Write a short note on the following Reserve for Unexpired Risk Created in order to ascertain the profits in case

e of general insurance business Represents the insurance premium received by the company in advance Provision for unexpired risk -100% of the net premium (In Marine Insurance business) -50% of the net premium (In other Insurance business) However, Insurance Company may keep additional reserve if it so feel necessary Insurance Company charge premium in advance & the risk may happen any day in future Necessary to carry forward a part of premium income to proceeding year which is received during a particular year Reinsurance Several companies come together to issue on a single risk Insurance companies go for reinsurance in order to protect themselves from the potential loss Every insurer can reinsure with Indian reinsurer not exceeding 30% of the sum assured on each policy as specified by IRDA When an Insurance co. takes reinsurance from other co. it has to pay premium & it gets commission from other co. On the other hand, when an insurance co. accepts reinsurance, it gets premium from other insurance co. & has to pay commission for accepting the reinsurance Surrender value of a life insurance policy In case a Life Insurance policyholder is not in a position to pay the future premiums on his policy, he may surrender or cancel his rights to the company The insurance co. will pay him the surrender value of the policy as per rules Amount so paid is an expense of the insurance company, which becomes part of BENEFITS PAID in the Revenue Account Surrender Value is calculated as follows: SURRENDER VALUE = Surrender Value factor x Paid up value 100 Bonus to policyholders Life Insurance co. should maintain a life fu nd for participating policyholders Surplus in distributed to the policyholders in the form of Bonus The rate of bonus is to be fixed by the Co. The amount of bonus is credited to policyholders Account The amount of bonus can be adjusted against Premium if the premiums is outstanding from the policyholder Explain how the following ratios help the management in interpretation of financial data. a) Working capital ratio b) Debtors Turnover Ratio c) Stock Turnover Ratio

d) Proprietory Ratio e) Return on Net Worth (a) Working capital ratio This is concerned with working capital, hence it is known as working capital ratio It is also known by Current Ratio It is the relationship between current assets & current liabilities It is Defined as CURRENT RATIO= Current Assets Current Liabilites It is normally expressed as a pure ratio This ratio measures the ability of a firm to meet its current liabilities It is used to measure the solvency of a firm It is used to test the adequacy of working capital, over-trading or under capitalization Current ratio is considered as safe & sound if it is 2:1 or more (b) Debtors Turnover Ratio This is an indication of the companys credit policies & aggressiveness in collecting receivebles by sales per day. Thus, AVERAGE COLLECTION PERIOD= Receivables x 360 Net Sales The receivables include debtors & Bills receivables (c) Stock Turnover Ratio It is the measure of effective inventory management policies It also indicates how funds invested in inventories are being turned over Thus, STOCK TURNOVER RATIO= COGS Average stock A high Turnover ratio indicates that smaller amount is blocked in inventory & requires less amount of working capital

Proprietory Ratio It shows the relationship between proprietors fiund & total assets Used for determining the long term solvency of a firm It shows the relationship between funds invested by the owners themselves & total funds invested in the business Higher the share of proprietors capital in the total capital of the company, the less is the likelihood of insolvency in future Normally, 60% to 75% of the total assets can be financed by the proprietors funds (d) Return on Net Worth Useful for investors to determine if the company has made proper use of shareholders funds. It is derived as follows: RONW=Net Profit x 100 Net Worth

Net Worth is equal to equity capital+ reserves Net profit is taken as after tax profits If the investors want to invest in a companys share, its RONW should be more than 15% Return on shareholders fund It is the measure of profitability of equity funds invested in a company It indicates the return on investment of the shareholders It measures the productivity of owners fund A high ratio indicates that owners funds have been better utilized It is determined as follows RETURN ON SHAREHOLDERS FUND=Net profit after tax x 100 Proprietors fund

Money at call & Short Notice The deposits made by bank with other banks & withdrawable only after giving a notice is called money at call & Short notice These deposits can be withdrawn by giving a 24 hours notice Money at short notice can also be withdrawn with 7 days notice Rebate on Bills Discounted It means Unexpired Discount Banks discount bills & provide advance to their customers When a bill is discounted by a bank, the bank debits the bills discount A/c & credits the discount A/c and customers A/c with the discounted value The discount is an income of the bank However if the maturity of the discount falls due after the balance sheet date, then the full amount of discount cannot be taken as an income of the current year Following enrty is passed on the Balance sheet date, Discount A/c Dr. To Rebate on Bills Discounted A/c The amount id unexpired discount is deducted from the Discount & shown on the liabilities side of B/S under the head Other liabilities

Inter-office Adjustments The transactions between the head office of the Bank & its branches may be unadjusted till the end of the year Such transactions are grouped under Branch Adjustment This A/c may have either Debit balance or Credit balance Debit balance is shown on the asset side under Other Asset & Credit balance on the liability side under Other Liabilities Licensing Banking companies has to obtain licensing from the Reserve Bank of India before starting banking business in India.

The licensing is laso required for opening new place of business or changing the existing place of business RBI has to ensure the financial soundness of the proposed banking company Non Banking Assets Banks usually allow loans & advances against a security of an assets like land & Building In case of defaults by borrowers, such asset may be possessed by the bank Such assets are known as Non-Banking Assets A banking co. must dispose of such asset within a period of 7 years from date of acquisition of such asset

Statutory Reserve Section 17 of Banking Regulation Act, 1949 provides that at least 25% of the profits prior to declaration of dividend must be transferred to Statutory reserve It should be shown seperatly from other reserves However, the Central Government on recommendation of RBI, may exempt any bank from this restriction if the amount of (reserve fund+ share premium)(share capital) Non-Performing Assets(NPA) As per RBI circular, any amount due under any credit facility becomes overdue if it is not paid on the due date fixed by the bank An asset including a leased asset, becomes NPA when it ceases to generate income for the bank Term loan becomes NPA when Interest and/or installment remains ovewrdue for more than 90 days Bills Discounted becomes NPA when bills remain overdue for more than 90 days

Standard & Sub-standard Asset (a) Standard Asset: Based on the type of advance a provision ranging from 0.25% for direct agriculture loan & 1% for personal & commercial loans This provision has not to be netted from Gross Advances in the B/S but has to be shown seperatly under other liabilities & provisions (b) Sub-standard Assets: A general provision of 10% for secured portion of advances (without considering ny ECGC cover or securities available) A provision of 20% for unsecured portion of the advance has to be made

Segment Reporting Chairmans statement on Annual Report of Companies Statutory Reserve

Common Size Statement Accounting Standard on Valuation of Inventories Contingent Liabilities Comparative Statement Standard & Substandard Assets.

State the requirements of Sch VI of the companies Act,1956 with regard to: (a) Share capital. (b) Fixed Assets. (c) Secured Loans. (d) Current liabilities & Provisions. (e) Current Assets, Loans & Advances.

State the various items to be covered under the following schedules with reference to Bank Balance Sheet: a) Investments b) Advances c) Contingent liabilities Fund Flow Statements & Cash Flow Statements are Similar but not the same. Discuss.