50,000 ...
15,00,000 5,00,000
[Total Assets to Debt Ratio: 2019—1.82 : 1; 2018—2.83 : 1.]

15. Following is the Balance Sheet of Star Ltd. as at 31st March, 2019. You are required to calculate Debt
to Equity Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 7,50,000 7,50,000
(b) Trade Payables 50,000 1,00,000
Total 22,00,000 17,00,000
II. ASSETS
Fixed Assets 8,00,000 9,00,000
2. Current Assets
(a) Inventories 4,50,000 3,00,000
Total 22,00,000 17,00,000
[Debt to Equity Ratio: 2019—1 : 1; 2018—0.67 : 1.]
16. Following is the Balance Sheet of Colours Ltd. as at 31st March, 2019.You are required to calculate Debt
to Equity Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 7,50,000 7,50,000
(b) Long-term Provisions 2,00,000 ...
(a) Trade Payables 3,50,000 1,00,000
(b) Short-term Provisions 1,50,000 50,000
Total 32,00,000 21,50,000
II. ASSETS
Fixed Assets 9,00,000 10,50,000
2. Current Assets
(a) Inventories 8,00,000 4,50,000
Total 32,00,000 21,50,000
[Debt to Equity Ratio: 2019—2 : 1; 2018—1 : 1.]

17. Following is the Balance Sheet of Star Sports Ltd. as at 31st March, 2019. You are required to calculate
Debt to Equity Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 7,50,000 7,50,000
(a) Trade Payables 1,50,000 1,00,000
(b) Short-term Provisions 50,000 ...
Total 26,00,000 21,00,000
II. ASSETS
Fixed Assets 9,00,000 10,50,000
2. Current Assets
(a) Inventories 6,00,000 4,50,000
Total 26,00,000 21,00,000
[Debt to Equity Ratio: 2019—1.67 : 1; 2018—1 : 1.]
18. Following is the Balance Sheet of Best Barcode Ltd. as at 31st March, 2019.You are required to calculate
Current Ratio and Liquid Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 5,00,000 5,00,000
(a) Short-term Borrowings 2,00,000 75,000
(b) Trade Payables 3,50,000 2,00,000
Total 20,00,000 16,75,000
II. ASSETS
(a) Fixed Assets 6,00,000 5,50,000
2. Current Assets
(a) Inventories 4,00,000 2,75,000
(d) Other Current Assets 2,00,000 1,00,000
Total 20,00,000 16,75,000
[Current Ratio: 2019—2.36 : 1; 2018—3.36 : 1; Liquid Ratio: 2019—1.64 : 1; 2018—2.36 : 1.]

19. Following is the Balance Sheet of Master Services Ltd. as at 31st March, 2019. You are required to
calculate Current Ratio and Liquid Ratio for the two years.
No. 2019 (`) 2018 (`)
(a) Share Capital 5,00,000 5,00,000
(b) Trade Payables 3,50,000 2,00,000
Total 20,00,000 16,75,000
II. ASSETS
(a) Fixed Assets 6,00,000 5,50,000
2. Current Assets
(a) Inventories 4,00,000 2,75,000
(d) Other Current Assets 2,00,000 1,00,000
Total 20,00,000 16,75,000
Inventories include Loose Tools amounting to ` 50,000 in both the years.
20. Following is the Balance Sheet of Ultimate Barcode Ltd. as at 31st March, 2019. You are required to
BALANCE SHEETS as at 31st March,2019
No. 2019 (`) 2018 (`)
(a) Share Capital 5,00,000 5,00,000
(b) Trade Payables 3,50,000 1,50,000
(c) Other Current Liabilities 1 1,00,000 ...
Total 20,00,000 16,75,000
II. ASSETS
(a) Fixed Assets 6,00,000 5,50,000
2. Current Assets
(a) Inventories 2 4,00,000 2,75,000
Total 20,00,000 16,75,000

Notes to Accounts
2019 (`) 2018 (`)
Expenses Payable 50,000 ...
Current Maturities of Long-term Debt 50,000 ...

1,00,000 ...
2. Inventories
Raw Materials 2,75,000 2,00,000
WIP 75,000 50,000
Stores and Spares 50,000 25,000
4,00,000 2,75,000
Other Advances 1,50,000 50,000

2,00,000 1,00,000
21. Following is the Balance Sheet of Master Services Ltd. as at 31st March, 2019. You are required to
BALANCE SHEET
No. 2019 (`) 2018 (`)
(a) Share Capital 8,00,000 6,00,000
(b) Trade Payables 3,00,000 2,00,000
(c) Other Current Liabilities 1 2,00,000 1,75,000
Total 25,00,000 20,00,000
II. ASSETS
(a) Fixed Assets 8,00,000 6,50,000
2. Current Assets
(a) Inventories 2 5,00,000 2,50,000
Total 25,00,000 20,00,000

Notes to Accounts
2019 (`) 2018 (`)
Expenses Payable 1,50,000 1,25,000
Current Maturities of Long-term Debt 50,000 50,000

2,00,000 1,75,000
2. Inventories
Raw Materials 3,00,000 2,00,000
WIP 1,00,000 50,000
Loose Tools 1,00,000 ...
5,00,000 2,50,000
Other Advances 75,000 50,000

1,00,000 1,00,000
22. Current Ratio 4.5, Quick Ratio 3 : 1, Inventory ` 72,000. Cash ` 4,000, Gross Profit @ 33
1
%
3
on cost was
` 1,00,000, Cash Revenue from Operations being 33
1
%
3
of Credit Revenue from Operations; Trade
Receivables Turnover Ratio is 3 Times. In current assets, there was no asset other than Inventory, Trade
Receivables and Cash. Calculate the Opening Trade Receivables. [Opening Trade Receivables = ` 60,000.]
[Hint: Current Assets = ` 2,16,000; Quick Assets = ` 1,44,000; Closing Trade Receivables = Quick Assets
– Cash = ` 1,40,000. Credit Revenue from Operations = ` 3,00,000.]

Calculation of Current Assets and Quick Assets:
Quick Ratio = =
Quick Assets (QA) Current Assets - Inventory
Current Liabilities (CL) CL
3 =
`
CA – 72,000
CL
CA – ` 72,000 = 3CL
CA – 3CL = ` 72,000 ...(1)
CA – 4.5CL = 0 [As per Current Ratio] ...(2)
Substracting Equation (2) from (1), we get
1.5CL = ` 72,000 or CL =
` 72,000
1.5
= ` 48,000.
Current Assets = Current Liabilities (CL) × Current Ratio
= ` 48,000 × 4.5 = ` 2,16,000.
Quick Assets = ` 48,000 (CL) × 3 = ` 1,44,000.
23. The Current Ratio of a company is 3 : 1. State giving reason, which of the following would improve,
reduce or not change the ratio:
(i) Repayment of a Current Liability;
(ii) Purchase of goods on cash;
(iii) Sale of office equipment for ` 4,000 (Book value ` 5,000);
(iv) Sale of goods for ` 11,000 (cost ` 10,000);
(v) Payment of dividend. (Delhi 1999)
[(i) Improve; (ii) No change; (iii) Improve; (iv) Improve; (v) Improve.]

24. Current Ratio of a company is 2.5 : 1. Which of the following suggestions would improve, reduce or not
change it?
(i) Payment to trade creditors
(ii) Sold machinery for cash
(iii) Purchased goods for cash
(iv) Issue of Equity Shares
[(i) Increase; (ii) Increase; (iii) No change; (iv) Increase.]
25. Balance Sheet of XYZ Ltd. as at 31st March, 2019 is as follows:
2019 (`) 2018 (`)


(a) Share Capital 1,00,000 1,00,000
(b) Reserves and Surplus 28,700 13,000


(a) Short-term Borrowings 26,000 25,000

(b) Trade Payables 31,000 36,000

Total 1,85,700 1,74,000
II. ASSETS

Fixed Assets (Tangible) 1,12,000 1,08,000

2. Current Assets

(a) Inventories 27,000 25,000

(b) Trade Receivables 45,000 40,000
(c) Cash and Cash Equivalents 1,000 450
(d) Other Current Assets 700 550

Total 1,85,700 1,74,000

Revenue from Operations (Net Sales) amounted to ` 4,00,000 in 2018 and ` 5,00,000 in 2019.
You are required to calculate following ratios: (i) Working Capital Turnover Ratio; (ii) Current Ratio; and
(iii) Quick Ratio.
[(i) Working Capital Turnover Ratio = 2018—80 Times; 2019—29.94 Times;
(ii) Current Ratio = 2018—1.08 : 1; 2019—1.29 : 1;
(iii) Quick Ratio = 2018—0.66 : 1; 2019—0.81 : 1.]
26. Quick assets ` 1,50,000; Inventory ` 50,000; Working Capital ` 1,20,000. Calculate Current Ratio.
[Hints: 1. Current Assets = Quick Assets + Inventory.
2. Current Liabilities = Current Assets – Working Capital.] [Current Ratio = 2.5 : 1.]
27. From the following data, calculate Current Ratio and Operating Ratio:
Sundry Debtors ` 10,000; Bills Payable ` 6,000; Stock ` 15,000; Cash ` 10,000; Bank ` 5,000; Creditors
` 14,000; Sales ` 60,000; Operating Expenses ` 12,000; Cost of Revenue from Operations (Cost of Goods
Sold) ` 18,000. [Current Ratio = 2 : 1; Operating Ratio = 50%.]

28. From the following Balance Sheet and other information, calculate any two of the following ratios:
(i) Debt to Equity Ratio;
(ii) Working Capital Turnover Ratio; and
(iii) Trade Receivables Turnover Ratio.
BALANCE SHEET
Particulars `



Long-term Borrowings (Loan @ 15%) 1,20,000

Trade Payables 50,000

Total 3,60,000
II. ASSETS


2. Current Assets



Total 3,60,000
Other Information:
Sales during the year amounted to ` 1,80,000.
[(i) Debt to Equity Ratio = 0.63 : 1; (ii) Working Capital Turnover Ratio = 1.38 Times;
(iii) Trade Receivables Turnover Ratio = 2 Times.]
29. Following information has been extracted from the books of Elite Electricals:
Revenue from Operations (Net Sales) ` 30,00,000; Cost of Revenue from Operations (Cost of Goods Sold)
` 20,00,000; Net Profit ` 3,00,000; Current Assets ` 6,00,000; Current Liabilities ` 2,00,000; Paid-up Share
Capital ` 5,00,000; Debentures ` 2,50,000. Compute any two ratios based on the above information:
(i) Gross Profit Ratio; (ii) Working Capital Turnover Ratio; and (iii) Debt to Equity Ratio.
[(i) Gross Profit Ratio =
1
33 %
3
(ii) Working Capital Turnover Ratio = 7.5 Times;
(iii) Debt to Equity Ratio = 0.31 : 1.]
30. Current Ratio 2.5; Working Capital ` 60,000. Calculate amount of Current Assets and Current Liabilities.
[Current Assets = ` 1,00,000; Current Liabilities = ` 40,000.]
31. Net Sales of M.S. Limited during the year were ` 1,80,000. If Trade Receivables Turnover Ratio is 4 times,
calculate Trade Receivables in the beginning and at the end of the year. You are informed that closing
Trade Receivables are two times in comparison to opening Trade Receivables.
[Trade Receivables in the beginning = ` 30,000; Trade Receivables at the end = ` 60,000.]

32. From the following information, calculate Working Capital Turnover Ratio:
Marketable Securities ` 1,50,000; Inventory ` 50,000; Sundry Debtors ` 2,00,000; Bills Receivable ` 50,000;
Cash at Bank ` 1,00,000; Cash in Hand ` 50,000; Bills Payable ` 30,000; Sundry Creditors ` 2,00,000;
Provision for Tax ` 20,000; Sales ` 23,00,000; Returns Inward ` 2,00,000.
[Working Capital Turnover Ratio = 6 Times.]
33. From the following information, calculate Inventory Turnover Ratio; Operating Ratio; and Gross Profit Ratio:
Opening Inventory ` 28,000 Carriage Inwards ` 4,000
Closing Inventory ` 22,000 Office Expenses ` 4,000
Purchases ` 46,000 Selling and Distribution Expenses ` 2,000
Revenue from Operations (Net Sales) ` 80,000 Capital Employed ` 2,00,000
Return ` 10,000
[InventoryTurnover Ratio = 2.24Times; Operating Ratio = 77.5%; Gross Profit Ratio = 30%.]

Cash Flow Statement
1. Cash Flow Statement It is the statement that shows flow of Cash and Cash Equivalents
during the period under report.
2. Cash Flows These are the inflows (receipts) and outflows (payments) of Cash and
Cash Equivalents.
3. Cash It comprises of Cash on Hand and demand deposits with banks.
4. Cash Equivalents These are short-term, highly liquid investments that are readily
convertible into known amount of cash and which are subject to an
insignificant risk of change in value. An investment normally qualifies
as cash equivalent only when it has short maturity period of, say,
three months or less from the date of acquisition, i.e., purchase.
5. Operating Activities These are the principal revenue producing activities of the enterprise
and other activities that are not Investing and Financing Activities.
6. Investing Activities These are activities of acquisition and disposal of long-term assets
and other investments not included in cash equivalents.
7. Financing Activities These are the activities that result in change in the size and
composition of the owner’s capital (including Preference Share Capital
in the case of a company) and borrowings of the enterprise.
8. Extraordinary Activities These are incomes or expenses that arise from events or transactions
that are clearly distinct from the ordinary activities of the enterprise
and, therefore, are not expected to recur frequently or regularly.
CHAPTER SUMMARY
• Cash Flow Statement is a statement that shows flow of Cash and Cash Equivalents during the period
under report. The statement shows net increase or decrease of Cash and Cash Equivalents under each
activity separately (operating/investing/financing) and collectively.
• Preparation of Cash Flow Statement: Cash Flow Statement is prepared following the steps as:
Step 1: Compute Cash Flow from Operating Activities.
Step 2: Compute Cash Flow from Investing Activities.
Step 3: Compute Cash Flow from Financing Activities.
Step 4: Cash flows under each activity, i.e., Operating Activity, Investing Activity and Financing Activity as
computed under Steps 1, 2 and 3 are added in Cash Flow Statement and the resultant amount
is Net Increase or Decrease in Cash and Cash Equivalents.
5
C H A P T E R

Step 5: Cash and Cash Equivalents balance in the beginning of the period is added to the cash flows as
arrived under Step 4. The amount so determined should be equal to Cash and Cash Equivalents
balance at the end of the year.
Step 6: Report any significant investing or financing transactions which do not involve Cash or Cash
Equivalents in a separate schedule to Cash Flow Statement.
Proposed Dividend
Proposed Dividend, both on Equity Shares and Preference Shares are paid after being
declared (approved) by the shareholders in the Annual General Meeting. Annual General
Meeting is held after the end of the financial year, i.e., in the next financial year.
AS-4 (Revised), Contingencies and Events Occurring After the Balance Sheet Date
prescribes that Proposed Dividend is not to be provided in the books of account
but is to be disclosed (shown) in the Notes to Accounts as Contingent Liability being
payable upon being declared (approved) by the shareholders. Dividend is an appropriation
of Profit and is deducted from Surplus, i.e., Balance in Statement of Profit and Loss in
the Note to Accounts on Reserves and Surplus in the year in which dividend is paid.
FORMAT OF CASH FLOW STATEMENT (INDIRECT METHOD) for the year ended ...
[As per Accounting Standard-3 (Revised)]
Particulars `
I. Cash Flow from Operating Activities
(A) Net Profit before Tax and Extraordinary Items (as per Working Note) ...
Adjustment for Non-cash and Non-operating Items
(B)
Add: Items to be Added
— Depreciation ...
— Goodwill,Patents and Trademarks Amortised ...
— Interest on Bank Overdraft/Cash Credit ...
— Interest on Borrowings (Short-term and Long-term) and Debentures ...
— Loss on Sale of Fixed Assets ...
— Increase in Provision for Doubtful Debts* ... ...
...
(C)
Less: Items to be Deducted
— Interest Income ...
— Dividend Income ...
— Rental Income ...
— Gain (Profit) on Sale of Fixed Assets ...
— Decrease in Provision for Doubtful Debts* ... ...
(D)
Operating Profit beforeWorking Capital Changes (A + B – C) ...
(E)
Add: Decrease in Current Assets and
Increase in Current Liabilities
— Decrease in Inventories (Stock) ...
— Decrease in Trade Receivables (Debtors/Bills Receivable) ...
— Decrease in Accrued Incomes ...
— Decrease in Prepaid Expenses ...
— Increase in Trade Payables (Creditors/Bills Payable) ...
— Increase in Outstanding Expenses ...
— Increase in Advance Incomes ... ...

Cash Flow Statement 5.3
(F) Less: Increase in Current Assets and
Decrease in Current Liabilities
— Increase in Inventories (Stock) ...
— Increase in Trade Receivables (Debtors/Bills Receivable) ...
— Increase in Accrued Incomes ...
— Increase in Prepaid Expenses ...
— Decrease in Trade Payables (Creditors/Bills Payable) ...
— Decrease in Outstanding Expenses ...
— Decrease in Advance Incomes ... ...
(G)
Cash Generated from Operations (D + E – F) ...
(H)
Less: Income Tax Paid (Net of Tax Refund received) ...
(I) Cash Flow before Extraordinary Items ...
— Extraordinary Items (+/–) ...
(J) Cash Flow from (or Used in) Operating Activities ...
II. Cash Flow from Investing Activities
— Proceeds from Sale of Fixed Assets ...
— Proceeds from Sale of Investments (Other than Current Investments (to be
included in Cash and Cash Equivalents) and Marketable Securities) ...
— Proceeds from Sale of Intangible Assets ...
— Interest and Dividend received (For Non-financial Companies only) ...
— Rent Received ...
— Payment for Purchase of Fixed Assets (...)
— Payment for Purchase of Investments (Other than Marketable Securities) (...)
— Payment for Purchase of Intangible Assets like Goodwill (...)
— Extraordinary Items (e.g.,Insurance Claim on Machinery against Fire) (+/–) ...
Cash Flow from (or Used in) Investing Activities ...
III. Cash Flow from Financing Activities
— Proceeds from Issue of Shares and Debentures ...
— Proceeds from Other Long-term Borrowings ...
— Increase/Decrease in Bank Overdraft and Cash Credit ...
— Final Dividend paid during the year (...)
— Interim Dividend paid during the year (...)
— Payment of Interest on Debentures and Loans (Short-term and Long-term) (...)
— Repayment of Loans (...)
— Redemption of Debentures/Preference Shares (...)
— Payment of Share Issue Expenses (...)
— Payment for Buy-back of Shares as Extraordinary Activity (...)
Cash Flow from (or Used in) Financing Activities ...
IV. Net Increase/Decrease in Cash and Cash Equivalents (I + II + III) ...
V. Add: Cash and Cash Equivalents in the beginning of the year
— Cash-in-Hand ...
— Cash at Bank ...
— Short-term Deposits ...
— Current Investments ...
— Marketable Securities ... ...
...
VI. Cash and Cash Equivalents at the end of the year
— Cash-in-Hand ...
— Cash at Bank ...
— Short-term Deposits ...
— Current Investments ...
— Marketable Securities ... ...
*Alternatively, increase/decrease in Provision for Doubtful Debts may be treated under increase/decrease in
Current Liabilities.In this situation,increase/decrease in Provision for Doubtful Debts is adjusted after Operating
Profit before Working Capital Changes.

Working Note: Net Profit beforeTax and Extraordinary Items: `
Net Profit as per Statement of Profit and Loss or Difference between Closing Balance and
Opening Balance of Surplus,i.e.,Balance in Statement of Profit and Loss ...
Add: Transfer to Reserves ...
Dividend (Proposed Dividend of previous year) paid during the year ...
Interim Dividend paid during the year ...
Provision for Tax for the current year ...
Extraordinary Items,if any,debited to the Statement of Profit and Loss ...
...
Less: Extraordinary Items,if any,credited to the Statement of Profit and Loss ...
Refund of Tax credited to the Statement of Profit and Loss ... ...
Net Profit beforeTax and Extraordinary Items ...
IMPORTANT NOTE
1. Current Investments to be taken as Marketable Securities unless otherwise specified.
2. Bank overdraft and cash credit is shown as part of Financing Activities.
Illustration 1. Following relevant information is obtained from the books of X Ltd.:
2019 (`) 2018 (`)
Short-term Provision:Provision for Tax 70,000 50,000
The amount of tax paid during 2018–19 amounted to ` 40,000. How would you deal
with this item while preparing Cash Flow Statement? You are also given net profit after
taxation ` 80,000.
Solution:
Dr. PROVISION FOR TAX ACCOUNT Cr.
Particulars
` Particulars
`
To Bank A/c (Tax Paid) 40,000 By Balance b/d 50,000
To Balance c/d
70,000 By Statement of Profit and Loss (Bal.Fig.) 60,000
(Tax Provided)
1,10,000 1,10,000
Note: If Opening and Closing amounts of Provision for Tax are given with the figure of tax paid (provided)
during the year, prepare Provision for Tax Account to ascertain the amount of tax provided (paid) during the
current year.
Solved Questions

CASH FLOW FROM OPERATING ACTIVITIES
Particulars ` `
Net Profit after Tax 80,000
Add: Provision for Tax 60,000
Cash Generated from Operations 1,40,000
Less: Tax Paid 40,000
Cash Flow from Operating Activities 1,00,000
Illustration 2. Calculate Net Profit before Tax and Extraordinary Items from the following
Balance Sheet of Prime Hotels Ltd. as at 31st March, 2019:
2019 (`) 2018 (`)
(a) Share Capital 8,00,000 6,00,000
(b) Reserves and Surplus 1 3,30,000 2,20,000
(a) Short-term Borrowings 2 40,000 55,000
(d) Short-term Provisions 3 70,000 40,000
Total 13,15,000 10,05,000
II. ASSETS
(a) Fixed Assets: Tangible Assets 9,75,000 6,05,000
2. Current Assets 2,30,000 3,00,000
Total 13,15,000 10,05,000
Notes to Accounts
2019 (`) 2018 (`)
General Reserve 1,20,000 80,000
Surplus,i.e.,Balance in Statement of Profit and Loss 2,10,000 1,40,000
3,30,000 2,20,000
Note:Proposed dividend for the years ended 31st March,2018 and 2019 are ` 90,000 and ` 1,00,000 respectively.

Solution:
Net Profit before Tax and Extraordinary Items: `
Surplus, i.e., Balance in Statement of Profit and Loss (Closing) 2,10,000
Less: Surplus, i.e., Balance in Statement of Profit and Loss (Opening) 1,40,000
70,000
Add: Transfer to General Reserve (` 1,20,000 – ` 80,000) 40,000
Dividend (Previous Year) Paid during the year 90,000
Provision for Tax (Current Year) 70,000
Net Profit before Tax and Extraordinary Items 2,70,000
Illustration 3. Calculate Cash Flow from Operating Activities from the following information:
`
Net Profit (After Provision for Tax ` 3,06,000) 14,06,000
Proposed Dividend 2,42,000
Above Net Profit is determined after following Credit and Debits:
Credits:
(i) Compensation for Earthquake Disaster 1,50,000
(ii) (Gain) Profit on Sale of Machinery 35,000
(iii) Dividend Received on Investments 30,000
Debits:
(i) Depreciation 2,80,000
(ii) Loss on Sale of Investments 60,000
Decrease or Increase in Current Assets and Current Liabilities is as follows:
Decrease in Current Assets (Other than Cash and Cash Equivalents) 20,000
Increase in Current Liabilities (Other than Bank Overdraft and Cash Credit) 3,02,000
Increase in Current Assets (Other than Cash and Cash Equivalents) 6,00,000
Decrease in Current Liabilities (Other than Bank Overdraft and Cash Credit) 1,28,000
Other Information:
Income Tax Paid 2,36,000
Refund of Income Tax Received 6,000
Solution: CASH FLOW FROM OPERATING ACTIVITIES
Particulars `
Net Profit After Tax 14,06,000
Add: Provision for Tax 3,06,000
17,12,000
Less: Refund of Income Tax 6,000

Extraordinary Items: Compensation for Earthquake Disaster 1,50,000 1,56,000
Net Profit beforeTax and Extraordinary Items 15,56,000
Add: Non-Cash/Non-Operating Items:
Depreciation 2,80,000
Loss on Sale of Investments 60,000
Less: Non-Cash/Non-Operating Items:
Gain (Profit) on Sale of Machinery (35,000)
Dividend Received on Investments (30,000)
Net Profit beforeWorking Capital Changes 18,31,000
Add: Decrease in Current Assets 20,000
Increase in Current Liabilities 3,02,000
21,53,000
Less: Increase in Current Assets (6,00,000)
Decrease in Current Liabilities (1,28,000) (7,28,000)
Cash Flow from Operating Activities beforeTax and Extraordinary Items 14,25,000
Less: Income Tax Paid (Net of Refund) (2,30,000)
Cash Flow from Operating Activities afterTax 11,95,000
Add: Extraordinary Item: Compensation for Earthquake Disaster 1,50,000
Note: Proposed Dividend is not taken as the Net Profit given is after Provision for Tax.

Illustration 4. From the following information, calculate Cash Flow from Operating Activities
and Investing Activities:
2018 (`) 2019 (`)
Surplus,i.e.,Balance in Statement of Profit and Loss 50,000 2,00,000
Trade Payables 20,000 75,000
Current Assets (Inventories and Trade Receivables) 2,30,000 2,60,000
Fixed Assets 4,25,000 4,66,000
Accumulated Depreciation 2,12,500 2,20,000
1. Tax paid during the year ` 15,000.
2. A machine costing ` 40,000 (Book value ` 10,000) was sold at a gain (profit) of ` 4,000.
Solution:
CASH FLOW FROM OPERATING ACTIVITIES AND INVESTING ACTIVITIES
Particulars `
(A) Cash Flow from Operating Activities
Net Profit before Tax and Extraordinary Items (WN 1) 1,65,000
Add: Depreciation (WN 3) 37,500
Less: Gain (Profit) on Sale of Machinery (4,000)
Operating Profit beforeWorking Capital changes 1,98,500
Less: Increase in Current Assets (30,000)
Add: Increase in Trade Payable 55,000 25,000
2,23,500
(B) Cash Flow from Investing Activities
Sale of Machinery 14,000
Purchase of Fixed Assets (WN 2) (81,000)
Cash Used in Investing Activities (67,000)
Working Notes:
1. Calculation of Net Profit before Tax and Extraordinary Items: `
Closing Surplus, i.e., Balance in Statement of Profit and Loss 2,00,000

Less: Opening Surplus, i.e., Balance in Statement of Profit and Loss 50,000
1,50,000

Add: Provision for Tax made during the Current Year 15,000
2.Dr. FIXED ASSETS ACCOUNT Cr.
Particulars ` Particulars `
To Balance b/d 4,25,000 By Bank A/c (Sale) 14,000
To Gain (Profit) on Sale of Asset A/c 4,000 By Accumulated Depreciation A/c 30,000
(Statement of Profit and Loss) (Depreciation on Sold Machine)
To Bank A/c (Purchase) (Bal.Fig.) 81,000 By Balance c/d 4,66,000
5,10,000 5,10,000

3.Dr. ACCUMULATED DEPRECIATION ACCOUNT Cr.
To Fixed Assets A/c (Transfer) 30,000 By Balance b/d 2,12,500
To Balance c/d 2,20,000 By Depreciation A/c (Bal.Fig.) 37,500
2,50,000 2,50,000
Illustration 5. Calculate Cash Flow from Financing Activities from the following:
2018 (`) 2019 (`)
12% Preference Share Capital 2,00,000 ...
10% Debentures ... 1,00,000
1. Equity shares were issued at a premium of 15%, underwriting commission paid thereon
` 10,000.
2. 12% Preference shares were redeemed at a premium of 5%.
3. 10% Debentures were issued at a discount of 10%.
4. Interest paid on debentures ` 10,000.
5. Dividend paid on preference shares ` 24,000.
6. Interim dividend paid on equity shares ` 64,000.
Solution: CASH FLOW FROM FINANCING ACTIVITIES
Particulars `
Issue of Equity Shares (` 2,00,000 + ` 30,000) 2,30,000
Redemption of 12% Preference Shares (` 2,00,000 + ` 10,000) (2,10,000)
Issue of 10% Debentures (` 1,00,000 – ` 10,000) 90,000
Underwriting Commission Paid (10,000)
Interest Paid on Debentures (10,000)
Dividend Paid on Preference Shares (24,000)
Interim Dividend Paid on Equity Shares (64,000)
Cash Flow from Financing Activities 2,000
Illustration 6. X Ltd. provides the following information, calculate the Net Cash
Flow from Investing Activities and Net Cash Flow from Financing Activities as per
AS-3 (Revised):
2018 (`) 2019 (`)
8% Preference Share Capital 2,00,000 1,50,000
11% Debentures 2,00,000 1,00,000
Securities Premium Reserve ... 50,000
Investment 1,00,000 2,50,000
Goodwill ... 1,00,000
Machinery 2,15,000 4,00,000
Patents 1,50,000 ...

1. Dividend on equity shares ` 50,000. The company paid preference dividend also.
2. Dividend received on shares held as an investment ` 15,000.
3. Interest received on ‘Government Bonds’ held as an investment ` 26,000.
4. A plot of land was purchased out of surplus funds for investment purposes and was
let out for commercial use and rent received ` 1,10,000.
5. All issues and redemption were made at the end of the year.
Solution: CASH FLOW FROM INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Particulars `
(A) Cash Flow from Investing Activities
Sale of Patents 1,50,000
Interest received on Government Bonds 26,000
Dividend Received on Shares held as Investments 15,000
Rent received on Plot of Land 1,10,000 3,01,000
Goodwill Purchased (1,00,000)
Investment Purchased (1,50,000)
Machinery Purchased (1,85,000) (4,35,000)
Cash Used in Investing Activities (1,34,000)
(B) Cash Flow from Financing Activities
Issue of Share Capital (including premium) 5,50,000
Dividend Paid (50,000)
Preference Dividend Paid (16,000)
Redemption of Preference Shares (50,000)
Redemption of Debentures (1,00,000)
Interest on Debentures (Note) (22,000) 3,12,000
Cash Flow from Financing Activities 3,12,000
Note: It is presumed that the company must have paid Interest on Debentures as it cannot pay Preference
Dividend and Equity Dividend without payment of interest. Decrease in Patents is considered as Sales.
Illustration 7. Following is the extract from the Balance Sheet of Atlas Ltd.:
2018 (`) 2019 (`)

ReservesandSurplus: Surplus,i.e.,Balance in Statement of Profit and Loss 5,00,000 9,00,000
II. ASSETS
Goodwill 11,50,000 9,00,000
Patents 9,00,000 11,50,000
Land 2,50,000 10,50,000
Plant and Machinery 85,00,000 93,20,000

Less: Provision for Depreciation (42,50,000) (44,00,000)
10% Investment 10,50,000 2,50,000
1. Investments costing ` 2,00,000 were purchased and some investments were sold at a
loss of 20% on 31st March, 2019.
2. Goodwill amortised was ` 5,00,000 and patents purchased was ` 5,00,000.

3. Depreciation provided on Plant and Machinery was ` 14,50,000. A machine costing
` 21,00,000 was sold at profit of 20%.

Calculate Cash Flow from Operating Activities and Cash Flow from Investing Activities.
Solution: Atlas Ltd.
CASH FLOW STATEMENT for the year ended 31st March, 2019
Particulars `
Surplus,i.e.,Balance in Statement of Profit and Loss (Closing) 9,00,000
Less: Surplus,i.e.,Balance in Statement of Profit and Loss (Opening) 5,00,000
Net Profit before Tax 4,00,000
Add: Patents Amortised (WN 2) 2,50,000
Goodwill Amortised (WN 1) 5,00,000
Depreciation 14,50,000
Loss on Sale of investment (WN 4) 2,00,000
Less: Gain (Profit) on Sale of Machinery (1,60,000)
Income from Investment (1,05,000) 25,35,000
Purchase of Land (WN 3) (8,00,000)
Purchase of Investment (2,00,000)
Sale of Investment (WN 4) 8,00,000
Income from Investment 1,05,000
Purchase of Machinery (WN 5) (29,20,000)
Sale of Machinery (WN 5) 9,60,000
Purchase of Patents (5,00,000)
Purchase of Goodwill (WN 1) (2,50,000) (28,05,000)
Working Notes:
1.Dr. GOODWILL ACCOUNT Cr.
To Balance b/d 11,50,000 By Statement of Profit and Loss (Amortised) 5,00,000
To Bank A/c (Purchase) (Bal.Fig.) 2,50,000 By Balance c/d 9,00,000
14,00,000 14,00,000
2.Dr. PATENTS ACCOUNT Cr.
To Balance b/d 9,00,000 By Statement of Profit and Loss (Amortised) 2,50,000
To Bank A/c (Purchase) 5,00,000 (Bal.Fig.)
By Balance c/d 11,50,000
14,00,000 14,00,000
3.Dr. LAND ACCOUNT Cr.
To Balance b/d 2,50,000 By Balance c/d 10,50,000
To Bank A/c (Purchase) (Bal.Fig.) 8,00,000
10,50,000 10,50,000

4.Dr. 10% INVESTMENT ACCOUNT Cr.
To Balance b/d 10,50,000 By Bank A/c (80% of ` 10,00,000) (Bal.Fig.) 8,00,000
To Bank A/c (Purchased) 2,00,000 By Loss on Sale of Investment A/c 2,00,000
(Statement of Profit and Loss)
12,50,000 12,50,000
5.Dr. PLANT AND MACHINERY ACCOUNT Cr.
To Balance b/d 85,00,000 By Bank A/c (Sale) 9,60,000*
To Gain (Profit) on Sale of Machine A/c 1,60,000 By Provision for Depreciation A/c 13,00,000
(Statement of Profit and Loss) By Balance c/d 93,20,000
1,15,80,000 1,15,80,000
* ` 21,00,000 – ` 13,00,000 (All Depreciation) + 20% of (` 21,00,000 – ` 13,00,000) = ` 9,60,000.
6.Dr. PROVISION FOR DEPRECIATION ACCOUNT Cr.
To Plant and Machinery A/c (Bal. Fig.) 13,00,000 By Balance b/d 42,50,000
(Accumulated Depreciation) By Depreciation A/c (Depreciation Provided) 14,50,000
To Balance c/d 44,00,000
57,00,000 57,00,000
Illustration 8. Prepare Cash Flow Statement on the basis of the information given in the
Balance Sheet of P.S. Ltd. as at 31st March, 2019:
2019 (`) 2018 (`)
(a) Share Capital 2,50,000 2,00,000
(b) Reserves and Surplus 1 70,000 50,000
Long-term Borrowings (12% Debentures) 80,000 1,00,000
(a) Trade Payables 2 1,60,000 60,000
(b) Other Current Liabilities (Outstanding Expenses) 20,000 25,000
Total 5,80,000 4,35,000
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets:Land and Building 2,80,000 2,00,000
(ii) Intangible Assets:Patents 2,000 10,000
(b) Long-term Loans and Advances 1,30,000 1,00,000
2. Current Assets
(a) Current Investments 5,000 3,000
(b) Inventories 90,000 70,000
(c) Trade Receivables 60,000 40,000
(d) Cash and Cash Equivalents 13,000 12,000
Total 5,80,000 4,35,000

Notes to Accounts
2019 (`) 2018 (`)
Surplus,i.e.,Balance in Statement of Profit and Loss 70,000 50,000
2. Trade Payables
Creditors 60,000 40,000
Bills Payable 1,00,000 20,000
1,60,000 60,000
Solution: P.S. Ltd.
CASH FLOW STATEMENT
for the year ended 31st March, 2019
Particulars `
Closing Balance of Surplus,i.e.,Balance in Statement of Profit and Loss 70,000
Less: Opening Balance of Surplus,i.e.,Balance in Statement of Profit and Loss 50,000
Net Profit before Tax and Extraordinary Items 20,000
Add: Non-cash Expenses:Patents Amortised 8,000
Non-operating Expense:Interest on 12% Debentures* 12,000 20,000
Operating Profit before Working Capital Changes 40,000
Add: Increase in Current Liabilities:
Creditors 20,000
Bills Payable 80,000 1,00,000
1,40,000
Less: Increase in Current Assets and Decrease in Current Liabilities:
Outstanding Expenses 5,000
Trade Receivables 20,000
Inventories 20,000 45,000
Cash Flow from Operating Activities 95,000
Purchase of Land and Building (80,000)
Loans and Advances (30,000)
Proceeds from Issue of Equity Shares 50,000
Repayment of Long-term Borrowings (20,000)
Interest on 12% Debentures (12,000)
IV. Net Increase in Cash and Cash Equivalents (I + II + III) 3,000
V. Cash and Cash Equivalents in the beginning of theYear (` 3,000 + ` 12,000)
15,000
VI. Cash and Cash Equivalents at the end of theYear (IV +V) (` 5,000 + ` 13,000) 18,000
*Debentures’ interest @ 12% on ` 1,00,000.

Illustration 9. From the following Balance Sheet of Bhushan Steel Ltd., prepare
Cash Flow Statement:
2019 (`) 2018 (`)


(a) Share Capital 1 9,50,000 8,00,000

(b) Reserves and Surplus 2 1,44,000 (20,000)
Long-term Borrowings: 15% Debentures 5,00,000 4,00,000


(a) Trade Payables 2,02,000 82,000

(b) Short-term Provisions (Provision for Tax) 18,000 18,000
Total 18,14,000 12,80,000
II. ASSET


(a) Fixed Assets 3 9,04,000 3,40,000
(b) Investments (Non-Current) 90,000 80,000

2. Current Assets

(a)
Inventories 4,00,000 3,00,000


Total 18,14,000 12,80,000
Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital
9,50,000 8,00,000
Securities Premium Reserve 10,000 10,000
Surplus,i.e.,Balance in Statement of Profit and Loss 1,34,000 (30,000)
1,44,000 (20,000)
3. Fixed Assets
Tangible Assets 10,00,000 4,00,000

Less: Accumulated Depreciation 96,000 60,000
9,04,000 3,40,000

Less: Provision for Doubtful Debts 32,000 20,000
1,12,000 3,52,000
1. Dividend on equity shares @ 9% was paid during the year.
2. Investments costing ` 20,000 were sold at a profit of 40%.
3. Fixed Assets costing ` 40,000 (accumulated depreciation ` 16,000) were sold for ` 34,000.
4. Fresh Equity Shares were issued at a premium of 5% and preference shares were redeemed
at par on 1st April, 2018.
5. Additional debentures amounting to ` 1,00,000 issued on 1st August 2018 at a discount
of 10% but redeemable at par after two years. The company wrote off discount on issue
of debentures from Securities Premium Reserve.

Solution: Bhushan Steel Ltd.
CASH FLOW STATEMENT for the year ended 31st March,2019
Particulars ` `
Net Profit (Note 1) 1,64,000
Add: Interim Dividend on Equity Shares Paid during the year 72,000
Provision for Tax 18,000
Dividend on Preference Shares 18,000
Net Profit before Tax and Extraordinary Items
2,72,000

Add: Non-Cash/Non-Operating Items:
Depreciation (Note 3) 52,000
Interest on Debentures (Note 5) 70,000
Provision for Doubtful Debts 12,000 1,34,000
4,06,000
Less: Gain(Profit) on Sale of Investments (being Investing Activity) 8,000
Gain (Profit) on Sale of Fixed Assets (being Investing Activity) 10,000 18,000
Operating Profit before Working Capital Changes 3,88,000
Add: Decrease in Current Assets:
Trade Receivables 2,28,000
Increase in Current Liabilities:
Trade Payables 1,20,000 3,48,000
7,36,000
Less: Increase in Current Assets:

Inventories 1,00,000


Purchase of Fixed Assets (Notes 2 and 3) (6,40,000)
Sale of Fixed Assets 34,000
Purchase of Investments (Note 4) (30,000)
Sale of Investments 28,000

(C) Cash Flow from Financing Activities
Proceeds from Issue of Equity Shares 2,00,000
Premium Received on Issue of Shares 10,000
Proceeds from Issue of Debentures 90,000
Redemption of Preference Shares (50,000)
Dividend Paid on Equity Shares (72,000)
Dividend on Preference Shares (18,000)
Interest on Debentures Paid (70,000)

Net Increase in Cash and Cash Equivalents (A + B + C) 1,00,000

Add: Cash and Cash Equivalents in the beginning of the year 2,08,000
Cash and Cash Equivalents at the end of the year 3,08,000
Working Notes:
1. Negative Surplus, i.e., Balance in Statement of Profit and Loss of ` 30,000 appearing in the previous
year’s Balance Sheet means the amount of loss. In the current year, after covering this loss of ` 30,000,
surplus of ` 1,34,000 is appearing on the liabilities side. It means that during the current year net profit
earned by the company is ` 1,64,000 (i.e., ` 1,34,000 + ` 30,000).

To Gain (Profit) on Sale of Asset A/c 10,000 By Accumulated Depreciation A/c 16,000
(Statement of Profit and Loss) (Depreciation on Fixed Assets Sold)
To Bank A/c (Bal.Fig.,being Purchase) 6,40,000 By Balance c/d
10,00,000

10,50,000 10,50,000
To Fixed Assets A/c 16,000 By Balance b/d 60,000
(Transfer of Depreciation on By Depreciation (Bal.Fig.) 52,000
Fixed Assets Sold) (Statement of Profit and Loss)
To Balance c/d 96,000

1,12,000 1,12,000
4.Dr. INVESTMENTS ACCOUNT Cr.
To Balance b/d 80,000 By Bank A/c (Sale) 28,000
To Gain (Profit) on Sale of Investment A/c 8,000 (` 20,000 + 40% of ` 20,000)
(Statement of Profit and Loss) By Balance c/d 90,000
To Bank A/c (Bal.Fig.,being Purchase) 30,000

1,18,000 1,18,000
5. Interest on Debentures = (` 4,00,000 × 15/100) + (` 1,00,000 × 15/100 × 8/12) = ` 60,000 + ` 10,000 = ` 70,000.
6. Since dividend payment on preference shares has a priority over payment of interim dividend payment on equity
shares so payment of dividend on preference shares is implied.
Illustration 10. Prepare Cash Flow Statement on the basis of information given in the
Balance Sheet of Simco Ltd. as at 31st March, 2019:
2019 (`) 2018 (`)
(a) Share Capital 1 1,00,000 80,000
Long-term Borrowings 3 14,000 12,000
(a) Trade Payables 22,000 24,000
(b) Short-term Provisions 4 8,400 6,000
Total 1,54,400 1,28,000

II. ASSETS

Fixed Assets: Tangible (Net) 5 50,000 60,000
2. Current Assets
(c) Cash and Cash Equivalents 7,000 2,400
(d) Other Current Assets 6 1,000 600
Total 1,54,400 1,28,000
Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital
Equity Share Capital 80,000 55,000
12% Preference Share Capital 20,000 25,000
1,00,000 80,000
General Reserve 7,600 4,000
10,000 6,000
15% Debentures 14,000 12,000
Provision for Taxation 8,400 6,000
5. Fixed Assets
Tangible Assets (Cost) 80,000 82,000

50,000 60,000
Prepaid Expenses 1,000 600

1. Proposed Dividend for the year ended 31st March, 2018 and 2019 are ` 10,000 and
` 8,000 respectively.

2. Provision for tax made ` 9,400.

3. Fixed assets costing ` 20,000 (accumulated depreciation till date of sale ` 6,000) were
sold for ` 10,000.
4. New Debentures were issued on 31st March, 2019.
Solution: Simco Ltd.
Particulars ` `
Net Profit before Tax and Extraordinary Items (WN 1) 23,400

Add: Depreciation (WN 4) 14,000
Interest on Debentures (15% of ` 12,000) 1,800
Loss on Sale of Fixed Assets (WN 3) 4,000


Adjustment for Change in Current Assets and Current Liabilities:

Decrease in Trade Payable (2,000)
Increase in Inventories (12,000)
Increase in Trade Receivables (19,400)
Increase in Prepaid Expenses (400)
Cash Generated from Operating Activities beforeTax 9,400

Less: Tax Paid (WN 2) 7,000

Sale of Fixed Assets (WN 3) 10,000

Proceeds from Issue of Equity Share Capital 25,000
Redemption of 12% Preference Shares (5,000)
Proceeds from Issue of 15% Debentures 2,000
Interest on Debentures (1,800)
Final Dividend Paid during the year (10,000)

(D) Net Increase in Cash and Cash Equivalents (A + B + C) 4,600

Add: Opening Balance of Cash and Cash Equivalents 2,400
(E) Closing Balance of Cash and Cash Equivalents 7,000
Working Notes:
1. Calculation of Net Profit before Tax and Extraordinary Items: `
Difference between Closing and Opening balance of Surplus, i.e.,
Balance in Statement of Profit and Loss 400

Add: Transfer to General Reserve 3,600
Proposed Dividend (Previous Year) paid during the year 10,000
2.Dr. PROVISION FOR TAX ACCOUNT Cr.
(Bal.Fig.) By Statement of Profit and Loss (Provision Made) 9,400
To Balance c/d 8,400
15,400 15,400
To Bank A/c (Bal.Fig.) 18,000 By Accumulated Depreciation A/c 6,000
By Loss on Sale of Asset A/c 4,000
By Balance c/d 80,000
1,00,000 1,00,000

To Fixed Assets A/c (Transfer) 6,000 By Balance b/d 22,000
To Balance c/d 30,000 By Depreciation (Balancing Figure) 14,000
36,000 36,000
Illustration 11. From the following Balance Sheet of ABC Ltd., prepare Cash Flow Statement:
2019 (`) 2018 (`)
(a) Share Capital 5,00,000 5,00,000
Long-term Borrowings 2 6,00,000 4,75,000
(b) Trade Payables 1,75,000 1,00,000
(c) Short-term Provisions 4 1,25,000 1,00,000
Total 17,50,000 13,75,000
II. ASSETS

Fixed Assets:
(i) Tangible Assets 5 10,75,000 9,25,000
(ii) Intangible Assets 6 25,000 37,500
2. Current Assets
(a) Inventories 2,50,000 1,37,500
(d) Other Current Assets 7 37,500 50,000
Total 17,50,000 13,75,000
Notes to Accounts
2019 (`) 2018 (`)
2,75,000 1,50,000
10% Debentures 3,75,000 2,50,000
Mortgage Loan 2,25,000 2,25,000
6,00,000 4,75,000
Cash Credit 20,000 25,000
75,000 50,000
Provision for Tax 1,25,000 1,00,000

5. Fixed Assets

Tangible Assets:
Land and Building 3,50,000 6,50,000
Machinery 7,25,000 2,75,000
10,75,000 9,25,000
6. Fixed Assets

Intangible Assets:

Brands 25,000 37,500

1. During the year ` 27,500 depreciation was charged on machinery.

2. Gain on sale of Land and Building ` 50,000.
3. Interest paid ` 62,500.
Solution: ABC Ltd.
Particulars ` `
Net Profit (` 1,87,500 – ` 1,00,000) 87,500

Provision for Tax (CurrentYear) 1,25,000

Net Profit beforeTax 2,50,000

Adjustment for Non-cash and Non-operating Items:

Add: Depreciation 27,500
Brands written off 12,500
Interest Paid 62,500

Less: Gain on Sale of Land and Building (50,000)
Operating Profit before Working Capital Changes
3,02,500

Add: Increase in Current Liabilities and Decrease in Current Assets:

Inventories (1,12,500)
Trade Receivables (1,00,000)
Net Cash Inflow from Operating Activities before Tax 1,77,500

Less: Income Tax Paid 1,00,000

Sale of Land and Building (WN 1) 3,50,000

Proceed from Bank Overdraft 30,000
Issue of Debentures 1,25,000
Payment of Cash Credit (5,000)
Interest Paid (62,500)

(E) Add: Cash and Cash Equivalents at the beginning
1,00,000
(F) Cash and Cash Equivalents at the end (D + E) 1,37,500

Working Notes:
1.Dr. LAND AND BUILDING ACCOUNT Cr.
To Balance b/d 6,50,000 By Bank A/c (Sale) 3,50,000
To Gain on Sale of Land and Building A/c 50,000 (Bal.Fig.)
7,00,000 7,00,000
2.Dr. MACHINERY ACCOUNT Cr.
To Balance b/d 2,75,000 By Depreciation A/c 27,500
To Bank A/c (Purchase) (Bal.Fig.) 4,77,500 By Balance c/d 7,25,000
7,52,500 7,52,500
Illustration12. From the following Balance Sheet of Bhusan Steel Ltd. as at 31st March,
2019, prepare its Cash Flow Statement:
2019 (`) 2018 (`)
(a) Share Capital 1 7,00,000 5,00,000
Short-term Provisions 4 50,000 25,000
Total 12,00,000 11,00,000
II. ASSETS
(a) Fixed Assets:
Tangible Assets (Machinery) 5,00,000 3,00,000
2. Current Assets
(a) Inventories 1,50,000 2,00,000
Total 12,00,000 11,00,000
Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital
7,00,000 5,00,000
General Reserve 1,50,000 3,75,000
2,50,000 3,25,000
9% Debentures 2,00,000 2,50,000

(i) Machinery costing ` 1,00,000 on which depreciation charged was ` 70,000, was sold
at a profit of 20% on book value. Depreciation charged during the year amounted to
` 70,000.
(ii) Preference Shares were redeemed at par on 31st March, 2019.
(iii) Debentures were redeemed on 1st January, 2019 and Equity Shares were issued on 1st
April, 2018.
(iv) The company declared and paid interim dividend on Equity Shares @ 8%. It did not
propose final dividend on Equity Shares.
(v) Non-current Investments costing ` 60,000 were sold at a profit of 20%.
(vi) Income tax ` 45,000 was provided.
Solution: CASH FLOW STATEMENT
Particulars ` `
A. Cash Flow from Operating Activities
Net Profit before Tax (WN 1) 42,000

Adjustment for Non-cash and Non-operating Items:

Add: Depreciation on Machinery (WN 3) 70,000

Less: Gain (Profit) on Sale of Machinery (WN 3) (6,000)

Add: Interest on Debentures 21,375
[(9% × ` 2,50,000 × 9/12) + (9% × ` 2,00,000 × 3/12)]

Less: Gain (Profit) on Sale of Non-current Investments (WN 4) (12,000)
1,15,375

Add: Decrease in Current Assets:
Inventories 50,000

Trade Receivables (30,000)

Net Cash Inflow from Operating Activities 1,35,375

Less: Tax Paid (WN 2) 20,000 1,15,375

B. Cash Flow from Investing Activities

Purchase of Non-current Investment (WN 4) (1,20,000)
Sale of Machinery (WN 3) 36,000
Sale of Non-current Investments (WN 4) 72,000 (3,12,000)

C. Cash Flow from Financing Activities

Cash Proceeds from Issue of Equity Shares (` 6,00,000 – ` 3,00,000) 3,00,000
Redemption of 12% Preference Shares (1,00,000)
Redemption of 9% Debentures (50,000)
Payment of Preference Dividend (12% of ` 2,00,000) (24,000)
Payment of Equity Dividend (8% of ` 6,00,000) (48,000)
Payment of Interest on Debentures (21,375) 56,625

D. Net Decrease in Cash and Cash Equivalents (A + B + C) (1,40,000)
Add: Opening Cash and Cash Equivalents 3,10,000
E. Closing Cash and Cash Equivalents 1,70,000

Working Notes:
1. Calculation of Net Profit beforeTax and Extraordinary Items: `
Closing Balance of Surplus,i.e.,Balance in Statement of Profit and Loss 1,00,000
Add: Opening Balance of Surplus, i.e.,Balance in Statement of Profit and Loss (Debit) 50,000
1,50,000
Less: Transferred from General Reserve (2,25,000)
(75,000)
Dividend on Preference Shares (12% of ` 2,00,000,WN 5) 24,000
Dividend (Interim) on Equity Shares (8% of ` 6,00,000) 48,000
Net Profit beforeTax and Extraordinary Items 42,000
2. Dr. PROVISION FOR TAX ACCOUNT Cr.
Particulars
` Particulars
`
To Bank A/c (Tax Paid) (Balancing Figure) 20,000 By Balance b/d 25,000
To Balance c/d 50,000 By Statement of Profit and Loss (Provision) 45,000
70,000 70,000
3. Dr. MACHINERY ACCOUNT Cr.
Particulars
` Particulars
`
To Balance b/d 3,00,000 By Bank A/c (Sale) (` 30,000 + ` 6,000) 36,000
To Gain (Profit) on Sale of Machinery A/c 6,000 By Depreciation A/c 70,000
6,06,000 6,06,000
4. Dr. NON-CURRENT INVESTMENTS ACCOUNT Cr.
Particulars
` Particulars
`
To Gain (Profit) on Sale of Investment A/c 12,000 (` 60,000 + 20% of ` 60,000)
2,72,000 2,72,000
5. Preference Shareholders get a preferential right as to payment of dividend.In the given question,company declared and
paid dividend on Equity Shares. So, it is implied that dividend was first paid to the preference shareholders and then to
equity shareholders.

Illustration 13. From the following Balance Sheet of ABC Ltd., prepare the Cash Flow
Statement:
2019 (`) 2018 (`)


(a) Share Capital 35,000 30,000


Long-term Borrowings:
10% Debentures 25,000 15,000


(a) Short-term Borrowings—Cash Credit 5,000 4,000

(b) Trade Payables 2 12,500 8,500
Total 99,500 63,000
II. ASSETS


(a) Fixed Assets (Net) 3 41,000 32,000

(b) Non-current Investmets:10% Investments 8,000 3,000

2. Current Assets



Total 99,500 63,000
Notes to Accounts
2019 (`) 2018 (`)
Surplus,i.e.,Balance in Statement of Profit and Loss 7,000 (4,500)
22,000 5,500
2. Trade Payables
Sundry Creditors 11,000 7,500
12,500 8,500
3. Fixed Assets
Machinery (Cost) 54,000 41,000

Less: Provision for Depreciation 13,000 9,000
41,000 32,000
1. Investments costing ` 3,000 were sold for ` 2,800 during the year.
2. A new machine was purchased for ` 13,000.

Solution:
CASH FLOW STATEMENT
Particulars `
Closing Balance as per Surplus,i.e.,Balance in Statement of Profit and Loss 7,000
Add: Opening Debit Balance (Loss) as per
Surplus,i.e.,Balance in Statement of Profit and Loss 4,500
Transfer to General Reserve 5,000
Add: Non-cash and Non-operating Expenses:
Depreciation 4,000
Loss on Sale of 10% Investments 200
Interest on Debentures 1,500 5,700
22,200
Less: Non-operating Income:
Interest on 10% Investments 300
Sundry Creditors 3,500
Bills Payable 500 4,000
Less: Increase in Current Assets: 25,900
Inventories 2,500
Trade Receivables 11,000 13,500
Purchase of Machinery (13,000)
Purchase of Investments (WN 3) (8,000)
Proceeds from Sale of Investments 2,800
Interest on 10% Investments 300
Proceeds from Issue of Equity Share Capital 5,000
Proceeds from Long-term Borrowings (10% Debentures) 10,000
Increase in Short-term Borrowings (Cash Credit) 1,000
(E) Add: Cash and Cash Equivalents in the beginning of the year 12,000
(F) Cash and Cash Equivalents at the end of the year (D + E) 21,000
Working Notes:
1. It is assumed that new debentures have been issued at the end of the current accounting year.
2. It is assumed that new investments have been purchased at the end of the current accounting year.

3.Dr. 10% INVESTMENTS ACCOUNT Cr.
To Balance b/d 3,000 By Bank A/c 2,800
To Bank A/c (Purchase) 8,000 By Loss on Sale (Statement of Profit and Loss) 200
(Balancing Figure) By Balance c/d 8,000
11,000 11,000
Illustration 14. From the following Balance Sheet of XY Ltd. as on 31st March, 2019,
prepare Cash Flow Statement:
2019 (`) 2018 (`)


(a) Share Capital 1 8,50,000 4,60,000


10% Debentures 1,80,000 2,00,000
Total 12,00,000 9,20,000
II. ASSETS

Fixed Assets 7,00,000 5,00,000

2. Current Assets

(a) Inventories 2,50,000 2,10,000



(d) Other Current Assets 3 ... 20,000
Total 12,00,000 9,20,000
Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital
8% Preference Share Capital 1,00,000 60,000
8,50,000 4,60,000
Securities Premium Reserve ... 20,000

1,70,000 2,60,000
Share Issue Expenses ... 20,000
(i) During the year machine costing ` 80,000 was sold for ` 50,000.
(ii) Dividend paid ` 80,000. (Delhi 2008, Modified)

Particulars `
Net Loss as per Surplus,i.e.,Balance in Statement of Profit and Loss (` 1,20,000 – ` 1,70,000) (50,000)
Add: Dividend paid 80,000
Less: Transfer from Reserve (20,000)
Add: Debentures Interest (` 2,00,000 × 10/100) 20,000
Loss on Sale of Machinery 30,000
60,000
Adjustment forWorking Capital Changes:
Inventories 40,000
Cash Used in Operating Activities (30,000)
Sale of Fixed Assets 50,000
Purchases of Fixed Assets (WN 2) (2,80,000)
Issue of Equity Share Capital 3,50,000
Issue of Preference Share Capital 40,000
Redemption of Debentures (20,000)
Dividend Paid (80,000)
Interest on Debentures Paid (20,000)
Add: Cash and Cash Equivalents in the beginning of the year 50,000
Cash and Cash Equivalents at the end of the year 60,000
Working Notes:
1. It is assumed that debentures had been redeemed at the end of the year.
2. Dr. FIXED ASSETS ACCOUNT Cr.
To Bank A/c (Purchases) 2,80,000 By Loss on Sale of Assets A/c 30,000
(Balancing Figure) (Statement of Profit and Loss)
7,80,000 7,80,000
3. Share Issue Expenses have been adjusted from Securities Premium Reserve as per Section 52(2) of the
Companies Act,2013.
4. It is assumed that Dividend paid includes dividend on equity as well as Preference Shares.

Illustration 15. From the following Balance Sheet of ABC Ltd. as at 31st March, 2019,
prepare the Cash Flow Statement:
2019 (`) 2018 (`)


(a) Share Capital: Equity Share Capital 35,000 30,000


10% Debentures 25,000 15,000

3. Current Liabilities:

(a) Short-term Borrowings—Bank Overdraft 1,000 700



Total 94,500 69,000
II. ASSETS


(a) Fixed Assets
(i) Tangible Assets: Machinery 41,000 32,000
(ii) Intangible Assets: Goodwill 8,000 10,000

(b) Non-current Investments (10% Investments) 8,000 3,000

2. Current Assets



Total 94,500 69,000
Note to Accounts
2019 (`) 2018 (`)
22,000 15,500
1. Investments costing ` 3,000 were sold for ` 2,800 during the year.
2. A new machine was purchased for ` 13,000. Depreciation of ` 4,000 has been charged
on machinery,
3. During the year, company purchased its own Debentures for ` 4,500 (Face Value ` 5,000)
and sold them at a gain (profit) of ` 300.

Particulars ` `
Closing Balance of Surplus,i.e.,Balance in Statement of Profit and Loss 7,000

Less: Opening Balance of Surplus,i.e.,Balance in Statement of Profit and Loss 5,500
1,500

6,500
Less: Gain (Profit) on Sale of Own Debentures 300

Adjustment for Non-Cash and Non-Operating Items:

Add: Depreciation on Machinery 4,000
Goodwill amortised 2,000
Loss on Sale of Investments 200
Interest on Debentures 1,500 7,700

Less: Non-Operating Income:
Interest on Investments (` 3,000 × 10/100) (300)

Other Current Liabilities 500 3,700
17,300

Inventories 1,500

Purchase of Machinery (13,000)
Purchase of 10% Investments (WN 3) (8,000)
Proceeds from Sale of 10% Investments 2,800
Purchase of Own Debentures (as investment) (4,500)
Proceeds from Sale of Own Debentures 4,800
Interest on Investments 300

Proceeds from Issue of Share Capital 5,000
Proceeds from Long-term Borrowings (Debentures) 10,000
Increase in Bank Overdraft 300
(E) Add: Cash and Cash Equivalents in the beginning of the year
12,000
(F) Cash and Cash Equivalents at the end of the year (D + E) 13,000
Working Notes:
1. It has been assumed that new debentures have been issued at the end of current accounting year.
2. It has been assumed that new investments have been purchased at the end of the current accounting year.

To Balance b/d 3,000 By Bank A/c 2,800
To Bank A/c (Purchase) 8,000 By Loss on Sale of Investments A/c 200
(Balancing Figure) (Statement of Profit and Loss)
By Balance c/d 8,000
11,000 11,000
4.Dr. MACHINERY ACCOUNT Cr.
To Balance b/d 32,000 By Depreciation A/c 4,000
To Bank A/c 13,000 By Balance c/d 41,000
45,000 45,000
Illustration 16. From the following Balance Sheet of X Ltd., prepare Cash Flow Statement:
Particulars Note No. 31st March,2019 31st March, 2018

` `
(a) Share Capital 1 6,30,000 5,60,000
(a)
(b) Other Current Liabilities 14,000 28,000
(c) Short-term Provisions (Provision for Tax) 16,000 16,000
Total 12,32,000 9,52,000
II. ASSETS

Fixed Assets:Plant and Machinery 3,92,000 2,80,000
2. Current Assets
(a)
Inventories 1,26,000 1,82,000
(b)
Trade Receivables 6,30,000 4,20,000
Total 12,32,000 9,52,000
Note to Accounts
2019 (`) 2018 (`)
1. Share Capital
6,30,000 5,60,000
1. An old machinery having book value of ` 42,000 was sold for ` 56,000.

2. Depreciation provided on machinery during the year ` 28,000.
3. Interim Dividend paid on equity shares during the current year ` 56,000.

Particulars ` `
Closing Balance of Surplus,i.e.,Balance in Statement of Profit and Loss 3,08,000
Less: Opening Balance of Surplus,i.e.,Balance in Statement of Profit and Loss 1,82,000
1,26,000
Add: Interim Dividend Paid on Equity Shares during the CurrentYear 56,000
Preference Dividend Paid during the year 16,000
Add: Non-Cash Expense:
Depreciation 28,000
2,42,000
Less: Gain (Profit) on Sale of Machinery 14,000
Add: Decrease in Current Assets and Increase in Current Liabilities:
Inventories 56,000
Trade Payables 98,000 1,54,000
3,82,000
Trade Receivables 2,10,000
Other Current Liabilities 14,000 2,24,000
Proceeds from Sale of Machinery 56,000
Payment for Purchase of Machinery (WN) (1,82,000)
Proceeds from Issue of Equity Shares 70,000
Interim Dividend Paid on Equity Shares (56,000)
Preference Dividend Paid (16,000)
Cash Used in Financing Activities (2,000)
(E) Cash and Cash Equivalents at the end of year 84,000
Working Notes:
1. Dr. PLANT AND MACHINERY ACCOUNT Cr.
To Gain (Profit) on Sale of Machinery A/c 14,000 By Depreciation A/c 28,000
To Bank A/c (Balancing Figure) 1,82,000
(Purchase of Machinery)
4,76,000 4,76,000
2. Preference Shareholders get a preferential right as to payment of dividend.In the given question,company declared and
paid dividend on Equity Shares. So, it is implied that dividend was first paid to the preference shareholders and then to
equity shareholders.

Illustration 17. From the following information, calculate Cash Flow from Investing
Activities of X Ltd.:
Particulars 31st March,2018 (`) 31st March,2019 (`)
1. Investments @ 10% 2,50,000 5,00,000
2. Fixed Assets 8,75,000 11,90,000
1. Half of the investments held in the beginning of the year were sold at 10% gain (profit).
2. Depreciation on Fixed Assets was ` 1,00,000 for the year.
3. Interest received on investments—` 35,000.
4. Dividend received on investments—` 15,000.
5. Rent received—` 10,000.
Solution: CASH FLOW FROM INVESTING ACTIVITIES
Particulars `
Proceeds from Sale of Investments 1,37,500
Purchase of Investments (WN 1) (3,75,000)
Purchase of Fixed Assets (WN 2) (4,15,000)
Interest Received 35,000
Dividend Received 15,000
Rent Received 10,000
Working Notes:
1. Dr. INVESTMENTS ACCOUNT Cr.
To Balance b/d (Opening) 2,50,000 By Bank A/c (Sale) 1,37,500
To Gain on Sale of Investment A/c 12,500 (` 2,50,000 × ½ = ` 1,25,000)
(Statement of Profit and Loss) (Gain 10% of ` 1,25,000 = ` 12,500)
To Bank A/c (Purchase of Investments) 3,75,000 By Balance c/d 5,00,000
(Balancing Figure)
6,37,500 6,37,500
To Balance b/d (Opening) 8,75,000 By Depreciation A/c 1,00,000
To Bank A/c (Purchase) 4,15,000 By Balance c/d 11,90,000
(Balancing Figure)
12,90,000 12,90,000

Illustration 18. Statement of Profit and Loss of XYZ Ltd. for the year ended
31st March, 2019 and additional information is given below. Calculate Cash Flow from
Operating Activities.
I. Revenue from Operations (Net Sales) 18,00,000
II. Other Income 1 22,000
IV. Expenses:
(a) Purchases of Stock-in-Trade 14,56,000
(b) Change in Inventories of Stock-in-Trade (16,000)
(Opening Inventories ` 80,000 and Closing Inventories ` 96,000)
(c) Employees Benefit Expenses 1,80,000
(d) Depreciation and Amortisation Expenses 50,000
(e) Other Expenses 2 1,74,000
18,44,000
V. Net Loss for theYear (III – IV) (22,000)
Notes to Accounts
Particulars `
1. Other Income
Rent 15,000
Miscellaneous 7,000
22,000
2. Other Expenses
Manufacturing Expenses 30,000
Insurance 9,000
Administration Expenses 47,000
Loss on Sale of Assets 30,000
1,74,000
31st March, 2019 (`) 31st March, 2018 (`)
1. Wages Payable 10,000 ...
2. Salaries Payable 25,000 ...
3. Prepaid Insurance 3,000 ...
4. Accrued Commission 7,000 ...

Solution: CASH FLOW FROM OPERATING ACTIVITIES
Particulars `
Net Loss as per Statement of Profit and Loss (22,000)
Adjustments for Non-Cash and Non-Operating Items:
Add: Depreciation and Amortisation Expenses 50,000
Loss on Sale of Assets 30,000 80,000
58,000
Less: Non-Operating Income: Other Incomes (Rent and Miscellaneous) 22,000
Wages Payable 10,000
Salaries Payable 25,000 35,000
71,000
Inventories (` 96,000 – ` 80,000) 16,000
Accrued Commission 7,000
Prepaid Insurance 3,000 26,000
Illustration 19. From the following Balance Sheet and information, prepare Cash Flow
Statement:
2019 (`) 2018 (`)


(a) Share Capital 8,00,000 5,00,000



(a) Short-term Borrowings: Bank Loan 50,000 ...

(b) Trade Payables 1 75,000 1,00,000
(c) Short-term Provisions: Provision for Tax 65,000 50,000

Total 14,40,000 9,50,000
II. ASSETS


(a) Fixed Assets:
(ii) Intangible Assets: Goodwill 50,000 1,00,000
(b) Non-current Investments 2,70,000 ...

2. Current Assets

(a) Current Investments 3 90,000 ...


(c) Trade Receivables 80,000 40,000

(d) Cash and Cash Equivalents: Cash and Bank Balance 3,80,000 50,000

Total 14,40,000 9,50,000

Notes to Accounts
2019 (`) 2018 (`)
1. Trade Payables
Creditors 55,000 50,000
75,000 1,00,000
2. Tangible Assets
Building 2,50,000 4,00,000
5,20,000 7,00,000
3. Current Investments
Investment in Securities (Other than Marketable Securities) 90,000 ...

1. ` 50,000 as Interim Dividend was paid during the year.

2. Building is sold at book value.
Solution: CASH FLOW STATEMENT for the year ended 31st March, 2019
Particulars `
Net Profit before Tax and Extraordinary Items (WN) 2,65,000
Add:
Non-Cash Items and Non-operating Items:
Goodwill amortised (` 1,00,000 – ` 50,000) 50,000
Depreciation on Plant and Machinery (` 3,00,000 – ` 2,70,000) 30,000
Creditors (Trade Payables) 5,000
Inventories 10,000
3,66,000
Bills Payable (Trade Payables) 30,000 70,000
Cash Generated from Operating Activities 2,96,000
Proceeds from Sale of Building 1,50,000
Purchase of Non-Current Investments (2,70,000)
Purchase of Securities (90,000)
Proceeds from Issue of Shares 3,00,000
Payment of Interest on Debentures (6,000)
Payment of Interim Dividend (50,000)
Proceeds from raising of Bank Loan 50,000
(D) Net Increase In Cash and Cash Equivalents (A + B + C) 3,30,000
(E) Cash and Cash Equivalents at the end of the year 3,80,000

Working Note: `
Balance—Statement of Profit and Loss as on 31st March, 2019 3,50,000
Less: Balance—Statement of Profit and Loss as on 31st March, 2018 2,00,000
1,50,000
Add: Appropriations:
Interim Dividend Paid 50,000
Provision for Tax (Current Year) 65,000
Illustration 20. From the following Balance Sheet of A Ltd., prepare Cash Flow Statement
as per AS-3 (Revised), as at 31st March, 2019:
2019 (`) 2018 (`)


(a) Share Capital: Equity Share Capital 2,00,000 2,00,000

(a) Short-term Borrowings:Cash Credit ... 10,000

(c) Other Current Liabilities 1 5,000 5,000
(d) Short-term Provisions: Provision for Tax 25,000 20,000

Total 3,40,000 3,00,000
II. ASSETS

Fixed Assets 2,75,000 2,35,000

2. Current Assets



(c) Cash and Cash Equivalents 2 30,000 30,000
Total 3,40,000 3,00,000
Notes to Accounts
2019 (`) 2018 (`)
Outstanding Expenses 1,000 5,000
Unclaimed Dividend 4,000 ...
5,000 5,000
2. Cash and Cash Equivalents
Cash 10,000 8,000
Bank 20,000 22,000
30,000 30,000
Net Profit for the year after providing ` 20,000 for depreciation was ` 60,000. During the
year, the company declared the interim dividend @ 10% and paid ` 15,000 as income tax.

Solution: CASH FLOW STATEMENT for the year ended 31st March, 2019
Particulars `
Net Profit before Tax and Extraordinary Items (WN 1) 80,000
Add: Non-Cash Item: Depreciation 20,000
1,15,000
Less: Tax Paid (Given) 15,000
Cash Used in Investing Activities
(60,000)
Decrease in Cash Credit (10,000)
Payment of Dividend [` 20,000 – ` 4,000 (Unclaimed)] (16,000)
Cash Used in Financing Activities (26,000)
(D) Net Increase in Cash and Cash Equivalents (A + B + C) Nil
Add: Opening Balance of Cash and Cash Equivalents 30,000
(E) Closing Balance of Cash and Cash Equivalents 30,000
Working Notes:
1. Calculation of Net Profit before Tax and Extraordinary Items:
`
Surplus, i.e., Balance in Statement of Profit and Loss as on 31st March, 2019 90,000
Less: Surplus,i.e.,Balance in Statement of Profit and Loss as on 31st March,2018 50,000
40,000
Add: Appropriations:
Interim Dividend 20,000
To Cash A/c (Balancing Figure) 60,000 By Balance c/d 2,75,000
(Fixed Asset Purchased)
2,95,000 2,95,000

Illustration 21. Following is the Balance Sheet of Sreshtha Ltd. as on 31st March, 2014:
2014 (`) 2013 (`)
(a) Share Capital 20,00,000 15,00,000
(a) Trade Payables 1,50,000 2,00,000
Total 30,20,000 22,60,000
II. ASSETS
Fixed Assets:
(ii) Intangible Assets 4 4,70,000 2,70,000
2. Current Assets
(a) Inventories 2,50,000 1,60,000
Total 30,20,000 22,60,000
Notes to Accounts
2014 (`) 2013 (`)
Surplus, i.e.,Balance in Statement of Profit and Loss 5,00,000 3,00,000

3. Tangible Assets

Machinery 27,00,000 21,00,000

Less: Accumulated Depreciation (8,00,000) (6,00,000)
19,00,000 15,00,000
4. Intangible Assets

Goodwill 4,70,000 2,70,000
Prepare a Cash Flow Statement after taking into account the following adjustment:
During the year, a piece of machinery costing ` 30,000 on which accumulated depreciation
was ` 6,000, was sold for ` 20,000. (Delhi 2015 C)

Solution:
CASH FLOW STATEMENT
Particulars ` `
Net profit before Tax and Extraordinary Items (WN 1) 2,70,000
Add: Non Operating/Non-cash Expenses:
Depreciation on Machinery (WN 3) 2,06,000
Loss on sale of Machinery 4,000
Operating Profit before Working Capital changes 4,80,000
Inventories 90,000
Trade Payables 50,000 1,40,000
Less: Income Tax Paid 60,000 2,80,000
Cash Flow from Operating Activities
2,80,000
Proceeds from Sale of Machinery 20,000
Goodwill Purchased (2,00,000) (8,10,000)

Cash Used in Investing Activities
(8,10,000)
Proceeds from Issue of Shares 5,00,000
Proceeds from Long-term Borrowings 1,00,000 6,00,000

Cash Flow from Financing Activities
6,00,000
IV. Net Increase in Cash and Cash Equivalents (I + II + III) 70,000

Add: Opening Balance of Cash and Cash Equivalents 1,20,000
V. Closing Balance of Cash and Cash Equivalents
1,90,000
Working Notes:
1. Calculation of Net Profit beforeTax and Extraordinary Items: `
Surplus,i.e.,Balance in Statement of Profit and Loss (` 5,00,000 – ` 3,00,000) 2,00,000
2. Dr. MACHINERY ACCOUNT Cr.
To Bank A/c (Balancing Figure) 6,30,000 By Accumulated Depreciation A/c 6,000
(Purchase) By Loss on Sale of Machinery A/c 4,000
27,30,000 27,30,000

3. Dr. ACCUMULATED DEPRECIATION ACCOUNT Cr.
To Machinery A/c (Transfer) 6,000 By Balance b/d 6,00,000
To Balance c/d (Given) 8,00,000 By Depreciation A/c (Balancing Figure) 2,06,000
8,06,000 8,06,000
1. From the following information, calculate Net Profit before Tax and Extraordinary Items:
`
Surplus, i.e., Balance in Statement of Profit and Loss (Opening) (2,00,000)
Surplus, i.e., Balance in Statement of Profit and Loss (Closing) 6,72,000
Dividend Paid in the current year 1,44,000
Interim Dividend Paid during the year 1,80,000
Transfer to Reserve 2,00,000
Provision for Tax for the current year 3,00,000
Refund of Tax 6,000
Loss due to Earthquake 4,00,000
Insurance Claim Received from Earthquake disaster settlement 2,00,000
[Ans.: Net Profit before Tax and Extraordinary Items: ` 18,90,000.]
2. Calculate Cash Flow from Operating Activities from the following information:
2019 (`) 2018 (`)
Trade Receivables 1,50,000 1,70,000
Outstanding Rent 48,000 72,000
Goodwill 80,000 70,000
[Ans.: Cash Used in Operating Activities = ` 84,000.]
3. Calculate Cash Flow from Operating Activities from the following information: `
Net profit for the year ended 31st March,2019 15,00,000
Annual Depreciation 6,00,000
Gain (Profit) on sale of furniture which was transferred to Statement of Profit and Loss 1,50,000
Trade Receivables (Increase in Debtors) 1,20,000
Trade Payables (Increase in Creditors) 1,80,000
[Ans.: ` 20,10,000.]
Unsolved Questions

4. Compute Cash Flow from Operating Activities from the following:
2019 (`) 2018 (`)
Trade Receivables:
Bills Receivable 8,000 5,000
Debtors 12,000 10,000
Inventories (Stock) 4,000 7,000
Prepaid Expenses ... 500
Trade Payables:
Creditors 6,000 4,000
Bills Payable ... 1,000
[Ans.: Cash Flow from Operating Activities = ` 40,500.]
5. From the following you are required to calculate Cash Flow from Operating Activities:
2019 (`) 2018 (`)
Trade Receivables:
Debtors 40,000 87,000
Dividend Equalisation Reserve 1,00,000 78,000
Salary Outstanding 12,000 30,000
Wages Prepaid 7,000 5,000
Goodwill 70,000 80,000
[Ans.: Cash Flow from Operating Activities = ` 58,000.]
6. Calculate Cash Flow from Operating Activities from the following:
Case (a) BALANCE SHEET (An Extract)
2019 (`) 2018 (`)

Reserves and Surplus: Surplus,i.e.,Balance in Statement of Profit and Loss 6,00,000 2,00,000
II. ASSETS
Non-Current Assets
Fixed Assets—Tangible Assets 12,00,000 10,00,000
9,50,000 8,00,000

Case (b) BALANCE SHEET (An Extract)
2019 (`) 2018 (`)
Reserves and Surplus: Surplus,i.e.,Balance in Statement of Profit and Loss 6,00,000 2,00,000
II. ASSETS
Non-Current Assets
Fixed Assets:Intangible Assets
Goodwill 90,000 1,00,000
Case (c) BALANCE SHEET (An Extract)
2019 (`) 2018 (`)

Reserves and Surplus 6,00,000 2,00,000

Short-term Provisions:
Case (d) BALANCE SHEET (An Extract)
2019 (`) 2018 (`)


Reserves and Surplus:
9,20,000 5,00,000
Case (e) BALANCE SHEET (An Extract)
2019 (`) 2018 (`)

Reserves and Surplus:
II. ASSETS
2,50,000 3,00,000

Additional Information: During the year, a part of machinery costing ` 50,000 (accumulated depreciation
thereon ` 40,000) was sold for ` 5,000.
[Ans.: (a) ` 4,50,000; (b) ` 4,10,000; (c) ` 4,50,000; (d) ` 4,20,000; (e) ` 4,95,000.]

7. Compute Cash Flow from Operating Activities of M/s Progressive Sales from the following details:
2019 (`) 2018 (`)
Expenses Outstanding 4,500 3,500
Accrued Income 9,000 8,000
[Ans.: ` 5,000.]
8. Compute Cash Flow from Operating Activities from the following:
2019 (`) 2018 (`)
Provision for Depreciation 30,000 28,000
Goodwill 16,000 20,000
[Ans.: ` 10,800.]
9. Following is the Balance Sheet of Good Luck Ltd.,prepare Cash Flow Statement:
2019 (`) 2018 (`)


(a) Share Capital 4,00,000 3,00,000

Long-term Borrowings (Mortgage Loan) 1,40,000 1,70,000

Total 7,46,000 6,45,000
II. ASSETS

Fixed Assets 2 3,41,000 2,32,000

2. Current Assets

(a) Inventories 2,80,000 2,00,000

(c) Cash and Cash Equivalents 3 18,000 80,000

(d) Other Current Assets: Prepaid Expenses ... 3,000
Total 7,46,000 6,45,000

Notes to Accounts
2019 (`) 2018 (`)
2. Fixed Assets

Tangible: Plant 2,96,000 1,72,000

Intangible: Goodwill 45,000 60,000
3,41,000 2,32,000
Cash-in-Hand 16,000 50,000
Cash at Bank 2,000 30,000
18,000 80,000
[Ans.: Cash Used in Operating Activities = ` 8,000; Cash Used in Investing Activities = ` 1,24,000;
Cash Flow from Financing Activities = ` 70,000;
Net Decrease in Cash and Cash Equivalents = ` 62,000.]

[Hint: No interest on mortgage loan is calculated because the rate of interest is not given.]
10. From the following Balance Sheet of Varun Ltd.as at 31st March,2019,prepare Cash Flow Statement:
Particulars Note No. 31st March, 31stMarch,
2019 2018
` `
(a) Share Capital 1,50,000 1,25,000
Long-term Borrowings :Bank Loan 20,000 ...
(a) Short-term Borrowings:Bank Overdraft 10,000 5,000
(c) Short-term Provisions 3 25,000 15,000
Total 3,50,000 2,70,000
II. ASSETS
(a) Fixed Assets 30,000 20,000
(b) Non-current Investments 10,000 15,000
2. Current Assets
(a) Inventories (Stock) 1,20,000 87,000
(b) Trade Receivables (Debtors) 90,000 98,000
(c) Cash and Cash Equivalents 1,00,000 50,000
Total 3,50,000 2,70,000

Notes to Accounts
2019 2018
` `
75,000 60,000
2. Trade Payables
Creditors 45,000 50,000
70,000 65,000

1. During the year ` 5,000 depreciation was charged on fixed assets.
2. Company has paid ` 12,000 interim dividend during the year.
3. Tax provided during the year ` 20,000.
[Ans.: Cash Flow from Operating Activities = ` 22,000; Cash Used in Investing Activities = ` 10,000;
Cash Flow from Financing Activities = ` 38,000; Net Increase in
Cash and Cash Equivalents = ` 50,000.]
11. From the following Balance Sheet of X Ltd.,prepare Cash Flow Statement:
2019 (`) 2018 (`)


(a) Share Capital 1 2,00,000 1,80,000


10% Debentures 14,000 12,000


(a) Short-term Borrowings (Bank Overdraft) 13,600 25,000

(b) Trade Payables (Creditors) 22,000 24,000

Total 2,64,400 2,53,000
II. ASSETS

Fixed Assets—Tangible 4 1,50,000 1,60,000
2. Current Assets



Total 2,64,400 2,53,000

Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital
2,00,000 1,80,000

6,400 6,000
4. Fixed Assets—Tangible
Cost 1,80,000 1,82,000

1,50,000 1,60,000

1. Fixed Assets sold for ` 10,000, their cost ` 20,000 and accumulated depreciation till date of sale
of them ` 6,000.
2. Interim Dividend during the year ` 9,000.
3. Tax paid ` 7,000.
4. Proposed dividend for the years ended 31st March, 2018 and 2019 were` 10,000 and ` 11,600 respectively.
[Ans.: Cash Flow from Operating Activities = ` 22,200; Cash Used in Investing Activities =
` 8,000; Cash Used in Financing Activities = ` 9,600;
Net Increase in Cash and Cash Equivalents = ` 4,600.]
[Hints: 1. It has been assumed that the new debentures have been issued at the end of the Current
Accounting Year.
2. Proposed Dividend includes dividend on Equity as well as Preference Shares.]
12. From the following summarised Balance Sheets of Add Gel Pens Ltd. as at 31st March, 2019 and
31st March,2018 and the additional information,prepare Cash Flow Statement:
BALANCE SHEETS
2019 (`) 2018 (`)
(a) Share Capital 1 3,00,000 2,00,000
(b) Reserves and Surplus 2 1,60,000 80,000
Long-term Borrowings 3 50,000 1,80,000
(a) Short-term Borrowings (Bank Overdraft) 30,000 45,000
Total 6,70,000 6,05,000

II. ASSETS
Fixed Assets 4,00,000 4,10,000
2. Current Assets

(c) Trade Receivables 1,50,000 1,00,000
(d) Cash and Cash Equivalents 5 21,000 10,000
Total 6,70,000 6,05,000
Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital
3,00,000 2,00,000


1,60,000 80,000

15% Debentures ... 80,000

Loan from Bank 50,000 1,00,000
50,000 1,80,000

Cash in Hand 11,000 5,000
Cash at Bank 10,000 5,000
21,000 10,000

1. Depreciation charged on Fixed Assets ` 10,000. 2. Interest paid on Loan from Bank ` 5,000.
3. Interest paid on Debentures ` 9,000.
4. Proposed dividend for the years ended 31st March, 2018 and 2019 were ` 10,000 and
[Ans.: Cash Flow from Operating Activities = ` 80,000; Cash Flow from Investing
Activities = Nil; Cash Used in Financing Activities = ` 69,000;
[Hint: Current Investments are taken as Marketable Securities as no information is given. It is taken as
Cash and Cash Equivalent.]

13. Balance Sheets of XYZ Ltd. as at 31st March, 2019 and 31st March, 2018 were:
BALANCE SHEETS
2019 (`) 2018 (`)


(a) Share Capital 6,00,000 5,00,000


8% Debentures 1,10,000 2,00,000


(a) Short-term Borrowings: Bank Overdraft 1,00,000 80,000


Total 9,85,000 9,30,000
II. ASSETS


(a) Fixed Assets:
(i) Tangible Assets:
(ii) Intangible Assets:
Goodwill 75,000 1,00,000

(b) Non-current Investment 2,00,000 1,50,000

2. Current Assets




Total 9,85,000 9,30,000
Notes to Accounts
2019 (`) 2018 (`)
Securities Premium Reserve 50,000 50,000
Surplus,i.e.,Balance in Statement of Profit and Loss 25,000 ...
75,000 50,000

1. Net Profit for the year before Tax and dividend amounted to ` 63,000.
2. Provision for Tax made during the year 2018–19 was ` 23,000.
3. Depreciation provided on Fixed Assets for the year 2018–19 ` 80,000.
4. Debentures amounted to ` 90,000 were redeemed on 1st July, 2018.
5. Proposed dividend for the years ended 31st March, 2018 and 2019 were ` 10,000 and ` 15,000
respectively.
You are required to prepare Cash Flow Statement as per Accounting Standard-3 (Revised).
[Ans.: Cash Flow from Operating Activities = ` 1,13,600; Cash Used in Investing Activities =
` 1,30,000; Cash Flow from Financing Activities = ` 9,400;
[Hint: Interest on Debentures = on ` 2,00,000 for 3 months + on ` 1,10,000 for 9 months = ` 10,600.]

14. From the following summarised Balance Sheets of KBC Ltd. as at 31st March, 2019 and 31st March,
2018, you are required to prepare Cash Flow Statement:
2019 (`) 2018 (`)


(a) Share Capital 3,50,000 3,00,000




(a) Trade Payables 1,25,000 80,000


(c) Other Current Liabilities: Outstanding Expenses 6,000 5,000
Total 8,49,000 7,20,000
II. ASSETS


(a) Fixed Assets: Tangible (Net) 3 4,75,000 4,00,000

(b) Long-term Investments (At Cost) 90,000 90,000

2. Current Assets

(a) Inventories 1,18,000 85,000


(c) Cash and Cash Equivalents:
Cash in Hand 43,500 32,500
Total 8,49,000 7,20,000
Notes to Accounts
2019 (`) 2018 (`)
Capital Reserve (Profit on Sale of Investment) 5,000 ...
2,30,000 1,50,000
3. Fixed Assets
Tangible Assets (At Cost) 6,00,000 5,00,000

Less: Accumulated Depreciation 1,25,000 1,00,000
4,75,000 4,00,000

1. During the year ended 31st March, 2019, Fixed Assets with a net Book Value of ` 5,000 (accumulated
depreciation ` 15,000) was sold for ` 4,000.
2. During the year ended 31st March, 2019, investment costing ` 40,000 was sold.
3. Debentures were redeemed at a premium of 10%.
4. Tax of ` 37,500 was paid.
5. Debenture interest paid during the year ended 31st March, 2019 was ` 15,000.
6. Proposed dividend for the years ended 31st March, 2018 and 2019 were` 15,000 and ` 17,000 respectively.
[Ans.: Cash Flow from Operating Activities = ` 1,57,000; Cash Used in Investing
Activities = ` 1,11,000; Cash Used in Financing Activities = ` 35,000;

]
[Hints:
To Bank A/c (Purchase) 1,20,000 By Accumulated Depreciation A/c 15,000
(Bal.Fig.) By Loss on Sale (Statement of Profit and Loss) 1,000
6,20,000 6,20,000
2. Dr. ACCUMULATED DEPRECIATION ACCOUNT Cr.
To Fixed Assets A/c (Transfer) 15,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By Depreciation A/c (Depreciation Provided) 40,000
(Bal.Fig.)
1,40,000 1,40,000
3. Dr. PROVISION FOR TAX ACCOUNT Cr.
To Balance c/d 38,000 By Statement of Profit and Loss (Provision Made) 40,500
(Bal.Fig.)
75,500 75,500
4. Dr. INVESTMENT ACCOUNT Cr.
To Capital Reserve A/c 5,000 (` 40,000 + ` 5,000 profit)
To Bank A/c—Purchase 40,000 By Balance c/d 90,000
(Bal.Fig.)
1,35,000 1,35,000
15. Calculate Net Profit before Tax and Extraordinary Items from the following Balance Sheets of
AB Trades Ltd. as at 31st March, 2019 and 2018:
2019 (`) 2018 (`)
(a) Share Capital 10,00,000 8,00,000
(a) Short-term Borrowings 50,000 60,000
Total 16,05,000 12,45,000
II. ASSETS
(a)
Fixed Assets: Tangible Assets 10,00,000 8,00,000
(b) Non-Current Investments 3,00,000 2,00,000
2. Current Assets 3,05,000 2,45,000
Total 16,05,000 12,45,000

Notes to Accounts
2019 (`) 2018 (`)
(a) General Reserve 1,20,000 80,000
(b) Surplus,i.e.,Balance In Statement of Profit and Loss 2,80,000 1,70,000
4,00,000 2,50,000

Additional Information: Proposed dividend for the years ended 31st March, 2018 and 2019 were ` 80,000
and ` 1,00,000 respectively. [Ans.: ` 3,30,000.]
16. From the following Balance Sheets of Vivek Ltd.,prepare Cash Flow Statement:
2019 (`) 2018 (`)
(a) Share Capital 1 2,90,000 2,50,000
Total 3,67,000 3,23,000
II. ASSETS

Fixed Assets:
(a) Tangible 3 1,50,000 1,40,000
(b) Intangible (Goodwill) 20,000 30,000
2. Current Assets
Total 3,67,000 3,23,000
Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital
2,90,000 2,50,000

72,000 50,000
3. Fixed Assets (Tangible)
Building 80,000 1,00,000
Plant 70,000 40,000
1,50,000 1,40,000

Additional Information: Depreciation charged on Plant was ` 30,000 and on Building ` 50,000.
[Ans.: Cash Flow from Operating Activities = ` 52,000; Cash Used in
Investing Activities = ` 90,000; Cash Flow from Financing Activities = ` 40,000;
Net increase in Cash and Cash Equivalents = ` 2,000.]

17. Balance Sheet of A Ltd. as at 31st March, 2019 was as follows:
2019 (`) 2018 (`)


(a) Share Capital 8,40,000 6,00,000




(b) Trade Payables 2,49,000 1,50,000

Total 16,20,000 11,55,000
II. ASSETS


(a) Fixed Assets:
(i) Tangible Assets (Net) 4 3,90,000 4,80,000
(ii) Intangible Assets 5 30,000 60,000

2. Current Assets

(a) Current Investments 6 90,000 60,000

(c) Trade Receivables 1,95,000 90,000
(d) Other Current Assets 7 39,000 15,000
(e) Cash and Cash Equivalents 36,000 45,000
Total 16,20,000 11,55,000
Notes to Accounts
2019 (`) 2018 (`)
12% Loan 1,50,000 1,50,000

4. Fixed Assets—Tangible (Net)

Less: Provision for Depreciation 1,50,000 1,20,000
3,90,000 4,80,000

Trademarks 30,000 60,000
6. Current Investments
Short-term Investments 90,000 60,000


1. Interest received on Investment: ` 45,000.
2. Proposed dividend for the years ended 31st March, 2018 and 2019 were ` 60,000 and ` 90,000 respectively.
You are required to prepare Cash Flow Statement.
[Ans.: Cash Flow from Operating Activities = ` 1,44,000; Cash Used in Investing Activities = ` 2,70,000;
Cash Flow from Financing Activities = ` 1,47,000; Net Increase in Cash and Cash Equivalents = ` 21,000.]
18. Nazma Ltd. received interest on an item and the accountant classified it under financing activity while
preparing Cash Flow Statement. Name another item for which such a treatment is possible.
(Delhi 2016 C)

Note by Authors: Thereseemstobeprintingerror.Pleaseread‘InvestingActivity’inplaceof’FinancingActivity’.
19. From the following Balance Sheets of X Ltd.,prepare Cash Flow State
ment:
2019 (`) 2018 (`)


(a) Share Capital 4,00,000 3,00,000

Surplus,i.e.,Balance in Statement of Profit and Loss 1,10,000 85,000

Long-term Borrowings: Bank Loan 75,000 1,00,000


(a) Trade Payables (Creditors) 2,95,000 3,10,000


Total 9,40,000 8,40,000
II. ASSETS

Fixed Assets (Net) 2 4,15,000 3,20,000
2. Current Assets

(a) Inventories (Stock) 2,25,000 2,00,000

(c) Cash and Cash Equivalents ... 30,000
Total 9,40,000 8,40,000
Notes to Accounts
2019 (`) 2018 (`)
2. Fixed Assets

Less: Accumulated Depreciation 1,35,000 80,000
4,15,000 3,20,000
Debtors 1,90,000 2,10,000
3,00,000 2,90,000


A piece of machinery costing ` 60,000 on which accumulated depreciation was ` 15,000 was sold
for ` 30,000.
[Ans.: Cash Flow from Operating Activities = ` 75,000; Cash Used in
Investing Activities = ` 1,80,000; Cash Flow from Financing Activities = ` 75,000;
20. From the following Balance Sheet of Sultan Ltd.as at 31st March,2019,prepare a Cash Flow Statement:
2019 (`) 2018 (`)
(a) Share Capital 1 7,00,000 5,00,000
(a) Short-term Borrowings (12% Bank Loan) 4,00,000 5,00,000
(b) Trade Payables 1,50,000 40,000
(c) Short-term Provisions 4 1,90,000 1,50,000
Total 18,90,000 17,65,000
II. ASSETS
(a)
Fixed Assets:
(i) Tangible Assets (Machinery) 11,00,000 9,00,000
(ii) Intangible Assets (Goodwill) 40,000 90,000
(b) 10% Non-current Investments 2,00,000 1,40,000
2. Current Assets
(a) Inventories 1,50,000 2,00,000
Total 18,90,000 17,65,000
Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital
12% Preference Capital 1,00,000 2,00,000
7,00,000 5,00,000

2,50,000 3,25,000

9% Debentures 2,00,000 2,50,000
(i) Machinery costing ` 1,00,000 on which depreciation charged was ` 70,000, was sold at a profit of
20% on book value. Depreciation charged during the year amounted to ` 70,000.

(ii) Bank loan was repaid and Preference Shares were redeemed at par on 31st March, 2019.
(iii) Debentures were redeemed on 1st January, 2019 and Equity Shares were issued on 1st April, 2018.
(iv) During the year, company declared and paid interim dividend on Equity Shares @ 8%. Final dividend
was not proposed on equity shares.
(v) At the end of the year some Non-current Investments costing ` 60,000 were sold at a profit of 20%.
Some of Non-current investments were also made on 31st March, 2019.
(vi) Tax paid during the year was ` 1,40,000 and adjusted against Provision for Tax Account.
(vii) Proposed dividend for the year ended 31st March, 2018 ` 24,000 was paid during the year.
[Ans.: Cash Flow from Operating Activities = ` 3,36,375; Cash Used in Investing Activities = ` 2,98,000;
Cash Used to Financing Activities = ` 1,03,375; Net Decrease in Cash and Cash Equivalents = ` 65,000.]
21. From the following extract of Balance Sheet of a company,calculate Cash Flow from Financing Activities:
2019 (`) 2018 (`)
Securities Premium Reserve 35,000 ...
11% Debentures 5,00,000 4,00,000
(i) Equity shares were issued at a premium of 20% on 31st March, 2019.
(ii)
Underwriting commission on issue of equity shares ` 5,000.The company met underwriting commission
from Securities Premium Reserve.
(iii) Preference shares were redeemed on 31st March, 2019 at par along with dividend.
(iv) Additional Debentures were issued on 1st April, 2018.
(v) The company paid interim dividend @ 9% on Equity Share Capital. The company did not propose
final dividend on Equity share Capital.
[Ans.: Cash Flow from Financing Activities = ` 1,14,000.]
22. Following are the Balance Sheets of Sreshtha Ltd.as on 31st March,2014 and 2013:
2014 (`) 2013 (`)
(a) Share Capital 40,00,000 30,00,000
(a) Trade Payables 3,00,000 4,00,000
(b) Short-term Provisions 2 1,40,000 1,20,000
Total 60,40,000 45,20,000
II. ASSETS

Fixed Assets:
(ii) Intangible Assets 4 9,40,000 5,40,000
2. Current Assets
(a) Inventories 5,00,000 3,20,000
Total 60,40,000 45,20,000

Notes to Accounts
2014 (`) 2013 (`)
3. Tangible Assets
Machinery 42,00,000 33,00,000

38,00,000 30,00,000
Goodwill 9,40,000 5,40,000
Prepare a Cash Flow Statement after taking into account the following adjustment:
During the year, a piece of machinery costing ` 40,000 on which accumulated depreciation was ` 30,000,
was sold for ` 9,000. (OD 2015 C)
[Ans.: Cash Flow from Operating Activities = ` 2,71,000; Cash Used in Investing Activities =
` 13,31,000; Cash Flow from Financing Activities = ` 12,00,000;
Net Increase in Cash and Cash Equivalents = ` 1,40,000.]
23. From the following Balance Sheet of India Ltd. and the additional information given, prepare Cash
Flow Statement:
2019 (`) 2018 (`)
(a)
Share Capital: Equity Share Capital 4,00,000 3,00,000
(b) Reserves and Surplus 1 1,18,000 70,000
(a) Trade Payables 2 99,000 75,000
Total 7,67,000 6,35,000
II. ASSETS
Fixed Assets—Tangible 4 3,70,000 2,80,000
—Intangible (Goodwill) 90,000 1,15,000
2. Current Assets
Total 7,67,000 6,35,000

Notes to Accounts
2019 (`) 2018 (`)
1,18,000 70,000
2. Trade Payables

Creditors 83,000 55,000

99,000 75,000


Plant 1,90,000 80,000
3,70,000 2,80,000
Debtors 2,00,000 1,60,000
2,30,000 1,80,000
Note: Proposed equity dividends for the years ended 31st March, 2018 and 2019 are ` 50,000 and

1. Depreciation of ` 10,000 and ` 20,000 have been charged on Plant and Land and Building respectively
in 2018–19.
2. An Interim Dividend of ` 20,000 has been paid in 2018–19.
3. Share Issue Expenses of ` 5,000 were incurred and written off in 2018–19 from the Statement of
Profit and Loss.
4. Income Tax ` 35,000 was paid during the year 2018–19.
[Ans.: Cash Flow from Operating Activities = ` 1,38,000; Cash Used in
Investing Activities = ` 1,20,000; Cash Used in Financing Activities = ` 25,000.
24. From the following Balance Sheet of Clay Ltd., prepare Cash Flow Statement:
2019 (`) 2018 (`)
(a) Share Capital 8,00,000 5,00,000
Long-term Borrowings (10% Debentures) 4,00,000 5,00,000
(a) Short-term Borrowings (10% Bank Loan) 50,000 ...
(b) Trade Payables 2 75,000 1,00,000
(c) Other Current Liabilities 3 30,000 ...
Total 17,70,000 13,55,000

II. ASSETS
(a)
Fixed Assets:
(ii) Intangible Assets 50,000 1,00,000
(b) Non-current Investments (10% Investments) 1,60,000 60,000
2. Current Assets
Total 17,70,000 13,55,000
Notes to Accounts
2019 (`) 2018 (`)
Securities Premium Reserve
Opening Balance 75,000 75,000

Less: Share Issue Expenses Written off 40,000 ...
35,000 75,000
Capital Reserve ... 5,000
3,50,000 2,05,000
2. Trade Payables
Trade Creditors 55,000 50,000
75,000 1,00,000

Unpaid Dividend 20,000 ...
Unpaid Interest on Debentures 10,000 ...
30,000 ...


Building 2,50,000 4,00,000
5,20,000 7,00,000
Note: Proposed Dividend for the year ended 31st March, 2018 and 2019 are ` 1,15,000 and ` 1,25,000
respectively.

1. Interim Dividend of ` 50,000 was paid during the year.
2. Share Issue Expenses of ` 40,000 were incurred and written off during the year 2018–19 from
Securities Premium Reserve.
3. Tax of ` 60,000 was paid during the year.
4. Debentures were redeemed at par on 1st April, 2018 and Bank Loan was raised on the same date.

5. At the end of the year some Non-current Investments costing ` 40,000 were sold at a loss of 25%
and some Non-current Investments costing ` 20,000 were sold at a profit of 25%. Profit/Loss on
investments was adjusted against Capital Reserve. Additional Non-current investments were made
on 31st March, 2019.
[Ans.: Cash Flow from Operating Activities = ` 4,34,000; Cash Flow from
Investing Activities = ` 51,000; Cash Flow from Financing Activities = ` 30,000;
Increase in Cash and Cash Equivalents = ` 5,15,000.]
[Hints:
To Capital Reserve A/c (Profit) 5,000 By Capital Reserve A/c (Loss on Sale) 10,000
To Bank A/c (Purchase) 1,60,000 By Bank A/c (` 20,000 + ` 5,000) 25,000
(Balancing Figure) By Balance c/d 1,60,000
2,25,000 2,25,000
2. Depreciation on Plant and Machinery—` 30,000; Sale of Building—` 1,50,000.]
25. From the following Balance Sheet of Varun Ltd. as at 31st March, 2019, prepare Cash Flow Statement:
Particulars Note No. 31st March, 31stMarch,
2019 (`) 2018 (`)
(a) Share Capital 1,50,000 1,25,000
Long-term Borrowings :Bank Loan 20,000 ...
(a) Short-term Borrowings:Bank Overdraft 10,000 5,000
Total 3,50,000 2,70,000
II. ASSETS
(a) Fixed Assets 30,000 20,000
(b) Non-current Investments 10,000 15,000
2. Current Assets
(a) Inventories (Stock) 1,20,000 87,000
(b) Trade Receivables (Debtors) 90,000 98,000
(c) Cash and Cash Equivalents 1,00,000 50,000
Total 3,50,000 2,70,000

Notes to Accounts
2019 2018
` `
75,000 60,000
2. Trade Payables
Creditors 45,000 50,000
70,000 65,000

1. During the year ` 5,000 depreciation was charged on fixed assets.
2. Company has paid ` 12,000 interim dividend during the year.
3. Tax provided during the year ` 20,000.
[Ans.: Cash Flow from Operating Activities = ` 22,000; Cash Used in Investing Activities = ` 10,000;
Cash Flow from Financing Activities = ` 38,000; Net Increase in
Cash and Cash Equivalents = ` 50,000.]

Practice Test Papers
Practice Test Paper 1
1. ABC Ltd. implemented Voluntary Retirement Scheme which was accepted by
100 employees. The company paid ` 20 lakhs to these employees as compensation. Under
which activity and how will this payment be shown in the Cash Flow Statement? (1)
2. Amrit Securities Ltd., a company dealing in shares and other financial instruments made
strategic investment of ` 50 lakhs in Rathi Securities Ltd., a company having membership
of BSE. Under which head ` 50 lakhs will be shown in Cash Flow Statement? (1)
3. Under which head of the Statement of Profit and Loss will the following items be shown?
(i) Loss on Issue of Debentures written off (ii) Share Issue Expenses written off
(iii) Goodwill written off (iv) Bad Debts Recovered (4)
4. (a) Ratio of Current Assets (` 12,50,000) to Current Liabilities (` 5,00,000) of a company
is 2.5 : 1. The management decided to maintain a current ratio of 2 : 1, by acquiring
some current assets on credit. By what amount should it increase its current assets to
maintain the ratio?
(b) A company has Debt to Equity Ratio of 3 : 1, total Debts ` 15,00,000 and Equities
` 5,00,000. If company wants to maintain Debt to Equity Ratio of 2 : 1, how much
amount should be paid? (4)
5. ABC Ltd. is in the business of manufacturing and selling FMCG, decided to set up a new
manufacturing unit in economically backward area of Chhattisgarh. It decided to employ
factory staff from the local population. But before that it imparted training to them for
six months and gave each trainee a stipend of ` 5,000 per month. Its Comparative Statement
of Profit and Loss for the years ended 31st March, 2018 and 2019 was as follows:

II.
Other Income 40,000
50,000 10,000 25.00
IV. Expenses
(a) Cost of Materials Consumed 7,00,000 8,00,000 1,00,000 14.29
(b) Employees Benefit Expenses 1,80,000 2,00,000 20,000 11.11
(c) Other Expenses 75,000 1,00,000 25,000 33.33
Total Expenses 9,55,000 11,00,000 1,45,000 15.18
VI. Less:Tax 95,000 1,50,000 55,000 52.63
VII. Profit afterTax (V –VI) 2,40,000 3,00,000 60,000 25.00

PTP.2 Analysis of Financial Statements—CBSE XII
Inventories for the years ended 31st March, 2017—` 2,00,000; 31st March,
2018—` 2,50,000 and 31st March, 2019—` 2,50,000.
Calculate Inventory Turnover Ratio for the two years. (4)
6. From the following Balance Sheet of Crystal Company Ltd. as at 31st March, 2019, prepare
BALANCE SHEET OF CRYSTAL COMPANY LTD.
2019 (`) 2018 (`)
(a) Share Capital 6,00,000 4,00,000

Long-term Borrowings: Bank Loan 1,00,000 2,00,000
(a) Trade Payables (Creditors) 45,000 60,000
Total 10,15,000 8,00,000
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets: Building 6,00,000 6,00,000
(ii) Intangible Assets: Patents 45,000 50,000
(b) Non-current Investments 75,000 ...
2. Current Assets
(b) Trade Receivables (Debtors) 1,95,000 1,20,000
Total 10,15,000 8,00,000
Notes to Accounts
2019 (`) 2018 (`)


1. During the year Building costing ` 75,000 was purchased. Loss on Sale of Building
was ` 5,000. Depreciation charged on Building was ` 12,000.
2. Proposed dividend for the years ended 31st March, 2018 and 2019 were ` 80,000
and ` 60,000 respectively. (6)

Practice Test Papers PTP.3
1. XYZ Ltd. purchased its own debentures from the market for investment for a consideration
of ` 5,00,000. Under which activity and how will this payment be shown in the Cash Flow
Statement? (1)
2. Avon Securities Ltd., a company dealing in shares and other financial instruments had made
strategic investment of ` 5 lakhs in Bull Securities Ltd., a company having membership of
BSE. It later sold these shares at a gain of ` 2,00,000. Under which head will the sale and
gain be shown in Cash Flow Statement? (1)
3. Under which main-head and sub-head of the Balance Sheet will the following items
be shown?
(i) Share Application Money
(ii) Debentures with maturity period of 12 months
(iii) Computer Software
(iv)
Preference Share Capital (4)
4. (a) State any two objectives of Common-size Balance Sheet.
(b) Opening Inventory ` 40,000; Closing Inventory ` 50,000; Revenue from Operations
` 6,00,000; Gross Profit Ratio 25%.
Calculate Inventory Turnover Ratio. (4)
5. XYZ Ltd. is in the business of manufacturing and selling carpets, decided to set up a new
manufacturing unit in Jammu and Kashmir. It decided to do so because of the natural
calamity struck in the state. It decided to employ factory staff from the local population
after giving them adequate training to develop the weaving skill in them. Each trainee was
paid stipend during the training period. Its Comparative Statement of Profit and Loss for
the years ended 31st March, 2018 and 2019 was as follows:
II. Other Income 40,000 50,000 10,000 25.00
IV. Expenses
(a) Cost of Materials Consumed 10,50,000 15,00,000 4,50,000 42.86
(b) Employees Benefit Expenses 3,80,000 4,00,000 20,000 5.26
(c) Other Expenses 75,000 1,00,000 25,000 33.33
Total Expenses 15,05,000 20,00,000 4,95,000 32.89
VI. Less:Tax 95,000 1,50,000 55,000 57.89
VII. Profit afterTax (V –VI) 1,90,000 4,00,000 2,10,000 110.53

Employees Benefit Expenses include Wages of ` 2,00,000 and ` 1,90,000 in the years ended
31st March, 2019 and 2018 respectively.
Calculate Gross Profit Ratio for the two years. (4)

6. (a) Classify the following items under different heads of operating, investing and
financing activities:
(i) Investments costing ` 4,00,000 sold for ` 5,00,000.
(ii) Goods sold on credit ` 50,000.
(iii) Dividend paid ` 1,00,000.
(iv) Furniture purchased for ` 90,000. (2)
(b) Few items have been extracted from the Balance Sheet of a company, which are
as under:
31st March, 31st March,
2019 (`) 2018 (`)
Securities Premium Reserve 1,40,000 1,00,000
12% Debentures 4,00,000 3,00,000

1. Interim Dividend on Equity Shares at the end of current year was paid @ 15%.
2. Preference Shares were redeemed at a premium of 5% on 31st March, 2019.
3. Issues of new Shares and Debentures were made on the last date of current year.
Calculate Cash Flow from Financing Activities. (4)

1. Moonlight Ltd. bought back its own shares having nominal value of ` 10,00,000 at its
nominal value. Under which activity and how will this payment be shown in the Cash
Flow Statement? (1)
2. Top Securities Ltd., a company dealing in shares and other financial instruments declared
and paid final dividend of ` 5,00,000. Under which activity dividend paid will be shown
in Cash Flow Statement? (1)
3. Under which main-head and sub-head of the Balance Sheet will the following items
be shown?
(i) Share Application Money Pending Allotment
(ii) Workmen Compensation Reserve
(iii) Patents
(iv) Debentures (4)
4. (i) Calculate Gross Profit Ratio based on the following information:
Cash Revenue from Operations: 25% of Total Revenue from Operations; Purchases:
` 2,76,000; Credit Revenue from Operations: ` 2,40,000; Excess of Closing Inventory
over Opening Inventory: ` 20,000.
(ii) Current Ratio of Z Ltd. is 1 : 1 at present. In future the company wants to improve
this ratio to 2 : 1. Suggest any two accounting transactions for improving the
Current Ratio. (4)
5. XYZ Ltd. is in the business of readymade garments, decided to take part in Swachh
Bharat Abhiyan by educating the people about the benefits of cleanliness from the
health point of view. Its Comparative Balance Sheet as at 31st March, 2018 and 2019
was as follows:
` ` ` %
(a) Share Capital 15,00,000 20,00,000 5,00,000 33.33
Long-term Borrowings 27,00,000 25,00,000 (2,00,000) (7.41)
(a) Short-term Borrowings 3,00,000 4,00,000 1,00,000 33.33
(b) Trade Payables 80,000 1,00,000 20,000 25.00
Total 49,80,000 55,00,000 5,20,000 10.44

II. ASSETS

Fixed Assets:
(i) Tangible Assets 27,50,000 30,00,000 2,50,000 9.10
(ii) Intangible Assets 6,00,000 5,00,000 (1,00,000) (16.67)
2. Current Assets
(a) Current Investments 7,50,000 7,50,000 0 0.00
(b) Trade Receivables 7,00,000 7,50,000 50,000 7.14
(c) Cash and Cash Equivalents 1,80,000 5,00,000 3,20,000 177.77
Total 49,80,000 55,00,000 5,20,000 10.44
Calculate Debt to Equity Ratio for the two years. (4)
6. Following is the Balance Sheet of GEC Ltd. as at 31st March, 2019:
BALANCE SHEET OF GEC LTD.as at 31st March,2019
2019 (`) 2018 (`)
(a) Share Capital 7,00,000 6,00,000
Total 12,30,000 9,35,000
II. ASSETS
Fixed Assets:
Tangible Assets 11,00,000 8,00,000
2. Current Assets
Total 12,30,000 9,35,000
Note to Accounts
2019 (`) 2018 (`)

Adjustments:
During the year, a piece of machinery of the book value of ` 80,000 was sold for ` 65,000.
Depreciation provided on tangible assets during the year amounted to ` 2,00,000.
Prepare a Cash Flow Statement. (6)

1. Sunlight Ltd. received insurance claim of ` 10,00,000 for the loss of building and machinery
due to floods. Under which activity and how will this payment be shown in the Cash Flow
Statement? (1)
2. Evergreen Securities Ltd., a company dealing in shares and other financial instruments
received dividend from various companies amounting to ` 5,00,000. Under which activity
dividend received will be shown in Cash Flow Statement? (1)
3. Under which main-head and sub-head of the Balance Sheet will be the following items
be shown?
(i) Employees Stock Option Account
(ii) Deferred Tax Liabilities
(iii) Bank Overdraft or Cash Credit
(iv) Investment in Shares (4)
4. (a) Total Equity and Liabilities are ` 50,00,000; Shareholders’ Funds ` 20,00,000 and Current
Liabilities ` 10,00,000. Calculate Debt to Equity Ratio. (2)
(b) During the year ending 31st March, 2019, Ajmera Ltd., a Jewellery manufacturer, sold
goods costing ` 4 crores. Its average of Opening and Closing Inventory was ` 40 lakh.
Calculate Company’s Inventory Turnover Ratio. The industry’s bench mark is 5 times.
Also, comment on the efficiency of company. (2)
5. C&C Ltd. is in the business of manufacturing ingots, implemented health programme
in its factory. Under the programme every employee was to undergo medical tests
every month, get healthy food at subsidised costs. Besides this, a gym was set up
with all exercise equipment for the staff. The staff was to be educated regularly about
the benefits of good health. Its Comparative Balance Sheet as at 31st March, 2018 and
2019 was as follows:
` ` ` %
(a) Share Capital 15,00,000 20,00,000 5,00,000 33.33
Long-term Borrowings 27,00,000 25,00,000 (2,00,000) (7.41)
(a) Short-term Borrowings 3,00,000 4,00,000 1,00,000 33.33
(b) Trade Payables 80,000 1,00,000 20,000 25.00
Total 49,80,000 55,00,000 5,20,000 10.44

II. ASSETS

Fixed Assets:
(i) Tangible Assets 27,50,000 30,00,000 2,50,000 9.10
(ii) Intangible Assets 6,00,000 5,00,000 (1,00,000) (16.67)
2. Current Assets
(a) Current Investments 7,50,000 7,50,000 0 0.00
(b) Trade Receivables 7,00,000 7,50,000 50,000 7.14
(c) Cash and Cash Equivalents 1,80,000 5,00,000 3,20,000 177.77
Total 49,80,000 55,00,000 5,20,000 10.44

Additional Imformation:
Revenue from Operations for the years ended 31st March, 2019 and 31st March, 2018 were
` 50,00,000 and ` 30,00,000 respectively.
Calculate Working Capital Turnover Ratio for the two years. (4)
6. From the following Balance Sheet of Alok Industries Ltd. as at 31st March, 2019, prepare
2019 (`) 2018 (`)
(a) Share Capital 40,00,000 34,00,000
Total 51,00,000 46,00,000
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets 16,00,000 18,00,000
(ii) Intangible Assets 12,00,000 10,00,000
2. Current Assets
(a) Inventories 2,00,000 ...
Total 51,00,000 46,00,000
Note to Accounts
2019 (`) 2018 (`)

1. Depreciation of ` 2,00,000 was provided on Tangible Assets during the year.
2. The company paid interest ` 30,000 on its long-term borrowings. (6)

Answers to Practice Test Paper 1
1. It will be shown under the head ‘Operating Activity’ as Extraordinary Item.
2. It will be shown under ‘Investing Activity’, it being an investment and purchase of
securities not for resale.
3. (i) Finance Costs
(ii) Finance Costs
(iii) Depreciation and Amortisation Expenses
(iv) Other Income
4. (a) Current Assets should be increased by ` 2,50,000.
(b) Debt should be paid = ` 5,00,000.
5. Inventory Turnover Ratio: 2018 – 5.56 Times and 2019 – 6 Times.
6. Cash Flow from Operating Activities = ` 1,37,000.
Cash Used in Investing Activities = ` 92,000.
Cash Flow from Financing Activities = ` 20,000.
Net Increase in Cash and Cash Equivalents = ` 65,000.

1. It will be shown under the head ‘Financing Activity’.
2. It will be shown under ‘Investing Activity’, since these were not purchased for resale.
3.
Item Main Head Sub-head
(i) Share Application Money Current Liabilities Other Current Liabilities
(ii) Debentures with maturity Current Liabilities Short-term Borrowings
period of 12 months
(iii) Computer Software Non-current Assets Fixed Assets—Intangible Assets
(iv) Preference Share Capital Shareholders’Funds Share Capital
4. (a) (i) To analyse the changes in individual items of Balance Sheet.
(ii) To assess the relative financial position on the basis of Common-size Balance Sheets
for different companies belonging to the same industry.
(b) Inventory Turnover Ratio = 10 Times.
5. Gross Profit Ratio – 2019 – 32%; and 2018 – 29.14%.
6. (a) (i) Investing (ii) No flow of Cash
(iii) Financing (iv) Investing
(b) Cash Used in Financing Activities = ` 86,000.

1. It will be shown under the head ‘Financing Activity’ as Extraordinary Item.
2. It will be shown under ‘Financing Activity’, because, dividend paid is associated with the
share capital of the company.
3.
(i) Share Application Money As a line item between ...
Pending Allotment Shareholders’Funds
and Non-current
Liabilities.
(ii) Workmen Compensation Shareholders’Funds Reserves and Surplus
Reserve
(iii) Patents Non-current Assets Fixed Assets—Intangible Assets
(iv) Debentures Non-current Liabilities Long-term Borrowings
4. (i) Gross Profit Ratio = 20%.
(ii) Issue of Shares for cash, Long-term loan borrowed from Bank.
5. Debt to Equity Ratio: 2019 – 1 : 1; and 2018 – 1.42 : 1.
6. Cash Flow from Operating Activities = ` 3,08,000;
Cash Used in Investing Activities = ` 5,15,000;
Cash Flow from Financing Activities = ` 2,00,000;
Net Decrease in Cash and Cash Equivalents = ` 7,000.

1. It will be shown under Investing Activity as Extraordinary item.
2. It will be shown under Operating Activity, it being its business.
3.
(i) Employees Stock Option Shareholders’Funds Reserves and Surplus
Account
(ii) Deferred Tax Liabilities Non-current Liabilities As a Line Item
(iii) Bank Overdraft or Cash Credit Current Liabilities Short-term Borrowings
(iv) Investment in Shares Non-current Assets Non-current Investments
4. (a) Debt to Equity Ratio = 1 : 1.
(b) Inventory Turnover Ratio = 10 Times.

Interpretation: Ajmera Ltd. is definitely very efficient because its Inventory Turnover
Ratio is just double to that of industry.
5. Working Capital Turnover Ratio (2019) = =
50,00,000
3.33 Times.
15,00,000
`
`
Working Capital Turnover Ratio (2018) = =
30,00,000
2.4 Times.
12,50,000
`
`
6. Cash Used in Operating Activities = ` 3,70,000;
Cash Used in Investing Activities = ` 3,00,000;
Cash Flow from Financing Activities = ` 7,70,000;
Net Increase in Cash and Cash Equivalents = ` 1,00,000.

Practical Test Paper 1

Time Allowed: 1 Hour Max. Marks: 12
1. (a) Who are mainly interested in Solvency Ratios?
(b) (i) What is meant by Inter-firm Analysis?
(ii) What is meant by an Operating Cycle? (1 + 2 = 3)
2. Quick Ratio is 2 : 1. State giving reason, whether the Quick Ratio will improve or decline
or will not change on sale of goods (costing ` 20,000) at a loss of ` 5,000. (1)
3. Debt to Equity Ratio of Alpha Ltd. and Salpha Ltd. is 1 : 1 and 2 : 1 respectively. Which
company in your opinion has got better Debt to Equity Ratio and why? (2)
4. From the following Balance Sheet of Green Ltd. as at 31st March, 2019, prepare Cash Flow
Statement:
BALANCE SHEET OF GREEN LTD.as at 31st March,2019
2019 (`) 2018 (`)
(a) Share Capital 6,00,000 4,00,000

Long-term Borrowings: Bank Loan 1,00,000 2,00,000
(a) Trade Payables 45,000 60,000
Total 10,15,000 8,00,000
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets (Building) 6,00,000 5,20,000
(ii) Intangible Assets (Patents) 45,000 50,000
(b) Non-current Investments 75,000 ...
2. Current Assets
Total 10,15,000 8,00,000
Practical Test Papers

Notes to Accounts
2019 (`) 2018 (`)


1. Dividend proposed by the Board for the previous year (2017–18) ` 60,000 was
declared in the AGM held during the year ended 31st March, 2019.
2. During the year, Building costing ` 2,00,000 was purchased. Loss on Sale of Building
was ` 5,000. Depreciation charged on Building was ` 12,000. (6)
1. (a) State how qualitative aspects are ignored in Financial Statement Analysis.
(b) Star Ltd. has Quick Ratio of 1.5 : 1. Its Working Capital is ` 1,20,000 and its Inventory
is ` 80,000. Calculate Current Assets. (1 + 2 = 3)
2. Strong Ltd. has given the following information for two years:
Particulars 31st March,2018 (`) 31st March,2019 (`)
Current Assets 12,00,000 18,00,000
Current Liabilities 6,00,000 10,00,000
Net Profit 4,50,000 7,20,000
The management of Strong Ltd. is of the opinion that their workers are working very
hard and manager is working very efficiently, since sales and net profits have increased
and current assets have increased by ` 6,00,000 whereas current liabilities have increased
only by ` 4,00,000 and thus their short-term financial position is becoming better. The
management is thinking of increasing the compensation to manager and the employees.
Do you agree with the management’s viewpoint? Justify your opinion. (3)
3. State with reason two examples of activities which are classified as Investing Activities in
case of one enterprise and as Operating Activities in case of another enterprise. (2)
4. Following balances were extracted from the Balance Sheet of Moon Ltd. as on
31st March, 2018: `
Fixed Assets (at cost) 40,00,000

Less: Accumulated Depreciation 5,00,000
35,00,000
Bank Balance 1,30,000
Current Assets 8,00,000

Practical Test Papers PTP.15

1. Net profit for the year ending 31st March, 2019, after depreciation was ` 3,00,000.
The company provided depreciation of ` 1,60,000 for the year ended 31st March, 2019.
2. During the year ended 31st March, 2019, the company purchased machine for ` 4,00,000.
It sold a machine costing ` 1,00,000 (accumulated depreciation thereon ` 35,000)
for ` 75,000.
3. Current Assets and Current Liabilities (excluding bank balances) on 31st March,
2019 were ` 11,30,000 and ` 8,00,000 respectively.
4. Interest received on investments amounted to ` 15,000.
Calculate Cash Flow from Operating Activities and Investing Activities for the year
ended 31st March, 2019. (4)
1. (a) What is meant by the term ‘Cash Flows’?
(b) From the following information, calculate Cash Flow from Financing Activities:
2019 (`) 2018 (`)
12% Preference Share Capital ... 5,00,000
14% Debentures 2,50,000 ...

(i) Equity Shares were issued at a premium of 20%.
(ii) 12% Preference Shares were redeemed at par.
(iii) 14% Debentures were issued at a discount of 10%.
(iv) Interim dividend paid on Equity Shares ` 1,50,000.
(v) Interest paid on 14% Debentures ` 35,000.
(vi) Underwriting Commission on Equity Shares ` 20,000.
(vii) Dividend paid on Preference Shares ` 60,000. (1 + 2 = 3)
2. For each of the following transactions, calculate the resulting Cash Flow and state the
nature of Cash Flow, viz., Operating, Investing and Financing:
A. Acquired machinery for ` 2,50,000 paying 20% immediately and executing a bond
for the balance amount.
B. Paid ` 2,50,000 for purchase of shares in Infosys Ltd. and received a dividend of
` 50,000 after acquisition.
C. Sold machinery of original cost ` 2,00,000 with an accumulated depreciation thereon
` 1,60,000 at a profit of 50% of its book value. (3)

3. CapitalEmployed` 1,00,000; Non-CurrentAssets ` 80,000; Cost of Revenue from Operations
` 3,20,000; Gross Profit Ratio 20%. Calculate Working Capital Turnover Ratio. (2)
4. Total Equity and Liabilities are ` 50,00,000; Shareholders’ Funds ` 20,00,000 and Current
Liabilities ` 10,00,000. Calculate Debt to Equity Ratio. (2)
5. During the year ending 31st March, 2019,Ajmera Ltd., a Jewellery manufacturer, sold goods
costing ` 4 crores. Its average of Opening and Closing Inventory was ` 40 lakh. Calculate
company’s Inventory Turnover Ratio. The industry’s benchmark is 5 times. Also, comment
on the efficiency of company. (2)
1. Under which heads and sub-heads in the Balance Sheet of a company following items will
be shown:
(i) Computer Software;
(ii) Capital Advance? (2)
2. Profit of Moon Ltd. after appropriation was ` 3,50,000. This profit was arrived at after
taking into consideration the following items:
(i) Trade Receivables decrease by ` 56,000 during the year.
(ii) Prepaid Expenses increase by ` 14,000 during the year.
(iii) Trade Payables decrease by ` 32,000 during the year.
(iv) Outstanding Expenses increase by ` 8,000 during the year.
(v) Decrease in Inventories by ` 1,00,000.
Calculate Net Cash provided by Operating Activities for the year ended 31st March, 2019.
(2)
3. Consider the following data: `
Machinery at the end of 2017–18 10,00,000
Machinery at the end of 2018–19 6,00,000

Adjustment: Machinery purchased in the beginning of the year (2018–19) ` 7,00,000 and
during the year, the balance Machinery was sold at 20% loss.
Find out the cash flow during the year and name the head under which it appears in the
Cash Flow Statement. (2)
4. (i) Calculate Gross Profit Ratio based on the following information:
Cash Revenue from Operations: 25% of Total Revenue from Operations; Purchases:
` 2,76,000; Credit Revenue from Operations: ` 2,40,000; Excess of Closing Inventory
over Opening Inventory: ` 20,000.

(ii) Current Ratio of Sun Ltd. is 1 : 1 at present. In future the company wants to
improve this ratio to 2 : 1. Suggest any two accounting transactions for improving
the Current Ratio.
(iii) Assume you are a loan officer of HDFC Bank and two companies require a loan of
equal amount to be repaid over the next two years based on the following information:
Green Ltd. Star Ltd.
Current Ratio 3.5 : 1 2 : 1
Acid Test Ratio 1.8 : 1 1.3 : 1
Debt to Equity Ratio 35% 45%
Interest Coverage Ratio 5 Times 3 Times
If you could grant loan to only one company, which will it be and why?
(2 + 2 + 2 = 6)

GUIDE TO ANSWERS
1. (a) Persons who provide Long-term Funds to the company like debentureholders and financial institutions.
(b) (i) It is a comparision of Financial Statements of two or more enterprises for the same accounting
period. It is conducted to determine the relative position of an enterprise as compared to other
competitive enterprises of the same industry.
(ii) An Operating Cycle is the time between the acquisition of assets for processing and their realisation
into Cash and Cash Equivalents.
2. Improve. Reason: Total Quick Assets are increased by ` 15,000 but total Current Liabilities remain unchanged.
3. Debt to Equity Ratio of 1 : 1 of Alpha Company is better. A low ratio is generally viewed as favourable from
long-term creditors’ (lenders) point of view, because a large margin of protection provides safety for lenders.
4. (i) Cash Flow from Operating Activities = ` 1,37,000.
(ii) Cash Used in Investing Activities = ` 1,72,000.
(iii) Cash Flow from Financing Activities = ` 40,000.
(iv) Net Increase in Cash and Cash Equivalents = ` 5,000.
[Hint:
Dr. BUILDING ACCOUNT Cr.
To Bank A/c (Purchase) 2,00,000 By Loss on Sale of Building A/c 5,000
By Bank A/c (Sale)—Balancing Figure 1,03,000
7,20,000 7,20,000
1. (a) Since the Financial Statements are confined to the monetary matters only, the qualitative elements like
quality of product, efficiency of management, public relations, etc., are ignored while carrying out the
Financial Analysis.
(b) Current Liabilities = ` 80,000; Current Assets = ` 2,00,000.

Note: Current Assets = Current Liabilities + Working Capital.
2. The analysis of Net Profit Ratio and Current Ratio indicates that both the ratios have decreased during the
year. It indicates low profitability and poor solvency position. Therefore, it is advisable not to increase the
compensation of manager and employees.
3. (a) Purchase and Sale of Shares and Debentures of other companies;
(b) Dividend Received on Shares and Interest Received on Debentures.

Reason: These are Investing Activities in case of manufacturing enterprise since these relate to the acquisition
and disposal of long-term assets but are Operating Activities in case of a financial enterprise since
these relate to the ‘Principal Revenue Producing Activities’ of the enterprise.
]

4. Cash Flow from Operating Activities = ` 3,55,000; Cash Used in Investing Activities = ` 3,10,000.
[Hints:
To Bank A/c (Purchase) 4,00,000 By Accumulated Depreciation A/c 35,000
To Gain (Profit) on Sale of Fixed Assets A/c 10,000 By Balance c/d (Balancing Figure) 43,00,000
44,10,000 44,10,000
To Fixed Assets A/c 35,000 By Balance b/d 5,00,000
To Balance c/d (Balancing Figure) 6,25,000 By Depreciation A/c 1,60,000
6,60,000 6,60,000
1. (a) Cash Flows are inflows and outflows of Cash and Cash Equivalents.
(b) Cash Flow from Financing Activities = ` 60,000.
2. A. Cash Used in Investing Activities = ` 50,000.
B. Cash Used in Investing Activities = ` 2,00,000.
C. Cash Flow from Investing Activities = ` 60,000.
3. 20 Times.
[Hints: 1. Revenue from Operations = ` 4,00,000.

2.
Working Capital = Capital Employed – Non-Current Assets = ` 20,000.]
4. 1 : 1.
5. 10 Times*.
*Interpretation: Ajmera Ltd. is definitely very efficient because its Inventory Turnover Ratio is just double to
that of industry.
1. (i) Major Head: Non-Current Assets; Sub-head: Fixed Assets: Intangible Assets.
(ii) Major Head: Non-Current Assets; Sub-head: Long-term Loans and Advances.
2. Cash Flow from Operating Activities: ` 4,68,000.
3. Cash Flow from Investing Activities:
Inflow = ` 8,80,000 [i.e., ` 11,00,000 – 20% of ` 11,00,000].
Outflow = ` 7,00,000.
4. (i) Gross Profit Ratio = 20%;
(ii) Issue of shares for cash, Long-term loan borrowed from Bank; and
(iii) Green Ltd. Because the accounting ratios of Green Ltd. show better Long-term and Short-term financial
position as compared to Star Ltd.
]

Project Illustration 1
You are to obtain the quarterly results of a listed company and analyse the published
results with respect to sales and profit before tax over the period using the suitable
analytical tools and give your conclusion.
Project Solution
The Project is to analyse sales and profit of a listed company with the purpose to analyse
the sales and profit pattern with respect to the quarter ended 31st March, 2012. Moreover,
determine profitability on the basis of accounting ratios.
Data Source
The data has been published in money.radiff.com as listed company in NSE. The data
relates to the company named ‘HT Media Ltd.’ and is as follows:
HT Media Ltd.
Quarterly Results (` In Lakhs)
Particulars Jun.,2012 Mar.,2012 Dec.,2011 Sept.,2011 Jun.,2011
Sales 309.95 317.22 365.24 314.09 330.74
Other Income 15.75 14.99 12.62 17.14 16.80
Total Revenue 325.70 332.21 377.86 331.23 347.54
Raw Material 95.44 98.54 106.17 100.67 95.92
Change in Inventories (0.09) 0.09 0.09 (0.12) (0.05)
Employees Benefit Expenses 63.11 60.78 65.45 59.09 61.90
Administrative and Selling Expenses ... ... ... 20.13 20.64
Finance Cost 7.58 8.15 6.33 5.67 4.43
Depreciation 13.82 16.43 14.13 15.83 13.90
Other Expenses 97.18 117.83 119.73 83.03 76.05
Total Expenses 277.04 301.82 311.90 284.30 272.79
Profit beforeTax 48.66 30.39 65.96 46.93 74.75
Taxation 11.89 8.74 16.23 11.30 21.94
Net Profit/Loss after Tax 36.77 21.65 49.73 35.63 52.81
Other Information
Gross Profit 62.48 46.82 80.09 62.76 88.65
Return on Net Worth (%) 12.19 15.19 12.36 9.45 15.78
Project Plan
Project is planned to be executed as follows:
1. A comparison of absolute amount of sales is made with the help of a bar diagram.
2. A comparison of percentage increase or decrease in sales is computed and presented graphically.
Project Work

P.2 Analysis of Financial Statements—CBSE XII
3. A comparison of Gross Profit is made with the help of a bar diagram.
4. A comparison of percentage increase or decrease in Gross Profit is made and presented
graphically.
5. A comparison of Profit after Tax is made with the help of a bar diagram.
6. A comparison of percentage increase or decrease in Profit after Tax is made and
presented graphically.
7. Calculate Gross Profit Ratio and show it graphically.
8. Calculate Net Profit Ratio and show it graphically.
9. Present the Return on Net Worth (%) through bar diagram.
10. Draw conclusion about the working result of the company.
Project Solution
1. Table showing Sales during different quarters:
Sales (` in Lakhs) 309.95 317.22 365.24 314.09 330.74
Graphical Presentation of Sales in Different Quarters:
2. Table showing percentage increase or decrease in Sales:
Sales (` in Lakhs) 309.95 317.22 365.24 314.09 330.74
% Increase or Decrease in Sales (2.29%) (13.15%) 16.29% (5.03%) ...
Graphical Presentation of percentage Change in Sales in Different Quarters:
Sales
370
360
350
340
330
320
310
300
290
280
Jun., 2012 Mar., 2012 Dec., 2011 Sept., 2011 Jun., 2011
`
in
Lakhs
% Change in Sales
20.00%
15.00%
10.00%
5.00%
0.00%
–5.00%
–10.00%
–15.00%
Value
in
Percentage
Jun., 2012 Mar., 2012
Dec., 2011
Sept., 2011

Project Work P.3
3. Table showing Gross Profit of different quarters:
Gross Profit (` in Lakhs) 62.48 46.82 80.09 62.76 88.65
Graphical Presentation of Gross Profit in Different Quarters:

4. Table showing percentage change in Gross Profit in different quarters:
% Change in Gross Profit 33.45% (41.54%) 27.61% (29.20%) ...
Graphical Presentation of the Percentage Change in Gross Profit in Different Quarters:
Gross Profit
100
`
in
Lakhs
90
80
70
60
50
40
30
20
10
0
% Change in Gross Profit
Jun., 2012
Mar., 2012
Dec., 2011
Sept., 2011
40.00%
0.00%
–10.00%
–20.00%
Value
in
Percentage
30.00%
20.00%
10.00%
–30.00%
–40.00%
–50.00%

5. Table showing absolute Net Profit after Tax of different quarters:
Net Profit (` in Lakhs) 36.77 21.65 49.73 35.63 52.81
Graphical Presentation of Net Profit After Tax for Different Quarters:
6. Table showing the percentage change in Net Profit after Tax in different quarters:
Net Profit (` in Lakhs) 36.77 21.65 49.73 35.63 52.81
% Change in Net Profit 69.84% (56.46%) 39.57% (32.53%) ...
Graphical Presentation of the Percentage Change in Net Profit after Tax in
Different Quarters:
Net Profit after Tax
60
50
40
30
20
10
0
`
in
Lakhs
% Change in Net Profit after Tax
Jun., 2012
Mar., 2012
Dec., 2011
Sept., 2011
80.00%
0.00%
–20.00%
–40.00%
Value
in
Percentage
60.00%
40.00%
20.00%
–60.00%
–80.00%

Project Work P.5
7. Table showing Gross Profit Ratio for the different quarters:
Sales (` in Lakhs) 309.95 317.22 365.24 314.09 330.74
Gross Profit Ratio 20.16% 14.76% 21.93% 19.98% 26.80%
Graphical Presentation of Gross Profit Ratio in Different Quarters:
8. Table showing Net Profit Ratio:
Net Profit/Loss after Tax (` in Lakhs) 36.77 21.65 49.73 35.63 52.81
Sales (` in Lakhs) 309.95 317.22 365.24 314.09 330.74
Net Profit Ratio 11.86% 6.82% 13.62% 11.34% 15.97%
Graphical Presentation of Net Profit Ratio in Different Quarters:
Gross Profit Ratio
Jun., 2012 Mar., 2012 Dec., 2011 Sept., 2011
30.00%
Value
in
Percentage
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Jun., 2011
Net Profit Ratio
18.00%
Value
in
Percentage
14.00%
4.00%
0.00%
16.00%
12.00%
10.00%
8.00%
6.00%
2.00%

9. Table showing Return on Net Worth in different quarters:
Return on Net Worth (%) 12.19 15.19 12.36 9.45 15.78
Graphical Presentation of Return on Net Worth in Different Quarters:
10. Conclusion
It can be observed that the company’s Gross Profits and Net Profits have fluctuated to a
large extent in absolute amount. In terms of ratios also it has fluctuated and the range has
been 14.76% to 26.80% for Gross Profit and 6.82% to 15.97% for Net Profit. Obviously, it
is because of the fluctuating sales. However, an increase can be observed in every respect
in December, 2011 in comparison with the previous quarters. Therefore, quarter ended
December, 2011 is important for the analysis purpose. Management has to investigate the
reasons of decline in the performance in comparison to the previous quarter.
Overall assessment is that the company has to work hard to gain their previous performance.
Return on Net Worth (%)
18
8
0
14
12
10
6
4
2
16
Value
in
Percentage

Project
You are required to take the annual results of a listed company and analyse the performance
with respect to result of the current year ended and the result of the previous year. The
analysis should include the profit and also the segment results.
Project Solution
I have drawn the Segment Results of Mphasis Limited, a company listed on Bombay Stock
Exchange. The results uploaded on the official website of the company are reproduced
hereunder:
(` in Lakhs)
Particulars Year ended Year ended
31st March, 2019 (`) 31st March,2018 (`)
Segment Revenue
Banking and Capital Market 8,796.25 8,202.63
Insurance 7,024.04 5,471.76
Information Technology, Communication and Entertainment 4,702.71 6,405.01
Emerging Industries 8,605.94 10,094.22
Unallocated-Hedge 137.69 90.84
29,266.63 30,264.46
Segment Result
Banking and Capital Market 125.75 1,050.77
Insurance 2,098.39 1,356.66
Unallocated-Hedge 137.69 90.84
6,794.18 8,226.18
Interest Income 602.78 517.12
Finance Costs (64.27) (59.21)
Other Income 1,020.66 1,104.29
Other Unallocable Expenditure (2,262.93) (2,471.77)
Profit before Taxation 6,090.42 7,316.61
Income Taxes 1,506.77 1,786.31
Profit after Taxation 4,583.65 5,530.30
(` in Lakhs)
2019 (`) 2018 (`)
Segment Assets
Insurance 2,681.29 1,926.40
Unallocated-Hedge 40,404.40 39,431.54
53,485.79 51,778.82
Segment Liabilities
Insurance 1,566.96 1,206.82
Information Technology, Communication and Entertainment 929.53 1,098.99
8,210.96 11,283.77

Capital Employed
Insurance 1,114.33 719.58
Information Technology, Communication and Entertainment 443.12 962.94
45,274.83 40,495.05
Solution: On the basis of the information of Mphasis Limited relating to financial results
of the year ended 31st March, 2019 and 31st March, 2018, the project has been prepared
showing the analysis of changes in Segment Results and comparison of the results with
Capital Employed.
Graphic presentation of Segement-wise Revenue from Operations through Pie-charts:
Revenue from Operations for the year ended 31st March, 2018 (`)
Banking and Capital Market
8,605.94
Information Technology,
Communication and
Entertainment
Emerging Industries
8,796.25
7,024.04
4,702.71
Insurance
90.84
10,094.22
8,202.63
5,471.76
6,405.01
Revenue from Operations for the year ended 31st March, 2019 (`)
137.69
Unallocated-Hedge
Banking and Capital Market
Information Technology,
Communication and
Entertainment
Emerging Industries
Insurance
Unallocated-Hedge

Project Work P.9
1. Table showing segment-wise Revenue from Operations for the year ended 31st March,
2019 and 31st March, 2018 with their difference:
Segment Name Year ended 31st March, Year ended 31st March, Difference
2019 (`) 2018 (`) (`)
Banking and Capital Market 8,796.25 8,202.63 593.62
Insurance 7,024.04 5,471.76 1552.28
Information Technology, Communication
and Entertainment 4,702.71 6,405.01 (1,702.3)
Emerging Industries 8,605.94 10,094.22 (1,488.28)
Unallocated-Hedge 137.69 90.84 46.85
2. Table showing percentage of segment-wise Revenue from Operations to Capital
Employed for the year ended 31st March, 2019:
Segment Name Revenue from Operations Capital Employed in Percentage of Revenue
2018–19 (`) theYear 2018–19 (`) to Capital Employed (%)
Insurance 7,024.04 1,114.33 630.34
and Entertainment 4,702.71 443.12 1,061.27
Emerging Industries 8,605.94 1,629.86 528.02
Unallocated-Hedge 137.69 38,893.35 0.35
Graphical representation of data showing segment-wise Revenue for Operations
in the year 2019 and 2018 with their difference
Year ended 31st March,2019 (`)
Year ended 31st March,2018 (`)
Difference
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Graphical representation of data showing Percentage of Segment-wise Revenue
from Operations to Capital Employed in the year 2018–19
3. Table showing percentage of segment-wise Revenue from Operations to Capital
Employed for the year ended 31st March, 2018:
Segment Name Revenue from Operations Capital Employed Percentage of Revenue
2017–18 (`) in theYear 2017–18 (`) to Capital Employed (%)
Insurance 5,471.76 719.58 760.41
and Entertainment 6,405.01 962.94 665.15
Graphical representation of data showing percentage of segment-wise Revenue
from Operations to Capital Employed in the year 2017–18
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254.17
760.41
665.15
587.52
0.27

Project Work P.11
4. Table showing percentage of segment-wise Revenue from Operations to Capital Employed
for the year ended 31st March, 2019 and 2018 with their difference:
Segment Name % of Segment-wise % of Segment-wise Difference
Revenue from Operations Revenue from Operations
to Capital Employed 2019 to Capital Employed 2018
Banking and Capital Market 275.38 254.17 21.21
Insurance 630.34 760.41 (130.07)
Emerging Industries 528.02 587.52 (59.50)
Graphical representation of data showing percentage of segment-wise Revenue to
Capital Employed with their difference for the year 2018–19 and 2017–18
5. Table showing percentage of Profit before Tax to Capital Employed for the year ended
31st March, 2019:
Segment Name Profit before Tax forYear Capital Employed in the year Percentage of PBT to
ended 31st March,2019 (`) ended 31st March,2019 (`) Capital Employed (%)
Banking and Capital Market 125.75 3,194.17 3.94
Insurance 2,098.39 1,114.33 188.31
1,200
1,000
800
600
400
200
0
–200
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% of Segment-wise Revenue from
Operations to Capital Employed (2018–19)
% of Segment-wise Revenue from
Operations to Capital Employed (2017–18)
Difference
275.38
254.17
21.21
630.34
760.41
1,061.27
665.15
396.12
528.02
587.52
0.35
0.27
0.08
–130.07
–59.50
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Graphical representation of data showing Profit before Tax to
Capital Employed for the year ended 31st March, 2019
6. Table showing percentage of Profit before Tax to Capital Employed for the year ended
31st March, 2018:
Segment Name Profit before Tax forYear Capital Employed in year Percentage of PBT to
ended 31st March,2018 (`) ended 31st March,2018 (`) Capital Employed (%)
Insurance 1,356.66 719.58 188.53
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Graphical Representation of data showing Profit before Tax to
Capital Employed for the year ended 31st March, 2018
350%
200%
150%
100%
0%
300%
250%
50%
250%
100%
50%
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200%
150%
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32.56
188.53 197.03
222.96
0.27

Project Work P.13
7. Table showing difference in the percentage of Profit before Tax and Capital Employed
for the year ended 31st March, 2019 and 2018:
Segment Name % of Profit before Tax to % of Profit before Tax to Difference
Capital EmployedYear Capital EmployedYear
ended 31st March,2019 (`) ended 31st March,2018 (`)
Banking and Capital Market 3.94 32.56 (28.62)
Insurance 188.31 188.53 (0.22)
and Entertainment 330.53 197.03 133.50
Emerging Industries 182.08 222.96 (40.88)
Graphical Representation of data showing difference in percentage of Profit before
Tax to Capital Employed for the year ended 31st March, 2018 and 2019
–100%
–50%
0%
50%
100%
150%
200%
250%
300%
350%
% of Profit before Tax to
Capital Employed (2019)
% of Profit before Tax to
Capital Employed (2018)
Difference (%)
3.94
32.56
–28.62
–0.22
–40.88
188.31
188.53
330.53
197.03
133.5
182.08
222.96
0.35
0.27
0.088
VIVA QUESTIONS
1. What is Segment Reporting?
Ans. Segment reporting is the reporting of the operating segments of a company in the disclosures accompa-
nying its financial statements.Segment reporting is required for publicly-held entities,and is not required
for privately held ones. Segment reporting is intended to give information to investors and creditors
regarding the financial results and position of the most important operating units of a company, which
they can use as the basis for decisions related to the company.
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2. Name the various segments of Mphasis Limited.
Ans. Various segments of Mphasis Limited are:
(i) Banking and Capital Market
(ii) Insurance
(iii) Information technology, Communication and Entertainment
(iv) Emerging Industries
(v) Unallocated-Hedge
3.
Which segment is the best segment of the Company?
Ans. Emerging Industries is the best segment,because it contributes about 48% to the profit of the company.
4. Which segment has high revenue?
Ans. Banking and Capital Market has high revenue,it has around 30.05% revenue to the total net revenue from
operations of the company.
5. Should the company operate in only Emerging Industries due to high profits?
Ans. In my opinion, the company should make efforts to promote business of other segments as these seg-
ments have more business potential than what has been achieved.

Following is the summarised Balance Sheet of Mohak Ltd. You are required to prepare Cash
Flow Statement and on the basis of it and interpret the result.
BALANCE SHEETS as at 31st March,2019 and 2018
2019 (`) 2018 (`)
(a) Share Capital 1 8,00,000 6,00,000
(a) Long-term Borrowings 3 3,50,000 50,000
(b) Long-term Provisions 4 1,11,000 86,000
(b) Other Current Liabilities 6 67,000 62,000
Total 15,01,000 9,09,500
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets 8(a) 6,74,400 3,15,000
(ii) Intangible Assets 8(b) 1,68,600 78,750
(iii) Capital Work-in-Progress 2,82,000 1,32,250
(b) Non-current Investments 9 42,000 70,000
(c) Deferred Tax Assets (Net) 8,000 4,000
2. Current Assets
(b) Inventories 1,00,500 1,03,500
(c) Trade Receivables 10 1,68,000 1,15,500
(e) Short-term Loans and Advances 12 4,000 4,000
Total 15,01,000 9,09,500
Non-current Investments are sold at a gain (profit) of ` 1,000.
Notes to Accounts
2019 (`) 2018 (`)
1. Share Capital

(a) Authorised Capital:

1,00,000 (PreviousYear 1,00,000 shares) Equity Shares of ` 10 each 10,00,000 10,00,000
5,000 Preference Shares of ` 100 each 5,00,000 5,00,000
15,00,000 15,00,000
(b) Issued Capital:
60,000 (PreviousYear 40,000 shares) Equity Shares of ` 10 each 6,00,000 4,00,000
2,000;10% Preference Shares of ` 100 each 2,00,000 2,00,000
8,00,000 6,00,000

(c) Subscribed Capital:
Subscribed and fully paid-up:
60,000 (PreviousYear 40,000 shares) Equity Shares of ` 10 each 6,00,000 4,00,000
2,000;10% Preference Shares of ` 100 each 2,00,000 2,00,000
8,00,000 6,00,000


Surplus/(Deficit),i.e.,Balance in Statement of Profit and Loss 47,000 (28,000)
97,000 22,000
3,500 (Previous year 500 Debentures);11% Debentures of ` 100 each 3,50,000 50,000
4. Long-term Provisions
Provision for Employees Benefit 1,11,000 86,000
5. Trade Payables
Sundry Creditors 28,000 46,500
30,000 52,500

Income Received in Advance 67,000 62,000
Net Block
8. Fixed Assets 31st March, 31st March, Depreciation Sale of Assets Purchase of
2019 2018 for the year on Book Value Assets during
during theYear theYear
` ` ` ` `
(a) Tangible Assets
Land 1,50,000 1,50,000 ... ... ...
Building 3,33,900 91,500 7,600 ... 2,50,000
Plant and Machinery 1,44,750 36,250 12,500 29,000 1,50,000
Furniture and Fixtures 40,000 29,500 2,900 4,000 17,400

Computers 5,750 7,750 2,000 ... ...
Total 6,74,400 3,15,000 25,000 33,000 4,17,400
(b) Intangible Assets
Computer Software 9,600 750 3,000 ... 11,850
Technical Know-how 1,59,000 78,000 9,000 ... 90,000
Total 1,68,600 78,750 12,000 ... 1,01,850
9. Non-Current Investments

Investment in Debentures 42,000 70,000
Debtors 1,40,000 1,08,000
1,68,000 1,15,500
Cash-in-Hand 4,500 6,500
Cash at Bank 14,000 31,000
18,500 37,500
12. Short-term Loans and Advances
Unsecured Loan 4,000 4,000
Note: Proposed Dividend for the years ended 31st March,2018 and 2019 are ` 75,000 and ` 80,000 respectively.

Project Work P.17
Project Solution
Introduction
The project is to draw Cash Flow Statement as per Accounting Standard-3 (Revised) issued
by the Institute of Chartered Accountants of India from the given data and to express the
views on the issue—why bank balance is not in line with the profit.
The data, i.e., Balance Sheets as at 31st March, 2019 and 31st March, 2018 and along with the
relevant information and Notes to Accounts for the year ended 31st March, 2019, is provided.
The project has been planned and executed as follows:
1. Redrafting Balance Sheets for the purpose of Cash Flow Statement.
2. Cash Flow Statement of Mohak Limited for the year ended 31st March, 2019 has been
prepared in accordance with the Accounting Standard-3 (Revised) and has been analysed
to determine the reasons for bank balance not being in line with the profit.
Redrafted Balance Sheets of Mohak Limited for the purpose of Cash Flow Statement:
BALANCE SHEETS as at 31st March,2019 and 2018
2019 (`) 2018 (`)
(a) Share Capital 1 8,00,000 6,00,000
(a) Long-term Borrowings 3 3,50,000 50,000
(b) Long-term Provisions 4 1,11,000 86,000
(b) Other Current Liabilities 6 67,000 62,000
Total 14,93,000 9,05,500
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets 8(a) 6,74,400 3,15,000
(ii) Intangible Assets 8(b) 1,68,600 78,750
(iii) Capital Work-in-Progress 2,82,000 1,32,250
(b) Non-current Investments 9 42,000 70,000
2. Current Assets
(b) Inventories 1,00,500 1,03,500
(c) Trade Receivables 10 1,68,000 1,15,500
(e) Short-term Loans and Advances 12 4,000 4,000
Total 14,93,000 9,05,500
Clarification:
As per the CBSE Guidelines, accounting treatment of the Deferred Tax Liability/Assets (Net)
is not to be evaluated, otherwise also it is a part of Surplus, i.e., Balance in Statement of
Profit and Loss and it is merely a book entry and not a actual Liability/Asset.
Hence, it is a redrafted Balance Sheet and Deferred Tax Asset (Net) is deducted from Surplus,
i.e., Balance in Statement of Profit and Loss.

Redrafted Note to Accounts
2019 (`) 2018 (`)
Surplus/(Deficit) ,i.e.,Balance in Statement of Profit and Loss 47,000 (28,000)
Less: Deferred Tax Assets (Net) transferred 8,000 39,000 (4,000) (32,000)
89,000 18,000
Particulars `
Closing Surplus,i.e.,Balance in Statement of Profit and Loss 39,000
Less: Opening Surplus,i.e.,Balance in Statement of Profit and Loss (32,000)
71,000
Dividend paid (Proposed Dividend of PreviousYear) 75,000 1,21,000
Add: Non-cash/Non-operating Expenses
Long-term Provisions (Provision for Employees Benefits) 25,000 67,500
2,59,500
Less: Non-cash/Non-operating Income
Gain (Profit) on Sale of Investment 1,000
Inventories 3,000
Other Current Liabilities (Income Received in Advance) 5,000 8,000
2,66,500
Less: Net Income Tax (paid) 37,000
Cash Flow from Operating Activities
1,54,500
Purchase of Fixed Assets (5,19,250)
Expenses on Capital Work-in-Progress (1,49,750)
Proceeds from Sale of Non-current Investments 29,000
Proceeds from Sale of Fixed Assets 33,000
Proceeds from Share Capital 2,00,000
Payment of Dividend (75,000)
Proceeds from Long-term Borrowings 3,00,000
Payment of Interest on Debentures (5,500)
(D) Net Decrease in Cash and Cash Equivalents (A + B + C) (33,000)
(E) Cash and Cash Equivalents at the end of the year 53,500
Note:It has been presumed that additional 3,000;11% Debentures of ` 100 each are issued on 31st March,2019.

Project Work P.19
Comments
Accrual method of accounting when used necessarily means that the amount of Net Profit
will not match with corresponding increase in cash balance.
Net Profit is ascertained after adjusting outstandings and prepayments (both in respect of
incomes and expenses) in the beginning and at the end of the accounting period.
In addition, items regarded as capital, e.g., the purchase of fixed assets are not part of
Statement of Profit and Loss but, involve payments of Cash and Cash Equivalents.
Cash Flow from Operating Activities is ` 1,54,500, it may be due to increase in sales or
decrease in expenses. But the Cash Outflow from Investing activity is ` (6,07,000) as the
company invest the amount in purchasing fixed asset which in future increases the efficiency
of the company. Cash Flow from Financing Activity is ` 4,19,500 as the company procured
funds by issuing share capital and by raising funds through long-term borrowings.
As a result, Cash and Cash Equivalents has decreased by ` 33,000 and, on the other hand,
the net profit has increased by ` 71,000 [` 39,000 – (` 32,000)], is because net cash outflow
from investing activities ` 6,07,000 exceeds the aggregates of net cash inflows from operating
activities ` 1,54,500 and financing activities ` 4,19,500. Another reason is that Mohak Ltd.
has invested more funds in working capital, largely because of an increase in the amount
owing from debtors and substantial decrease in the amount due to the creditors.
VIVA QUESTIONS
1. Under which method of accounting,net profit will not match with a corresponding increase in cash balance?
Ans. Under accrual method of accounting, net profit will not match with a corresponding increase in
cash balance.
2. Do you think that purchase of fixed assets do not appear in the Statement of Profit and Loss?
Ans. Yes, purchase of fixed assets do not appear in the Statement of Profit and Loss.
3. Why purchase of fixed assets do not appear in the Statement of Profit and Loss?
Ans. Purchase of fixed assets do not appear in the Statement of Profit and Loss because it is a Capital Expenditure.
4. Why Gain (Profit) on Sale of Investments is deducted from Income from Operating Activities?
Ans. Because it is an investing activity and the full amount of sale is added in Cash from Investing Activities.
5. Why we do not deduct Expenses on Issue of Shares from Financing Activities?
Ans. Because it is Deferred Revenue Expenditure that is written off in 5 years.
6. Give two examples of Cash Flow from Operating Activities.
Ans. (i) Cash receipts from the sale of goods and the rendering of services.
(ii) Cash payments to suppliers for goods purchased and for services availed.
7. Give one example of Financing Activity.
Ans. Cash proceeds from issuing shares or debentures.
8. How can we ascertain Cash Flow from Financing Activities?
Ans. Cash Flow from Financing Activities can be ascertained by analysing the change in Equity Share Capital,
Preference Share Capital,Debentures,other Long-term Borrowings and Short-term Borrowings,i.e.,Bank
Overdraft.
9. How can we ascertain Cash Flow from Investing Activities?
Ans. Cash Flow from Investing Activities can be ascertained by analysing the change in Fixed Assets and
Long-term Investments during the accounting period.
10. State the conditions for an investment to qualify as Cash Equivalents.
Ans. For an investment to qualify as Cash Equivalent:
1. It must be readily convertible to a known amount of cash.
2. It must be subject to an insignificant risk of change in value.
Therefore, an investment normally qualifies as a Cash Equivalent only when it has a short maturity of,
say, three months or less from the date of acquisition.

T.s. grewal book part 3

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