Preparation and analysis of Balance sheet

This presentation is about balance sheet and analysing ratios that check whether a project is profitable and also to analyze a business solvency ratios

1. Preparation and Analysis of Financial statements– Balance sheet Avandhika A 2022001030

2. Introduction A balance sheet or net-worth statement is a financial tool used to understand farm solvency or financial position of a farm. • It includes assets, liabilities, and equity on a specific date . • Prepared at the end of an accounting period. • Shows how resources are financed through debt or equity. Owner’s equity = Assets – Liabilities

3. Objectives of Preparing a Balance Sheet • To determine the financial strength of a business. • To evaluate solvency and liquidity. • To assess net worth and capital structure. • To guide management and investors in decision-making.

4. Classification of Assets 1. Current Assets: - Cash in Hand, Debtors, Bills Receivable, Inventory, Prepaid Expenses. 2. Intermediate Assets: - Convertible into cash within 1–3 years. - Examples: Livestock, Agricultural Implements, Investments, Standing Crops. 3. Long-Term Assets: - Used for more than 3 years to generate income. - Examples: Land, Buildings, Machinery, Furniture, Vehicles.

5. Classification of Liabilities 1. Current Liabilities: - Payable within one year. - Examples: Creditors, Bills Payable, Outstanding Expenses, Short-Term Loans. 2. Intermediate Liabilities: - Payable within 1–3 years. - Examples: Medium-Term Loans, Hire Purchase Obligations. 3. Long-Term Liabilities: - Payable after 3 years. - Examples: Term Loans, Mortgages, Debentures, Bonds.

6. Exa mple Balance sheet

7. Test Ratios 1. *Intermediate Ratio*: - Indicates liquidity position over an intermediate period (0 to 2 years). - Should be > 1 for a sound warning farm business. - A progressive ratio indicates healthy growth due to minimal physical loss and price decline 2. *Net Capital Ratio*: - Total assets / Total liabilities - Indicates long-term solvency position. - A ratio > 1 means institutional agencies are safe; a consistently increasing ratio shows sound financial growth. - Important for overall solvency of farmers-borrowers. 3. *Acid Test Ratio (Quick Ratio)*: - (Cash receipts + accounts receivable + marketable securities) / Total current liabilities.

8. * Current Liability Ratio*:
- Current liabilities / Owner’s equity
- A ratio of less than 1 indicates healthy performance. The ratio should decrease over time for good performance. *Debt-Equity Ratio (Leverage Ratio)*:
- Total debt / Owner’s equity
- Shows the farmer’s capacity to meet long-term commitments and the extent of indebtedness. A consistently falling ratio indicates improving performance and reduced dependence on borrowings. *Equity-Value Ratio*:
- Owner’s equity / Value of assets . This ratio gives the productivity gained by the farmers in relation to the assets he owns.

9. Interpretation of Ratios • Current Ratio – Indicates sound liquidity. • Acid Test Ratio – Shows ideal short-term solvency. • Net Capital Ratio - Reflects working capital adequacy. • Debt-Equity Ratio – Indicates low financial risk. • Equity Value Ratio – Reflects strong ownership stake.

10. Conclusion • Balance Sheet provides a snapshot of financial health. • Classification improves clarity and interpretation. • Ratio analysis strengthens understanding of liquidity, solvency, and profitability. • A well-prepared balance sheet ensures effective financial management .