I.

1 INTRODUCTION
Financial 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: a) Continue or discontinue its main operation or part of its business; b) Make or purchase certain materials in the manufacture of its product; c) Acquire or rent/lease certain machineries and equipment in the production of its goods; d) Issue stocks or negotiate for a bank loan to increase its working capital; e) Make decisions regarding investing or lending capital; f) Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business. The financial statements are the basis for decision making not only for the management but also for all other outsiders who are interested in the affairs of the firm such as investors, creditors, customers, suppliers, financial institutions, and employees, potential investors, government and the general public. The analysis and interpretation of financial statements depend upon the nature and type of information available in these statements. Goals The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm, just like a doctor examines his patient before making his conclusion regarding the illness the before giving his treatment. So Financial analysts often assess the firm's: 1. Profitability It is the ability to earn income and sustain growth in both short-term and longterm. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;

2. Solvency It is the ability to pay its obligation to creditors and other third parties in the longterm. 3. Liquidity it is the ability to maintain positive cash flow, while satisfying immediate obligations; 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a companys stability requires the use of the income statement and the balance sheet, as well as other financial and non-financial indicators. Methods: A number of methods, tools, devices are used to study the relationship between different statements. An effort is made to use those devices which clearly analysis the position of the enterprise. These Techniques/tools are used. 1. Comparative financial statement analysis 2. Common size statement analysis 3. Trend analysis 4. Funds flow analysis 5. Cash flow analysis 6. Ratio analysis 7. Break-even analysis Financial ratios face several theoretical challenges: They say little about the firm's prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms. One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm's performance.

Seasonal factors may prevent year-end values from being representative. A ratio's values
may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.
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 Financial ratios are no more objective than the accounting methods employed. Changes
in accounting policies or choices can yield drastically different ratio values.

They fail to account for exogenous factors like investor behavior that are not based upon
economic fundamentals of the firm or the general economy.

I.2.NEED FOR THE STUDY

Various account balances appear in the financial statements. These account balances do not represent homogeneous data, so this requires an analysis of data in the financial statements so as to bring some homogeneity to the figures shown in the financial statements. In a financial analysis a ratio is used as the index yardstick for evaluating the financial position and performance of a firm. The analysis is very useful for both the inside and outside groups. The analysis helps to make a qualitative judgment about the firms financial position and performance. The ratio indicates a quantitative relationship which can be used to make a qualitative judgment. The analysis of financial statements which results in the presentation of data helps
the management, shareholders and creditors in forming an idea about the company. To understand this, conceptual idea is not only sufficient but also it needs a wide knowledge and understanding of the factors that are affecting them. Now, the study is all about analyzing, how this has been possible for a company whose figures were budgeted to show finally ended with high positively.

So the analysis of financial reports is utmost importance to know the position of a company in different aspects like profitability, liquidity, solvency etc.

1.3. SIGNIFICANCE OF THE STUDY

Understanding the past is a prerequisite for anticipating the future. The future plans of the firm should be laid down in view of the firms financial strengths and weakness. Thus financial analysis is the starting point for making plans, before using any sophisticated forecasting and
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planning procedures. So here the study focuses on measuring the financial performance of the company which guides the firms shareholders as well as stake holders in making decisions relating to future. Management, creditors, investors and others use the information contained in these statements to form judgement about the operating performance and financial position of the firm based on financial analysis only. Users of financial statements and get further insight about financial strengths and weaknesses of the firm if they properly analyze information reported in these statements. Management should be particularly interested in knowing financial strengths of the firm to make their best use and to be able to spot out financial weaknesses of the firm to take suitable corrective actions. Financial analysis become inevitable for any organization and its dependers in order to make any step forward whether it is relating to short term like working capital requirements and long term needs like procurement of finance or usage of funds in a way that reaps best amount benefits to shareholders as well as stake holders.

1.4. SCOPE OF THE STUDY

The study is limited to Kusalava International Limited, Krishna district. It is limited to a span of 5 years i.e. 2005-06 to 2009-10. The study is based on the quantitative data available. The study was carried in Kusalava International Limited for a period of eight weeks. The scope of the study is of immense significance because it is carried out by taking into account the very recent balance sheets of the company.

I.5.OBJECTIVES OF THE STUDY

The Study is based upon the part of Financial Performance that has been taken into consideration i.e. Financial Statements and Analysis. The purpose of current study is to analyze the financial performance of CHUKKAPALLI KUSALAVA INTERNATIONAL LTD., and to
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know the present financial position. Accordingly the present work is the modest attempt in this direction to appraise the financial performance of CHUKKAPALLI KUSALAVA

INTERNATIONAL LTD., by adopting various tools of financial analysis, like ratio analysis, funds flow statements and other performance statements. Apart from the major objective of assessing financial performance the study is also concentrating on the following ancillary objectives: 1. To find out Financial Strengths and weaknesses of the firm. 2. To know the Liquidity Position of a firm, Capital expenditure, Dividend and extent of external financing.

3. To find out important tools of Short-term, Long-term Financial Planning.

4. To know the ability of the firm to meet its current obligations.

5. To know the overall operation efficiency and performance of the firm with the help of profitability ratios

6. To know the detailed information about Cash Flow and Funds Flow Statements. 7. To know the companys riskiness and future financial needs how soundly is it financed.

8. To offer suggestions if necessary for improvement in its financial performance.

I.6.METHODOLOGY
Methodology is an intensive and purposeful search for knowledge and for the understanding social and physical phenomenon. It is the method for the discovery of true values in scientific way. The information for the study has been obtained from two sources namely:
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 Primary Data Secondary Data

1. Primary Data: It is the information collected directly without any reference. In this study it was mainly the interviews with concerned officers and staff, either individually or collectively, sum of the information has been verified or supplemented with Personal observations. The data includes. o Having a discussion with finance manager. o Guidelines are taken from Asst. General Manager (F&A). 2. Secondary Data: o Annual reports of the company. o Textbooks relating to the financial management. o World wide we

1.7. LIMITATIONS OF THE STUDY

The period of study is only 8 weeks which was not enough to go in the detailed aspects of the study. The reliability of the study depends upon the available information furnished by the officials. Financial accounting doesnt take into account the price level changes. The study is conducted with the available data from the annual reports, internal report etc. Figures wherever appearing are rounded to the nearest numerical. The study is only pertaining to Kusalava International limited. The study is limited to a turnaround period of 2005-2010.

2.1. INDUSTRY PROFILE

Automotive industry designs, develops, manufactures, markets, and sells motor vehicles, and is one of the world's most important economic sectors by revenue. The term automotive industry usually does not include industries dedicated to automobiles after delivery to the customer, such as repair shops and motor fuel filling stations. Industry background: Driving the most luxurious car has been made possible by the stiff competition in the automobile industry in India, with overseas players gathering the same momentum as the domestic participants. In 2009, the automobile industry is expected to see a growth rate of around 9%, with the disclaimer that the auto industry in India has been hit badly by the ongoing global financial crisis. Major segments of automotive industry: Auto components amount to 31.5% share of the global automobiles and components industry group's value. The global automotive component industry is highly diverse and comprises of various product segments like engine parts, drive transmission and steering parts, suspension & braking parts, electrical parts and other auto components parts. Engine Parts segment in the automotive component industry comprises of different parts like engine parts, fuel delivery system and products such as pistons, piston rings, engine valves, carburetors, and diesel-based fuel delivery systems. Engine parts form one of largest product segment of the automotive components industry and have a production share of 31%. A technology intensive segment, engine parts are moving towards improved designs for optimal fuel consumption and lesser emission. The latest trend in this sector is of outsourcing a part of the engine from vendors. Electrical Parts segment comprises of generators, starter motors and spark plugs. An important and relatively larger product segment - engine parts are gaining popularity at a faster pace in the
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global automotive parts & components industry. Electric start mechanism in different scooter and motorcycles is the latest concept in the automobile industry. Electrical parts sector contribute around 9% to the auto components industry. Drive Transmission and Steering Parts segment has sub segments like gears, wheels, steering systems, axles, and clutches. Having 19% share, this segment is considered the largest product segment after engine parts segment. The emergence of different leading automotive manufacturers is intensifying the competition in the sector especially for products like gears and clutches. Suspension and Braking Parts segment comprises of automobile components like brakes, brake assemblies, leaf springs, shock absorbers, brake linings. Suspension and braking parts segment has around 12% share in the global auto component industry.

AUTOMOBILE INDUSTRY IN INDIA

The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. India manufactures over 11 million vehicles (including 2 wheeled and 4 wheeled) and exports about 1.5 million every year. It is the world's second largest manufacturer of motorcycles, with annual sales exceeding 8.5 million in 2009. India's passenger car and commercial vehicle manufacturing industry is the seventh largest in the world, with an annual production of more than 2.6 million units in 2009. In 2009, India emerged as Asia's fourth largest exporter of passenger cars, behind Japan, South Korea and Thailand. A chunk of India's car manufacturing industry is based in and around the city of Chennai, also known as the "Detroit of India". With the Indian city accounting for 60 per cent of the country's automotive exports. Gurgaon and Manesar near New Delhi are hubs where all of the Maruti Suzuki cars in India are manufactured. The Chakans corridor near Pune, Maharashtra is another vehicular production hub with General Motors, Volkswagen/ Skoda, Mahindra, Tata in the process of setting up or already set up facilities. Ahmadabad with Tata Motors Nano plant and Halols with General Motors in Gujarat, Aurangabad in Maharashtra, Kolkatta in West Bengal are some of the other automotive manufacturing regions around the country.
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Following India's growing openness, the arrival of new and existing models, easy availability of finance at relatively low rate of interest and price discounts offered by the dealers and manufacturers all have stirred the demand for vehicles and a strong growth of the Indian automobile industry. The data obtained from ministry of commerce and industry, shows high growth obtained since 2001- 02 in automobile production continuing in the first three quarters of the 2004-05. Annual growth was 16.0 per cent in April-December, 2004; the growth rate in 2003-04 was 15.1 per cent the automobile industry grew at a compound annual growth rate (CAGR) of 22 per cent between 1992 and 1997. With investment exceeding Rs. 50,000 crore, the turnover of the automobile industry exceeded Rs. 59,518 crore in 2002-03. Including turnover of the auto-component sector, the automotive industry's turnover, which was above Rs. 84,000 crore in 2002-03, is estimated to have exceeded Rs.1,00,000 crore ( USD 22. 74 billion) in 2003-04. . According to the Society of Indian Automobile Manufacturers, annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads.

GLOBAL AUTOMOBILE INDUSTRY

The global automotive industry is a highly diversified sector that comprises of manufacturers, suppliers, dealers, retailers, original equipment manufacturers or OEMs, aftermarket parts manufacturers, automotive engineers, motor mechanics, auto electricians, spray painters or body repairers, fuel producers, environmental and transport safety groups, and trade unions. The automobile and automotive parts & components manufacturers constitute a major chunk of automotive industry throughout the world. The automotive manufacturing sector consists of automobile and light truck manufacturers, motor vehicle body manufacturers, and motor vehicle parts and supplies manufacturers. This sector is engaged in manufacturing of
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automotives and light duty motor vehicles, motor vehicle bodies, chassis, cabs, trucks, automobile and utility trailers, buses, military vehicles, and motor vehicle gasoline engines. Low cost vehicles namely scooters, motorcycles, mopeds and bicycles have led to the massive growth of some of the fastest developing economies like China and India. The future of automotive industry in the Asian countries such as Thailand, Philippines, Indonesia, and Malaysia is bright and promising because of the ASEAN free trade area under which the export tariffs are very less. On a global scale, the assets of the top ten automotive corporations accounts for 28% of the assets of the world's top 50 companies, 29% of their employment and 30% of their total sales. In the year 2006, the United States of America sold around 16 h of this industry. Million of new automobiles, Western Europe sold around 15 million, while China and India sold 4 million and one million respectively. Latin America, Middle East, Eastern Europe, China, Malaysia and other South-Asian nations are now emerging as the dominant markets of the automotive industry. Most of the major automotive players are shifting their production facilities in these emerging markets with the main purpose of gaining better access and reduction in their production costs. There is estimation that the automotive markets in South America and Asia will witness a boom in the near future. The various factors such as cheap financing and prices discounts, rising income levels and infrastructure developments will assist in the growth and development of automotive sector in the majority of Asian actions.

The Top Automaking Nations:

United States, Japan, China, Germany and South Korea are the top five automobile manufacturing nations throughout the world. The United States of America is the world's largest producer and consumer of motor vehicles and automobiles accounting for 6.6 million direct and spin-off jobs and represents nearly 10% of the $10 trillion US economy.

MAJOR MANUFACTURING REGIONS

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Northeastern United States and Southern Great Lakes Region, Northwestern Europe, Western Russia and the Ukraine, and Japan are the major manufacturing regions of automotive in the world. In North America, the prominent automotive manufacturing regions are New England, New York and the Mid-Atlantic, Central New York, Pittsburgh/Cleveland, Western Great Lakes, St. Lawrence Valley, Ohio and Eastern Indiana, Kanawha and middle Ohio Valley, St. Louis, the Southeastern region, Gulf Coast, Central Florida, and the West Coast. The European Union has the largest automotive production regions in the World. The key automobile manufacturing regions are United Kingdom, Rhine-Ruhr River Valley, Upper Rhine - Alsace Lorraine region, and the Po Valley in Italy. In the Western Russian and Ukraine Region, the leading industrial regions are Moscow, the Ukraine region, the Volga region, the Urals regions, and the Kuznetsh Basin Region.

Major Industry Players The worldwide automobile industry is largely dominated by five leading automobile manufacturing corporations namely Toyota, General Motors, Ford Motor Company, Volkswagen AG, and Daimler Chrysler. These corporations have their presence in almost every country and they continue to invest into production facilities in emerging markets namely Latin America, Middle East, Eastern Europe, China, Malaysia and other markets in Southeast Asia with the main aim of reducing their production costs.

Global Automobiles and Components % Share, (By Volume 2004)

General Motors - 10.10 % Toyota - 7.90 % Ford - 7.70 % Others - 74.30 %

KEY INDUSTRY DRIVERS The highlighting features of global automotive industry are:
1.

Offers support to other industries such as iron, steel, rubber, glass, plastic, petroleum, textiles, oil & gas, paints & coatings, transportation industries.
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2.

Rising foreign investments have led to the rapid growth in terms of automobile production and exports. Overseas companies are making huge investments and are installing extensive production capacities in developing countries.

3.

Continuous investment in research & development has resulted in increased productivity and better quality automobiles, automotive accessories and parts.

4.

Increase in standards of living and purchasing power parity have resulted in the increase demand of automobiles especially four-wheelers in developing nations, mostly in South Asian region.

5.

This sector provides employment to major chunk of human population in the world i.e. 25 million. This industry not only provides millions of jobs to the people, but also produces billions of dollars in terms of worldwide revenues.

6.

Adequate infrastructural facilities in form of power supply, machinery, capital, ready availability of raw materials and labor help in the tremendous growth future outlook

7.

The automotive industry is witnessing tremendous and unprecedented changes these days. This industry is slowly and gradually shifting towards Asian countries, mainly because of saturation of automobile industry in the western world. The principal driving markets for Asian automotive industry are China, India and ASEAN nations.

Conclusion: It is believed that by 2015, the global auto component industry would reach US$ 1.9 trillion. With different low cost countries emerging at a fast pace in this industry, it is also expected that around 40% of the money will be sourced from such countries. India is one of such low cost countries. At present, it has only 0.4% of the global auto components trade of US$ 185 billion. By the year 2025, it is expected that India might be among the top five auto component economies.

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2.2. COMPANY PROFILE

History:
It was started in 1964 as a small foundry under the visionary leadership of Mr. Kusalava Rao (chairman) today KUSALAVA INTERNATIONAL LTD has transformed itself into a truly professional organization with revenues close to 25 million USD. Today KUSALAVA INTERNATIONAL LTD supplies critical engine components to original equipment manufacturers in India, USA and Europe. The company has established itself as the preferred supplier of cylinder liners worldwide. Kusalava International ltd., the front runner of Indian Cylinder Liner Manufacturing Industry, well tuned to hi-tech environment always reaching new heights in fulfilling world class customer requirements. A cylinder liner is a cylindrical part to be fitted into an engine block to form a cylinder. It is one of the most important functional parts to make up the interior of an engine the cylinder liner, serving as the inner wall of a cylinder, forms a sliding surface for the piston rings while retaining the lubricant. Kusalava is enjoying a major share in domestic OEM requirements as well as After Market in India for the past 3 decades. It has spread its wings to global market and now exports across the globe. In recognition to the quality excellence, Kusalava received TS 16949:2002 Certification in October 2004 from TUV renewed up to 2007. Kusalava Group activities cover almost every nook and corner in the automobile sector right from FOUR/TWO wheeler dealerships to spare parts, Leasing and Finance activities. Products Manufactured: TIGER POWER - The Tough Parts

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Most of the vehicle manufacturers in the Indian Domestic market have a tie-up with international manufacturers Like Mazda, Hino, Mercedes Benz, and Mitsubishi. Kusalava International Limited supplies their products to the below OEMs in India who has international collaboration.

LIST OF DOMESTIC O.E.M. CLIENTELE SUPPLY MANUFACTURER COLLABRATION SHARE IN % 1. Ashok Leyland ltd 2. Telco 3. Eicher Motors 4. Bajaj Tempo 5Swaraj Mazda 6. Mahindra & Mahindra 7. VST Tillers Tractors Ltd 8. Cummins India ltd Hino-Japan & British Leyland Mercedes Benz Mitsubishi Daimler Benz Mazda Nissan Mitsubishi Cummins inc USA 50 70 100 100 100 100 100 10

International market:
And for the International Market, Kusalava International Limited had a start 4 years back supplying the products after quality validation for the below customers. Interestingly, Kusalava has worked in tandem with the above International collaborated Indian OEMs to achieve their stringent quality requirement both in Foundry and Machining. The above OEMs contribute 30% of Kusalava International Limited turnover. Technical officers from Kusalava have played a vital role in establishing and understanding the International specification for the domestic OEMs and

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had good report for working hand in hand to meet the drawing print specifications. For the International Mar Kusalava International Limited is supplying the products after quality validation for the below customers. Kusalava is supplying liners to "Ford Certified Rebuilders" at USA. They are A) AER MANUFACTURING INC., CARROLLTON TX B) FRANKLIN ENGINE & PARTS INC., P.O BOX# 991293 CA C) SEMINOLE SALES BIRMINGHAM AL D) TOMADUR ENGINE COMPANY CAPITAL AVENUE CA DOMESTIC AFTER MARKET Kusalava International Limited has a good market share in domestic market with the "Tiger Power" brand and is the biggest liner manufacturer in India. Kusalava has well established off site warehouses and branch set-ups across India for market and customer access.

Company Products
Kusalava manufacturers Liners/Sleeves in Cast Iron and S.G.Iron, Centri Cast Valve seat Inserts and Alfin Piston Inserts. As a new development Kusalava has started manufacturing the engineering items out of its own technology like 3 mts., pipes for ash disposal for the thermal power plants, sugar crushers material, and motor frames for the heavy electrical motors. Headquartered at Vijayawada, India, Kusalava also has its offices in Houston, USA, Paris, France and Stuttgart, Germany to serve Our Products Range Include: -Cylinder liners -Sleeves -Centrifugal cast -Phosphated liners
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-Ductile iron sleeves -Ring castings -Valve seat inserts -Valve guides -Alfin piston inserts -Centrifugal casted pipes tubes -Cast iron liners -Cast iron cylinder liners -Cast iron cylinder sleeves -Pipes for ash disposal -S.G. Iron liners -S.G iron sleeves -Ductile iron liners -Nodular iron sleeves -Cylind

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Technical Strengths
1) Automated Foundry 2) Spectro Check (German Make) for instant Chemical Analysis 3) Centri Cast Pipes up to 3.0 mts., Length 4) Hardness Testing (Rockwell and Brinell) 5) Tensile and Bending, yield strength, % of alongation (up to 40MT) 6) Microscopes: Graphite morphology (etched & un etched conditions) upto 500x 7) CNC Machines for machining complicated profiles 8) Plateau honing (Nagel make) machine with auto size control 9) WMW Grinding / Honing Machines (German Make) for maintaining stringent tolerances 10) Quality control equipped with latest Pneumatic/Electronic Gauges and Profile projectors 11) Geometrical Accuracies: Taylor Hobson-Roughness testing equipment, Optical profile projector

Technology Up gradation
Kusalava has developed the basic technical requirement for the manufacturing of their products, and in line to develop the technical strength hires experts from Germany for upgrading the foundry technology in line to the international practices. Till today Kusalava has taken 3 rounds of experts views to validate their process and to fine tune their existing process for better productivity. Most significantly, Kusalava deputes their technical and managerial personnel for the training in different institutes for betterment of their knowledge and practices. Mr.Prasad R.K Chukkapalli, Managing Director of the company has visited Japan under AOTS programme for 15days technical training in Quality Systems during the first week of October02.

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Product Development and Outsourcing

New Thrust is identified in the developing/sourcing group of products related to the Automotive/Engineering Industry. In this line Kusalava has achieved a significant development in the Domestic and International Sourcing Requirement. Highlighted some of the products developed in "Tiger Power" brand and bulk supplied for After Market customers are Piston Assemblies, Valve Guides and Gaskets, TP Springs etc.

Network and Logistics

In India At present Kusalava has central office/warehouse at Vijayawada, and has warehouses and trained personnel across India for identification and follow up. Our own fleet of trucks play a major role in logistics for on time deliveries as per customers requirement. The central warehouses in India are: 1) Vijayawada 2) Chennai (Madras) 3) Cuttack 4) Nagpur 5) Rajkot 6) Ghaziabad Through Sea Being an established 2 preferred brand in US "Tiger Power", Kusalava International Ltd., supplies 2 to 3 containers per month for replenishing the parts and new parts developed for both existing and new customers. Having movement of frequent containers from factory to US made us to prove an economical sourcing to compensate the high freight cost for different customers in USA. There by the freight cost per piece is economically shared by volume of parts.

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At USA Our central warehouse at Houston TX with 10, 000 Sq. Ft., area has facility to stock and distribute parts across US and Canada. Tiger Power has around 24 factory warehouses for easy to lift option for customers across US and Canada. ERP Software Kusalava has in house software development Centre, and presently implementing self developed ERP System 'Konline' integrating Finance, Manufacturing, and Distribution & HR activities across INDIA and USA offices. At Konline, we understand the strategic role supply management must play in a corporation today and the significant impact a supply chain management strategy can have on earnings. Supply Chain Management Solutions helps companies transform supply strategy into a competitive advantage.

KUSALAVA GROUP COMPANIES

Kusalava Motors (P) Ltd : The Company is involved in the activity of trading 2 Wheelers and 4 Wheelers, it is the official dealer for TVS Motor Bikes (Earlier known as TVS SUZUKI) and Hyundai Cars in the cities of Vijayawada, Guntur, Ongole, Bhimavaram and Gudivada. Kusalava Informatics: Started of as an in-house software arm for developing an integrated ERP solution, the division has been spun off into a separate company in 2006. Since then the company has been working on many projects with overseas clients and has seen unprecedented growth. Please visit www.kusalavainfo.com. Kusalava Finance: The Company has been established way back in 1970 and is engaged in the business of financing automobiles. The company has been able to carve a niche of itself in the automotive sector by offering clients customized financing options as per their needs. Kusalava Power: The Company is involved in the business of power generation and has a total generating capacity of 3 MW.
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Kusalava Realty: The Company is involved in the business of developing housing, apartments and shopping malls. Bharat Automobiles: The company activities involve trading is automobile spare and represents a host of reputed manufacturers like Bharat Forge for Crank Shafts, Timken for Bearing, Mahle for Pistons and Kusalava for Liners. The company operations and network spread across entire south India. Kraus Inc: The Company is a trading firm located in Houston, Texas, USA and is involved in the activity of sourcing automotive components from India and China to OEM's in USA. The company has products stocked in 22 warehouses across USA to supply to customers on a JIT basis. Sneha Biotech: The Company is research firm, which focuses on development of products using biotechnology for agriculture, marine industry and humans as well. The products are used as a substitute to chemicals & fertilizers in agriculture and aqua industries and are used as substitutes to drugs for humans. KE Auto Electronics Pvt. Ltd / Efftronics: Manufacturers of Electronic display boards Mile stones: 1964: Kusalava International Limited comes into existence as M/S Bharat Industries. Products: Brake drums during the inception year itself supplies were started to OEM, Bajaj Tempo. 1972: Started production of grey iron cylinder liners. Started supplies to major road transport corporations (STU's) 1982: Supplies to replacement market with TIGER POWER-TOUGH PARTS Brand name 1986: Installed the first Dual Track Induction Furnace in India. 1987: Became the major source for Defence Vehicle Factory 1990: Exported its first consignment to New Zealand.
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1992: Tiger Power became the major supplier of cylinder liners in After Market 1994: Emerged as the largest cylinder liner manufacturer in India. 1995: Kuslava commissions its first overseas office in Houston, Texas, and USA ISO: 9002 certified. 1996: Sales figures crossed of 1 million USD. Kuslava becomes a limited company. 1998: QS-9000 certified 1999: Started production of Ductile Iron castings. 2000: ISO/TS 16949 certified. 2002: Turn Over crosses 10 millions USD. 2003: Introduced Six Sigma Process. Awarded by ACMA for Best Six Sigma Project in 2003 2004: Introduced Lean Manufacturing Practices. Received the best supplied award from EICHER MOTORS, for outstanding contribution to supply chain management. Awarded by ACMA for Best Six Sigma Project in 2004 again. 2005: Entered into an agreement with the Market Leader Darton Sleeves, USA for supplying High Grade Ductile iron liners to the Drag Racing Market. 2006: Total PM Kick off on July 3rd 2006. Kusalava commissions new plant at pantnagar, Uttarakhand. 2007: Turn over crosses 20 million USD. Kusalava commissions new plant at Visakhapatnam, Andhra Pradesh. 2009: Implemented SAP across Four Manufacturing Locations.

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Today KUSALAVA INTERNATIONAL LTD supplies critical engine components to original equipment manufacturers in India, USA, Europe. The company has established itself as the preferred supplier of cylinder liners worldwide. KUSALAVA had started supplying its products to the aftermarket under the brand name TIGER POWER since 1982. It has a dominating presence in the aftermarket and enjoys the confidence of major engine rebuilders/reborers, OEMs and mechanics. Currently it possesses a market share of 35% in India and 30% in USA. Even Exports a major share of its production to various countries across the globe viz., Italy, U.K., France, New Zealand, Bangladesh, Australia, Malaysia, Thailand, Mauritius and the Middle East. It had wide-spread, well established networks in India, USA, Canada and Europe to serve its clients on 24x7 bases. Tiger Power offers a wide range of ?The Tough Parts' like Cylinder Liners/Sleeves, Valve Seat Inserts, Valve Guides, Pistons, Piston Pins, Gaskets, Alfin Nickel Inserts, cast sleeves for aluminum blocks, cast iron/Ductile Iron Pipes. It caters to Marine, Industrial, Automotive, refrigeration, sand compressors, Tractor, Aeronautical and Truck Business. It also caters to the aftermarket requirements by indirectly supplying the liners in Bulk to Liner manufacturers. TIGER POWER TOUGH PARTS has dovetailed their process to give peak performance with best quality at affordable price? A tangible result. The company is proud to say now TIGER POWER TOUGH PARTS is complete Global. Kusalava International is one of the leading manufacturers of critical engine parts, supplying to major OEMs in India, USA & Europe. Kusalava International also has a dominating presence in the After Market, its products are marketed under the brand name Tiger Power, and currently Tiger Power possesses a market share of 35% in India and 30% in USA. Backed by a strong Research and Development team with over four decades of manufacturing excellence in engine critical parts, today Kusalava has emerged as the market leader for developing superior products at cost effective prices in the global market. Its global clients on a 24x7 basis.

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FINANCIAL STATEMENTS INTRODUCTION Accounting process involved recording, classifying and summarizing various business transactions. The aim of maintaining various records is to determine profitability of the

enterprise from operation of the business and also to find out is financial position. Financial statements are in term reports, presented annually and reflect a division of the life of an enterprise in to more or less arbitrary accounting period more frequently a year. The financial statement is an organized collection of data according to logical and consistent accounting procedures its purpose is to convey of a business firm. Definitions: According to John N.Myer The financial statements provide a summary of the accounts of business enterprises, the balance sheet reflecting the assets, liabilities, and capital as on a certain date and the income statement showing the results of operations during a certain period. The term financial statement generally refers to following basic statements: 1. 2. 3. 4. The income Statement. The Balance Sheet. A Statement of Retained earring. A Statement of Changes in financial position.

Technical Strengths
1) Automated Foundry 2) Spectro Check (German Make) for instant Chemical Analysis 3) Centri Cast Pipes up to 3.0 mts., Length 4) Hardness Testing (Rockwell and Brinell) 5) Tensile and Bending, yield strength, % of alongation (up to 40MT) 6) Microscopes: Graphite morphology (etched & un etched conditions) upto 500x
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7) CNC Machines for machining complicated profiles 8) Plateau honing (Nagel make) machine with auto size control 9) WMW Grinding / Honing Machines (German Make) for maintaining stringent tolerances 10) Quality control equipped with latest Pneumatic/Electronic Gauges and Profile projectors 11) Geometrical Accuracies: Taylor Hobson-Roughness testing equipment, Optical profile projector

Technology Up gradation
Kusalava has developed the basic technical requirement for the manufacturing of their products, and in line to develop the technical strength hires experts from Germany for upgrading the foundry technology in line to the international practices. Till today Kusalava has taken 3 rounds of experts views to validate their process and to fine tune their existing process for better productivity. Most significantly, Kusalava deputes their technical and managerial personnel for the training in different institutes for betterment of their knowledge and practices. Mr.Prasad R.K Chukkapalli, Managing Director of the company has visited Japan under AOTS programme for 15days technical training in Quality Systems during the first week of October02.

Product Development and Outsourcing

New Thrust is identified in the developing/sourcing group of products related to the Automotive/Engineering Industry. In this line Kusalava has achieved a significant development in the Domestic and International Sourcing Requirement. Highlighted some of the products developed in "Tiger Power" brand and bulk supplied for After Market customers are Piston Assemblies, Valve Guides and Gaskets, TP Springs etc.

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Network and Logistics

In India At present Kusalava has central office/warehouse at Vijayawada, and has warehouses and trained personnel across India for identification and follow up. Our own fleet of trucks play a major role in logistics for on time deliveries as per customers requirement. The central warehouses in India are: 1) Vijayawada 2) Chennai (Madras) 3) Cuttack 4) Nagpur 5) Rajkot 6) Ghaziabad Through Sea Being an established 2 preferred brand in US "Tiger Power", Kusalava International Ltd., supplies 2 to 3 containers per month for replenishing the parts and new parts developed for both existing and new customers. Having movement of frequent containers from factory to US made us to prove an economical sourcing to compensate the high freight cost for different customers in USA. There by the freight cost per piece is economically shared by volume of parts.

At USA Our central warehouse at Houston TX with 10, 000 Sq. Ft., area has facility to stock and distribute parts across US and Canada. Tiger Power has around 24 factory warehouses for easy to lift option for customers across US and Canada.

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ERP Software Kusalava has in house software development Centre, and presently implementing self developed ERP System 'Konline' integrating Finance, Manufacturing, and Distribution & HR activities across INDIA and USA offices. At Konline, we understand the strategic role supply management must play in a corporation today and the significant impact a supply chain management strategy can have on earnings. Supply Chain Management Solutions helps companies transform supply strategy into a competitive advantage. FINANCIAL STATEMENTS INTRODUCTION Accounting process involved recording, classifying and summarizing various business transactions. The aim of maintaining various records is to determine profitability of the

enterprise from operation of the business and also to find out is financial position. Financial statements are in term reports, presented annually and reflect a division of the life of an enterprise in to more or less arbitrary accounting period more frequently a year. The financial statement is an organized collection of data according to logical and consistent accounting procedures its purpose is to convey of a business firm. Definitions: According to John N.Myer The financial statements provide a summary of the accounts of business enterprises, the balance sheet reflecting the assets, liabilities, and capital as on a certain date and the income statement showing the results of operations during a certain period. The term financial statement generally refers to following basic statements: 1. 2. 3. 4. The income Statement. The Balance Sheet. A Statement of Retained earring. A Statement of Changes in financial position.

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Financial Statements

Income Statement
Income Statement:

Balance Sheet

Retained Earnings

Financial Position

The income statement (also termed as profit and loss account) is generally considered to be the most useful of all financial statements. It explains what has happened to a balance sheet dates. The nature of the income which is the focus of the income statement can be well understood if a business is taken as an organization that uses inputs to produce output. Balance Sheet: It is a statement of financial position of a business at a specified moment of time. It represents all assets owned by the business at a particular moment of time and the claims of the owners and outsiders against those assets at that time. The important distinction between as

income statement is for a period while balance sheet is on a particular date. Statement of Retained Earnings: The term retained earnings means the accumulated excess earnings over losses and dividends. The balance shown by the income statement is transferred to the balance sheet through this statement after making necessary appropriations. It is fundamentally a display of things that have caused the beginning of the period retained earnings balance to be changed in to the one show in the end-or-the-period balance sheet. Statement of changes in financial position: The balance sheet shows the financial condition of the business at a particular moment of time while the income statement discloses the results of operations of business over a period of
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time for a better understanding of the affairs of the business, it is essential to identify the movement of working capital or cash in the statement of changes in financial position.

Nature of Financial Statements: The financial statements are prepared on the basis of recorded facts. The recorded facts are those which can be expressed in monetary terms. The statements are prepared for a

particular period, generally one year. The transactions are recorded in a chronological order as and when the events happen. The financial statements by nature are summaries of the items recorded in the business and there statements are prepared periodically generally for the accounting period. The following points explain the nature of financial statement 1. Recorded Facts: The term Recorded facts; refers to the data taken out from the accounting records. The records are maintained on the basis of actual cost data. The figures of various accounts such as cash in hand, cash at bank, bills receivables, Sunday debtors, fixed assets are taken as per the figure recorded in the accounting books. As the recorded facts are not based on replacement costs the financial statements do not show current financial condition of the concern. 2. Accounting Conversions: Certain accounting converters are followed while preparing financial statements. The

conversion of valuating inventory at cost or market price, whichever is lower, is followed. The valuing of assets at cost less depreciation principle for balance sheet purposes statements comparable, simple and realistic. 3. Postulates: The accountants make certain assumption while making accounting records. One of these assumptions is that the enterprise is treated as a going concern. The other alternative to this postulate is that the concern is to be liquidated the concern. So the assets are shows on a going concern basis. Another important assumption is to presume that the value of money will remain in the same in different periods.
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4. Personal Judgments: Even though certain standard accounting conversions are followed in preparing financial statement but still personal judgment of the accountant plays on important part. Characteristics of financial statement: The financial statements are prepared with a view to depict financial position of a concern. The financial statements should be prepared in such a way that they are able to give a clear and orderly picture of the concern. The ideal financial statement has the following characteristics. 1. Depict true financial position: The information contained in the financial statements should be such that a true and correct idea is taken about the financial position of the concern. 2. Attractive: The financial statements should be prepared in such a way that important information is underlined so that it attracts the eye of the reader. 3. Comparability: The results of financial analysis should be comparable. The financial statements should be presented in such a way that they can be compared to the previous years statements. Previous years figures in the balance sheet. 4. Brief: If possible, the financial statements must be prepared in brief. The reader will be able to form as idea about the figures.

Importance of financial statements: Financial statements contain a lot of useful and valuable information regarding profitability financial position and future prospective of business concern. financial statement to different parties may be summarized as follows: 1. Management:
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The utility of

The financial statements are useful for assessing the efficiency of different cost canters. The management is able to decide the course of action to be adopted in future. 2. Creditors: The trade creditors are to be paid in a short period. The CRS will be interested in current solvency of the concerns. The calculations of current ratio and liquid ratio will enable the creditors to assess the current financial position of the concerns in relation to their debts.

3. Investors: The investors include both short-term and long term investors. They are interested in the security of the principal amounts of loan and regular payments by the concern. The investors

will not only analyze the parent financial position but will also study the future prospectus and expansion plans of the concern.

4. Government: The financial statements are used assess tax liability of business enterprises. The Government studies economic situation of the country from these statements. These statements enable the government to find out whether business is following various rules and regulations or not. 5. Trade Associations: These associations provide service and protection to the members. They may analyze the financial statements for the purpose of providing facilities to these members. They may develop standard ratios and design uniform system of accounts. 6. Stock Exchange: The stock exchange deal in purchase and sale of securities of different companies. The financial statements enable the stock broker to judge the financial position of different concerns. The fixation of prices for securities etc. is also based on the statements.
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LIMITATIONS OF FINANCIAL STATEMENTS Financial statements are relevant and useful for the concern, still they do not present a final picture of the concern, and otherwise misleading conclusions may be drawn. The financial statements suffer from following limitation: 1. Ignoring of non-monetary aspects: These statements are prepared with the help of accounting information which mainly consider monetary aspects only. The value of business depends both on qualitative and quantitative factors. 2. Historical cost: The statements are prepared on the basis of historical cost. The values of fixed assets are at their original cost less depreciation. The balance sheet value are not shown the value of assets may be sold more over they do not reflect the market value which is as important factor in determining the solvency of an enterprise.

3. Personal Judgment: In preparing financial statements certain items are left to the personal Judgment of the accountant. If any accountant is not following accounting principles correctly his judgment will give wrong picture. 4. Conversion of Conservation: Due to conversion of conservation the income statement may not disclose true income of the business. This is due to ignorance of probable incomes and accounting probable losses.

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FINANCIAL ANALYSIS Financial statements include trading & profit and loss account and profit& loss appropriation account and balance sheet. These statements give only the information to the management regarding the financial conditions, and profits which help the management to

control the business. Therefore, for the better understanding of the financial statements, the selfappraisal of the business and for the better judgment of outsiders regarding the performance of the company, the analysis of the financial statement is done. Meaning of financial analysis: Analysis of financial statement is the process of critically examining of the data of the financial accounts. The main function of this analysis is to find the strengths and weaknesses of the business by using different tools. Financial analysis serves the interests of the shareholders, debentures, long-term and short-term investors, bankers, creditors, politicians, journalists, legislators, economists and researchers by classifying, re-arranging,. Re-grouping the financial statements. Thus it helps the interested parties to reach on significant statements. Definition: In the words of John M.Myer financial statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements and a study of the trends of these factors as shown in a series of statements. Thus, the financial statement analysis refers to the classification, diagnosis and comparison of the data of financial statements so that the profitability, financial position managerial efficiency and weakness of the business may be disclosed. Procedure for analysis: 1. Before the analysis, the objective and extent of analysis and interpretation should be

determined. Extent of analysis is based on the objective of analysis. 2. All the required financial data should be collected and studied from financial statements. If required, the financial statements should be re-arranged or re-organized to find the same nature of item.
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3. To reduce the complexity of the financial statements, the figures of the financial statements, the figures of the financial statements should be approximated to the thousand or hundred. 4. To create a relationship among the income statement and financial position statement, different analysis techniques as ratio analysis, trend and common size should be used. 5. If there are given some additional information relating to interpretation accept financial statement those must also be collected. 6. If it is required for the comparison, the financial data should be re-arranged in the tables in a logical way. 7. To interpret the financial data and to draw a conclusion, the proper tool (technique) as average comparative statement should be used. 8. The analyzed trend of the data should be interpreted keeping in mind the economic fact of the business. 9. The interpreted data and conclusion drawn should be presented to the management in a brief and clear report. Types of financial analysis: There are different parties who have their interest in the financial statements. Their purpose of analysis of the financial statements is also different. On the basis of their usage and purposes the financial analysis is classified as below: Analysis of financial statements

According to material used

According to modus operandi

Internal analysis

External analysis

Horizontal analysis

Vertical analysis

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aaaa

According to Material used: Internal analysis: Internal analysis of financial statement is done by such person who can access the books of accounts and other related information of the business. Generally such persons are the employees, management executives, sometimes government, regulatory bodies, or court. Generally internal analysis of financial statement is done for the purpose of management. External analysis: External analysis of financial statement is done by such parties who cannot approach the books of accounts as investors, creditors and general public. This analysis is based on the published financial statements. They cannot access to the enterprise for data. According to Modus Operandi: Horizontal analysis: it is also known as dynamic analysis or trend analysis. When the financial data of a company for several years are analyzed and compared, such type of analysis is called horizontal analysis. For this type of analysis the data of the different years are kept in the different columns horizontally. The percentage increase of one years figures is taken as base years figures. The base year may be the beginning year, preceding year or different year. Thus horizontal analysis may be done for periodical long-term, trend analysis and comparative study. Vertical analysis: it is also known as structural analysis or static analysis. Under this type of analysis a single set of financial statement prepared on a particular date is analyzed. In this

analysis only the quantitative relationship is created or one item of the financial statement is compared with other items of that statement as percentage of assets to total assets and percentage of profit to sales etc., The example of this analysis is the common size statement and financial ratio.

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Techniques of analysis and interpretation; To simplify the financial statements for the purpose of analysis and interpretation the following techniques/tools are used. Comparative financial statement analysis Common size statement analysis Trend analysis Funds flow analysis Cash flow analysis Ratio analysis Break-even analysis

Comparative Financial Statement Analysis:

These statements are very important for the analysis and interpretation. Inter-firm financial statements can be prepared for the comparison of the results and financial position of two firms. Similarly, the inter-period financial statements can be prepared. Inter-period comparison is done very easily by inter-period financial statements. Both the income statement

and balance sheet can be prepared in the form of comparative financial statements. The comparative financial statements contain the following items. Absolute figures (amount in Rs. As given in the final accounts), Absolute figures expressed in terms of percentages. Increase of decrease in absolute figures in terms of money value. Increase or decrease in terms of percentages. Comparison expressed in ratios. Percentages of totals.

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Comparative Income Statements: The income statement (profit & loss A/c) gives the results of the operations during a definite period. It reveals the profit carried or loss incurred by the cancers. The comparative study if income statement for more than 1 year may enable us to know the program of the concern. First two columns gibe figures of various items for two years. The third and fourth column used to show increase or decrease in figures in absolute adopted in preparing comparative balance sheet. 1. In first step, find out the changes in absolute figures i.e., increase or decrease should be calculated. 2. In second step percentage of change should be calculated with the help of following formula. Change in amount Percentage of change = Base year amount x 100

Guidelines for interpretation: The increase or decrease in sales should be compared with increase or decrease in cost of goods sold. If increase in sales is more than the cost of goods sold. It means that the profitability of the concerns is increased. The amounts of gross profit should be studied. Operating profits should be studied. The express should be deducted from gross profit to find out operating profit and then operating incomes should be added. The next step is some of the non operating expenses are to be deducted from the operating profits and non operating incomes should be added to get net profit The opinion should be formed the profitability of the business concern and it should be given at the end.

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omparative balance sheet: The balance sheet prepared on a particular date reveals the financial position of the concern on the date to study the trends of business over a period of time comparative balance sheet reveals the cause for changes in the financial position on amount of various transactions. The comparative studies throw light on financial policies adopted by management. The comparative balance sheet consists of two columns for the original data. A third column used to show increase or decrease in various items. A south column containing the parentage of increase or decrease may be added. Guide lines for interpretation of balance sheet: 1. The short term financial position can be studied comparing the working capital of both years. 2. To study the liquidity position changes in liquid assets must be ascertain if there is any increase in liquid assets. We must understand that is an improvement in the liquidity position of the concern and vice versa. 3. A high increase in sundry debtors and bills receivable mean in increase in risk in collecting the amount of dues. 4. 5. A high increase in closing stock may mean that decrease in the demand. Long term financial position of the business concern can be analyzed by studying the changes in fixed assets, long term liabilities and capital. 6. Fixed assets must be compared with long term loans and capital. If the increase in fixed assets is more than the increase in long term financiers from the working capital which is not good.

Common Size Statement Analysis

The comparative financial statement are only concerned with the changes but they fo not show the relationship of the different items of balance sheet with total assets or total liabilities. In the common size statement the relation of individual items of the balance sheet to the total assets is shown in the form of percentage. In the case of common size balance sheet, in assets side the total of assets is treated as a common base. On the basis of it the percentage of other assets are
38

calculated. The total of all percentage of individual assets becomes hundred which represent the total of asserts. In the liability side of the balance sheet the total of liabilities is taken a common base (100). Then the percentage for other liabilities is computed on the basis of its common base. The total of all percentages of individual liabilities become 100. In case of common size profit and loss account total sales are assumed t be equal to 100, then parentages of all other items of P&L a/c are calculated on the common base of sales. Common Size Income Statement: The items in income statement can be shown as percentages of sales to show the relation of each item to sales. A significant relationship can be established between items of income statement and volume of sales. The increase in sales will certainly increases selling expression and volume of sales. The increase in sales will certainly increases selling expresses and not administrative or financial expenses. In case the volume of sale increases to a considerable extent, administrative and financial expenses may go up. In case the sales are declining, the selling expenses should be reduced at once. So, a relationship is established between sales and other in income statement and this relationship is helpful in evaluating operational activities of the enterprises. Common Size Balance Sheet: Statement in which balance sheet items are expressed as the ratio of each asset to total assets and the ratio of each liability is expressed as a ratio of total liabilities is called common size balance sheet. The common size balance sheet is a horizontal analysis. The comparison of figures in different periods is not useful becomes total figure may be affected by a number of factors. It is not possible to establish standard norms for various assets. The trends of year to year may not be studied and even they may not give proper results Trend analysis: It is an important technique for the analysis and interpretation of financial statements. Generally, the trend means tendency. To know the tendency of the data of the financial statement, the data of four to five years are required. Data may be taken from the balance sheet and profit and loss account. It depends on the objective of analysis. To compute the tendency one years figures are taken as base year. On the basis of this base year the other years relative
39

figures the tendency of a particular item is determined. The trend analysis of the business activities and financial position may be done in the following ways. Trend percentage ratio Graphic or diagrammatic presentation Objectives of trend analysis: It is of great significance in making comparative study of financial statements for several years. It shows the direction of movement over a period of time the following are the objectives f trend analysis. To draw a comparative chart and make a comprehensive study of financial statements Trend analysis indicates the direction of movement or changes in them over a long period of time To have a better view of things unaffected by short term fluctuations, by studying a long term trend percentage analysis. Limitations of trend analysis: This tool has its own limitations. It is necessary that the base year must be normal year. Further, it places all items at par in the base year with the result that a variation in the least significant item may receive an emphasis out of all proportion to its importance. Trend percentage ratio: To calculate the trend percentage the following procedure is adopted. First of all the original figures of the financial statement are set in a statement. One years figure (the earliest year) is assumed as base years figure i.e., 100. In order to compute the trend percentage the each and every item of the other years are divided by the corresponding item f the base year and multiplied by 100.

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Graphic or diagrammatic presentation The trend percentage ratio discussed in the previous method may be represented by graphs and diagrams. Two or three variables can be represented on graphs very easily. If

different variables of the financial statements are re presented by graphs and diagrams, those quickly draw the human attraction. Now-a-days there is a trend to show the important variable on the graphs. These diagrams are also being published with the financial statements. Break even analysis: This is an important technique of the management to take some decision. Under this analysis the costs of production are divided into fixed and variable cost. From sales the fixed cost is subtracted to find the contribution on the basis of contribution, the break-even point is determined. It is that point of sales or production at which the company gains no profit and suffers no loss. Several managerial decisions as make or buy, shut down point, price determination, etc. are taken with the help of break-even analysis.

Ratio Analysis:
Financial statements are very useful to provide the information to its users. But the absolute figures have no value in itself if they are not correlated with each other. The

independent figures have no value, until these figures are not associated with each other. If we associate the profit to sales and sales to capital, these figures will give a significant meaning. Under the ratio analysis such type of relationships between different items are calculated to analyses and interpret the financial statement. Financial analysis depends to very large extents of the use of ratios through there are other equality important tools of such analysis. Thus, a direct examination of the magnitude of two released items is somewhat enlightening but the comparison is greatly facilitated by expressing the relationship as a ratio. Ratio analysis of business enterprises enters on efforts to derive quantitative measures or guides concerning the expected capacity of the firm to meet its future financial obligation or expectations present and past data are used for the purpose and whatever extrapolations appear necessary.

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They are made to provide no indication of feature performance. Alexander Walt, who criticized the bankers for its lap sided development owing to their decisions regarding the grant of credit on current ratios a lone, made the presentation of an elaborate system of ratio analysis in1919.

Meaning of ratio: Ratio is mathematical relationship between two items and group of items of the financial statements. Under the ratio analysis several rations are calculated and then studied to draw inferences. Ratio is defined by experts as follows. According to R.N.Anthony a ratio is simply one number expressed in term s of another. According to the accountants hand book by Wixon, Kell and Bedford, A ratio is an expression of the quantitative relationship between two numbers.

Classification of ratios: There is no standard classification of the accounting ratios. Some authors classify the ratios as per the financial statements, some authors as per the importance of ratio and specific purpose of ratios and some on the basis of users. There is one more classification of ratio that is functional classification. 1. Profitability ratios: The main objective of the business is to earn the profit. Profitability of a business means the profit earning capacity of the business while profit means the actual amount of profit. The profitability of a business depends upon the quantity of sales, production and financial resources. Profitability checks the managerial efficiency in utilization of the resources of the business. Profitability ratios are computed on the basis of the following factors:

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1.1. Based on turnover a) Gross profit ratio: It is the relationship of gross profit and net sales. This ratio is also called gross profit margin. It is calculated in percentage. It is computed with the help of following formula:

Gross profit ratio

= Gross profit Net sales

X100

b) Net profit ratio:

It is a relationship between net profit and the net sales and is expressed in percentage. Net profit is determined by adjusting the operating and non-operating incomes and expenses and loss in the gross profit. If net profit is being computed to find out the operational efficiency of the business, net profit before tax should be used to compute this ratio. If the purpose of calculation of this ratio is to declare the rate of dividend, net profit after tax must be considered. It is useful to do inter-firm comparison of profitability. This ratio is calculated with the help of following formula: Net profit Net profit ratio = Net sales 1.2 Profitability ratio based on capital or assets: To check the profitability and efficiency of the business, profitability ratios based on capital or assets are more useful than the ratios based on sales. The theory behind this thought is that the amount of profit is earned on the total assets/capital. Therefore, the profitability ratios must be calculated on the basis of capital, assets or investments. Under this group the following ratios are calculated: X100

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a) Return on equity capital: This ratio is the relationship between the net profits available for the equity shareholders and the equity share capital. The net profit available for equity shareholders means that amount of net profit which comes after deducting interest, tax and the dividend to preference shareholders. Equity share capital means the paid up value of ordinary share capital and reserve and surplus. This ratio is also computed into percentages.

Net profit after dividend on preference shares Return on equity capital = Equity share capital b) Return on capital employed: It is also known as return on investment. This ratio is computed to judge the overall efficiency of the business. This ratio reveals the relationship between the income and the capital employed. In other words it reveals whether the amount of capital employed has been properly used or not in the business to generate the incomes. Higher ratio shows the more efficient use of the capital employed in the business. Profits after taxes, interest and dividend Return on capital employed = Capital employed c) Earnings per share: The profitability of the shareholders investment can also be measured in many other ways. One such measure is to calculate the earnings per share. The earnings per share is calculated by dividing the profit after taxes by the total number of ordinary shares outstanding X100 X100

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Profit after taxes Earnings per share ` 2. Financial ratios: It is of two typed liquid and solvency ratios: = Number of shares outstanding X100

2.1 Liquidity ratio: These ratios are also known by the name of short-term solvency ratio. These ratios are relating with the short-term financial position of the company. Liquidity ratios are used to find out the ability of the company to pay its short-term obligation includes creditors, banks, money lenders suppliers, employees etc. a) Current ratio: This ratio is also known by the name of bankers ratio or working capital ratio. This ratio reveals the relationship between current assets and current liabilities. Current ratio is used to measure the short-term liquidity positions of a company means short-term solvency. This ratio is calculated by matching the current liability with current assets as below Current assets Current ratio = Current liabilities It is the test of short term solvency of company. in other words it is the indicator of the shortterm solvency of the company. The ideal current ratio is 2:1 if a company has this ideal current ratio, it is assumed that its current assets are sufficient to meet its current liabilities or its working capital is adequate. b) Quick ratio:
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X100

This ratio is also called by the name of acid test ratio. Current ratio is used to measure the short-term solvency. If the amount of stock is heavy in the current assets, current ratio may mislead. Inventories are considered to be less liquid so quick assets include current assets less inventory. The higher of the ratio shows the better ability of the company to discharge its short-term liabilities as and when required. The ideal liquid ratio is 1:1.

Quick assets Quick ratio = Current liabilities X100

c) Cash ratio: Since cash is the most liquid asset, a financial analyst may examine cash ratio and its equivalent to current liabilities. Trade investment or marketable securities are equivalent of cash; therefore, they may be included in the computation of cash ratio Cash + Marketable securities Cash ratio = Current liabilities X100

d) Net working capital ratio: The difference between current assets and current liabilities excluding short-term bank borrowing is called net working capital or net current assets. NWC is sometimes used as a measure of a firms liquidity. It is considered that, between two firms, the o ne having the larger
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NWC has the greater ability to meet its current obligations. This is not necessarily so; the measure of liquidity is a relationship rather than the difference between current assets and current liabilities. NWC, however, measures the firms potential reservoir of funds. It can be related to net assets. Net working capital NWC ratio = Net Assets X100

2.2 Solvency (leverage) ratios: Solvency indicates companys ability to meet its long term liabilities. Therefore these ratios are called long-term solvency ratios. The long term liability of a company comprises of debentures, long-term loans unpaid installment on hire purchase, and long0-term creditors. The long-term creditors take interest in those ratios which highlight the long-term financial position of a company so that they may ensure regarding the repayment of their principal amount on maturity as well as regular interest on their dues. a) Debt equity ratio: This ratio reveals the relationship between external equities and internal equities. Therefore, it is also called the external internal equity ratio. It is computed on the basis of the following External equities or debts Debt equity ratio = Internal equities or equities It is taking as an indicator of the degree of protection enjoyed by the outsider creditors. Generally, a ratio of 1:1 is considered satisfactory. The lower debt equity ratio expresses that there is greater claim of the shareholders over the assets of the company which is considered good from the point of view of the management.
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b) Proprietary ratio: This ratio is also known by the name of net worth to total assets or equity ratio. It indicates a relationship between net worth and total assets. It expresses the extent to which the shareholders own business.

Shareholders fund or net worth Proprietary ratio = Total assets Shareholders fund includes the equity capital preference capital total accumulated reserves and surplus. It is calculated to determine the long-term solvency of the company. The higher the proprietary ratio reveals the stability of the business in the long run the lesser ratio indicates the failure of the business in long run. The ideal proprietary ratio of 1:2 is considered. The total shareholders funds (net worth) are compared with the total tangible assets of the company. c) Fixed asset ratio: This ratio reveals the relationship between fixed assets and long-term fund and capital Long term fund+ capital Fixed asset ratio = Fixed Assets Long-term fund = equity capital+pref capitaql+reserves and surplus+long term loans Fixed assets = fixed assets less depreciation+ long term investements+shaers in subsidiaries This ratio reveals whether the long-term funds are being used to acquire the fixed assets or not. Fixed assets should be purchased from the long-term funds. 1:5 of the fixed asset ratio may be considered satisfactory.
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d) Interest coverage ratio: This ratio is also known as debt-service ratio. It expresses the relationship between the interest on long-term loans and other obligations and the net profit before interest on tax. It is computed by the following formula Net profit before interest and tax Interest coverage ratio = Interest on long term loans This ratio indicates the number of times interest covers the net profit. 6-7 times of the ratio is considered good. The high ratio shows the more safety to the long term creditors. If it is too much high, it indicates that the company is not using the loans from outsiders. 3. Activity ratio: It is of four types: Inventory turnover ratio Capital employed to turnover Total assets turnover Fixed asset ratio a) Total assets turnover This ratio ensures whether the capital employed has been effectively used or not. This is also the test of managerial efficiency and business performance. Higher total capital turnover ratio is always required in the interest of the company. The ratio is measured on the basis of the following formula: Sales Total assets to turnover = Capital employed X100

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b) Fixed assets turnover ratio: Fixed assets are used in the business for producing goods to be sold. The effective utilization of fixed assets will results in increased production and reduced cost. It also ensures whether investment in the assets have been judicious or not. The following fomula is used for measurement of the ratio: Sale or cost of sales Fixed asset turnover ratio = Fixed assets X100

c) Working capital turnover: This ratio measures the relationship between working capital and sales. The ratio shows the number of times the working capital results, in sales working capital as usual is the excess of current assets over the current liabilities. The following formula is used to measure this ratio Sale of cost of sales Working capital turnover ratio = Working capital X100

d) Inventory turnover ratio This ratio measures how many times on an average stock is sold during the year. Promptness of sale indicates better performance of the business. It also shown efficiency of the concern. Immediate sale of goods produced requires further production which consequently activates the productive process and it responsible for rapid development of the business. Higher inventory turnover ratio is always beneficial to the concern. Lower inventory turnover ratio shows that the stock is blocked and not immediately sold. It shows the poor performance of the business and

50

inefficiency of the management. The ratio measures the effectiveness of the stock policy of the management. It should be constant effort of the management to dispose of stock at the earliest. Cost of goods sold Inventory turnover ratio = Average stock Cost of goods sold= opening stock+purchases+direct expenses-closing stock CASH FLOWS MEANING OF CASH FLOW NATURE Cash plays very important role in the entire economic life of a business. A firm needs cash to make payments to its suppliers, to insure day-go-day expenses and to pay salaries, wages, interest and dividends etc. In fact, what blood is to a human body, cash is to a business enterprise? It is very essential for a business to maintain an adequate balance at cash. But many a times, a concern operates profitability and yet it becomes very difficult to pay taxes and dividends this movement of cash is of vital importance to the management. A statement of changes in the Financial Position of firm on cash basis is called a cash flow statement. A cash flow statement summarizes the causes of changes in cash position of a business enterprise between dates of two balance sheets. This statement is very much similar to the statement of changes in Financial Position Prepared on working capital basis, i.e., a funds flow statement, except that a cash flow statement focuses attention on cash instead of working capital. It is called a cash flow statement because it describes the Inflow (Sources) and out flow (use) of cash. Management of Cash: Importance, Sydney Robbins describes Cash what a strange commodity. A business wants to get hold of it in the shortest possible time but to keep the least possible quantity on hand Increased sophistication in the handling of cash has enabled companies to cut down on the balances needed to sustain any given level of operations.
51

Cash in a firm may be compared to the blood of the human body. Excess cash should be avoided and cash should not be kept idle. It should be utilized in an optimum manner, which results in profits and solvency as well as matching of inflow and outflow of funds. As in case of inventory, a finance manager has to follow five Rs of money as follows: Right quality for liquidity Right quality of money Right time for solvency Right source Right cost of capital

Effective Cash Management: The following are raw strategies for effective Cash Management: Cash planning, the requirement of cash has to be planned carefully, for this purpose two kinds of cash forecast short term and long-term are required estimating the cash inflow as well as cash outflow (i.e., cash budget). Managing the cash flows. Both the cash inflow and cash outflow are to be managed carefully in such a way as to improve the cash inflow and delay the cash outflow. Productive utilization of excess funds. If the excess is permanent, it may be utilized for expansion or for repayment of long-term loans, which will reduce the burden of Interest. But if the excess is temporary. It may be invested in short-term deposits for 15 days or more or in marketable securities even if it is for 15 days. It carries an interest rate of 3% per annum. It may be noted that current accounts will not fetch any interest. Optimum cash level. The cost of excess cash and dangers of cash deficiency are to be considered while working out the optimum cash level. Managing the cash flow: Cash flow includes both inflow and outflow. A firm has to maintain an optimum cash balances for meeting the day-to-day operating expenses and for precautionary purposes in order to maintain the liquidity and solvency. A good bank relationship has to be maintained. Cash
52

inflow may be improved by increasing the cash sales, speedy and decentralized collections from the customers. In this connection lock-box system can be operated. Under this system, the company rents lock-box from post officers and the customers are requested to main cheques to the local box. The companys bank branch collects all such cheques. Deposits then in the bank and remit the funds on the same day by telegraphic transfer to the companys account at Head Office. Similarly cash outflow also should be controlled by delaying the disbursements to the suppliers and other creditors. If the salary payments are made weekly the system can be changed to fortnightly or monthly payments. Finally a finance manager may use the float very continuously as it is a very risky one. There will be a gap between the issue of a cheque by the firm and collection of cheque by the customer. During the period of gap, the bank balance will be higher and cash book balance will be lower. These funds can be utilized carefully and very cautiously by monitoring the position at bank daily. But it is a risky game then cash book may show even negative balance. Similarly cheques deposited by the firm will take time or

realization. All these points should be taken care of while using the float. Excess funds should be utilized for productive purposes as already discussed above. Liquidity is the life blood of company liquidity maybe defined as the ability of a company to realize value in money in time and with certainly. M.H.B. Abd EI-Mottal suggests a comprehensive test of liquidity with the help of the following three ratios. i. ii. iii. Liquid assets to current assets (LA/CA) Working capital to current assets Stock to current assets. Finally the objects should be to keep the cash available in the right amount and at the right time to meet the financial obligations as the minimum cost. Optimum Cash Level: If the firm maintains lower cash balance, its liquidity position is affected. For urgent payments it has to sell some marketable securities incurring penal interest and transaction costs. But the profitability will be higher by utilizing the released funds if the firm maintains the higher cash balance its liquidity will improve but profitability will decline by lasting the interest on it,
53

which involves an opportunity cost. Thus the optimum cash balance is to be arrived by matching the transaction costs and opportunity costs Similar to EOQ formula, optimum cash balance is the amount of cash balance at which the sum of both the transaction costs and opportunity costs will be minimum.

Uses and significance of cash flow statement: Cash flow statement is of vital importance to the financial management. It is an essential

tool of financial analysis for short-term planning. The chief advantages of cash flow statement are as follows: 1. Since a cash flow statement is based on the cash basis of accounting, it is very useful in the evaluation of cash position of a firm. 2. A projected cash flow statement can be prepared in order to know the future cash position of a concern so as to enable a firm to plan and coordinate its financial operations properly. By preparing this statement a firm can come to know as to how much cash

will be needed into the firm and how much cash will be needed to make various payments and hence the firm can well plan to arrange for the future requirements of cash. 3. A comparison of the historical and projected cash flow statements can be made so as to find the variations and the deficiency or otherwise in the performance so as to enable the firm to take immediate and effective action. 4. A series of intra-firm and inter-firm cash flow statements reveal whether the firms liquidity (short-term paying capacity) is improving or deteriorating over a period of time and in comparison to other firms over a given period of time. 5. Cash flow statement helps in planning the repayment of loans, replacement of fixed assets and other similar long-term planning of cash. It is also significant for capital budgeting decisions.

54

Limitation of Cash Flow Statement: Despite a number of uses, cash flow statements suffer from the following limitations: a. It is difficult to precisely define the term cash. There are controversies over a number of items like cheques, stamps, postal orders, etc. to be included in cash. b. A cash flow statement reveals the inflow and outflow of cash but the exclusion of near cash items from cash obscures the true reporting of the firms liquidity position. c. Working capital being a wider concept of funds, a funds flow statement presents a more complete picture than cash flow statement. Determinants of Cash flow: The following factors will determine the cash flow: a. b. c. d. e. f. g. h. Operating decisions-operating expenses, sales revenue and net profit. Capital expenditure decisions-investment decisions, expansion etc. Credit policy-credit period allowed to customers and followed by suppliers. Inventory decisions-inventory control and management. Tax on profits-tax planning, investment in IDBI etc. Payment of Interest, dividends and issue of bonus shares. Productive decisions. Liquidity gaps arising out of delay in cash realization, utilization of working capital for capital expenditure, high fixed charges obligation and finally low generation of internal resources which may be due to lower production and sales etc. Procedure for preparing a Cash Flow Statement: Cash flow statement shows the impact of various transactions on cash position of firms. It is prepared with the help of financial statements, i.e., balance sheet and profit and loss account and some additional information. A cash flow statement starts with the opening balance of cash and balance at bank, all the inflows of cash are added to the opening balance and the out flows of cash are deducted from the total.

55

The balance i.e., opening balance of cash and bank balance plus inflows of cash minus outflows of cash is reconciled with the closing balance of cash. The preparation of cash flow statement involves the determining of: Inflow of cash Out flows of cash

[A] Sources of cash Inflows: The main sources of Cash flows are: 1. 2. 3. 4. Cash flow from operations Increase in existing liabilities or creation of new liabilities. Reduction in or Sale of Assets. Non-trading Receipts.

[B] Application of cash or cash flows: 1. 2. 3. 4. Cash lost in operations. Decrease in or discharge of liabilities. Increase in or purchase of assets. Non-trading payments

56

SPECIMEN OF REPORT FORM OF CASH FLOW STATEMENT

Cash Balance in the beginning. ADD: Cash Inflows: Cash flow from operations Sale of Assets Issue of shares Issue of debentures Raising of loans Collection from debentures Non trading receipts such as Dividend received Income tax refund Less: Applications or outflow of cash: Redemption of preference shares Redemption of debentures Repayment of loans Purchase of assets Payment of dividend Payment of taxes Cash lost in operations Cash Balance at the end:
57

Rs.

xxx xxx xxx xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx xxx xxx Xxx

FUNDS FLOW STATEMENT

INTRODUCTION

The basic financial statement i.e., the balance sheet and profit and loss account (or) income statement of business, reveal the net effect of the various transaction on the operational and financial position of the assets and liabilities of an undertaking at particular point of time. It reveals the financial status of the company. The assets side of a balance sheet shows of the

deployment of resources of an undertaking while the liabilities side indicates its obligation i.e., the manner in which these resources were obtained. The profit and loss account reflects the

results of the business operations for a period of time. It contains a summary of expenses incurred and the revenues realized in an accounting period. Both these statement provide the essential basic information on the financial activities of a business. The balance sheet gives a static view of the resources (liabilities) of a business and uses (assets) to which these resources have been but at a certain point of time. It does not disclose the cause for changes in the assets and liabilities between two different points of time. The profit and loss account, in a general way, indicates the resources provided by operations. But there are many transactions that take place in an undertaking and which do not operate through profit and loss account. Thus another

statement has to prepare to show the change in the assets and liabilities from the end of one period of time to the end of another period of time. The statement is called a statement of changes in financial position or a funds flow statements. The funds flow statement is a statement which shows the movement of funds and is a report of the financial operations of the business undertakings. It indicates various means by

which funds were obtained during a particular period and the way to which these funds were employed. In simple words it is a statement of sources and applications of funds.

MEANING AND CONCEPT OF FUNDS

The term funds has been defined in a number of ways. In a narrow sense, it means cash only and a funds flow statement prepared on this basic is called a cash flow statement such a statement enumerates net effects of various business transactions in cash and takes into account receipts and disbursements of cash.
58

 In a broader sense the term funds refers to money values in whatever form it may exist. Here funds means all financial resources used in business whether in the form of men, material, money, machinery and other. In a popular sense the term funds means working capital i.e., the excess of current assets over current liabilities, the working capital concept of funds has emerged due to the fact that total resources of business are invested partly in fixed assets in the form of fixed capital and partly kept inform of liquid or hear liquid form as working capital.

Meaning and concept of flow of funds:

The term flow means movement and includes both inflow and outflow the term flow of funds means transfer of economic values from one assets of equity to another flow of funds is said to have taken place when any transaction makes changes in the amount of funds available before happening of the transaction. If the effect of transaction results in the increase of funds it is called a source of funds and if it results in the decrease of funds, it is known as an application of funds. Further, in case the transaction does not change funds. It is said to have not resulted in the flow of funds. According to the working capital concept of funds, the term flow of funds refers to the movement of funds in the working capital. If any transaction results in the increase in working capital it is said to be a source or inflow of funds and it results in decrease of working capital, it is said to be an application or outflow funds.

FUNDS FLOW STATEMENT

Funds flow statement is the statement of sources and application of funds.

It is also

called as funds where got and where gone statement Almond Coleman observed. The funds statement in a statement summarizing the significant financial changes which have occurred between the beginning and the end of companys accounting period. There are 4 steps involving in preparation of funds flow statement:

59

a. b. c.

Ascertain the funds from operations. Preparation of statement of changes. Computation of any missing figures as to profit or loss on Sale of fixed assets purchases or sale of fixed assets and the amount of depreciation on fixed assets etc.

d.

Finally preparation of funds flow statement.

Foulke defines this statement as: A statement of sources and appreciation of funds in technical device designed to analyse the changes in the financial condition of a business enterprise between two dates In the words of Anthony the funds flow statement describes the sources from which additional funds were derived and the use to which these sources were put. F.C.W.A. in glossary of management accounting terms defined funds flow statement as a statement either prospectus or retrospects, setting out the sources and applications of the funds of an enterprise. The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same. Thus funds flow statement in a statement which indicates various means by which the funds have been obtained during a certain period and the ways to which these funds have been used during that period. The term funds used here means working capital i.e., the excess of current assets over current liabilities. Funds flow statement is called by various names such as sources and application of funds; statement of changes in financial position, sources and uses of duns; summary of financial operation, where came in and where gone out statement, where got, where gone statement, movement of working capital statement, movement of funds statement, funds received and disbursed statement; funds generated and expended statement; sources of increase and application of decrease; funds statement etc.

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Difference between funds flow statement and income statement Funds Flow statement 1 Income Statement It does not reveal the inflows and outflows of funds but depicts the items of expenses and incomes to arrive all the figure of profit or loss.

It highlights the changes in the 1. financial position of a business and indicates the various means by which funds were obtained during a

particular period and the ways to which these funds were employed. 2. It is complementary to Income 2

Income statement is not prepared from funds flow statement.

statement income statement helps the preparation of funds flow statement. 3. While preparing funds flow statement 3. both capital and revenue items are considered. 4. There is no prescribed Format for preparing a funds flow statement. 4.

Only

revenue

items

are

considered.

It is prepared in a prescribed format.

USES, SIGNIFICANCE AND IMPORTANCE OF FUNDS FLOW STATEMENT A funds flow statement is an essential tool for the financial analysis and is of primary importance to the financial management. Now-a-days, it is being widely used by the financial analysis, credit granting institutions and financial managers. The basic purpose of a funds flow statement is to reveal the changes in working capital on the two balance sheets dates. It also describes the sources from which additional working capital has been financial and the uses to which working capital has been applied such a statement is particularly useful in assessing the growth of the firm its resulting financing these needs. By making use of projected funds flow statement, the management can come to know the adequacy or inadequacy of working capital even in advance. One can plan the intermediate and long-term financial of the firm, repayment
61

of long-term debts, expansion of the business, allocation of resources, etc., the significance or importance of a funds flow statement can be were followed from its various uses given below: (1) It helps in the analysis of financial operations: The financial statements reveal the net effect of various transactions on the operational and financial position of a concern. The balance sheet gives a static view of the resources of a business and the uses to which these resources have been put at a certain point of time. But it does not disclose the causes for changes in assets and liabilities between two different points of time. The funds flow statement explains causes for such changes and also the effect of these changes on the liquidity position of the company. Sometimes a concern may operate profitably and yet its cash position may become more and more course. The funds flow statement gives a clear answer to such a situation explaining what has happened to the profit of the firm. (2) It throws light on many perplexing questions of general interest: Which otherwise may be difficult to be answered, such as:

a. b. c. d. e.

Why were the net current assets lesser in spite of higher profits and vice-verse. Why more dividends could not be declared in spite of available Profit? How was it possible to distribute more dividends than the present earning? What happened to the net profit? Where did they go? What happened to the proceeds of sale of fixed assets or issue of Shares, debentures etc?

(3) It helps in the formation of a realistic dividend policy: Sometime a firm has sufficient profit available for distribution as dividend but yet it may not be advisable to distribute dividend for lack of liquid or cash resources. In such causes, a funds flow statement helps in the formation of a realistic dividend po. (4) It helps in the proper allocation of resources: The resources of a concern are always limited and it works to make the best use of these resources. A projected funds flow statement constructed for the future help in making

managerial decision. The firm can plan the deployment of its resources and allocate them among various applications.
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(5) It acts as a future guide: A project funds flow statement also acts as a guide for future to the management. The management can come to know the various problems it is going to funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problem. (6) It helps in appraising the use of working capital: Funds flow statement helps in explaining how efficiently the management has used its working capital and also suggests way to improve working capital position of the firm. (7) It helps knowing the overall credit worthiness of a firm: The financial institutions and banks such as state financial institutions, industrial development corporation, industrial finance corporation of India, industrial development bank of India etc., all ask for funds flow statement constructed for a number of years before granting loans to know the credit worthiness and paying capacity of the firm. Hence, a firm seeking financial assistance from these institutions has no alternative but to prepare funds flow statements. Limitations of Funds Flow Statement: The funds flow statement has a number of uses; however, it has certain limitations also, which are listed below: 1. It should be remembered that a funds flow statement is not a substitute of an income statement or a balance sheet. It provides only some additional information as regards changes in working capital. 2. 3. It cannot reveal continuous changes. It is not an original statement but simply a re-arrangement of data given in the financial statement. 4. It is essentially historic in nature and projected funds flow statement cannot be prepared with much accuracy. 5. Changes in cash are more important and relevant for financial management than the working capital.
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Procedure for Preparing a Funds Flow Statement: Funds flow statement is a method by which are study changes in financial position of a business enterprise between beginning and ending financial statement dates. Hence, the funds flow statement is prepared by comparing two balance sheets and with the help of such other information derived from the accounts as may be needed. Broadly speaking the preparation of a funds flow statement consists of two parts. 1. 2. Statement of schedule of changes in working capital. Statement of sources and application of funds.

A. Statement of schedule of changes in working capital: Working capital means the excess of current assets over current liabilities. Statement of changes in working capital between the two balance sheet dates. This statement is prepared with the help of current assets and current liabilities derived from the two balance sheets. As working capital = current assets current liabilities.

An increase in current assets increase working capital A decrease in current assets decreasing working capital. An increase in current liabilities decreasing working capital; A decrease in current liabilities increases working capital. Statement of Sources and Application of Funds: Funds flow statement is statement which indicates various sources from which funds (working capital) have been obtained during a certain period and the uses or applications to which these funds have been put during the period.

64

Specimen of report form of fund flows statement: Sources of Funds Funds from operations Issue of share capital and issue of debentures Raising of long term loans Receipts from partly paid share, called up Sales of non current (fixed) assets Non-trading receipts such as dividends received Sale of investment (long term) Decrease in working capital (as per schedule of changes in W.C.) Total Applications or uses of funds: Funds lost in operations Redemption of preference share capital Redemption of debentures Repayment of long-term loans Purchase of noncurrent (fixed) assets Purchase of long-term investments Non-trading payments Payments of dividends Payment of tax Increase in working capital (as per schedule of changes in working capital Total
65

Rs.

Funds from Operation: As a first step it would be convenient if the profit and loss appropriation account is prepared and net profit after tax is ascertained as a balancing figure. Then the funds from operations are worked out as follows: Particulars Net profit after tax Add: 1. Non-cash expenses during the year [a] [b] Depreciation Writing off of goodwill, patents, trademarks, deferred revenue expenditure, Preliminary expenses etc. [c] Amortization of discount on issue of Rs. Rs.

debentures or share etc. 2. 3. Less: 4. 5. Profit on sale of fixed assets. Amortization of share premium or debenture premium etc. Loss on sale of fixed assets,. Extra-ordinary (or) non recurring losses.

Funds from operations: Funds from operation are a source of fund during period. If it is still a negative balance it is loss from operations and is shown on the side of Application of funds but if it shows a positive it is a source of funds.
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P & L appropriation account: Particulars To Interim Dividend To Proposed equity Dividend To Preference dividend To Transfer to reserve To Balance c/d By Dividend received By net profit after tax (Balancing figure) (Transferred from P&L account Amount Particulars By balance b/d By excess provision written back Amount -

By income tax provision not required

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LIQUIDITY RATIOS 1. YEAR Current ratios: CURRENT ASSETS (RUPEES LAKHS) 3080.93 3162.81 3792.00 4076.11 5287.25 CURRENT LIABILITIES IN (RUPEES LAKHS) 774.12 929.91 1195.14 1095.89 1307.43 RATIO IN 3.7 3.4 3.2 3.7 4.0

2005-06 2006-07 2007-08 2008-09 2009-10 Analysis:

From the above table it was observed that the current assets of the company are continuously increasing from Rs.3080.93 lakhs in 2005-06 to 5287.25 lakhs in 2009-10 and the current liabilities are also gradually increased from 774.12 in 2005-06 to Rs.1307.43 lakhs in 2009-10 but current liabilities were decreased in respect to previous year only in 2008-09. Graphical representation: CURRENT RATIO (IN %)
4 3 ratio 2 1 0 year 3.7 3.4 3.2 3.7 4

Interpretation: From the above figure it is observed that the current ratio of a company has been increased from 3.7 to 4 during the period of 5 years. The ideal current ratio is 2:1. The companies current ratio during 5 years is more than thrice. So the companies working capital position is very good and it is in a position to pay off its short term liabilities from short term asset.
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2. QUICK RATIOS YEAR QUICK ASSETS (Rupees in Lakhs) 2407.41 2185.2 2557.99 2729.04 3155.83 CURRENT LIABILITIES (Rupees in Lakhs) 774.12 929.91 1195.14 1095.89 1307.43 RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

3.1 2.3 2.1 2.5 2.4

Analysis: The quick assets as well as current liabilities of a company have been increased during 2005-06 and 2009-2010. Though in the year 2005-06 the quick asset ratio is more than 3% drastically it reaches to 2 and more than 2 percent. Graphical representation: QUICK RATIO (IN %)
4 3 ratio 2 1 0 3.1 2.3 2.1 2.5

2.4

year

Interpretation: From the figure it is observed that the quick asset ratio has been decreasing from 3.1 to 2.4. The ideal liquid ratio is assumed to be 1:1.since the liquid asset ratio is more than ideal it can be said that the short term financial position of a company is sound.

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3. CASH RATIO

YEAR

CASH+MARKETABLE SECURITIES (RUPEESIN LAKHS) 59.85 46.84 57.14 105.29 9.62

CURRENT LIABILITIES (RUPEES IN LAKHS) 774.21 921.91 1195.14 1095.89 1307.43

CASH RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

7.00 5.08 4.78 9.61 0.74

Graphical representation:

CASH RATIO

0.1

Ratio 0.05

0.077 0.050 0.047 0.096 0.007

2005-06

2006-07

2007-08
year

2008-09 200910

Analysis: The companies cash reserves from 2005-06 to 2008-2009 is high where as it is very low in 2009-10. The current liabilities have been increasing from year to year. The cash ratio is decreasing though there is a increase in cash reserves because of increase of current liabilities. Interpretation: The Companys cash ratio is very good in all the years except in the last year. So the company is in a situation to carry cash to look after day to day operations for the smooth flow.

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NET WORKING CAPITAL RATIO

YEAR NET WORKING CAPITAL (RUPEES IN LAKHS) NET ASSETS (RUPEES IN LAKHS) RATIO

2005-06 2006-07 2007-08 2008-09 2009-10 Analysis:

2306.72 2232.9 2596.86 2980.22 3979.82

5193. 5738.03 6037.83 6631 7687.99

0.44 0.38 0.43 0.44 0.51

The net working capital of a company is continuously increasing from Rs.2306.72 lakhs in 2005-06 to Rs. 3979.82 lakhs in 2009-10 with an increase in net assets. The net working capital ratio is also increasing from year to year. Graphical representation:

NET WORKING CAPITALRATIO

0.6 0.5 0.4 RATIO 0.3 0.2 0.1 0 0.44 0.51 0.38 0.43 0.44

2005-06

2006-07

2007-08
YEAR

2008-09

2009-10

Interpretation: The above figures of NWC which are above 4 % indicate the potential reservoir of funds, which is a big sign of liquidity of firm.

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II LEVERAGE (SOLVENCY) RATIOS

1. FIXED ASSET RATIO YEAR FIXED ASSETS (RUPEES IN LAKHS) EQUITY (RUPEES IN LAKHS) RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

2414.83 3033.66 2969.5 3179.32 3411.64

1202 1202 1202 1250 1250

2.00 2.52 2.47 2.54 2.72

Analysis: The fixed assets are continuously increasing from year to year and the amount of equity remains constant for the first 4 years and it reaches Rs.1250 lakhs in 2009-10. Graphical representation: FIXED ASSETRATIO

3 2.5 2 RATIO 1.5 1 0.5 0 YEAR 2.009 2.523 2.470 2.543 2.729

Interpretation: The fixed asset ratio is satisfactory in the company.

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2. CAPITAL EMPLOYED TO NETWORTH RATIO

YEAR

CAPITAL EMPLOYED (RUPEES IN LAKHS)

NET WORTH (RUPEES IN LAKHS)

RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

5193.02 5738.03 6037.83 6631 7687.99

1790.18 1922.94 2087.1 2311.13 2970.44

2.90 2.98 2.89 2.86 2.58

Analysis: Capital employed to net worth ratio establishes the relationship between capital employed for every rupee of owners capital. The net worth of a company is increasing year by year so as the case with capital employed too. The capital employed ratio is above 2% in all the years for 5 years. Graphical representation:

3 2.8 RATIO 2.6 2.4 2.2 YEAR 2.90 2.98 2.89

2.86

2.58

Interpretation: It is clear from the above figure that capital employed to net worth ratio is above 2.5 % in all the years and it is highest in the year 2006-07. Capital employed is nearly thrice than that of net worth so it is a good indicator of the satisfactory capital structure of a company.
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3. INTEREST COVERAGE RATIO

YEAR

EBIT (RUPEES IN LAKHS)

INTEREST (RUPEES IN LAKHS)

RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

643.53 851.72 1018.41 1082.72 1646.9

143.12 232.41 319.27 340.6 298.9

4.49 3.66 3.18 3.17 5.50

Analysis: Here the earnings of a company before depreciation and interest have been increasing drastically from year to year and the interest charges of a company are also increasing except in the year 2009-2010. The interest coverage ratio is over and above 3 times every year. Graphical representation: INTEREST COVERAGE RATIO

6 4 RATIO 2 0

4.49

3.66

3.18

3.17

5.50

YEAR

Interpretation: The interest coverage ratio is high in the year 2005-06 but it has been decreasing from next year onwards and in the year 2009-10 it has increased to highest level. From this the fixed interest of a company has been decreasing due to the decrease of debt amount and also due to the increase of non-operating income. So the firms position with regard to solvency is satisfactory.

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4. DEBT EQUITY RATIO

YEAR DEBTEQUITYRATIO (RUPEES IN LAKHS) TOTALEQUITY (RUPEES INLAKHS) DEBTEQUITY RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

2332 2535.53 2583.45 2546.9 2391.77

1202 1202 1202 1202 1250

1.94 2.11 2.15 2.12 1.91

Analysis: The above table depicted that the sources of funds from debt capital is continuously increasing from year to year where as total equity remain same for 4 years and it has increased from Rs.1202 lakhs to Rs.1250 lakhs in 2009-10. The debt equity ratio is above 1.5 times over all the years. Graphical representation: DEBT EQUITY RATIO

2.20 2.10 ratio 2.00 1.90 1.80 1.70 2.10 1.94 2.14 2.11 1.91

YEAR
Interpretation: The debt equity ratio is satisfactory since the debt is approximately near to 2 times of debt so the company is favoring both the share holders as well as bond owners.
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5. PROPRIETARY RATIO

YEAR

NET WORTH (RUPEESINLAKHS)

TOTALTANGIBLEASSETS PROPRIETARY (RUPEES IN LAKHS) RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

1790.18 1922.94 2087.1 2311.13 2970.44

5920.86 6621.58 7186.61 7680.53 8949.06

0.30 0.29 0.29 0.30 0.33

Analysi s: I n the above table we

observed that the total net worth of a company is continuously increasing. The total amount of investment in tangible assets is also continuously increasing from year to year. The proprietary ratio is above 30 %. the investment in tangible assets is made from outsiders debt. Graphical representation: PROPREITORY RATIO
0.34 0.32 RATIO 0.30 0.28 0.26 YEAR 0.30 0.29 0.29 0.30 0.33

Interpretation: Generally a ratio above 50% is considered as safe for creditors. Here the ratio is near to 30% in all the cases. It reveals that the company has depend more on outsiders liability to get tangible assets which may lead to declining of creditors margin of safety.

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III ACTIVITY RATIOS 1. TOTAL ASSETS TURNOVER RATIO

YEAR NETSALES (RUPEES INLAKHS) CAPITALEMPLOYED (RUPEES IN LAKHS) TOTAL ASSETS

TURNOVER RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

6485 7036.39 8326.36 9202 10281

5193.02 5738.03 6037.83 6631 7687.99

1.25 1.23 1.38 1.39 1.34

Analysis: The amount of sales has increased gradually from Rs.6485 lakhs in 2005-06 to Rs.10281 lakhs in 2009-10. There is also an increase in the amount of capital employed during the 5 year period. As a consequence the ratio has increased in one period and decreased in another period. Graphical representation: TOTAL ASSETS TURNOVER RATIO

RATIO

1.25

1.38 1.23

1.39

1.34

YEAR

Interpretation: The total asset turnover ratio tests the managerial efficiency of an organization in creating sales and generating revenues. The firms performance is in a satisfactory position as the ratio is above 1% in all the cases and continuously increasing as shown in the graph.
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2. FIXED ASSET TURNOVER RATIO

YEAR COST OF GOODS SOLD (RUPEES IN LAKHS) FIXED ASSETS RUPEES IN LAKHS) FIXED ASSET RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

5841.46 6184.67 7308 8120 8639

2414.83 3033.66 2969.5 3179.32 3411.64

2.42 2.04 2.46 2.55 2.53

Analysis: The cost of goods sold has been increasing due to incrase in the turnover of a company from the last 5 years. The fixed assets are also continuously increasing. The ratio of fixed asset turnover is over and above 2 % in all the cases and it is maximum during the period 2008-09. Graphical representation: FIXED ASSET RATIO
3.00 2.50 2.00 ratio 1.50 1.00 0.50 0.00 year 2.42 2.04 2.46 2.55 2.53

Interpretation: The company is using its fixed assets in the production of goods to the fullest extent. Since the ratio is above 2% the companies capability in using its fixed assets is satisfactory.

78

3. WORKING CAPITAL TURNOVER RATIO

YEAR COST OFGOODSSOLD (RUPEES IN LAKHS) NET WORKING CAPITAL (RUPEES IN LAKHS) WORKING CAPITAL RATIO

2005-06 2006-07 2007-08 2008-09 2009-10 Analysis:

5841.46 6184.67 7308 8120 8639

2306.72 2232.9 2596.86 2980.22 3979.82

2.53 2.77 2.81 2.72 2.17

The amount of working capital as well as cost of goods sold is continuously increasing as the company is in growth position. The ratio indicates that number of times the working capital meet the cost of sales or cost of goods sold. It is observed from the table that the ratio is increasing in all the years except in the year 2009-10. Graphical representation: WORKING CAPITAL RATIO
3.00 2.00 ratio 1.00 0.00 2.53 2.77 2.81 2.72 2.17

year

Interpretation: The working capital is more than 2 times in sales. Therefore from the above table it is interpreted that the firm is in a satisfactory position. So the company is utilizing working capital to meet cost of sales in a satisfactory way.

79

4. INVENTORY TURNOVER RATIO

YEAR COST OF GOODS SOLD (RUPEES IN LAKHS) AVERAGEINVENTORY (RUPEES IN LAKHS) INVENTORY TURNOVER RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

5841.46 6184.67 7308 8120 8639

223.915 106.5 208 306 452

26.09 58.07 35.13 26.54 19.11

Analysis: The above table shows that the inventory turnover ratio during the four years i.e. from 2005-06 to 2008-09 is more where as in 2009-10 it is very low. Graphical representation:

INVENTORY TURNOVER RATIO

60.00 40.00 ratio 20.00 0.00 26.09 58.07 35.13 26.54 19.11

year

Interpretation: The stock turnover ratio is satisfactory during the 4 years but in the year the company is maintaining a heavy stock. Though the sales are high in this year over production leads to high amount of closing stock.

80

IV. PROFITABILITY RATIOS 1. GROSS PROFIT RATIO

YEAR GROSS PROFIT (RUPEES IN LAKHS) NET SALES (RUPEES INLAKHS) GROSS PROFIT RATIO

2005-06 2006-07 2007-08 2008-09 2009-10 Analysis:

643.54 851.73 1018 1083 1642

6485 7036.39 8326.36 9202 10281

0.10 0.12 0.12 0.12 0.16

The above chart shows that gross profits as well as sales are continuously increasing from year to year. The gross profit ratio is also continuously increasing and it is maximum in the year 200910. Graphical representation: GROSS PROFIT RATIO
0.20 0.15 RATIO 0.10 0.10 0.05 0.00 YEAR 0.12 0.12 0.12 0.16

Interpretation: The gross profit ratio for the year 2005-06 is 10% and it is slightly increased in the year 2006-07 and remains same till2008-09. Though the gross profit ratio is not satisfactory during initial years it was good in the y ear 2009-10.

81

2. NET PROFIT RATIO

YEAR NET PROFIT (RUPEESIN LAKHS) NET SALES (RUPEES IN LAKHS) NET RATIO PROFIT

2005-06 2006-07 2007-08 2008-09 2009-10 Analysis:

130.75 132.75 164.16 176 659

6485 7036.39 8326.36 9202 10281

0.02 0.02 0.02 0.02 0.06

The amount of net profit has been increasing from year to year but the net proit ratio remains same during first 4 years and it is increased to 6% in the year 2009-10 due to increase of profits on a large scale. Graphical representation: NET PROFIT RATIO
0.07 0.06 0.05 RATIO 0.04 0.03 0.02 0.01 0.00 0.02 0.06 0.02 0.02 0.02

YEAR

Interpretation: The net profit position of a company is not satisfactory during first 4 years but it was slight better in the year 2009-10 when compared to previous years. So the company must concentrate on operating cost.

82

3. RETURN ON CAPITAL EMPLOYED

YEAR NET PROFIT BEFORE CAPITAL EMPLOYED (RUPEES IN LAKHS) RETURN CAPITAL EMPLOYED ON

INTEREST AND TAXES (RUPEES IN LAKHS)

2005-06 2006-07 2007-08 2008-09 2009-10

347.81 443.88 579 620 1148

5193.02 5738.03 6037.83 6631 7687.99

0.07 0.08 0.10 0.09 0.15

Analysis: It can be seen from the table that the net profit of the company is gradually increasing over the years the same is the case with capital employed also. Return on capital employed is also increasing but it has recorded a great change in the year 2009-10. Graphical representation: RETURN ON CAPITAL EMPLOYED
0.15

0.10 ratio 0.05 0.07 0.08 0.10 0.09

0.15

0.00 year

Interpretation: The percentage of return on capital over the 4 years is not satisfactory but it was comparatively better in the year of 2009-10.

83

4. RETURN ON EQUITY
YEAR PAT (RUPEES IN LAKHS) EQUITY (RUPEES IN LAKHS) RETURN ON EQITY

2005-06 2006-07 2007-08 2008-09 2009-10 Analysis:

130.74 132.75 164.16 176 659

1202 1202 1202 1202 1250

0.11 0.11 0.14 0.15 0.53

The amount of equity capital was same during 4 years but it was increased to Rs.48 lakhs in the year 2009-10. The amount of profits after taxes has also increased to a greater extent in the year 2009-10. As a consequence the return on equity made an enormous growth in the last year and it reaches 53 %. Graphical representation:

RETURN ON EQITY
0.60 0.50 0.40 RATIO 0.30 0.20 0.10 0.00 YEAR 0.11 0.11 0.14 0.15 0.53

Interpretation: The return on equity during first 4 years was satisfactory. It was excellent in the year 200910. So the directors are in a position to refinance their funds

84

5. EARNINGS PER SHARE YEAR PAT (RUPEES LAKHS) NUMBER OF SHARES IN (RUPEES IN LAKHS) EARNING PER SHARE

2005-06 2006-07 2007-08 2008-09 2009-10

130.74 132.75 164.16 176 659

120.2 120.2 120.2 120.2 125

1.09 1.10 1.37 1.46 5.27

Analysis: The companys profitability position was very good in the year 2009-10 when compared to previous years. The amount of profit is gradually increasing as we seen in the table. Graphical representation:

6.00 5.00 4.00 RATIO 3.00 2.00 1.00 0.00

EARNING PER SHARE

5.27 1.09 1.10 1.37 1.46

YEAR

Interpretation: The earnings per share is not up to the mark during the first 4 years. It was satisfactory during the period of 2009-10. So the company is performing well with respect to profit point of view as well as from the shareholders wealth maximization point of view.

85

COMPARATIVE BALANCE SHEET FOR THE YEAR 2005 & 2006

Particulars

2005 (Rs. lakhs)

1202 457.44 2679.83 54.93 4394.2

2006 In Rs.In lakhs)

1202 588.18 3352.44 50.37 5192.99

Inc/Dec % of Change

LIABILITIES Share capital Reserves & surplus Loans&advances Deferred tax Total ASSETS Fixed assets(1) Investments(2) Current assets: Inventories Cash and bank balance Trade debtors Sundry debtors Loans&advances Total Current liabilities: Creditors Sudry creditors Advances Provisions Total Net current assets(3) Total(1+2+3) Interpretation:

130.74 672.61 (4.56) 798.79

28.58 25.10 (8.30) 18.18

1960.19 496.71 683.52 61.59 1180.6 422.42 185.66 2533.79 254.69 220.83 9.17 111.8 596.49 1937.3 4394.2

2414.83 471.46 673.52 59.85 1483.4 536.65 327.48 3080.9 449.83 187.83 15.13 121.4 774.19 2306.71 5193

454.64 (25.25) (10) (1.74) 302.8 114.23 141.82 547.11 0 195.14 (33) 5.96 9.6 177.7 369.41 798.8

23.19 (5.08) (1.46) (2.83) 25.65 27.04 76.39 21.59 76.62 (14.94) 64.99 8.59 135.26 19.07 18.18

The company has invested huge funds in fixed assets which depicts long-term solvency. The company has lowered his inventory position which is good for sale improvisation. The debtors position has also increased, which involves risk The working capital position of the company was very good. The company has raised more amounts of loans when compared to previous year. The obligation of the company in the form of creditors has also increased.
86

COMPARATIVE BALANCE SHEET OF 2006 & 2007 Particulars LIABILITIES Share capital Reserves & surplus Loans & advances Deferred tax Total ASSETS Fixed assets(1) Investments(2) current assets: Inventories Cash and bank balance Stock in transit Trade debtors Sundry debtors Loans & advances Total Current liabilities: Creditors Sundry creditors Advances Provisions Total Net current assets(3) Total(1+2+3) Interpretation: The fixed assets have increased to a greater extent which indicates very good long term solvency but company has acquired funds through working capital which is not good. The investments position remains constant The companys inventory position has increased to a greater extent which is affecting sales as well as profitable position of the company. Net current assets are i.e. working capital of the company was very good. The company reduced its cash reserves to a certain extent. There is a tremendous increase in amount of reserves
87

2005 2006 (Rs. In lakhs) Rs.In lakhs) 1202 588.18 3352.44 50.37 5192.99 1202 720.94 3715.47 99.61 5738.02

Inc/Dec

% of Change 22.57 10.83 97.76 10.50

132.76 363.03 49.24 545.03

2414.83 471.46 673.52 59.85

3033.66 471.46 977.61 46.84 20.65 1418.11 394.18 305.4 3162.79 718.38 85.35 16.08 110.07 929.88 2232.91 5738.03

618.83

25.63 0.00 45.15 (21.74)

304.09 (13.01) 20.65 (65.29) (142.47) (22.08) 81.89 268.55 (102.48) 0.95 (11.33) 155.69 (73.8) 545.03

1483.4 536.65 327.48 3080.9 449.83 187.83 15.13 121.4 774.19 2306.71 5193

(4.40) (26.55) (6.74) 2.66 59.70 (54.56) 6.28 (9.33) 20.11 (3.20) 10.50

COMPARATIVE BALANCE SHEET OF 2007 & 2008 Particulars 2005 (Rs. In lakhs) 2006 (Rs.In lakhs) 1202 885.1 3792.88 157.83 6037.81 Inc/Dec % of Change

ASSETS Share capital Reserves & surplus Loans & advances Deferred tax Total LIABILITIES Fixed assets(1) Investments(2) Current assets: Inventories Cash and bank balance Trade debtors Sundry debtors Loans & advances Total Current liabilities: Creditors Sundry creditors Advances Provisions Total Net current assets(3) Total(1+2+3)

1202 720.94 3715.47 99.61 5738.02

164.16 77.41 58.22 299.79

22.77 2.08 58.45 5.22

3033.66 471.46 998.62 46.84 1418.11 394.18 305.4 3183.8 718.38 85.35 16.08 110.07 929.88 2253.92 5759.04

2969.5 471.46 1234.01 57.14 1438.57 710.58 351.68 3791.98 911.89 122.84 21.94 138.47 1195.14 2596.84 6037.8

(64.16) 235.39 10.3 20.46 316.4 46.28 608.18 0 193.51 37.49 5.86 28.4 265.26 342.92 278.76

(2.11) 23.57 21.99 1.44 80.27 15.15 19.10 26.94 43.93 36.44 25.80 28.53 15.21 4.84

Interpretation: The liquidity position of the company was increased during the period. The company has sold of its fixed assets up to 2% The company has increased its cash position to certain extent The maintenance of reserves & surplus has also increased. Deferred tax reserve has increased up to 50%.
88

COMPARATIVE BALANCE SHEET OF 2008 & 2009 Particulars LIABILITIES Share capital Reserves & surplus Loans & advances Deferred tax Total ASSETS Fixed assets(1) Investments(2) Current assets: Inventories Cash and bank balance Trade debtors Sundry debtors Loans & advances Total Current liabilities: Creditors Sundry creditors Advances Provisions Total Net current assets(3) Total(1+2+3) 2005 (Rs. In lakhs) 1202 885.1 3792.88 157.83 6037.81 2006 (Rs.In lakhs) 1250 1061.13 4097.68 222.17 6630.98 Inc/Dec % of Change 3.99 19.89 8.04 40.77 9.82

48 176.03 304.8 64.34 593.17

2969.5 471.46 1234.01 57.14 1438.57 710.58 351.68 3791.98 911.89 122.84 21.94 138.47 1195.14 2596.84 6037.8

3179.32 471.46 1347.07 105.29 1667.42 640.67 315.63 4076.08 787.47 107.03 19.03 182.34 1095.87 2980.21 6630.99

209.82

7.07

113.06 48.15 228.85 (69.91) (36.05) 284.1 (124.42) (15.81) (2.91) 43.87 (99.27) 383.37 593.19

9.16 84.27 15.91 (9.84) (10.25) 7.49 (13.64) (12.87) (13.26) 31.68 (8.31) 14.76 9.82

Interpretation: The company has increased its share capital by 4% The amount of funds raised through loans & advances is very high when compared to previous year in the year 2009. The company has increased its cash position. The company has not used funds for acquiring fixed assets, only a small portion of amount was moved to fixed assets. The debtors position has decreased when compared to last year. The higher amount of funds was blocked in inventories.
89

COMPARATIVE BALANCE SHEET OF 2009 & 2010 Particulars LIABILITIES Share capital Reserves & surplus Loans & advances Deferred tax Total ASSETS Fixed assets(1) Investments(2) Current assets: Inventories Cash and bank balance Trade debtors Sundry debtors Loans & advances Total Current liabilities: Creditors Sundry creditors Advances Provisions Total Net current assets(3) Total(1+2+3) 2005 (Rs. In lakhs) 1250 1061.13 4097.68 222.17 6630.98 2006 (Rs.In lakhs) 1250 1720.44 4414.25 303.28 7687.97 Inc/Dec % of Change 62.13 7.73 36.51 15.94

659.31 316.57 81.11 1056.99

3179.32 471.46 1347.07 105.29 1667.42 640.67 315.63 4076.08 787.47 107.03 19.03 182.34 1095.87 2980.21 6630.99

3411.64 296.52 2131.42 277.72 1606.36 541.51 730.23 5287.24 958.44 129.69 28.76 190.52 1307.41 3979.83 7687.99

232.32 (174.94) 784.35 172.43 (61.06) (99.16) 414.6 1211.16 170.97 22.66 9.73 8.18 211.54 999.62 1057

7.31 (37.11) 58.23 163.77 (3.66) (15.48) 131.36 29.71 21.71 21.17 51.13 4.49 19.30 33.54 15.94

Interpretation: The reserves & Surplus has increased to a greater extent due to increase of profits. The company has invested a small portion of amount in fixed assets. The liquidity position of the company was very good. There is a reduction in the amount of investments to certain extent. Inventory position was satisfactory. The cash balances are maintained at a higher rate.

90

COMMON SIZE BALANCE SHEET for the 5 years starting from 2005 to 2010:
PARTICULARS 2005 (Rupees in Lakhs) % 2006 (Rupees in Lakhs) % 2007 (Rupees in Lakhs) % 2008 (Rupees in Lakhs) % 2009 (Rupees in Lakhs) % 2010 (Rupees in Lakhs) %

LIABILITIES Share capital Reserves & surplus Loans and advances Deferred tax Total ASSETS Fixed assets(1) Investments(2) Current assets: Inventories Cash and bank balance Sundry debtors Loans & advances Total Current liabilities: Creditors Sundry creditors Advances Provisions Total Net current assets(3) Total(1+2+3) 254.69 220.83 9.17 111.80 596.49 1937.30 4394.20 5.80 5.03 0.21 2.54 13.57 44.09 100.00 449.83 187.83 15.13 121.40 774.19 2306.71 5193.00 8.66 3.62 0.29 2.34 14.91 44.42 100.00 718.38 85.35 16.08 110.07 929.86 2232.91 5738.02 12.52 1.49 0.28 1.92 16.21 39.28 100.37 911.89 122.84 21.94 138.47 1195.14 2596.84 6037.80 15.10 2.03 0.36 2.29 19.79 43.01 100.00 787.47 107.03 19.03 182.34 1095.87 2980.21 6630.99 11.88 1.61 0.29 2.75 16.53 44.94 100.00 958.44 129.69 28.76 190.52 1307.41 3979.83 7687.99 12.47 1.69 0.37 2.48 17.01 51.77 100.00 683.52 61.59 1603.02 185.66 2533.79 15.56 1.40 36.48 4.23 57.66 673.52 59.85 2020.05 327.48 3080.90 12.97 1.15 38.89 6.31 59.33 998.26 46.84 1812.29 305.40 3162.79 17.40 0.82 31.58 5.32 55.49 1234.01 57.14 2149.15 351.68 3791.98 20.44 0.95 35.59 5.82 62.80 1347.07 105.29 2308.09 315.63 4076.08 20.31 1.59 34.80 4.76 61.47 2131.42 277.72 2147.87 730.23 5287.24 27.72 3.61 27.93 9.50 68.77 1960.19 496.71 44.61 11.30 2414.83 471.46 46.50 9.08 3033.66 471.46 52.87 8.22 2969.50 471.46 49.18 7.81 3179.32 471.46 47.95 7.11 3411.64 296.52 44.38 3.86 1202.00 457.44 2679.83 54.93 4394.20 27.35 10.41 60.99 1.25 100.00 1202.00 588.18 3352.44 50.37 5192.99 23.15 11.33 64.56 0.97 100.00 1202.00 720.94 3715.47 99.61 5738.02 20.95 12.56 64.75 1.74 100.00 1202.00 885.10 3792.88 157.83 6037.81 19.91 14.66 62.82 2.61 100.00 1250.00 1061.13 4097.68 222.17 6630.98 18.85 16.00 61.80 3.35 100.00 1250.00 1720.44 4414.25 303.28 7687.97 16.26 22.38 57.42 3.94 100.00

91

Interpretation for common size balance sheet: The share capital remains constant during 3 years and it is increased very slight during last two years. Reserves & surplus and loans and advances were in increasing trend. Fixed assets have been increasing from year to year. Investments receive slight fluctuations during the study. There is slight variation in the increase of debtors but the company is maintaining a consistency. Creditors are also at similar percentages with slight change. Inventories position was good except in the last year. The net working capital position of the company has been increasing from year to year which is good sign for liquidity. The company is maintaining the reserves at required percentages.

92

FUNDS FLOW STATEMENTS Funds flow statement for the year ended 2005-06: Particulars Sources: Profit from operations 130.74 Rupees in lakhs

Increase in unsecured loans

301.28

Increase in secured loans

371.34

Decrease in investment

25.25

Total Applications:

828.61

Increase in working capital

369.42

Purchase of fixed assets

454.64

Decrease in deferred tax adjustment

4.55

Total

828.61

Interpretation: The operating profits of the company are good. The company has used most of secured and unsecured loans to purchase fixed assets. The working capital requirement of the company are high. The company has sold very small amount of investments.
93

Funds flow statement for the year ended 2006-07: Particulars Sources: Profit from operations 132.75 Rupees in lakhs

Increase in unsecured loans

130.20

Increase in secured loans

232.82

Deferred tax adjustments

49.24

Decrease in working capital

73.83

Total

618.84

Applications:

Purchase of fixed assets:

618.84

Total

618.84

Interpretation: There is a slight increase in profits. The external finance raised through secured and unsecured loans was very low when compared to last year. The company has invested lot of funds in fixed assets through working capital which is not good for the company. The deferred tax has increased a lot.

94

Funds flow statement for the year ended 2007-08: Particulars Sources: Profit from operations 164.19 Rupees in lakhs

Increase in unsecured loans

17.18

Increase in secured loans

60.22

Deferred tax adjustment

58.21

Sale of fixed assets

64.16

Total

363.96

Application:

Increase in working capital

363.96

Total

363.96

Interpretation: The profitability of the company was satisfactory. The amount of funds raised through secured and unsecured loans was very low. The working capital requirements of the company in this year were very high. It was observed that the working capital needs were met by company mostly from long term financing. The company has sold fixed assets to a minimum extent.

95

Funds flow statement for the year ended 2008-09: Particulars Sources: Profit from operations 176.02 Rupees in lakhs

Increase in unsecured loans

5.02

Increase in secured loans

299.79

Deferred tax adjustment

64.34

Share capital

48.00

Total

593.17

Applications: Increase in working capital 383.35

Purchase of fixed assets

209.82

Total

593.17

Interpretation: There is a slight increase in profitable position of the company. Working capital requirements of the company are low when compared to previous year. The company has invested more funds in purchase of fixed assets and these are financed mainly thorough long term finance. There is a slight increase in deferred tax adjustment. The amount of share capital was increased by Rs. 48 lakhs after so many years. The companys performance and methods of financing was very good.
96

Funds flow statement for the year ended 2009-10: Particulars Sources: Profit from operations 659.31 Rupees in lakhs

Increase in unsecured loans

12.02

Increase in secured loans

304.55

Deferred tax adjustment

81.11

Decrease of investment

174.94

Total

1231.92

Applications: Increase in working capital 999.60

Purchase of fixed assets

232.32

Total

1231.92

Interpretation: The profits of the company were increased to a greater extent during this period. The share capital remains fixed. The working capital requirements of the company were quite high. It was observed that working capital requirements were met by sale of investments to a minimum level. The company raised its fixed assets through long term funds.

97

Cash follow statement for the year ended 2005-06: Particulars Cash flow from operating activities: Profit Depreciation Deferred tax liability Increase in current assets Increase in current liabilities 130.74 290.54 (4.56) (548.86) 177.71 Rupees in lakhs Rupees in lakhs

Net cash flow from operating activities

45.57

Cash flow from financing activities: Increase in unsecured loans Increase in secured loans 301.29 371.34

Net cash flow from financing activities

672.63

Cash flow from investing activities: Sale of fixed assets Purchase of investments (745.19) 25.25

Net cash flow from investing activities

(719.94)

Net inc/dec in cash flows: Opening balance of cash & cash equivalence Closing balance of cash &cash equivalence

(1.74) 61.59 59.85

Interpretation: There is a net decrease in cash flows during the year and closing balance of cash is Rs.59.85 lakhs. The fixed assets were sold to a greater extent and the net operating income was very low. The company has gathered huge funds during the period.
98

Cash follow statement for the year ended 2006-07: Particulars Cash flow from operating activities: Profit Depreciation Deferred tax liability Increase in current assets Increase in current liabilities 132.75 406.00 49.25 (94.89) 155.70 648.81 Net cash flow from operating activities Rupees in lakhs Rupees in lakhs

Cash flow from financing activities: Increase in unsecured loans Increase in secured loans 232.82 130.20 363.02 Net cash flow from financing activities

Cash flow from investing activities: Purchase of fixed assets (1024.84) (1024.84) Net cash flow from investing activities

Net inc/dec in cash flows Opening balance of cash & cash

(13.01) 59.85 46.84

equivalence Closing balance of cash & cash

equivalence Interpretation: In this year there is a decrease in net cash flows and the closing balance of cash is Rs.46.84 lakhs. There was a lot of disinvestment and the cash flow from operating and financing activities increased to a greater extent.
99

Cash follow statement for the year ended 2007-08: Particulars Cash flow from operating activities: Profit Depreciation Deferred tax liability Increase in current assets Increase in current liabilities 164.16 438.55 58.22 (618.89) 265.23 307.27 Net cash flow from operating activities Rupees in lakhs Rupees in lakhs

Cash flow from financing activities: Increase in unsecured loans Increase in secured loans 60.23 17.18 77.41 Net cash flow from financing activities

Cash flow from investing activities: Purchase of fixed assets (374.38)

Net cash flow from investing activities

(374.38)

Net dec/inc in cash flows Opening balance of cash & cash

10.3 46.84 57.14

equivalence Closing balance of cash & cash equivalence

Interpretation: During the year there is a net increase in cash flows and the closing balance of cash is Rs. 57.14 lakhs. The amount of investment in fixed assets was increased to a greater extent and the funds were mostly contributed from short term funds.
100

Cash follow statement for the year ended 2008-09: Particulars Cash flow from operating activities: Profit Depreciation Deferred tax liability Increase in current assets Decrease in current liabilities 176.03 448.95 64.34 (235.96) (99.25) 354.11 Net cash flow from operating activities Rupees in lakhs Rupees in lakhs

Cash flow from financing activities: Increase in share capital Increase in unsecured loans Increase in secured loans 48.00 299.78 5.02 352.80 Net cash flow from financing activities

Cash flow from investing activities: Purchase of fixed assets (658.76) (658.76) Net cash flow from investing activities

Net dec/inc in cash flows Opening balance of cash & cash equivalence Closing balance of cash & cash equivalence Interpretation:

48.15 57.14 105.29

During the year there is a net increase in cash flows and the closing balance of cash is Rs. 105.29 lakhs. The amount of operating income has been increased to a greater extent.

101

Cash follow statement for the year ended 2009-10: Particulars Cash flow from operating activities: Profit Depreciation Deferred tax liability Increase in current assets Increase in current liabilities 659.32 488.32 81.12 (1060.03) 211.54 380.27 Net cash flow from operating activities Rupees in lakhs Rupees in lakhs

Cash flow from financing activities: Increase in unsecured loans Increase in secured loans 304.55 12.02 316.57 Net cash flow from financing activities

Cash flow from investing activities: Purchase of fixed assets Sale of investments (720.65) 174.94 (545.71) Net cash flow from investing activities

Net inc/dec in cash flows Opening balance of cash & cash equivalence Closing balance of cash & cash equivalence Interpretation:

151.13 105.29 256.40

During the year there is a net increase in cash flows and the closing balance of cash Rs.256.40 lakhs. The amount of income from operating and financing activities has increased to a greater extent.

102

FINDINGS 2. The entire amounts of funds were contributed by directors, so the company has no debentures. 3. The company is a non-listed one so the company has been resorting to outsiders fund which increases cost of capital. 4. The company is maintaining high amount of current assets as more than required. 5. The liquidity position of the company is also high which affect the cost of capital to a greater extent. 6. The turnover of a company is increasing at a rapid rate. 7. The fixed assets of the company are in the increasing trend. 8. The maintenance of depreciation on all types of assets was good. 9. The amount of reserves that are kept for taxation helps the company for timely payment of taxes. 10. The company has no cash sale which increases the requirement of more liquid funds. 11. The methods adopted in the company for easy retrieval of financial data and coordination of different departments is impressive.

103

SUGGESTIONS
1.

The gross profit ratio of the company is very high due to operational efficiency; net profit ratio is not up to the mark due to heavy indirect expenditure. So I would like to suggest the company to adopt sophisticated technologies for better and optimum utilization of men and machinery to ensure far better performance in future.

2.

There is a chance for a company to reduce its liquidity position from highest to moderate so that the cost of capital may reduce.

3.

The company deals in a single line of production. It must widen its wings through component products manufacturing in order to have a better market share.

4.

Different and new sales promotional schemes would definitely help the company to have a high turnover.

5.

The company should also concentrate on better utilization of reserve and surplus funds by investing in high return with low risky portfolios.

6.

The depreciation amount can be used for high yielding investing proposals so that the company may not face any problems while replacing the assets.

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BIBILIOGRAPHY

Books: 1. Financial management by I.M.Pandey (Vikas Publishing house,1999) 2. Financial Management Text & Problems by M.Y.Khan & P.K.Jain (Tata Mc GrawHill,2001) 3. Fundamentals of financial management by D.Chandra Bose (Prentice Hall of India,1998) 4. Financial management and policy by James C.Van Horne (Prentice Hall of India, 2000) 5. Essentials of managerial finance by J.F.Weston & Brigham (Pearson Education,1999) 6. Financial Management by Prasanna Chandra (Tata Mc Graw-Hill,2001) 7. Financial Management by V.K.bhalla (Anmoll Publishing house. 1998) 8. Financial Management by Keown Martin (Prentice Hall of India,2003) 9. Financial Management by S.P.Jain and K.L.Narang (Kalyani publishers. 2004) 10. Financial Management, Dr.S.N.Maheswari (Sultan Chand & Sons, 2003) 11. Financial management by P.N.Reddy B.G.Satya Prasad (Himalaya publishing house,2002) 12. Financial management by Ravi M Kishore (Taxmann publishers,2006)

Website: www.kusalava.com

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