Himanshu v Mathur

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CHAPTER-1

Introduction to Indian Dairies:

Today, India is 'The Oyster' of the global dairy industry. It offers opportunities galore to

entrepreneurs worldwide, who wish to capitalize on one of the world's largest and fastest growing

markets for milk and milk products. A bagful of 'pearls' awaits the international dairy processor in

India. The Indian dairy industry is rapidly growing, trying to keep pace with the galloping progress

around the world. As he expands his overseas operations to India, many profitable options await

him. He may transfer technology, sign joint ventures or use India as a sourcing center for regional

exports. The liberalization of the Indian economy beckons to MNC's and foreign investors alike.

Indias dairy sector is expected to triple its production in the next 10 years in view of expanding

potential for export to Europe and the West. Moreover, with WTO regulations expected to come

into force in coming years all the developed countries that are among big exporters today would

have to withdraw the support and subsidy to their domestic milk products sector. In addition, India

today is the lowest cost producer of per liter of milk in the world, at 27 cents, compared with the

U.S' 63 cents, and Japans $2.8 dollars. In addition, to take advantage of this lowest cost of milk

production and increasing production in the country multinational companies are planning to

expand their activities here. Some of these milk producers have already obtained quality standard

certificates from the authorities. This will help them in marketing their products in foreign countries

in processed form.

The urban market for milk products is expected to grow at an accelerated pace of around 33% per

annum to around Rs.43, 500 cores by year 2005. This growth is going to come from the greater

emphasis on the processed foods sector and by increase in the conversion of milk into milk

products. By 2005, the value of Indian dairy produce is expected to be Rs 10, 00,000 million.

Presently the market is valued at around Rs7, 00,000mn

1.1. Background

India with 134mn cows and 125mn buffaloes has the largest population of cattle in the world. Total

cattle population in the country as on October'00 stood at 313mn. More than fifty percent of the

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buffaloes and twenty percent of the cattle in the world are found in India and most of these are

milch cows and milch buffaloes.

Indian dairy sector contributes the large share in agricultural gross domestic products. Presently

there are around 70,000 village dairy cooperatives across the country. The co-operative societiesare federated into 170 district milk producers unions, which is turn has 22-state cooperative dairy

federation. Milk production gives employment to more than 72mn dairy farmers do. In terms of tota

production, India is the leading producer of milk in the world followed by USA. The milk production

in 1999-00 is estimate at 78mn MT as compared to 74.5mn MT in the previous year. This

production is expects to increase to 81mn MT by 2000-01. Of this total produce of 78mn cows' milk

constitute 36mn MT while rest is from other cattle.

While world milk production declined by 2 per cent in the last three years, according to FAOestimates, Indian production has increased by 4 per cent. The milk production in India accounts for

more than 13% of the total world output and 57% of total Asia's production. The top five milk-

producing nations in the world are India, USA, Russia, Germany and France.

Although milk production has grown at a fast pace during the last three decades (courtesy:

Operation Flood), milk yield per animal is very low. The main reasons for the low yield are

Lack of use of scientific practices in mulching

Inadequate availability of fodder in all seasons

Unavailability of veterinary health services

1.2. The Indian Market - A Pyramid

1.2.1. Consumer Habits and Practices

Milk has been an integral part of Indian food for centuries. The per capita availability of milk in India

has grown from 172 gm per person per day in 1972 to 182gm in 1992 and 203 gm in 1998-99.This

is expected to increase to 212gms for 1999-00. However, a large part of the population cannot

afford milk. At this per capita consumption, it is below the world average of 285 gm and even less

than 220 gm recommended by the Nutritional Advisory Committee of the Indian Council of Medical

Research.

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There are regional disparities in production and consumption also. The per capita availability in the

north is 278 gm, west 174 gm, south 148 gm and in the east only 93 gm per person per day. This

disparity is due to concentration of milk production in some pockets and high cost of transportation

Also the output of the milk in cereal growing areas is much higher than elsewhere, which can be

attributed to abundant availability of f odder, crop residues, etc which have a high food value for

milch animals. In India about 46 per cent of the total milk produced is consumed in liquid form and

47 per cent is converted into traditional products like cottage butter, ghee, paneer, khoya, curd,

malai, etc Only 7 per cent of the milk goes into the production of western products like milk

powders, processed butter and processed cheese. The remaining 54% is utilizes for conversion to

milk products. Among the milk products manufactured by the organized sector, some of the

prominent ones are ghee, butter, cheese, ice creams, milk powders, malted milk food, condensed

milk infants foods etc. Of these ghee alone accounts for 85%.

It is estimate that around 20% of the total milk produced in the country is consume at producer-

household level and remaining is marketed through various cooperatives, private dairies and

vendors. In addition, cooperatives and other private dairies procure the total produce more than

50%. While for the cooperatives of the total milk procured 60% is consumed in fluid form and rest

is used for manufacturing processed value added dairy products for private dairies only 45%.It is

marketed in fluid form and rest is processed into value added dairy products like ghee, makhan

etc.Still, Several consumers in urban areas prefer to buy loose milk from vendors due to the strong

perception that loose milk is fresh. In addition, the current level of processing and packaging

capacity limits the availability of packaged milk.

The preferred dairy animal in India is buffalo unlike the majority of the world market, which is

dominated by cow milk. As high as 98% of milk is, produce in rural India, which caters to 72% of

the total population, whereas the urban sector with 28% population consumes 56% of total milk

produced. Even in urban India, as high as 83% of the consumed milk comes from the unorganized

traditional sector. Presently only 12% of the milk market is represents by packaged and branded

pasteurized milk, valued at about Rs. 8,000 cores. Quality of milk sold by unorganized sector

however is inconsistent and so is the price across the season in local areas. In addition, these

vendors add water and caustic soda, which makes the milk unhygienic.

India's dairy market is multi-layered. It is shaped like a pyramid with the base made up of a vast

market for low-cost milk. The bulk of the demand for milk is among the poor in urban areas whose

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individual requirement is small, maybe a glassful for use as whitener for their tea and coffee.

Nevertheless, it adds up to a sizable volume - millions of liters per day. In the major cities lies an

immense growth potential for the modern sector. Presently, barely 778 out of 3,700 cities and

towns are serving by its milk distribution network, dispensing hygienically packed wholesome,

quality pasteurized milk. According to one estimate, the packed milk segment would double in the

next five years, giving both strength and volume to the modern sector. The narrow tip at the top is

a small but affluent market for western type milk products.

1.2.2. Growing Volumes

The effective milk market is largely confines to urban areas, inhabited by over 25 per cent of the

country's population. An estimated 50 per cent of the total milk produced is consumes here. By the

end of the twentieth century, the urban population is expects to increase by more than 100 millionto touch 364 million in 2000 a growth of about 40 per cent. The expected rise in urban population

would be a boon to Indian dairying. Presently, the organized sector both cooperative and private

and the traditional sector cater to this market.

The consumer access has become easier with the information revolution. The number of

households with TV has increased from 23 million in 1989 to 45 million in 1995. About 34 per cent

of these households in urban India have access to satellite television channel.

1.2.3. Potential for further growth

Of the three A's of marketing - availability, acceptability and affordability, Indian dairying is

already endowed with the first two. People in India love to drink milk. Hence, no efforts are needs

to make it acceptable. Its availability is not a limitation either, because of the ample scope for

increasing milk production, given the prevailing low yields from dairy cattle. It leaves the third vital

marketing factor affordability. How make milk affordable for the large majority with limited

purchasing power? That is essence of the challenge. One practical way is to pack milk in small

quantities of 250 ml or less in polythene sachets. Already, the glass bottle for retailing milk has

given way to single-use sachets, which are more economical. Another viable alternative is to sell

small quantities of milk powder in mini-sachets, adequate for two cups of tea or coffee.

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1.2.4. Major Players

The packaged milk segment is dominates by the dairy cooperatives. Gujarat Co-operative Milk

Marketing Federation (GCMMF) is the largest player. All other local dairy cooperatives have their

local brands (For e.g. Gokul, Warana in Maharashtra, Saras in Rajasthan, Verka in Punjab, Vijayain Andhra Pradesh, Aavin in Tamil Nadu, etc). Other private players include J K Dairy, Heritage

Foods, Indiana Dairy, Dairy Specialties, etc. Amrut Industries, once a leading player in the sector

has turned bankrupt and is facing liquidation.

1.2.5. Future Prospects

India is the world's highest milk producer and all set to become the world's largest food factory. In

celebration, Indian Dairy sector is now ready to invite NRIs and Foreign investors to find this

country a place for the mammoth investment projects. Be it investors, researchers, entrepreneurs,

or the merely curious Indian Dairy sector has something for everyone.

Milk production is relatively efficient way of converting vegetable material into animal food. Dairy

cows buffalos goats and sheep can eat fodder and crop by products, which are not eaten by

humans. Yet the loss of nutrients energy and equipment required in milk handling inevitably make

milk comparatively expensive food. In addition, if dairying is to play its part in rural development

policies, the price to milk producers has to be remunerative. In a situation of increased

international prices, low availabilities of food aid and foreign exchange constraints, large-scale

subsidization of milk conception will be difficult in the majority of developing countries.

Hence in the foreseeable future, in most of developing countries milk and milk products will not

play the same roll in nutrition as in the affluent societies of developed countries. Effective demand

will come mainly from middle and high-income consumers in urban areas.

There are ways to mitigate the effects of unequal distribution of incomes. In Cuba where the

Government attaches high priority to milk in its food and nutrition policy, all pre-school children

receive a daily ration of almost a liter of milk fat the reduced price. Cheap milk and milk products

are made available to certain other vulnerable groups, by milk products outside the rationing

system are sold price, which is well above the cost level. Until recently, most fresh milk in the big

cities of China was a reserved for infants and hospitals, but with the increase in supply, rationing

has been relaxed.

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In other countries, dairy industries have attempted to reach lower income consumers by variation

of compositional quality or packaging and distribution methods or blending milk in vegetable

ingredients in formula foods for vulnerable groups. For instance, pricing of products rich in butterfat

or in more luxury packaging above cost level so as to enable sales of high protein milk products at

a somewhat a reduced price has been widely practiced in developing countries. This policies need

to be brought in Indian Dairy scenario.

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CHAPTER 2

INTRODUCTION OF PRDUSS Ltd. SARAS DAIRY, JODHPUR

The Feeder Balancing Dairy Jodhpur is located on the out skirts of Jodhpur city in Heavy Industria

Area. A uniform piece of 25 acres of land has got road on its front side two sides of this piece o

land are free and at the back long way away is Central Arid Zone. Paschimi Rajasthan Dugadh

Utpadak Sahakari Sangh, (Jodhpur PRDUSS) was established in the year 1972, under the

Operation Flood Programmed finds from D.P.A.P. were utilized for the construction of plant at

Jodhpur, and later on the established various chilling centers. Initially five districts of Jodhpur, Pali

Jaislmer, Barmer and Nagore were included under PRDUSS. However, Pali was hived off later and

was made into an independent union.

Under Jodhpur Union, the production of milk is one lack per day while consumption of milk is 73

thousand liters per day. The excess of milk (60 thousand liters) is send to the central dairy Delhi

and Gujarat. At present 485 co-operative societies and 347-milk collection canter are functioning

where average production of milk is one lack thirty three thousand liters coming in Jodhpur dairy

through 53,198 milk productions. Through increase milk, production can fight with famine. Main

district of Marwar faces with famine in every year but through increase in milk production, they do

earn money and get relief from famine. There is only source of earning money is selling of milk to

DCS. They get payment in cash or bank account after days.

According to dairy officers whenever falling famine in western Rajasthan, in dairy collection of mil

increase. During the famine in Barmer and Jaislmer district, the collection of milk is increase 45,000

liter. In the last year, December the total collection of milk was 72,000 liter while this year it is

reached one, 17000 liter. Dairy provides animal food at cheap rate for maximum production of milkIn Barmer and Jaislmer village almost 24 bulk cooler through this the problem of farmer is eliminate

Whenever dairy vehicles reach late, milk keep in these bulk cooler. In the year November 2005 afte

setup new milk centre at Bilara, the collection of milk was between 30 to 40 thousand liters.

2.1. Milk Union Profile & Organizational Detail

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collection of milk was, five lack 90 thousand in which three lacks 56 thousand liter supplied in city

and remaining milk send to its mother dairy.

2.4. Main products of Jodhpur Dairy:-

Fresh Milk

TONED

STANDARD

FULL CREAM

SKIMMED

COW MILK

Fresh Milk Products

CHAACH

LASSI

DAHI

PANEER

SHRIKHAND

ICE CREAM

RASGULLA

FLAVOURED MILK

MAWA

Cattle Feed

BALANCED FEED

HIGH ENERGY

MINERAL MIXTURE

CALF STARTER

UREA MOLASSES BRICK (UMB)

2.5. ORGANIZATION STRUCTURE

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Organizing is the structure framework of duties and responsibilities required of personal in

performing various within the company; it is essentially a blueprint for action resulting in a

mechanism for carrying out function to achieve the goals setup by the company.

An organization structure shows the authority and responsibility relationship between variousposition in the organization and clarifies who reports to whom. It is a set of planned relationship

between groups of related functions and between physical factors. In addition, personnel required

for the achievement of organizational goals.

The organizational structured is generally shown on organization chart. It represent authority

relationship between various position in the organization by showing who reports to who me. It is a

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set of planned relationships between groups of related junctions and between physical factors and

personnel required for the achievement of organizational goals.

An organizational chart is a diagrammatical form, which shows important aspects of an

organization including the major function and their respective relationship. It is graphic portrayal of

position in the enterprise and of the formal line of accountability among them. It provides a bird

eye-view of the relationship between different departments or division of an enterprise as well as

the relationship between the executives and the subordinates at various levels.

An organization cannot work cutting a detents structure. The first step in designing the structure of

an organization is to insetting and group the activities involved, whichs expressed as

departmeantation because of the intimate connection between the felonry over time and cos

accounts it is necessary into which the factories are usually divided the manner in which they are

linked and way in which they are managed. In Paschimi Rajasthan Dugdh Utpadak Sahakar

Sangh Ltd.

The managing Director (M.D.) is the key person of the company he gives all the information to

direction of tech, Darnel of administration and directors of works.

Purchases Officer: - Purchase officer is in- charge of purchase section that is assists by two

assistants. They collect information regarding price movement in different markets for each

important market they have appointed a buying agent who is authorize in advance to intake the

purchase as and whos profited and supply regularly profitable and to supply regularly to the factoron the prevailing terms

Sales manager: - Sales manager are lineage of sales section of marketing and discharge his

duties with the help other assistant sales manager, two salespersons. They work to pass the

finished products in the markets.

Store In-Charge- :- Stores in charge gives the information to purchase and sales section as

regards to how man quantity of raw material (raw milk) is lying in balance in stores and how many

quantities of finished goods (milk & milk products) are in stores.

Personnel Manager: - He is the in charge of personnel department, who is maintaining the

records about costing, financial, and also assets and liabilities.

Account officer: - Accounts officer is the head of the account department, who is maintain the

records about costing financial, assets, and liabilities.

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2.6. Departments of Saras Dairy (PRDUSS Ltd., Jodhpur)

2.6.1. Marketing Department

According to Peter Duckers, The aim of marketing is to make selling superfluous.

Marketing department is one the most important department in every organization. The marketing

activities of the organization include providing support to the milk unions within and outside the

state. The marketing department conducts various surveys to know the needs and expectations of

the customers.

. Various sales promotion techniques are used by marketing department to increase the sale o

Saras products as if It mainly includes the management related with:-

A.) Sales and Marketing

B.) Advertisement

Hoardings

Glow sign board

Gift hampers

Banners1

Advertisement through local cable

Wall paintings

C.) Cost Fixation

D.) Distribution of Product

It also cares:

E.) Production and distribution based on consumer needs

F.) Transportation Management

G.) Import Export management

H.) Packaging

I.) Sales Expansion etc

J.) Incentive schemes to dealers

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CHAPTER 3

RESEARCH METHODOLOGY

Research methodology is a systematically solve the research problem. It has many dimensions

and research methods constitute a part of the research methodology.

Thus, when we talk about research methodology, we do not only talk of research methods but also

consider the logic behind the methods. We use in context of our research study, so that research

results are capable of being evaluated by researcher himself or by others To effectively carry out

my research, I used following research process, which consists of series of actions or steps.

Research comprises of following steps:-

1. Formulating the research problem:

This is the first step under which the problem is stated in general way and then ambiguities i.e.

understanding and rephrasing the problem thoroughly and rephrasing the same into a

meaningful terms from an analysis point of view.

The research problem under the present project was to study data of various funds. For this

research, process has to formulate and the execution of which would result in the desired data.

2. Preparing The Research Design:

The function of research design is to provide data for the collection of relevant evidences with

minimum expenditure of efforts, time and money.

3. Observation Design (Collection Of Data) :

Observational design relates to the condition under which the observations are to be made.

Observational design is respect to descriptive research study. Data collection is an integral part

of marketing research. There are several ways of collecting the appropriate data, which differ

considerable in context of money, time cost and other resources at the disposal of the

researcher.

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4. Data can be obtained from two important sources:

Primary data

Secondary data

Primary Data

Primary data is collected a fresh and for the first time. Thus happens to be in character. Primary

data should collected by various methods i.e.

1. Observation

2. Interview

3. Schedules

4. Questionnaires

Secondary Data

Secondary data are the data that are already collected and are only analyzed by different

sources these sources are as follows

1. Corporate magazine

2. Manuals of various companies Books, journals, newspaper

3. Employment exchange

The secondary data would collected from financial statement, journal of national repute, books

of national and international author as well as the annual report of the company. In addition to this

internet, access will make the study more effective and meaningful.

3.1 Title of the Study-

Financial Statement Analysis of Saras Dairy

3.2 Duration of the Project-

The duration for the project was 45 days, which was begin from 22nd of June to 7 August 2010.

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3.3 Objective of the Study-

Conceptual-

To prepare a report after analysis and interpretation of finding from Balance sheet as well profit

and loss account through applying various mathematical and financial tool and techniques.

Functional-

The present earning capacity or profitability of the Jodhpur Dairy Ltd

The operational efficiency of Jodhpur Dairy Ltd

The short-term and long-term solvency

The financial stability of a business

The possibility of development in the future by making forecast and preparing budget

The main aim if study is to analyze the financial performance of Jodhpur Dairy more

especially the following are the objectives of the present study.

To give the growth and working of dairy industry

To present the theoretical framework of working capital management in addition, the

application

To review the growth and working of dairy during the last 6 years i.e. from 2001 to 2007

To find the present day problems of dairy industry in India

To evaluate the working capital management of JODHPUR Dairy

Finally to suggest the measure for more effective financial management of the firm if any

To give conclusion and meaningful suggestion to strengthen dairy Industry in general and

Jodhpur Dairy in particular

3.4. Type of Research-

Analytical

Analytical research is type of research, which has to use facts or information already

available, and analyze these to make a critical evaluation of the material.

3.5. Sample Size and method of selecting sample-

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N/A

3.6. Scope of the Study:

The need of started financial statement analysis has become greater in recent year proper working

capital management is of special repentance in an organization of service oriental nature. Working

capital is the capital that allows business to operate a day today business. Decision on working

capital, therefore is the management of current assets and current liabilities of the company

decision like economic situation Government policies, industrial policies, Fiscal Policies, and

availabilities of in visible funds etc

Industries are of large scale and small scale depending of the investments input on it. Therefore,

careful pre-planning is required for the proper establishment of these industries, which require

huge funds, and in of their funds a study on it gives an idea about the working progress of the

organization.

Working capital can be required for day-to-day operations of the firm; in short, we can say that

working capital is that necessity of any organization.

The scope of the present study extends to analogues the working capital operations carrying out

by the Jodhpur Dairy. In the next step, attempts have made to highlight the present scenario of the

dairy industry in the India market in particular.

The study also covers various components of working capital management like invertors cash and

accounts receivables management of Jodhpur Dairy.

3.6.1 Financial Statement Analysis

Accounting process involves recording, classifying, and summarizing various business

transactions. Financial statements are the result of summarizing process. Their purpose is todetermine the profitability of the firm from operations and to know about the financial position.

Thus, financial statements contain systematically collection-summarized information about a firms

operating results and financial strength and are means to communicate the information to various

users. These financial statements are prepared from the accounting records maintained by the firm

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and the generally accepted accounting principles and procedures are followed in preparing these

statements.

3.6.1.1 Meaning of Financial Statement

Financial statements are the products of the financial process. These statements are nothing bu

the presentation of financial information about the firm in concise and capsule form. The financia

information is that information which relates to the financial position at a moment in time and the

results of a series of activities over a period. Thus, financial statements refer to the statements

that show the financial position. Financial or annual report and result of business activities at the

end of the Accounting period These statements reveal the gross and net profits of the business

carried on during a certain period ad the financial position at the end of that period. Financia

statements form part of the process of financial reporting a complete set of financial statements

normally includes a balance sheet, a statement of profit and loss (also known as income

statement), a cash flow statement and those notes and other statements and explanatory materia

that are an integral part of the financial statements. They may also include supplementary

schedules and information based on or derived from, and expected to be real with such

statements. Such schedules and supplementary information may deal, for example, with financia

information about business and geographical segments, and disclosures about the effects o

changing prices. Financial statements do not; include such items as reports by directorsstatements by the chairperson, discussion, and analysis by management and similar items that

may be included in financial or annual report.

3.6.1.2. Objectives of Financial Statements

Financial statements serve as horoscopes of a business as they enable readers to measure

financial position of a concern. Such statements contain sufficient valuable information abou

various aspects of business that can be useful for business decisions. As stated by the AccountingStandards Board of India that, the objective of financial statements is to provide information abou

the financial position, performance and cash flows of an enterprise that is useful to a wide range of

users in making economic decisions. The various objectives of such statements ware

summarized below:

1. To provide financial data on economic resources and Obligations of a concern

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2. To reveal implications of operating profit on the financial Position of a concern

3. To provide sufficient and relevant information to various Parties interested in financia

statements

4. To present true and fair view

5. To serve as the basis of future operations

3.6.1.3. Balance Sheet

Balance sheet is one of the most significant financial statements of business firm. It is generally

known by various titles such as; (1) economic or general balance sheet; (2) statement of financia

position; (3) statement of assets and liabilities; (4) statement of resources and liabilities; (5

statement of assets, liabilities and owners funds etc. A balance sheet contains information aboutthe assets, liabilities and owners interest in the business at a particular point of time. For example

a balance sheet of a firm prepared as on 31st, March 2009 reveals the firms financial position on

this specific date. Thus, the balance sheet is a statement of financial position of a business firm as

on a specific data, which reports assets, liabilities, capital, reserves and the balances of other

accounts at their respective book values. At the end of the accounting year, after transferring al

the revenue accounts to Trading, Profit & Loss Account, the balance of remaining account are

shows in it. Out of these accounts, the debit balance of various assets such as land, building

investments, inventory, cash at bank, cash in hand, sundry debtors etc. are shown on the right side

of the balance sheet, whereas claims against these assets i.e. liabilities and owners equity such

as secured and unsecured loans, sundry creditors, capital reserve funds etc., which have credit

balances, are shown in the left side of the balance sheet. Thus, the liabilities and owners fund are

shows on the left side and various assets on the right side of the balance sheet. This makes the

total of the both side equal.That is why the statement of assets, liabilities and owners equities

generally known as balance sheet. In other words, a balance sheet is a screen picture of the

financial position of a going concern at a certain moment

3.6.1.3.1 Form of Balance Sheet

Balance sheet is a statement of financial position; therefore, it contains assets, liabilities and

owners equity. Balance sheet either can be prepared in horizontal/account from or in

vertical/report from.Publised financial statement are prepared usually in account from as pe

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schedule 6 of Companies Act, 1956. The balance sheet has two sides. In right side, various assets

are listed and on left side, liabilities and owners equities are shown in order of permanency

Previous years figures along with current year figures age also depicted. A specimen balance

sheet in the account form is given be:

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Balance sheet of Jodhpur Saras Dairy

As on 31st March

Liabilities Rs. ASSETS Rs.

Share Capital:

Authorized, Issued

Subscribed and Paid up-----

Shares of Rs each fully paid

Reserve and surplus:

Capital Reserve

General Reserve

Loans and Borrowings:

Secured Loans

Debentures

Mortgage Loan

Unsecured Loans

Public Deposits

Current Liabilities and Provision:

I. Current Liabilities-

Creditors

Bills Payable

Customer Advances

Taxation

Proposed dividend

Unclaimed Dividend

II. Provisions

Fixed Assets:

Land, Building, plant and machinery

(-) Depreciation

Investments (at Cost)

Current Assets:

Loans and Advances

Stock

Bills Receivable

Debtors

Advance Deposits etc.

Cash and Bank

Miscellaneous Expenditure

The above balance sheet in horizontal or account form is not much useful from analysis point o

view. Therefore, the balance sheet is presented in vertical or report form. In the report form

stepwise balance sheet is prepared listing assets at the top followed by liabilities and owners

equity. A specimen of such balance sheet is given below.

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3.6.1.3.2 Classification of Balance Sheet Items

A clear and correct understanding of the classification of balance sheet items, their meaning which

they signify and the account which they represent, are very essential for the meaningfu

interpretation of financial statements. As per companies act, 1956, all the items of balance sheet

are divided in two parts, Assets and liabilities. Again, assets have been put into (1) fixed assets, (2

investment, (3) current assets, loans and advances, (4) miscellaneous or deferred expenditures

Similarly, liabilities have classified in (1) share capital, (2) reserve and surplus, (3) secured loans,

(4) unsecured loans and (5) current liabilities and provisions. However, this classification is no

suitable for analysis. Therefore, for the purpose of analysis and interpretation, the various items o

balance sheet should classify as follows, on the presumption that total value of assets is equal to

the total liabilities and owners equity.

1) Assets

A. Fixed Assets

B. Current Assets

C. Investments

D. Miscellaneous or Deferred

E. Expenditures2. Liabilities

Long-term Liabilities

Current Liabilities

3. Equity or Net Worth

Share Capital

Reserves and Surplus

Assets:

Assets have been defined as a tangible objects or intangible rights owned by an enterprise and

carrying future economic benefits. The future economic benefits embodied in an asset may flow to

the enterprise in a number of ways. For example, an asset may be (a) used single or in

combination with other assets in the production of goods or services to be sold by the enterprise,

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(b) exchanged for other assets; (c) used to settle a liability; (d) distributed to the owners of the

enterprise. These assets represent (a) purchasing power (cash); (b) money claims (receivables

stock etc.) and (c) tangible and intangible items the can be sold or used in business to generate

income. All the assets in the balance sheet are listed either in order of liquidity or permanency

These assets grouped in different categories because of similar characteristics. From analysis

point of view, the assets can classify in the following groups:

1. Fixed Assets-

Fixed assets are those assets, which are acquired for using them in the conduct of business

operations and not for reselling to earn profits. In other words, fixed assets are assets of a

relatively permanent nature used in the conduct of business operations and not intended for sale

These are the long-term assets held for periods longer than accounting period and known as block

or Capital assets, fixed assets may be either tangible or intangible. Tangible fixed assets are those

fixed assets, which have physical existence and generate goods and services. These include

land, building, plant and machinery, furniture and fixtures, trucks etc. These assets are normally

recorded at cost and this cost is allocated over their useful lives. The amount so allocated each

year is called depreciation and tangible assets are reduced every year by the amount o

depreciation. Intangible fixed assets are those fixed assets, which have neither physical existence

nor can be seen but can be imagined. They do not represent any physical asset in the form of

documents of title like bills receivable and promissory notes. They cannot be seen or touched

because they are invisible. The intangible assets confer certain exclusive rights and facilities so

that one firm is in a position to earn more profits earning ability of the firm. These assets include

(1) goodwill (2) patent and trade mark, (3) copyright, (4) license and franchise, brands, intellectua

capital etc. Goodwill represents the excessive earning power of a firm:

Patents: confer exclusive right to use an invention; trademarks represent exclusive right to use

certain names, symbols, labels, designs etc.; copyright relates to production and sale of literary

musical or artistic works; franchise or license represents contracts giving exclusive right to perform

certain functions or to sell certain services or products.

2. Current Assets-

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Current assets are those assets, which are reasonably expected and be realized in cash, sold, or

consumed during the normal operating cycle of the business. The operating cycle is the period

which is taken to complete the sequence of events right from purchase of materials or goods for

cash to the realization of sales in cash, and normally it is of one year. The current assets are

acquired for reselling or be converted into cash during the course of business. These are also

known as short-term assets. These current assets include (1) cash in hand and at bank; (2) bills

receivable; (3) sundry debtors,(4) inventory raw material, work-in-progress, finished goods; (5

marketable securities, temporary or short-term investments, (6) advance payments; (7) prepaid

expensed, accrued incomes etc.

3. Quick or Liquid Assets-

Those assets, which can converted into cash quickly. These are also known as, near cash

assets. Cash and bank balances are the liquid assets but debtors, cash advances and marketable

securities can convert into cash at short notice. Hence, they are also known as, quick assets

Inventory and prepaid expenses do not include in this category because these cannot converted

into cash quickly. Therefore, when inventory and prepaid expenses deducted from current assets

the balance will represent quick or liquid assets.

4. Investments:

The investments of a firm in shares, debentures and bonds of other firms or government bodies fo

profit or control are known as investments. The investments are purchase for long-term to hold at

least for more than the accounting period. The long- term investments are show at their origina

cost, but the current market price is usually given in parenthesis. Trade investments mean

investment by a company in share and debentures of another company for promoting the trade or

business of the first company. Trade investments are long-term investments. For balance sheet

purpose, the investment can classify into: (1) long-term investment and (2) marketable securities

Long- term investments are those investments, which satisfy any of following conditions:

They do not meet the test of ready marketability.

They required being hold by the nature and conditions of the business. For example, export

house is required to subscribe to the shares of the concerned Export Promotion Council

They may be made in order to promote and float a new Company

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They are made to develop operating relationship with other Companies. For example, an

automobile company may Investment in the shares of a manufacturing company.

Marketable securities are those investments that are acquired by the company by employing

surplus funds or cash temporarily. These investments can be disposed off by the company at its

free will and thus convert it into cash as and when need arises. Therefore, these investments are

considered as cash, and are often called secondary cash resources and shown under the head

current assets.

Note: The interest accrued on investment should be shown under the heading current assets and

not under this head.

5. Miscellaneous Assets-

All other assets, which cannot be included in any above categories, are grouped as other assets

Usually, they represent deferred expenditures, which represent, pre-payments for service and

benefits for period longer than the accounting period. These include: (1) preliminary expenses; (2)

discount or underwriting commission on issue of shares and debentures; (3) advertising

expenditure; (4) debit balance of profit and loss account. These expenditures contribute income or

benefit in future years. These are written of gradually over several years of operations, treating

each years share in such expenditures as a charge against profit for the year. There are also

called fictitious assets which can not be realized and not convertible into cash.

Liabilities:

Liabilities nay are defined as the claims of outsiders against the firm. In other words, it is that

amount for which the off owns to outside i.e. other than owners. Generally, liabilities are created for

financing the assets form different sources. The firm can borrow money on long-term basis from

financial institutions, banks and public through issue of debentures, bonds or mortgages. The

short-term borrowings may be in the form of purchase of goods and services on credit. The outside

sources from which a firm borrows are known as liabilities. Since, these sources finance the

assets; they are in a sense claims against the assets. Because of periodicity of the funds, the

liabilities can be grouped into: (1) current Liabilities; and (2) long-term liabilities as explained

below:

1) Long-term Liabilities-

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Long term liabilities, sometimes also called fixed liabilities, can be defined as, a liability falling

due on a date later than the expiration of one completely accounting period. Such liabilities are o

two types secured and unsecured based on charge on assets of the firm. A few examples of such

liabilities are: (1) debentures or bonds, (2) mortgages, loans (3) long-term loans from banks or

financial institutions.

2) Current Liabilities-

Current liabilities, from the viewpoint of an analyst are all short- term obligations generally due and

payable within a year or an operating cycle. These include those parts of the long- term obligations

whose liquidation is expected within one year of the balance sheet date. Such liabilities arise due

to day-to-day transactions. Generally, payment of these liabilities is made either out of current

assets converted into cash or by creating news current liabilities. These are also known as short-

term liabilities. The examples of current liabilities are: (1) trade Creditors, (2) bills payable, (3)

dividend and tax payable, (4) bank Overdraft, (5) outstanding expenses and deferred income etc.

3) Owners Equity-

In case of a company, the owners of a business are known as shareholders. Owners equity

means the financial interests or claims of owners of the business against the assets of the firm

Alternatively, owners equity may be defined as the residual interest in the assets of the enterprise

after deducting all its liabilities. It is also called Net Worth, Shareholders Funds, or Net Capita

Employed Thus, the owners interest is residual in nature reflecting the excess of the firms assets

over its liabilities, current as well as long-term. This amount is not always static, but changes with

the change in the assets of the company.

Shareholders or owners equity consists of two elements:

(1) Capital and (2) reserves and surplus or retained earnings:

1. Paid-up share Capital: It is initial amount of funds contributed by shareholders. It includes both

equity share capital and preference share capital. If shareholders pay more than per value of

shares, the excess amount is shown separately as securities premium.

2. Reserves and Surplus: It represents retained earnings. It means that part of the profits

belonging to the shareholders, which not paid out to them as divided, but retained or ploughed

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back in the business. It includes: (1) revenue reserves; (2) capital reserves and surplus o

undistributed profits, which are available for distribution as, divided.

Relationship between Assets, Liabilities and Owners Equity:

From the foregoing description, it is clear that assets are resources of the firm, which are acquired

from the funds provided by outsiders (liabilities) and owners or shareholders (owners equity) of the

firm. Alternatively, assets represent outsiders and owners investments. This relationship can

express in the following account equations.

Assets = Liabilities + Owners Equity

or

Liabilities = Assets Owners Equity

or

Owners Equity or Net Assets= Assets Liabilities

From the above equations, it is clear that owners equity represents the remaining assets of the

firm after meeting the outsiders claims (liabilities). Remaining assets are the net assets

representing the difference between total assets and total liabilities. Thus, owners equity is he

claims against the firms assets, which can be computed by ascertaining net assets. The two

values i.e. owners equity and net assets are equal. Therefore, any change in net assets due to

change in total assets and liabilities will produce a change in owners equity.

3.6.1.4 Profit And Loss Account or Income Statement:

The balance sheet, as discussed above, indicates firms financial position at a specific date

Hence, bankers and lenders consider it as a very significant statement. However, it fails to indicate

whether a firm is making or losing money. Therefore, creditors and financial analysts have recently

started paying more attention to the earning capacity of the firm as a measure of financial strength

The earning capacity of the firm is reflected by profit and loss account or income statement

According to ICAI, The profit and loss account is a financial statement which presents revenuesand expenses of an enterprise for an accounting period and shows the excess of revenues over

expenses (or vice-versa). In this account, revenues of an accounting period are matched with the

expenses incurred in earning the revenues and the difference between revenues and expenses is

treated as profit or loss. Thus, profit and loss account depicts the summary of revenues, expenses

and net profit or loss of a business entity for a certain period. It serves as a measure of the firms

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profitability. Various know the profit and loss account, like balance sheet names, such as income

statement, statement of revenues and expenses, statement of income and earned surplus

operating statements etc.

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In single-step income statement, items of revenues are recorded first and than the items o

expenses are shown. The total of expense items deducted from the total of revenue items to arrive

at the net profit or net loss. A specimen of such Performa is given below:

JODHPUR SARAS DAIRY

Income Statement

For the year ended 31st March,

Particulars Total Amount

Revenue:

Sale Less Return

Other Income

Other RevenueCost & Expenses:

Cost Of SalesGeneral And Administration ExpensesSelling ExpensesDepreciationInterestNon-Operating ExpensesProvision For Tax

Total Cost And Expenses

Net Profit (After Tax)

Proposed Dividend

Income Retained In Business

Multi-step Income Statement:

Multi-step income statement provides much more useful and detailed information considering each

item of revenues and expenses systematic. In this form of income statement, a distinction is made

between operating revenue and non-operating revenue. Items of operating revenue (sales less

return) and cost of goods sold are considers first, that gives gross profit or gross margin. Second,

all operating expenses are deduces from gross profit to arrive at operating profit. After this, non-

operating incomes are added and non-operating expenses deducted to arrive at net profit before

tax. Lastly, provision for tax deducted from the net profit and net profit after tax is calculated. This

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type of income statement is very useful for the purpose of analysis and interpretation. A specimen

of such income statement is given below:

JODHPUR SARAS DAIRY

Income Statement

For the year ended 31st March,

Sales Revenue (net)

Less: Cost of Goods SoldGross Profit

Less: operating Expenses

General and Administrative

ExpensesSelling Expenses

DepreciationOperating Profit

Other Revenue

Less: Non-operating Expenses

InterestProfit Before tax

Less: Provision for taxNet Profit after tax

Proposed DividendRetained Surplus

3.6.1.5 Nature of Financial Statements:

Financial statements are prepared for the purpose of presenting review or report on the progress

made by the firm to the management. These statements deal with the status of investments in the

business and the results achieved during the period under review. The American Institute of

Certified Public Accountants states that, financial statements reflect a combination of recorded

facts; accounting conventions and personal judgments and the judgments and conventions applied

affect them materially. John N. Myer, who states that the financial statements are composed of

data, which is the result of the combination of, has also expressed similar views about the nature

of financial statements:

Recorded facts concerning the business tradition

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Conventions adopted to facilitate the accounting techniques

Postulates or assumptions made to, and

Personal judgments used in application of conventions and Postulates.

This implies that data exhibited in financial statements are affects by recorded facts, accounting

conventions, postulates and personal judgments. The implications and significance of these facts

are explains below:

1) Recorded Fact-

The term recorded facts means that data used for preparing financial statements are taken ou

from the accounting records. Figures relating to cash in hand, cash at bank, debtors, bills

receivable, cost of fixed assets, bills payable, creditors, sales, purchases, wages, salaries, rent etc

are recorded facts. The financial statements do not disclose such facts, which are not, recorded inthe accounting books whether such facts are significant or not. For example, the fixed assets

purchased are show at cost price in the accounting books. The market price or replacement cost o

fixed assets is not stated in the balance sheet, because the cost price of the fixed assets is a

recorded fact as per accounting records.

2) Accounting Conventions and Postulates-

The financial statements are affects largely by accounting principles, concepts and conventions

On the going concern concept assets are shown at cost after deducting depreciation instead oftheir market value, on the assumption that these assets will not be sold. On money measuremen

concept, non-monetary factors such as managerial efficiency and integrity that affect firms profit

largely are not show in the financial statements. Similarly, according to convention o

conservatism, provisions are making for contingent liabilities and losses. Income for the period

ending at certain specific date is determined according to realization postulate. The convention of

materiality is follows in dealing with small items like pencils, pen, postage stamps etc. The

stationery is valued at cost and not on the principle of cost or market price whichever is less. The

use of accounting conventions makes financial statements comparable, simple and realistic.

3. Personal Judgment-

Although accounting concepts and conventions provide good guidelines to the accountant, yet the

application of these concepts and conventions depends upon the personal judgment of the

accountant. For example, depreciation on fixed assets is charged on cost but which method (fixed

installment, written down value or unit of service) and rate of depreciation are used; depend upon

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the personal judgment of accountant. Similarly, selection of the inventory valuation method (FIFO,

LIFO, Average etc.); rate of provision for bad doubtful debts, division of an item into capital and

revenue, determining the amount and period for writing off the intangibles are some of the

examples, where judgment of the accountant plays an important role in choosing the mos

appropriate course of action. Thus, combined effect of recorded facts, accounting conventions

postulates and personal judgment is that the values of various items shown in the financia

statements do not indicate the current market or economic value. These are simply interim reports

for the information of outsiders.

3.6.1.6 Limitations of Financial Statements:

The summary of accounts maintained by a business firm is presents in the form of financial

statements. The amounts expressed in these statements are based on vouchers and accounting

records. Hence, decisions based on this information are more true and logical. However, the

conclusions drawn because of this information cannot treat as final and accurate, because there

are certain limitations to the financial statements. One must, there for keep in view these limitations

while studying the profit and loss account and balance sheet of a firm. Important and impact-

bearing limitations of financial statements are identified as below:

1) Lack of precision

2) Incomplete Information

Reputation and prestige of the management

Efficiency, integrity and loyalty of the employees

Expected difficulties and facilities in procuring raw Materials

3) Lack of Exactness

4) Interim Reports

5) Hiding the Real Position or window Dressing

6) Lack of Comparability

7) Historical Costs

3.6.1.7 .Parties Interested in Financial Statements and Their Utility:

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Each group of society is directly or indirectly affected by the activities of a business entity. They

have been interest in the profits, development and progress of the enterprise. Financial statements

provide all information relating to financial position and operating strength or weakness of the

enterprise. Therefore, various users require statements for different purposes, which are narrated

below:

1. Management

2. Investment

3. Share holder

4. Debentures holder

5. Public

6. Customer

7. Employees

8. Stock exchange

3.6.2 Financial Appraisal

A companys financial statements are intended to summarize the results of its operations and it is

ending financial condition. The information in this statement is study and related to othe

information by external users for several reasons. Current shareholders, for example, are

concerned about their invested income, as well as the companys overall profitability and stability

Some potential investors are interested in solid companies that whose financial statements

indicate stable earnings and dividends with little growth in operations. Others prefer companies

whose financial statement indicate rend for rapid growth in different lines of business. Short-term

creditors are interested in a companys short run solvency, its ability to pay current obligation as

they become due. Long-term creditors are concerned about the safety of their interest; income and

companys ability to continue earning and cash flow to meet its financial commitments and theseare only few of the users and uses of financial statements.

However, the numerical data in the financial statement are quite calm. They cannot speak

Analytical data are not ending in themselves, but they are meant to an end. Financial appraisal is

an attempt to determine the significance and meaning of the financial statement data so tha

forecast may be may be made of the prospects for future earnings, ability to pay interest, debts

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maturities both current as well as long-term profitability of a sound dividend policy. Financia

appraisal involves the assessment of firms past, present and anticipated future financial condition

Financial appraisal is a scientific evaluation if the profitability and financial strength of a business

concern. In fact, financial appraisal and analysis of financial statement have nearly the same

meaning. Financial statement analysis is used for the purpose of financial appraisal. Financia

appraisal is the process of making a scientific proper, critical and comparative evaluation of the

profitability and financial health of given concern through the application of financial statemen

analysis. Financial statement analysis is a preliminary step towards the evaluation of result dawn

by the analyst or management accountant. Appraisal or evaluation of such results is making

thereafter. Financial appraisal begins where financial analysis ends and financial analysis starts

where the summarization of financial data in the form of profit and loss accounts and Balance

Sheet ends. In the words of Kenney and McMillan, Financial statement analysis attempts to unvei

the meaning and significance of the items composed in profit and loss account ad balance sheet

so as to assist the management in the formation of sound operating financial policies. The

appraisal or analyses of financial statements spotlight the significant facts and relationships

concerning managerial performance, corporate efficiency, financial strength or weakness and

credit worthiness that would have otherwise been buries in the maze of details.

The technique of financial appraisals frequently applied to the study of accounting data with a view

to determining continuity or discontinuity of the operating policies and investment value o

business. Everyday interested in the affairs of the company is interested in finding answer to the

following searching question:

(a) Does the company earn adequate profit

(b) Does the company process have enough funds to meet its obligation as and when they

mature

(c) Is investment in the company safe

Appraisal of financial statement alone can answer such queries. It is true that statement analysis

merely reveals what has taken lace in the past, but past events given some indication of what may

be expected in future unless some drastic changes take place in business it will continue to move

in the same direction in the past.

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3.6.2.1 Tools and Techniques of Financial Appraisal:

Financial appraisal tools and techniques are the measurement of performance of business and

soundness of financial position. They are one of the inevitable steps required for financial position

They are one of the inevitable steps required for financial appraisal.

They can be divided into three parts:

(1)Accounting technique

(2) Statistical techniques and

(3) Mathematical technique

In this study, ratio analysis has been used as a tool, hence only accounting technique has

discussed in detail.

Accounting techniques:

To appraise the financial strength as well performance of a business concern various accounting

technique are applied. The object of these techniques is to simplify to collected and rearranged

and data by which they can be made easy to Understand. These techniques are summarized as

under:

Ratio analysis

Trend percentage

Common size and comparative statement

Fund flow analysis

Break even analysis

Ratio analysis

Accounting ratios are relationship expressed in mathematical terms, between figures which have a

cause and effect relationship or which are connected with each other in some manner or the other.

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To quote Wixon, Keil and Bedford, A ratio is an expression of the quantitative relationship

between two numbers. Ratio analysis of statements is the process of determining and presenting

relationship of items and groups of items in the statements.

The purpose of ratio is to anatomies and facilitates comparisons with periods, and anothe

organization or an industry average or standard. It is very significant to know that ratios are

calculated only when both the figures have some kind of relationship. If the figures are no

interrelated, the ratio calculated does not convey and meaning or significance. For instance, profit

is related to sales because it is an outcome or sales minus cost but not a remote relationship

between lab our cost and amount of debtors, thus the ratio calculated will not have any meaning.

Most important part of ratio analysis is interpretations of ratios. Computation is important as well as

but it is only clerical work. Interpretation of ratios matters. It is the task of human brain requiring the

art and the skill. The usefulness of ratios is wholly dependent on their Intelligence and judicious

interpretation.

Ratio can be classifies on two bases:

(A)Structural Classification:

On this basis, ratios can divide as under:

Balance sheet ratio: These types of ratios are calculated by figures given in the balance

sheet.

Income statement ratios: Ratio calculated from figures Derived from profit and loss

accounts is included in this type of ratios

Inter statement ratios: The ratios, which are compute from figures of both the financia

statements, are called inter-statement ratio.

(B) Functional Classification:

On the basis, ratios can divide in the following:

Profitability ratios: Ratios, which measure the profitability of a concern, are termed as

profitability ratios.

Turnover or activity ratios: Ratios used to measure the effectiveness of the use of capital or

assets are called activity ratios.

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Solvency ratios: This type of ratios denotes the financial position concern. Solvency can be

divided in to two types.

(a) Short-term solvency or liquidity: The capacity of firm to meet its current obligations is called

liquidity. Ratios to measure liquidity are called liquidity ratios.

(b) Long-term solvency: It is a measurement of the firms overall strength. Ratios to measure this

term are specifies as long-term solvency ratios.

Trend Percentage: A horizontal comparison of various items of one along with thei

Percentage to the total can be make to know the trend of Particular Item of over a period of

years. The study of trend will indicate the direction of movement over a long time. One can

get a better view of things unaffected by short-term influences by the study of long-termtrend percentage. Another type of the comparison by trend percentage can be termed as

index numbers. Index numbers can be compute by taking common base.

Comparative and Common Size Statements

(A)Comparative Statement: Comparison of two or more years of a concern and comparison of

two comparable units can be made through comparative statements. This will be facilitated if the

relevant dated are lay side by side in statement in single column form.

(B)Common Size Statements: The proportion, which a single Time represents within a tota

group or subgroup if calculated, will give an idea about the relative importance of items inter-se

The total group figure is the base and can be taken as 100. Since all other components expressed

as a percentage of the total, which has common size (i.e.100), the financial statements are known

as common-size statements. This is in facts a vertical financial statement. The statements are

known comparative common size statements, if comparative actual data are also placed side by

side.

However, under this technique individual items of profit and loss account and Balance sheet are

educated to common base, which we treated as equivalent to one hundred. In case of profit and

loss account, sales are taken as hundred and all items are expressed with reference to sales. In a

Balance sheet, the ratio of each asset to total assets and ratio of each liability and capital item to

total liabilities and capital (which is the same amount as total assets) is computed.

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Fund Flow Analysis:

A statement of changes in financial position can be prepared to analysis the reason, which has laid

to such changes. Fund flow statement is a statement either prospective setting out the sourcesand application of the funds of an enterprises. The purpose of statement is to indicate clearly the

requirement of funds and how they are proposing to be raised, the efficient utilization and

application of the same.

Break-Even Analysis:

The narrower interpretation of the Break-even analysis tells us that it is a system of determination

of that level of activity where total cost equal total revenue of selling price. The broadeinterpretation refers to that analysis which determines the provable profit at any level of activity, as

stated by Weton and Briahman. Break-even analysis is useful in studying the relations among

volume prices and cost structure, it is thus helpful in pricing, cost control and other financial

decision. There, it is very crucial tool to measure profitability of business. It magnifies a set of

interrelationship of fixed costs, variable costs, level of activity of the profitability of the concern,

Says Kulsrestha. Thus, it is a tool of financial analysis in a specific way of presenting and studying

in interrelationship among costs, volume and profits.

3.6.3 Working Capital Analysis

CONCEPT

NEED FOR WORKING CAPITAL

ANALYSIS OF WORKING CAPITAL

WORKING CAPITAL TREND ANALYSIS

RATIO ANALYSIS OF WORKING CAPITAL

3.6.3.1 Concept

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The funds required for financing the duration of operation cycle in business are known as working

capital. It is excess of current assets over current liabilities.

The term net working capital can be defined in two ways (1) the most common definition of net

working capital (NWC) is the difference between currents assets and current liabilities (II) and

alternate definition of NWC is that portion of a firms current assets which is financed by long-term

funds. The quantitative concept or net working capital concept explains working capital as excess

of current assets over current liabilities (2). Net working capital represents the amount of the

current assets, which remain if all the current liabilities were paid, (3). Net working capital is

commonly defines as difference between current assets and current liabilities.

The term current assets may be defined as cash and other assets, which are expect to be

converted in to cash in the ordinary course of business liquidation is reasonably expected to

require the use of existing resource properly classifiable as current assets or the creation of other

current liabilities.

3.6.3.2 Need of Working Capital

In business the current assets and current liabilities flows like an electric current. The working

capital plays the same role in circulate, the same role in the business as the role of heart in human

body. Just as hearts gets blood and circulate, the same way working capital funds are generates

and these funds are circulating in the business. As and when this circulation stops, the business

becomes lifeless. It is because of this reason that the working capital is known as the circulating

capital as it circulates in the business just like blood in human body. The funds generated from

issue of shares, borrowings and from operations are used to pay creditors, for etc., this make

available stock of finished goods by sale of which either debtor is created or cash is received, thus

generating profit. A portion of profit is utilized for payment of tax, interest and dividends. This cycle

continues throughout the continuous throughout the life of business.

Without adequate working capital no progress can he made According to Kennedy and Macmillan

working capital should be sufficient in amount to enable the company to conduct its business on

the most economical basis and without financial disaster.

The importance of working in a business enterprise can hardly be overemphasized. It is the capital

which keeps the working of business. Working capital is a consideration major importance in

determining the financial strength of an enterprise. It indicates the concerns ability to carry on its

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normal business comfortably and without financial stringency, to expend its operation without the

need of new financing and to meet emergencies and losses without disaster.

3.6.3.3 Analysis of Working Capital

Working capital is an essential part of financial management. If mere is an adequate amount of

working capital and it utilized in the right manner, it is a great achievement for the business. The

excess of working capital cause financial stringency and brines the business to a standstill.

Realizing the important of working capital in financial management the analysis of working capita

becomes a phenomenon. It facilitates the adequacy and management of working capital the

analysis of working capital provides a careful inquiry into its components to control the workingcapital and to conserve it properly. It helps in determining the optimum level of working capital in

the firm. The process of measurement and analysis of working capital performed based on

financial statements of the business enterprise for past few years. In the present study, the present

study the analysis of working capital of Jodhpur Dairy has made by two techniques viz., trend

analysis and ratio analysis.

3.6.3.4 Working Capital Trend Analysis

The working capital trend analysis represents a picture of variation in current assets, curren

liabilities and working capital over a period. Such an analysis enables us to study upward and

downward trend in current liabilities and its effect on the working capital position. The trend

analysis is a tool of financial appraisal where the changes in the factors are comparing with the

base year assuming the base year as 100.

In the present, study a statement-showing trend of important study because each component of

working capital has the relationship of causes and effects.

3.6.3.5 Ratio Analysis of Working Capital

Trend analysis shows the trend of current assets, Current Liabilities and working capital only. It do

not interpret the contribution of each item of working capital in the trend, whereas, it can be done

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The solvency of a company is better indicated by quick ratio. The fundamental object of calculating

this ratio to enable the financial management of the company to ascertain that would happen if

current creditor presses for immediate payment and either not possible to push up the sales o

closing or it is sold a heavy loss is likely to be suffered. These problems arise because closing

stock is two-step away from the cash and their price is more or less uncertain to market demand.

The term quick assets include all current assets except inventories and prepaid expense. Quick

ratio indicates the relationship of quick assets and current liabilities. The ratio calculated by

dividing quick assets by current liabilities. The following is the formula below: It is wise to keep

liquid assets at least to current liabilities at all the time. Therefore, the standard ratio of 1:1 is

regarded as norm, however this is not a hard and fast rule and not necessary to be adopted

everywhere.

Quick Ratio = Quick Assets / Current Liabilities

(3) Absolute Liquidity Ratio-

The absolute liquid ratio is the ratio between absolute liquid assets and current liabilities can

calculate by dividing the liquid assets by current liabilities. The formula is as follows:

Absolute Liquidity Ratio= Absolute Liquid Assets / Quick Liabilities

The term liquid assets includes cash, bank balance and marketable securities, if current liabilities

are to paid at once, only balance of cash and bank and marketable securities will be utilized

Therefore, to measure the absolute liquidity of a business, this ratio is calculated. The standard of

the ratio is .5:1 the idea behind the norm is that if all creditor demands for payment at least 50% of

their claim should be satisfied at once.

ACTIVITY RATIO:-

(4) Stock Turnover Ratio-

Current, quick and absolute liquidity ratio examine that the company would be able to discharge its

current liabilities. Some of the current assets expect cash take time to convert in to cash. To

measure how quickly these assets convert in to cash turnover ratio are calculated. Inventory

turnover ratio indicates the number of items inventory or stock is replaced during the year. It

measures relationship between cost of goods sold and inventories level. The ratio calculated as

follows:

Inventory Ratio = Cost of goods sold / Average Inventory

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Cost of goods sold includes opening stock (inventory) and manufacturing cost (including purchase

minus closing inventory, cost of goods sold has been divided by Average inventory. Inventory

turnover ratio is better than a low ratio.

Higher ratio indicates:

1. Stock is sell- out fast

2. Same volume of sales from less stock or more sales from same stocks

3. Too high ratio shows stock outs or over trading

4. Less working capital requirement lower ratio reveals:

Stock is sold at a slow speed

Same volume of sales from more stocks or less sales from Same stocks

More working capital requirement

Too low ratios show obsolete stocks or under trading

(5) Receivable Turnover Ratio-

This ratio is also supplementary measure of liquidity like the inventory turnover ratio. The

receivable turnover ratio revels how quickly receivable or debtor are converted into cash

The receivable turnover ratio shows relationship between sales and receivables (debtors and bills

receivables), this ratio is derived from the following formula-

Receivable Turnover Ratio = NET Credit SALE / AVG. RECIVABLE

(6) Working Capital Turnover Ratio-

This ratio reveals relationship between sales and working capital of firm. This ratio test the

efficiency with which the working capital has been utilize the higher the ratio the greater the use of

working capital, which result in more profit. The ratio can be computed as follows-

Working Capital = Sale / Working Capital

This ratio interprets about the over and under trading of the business. A very high ratio may be

result of over trading i.e., increase in volume is sales without corresponding increase for working

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capital. On the other hand, a very low ratio is the indication of under trading which means more

funds have been utilized in the business in the form of working capital than needed.

Profitability Ratios Related To SalesThese ratios are based on the premise that a firm should earn sufficient profit on each rupee of

sales. If adequate profits are not earn on sales, there will be difficulty in meeting the operating

expenses and no returns will be available to the owners. These ratios consist of profit margin and

expenses ratios. These are calculating as follows:

1. Profit Margin Ratios

Gross Profit Ratio-

Gross profit ratio reveals the relationship between gross profit and net sales in terms o

percentage. A net sale is obtained by deducting returns from gross sales while gross profit is

calculate by subtracting direct from goods sold net sales. Gross profit ratio is also known as gross

profit margin or gross margin. It is calculate through dividing gross profit by sales. The following is

the formula:

Gross Profit = Gross Profit / Net Sale * 100

A high ratio of gross profit to sales is a sign of good management as it implies that the cost o

production of the firm is relatively low.

Usually a high gross margin is result of following:

Increase in selling price without a corresponding decline in cost of goods sold.

A decline in cost of sales without corresponding decline in selling price

Sales mix is such that product having a high gross margin are sold in high quality

Over valuation of closing stock or under valuation of opening stock

A relatively low gross margin is definitely a danger signal, warranting a careful and detained

analysis of the factors responsible for it. The important contributory factors may be:

Decrease in selling price to increase sales volume without corresponding decline in cost of

goods sold.

Increase in cost goods sold without corresponding change in selling price.

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Under valuation of closing stock and over valuation of opening stock

Operating Profit Ratio-This ratio shows the profitability of sales. A business may yield high

gross income but low operating profit because of high operating expense. This ratio is computethrough dividing the operating profits by net sales. The formula is expressed as-

Operating Profit Ratio = Operating Profit / Net Sale * 100

The term operating profit refers so the profit of concern before adjustment of non- operating items

as interest etc. in other words, operating profit equals to net sales minus all operating cost (i.e. the

sum of cost of goods sold on-operating expenses). A business may earn more profit due to its non-

operating activities like purchase and sale of securities. Hence, it is essential to compute this ratio

not to measure the efficiency of management but also the effectiveness of production and sales of

company product in generating pre tax profit for the company.

A low margin of operating profit to net sales means that a slight unfavorable change in future

revenue rate without a proportionate, change in costs probably would result in loss instead of

profit.

Net Profit Ratio-

This ratio is also known as net profit margin on sales. This ratio measures the relationship betweennet profit and net sales of a firm. Net profit is the excess of revenue over expenses during

particular accounting period. Here net profit includes profit from both the operating and non-

operating activities of a concern. The ratio can be compute based on either net profit tax or net

profit after tax, expressed in formula.

Net Profit = Net Profit / Net Sale * 100

2. Expenses Ratio:

Cost of Goods Sold Ratio-

This ratio shows what percentage share is consume by cost of goods sold and conversely what

proportion is available for meeting expense such as selling and general distribution expense as

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well as financial expense consisting of taxes, interest, and dividend and so on. This ratio is

compute by following formula:

Cost of Goods Sold = Cost Of Goods Sold / Net Sale * 100

3. Profitability Ratios Related To Investment

Profitability measurement based upon the sales only may be wrong. Because it is quite possible

that profits in relation to sales are adequate for the investment in the business. Due to this reason

profitability based on sales shows good profit earning capacity of the business but in fact profit of

the business are inadequate for the owners of the business as profit are not giving a good return

on investment.

Therefore, in present study ratios are also computed by relating profits of Jodhpur Dairy to itsinvestment, in this study two types of ratios relating to investments in Jodhpur Dairy Ltd. has been

calculated i.e. return on capital employed and return on net worth.

Return on Capital Employed-

Return on capital employed is a good measure of profitability in as much as it is extension of the

input-output analysis. It aids in comparing the performance efficiency of an identical enterprises

The term capital employed may be defines as gross capital employed and net capital employed

Gross capital includes assets used in business whereas net capital employed consists of tota

assets of the business less its current liabilities. Return on capital employed is calculates as

follows:

Return on Capital Employed = Net Profit before Interest & Tax / Capital Employed * 100

Return regards the operating profits, excluding any income from assets excluded from the capita

employed and eliminating adjustments such as writing off preliminary expenses etc, but the

amount of interest on long- term borrowings is not deducted from net profits for this purpose.

The return on capital employed indicates how well management has used the funds supplied by

creditor and owner. The higher the ratio the more deficient the concern can be considered. The

decision of management for the further investment depends upon this ratio. It is also important for

the prospective investors. Shareholders can measure the success or failure of company in terms of

profit related to capital employed.

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Capital Structure Analysis

Meaning of capital structure

Financial Structure of Jodhpur Dairy

Analysis of common size balance sheet

Ratio Analysis

Debt to Equity Ratio

Proprietary Ratio

Long Term Fund to Fixed Assets Ratio

Fixed Assets to Net worth

Capital Gearing Ratio

Meaning of Capital Structure

Capital structure implies the financial plan according to which the assets of a financed. The capita

structure refers the makeup of long-term funds as represented by equity share capital, preference

share capital and long-term debts.

The left hand side of balance sheet represented by total liabilities is known as financial structure

That part of the financial structure, which includes long-term sources, is known as capital structure

Capital structure signifies the financial plan of the company in which various sources of capita

mixed in proportion desire by the management it is often suggest that a capital structure should be

determined which could maximize the long-term run value of an enterprise. Some company does

not plan their capital structure. These companies may proper in the short run, but ultimate they wil

face considerable difficulties in rising funds to finance their activities.

In common parlance, it is said that a financial manager should plan an optimum capital structure

However, until date nobody could formulate a model for

Documents

Himanshu v Mathur