1|Page

Chapter 1

Introduction
Accounting aids the persistence of providing financial information relating a business. Such
information is provided to people who have an interest in the organization, such as
shareholders, managers, creditors, debenture holders, bankers, tax authorities and others.
Broadly speaking, on the basis of type of accounting information and the purpose for which
such information is used, below mentioned are the three different Types of Accounting:
1. Financial Accounting (or General Accounting)
2. Cost Accounting and
3. Management Accounting.

Financial Accounting Definition

Financial Accounting mostly deals with recording business dealings in the records of
financial statement for the purpose of giving final accounts. It is mentioned as the art of
recording. Summarizing and classifying in a substantial manner and in terms of transactions,
money and events, that are in quantity at least, of interpreting the results thereof and a
financial character. The information provided by Financial Accounting Definition is actually
summarized in the subsequent two statements at the end of the accounting period, generally
one year.

Loss account and profit showing the loss or net profit during the period.

Balance Sheet showing the financial position of the firm at a point of time. The objective of
financial accounting is to provide information to external parties such as shareholders,
employees, potential investors, government agencies, etc.

Cost Accounting Definition

Standard Cost accounting is a branch of accounting which specializes in providing information
about the detailed cost of products or services being supplied by the undertaking. Compared
with financial accounting, cost accounting is relatively a recent development. It has primarily
developed to meet the needs of management. Profit and Loss Account and Balance Sheet are
presented to management by the financial accountant. However modern management requires
much more thorough information than provided by financial statements. Cost accounting offers
detailed cost information to numerous levels of management for effective performance of their
functions. The information supplied by Cost Accounting Standards acts as a too1 of

2|Page
management for making optimum use of scarce resources and ultimately adds to the
productivity of business. The terms 'costing' and 'cost accounting' are often used
interchangeably. The Chartered Institute of Management Accountants - (CIMA) of UK has
defined costing as, "the techniques and processes of ascertaining cost". Thus, costing simply
means cost finding by any process or technique. It consists of principles and rules which are
used for determining:

The cost of manufacturing a product; e.g., motor car, furniture, chemical, steel, paper,
etc. and

. The cost of providing a service; e.g., electricity, transport, education, etc.

Cost Accounting Standards are mainly for internal use i.e. management. It is not to be
provided to external parties such as shareholders, creditors, potential investors, etc.
Neither do they have any claim on this information, excepting government, to whom
cost information may have to be submitted.

What is Management Accounting?

The term 'management accounting' is the modern concept of accounts as a tool of management.
It is a broad term and is concerned with all such accounting information that is useful to
management. In simple words, the term management accounting is applied to the prevision of
accounting information for management activities such as planning, controlling and decision
making, etc. Management accounting is an essential part of an organization concerned with
presenting, identifying and interpreting data used for:
1. Framing strategy
2. Planning and controlling activities
3. Decision-making
4. Improving the use of resources
5. Disclosure to shareholders and others external to the entity
6. Disclosure to employees and
7. Safeguarding assets.

Relationship of Management Accounting to Cost Accounting and Financial

Accounting:
The three types of accounting, i.e., financial accounting, cost accounting and management
accounting are closely linked. The management accounting uses the principles and

3|Page
practices not only of cost accounting but also of financial accounting. Information provided
by financial accounting proves extremely useful for management

accounting. For

example, profit and loss account and balance sheet become the basis of ratio analysis and
comparative financial statements, etc., which are used by the management accounting as
important tools of planning and control.
Financial accounting records also become basis of preparing detailed cost computation and
reports. Cost accounting is a more detailed application of financial accounting and provides
detailed cost information about products, services, departments, etc. This information is
used by management accounting for planning, controlling and decision making purposes.
Fig. 1.1 shows the evolution of management accounting and its relationship to cost
accounting and financial accounting.

PREPARING
PROFIT & LOSS
ACCOUNT AND
BALANCE SHEET

ANALYSING
COST FOR
CONTROL AND
MAXIMISING
EFFICIENCY

ASSISTING
MANAGEMENT
FOR PLANNING,
DECISION
MAKING AND
CONTROL

FINANCIAL
ACCOUNTING

COST
ACCOUNTING

MANAGEMENT
ACCOUNTING

4|Page

MANAGEMENT ACCOUNTANT THE CONTROLLER

Management accountant plays a very important role in an organization. He analyses and
interprets accounting information and meets the informational needs of management at
different levels. In an organization, a management accountant generally performs a staff
function i.e. advisory role. But if he is permitted to participate in planning and decision making,
he is a part of the management team and thus becomes a part of the line function. It is very
important that status of the management accountant in the organization is clearly defined so
that the scope of his work and responsibilities are accordingly determined.

ORIGIN
The first basic principles of management accounting emerged during the period 1400 to
1600 in the form of standards for materials, employee productivity, job cost system and
budgets. But no standardized management accounting was in practice until 1885 when
Henry Metcalf published the cost manufacture. The real growth of management
accounting was in 20th century in USA due to the emergence of large and integrated
companies such as DuPont and general motors. In fact the growth of management
accounting is because of the need to overcome the limitations of financial and cost
accounting.

LIMITATIONS OF FINANCIAL ACCOUNTING:

Financial accounting is extremely useful to different categories of users. But it also suffers
from the following limitations.
1.

Shows only overall performance. Financial accounting provides

information about profit, loss, cost etc., of the collective activities of the
business as a whole. It does not give data regarding costs by departments,
products, processes and sales territories, etc.

2.

Historical in nature. Financial accounting is historical, since the data are

summarized only at the end of the accounting period. There is no system of
computing day to day cost and also computing pre- determined costs.

3.

No performance appraisal. In financial accounting, there is no system of

developing norms and standards to appraise the efficiency in the use of

5|Page
materials, labor and other costs by comparing the actual performance with
what should have been accomplished during a given period of time.

4.

No material control system. Generally, there is no proper system of control

of materials losses which may arise in the form of obsolescence,
deterioration, excessive scrap and misappropriation, etc.

5.

No labor cost control. In financial accounting, there is no system of

recording loss of labor time; i.e., idle time. Labor cost is not recorded by jobs,
processes or departments and as such no system of incentives may be easily
used to compensate workers for their above standard performance.

CHARACTERISTICS OR NATURE OF MANAGEMENT

ACCOUNTING:
It is clear from the above definitions that management accounting is concerned with
accounting data that is useful in decision making. The main characteristics of management
accounting are as follows:
1.

Useful in decision making. The essential aim of management accounting is

to assist management in decision making and control. It is concerned with all
such information which can prove useful to management in decision making.

2.

Financial and cost accounting information. Basic accounting information

useful for management accountings derived from cost accounting records.

3.

Internal use. Information provided by management accounting is

exclusively for use by management for internal use. Such information is not
to be given to parties external to the business like shareholders, creditors,
banks etc.

4.

Purely optional. Management accounting is a purely voluntary technique

and there is no statutory obligation. Its adoption by any firm depends upon
its utility and desirability.

5.

Concerned with future. As management accounting is concerned with

decision making, it is related with future because decision is taken for future
course of action and not the past.

6|Page

CHARACTERISTICS OR NATURE OF MANAGEMENT

ACCOUNTING:
It is clear from the above definitions that management accounting is accounting is
concerned with accounting data that is useful in decision making. The main characteristics
of management accounting as follows:

Useful in decision making. The essential aim of management accounting is

to assist management in decision making and control. It is concerned with all
such information which can prove useful to management in decision making.

Financial and cost accounting information. Basic accounting information

useful for management accountings derived from financial and cost
accounting records.

Internal use. Information provided by management accounting is

exclusively for use by management for internal use. Such information is not
to be given to parties external to the business like shareholders, creditors,
banks, etc.

Purely optional. Management accounting is a purely voluntary technique

and there is no statutory obligation. Its adoption by any firm depends upon
its utility and desirability.

Concerned with future. As management accounting is concerned with

decision making, it is related with future because decisions are taken for
future course of action and not the past.

SCOPE OF MANAGEMENT ACCOUNTING:

Management accounting has a very wide scope. It includes not only financial accounting
and cost accounting but all type of internal control, internal audit, tax accounting, office
services, cost control and other methods and control procedures. Thus scope of
management accounting inter alia includes the following:

1.

FINANCIAL ACCOUNTING: Financial accounting provides basic historical

data which helps management to forecast and plan its financial activities for the
future period. Thus for an effective and successful management accounting, there
should be a proper and well-designed financial accounting system.

7|Page

2.

COST ACCOUNTING: Many of the techniques of profit planning and

decision-making like marginal costing, CVP analysis and differential cost
analysis are used by the management accounting.

3.

BUDGETING AND FORECASTING: In order to plan business activities for

the future, forecasting and budgeting play a very significant role. Forecasting
helps in the preparation of budgets and budgeting helps management accountant
in exercising budgetary control.

4.

TAX PLANNING: In order to take advantage of various provisions of tax laws,

management accountant has to depend upon tax accounting and planning to
minimize its tax liabilities and save more funds for the business.

5.

REPORTING TO MANAGEMENT: For effective and timely decision, there

should be a system of prompt and intelligent reporting into management both
routine and special reports are prepared for submission to top management,
middle order management and operating level management depending and their
requirements.

TOOLS & TECHNIQUES USED IN MANAGEMENT ACCOUNTING

Management accounting uses a number of tools and techniques to help management in
achieving business goals. Some of the important tools and techniques are as follows:
1.

Budgeting

2.

Standard costing and variance analysis.

3.

Marginal costing and costing volume profit analysis.

4.

Ratio analysis.

5.

Comparative financial statements

6.

Differential cost analysis.

FINANCIAL ACCOUNTING & MANAGEMENT ACCOUNTINGCOMPARISON

Financial accounting and management accounting are two major sub systems of
accounting information system. Both are concerned with revenues and expenses, assets and
liabilities and cash flows. Both therefore involve financial statements. But the major

8|Page
differences between the two arise because they serve different audiences. The main points
of difference the two are as follows:
Basis
1. External &
internal users

Financial Accounting

Management Accounting

Financial accounting information is

Management

mainly intended for external users

information meant for internal

like investors, shareholders,

users, i.e., management.

accounting

creditors, govt. authorities, etc.

2. Accounting

It is based on double entry system

It is not based on double entry

method

for recording business transactions.

system.

3. Statement

Under company law and tax laws,

Management accounting

financial accounting is obligatory to

provides detailed information

satisfy various statutory provisions.

about individual products,

requirements

plants, departments or any other

responsibility center.
4. Analysis of cost
& profit

5. Past and future

data.

Financial accounting shows the

Management accounting

profit/loss of the business as a

provides detailed information

whole. It does not show the cost &

about individual products,

profit for individual products,

plants, departments or any other

processes or departments are.

responsibility center.

It is concerned with recording

It is future oriented and

transitions which have already taken

concentrates on what is likely to

place, i.e., it represents past or

happen in future though it may

historical records.

use past data for future

projections.

COST ACCOUNTING & MANAGENT ACCOUNTING:

An examination of the meaning and definitions of cost accounting and management
accounting indicates that the distinction between the two is quit vague. Some writers even
consider these two areas as synonymous while others distinguish between the two.
Horngren, a renowned author on the subject, has gone to the extent of saying, modern cost

9|Page
accounting is often called management accounting. Why? Because cost accountings look
at their organization through managers eyes. Thus managerial aspects of cost accounting
are inseparable from management accounting. One point on which all agree is that these
two types of accounting do not have clear cut territorial boundaries. However, distinction
between cost accounting and management accounting may be made on the following point:
BASIS

COST ACCOUNTING

MANAGEMENT
ACCOUNTING

1. Scope

Scope of cost accounting is

Scope

of

management

limited to providing cost

accounting is broader than

information for managerial

that of cost accounting as it

uses.

provides

all

types

information,

of

i.e...Cost

accounting information for

managerial uses.
2. Emphasis

Main emphasis is on cost

Main

ascertainment

planning controlling and

control

and

to

cost
ensure

emphasis

is

decision-making

on

to

maximum profit.

maximize profit.

3. Technique

Various technique used by

Management

accounting

employed

cost accounting include

also

all

standard

and

techniques used in cost

variance analysis, marginal

accounting but in addition it

costing and cost volume

also uses techniques like

profit analysis, budgetary

ratio analysis, funds flow

control, uniform costing

statement,

and inter-firm comparison,

analysis,

etc.

research

and

certain

techniques

from

various

costing

uses

these

statistical
operations

branches of knowledge like

mathematics,

economics,

10 | P a g e
etc., which so ever can help
management in its tasks.

LIMITATION ON MANAGEMENT ACCOUNTING

Management accounting is very useful tool of management. However, it suffers from
certain limitations as stated below:
1)

Based on historical data: Management accounting helps management in

making decisions for the future but it is mainly based on the historical data
supplied by financial accounting and cost accounting. This implies that
historical data is used for making future decisions. The accuracy and
dependability of such data will leave their mark on the quality of managerial
decisions.

2)

Lack of wide knowledge: The management accountant should have

knowledge of not only financial and cost accounting but also many allied
subjects like economics, management, taxation, statistical and mathematical
techniques etc. lack of knowledge of these subjects on the part of
management accountant limits the quality of management accounting.

3)

Complicated approach: Management accounting provides mass of data

using various accounting and non-accounting subjects for decision making
purpose. But sometimes management avoided this complicated and lengthy
course of decision making and makes decisions based on intuition. This leads
to unscientific approach to decision making.

4)

Not a substitute of management: Management accounting only provides

information to management for decision making but it is not a substitute of
management and administration.

5)

Costly system: The installation of management accounting system in an

organization is costly affair as it requires a wide net-work of management
information system, rules and regulations. All this requires heavy investment
and small concerns may not be able to afford it.

11 | P a g e

RATIO ANALYSIS
MEANING OF FINANCIAL STATEMENT:
The term financial statements refer to two basic statements which an accounting prepares
at the end of an accounting period for a business enterprise. These are:

1.

Balance sheet (or Income statement of financial position ) which reflects the
assets, Liabilities and capital as on a certain date, and

2.

Profit and Loss Account (or Income Statement) which shows the results of
operations i.e. profit or loss during a certain period.

RATIO ANALYSIS:
Ratio analysis is the process of determining and interpreting numerical relationship based
on financial statements. It is the technique of interpretation of financial statements with the
help of accounting ratios derived from the balance sheet and profit and loss account. Ratio
analysis is a very important tool of financial analysis. It is the process of establishing the
significant relationship between the items of financial statement to provide a meaningful
understanding of the performance and financial position of a firm. Ratio when calculated
on the Basis of accounting information are called Accounting Ratio.

DEFINITIONS:
Kennedy and Mc Mullah. The relationship of one to another, expressed in simple term
of mathematical is known as ratio
According to Accountants Handbook by Wixom, kell and Bedford, a ratio is an
expression of the quantitative relationship between two numbers.

Ratio analysis is very powerful and most commonly used tool of analysis and interpretation
of financial statements. It concentrates on the inter-relation among the figures appearing in
the financial statements. Ratio analysis helps to analyze the part performance of a company
and to make future projections. It allows

various interested parties like management,

shareholders, potential investors, creditors, government and other analysts to make an

12 | P a g e
evaluation of the various aspects of companys performance from their own point of view
and interest. For example, management and shareholders may be interested in the
companys profitability while creditors and debenture holders may be interested in
solvency of the company.

BASIS OF COMPARISON:
Trend Analysis involves comparison of a firm over a period of time, that is, present ratios
are compared with past ratios for the same firm. It indicates the direction of change in the
performance improvement, worsening or fidelity over the years. Inter-firm Comparison
involves comparing the ratios of a firm with those of others in the same lines of business
or for the industry as a whole. It reflects the firms performance in relation to its
competitors.

WAYS TO INTERPRET ACCOUNTING RATIOS:

Single absolute ratio.

Group ratio.

Historical comparison.

Inter-firm comparison.

Projected ratios.

CLASSIFICATION OF RATIOS:

Analysis of Short Term Financial Position or Test of Liquidity.

Analysis of Long Term Financial Position or Test of Solvency.

Activity Ratios.

Profitability Ratios.

TEST OF LIQUIDITY:

The liquidity ratios are used to test the short term solvency or liquidity
position of the business.

It enables to know whether short term liabilities can be paid out of short term
assets.

It indicates whether a firm has adequate working capital to carry out routine
business activity.

13 | P a g e

It is a valuable aid to management in checking the efficiency with which

working capital is being employed.

It is also of importance to shareholders and long term creditors in determining

to some extent the prospects of dividend and interest payment.

IMPORTANT RATIOS IN TEST OF LIQUIDITY:

1.

Current ratio.

2.

Quick ratio.

3.

Absolute liquid ratio.

CURRENT RATIO
It is the most widely used of all analytical devices based on the balance sheet. It establishes
relationship between total current assets and current liabilities.
Current assets
Current ratio =
Current liabilities

IDEAL RATIO: 2:1

High ratio indicates under trading and over capitalization.
Low ratio indicates over trading and under capitalization.

ABSOLUTE LIQUIDITY RATIO

This ratio establishes a relationship between absolute liquid assets to quick liabilities.

Absolute liquid assets

Absolute liquid ratio=
Quick liabilities

IDEAL RATIO: 1:2

It means that if the ratio is 1:2 or more than this the concern can be taken as liquid. If the
ratio is less than the standard of 1:2, it means the concern is not liquid.
Notes: - {Quick assets = Current asset-(inventories + prepaid expenses)

14 | P a g e
Quick Liabilities = Current liabilities Bank overdraft
Absolute liquid assets include cash in hand, cash at bank, marketable
securities, Temporary investments.

II. TEST OF SOLVENCY

Solvency indicates that position of an enterprise where it is capable of

meeting long term obligations.

When an organization's assets are more than its liabilities is known as solvent
organization.

Long term solvency ratios denote the ability of the organization to repay the
loan and interest.

IMPORTANT RATIOS IN TEST OF SOLVENCY:

Debt-equity ratio.

Proprietary ratio.

Solvency ratio.

Fixed assets to net worth ratio.

Current assets to net worth ratio.

Current liabilities to net worth ratio.

Capital gearing ratio.

Fixed assets ratio

Debt servicing ratio.

Dividend coverage ratio.

DEBT EQUITY RATIO:

It is calculated to measure the relative claims of outsiders and the owners against the firms
assets. This ratio indicates the relationship between the outsiders funds and the
shareholders funds.

15 | P a g e
Outsiders funds
Debt equity ratio=
Shareholders funds

IDEAL RATIO: 2:1;

It means for every 2 shares there is 1 debt. If the debt is less than 2 times the equity, it
means the creditors are relatively less and the financial structure is sound. If the debt is
more than 2 times the equity, the state of long term creditors are more and indicate weak
financial structure.
Notes: Components of Debt Equity Ratio Outsiders funds include all debts/liabilities
to outsiders, whether long term or short term or whether in the form of debentures, bonds,
mortgages or bills.
Shareholders funds consists of equity share capital, preference share capital, capital
reserves, revenue reserves and reserves representing accumulated profits and surpluses like
reserve for contingencies sinking funds. The accumulated losses and deferred expenses, if
any should be deducted from the total to find out shareholders funds, it is called net worth
and the ratio may be termed as debt to net worth ratio.

PROPRIETARY RATIO OR NET WORTH RATIO:

It establishes relationship between the proprietors fund or shareholders funds and the total
assets

Proprietary funds
Proprietary ratio =

Capital employed
or

Total assets

Total liabilities

IDEAL RATIO: 0.5:1

Higher the ratio betters the long term solvency (financial) position of the company. This
ratio indicates the extent to which the assets of the company can be lost without affecting
the interest of the creditors of the company
Notes :-{ Components of Proprietary Ratio: Shareholders funds or Proprietary
funds are equity share capital, preference share capital, undistributed profits, reserves and

16 | P a g e
surpluses. Out of this amount accumulated losses should be deducted. Total assets on
other hand denote total resources of the concern.}

SOLVENCY RATIO:
It expresses the relationship between total assets and total liabilities of a business. This ratio is
a small variant of equity ratio and can be simply calculated as 100-equity ratio

Total assets
Solvency ratio=
Total liabilities

No standard ratio is fixed in this regard. It may be compared with similar, such
organizations to evaluate the solvency position. Higher the solvency ratio, the stronger is
its financial position and vice-versa.

FIXED ASSETS TO NET WORTH:

It is obtained by dividing the depreciated book value of fixed assets by the amount of
proprietors funds.

Net fixed assets

Fixed assets to net worth ratio=
Net worth

IDEAL RATIO: 0.75:1

A higher ratio, say, 100% means that there are no outside liabilities and all the funds
employed are those of shareholders. In such a case the return to shareholders would be
lower rate of dividend and this is also a sign of over capitalization.
This ratio shows the extent to which ownership funds are sunk into assets with relatively
low turnover. When the amount of proprietor's funds exceed the value of fixed assets, a
part of the net working capital is provided by the shareholders, provided there are no other
non-current assets, and when proprietors funds are less than the fixed assets, creditors
obligation have been used to finance a part of fixed assets. The Yardstick for this measure
is 65% for industrial undertakings.

17 | P a g e

CURRENT ASSETS TO NET WORTH RATIO:

It is obtained by dividing the value of current assets by the amount of proprietors funds. The
purpose of this ratio is to show the percentage of proprietors fund investment in current assets.
A higher proportion of current assets to proprietors fund, as compared with the proportion of
fixed assets to proprietors funds are advocated, as it is an indicator of the financial strength of
the business, depending on the nature of the business there may be different ratios for different
firms. This ratio must be read along with the results of fixed assets to proprietors funds ratio.
Current assets
Current assets to net worth ratio=
Proprietors fund

CURRENT LIABILITIES TO NET WORTH:

It is expressed as a proportion and is obtained by dividing current liabilities by proprietor's
fund.
Current liabilities
Current liabilities to net worth ratio =
Net worth

IDEAL RATIO: 1:3

This ratio indicates the relative contribution of short term creditors and owners to the capital
of an enterprise. If the ratio is high, it means it is difficult to obtain long term funds by the
business.

CAPITAL GEARING RATIO:

It expresses the relationship between equity capital and fixed interest bearing securities
and fixed dividend bearing shares.

Fixed interest bearing securities + fixed dividend

CGR =
Equity shareholders funds

bearing shares

18 | P a g e

INTERPRETATION OF CAPITAL GEARING RATIO:

When fixed interest bearing securities and fixed dividend bearing shares are
higher than equity shareholders funds, the company is said to be highly
geared.

Where the fixed interest hearing securities and fixed dividend bearing shares
share equal to equity share capital it is said to be evenly geared.

When the fixed interest bearing securities and fixed dividend bearing shares
are lower than equity share capital it is said to be low geared.

If capital gearing is high, further rising of long term loans may be difficult
and issue of equity shares may be attractive and vice-versa.

FIXED ASSETS RATIO:

It establishes the relationship between fixed assets and capital employed

Fixed assets
Fixed assets ratio=
Capital employed

IDEAL RATIO: 0.67:1

This ratio enables to know how fixed assets are financed i.e. by use of short term funds or
by long term funds. This ratio should not be more than 1.

FIXED CHARGES COVER OR DEBT SERVICE RATIO:

This ratio is determined by dividing net profit by fixed interest charges.

Net profit before deduction of interest and income tax

Debt service ratio =
Fixed interest charges

19 | P a g e

IDEAL RATIO: 6 OR 7 TIMES:

If the ratio is high it means there is higher margin of safety for the long term lenders and as
such it is not difficult for the business to obtain further long term funds and vice-versa. This
ratio indicates the financial ability of the enterprise to meet interest payment out of current
earnings

DIVIDEND COVER RATIO:

It is the ratio between disposable profit and dividend. Disposable profit refers to profit left
over after paying interest on long term borrowing and income tax.
Net profit after interest and tax
Dividend cover ratio=
Dividend declared

This ratio indicates the ability of the business to maintain the dividend on shares in future.
If this ratio is higher is indicates that there is sufficient amount of retained profit. Even if
there is slight decrease in profit in the future it will not affect payment of dividend in future.

III. ACTIVITY RATIO:

Activity ratios indicate the performance of an organization.

This indicates the effective utilization of the various assets of the

organization.

Most of the ratio falling under this category is based on turnover and hence
these ratios are called as turnover ratios.

IMPORTANT RATIOS IN ACTIVITY RATIO:

Stock turnover ratio.

Debtors turnover ratio.

Creditors turnover ratio.

Wording capital turnover ratio.

Fixed assets turnover ratio.

Current assets turnover ratio.

20 | P a g e

Total assets turnover ratio.

Sales to net worth ratio.

STOCK TURNOVER RATIO:

This ratio establishes the relationship between the cost of goods sold during a given period and
the average sock holding during that period. It tells us as to how many times stock has turned
over (sold) during the period. Indicates operational and marketing efficiency. Helps in
evaluating inventory policy to avoid over stocking.

Cost of goods sold

Inventory turnover ratio =
Average stock

Cost of goods sold

= sales - gross profit

= opening stock + purchases closing stock

Opening stock + Closing stock

Average stock =
2

INTERPRETATION OF STOCK TURNOVER RATIO:

Ideal ratio:
8 times; a low inventory turnover may reflect dull business, over investment in inventory,
accumulation of stock and excessive quantities of certain inventory items in relation to
immediate requirements.
A high ratio may not be accompanied by a relatively high net income as; profits may be
sacrificed in obtaining a large sales volume (unless accompanied by a larger total gross
profit). It may indicate under investment in inventories. But generally, a high stock turnover
ratio means that the concern is efficient and hence it sells its goods quickly.

DEBTOR TURNOVER RATIO:

This ratio explains the relationship of net credit sales of a firm to its book debts indicating
the rate at which cash is generated by turnover of receivables or debtors. The purpose of

21 | P a g e
this ratio is to measure the liquidity of the receivables or to find out the period over which
receivables remain uncollected.

Net credit sales

Debtor turnover ratio =
Average Debtors

Opening balance + closing balance

Average debtors =
2
Debtors include bills receivables along with book debts
Notes: - {when information about opening and closing balances of trade debtors is not
Available then the debtor turnover ratio can be calculated by dividing the
total
Sales by the balances of debtors. Debtor turnover ratio = total sales/debtors}

AVERAGE COLLECTION PERIOD:

The average collection period represents the average number of days for which a firm has
to wait before its receivables are converted into cash
Number of working day in year
Average collection period =
Debtor turnover ratio

INTERPRETATION OF DEBTOR TURNOVER RATIO:

Ideal ratio: 10 to 12 times; debt collection period of 30 to 36 days is

considered ideal.

A high debtor turnover ratio or low collection period is indicative of sound

management policy.

22 | P a g e

The amount of trade debtors at the end of period should not exceed a
reasonable proportion of net sales. Larger the trade debtors greater the
expenses of collection.

CREDITORS TURNOVER RATIO:

This ratio indicates the number of times the creditors are paid in a year. It is useful for
creditors in finding out how much time the firm is likely to take in repaying its trade
creditors.

Net credit purchases

Creditors turnover ratio =
Average creditors

Opening balance + closing balance

Average creditors =
2

Number of working days

Average payment period =
Creditors turnover ratio

Notes: - {if information about credit purchases is not available, total purchases may be
Taken, if opening and closing balances of creditors are not given the balances of
Creditors may be taken. Trade creditors include sundry creditors and bills
Payable.}

INTERPRETATION OF CREDITOR TURNOVER RATIO:

Ideal ratio: 12 times; debt payment period of 30 days is considered ideal.

Very less creditors turnover ratio or a high debt payment period may indicate
the firms inability in meeting its obligation in time.

WORKING CAPITAL TURNOVER RATIO:

23 | P a g e
This ratio indicates the number of times the working capital is turned over in the course of the
year. Measures efficiency in the working capital usage. It establishes relationship between
cost of sales and working capital.
Cost of sales
Working capital turnover ratio =
Average working capital

Opening + closing working capital

Average working capital =
2
If cost of sales is not given, then sales can be used. If opening working capital is not
disclosed then working capital at the yearend will be used.
Working capital turnover ratio= cost of sales (sales)/net working capital.

INTERPRETATION OF WORKING CAPITAL TURNOVER RATIO:

A higher ratio indicates efficient utilization of working capital and a low ratio
indicates inefficient utilization of working capital.

But a very high ratio is not a good situation for any firm and hence care must
be taken while interpreting the ratio.

FIXED ASSETS TURNOVER RATIO:

This ratio establishes a relationship between fixed assets and sales.

Net sales
Fixed assets turnover ratio =
Fixed assets

Ideal ratio: 5 times

A high ratio indicates better utilization of fixed assets.
A low ratio indicates underutilization of fixed assets.

TOTAL ASSET TURNOVER RATIO:

This ratio establishes a relationship between total assets and sales. This ratio enables to know
the efficient utilization of total assets of a business.

24 | P a g e

Net sales
Total assets turnover ratio =
Total assets

Ideal ratio: 2 times

High ratio indicates efficient utilization and ratio less than 2 indicates underutilization.

IV. PROFITABILITY RATIO:

Profitability ratios indicate the profit earning capacity of a business.

Profitability ratios are calculated either in relation to sales or in relation to

investments.

Profitability ratios can be classified into two categories.

General Profitability Ratios

Overall Profitability Ratios.

GENERAL PROFITABILITY RATIOS:

Gross profit ratio.

Net profit ratio.

Operating ratio.

Operating profit ratio.

Expense ratio.

GROSS PROFIT RATIO:

It expresses the relationship of gross profit to net sales and is expressed in terms of
percentage. This ratio is a tool that indicates the degree to which selling price of goods per
unit may decline without resulting in losses.
Gross profit
Gross profit ratio =

X 100
Net sales

25 | P a g e
A low gross profit ratio may indicate unfavorable purchasing; the instability of
management to develop sales volume thereby making it impossible to buy goods in large
volume. Higher the gross profit ratio betters the results.

NET PROFIT RATIO:

It expresses the relationship between net profits after taxes to sales. Measure of overall
profitability useful to proprietors, as it gives an idea of the efficiency as well as profitability
of the business to a limited extent.
Net profit after taxes
Net profit ratio =

X 100
Net sales

Higher the ratio better is the profitability

OPERATING RATIO:
This ratio establishes a relationship between cost of goods sold plus other operating expenses
and net sales. This ratio is calculated mainly to ascertain the operational efficiency of the
management in their business operations.

Cost of goods sold + operating expenses

Operating ratio =
Net sales

Higher the ratio the less favorable it is because it would leave a smaller margin to meet
interest, dividend and other corporate needs. For a manufacturing concern it is expected to
touch a percentage of 75% to 85%. This ratio is partial index of overall profitability.

OPERATING PROFIT RATIO:

This ratio establishes the relationship between operation profit and net sales.

26 | P a g e
Operating profit
Operating profit ratio=

X 100
Net sales

Operating profit ratio = 100 - operating ratio

Operating profit = Net sales (cost of goods sold + Administrative and office expenses +
selling and distributive expenses.

EXPENSES RATIO:
It establishes relationship between individual operation expenses and net sales revenue.

Cost of goods sold

1.

Cost of goods sold ratio =

X 100
Net sales

Office and admin exp

2. Admin. And office exp ratio=

X100
Net sales

Selling and dist. exp

3. Selling and distribution ratio=

X 100
Net sales

Non-operating expense
4. Non-operating expense ratio=

X 100
Net sales

TEST OF OVERALL PROFITABILITY:

Return on shareholders investment or Net worth ratio.

Return on equity capital.

27 | P a g e

Return on capital employed.

Return on total resources.

Dividend yield ratio.

Preference dividend cover ratio.

Equity dividend cover ratio.

Price covering ratio.

Dividend payout ratio.

Earnings per share.

RETURN ON SHAREHOLDERS INVESTMENT:

Shareholders investment also called return on proprietors funds is the ratio of net profit to
proprietors funds. It is calculated by the prospective investor in the business to find out
whether the investment would be worth-making in terms of return as compared to the risk
involved in the business.

Net profit (After tax and interest)

Return on shareholders investment=
Proprietors funds

RETURN ON SHAREHOLDERS INVESTMENT:

This ratio is of great importance to the present and prospective shareholders as well as the
management of the company. As this ratio reveals how well the resources of a firm are being
used, higher the ratio, better are the results. The return on shareholders investment should be
compared with the return of other similar firms in the same industry. The inter-firm comparison
of this ratio determines whether their investments in the firm are attractive or not as the
investors would like to invest only where their return is higher. Similarly, trend ratios can also
be calculated for a number of years to get5 and idea of the prosperity, growth of deterioration
in the companys profitability and efficiency.

RETURN ON EQUITY CAPITAL:

This ratio establishes the relationship between net profit available to equity shareholders
and the amount of capital invested by them. It is used to compare the performance of

28 | P a g e
company's equity capital with those of other companies, and thus help the investor in
choosing a company with higher return on equity capital.

Net profit preference dividend

Return on equity capital =
Equity share capital (paid up)

RETURN ON CAPITAL EMPLOYED:

This ratio is the most appropriate indicator of the earning power of the capital employed in the
business. It also acts as a pointer to the management showing the progress or deterioration in
the earning capacity and efficiency of the business.

Net profit before taxes and interest on long term

loans

and debentures

Return on capital employ

Capital employed

IDEAL RATIO: 15%

If the actual ratio is equal ratio is equal to or above 15% it indicates higher productivity of
the capital employed and vice versa
Proprietors net capital employed = fixed assets + current assets outside liabilities (both
long and short term)

SIGNIFICANCE OF THE RATIO:

1.

It is a prime test of the efficiency of business. It measures not only the overall
efficiency of business but also helps in evaluating the performance of various
departments.

29 | P a g e
2.

The owners are interested in knowing the profitability of the business in

relation to amounts invested in it. A higher percentage of return on capital
employed will satisfy the owners that their money is profitably utilized.

RETURN OF TOTAL RESOURCES:

This ratio acts as a yardstick to assess the efficiency of the efficiency of the operations of
the business as it indicates the extent to which assets employed in the business are utilized
to results in net profit.
Net profit
Return on total recourses =

X 100
Total assets

DIVIDEND YIELD RATIO:

Refers to the percentage or ratio of dividend paid per share to the market price per share. This
ratio throws light on the effective rate of return on investment, which potential investors may
hope to earn.
Dividend paid per equity share

Dividend yield ratio =

Market price per equity share

PREFERENCE DIVIDEND COVERS:

It indicates how many times the preference dividend is covered by profits after tax. This
ratio measures the margin o safety for preference shareholders. Such investors normally
expect their dividend to be covered about 3 times by profits available for dividend purpose.

Profit after tax

Preference dividend cover =
Annual program me dividend

30 | P a g e

EQUITY DIVIDEND COVERS:

This ratio indicates the number of times the dividend is covered by the amount of profit
available for equity shareholders.

Net profit after tax - prefer dividend

Equity dividend cover

=
Dividend paid on equity capital

Earning per equity share

=
Dividend per equity share

Ideal ratio:
Two times; i.e. for every Rs. 100 profits available for dividend, Rs. 50 is retained in the
business and Rs. 50 is distributed. Higher the ratio higher is extent of retained earnings and
higher is the degree of certainty that dividend Will be repeated in future.

PRICE EARNINGS RATIO:

It shows how many times the annual earnings the present shareholders are willing to pay to
get a share. This ratio helps investors to know the effect of earnings per share on the market
price of the share. This ratio when calculated for several years can be used as term analysis
for predicting future price earnings ratios and therefore, future stock prices.

Average market price per share

Price earnings ratio =
Earnings per share

DIVIDEND PAYOUT RATIO:

This ratio indicates the proportion of earnings available which equity shareholders actually
receive in the form of dividend.

31 | P a g e
Dividend paid per share
Payout ratio =
Earnings per share

An investor primarily interested should invest in equity share of a company with high
payout ratio. Company having low payout ratio need not necessarily be a bad company. A
company having income may like to finance expansion out of the income, thus low payout
ratio. Investor interested in stock price appreciation may well invest in such a company
though the payout ratio is low.

EARNINGS PER SHARE:

This ratio indicates the earning per equity share. It establishes the relationship between net
profit available for equity shareholders and the number of equity shares.

Net profit available for equity share holders

Earnings per share =
Number of equity shares

32 | P a g e
Chapter 2

Research Method
TITLE OF THE STUDY
A study on financial statement using ratio analysis at Mahindra Finance

INTRODUCTION OF RATIOS:
Ratio analysis is a technique of analysis and interpretation of financial position. It is the process
of establishing and interpretation various for helping in making certain decisions, however ratio
analysis is not an end in itself. It is only a mean of better understanding of financial strengths
and weakened of a firm. Calculated of mere ratio does not serve4 any purpose unless several
appropriate ratios are analyses and interpreted. There are a number of ratios which can be
calculated from the information given in the financial position, but the analysis has to select
the appropriate data and calculated only a few appropriate ratios from the same keeping in
mind.

STATEMENT OF PROBLEM:
In the present global scenario financial position of an organization plays an important role on
its survival. So analyzing financial position of organization has becoming a little bit of difficult
to financial analysis. Financial position of an organization can be analyzed by using compound
and discounting techniques and ratio analysis plays an vital by analyzing the financial position
of an organization this study mainly focuses on the financial position through analyzing various
ratios.

SCOPE OF THE STUDY:

The research study covers the area of ratios analysis and the research is restricted to the
coverage of ratio analysis concept and to respected organization study covers all the aspects
of ratio analysis with respect to the organization.

NEED OF THE STUDY:

The study has significant and provide benefits to various parties whom
directly or indirectly interest with the company.

33 | P a g e

It is beneficial to management of the company by providing crystal clear

picture regarding important aspects like liquidity, leverage, activity and
profitability.

The study is also beneficial to employees and offers motivation by showing

how actively they are contributing for companys growth.

The investors who are interested in investing companys shares will also get
benefited by setting through the study and can easily take a decision whether
to invest or not to invest the companys share.

OBJECTIVES OF THE STUDY:

The objectives of the recent study known about the financial strength and weakness of
Mahindra Finance through financial ratio analysis.

To evaluate the performance of the company by using ratio as yard stick and
to measure the efficiency of the company.

To understand the liquidity, profitability and efficiency position of the

company during the study period.

To make comparison between the ratios by using different periods.

To study the present financial system at Mahindra Finance

To analyze the capital structure of the company with help of leverage ratio.

RESEARCH METHODOLOGY:
Research methodology is a way to systematic search pertinent information on a specific topic
and solves the research problem research. It is a scientific investigation. It may be understood
as a science of studying how research is done science of studying how research is done
scientifically. Research is a schematized effort to gain new knowledge.
There are two sources of data:

Primary data

Secondary data

1. Primary data: Data observed or collected directly from firsthand experience

2. Secondary Data: Secondary data refers to the data that has been complied by some
agency other than the user.

34 | P a g e
Secondary Data Are:

Annual report of the company

Published financial statement of the company

Financial reports of the company

Text books

35 | P a g e
Chapter 3

Introduction of Mahindra Finance

Two decades ago, Mahindra and Mahindra Financial Services Limited (MMFSL) commenced
its journey in the rural non-banking finance industry and with that was born a vision to
transform rural and semi-urban India into a self-reliant, flourishing landscape. Since then,
Mahindra finance have come a long way, empowering millions of ambitious individuals with
personalized finance for a wide range of vehicles, home development requirements and many
other diverse endeavors all to help them live their dreams and Rise in life.
Mahindra Finance guided by a firm belief in people, their dreams, and their potential to achieve
those dreams. Hence, socially inclusive business model facilitates loans to customers based not
on their current financial status, but their future earning capacity. This philosophy has instilled
a sense of confidence in the minds of rural and semi-urban India a confidence that allows
them to believe that no dream is too big. Today, as one of the leading non-banking finance
companies, we are proud to have touched over 3 million lives.
During the course of journey, apart from emerging as the top tractor financer in India, MMFSL
have constantly strived towards developing skill sets of the local population. MMFSL provides
employment to over 16,000 people in over 1000plus branches across India. This not only
ensures equal growth opportunity for all, but also enables MMFSL to serve their customers
better through local understanding and expertise.
So be it a humble farmer or a budding entrepreneur we are committed to empower every
individual with resources to help their dreams see the light of day.

Mahindra Finance Vision Statement

To be a leading financial services provider in semi-urban and rural India

Mahindra Finance Mission Statement

To transform rural lives and drive positive change in the communities

About Mahindra products

36 | P a g e

Tractor loan

Repayment for tractor loan is based on cash flows i.e. monthly/quarterly and half yearly (asset
becomes loan free in five years)

Quick disbursal within two days after loan approval

Available for a wide range of tractors

Stress-free loan sanction without mortgaging of land

Easy and flexible documentation

Utility vehicle loan:

Flexible repayment options ranging from 12 to 60 months

Fast loan disbursement within 48 hours

Competitive rates of interest on utility vehicle loans

Hassle-free documentation

Pay online and through direct debit

Enjoy a repayment period of up to 5 years on MUVs

Car loan

Hassle-free loan application process

Quick and easy loan procedures and disbursement

Diverse loan options based on individual requirement

Varied repayment options

Minimum documentation to ensure a hassle-free process

Quick car loan approval

Up to 100% ex-showroom funding with competitive interest rates on auto loans

Multiple repayment options

Three wheeler loans:

We cover the widest range of three-wheelers in India

Flexible repayment options, ranging from 12 to 36 months

3 wheeler loans sanctioned within 48 hours

37 | P a g e

Enjoy hassle-free documentation

Multiple plans customized to match your needs

Competitive rates of interest

Commercial vehicle loan:

The rate of interest for the loan depends on various factors like customer profiles and location.
A commercial vehicle loan can be taken for a variety of commercial vehicles, which may be
used at different locations. The loan is applicable to customers with diverse profiles.

For new Commercial Vehicles

Fast processing

Greater flexibility

Maximum tenure of 60 months

Competitive rates

Customized financing

For old Commercial Vehicles

Finance against vehicles that are up to 15 years old

Maximum tenure of up to 3 years

Maximum finance flexibility

Two wheeler loans:

Quick and efficient loan approval for two wheelers

Special 0.5% rebate for women customers

Maximum funding of up to 80% on LTV

Flexible repayment option, ranging from 12 to 36 months

Loan insurance available

Used vehicle loan

Used vehicle loans available for vehicles up to 10 years old

Lower rates of interest on pre-owned cars as compared to other unsecured loans

Maximum flexibility

38 | P a g e

Speedy loan disbursements

Personal loans

Instant personal loan approval and disbursement in 2 days

Loans of up to Rs. 3 lakh

Hassle-free documentation with maximum flexibility

Maximum loan tenure of up to 3 years*

Easy EMI payment option through cheque, ECS, mobile transfer or cash at the branch

Gold loans:

Get a gold loan of up to Rs. 10,00,000/-

Repay only by servicing regular interest on the loan/EMI repayment option available on request

Enjoy assured security of your gold jewelry

Loan tenure is of 1 week to 3 years

Home loans:

Wide network across the country to ensure you have no trouble reaching us

Personalized documentation assistance for smooth processing

Flexible repayment options

Door-to-door servicing to ensure maximum convenience

Loan available for various purposes construction, renovation, improvement and purchase

Fixed and variable rates of interest subject to conditions

SME loans:

Wide network across the country to ensure you have no trouble reaching us

Personalized documentation assistance for smooth processing

Flexible repayment options

Door-to-door servicing to ensure maximum convenience

Loan available for various purposes construction, renovation, improvement and purchase

Fixed and variable rates of interest subject to conditions

39 | P a g e

Industries served:
The Indian automobile and the allied auto ancillary sector is among the fastest growing sectors
in emerging market. The Indian auto and auto component industry has witnessed some new
developments. Massive competition, swing in the focus of global automobile manufacturers,
and vigorous changes in policies and business rules are the driving factors for its growth.
It is estimated that manufacturing of auto ancillaries and exports of auto components will see
the auto ancillary industry scale new heights in the coming years. Don't miss this opportunity
to grow your business and accelerate your position in the auto industry with Mahindra
Finance's SME loans.
Designed specially to cater to the financial requirements of the auto ancillary industry, our
quick and hassle-free loans for small businesses can also be customized for your wide-ranging
business requirements.
Due to Mahindra & Mahindra heritage, Mahindra Finance, understand the dynamics of this
industry as well as the unique business requirement that such a setup needs and corresponding
financial solutions. MMFSL aim to extend credit to fulfill the capital and working capital needs
of auto ancillary business. The purpose of these SME loans for small business is to help
customers to achieve their business goals in the best possible manner.
Food processing and Agro based industry:
The Food Processing Industry has witnessed a massive growth in recent years. The availability
of raw materials, improved lifestyles, relaxation of strict government policies are major
contributors to this phenomenal growth. This sector, therefore, plays a critical role in the
agricultural and rural economy drawing a synergy between the consumer, agriculture, and
industry on the whole. Despite its tremendous potential, it has still not achieved its full
potential. Food entrepreneurs require finance for both working capital and capital expansion
needs that has not been readily available. Mahindra Finance, thus, extends loans to finance the
food processing and agro based industries for the acquisition of the equipment and machineries
and meet working capital requirements. Mahindra Finance takes care of the funding needs of
Food and Agro based SMEs by providing specifically tailored loans keeping in view the special
requirements of these industries.
Whenever customer is in need of financial assistance, and are looking for a secured SME
loan for their business, consider Mahindra Finance. MMFSL ensure that business runs as

40 | P a g e
smoothly as possible with our quick and easy business loans for the food processing and agro
based industry.

Project finance:

Finance amount: Up to Rs. 40 crore

Margin requirement: Depends on customer profile

Tenure: Up to 6 years

Security: Normally asset cover of 1.5 times

Equipment finance

Finance amount: Up to Rs. 25 crore

Margin requirement: Flexible

Tenure: 6 months to 5 years

Security: Normally asset cover of 1.5 times

Corporate finance:

Finance amount: Up to Rs. 25 crore

Tenure: 1 year to 5 years

Security: Normally asset cover of 1.5 times

Secured business loans

Finance amount: Based on valuation of property

Security: Normally asset cover of 1.5 to 2 times

Tenure: Up to 7 years linked to business cycle

Working capital loans

Tenure of up to 36 months on working capital loans

Annually reviewed

Cycles of 30-60 days

Loan tranche payable after the cycle time

41 | P a g e

Bill discounting

Finance amount: Up to Rs. 10 crore

Validity: Up to 12 months

Lease rental discounting

Finance amount: Up to Rs. 25 crore

Tenure: Up to 6 years

Security: Mortgage of the property under lease

Financial advisory

Loan structuring

Cash position improvement and interest cost reduction

Government's incentives available for the sector

Insurance solutions

Insurance cost reduction

Insurance cover optimization

Insurance features fitment

Fixed deposits product details

The MMFSL Fixed Deposit has a Crisil rating of 'FAAA', which indicates a high level of safety

Cumulative as well as non-cumulative options available

0.25% additional rate for senior citizens.

0.35% additional interest for all Mahindra group company employees and Employees Relatives

Mutual funds
Fund Distribution (FINSMART)
Our Mutual Fund Distribution team started its operation in September 2005, and since then,
has spread widely across the Southern, Western and Northern states of India.

42 | P a g e
The entire effort here is to provide you with end-to-end solutions to help you achieve your
financial objectives in a hassle-free manner.
When it comes to investing, we understand that everyone has unique needs based on their own
financial objectives and risk profiles. And while many investment avenues are open to
investors, it is usually seen that in the longer run, equities typically outperform the others.
Which is why, we believe that systematic investment in equity has the potential to help your
money reap maximum returns and in turn, create more wealth for you in a shorter span of time.
However, investing in equity requires thorough understanding of the market and its myriad
complexities. This is where we step in with our expertise. Our advisors carefully understand
your investment objectives and risk appetite. They accordingly help you allocate your money
in schemes that are best suited for your unique needs. This way, you can hang up your boots,
lie back and watch your money do all the hard work.

Equity Mutual Funds: Predominantly investing in equity and equity-related instruments

(Diversified)

Sector Funds: Technically called Thematic Funds, investing in particular sectors

Index Funds: Investing in BSE listed stocks, managing the funds passively

Fund of funds: Investing in the best performing mutual funds

Tax Saver Mutual Funds: Section 80 C benefits, where the invested amount is locked for three
years

Debt Mutual Funds: Investing in government-related instruments

Monthly Income Plans: Where the monthly dividend is paid back to the investor

Liquid Funds: Investing in money market funds with high liquidity

Floating Rate Short term Funds: Invests in debt securities, money market instruments &
floating rate instruments with maturity profile of three months and up to 2 years

Gilt Funds: Investing in government-related securities

Fixed Maturity Plans: Fixed returns up to the maturity period

Gold Exchange Traded Funds: Predominantly investing in gold commodity stocks

New Fund Offers: The new funds launched by Fund Houses at a face value of Rs.10
Risk Documentation

Insurance services

One-stop shop for all insurance requirements (Life & General)

Superior negotiating skills through functional and technical competency

43 | P a g e

Professionally qualified team to handle your portfolio

Optimized premium outgo

Most comprehensive coverage with best rates

Documents and claims managed in the most professional manner

Provision for technical discussions with the surveyor and insurer regarding admissibility and
quantum of claims

Strong distribution network through our pan-India presence

Regular updates on the insurance

Available general insurance policies

Individual Insurance

Motor Insurance

Health Insurance

Travel Insurance

Home Insurance

Personal Accident Insurance

Corporate Insurance

Group Med claim Policy

Group Personal Accident Policy

Fire and Marine Insurance

Office Package Insurance

44 | P a g e
Chapter 4

DATA ANALYSIS AND INTERPRETATION OF FINANCIAL

STATEMENT USING RATIO ANALYSIS:
Financial statements provide summarized view of the financial position and operation of
the company. Many parties are interested in financial statement analysis to know about the
financial position of the firm. They include investors, creditors, lenders, suppliers etc. it is
process of establishing the meaningful relationship between the items of financial
statements. To know financial position of the company with the help of past and present
performance of the company, Items include Balance sheet, Profit and loss account, Reports
and Explanatory notes.
THE FINANCIAL ANALYSIS AND INTERPRETATION:
The significance of financial statement not lies in their preparation but in their analysis and
interpretation. Therefore analysis and interpretation is an attempt to determine the
importance of financial statements. It increases the meaning of accounting data, to provide
more understanding in Laymans language. That helps to forecast the future earnings,
ability to pay dividend policy etc. the analysis and interpretation are 2 terms complementary
to each other. For interpretation analysis is necessary. And analysis without interpretation
is meaningless.
ANALYSIS : A process of grouping or sub grouping of a given data for the purpose of
developing some relationships among the groups either for decisions or for future
prediction
The financial analysis involves the division of facts or information on the basis of some
definite plans and to classify them into groups on the basis of some conditions and
presenting them in most convenient, simple and understandable. Therefore analysis
involves the following:

Study and understanding of the data presented in the financial statements.

Collection of additional information necessary for interpretation.

presentation of the financial data in logical and simple manner

Grouping and sub grouping of the items given in the financial statements on the
basis of common characteristics.

45 | P a g e

Development relationship from one group to another group for further study.

The data provided in the financial statements is re arranged and methodically

classified for comparisons. For this purpose some standards are established for
comparison such as:
a.

Past year figures may be used as standard for comparison with the present
year figures.

b.

Future year estimated figures may be used as standards.

c.

Another progressive or successful firms figures may be used as standards.

d.

Over all industry figures may be used as standards for a comparison.

The relationship can also be established from one item of statement to the other item of
statement. E.g.Net profit or gross profit to sales, current assets to current liabilities, cost of
sales to inventory, fixed assets to capital etc.
INTERPRETATION:
To interpret means to put the meaning of data in simple and understandable manner to a
layman. Interpretation can be made only after analysis. It is the explanation of the
conclusion drawn from analysis in simple terms. The interpretation involves the following.
1)

Study of relationship among the items of financial statements.

2)

Study of trend over a period or actual data with the standard data used for
comparison

3)

Conclusions or inferences are put in simple terms for easy and more understanding
for a common man.

USES OR ADVANTAGES OF ANALYSIS:

1)

It helps to determine financial strength or weakness of the business firm.

2)

It highlights the significant facts and relations which cannot be understood by mere
reading of financial statements.

3)

It is based on some logical and scientific method and is useful for decisions.

4)

It is useful to understood multidirectional relationships of the various items of

financial statements.

5)

It minimizes the threat of wrong or delayed decisions.

6)

It helps to evaluate correctness and accuracy of the decisions.

46 | P a g e
CLASSIFICATION OF RATIOS:
Ratio may be classified as given below:
A. Classification according to the nature of accounting statement from which the
ratios are derived
1. Balance Sheet Ratios. These ratios deal with the relationship between two items
appearing in the balance sheet, e.g., current ratio, liquid ratio, debt equity ratio, etc.
2. Profit and loss Account Ratios. This type of ratios show the relationship between
two items which are in the profit and loss account itself, e.g. gross profit ratio, net
profit ratio, operating ratio, etc.
3. Combined or Composite ratios. These ratios show the relationship between items
one of which is taken from profit and loss account and the other from the balance
sheet, e.g., Ratio of return on capital employed, debtors turnover ratio, stock
turnover ratio, capital turnover ratio, etc.
B. Classification from the point of view of financial management or objective
1. Liquidity Ratios.
2. Capital Structure Ratios.
3. Turnover Ratios.
4.

Profitability Ratios.

1. LIQUIDITY RATIOS (short term solvency):

Liquidity means ability of a firm to meet its current liabilities. The liquidity ratios, therefore,
try to establish a relationship between current liabilities, which are the obligations soon
becoming due and current assets, which presumably provide the source from which these
obligations will be met. In other words, the liquidity ratios answer the question : will the
company probably be able to meet its obligations when they become due? the failure of a
company to meet its obligations due to lack of adequate liquidity will result in bad credit
ratings, loss of creditors confidence or even in law suits against the company. The following
ratios are commonly used to indicate the liquidity of business.
IMPORTANT LIQUIDITY RATIOS:
i.

Current Ratio.

ii.

Quick Ratio.

iii.

Absolute liquid ratio.

47 | P a g e
CAPITAL STRUCTURE RATIOS OR GEARING RATIOS (long term solvency):
Capital structure ratios are also known as gearing ratios or solvency ratios or leverage ratios.
These are used to analyze the long term solvency of any particular business concern. There are
two aspects of long term solvency of a firm
(i)

Ability to repay the principal amount when due, and

(ii)

Regular payment of interest. In other words long term creditors like debenture
holders, financial institution etc. are interested in the security of their loan
amount as well as the ability of the company to meet interest costs. They,
therefore, also consider the earning capacity of the company to know whether it
will be able to pay off interest on loan amount. Liquidity ratios discussed earlier
indicate short term financial strength whereas solvency ratios judge the ability of
a firm to pay off its long term liabilities. Important solvency ratios are discussed
below :

IMPORTANT CAPITAL STRUCTURE RATIOS:

1.

Debt equity ratio

2.

Proprietary ratio.

3.

Interest coverage ratio.

4.

Debt to total funds ratio.

5.

Capital gearing ratio.

TURNOVER RATIOS (Performance ratios or Activity Ratios):

Turnover ratios are used to indicate the efficiency with which assets and resources of the firm
are being utilized. These ratios are known as turnover ratios because they indicate the speed
with which assets are being converted or turnover over into sales. These ratios, thus express
the relationship between sales and various assets. A higher turnover ratio generally indicates
better use of capital resources which in turn has a favorable effect on the profitability of the
firm.
IMPORTANT TURNOVER RATIOS:
1. Inventory turnover ratio
2. Debtors turnover ratio
3. Fixed assets turnover ratio

48 | P a g e
4. Working capital turnover ratio.
5. Capital turnover ratio.
6. Creditors turnover ratio.
PROFITABILITY RATIOS:
Every business should earn sufficient profits to survive and grow over a long period of
time. In fact efficiency of a business is measured in terms of profits. Profitability ratios are
calculated to measure the efficiency of a business. Profitability of a business may be
measured in two ways:
1.

Profitability in relation to sales.

2.

Profitability in relation to investment.

Profitability in relation to sales indicated the amount of profit per rupee of sales. Similarly,
profitability in relation to investment indicates the amount of profit per rupee invested in assets.
If a company is not able to earn a satisfactory return on investment, it will not be able to pay a
reasonable return to investors and the survival of the company may be threatened.
IMPORTANT PROFITABILITY RATIOS:
1.

Gross profit ratio.

2.

Net profit ratio.

3.

Operating ratio and expense ratios.

4.

Return on investment

5.

Return on equity.

6.

Earnings per share (EPS).

7.

Dividend payout ratio.

8.

Dividend yield ratio.

9.

Price earnings ratio.

49 | P a g e
Data analysis and interpretation

year

1. CURRENT RATIO
2014

2013

2012

2011

Current asset

14,78,946.19

11,71,196.39

8,83,772.53

6,93,215.45

Current liability

9,07,388.71

7,46,914.99

5,86,884.38

4,21,728.92

Current ratio

1.62

1.57

1.51

1.64

Analysis:
In the year 2011 the current ratio of the firm stood at 1.64, current assets were
6,93215.45(in lakhs), and current liabilities were 421728.92(in lakhs)
In the year 2012 the current liabilities stood at 1.51 it decreased by .13, the
current assets were 883772.53(in lakhs) and current liabilities were
586884.38(in lakhs)
In the year 2013 the current ratio of the firm stood at 1.57 a slight increase of
.06 compared to previous years ratio of 1.51, the current assets were
1171196.39(in lakhs) and current liabilities were 746914.99 (in lakhs)
In the year 2014 the current ratio of the firm stood at 1.62 an increase of .05
than previous years 1.57, the current assets were 1478946.19(in lakhs) and
current liabilities were 907388.71(in lakhs)

current ratio
1.65

Axis Title

1.6

1.55

1.5

1.45

1.4

current ratio

year 2014

year 2013

year 2012

year 2011

1.62

1.57

1.51

1.64

50 | P a g e

Interpretation:
The current ratio of the firm indicates the liquidity position of the firm suppose if the ratio is 4
it means that the company current assets is 4 times more than current liability. In the above
graph year 2011 and 2014 had better liquidity ratio 1.64 and 1.62 respectively. The ideal current
ratio is 2:1.

Year

2. DEBT EQUITY RATIO

2014
2013

2012

2011

Total liability

2491503.97

1959675.57

1441851.49

1009855.38

Shareholders fund

509421.60

445457.88

295101.06

249009.42

Debt equity ratio

4.9

4.4

4.8

4.1

Analysis:
In the year 2011 the Debt equity ratio of the firm stood at 4.1, the total liability
were 1009855.38 in lakhs and shareholders fund were 249009.42 in lakhs
In the year 2012 the Debt equity ratio of the firm stood at 4.8 a slight increase
in .7, total liability were 1441851.49 in lakhs and shareholders fund was
295101.06 in lakhs.
In the year 2013 the Debt equity ratio of the firm stood at 4.4 decreased by .4
from previous year, the total liability were 1959675.57 in lakhs and
shareholders fund were 445457.88 in lakhs
In the year 2014 the Debt equity ratio of the firm stood at 4.9 a slight increase
in .5 , the total liabilities were 2491503.97 in lakhs and shareholders fund were
509421.60

51 | P a g e

debt equity ratio

4.9

4.8

4.8
4.6

4.4

4.4
4.2

4.1

4
3.8
3.6
debt equity ratio

year 2011

year 2012

year 2013

year 2014

4.1

4.8

4.4

4.9

debt equity ratio

Interpretation:
It means for every 2 shares there is 1 debt. If the debt is less than 2 times the equity, it means
the creditors are relatively less and the financial structure is sound. If the debt is more than 2
times the equity, the state of long term creditors are more and indicate weak financial structure.

year

3. DEBT RATIO
2014

2013

2012

2011

Total liability

2491503.97

1959675.57

1441851.49

1009855.38

Total assets

3166572.28

2549241.70

1856155.82

1368297.26

Debt ratio

.78

.76

.77

.74

Analysis
In the year 2011 the debt ratio was .74, the total liability were 1009855.38 in
lakhs and total assets 1368297.26
In the year 2012 the debt ratio was .77 the total liability were 1441851.49 in
lakhs, and total assets 1856155.82 in lakhs
In the year 2013 the debt ratio was .76, the total liability were1959675.57 in
lakhs, and total assets 2549241.70 in lakhs
In the year the 2014 the debt ratio was .78, the total liability were2491503.97
in lakhs, and total assets were 3166572.28 in lakhs.

52 | P a g e

debt ratio
0.79
0.78
0.78
0.77
0.77

Axis Title

0.76
0.76
0.75

0.74
0.74
0.73
0.72
debt ratio

year 2014

year 2013

year 2012

year 2011

0.78

0.76

0.77

0.74

Interpretation:
The debt ratio is shown in decimal format because it calculates total liabilities as a percentage
of total assets. As with many solvency ratios, a lower ratios is more favorable than a higher
ratio. A lower debt ratio usually implies a more stable business with the potential of longevity
because a company with lower ratio also has lower overall debt. Each industry has its own
benchmarks for debt, but .5 is reasonable ratio. A debt ratio of .5 is often considered to be less
risky. This means that the company has twice as many assets as liabilities. Or said a different
way, this company's liabilities are only 50 percent of its total assets

4. RETURN ON CAPITAL EMPLOYED

year

2014

2013

2012

2011

Employed
capital

2259183.57

1802326.71

1269271.44

946568.34

Operating
profits

134576.84

127919.88

92525.60

70244.82

53 | P a g e

ROCE

5.9%

7.09%

7.3%

7.4%

Analysis

In the year 2011 the ROCE stood at 7.4 %, the employed capital is
946568.34 and operating profits were 70244.82 in lakhs

In the year 2012 the ROCE stood at 7.3 %, the employed capital is
1269271.44 and operating profits were 92525.60 in lakhs

In the year 2013 the ROCE stood at 7.09% , the employed capital is
1802326.71 in lakhs and operating profits were 127919.88 in lakhs

In the year 2014 the ROCE stood at 5.9% , the employed capital is
2259183.57 in lakhs and operating profits were 134576.84 in lakhs

RETURN ON CAPITAL EMPLOYED

return on capital employed
7.09

7.3

7.4

year 2014

year 2013

year 2012

year 2011

5.9

7.09

7.3

7.4

8
7
5.9

6
5
4
3
2
1
0
return on capital employed

Interpretation:
The return on capital employed ratio shows how much profit each dollar of employed capital
generates. Obviously, a higher ratio would be more favorable because it means that more
dollars of profits are generated by each dollar of capital employed. Investors are interested in
the ratio to see how efficiently a company uses its capital employed as well as its long-term
financing strategies.

54 | P a g e

5. RETURN ON EQUITY
Year

2014

2013

2012

2011

Net income

88722.75

88269.18

62011.67

46310.92

Shareholders
fund

509421.60

445457.88

295101.06

249009.42

ROE

17.42%

19.82%

21.01%

18.60%

Analysis:

In the year 2011 the ROE stood at 18.60 and net income were 46310.92
in lakhs and shareholders fund were 249009.42 in lakhs.

In the year 2012 the ROE stood at 21.01 a slight increase of 2.41% than
previous year 18.60, the net income were 62011.67 in lakhs and
shareholders fund were 295101.06 in lakhs.

In the year 2013 the ROE stood at 19.82 decrease in 1.19% than
previous year, the net income were 88269.18 in lakhs and shareholders
fund were 445457.88 in lakhs

In the year 2014 the ROE stood at 17.42% decrease of 2.4% than
previous years 19.82% net income were 88722.75nin lakhs and
shareholders fund were 509421.60 in lakhs

55 | P a g e

RETURN ON EQUITY
RETURN ON EQUITY
25

20

19.82

21.01
18.6

17.42

15

10

0
RETURN ON EQUITY

year 2014

year 2013

year 2012

year 2011

17.42

19.82

21.01

18.6

Interpretation:
Return on equity measures how efficiently a firm can use the money from shareholders to
generate profits and grow the company. Unlike other return on investment ratios, ROE is a
profitability ratio from the investor's point of view not the company, investors want to see a
high return on equity ratio because this indicates that the company is using its investors' funds
effectively. Higher ratios are almost always better than lower ratios, but have to be compared
to other companies' ratios in the industry

56 | P a g e

Chapter 5

Findings suggestions and conclusion

FINDINGS:

The profitability and efficiency of the business has increased over the 5 years. The Net
profit stood at Rs.134576.84 (in lakh) for 2014-13.

The return on capital employed was 7.4 in the year 2011 followed by 7.3 is said to be
highest, the company was able to generate profits from capital employed in 2011 and
2012 but it came down in 2013 to 7.01 and 5.9 in 2014.

The Return on shareholder was highest in the year 2012 which stood at 21.01%. In the
year 2013, it stood at 19.82%, this is mainly because the Net worth has increased 1.5
times compared to 2012.

There is a continuous increase in the Debt-equity ratio from 2011 to 2014

The Trade payables of the company has decreased in the year 2014 which stood at
43785.76 in lakhs than previous years 47884.82 in lakhs. Indicating that the firm was
prompt in making payments.

Trade receivable was 768.40in lakhs in 2012 and has increased to 1435.36 in lakhs in
the year 2014

From 2012 to 2013, the total revenue of the firm has increased by 1.3 times whereas
the total expenses of the firm have increased by 1.4 times. The company has to ensure
that this does not continue; else its profitability will be eroded.

The company has spent a considerable amount in providing benefit to its employees,
there had been increase benefits expenses incurred by company from 2011 till 2014
there is increase in amount spent by the company for employees.

SUGGESTIONS:

A strong supply chain helps Mahindra finance obtain the right resources from suppliers
and delivery the right product to customers in a timely manner.

57 | P a g e

Any increase in the NPA levels of the Company could adversely affect the Companys
performance. Therefore, the company has to concentrate on the movement of the NPA.

In the present era, adopting of new technology is very essential for the survival in the
market. Superior technology allows Mahindra finance to better meet the needs of their
customers.

Mahindra finance can expand their business in fragmented markets and increase market
share.

In online market segment Mahindra finance has not made much improvement.
Therefore, they can expand their business through online market.

Mahindra finance has a well-established market in the domestic sector. It has not yet
entered the international market where the growth opportunities are high. So they can
expand their market in the international markets.

Mahindra finance has a lot of competitors and also the threat of new entrants is
increasing. Unique products help distinguish Mahindra finance from competitors and
also help retain its customers.

Recruiting of local people, not only helps the company to keep the costs lower but also
have an understanding of a particular region.

CONCLUSION:
Mahindra Finance exists and prospers only because of the customer. They respond to the
changing needs and expectations of their customer speedily and effectively. They always
sought the best people for the job and give them freedom and opportunity to grow. Consistent
economic growth has given rural India the capability and the confidence to surge ahead. At
Mahindra Finance, they are helping drive this rural opportunity through their products and
services. They value rural aspirations, strengthen relationships of trust with customers and
evolve a viable business model focused on their needs, with a vision of creating a self-reliant
India, they have empowered millions of ambitious individuals by providing flexible financing
opportunities to transform their dreams and help them to rise. Today, they are not just one of

58 | P a g e
the trusted NBFCs of the country; they empower those who reside at the lower end of the social
pyramid. The Indian NBFC arena has seen a lot of transformation, especially due to change in
regulations pertaining to NBFCs and emergence of newer financial products. As this study
shows, Mahindra Finance has done well in terms of meeting customers aspirations. It will have
to ensure that in the future it is able to connect with the people in many more ways and offer
more variety in its products and services. This will enable the company to scale newer heights
in the days to come

59 | P a g e

ANNEXURE
BALANCE SHEET 2014-2013

60 | P a g e

61 | P a g e

BALANCHE SHEET 2012-2011

62 | P a g e

PROFIT AND LOSS ACCOUNT 2012-2011

63 | P a g e

REFERENCE
Introduction to accounting

http://www.edu-

resource.com/accounting/types-ofaccounting.php
About Mahindra

Mahindrafinance.com

Mahindra financial statement

Mahindrafinance.com

balance sheet and profit and loss