TOPIC: FINANCIAL ANALYSIS OF VIDEOCON

SUBJECT: ACCOUNTING FOR MANAGERS

SUBMITTED ON: 4TH NOV 2010

SUBMITTED BY: MANDEEP KAUR

MBA (HHM)

INDEX

1. INTRODUCTION OF VIDEOCON 3

2. METHODOLOGY 10

3. ANALYSIS AND INTERPRETATION 11

4. COMMON SIZE AND COMPARISON 12

5. RATIO ANALYSIS 16

6. TREND ANALYSIS 31

7. FUND FLOW 35

2

8.CASH FLOW 38

9. COST SHEET 41

10. REFERENCES 42

3

INTRODUCTION

Videocon is an industrial conglomerate with interests all over the world and based in

India. The group has 17 manufacturing sites in India and plants in China, Poland, Italy

and Mexico. It is also the third largest picture tube manufacturer in the world.

Type Public (BSE: 511389)

Industry Conglomerate.

Founded 1979

Founder(s) Nandlal Madhavlal Dhoot.

Headquarter Aurangabad, Maharashtra.,

products

Consumer,Electronics

Home-Appliances

Components

Office,Automation

mobiles

Internet

Petroleum

satellite

Power Revenue ▲ US$2 billion (2010).

Net income ▲ US$276 million (2010).

Employees 5,000 (2010).

Website Videocon.com

Corporate profile

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The Videocon group has an annual turnover of US$ 2 billion, making it one of the

largest consumer electronic and home appliance companies in India. Since 1998, it has

expanded its operations globally, especially in the Middle East.

Today the group operates through six key sectors:

Consumer electronics

In India the group sells consumer products like Colour Televisions, Washing Machines,

Air Conditioners, Refrigerators, Microwave ovens and many other home appliances,

selling them through a Multi-Brand strategy with the largest sales and service network

in India.[4] Videocon Group brands include Akai, Electrolux, Hyundai, Kelvinator,

Kenstar, Kenwood, Next, PlanetM, Sansui, Toshibha, Philips (TV Products) etc.

Mobile Phones

In November 2009 Videocon launched its new line of Mobile Phones.

Colour picture tube glass

Videocon is one of the largest CPT Glass manufacturers in the world, operating in

Mexico, Italy, Poland and China..Oil and Gas

An important asset for the group is its Ravva oil field with one of the lowest operating

costs in the world producing 50,000 barrels of oil per day.

DTH

In 2009, Videocon launched its DTH product, called 'd2h'. As a pioneering offer in the

Indian DTH market, Videocon offered LCD & TVs with built-in DTH satellite receiver

with sizes 19" to 32". This concept in the DTH service is relatively new in the presence

of other players like ZEE tv's Dishtv, Tata Sky, Air tel Digital Tv and Reliance's BIG

TV providing only the set top box.

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Telecommunication

Videocon Telecommunication Ltd has license for mobile service operations across

India. It launched its services on 7 March 2010 in Mumbai.

Acquisition of Thomson SA

Videocon through its Wholly Owned Offshore Subsidiary acquired the Color Picture

Tube (CPT) businesses from Thomson S.A having manufacturing facilities in Poland,

Italy, Mexico and China along with support research and development facilities.

Acquisition Rationale

The acquisition came at a time when Thomson was facing a fall in demand in developed

markets for television with CPTs and was moving more towards Flat-screen and Plasma

Television. However, Videocon saw an opportunity in the emerging countries for CPTs

and hence pursued with the acquisition. Besides, the acquisition gave Videocon, the

access to advanced technology giving the company control over an R&D facility in

Agnani, Italy. The major reasons behind this acquisition were

Cost cutting – Videocon was better positioned to shift the activities to low-cost

locations and also it could integrate the operations with the glass panel facility in India

with the CPT manufacturing facilities acquired from Thomson S.A. Videocon wanted to

leverage its position in the existing parts of the business and this acquisition would give

it a strong negotiation position and could reduce impact of glass pricing volatility.

Videocon could also reduce the costs by upgrading and improving the existing

production lines.

Vertical Integration – The acquisition helped Videocon in vertically integrating its

existing glass-shell business where it had been enjoying substantially high margins. [8]

Videocon’s glass division had the largest glass shell plant in a single location. This gave

the company an unrivalled advantage in terms of economies of scale and a leadership

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position in the glass shell industry. The acquisition also gave Videocon a ready-market

for its glass business and it was part of Videocon’s long-term strategy to have a global

vertically-integrated manufacturing facility.

Rationalization of Product Profile – Videocon modified its product profile to cater to

the changing market needs like moving away from very large size picture tubes to

smaller ones. Apart from the overall strategy Videocon also had a plan on the

technological front. It wanted to improve the setup for the production line and line

speed post-merger. Its focus was to increase sales while reducing the costs and thereby

improving the productivity of the existing line. The company also wanted to foray in a

big way into LCD panels back-end assembly . On the sales front the company wanted to

leverage on the existing clients of Thomson and build relation as a preferred supplier to

maximise sales. Also, Videocon could benefit from OEM CTV business with the help

of Videocon’s CTV division, invest for new models and introduction of new

technologies.

Thomson’s perspective

In 2004 Thomson planned entry into the high-growth digital media and technology

business. Also, Thomson wanted to exit consumer and electronics businesses as they

were incurring significant losses. After sale of its TV business to Chinese group TCL,

and Tubes to Videocon, Thomson divested from the audio/video accessories business

which was the last unit of its consumer electronics business. The need to divest are

quite evident from the losses that it incurred in these businesses particularly that the unit

that it sold off to Videocon, the Optical Modules activity, and the Audio/Video &

Accessories businesses which totalled around €749 million for 2005. Moreover

Thomson had done some acquisitions that were in line with boosting their revenues in

the following years.

Other Competitors for the Acquisition

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When Videocon entered the race for the colour picture tubes manufacturing capacity of

Thomson SA in November 2004, there were 16 other bidders. Videocon stood slim

chances given the fact that it had to battle it out with players like LG,Philips, Samsung

and Matsushita, Daewoo and several Chinese manufacturers but finally managed to

close the deal. The deal catapulted Videocon into the No. 3 slot in the global pecking

order for CPTs. An official of Videocon said on the deal "The word is out in the world

that India and Indian companies are not just a good bet by themselves, but also a hedge

against China.

Pre-merger scenario analysis

CPT industry is affected by many competitive factors such as change in the consumer

preferences ,the product offer strategy of retailers, the progress made by alternative

technology manufacturers ,capacity adjustment facility of competitors etc. Based on all

of these factors there were two scenarios that emerged from the 2005 budget of

Videocon. The first scenario is a conservative one. It mainly assumes Price pressures

similar to those in the past(-8 to -12%),capacity reduction over a period of two years, a

gradual shift to newer technologies like True Flat and good amount of growth for LCD

makers.

The second scenario is a more aggressive one in term of trends predicted. It assumes

that the switch to TrueFlat would be faster, more overcapacity, more competition from

LCD manufacturers and rising price strategy pressures in general. The second scenario

obviously requires an industrial strategy which is more adapted to the environment.

However even if the second scenario arises,Videocon believes there is an opportunity in

the CRT business. Though it is very obvious that in the developed markets of the

western world the demand is shifting towards the flat panel side(FPD it is expected to

contribute 70% of TV market in these regions),in the emerging markets like BRIC CRT

still holds fort. CRT holds a dominant 70% share in these markets. When translated into

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number of units the demand is more than 100 million units. As Videocon is primarily

based in these countries, it hopes to harness the value of the Thomson acquisition in the

coming years.

Post merger situation (2008)

Videocon has not been able to turn the plant around in Italy still. However it is getting

support from the local government(which want to prevent job cuts) in form of grants.

The government is in fact trying to set up a Greenfield venture in form of a LCD

manufacturing facility in partnership with Videocon. The banks are also supporting

Videocon and with help from all these quarters Videocon expects to turn around the

plant in Italy.[13] The Thomson plant has not turned around in Mexico as well and in fact

production has been reduced over there.In Poland,the situation is more promising and

Videocon hopes that plant over there will get in black in the very near future. [14]

However the surprise has been in the Chinese market .Despite facing a highly

competitive market Videocon has managed to turn a plant around while the other is on

its way. In China Videocon is adopting a different strategy for manufacturing CTVs as

the local players dominate the market .It plans to supply these players by taking

advantage of low-cost nature of mainland(the number targeted by it about 6 million

CPTs).

.

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ANALYSIS OF FINANCIAL REPORT

The financial position of company will be analysed with the help of annual report of

company. After interpreting annual report analysis will be provided.

METHODOLOGY

Financial position of company will be analysed with following steps:

1. Comparative analysis of 2 years.

Comparative analysis of 2 years will be done by subtracting value of 2009 from

2008 and dividing it with base i.e 2008.

2. common size statement.

Common size will be calculated as by dividing a value with total and multiply it

with 100.

3. Trend analysis.

Trend analysis of 5 years will be done with graphs. with the help graphs it will

show the trend of increase and decrease of asset and liabilities .

4. ratio analysis

2 years ratio analysis , which include :

Liquidity ratio

Solvency ratio

Profitability ratio

Activity ratio

5. fund flow statement

schedule of 2 years

fund from operation

fund flow statement

6. cash flow statement

7. cost sheet

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ANALYSIS AND INTERPRETATION

FINANCIAL ANALYSIS

Financial analysis (also referred to as financial statement analysis or accounting

analysis) refers to an assessment of the viability, stability and profitability of a

business, sub-business or project.

It is performed by professionals who prepare reports using ratios that make use of

information taken from financial statements and other reports. These reports are usually

presented to top management as one of their bases in making business decisions. Based

on these reports, management may:

Continue or discontinue its main operation or part of its business;

Make or purchase certain materials in the manufacture of its product;

Acquire or rent/lease certain machineries and equipment in the production of its

goods;

Issue stocks or negotiate for a bank loan to increase its working capital;

Make decisions regarding investing or lending capital;

Other decisions that allow management to make an informed selection on various

alternatives in the conduct of its business.

COMMON SIZE STATEMENT

Common-size analysis (also called vertical analysis) expresses each line item on a

single year's financial statement as a percent of one line item, which is referred to as a

base amount. The base amount for the balance sheet is usually total assets (which is the

same number as total liabilities plus stockholders' equity), and for the income statement

it is usually net sales or revenues. By comparing two or more years of common-size

statements, changes in the mixture of assets, liabilities, and equity become evident. On

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the income statement, changes in the mix of revenues and in the spending for different

types of expenses can be identified. .

The common size ratio for each line on the financial statement is calculated as follows:

Common Size Ratio   =  

Item of Interest

Reference Item

The ratios often are expressed as percentages of the reference amount. Common size

statements usually are prepared for the income statement and balance sheet, expressing

information as follows:

Income statement items - expressed as a percentage of total revenue

Balance sheet items - expressed as a percentage of total assets

Comparisons Between Companies (Cross-Sectional Analysis)

Common size financial statements can be used to compare multiple companies at the

same point in time. A common-size analysis is especially useful when comparing

companies of different sizes. It often is insightful to compare a firm to the best

performing firm in its industry (benchmarking). A firm also can be compared to its

industry as a whole. To compare to the industry, the ratios are calculated for each firm

in the industry and an average for the industry is calculated. Comparative statements

then may be constructed with the company of interest in one column and the industry

averages in another. The result is a quick overview of where the firm stands in the

industry with respect to key items on the financial statements.

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Limitations

As with financial statements in general, the interpretation of common size statements is

subject to many of the limitations in the accounting data used to construct them. For

example:

Different accounting policies may be used by different firms or within the same

firm at different points in time. Adjustments should be made for such differences.

Different firms may use different accounting calendars, so the accounting periods

may not be directly comparable

COMMON SIZE AND COMPARATIVE ANALYSIS OF VIDEOCON

Particulars

30th Sept.,

2009

30th Sept.,

2008

(Rs. in

Million)

(Rs. in

Million)

sources of fund common size 2009

common size

2008

comparativ

e

shareholders

fund

share capital 2,754.16 1.6 2753.11 1.8 99.96187585

reserve and

surplus 69,296.25 41.0 65,384.86 42.8 94.35555315

warrant

subscription 950.01 0.56 0 0

deffered tax

liability(net) 5,123.38 3.03 4244.3 32 82.84179585

Loan funds

secured loans 67,350.37 39.85 44,012.54 28.8 65.34862392

unsecured loans 23,495.10 13.9 36,043.40 23.6 153.4081574

Total 168,969.27 100 152,438.21 100 90.21652872

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appllication of

funds

Fixed assets

gross block 103,191.05 61.0 102,373.03 67.1 99.20727621

less:depreciation 42,988.32 25.4 43,106.32 28.2 100.2744932

net block 60,202.73 35.6 592,666.71 3.38 984.4515523

Investments 30,648.99 18.1 26,955.88 17.6 87.9503044

Current asset,loans,advances 0

Inventories 175,634.93 10.3 15,688.64 10.2 8.932528399

sundry debtors 17,061.13 10.0 15,828.89 10.3 92.77750067

Cash and bank

balance 4,985.06 2.9 3,932.46 2.5 78.88490811

other current

assets 320.43 0.1 185.74 0.1 57.96585838

loans and

advances 47,935.04 28.3 39,932.46 26.1 83.30536493

87,956.59 52.0 75,518.57 49.5 85.85891063

less:current assets and

provisions

current liabilities 8,537.12 5.0 7,783.24 5.1 91.16938733

Provisions 1,301.92 0.7 1,519.71 0.9 116.7283704

Total 9,839.04 5.8 9,302.95 6.1 94.55139932

net current assets 78,117.55 46.29 66,215.62 43.43767878 84.7640767

Total 168,969.27 100 152,438.21 100 90.21652872

Interpretation

It shows analytical percentage.shows sales at 100 and remaining item as percentage of 1

PROFIT AND LOSS ACCOUNT

Particulars Year ended

on

30th Sept.,

Year ended on

14

2009

(Rs. in

Million)

common

size

30th Sept.,

2008

common

size

(Rs. in Million)

Income

sales/income from

operations 93,812.69 1.0 101,051.28 103.2982652

less:exise duty 2,182.28 2.3 3,514.74 3.592894069

net sales 91,630.41 99.6 97,536.54 184.3426074

other income 340.15 0.3 288.22 2.328185079

Total 91,970.56 100 97,824.76 100

Expenditure

cost of goods

consumed/sold 56,143.96 65.14193768 52,910.47 62.33783294

production and

exploration

expences 7,206.86 8.361875881 12,379.60 14.58534458

salaries,wages 1,264.23 1.466843306 1,158.18 1.364539596

Manufacturing and

other 9,436.94 10.94936227 7,815.63 9.208185777

interest and finance

charge 6,363.61 7.38348143 4,011.03 4.725698299

Depreciation 5,771.52 6.696499431 7,137.22 8.408899563

less:transferred from

revaluation 535.15 0.630500755

Total 86,187.12 100 84,876.98 100

what Does Ratio Analysis Mean?

A tool used by individuals to conduct a quantitative analysis of information in a

company's financial statements. Ratios are calculated from current year numbers and

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are then compared to previous years, other companies, the industry, or even the

economy to judge the performance of the company. Ratio analysis is predominately

used by proponents of fundamental analysis

According to Myers, " Ratio analysis of financial statements is a study of relationship

among various financial factors in a business as disclosed by a single set of statements

and a study of trend of these factors as shown in a series of statements."

Advantages and Uses of Ratio Analysis

There are various groups of people who are interested in analysis of financial position

of a company. They use the ratio analysis to workout a particular financial characteristic

of the company in which they are interested. Ratio analysis helps the various groups in

the following manner: -

1. To workout the profitability: Accounting ratio help to measure the profitability

of the business by calculating the various profitability ratios. It helps the

management to know about the earning capacity of the business concern. In this

way profitability ratios show the actual performance of the business.

2. To workout the solvency: With the help of solvency ratios, solvency of the

company can be measured. These ratios show the relationship between the

liabilities and assets. In case external liabilities are more than that of the assets of

the company, it shows the unsound position of the business. In this case the

business has to make it possible to repay its loans.

3. Helpful in analysis of financial statement: Ratio analysis help the outsiders just

like creditors, shareholders, debenture-holders, bankers to know about the

profitability and ability of the company to pay them interest and dividend etc.

4. Helpful in comparative analysis of the performance: With the help of ratio

analysis a company may have comparative study of its performance to the

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previous years. In this way company comes to know about its weak point and be

able to improve them.

5. To simplify the accounting information: Accounting ratios are very useful as

they briefly summarise the result of detailed and complicated computations.

6. To workout the operating efficiency: Ratio analysis helps to workout the

operating efficiency of the company with the help of various turnover ratios. All

turnover ratios are worked out to evaluate the performance of the business in

utilising the resources.

7. To workout short-term financial position: Ratio analysis helps to workout the

short-term financial position of the company with the help of liquidity ratios. In

case short-term financial position is not healthy efforts are made to improve it.

8. Helpful for forecasting purposes: Accounting ratios indicate the trend of the

business. The trend is useful for estimating future. With the help of previous

years’ ratios, estimates for future can be made. In this way these ratios provide

the basis for preparing budgets and also determine future line of action.

Classification of various profitability ratios: -

a. Gross Profit Ratio.

b. Net Profit Ratio

c. Operating Net Profit Ratio

d. Operating Ratio.

e. Return on Investment or Return on Capital Employed.

f. Return on Equity.

g. Earning Per Share.

Meaning, Objective and Method of Calculation: -

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a. Gross Profit Ratio: Gross Profit Ratio shows the relationship between Gross

Profit of the concern and its Net Sales. Gross Profit Ratio can be calculated in the

following manner: -

Gross Profit Ratio = Gross Profit/Net Sales x 100

Where Gross Profit = Net Sales – Cost of Goods Sold

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses –

Closing Stock

And Net Sales = Total Sales – Sales Return

2009 = 93812.69-5614396/93812.69*100

=0.4

2008= 101051.28-52910.47/101051.28*100

= 0.47

Interpretation: Gross Profit Ratio provides guidelines to the concern whether it

is earning sufficient profit to cover administration and marketing expenses and is

able to cover its fixed expenses. The gross profit ratio of current year is compared

to previous years’ ratios or it is compared with the ratios of the other concerns.

The minor change in the ratio from year to year may be ignored but in case there

is big change, it must be investigated. This investigation will be helpful to know

about any departure from the standard mark-up and would indicate losses on

account of theft, damage, bad stock system, bad sales policies and other such

reasons.

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However it is desirable that this ratio must be high and steady because any fall in

it would put the management in difficulty in the realisation of fixed expenses of

the business.

b. Net Profit Ratio: Net Profit Ratio shows the relationship between Net Profit of

the concern and Its Net Sales. Net Profit Ratio can be calculated in the following

manner: -

Net Profit Ratio = Net Profit/Net Sales x 100

Where Net Profit = Gross Profit – Selling and Distribution Expenses – Office and

Administration Expenses – Financial Expenses – Non Operating Expenses + Non

Operating Incomes.

And Net Sales = Total Sales – Sales Return

2009 = 4006.62/93812.69*100

= 4.27

2008 = 8542.95/101051.28*100

= 8.45

Interpretation : In order to work out overall efficiency of the concern Net Profit

ratio is calculated. This ratio is helpful to determine the operational ability of the

concern. While comparing the ratio to previous years’ ratios, the increment

shows the efficiency of the concern.

Net profit ratio of Videocon is decreasing as compare to previous year

c. Operating Profit Ratio: Operating Profit means profit earned by the concern

from its business operation and not from the other sources. While calculating the

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net profit of the concern all incomes either they are not part of the business

operation like Rent from tenants, Interest on Investment etc. are added and all

non-operating expenses are deducted. So, while calculating operating profit these

all are ignored and the concern comes to know about its business income from its

business operations.

Operating Profit Ratio shows the relationship between Operating Profit and Net

Sales. Operating Profit Ratio can be calculated in the following manner: -

Operating Profit Ratio = Operating Profit/Net Sales x 100

Where Operating Profit = Gross Profit – Operating Expenses

Or Operating Profit = Net Profit + Non Operating Expenses – Non Operating

Incomes

And Net Sales = Total Sales – Sales Return

2009 = 56143.96+7206.96/93812.69*100

= 67.5

2008 = 52910.47+12379.60/101051.28*100

= 64.6

Interpretation : Operating Profit Ratio indicates the earning capacity of the concern on

the basis of its business operations and not from earning from the other sources. It

shows whether the business is able to stand in the market or not.

Operating profit ratio of Videocon shows increasing it is good for company

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d. Return on Equity: Return on equity is also known as return on shareholders’

investment. The ratio establishes relationship between profit available to equity

shareholders with equity shareholders’ funds.

Return on Equity

= Net Profit after Interest, Tax and Preference Dividend/Equity

Shareholders’ Funds x 100

Where Equity Shareholders’ Funds = Equity Share Capital + Reserves and

Surplus – Fictitious Assets.

2009 = 4006.62+881.20+36.81/72050.41*100

= 6.83

2008= 8542.95+135.00+36.81/67137.97*100

= 12.9

Interpretation : Return on Equity judges the profitability from the point of view

of equity shareholders. This ratio has great interest to equity shareholders. The

return on equity measures the profitability of equity funds invested in the firm.

The investors favour the company with higher ROE.

e. Earning Per Share: Earning per share is calculated by dividing the net profit

(after interest, tax and preference dividend) by the number of equity shares.

Earning Per Share

= Net Profit after Interest, Tax and Preference Dividend/No. Of Equity Shar

2009 = 4006.62+36.81/2294.07

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= 1.76

2008 = 8542.85+36.81/2293.02

= 3.74

Interpretation : Earning per share helps in determining the market price of the equity

share of the company. It also helps to know whether the company is able to use its

equity share capital effectively with compare to other companies. It also tells about the

capacity of the company to pay dividends to its equity shareholders.

Classification of Turnover/Activity/Performance Ratios: -

a. Capital Turnover Ratio

b. Fixed Assets Turnover Ratio.

c. Working Capital Turnover Ratio.

d. Stock Turnover Ratio.

e. Debtors Turnover Ratio.

f. Debt Collection Period

a. Fixed Assets Turnover Ratio: Fixed assets turnover ratio establishes a relationship

between net sales and net fixed assets. This ratio indicates how well the fixed assets

are being utilised.

Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets

In case Net Sales are not given in the question cost of goods sold may also be used in

place of net sales. Net fixed assets are considered cost less depreciation.

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2009 = 93812.69/103191.05

= 0.9 times

2008 = 101051.28/102373.03

= 0.98 times

Interpretation : This ratio expresses the number to times the fixed assets are

being turned over in a stated period. It measures the efficiency with which fixed

assets are employed. A high ratio means a high rate of efficiency of utilisation of

fixed asset and low ratio means improper use of the assets.

b. Stock Turnover Ratio: Stock turnover ratio is a ratio between cost of goods sold

and average stock. This ratio is also known as stock velocity or inventory turnover

ratio.

Stock Turnover Ratio = Cost of Goods Sold/Average Stock

Where Average Stock = [Opening Stock + Closing Stock]/2

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses –

Closing Stock

2009 = 56143,96/43349.65

= 12.95

= 360/12

= 30 days

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2008 = 52910.47/4261.24

= 12.41

= 30 days

Interpretation : Stock is a most important component of working capital. This

ratio provides guidelines to the management while framing stock policy. It

measures how fast the stock is moving through the firm and generating sales. It

helps to maintain a proper amount of stock to fulfill the requirements of the

concern. A proper inventory turnover makes the business to earn a reasonable

margin of profit.

c. Debtors’ Turnover Ratio: Debtors turnover ratio indicates the relation between net

credit sales and average accounts receivables of the year. This ratio is also known as

Debtors’ Velocity.

Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables

Where Average Accounts Receivables = [Opening Debtors and B/R + Closing

Debtors and B/R]/2

Credit Sales = Total Sales – Cash Sales

2009 = 9381.69/16455.01

= 0.005 times

2008 = 101051.28/16455.01

= 0.06 times

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interpretations: This ratio indicates the efficiency of the concern to collect the

amount due from debtors. It determines the efficiency with which the trade

debtors are managed. Higher the ratio, better it is as it proves that the debts are

being collected very quickly.

Classification of Liquidity Ratios:

a. Current Ratio.

b. Liquid Ratio.

Meaning, Objective and Method of Calculation:

a. Current Ratio: Current ratio is calculated in order to work out firm’s ability to

pay off its short-term liabilities. This ratio is also called working capital ratio.

This ratio explains the relationship between current assets and current liabilities

of a business. Where current assets are those assets which are either in the form

of cash or easily convertible into cash within a year. Similarly, liabilities, which

are to be paid within an accounting year, are called current liabilities.

Current Ratio = Current Assets/Current Liabilities

2009 = 87,956.59/8537.12

= 10.2 :1

2008 = 75518.57/7783.24

= 9.70:1

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Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills

Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses,

Accrued Incomes etc.

Current Liabilities include Sundry Creditors, Bills Payable, Bank Overdraft,

Outstanding Expenses etc.

Interpretation : Current ratio shows the short-term financial position of the

business. This ratio measures the ability of the business to pay its current

liabilities. The ideal current ratio is suppose to be 2:1 i.e. current assets must be

twice the current liabilities. In case, this ratio is less than 2:1, the short-term

financial position is not supposed to be very sound and in case, it is more than

2:1, it indicates idleness of working capital.

b. Liquid Ratio: Liquid ratio shows short-term solvency of a business in a true

manner. It is also called acid-test ratio and quick ratio. It is calculated in order to

know how quickly current liabilities can be paid with the help of quick assets.

Quick assets mean those assets, which are quickly convertible into cash.

c. Quick ratio =current assets – stock/current liabilities

2009 =87956.59-17634.93/8537.12

= 8.23:1

2008 = 75518.57-15634.93/7783.29

= 7.6:1

c. cash ratio

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cash ratio = cash + marketable securities/current liabilities

2009 = 4985.06/8537.12

= 0.58:1

2008 = 3882.84/7783.24

= 0.49:1

d. net working ratio

2009 = net working capital/total assets

= 55924.37/168969.27

= 0.33:1

2008 = 31691.93/152438.21

= 0.02:1

e. absolute ratio

= absolute liquid assets/current liabilities

2009 = 4985.06/8537.12

= 0.5:1

2008 = 3882.84/7783.24

= 0.4 :1

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Classification of Solvency Ratios:

a. Debt-Equity Ratio.

b. Debt to Total Funds Ratio

c. Fixed Assets Ratio

d. Proprietary Ratio.

e. Interest Coverage Ratio.

Meaning, Objective and Method of Calculation: -

a. Debt-Equity Ratio: Debt equity ratio shows the relationship between long-term

debts and shareholders funds’. It is also known as ‘External-Internal’ equity ratio.

Debt Equity Ratio = Debt/Equity

Where Debt (long term loans) include Debentures, Mortgage Loan, Bank

Loan, Public Deposits, Loan from financial institution etc.

Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves

and Surplus – Fictitious Assets

2009 = 168969.27/7205.05

= 23.45

2008 = 152438.21/6813.8

= 22.4

28

Interpretation : This ratio is a measure of owner’s stock in the business.

Proprietors are always keen to have more funds from borrowings because:

(i) Their stake in the business is reduced and subsequently their risk too

(ii) Interest on loans or borrowings is a deductible expenditure while computing

taxable profits. Dividend on shares is not so allowed by Income Tax Authorities.

The normally acceptable debt-equity ratio is 2:1.

b. Debt to Total Funds Ratio: This ratio gives same indication as the debt-equity

ratio as this is a variation of debt-equity ratio. This ratio is also known as

solvency ratio. This is a ratio between long-term debt and total long-term funds.

Debt to Total Funds Ratio = Debt/Total Funds

Where Debt (long term loans) include Debentures, Mortgage Loan, Bank

Loan, Public Deposits, Loan from financial institution etc.

Total Funds = Equity + Debt = Capital Employed

Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves

and Surplus – Fictitious Assets

2009 = 17081.13/87956.58

= 0.19

2008 = 15828.89/75518.57

= 2.0

29

Interpretation : - Debt to Total Funds Ratios shows the proportion of long-term

funds, which have been raised by way of loans. This ratio measures the long-term

financial position and soundness of long-term financial policies. In India debt to

total funds ratio of 2:3 or 0.67 is considered satisfactory. A higher proportion is

not considered good and treated an indicator of risky long-term financial position

of the business. It indicates that the business depends too much upon outsiders’

loans.

c. Interest Coverage Ratio: Interest Coverage Ratio is a ratio between ‘net profit

before interest and tax’ and ‘interest on long-term loans’. This ratio is also termed

as ‘Dbt Service Ratio’.

Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on

Long-term Loans

2009 = 2536.34/466.82

= 5.43

2008 = 2306.65/381.68

= 6.04

Interpretation : This ratio expresses the satisfaction to the lenders of the concern

whether the business will be able to earn sufficient profits to pay interest on long-

term loans. This ratio indicates that how many times the profit covers the interest.

It measures the margin of safety for the lenders. The higher the number, more

secure the lender is in respect of periodical interest.

d. debt to capitalised ratio

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= long term debt/ long term debt + net worth = total capital

2009 = 67350.37/6350.37 + 7205.05

= 0.90

2008 = 44012.54/44012.54 + 6813.18

= 0.86

TREND ANALYSIS

Trend analysis is that by which financial statement is analysed by computing

trends relating to series of information method involves computation of

percentage relationship that each statement item bears to the same item in the

base year.

1.graph shows the change in total loans in 5 years.

Fig 1

interpretation : this graph show that there is change in total loans it seems to be

increasing upto 2009.

31

total loans

6,735.044,401.25

3,343.50 3,608.39 2,776.10

16,384.5914,819.39

10,884.509,075.67

6,941.90

0

5000

10000

15000

20000

Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06 Sep ' 05

year

Rs

in c

rore

Loan funds

Secured loans

Unsecured loans

Total

E

2. graph shows change in uses of funds.

Fig: 2

Interpretation : graph predicts that fixed assets increased upto 2009.net block is

also increased.

3. graph of income

Fig 3

4. graph of assets.

32

uses of funds

0

2000

4000

6000

8000

10000

Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06 Sep ' 05

YEAR

Rs

in c

rore

Fixed assets

Gross block

Less : revaluation reserve

Less : accumulateddepreciation

Net block

Capital work-in-progress

Investments

income

0

2000

4000

6000

8000

10000

12000

Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06 Sep ' 05

years

Rs

Income

Operating income

Fig 4.

Interpretation : fig 4 predicts that there is change in assets also upto 2009 it has

increased above 15000.

5. total income

Fig 5

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assets

0

5000

10000

15000

20000

Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06 Sep ' 05

year

Rs

in c

rore

Current assets, loans &advances

Less : current liabilities &provisions

Total net current assets

Miscellaneous expenses notwritten

Total

income

9,163.04 9,753.658,285.42

7,218.82

5,460.25

0

2000

4000

6000

8000

10000

12000

Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06 Sep ' 05

year

Rs

in c

rore

Operating income

Interpretation : fig 5 predicts that operating income seems to be increasing but

decreased as compared to previous year.

6. graph for expences

Fig 6

Interpretation ; fig 6 shows increase in cost of sales and material consumed.

No such change in selling and manufacturing expences.

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expenses

010002000300040005000600070008000

Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06 Sep ' 05

year

Rs

in c

rore

Material consumed

Manufacturing expenses 

Personnel expenses

Selling expenses

Adminstrative expenses

Expenses capitalised

Cost of sales

Operating profit

FUND FLOW STATEMENT

Schedule of changes in Working capital :

For preparing the Fund Flow statement we should know the components of working

capital. There are two components of working capital

1.Current Assets

2.Current liabilities

Current assts are those assets which are converted into cash within one year. For

example cash, bank balances, debtors, stock, bills receivables, prepaid expenses, short –

term investment etc.

Current liabilities mean liabilities including loan, deposits, and overdrafts etc. which

fall due for payment in a relatively short period normally not more then one year. For

example creditors, bills payable, outstanding expenses, income tax payable, declared

dividend etc.

Funds Flow statement is prepared on the basis of ‘working capital’. Under this method

the following two statements are prepared:

1. Schedule of changes in Working Capital

2. Funds Flow statement

 1.     Schedule of changes in Working capital :

Schedule of changes in net working capital is a statement prepared to ascertain the net

change (increase or decrease) in working capital over period of time. An increase in

working capital is shown as a use of funds, while a decrease is shown as a source of

fund in the fund flow statement. 

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Current assets 2008 2009 Increase in wc Decrease in wc

cash 3882.84 4985.00 1102.22

Sundry detors 15828.89 17081.13 1252.24

inventory 15688.64 17634.93 1946.29

Other current assets 185.74 320.43 134.69

Loans and advances 39932.48 47935.04 8002.56

total 75518.57 87956.59

Current liabilities

Sundry creditors 7783.24 8537.12 753.88

provisions 1519.71 1301.92 217.79

total 9302.95 9839.04

Working capital 66215.62 78117.55

Increase in wc 11901.93 11901.93

78117.55 78117.55 123438 123438

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Fund Flow Statement:

Meaning of Fund Flow

The financial statement of the business indicate assets, liabilities and capital on

a  particular date and also the profit or loss during a period. But it is possible

that there is enough profit in the business and the financial position is also good

and still there may be deficiency of cash or of working capital in business. If the

management wants to find out as to where the cash is being utilized, financial

statement cannot help. Therefore, a statement is prepared of the sources and

applications of funds from where Working Capital comes and  where it is

utilized. This is called Fund Flow statement.

Meaning of ‘Fund’

In a popular and generally accepted sense the term ‘fund’ is used to denote the

excess of current assts over current liabilities :

Working Capital     =    Current Assets – Current Liabilities

Meaning of ‘Flow’ of Fund

Flow of funds means transmigration (coming and going) of funds. In other

words, Flow of funds means change in Working capital, as in funds flow

statement the words ‘funds’ mean net working  capital.

Definition:

According to R.N. Anthony, “Fund Flow is a statement prepared to indicate

the increase in cash resources and the utilization of such resources of a

business during the accounting period.”

Fund from operations

37

Net profit of the year 4006.62

Add : depreciation 5771.52

Less: other income 340.15

FFO 9437.99

DIFFERENCE = 2009-2008

= 9437.99- 15391.95

= 5953.96

Fund flow statement

Sources Application

Fund from operation 5953.96 Increase in wc 11901.93

Shares 1.05 Change in fixed

assets

118

Reserves 3911.39 Investment 3693.11

Long term loans 23337.83Dividend

Net block

84.86

17753.71

33204.33 Total 33204.33

Cash Flow Statement

A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing

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funds flow statement all the current assets and current liabilities are taken into

consideration. But in a cash flow statement only those sources of funds are taken which

provide cash and only the uses of cash are taken into consideration, even liquid asset like

Debtors and Bills Receivables are ignored.

A Cash Flow Statement is a statement, which summarises the resources of cash available

to finance the activities of a business enterprise and the uses for which such resources

have been used during a particular period of time. Any transaction, which increases the

amount of cash, is a source of cash and any transaction, which decreases the amount of

cash, is an application of cash.

Cash flow statement OF Videocon

A. CASH FROM OPERATING ACTIVITIES

Net profit before tax 6084.00

a. depreciation 5887.57

b. interest and finance charges 748.20

c. provision for retirement benefits 26.17

d. investment value 53.15

e. interest for the year 0.03

f. interest received 662.48

g. loss from investment 4.76

h. loss on sale of fixed assets 100.61

cash flow from operating activities before working capital 19083.99

a. inventories 1953.63

b. sundry debtors 501.87

c. other current assets 164.87

d. loans and advances 10988.25

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e. current liabilities 2604.55

cash flow from operating activities 8079.92

less: income tax paid 921.34

less: fringe benefit tax paid 16.41

net cash flow from operating activities (A) 7142.17

B. CASH FLOW FROM INVESTING ACTIVITIES

Sales of fixed assets 3219.98

Interest received 662.48

Income(loss) from investment 4.76

Increase in fixed assts 20919.27

Increase in preoperating expenditure 5141.54

Miscellaneous expences 0.09

Decreas in goodwill 26.74

Sale of investment 16704.65

Net cash flow investing activities 5433.83

C. CASH FLOW FROM FINANCING ACTIVITIES

Increase in equity share capital 1.05

Increase in share application money 7072.48

Securities premium receive 11.90

Forfeited shares 2.72

Change in secured term loans from banks 19134.97

Change in unsecured loans 13062.72

Change in working capital 1702.45

Transfer of deferred tax liabilities 0.97

Redemption 753.74

Payment of dividend 268.59

Tax on dividend 45.25

Interest paid 7478.20

40

C 8554.91

Net change in cash and cash equivalents A+B+C = 6846.57

The Meaning of Cost Sheet. (Cost Accounting)

Cost sheet is a statement of cost. In other words, when costing information are set out in

the form of a statement, it is called cost sheet. It is usually adopted when there is only

one product is produced and all costs are incurred for that product only. Cost sheet may

be prepared for a week, monthly, quarterly or yearly indicating various components of

cost as prime cost, works cost, cost of production, cost of goods sold, total cost and also

profitability on a production.

The preparation of cost sheet depends on the cost data provided by cost accounting. Due

to differences in the nature of cost data there  are three different cost sheet Performa

may be used.

(a) Cost sheet with break up cost: These types of cost sheet contains two column as

total cost, cost per unit of out put. A specimen of cost sheet with imaginary figure.

(b) Cost Sheet with treatment of Stock: This type of cost sheet is maintained in case

of manufacturing concern. Generally there are three types of stock as (1) Stock of Raw

material, (2) Stock of work in progress and (3) Stock of finished goods. The treatment

of stock in cost sheet has been given in a separate Performa.

(c) Estimated cost sheet or price quotation: Price quotation means quoting the

minimum price for obtaining a specific order. The quotation is send in the form or

41

estimated cost sheet having one column. In estimated cost sheet all elements of cost and

overhead expenses are calculated in the following manner.

Estimated direct material

Estimated labor cost

Estimated overheads

COST SHEET OF VIDEOCON

DIRECT MATERIAL

Opening stock 10201.57

Add: purchase 68047.07

78248.58

Less: closing 11129.45

67119.13

Direct wages 1523.22

Expences 9436.94

PRIME COST 176779.29

Add: factory or work overhead

Indirect wages 91.04

Power & fuel 808.42

Rent 115.86+ 73

Depreciation 5771.52

Welfare services 91.04

Insurance 89.53

Work or factory cost 7041.01

Add: administrative overhead

Rent rates n taxes 115+73

Lighting n cooling 308.42

42

Insurance 39.79

Maintainance, repair 91.09+94.98+26

Printing n stationary 24.82

Bank charges 213.93

Miscellaneous expences 567.27

COST OF PRODUCTION 3013.21+24.82

Add: selling and distribution overhead

Market consultancy 254.08

Rent and tax 83.49

Salaries 1056.19

Advertising 927.68

Bad debt 264.01

Mis expences 567.27

Cost of sales 3152.05

Add: net profit 91070.56

Less: net loss

REFERENCES

1. www.accountingmanagement.com

2. www.rediff.com

3.www.moneycontrol.com

4.www.tutor2u.com

5.www.videocon.com

6www.cliffsnotes.com/study_guide/CommonSize-Analysis.topicArticleId-

21248,articleId-21212.html#ixzz13lVPwJJ6

7.www.netmba.co.

8. www.universalteacher4u.com

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