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Group No. 6 (B) MANAGEMENT ACCOUNTING - 1 2011-13

X L R I S c h o o l o f B u s i n e s s a n d H u m a n R e s o u r c e s Page 1

MANAGEMENT ACCOUNTING - 1

End-Term Project Submission

Submitted By-

(Group No. 6, Section - B)

Ankit Bhatnagar B11068

Jitendra Bansal B11084Shaurya Jeet Singh B11109

Shiv Shankar B11111

Shivendra Sharma B11113

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Important Information Extracted From the Annual Report

1. According to auditors, the annual reports of the company give a true and fair view of

the company.

2. Sales for the company have increased from 65899.95 lakhs to 73641.78 lakhs, an

increase of 11.75%.

3. However, PAT(Profit After Tax) for the company has dropped from 4717.87 lakhs to

83.25 lakhs, a drop of 98.24%.

4. Payment to sub-contractors has increased substantially from 10129.79 lakhs to

18030.83 lakhs, which is a huge increase of 77.99 %.

5. Company has paid Managerial Remuneration in excess of Rs. 39.33 lakhs to the

Managing Director for the year which is subject to the approval of the Central

Government.

6. Company has made adjustments for the financial irregularities of previous yearswhich have caused them a drop in profit figures.

7. Company has taken a short term loans amounting to 5487.89 lakhs and long term

loans amounting to 5061.40. This break up of loans is substantially different from the

figure of previous year where all the borrowings were short term amounting to

10080.49 lakhs.

8. Company has repaid debt in the form of Commercial Papers amounting to Rs. 1500

lakhs.

9. Company has purchased fixed assets worth Rs. 1664.15 lakhs this year as compared

to Rs. 1120.96 lakhs in the previous year which shows company is in expansionmode in last couple of years.

10.The company has purchased investments in subsidiaries amounting to Rs. 3032.88

lakhs in comparison to previous years purchase of Rs. 5307.75 lakhs. The company

has also given an interest free loan to subsidiary amounting to Rs. 652.56 lakhs.

11.The provisions of the companies changed from Rs 3039.31 lakhs in the previous year

to Rs 2587.65 lakhs. The company has written back an excess liability of Rs 520

Lakhs to cover up losses during the year an instance ofcreative accounting.

12.The Net cash flow generated from operating activities for the year was negative i.e.

the operating activities consumed the companys cash. The figure was Rs (1494.82)

lakhs in comparison to previous years Rs 109.74 Lakhs (inflow), which has decreased

by 1462 %.

13.In spite of very low net profit, the company has proposed to pay a dividend of 20%

to its shareholders this year. The dividend paid last year was 75%. The total amount

which company has to pay as dividend is much higher than the net profit of the

company. Payment of dividend has been financed through long term loans for the

last 2 years, which is critically incorrect.

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14.The interest expenses of the company have increased from Rs 946.84 Lakhs inprevious year to Rs 1383.97 Lakhs. There has been a rise of 46.16% in interest

expenses.

15. The company has transferred only Rs 6.5 lakhs to general reserve in comparison to

Rs 4000 lakhs transferred last year.16. The capital work-in-progress has increased from Rs 174.19 Lakhs in previous year to

Rs 1091.14 lakhs this year amounting to a rise of 526.4%.

17.The contracts in progress increased from Rs 1900.34 lakhs in the previous year to Rs

3069.25 Lakhs this year. This is an increase of 61.51%.

18.Pending settlement of liquidated damages claims in the sundry debtors balances

have been shown in the accounts as fully recoverable.

19. Scrap and off- cuts at the contract sites are being accounted on cash basis in view of

the contracts being in progress.(As a practice followed in previous year).

20.The investigations into incorrect recording of costs in earlier years, confirmed theexistence of certain contract costs recorded without underlying transactions. The

wrong costs and the consequential revenues recorded in the earlier years were

reversed in the accounts for the year ended March 31, 2009 and March 31, 2010

and required no further adjustment in the current year.

21.Managerial remunerations for MD have been reduced from 211.73 to 104.13 Lakhs,as compared to last year, though this is a loss making year and the remunerations

have a decrease of 50.8 %, they are still in access of 39.33 lakhs as scheduled.

22.Earnings in foreign Exchange have risen from 32657.97 previous year to 46171.92, an

increase of 41 %.23. In accordance with IAS 21 on The Effect of Changes in Foreign Exchange rates have

been restated.in the restatement Company had recognized a prior period income of

Rs 58.71 lakhs,. The foreign currency translation reserve includes an adjustment of

Rs. 620.57 lakhs (Dr) referred to as prior period items.

24.Contingent Liabilities for Sales tax matters in dispute, relating to issues of

applicability and classification have increased from 106.33 last year to 575.52 this

year, an increase of 441 %.

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Strength Areas of the Company

1. The company has shown improvement in Debt-Equity Ratio. The value for previous

year was 0.86. In current year, the debt-equity ratio is 1.4. The Debt-Equity ratio of

the company is coming closer to considered ideal value 2:1.

2. The sales figures of the company have increased in comparison to last year. The

increase has been 11.75%

3. Despite the considerable decrease in the profits being compared to last year, the

company has a very good market perception which is visible in the Price Earnings

ratio of the company. As compared to September first week in previous year, PER

has increased from 18.43 to 436.05 in August this year which is still quite good.

4. The company has been continuously involved in expansion activities in the form of

purchase of fixed assets as well as investment in subsidiaries. The company has also

provided interest free loans to its subsidiaries.5. The company has maintained its liquidity position strong which is apparent in the

value of quick ratio. The quick ratio for current year is 1.46 which is slightly better

than the value 1.45 in the previous year.

6. The current ratio of the company is slightly better than the previous year. This year

current ratio was 1.55 while in previous year was 1.51.

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Areas of Weakness of the Company

1. The company has shown a negative cash flow from its operating activities. The

company is actually taking loans for covering net outflows due to operating

activities. As a result of this, the company has a negative Debt-Service CoverageRatio i.e. the company is not capable of covering for the debt obligations through its

operations.

2. Despite low net profit this year, the company has proposed and owners have also

approved of an amount of dividend which the profit of the company is unable to

cover. The Dividend coverage ratio for this year is 0.378, which is alarming

indication at company as well as owners decision making abilities.

3. The profitability position of the company is under question this year. The company

has displayed very low Net profit ratio this year. NPR stood at 0.12% this year.

4. From the analysis of the expenses incurred during the year, we can see that the

major contributor to the decreased profit this year was Payment to Sub-contractors.

This expense rose from being 22.88% of Cost of goods sold last year to 31.3% of

Cost of goods sold this year.

5. There has been a formidable increase in the interest expenses of the company. The

interest expenses rose by 46.16%.

6. The company is making huge operation losses still it has proposed and approved the

payment of dividend amounting to 220 Lakhs.

7. The z score of the company is 1.61 this year, which is critically low. The z score of the

company in previous year was 2.25 which has drastically reduced this year.

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Suggested Remedial measures

1. Improvement of profitability should be number one concern for the company. The

expense which has driven the decline in profitability this year is the Payment toSubcontractors. If this is the expense incurred from outsourced work, then the

company must develop capability to do more of the job in house.

2. Dividend more than the profit after tax should not be paid. Financing dividend

payments via short term debt is not proper.

3. Gross Profit should be utilized in repayment of long term debt. This would also ease

pressure on covering the interest expense.

4. Long Term debt equity ratio is still within reasonable limits, hence company can take

some more of long term debt and use it expand or diversify operations with the

intent of reducing reliance on subcontractors.5. Retained earnings of the company are very low which is causing the Z-score to go

very down. Company should save some money from dividend and use that to

increase its Retained Earnings.

6. Company is investing very hugely in the expansion plans, but as financial condition

of company is not very strong, they must halt the process of expansion for time

being and concentrate on profitability instead.

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DuPont Analysis

Analysis Points

About 98 % drop in PAT is driven by about 29 % rise in COGS which is driven by 78 % rise in

payment to sub-contractors

Sales/Capital Employed has dropped by about 13 % due to the Long Term Loans taken by

the company

Profitability, Solvency, Performance Indicators and

Coverage Ratios

Ratio Year 2010-11 Year 2009-10Net Profit Ratio = (PAT/Net

Sales)*100

=(83.25/72358.02)*100

= 0.12%

=(4717.87/64994.95)*100

=7.26%

Return on Equity = PAT/Equity =83.25/16805.61 = 0.00495 =4717.87/16978.15 = 0.2779

Return on Net worth = PAT/Net

worth

=83.25/14736.28 = 0.057% =4717.87/14716.98 = 32%

Gross Profit = Net Sales Direct

Expenses(Raw Material + Sub

Contractors +Decrease inInventory)

= 72358.02-

(40042.63+18030.83-479.46)

=14764.85

=65,360.26-

(36131.61+10129.79-1616.29)

=20715.76

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Gross Profit Ratio =

Gross Profit/Net Sales

=14764.85/72358.02 = 20.41% =20715.76/65360.26 = 31.69%

Earning Power =

EBIT/Total Assets

=(140.85+1246.50)/

(3115.70+1091.4+70635.79)

=1.85%

=(7374.21+972.82)/

(2747.18+174.19+60254.66)

=13.21%

Price Earnings Ratio (PER) =Market Price/EPS

=331.40/0.76= 436.05 =790/42.87=18.43

Current Ratio = Current

Assets/Current Liabilities

=70635.79/45571.88

= 1.55

=60254.66/39820.13

= 1.51

Quick Ratio = (Current Assets-

Inventories-Prepaid Expenses)/

(Current Liabilities-Short term

bank overdraft)

=70635.79-7846.55/42,984.23

=1.46

=60254.66-6902.32/36,780.31

=1.45

Interest Coverage Ratio =

EBIT/Interest

=1387.35/1246.50

=1.11

=8346.82/972.82

=8.58

Dividend Coverage Ratio=

PAT/Proposed Dividend

=83.25/220.09

=0.378

=4,717.87/825.33

=5.716Earnings Per Share 0.76 42.87

Debt Equity Ratio = Total

Debts/Equity

=23645.02/16805.51

= 1.41

=14595.73/16978.15

= 0.86

Proprietary Ratio = Fixed

Assets/Capital Employed

=4206.84/40450.66

= 0.104

=2921.37/31573.88

= 0.923

Debtor Velocity = (Debtors/Net

Sales)*365

=(45043.99/72358.02)*365

= 227 days

=(37620.34/64994.95)*365

= 211 days

Creditor Velocity=

(Creditors/Purchase)*365

=(42984.23/58072.63)*365

= 270 days

=(36780.31/45895.48)*365

= 293 days

Capital Turnover Ratio = Net

Sales/Capital Employed

=72358.02/40450.66

= 1.79

=64994.95/31573.88

= 2.06

Z- Score

Z = 1.2X1 + 1.4X2 + 3.3X3 +0.6X4 + 1.0X5

= 1.2*0.3348 + 1.4*0.01842 + 3.3*0.0185 + 0.6*0.2428 + 1.0*0.9668 = 1.601 (Previous Year = 2.25)

Where X1 = working capital to total assets

= 25063.91 / 74842.63 = 0.3348 (Previous Year =0.3967)

X2 = cumulative retained earnings to total assets

= (Balance as per P/L a/c +General Reserves)/ Total Assets

= (1358.75 + 6.50) / 74842.63 = 0.01824 (Previous Year = 0.0879)

X3 = earnings before interest and taxes to total assets

= (1387.35)/ 74842.63 = 0.0185 (Previous Year = 0.1321)

X4 = market value of equity to book value of total liabilities

= [(16805.51)]/[45571.88+23645.05]=.2428 (Previous Year = 0.312)

X5 = sales to total assets

= 72358.02/74842.63 = .9668 (Previous Year = 1.028)

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Workings:

% Change in increase in Inventories = (479.46 1616.29)/1616.29 * 100

% Change in payment to subcontractors = (18030.83-10129.79)/10129.79

% Change in Raw materials and components = (40042.63 36131.61)/36131.61

COGS = Raw materials & Components cost + Payment to subcontractors + (Increase)/Decrease in

Inventory

Payment to subcontractors has been included in the COGS as it is assumed to be the payment done

for the part of core project work outsourced by the company.

COGS (current year) = (40042.63+18030.83-479.46) = 57594

COGS (previous year) = 36131.61 + 10129.79 - 1616.29 = 44645.11

% Change in COGS = (57594 - 44645.11)/44645.11 * 100 = 29 %

% Change in sales = (73641-65889)/65889 * 100 = 11.76 %

% Change in Sales = (72358.02 64994.95)/64994.95 * 100 = 11.32%

Gross Profit (Current Year) = Net Sales (Current Year) COGS (Current Year) = 72358.02 64994.95 =

14764.02

Gross Profit (Previous Year) = Net Sales (Previous Year) COGS (Previous Year) = 64994.95

44645.11 = 20349.84

% Change in gross Profit = 14764.02 20349.84 / 20349.84 * 100 = - 27.5%

Tax and other Expense = Employee Costs + Operations, Admin & Selling Expenses + Depreciation &

Amortization + Interest + Current Tax MAT credit entitlement + Deferred Tax

Tax and other Expense (Current year) = 4573.79 + 9287.54 + 385.62 + 1246.50 + 42.94 42.94 +

57.60 = 15551.05

Tax and Other Expense (Previous Year) = 4308.51 + 7740.11 + 319.50 + 972.82 + 2575 0 158.57 =

15757.37

% Change in Tax & Other Expense = 15757.37 15551.05 / 15757.37 * 100 = 1.31%

Profit After Tax = Gross Profit + Other Income Tax and other Expense

Profit After Tax (Current Year) = 14764.02 + 870.28 15551.05 = 83.25

% Change in Profit After Tax = 83.25 4717.87/4717.87 * 100 = -98.23%

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