The financial statements of Matrix Limited are shown below:

Matrix Limited: Profit and Loss Account for the year ending 31 st
March 20X1

Net Sales
Cost of goods sold
Stocks
Wages and salaries
Other manufacturing expenses
Gross profit
Operating expenses
Depreciation
Selling and general administration
Profit before interest and tax
Interest
Profit before tax
Tax
Profit after tax
Dividends
Retained earnings

20 X 1
1065
805
600
120
85
260
90
50
40
170
35
135
50
85
35
50

(Rs. In Million)
20 X 0
950
720
520
110
90
230
75
40
35
155
30
125
45
80
30
50

Matrix Limited: Balance sheet as at 31st March 20X1

Rs. In million
20X1

20X0

I. Sources of Funds
1. Shareholders funds
(a) Share Capital
(b) Reserve and surplus
2. Loan funds
(a) Secured loans
(i) Due after 1 year
(ii) Due within 1 year
(b) Unsecured loans
(i) Due after 1 year
(ii) Due within 1 year
Total
II. Application of Funds

505
125

455
125

380
280
180
130

330
260
160
135

50
100
60

25
100
70

40
785

30
715

1. Net fixed assets

2. Investments
(a) Long term investments
(b) Current investments
3. Current assets, loans and advances
333
(a) Inventories
(b) Sundry debtors
(c) Cash and bank balances
(d) Loans and advances
Less: Current Liabilities and provisions
Net current assets
Total

550

495

30

25
20
10

20
5
355

160

138

120

115
25
50

20
60
150
205

785

138
195
715

(ii) Prepare the classified cash flow statement

(iii) Prepare the cash flow identity
Solution
(i)

Classified Cash Flow Statement

Classified Cash Flow Statement for Matrix Limited for period 1.4.20X0 to
31.3.20X1
A.
Cash Flow from Operating Activities
Net profit before tax and extraordinary items
135
Adjustments for
Interest paid
35
Depreciation
50
Operating profit before working capital changes
220
Adjustments for
Debtors
(5)
Inventories
(22)
Loans and advances
10
Current Liabilities and provisions
12
Cash generated from operations
215
Tax paid
(50)
Net cash flow from operating activities
165
B.
Cash flow from Investing activities
Purchase of fixed assets
(105)
Net investment in marketable securities
(5)
Net cash flow from investing activities
(110)
C.
Cash Flow from Financing Activities
Proceeds from loans
20
Interest paid
(35)

Dividend paid
(35)
Net cash flow from financial activities
(50)
D.
Net Increase in Cash and Cash Equivalents
5
Cash and cash equivalents as on 1.4.20X1
25
Cash and cash equivalents as on 1.4.20X0
20
(ii)
Cash Flow Identity
The cash flow identity for the period 1.4.20X0 to 31.3.20X1 is as follows:
A.
Cash flow from assets
= Operating cash flow Net
capital spending
Net investment in marketable
securities
Change in net working capital
Operating cash flow
= PBIT Taxes + Depreciation =
170 50 + 50 =
170
Net capital spending
= Ending net fixed assets
Beginning net fixed
Assets + depreciation = 550 495 +
50 = 105
Net investment in
= Ending Investments in marketable
securities
Marketable securities
beginning investment in
marketable securities
= 30 25 = 5
Change in net working
= Ending net working capital
Beginning net
Capital
working capital = 205 195 = 10
Cash flow from assets
= 170 105 5 10 = 50
Cash flow to lenders
Interest Net new borrowing = 35
20 = 15
Cash flow to shareholders
Dividend paid Net new share
capital raised =
35

1. A firms current assets and current liabilities are 1,600 and 1,000 respectively.
How much can it borrow on a short- term basis without reducing the current ratio
below 1.25?
Solution: Let the maximum short- term borrowing be B. The current ratio with
this borrowing should be 1.25.

1,600+ B
=1.25
1,000+ B
Solving this equation, we get B = 1,400. Hence the maximum permissible
short -term borrowing is 1,400.
2. Determine the sales of a firm given
Current ratio
Acid-test ratio
= 1.2
Current Liabilities
Inventory turnover ratio

the following information:

= 1.4
= 1,600
=8

Solution: The sales figure may be derived as follows:

Current assets
= Current liabilities x Current ratio
= 1,600 x 1.4 = 2,240
Current assets Inventories = Current Liabilities x Acid -test ratio
= 1,600 x 1.2 1,920
Inventories
= 2,240 1,920 = 320
Sales
= Inventories x Inventories turnover ratio
= 320 x 8 = 2,560
3. The following ratios are given for Mintex Company
Net profit margin ratio
4 percent
Current ratio
1.25
Return on net worth
15.23 percent
Total debt to total assets ratio 0.40
Inventory turnover ratio
25
Complete the following statements
Profit and Loss Account
Rs.
Sales
Cost of goods sold
Operating expenses
Profit before interest and tax
Interest
Profit before tax

700
45

Tax provision (50 percent)

Profit after tax

Net worth
Long-term debt
(10 percent interest)
Short-term debt
(10.42 percent interest)

Balance Sheet
Fixed assets
Current Assets
Cash
Receivables
Inventory

180

60

Solution: The blanks in the above statements may be filled as follows:

(a) Short term debt: The value of short-term debt - the only current liabilities
is derived as follows.

current ratio=

Current assets
=1.25
Current liabilities

Current liabilities=

Current assets 180

=
=144
1.25
1.25

So short-term debt is 144.

(b)Long-term debt: The long-term debt carries 10 percent interest rate.
Hence the long-term debt is equal to
Interest .1042(144) 4515
=
=300
0.10
0.10
(c) Total assets: As the ratio of total debt to total assets is 0.4, total
assets (the total of the balance sheet) is simply:
Total debt 144+300
=
=1110
0.4
0.4
(d)Net worth: The difference between total assets and total debt
represents the net worth. Hence, it is equal to:
1100- (444) = 666
(e) Fixed assets: The difference between total assets and current assets
represents fixed assets. So,
Fixed assets = 1100 180 = 930
(f) Profit after tax: This is equal to:
(Net worth) (Return on net worth) = (666) (0.1523) = 101.4
(g)Tax: As the tax rate is 50 percent, the tax provision is simply equal to
the profit after tax, i.e., 101.4

(h)Profit before tax: The sum of the profit after tax and the tax provision
is equal to the
Profit before tax. So, it is equal to:
101.4 = 101.4 = 202.8
(i) Profit before interest and taxes: This is equal to the profit before tax
plus the interest
Payment. Hence, it is equal to:
202.8 + 45 = 247.8
(j) Sales: The figure of the sales may be derived as follows:
Profit after tax
101.4
=
=2535
Net profit marginratio 0.04
(k) Cost of goods sold: The figure of cost of goods sold may be derived
from the following accounting identity:
Sales cost of goods sold operating expenses = EBIT
2535 Cost of goods sold 700 = 247.8
Hence the cost of goods sold figure is 1587.2
(l) Inventory: This is equal to:
Sales
2535
=
=101.4
Inventory turnover ratio
25
(m)
Cash: This may be obtained as follows:
Current assets receivables inventory = 180 60 101.4 =18.6
4. The financial statements of Matrix Limited are given below:
Matrix Limited: Profit and Loss Account for the Year Ending 31st March
20X1
(Rs. In million)
Net Sales
Cost of goods sold
Stocks
Wages and salaries
Other manufacturing expenses
Gross profit
Operating expenses
Depreciation
Selling and general administration
Profit before interest and tax
Interest

20 X 1
1065
805
600

20 X 0
950
720
520
120
85

260

110
90
230

90
50
40
170
35

75
40
35
155
30

Profit before tax

135
20 X 1
50

Tax
Profit after tax
Dividends
Retained earnings

125
20 X 0
40
85

80

35

30
50

50

Matrix Limited: Balance sheet as at 31st March 20X1

Rs. In million
20X1
I. Sources of Funds
1. Shareholders funds
(a) Share Capital
(b) Reserve and surplus
2. Loan funds
(a) Secured loans
(i) Due after 1 year
(ii) Due within 1 year
(b) Unsecured loans
(i) Due after 1 year
(ii) Due within 1 year

505
125
380
280
180

330
260
160

130

135
50
100

25
100

60

70
40

30

785

715

550

495

30

25
20
10

20
5
355

160

138

120

115
25
50

20
60
150
205

Total

a. Calculate the following ratios

Current ratio
Acid-test ratio
Cash ratio
Debt-equity ratio

455

125

Total
II. Application of Funds
1. Net fixed assets
2. Investments
(c) Long term investments
(d) Current investments
3. Current assets, loans and advances
333
(e) Inventories
(f) Sundry debtors
(g) Cash and bank balances
(h) Loans and advances
Less: Current Liabilities and provisions
Net current assets

20X0

785

138
195
715

 Interest coverage ratio

Fixed charges coverage ratio
Inventory turnover ratio
Debtors turnover ratio
Average collection period
Fixed assets turnover
Total assets turnover
Gross profit margin
Net profit margin
Return on assets
Earning power
Return on equity
b. Set up the Dupont equation
Solution:
a.
Current ratio=

Current assets , loansadvances +Current investments 355+10

=
=1.52
Current liabilitiesprovisions+ Short term debt
150+90

Acid-test ratio =

Cash ratio =

Quick assets
365160
=
=0.85
Current liabilities
240

Cashbank balanes+ Current investments 25+10

=
=0.15
Current liabilities
240

Debt-equity ratio =

Debt 280
=
=0.55
Equity 505

Interest coverage ration =

PBIT
170
=
=4.9
Interest 35

Fixed charges coverage ration =

PBIT + Depreciation
170+50
=
Repayment of loan 35+90
Interest +
1Tax rate
137

=1.24
Inventory turnover =

Cost of goods sold

805
=
=5.40
Average inventory (160+138)/2

Net credit sales

1065
=
=9.06
Average debtors (120+115)/2

Debtors turnover =

Average collection period =

365
365
=
=40.3 days
Debtors turnover 9.06

Fixed assets turnover =

Net sales
1065
=
=2.04
Average net fixes assets (550+ 495)/ 2

Total assets turnover =

Net sales
1065
=
Average total assets ( 785+715)/2 =1.42

Gross profit margin =

Gross profit 260

=
=24.4
Net sales
1065

Net profit margin =

Net profit
85
=
=7.98
Net sales 1065

Return on assets =

Net profit
85
=
=11.3
Average total assets ( 785+715) /2
PBIT
170
=
=22.7
Average total assets ( 785+715)/2

Earning power =

Return on equity =

Equity earnings
85
=
=17.7
Average equity (505+ 455)/2

b. Dupont equation
Return on equity = Net profit margin x Total assets turnover ratio x
Leverage multiplier
Net profit
Net sales
Average total assets
= Net sales x Average total assets x Average equity
=

(785+715)/2
85
1065
x
x
1065 (785+715)/2 ( 504+455)/2

= 7.98% x 1.42 x1.5625

= 17.7%
5. The balance sheets of ABC for the past two years are as under:
Liabilities
X6

31-3-X6

31-3-X7

Assets

31-3-

31-3-X7
Equity shares 50000

60000

50000

Gross fixes assets

72000

General reserves
accumulated

10000

16000

14000

Less

21000
Depreciation

Liabilities

31-3-X6

31-3-X7

Assets

31-3-X6

31-3-X7
Surplus

4000

4800

Net fixes assets

8000

2000

Long term invest-

44000

51000
Public deposits

30000

32000
Debentures
16500

15000

17000

Sundry debtors

18000

Inventories

12000

Term loan

20000

32000

34000

Trade creditors

8000

10800

Miscellaneous exp

9500

10000
Short term bank 15000

20000

Borrowing
Provision for tax
Total

2000
132000

2400
139000

132000

139000
(i)

One of the important ratios considered by a bank for lending purposes

is the ratio of the total outside liabilities to tangible net worth. What is
the ratio for ABC for the year ended 31-3-X7?

(ii)

List out the sources and uses of funds for the year ended 31-3-X7

(iii)

classifying them under the heads long-term and short-term.

Comment on the uses of funds based on the above.

Solution:
(i) Total outside liability = Public deposits + Debentures + Term loan +
Trade creditors + Short term bank borrowing + Provision for tax.
= 2000 + 17000 + 18000 + 10800 + 20000 + 2400 = 70200.
Tangible Networth = Equity shares + General reserve + Surplus
Miscellaneous expenses
= 50000 + 14000 + 4800 10000 = 58800
The required ratio is: 70200/58800 = 1.19
(ii)
Long-term sources
Long-term uses
Net profit
4800 Purchase of fixes assets
12000
(Increase in reserve & surplus)
2000
Depreciation for the year
6000
Increase in debentures

Additional investments
5000 Repayment of public deposits

2000

Repayment of term loan

2000
Addition to miscellaneous expenses
500
Total of long-term sources 11800
22500
Short-term sources
Increase in trade creditors

Total of long-term uses

Short-term uses
2800
Increase in inventories

2000
Increase in bank borrowing
5000
Increase in provision for tax
400
Decrease in sundry debtors
4500
Total of short-term sources
12700

Total of short-term

uses
2000
(iii)
Long-term deficit = 22500 11800 = 10700
(iv)
Short-term surplus = 12700 2000 = 10700
ABC has diverted short-term funds amounting to 10700 raised mainly
by resorting to additional market credit and increased short-term bank
borrowing, for long-term uses like purchase of fixed assets and
repayment of public deposits which is not prudent.

1. The income statements and balance sheets of Deepam silks for years 1
and 2 are as follows:
Profit and Loss Account
1

Year

Year 2
Net sales

600

720
Cost of goods sold

500
Gross Profit

220
Selling expenses

60
General and administration expenses

40
Depreciation

40
Operating profit

80
Non-operating surplus/deficit

10

(8)
Profit before interest and tax

44

72
Interest

450
150
50
36
30
34

10

12
Profit before tax

60
Tax

14
Profit after tax

34
Dividends

15
Retained earnings

34

26
20
12
8

19
Balance sheet
Year 1
Assets

Year 2

Fixed Assets (net)

270
Investments

240
10

10
Current assets, loans and advances
Cash and bank

6
Receivables
80

90
Inventories

125

144
Loans and advances

25

30
Miscellaneous expenditures and losses
10
Total

500

560
Balance sheet
Year 1

15

Year 2

Liabilities

Share capital
Equity
100
Preference

100
20

20
Reserves and surplus

169
Secured loans
Bank borrowings

60

80
Unsecured loans
Public deposits

150

11
Current liabilities and borrowings
Total Creditors
130
Provisions

125
45

50
500

560

Prepare the proforma income statement for year 3 and the proforma balance
sheet as at the end of year 3, based on the following assumptions:
(a) The projected sales for year 3 are 850
(b)The forecast values for the following profit and loss account items may
be derived using the percent of sales method (for this purpose, assume
that the average of the percentages for year 1 and 2 is applicable).
Cost of goods sold
Selling expenses
General and administration expenses
Non-operating surplus/deficit
Interest
(c) The forecast values for the other items of the profit and loss account
are as follows:
Depreciation
Tax

: 45
: 50 percent of earnings before tax

 Dividends
: 21
(d)The forecast values of various balance sheet items may be derived as
follows:
Fixed assets (net)
Investments
Current assets

: Budgeted at 300
: No change over year 2
: Percent of sales method wherein

the percentages
Are based on the average for the
previous two
Years
Miscellaneous expenditures

: Expected to be reduced to 5 and

losses
Equity and preference capital

: No change over year 2

Reserves and surplus

: Proforma profit and loss account

Bank borrowings and current

: Percent of sales method wherein

the percentages
Are liabilities and provisions based on
the average
For the previous two years
Public deposits

: No change

External fund required

: Balancing item

Solution
The proforma profit and loss account and the proforma balance sheet are
shown below:
Pro forma Profit and loss account for Deepam Silks for Year 3
Historical data
Average percent
Proforma profit and
Year 1
loss account for year 3

Year 2

of sales

Net sales

600

720

850
Cost of goods sold

450

500

72.0

612
Gross profit

150

220

238
Selling expenses

50

60

70.6
General and administration

49.3
Expenses
Depreciation

45
Operating profit

73.1
Non-operating surplus/deficit

10

-8

1.4

11.9
Profit before interest and tax

44

72

85.0
Interest

14.5
Profit before tax

70.5
Tax

35.3
Profit after tax

20

34

35.2
Dividends

12

15

21
Retained earnings

36

40

30

40

34

10
34
14

80

12
60
26

19

8.3
5.8

Budgeted
@

1.7
@
Budgeted
@
Budgeted
@

14.2
@ Based on accounting identity.
Pro forma Profit and loss account for Deepam Silks for Year 3
Historical data
Average percent
Proforma profit and

Year 1
loss account for year 3
Net sales

850
Assets
Fixed assets (net)

300
Investments

10
Current assets, loans and
advances
Cash

6.8
Receivables

600

Year 2

of sales

720

240

270

10

10

Budgeted
No change

0.8

80

90

109.7
Inventories

125

144

20.0

170.0
Loans and advances

25

30

4.1

15

10

Budgeted

500

560

34.9
Miscellaneous expenditures
And losses
5.0
Total

12.9

636.4

Liabilities

Share capital
Equity

100

100

100
Preference

20

20

20
Reserves and surplus
profit

150

169

No change
No change
Proforma

183.2
And loss

account
Secured loans
Bank borrowings

60

80

90.1
Unsecured loans
Public deposits

11

11.0
Current liabilities
Trade creditors

125

164.9
Provisions

61.2
External funds requirement
item

45

130
50

10.6

No change

19.4
7.2
Balancing

6.0
500

560

636.4
2. The following information is available for Olympus Limited: A/S = 0.8,
S = Rs. 20 million, L/S = 0.40, m = 0.06, S = Rs. 100 million and d
1
= 0.4. What is the external funds requirement for the forthcoming
year?
Solution:
The external funds requirement of Olympus is:
EFR = A*/SO ( S ) L*/ S ( S ) mS1(r)
= 0.8 x 20 0.4 x 20 0.6 x 100 x 0.6
= Rs. 4.4 million
3. The following information is available for Signal Corporation: m = 0.05,
d = 0.30, A/E = 2.4, A/So = 1.0. What rate of growth can be sustained
with internal equity?
Solution:
The sustainable growth rate for Signal is:

g=
m( So/ Ao)(1+ D/ E) b
0.05 x 1 x 2.4 x 0.7
=
1m ( So/ Ao )( 1+ D /E ) b 10.05 x 1 x 2.4 x 0.7
= 9.17 percent.

1. If you invest Rs. 5,000 today at a compound interest of 9 percent, what

will be its future value after 75 years?
Solution: The future value of Rs. 5,000 after 75 years, when it earns a
compound interest of 9 percent is
Rs. 5,000 (1.09)75
Since the FVIF table given in Appendix A has a maximum period of 30,
the future value expression may be stated as
Rs. 5,000 (1.09)30 (1.09)30 (1.09)15
The above product is equal to
Rs. 5,000 (13.268) (13.268) (3.642) = Rs. 32, 05,685.1
2. If the interest rate is 12 percent, what are the doubling periods as per
the rule of 72 and the rule of 69 respectively?
Solution: As per the rule of 72 the doubling period will be
72/12 = 6 years

As per the rule of 69, the doubling period will be

69
0.35 + 12 =6.1 years
3. A borrower offers 16 percent nominal rate of interest with quarterly
compounding. What is the effective rate of interest?
Solution: The effective rate of interest is
0.16
(1+ 4 )4
- 1 = (1.04)4 1
= 1.17 1
= 0.17 = 17 percent
4. Fifteen annual payments of Rs. 5,000 are made into a deposit account
that pays 14 percent interest per year. What is the future value of this
annuity at the end of 15 years?
Solution: The future value of this annuity will be:
Rs. 5,000 (FVIFA14%, 15) = Rs. 5,000 (43.842) = Rs. 2, 19,210
5. A finance company advertises that it will pay a lumpsum of Rs. 44,650
at the end of five years too investors who deposit annually Rs. 6,000
for 5 years. What is the interest rate implicit in this offer?
Solution: The interest rate may be calculated in two steps
(a) Find the FVIFA for this contract as follows:
Rs. 6,000 (FVIFA) = Rs. 44,650
So
Rs . 44.650
FVIFA = Rs .6,000 =7.442
(b)Look at the FVIFA table and read the row corresponding to 5 years
until 7.442 or a value close to it is reached. Doing so we find that
FVIFA20%,5yrs is 7.442
So, we conclude that the interest rate is 20 percent.
6. What is the present value of Rs. 1,000,000 receivables 60 years from
now, if the discount rate is 10 percent?
Solution: The present value is
1
Rs. 1,000,000 ( 1.10 )60
This may be expressed as
1
1
Rs. 1,000,000 ( 1.10 )30 ( 1.10 )30

= Rs. 1,000,000 (0.057) (0.057) = Rs. 3249

7. A 12 payment annuity of Rs. 10,000 will begin 8 years hence. (The
first payment occurs at the end of 8 years.) What is the present value
of this annuity if the discount rate is 14 percent?
Solution: This problem may be solved in two steps.
Step 1: Determine the value of this annuity a year before the first
payment begins i.e., 7 years from now. This is equal to:
Rs. 10,000 (PVIFA14%,12years) = Rs. 10,000 (5.660)
= Rs. 56,600
Step 2: Compute the present value of the amount obtained in Step 1:
Rs. 56,600 (PVIFA14%,7years)
= Rs. 56,600 (0.400)
= Rs. 22,640
8. What is the present value of the following cash stream if the discount
rate is 14 percent?
Year

4
Cash flow

5,000

1
6,000

8,000

9,000

8,000
Solution: The present value of the above cash flow stream is:
Year
Present value
0

Cash Flow

(PVIFA 14%,n)

Rs. 5,000

1.000

6,000

0.877

8,000

0.769

9,000

0.675

8,000

0.592

Rs. 5,000
1
5,262
6,152
6,075
4,736

Rs
. 27,225
9. Mahesh deposits Rs. 200,000 in a bank account which pays 10 percent
interest. How much can he withdraw annually for a period of 15 years?

Solution: The annual withdrawal is equal to:

Rs .200,000
Rs .2000,000
=
=Rs .26,295
PVIFA 10 , 15 YRS
7,606
10.

You want to take a world tour which costs Rs. 1,000,000 the

cost is expected to remain unchanged in nominal terms. You are willing

to save annually Rs. 80,000 to fulfill your desire. How long will you
have to wait if your savings earn a return of 14 percent per annum?
Solution: The future value of an annuity of Rs. 80,000 that earns 14
percent is Equated to Rs. 1,000,000.
80,000 x FVIFAn=?,14% = 1,000,000
1,14 n1
80,000 (
) = 1,000,000
0.14
1.14n 1 =

1,000,000
80,000

x 0.14 = 1.75

1.14n 1 = 1.75 + 1 = 2.75

n log 1.14 = log 2.75
n x .0569 = 0.4393
n = 0.4393/0.0569 = 7.72 years
You will have to wait for 7.72 years
11.
Shyam borrows Rs. 80,000 for a musical system at a monthly
interest of 1.25 percent. The loan is to be repaid in 12 equal monthly
instalments, payable at the enf of each month. Prepare the loan
amortization schedule.
Solution:
The monthly installment A is obtained by solving the equation:
80,000 = A x PVIFAn=12,r=1.25%
1
1
(1+r )n
80,000 = A x
r
1
80,000 = A x

1
(1.0125)12
.0125

= A x 11.0786
Hence A = 80,000 / 11.0786 = Rs. 7221
The loan amortization schedule is shown below:
Loan Amortisation Schedule
Month

Beginning

Monthly

Interest

Principal

Remaining
Amount

Installment

Repayment

Balance
(1)
1

(2)

(3)

(2) (3) = (4)

(1) (4) = (5)

80,000

7221

73,779

7221

922.2

6298.8

67,480.2

7221

843.5

6377.5

61102.7

7221

763.8

6457.2

54645.5

7221

683.1

6537.9

48107.6

7221

601.3

6619.7

1000

6221

73779
2
67480.2
3
61102.7
4
54645.5
5
48107.6
6
41487.9
7
6702.4
8
6786.2
9
6871.0
10
6956.9
11
7043.9
12
7131.9
@

41487.9

7221

518.6

7221

434.8

7221

350.0

34785.5
34785.5
27999.3
27999.3
21128.3
21128.3

7221

264.1

7221

177.1

7221

89.1

14171.4
14171.4
7127.1
7127.1
-4.8@

Rounding off error

191