CHAPTER - I

Introduction

Accounting process involves recording, classifying and summer sing business

transactions. The day to day transactions of business are recorded in
subsidiary books .these transactions are posted into various ledgers accounts
and the balance is taken out at the end of a financial period

The primary function of financial accounting is to provide relevant

financial information to users for making decisions and taking actions. The
primary means of providing financial information to investors, creditors and
other external users is through financial statements. In this chapter having
learnt the steps involved in creating financial information, the various users of
financial statements, form and content of financial statements and the various
concepts underlying the measurement of elements constituting the financial
statements, it is critical that the investors should be able to compare financial
information among companies.

Definitions:

According to smith and Ashburn ,financial statement are the end product of
financial accounting prepared by the accountant that purport to reveal the
financial position of the enterprise the result of its activities and an analysis of
what has been done with the earnings

According to john n Meyer “the financial statement provide summary of

the accounts of a business enterprise, the balance reflecting the assets,
liabilities and capital as on certain period

Accounting and Financial Analysis:

Accounting data is of great importance for carrying out detailed financial

analysis. Financial analysis is usually carried out to study the financial position
of the company from the point of view of,

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• Shareholders.
• Debenture holders.
• Banks (for working capital purposes).
• Financial Institutions (like State Finance Corporation, IDBI, etc.)
• Statutory Agencies (like Stock Exchanges, Registrar of Companies).
• Others (like potential buyers of companies in takeovers or mergers).

Financial analysis is carried out using accounting data available in Profit and
Loss Account, and Balance Sheet. Hence a good grasp of the accounting
logic underlying these statements will be of immense help in financial
analysis.

Use of Financial Statements

Decision-making requires critical analysis and careful interpretation of the

published financial statements. In general, the common tools used by the
management to facilitate analysis are Ratio Analysis, Funds Flow Statement,
Cash Flow Statement, Comparative Statements and Common Size Statements.

In this connection, the words of the Bombay Stock Exchange Official Directory
are pertinent:

“Financial statements are prepared for the purpose of presenting a periodical

review or report on progress by management and deal with the status of
investment in the business and the results achieved during the period under
review. They reflect a combination of recorded facts, accounting conventions
and personal judgments, and the judgments and conventions applied affect
them materially. The soundness of the judgment necessarily depends on the
competence and integrity of those who make them and on their adherence to
the Generally Accepted Accounting Principles and Conventions”.

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Objectives of the financial statement:-:-

1. To provide reliable information about economic resources and

obligation i.e. cash inflows, cash out flows.
2. To provide reliable information about changes in net resources of an
enterprise, the result from the activities, profitability of the business.
3. To provide financial Information that assists in estimating the future
capacity of an enterprise to generate earnings.
4. To provide information about change in resources and obligations
resulting from sources other then profit directed activities such as
transaction between an entity and its owners and information about
working capitals and other fund flows.
5. To know about the fund flows statement in the current real organization
scenario.
6. To ascertain the present and future profitability.

7. It is a means of recording the monetary transactions and events.

8. It is required to ascertain the earnings of the company, which is achieved

by preparation of Profit and Loss account.

9. It is required to identify the obligations (liabilities) and resources (asset)

of the organization.

10. Accounting records are required to be maintained statutorily by certain

government and regulatory bodies.

11. Accounting records are also required by the management for taking the
financial decisions.

12. Generally, investors and certain lenders also require the preparation of
financial statements

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Importance of Financial statement analysis:-
The financial position and operating strength or weakness of the concern,
these statements are useful to management, creditors, bankers, investors,
and government.
The utility of financial statements to different parties interested in the financial
position of the concern are enumerated as follows:-

1. Management: - The financial statement are useful for assessing

the efficiency of different cost centers, the management is able to
exercise cost control through these statements. The efficient and
inefficient spots are brought to the notice of the management; the
management is able to decide the future course of action to be taken.

2. Creditors: - The trade creditor is to be paid in a short period the

liability is meet out of the current assets. The creditor is interested in
the current solvency of the undertaking. The calculation of current
ratios and liquid ratio will enable the creditors to assess the current
financial position of the concern in relation to their debts.

3. Banker’s:- The banker’s is interested to see that the loan amount

is secured and the customer is able to pay the interest regularly. The
banker will study the profit and loss account to find out the earning
capacity and also analyze the balance sheet to determine the financial
strength of the concern. This statement also helps the banker to
determine the margin to be kept for granting the loans.

4. Investors: - The investors include both short-term and long –term

investors. They are interested in the security of the principle amount of
the loan and regular interest payments by the concern. The investors
will study the long term solvency of the concern with the help of
financial statement. The investors will not only analyzed the present
financial position but will also study the future prospects and expansion
program of the unit.

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 5. Government: - The financial statement is used to assess tax
liability of the business undertaking. The government studies economic
situation of the country from the statements.

6. Stock exchange: - The stock exchange deal in purchase and

sale of securities of different companies. The financial statement is
enable the stock broker to judges the financial position of different
concerns. The fixation of prices for securities is also based on these
statements.

7. Trade associations:- These associations provide service and

protection to the members, they may analyzed the financial statement
for the purpose of providing facilities to this members they may
develop standard ratio’s and design uniform system of accounts.

Limitation of the financial statement:-

Financial statement is prepared with the object of presenting periodical review

or report on progress by the management and deal with:-

i. status of the investment in the business and

ii. Results achieved during the period under review. However, these
objectives are subject to certain limitations as given below.

1. Financial statements are essentially interim reports:-

The profit shown by profit and loss account and the financial position as
depicted by the balance sheet is not exact. The exact position can be known
only when the business is closed. Again, the existences of contingent
liabilities deferred revenue expenditure make them imprecise.

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2. Accounting concepts and convention:-

Financial Statements are prepared on the basis of certain accounting

concepts and convention on the account of this reason the financial positions
as disclosed by these statements may not be realistic. For example, Fixed
assets in the balance sheet are shown on the basis of going concern
concepts this means that value place on fixed assets may not be same which
may be realized on their sale.

3. Influence of personal Judgment:-

Many items are left to the personal judgment of the accountant for example
the method of depreciation, mode of amortization of fixed assets, treatment of
differed revenue expenditure all depend on the personal judgment of the
accountant. The soundness of such judgment will necessarily depend upon
on his competence and integrity how ever the convention of consistency acts
as a controlling factor on making indiscrete personal judgment.

4. Disclosure monetary facts:-

Financial statements do not deficit those facts which cannot be expressed in

terms of money. For example, development of a team of loyal and efficient
workers, enlightened management the reputation and prestige of
management with the public or matters which are of considerable importance
for the business, but they are no where deficit financial statement.

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 RESEARCH METHODOLOGY

Need and importance of the study:-

The financial statements of Kakatiya diesel engineer are mirrors reflect the
financial position and operating strength or weakness of the firm. The
statement is useful to management investors, creditor’s banker’s workers
and government and public at large.

Objectives of the study:-

The financial statement analysis of Kakatiya Diesel Engineers is made with

the following objectives.

1) To analyzed pattern of asset and liabilities with the help of

comparative and common size statements.

2) To study the profitability, liquidity and the activity position of

the concern, with a view to analyze its performance.

3) To present the summary of the study and makes suggestions

for further improvement of the firm.

Methodology:-

For the study, the data was collected from the primary and secondary
sources have been scrutinized, edit and presented in the form of tables and
statements. The analysis of the data has been made with the help of certain
mathematical techniques like percentages proportion.

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Data Collection:-

The data for the present study is collected from two sources.

i) Primary Data:-

Primary data are the measurements observed and regarded as a part of

original study. When the data is required for the particular study can be
found neither internal record of the enterprise nor in the published
sources it may become necessary to collect original data i.e., to conduct
first hand investigation. There are two methods of obtaining the primary
data namely questionnaire and observation

The primary data for the present study is collected through personal
discussion held with Kakatiya Diesel engineering staff.

ii) Secondary Data:-

When an investigator uses the data that which others are already
collected such data is called secondary data. Secondary data is obtain
from the journal reports government publication of research organisation.

The secondary for the present study is collected from the annual
reports on manuals of Kakatiya Diesel engineering.

Scope of the Study:-

The present study reveal the financial performance of Kakatiya Diesel

Engineers covering purely the financial data supplied in the companies
financial statement through common size and comparative statements.

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Limitations of the study:-

1) The study confined to the Kakatiya Diesel Engineers.

2) Financial Management covers the topic like cost of capital

budgeting, cash flow statement cash and inventory management etc.
The present study deals with the financial analysis of the Kakatiya
Diesel Engineers.

3) Statement like comparative common size is compared from

the accounting records. So they possess this limitations and
weakness as a accounting records possess.

4) It not always possible to make estimation on the basis of the

past, as it always does not come true

5) All the data presented for the financial analysis was limited
upto only five years i.e., 2004-2005, 2005-2006,2006-2007, 2007-
2008,2008-2009.

6) How ever with this limitation the study is not handicapped in

any way with available data care is taken to cover all aspects of the
required objectives.

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 CHAPTER – II

COMPANY PROFILE

About MICO:-

Motor Industries Company Limited (MICO) has founded in 1951. It is a

pioneer and acknowledged leader in diesel fuel injection equipment and
spark plugs. Access to state of the art & technologies from Bosch and a
zealous commitment to quality have made MICO the country’s largest
manufacturer of diesel fuel injection equipment and one among the largest
in the world. With its head office and hi-tech manufacturing facilities in
Bangalore.

Naganathpura near by Bangalore. Nasik and Jaipur, MICO

manufactures products as diverse as industrial equipments auto-electrical,
hydraulics for industrial and tractor applications, electric power tools,
packaging machine, and blaupunkt, and audio systems.

MICO’s mission to delight customers and achieved through world class

product as well as a nation wide network of dedicated sale and service
outlets. Its all India network is well equipped to provide quick solution
backed up by mobile service workshops, excellent training maintenance,
and availability of genuine spares MICO as an extensive original equipment
customer base in India and abroad for its products the customer base
encompasses segments like automobiles, tractors, generator sets, and
agriculture implements major customer in India to mention a few Tata
motors, Ashok Leyland, Mahindra & Mahidra, Eicher, Simpson’s, Escorts
etc. and international original equipment manufactures includes Cummins,
Ireco and Dentz. MICO is one of the first industry in India to implement
environment protection measures in line with international standards way
back in 1988. progressively they approach as shifted from end of pipe
pollution control measures to integrated measures at the initial stage of
design and development of products and process.
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 Further, in the area of water conservation, the total fresh water
consumption which was 13.5 lakh liters per day in 1994 has come down to
5.5 lakhs liters per day in 2002 even though the production values have
gone up, the further objectives include elimination of ozone depleting
substances in cooling operations besides continuing efforts in the area of
water and energy conservations.

MICO in Focus:-

Motor Industries Company Limited was founded in 1951. Being a member of

the Bosch group Germany, MICO is the pioneer of automotive spark plugs
and diesel fuel injection equipment in it access to international technology
and conscious commitment to quality and over 11000 employees, MICO is
the largest manufacturer of diesel fuel injection. MICO also manufacturer’s
industrial equipment auto-electrical, hydraulic gear pumps for tractor
application electric power tools, packaging machines and Blaupunkt and
audio systems.

About Company in warangal:-

Kakatiya Diesel Engineers:-

Here in after deferred to as Kakatiya Diesel Engineers was established in

the year 1998. as a main here for MICO and Bosch products by Mr. Basha
(M-Tech) in 1980. The organizations become a workshop for servicing of
diesel engines. In 1981 Kakatiya Diesel Engineers got distinction of getting
distribution rights for north telangana region for MICO and Bosch products
from then the organization has expanded its service activities to various
parts of the state. Kakatiya diesel engineers have its branches in
Ramagundam, Khammam, and Karimnagar. It also supplies product of
MICO and Bosch to their customers located at Adilabad, Nizambad,
Karimnagar, Khammam and Nalgonda.

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 Mr. Basha is a M.Tech by qualification and has vast experience in this field
he grooved the organization from an independent workshop in 1976 to the
present level. The organization consists with a Bunch of dedicated
technicians with good knowledge and experience in repairing servicing of
fuel injection pumps.

The organization has major customers in:

1) M/S Singareni Collieries.

2) M/S Orient Cements.

3) M/S National Thermal Power Corporation (NTPC).

4) South Central Railway.

5) Andhra Pradesh State Road Transport Corporation (APSRTC).

The present turnover of the organization is 1.95 crores:

Kakatiya Diesel Engineers is providing the sales and services of MICO and
Bosch products which has its market area in the northern telangana regions
such as Karimnagar, Adilabad, Nizambad, Khammam Warangal, and
Nalgonda. The major MICO and Bosch products, which the Kakatiya diesel
engineers supplies to its customers are as follows:

1) Fuel Injection Equipment.

2) Fuel Injection Pumps.

3) Gear Pumps.

4) Spark Plugs.

5) Horns.

6) Batteries.

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 7) Diesel Filters.

8) Oil Filters.

9) Petrol Filters.

10)Air Filters.

11)Bosch Power tools (Drilling Machine, Grinding Machine Etc).

12)Bulbs.

13) Starter Motors.

14)Alternators.

Major Service Provided by Kakatiya Diesel Engineers:-

1) Sales and service of MICO and Bosch products.

2) Servicing of fuel injection equipment.

3) Servicing of auto electrical.

4) Servicing of Bosch power tools.

5) Door delivery to the customers.

6) Credit facility.

7) 24X7 services to its customers.

8) Provide quality service to the customers.

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Recognition:-

Kakatiya Diesel Engineers has been owned up on with recognition from time to
time for its performance and effective functions.

Kakatiya diesel engineers was its recognitions in offering the servicing of fuel
injection, which is considered as the heart of the motor engine of the vehicle
servicing of auto- electrical, servicing of Bosch power tools. In the year 2009
KDE is certified by ISO- 9001-2000 for providing high value added services to
the customers, the organization consistently is new rising to achieve ISO –
9001-2000 certification.

Objectives of the Kakatiya Diesel Engineers:-

 To provide better quality services.

 To provide cent percent customer satisfaction.

 To increase the sales turnover.

 To expand the business activities in the telangana region.

 To increase the profits of the firm.

 To retain its customers by offering quality services.

 To control the environmental position.

 To provide 24X7 services and door to door delivery.

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Awards received by Kakatiya Diesel Engineers:-

Kakatiya diesel engineers has been awarded the excellent performance by

MICO industries few the customers lot and the sales performance which record
an increase in the year by year turnover. The following are the awards received
by Kakatiya Diesel Engineers:-

1) Bosch Diesel World Cup – 1. Bosch in recognition of high quality

services of international standards.

2) Bosch World Cup – 2. In 1993 as distinguished numbers of Bosch world

cup service network for high quality service.

3) Excellence award in 2003 for the excellent performance in sales and

service.

4) Quality Cup Awarded in the year 2004 – 2005 for Quality service.

Vision of Kakatiya Diesel Engineer’s:-

It wants to provide technology need of the market, wants to introduce electronic

equipment now prevalent in the market to takeover the old mechanical
equipment. KDE wants to commence workshop which provide service to both
mechanical and electronic equipments to cope with the automotive
technological needs

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About Bosch:-

Bosch is Global leader in automobile technology:-

Bosch has already committed on investment of Rs 1000 Crores in India through

its flagship company – Motor Industries Company Limited (MICO). That
includes application, testing and manufacturing of common rail system.

Management of Robert Bosch Said , “Size alone is not what counts for
us. Our strengths are in innovation, competitiveness customer focus, and
internationalism”. Maintaining its strong R & D Capabilities to drive innovation,
Bosch also increased R&D spends to nearly 3 billion euros making it 7.5% of
sales. As a result of its internationalism and customer focus Bosch also
increased its global head count by nearly 1100 to 2, 42,500.

The Bosch Group recorded 10% increased in its sale turnover from 36
billion Euros to 40 billion euros for the year ending 2004.

With this, Bosch reached to Number 1 position in the world as the strongest
automotive supplier. Sales of the automotive technology division rise by
approximately 9% (after adjustment of currency effect) to 25.3 billion euros
most of this growth was driven by markets outside Germany. The group plans
to continued its focus in Asia and invest ½ a billion euros over the next 3 years.

Strategic focus on further growth:-

As before, the Bosch group is consistently pursuing its aim of achieving a better
balance in its business portfolio, an undertaking that above all involves
strengthening its industrial technology, consumer goods and building
technology business sector, in industrial technology, the acquisition of skipjacks
is significant. In addition Bosch is moving into new growth areas example
Include Micro system technology, with its promise of growth potential outside
automotive technology and hybrid drive. Moreover the past year the Bosch
group focuses more strongly on growth regions in the America and Asia.

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To increase it competitiveness still further Bosch is extending its development
and manufacturing network not only in Europe but also in Asia and America. Its
aim is mixed between locations in newly industrialized countries with their
particularly favorable cost structures, and locations that benefit from their
proximity to customers or research institutes.

Bosch Products:-

With over a 100 years of Expertise in making high quality automotive products,
Bosch enjoys and excellent reputation worldwide as dominant player in the
automotive product segment. Bosch continues to make significant contribution
to the automotive world through continues innovations, intensive research and
development. Among this are breaking systems, Management systems for
petrol engines, Body work electrics, Diesel Fuel Injection Technology, Body
Electronics, Mobile Communications, Semi-conductors and electronic
distribution network the current product program comprises of:

 Bosch Silver Batteries.

 Bosch Horns.

 Bosch Spark Plugs.

 Bosch Automotives Relays.

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 CHAPTER – III

THEORITICAL ASPECT

Financial statements are summarized periodical reports or the financial

and operative information accumulated by the concern in its books of accounts.
They are overall general purpose entity statements as they report the financial
position and operating results of an enterprise at the end of the accounting
period. Financial Statements are interim reports, usually presented annually
and reflect a division of the life of an enterprise into arbitrary accounting
periods.

The term “Financial Analysis” also known as analysis and interpretation

of financial statements refers to the process of determining financial strengths
and weaknesses of the firm by establishing strategic relationship between the
items of the balance sheet, profit and loss account and other operative data.

Financial Analysis is a process of evaluating the relationship between

component parts of a financial statement to obtain a better understanding of a
firm’s position and performance.

Financial statement analysis is largely a study of relationship among the

various financial factors in a business as disclosed by a single set-of statement.

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.

Financial statements which are also known as accounting reports contain the
basic information often needed by various persons interested in the enterprises.

Financial statement analysis involves the application of analytical tools and

techniques to the financial data to get information that is useful in decision
making. As we have observed, the foundation of any good analysis is a
thorough understanding of the objectives to be achieved and the uses to

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which it is going to be put. Such understanding leads to economy of effort as
well as to an useful and most relevant focus on the points that need to be
clarified and the estimates and projections that are required.

Financial statement analysis is oriented towards the achievement of definite

objectives. There are three types of users to whom the financial statement
analysis could be very useful. They are short-term lenders, long-term lenders
and finally stockholders. In this chapter an important tool ratio analysis is
covered extensively. Other tools covered are comparative analysis and Du
Pont analysis.

The two basic financial statements which are required to be prepared for
the purpose of external reporting (to owners, investors, editors, and others) are

1) Balance Sheet.
2) Income Statements or Profit and Loss account.

For internal management purpose of planning decision-making and

control much more information than is contained in the balance sheet and profit
and loss account is needed. So the financial accounting information is
presented in different statements and reports in such a way as to serve the
internal needs of the management.

OBJECTIVES OF FINANCIAL STATEMENT:-

1) To provide reliable financial information about the economic resources
and obligations of an enterprise.
2) To provide reliable information about changes in net resources of an
enterprise that result from the activities.
3) To provide other relevant information about changes in the economic
Resources and obligations.
4) To disclose, to the extent possible, other information related to the Users
of the statement.

NATURE OF FINANCIAL STATEMENTS:

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 1) Records financial facts concerning the business transactions.
2) Conventions adopted to facilitate the accounting technique.
3) Postulates or assumptions made to.
4) Personal judgment used in the application of the conventions and
Postulates.
IMPORANCE OF FINANCIAL STATEMENTS:

• To determine the legality of dividends.

• As a guide to wise dividend action.
• As a basis for the granting of credit.
• As information for prospective investors in an enterprise.
• As a guide to the value of investment already made.
• As an aid to government supervision.
• As a basis for price or rate regulation.
• As a basis for taxation.

Though all the above techniques of analysis are important the last three
have significant role for examining the changes in “Working Capital” liquidity,
and overall financial position of the enterprise.

PROCEDURE OF FINANCIAL STATEMENT ANALYSIS:

Broadly speaking there are three steps involved in the analysis of
financial statements. They are
1. Selection.
2. Classification.
3. Interpretation.

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 The first step involves selection of information (data) relevant to the
purpose of analysis of financial statements.
The Second step involved is the methodical classification of the data.
The third step includes drawing of inference as and conclusions.

PROBLEMS ENCOUNTERED IN FINANCIAL STATEMENT ANALYSIS

Analysis of financial statements using ratios can be very helpful in

understanding a company’s financial performance and condition. Yet there
are certain problems which come in the way of such an analysis.
Development of Benchmarks

Many companies have operations spread across a number of industries. As

there may not be any other company having a presence in the same
industries, that too in the same proportion, development of a benchmark
becomes a problem. Even when the company is not a diversified one, figures
for the various firms are needed in addition to the industry average, in order
to draw a meaningful conclusion.
WINDOW–DRESSING

Firms may window-dress the financial statements in order to show a rosy

picture. In such a case, the whole exercise of analyzing the statements
becomes useless. In order to draw some meaningful results out of the
analysis, the average figures over a period of time should be looked into.
PRICE LEVEL CHANGES

Financial statements do not take into account changes in price levels.

Analysis of such statements may not give a true picture of the state of affairs.

DIFFERENCES IN ACCOUNTING POLICIES

Different companies may follow different accounting policies in respect of

depreciation, stock valuation etc. Comparison between the ratios of two firms
following different policies may not give the true result.

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Types of the Financial Analysis:-
1) The nature of the analyst and the material used by him.
2) The objective of the analysis and
3) The modus operandi of the analysis.

1) ACCORDING TO THE NATURE OF THE ANALYST AND THE

MATERIAL USED BY HIM.:
a. Internal Analysis:-
The people who have assessed to the books of accounts make the
internal analysis. They are the members of the analysis. Analysis of the
financial statement or other financial data for managerial is the internal
type of the analysis. The internal analyst can give more reliable result
than the external analysis because every type of analysis. The internal
type of analysis can give more reliable result than the external analyst
because every type of information is at his disposal

b) External Analysis:-
It is made by those persons who are not connected with the enterprises
they do not have the assess to the detailed record of the company and
have to depend mostly on published statements such analysis is made
by investors, credit agencies, government agencies and research
scholars.

2) ACCORDING TO THE OBJECTIVE OF THE ANALYSIS

a) Long Term Analysis:-

The analysis made in order to study the long term financial stability,
solvency, profitability and earning capacity of a company. The
propose of making such type of analyst is to know whether in the
long run the company will be able to earn a minimum amount which
will be sufficient to maintain a reasonable rate return of the
investment of the company and to meet it to cost of capital.

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 This type of analysis helps the long term financial planning which
essential for the continued success of the company.

b) Short Term Analysis:-

This is made to determine the short term solvency and liquidity of
the company. The purpose of this analysis is to know whether in
the short run a company will have adequate funds readily available
meet its short term requirements and sufficient borrowing capacity
to made contingency in the near future. This analysis is made with
reference to its items of current assets and current liabilities to have
fairly sufficient knowledge about the company position which may
be helpful short term financial planning.
3) ACCORDING TO THE MODUS OPERANDI OF THE ANALYSIS.
a) Horizontal Analysis:-
This analysis is made to review and analysis financial statement
of a number of years and therefore based on financial data taken
from several years. This is very useful for long term trend analysis
and planning.
b) Vertical Analysis:-
This analysis is made to review and analyze the financial
statement of one particular year.

METHODS OF FINANCIAL STATEMENT ANALYSIS:

The analysis and interpretation of financial statement is used to
determine the financial position and results operation as well. A number of
methods are used to study the relationship between different statements.
1. Comparative Statement Analysis.
2. Common size Statement Analysis.
3. Trend Analysis
4. Ratio Analysis.
5. Funds Flow Analysis.
6. Cash Flow Analysis

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COMPARATIVE STATEMENT ANALYSIS:

Comparative financial statements are those statements which have

been prepared in such a way as to provide time perspective to the
consideration of various elements of operations and financial position of
the business embodied in the statement.
In these statements figures for two or more periods are provided side
to facilitate comparison.
The comparative financial statements are the statements of financial
position at different periods of time.
Not only has the comparison of the figures of two periods but also the
relationship between balance sheet and income statement enabled an in-
depth study of financial position and operative results.

COMMON SIZE SATEMENT ANALYSIS:

The common size statement balance sheet and income statements are
shown in analytical percentages. The figures are shown as percentages of
total assets total liabilities and total sales. The total assets are taken as 100
and different assets are expressed as a percentage of the total. Similarly,
various liabilities are taken as a part of total liabilities. These statements are
also known as component percentage of 100 percent statement because every
individual item is stated as a percentage of the total 100. The short comings in
comparative statements are trend percentages where changes in items could
not be compared with the totals have been covered up. The analysis is able to
assess the figures in relation to total values.

The common size balance statement may be prepared in the following way.

1. The totals of assets or liabilities are taken as 100.

2. The individual assets are expressed as a percentage of total assets.

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 RATIO ANALYSIS:-

1. Current Ratio:

Current ratio is the ratio of current assets to current liabilities. Current

assets are assets that are expected to be realized in cash or sold or consumed

during the normal operating cycle of the business or with in one year which

ever is long run. They include cash in hand and at bank, bills receivable, net

sundry debtors, stock of raw materials, finished goods and work in progress,

prepaid expenses.

Current liabilities are liabilities that are to be repaid with in a period of

one year. They include bills payable, sundry creditors, bank over draft,

outstanding expenses, and income received in advanced, short term loans and

advance repayable with in a year.

Current Assets
Current Ratio =
Current Liabilities

A current ratio of 2:1 is usually considered as ideal. The higher the

current ratio the larger is the amount of rupee available per rupee of current

liability. The more is the firm’s ability to meet current obligations and the greater

is the safety of funds of short term credit.

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2. Quick Ratio

Quick ratio is a ratio of quick assets to quick liabilities. Quick assets are

assets that can be converted into cash with out much loss.

Quick liabilities are liabilities which must be paid within one year.

All current assets except stock and prepaid expenses are also quick

assets.

All current liabilities except bank overdraft are quick liabilities.

Quick Assets
Quick ratio =
Quick Liabilities

Quick assets = current assets – (stock + prepaid expenses)

Quick liabilities = current liabilities – bank overdraft.

• A quick ratio of 1 usually considered as ideal

• A quick ratio of less than 1 indicates the inadequate liquidity of the

business.

• A high quick ratio is not advisable.

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3. Working Capital Turnover Ratio :

The ratio shows the number of times the working capital result in

sales. Working capital as usual is the excess of current assets over

the current liabilities. The higher ratio indicates that efficient utilization

of working capital and lower ratio indicates other wises defined as:

Cost of good sold or net sales

Working capital turnover ratio =
Net working capital

• If cost of good sold is not known net sales can be take.

• Working capital = current assets – current liabilities.

• A high working capital turn over ratio indicates efficient utilization of firm

funds.

27
 4 INVENTORY TURNOVER RATIO:
Inventory turnover ratio is also called as stock turnover ratio.
How many times stock is purchased during the year is an important
calculation because it depends on company purchase policy. Through
bulk buying gives various advantages of external and internal
economics, it results in heavy carrying costs and blocking funds, thus
limiting liquidity of concern.

High turnover stock not necessarily means that the company

buys in small lots. It may be so that the company is efficient and sells
it away quickly. It means more profit for the company, since the
company is able to secure more sales because of its efficient selling.
It also means efficient utilization on working capital and the stock are
fresh and not absolute. A low inventory turnover indicates poor quality
of inefficient selling and poor management of working capital.

SALES
STOCK TURNOVER RATIO = ------------------------------------
AVERAGE INVENTORY

NO. OF DAYS IN AN YEAR

INVENTORY CONVERTION = --------------------------------------
STOCK TURNOVER RATIO

28
 5 DEBTORS TURNOVER RATIO:
It means the number of times, average debtors are turned over during a
year. This ratio helps the financial manager to judge the adequacy or
otherwise of working capital.
This ratio is measured on the average credit period enjoyed by the
customers. It the velocity slows down, it is an indication that the risk of
collection of debts and costs of collection is increasing. This ratio is
favorable during periods of boom due to speedy realization of debts. The
opposite effects follow during period of recession.

Net credit sales

Debtors turn over ratio =
Average debtors

29
 6. CURRENT ASSETS TURNOVER RATIO:

This ratio establishes a relationship between net sales and

current assets. The objective of computing this ratio is to determine the
efficiency with which the current assets are utilized.

It indicates the firm’s ability to generate sales per rupee of

investment in current assets. In general, higher the ratio, the more efficient
the management and utilization of current assets, and vice versa.

CURRENT ASSETS NET SALES

TURNOVER RATIO = ----------------------------------
CURRENT ASSETS

7. CREDIT TURN OVER RATIO:

Credit turns over ratio express the relationship between creditors and

purchases.

Net credit purchases

Credit turn over ratio =
Avg. creditor

A net credit purchases implies credit purchases after adjusting from

purchase returns. In case of credit purchase is not available purchase may

be taken.

30
 In case average creditors can’t be found closing balance of creditors

should be taken.

The low the credit turn over ratio the high the efficiency of the payment of
debts. 12 is the ideal credit turn over ratio.

31
8. DEBT PAYMENT PERIOD:

Credit turnover ratio can also be expressed in terms of days taken by the

business to pay off its debts it is termed as debt payment period.

Number of days in a year

Debt payment period =
Credit turn over ratio

A high debt payment period indicates the firms in ability in meeting its

obligations. The ideal period for debt payment for a firm is 30 days.

9. STOCK TURN OVER RATIO:

Stock turn over ratio indicates the number of times the stock has turned
over into sales in a year.
Cost of goods sold (or) net sales
Stock turn over ratio =
Avg. stock

Cost of goods sold = sales – gross profit

Average stock = (opening stock and closing stock)/2

A stock turn over of ‘8’ is considered ideal a high stock turn over ratio

indicates that the stock are fast moving and get converted into sales quickly.

32
 CHAPTER - IV

DATA ANALYSIS

Comparative Balance Sheet as on 31-03-2004-2005.

Sl. Particulars Years I/D I/D

2004 2005 Amount Percentage
No
Liabilities
1. Capital 1769566.86 1920150.75 150583.9 8.5
2. Borrowings 9768493.37 8435808.77 -1332684.6 13.64
3. S.creditors 12186037.05 8300183.00 -3885854.05 31.89
Total 23724097.28 18656142.52 5067954.76 21.36
Assets
1. Cash & Bank 369852.09 240545.51 -129306.58 34.96
2. Fixed Assets 4464158.46 3817275.71 -646882.75 14.49
3. Other Assets 18890086.73 14598321.3 -4291765.43 22.71
Total 23724097.28 18656142.52 5067954.76 21.36
Source: Financial Statements of Kakatiya Diesel Engineers.

Interpretation of year ending 2004-2005 based on the above figures:-

 The current assets have been decreased to 240545.59 in 2005.

From rupees 369852.09 in 2004 – 34.96%. The current liabilities have
been decreased from 83000183 in 2005 from rupees 12186037.5 in
2004 i.e., -31.89. By comparing both year performance we can analyze
it is better than last year performance.

 The fixed assets have been decreased by 14.49% in the year 2005
but the owner funds have been increased by 8.5% it reflect the sound
financial position of the company.

 Since there is no results in the financial year and no profit nor loss
have been occurred in this year. Since the overall position of the
company is good.

33
 Comparative Balance Sheet as on 31-03-2005 - 2006

Sl. Particulars Years I/D I/D

2005 2006 Amount Percentage
No
Liabilities
1. Capital 1920150.75 2704822.51 784671.76 40.87
2. Borrowings 8435808.77 6443253.91 -1992554.86 23.62
3. S.creditors 8300183.00 12290647.64 3990464.64 48.08
Total 18656142.52 21438724.86 2782582.34 14.92
Assets
1. Cash & Bank 240545.51 721563.46 481017.95 33.3s
2. Fixed Assets 3817275.71 3382223.53 -435052.18 11.40
3. Other Assets 14598321.3 17334936.17 2736614.87 18.75
Total 18656142.52 21438724.86 2782582.34 14.92

Source: Financial Statements of Kakatiya Diesel Engineers.

Interpretation of year ending 2005-2006 based on the above figures:-

 The current asset has been increased to 200% in the year 2006.

the current liabilities also increased to 48.08% but by comparing both it

is still having much more to use working capital.

 The fixed assets have been decreased by 11.04% in 2006 but the

owners fund have been increased to 40.87% and also the borrowing

are shutdown to 23.63% so it makes the organisation more stronger.

 The profits have been occurred in this year so the performance of

the companies is good. The performance of organisation is

satisfactory.

34
 Comparative Balance Sheet as on 31-03-2006 - 2007

Sl. Particulars Years I/D I/D

2006 2007 Amount Percentage
No
Liabilities
1. Capital 2704822.51 1387326.44 -1317496.07 40.71
2. Borrowings 6443253.91 6308066.29 -135187.62 2.10
3. S.creditors 12290647.64 14883333.19 2592685.55 21.09
Total 21438724.86 22578725.92 1140001.6 5.32
Assets
1. Cash & Bank 721563.46 38120.29 -683443.17 94.72
2. Fixed Assets 3382223.53 4202930.52 820706.99 24.27
3. Other Assets 17334936.17 18337674.95 1002738.78 5.78
Total 21438724.86 22578725.92 1140001.6 5.32

Source: Financial Statements of Kakatiya Diesel Engineers.

Interpretation of year ending 2006-2007 based on the above figures:-

 The current assets have been decreased to 94.72% in 2007. And

Sundry creditors have been increased to 21.09% in 2006. So it reflects
the flow of company i.e., reflects working capital.

 The fixed assets have been increase to 24.27% in the year 2007.
The capital and borrowings have been decreased by 48.71% and 2.10
in the year 2007.

 The profitability for the current year has been affected due to heavy
borrowing and S. creditors.

 The overall performance is not so bad.

35
 Comparative Balance Sheet as on 31-03-2007 - 2008

Sl. Particulars Years I/D I/D

2007 2008 Amount Percentage
No
Liabilities
1. Capital 1387326.44 1827295.67 439969.23 31.79
2. Borrowings 6308066.29 5831696.36 -476369.93 7.55
3. S.creditors 14883333.19 16914609.66 2031276.47 13.65
Total 22578725.92 24573601.69 1994875.77 8.84
Assets
1. Cash & Bank 38120.29 412026.78 373816.49 980
2. Fixed Assets 4202930.52 3900800.19 -302130.33 7.19
3. Other Assets 18337674.95 20260774.89 1923099.94 10.49
Total 22578725.92 24573601.69 1994875.77 8.84

Source: Financial Statements of Kakatiya Diesel Engineers.

Interpretation of year ending 2007-2008 based on the above figures:-

 The current assets have been tremendously to 980% in 2008. and

borrowings has been decreased to 7.55% in the year 2008 it shows a
good signed of improvement in the organisation.

 The fixed assets have been decreased by 7.19% in the year 2008
and sundry creditors are increased to 13.65% it is not good for the long
term position for the organisation.

 The profits have been taken place in current financial year

compared to last year.

 The overall performance of the organisation is good and

satisfactory one.

36
 Common Size Balance Sheet as on 31-03-2004 - 2005

Sl. Particulars 2004 Percentage 2005 Percentage

No
:
Liabilities
1. Capital 1769566.86 7.45 1920150 10.2
2. Borrowings 9768493.37 41.17 8435808.77 44.73
3. S.creditors 12186037.05 51.36 8300183 44.44
Total 23724097.28 100 18656142.52 100
Assets
1. Cash & Bank 369852.09 1.55 240545.51 1.28
2. Fixed Assets 4464158.46 18.81 3817275.71 20.46
3. Other Assets 18890086.73 79.62 14598321.3 78.24
Total 23724097.28 100 18656142.52 100

Comments:-

Instead of keeping cash on other assets the organisation can expand cash on
fixed asset and cash on bank balances so that the manufacturing can be
increased and cash and bank balance can be use for day to day work.

37
 Common Size Balance Sheet as on 31-03-2005 - 2006

Sl. Particulars 2005 Percentage 2006 Percentage

No
:
Liabilities
1. Capital 1920150 10.2 2704822.51 12.6
2. Borrowings 8435808.77 44.73 6443253.91 30
3. S.creditors 8300183 44.44 12290647.6 57.3
Total 18656142.52 100 21438724.86 100
Assets
1. Cash & Bank 240545.51 1.28 721563.46 3.36
2. Fixed Assets 3817275.71 20.46 3382223.53 15.77
3. Other Assets 14598321.3 78.24 17334936.17 80.85
Total 18656142.52 100 21438724.86 100

Comments:-

Instead of keeping cash on other assets the organisation can expand cash on
fixed asset and cash on bank balances so that the manufacturing can be
increased and cash and bank balance can be use for day to day work.

38
 Common Size Balance Sheet as on 31-03-2006 - 2007

Sl. Particulars 2006 Percentage 2007 Percentage

No
:
Liabilities
1. Capital 2704822.51 12.6 1387326.44 6.14
2. Borrowings 6443253.91 30 6308066.29 27.9
3. S.creditors 12290647.6 57.3 14883333.19 65.9
Total 21438724.86 100 22578725.9 100
Assets
1. Cash & Bank 721563.46 3.36 38120.09 0.16
2. Fixed Assets 3382223.53 15.77 4202930.52 18.6
3. Other Assets 17334936.17 80.85 18337674.95 81.2
Total 21438724.86 100 22578725.9 100

Comments:-

Instead of keeping cash on other assets the organisation can expand cash on
fixed asset and cash on bank balances so that the manufacturing can be
increased and cash and bank balance can be use for day to day work.

39
 Common Size Balance Sheet as on 31-03-2007 - 2008

Sl. Particulars 2007 Percentage 2008 Percentage

No
:
Liabilities
1. Capital 1387326.44 6.14 1827295.67 7.43
2. Borrowings 6308066.29 27.9 5831696.3 23.73
3. S.creditors 14883333.19 65.9 16914609.6 68.8
Total 22578725.9 100 24573601.69 100
Assets
1. Cash & Bank 38120.09 0.16 412026.78 1.67
2. Fixed Assets 4202930.52 18.6 3900800.19 15.8
3. Other Assets 18337674.95 81.2 20260774.89 82.4
Total 22578725.9 100 24573601.69 100

Comments:-

Instead of keeping cash on other assets the organisation can expand cash on
fixed asset and cash on bank balances so that the manufacturing can be
increased and cash and bank balance can be use for day to day work.

40
RATIO ANALYSIS:-

CURRENT RATIO:-
TABLE – 1 SHOWS THE CURRENT RATIO OF KAKATIYA DIESEL
ENGINEERS FOR FIVE YEARS (2004-2009)
Current
Year Current liabilities Current ratio
assets
2004-
2005
2005-
19259938 12186037 1.58
2006
14838866 8300183 1.78
2006-
18056499 12290647 1.46
2007
18375794 14883333 1.23
2007-
20672800 16914609 1.22
2008
2008-
2009
> Source (financial statement of Kakatiya Diesel Engineers).

Graphical Statement – 1:-

2
1.78
1.58
1.5 1.46
1.23 1.22
1

0.5

0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Current Ratio

Interpretation:

41
The above table – 1 & Graphical Statement – 1 show that current ratio of
Kakatiya Diesel Engineers is inadequate. The current ratio of 2:1 signifies that
current assets are two fold of its short term obligations. The liquidity position as
measured by current ratio is not better in case of studied organization.

42
WORKING CAPITAL TURN OVER RATIO:-

TABLE – 2 SHOWS THE WORKING CAPITAL TURN OVER RATIO OF

KAKATIYA DIESEL ENGINEERS FOR FIVE YEARS (2004-2009)
Cost of goods Net working Working capital
Year
sold capital turn over ratio
2004-2005 2798037.8 7073901 3.95
2005-2006 22805814 6538683 3.48
2006-2007 23364698 5766032 4.05
2007-2008 12474219 3492461 3.57
2008-2009 13082260 3758191 3.40
>Source (financial statement of Kakatiya Diesel Engineers)
Graphical Statement – 2:-

4.2
4.05
4 3.95

3.8
3.6 3.57
3.48
3.4
3.4
3.2
3
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Working Capital Turn over ratio

Interpretation:
The working capital turns over ratio table – 2 & Graphical Statement - 2
represents that there is a moderate working capital management for KAKATIYA
DIESEL ENG.. There was a gradual decrease in the year 2008-2009. Some
appropriate strategies to be prepared for effective utilization of Net Working
Capital. A high ratio is preferable. It shows how Net Working Capital is utilized.

43
CURRENT ASSET TURN OVER RATIO:

TABLE – 3 SHOWS THE CURRENT ASSET TURN OVER RATIO OF

KAKATIYA DIESEL ENGINEERS FOR FIVE YEARS (2004-2009)

Current Assets
Year Net sales Current assets
turn over ratio
2004-2005 27980278 12186037 2.29
2005-2006 22805814 83300183 2.74
2006-2007 23364698 12290647 1.90
2007-2008 12474211 14883333 0.83
2008-2009 13082260 16914609 0.77
>Source (financial statement of Kakatiya Diesel Engineers)

Graphical Statement 3:-

3 2.74
2.5 2.29
2 1.9

1.5
1 0.83 0.77
0.5
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

CURRENT ASSET TURN OVER RATIO

Interpretation:

Current Asset turn over ratio table – 3 and graphical statement -3 shows

that the Kakatiya Diesel Engineers is having the ratio in (2004-05 & 2005-06)

i.e. 2.29- 2.74, where it has marginal its efficiency but from the year 2006-2007

and reduced its effectiveness drastically to 0.77 in the year 2008-2009 which

means that the current asset turn over ratio is not a stable position.

STOCK TURN OVER RATIO:-

44
TABLE – 4 SHOWS THE STOCK TURN OVER RATIO OF KAKATIYA
DIESEL ENGINEERS FOR FIVE YEARS (2004-2009)
Stock turn over
Year Net sales Avg stock
ratio
2004-2005 27980278 10160604 2.75
2005-2006 22805814 11450816 1.99
2006-2007 23364698 10938762 2.13
2007-2008 12474211 12679036 0.98
2008-2009 13082260 14327237 0.91
>Source (financial statement of Kakatiya Diesel Engineers)
Graphical Statement – 4:-

3 2.75
2.5
2.13
1.99
2
1.5
0.98 0.91
1
0.5
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Stock Turn Over Ratio

Interpretation:
From the Table 4 & graphical statement 4 shows that stock turn over
ratio was good during the years (2004-2005) which is 2.75 and has decreased
its efficiency to 1.99 in (2005-2006). And has increased its effectiveness to 2.13
in (2006-2007). The last year’s stock turn over ratio indicates that stocks are
getting converted into sales at a unsatisfactory speed which is 0.91 in the year
(2008-2009).

45
FIXED ASSET TURN OVER RATIO
TABLE – 5 SHOWS THE FIXED ASSET TURN OVER RATIO OF
KAKATIYA DIESEL ENGINEERS FOR FIVE YEARS (2004-2009)
Fixed asset turn
Year Net sales FIXED ASSET
over ratio
2004-2005 27980278 4464158 6.2
2005-2006 22805814 3817275 5.2
2006-2007 23364698 3382223 6.9
2007-2008 12474211 4202930 2.9
2008-2009 13082260 3900800 3.3
>Source (financial statement of Kakatiya Diesel Engineers)
Graphical Statement – 5:-

6.9
7
6.2
6
5.2
5
4 3.3
3 2.9
2
1
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

FIXED ASSET TURN OVER RATIO

Interpretation:
From the Table 5 & graphical statement 5 shows that fixed asset turn
over ratio was good during the years (2004-2005) which is 6.2 and has
decreased its efficiency to 5.2 in (2005-2006). And has increased its
effectiveness to 6.9 in (2006-2007). The last year’s fixed assets turn over ratio
indicates that are getting converted into sales at a unsatisfactory speed which
is 2.9.in the year (2007-2008).

46
 CHAPTER – V

CONCLUSION AND SUGGESTIONS

The MICO performance in the year 2004-2005 is 21.36% which

shows the overall good performance of the organisation.

In the 2004-2005 the company as utilized the capital in an efficient

way so that it reduces its borrowing to 13.64% and also paid off
31.89% of Sundry Creditors amount.

The company has reduce its current liabilities and increased the
capital of 150583.9 i.e., 8.5%. which the company image is good
from the investors point of view.

The company has increased its current assets upto 200% in thew
year 2005-2006. which reveals that the company does not want to
loose its image in the market that’s the reason in the last year i.e., in
2004-2005 it has decreases all its assets to pay off lenders and
creditors.

The owners funds also increase to a large extended i.e., 40.87%

which shows that trust worthiness towards the organisation.

In the year 2006-2007 the organisation has been effected due to

heavy borrowings and S.creditors but the fixed assets and other
machineries have been purchased it will results in the long run
performance of the organisation.

The capital has been decreased to 40.71% in the 2006-2007.

Again in the year 2007-2008 the performance of the organisation

has achieved a great result.

47
The current assets have increased phenomenously i.e., 980% in the
year 2008 and also capital increased to 31.79%. It reveals that the
organisation performance in this year is very efficient one.

The creditors increased to 13.65% but it does not matter a large for
the organizations in the long run.

Suggestions:-

The company has to reduce its borrowings, why because the

organisation has to pay regularly for the banks and other institutions
in the form of interest.

The company has to utilize their resource and assets in an efficient

way so that the company may come up from the heavy borrowings.

In the 2006-2007 the company utilized the capital in the efficient

way so that it reduced the borrowing to some extended.

The organisation has to spend more on fixed assets rather than

other assets which makes the increase in manufacturing services.

48
 B IB IL O G R A P H Y

1 . F IN A N C IA L M A N A G E M E N T : I M PANDEY

2 . F IN A N C IA L M A N A G E M E N T : K H A N & J A IN

3. M A N A G E M E N T A C C O U N T IN G
: R .K S H A R M A & S H A S H I

4. F IN A N C IA L M A N A G E M E N T
: S .N M A H E S H W A R I &
S .K .M A H E S W A R I

5. A N N U A L F IN A N C IA L
S T A T E M E N T K:A K A T IY A
D IE S E L E N G IN E E R S .

49