FINANCIAL AND MANAGEMENT ACCOUNTING

ASSIGNMENT
RAGESH KUMAR M S
MBA ZC415
ID: 2019HB58032
CASE STUDY 1: COPIES EXPRESS
SOLUTION
1. COPIES EXPRESS INCOME STATEMENT- FOR THE YEAR ENDED 31-DECEMBER-2006

AMOUNT AMOUNT
Category Particulars ($) ($)

Revenue
Cash Receipts 176450
Cash Sales 64750
Trade Receivables 11000
Net Sales 252200
(-) COGS (Cost of Goods Sold)
Heat, Light, Power 15000
Wages & Salaries 85750
Supplies Expenses 60250 161000
Gross Profit 91200
(-) Selling & Administrative
expense 28375
Operating Income(EBDIT) 62825
(-) Depreciation 15000
EBIT 47825
(-)Interest 2880
EBT 44945
(-) Income Tax 11953
EAT(Earnings After Tax) 32992
 1. COPIES EXPRESS BALANCE STATEMENT- FOR THE YEAR ENDED 31-DECEMBER-2006
AMOUN
T AMOUNT AMOUNT AMOUNT
LIABILITIES ($) ($) ASSETS ($) ($)
CAPITAL FIXED ASSETS
Capital Stock 304000 Land 12000
Retained Building &
Earnings 32992 336992 Equipment 300000
(-)
Depreciation
LONG-TERM of Building &
LIABILITIES Equipment 15000 297000
CURRENT
Bank Loan 24000 ASSET
(-) Repaid 12000 12000 SUPPLIES
CURRENT Opening
LIABILITIES Supplies 24400
Accounts Additional
Payable 9875 Supplies 52600
Income Tax Credit
Payable 11953 21828 Purchase 9875
(-) Cost of
Supplies 60250 26625
CASH
Cash 2000
Cash Receipt 176450
Cash Sales 64750
Cash
Receivables 11000
(-) Cash
Disbursement
s 207005 47195
Total 370820 Total 370820
CASE STUDY 2: LAKME

1.Comment on Lakme’s performance. Show computation to support your answer.

Ratio Description 20X6 20X7 Comment

REV/CE Turnover 6561/2919=2.25 9773/3110=3.14 Increase
Profit
Margin
PAT/REV Ratio 321/6561=0.048 283/9773=0.02 Decrease
Operating
Margin
EBIT/REV Ratio (537/6561)*100=8.20% (724/9773)*100=7.40% Decrease
Return on
PAT/Total Assets
Assets Ratio (321/1339)=0.239 (283/1589)=0.178 Decrease
Return of
PAT/Gross Capital
Capital Employed
Employed Ratio (321/2919)=0.109 (283/3110)=0.090 Decrease
PAT/EBIT Tax 59.80% 39.10% Decrease
CE/NW Finance 2.02 1.97 Decrease
PAT/NW ROE 22.20% 17.90% Decrease
RE/PAT Retention 50.80% 44.20% Decrease
RE/NW Growth 11.30% 7.90% Decrease
EBIT/CE ROI 18.40% 23.30% Increase

Formula: Profit Margin Ratio = PAT / Revenue

= 321 /6561 (for 20X6) = 283 / 9773 (for 20X7)

= 4.9% = 2.9%

A. Revenue generation increased from Rs 6561 Lakh to Rs 9773 Lakh. Favourable condition
(9773-6561)/6561 * 100 = 48.95
Increase of 49%
B. Operating profit increased from Rs 625 Lakh to Rs 839 Lakh. Favourable condition
(839-625)/625 * 100 = 34.24
Increase of 34%
C. EBDIT increased from Rs 625 Lakh to Rs 839 Lakh Favourable condition
D. (724-537)/537 * 100 = 34.82
Increase of 35%.
E. PAT Decreased from Rs 321 Lakh to 283 Lakh. Unfavourable, however positive, hence good.
(321-283)/321 * 100 = 11.83
Decrease of 12%
This is because of Increase in Interest (from Rs 216 Lakh to Rs 376 Lakh) 74%
F. Interest component increased from Rs 216 Lakh to Rs 376 Lakh.
Increase of 74%
 Interest increase is on account of increased borrowings from Rs 1473 Lakh to Rs 1530 Lakh.
G. Earning Per Share (EPS) decreased from Rs 10.7 to Rs 8.97. On lower side compared to last
year.
Decrease of 16.16%
H. Dividend Per Share (DPS) maintained at 5%
No Change
Profit Margin Ratio = PAT / Revenue
= 321 /6561 (for 20X6) = 283 / 9773 (for 20X7)
=5% =3%
OBSERVATIONS
 All profitability ratios are declining in 20X7.
 Despite of increase in Revenue generation, operating profit and EBIDT, the PAT has
decreased.
 This is because company has invested in new assets and hence depreciation component is
increased. Also, company instead of increasing share capital, has increased borrowings
(seen from increased Interest component). Since borrowings are cheaper than share
capital, this is a good initiative. This is evident from the fact of decreased Earning Per
Share by 16.16%
 Consequent to above facts, returns on Asset, Equity and Capital Employed has reduced.
 Despite having increased Revenue, EBDIT, PMR reduced and hence higher DPS was not
considered.

Formula: Return on Equity= Profit after Tax/Networth

Calculation of ROE

20X6 20X7
PAT 321 283
Share Capital 316 316
Reserve & Surplus 1130 1264
Networth=Share Capital + Reserve & Surplus 1446 1580
0.221991701
In Percentage: 22% 0.179113924
ROE=PAT/Networth In Percentage: 17%

Formula: Networth=ShareCapital + Reserve&Surplus

Networth: 20X6: 316+1130=1446
20X7: 316+1264=1580
Analysis:
The Ratio is decreasing so the Manager of Lakme is unable to utilize the shareholder fund
effectively.
2. How effectively has Lakme used its assets in generating sales?

Fixed Asset Turnover Ratio (FAT)

FAT = Sales / Fixed Assets 20X6 20X7
Sales (Revenue) 6561 9773
Fixed Assets (Gross Assets - Depreciation) 1251 1474
Gross Assets 1339 1589
Depreciation 88 115
FAT = Sales / Total Assets 524% 663%

FAT (Fixed Asset Turnover Ratio) has increased from 524% to 663% (26.5%).
It can be concluded that Lakme has improved Asset utilization for generating Sales.
3. Do you think there is appropriate balance between equity and borrowed funds?
Show relevant ratios.
Debt Ratio
Debt Ratio= Total Debt / Capital Employed 20X6 20X7
Total Debt = Total Borrowings 1473 1530
Capital Employed = Net Worth + Total Borrowings 2919 3110
Net Worth 1446 1580
Total Borrowings 1473 1530
Debt -Equity Ratio = Total Debt / Net Worth 50% 49%

Debt -Equity Ratio

Debt -Equity Ratio = Total Debt / Net Worth 20X6 20X7
Total Debt = Total Borrowings 1473 1530
Net Worth = Share Capital + Reserves 1446 1580
Share Capital 316 316
Reserves 1130 1264
Debt -Equity Ratio = Total Debt / Net Worth 102% 97%

~50% debt ratio and ~100% Debt – Equity ratio indicates there is an appropriate balance
between Equity and Borrowings

4. Critically evaluate Lakme’s profitability?

Profit Margin Ratio
20X6 20X7
Profit Margin Ratio= PAT / Sales 5% 3%
Operating Margin ratio = EBIT / Sales 8% 7%
 Profit Margin is declining

Return on Assets Ratio (ROA)

ROA = PAT / Total Assets 20X6 20X7
PAT 321 283
Total Assets (Gross Assets - Depreciation) 1251 1474
Gross Assets 1339 1589
Depreciation 88 115
ROA = PAT / Total Assets 26% 19%

Return on Assets is decreasing indicating deterioration in effective Asset utilization

Return on Equity Ratio (ROE)

ROE = PAT / Equity 20X6 20X7
PAT 321 283
Net Worth = Share Capital + Reserves 1446 1580
Share Capital 316 316
ROE = PAT / Net Worth 22% 18%
ROE = PAT / Equity 102% 90%

Return on Equity is decreasing indicating less profit per rupee of investor’s money and
consequently less returns

Earnings Per Share

20X6 20X7
Earnings Per Share = PAT / Number of Shares 10.7 8.97

Decline in EPS shows less profit per Equity Share and consequently less returns to
shareholders.

5. Does Lakme have sufficient liquidity?

20X6 20X7
PAT 321 283

Reserve and Surplus 1130 1264

Though PAT has decreased from Rs 321 to Rs 283 Lakh, the Reserves have increased from
Rs 1130 Lakh to Rs 1264 Lakh (12% increase). This indicates Lakme has sufficient Liquidity.