financial statement analysis
DESCRIPTION
MBA Project reportFinance ProjectFinancial statement analysisTRANSCRIPT
CHAPTER 1
INTRODUCTION TO THE STUDY
1
1.1 INTRODUCTION
The project titled “Financial Statement Analysis of Kerala Khadi &
Village Industries Association, Avanissery” is based on the study of financial
performance and position of this institution. KK & VIA, Avanissery is a well
known institution placed in the A+ category by the KVIC along with fifteen other
institutions all over India. Main activity of the Association is Khadi production and
marketing. And hence, the financial prospects of the institution vary from year to
year. The study conducted has taken into consideration financial statements of the
institution that covers a period of last 5 years. A comparison of the financial
statements has been carried out that helps the project portray the institution’s
financial position, growth, profitability, solvency etc. Financial analysis is the
process of determining financial strengths and weaknesses of the institution by
establishing strategic relationship between the components of Balance Sheet and
Profit and Loss account and other operative data. It is thus an attempt to dissect the
financial statements into their components so as to analyze financial growth and
potential of the enterprise.
Financial analysis seeks to spotlight the significant facts and relationships
concerning managerial performance, efficiency, financial strengths and weaknesses
and creditworthiness of the institution. Various tools of analysis are used to study
accounting data so as to determine the continuity of operating policies, investment
2
value, credit rating and efficiency of operations. These tools of analysis are
immensely helpful in carrying out planning and controlling functions.
1.2 OBJECTIVES OF THE STUDY
To analyze the financial statements of Kerala Khadi &Village
Industries Association, Avanissery for a period of 5 years
To evaluate the overall performance of KK&VIA, Avanissery.
To ascertain the financial growth and prospects of KK & VIA, Avanissery.
To ascertain the profitability solvency of the institution.
To ascertain the liquidity of the institution.
To ascertain the efficiency of the institution’s performance.
3
1.3 SIGNIFICANCE OF THE STUDY
The analysis of financial statements refers to the treatment of the
information contained in the financial statements in a way so as to afford a full
diagnosis of the profitability and financial position of the firm concerned. The
analysis and interpretation of financial statements is essential to bring out the
mystery behind the figures in financial statements.
Financial statement analysis is an attempt to determine the significance and
meaning of the financial statement data so that forecast may be made of the future
earnings, ability to pay interest and debt maturities etc. And hence, the project
conducted during the period dated November 18th to January 18th is based on the
study of financial performance and position of KK & VIA, Avanissery. The
financial statement of the institution that covers a period of last 5 years has been
taken into consideration. A comparison of the financial statements has been carried
out that helps the project in portraying the institution’s financial performance and
growth, profitability, solvency etc.
4
1.4 METHODOLOGY
Research methodology refers to the various sequential steps to be adopted by
a researcher while studying a topic with certain objectives in view. It includes
certain typical proceedings of enquiry about something to get a conclusion. It’s a
scientific approach to inquest something. Research may be defined as the objective
and systematic method of finding solution to a problem i.e., systematic collection,
recording, analysis and recording of information about various facts of a
phenomenon under study.
DATA COLLECTION
The data can be collected through various methods. Primary and secondary
methods of data collection are available for concerned data collection. The
classification of data is based on the source of data. Primary data means first hand
information collected for the first time and, secondary data means second hand
information collected already by somebody, processed and reported in the right
time.
The study and analysis conducted for this project is based on the secondary
data received. It’s based on the relevant information available through the
institution’s Annual Reports, accounting records etc., which covers a period of last
5 years. Various statistical tools and Excel, Word etc., are used for presentation,
analysis and interpretation of data.
5
1.5 LIMITATIONS OF THE STUDY
Analysis of financial statements is a powerful mechanism to ascertain
strengths and weaknesses in the operations and financial position of an enterprise.
However, it suffers from certain limitations. Some of the major limitations are as
under:
Financial analysis is subject to limitations inherent in the financial
statements like following of different accounting principles or practices
regarding depreciation methods, inventory valuation and pricing.
Financial analysis is based upon only monetary information and
non-monetary factors are ignored.
The continuous and rapid changes in the value of money, present
day economy etc., reduce the validity of the analysis.
As financial statements reflect values in terms of historical costs,
analysis of financial statements wouldn’t portray the effect of price level
changes over the period.
The results or indications derived from the analysis of these
statements may be differently interpreted by different users.
6
CHAPTER 2
ABOUT THE INSTITUTION
7
2.1INDUSTRY PROFILE
KHADI - AN OVERVIEW:
Khadi has an extremely important connection with Indian freedom
movement and has become virtually symbolic to the struggle for freedom. It was at
the time of the Nagpur session (1920) that the Indian National Congress decided to
encourage “Khadi”. The first Khadi production center was established at
Kathiawad, Gujarat. Mahatma Gandhi used to refer to Khadi as “The livery of
freedom”. In fact Khadi was introduced in 1920 as a political weapon and as the
best instrument for giving concrete expression to the Swadeshi spirit to boycott
foreign goods.
Khadi means any cloth woven on handlooms in Kerala from cotton, silk or
woolen yarn handspun in India or from a mixture of any two or all such yarns.
Village Industries means any industry located in a rural area which
produces any goods or renders any service with or without the use of power in
which the fixed capital investment per head of an artisan or a worker doesn’t
exceed one lakh rupees or such other sum as may, by notification in the Official
Gazette, be specified from time to time by the Central Government.
INDUSTRIAL SCENARIO:
8
The Khadi market stands today is medium and it is growing. As a result, the
globalization of the fabrics trade has opened up highly demanding and evolving
requirement for outsourcing in Khadi industry. During the last 10 years the Khadi
industry is loosing its markets, because of global market entered in domestic
market and Mill made fabric available in global market entered with low cost.
NATIONAL SCENARIO:
The Indian Khadi industry has an overwhelming presence in economic life
of the country. Apart from providing one of the basic necessities of life, Khadi
industry also plays a pivotal role through its contribution to industrial output,
employment generation and the export earning of the Country. It provides direct
and indirect employment to the people and largest it’s the largest employment
sector after agricultural sector. Thus, the growth and all round development of
Khadi industry have a direct bearing on the improvement of the nation.
CURRENT SCENARIO:
Khadi industry faces stiff competition from power loom and hand loom
sector. Cost of Khadi depends on the human involvement in both the spinning and
weaving stages of Khadi production. As such the cost of Khadi cloth is a bit higher
when compared to handloom.
KHADI AND VILLAGE INDUSTRIES IN KERALA
9
Khadi industry in Kerala assumes a vital role in the State’s economy. Khadi
industry has been implemented in Kerala by KVIC and KKVIB through its directly
assisted institutions as a solution for rural unemployment rather than of
underemployment. The Khadi industry is concentrated mainly in the northern and
southern Districts of the State namely Trivandrum in the South and Kannur in the
North. In Thrissur, the industry is dominated mostly by aided and certified
institutions.
The total number of job seekers registered at employment exchanges in
Kerala during the year 2000 was nearly 42 lakh of which 55 percentage were
women. Khadi Sector is unable to attract enough workers to operate even their
existing charkas and looms. In a State like Kerala where the physical qualities of
life are comparable to that of any developed countries of the world, people prefer
to be unemployed rather than to seek employment in Khadi. Though spinning and
weaving activities are run as shed based programme with scheduled working hours
and holydays, not many people are attracted to this sector.
A majority of Khadi workers are women below the age of 30 who consider
it as an engagement till marriage. Of the entire spinners, 93 percent of the weavers
and 84 percent of the workers are women. Male ascendancy is witnessed only in
the salaried class.
A perusal of Khadi sale in Kerala reveals that more than 90 percentages of
the sales are made in semi-urban and urban areas through the 160 outlets run by the
Board. Nearly 74 to 88 percentages of the annual sales are made during special
rebate seasons (Onam, Bakreed, and Christmas and Gandhi Jayanthi weeks).
10
Cotton Khadi is the main variety produced in Kerala though above 50
percentages of sales in the state is constituted of muslin and silk items. The huge
pile of stock with the Board includes yarn and cloth made of cotton.
2.2 COMPANY PROFILE
INTRODUCTION:
The Kerala Khadi and village Industries Association was registered under
the Cochin Literary Scientific and Charitable Societies Act as No.1 of 1955.The
Head Office is at Avanissery of Thrissur district. The Association started with 150
Traditional charka spinners and 6 staff members. Only Khadi work was done in the
beginning.
Main activity of the Association is Khadi production and marketing. A mini
dye house and printing section is working at Avinisserry Head Quarters. Apart
from Khadi, the institution is engaged in village oil industry with 4 power Ghanies
(oil extraction unit-wooden chakku), washing soap making unit and honey
processing unit. A fully equipped carpentry and black smithy workshop is
functioning at Avanissery complex for the manufacture and repairing of
charkas ,looms, other implements connected to weaving\spinning, furniture and
wooden handicraft. They are pioneers in the production of 8 spindles wooden
11
muslin charkas, approved by the Khadi & Village Industries Commission and
acclaimed by the institutions all over India.
The Association has the privilege of organizing four All India Khadi &
Village Industries Exhibitions in 1956, 1957, 1960 and 1980. Kuppadam weaving
is an art of Kerala Khadi weaving. KVI’s have such 3 weaving centers and the
products of these centers attract the market all over India.
The Association provides direct employment to 1424 rural artisans, mostly
women artisans. There are 31 production centers and 15 showrooms cum retail
outlets spread over the district of Malapuram, Palakkad, Thrissur and Ernakulam.
The affairs of the Association are managed by 112 administrative staff including
President, Secretary and a General Manager. There are 17 members in the
executive committee including 2 artisans’ members and 8 workers.
SALIENT FEATURES
The Association is one of the major institutions directly aided by Khadi and
Village Industries Commission in Kerala State. KVIC is pioneers in the field of
muslin Khadi. One of the 10 muslin pilot centers started through out India in 1970-
71 was at Aryannur near Guruvayur, which topped the list of all the centers in
production and quality.
The Association is placed A+ (top most) category by Khadi &Village
Industries Commission along with 15 other institutions all over India. Main activity
of the Association is Khadi production and marketing.
12
The Association at present has a capacity of bleaching and dyeing of
clothes of 30 meters per day only and is not able to meet the huge demand. The
Association is the only place in Thrissur District where Khadi bleaching and
dyeing is carried out.
In 2006-07, institution had a production of Khadi worth 257.20 crores. The
total sale during the year was 380.98 lakh. There are 110 regular employees and
1158 rural artisans. Mostly woman are getting regular employment opportunity
through these activities. The Association has earned all India reputation in the
production of muslin Khadi, Kuppadam varieties and in the manufacture of 8
spindle charkas. The other activities are silk Khadi production, carpentry and
blacksmith, agmarked honey production, Ghani oil, Cane Furniture etc. There are
31 production centers and 15 sales centers under the Institution spread over the
district of Malapuram, Palakkad, Thrissur and Ernakulam. The Institution has its
own land and building worth Rs.5.78 crores located in 31 places in 24 Panchayath.
The own capital of the Association is Rs.71.68 lakh.
OBJECTIVES OF THE ASSOCIATION:
To establish or spread Khadi production and sales.
To organize and establish Village Industries.
To spread Sarvodaya ideology amongst the people through
establishing libraries, holding meetings, conference, exhibitions etc.
13
To acquire by purchase, take on lease or otherwise lands and
buildings and all other movable and immovable property which the Association
for the purpose there off may from time to time think proper to acquire.
To sell, improve, manage, develop, exchange lease or let, under-
lease sublet, mortgage dispose of, turned to account or otherwise deal with all
or any part of the property of the Association.
To serve the people in Kerala in accordance with the principles
underlying the various items of the constructive program as laid down in the
teaching of Gandhi.
To construct upon any premises acquired for the purpose of the
Association any building or buildings for the purpose of the Association and to
alter, add to, or remove, any building upon such premises.
To borrow or raise any money required for the purpose of the
Association, upon such terms and in such a manner and on such securities as
many be determined by the executive committee
UNITS WORKING UNDER THE ASSICIATION
Khadi Gramodyog Bhavan (RGB) Avanissery
KGB Chalakudy
KGB Guruvayur East
KGB Guruvayur West
KGB Kodungallur
14
KGB Kunnamkulam North
KGB Kunnamkulam South
KGB Nattika
KGB Ottupara
KGB Thrissur North
KGB Thrissur West
KGB Peringottukara
KGB Thripunithura
Production Center (PC) Avanissery
PC Choorakattukara
PC Erumapetty
PC Kadavallur
PC Kodakara
PC Mayannur
PC Peringottukara
PC Trichur
PC Trikkur
Central Vastralaya
Central Store
Soap Unit
Oil Unit
Honey Unit
Cane Unit
Sliver Unit
15
Saranjan Karyalaya
Readymade Unit
Dye House
SUPPLY CHAIN
The supply of cotton to this institution is mainly from the Cotton Growers
co-operative Marketing Societies in Pollachi and Thirupur in Tamil Nadu. This
cotton is processed at KVIC’s Central Sliver Plant at Kuttoor and sliver rovings are
supplied to Khadi institutions. However cotton for NMC 50 count is processed at
Avanissery sliver unit. Association is also purchasing slivers from KVIC Kuttoor
directly. Slivers are converted into yarn by the spinners of the Association.
MAJOR ISSUES & CONSTRAINTS
Major issues, constraints and problems faced by the KK&VIA and other
Khadi institutions were relating to labour, non-remunerative prices, insufficient
work place, irregular supply of raw material etc., which are summarized below:
16
The charkas and looms are more than 20 years old.
Work sheds are very old and in rainy season it becomes very
difficult to do the activities due to the leakage and other problems.
Supply of ready made warp is irregular which creates loss of time in
weaving.
Lack of spare parts for charkas.
In spinning units, due to inhalation of cotton dust particles, health
problems may occur.
Lack of persons for repairing of maintenance.
Due to the low wages skilled manpower is not available for taking
up spinning and weaving and pre-loom activities.
17
CHAPTER 3
CONCEPT OF FINANCIAL
STATEMENT ANALYSIS
18
3.1 CONCEPT OF FINANCIAL STATEMENTS
Financial statements also called financial reports are the end products
of business transactions. It comprises primarily the position statement or the balance
sheet and the income statement or the profit and loss account. These statements are
the outcome of summarizing process of accounting and are; therefore the sources of
information on the basis of which conclusions are drawn about the profitability and
the financial position of a concern. Financial statements are the basis for decision
making by the management as well as all other outsiders who are interested in the
affairs of the firm such as investors, creditors, customers, suppliers, financial
institutions, employees, potential investors, government and the general public.
A financial statement is a collection of data organized according to
logical and consistent accounting procedures. In the words of john m Myer,” financial
statement provides a summary of the accounts of a business enterprise, the balance
sheet reflecting the assets, liabilities and the capital as on a certain date and the
income statement showing the results of operations during a certain period.”
19
NATURE OF FINANCIAL STATEMENTS
Financial statements are prepared for the purpose of presenting a
periodical review or report by the management and deals with the state of investment
in business and result achieved during the period under review. It reflects a
combination of recorded facts, accounting concepts and conventions and personnel
judgments.
The following points explain the nature of financial statements:
The figures in the financial statements, as a combination of
recorded facts, which are not based on replacement costs, do not show current
financial position of the concern.
The use of accounting conventions makes financial statements
more comparable, simple and realistic.
The assumptions made by the accountant, while making the
records, make the preparation of financial statements comparatively easy.
These statements are influenced by the personal judgments of the
accountant though he is expected to be more objective in his approach.
20
OBJECTIVES
Financial statements are the source of information on the basis of which
conclusions are drawn about the profitability and financial position of a concern. The
primary objective of financial statement is to assist in decision making. The
accounting principle board of America states the following objectives of financial
statements:
To provide reliable financial information about economic resources and
obligations of a business firm.
To provide other needed information about changes in such economic
resources and obligations.
To provide reliable information about changes in net resources arising out of
business activities.
To provide financial information that assist in estimating the potential of
business.
To disclose, to the extent possible, other information related to the financial
statements that is relevant to the needs of the users of these statements.
21
USES & SIGNIFICANCE
The financial statements are mirror which reflects the financial position and
operating strength or weakness of the concern. These statements are useful to
management, investors, creditors, bankers, employees, government, research scholars
and public at large. The major uses of financial statements can be point out as follows:
As a report stewardship;
As a basis for fiscal policy;
As a guide to advice dividend action;
As a basis for the granting of credit;
As informative for prospective investors in an enterprise;
As a guide to the value of investment already made;
As an aid to government supervision;
As a basis for price or rate regulation;
22
3.2 ANATOMY OF FINANCIAL STATEMENTS
Financial statements comprise two basic statements, viz.
1. The position statement or the balance sheet; and
2. The income statement or the profit and loss account.
These statements are the record of operating performance with its impact on financial
position and progress of the enterprise.
1. Balance sheet:
The balance sheet also called statement of financial position depicts the
financial strength of the concern. Its purpose is to show the resources that the
company has, i.e., its assets, and from where those resources come from, i.e., its
liabilities and investments by owners and outsiders. Thus the balance sheet delineates
the firm’s holdings and obligations.
The important features of balance sheet are as under:
Balance sheet is prepared as of a specific date. Hence, it portrays financial
position of the enterprise on that date.
Balance sheet is usually written in two columns which illustrates the
relationship between assets and liabilities. The assets are shown on the right hand
side, while the sources of the assets on the left hand side. Total of both sides will
always tally.
23
Financial position is not based absolutely on facts but to some extent
accounting procedures, assumptions and personal judgments also influence.
Balance sheet provides useful information about the firm’s resources and
obligations. It reflects economic results of management policies. It contains
information about liquidity as well as solvency position of the firm.
2. Income statements:
Income statement, also called profit and loss account, is a performance report
which records changes in income, expenses profits and losses as a result of business
operations during the year between the two balance sheet dates. This statement
measures the progress of a business in carrying out the function of delivering services
and products to its customers for which the enterprise was set up.
Income statement is commonly divided into four sections:
Gross profit section
Operating profit section
Final net profit
Appropriation section
Income statement is the “store board” of the company’s performance during a
particular period of time since it reflects the results of operations for a period of time.
Income statement also portrays the repaying capacity of the company and can also
measure the profitability of the company. On the basis of this statement the
24
management can evaluate the effectiveness of its past policies and decisions. They
can also take decisions with respect to present production capacity, change in
advertisement policies, and change in sale price, diversification, merger plan etc; on
the basis of income statement.
LIMITATIONS:
The following are the main drawbacks of financial statements:
Financial statements do not depict the exact position and are essentially
interim reports.
Financial statements may not be realistic because these are prepared by
following certain basic concepts and conventions.
Personal decision or judgments of the accountant may adversely affect the
preparation of financial statements.
Financial statements discloses only monetary factors and avoids those
factors which can not be measured in monetary terms
These statements do not give a real and correct report about the worth of the
assets and their loss of value as these are shown on historical cost basis.
These statements are drawn after the real happening of the events.
3.3 FINANCIAL STATEMENT ANALYSIS
Financial statements play a dominant role in setting the framework of
managerial decisions. But the information provided in the financial statements is not
25
an end in itself as no meaningful conclusions can be drawn from these statements
alone. However the information provided in the financial statement is of immense use
in making decisions through analysis and interpretation of financial statements.
Analyzing financial statements is a process of evaluating relationship between
component parts of financial statement to obtain a better understanding of firm’s
position and performance.
The term ‘financial analysis’ ,also known as analysis and interpretation of
financial statements, refers to the process of determining financial strength and
weaknesses of the firm by establishing strategic relationship between the items of the
balance sheet, profit and loss account and other operative data. Financial analysis is
an attempt to determine the significance and meaning of the financial statement data
so that forecast may be made of the future earnings, ability to pay interest and debt
maturities and profitability of a sound dividend policy.
The term ‘financial analysis’ includes both ‘analysis’ and ‘interpretation’.
While the term ‘analysis’ is used to mean the simplification of financial data,
methodical classification of data given in financial statements; ‘interpretation’ means,
explaining the meaning and significance of data so simplified.
OBJECTIVES
Financial analysis is helpful in assessing the financial position and profitability
of a concern. This is done through comparison by ratios for the same concern over a
period of years; or for one concern against the industry as a whole; or for one concern
26
against the predetermined standards; or for one department of a concern against other
departments of the same concern.
In short, the main objectives of analysis of financial statement are to assess:
The present and future earning capacity or profitability of the concern,
The operational efficiency of the concern as a whole and of its various parts or
departments,
The short term and long term solvency of the concern for the benefits of the
debenture holders and trade creditors,
The comparative study in regard to one firm with another firm or one
department,
The possibility of developments in the future by making forecasts and
preparing budgets,
The financial stability of a concern,
The real meaning and significance of financial data,
The long term liquidity of its funds,
Managerial efficiency of the firm,
The debt capacity of the firm.
TYPES OF FINANCIAL ANALYSIS
Various types of financial analysis can be classified into different categories
depending upon;
i. the nature of the analyst and the materials used by him ;
27
ii. the objectives of the analysis; and
iii. the modus operandi of the analysis.
These are discussed one by one.
I. According to the nature of analysis and the materials
used by him:
On this basis, the financial analysis can be external and internal analysis.
a) External analysis:
It is made by those persons who are not concerned with the enterprise.
They are outsiders who do not have access to the enterprise. They do not have
access to the detailed internal accounting records of the company and have to
depend mostly on published statements. Such type of analysis is made by
investors, credit agencies, government agencies and research scholars.
Types of financial analysis
On the basis of nature of analyst and the materials used by him.
On the basis of objective of analysis.
On the basis of modus operandi.
External analysis
Internal analysis
Long term analysis
Short term analysis
Horizontal analysis
Vertical analysis
28
b) Internal analysis:
Internal analysis is done by persons who have access to the internal
accounting records. Such an analysis can , therefore, be performed by
executives and employees of the organization as well as government agencies
which have statutory powers vested in them. Financial analysis for managerial
purposes is the internal type of analysis that can be affected depending upon
the purpose to be achieved. The internal analyst can give more reliable result
than the external analyst because every type of information is at his disposal.
II. According to the objective of the analysis:
On this basis the analysis can be long term analysis and short term analysis.
a) Long term analysis:
This analysis is made in order to study the long term financial stability,
solvency, and liquidity and earning capacity of a concern. The purpose of
making such type of analysis is to know whether in the long run the concern
will be able to earn a minimum amount which will be sufficient to maintain a
reasonable rate of return on the investment so as to provide the funds required
for modernization, growth and development of the concern and to meet its
cost and capital.
b) Short term analysis:
29
The purpose of this analysis is to know whether in the short run a business
concern will have adequate funds readily available to meet the short term
requirements and sufficient borrowing capacity to meet contingencies in the
nearer future. This analysis is made with reference to items of current assets
and current liabilities to have fairly sufficient knowledge about the company’s
current position which may helpful for short term financial planning.
III. According to the modus operandi of the analysis:
On this basis the analysis may be horizontal analysis and vertical analysis.
a) Horizontal (or dynamic) analysis:
This analysis is made to review and analyze financial statement of a number
of years and, therefore, based on financial data taken from several years. This
is very useful for long term trend analysis and planning. Comparative
financial statement is an example of this type of analysis.
b) Vertical (or static) analysis :
This analysis is made to review and analyze the financial statement of one
particular year only. Ratio analysis relating to a particular accounting year is
an example of this type of analysis.
3.4 TECHNIQUES OF FINANCIAL ANALYSIS
30
The analysis and interpretation of financial statements is used to determine the
financial position and results of operations as well. A number of methods or devices
are used to study the relationship between different statements. The following
methods of analysis are generally used:
I. Comparative statements;
II. Common-size statements;
III. Fund flow analysis;
IV. Cash flow analysis;
V. Ratio analysis;
VI. Trend analysis;
VII. Cost-volume-profit-analysis.
I. Comparative statements:
These statements are prepared in such a way so as to provide time
perspective to the consideration of various elements of financial position embodied in
such statements. This is done to make the financial data more meaningful. The
statement of two or more years are prepared to show absolute data two or more years,
increase or decrease in absolute data in value and in terms of percentages.
Comparative statements can be prepared for both income statements and position
statement.
i. Comparative income statement:
31
This statement discloses the net profit or net loss resulting from the
business operations. Such statement shows the operating results of a number
of accounting periods so that changes in absolute data from one period to
another period may be stated in terms of absolute change or in terms of
percentages. This statement helps in deriving meaningful conclusions as it is
very easy to ascertain the changes in sales volume, administrative expenses,
selling and distribution expenses etc.
ii. Comparative balance sheet:
This statement, prepared in two or more different dates, can be used for
comparing assets and liabilities and to find out any increase or decrease in
these items. This facilitates the comparison of figures of two or more periods
and provides necessary information which may be useful in forming an
opinion regarding the financial position as well as progressive outlook of the
concern.
Advantages of comparative statements:
These statements indicate trends in sales, cost of production, profits etc.
helping the analyst to evaluate the performance, efficiency and financial
condition of the undertaking.
Comparative statements can also be used to compare the position of the firm
with the average performance of the industry or with other firms. Such a
comparison facilitates the identification of weaknesses and remedying the
situation.
32
Disadvantages:
Inter-firm comparison may be misleading if the firms are not of the same
age and size, following different accounting policies in relation to
depreciation, valuation of stock etc. and do not cater to the same market.
Inter-period comparison will also be misleading if the period has witnessed
frequent changes in accounting policies.
II. Common size financial statements:
Common size financial statements are those in which figures reported are
converted to some common base. Items in the financial statements are presented as
percentages or ratios to total of these items and a common base for comparison is
provided. Here vertical analysis becomes the relation of individual items to its
respective total. Common size statements may be used for balance sheet as well as
income statement.
i. Common size balance sheet:
A statement in which balance sheet items are expressed as the ratio of each
asset to total assets and the ratio of each liability as the ratio of total liabilities is
called common size balance sheet. If it is prepared for different firms in an
industry, it facilitates to judge the relative soundness and helps in understanding
their financial strategy.
ii. Common size income statement:
33
In such a statement, the items can be shown as percentages of sales to show
the relation of each item to sales. Common size income statement for different
periods helps to establish a significant relationship between sales and other
items in income statement and this relationship is helpful in evaluating
operational activities of the enterprise.
III. Fund flow analysis:
The fund flow statement is a financial statement which reveals the methods by
which the business has been financed and how it has used its funds between the
opening and closing balance sheet dates. This statement is known by different titles
such as, statement of sources and application of funds, summary of changes in
financial position, where came in and where gone out statement, where got where one
statement, movement of working capital statement etc.
In the words of Anthony, “the fund flow statement describes the sources from
which additional funds were derived and uses to which these funds were put.” Thus
the analysis of such statements over periods of time clearly shows the sources from
which past activities have been financed and brings to highlight the uses to which
such funds have been put.
Objectives:
The main purposes of fund flow statements are;
To help to understand the changes in assets and asset sources which are not
readily evident in the income statement or the financial position statement.
To inform as to how the loans to the business have been used; and
34
To point out the financial strengths and weaknesses of the business.
Uses & significance:
The fund flow statement is used for estimating the amount of funds needed for
growth, improving the rate of income on assets, planning the temporary investment of
idle funds etc. the uses of fund flow statement can be listed as under.
It explains the financial consequences of business operations.
It answers intricate queries.
It acts as an instrument of resources.
It is a test as to effective or otherwise use of working capital.
It helps in lending or borrowing operations and policies.
Disadvantages:
The fund flow statement has a number of uses; however, it has certain limitations
also, which are listed below:
Fund flow statement is not a substitute of an income statement or a balance
sheet. It provides only some additional information as regards changes in
working capital.
It can’t reveal continuous changes.
It is not an original statement but simply is arrangement of data given in the
financial statements.
It is historic in nature and projected funds flow statement can not be prepared
with much more accuracy.
35
Changes in cash are more relevant for financial management than the working
capital.
IV. Cash flow statement :
The management of cash assumes importance because it is difficult to predict
cash inflows and outflows. Cash flow statement is one important tool of cash
management because it throws light on cash inflows and outflows of a particular
period.
Cash flow statement is based on a narrower concept of funds. It can be defined
as a statement which summarizes sources of cash inflows and uses of cash outflows of
a firm during a particular period of time, say a month or a year. Such a statement can
be prepared from the data made available from comparative balance sheet, profit and
loss account and additional information.
Uses & significance:
Cash flow statement is very useful to the management for short term planning
due to the following reasons.
It predicts future cash flows on the basis of what happened in the past.
It helps to determine the ability to pay dividend and other commitments.
It shows the relationship of net income to the changes in the business cash.
It helps in evaluating financial policies and cash position.
It discloses movement of cash.
It discloses success or failure of cash planning.
36
It provides cash flow information to investors and creditors which help them
to evaluate management decisions.
It enhances the comparability of the reporting of operating performance by
different enterprises, because it eliminates the effect of using different
accounting treatments for the same transactions and events.
Limitations:
Despite a number of uses, cash flow statement suffers from the following
limitations.
It is difficult to precisely define the term ‘cash’. There are controversies
over a number of items like cheques, stamps etc.
It excludes near cash items from cash obscures the true reporting of the firm’s
liquidity position.
Working capital being a wider concept of funds, a fund flow statement
presents a more complete picture than cash flow statement.
V. Ratio analysis :
Ratio is an expansion of one number in relation to another. It may be defined
as the indicated quotient of two mathematical expressions. According to Accountant’s
Handbook by Wixon, Kell and Bedford, a ratio is “an expression of the quantitative
relationship between two numbers.” In simple language, ratio is one number
expressed in terms of another. A financial ratio is the relationship between two
accounting figures expressed mathematically.
37
Ratio analysis provides clues to the financial position of a concern. These are
the pointers or indicators of financial soundness, position etc of an enterprise. With
the use of ratio analysis one can measure the financial position of a firm and can point
out whether the condition is strong, questionable or poor. The conclusions can be
drawn as to whether the performance of the firm is improving or deteriorating. Thus
ratios have wide applications and are of immense use today.
Uses & significance
The ratio analysis is one of the most powerful tools of financial analysis. It is
used as a device to analyze and interpret the financial health of enterprise. It is with
the help of ratios that the financial statements can be analyzed more clearly and
decisions made from such analysis.
There are different parties interested in the ratio analysis for knowing the
financial position of a firm for different purposes. These are discussed below:
a) Managerial uses of ratio analysis:
Helps in decision-making
Helps in financial forecasting and planning
Helps in communicating
Helps in co-ordination
Helps in control
Helps in budgetary control and standard costing
b) Utility to shareholders\investors:
38
Helps in assessing the financial position of the concern
Helps in determining profitability position
Helps in deciding the accurate time for investment
c) Utility to creditors:
Helps in assessing the financial position that warrants their payments at a
specified time
Helps in knowing about the current financial position through current and
acid-test ratios.
d) Utility to employees:
Helps to know the firm’s financial position which in turn will affect their
fringe benefits.
Various profitability ratios relating to operating profit, net profit etc enables
employees to put forward their viewpoints for the increase of wages.
e) Utility to Government:
Helps to assess the overall strength of the industry
Helps to prepare the profitability indexes
Helps to form successful plans and policies on the basis of
industrial information available from various units
Classification of ratios
39
In view of various users of ratios, there are different types of ratios which can
be calculated from the information given in the financial statements. The particular
purpose of the user determines the particular ratios that might be used for financial
analysis
.
Various accounting ratios can be classified as follows:
Ratios
(A) (B) (C)
Traditional classification Functional classification Significance ratios
Or Or Or
Statement ratios Classification according Ratios according to
to test importance
1) Balance sheet ratios 1) Liquidity ratios 1) Primary ratios
2) Profit and loss account 2) Leverage ratios 2) Secondary ratios
ratios 3) Activity ratios
3) Inter statement ratios 4) Profitability ratios
(A) Traditional Classification or Statement Ratios
Traditional classification or classification according to the statement, from
which these ratios are calculated, is as follows:
40
Traditional classification or statement ratios
Balance Sheet ratios Profit and Loss account ratios Composite ratios
1) Current ratio 1) Gross profit ratio 1)Stock turnover
2) Liquid ratio 2) Operating ratio ratio
3) Absolute liquid ratio 3) Operating profit ratio 2)Debtors turnover ratio
4) Debt equity ratio 4) Net profit ratio 3)Payable turnover ratio
5) Proprietary ratio 5) Expense ratio 4)Fixed asset turnover ratio
6) Capital gearing ratio 6) Interest coverage 5)Return on equity
7) Assets-proprietary ratio ratio 6)Return on shareholders
8) Capital inventory to fund
Working Capital Ratio 7) Return on capital
9) Ratio of Current Assets employed
to Fixed Assets 8) Capital turnover ratio
9) Working Capital
turnover ratio
10) Return on total resources
11) Total assets turnover
B) Functional classification or classification according to
test:41
Functional Classification or Classification according to Tests
Liquidity Ratios Long-Term Solvency & Activity Ratios Profitability Ratios
Leverage Ratios
(A)1) Current Ratio 1) Debt Equity 1)Inventory Turn- (A) In relation to
2) Liquid Ratio Ratio over sales
3) Absolute Liquid 2) Debt to total 2) Debtors Turnover 1) Gross Profit Ratio
Ratio capital Ratio 3) Fixed Asset 2) Operating Ratio
(B) 1) Debtors Turn- 3) Interest Coverage Turnover Ratio 3) Operating Profit
over Ratio 4) Cash Flow/Debt 4) Total Asset Ratio
2) Creditors 5) Capital Gearing Turnover 4) Net profit Ratio
Turnover 5) Working Capital 5) Expense Ratio
Ratio Turnover Ratio (B) In relation to
3) Inventory 6) Payables Turnover investments
Turnover 7) Capital Employed 1) Return On
Ratio Turnover Investments
2) Return on
Capital
3) Return on Total
Resources
4) Earning Per Share
5) Price-Earning Ratio42
(B) Classification according to Significance or
Importance:
The ratios have also been classified according to their significance or
importance. Classification of ratios according to importance is made for inter-
firm comparison. For inter firm comparison the ratios may be classified as
primary and secondary ratios. The other ratios which support or explain the
primary ratios are called secondary ratios, e.g., the relationship of sales to total
assets of the firm.
Limitations:
The ratio analysis is one of the most powerful tools of financial management.
Though ratios are simple to calculate and easy to understand, they suffer from
some serious limitations:
A single ratio, usually, doesn’t convey much of a sense.
Lack of well accepted standards which can be accepted as norms renders
interpretation of the ratios difficult.
Ratios suffer from inherent weaknesses of accounting records such as their
historical nature.
Ratios of past are not indicators of future.
Change of accounting procedure by a firm often makes ratio analysis
misleading.
43
Ratios have to be interpreted and different people may interpret the same
ratio in different ways.
Ratios devoid of absolute figures may prove distort as ratio analysis is
primarily a quantitative analysis and not a qualitative analysis.
Avoidance of price level changes makes the interpretation of ratios invalid.
VI. Trend analysis :
This analysis is an important tool of horizontal financial analysis. This
method is immensely helpful in making a comparative study of the financial
statements of several years. Under this method trend percentages are calculated for
each item of the financial statements taking the figures of the base year as 100. The
trend percentages show the relationship of each item with its preceding year’s
percentages. This will exhibit the upward or downward trend to which the concern
is proceeding. These trend ratios may be compared with the industry in order to
know the strong or weak points of a concern.
Limitations:
Trend percentages or ratios become incomparable if accounting
practices reflected in accounts have not been consistently followed year after
year.
A change in price level makes comparisons out of tune.
44
Trend percentages must not be real without considering the absolute
data on which they are based.
VII. Cost-volume-profit analysis:
Cost-volume-profit analysis is a technique for studying the relationship
between cost, volume and profit. In the words of Herman C. Heiser, “the most
significant single factor in profit planning of the average business is the
relationship between the volume of business, cost and profits”.
The three factors of CVP analysis are interconnected and dependent on one
another. In cost-volume-profit analysis an attempt is made to analyze the
relationship between variations in cost with variations in volume. The cost-
volume-profit relationship is of immense utility to management as it assists in
profit planning, cost control and decision making.
45
CHAPTER 4
DATA ANALYSIS
AND
INTERPRETATION
46
4.1 FINANCIAL HIGHLIGHTS
CURRENT ASSETS
YEAR Rs (in lakh)
2005 590.00
2006 692.21
2007 730.93
2008 675.21
2009 721.88
Source: Annual Report
Inference:
Current Asset shows an increasing trend during the period 2003-05 and a slight fall
in the year 2006 and again an increase in the year 2007
BAR CHART OF CURRENT ASSETS
0
200
400
600
800
2005 2006 2007 2008 2009
YEAR
VA
LU
E (
in la
kh)
CURRENT ASSETS
47
CURRENT LIABILITIES
YEAR Rs (in lakh)
2005 286.25
2006 409.73
2007 460.18
2008 408.89
2009 464.73
Source: Annual Report
Inference:
Current liabilities show a constant increase till the year 2005 and a slight fall in the
year 2009 and again an increase in the year 2009.
BAR CHART OF CURRENT LIABILITIES
0
100
200
300
400
500
2005 2006 2007 2008 2009
YEAR
VA
LU
E (
in la
kh)
current liabilities
48
NET SALES
YEAR Rs (in lakh)
2005 481.52
2006 496.77
2007 512.84
2008 631.65
2009 635.53
Source: Annual Report
Inference:
The amount of sales shows an increasing trend till the year 2009.
BAR CHART OF SALES
0100200300400500600700
2005 2006 2007 2008 2009
YEAR
VA
LU
E (
in la
kh)
sales
49
4.2 RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of financial management.
It is used as a device to analyze and interpret the financial health of enterprise.
Conclusions can be drawn as to whether the performance of the firm is improving
or deteriorating.
Following are the ratios applied in this project study:
1. Profitability ratio:
Net profit ratio establishes a relationship between net profit and sales and
indicates the efficiency of the management in manufacturing, selling,
administration and other activities of firm.
Profitability ratio = Net Profit *100
Net Sales
2. Gross Profit Ratio:
Gross profit ratio indicates the extent to which selling price of
goods per unit may decline without resulting in losses on operations of a firm.
It reflects the efficiency with which a firm produces its products.
Gross Profit Ratio = Gross Profit *100
Net Sales
3. Operating Ratio:
Operating ratio establishes the relationship between cost of goods
sold and other operating expenses on the one and sales on the other. The two
basic elements of this ratio are operating cost and net sales.
50
Operating Ratio = Operating Cost *100
Net Sales
4. Current Ratio:
Current ratio may be defined as the relationship between current assets
and current liabilities. This ratio, is a measure of general liquidity and is most
widely used to make the analysis of a short-term financial position and liquidity
of a firm.
Current ratio = Current Assets
Current liabilities
5. Stock Turnover Ratio:
Stock Turnover ratio also known as stock velocity, indicates the number
of times the stock has been turned over during the period and evaluate the
efficiency with which a firm is able to manage its inventory. The purpose is to
see whether only the required minimum funds have been locked up in inventory.
Stock Turnover Ratio = Cost of Goods sold
Average Inventory
6. Debtors Turnover Ratio:
Debtor’s turnover ratio indicates the velocity of debt collection of firm. In
simple words it indicates the number of times average debtors are turned over
during a year.
Debtors Turnover Ratio = Net Credit Sales
Average Debtors
51
7. Creditors Turnover Ratio:
In the course of business operations, a firm has to make credit
purchases and incur short term liabilities. The analysis for creditor’s turnover
is basically the same as of debtor’s turnover ratio.
Creditors Turnover Ratio = Net Credit Purchase
Average Creditors
8. Working Capital Turnover Ratio:
Working capital turnover ratio indicates the velocity of the
utilization of net working capital. Avery high working capital turnover ratio is
not a good situation for any firm and hence care must be taken while
interpreting the ratio.
Working Capital Turnover Ratio = Cost of Sales
Average Working Capital
9. Fixed Asset Turnover Ratio:
Fixed asset turnover is the relationship between sales or cost of
goods sold and fixed / capital assets employed in a firm. It is calculated by
dividing net fixed assets by sales.
Fixed Asset Turnover Ratio = Sales
Net Fixed Assets
The analysis and interpretation of these ratios is given below.
52
1. Profitability Ratio:
Rs (in lakh)YEAR NET
PROFITSALES RATIO
2005 11 481.52 2.28
2006 2.07 496.76 0.42
2007 3.21 512.84 0.62
2008 4.57 631.65 0.72
2009 10.06 635.53 1.58
Source: Annual Report
Inference:
During the period 2006-07 the profitability position of this institution was high.
Then it faced a sudden fall in the year 2009. By implementing new production
strategies, technologies etc the institution revived its financial position.
Profitability Ratio Chart
0
0.5
1
1.5
2
2.5
2005 2006 2007 2008 2009
Year
Val
ue
RATIO
53
2. Gross profit ratio:
Rs (in lakh)YEAR GROSS
PROFITNET
SALESRATIO
2005 113.08 481.52 23.48
2006 114.43 496.76 23.03
2007 130.42 512.84 25.43
2008 149.22 631.65 23.62
2009 180.30 635.53 28.37
Source: Annual Report
Inference:
Gross profit shows an increasing trend. By adopting new production and
marketing strategies the institution is now efficient in producing its products. The
gross profit is sufficient to cover operating charges and to provide for fixed
charges.
Gross Profit Ratio Chart
0
5
10
15
20
25
30
2005 2006 2007 2008 2009
Year
Val
ue
RATIO
54
3. Operating ratio:
Rs (in lakh)YEAR OPERATING
COSTNET SALES RATIO
2005 94.87 481.52 96.22
2006 99.54 496.76 97
2007 122.97 512.84 98.55
2008 113.37 631.65 94.32
2009 133.22 635.53 92.59Source: Annual Report
Inference:
Operating ratio shows an increasing trend till the year 2007 and then it declines
and shows a positive position.
Operating Ratio Chart
889092949698
100
2005 2006 2007 2008 2009
Year
Val
ue
RATIO
55
4. Current ratio:
Rs (in lakh)YEAR CURRENT
ASSETS
CURRENT
LIABILITIES
RATIO
2005 590.00 286.25 2.06
2006 692.21 409.73 1.68
2007 730.93 460.18 1.59
2008 675.21 408.89 1.65
2009 721.88 464.73 1.55
Source: Annual Report
Inference:
During the year 2005, the current ratio of the institution is relatively high which
indicates good liquidity position. It shows a declining trend and there is a slight
increase in the year 2008 and again decline in the year 2009.
Current Ratio Chart
0
0.5
1
1.5
2
2.5
2005 2006 2007 2008 2009
Year
Val
ue
RATIO
56
5. Stock Turnover ratio:
Rs (in lakh)YEAR COST OF
SALESAVERAGE
STOCKRATIO
2005 368.44 405.89 0.9
2006 382.34 448.19 0.85
2007 382.42 503.3 0.75
2008 482.42 520.28 0.93
2009 455.23 542.87 0.83
Source: Annual Report
Inference:
Stock Turnover ratio shows a fluctuating trend. It decline till the year
2007 and increase in 2008 and again decline in the year 2009.
Stock Turnover Ratio Chart
0
0.2
0.4
0.6
0.8
1
2005 2006 2007 2008 2009
Year
RATIO
57
6. Debtors Turnover ratio:
Rs (in lakh)YEAR NET
SALESTRADE
DEBTORSRATIO
2005 481.52 51.54 9.34
2006 496.76 37.28 13.33
2007 512.84 42.07 12.19
2008 631.65 33.77 18.71
2009 635.53 50.75 12.52
Source: Annual Report
Inference:
Debtors’ turnover ratio is low in the year 2005. It increases in the year
2006 and again a slight fall can be seen in 2007. It shows a sudden increase in
the year 2008 indicating the efficient management of debtors/sales. Then it
declines due to the absence of liquid debtors.
Debtors Turnover Ratio Chart
0
5
10
15
20
2005 2006 2007 2008 2009
Year
Val
ue
RATIO
58
7. Creditor’s Turnover ratio:
Rs (in lakh)YEAR NET
PURCHASE
TREDE
CREDITORS
RATIO
2005 295.91 65.13 4.54
2006 483.45 117.48 4.12
2007 421.03 142.31 2.96
2008 450.12 133.32 3.37
2009 399.21 150.37 2.65
Source: Annual Report
Inference:
During the year 2009 creditors’ turnover ratio is very low, indicating
the better liquidity position of the institution.
Creditors Turnover Ratio Chart
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2005 2006 2007 2008 2009
Year
RATIO
59
8. Working Capital Turnover Ratio:
Rs (in lakh)YEAR COST OF
SALESWORKING CAPITAL
RATIO
2005 368.44 303.76 1.21
2006 382.34 343.88 1.11
2007 382.42 270.74 1.41
2008 482.42 266.31 1.81
2009 455.23 257.15 1.77
Source: Annual Report
Inference:
Working capital turnover ratio is increasing till the year 2008, and a
slight fall is there in the year 2009. it indicates the efficient utilization of
working capital.
Working Capital Turnover Ratio Chart
0
0.5
1
1.5
2
2005 2006 2007 2008 2009
Year
Va
lue
RATIO
60
9. Fixed Asset Turnover Ratio:
Rs (in lakh)YEAR SALES NET
FIXED ASSETS
RATIO
2005 481.52 186.16 2.58
2006 496.76 210.86 0.86
2007 512.84 235.38 2.17
2008 631.65 734.47 2.36
2009 635.53 749.96 2.58
Source: Annual Report
Inference:
New machineries were introduced in the year 2005 and due to
depreciation a sudden fall occurred in the next year. Then it shows a constant
increase till the year 2009
Fixed Asset Turnover Ratio Chart
0
0.5
1
1.5
2
2.5
3
2005 2006 2007 2008 2009
Year
Va
lue
RATIO
61
4.3 TREND ANALYSIS
Financial data can be presented for a number of years. Such a data is
helpful in looking at the trend increase or decrease in various financial items.
The objective in doing so is to reveal the direction and nature of change in
enterprise position in terms of progress or otherwise. The financial data in
absolute rupees can also be expressed in percentages to indicate and analyze
the trend in various years. Such analysis is called Trend Analysis.
Trend Analysis is one of the most useful forms of horizontal analysis.
It is helpful in revealing the proportionate change, and emphasizes changes in
the financial data from year to year and enables the analyst to study horizontal
data.
The trend percentage enables the analyst to inter prêt growth pattern
and to determine the pattern of change from year to year. Trend calculations as
an approach for financial analysis are made in relation to a base year.
62
Rs (in lakh)YEAR SALES PROFIT CURREN
T ASSETWORKING CAPITAL
FUND FROM OPERATION
2005 481.52 3.01 590.01 303.76 106.79
2006 496.77 2.07 692.22 343.87 92.91
2007 512.84 3.21 730.93 270.74 112.23
2008 631.65 4.57 675.21 266.31 598.53
2009 635.53 100.56 721.88 257.15 647.81
Source: Annual Report
In the table above of Trend Analysis, monetary details regarding
sales, profit, current asset, working capital and fund from operation are taken
into consideration for carrying out a trend analysis of the past 5 years, starting
from 2005-2009.
63
1. Trend analysis of sales:
YEAR SALESRs (in lakh)
TREND RATIO
2005 481.52 100
2006 496.77 103
2007 512.84 106
2008 631.65 131
2009 635.53 132
Source: Annual Report
Inference:
Amount of sales is comparatively low till the year 2007. the
management applied new marketing strategies and consequently sales shows
an increasing trend.
TREND ANALYSIS OF SALES
0
200
400
600
800
2005 2006 2007 2008 2009
YEAR
SALES
TR(S)
64
2. Trend analysis of Profit:
YEAR PROFIT(Rs. In lakh)
TREND RATIO
2005 3.01 100
2006 2.07 68.77
2007 3.21 106.64
2008 4.57 151.82
2009 100.56 3340.7
Source: Annual Report
Inference:
The profit trend is low in the year 2005. By the adoption of new
techniques and marketing strategies they successfully achieved the increasing
profit trend.
TREND ANALYSIS OF PROFIT
01000
20003000
4000
20052006200720082009
YEAR
VA
LU
E (
in la
kh)
PROFIT
TR(P)
65
3. Trend analysis of Current Assets:
YEAR CURRENT ASSETRs (in lakh)
TREND RATIO
2005 590.01 100
2006 692.22 117.32
2007 730.93 123.88
2008 675.21 114.44
2009 721.88 122.35
Source: Annual Report
Inference:
The trend analysis of current assets shows only a slight variation in
the level of current assets.
TREND ANALYSIS OF CURRENT ASSETS
0
200
400
600
800
2005 2006 2007 2008 2009
YEAR
VA
LU
E (
in la
kh)
CURRENTASSET
TR(CA)
66
4. Trend analysis of Working Capital:
YEAR WORKING CAPITAL
Rs (in lakh)
TREND RATIO
2005 303.76 100
2006 343.87 113.20
2007 270.74 89.13
2008 266.31 87.67
2009 257.15 84.64
Source: Annual Report
Inference:
Trend analysis of working capital shows a decreasing trend.
TREND ANALYSIS OF WORKING CAPITAL
050
100150200
250300
350400
2005 2006 2007 2008 2009
YEAR
VA
LU
E (
in la
kh)
WORKINGCAPITAL
TR(WC)
67
5. Trend analysis of Fund from Operation:
YEAR FUND FROM OPERATION
Rs (in lakh)
TREND RATIO
2005 106.79 100
2006 92.91 87
2007 112.23 105.09
2008 598.53 560.45
2009 647.81 606.59
Source: Annual Report
Inference:
The fund from operation shows an increasing trend. It’s in a
constant level till 2007 and a sudden increase can be seen till 2009.
TREND ANALYSIS OF FUND FROM OPERATION
0
100
200
300
400
500
600
700
2005 2006 2007 2008 2009
YEAR
VA
LU
E (
in la
kh)
FUND FROMOPERATION
TR
68
4.4 COMMON SIZE BALANCE SHEET
1. Common size percentages of fixed assets and current assets:
Source: Annual Report
Inference:
The common size percentage of fixed assets is almost constant till the
year 2007 and then it increases. Common size percentage of current assets is
also in a constant level till 2007 and increases till 2009
YEAR COMMON SIZE PERCENTAGE OF FIXED ASSETS
COMMON SIZE PERCENTAGE OF CURRENT ASSETS
2005 23.98 76.02
2006 23.35 76.65
2007 24.36 75.64
2008 51.93 48.07
2009 50.95 49.05
COMMON SIZE PERCENTAGE OF CURRENT ASSETS AND FIXED ASSETS
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009
YEAR
FIX
ED
AS
SE
TS
AN
D
CU
RR
EN
T A
SS
ET
S
Common size percentage of current assets
Common size percentage of fixed assets
69
2. Common Size percentages of capital & reserves, fixed
and Current Liabilities
YEAR COMMON SIZE PERCENTAGE OF CAPITAL &RESERVES
COMMON SIZE PERCENTAGE
OF FIXED LIABILITIES
COMMON SIZE PERCENTAGE OF CURRENT LIABILITIES
2005 25.38 37.74 36.88
2006 22.58 31.95 38.57
2007 22.93 29.45 47.62
2008 50.59 20.3 29.11
2009 50.85 17.57 31.57
Source: Annual Report
Inference:
The common size percentages of capital & reserves are almost constant
till the year 2007 and then it increases till 2009. Fixed liabilities increase
during the period 2008-09 followed by a fall till 2009. A common size
percentage of current liabilities falls till 2008 and increases in 2009.
COMMON SIZE PERCENTAGE OF CAPITAL&RESERVES,FIXED,CURRENT
LIABILITIES
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009
YEAR
CO
MM
ON
SIZ
E
PE
RC
EN
TAG
ES
COMMON SIZEPERCENTAGE OFCURRENT LIABILITIES
COMMON SIZEPERCENTAGE OFFIXED LIABILITIES
COMMON SIZEPERCENTAGE OFCAPITAL &RESERVES
70
CHAPTER 5
FINDINGS
SUGGESTIONS
&
CONCLUSION
71
5.1 FINDINGS
1) The increasing trend of profits can be seen from the trend analysis of
profits. The management is successful in sustain the goodwill of this
Khadi institution.
2) From the fixed asset turnover ratio it can be seen that the acquisition
rate of fixed assets is low. The machineries used are few; the work is
mainly based on hand made.
3) Khadi products make no compromise with the quality. KK& VIA has
experience of producing and marketing products for the last 53 years.
They still have ready market and demand for their products.
4) From the common size percentage, it can be seen that the level of
capital and reserves is increasing.
5) The institution has all the required infrastructure facility including
water, electricity, road etc.
6) Creditors’ turnover ratio is decreasing year after year and reaches 2.67
in the year 2007. The number of days they take to pay off the creditors
will be low. This indicates the sufficient liquidity position of the
institution.
7) Khadi products have steady demand. Good export potential is there.
8) Good quality raw material is available. Seasonal raw materials are
stored in their own store rooms. Non availability of these items in the
market may not affect their production procedure.
72
5.2 SUGGESTIONS AND PERCEPTIONS
Provision for new charkas and looms will enable to increase the
production and profitability can also be increased.
Replacement of old charkas with 8 spindle muslin charka will
enhance the production of hanks to 36 from the present level of 18-20 per
day.
Better working atmosphere in the renovated work sheds and
better wages will definitely attract more people to Khadi industry.
Capacity building programs like training in spinning and
weaving etc.will increase skill and efficiency of the spinners and weavers
and exposure visits to other units will bring in the weavers\spinners more
enthusiasm in their activities.
Common facility centre for ready made warp units for supply to
ready-to-use warp for weavings will help weavers to increase their
production as they do not have to engage themselves in the pre-loom
activities.
Post-loom facilities, viz., dyeing and printing training will
provide new opportunities.
The work sheds are to be renovated as most of them are more
than 20 years old and are in a very bad condition due to leakage, poor
maintenance etc and this is affecting the production very badly.
73
Organizing regular health medical camps for artisans and
medical insurance coverage will help to mitigate the problem of artisans.
Provision of testing lab will ensure quality of finished products.
Improved and new designs will result in better market of Khadi
products.
To increase the sale of Khadi products, there is a need to
renovate, upgrade the existing marketing outlets of the institutions and
opening of few new outlets in strategic places. This will ensure marketing of
Khadi products regularly.
The setting up of new production centers at various places
should be continued as it has a favorable brand image, and hence
introducing new products into the market would achieve faster market,
acceptability and demand.
74
75
5.3 CONCLUSION
The project titled “FINANCIAL STATEMENT ANALYSIS” of
Kerala Khadi & Village Industries Association, Avanissery, is based on the
study of financial performance and position of this institution. The study
conducted has taken into consideration the financial statements of the
institution that covers a period of last five years. The objective of the project
study was to analyze and evaluate the overall performance of Kerala Khadi &
Village Industries Association, Avanissery. Khadi products have a good brand
image. This study reveals that the management is efficient in tackling with the
competitive market. By improving the production quality they are now in a
satisfactory position.
To conclude, this study was very useful to gather knowledge regarding
the practical implication of the theoretical aspects. The study also helped to
know and study the actual working of a reputed institution.
76
77