MANEGERIAL ACCOUNTING ASSIGNMENT

PROGRAMME: MBA [BATCH 2023-2025]

SEMESTER 1

SUBMITTED BY: - VINESH RATHORE

(M23MBAG0039)
SUBMITTED TO: - Dr. Krishnendu Ghosh
Q1) Prepare and analyse the cash flow statement of the company.
Analyzing the cash flows of the business is a critical aspect of evaluating its performance. A
favorable increase in cash is evident, primarily driven by positive outcomes in operating
activities, where a substantial portion is derived from income statement activities. The strategic
shift to reclassify interest expense to the finance section and the inclusion of depreciation as a
non-cash charge have contributed positively to the overall cash flow.

The rise in inventory has led to a reduction in operating cash flow, indicating Anandam's
adoption of a more conservative working capital approach to elevate inventory levels on the
balance sheet. Examining the cash flow from investing activities reveals that, in recent years,
there has been a prudent allocation of cash towards purchasing new property, plant, and
equipment (PPE), reflecting positively on cash reserves. However, there was an upswing in this
investment in 2014.

Notably, the net cash flow from financing activities exhibits a positive trajectory, particularly in
the past year. The increased equity and debt issuances have been instrumental in generating
financing for the company. The issuance of shares has notably augmented the cash balance by
$400 in each of the two preceding years. The absence of information on dividends leaves an
aspect unexplored.

In summary, considering the cumulative analysis, it can be deduced that the current cash position
of the company is robust, signifying ample liquidity to meet its financial obligations.

2013-14 2014-15
Particulars
Details Amount Details Amount
A). Cash Flows from Operating Activities
Profit before Tax 960.00 1,200.00
Add: Non-Operating Expenses
Depreciation 400.00 660.00
Less: Non-Operating Income
Operating Profit before Working Capital
1,360.00 1,860.00
Changes
Add/(Less): Working Capital Changes
Add: Increase in Current Liabilities 1,468.00 1,052.00
Less: Increase in Accounts Receivable -1,200.00 -600.00
Less: Increase in Inventories -1,180.00 -750.00
Less: Taxes Paid -288.00 -360.00
Net Cash Flow from Operating Activities 160.00 160.00 1,202.00 1,202.00

B). Cash Flows from Investing Activities

Purchase of Fixed Assets -1,000.00 -2,860.00
Net Cash Flows from Investing Activities -1,000.00 -1,000.00 -2,860.00 -2,860.00
C). Cash Flows from Financing Activities
Proceeds from Issue of Shares 400.00 400.00
Proceeds from Loans 500.00 1,264.00
Net Cash Flows from Investing Activities 900.00 900.00 1,664.00 1,664.00

Net Increase in Cash and Cash Equivalents 60.00 6.00

Add: Opening Balance of Cash and Cash 40.00 100.00

Equivalents
Closing Balance of Cash and Cash
100.00 106.00
Equivalents

Q2) Prepare and analyse the Common size statement of the company.

We proceeded to create the common size financial statements for the company, a task initiated by
examining its vertical financial statements. As per the vertical analysis, it was observed that
credit sales constitute approximately 90% of the total revenues. While the percentage of cost of
sales to total sales decreased, various operational costs, such as interest, selling, general, and
administrative expenses, witnessed an upward trend. Both the operational profit and net profit,
when considered as a proportion of total sales, displayed a declining trend, raising concerns for
the company's management. This trend does not bode well for the company's overall
profitability.

The vertical balance sheet analysis revealed a decrease in cash as a percentage of total assets,
aligning with a similar trend in accounts receivable. The latter, however, is a favorable trend for
the business. Moreover, the percentage of inventory in relation to total assets is declining,
indicating the company's benefit from an approach of conservative working capital. Conversely,
as a percentage of the company's total assets, long-term debt has increased, while current
obligations have experienced a marginal decline.
A). Common Size Income Statement

(Amount in '000)
Absolute Terms Percentage of Revenue
Particular
2012-13 2013-14 2014-15 2012-13 2013-14 2014-15
Sales
Cash Sales 200 480 800 10.00% 10.00% 10.00%
Credit Sales 1,800 4,320 7,200 90.00% 90.00% 90.00%
Total Sales 2,000 4,800 8,000 100.00% 100.00% 100.00%
Cost of Goods Sold 1,240 2,832 4,800 62.00% 59.00% 60.00%
Gross Profit 760 1,968 3,200 38.00% 41.00% 40.00%
Operating Expenses
General, Administrative,
80 450 1,000 4.00% 9.38% 12.50%
and selling expenses
Depreciation 100 400 660 5.00% 8.33% 8.25%
Interest Expenses (on
60 158 340 3.00% 3.29% 4.25%
borrowings)
Profit Before Tax 520 960 1,200 26.00% 20.00% 15.00%
Tax 156 288 360 7.80% 6.00% 4.50% Profit after Tax 364 672 840
18.20% 14.00% 10.50%

B). Common Size Balance Sheet

Q3) Compute and analyse the trend analysis of the company.

As seen from the above common size statement the total sales in absolute term have increased by
240% in 2013-14 and 166.67% in 2014-15. This is a positive trend analysis as since the sales are
increasing the amount of gross profit has also increased 258.95% in 2013-14 and 162.6% in
2014-15. The company has also taken debt to increase its scalability and because of that each
year more amount of money is required to ensure smooth scalability and hence the amount of
debt has also increased by 167.93% in 2013-14 and by 202.27% in 2014-15. The company is not
only borrowing money as debt but also raising more money through equity share capital which
has shown a growth of 133.33% in 2013-14 and 125% in 2014-15.
 Trend Analysis of Profit and loss statement
9000
8000
8000

7000

6000
4800
5000

4000
3200
3000
2000 1968
2000
760 672 840
1000364

0
2012-13 2013-14 2014-15
Total Sales Gross Profit Profit after Tax

Trend Analysis of Profit and loss statement

Trend line analysis of the company’s balance sheet is shown below: -

Trend Analysis of Balance sheet

10000
2000
9000

8000
4700
7000

6000
1600
5000
1200 2500
4000

1900
3000 2500

2000
1236
1000736

0
2012-13 2013-14 2014-15
Long- Term Borrowings Fixed Asset Equity share capital

Trend Analysis of Balance sheet

Q4) What are the various ratio computed to analyse financial statements?

An analysis of Anandam's Manufacturing business involves evaluating ten key ratios, which
are categorized into liquidity, solvency, operating performance, and asset-use approaches.
These ratios help assess the company's financial health in comparison to industry averages.

In terms of liquidity, Anandam's ratios were below the industry average in 2014 and 2015.
Liquidity ratios, such as the current and quick ratios, measure how well a company uses its
current assets to meet short-term obligations. Anandam's current ratios were 1.79:1 and 1.6:1
in 2014 and 2015, lower than the 2.3:1 industry average. The trend was similar for the quick
ratio, indicating a potential challenge in meeting short-term obligations.

Solvency and capital structure ratios showed an increasing trend over the analyzed years.
Unfortunately, the trend was unfavorable, indicating that the company relied more on debt
than equity to finance its assets. The debt-to-equity ratios were significantly higher than the
industry average, suggesting potential financial risks. The interest-coverage metric also
decreased, indicating a constriction in the company's ability to meet short-term debts.

In terms of investment ratios, Anandam's Return on Total Assets (ROTA) and Return on
Equity (ROE) showed a decreasing trend from 2013 to 2015, falling below industry averages.
This suggests a decline in investment gains, increasing the company's risks due to rising debt
without a proportional increase in gains.

Profitability ratios, which measure the company's ability to generate earnings, showed a
mixed trend. The Gross Profit (GP) margin increased, aligning with the industry average,
while the Net Profit margin declined due to increased operational costs.

Efficiency ratios indicated mixed performance. The inventory turnover increased slightly but
lagged behind the industry average. Working turnover ratios were below the industry
average, suggesting that the company wasn't fully efficient in utilizing its net assets to
generate revenues.

In summary, Anandam's financial analysis reveals areas of concern, particularly in liquidity,

solvency, and efficiency, which may require strategic adjustments to enhance the company's
overall financial health and sustainability.
Q5) Compute the above ratios based on case?

Anandam
Industry Favourable/
Particular Manufacturing
Average Unfavourable
Company
Current ratio 2.30:1 1.6:1 Unfavourable
Acid test ratio (quick ratio) 1.20:1 0.79:1 Unfavourable
Receivable turnover ratio 7 times 4 Times Unfavourable
Receivable days 52 days 106 Days Unfavourable
Inventory turnover ratio 4.85 times 2.56 times Unfavourable
Inventory days 75 days 142.57 Days Unfavourable
Long-term debt to total debt 24% 64.26% Unfavourable
Debt-to-equity ratio 35% 64% Unfavourable Gross profit ratio 40% 60% Favourable
Net profit ratio 18% 15% Unfavourable
Return on equity 22% 36.86% Favourable
Return on total assets 10% 16.82% Favourable
Total asset turnover ratio 1.1 1.08 Unfavourable Fixed asset turnover ratio 2 2.22 Favourable
Current asset turnover ratio 3 1.79 Unfavourable
Interest coverage ratio 10 4.53 Unfavourable
Working capital turnover
8 2.86 Unfavourable
ratio
Return on fixed assets 24% 25.53% Favourable
Summary of Financial Ratios

Q6) Based on your findings would you grant the loan request?

One of the most important criteria for granting a loan is to see the profitability of the company
and the future trend analysis of the profitability by using estimates about the future market
scenario. In the current situation, the profitability of Anandam is rising at a greater speed, along
with profitability one must also look at the competitors and the speed at which its competitors are
growing, as seen in table 3 above although the gross profit of the company is much higher than
the industry but still at the end the Net profit or the actual profit that is left with the company is
only 15% whereas in the industry the net profit is around 18%. And most of the ratios calculated
above are not in favour of the company and hence the decision regarding the grating of loan to
the company cannot solely be based on the profitability of the company, the lender has to ensure
various other criteria also. Hence, by looking at the above ratios and its comparison with the
industry the Anandam Manufacturing company is not as profitable as its competitors and hence
the loan should not be granted.
Q7) What are the areas of improvement can you suggest for the future?

Every company has some or the other scope for improvements just like Anandam

Manufacturing company, following are the various scope for its improvement:

 It needs to have a proper balance between short-term debt and the long-term debt.
 The credit period allowed to customers by Anandam Manufacturing Company is too high
as compared to the industry standards.
 It needs to reduce its indirect cost so as to increase the profitability.
 There should be proper management of the working capital.
 The company should try to lower the inventory days as it is almost doubled as compared
to the competitors in the same industry.

Conclusion
 Anandam Manufacturing Company, established in 2012, was in the business of garment
manufacturing, specializing in formal party dresses for girls up to 12 years of age. The
company was able to capture a sizeable share of the market by providing innovative and
modern garments to customers at reasonable prices.
 The financial situation of Anandam Manufacturing Company started deteriorating with
the growth of the business. The company faced funding problems due to the working
capital required for regular purchases of raw materials, high transportation costs,
ambiguous and obsolete labor laws, outdated technology, and a lack of economies of
scale.
 Anand Agarwal, the owner of Anandam Manufacturing Company, approached the local
bank for additional funding of 250 million to meet the growing requirements of his
garment manufacturing company. After presenting the performance of his company to the
bank manager, he was able to secure the loan.
 The Indian textile and garment sector is expected to reach the $220 billion mark by 2020,
with a compound annual growth rate of more than 13% in the apparel segment over the
next 10-year period. The various drivers that enabled the growth of the textile sector in
the Indian market were increases in per capita income and demographic distribution, a
shift among the youth towards branded products and changes in the lifestyle of the
general population, superior-quality products, favorable trade policies, increased
opportunities for exports, increases in cloth production due to demand in the local
market, and growth in the retail sector due to increases in the consumerism and
disposable income of the population.
 Anandam Manufacturing Company faced a severe need for additional financing of 50
million at a minimum to continue with smooth operations and to expand his business. The
company needed to address its financial liquidity and funding problems, improve its
credit management system, upgrade its technology, and increase its economies of scale to
remain competitive in the market.
Overall, the case study highlights the challenges and opportunities facing the Indian garment
manufacturing sector and the importance of financial management for the success of small and
medium-sized enterprises.