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WELCOME
This is a presentation for the E1-E2 (Finance) Module for the Topic: Accounting standards and Ratio analysis Eligibility: Those who have got the Upgradation from E1 to E2. This presentation is last updated on 15-3-2011. You can also visit the Digital library of BSNL to see this topic.
Introduction
If Accounts is the language of business, Accounting Standards may be stated to be the grammar of that language. These standards are mandatory to be complied with to ensure that financial statements are prepared in accordance with the generally accepted accounting practices Accounting Standards provide for disclosure norms to add value to the preparation of accounting statements.
ICAI recognizing the need to harmonize the diverse accounting policies and practices prevalent in India constituted an ASB in April 1977
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Compliance
Compliance with the Accounting Standards has been made mandatory. Sub section 3(A) to section 211 of Companies Act requires that every profit and loss account and Balance Sheet shall comply with the Accounting Standards.
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Compliance
Sub Section 3(B) prescribes that in case the profit and loss account and balance sheet of a company does not comply with the requirements of the AS, disclosures should be made stating
I. Deviations from the AS II. The Reasons for such deviation and III. The financial effect, if any, arising due to such deviation
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Compliance
Sub Section 3(C) Provides that the standard of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government
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Compliance
Sub Section (3) of Section 227 of Companies Act requires the auditors to report whether in his opinion the profit and loss account and balance sheet comply with the accounting standards The statutory auditors are required to make qualification in his report in case any item is treated differently from the prescribed treatment in the relevant Accounting standard.
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Accounting Standards
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RATIO ANALYSIS
FINANCIAL ANALYSIS : Is the process of identifying the financial strengths and weakness of the firm by properly establishing relationships between the items of Balance Sheet and Profit and Loss Account RATIO ANALYSIS : is a tool of financial analysis.
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RATIO ANALYSIS
Ratio analysis is the analysis of the relationship between items of financial data, or between financial and non financial data. Ratios sometimes prove themselves to be more meaningful than the absolute figures
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Standards of comparison:
A single ratio does not indicate any condition. It should be compared with some standard. Standards of comparison may consist of: 1) Ratios calculated from the past financial statements of the same firm. 2) Ratios developed using the projected, or pro forma, financial statements of the same firm. 3) Ratios of some selected firms, ( most progressive & successful,) 4) Ratios of the industry to which the firm belongs.
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Precautions
Points to be borne in mind while using ratio analysis technique Only figures that have a mutual cause and effect relationship should be considered Particular characteristics of the industry should always be kept in mind while a firm is being studied. Ratios are only symptoms and not the real disease in itself Good profits rather than good ratios is the objective of the firm
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RATIO ANALYSIS
Classification of Ratios:
Structural Classification Functional Classification
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S.N
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Type
Balance Sheet Ratios
Ratios for which the components are drawn from the P&L Account. (Income Statement Ratios or Operating Ratios )
* Gross Profit Ratio * Net Profit Ratio * Operating Ratio * Stock Turnover Ratio * Expenses Ratio
Ratios for which the components are drawn both from the Balance Sheet and P&L Account. ( Financial Ratios. )
* Return on Capital Employed * Return on Investments [ROI] * Debtors Turnover Ratio * Creditors Turnover Ratio * Fixed Assets Turnover Ratio
[ROCE]
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Activity analysis
Activity ratios describe the relationship between the firms level of operations and the assets needed to sustain operating activities. Short term (operating) activity ratios Inventory turnover Receivables turnover Payable turnover Working capital turnover Long term (investment) activity ratios Fixed assets turnover Total asset turnover
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Liquidity analysis
Liquidity ratios helps in assessing the ability of a firm to meet its current obligations. This ability depends on the cash resources available as on the balance sheet date. Current ratio Quick ratio Cash ratio
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Profitability analysis
Investors are concerned with the firms ability to generate, sustain and increase profits Return on sales Gross margin Operating margin Profit margin Return on investments Return on assets Return on equity
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