Question

Following are the balance sheets of Reddy Ltd. as on 31 March 2003 and 2004.

Liabilities	2004	2005	Assets	2004	2005
Share Capital	2,400	3,600	Land & buildings	1,620	1,040
Reserves & Surplus	1,872	2,124	Plant & Machinery	1,860	4,716
Debentures	300	600	Furniture & Fixtures	54	108
Long-term Debt	900	1,530	Other Fixed Assets	120	180
Bills Payable	1,530	702	Long-terms Loans	276	354
Other Current Liabilities	42	60	Cash & Bank Balances	708	60
			Bill Receivable	1,254	1,120
			Stock	960	780
			Prepaid Expenses	18	18
			Other Current Assets	174	240
	7,044	8,616		7,044	8,616

Analyse the financial position of the company with the help of the Common Size Balance Sheet.

Answer 1

Common Size Balance Sheet of Reddy Ltd. as on March 31, 2003 and 2004
Particulars		2003		2004
		Rs	%	Rs	%
Fixed Assets:
	Land and Building	1,620	23.00	1,040	12.07
	Plant and Machinery	1,860	26.41	4,716	54.73
	Furniture and Fixtures	54	0.77	108	1.25
	Other Fixed Assets	120	1.70	180	2.09
Total Fixed Assets (A)		3,654	51.88	6,044	70.14
Investments (B)
	Long Term Loan	276	3.91	354	4.12
	Current Assets:
	Cash and Bank Balances	708	10.05	60	0.70
	Bill Receivable	1,254	17.80	1,120	13.00
	Stock	960	13.63	780	9.05
	Prepaid Expenses	18	0.26	18	0.21
	Other current Assets	174	2.47	240	2.78
Total current Assets (c)		3,114	44.21	2,218	25.74
Total Assets (A+B+C)		7,044	100.00	8,616	100.00
Current Liabilities:
	Bills Payable	1,530	21.72	702	8.14
	Other current Liabilities	42	0.59	60	0.70
Total Current Liabilities		1,572	22.31	762	8.84
Long Term External Liabilities
	Debentures	300	4.26	600	6.96
	Long Term Debt	900	12.77	1,530	17.76
Total Long Term External Liabilities		1,200	17.03	2,130	24.72
Share Holders Fund
	Share Capital	2,400	34.07	3,600	41.78
	Reserve and Surplus	1,872	26.57	2,124	24.66
		4,272	60.64	5,724	66.44
	Total Liabilities	7,044	100.00	8,616	100.00

Interpretation:

1) The Current Assets has decreased from 44.21% to 25.74% i.e. by 18.47% and the Current Liabilities has reduced from 22.31% to 8.84% i.e. by 13.47%. Despite the decrease in the Current Assets and the decrease in the Current Liabilities, the Current Ratio has improved.

2) Fixed Assets, Long term External Debts and the Share Capital have increased from 51.88% to 70.14%, 17.03% to 24.72%, 34.07% to 41.78% respectively. Thus from this, it can be inferred that the company had purchased fixed assets from long-term source of finance. As the fixed assets were financed through the long-term debts, so the company’s working capital remained unaffected.

3) Analysing the reducing figures of the Cash and Bank Balances, it can be inferred that the company has a poor cash management policy. Thus we can predict that the company may face an acute liquidity problem.