INTERVIEW QUESTIONS

A Pays to B on behalf of C Journalise in all three Books

Note:A’s Creditor is C

         A Pay’s to B by writing cheque in B’s name for discharging the liability of C

         B is liable to pay to C

A’s Books	B’s Books	C’s Books
B a/c dr	Bank a/c dr	B a/c dr
To Bank	To C	To A

RUNNING BILLS

Concept of Running Bills and accounting submitted by contractors

Description	RA-1	RA-2
Bill Value	100	150
Bill Certified	80	120
Retention	10%	10%

Note : Liability to be accounted for RA- 1 is 80 and for RA-2 is Rs120

            Bill RA-2 is cumulative so Bill to be accounted is 120-80=40

            Retention % to be applied on Bill Certified

Entry for RA-1

Dr Expense   80

Cr  Liability          72

Cr Retention         8

Entry for RA-2

Dr Expense 40

Cr Liability        36

Cr Retention      4

RATIOS

Ratios Analysis

What is Ratio Analysis?

Establishes numerical realtionship between two variables of Financial statements

To Judge the historical performance and current Financial position.

classification

Liquidity Ratios

Capital Structure or Leverage Ratios

Activity Ratios

Profitability Ratios


LIQUIDITY RATIOS

Liquidity or short Term solvency means the ability to pay short term liabilities.

Inability to pay short term liabilities consistently will hamper the company's credit Rating.

covers

Current Ratio

Liquid Ratio/Acid Test Ratioo/Near Money Ratio/Quick Ratio

Cash Ratio/Super Quick Ratio/Absolute Cash Ratio

Current Ratio

Current Assets/Current Liabilities

Ideally 2:1 (As per Chore Commitee 1.33)

Quick Ratio/Liquid Ratio/Acid Test Ratio/Near Money Ratio

Quick Assets/Quick Liabilities

Ideally should be 1:1

Cash Ratio/Super Quick Ratio/Absolute Cash Ratio

Cash+Marketable securities/Current Liabilities


Capital Structure Ratios or Leverage Ratios

Measures the Longterm stability and structure of the Firm.
Particularly important for long term providers of Finance

Covers
.Debt Equity Ratio
.Debt Service Coverage Ratio
.Interest Coverage Ratio
.Preference Dividend Coverage Ratio
.Eqauity Dividend Coverage Ratio
.Capital Gearing Ratio
.Fixed Assets to Long Term Fund Ratio
.Propriterary Ratio
.Book Value per share
.Degree of Operating Leverage
.Degree of Financial Leverage
.Degree of Combined Leverage

Debt Equity Ratio
Debt/Equity

Ideally should be 1:2
Debt gives tax advantage

Debt Service coverage Ratio
Earnings avalable for debt service

Net Profit+Non cash Items(Depreciation)+Non operating expenses+interest on debt/Instalment(Principal Component)+interest

Note; Numerator is called Cash accruals or cash profit

Interest Coverage Ratio

EBIT(Earnings before Interest and Tax)/Interest

Preference Dividend Coverage Ratio

PAT(Profit after Tax)/Preference Dividend

Indicates a MOS(Measure of Safety) to Preference shareholders (PSH)

Equity Dividend Coverage Ratio

PAT(Profir after Tax)-Preference Dividend//Equity Dividends

Capital Gearing Ratio

Preference Share Capital+Debenture+Long Term Loans/Equity sharecapital+Reserves&surplus-accumulated losses
Alternatively
Fixed Income bearing Securities//Non FFixed Income Bearing Securities

Fixed Assets to Long Term Fund Ratio
Fixed Assets/Long Term Funds

Should not be less than 1
If it is more than 1it indicates that Short Term Funds has been used  to finance fised assets.

Proprietory Ratio

Proprietary Funds/Total Assets

PF=Share Capital +Reserves &surplus-Fictitious Assets
TA=Total Assets-Fictitious Assets
Measures Long Term Solvency Position

High Indicates over Investment in Fixed asset which adversely affects Working capital

Book Value per share

Net Assets available to ESH/No of Equity Shares

Operating Leverage(DOL)

Contribution/EBIT
or

% Change in EBIT/% Change in Sales

Financial Leverage (DFL)
EBIT/EBT
or
% Change in EPS/%Change in EBIT

Combined Leverage (DCL)
DOL*DFL
Contribution/EBT

ACTIVITY RATIOS/TURNOVER RATIOS
.Also known as performance ratio
.indicates frequency with respect to asset

Covers
.Capital Turnover Ratio
. Fixed Assets Turnover Ratios
.Stock Turnover Ratio
.Stock Velocity
.Debtors Turnover Ratio
.Debtors Velocity
.Creditors Turnover Ratios
.Creditors Velocity

Capital Turnover Ratio

Sales//Capital Employed

Indicates Firms ability of generating sales per rupee of Long Term Investment

Capital Employed =LTFA(Long Term Funds approach

Fixed Assets Turnover Ratio

Sales/Fixed Assers

Higher the better(but not very high

Stock Turnover Ratio (STR)
Cost of goods sold/Average Inventory

Stock Velocity

365/12
-------
STR

Debtors Turnover Ratios (DTR)

Credit sales/Average Debtors

Debtors Velocity

365/12
------
DTR

Also Known as Debt Collection Period

Creditors Turnover Ratios(CTR)

Credit Purchases/Average Creditors

Creditors Velocity

365/12
-------
CTR

Also Known as Creditors Payment Period.

PROFITABILITY RATIOS
These Ratios measures the profitability or the operational efficiency of the firm.


Covers
.Gross Profit Ratio
.Operating Profit Ratio
.Net Profit Ratio
.ROE
.ROCE
.ROI
.EPS
.DPS
.PE RATIO
.Dividend Yield

Gross Profit Ratio
Gross Profit/Sales*100

Gross Profit=Sales-Cost of Goods Sold

Operating Profit Ratio
Operating Profit/sales*100

OP=EBIT

Net Profit Ratio

Net Profit/Sales*100
NP=PAT

Return on Equity(ROE)
PAT-Preference Dividend/ESC+R&S-Fictitious assets

Return on Capital  Employed (ROCE)
Return/Capital employed*100

Return=Net Profit+Interest+Tax Provision-Interest/dividend on Non Trade Investments

Capital Employed=LTFA(Long Term Funds Approach)

Return on Investment (ROI)

EBIT/Capital employed *100

Capital Employed =LTFA

EBIT=Return

Earnings per share

PAT-Pref Dividend/No of Euity shares
covered by AS-20

Dividend Per share

EPS//D/P ratio

D/p Ratio=DPS/EPS

Price Earnings Ratio(PE Ratio)
MPS/EPS

MPS=PE*EPS

Dividend Yield (Always expressed as a percentage)

DPS/MPS*100

LIMITATIONS

.Ignores Price level changes
.Difference in accounting policy
.WWindow dressing

Case Studty -1

From the following information prepare a summarised balance sheet  as at 31.3.1990

.Stock Velocity 6

.Fixed Assets Turnover 4
.Capital Turnover Rato 2

.Gross Profit 20%
.Debt collection period 2 months
.Creditors Payment Period 73 days

.The Gross Profit was Rs 60000/=

.Closing stock was Rs 5000/= in excess of opening stock

.All Workings should form part of your answer.