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2. Net working capital

The gross working capital is the capital invested in the total current assets of the enterpr

current assets are those

Assets which can convert in to cash within a short period normally one accounting year.

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net working capit



the excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the cur

liabilities are more than the current assets. Current liabilities are those liabilities, which

intended to be paid in the ordinary course of business within a short period of normally

accounting year out of the current assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation , if it does not amt. to app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working ca

is an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following reaso

1. It enables the enterprise to provide correct amount of working capital at cor time.

2. Every management is more interested in total current assets with which it haoperate then the source from where it is made available.

3. It take into consideration of the fact every increase in the funds of the enterp



would increase its working capital.

4. This concept is also useful in determining the rate of return on investment

working capital. The net working capital concept, however, is also importantfollowing reasons:

• It is qualitative concept, which indicates the firm’s ability to meet to its oper

expenses and short-term liabilities.

• IT indicates the margin of protection available to the short term creditors.

• It is an indicator of the financial soundness of enterprises.

• It suggests the need of financing a part of working capital requirement out o permanent sources of funds.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o On the basis of concept.

o On the basis of time.

On the basis of concept working capital can be classified as gross working capital and

working capital. On the basis of time, working capital may be classified as:

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effec

utilization of fixed facilities and for maintaining the circulation of current assets. Every firm ha

maintain a minimum level of raw material, work- in-process, finished goods and cash balance.

minimum level of current assts is called permanent or fixed working capital as this part of workin

permanently blocked in current assets. As the business grow the requirements of working capital



increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet

seasonal demands and some special exigencies. Variable working capital can further be classifie

seasonal working capital and special working capital. The capital required to meet the seasonal

of the enterprise is called seasonal working capital. Special working capital is that part of wor

capital which is required to meet special exigencies such as launching of extensive marketing

conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is required

short periods and cannot be permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintai

solvency of the business by providing uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to make prompt paym

and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standin

arrange loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to ava

discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures regula

of raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day TOCommitments: It leads to the satisfaction of the employees and raises the morale

employees, increases their efficiency, reduces wastage and costs and enhances production

profits.

Exploitation Of Favorable Market Conditions: If a firm is having



working capital then it can exploit the favorable market conditions such as purchasin

requirements in bulk when the prices are lower and holdings its inventories for higher price

Ability To Face Crises: A concern can face the situation during the depression.

Quick And Regular Return On Investments: Sufficient working capita

a concern to pay quick and regular of dividends to its investors and gains confidence of

investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of securities, confid

high morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its busi

operations. It should have neither redundant or excess working capital nor inadequate

shortages of working capital. Both excess as well as short working capital positions are bad

any business. However, it is the inadequate working capital which is more dangerous from

point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITA

1. Excessive working capital means ideal funds which earn no profit for firm and business cannot earn the required rate of return on its investments.

2. Redundant working capital leads to unnecessary purchasingaccumulation of inventories.

3. Excessive working capital implies excessive debtors and defective cr policy which causes higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with baand other financial institution may not be maintained.

6. Due to lower rate of return n investments, the values of shares may also f



7. The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due to

time gap between production and realization of cash from sales. There is an operating cycle invol

in sales and realization of cash. There are time gaps in purchase of raw material and product

production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

• For the purpose of raw material, components and spares.

• To pay wages and salaries

• To incur day-to-day expenses and overload costs such as office expenses.

• To meet the selling costs as packing, advertising, etc.

• To provide credit facilities to the customer.

• To maintain the inventories of the raw material, work-in-progress, stores and spares

finished stock.

For studying the need of working capital in a business, one has to study the business under var

circumstances such as a new concern requires a lot of funds to meet its initial requirements suc

promotion and formation etc. These expenses are called preliminary expenses and are capitali

The amount needed for working capital depends upon the size of the company and ambitions o

promoters. Greater the size of the business unit, generally larger will be the requirements of

working capital.

The requirement of the working capital goes on increasing with the growth and expensing of business till it gains maturity. At maturity the amount of working capital required is called nor

working capital.

There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS



1. NATURE OF BUSINESS: The requirements of working is very li

public utility undertakings such as electricity, water supply and railways because they o

cash sale only and supply services not products, and no funds are tied up in inventories

receivables. On the other hand the trading and financial firms requires less investmefixed assets but have to invest large amt. of working capital along with fixed investmen

2. SIZE OF THE BUSINESS: Greater the size of the business, grea

requirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep production st

accumulating inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manu

time the raw material and other supplies have to be carried for a longer in the process

progressive increment of labor and service costs before the final product is obtained

working capital is directly proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy seaso

requires larger working capital than in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the

cycle completes one cycle determines the requirements of working capital. Longer

cycle larger is the requirement of working capital.

DEBTORS

CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS



7. RATE OF STOCK TURNOVER: There is an inverse co-relationship betw

question of working capital and the velocity or speed with which the sales are affecte

firm having a high rate of stock turnover wuill needs lower amt. of working capita

compared to a firm having a low rate of turnover.

8. CREDIT POLICY: A concern that purchases its requirements on credit and sa

product / services on cash requires lesser amt. of working capital and vice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is prosperous, t

need for larger amt. of working capital due to rise in sales, rise in prices, optim

expansion of business, etc. On the contrary in time of depression, the business contr

sales decline, difficulties are faced in collection from debtor and the firm may have a l

amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shal

large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms h

earning capacity than other due to quality of their products, monopoly conditions, etc. S

firms may generate cash profits from operations and contribute to their working cap

The dividend policy also affects the requirement of working capital. A firm maintaini

steady high rate of cash dividend irrespective of its profits needs working capital thanfirm that retains larger part of its profits and does not pay so high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the working

requirements. Generally rise in prices leads to increase in working capital.

Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.



Asset structure.

Importance of labor.

Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises in attemptin

manage the current assets, current liabilities. The basic goal of working capital manageme

to manage the current assets and current liabilities of a firm in such a way that a satisfac

level of working capital is maintained, i.e. it is neither adequate nor excessive as both

situations are bad for any firm. There should be no shortage of funds and also no wor

capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm h

great on its probability, liquidity and structural health of the organization. So working ca

management is three dimensional in nature as

1. It concerned with the formulation of policies with regard to profitabilliquidity and risk.

2. It is concerned with the decision about the composition and level of cur assets.

3. It is concerned with the decision about the composition and level of cur liabilities.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business. Adequate amou

working capital is very much essential for the smooth running of the business. And the

important part is the efficient management of working capital in right time. The liqu

position of the firm is totally effected by the management of working capital. So, a stud

changes in the uses and sources of working capital is necessary to evaluate the efficiency



which the working capital is employed in a business. This involves the need of working ca

analysis.

The analysis of working capital can be conducted through a number of devices, such as:

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

1. RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique of

analysis can be employed for measuring short-term liquidity or working capital position

firm. The following ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.



2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from w

additional funds were derived and the use to which these sources were put. The fundanalysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working cap

business enterprise between beginning and ending of the financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices t

pursued in the future period time. Working capital budget as a part of the total budge

process of a business is prepared estimating future long term and short term working caneeds and sources to finance them, and then comparing the budgeted figures with a

performance for calculating the variances, if any, so that corrective actions may be take

future. He objective working capital budget is to ensure availability of funds as and nee

and to ensure effective utilization of these resources. The successful implementatio

working capital budget involves the preparing of separate budget for each element of wor

capital, such as, cash, inventories and receivables etc.

ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TESTLIQUIDITY

The short –term creditors of a company such as suppliers of goods of credit and comme

banks short-term loans are primarily interested to know the ability of a firm to mee

obligations in time. The short term obligations of a firm can be met in time only when



having sufficient liquid assets. So to with the confidence of investors, creditors, the sm

functioning of the firm and the efficient use of fixed assets the liquid position of the

must be strong. But a very high degree of liquidity of the firm being tied – up in cu

assets. Therefore, it is important proper balance in regard to the liquidity of the firm.types of ratios can be calculated for measuring short-term financial position or short-t

solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ‘ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and when t

become due. The short-term obligations are met by realizing amounts from current, floa

or circulating assts. The current assets should either be liquid or near about liquidity. T

should be convertible in cash for paying obligations of short-term nature. The sufficienc

insufficiency of current assets should be assessed by comparing them with short-

liabilities. If current assets can pay off the current liabilities then the liquidity positio

satisfactory. On the other hand, if the current liabilities cannot be met out of the curassets then the liquidity position is bad. To measure the liquidity of a firm, the follo

ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general liquidity an

most widely used to make the analysis of short-term financial position or liquidity of a f



It is defined as the relation between current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITES

The two components of this ratio are:

1) CURRENT ASSETS

2) CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry deb

inventories and work-in-progresses. Current liabilities include outstanding expenses, payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the ability to

its current obligations in time. On the hand a low current ratio represents that the liqui

position of the firm is not good and the firm shall not be able to pay its current liabilitie

time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the cur

liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in crore)

e.g.

Year 2006 2007 2008

Current Assets 81.29 83.12 13,6.57Current Liabilities 27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

Interpretation:-

As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of



company for last three years it has increased from 2006 to 2008. The current rati

company is more than the ideal ratio. This depicts that company’s liquidity position is so

Its current assets are more than its current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defi

as the relationship between quick/liquid assets and current or liquid liabilities. An ass

said to be liquid if it can be converted into cash with a short period without loss of valu

measures the firms’ capacity to pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS

CURRENT LIABILITES

Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its cur

liabilities in time and on the other hand a low quick ratio represents that the firms’ liqui

position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if q

assets are equal to the current liabilities then the concern may be able to meet its short-t

obligations. However, a firm having high quick ratio may not have a satisfactory liqui

position if it has slow paying debtors. On the other hand, a firm having a low liqu

position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)



Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55

Current Liabilities 27.42 20.58 33.48

Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :

A quick ratio is an indication that the firm is liquid and has the ability to meet its cur

liabilities in time. The ideal quick ratio is 1:1. Company’s quick ratio is more than i

ratio. This shows company has no liquidity problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid than inventoyet there may be doubts regarding their realization into cash immediately or in time

absolute liquid ratio should be calculated together with current ratio and acid test ratio s

to exclude even receivables from the current assets and find out the absolute liquid as

Absolute Liquid Assets includes :

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2006 2007 2008

Absolute Liquid Assets 4.69 1.79 5.06

Current Liabilities 27.42 20.58 33.48

Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

These ratio shows that company carries a small amount of cash. But there is nothin

be worried about the lack of cash because company has reserve, borrowing power &

term investment. In India, firms have credit limits sanctioned from banks and can e



draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits.

efficiency with which assets are managed directly affects the volume of sales. The better

management of assets, large is the amount of sales and profits. Current assets move

ratios measure the efficiency with which a firm manages its resources. These ratios are ca

turnover ratios because they indicate the speed with which assets are converted or tu

over into sales. Depending upon the purpose, a number of turnover ratios can be calcula

These are :

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high am

of debtors due to slow credit collections and moreover if the assets include high amoun

slow moving inventories. As both the ratios ignore the movement of current assets,

important to calculate the turnover ratio.

1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO

Every firm has to maintain a certain amount of inventory of finished goods so a

meet the requirements of the business. But the level of inventory should neither be

high nor too low. Because it is harmful to hold more inventory as some amoun

capital is blocked in it and some cost is involved in it. It will therefore be advisab

dispose the inventory as soon as possible.

INVENTORY TURNOVER RATIO = COST OF GOOD SOLD

AVERAGE INVENTORY



Inventory turnover ratio measures the speed with which the stock is converted

sales. Usually a high inventory ratio indicates an efficient management of inven

because more frequently the stocks are sold ; the lesser amount of money is require

finance the inventory. Where as low inventory turnover ratio indicates the inefficmanagement of inventory. A low inventory turnover implies over investme

inventories, dull business, poor quality of goods, stock accumulations and slow mo

goods and low profits as compared to total investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

2

(Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times

Interpretation :

These ratio shows how rapidly the inventory is turning into receivable through sale2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.75 ti

This shows that the company’s inventory management technique is less efficient as com

to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

e.g.

Year 2006 2007 2008

Days 365 365 365



Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130 days 202 days

Interpretation :

Inventory conversion period shows that how many days inventories takes to co

from raw material to finished goods. In the company inventory conversion perio

decreasing. This shows the efficiency of management to convert the inventory into cash.

3. DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to increase its sales a

liberal credit policy may result in tying up substantial funds of a firm in the form of t

debtors. Trade debtors are expected to be converted into cash within a short period andincluded in current assets. So liquidity position of a concern also depends upon the qualit

trade debtors. Two types of ratio can be calculated to evaluate the quality of debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtor’s velocity indicates the number of times the debtors are turned over duri

year. Generally higher the value of debtor’s turnover ratio the more efficient is

management of debtors/sales or more liquid are the debtors. Whereas a low debtors turn

ratio indicates poor management of debtors/sales and less liquid debtors. This ratio shoul

compared with ratios of other firms doing the same business and a trend may be foun

make a better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

2



e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times

Interpretation :

This ratio indicates the speed with which debtors are being converted or turnover

sales. The higher the values or turnover into sales. The higher the values of debtors turno

the more efficient is the management of credit. But in the company the debtor turnover r

is decreasing year to year. This shows that company is not utilizing its debtors efficie Now their credit policy become liberal as compare to previous year.

4. AVERAGE COLLECTION PERIOD :

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number of days for whfirm has to wait before its receivables are converted into cash. It measures the qualit

debtors. Generally, shorter the average collection period the better is the quality of debtor

a short collection period implies quick payment by debtors and vice-versa.

Average Collection Period = 365 (Net Working Days)

Debtors Turnover Ratio

Year 2006 2007 200

Days 365 365 3

Debtor Turnover Ratio 9.6 8.3 7.

Average Collection Period 38 days 44 days 49 day

Interpretation :



The average collection period measures the quality of debtors and it he

analyzing the efficiency of collection efforts. It also helps to analysis the credit po

adopted by company. In the firm average collection period increasing year to year. It sh

that the firm has Liberal Credit policy. These changes in policy are due to competitor’s cr policy.

5. WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of net wor

capital. This ratio indicates the number of times the working capital is turned ov

the course of the year. This ratio measures the efficiency with which the wor

capital is used by the firm. A higher ratio indicates efficient utilization of wor

capital and a low ratio indicates otherwise. But a very high working capital turnis not a good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover = Sales

Networking Capital

e.g.

Year 2006 2007 200

Sales 166.0 151.5 16

Networking Capital 53.87 62.52 103.0

Working Capital Turnover 3.08 2.4 1.6

Interpretation :



This ratio indicates low much net working capital requires for sales. In 2008

reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company require

paisa as working capital. Thus this ratio is helpful to forecast the working c

requirement on the basis of sale.

INVENTORIES

(Rs.

Year 2005-2006 2006-2007 2007-20

Inventories 37.15 35.69 75.

Interpretation :

Inventories is a major part of current assets. If any company wants to manag

working capital efficiency, it has to manage its inventories efficiently. The graph shows

inventory in 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of

current assets. The company should try to reduce the inventory upto 10% or 20% of cur

assets.

CASH BNAK BALANCE :

(Rs.

Year 2005-2006 2006-2007 2007-20

Cash Bank Balance 4.69 1.79 5.0

Interpretation :

Cash is basic input or component of working capital. Cash is needed to keep

business running on a continuous basis. So the organization should have sufficient cas

meet various requirements. The above graph is indicate that in 2006 the cash is 4.69 cr

but in 2007 it has decrease to 1.79. The result of that it disturb the firms manufactu

operations. In 2008, it is increased upto approx. 5.1% cash balance. So in 2008, the comp

has no problem for meeting its requirement as compare to 2007.

DEBTORS :



(Rs.

Year 2005-2006 2006-2007 2007-20

Debtors 17.33 19.05 25

Interpretation :

Debtors constitute a substantial portion of total current assets. In India it constitute

third of current assets. The above graph is depict that there is increase in debto

represents an extension of credit to customers. The reason for increasing cred

competition and company liberal credit policy.

CURRENT ASSETS :

(Rs.

Year 2005-2006 2006-2007 2007-20

Current Assets 81.29 83.15 136

Interpretation :

This graph shows that there is 64% increase in current assets in 2008. This increa

arise because there is approx. 50% increase in inventories. Increase in current assets sh

the liquidity soundness of company.

CURRENT LIABILITY :

(Rs.

Year 2005-2006 2006-2007 2007-20

Current Liability 27.42 20.58 33.4

Interpretation :



Current liabilities shows company short term debts pay to outsiders. In 2008 the cur

liabilities of the company increased. But still increase in current assets are more tha

current liabilities.

NET WOKRING CAPITAL :

(Rs.

Year 2005-2006 2006-2007 2007-20

Net Working Capital 53.87 62.53 103.09

Interpretation :

Working capital is required to finance day to day operations of a firm. There shoul

an optimum level of working capital. It should not be too less or not too excess. In

company there is increase in working capital. The increase in working capital arises bec

the company has expanded its business.

RESEARCH METHODOLOGY

The methodology, I have adopted for my study is the various tools, which basically analyze critic

financial position of to the organization:

I. COMMON-SIZE P/L A/C II. COMMON-SIZE BALANCE SHEET

III. COMPARTIVE P/L A/C

IV. COMPARTIVE BALANCE SHEET

V. TREND ANALYSIS

VI. RATIO ANALYSIS



The above parameters are used for critical analysis of financial position. With the evaluation of eacomponent, the financial position from different angles is tried to be presented in well and systema

manner. By critical analysis with the help of different tools, it becomes clear how the financialmanager handles the finance matters in profitable manner in the critical challenging atmosphere, threcommendation are made which would suggest the organization in formulation of a healthy andstrong position financially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios and comparative analythe organization would be able to conquer its in efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent accounting procedure to convey an under-standing of some financial aspects of a business firm. It may show position at a moment in time, as in the case of balance sheet or may reveal a series of activities ovegiven period of time, as in the case of an income statement. Thus, the term ‘financial statements’generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business

firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missiout of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.



LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a final picture of a concern. The utility of these statements is dependent upon a number of

factors. The analysis and interpretation of these statements must be done carefully otherwisemisleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statemeis only approximate. The actual value can only be determined when the business is sold or liquidat

2. Financial statements have been prepared for different accounting periods, generally one year,during the life of a concern. The costs and incomes are apportioned to different periods with a viedetermine profits etc. The allocation of expenses and income depends upon the personal judgment

the accountant. The existence of contingent assets and liabilities also make the statements imprecisSo financial statement are at the most interim reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accur position. The value of fixed assets in the balance sheet neither represent the value for which fixedassets can be sold nor the amount which will be required to replace these assets. The balance sheet

prepared on the presumption of a going concern. The concern is expected to continue in future. Sofixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in t

balance sheet which will realize nothing at the time of liquidation but they are shown in the balancsheets.

4. The financial statements are prepared on the basis of historical costs Or original costs. The valuassets decreases with the passage of time current price changes are not taken into account. Thestatement are not prepared with the keeping in view the economic conditions. the balance sheet losthe significance of being an index of current economics realities. Similarly, the profitability shownthe income statements may be represent the earning capacity of the concern.

5. There are certain factors which have a bearing on the financial position and operating result of t business but they do not become a part of these statements because they cannot be measured inmonetary terms. The basic limitation of the traditional financial statements comprising the balancesheet, profit & loss A/c is that they do not give all the information regarding the financial operatiothe firm. Nevertheless, they provide some extremely useful information to the extent the balance s

mirrors the financial position on a particular data in lines of the structure of assets, liabilities etc. athe profit & loss A/c shows the result of operation during a certain period in terms revenue obtaineand cost incurred during the year. Thus, the financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS



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