N 7, Trade Payables turnover ratio, @. Net Capital Turnover Ratio, 9. Net Profit Ratio, 10 Return on Capital employed, 41. Return on Investment. _—— 0880: NOTE 20: Following Ratios are to be discl 1. Current Ratio, 2. Debt-Equity Ratio, 3. Debt Service Coverage Ratio, 4. Retum on Equity Ratio, 5. Inventory Turnover Ratio, 6. Trade Receivables tumover ratio, —ralor and denominator (compa luded in nut : Sti provided for any change in the ratio by more than ae items incl The company shall explain the items ir above vase Further explanation shall be the preceding year. foe 1. LIQUIDITY RATIOS 7. CURRENT RATIO Current Assets Current Ratio = erent Liabilities Notes: : * - 1. Current Assets = Current Investments + Inventories + Trade Receivables + Cash and Cash Equivalents + Short-term Loans and Advances + Other Current Assets a, Prepaid Expenses, Accrued Incomes, Advance Tax) - Non-Current Assets classifieg as held for sale 2. Current Liabilities = Short-Term Borrowings + Trade Payables + Other Current Liabilities + Short-Term Provisions - Current Maturities of long-term debt - Interest accrued on borrowings Working Capital = Current Assets — Current Liabilities o Interpretation: Current Ratio indicates rupees of current assets available for each rupee of current liability. Higher the ratio, greater the margin of safety for short-term creditors and vice versa. Traditionally, a Current Ratio of 2 : 1 is considered to be a satisfactory ratio. On the basis of this traditional rule, if the Current Ratio is 2 ormore, it means the firm is adequately liquid and i if the Current Ratio is Jess than 2, it means nt Ratio may be the result of. excessive investment in current assets which may r ls earn nothing. On result in idle funds which further results in low Profitability since idle fund: the ete @ too low Current Ratio may be the result of inadequate investment in current assets which may result in low liquidity and may threaten the solvency of the enterprise. Higher liquidity means lower Profitability and vice versa.Statements of a Company 8.63 a ae 2SOLVENCY RATIOS 2. DEBT-EQUITY RATIO Debt-Equity ato «Total Debt— Total Equity tal Debt = Long-t sro 'g-term Borrowings + Short-term Borrowings 2, Total Equity [i.e. Funds belo, = Equity Share Capital a pel ae Shareholders (whether Equity or Preference)]- ‘ion: ss 7 ‘apital + Reserves & Surplus g.interpretation: Debt-Equity Ratio indi rp equity ratio implies the ettnor indicates the margin of safety to Lenders. A low deBt- Lenders since owner's equity Te equity than debt which means a larger safety margin {OF Traditionally, a Debt Equity Hy teated as a margin of safety by ‘Lenders and vice versa- gould be twice the equity. "is considered to be satisfactory which means dept F— 3. DEBT SERVICE COVERAGE RATIO ‘Approach 1: When Principal Repayment is not adjusted for tax effects Net Profit before interest,Tax and Exceptional Items Interest on Borrowings + Principal Repay! cts .d Exceptional Items (-tax rate)] pebt-Service coverage Ratio = ment 2: When Principal Repayment is adjusted for tax effe Net Profit before Interest Tax an Interest + [Principal portion of instalment /( such payment is not Approact pebt-Service coverage Rati Note: The principal portion of instalment is adjusted for tax effects since deductible from net profit for tax purposes. Cash from operations is used instead of Net Profit Cash Operating capacity t ested in determining the firm’s I, prefer to calculate the Debt Service ‘Coverage Ratio as Approach 3 When Some Accountants who are inter pay off both interest and principal rest,Tax and Exceptional Items follows: «Gash from operations before Inte B pal portion of instalment (1-tax rate) Interest + (Princi [interpretations Debt-Service Coverage Ratio shows the number of times the amount of interest on long-term debts and the principal portion of instalment is covered by the profits out trench that wil be paid. It indicates the lit eyond which the ability ofthe firm to service its Fett wauid bo acveraely affected: FOV INSISTS Debt Service Ratio of five times would imply that even ifthe firm’s Net Profits before Interest and Tax decrease by 80% of the present level, the firm will still be able to pay. interest and instalment out of profits. Higher the ratio, greater ore and instalment but very high ratio may imply lesser use the firm's ability to pay current inte of debt and very efficient operation’. 3, acTIVITY (OR TURNOVER) RATIOS 7. Net Capital Turnover Ratio ‘Net Revenue from Operations Pe Net Working Capital . Times Net Capital Turnover Rati8.54 Tulsian’s Corporate counting Assets - Current Liabilities ea tox venue from Opera 1. Net ‘ing Capital tes the firm's ability 10 a eae ion Oy to 2 tion: It ire Capital. In general, hah ee ot re mee Capital. iilisation of Working io is lower than that regu chatontoetnag| (or under-capitalisation) if current rati cae reasonably and vice versa. ‘Thus, an enterprise should have neither a very high tory of not, It should be compares Satisfactory ratio. To judge whether the ratio is satisfact sa the same industry or with the with its own past ratios or with the ratio of similar enterprise 'e industry average. nor a very low ratio, it should hay a 5. Inventory Turnover Ratio Cost of Revenue from Operations _ Cost of Revenue from Operations . Times ‘ventory Turnover Ratio = ‘Average Inventory Notes: a. Cost of Revenue ‘from Operations = Cost of Materials Consumed + Purchases of Stock-in-Trade + Changes in Inventories of Finished Goods + Direct Expenses 2. Average inventor FY = (Opening Inventory + Closing Inventory)/2 No’ Inventory include Stores and spar Interpretation: converted into fes Raw materials and components, Work-in-progress, Finished goods, re parts, Consumable tools and Goods-in-transit. Inventory tumover indicates the speed with which the Inventory is Revenue from Operations. In general, a high ratio indicates efficient Performance since an improvement in the ratio shows that either the same volume of Revenue trom Operations has been maintained with a lower investment in Inventory, or {he volume of Revenue from Operations has increased without, any increase in the amount Of Inventory. However, too high ratio and too low ratio call for further investigation. A too high ratio may be the result of a very low inventory levels which may result in frequent Inventory-outs and thus the firm may incur high Inventory-out costs. On the other hand, 3 'o0 low ratio may be the result of excessive inventory levels, slow-moving or obsolete inventory and thus, the firm may incur high carying costs. Thus, a firm should have neither a very high nora very low Inventory Turnover Ratio, it should have a satisfactory level, : 6. Trade Receivables Turnover Ratio Credit Revenue from Operations Average Trade Receivables Debtors Turnover Ratio = Times Notes: 1. Credit Revenue from Operations = Revenue from Operations - Cash Revenue from Operations 2. Average Trade Receivables = (Opening Trade Receivables + Closing Trade Receivables! Bilas le Debtors + Bills Receivable Note: Trade Receivables = Trad55 __Financial Statements of a Company 85° cerpretation: Debtors mG ne credit collection gig Net Ratio indi wvables Icates Recel' ors are Converted into 1 8 both the quality of Trade * enterprise i indeates tho speed with which fm gollection Period Which impjigs"°8M Yoar. In genersn a high rato indicates the shod indicates @ lONGer Collection pony ™P" Payments by Trade Receivables, and a 1OW (Ae However. t00 high ratio ang a Which implies delayed payments by Trade Receivable pe the result Of a restrictive crag n/a calls for further investigation. A too high ratio fe rations and Consequentiy m6 Collection policy which may curtail the Revenue ITOK afiberal and ineticent cregy e°ot"8: On the other hand, a to low ratio may De tM Hebts rdburden of high interest onc” COlection policy which may involve the risk of Bad GED S m us, a fim should neither Involved in maintaining a higher level of Trade ag 1m but should have a satisfactory level,” ° VEY high nor a very low Debtors Tumover cas} 7. Trade Payables Tumover Ratio | trade Payables Turnover Ratio _ Cost of Materials Consumed =... Times | A Same: erage Trade Payables a 1.Cost of Materials Consumed = Cost of Materials Consumed + Purchases Of stock Trade + Other Operating Expenses 2.Average Trade Payable: ayables)/2 (Opening Trade Payables + Closing Trade Pé Note: Trade Payables = Trade Creditors + Bills Payable tum over 5. Interpretation: Creditors Tumover indicates the speed with which the Creditors Prod on af average each year. In general, a high ratio indicates the shorter payme ratio which implies either the availabilty of less credit or earlier payments and a low it or indicates a larger payment period which implies either the availabilty of more cred delayed payments. [Sadehyed peyments an 4. PROFITABILITY RATIOS 8, Net Profit Ratio a Net Profit Before Tax 1. Net Profit Ratio = Net Profit Before Tax 199 = 9% Revenue from Operations * ‘°° Net Profit After Tax or, Net Profit Ratio = Notes: Dee eee Revenue from Operations 1. Net Profit = Revenue from Operations — Cost of Revenue from Operations - Operating Expenses — Non-Operating Expenses + Non-Operating Incomes or, = Revenue from Operations ~ Operating Cost - Non-Operating Expenses + Non-Operating Incomes or, = Operating Profit - Non-Operating Expenses + Non-Operating Incomes 2. Revenue from Operations = Credit Revenue from Operations + Cash Revenue from Operations 3. Interpretation: Net Profit Ratio incicates (a) an average Net Margin ea ‘rom Operations of & 100 (b) what portion of Revenue from Operations etl @ Revenue and to create reserves, and (c) fm's capacity to withstand adverse ecen so Po, dividend when selling price is decining, cost of production is rising and the onan nomic conditions 'sfalling, In general, Higher the ratio, greater is the capacity of the fe no" the Product economic conditions and vice versa. firm to withstand adverse aae 7" 8.56 Tulsian's Corporate Accounting ee eee — pital Employed a new ai fl Profit before Interest sod Te ae fe % | Employe Return on Capital Employed (Pre-tax) = — Average Caplta ital Employed(Post-tax)= Return on Capital Emp! Income) + Finance Cost - Other Income ied Tax Expensel( x ‘Average Capital Employed Fa “peg Capital Employed+ Closing Capital Employeqya F ahae® Capital Employed {Opening Capt Em $+ Deterred Tax iablitiess Credit, 2 Capital Employed = Shareholders’ Funds + Borrowing} Capital WIP- Intangible a, for Capital Expenditure — Non-Trade tnvestnds— Capt, WIE (nena aan under Development- Advances for Purchase of Non 'sh Equivalents P 3. Income from Non-Operating Assets should also be ose ea the Z ie ‘ jicates the firm's ability of generat 4. Interpretation: Retum on Capital Employed Ratio indicates s Profit per rupee of Capital Employed. Higher the Ratio, the more efficient the management nd utilisation of Capital Employed. _ An enterprise should have a satistactory ratio. To Judge whether the ratio is satisfactory o, cama should be compared with its own past ratios or wih the rato of similar enterprises inthe Same industry or with the industry average. 10. Return on Investment [ROI] Other Income (Excluding Dividend) Retum on Investments = 100 ‘Average Investments Notes: 1 Average Investments. =[Opening Investments + Closing Investments. 2. Investments = Cash, Cash Equivalents + Other Marketable Securities — 3. Interpretation: Retum on Investments Ratio indicates the fim's ability Per rupee of Investments . Higher the Ratio, the more efficient the ma of Invested Capital An enterprise should have a satisfactory ratio. Yo is satisfactory oF not, it should be compared with its own pact ratios enterprises in the same industry or with the Industry average. 11. Return on Equity Net Profit after Interest and Tax ‘Average Shareholders’ Funds Return on Equity =Financial Statements of a Company 8.57 ee Sharehold average Sharehol lers' Funds, =|0, ; 1 Findsy/2 Opening Shareholders Funds.+ Closing Shen ; ghareholders’ Funds = Funds g . " Upplied Bre Capital + Reserves & Surplus Ried by the Shareholders = Equity Share Capital + Pref. _ interpretation: Return on Equity Ratio i soe of Shareholders’ Fund. Higher the va utilization of Shareholders’ Funds. 0, th he firm's ability of generating profit per le more efficient the management and An enterprise should have a Satisfactory ratio. To j i ith it Judge wheth satist not, it should be compared with its own past ratios eae the est aan ee ey vas same industry or with the industry average. similar enterprises ILLUSTRATION 20 TULSI, AMLA, GILOY Ltd provides the following information: CT Partcuers | z 1,50,000 | Non-Current Investments [Trade ] a8 Equity Share Capital (@ 10 each) 18% Pref. Share capital Reserves & Surplus 15% Long-term Borrowings 8,00,000 | Inventories (payable in annual instalments of 2 90,000) Current Liabilities (including Trade Payables % 1,00,000,Short-term Borrowings nil) Revenue from Operations (on credit) Purchases (on credit) Net Profit before Interest & Tax 6,00,000 | Gross Profit Ratio 50% Required: Calculate the 11 ratios required as per Schedule III to The Companies Act,2013. Sisls i 4,00,000 | Trade Receivables 4 '24,00,000 | Cash & Cash equivalents 12,00,000 | Tax Rate 25%Gloomy LUSTRATION 21 How will you disclose the following it inaving operating cycle of 14 mio items while preparin: (0 oe ack aoe aoe months) as ai Bat Head es Sheet of a TULSIAN Ltd aap Head and 7 , as per the Schedule III t Tl ub-Sub-Heagd, if an’ ail A ry)turities Current Mai of Long-term Debt Security Deposit i f 3, Debit Balance o' Profit & Loss A/c 4. Computer Software under Development . Building under construction - Uncalled Liability on partly paid Debentures held as Investments - Employees’ earned leave Payable on retirement8.60 Tulsian’s Corporate 8. Share application money received in excess of issued share capital standing account 9. Share option out [F c L 10. Unpaid matured debentures and interest accrued thereon 11. Unealled liabil- ity on shares and other partly paid investments 12, Calls-in-Advance 18. Investment in Bonds of Reliance Ltd. (Redeemable within 1 year) 14. Interest accrued on Bonds of Reliance Lta. 18. Tonnage Tax Reserve 16. Arrears of Fixed Cumulative Dividends on Preference Shares 17. Crypto Currency or Virtual Currency 18. Crypto Currency or Virtual Currency held for sale in ordinary course of business 19. Leasehold Land 20. Licenses & Franchise whose expected realisation date is 30th June, 2024 21. X, a customer 12. Unpaid matured debenture and interest accrued thereon. _ Amalgamation Adjustment A/c 04. Bank deposits with more than 12 months maturitySa |LUSTRATION 22 [DISCLOSURE OF SHARE CAPITAL] tulsian Ltd. was formed with a capital of % 1,00,000 divided into 10,000 Equity Shares of 710 each. Out of these 2,000 Equity Shares were issued to the Vendors as fully paid as purchase consideration for a fixed asset acquired. 6,000 Equity Shares were offered to the public and the issue WaS fully subscribed. The directors called 6 per share and received the entire amount except a call of T 2 per share on 500 shares out of which 200 shares were forfeited Required: How would you show the relevant i i . | Beaute Ill to The Companies Act, 2013. int items in the Balance Sheet of Tulsian Ltd., as per