Chapter 25 PROBLEMS
1. The balance sheets sheets and trading trading and profit profit and loss accounts accounts for the year ended 30 June, 19X2 of S of S Ltd and T Ltd T Ltd are given in Tables 4.30 and 4.31. You may assume that stocks have increased evenly throughout the year. You are required to: (a) Calcula Calculate te three of the followin following g ratios separa separatel tely y for each company: (i) net net profi rofitt for for the the year ear as a perc percen enttage age of net net asse assets ts employed at 30 June, 19X2; (ii) ii) net profit profit for for the year year as a percentage percentage of of sales; (iii) iii) gross profit profit for the the year as as a percentage percentage of sales; sales; (iv ) current current assets assets to current current liabilities liabilities at at 30 June, June, 19X2; 19X2; (v ) liquid liquid ratio ratio at at 30 June, June, 19X2; 19X2; and and (vi) vi) stock stock turno turnover ver durin during g the year. year. (b) Describe Describe briefly the main main conclusions conclusions which you draw from a comparison of the ratios which you have calculated for each each company company.. (C.A., adapted) adapted)
Table 25.30: S Ltd and T Ltd Balance Sheet as on 30 June, 19X2 S Ltd
(Rs) T Ltd
Fixed assets at cost60,00030,000 Less: Provision for depreciation20,000 40,000 20,000 Current assets Stock 57,000 30,000 Debtors 22,000 20,000 Cash 11,000 10,000 90,000 60,000 Less: Curr Curren entt liab liabili iliti ties3 es30, 0,00 000 0 30 30,0 ,000 00 Net current assets 60,0003 030 0,000 Net assets 100,000 50,000 PaidPaid-up up sh shar are e capit capital al 95,0 95 ,00045 0045,0 ,000 00 Revenue reserve 5,000 5,000 100,000 50,000
10,000
Table 25.31: S Ltd and and T Ltd Trading and Profit and Loss Account
for the year ended 30 June, 19X2(Rs) S Ltd
T Ltd
Sales 160,000 120,000 Stock at July 1, 19X1 39,000 20,000 Add: Purchases114,000 85,000 153,000 105,000 Less: Stock at June 30, 19X2 57,000 30,000 Cost of goods sold 96,000 75,000 Gross profit 64,000 45,000 Less: General expenses 56,000 39,000 Net profit for the year 8,000 6,000 Add: Balance brought forward 3,000 1,000 11,000 7,000 Less: Dividend paid 6,000 2,000 Balance carried forward 5,000 5,000 2. Extracts from financial accounts of XYZ Ltd are given below:
Table 25.32: XYZ Ltd Year I
Year II
AssetsLiabilitiesAssets
Liabilities
Stock 10,000 – 20,000 – Debtors 30,000 – 30,000 – Payment in advance 2,000 – – – Cash in hand20,000 – 15,000 – Sundry creditors – 25,000 – 30,000 Acceptances – 15,000 – 12,000 Bank overdraft – – – 5,000 62,00040,00065,00047,000 Sales amounted to Rs 350,000 in the first year and Rs 300,000 in the second year. You are required to comment on the solvency position of the concern with the help of accounting ratios. 3. From the following information you are required to (a) analyze the relative position of ABC Ltd in the industry and (b) point out the deficiencies and suggest improvements.
Table 25.33: ABC Ltd Balance Sheet
as on 31 December, 19X1 (Rs) Share capital1,278,000Fixed assets: Current liabilities: Equipment 600,000 Creditors 150,000Less: Depreciation 80,000 520,000 Bank loan 300,000Current assets: Cash 180,000 Debtors 240,000 Stock 660,000 Prepaid expenses 128,000 Total capital1,728,000Total assets 1,728,000
Table 25.34: ABC Ltd Profit and Loss for the year ended 31 December, 19X1 (Rs) Sales 345,000 Cost of goods sold 150,000 Gross profit 195,000 Operating expenses 90,000 Profit before interest and taxes105,000 Interest 24,000 Profit before taxes 81,000 Tax 27,000 Profit after taxes 54,000 Table 25.35: ABC Ltd Industry Averages Current ratio Quick ratio Debt-equity ratio Times interest earned Inventory turnover Fixed-assets turnover Total assets turnover Net profit margin Return on assets Return on equity
2.95 1.05 50% 2.60% 0.35 0.80 0.50 16% 15% 21%
4. The two firms, M and N, have the following data:
N Rs
Sales Total assets Net profit
M Rs
800,000 4,000,000600,000 750,000420,000
200,000
Compute return on investment for both firms. Explain how the figures are similar and how they are different. 5. The summary of the balance sheets and the profit and loss accounts from 19X1 to 19X5 for Jagan Limited is given in Tables 25.36 and 25.37. During this period, the company undertook a major expansion programme. You are required to calculate important ratios for the five years and assess the financial health of the company. Also, explain the implications of the development of the financial health of the company for the shareholders. (C.A. Engg., adapted)
Table 25.36: Jagan Ltd Balance Sheets(Rs
’000)
19X119X219X319X4
19X5
Liabilities and Equity Creditors 25 25 25 25 25 Debentures 2501,0001,7502,500 3,250 Share capital 1,0001,0001,0001,000 1,000 Reserves 2252252252,252,25 Total 1,5002,2503,00037,50 45,00 Asset Cash 50 50 50 50 50 Debtors 50 50 50 50 50 Stock 40065090011,501,400 Fixed assets, net1,0001,5002,0002,500 3,000 Total
1,5002,2503,0003,750
4,500
Table 25.37: Jagan Ltd Profit and Loss Accounts (Summary) 19X119X2 19X319X4
Sales 300450 600750900 Cost of goods sold100150200250300 Gross profit 200300 400500600
(Rs ’000)
19X5
Operating expenses25 50100150200 EBIT 175250 300350400 Interest 15 67.5127.5195270 Profit before tax160182.5172.5155130 Tax 67.5575.35 73.55 65.15 53.1 Net profit 92.45107.1598.9589.85 76.9 No. of shares 100100 100100100 P/E ratio 5 5 4 3.5 3.5 6. Using the following data, complete the balance sheet given below: Gross profit (Rs) 54,000 Shareholders’ equity (Rs)600,000 Gross profit margin 20% Credit-sales to total-sales80% Total assets turnover0.3 times Inventory turnover 4 times Average collection period (a 360-day year) 20 days Current ratio 1.8 Long-term debt to equity40%
Balance Sheet Creditors ......... Cash ......... Long-term debt......... Debtors Shareholders’ equity ......... ......... Fixed assets......... ......... .........
......... Inventory .........
7. Surendra Mohan and Sons are wholesale distributors of electric goods. Tables 25.38 and 25.39 contain their balance sheets and profit and loss statements during the period 19X1 to 19X3. You are required to critically evaluate the firm’s financial performance.
Table 25.38: Surendra Mohan and Sons Comparative Balance Sheets(Rs) 19X319X219X1
Liabilities and Capital Creditors 65,99462,22955,065 Accrued expenses2,6451,9201,168 Total current liabilities68,63964,149
56,233
Owner’s capital208,812181,341163,394 Total 277,451245,490219,627 19X319X219X1
Assets Cash 19,55014,3769,542 Debtors 86,78461,60140,217 Stock 61,66163,16768,086 Prepaid expenses2,6671,433 863 Total current assets170,662140,577 118,708 Fixed assets 99,28597,87896,229 Investments 7,5047,0354,690 Total non-current assets106,789104,913 100,919 Total 277,451245,490219,627 Table 25.39: Surendra Mohan and Sons Summarised Profit and Loss Statements
(Rs)
19X319X219X1
Sales 481,053457,172 399,291 Cost of goods sold310,720275,514229,878 Gross profit 170,333181,658169,413 Operating expenses141,377137,984 120,593 Net profit 28,956 43,674 48,820 8. The following are the comparative financial statements for three years for Plastic Works Limited. You are required to comment on the firm’s financial condition and indicate the areas which require management’s attention.
Table 25.40: Plastic Works Limited Comparative Balance Sheets(Rs) 19X319X219X1
Liabilities and Capital Bank borrowing 30,525 10,175 – Creditors 331,127147,725113,980 Accrued expenses 21,510 14,361 20,350 Provision for dividend 20,350 20,350 20,350 Provision for taxes56,36788,43586,111 Total current liabilities 459,879281,046 240,791 Long-term loan 71,225 Nil Nil
Total liabilities531,104281,046240,791 Share capital 407,000407,000407,000 Reserves and surplus80,98388,826 67,067 Net worth 487,983495,826474,067 Total Funds 1019,087776,872714,858 Assets Cash 99,164 35,922 13,930 Debtors 215,356207,780211,196 Stock: Raw material 133,577107,409 98,411 Work in process 47,882 50,179 42,230 Finished goods 266,534177,788174,892 Prepaid expenses17,35013,72612,697 Total current assets779,863592,804 553,356 19X319X219X1
Buildings, plant and equipment 229,314 161,502 Misc. fixed assets9,9107,021 – Total non-current assets239,224184,068 Total Assets 1,019,087776,872714,858
177,047
161,502
Table 25.41: Plastic Works Limited Summarised Profit & Loss Statements for the year ended 31 December (Rs) 19X3 19X2 19X1
Sales 1,872,9371,599,3151,429,818 Cost of goods sold896,953 767,673 683,597 Gross profit 975,984 831,642 746,221 19X3 19X2 19X1
Operating expenses846,059 640,048 545,750 Profit before taxes129,925 191,594 200,471 Taxes 56,367 88,435 93,050 Net profit 73,558 103,159 107,421 Dividends 81,400 81,400 81,400 9. Tata Iron & Steel Company Limited (TISCO). TISCO was established in 1907 at Jamshedpur. It is the largest private sector company. Tables 25.42 and 25.43 give the profit and loss statements and balance sheets for the last seven years
for the company. You are required to provide an analysis of the company’s financial performance.
Table 25.42: Tata Iron and Steel Company Limited March
(Rs
Summarised Balance Sheet as on 31 in crore)
2000
19951996199719981999 2001
ASEETS Gross fixed assets 6,962.897,408.467,850.82 8,948.52 10,032.1710,668.3311,258.17 Less: Cumulative depreciation1,749.412,014.902,324.42 2,648.48 2,973.593,241.953,720.08 Net fixed assets 5,213.485,393.565,526.40 6,300.04 7,058.587,426.387,538.09 Investments 220.65410.94664.90626.08 588.84 818.89850.83 Current Assets Inventories 1,039.70 Receivables 1,948.40 Marketable investment 399.51 Cash and bank balance 336.19
865.341,076.571,021.11 1,016.51944.85921.77 1,341.871,723.632,178.76 1,874.181,868.772,060.70 175.51365.75479.77453.03 342.35381.38 162.44437.09251.38462.96 232.87239.78
2,545.163,603.043,931.02 3,904.09 3,626.393,388.843,603.63 Misc. expenses not written off 31.33167.99278.32896.98 1,118.53 828.12920.29 Total Assets 7,835.119,209.789,920.87 11,274.16 11,992.8312,119.8812,531.46 CAPITAL & LIABILITIES
Net worth 4,064.88 Share capital 367.77
2,688.043,742.403,974.02 4,164.424,558.404,888.43 336.87367.23367.38367.55 517.77507.77
Equity capital 336.87367.23367.38367.55 367.77 367.77367.77 Preference capital 0.00 0.00 0.00 0.00 0.00 150.00 140.00 Reserves & surplus 2,351.173,375.173,606.64 3,697.33 3,796.654,040.634,380.66 Total borrowings 3,582.733,842.074,082.49 5,212.44 5,503.264,946.524,672.56 Current liabilities & provisions1,564.341,625.311,864.36 1,996.84 2,325.152,614.962,970.47 Current liabilities 1,421.511,326.821,385.47 1,414.66 1,463.351,492.551,696.38 Sundry creditors 1,256.721,203.971,251.00 1,296.61 1,340.171,345.651,574.35 Others 164.79122.85134.47118.05 123.18 146.90122.03 Provisions 142.83298.49478.89582.18 861.80 1,122.411,274.09 Tax provision 21.2418.96111.40150.58 185.53 167.04180.20 Dividend provision 118.24156.97165.66147.25 147.11 147.11183.89 Other provisions 3.35122.56201.83284.35 529.16 808.26910.00
Total Liabilities 7,835.11 9,209.78 9,920.87 11,274.16 11,992.8312,119.8812,531.46 Table 25.43: Tata Iron and Steel Company Limited Summarized Profit & Loss Account for the Year Ending on 31 March (Rs
in crore)
2000
Income Sales 7012.35 Less: Excise 710.09 Net sales 6175.03
19951996199719981999 2001
4993.396349.356919.4 6885.127015.167822.58 440.77592.61696.49724.34 796.86920.83 4552.625756.746222.916288.01 6218.36901.75
Other income 96.73 Change in stocks 33.19 Non-recurring income 152.44 Total Income 6457.78 PBDIT (EBITDA) 1058.26 Less: Depreciation 382.18
44.5876.18150.52117.16 68.5186.53 –17.3566.2442.12 4.846.18 – –56.74 16.03 0.35 11.227.59139.84 13.15 4595.885899.516426.756437.56 6406.066944.69 808.11212.741260.451030.38 1291.981507.68 262.26297.61326.83343.23 426.54492.25
PBIT 687.15 Less: Interest 360.35
545.84915.13933.62 676.08865.441015.43 281.4348.91390.66323.42 388.35412.39
PBT 363.73 Less: Tax provision 54.5 PAT 322.08
264.44566.22542.96 315.73477.09603.04 0.25 0.4373.7541.65 33.5 49.6 264.19565.79469.21 282.23422.59553.44
Appropriation of Profit Equity Dividends 118.24156.97165.66147.25 147.11 154.86196.09 Dividend Tax 0 016.5714.7316.18 17.04 21.52 Retained earnings 145.95408.82286.98160.1 118.94 250.69335.83 Other Financial Items Cash profit 530.35867.3801.69665.31 664.41 849.131045.69 Cash flow from business activities681.14638.86881.3880.44 1007.98 1323.941718.7 Value of output 4504.295795.266238.26257.51 6189.62 6154.846812.71 Gross value added 1501.192174.542205.362055.3 1998.68 2273.552732.1 Net value added 1238.93 1876.93 1878.53 1712.07 1616.5 1847.01 2239.85
10. Agro-Chemical & Pesticides Industry. The financial data in Table 25.44 related to ten agro-chemicals and pesticides companies for the year ending on March 31, 19X2. Provide a detailed analysis of the profitability and the market performance of the companies. How have these companies performed in relation to the industry performance? Show computations.
