Variable Working Capital

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Project Report - Working Capital Management

WORKING CAPITAL - Meaning of Working Capital

Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day

operations. Long terms funds are required to create production facilities through purchase of fixed assets such as

p&m, land, building, furniture, etc. Investments in these assets represent that part of firms capital which is

blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for

the purchase of raw material, payment of wages and other day to- day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that part of the

firms capital which is required for financing short- term or current assets such as cash, marketable securities,

debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly

converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as

revolving or circulating capital or short term capital.

CONCEPT OF WORK ING CAPITA L

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises current assets are

those

Assets which can convert in to cash within a short period normally one accounting year.

CONSTITUENTS OF CURRENT A SSETS

1) Cash in hand and cash at bank

2) Bills receivables

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3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net working capital is the excess

of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the current liabilities

are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in

the ordinary course of business within a short period of normally one accounting year out of the current

assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation , if it does not amt. to app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working capital is an

accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following reasons:

1. It enables the enterprise to provide correct amount of working capital at correct time.

2. Every management is more interested in total current assets with which it has to operate


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then the source from where it is made available.

3. It take into consideration of the fact every increase in the funds of the enterprise would

increase its working capital.

4. This concept is also useful in determining the rate of return on investments in working

capital. The net working capital concept, however, is also important for following reasons:

It is qualitative concept, which indicates the firms ability to meet to its operating expenses andshort-term liabilities.

IT indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital requirement out of the permanent

sources of funds.


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CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o On the basis of concept.

o On the basis of time.

On the basis of concept working capital can be classified as gross working capital and net working

capital. On the basis of time, working capital may be classified as:

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKIN G CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed

facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of raw

material, workin-process, finished goods and cash balance. This minimum level of current assts is calledpermanent or fixed working capital as this part of working is permanently blocked in current assets. As the

business grow the requirements of working capital also increases due to increase in current assets.

TEMPORARY OR VARIA BLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal

demands and some special exigencies. Variable working capital can further be classified as seasonal working

capital and special working capital. The capital required to meet the seasonal need of the enterprise is called

seasonal working capital. Special working capital is that part of working capital which is required to meet special

exigencies such as launching of extensive marketing for conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is required for short periodsand cannot be permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY OF THE BU SINESS: Adequate working capital helps in maintaining the solvency of

the business by providing uninterrupted of production.

Goodwi l l : Sufficient amount of working capital enables a firm to make prompt payments and makes

and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans

from banks and other on easy and favorable terms.

Cash Discounts : Adequate working capital also enables a concern to avail cash discounts on the

purchases and hence reduces cost.

Regular Supp ly o f Raw Mater ia l : Sufficient working capital ensures regular supply of raw

material and continuous production.

Regular Payment Of Salar ies, Wages And Other Day TO Day Commi tm ents : It

leads to the satisfaction of the employees and raises the morale of its employees, increases their

efficiency, reduces wastage and costs and enhances production and profits.


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Exp lo ita t ion Of Favorab le Marke t Cond i t ions : If a firm is having adequate working

capital then it can exploit the favorable market conditions such as purchasing its requirements in bulk

when the prices are lower and holdings its inventories for higher prices.

Abi l i t y To Face Cr ises: A concern can face the situation during the depression.

Quick And Regu lar Return On Investments : Sufficient working capital enables a concern

to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise

more funds in future.

High Morale: Adequate working capital brings an environment of securities, confidence, high morale

which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITA L

Every business concern should have adequate amount of working capital to run its business operations. It

should have neither redundant or excess working capital nor inadequate nor shortages of working capital.

Both excess as well as short working capital positions are bad for any business. However, it is the inadequate

working capital which is more dangerous from the point of view of the firm.

DISADVA NTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITA L

1. Excessive working capital means ideal funds which earn no profit for the firm and

business cannot earn the required rate of return on its investments.

2. Redundant working capital leads to unnecessary purchasing and accumulation of

inventories.

3. Excessive working capital implies excessive debtors and defective credit policy which

causes higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with banks and other

financial institution may not be maintained.

6. Due to lower rate of return n investments, the values of shares may also fall.

7. The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due to the time gap

between production and realization of cash from sales. There is an operating cycle involved in sales and

realization of cash. There are time gaps in purchase of raw material and production; production and sales; and

realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses.

To meet the selling costs as packing, advertising, etc.


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To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock.

For studying the need of working capital in a business, one has to study the business under varying

circumstances such as a new concern requires a lot of funds to meet its initial requirements such as promotion

and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed

for working capital depends upon the size of the company and ambitions of its promoters. Greater the size of

the business unit, generally larger will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and expensing of the business till it

gains maturity. At maturity the amount of working capital required is called normal working capital.

There are others factors also influence the need of working capital in a business.

FACTORS DETERMININ G THE WORK ING CAPITA L REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of working is very limited in publicutility undertakings such as electricity, water supply and railways because they offer cash sale only

and supply services not products, and no funds are tied up in inventories and receivables. On the other

hand the trading and financial firms requires less investment in fixed assets but have to invest large

amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business, greater is therequirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady by accumulatinginventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the rawmaterial and other supplies have to be carried for a longer in the process with progressive increment of

labor and service costs before the final product is obtained. So working capital is directly proportional

to the length of the manufacturing process.

5. SEASONALS V ARIATIONS: Generally, during the busy season, a firm requireslarger working capital than in slack season.

6. WORK ING CAPITAL CYCLE: The speed with which the working cycle completesone cycle determines the requirements of working capital. Longer the cycle larger is the requirement

of working capital.

DEBTORS

CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question of

working capital and the velocity or speed with which the sales are affected. A firm having a high rate

of stock turnover wuill needs lower amt. of working capital as compared to a firm having a low rate of


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WORKING CAPITAL AN ALYSIS

As we know working capital is the life blood and the centre of a business. Adequate amount of working

capital is very much essential for the smooth running of the business. And the most important part is the

efficient management of working capital in right time. The liquidity position of the firm is totally effected

by the management of working capital. So, a study of changes in the uses and sources of working capital

is necessary to evaluate the efficiency with which the working capital is employed in a business. This

involves the need of working capital analysis.

The analysis of working capital can be conducted through a number of devices, such as:

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

1. RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be

employed for measuring short-term liquidity or working capital position of a firm. The following ratios can

be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANA LYSIS

Fund flow analysis is a technical device designated to the study the source from which additional funds

were derived and the use to which these sources were put. The fund flow analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital) business


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enterprise between beginning and ending of the financial dates.

3. WORKIN G CAPITAL BU DGET

A budget is a financial and / or quantitative expression of business plans and polices to be pursued in the

future period time. Working capital budget as a part of the total budge ting process of a business is

prepared estimating future long term and short term working capital needs and sources to finance them,

and then comparing the budgeted figures with actual performance for calculating the variances, if any, so

that corrective actions may be taken in future. He objective working capital budget is to ensure

availability of funds as and needed, and to ensure effective utilization of these resources. The successful

implementation of working capital budget involves the preparing of separate budget for each element of

working capital, such as, cash, inventories and receivables etc.

ANA LYSIS OF SHORT TERM FINAN CIAL POSITION OR TEST OF LIQUIDITY

The short term creditors of a company such as suppliers of goods of credit and commercial banks

short-term loans are primarily interested to know the ability of a firm to meet its obligations in time. The

short term obligations of a firm can be met in time only when it is having sufficient liquid assets. So to

with the confidence of investors, creditors, the smooth functioning of the firm and the efficient use of

fixed assets the liquid position of the firm must be strong. But a very high degree of liquidity of the firm

being tied up in current assets. Therefore, it is important proper balance in regard to the liquidity of

the firm. Two types of ratios can be calculated for measuring short-term financial position or short-term

solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and when these become due.

The short-term obligations are met by realizing amounts from current, floating or circulating assts. The

current assets should either be liquid or near about liquidity. These should be convertible in cash for

paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be

assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities

then the liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met out of

the current assets then the liquidity position is bad. To measure the liquidity of a firm, the following

ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general liquidity and its most widely


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3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time

and on the other hand a low quick ratio represents that the firms liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are

equal to the current liabilities then the concern may be able to meet its short-term obligations. However,

a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors.

On the other hand, a firm having a low liquidity position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55

Current Liabilities 27.42 20.58 33.48

Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :

A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in

time. The ideal quick ratio is 1:1. Companys quick ratio is more than ideal ratio. This shows company

has no liquidity problem.

3. AB SOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid than inventories, yet there

may be doubts regarding their realization into cash immediately or in time. So absolute liquid ratio

should be calculated together with current ratio and acid test ratio so as to exclude even receivables

from the current assets and find out the absolute liquid assets. Absolute Liquid Assets includes :

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2006 2007 2008

Absolute Liquid Assets 4.69 1.79 5.06

Current Liabilities 27.42 20.58 33.48

Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

These ratio shows that company carries a small amount of cash. But there is nothing to be worried

about the lack of cash because company has reserve, borrowing power & long term investment. In

India, firms have credit limits sanctioned from banks and can easily draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits. The efficiency with

which assets are managed directly affects the volume of sales. The better the management of assets,

large is the amount of sales and profits. Current assets movement ratios measure the efficiency with

which a firm manages its resources. These ratios are called turnover ratios because they indicate the


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speed with which assets are converted or turned over into sales. Depending upon the purpose, a number

of turnover ratios can be calculated. These are :

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount of debtors

due to slow credit collections and moreover if the assets include high amount of slow moving inventories.

As both the ratios ignore the movement of current assets, it is important to calculate the turnover ratio.

1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO :

Every firm has to maintain a certain amount of inventory of finished goods so as to meet the

requirements of the business. But the level of inventory should neither be too high nor too low.

Because it is harmful to hold more inventory as some amount of capital is blocked in it and some

cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible.

INVENTORY TURNOVER RATIO = COST OF GOOD SOLD

AVERAGE INVENTORY

Inventory turnover rat io measures the speed with which the stock is converted into sales. Usually a

high inventory ratio indicates an efficient management of inventory because more frequently the

stocks are sold ; the lesser amount of money is required to finance the inventory. Where as low

inventory turnover ratio indicates the inefficient management of inventory. A low inventory

turnover implies over investment in inventories, dull business, poor quality of goods, stock

accumulations and slow moving goods and low profits as compared to total investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

2

(Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times

Interpretation :

These ratio shows how rapidly the inventory is turning into receivable through sales. In 2007 the

company has high inventory turnover ratio but in 2008 it has reduced to 1.75 times. This shows that the

companys inventory management technique is less efficient as compare to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

e.g.


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Year 2006 2007 2008

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130 days 202 days

Interpretation :

Inventory conversion period shows that how many days inventories takes to convert from raw

material to finished goods. In the company inventory conversion period is decreasing. This shows the

efficiency of management to convert the inventory into cash.

3. DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit

policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are

expected to be converted into cash within a short period and are included in current assets. So liquidity

position of a concern also depends upon the quality of trade debtors. Two types of ratio can be

calculated to evaluate the quality of debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtors velocity indicates the number of times the debtors are turned over during a year.

Generally higher the value of debtors turnover ratio the more efficient is the management of

debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor

management of debtors/sales and less liquid debtors. This ratio should be compared with ratios of other

firms doing the same business and a trend may be found to make a better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

2

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times

Interpretation :

This ratio indicates the speed with which debtors are being converted or turnover into sales. The

higher the values or turnover into sales. The higher the values of debtors turnover, the more efficient is

the management of credit. But in the company the debtor turnover ratio is decreasing year to year. This

shows that company is not utilizing its debtors efficiency. Now their credit policy become liberal as

compare to previous year.

4. AVERAGE COLLECTION PERIOD :

Average Collection Period = No. of Working Days


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Debtors Turnover Ratio

The average collection period ratio represents the average number of days for which a firm has to

wait before its receivables are converted into cash. It measures the quality of debtors. Generally, shorter

the average collection period the better is the quality of debtors as a short collection period implies

quick payment by debtors and vice-versa.

Average Collection Period = 365 (Net Working Days)

Debtors Turnover Ratio

Year 2006 2007 2008

Days 365 365 365

Debtor Turnover Ratio 9.6 8.3 7.5

Average Collection Period 38 days 44 days 49 days

Interpretation :

The average collection period measures the quality of debtors and it helps in analyzing the

efficiency of collection efforts. It also helps to analysis the credit policy adopted by company. In the

firm average collection period increasing year to year. It shows that the firm has Liberal Credit policy.

These changes in policy are due to competitors credit policy.

5. WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of net working capital. This

ratio indicates the number of times the working capital is turned over in the course of the year.

This ratio measures the efficiency with which the working capital is used by the firm. A higher

ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a

very high working capital turnover is not a good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover = Sales

Networking Capital

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Networking Capital 53.87 62.52 103.09

Working Capital Turnover 3.08 2.4 1.64

Interpretation :

This ratio indicates low much net working capital requires for sales. In 2008, the reciprocal

of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 60 paisa as working

capital. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.

INVENTORIES


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(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Inventories 37.15 35.69 75.01

Interpretation :

Inventories is a major part of current assets. If any company wants to manage its working capital

efficiency, it has to manage its inventories efficiently. The graph shows that inventory in 2005-2006 is

45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current assets. The company should try to

reduce the inventory upto 10% or 20% of current assets.

CASH BNAK BALANCE :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Cash Bank Balance 4.69 1.79 5.05

Interpretation :

Cash is basic input or component of working capital. Cash is needed to keep the business running

on a continuous basis. So the organization should have sufficient cash to meet various requirements. The

above graph is indicate that in 2006 the cash is 4.69 crores but in 2007 it has decrease to 1.79. The

result of that it disturb the firms manufacturing operations. In 2008, it is increased upto approx. 5.1%

cash balance. So in 2008, the company has no problem for meeting its requirement as compare to 2007.

DEBTORS :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Debtors 17.33 19.05 25.94

Interpretation :

Debtors constitute a substantial portion of total current assets. In India it constitute one third of

current assets. The above graph is depict that there is increase in debtors. It represents an extension of

credit to customers. The reason for increasing credit is competition and company liberal credit policy.

CURRENT ASSETS :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Current Assets 81.29 83.15 136.57

Interpretation :

This graph shows that there is 64% increase in current assets in 2008. This increase is arise because

there is approx. 50% increase in inventories. Increase in current assets shows the liquidity soundness of

company.

CURRENT LIABILITY :


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(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Current Liability 27.42 20.58 33.48

Interpretation :

Current liabilities shows company short term debts pay to outsiders. In 2008 the current liabilities of

the company increased. But still increase in current assets are more than its current liabilities.

NET WOKRING CAPITAL :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Net Working Capital 53.87 62.53 103.09

Interpretation :

Working capital is required to finance day to day operations of a firm. There should be an optimum

level of working capital. It should not be too less or not too excess. In the company there is increase inworking capital. The increase in working capital arises because the company has expanded its business.

RESEARCH METHODOLOGY

The methodology, I have adopted for my study is the various tools, which basically analyze critically financial

position of to the organization:

I. COMMON-SIZE P/L A/C II. COMMON-SIZE BALANCE SHEET

III. COMPARTIVE P/L A/C

IV. COMPARTIVE BALANCE SHEET

V. TREND ANALYSIS

VI. RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With the evaluation of each component,

the financial position from different angles is tried to be presented in well and systematic manner. By critical

analysis with the help of different tools, it becomes clear how the financial manager handles the finance mattersin profitable manner in the critical challenging atmosphere, the recommendation are made which would suggest

the organization in formulation of a healthy and strong position financially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis, the

organization would be able to conquer its in efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS


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FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent accounting procedure toconvey an under-standing of some financial aspects of a business firm. It may show position at a moment in time,as in the case of balance sheet or may reveal a series of activities over a given period of time, as in the case of anincome statement. Thus, the term financial statements generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missing out ofbusiness act ivities.

4. To provide financial information that assets in estimating the learning potential of the business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a finalpicture of a concern. The utility of these statements is dependent upon a number of factors. The analysis andinterpretation of these statements must be done carefully otherwise misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statements is onlyapproximate. The actual value can only be determined when the business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year, during the life ofa concern. The costs and incomes are apportioned to different periods with a view to determine profits etc. Theallocation of expenses and income depends upon the personal judgment of the accountant. The existence ofcontingent assets and liabilities also make the statements imprecise. So financial statement are at the most interim

reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accurate position.The value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold northe amount which will be required to replace these assets. The balance sheet is prepared on the presumption of agoing concern. The concern is expected to continue in future. So fixed assets are shown at cost less accumulateddeprecation. Moreover, there are certain assets in the balance sheet which will realize nothing at the time ofliquidation but they are shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs Or original costs. The value of assetsdecreases with the passage of time current price changes are not taken into account. The statement are notprepared with the keeping in view the economic conditions. the balance sheet loses the significance of being anindex of current economics realities. Similarly, the profitability shown by the income statements may be representthe earning capacity of the concern.

5. There are certain factors which have a bearing on the financial position and operating result of the business butthey do not become a part of these statements because they cannot be measured in monetary terms. The basiclimitation of the traditional financial statements comprising the balance sheet, profit & loss A/c is that they do notgive all the information regarding the financial operation of the firm. Nevertheless, they provide some extremelyuseful information to the extent the balance sheet mirrors the financial position on a particular data in lines of thestructure of assets, liabilities etc. and the profit & loss A/c shows the result of operation during a certain period interms revenue obtained and cost incurred during the year. Thus, the financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and weakness of a firm from the available accounting data


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and financial statements. The analysis is done

CALCULATIONS OF RATIOS

Ratios are relationship expressed in mathematical terms between figures, which are connected with each other in

some manner.

CLASSIFICATION OF RATIOS

Ratios can be classified in to different categories depending upon the basis of classification

The traditional classification has been on the basis of the financial statement to which the determination of ratios

belongs.

These are:-

Profit & Loss account ratios

Balance Sheet ratios

Composite ratios

Project Description :

Title : Working Capital Management of ____________

Pages : 73

Category : Project Report for MBA

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Variable Working Capital