TOPIC: FINANCIAL ANALYSIS OF VIDEOCON

SUBJECT: ACCOUNTING FOR MANAGERS

SUBMITTED ON: 4TH NOV 2010

SUBMITTED BY: MANDEEP KAUR

MBA (HHM)

INDEX
1. INTRODUCTION OF VIDEOCON 3
2. METHODOLOGY 10
3. ANALYSIS AND INTERPRETATION 11

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4. COMMON SIZE AND COMPARISON 12
5. RATIO ANALYSIS 16
6. TREND ANALYSIS 31
7. FUND FLOW 35
8.CASH FLOW 38
9. COST SHEET 41
10. REFERENCES 42

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 INTRODUCTION
Videocon is an industrial conglomerate with interests all over the world and based in
India. The group has 17 manufacturing sites in India and plants in China, Poland, Italy
and Mexico. It is also the third largest picture tube manufacturer in the world.

Type Public (BSE: 511389)

Industry Conglomerate.
Founded 1979
Founder(s) Nandlal Madhavlal Dhoot.
Headquarter Aurangabad, Maharashtra.,
products
Consumer,Electronics
Home-Appliances
Components
Office,Automation
mobiles
Internet
Petroleum
satellite
Power Revenue ▲ US$2 billion (2010).
Net income ▲ US$276 million (2010).
Employees 5,000 (2010).
Website Videocon.com

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Corporate profile

The Videocon group has an annual turnover of US$ 2 billion, making it one of the
largest consumer electronic and home appliance companies in India. Since 1998, it has
expanded its operations globally, especially in the Middle East.

Today the group operates through six key sectors:

Consumer electronics

In India the group sells consumer products like Colour Televisions, Washing Machines,
Air Conditioners, Refrigerators, Microwave ovens and many other home appliances,
selling them through a Multi-Brand strategy with the largest sales and service network
in India.[4] Videocon Group brands include Akai, Electrolux, Hyundai, Kelvinator,
Kenstar, Kenwood, Next, PlanetM, Sansui, Toshibha, Philips (TV Products) etc.

Mobile Phones

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

Colour picture tube glass

Videocon is one of the largest CPT Glass manufacturers in the world, operating in
Mexico, Italy, Poland and China..Oil and Gas

An important asset for the group is its Ravva oil field with one of the lowest operating
costs in the world producing 50,000 barrels of oil per day.

DTH

In 2009, Videocon launched its DTH product, called 'd2h'. As a pioneering offer in the
Indian DTH market, Videocon offered LCD & TVs with built-in DTH satellite receiver

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with sizes 19" to 32". This concept in the DTH service is relatively new in the presence
of other players like ZEE tv's Dishtv, Tata Sky, Air tel Digital Tv and Reliance's BIG
TV providing only the set top box.

Telecommunication

Videocon Telecommunication Ltd has license for mobile service operations across
India. It launched its services on 7 March 2010 in Mumbai.

Acquisition of Thomson SA

Videocon through its Wholly Owned Offshore Subsidiary acquired the Color Picture
Tube (CPT) businesses from Thomson S.A having manufacturing facilities in Poland,
Italy, Mexico and China along with support research and development facilities.

Acquisition Rationale

The acquisition came at a time when Thomson was facing a fall in demand in
developed markets for television with CPTs and was moving more towards Flat-screen
and Plasma Television. However, Videocon saw an opportunity in the emerging
countries for CPTs and hence pursued with the acquisition. Besides, the acquisition
gave Videocon, the access to advanced technology giving the company control over an
R&D facility in Agnani, Italy. The major reasons behind this acquisition were

Cost cutting – Videocon was better positioned to shift the activities to low-cost
locations and also it could integrate the operations with the glass panel facility in India
with the CPT manufacturing facilities acquired from Thomson S.A. Videocon wanted
to leverage its position in the existing parts of the business and this acquisition would
give it a strong negotiation position and could reduce impact of glass pricing volatility.
Videocon could also reduce the costs by upgrading and improving the existing
production lines.

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Vertical Integration – The acquisition helped Videocon in vertically integrating its
existing glass-shell business where it had been enjoying substantially high margins.[8]
Videocon’s glass division had the largest glass shell plant in a single location. This gave
the company an unrivalled advantage in terms of economies of scale and a leadership
position in the glass shell industry. The acquisition also gave Videocon a ready-market
for its glass business and it was part of Videocon’s long-term strategy to have a global
vertically-integrated manufacturing facility.

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

the changing market needs like moving away from very large size picture tubes to
smaller ones. Apart from the overall strategy Videocon also had a plan on the
technological front. It wanted to improve the setup for the production line and line
speed post-merger. Its focus was to increase sales while reducing the costs and thereby
improving the productivity of the existing line. The company also wanted to foray in a
big way into LCD panels back-end assembly . On the sales front the company wanted to
leverage on the existing clients of Thomson and build relation as a preferred supplier to
maximise sales. Also, Videocon could benefit from OEM CTV business with the help
of Videocon’s CTV division, invest for new models and introduction of new
technologies.

Thomson’s perspective

In 2004 Thomson planned entry into the high-growth digital media and technology
business. Also, Thomson wanted to exit consumer and electronics businesses as they
were incurring significant losses. After sale of its TV business to Chinese group TCL,
and Tubes to Videocon, Thomson divested from the audio/video accessories business
which was the last unit of its consumer electronics business. The need to divest are
quite evident from the losses that it incurred in these businesses particularly that the unit
that it sold off to Videocon, the Optical Modules activity, and the Audio/Video &
Accessories businesses which totalled around €749 million for 2005. Moreover

7
Thomson had done some acquisitions that were in line with boosting their revenues in
the following years.

Other Competitors for the Acquisition

When Videocon entered the race for the colour picture tubes manufacturing capacity of
Thomson SA in November 2004, there were 16 other bidders. Videocon stood slim
chances given the fact that it had to battle it out with players like LG,Philips, Samsung
and Matsushita, Daewoo and several Chinese manufacturers but finally managed to
close the deal. The deal catapulted Videocon into the No. 3 slot in the global pecking
order for CPTs. An official of Videocon said on the deal "The word is out in the world
that India and Indian companies are not just a good bet by themselves, but also a hedge
against China.

Pre-merger scenario analysis

CPT industry is affected by many competitive factors such as change in the consumer
preferences ,the product offer strategy of retailers, the progress made by alternative
technology manufacturers ,capacity adjustment facility of competitors etc. Based on all
of these factors there were two scenarios that emerged from the 2005 budget of
Videocon. The first scenario is a conservative one. It mainly assumes Price pressures
similar to those in the past(-8 to -12%),capacity reduction over a period of two years, a
gradual shift to newer technologies like True Flat and good amount of growth for LCD
makers.

The second scenario is a more aggressive one in term of trends predicted. It assumes
that the switch to TrueFlat would be faster, more overcapacity, more competition from
LCD manufacturers and rising price strategy pressures in general. The second scenario
obviously requires an industrial strategy which is more adapted to the environment.

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However even if the second scenario arises,Videocon believes there is an opportunity in
the CRT business. Though it is very obvious that in the developed markets of the
western world the demand is shifting towards the flat panel side(FPD it is expected to
contribute 70% of TV market in these regions),in the emerging markets like BRIC CRT
still holds fort. CRT holds a dominant 70% share in these markets. When translated into
number of units the demand is more than 100 million units. As Videocon is primarily
based in these countries, it hopes to harness the value of the Thomson acquisition in the
coming years.

Post merger situation (2008)

Videocon has not been able to turn the plant around in Italy still. However it is getting
support from the local government(which want to prevent job cuts) in form of grants.
The government is in fact trying to set up a Greenfield venture in form of a LCD
manufacturing facility in partnership with Videocon. The banks are also supporting
Videocon and with help from all these quarters Videocon expects to turn around the
plant in Italy.[13] The Thomson plant has not turned around in Mexico as well and in fact
production has been reduced over there.In Poland,the situation is more promising and
Videocon hopes that plant over there will get in black in the very near future.[14]
However the surprise has been in the Chinese market .Despite facing a highly
competitive market Videocon has managed to turn a plant around while the other is on
its way. In China Videocon is adopting a different strategy for manufacturing CTVs as
the local players dominate the market .It plans to supply these players by taking
advantage of low-cost nature of mainland(the number targeted by it about 6 million
CPTs).

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 ANALYSIS OF FINANCIAL REPORT

The financial position of company will be analysed with the help of annual report of
company. After interpreting annual report analysis will be provided.

METHODOLOGY
Financial position of company will be analysed with following steps:
1. Comparative analysis of 2 years.

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

2008 and dividing it with base i.e 2008.
2. common size statement.
Common size will be calculated as by dividing a value with total and multiply it
with 100.
3. Trend analysis.
Trend analysis of 5 years will be done with graphs. with the help graphs it will
show the trend of increase and decrease of asset and liabilities .
4. ratio analysis
2 years ratio analysis , which include :
Liquidity ratio
Solvency ratio
Profitability ratio
Activity ratio
5. fund flow statement
schedule of 2 years
fund from operation

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 fund flow statement
6. cash flow statement
7. cost sheet

ANALYSIS AND INTERPRETATION

FINANCIAL ANALYSIS

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

analysis) refers to an assessment of the viability, stability and profitability of a
business, sub-business or project.

It is performed by professionals who prepare reports using ratios that make use of
information taken from financial statements and other reports. These reports are usually
presented to top management as one of their bases in making business decisions. Based
on these reports, management may:

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

• Make or purchase certain materials in the manufacture of its product;
• Acquire or rent/lease certain machineries and equipment in the production of its
goods;
• Issue stocks or negotiate for a bank loan to increase its working capital;
• Make decisions regarding investing or lending capital;
• Other decisions that allow management to make an informed selection on various
alternatives in the conduct of its business.

COMMON SIZE STATEMENT

Common-size analysis (also called vertical analysis) expresses each line item on a
single year's financial statement as a percent of one line item, which is referred to as a

11
base amount. The base amount for the balance sheet is usually total assets (which is the
same number as total liabilities plus stockholders' equity), and for the income statement
it is usually net sales or revenues. By comparing two or more years of common-size
statements, changes in the mixture of assets, liabilities, and equity become evident. On
the income statement, changes in the mix of revenues and in the spending for different
types of expenses can be identified. .

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

Item of Interest
Common Size Ratio =
Reference Item

The ratios often are expressed as percentages of the reference amount. Common size
statements usually are prepared for the income statement and balance sheet, expressing
information as follows:

• Income statement items - expressed as a percentage of total revenue

• Balance sheet items - expressed as a percentage of total assets

Comparisons Between Companies (Cross-Sectional Analysis)

Common size financial statements can be used to compare multiple companies at the
same point in time. A common-size analysis is especially useful when comparing
companies of different sizes. It often is insightful to compare a firm to the best
performing firm in its industry (benchmarking). A firm also can be compared to its
industry as a whole. To compare to the industry, the ratios are calculated for each firm
in the industry and an average for the industry is calculated. Comparative statements
then may be constructed with the company of interest in one column and the industry
averages in another. The result is a quick overview of where the firm stands in the
industry with respect to key items on the financial statements.

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Limitations

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

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

• Different accounting policies may be used by different firms or within the same
firm at different points in time. Adjustments should be made for such differences.
• Different firms may use different accounting calendars, so the accounting periods
may not be directly comparable

COMMON SIZE AND COMPARATIVE ANALYSIS OF VIDEOCON

30th Sept., 30th Sept.,

Particulars 2009 2008
(Rs. in (Rs. in
Million) Million)
common size comparativ
sources of fund common size 2009 2008 e
shareholders
fund

share capital 2,754.16 1.6 2753.11 1.8 99.96187585

reserve and
surplus 69,296.25 41.0 65,384.86 42.8 94.35555315
warrant
subscription 950.01 0.56 0 0
deffered tax
liability(net) 5,123.38 3.03 4244.3 32 82.84179585
Loan funds
secured loans 67,350.37 39.85 44,012.54 28.8 65.34862392
unsecured loans 23,495.10 13.9 36,043.40 23.6 153.4081574
Total 168,969.27 100 152,438.21 100 90.21652872
appllication of
funds
Fixed assets
gross block 103,191.05 61.0 102,373.03 67.1 99.20727621
less:depreciation 42,988.32 25.4 43,106.32 28.2 100.2744932
net block 60,202.73 35.6 592,666.71 3.38 984.4515523
Investments 30,648.99 18.1 26,955.88 17.6 87.9503044

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Current asset,loans,advances 0
Inventories 175,634.93 10.3 15,688.64 10.2 8.932528399
sundry debtors 17,061.13 10.0 15,828.89 10.3 92.77750067
Cash and bank
balance 4,985.06 2.9 3,932.46 2.5 78.88490811
other current
assets 320.43 0.1 185.74 0.1 57.96585838
loans and
advances 47,935.04 28.3 39,932.46 26.1 83.30536493
87,956.59 52.0 75,518.57 49.5 85.85891063
less:current assets and
provisions
current liabilities 8,537.12 5.0 7,783.24 5.1 91.16938733
Provisions 1,301.92 0.7 1,519.71 0.9 116.7283704
Total 9,839.04 5.8 9,302.95 6.1 94.55139932
net current assets 78,117.55 46.29 66,215.62 43.43767878 84.7640767
Total 168,969.27 100 152,438.21 100 90.21652872

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

PROFIT AND LOSS ACCOUNT

Year ended
on
30th Sept.,
2009
(Rs. in
Particulars Million) Year ended on
common 30th Sept., common
size 2008 size
(Rs. in Million)
Income
sales/income from
operations 93,812.69 1.0 101,051.28 103.2982652
less:exise duty 2,182.28 2.3 3,514.74 3.592894069
net sales 91,630.41 99.6 97,536.54 184.3426074
other income 340.15 0.3 288.22 2.328185079
Total 91,970.56 100 97,824.76 100
Expenditure
cost of goods 56,143.96 65.14193768 52,910.47 62.33783294

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 consumed/sold
production and
exploration
expences 7,206.86 8.361875881 12,379.60 14.58534458
salaries,wages 1,264.23 1.466843306 1,158.18 1.364539596
Manufacturing and
other 9,436.94 10.94936227 7,815.63 9.208185777
interest and finance
charge 6,363.61 7.38348143 4,011.03 4.725698299
Depreciation 5,771.52 6.696499431 7,137.22 8.408899563
less:transferred from
revaluation 535.15 0.630500755
Total 86,187.12 100 84,876.98 100

what Does Ratio Analysis Mean?

A tool used by individuals to conduct a quantitative analysis of information in a
company's financial statements. Ratios are calculated from current year numbers and
are then compared to previous years, other companies, the industry, or even the
economy to judge the performance of the company. Ratio analysis is predominately
used by proponents of fundamental analysis

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

among various financial factors in a business as disclosed by a single set of statements
and a study of trend of these factors as shown in a series of statements."

Advantages and Uses of Ratio Analysis

There are various groups of people who are interested in analysis of financial position
of a company. They use the ratio analysis to workout a particular financial characteristic
of the company in which they are interested. Ratio analysis helps the various groups in
the following manner: -

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

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

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 management to know about the earning capacity of the business concern. In this
way profitability ratios show the actual performance of the business.
2. To workout the solvency: With the help of solvency ratios, solvency of the

company can be measured. These ratios show the relationship between the
liabilities and assets. In case external liabilities are more than that of the assets of
the company, it shows the unsound position of the business. In this case the
business has to make it possible to repay its loans.
3. Helpful in analysis of financial statement: Ratio analysis help the outsiders just

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

profitability and ability of the company to pay them interest and dividend etc.
4. Helpful in comparative analysis of the performance: With the help of ratio

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

previous years. In this way company comes to know about its weak point and be
able to improve them.
5. To simplify the accounting information: Accounting ratios are very useful as

they briefly summarise the result of detailed and complicated computations.

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

operating efficiency of the company with the help of various turnover ratios. All
turnover ratios are worked out to evaluate the performance of the business in
utilising the resources.
7. To workout short-term financial position: Ratio analysis helps to workout the

short-term financial position of the company with the help of liquidity ratios. In
case short-term financial position is not healthy efforts are made to improve it.
8. Helpful for forecasting purposes: Accounting ratios indicate the trend of the

business. The trend is useful for estimating future. With the help of previous
years’ ratios, estimates for future can be made. In this way these ratios provide
the basis for preparing budgets and also determine future line of action.

Classification of various profitability ratios: -

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 a. Gross Profit Ratio.

b. Net Profit Ratio

c. Operating Net Profit Ratio
d. Operating Ratio.

e. Return on Investment or Return on Capital Employed.

f. Return on Equity.

g. Earning Per Share.

Meaning, Objective and Method of Calculation: -

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

Profit of the concern and its Net Sales. Gross Profit Ratio can be calculated in the
following manner: -

Gross Profit Ratio = Gross Profit/Net Sales x 100

Where Gross Profit = Net Sales – Cost of Goods Sold

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

Closing Stock

And Net Sales = Total Sales – Sales Return

2009 = 93812.69-5614396/93812.69*100

=0.4

2008= 101051.28-52910.47/101051.28*100

= 0.47

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 Interpretation: Gross Profit Ratio provides guidelines to the concern whether it
is earning sufficient profit to cover administration and marketing expenses and is
able to cover its fixed expenses. The gross profit ratio of current year is compared
to previous years’ ratios or it is compared with the ratios of the other concerns.
The minor change in the ratio from year to year may be ignored but in case there
is big change, it must be investigated. This investigation will be helpful to know
about any departure from the standard mark-up and would indicate losses on
account of theft, damage, bad stock system, bad sales policies and other such
reasons.

However it is desirable that this ratio must be high and steady because any fall in
it would put the management in difficulty in the realisation of fixed expenses of
the business.

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

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

Net Profit Ratio = Net Profit/Net Sales x 100

Where Net Profit = Gross Profit – Selling and Distribution Expenses – Office and
Administration Expenses – Financial Expenses – Non Operating Expenses + Non
Operating Incomes.

And Net Sales = Total Sales – Sales Return

2009 = 4006.62/93812.69*100

= 4.27

2008 = 8542.95/101051.28*100

= 8.45

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 Interpretation : In order to work out overall efficiency of the concern Net Profit
ratio is calculated. This ratio is helpful to determine the operational ability of the
concern. While comparing the ratio to previous years’ ratios, the increment
shows the efficiency of the concern.

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

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

from its business operation and not from the other sources. While calculating the
net profit of the concern all incomes either they are not part of the business
operation like Rent from tenants, Interest on Investment etc. are added and all
non-operating expenses are deducted. So, while calculating operating profit these
all are ignored and the concern comes to know about its business income from its
business operations.

Operating Profit Ratio shows the relationship between Operating Profit and Net
Sales. Operating Profit Ratio can be calculated in the following manner: -

Operating Profit Ratio = Operating Profit/Net Sales x 100

Where Operating Profit = Gross Profit – Operating Expenses

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

Incomes

And Net Sales = Total Sales – Sales Return

2009 = 56143.96+7206.96/93812.69*100

= 67.5

2008 = 52910.47+12379.60/101051.28*100

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 = 64.6

Interpretation : Operating Profit Ratio indicates the earning capacity of the concern on
the basis of its business operations and not from earning from the other sources. It
shows whether the business is able to stand in the market or not.

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

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

investment. The ratio establishes relationship between profit available to equity

shareholders with equity shareholders’ funds.

Return on Equity

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

Shareholders’ Funds x 100

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

Surplus – Fictitious Assets.

2009 = 4006.62+881.20+36.81/72050.41*100

= 6.83

2008= 8542.95+135.00+36.81/67137.97*100

= 12.9

Interpretation : Return on Equity judges the profitability from the point of view
of equity shareholders. This ratio has great interest to equity shareholders. The
return on equity measures the profitability of equity funds invested in the firm.
The investors favour the company with higher ROE.

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

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

Earning Per Share

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

2009 = 4006.62+36.81/2294.07

= 1.76

2008 = 8542.85+36.81/2293.02

= 3.74

Interpretation : Earning per share helps in determining the market price of the equity
share of the company. It also helps to know whether the company is able to use its
equity share capital effectively with compare to other companies. It also tells about the
capacity of the company to pay dividends to its equity shareholders.

Classification of Turnover/Activity/Performance Ratios: -

a. Capital Turnover Ratio

b. Fixed Assets Turnover Ratio.

c. Working Capital Turnover Ratio.

d. Stock Turnover Ratio.

e. Debtors Turnover Ratio.

f. Debt Collection Period

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

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

Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets

In case Net Sales are not given in the question cost of goods sold may also be used in
place of net sales. Net fixed assets are considered cost less depreciation.

2009 = 93812.69/103191.05

= 0.9 times

2008 = 101051.28/102373.03

= 0.98 times

Interpretation : This ratio expresses the number to times the fixed assets are
being turned over in a stated period. It measures the efficiency with which fixed
assets are employed. A high ratio means a high rate of efficiency of utilisation of
fixed asset and low ratio means improper use of the assets.

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

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

Stock Turnover Ratio = Cost of Goods Sold/Average Stock

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

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

Closing Stock

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 2009 = 56143,96/43349.65

= 12.95

= 360/12

= 30 days

2008 = 52910.47/4261.24

= 12.41

= 30 days

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

ratio provides guidelines to the management while framing stock policy. It
measures how fast the stock is moving through the firm and generating sales. It
helps to maintain a proper amount of stock to fulfill the requirements of the
concern. A proper inventory turnover makes the business to earn a reasonable
margin of profit.

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

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

Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables

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

Debtors and B/R]/2

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 Credit Sales = Total Sales – Cash Sales

2009 = 9381.69/16455.01

= 0.005 times

2008 = 101051.28/16455.01

= 0.06 times

interpretations: This ratio indicates the efficiency of the concern to collect the
amount due from debtors. It determines the efficiency with which the trade
debtors are managed. Higher the ratio, better it is as it proves that the debts are
being collected very quickly.

Classification of Liquidity Ratios:

a. Current Ratio.

b. Liquid Ratio.

Meaning, Objective and Method of Calculation:

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

pay off its short-term liabilities. This ratio is also called working capital ratio.
This ratio explains the relationship between current assets and current liabilities
of a business. Where current assets are those assets which are either in the form
of cash or easily convertible into cash within a year. Similarly, liabilities, which
are to be paid within an accounting year, are called current liabilities.

Current Ratio = Current Assets/Current Liabilities

2009 = 87,956.59/8537.12

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 = 10.2 :1

2008 = 75518.57/7783.24

= 9.70:1

Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills
Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses,
Accrued Incomes etc.

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

Outstanding Expenses etc.

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

business. This ratio measures the ability of the business to pay its current
liabilities. The ideal current ratio is suppose to be 2:1 i.e. current assets must be
twice the current liabilities. In case, this ratio is less than 2:1, the short-term
financial position is not supposed to be very sound and in case, it is more than
2:1, it indicates idleness of working capital.

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

manner. It is also called acid-test ratio and quick ratio. It is calculated in order to
know how quickly current liabilities can be paid with the help of quick assets.
Quick assets mean those assets, which are quickly convertible into cash.

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

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 2009 =87956.59-17634.93/8537.12

= 8.23:1

2008 = 75518.57-15634.93/7783.29

= 7.6:1

c. cash ratio

cash ratio = cash + marketable securities/current liabilities

2009 = 4985.06/8537.12

= 0.58:1

2008 = 3882.84/7783.24

= 0.49:1

d. net working ratio

2009 = net working capital/total assets

= 55924.37/168969.27

= 0.33:1

2008 = 31691.93/152438.21

= 0.02:1

e. absolute ratio

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 = absolute liquid assets/current liabilities

2009 = 4985.06/8537.12

= 0.5:1

2008 = 3882.84/7783.24

= 0.4 :1

Classification of Solvency Ratios:

a. Debt-Equity Ratio.

b. Debt to Total Funds Ratio

c. Fixed Assets Ratio
d. Proprietary Ratio.
e. Interest Coverage Ratio.

Meaning, Objective and Method of Calculation: -

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

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

Debt Equity Ratio = Debt/Equity

Where Debt (long term loans) include Debentures, Mortgage Loan, Bank
Loan, Public Deposits, Loan from financial institution etc.

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

and Surplus – Fictitious Assets

2009 = 168969.27/7205.05

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 = 23.45

2008 = 152438.21/6813.8

= 22.4

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

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

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

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

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

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

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

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

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

Debt to Total Funds Ratio = Debt/Total Funds

Where Debt (long term loans) include Debentures, Mortgage Loan, Bank
Loan, Public Deposits, Loan from financial institution etc.

Total Funds = Equity + Debt = Capital Employed

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

and Surplus – Fictitious Assets

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 2009 = 17081.13/87956.58

= 0.19

2008 = 15828.89/75518.57

= 2.0

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

funds, which have been raised by way of loans. This ratio measures the long-term
financial position and soundness of long-term financial policies. In India debt to
total funds ratio of 2:3 or 0.67 is considered satisfactory. A higher proportion is
not considered good and treated an indicator of risky long-term financial position
of the business. It indicates that the business depends too much upon outsiders’
loans.

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

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

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

Long-term Loans

2009 = 2536.34/466.82

= 5.43

2008 = 2306.65/381.68

= 6.04

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 Interpretation : This ratio expresses the satisfaction to the lenders of the concern
whether the business will be able to earn sufficient profits to pay interest on long-
term loans. This ratio indicates that how many times the profit covers the interest.
It measures the margin of safety for the lenders. The higher the number, more
secure the lender is in respect of periodical interest.

d. debt to capitalised ratio

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

2009 = 67350.37/6350.37 + 7205.05

= 0.90

2008 = 44012.54/44012.54 + 6813.18

= 0.86

TREND ANALYSIS

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

trends relating to series of information method involves computation of
percentage relationship that each statement item bears to the same item in the
base year.

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

20000
16,384.59
14,819.39
15000
rore

30
10,884.50
 Fig 1

interpretation : this graph show that there is change in total loans it seems to be
increasing upto 2009.

2. graph shows change in uses of funds.

uses of fund

10000

8000
Rs in crore

6000
Fig: 2
4000
Interpretation : graph predicts that fixed assets increased upto 2009.net block is
also increased. 2000
income
3. graph of income
12000 0
10000
8000 Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06
Inc om e
6000
Rs

Operating inc om e
YEAR
4000
2000
0
S ep ' 09 S ep ' 08 Sep ' 07 S ep ' 06 S ep ' 05
ye a rs

31
 Fig 3

4. graph of assets.

assets

20000

15000
Rs in crore

10000
Fig 4.

Interpretation : fig5000
4 predicts that there is change in assets also upto 2009 it has
increased above 15000.

5. total income 0
Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06 S
income
year
12000
9,753.65
10000 9,163.04
8,285.42
7
rore

32
8000
 Fig 5

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

decreased as compared to previous year.

6. graph for expences

expenses

8000
7000
6000
Rs in crore

5000
4000
3000 Fig 6
Interpretation ; 2000
fig 6 shows increase in cost of sales and material consumed.
1000
No such change in selling and manufacturing expences.
0
Sep ' 09 Sep ' 08 Sep ' 07 Sep ' 06
year

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 FUND FLOW STATEMENT

Schedule of changes in Working capital :

For preparing the Fund Flow statement we should know the components of working
capital. There are two components of working capital

1.Current Assets

2.Current liabilities

Current assts are those assets which are converted into cash within one year. For
example cash, bank balances, debtors, stock, bills receivables, prepaid expenses, short –
term investment etc.

Current liabilities mean liabilities including loan, deposits, and overdrafts etc. which
fall due for payment in a relatively short period normally not more then one year. For
example creditors, bills payable, outstanding expenses, income tax payable, declared
dividend etc.

Funds Flow statement is prepared on the basis of ‘working capital’. Under this method
the following two statements are prepared:

1. Schedule of changes in Working Capital

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 2. Funds Flow statement

1. Schedule of changes in Working capital :

Schedule of changes in net working capital is a statement prepared to ascertain the net
change (increase or decrease) in working capital over period of time. An increase in
working capital is shown as a use of funds, while a decrease is shown as a source of
fund in the fund flow statement.

Current assets 2008 2009 Increase in wc Decrease in wc

cash 3882.84 4985.00 1102.22
Sundry detors 15828.89 17081.13 1252.24
inventory 15688.64 17634.93 1946.29
Other current assets 185.74 320.43 134.69
Loans and advances 39932.48 47935.04 8002.56
total 75518.57 87956.59

Current liabilities
Sundry creditors 7783.24 8537.12 753.88
provisions 1519.71 1301.92 217.79
total 9302.95 9839.04
Working capital 66215.62 78117.55
Increase in wc 11901.93 11901.93
78117.55 78117.55 123438 123438

Fund Flow Statement:

Meaning of Fund Flow

The financial statement of the business indicate assets, liabilities and capital on
a particular date and also the profit or loss during a period. But it is possible
that there is enough profit in the business and the financial position is also good

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and still there may be deficiency of cash or of working capital in business. If the
management wants to find out as to where the cash is being utilized, financial
statement cannot help. Therefore, a statement is prepared of the sources and
applications of funds from where Working Capital comes and where it is
utilized. This is called Fund Flow statement.

Meaning of ‘Fund’

In a popular and generally accepted sense the term ‘fund’ is used to denote the
excess of current assts over current liabilities :

Working Capital = Current Assets – Current Liabilities

Meaning of ‘Flow’ of Fund

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

words, Flow of funds means change in Working capital, as in funds flow
statement the words ‘funds’ mean net working capital.

Definition:

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

the increase in cash resources and the utilization of such resources of a
business during the accounting period.”

Fund from operations

Net profit of the year 4006.62

Add : depreciation 5771.52

Less: other income 340.15

FFO 9437.99

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 DIFFERENCE = 2009-2008

= 9437.99- 15391.95

= 5953.96

Fund flow statement

Sources Application
Fund from operation 5953.96 Increase in wc 11901.93
Shares 1.05 Change in fixed 118
assets
Reserves 3911.39 Investment 3693.11
Long term loans 23337.83 Dividend 84.86

Net block 17753.71

33204.33 Total 33204.33

Cash Flow Statement

A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds
flow statement all the current assets and current liabilities are taken into consideration. But
in a cash flow statement only those sources of funds are taken which provide cash and only
the uses of cash are taken into consideration, even liquid asset like Debtors and Bills
Receivables are ignored.

A Cash Flow Statement is a statement, which summarises the resources of cash available to
finance the activities of a business enterprise and the uses for which such resources have
been used during a particular period of time. Any transaction, which increases the amount of
cash, is a source of cash and any transaction, which decreases the amount of cash, is an
application of cash.

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Cash flow statement OF Videocon
A. CASH FROM OPERATING ACTIVITIES
Net profit before tax 6084.00
a. depreciation 5887.57
b. interest and finance charges 748.20
c. provision for retirement benefits 26.17
d. investment value 53.15
e. interest for the year 0.03
f. interest received 662.48
g. loss from investment 4.76
h. loss on sale of fixed assets 100.61
cash flow from operating activities before working capital 19083.99
a. inventories 1953.63
b. sundry debtors 501.87
c. other current assets 164.87
d. loans and advances 10988.25
e. current liabilities 2604.55
cash flow from operating activities 8079.92
less: income tax paid 921.34
less: fringe benefit tax paid 16.41
net cash flow from operating activities (A) 7142.17

B. CASH FLOW FROM INVESTING ACTIVITIES

Sales of fixed assets 3219.98
Interest received 662.48
Income(loss) from investment 4.76
Increase in fixed assts 20919.27
Increase in preoperating expenditure 5141.54
Miscellaneous expences 0.09

38
 Decreas in goodwill 26.74
Sale of investment 16704.65
Net cash flow investing activities 5433.83
C. CASH FLOW FROM FINANCING ACTIVITIES
Increase in equity share capital 1.05
Increase in share application money 7072.48
Securities premium receive 11.90
Forfeited shares 2.72
Change in secured term loans from banks 19134.97
Change in unsecured loans 13062.72
Change in working capital 1702.45
Transfer of deferred tax liabilities 0.97
Redemption 753.74
Payment of dividend 268.59
Tax on dividend 45.25
Interest paid 7478.20
C 8554.91
Net change in cash and cash equivalents A+B+C = 6846.57

The Meaning of Cost Sheet. (Cost Accounting)

Cost sheet is a statement of cost. In other words, when costing information are set out in
the form of a statement, it is called cost sheet. It is usually adopted when there is only
one product is produced and all costs are incurred for that product only. Cost sheet may
be prepared for a week, monthly, quarterly or yearly indicating various components of

39
cost as prime cost, works cost, cost of production, cost of goods sold, total cost and also
profitability on a production.

The preparation of cost sheet depends on the cost data provided by cost accounting.
Due to differences in the nature of cost data there are three different cost sheet
Performa may be used.

(a) Cost sheet with break up cost: These types of cost sheet contains two column as
total cost, cost per unit of out put. A specimen of cost sheet with imaginary figure.

(b) Cost Sheet with treatment of Stock: This type of cost sheet is maintained in case
of manufacturing concern. Generally there are three types of stock as (1) Stock of Raw
material, (2) Stock of work in progress and (3) Stock of finished goods. The treatment
of stock in cost sheet has been given in a separate Performa.

(c) Estimated cost sheet or price quotation: Price quotation means quoting the
minimum price for obtaining a specific order. The quotation is send in the form or
estimated cost sheet having one column. In estimated cost sheet all elements of cost and
overhead expenses are calculated in the following manner.

• Estimated direct material

• Estimated labor cost
• Estimated overheads

COST SHEET OF VIDEOCON

DIRECT MATERIAL
Opening stock 10201.57
Add: purchase 68047.07
78248.58
Less: closing 11129.45
67119.13

40
Direct wages 1523.22
Expences 9436.94
PRIME COST 176779.29
Add: factory or work overhead
Indirect wages 91.04
Power & fuel 808.42
Rent 115.86+ 73
Depreciation 5771.52
Welfare services 91.04
Insurance 89.53
Work or factory cost 7041.01

Add: administrative overhead

Rent rates n taxes 115+73
Lighting n cooling 308.42
Insurance 39.79
Maintainance, repair 91.09+94.98+26
Printing n stationary 24.82
Bank charges 213.93
Miscellaneous expences 567.27
COST OF PRODUCTION 3013.21+24.82
Add: selling and distribution overhead
Market consultancy 254.08
Rent and tax 83.49
Salaries 1056.19
Advertising 927.68
Bad debt 264.01
Mis expences 567.27

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Cost of sales 3152.05
Add: net profit 91070.56
Less: net loss

REFERENCES
1. www.accountingmanagement.com
2. www.rediff.com
3.www.moneycontrol.com
4.www.tutor2u.com
5.www.videocon.com
6www.cliffsnotes.com/study_guide/CommonSize-Analysis.topicArticleId-
21248,articleId-21212.html#ixzz13lVPwJJ6
7.www.netmba.co.
8. www.universalteacher4u.com

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