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Understanding The Balance of a Company
MFM – 1st Year, Division B

Mumbai Education Trust

MFM (FIRST YEAR), DIV: B
First Semester

Financial Accounting

Project on

UNDERSTANDING THE BALANCE SHEET OF A COMPANY

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Presented by

Sr. No. Name Roll No.

1 Nidhi GANDHI 75

2 Ameya MAHURKAR 89

3 Pranav PRAJAPATI 98

4 Durgashree DATE 111

5 Unnati UMROOTKAR 114

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Under the Guidance of :

Mr. L. N. Chopde

Mumbai Educational Trust’s

INSTITUTE OF MANAGEMENT

(PART TIME MANAGEMENT)

CERTIFICATE

This is to certify that project titled UNDERSTANDING THE BALANCE SHEET OF A CO.
is based on original study conducted by the group under my guidance and this had not
formed a basis for the award of any other degree of this institute / university.

Place : Mumbai

Date : 21st December 2009

( Mr. L. N. Chopde )

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MUMBAI EDUCATIONAL TRUST’S

INSTITUTE OF MANAGEMENT

(PART TIME MANAGEMENT)

CERTIFICATE FROM THE ORGANISATION

This is to certify that the group has / have successfully completed a study on
UNDERSTANDING THE BALANCE SHEET OF A CO. and has / have submitted the
project report on the same.

The study conducted was satisfactory. We wish him / them all the best.

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PREFACE

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ACKNOWLEDGEMENTS

We would sincerely like to thank Prof. L. N. Chopde sir for his valuable guidance without
which the project would never have been accomplished.

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EXECUTIVE SUMMARY

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TABLE OF CONTENTS

Sr. No. Particulars Page No.

1 Introduction 9

2 Profile of the Company 9

3 Hero Honda’s Logo 11

4 Hero Honda’s Mandate 11

5 Hero Honda’s Mission 11

6 Award’s & Recognitions 12

7 Corporate Profile 13

8 Subsidiaries 13

Hero Honda’s performance on the
9 BSE and NSE in the last 14
FY2009-2010

10 Meaning of the Balance Sheet 15

11 Concepts of the Balance Sheet 15

12 Ratio Analysis 28

13 Conclusion 32

14 Bibliography 33

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Introduction

Every organization needs funds for smooth running of activities. The Balance Sheet is a
statement of Assets and Liabilities of a Company expressed in monetary terms as on a
particular date. This gives us the financial position of the company at a given point of
time.

Assets are items of monetary value owned by a Company. Liabilities are the monetary
claims that the Company owes to the outsider.

A Balance Sheet is prepared and published by Companies, not on their own volition, but
because of statutory obligation, imposed by the Companies Act, under which every
public limited Company is required to prepare and publish its Balance Sheet, and other
related documents. Within 6 months from the close of the accounting period. The Act
further insists that the financial statements should be audited by a chartered accountant
who has to report to the shareholders whether or not he accounts are “true and fair”.

The main parts to a balance Sheet are:
a) Sources of Funds
b) Application of Funds

In this project we will understand the balance sheet of Hero Honda Motors Ltd. We will
understand each and every line items of the balance sheet and some important financial
ratios.

Profile of the Company

Hero Honda Motors Ltd. is the world's largest manufacturer of two – wheelers, based in
India.
Hero Honda is not a Company. It is the integration of two cultures that’s namely Indian
and Japanese.

The company is a joint venture between India's Hero Group and Honda Motor Company,
Japan that began in 1984.

In 2001, the company achieved the coveted position of being the largest two-wheeler
manufacturing company in India and the ‘World No.1’ two-wheeler company in terms of
unit volume sales in a calendar year by a single company. Hero Honda has retained that
coveted position till date.

Today, every second motorcycle sold in the country is a Hero Honda bike. Every 30
seconds, someone in India buys Hero Honda's top-selling motorcycle – Splendor.

Vision
The Hero Honda story began with a simple vision – the vision of a mobile and an
empowered India, powered by Hero Honda. This vision was driven by Hero Honda’s
commitment to customer, quality and excellence, and while doing so, maintaining the
highest standards of ethics and societal responsibilities. Hero Honda believes that the
fastest way to turn that dream into a reality is by remaining focused on that vision.

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Strategy
Hero Honda’s key strategy has been driven by innovation in every sphere of activity –
building a robust product portfolio across categories, exploring new markets,
aggressively expanding the network and continuing to invest in brand building activities.

Manufacturing
Hero Honda bikes are manufactured across three globally benchmarked manufacturing
facilities. Two of these are based at Gurgaon and Dharuhera which are located in the
state of Haryana in northern India. The third and the latest manufacturing plant is based
at Haridwar, in the hill state of Uttrakhand.

Technology
In the 1980’s Hero Honda pioneered the introduction of fuel-efficient, environment
friendly four-stroke motorcycles in the country. Today, Hero Honda continues to be
technology pioneer. It became the first company to launch the Fuel Injection (FI)
technology in Indian motorcycles, with the launch of the Glamour FI in June 2006.

Products
Hero Honda's product range includes variety of motorcycles that have set the industry
standards across all the market segments. The company also started manufacturing
scooter in 2006. Hero Honda offers large no. of products and caters to wide variety of
requirements across all the segments.

Distribution
The company's growth in the two wheeler market in India is the result of an intrinsic
ability to increase reach in new geographies and growth markets. Hero Honda's
extensive sales and service network now spans close to 4500 customer touch points.
These comprise a mix of authorized dealerships, Service & Spare Parts outlets, and
dealer-appointed outlets across the country.

Brand
The company has been continuously investing in brand building utilizing not only the
new product launch and new campaign launch opportunities but also through innovative
marketing initiatives revolving around cricket, entertainment and ground- level activation.

Hero Honda has been actively promoting various sports such as hockey, cricket and
golf. Hero Honda was the title sponsor of the Hero Honda FIH Hockey World Cup that
was played in Delhi during Feb-March 2010. Hero Honda also partners the
Commonwealth Games Delhi 2010.

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HERO HONDA’s Logo

HERO HONDA'S Mission

Hero Honda’s mission is to strive for synergy between technology, systems and human
resources, to produce products and services that meet the quality, performance and
price aspirations of its customers. At the same time maintain the highest standards of
ethics and social responsibilities.

This mission is what drives Hero Honda to new heights in excellence and helps the
organization forge a unique and mutually beneficial relationship with all its stake holders.

HERO HONDA'S Mandate

Hero Honda is a world leader because of its excellent manpower, proven management,
extensive dealer network, efficient supply chain and world-class products with cutting
edge technology from Honda Motor Company, Japan. The teamwork and commitment
are manifested in the highest level of customer satisfaction, and this goes a long way
towards reinforcing its leadership status.

As Brijmohan Lall Munjal, the Chairman, Hero Honda motors succinctly points
out………….

“We pioneered India’s motorcycle industry, and its our responsibility now to take the
industry to the next level. We’ll do all it takes to reach there.”

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Awards and Recognitions

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Year
Awa
rds
&
Rec
ogni
tion
s

2010
Com
pan
y of
the
Year
awar
ded
by
Econ
omic
Time
s
Awar
ds
for
Corp
orate
Exce
llenc
e
2008
-09.
CNB
C
TV1
8
Over
drive
Awar
ds
2010
'Hall
of
Fam
e' to
Sple
ndor
NDT
V
Profi
t Car
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Corporate Profile

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No.
Na
me
of
the
Dir
ect
ors
De
sig
nat
ion

1
Mr.
Brij
mo
han
Lall
Mu
njal
Ch
air
ma
n&
Wh
ole-
tim
e
Dir
ect
or

2
Mr.
Pa
wa
n
Mu
njal
Ma
nag
ing
Dir
ect
or
&
CE
O

3
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Subsidiaries

Hero Cycles Ltd.

Hero Honda Finlease Ltd.

Munjal Showa Ltd.

Sunbeam Auto Ltd.

Hero Financial Services Ltd.

Munjal Auto Industries Ltd

Hero Honda Motors Performance on the BSE and NSE for fiscal 2009-2010

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Meaning of a Balance Sheet

A quantitative summary of a company's financial condition at a specific point in time,
including assets, liabilities and net worth. The first part of a balance sheet shows all the
productive assets a company owns, and the second part shows all the financing
methods (such as liabilities and shareholder’s equity).

A balance sheet is prepared at the end of the year to know the financial position of an
organization. It is the statement of assets and liabilities of an organization. It is a
statement which shows sources of funds and the application of funds.

The Companies Act, 1956 has laid down a vertical and a horizontal format of the
balance sheet. The vertical format of the balance sheet is an abridged format which is
supported by various schedules. Horizontal format is not supported by schedules
because entire info is disclosed in the horizontal format only. Companies are given an
option to follow either of the formats. However, most companies follow the vertical
format.

Concepts of the Balance Sheet

Share Capital:

It is the capital collected by the Company from the members of the public by
subscription to the shares. Total share capital of the Company is divided into small units

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having fixed denomination. Each unit is called as a share and the fixed denomination of
the share which is mentioned under capital clause of the Memorandum of association is
called as the Face Value of the share. It is also called as Nominal Value of a share. As
per SEBI (Securities and Exchange Board of India) Guidelines, Face Value of a share
cannot be less than Re. 1.

Authorized Capital:

It is the maximum amount of capital that can be raised by the Company by issue of
shares. It is mentioned under capital clause of Memorandum of Association. The
company is authorized to raise the capital to the extent of authorized capital.

Issued Capital:

It is a part of the authorized capital which is offered to the public for subscription. It is the
capital for which applications are invited by the Company for subscription.

Subscribed Capital:

Capital for which applications are received for subscription to the share capital. If the
number of shares applied is more than the number of shares issues it is called over
subscription. In such a case the shares are allotted to the applications proportionately. If
the number of shares applied is equal to the number of shares issued it is called par
subscription. In this case all eligible applicants get allotment. If number of shares applied
is less than the number of shares issued it is called under subscription. In this case,
eligible applicants get following allotments.

Paid-up Capital:

It is part of the subscribed capital which is actually paid-up by the shareholders.

As per the Company’s law the following information has to be disclosed about share
capital:

Types of Shares – Equity Shares or Preference Shares
Number of Shares
Face Value of each Share
Amount paid per Share
Issue of Bonus Shares
Issue of Shares for consideration other than Cash

Hero Honda’s Share Capital consists of :

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Reserves and Surplus

General Reserve / Revenue Reserve / Free Reserve:

Amount kept aside out of profit for meeting future contingencies. It is called as Free
reserve because it can be use freely for any purpose. It is available for distribution as
dividend among shareholders.

Dividend Equalization Reserve:

It is the amount kept aside out of profit for equalizing the rate of dividend. It is divisible
profit.

Capital reserve:

It is a reserve created out of capital profits. It is the profit which is non-recurring. For e.g.
Profit on sale of capital assets, profit on reissue of forfeited shares, profit prior to
incorporation etc.
Capital reserve can be utilized for writing off capital losses and for issue of fully paid
bonus shares. Capital reserve cannot be utilized for payment of dividend to the
shareholders.

Securities Premium:

It is the excess of issue price over Face Value of securities issued. It includes premium
on issue of shares and on debentures. Securities premium can be utilized for the
following purposes only.
1) To write – off preliminary expenses/formation expenses of the company.

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2) To issue fully paid bonus shares.
3) To adjust premium on redemption of preference shares.
4) To adjust premium on buyback of Equity shares.
5) Securities premium cannot be utilized for payment of Dividend.

Workmen compensation fund:

It is an amount kept aside out of profit for payment of compensation to the workers who
receive personal injury due to an accident which takes place during the course of
employment. If there is no liability against the fund the entire amount of the fund is a part
of accumulated profit which can be utilized for any purpose.

Revaluation Reserve:

It is a reserve created out of the appreciation incase on land and building. The company
appoints expert re-valuer to bring the current price of building into the books. The
amount of appreciation recommended is added to the book value of the building and
transferred to revaluation reserve. Revaluation reserve is of capital nature. It cannot be
utilized for payment of dividend. It cannot be used to issue bonus shares.

Capital Redemption Reserve:

It is the reserve created out of divisible profit for redemption of preference shares. The
amount of Capital Redemption Reserve is the nominal value of preference share capital
redeemed out of divisible profits. Capital redemption reserve can be utilized for payment
of dividend.

Investment Allowance Reserve:

It is a reserve created as per the provisions of the Indian IT Act, 1961. The amount of
reserve created is equal to 25% of cost of machinery purchased during the year. The
reserve can be utilized for replacement of machinery after 8 years.

As per the provisions of the Companies Act, the following information should be
disclosed about every reserve. Balance at the beginning of the year (opening
balance), additions during the year, utilization during the year and closing
balance.

Hero Honda’s Reserves and Surplus consists of:

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Profit & Loss a/c Balance (Retained Earnings)

It is the amount of profit left in the business after making all the appropriations. It is
called as retained earnings. It can be utilized for any purpose.

Secured Loans

Loans taken by the company against the security of assets is called as secured loans. If
the loan is taken against the security of fixed assets it is called as a mortgage loan.
Secured loans have the following features:

1) It carried fixed rate of interest.
2) Interest payable irrespective of profits.
3) No right of management.
4) Refundable after a certain period.
5) Secured by the assets.
In case there is any default in repayment of loan the asset given as a security is
disposed off and the claim is recovered.

Debentures

Acknowledgment of debt by a company from the members of the public by issue of an
instrument. It is a written given by the company to the lenders for repayment of a certain
amount with interest on a certain date.

Categories of debentures:

a) On the basis of registration:

1) Registered Debentures:

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They are registered with the company and they are transferable as per the
procedure of transfer laid down by the law. Interest on such debentures is
paid by issue of Interest Warrants.

2) Bearer Debentures:
These debentures are transferrable by mere delivery of the instruments. It
goes on changing hands at any number of times. The company cannot have
a record of the holder on the date of payment of interest. Therefore interest is
paid by issue of interest coupon.

b) On the basis of security:

1) Secured Debentures:
These debentures are secured by the assets of the company.

2) Unsecured Debentures:
These debentures are not secured by the assets of the company.

c) On the basis of Redemption:

1) Redeemable Debentures:
These are refundable after certain period.

2) Irredeemable Debentures:
These are not refundable after certain period. The refund depends on the
desire of the Company.

d) On the basis of conversion:

1) Convertible Debentures:
These are convertible into equity shares.

2) Non-convertible Debentures:
These cannot be converted into equity shares.

e) Zero coupon Bond or Debentures:

These type of debentures do not carry any rate of interest. These are issued at a
price lower than future value on redemption, the debenture holder is paid equal
to the future value.

f) Collable Bonds:

It is the amount of debentures which can be repaid by the company on receiving
a call from debenture holders. In other words, such debentures are refundable at
any time at the request of debenture holders.

g) Bonus Debentures:

These are the debentures issued by the company to the shareholders out of
profits of the company. The holders are not required to pay any amount to the

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company. The amount payable by the holders is adjusted out of the profits of the
company.

Unsecured Loans

Amount of loan taken by the company without creating any change on the assets. The
amount of loan is repayable after a certain period. In case of any default, the amount
can be recovered from the company by taking legal action.
a) Unsecured Debentures
b) Unsecured bank loan
c) Unsecured loan from financial institutions
d) Unsecured loan from Directors
e) Public deposits are fixed deposits accepted by the companies from the members
of the public as per the provisions of acceptance of deposit rules specified by
Companies Act. Public deposits as a source of finance has the following
features:
1) Unsecured
2) Accepted for maximum period of 3 years
3) Rate of interest not to exceed 12.5%
4) Refundable after a certain period
5) Do not have right of management
6) Interest is payable irrespective of profit
7) In case of default, amount can be recovered through legal action.
8) The companies are required to announce through leading newspapers about
acceptance of deposit as per the format laid down by the law.
9) The deposits are acknowledged by the company by issue of deposit receipt.
10) In case the deposits are not refunded by the companies after a specified
period, the responsible officer is penalized by the penalty which is equal to
the amount of deposit.

Hero Honda’s Loan Funds consists of:

Current Liabilities & Provisions:

These are the obligation which is required to be paid within the operating cycle period
out of current assets.

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Current liabilities:

Current Liabilities are what a company currently owes to its suppliers and creditors.
These are short-term debts that normally require that the company convert some of its
current assets into cash in order to pay them off. These are all bills that are due in less
than a year. As well as simply being a bill that needs to be paid, liabilities are also a
source of assets. Any money that a company pulls out of its line of credit or gains the
use of because it pushes out its accounts payable is an asset that can be used to grow
the business. There are five main categories of current liabilities: Accounts Payable,
Accrued Expenses, Income Tax Payable, Short-Term Notes Payable and Portion of
Long-Term Debt Payable.

Accounts Payable:

Accounts Payable is the money that the company currently owes to its suppliers, its
partners and its employees. Basically, these are the basic costs of doing business that a
company, for whatever reason, has not paid off yet. One company's accounts payable is
another company's accounts receivable, which is why both terms are similarly
structured. A company has the power to push out some of its accounts payable, which
often produces a short-term increase in earnings and current assets.

Accrued Expenses:

Accrued expenses are bills that the company has racked up that it has not yet paid.
These are normally marketing and distribution expenses that are billed on a set
schedule and have not yet come due. A specific type of accrued expense is Income Tax
Payable. This is the income tax a company accrues over the year that it does not have
to pay yet according to various federal, state and local tax schedules. Although subject
to withholding, there are some taxes that simply are not accrued by the government over
the course of the quarter or the year and instead are paid in lump sums whenever the
bill is due.

Short-Term Notes:

Short term note payable is the amount that a company has drawn off from its line of
credit from a bank or other financial institution that needs to be repaid within the next 12
months. The company also might have a portion of its Long-Term Debt come due with
the year, which is why this gets counted as a current liability even though it is called
long-term debt -- one of those little accounting quirks.

Provision:

It is an amount kept aside out of income/profit for the known liabilities. For e.g. Provision
for taxation is amount kept aside out of income for payment of tax obligation where as
payment of dividend. In case it is recommended are declared. For e.g. Provision for
dividend tax (15.7%). It is the amount kept aside out of profit for payment of Dividend tax
on the dividend that could be distributed during the year. Dividend tax I is about 15.7%
of the dividend distribution. Provision for interim dividend.

Hero Honda’s Current Liabilities and Provisions consist of:

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Fixed assets

Long – term assets which are held in business for production of goods and services and
generation of revenue. They are called as long – lived assets. These assets are held or
used in business and not for sale. For e.g. Furniture and Fixtures, Patents and
copyrights etc.

Goodwill: Intangible fixed asset, having realizable value. Goodwill though intangible is
not fictitious. Fictitious assets are intangible; they cannot be converted into cash. These
are assets which do have physical existence but they cannot be seen by eyes.

Land & building: It is the cost of purchasing or constructing the building for business
purpose. The company may build building for residential purpose of its employees. All
these are included in building account.

Furniture and fittings: It includes assets like tables and chairs etc. used for helping
operational functions of the company.

Machinery & Plant: It includes the purchase price, taxes, transport, insurance in transit,
assembling and testing of machinery and plants.

Vehicles: It includes cars, trucks, buses and any other vehicles that the company has
bought for use in the business.

Capital work – in – progress: It includes the cost of assets manufactured during the
year but on the date of balance sheet the manufacturing is not completed. For e.g.
construction of building, manufacturing of machine for own use in the factory. The cost
incurred on such assets is shown as capital work – in – progress.

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As per the provision of the Company’s Law, fixed assets are to be presented in the
balance sheet of companies less provision for depreciation to date. Gross block is equal
to total cost of the Fixed Assets.

Provision for Depreciation represents the total accumulated depreciation right from the
date of acquisition to the date of balancing. Net block is the total written down value
(WDV) of the fixed assets. It is also called as book value of the Fixed Assets.

Cost of the assets include acquisition costs, installation cost charges, import duty,
documentation charges, freight, transit insurance, stamp duty and registration.

As per the provisions of the Company Law, total provision for depreciation should be
deducted from the cost of fixed assets. Company’s can provide depreciation as per
Straight line method (SLM) or Written down Value method (WDV) as per the rate of
depreciation specified in the schedule.

XIV of Company’s Act the Company’s are given the option of following any method out
of the two. Most of the companies follow SLM of depreciation. For Income Tax purpose,
Income Tax Act recognizes WDV method. The Income Tax Act has laid down rates of
depreciation for taxation purposes. Companies have to provide depreciation as per the
Companies Law for calculation of accounting profit. While deducting the tax liability,
depreciation adjustment is made in the profit on account of depreciation, by income tax
officer.

Hero Honda’s Fixed Assets consists of:

Investments

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Investments are the assets held by the Company for generation of incomes on account
of interest or dividend. As per the provisions of the Company’s Law following information
has to be disclosed about investment:

a) Pattern of investment.
b) Cost, Market Value, Nominal Value.
c) Quoted / Unquoted
d) Trading / Non-Trading
e) Terms and Conditions

Hero Honda’s Investments consists of:

Current assets & Loans & Advances

Current Assets

Current assets are the assets held for consumption or conversion during the operating
cycle period. Current Assets are assets that a company has at its disposal that can be
easily converted into cash within one operating cycle. An operating cycle is the time that
it takes to sell a product and collect cash from the sale. It can last anywhere from 60 to
180 days. Current assets are important because it is from current assets that a company
funds its ongoing, day-to-day operations. If there is a shortfall in current assets, then the
company is going to have to dig around to find some other form of short-term funding,
which normally results in interest payments or dilution of shareholder value through the
issuance of more shares of stock. There are five main kinds of current assets -- Cash &
Equivalents, Accounts Receivable and Inventories.

Cash & Equivalents:

Cash and cash equivalents are assets that are money in the bank, literally cold, hard
cash or something equivalent, like bearer bonds, money market funds. Cash and
equivalents are completely liquid assets, and thus should get special respect from
shareholders. This is the money that a company could immediately mail to you in the
form of a fat dividend if it had nothing better to do with it. This is the money that the
company could use to buy back stock, and thus enhance the value of the shares that
you own.

Hero Honda’s Cash and Cash equivalents consists of:

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Sundry Debtors:

Sundry debtors are customers who owe money to the Company.. The reason why the
customers owe money is that the product has been delivered but has not been paid for
yet. Companies routinely buy goods and services from other companies using credit.
Although typically debtors are almost always turned into cash within a short amount of
time, there are instances where a company will be forced to take a write-off for debtors if
it has given credit to someone who cannot or will not pay. This is why you will see
something called allowance for bad debt in parentheses beside the Sundry Debtors
number.

The allowance for bad debt is the money set aside to cover the potential for bad
customers, based on the kind of receivables problems the company may or may not
have had in the past. However, even given this allowance, sometimes a company will be
forced to take a write-down for accounts receivable or convert a portion of it into a loan if
a big customer gets in real trouble. Looking at the growth in debtors relative to the
growth in revenues is important -- if debtors are up more than revenues, you know that a
lot of the sales for that particular quarter have not been paid for yet. We will look at
debtors turnover and days sales outstanding ratios to measure Sundry Debtors.

Hero Honda’s Sundry Debtors consists of:

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Inventories:

Inventories are the components and finished products that a company has currently
stockpiled to sell to customers. Not all companies have inventories, particularly if they
are involved in advertising, consulting, services or information industries. For those that
do, however, inventories are extremely important. Inventories should be viewed
somewhat skeptically by investors as an asset. First, because of various accounting
systems like FIFO (first in, first out) and LIFO (last in, first out) as well as real liquidation
compared to accounting value, the value of inventories is often overstated on the
balance sheet. Second, inventories tie up capital. Money that it is sitting in inventories
cannot be used to sell it. Companies that have inventories growing faster than revenues
or that are unable to move their inventories fast enough are sometimes disasters waiting
to happen. We will look at inventory turnover later as another way to measure inventory.

Hero Honda’s Inventories consists of:

Loans and Advances

These are the short-term advances given by the Company which are recoverable in
cash. For e.g. Expenses paid in advance, Advance payment of Income Tax, Advance to
Staff, Advances to Suppliers, Bills Receivable, and Security Deposit with Customs
Authority etc.

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Hero Honda’s Loans and Advances consist of:

Miscellaneous Expenditure

Preliminary expenses / formation expenses, expenses on issue of shares / debentures,
underwriting commission, discount on issue of shares / debentures, deferred revenue
expenditure, amalgamation adjustment account. As per the accounting policy fictitious
assets are to be written off over certain number of years. The amount written off is
shown over certain number of years. The amount written off is shown in the Income
Statement and the remaining unwritten off is shown in the Balance Sheet under
miscellaneous expenses.

Contingent Liabilities

The liabilities which are likely to arise in future on happening of certain events are called
as contingent liabilities. Whether the liabilities will arise or not depends on the
happenings in the future. For e.g. Arrears of preference dividend, Claim for
compensation pending in the court of law, Amount payable on calls on shares
purchased etc.

Deferred Tax Assets / Liabilities

Accounting profit is the profit arrived as per the Income statement prepared according to
provisions of Indian Companies Act, accounting standards and generally accepted
accounting principles. The profit disclosed in the Income statement may not be accepted
by the Income Tax officer for taxation purpose because accounting profit shown by the
income statement is not arrived as per the provisions of the Income Tax Act.

Example:
While deciding accounting profit depreciation is provided as per the Indian Companies
Act whereas for determination of taxable profit, depreciation is provided as per Income
Tax Act. Bad debt provisions maybe made in the accounting profit and loss a/c but the
Income Tax officer does not allow bad debt provision unless the loss on bad debt is
actually incurred. As a result, the accounting profit differs from taxable profit because of
this difference in treatment; the tax liability provided differs from tax payable decided by
the Income Tax officer. As a result, Deferred Tax Asset or Deferred Tax Liability arises.

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If the amount of tax payable as per Income Tax Law is more than the amount of tax
payable as per the accounting principles Deferred Tax Asset arises.
If the amount of tax payable as per Income Tax Law is less than the amount of tax
payable as per the accounting principles Deferred Tax Liability arises.

Hero Honda’s Deferred Tax Assets / Liabilities consist of:

Ratio Analysis:

Ratio Analysis enables the business owner/manager to spot trends in a business and to
compare its performance and condition with the average performance of similar
businesses in the same industry. To do this compare your ratios with the average of
businesses similar to yours and compare your own ratios for several successive years,
watching especially for any unfavorable trends that may be starting. Ratio analysis may
provide the all-important early warning indications that allow you to solve your business
problems before your business is destroyed by them.

Balance Sheet Ratio Analysis Formula

Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to
pay its bills as they come due) and leverage (the extent to which the business is
dependent on creditors' funding). They include the following ratios:

Liquidity Ratios

These ratios indicate the ease of turning assets into cash. They include the Current
Ratio, Quick Ratio, and Working Capital.

Current Ratios: The Current Ratio is one of the best known measures of financial
strength. It is figured as shown below:

Total Current Assets
Current Ratio = ____________________
Total Current Liabilities

The main question this ratio addresses is: "Does your business have enough current
assets to meet the payment schedule of its current debts with a margin of safety for
possible losses in current assets, such as inventory shrinkage or collectable accounts?"

31


A generally acceptable current ratio is 2 to 1. But whether or not a specific ratio is
satisfactory depends on the nature of the business and the characteristics of its current
assets and liabilities. The minimum acceptable current ratio is obviously 1:1, but that
relationship is usually playing it too close for comfort.

If you decide your business's current ratio is too low, you may be able to raise it by:

• Paying some debts.
• Increasing your current assets from loans or other borrowings with a maturity of
more than one year.
• Converting non-current assets into current assets.
• Increasing your current assets from new equity contributions.
• Putting profits back into the business.

Quick Ratios: The Quick Ratio is sometimes called the "acid-test" ratio and is one of the
best measures of liquidity. It is figured as shown below:

Cash + Government Securities + Receivables
Quick Ratio = _________________________________________
Total Current Liabilities

The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding
inventories, it concentrates on the really liquid assets, with value that is fairly certain. It
helps answer the question: "If all sales revenues should disappear, could my business
meet its current obligations with the readily convertible `quick' funds on hand?"

An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets"
are in accounts receivable, and the pattern of accounts receivable collection lags behind
the schedule for paying current liabilities.

Working Capital: Working Capital is more a measure of cash flow than a ratio. The
result of this calculation must be a positive number. It is calculated as shown below:

Working Capital = Total Current Assets - Total Current Liabilities

Bankers look at Net Working Capital over time to determine a company's ability to
weather financial crises. Loans are often tied to minimum working capital requirements.

A general observation about these three Liquidity Ratios is that the higher they are the
better, especially if you are relying to any significant extent on creditor money to finance
assets.

Leverage Ratio

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This Debt/Worth or Leverage Ratio indicates the extent to which the business is reliant
on debt financing (creditor money versus owner's equity):

Total Liabilities
Debt/Worth Ratio = _______________
Net Worth

Generally, the higher this ratio, the more risky a creditor will perceive its exposure in
your business, making it correspondingly harder to obtain credit.

Management Ratios

Other important ratios, often referred to as Management Ratios, are also derived from
Balance Sheet and Statement of Income information.

Inventory Turnover Ratio: This ratio reveals how well inventory is being managed. It is
important because the more times inventory can be turned in a given operating cycle,
the greater the profit. The Inventory Turnover Ratio is calculated as follows:

Net Sales
Inventory Turnover Ratio = ___________________________
Average Inventory at Cost

Accounts Receivable Turnover Ratio: This ratio indicates how well accounts receivable
are being collected. If receivables are not collected reasonably in accordance with their
terms, management should rethink its collection policy. If receivables are excessively
slow in being converted to cash, liquidity could be severely impaired. The Accounts
Receivable Turnover Ratio is calculated as follows:

Net Credit Sales/Year
__________________ = Daily Credit Sales
365 Days/Year

Accounts Receivable
Accounts Receivable Turnover (in days) = _________________________
Daily Credit Sales

Return on Assets Ratio: This measures how efficiently profits are being generated from
the assets employed in the business when compared with the ratios of firms in a similar
business. A low ratio in comparison with industry averages indicates an inefficient use of
business assets. The Return on Assets Ratio is calculated as follows:

Net Profit Before Tax
Return on Assets = ________________________
Total Assets

Return on Investment (ROI) Ratio: The ROI is perhaps the most important ratio of all. It
is the percentage of return on funds invested in the business by its owners. In short, this
ratio tells the owner whether or not all the effort put into the business has been

33


worthwhile. If the ROI is less than the rate of return on an alternative, risk-free
investment such as a bank savings account, the owner may be wiser to sell the
company, put the money in such a savings instrument, and avoid the daily struggles of
small business management. The ROI is calculated as follows:

Net Profit before Tax
Return on Investment = ____________________
Net Worth

These Liquidity, Leverage and Management Ratios allow the business owner to identify
trends in a business and to compare its progress with the performance of others through
data published by various sources. The owner may thus determine the business's
relative strengths and weaknesses.

Hero Honda Motors Ltd. Financial Ratios
DESCRIPTION Mar-1 Mar- Mar- Mar- Mar- Mar-0
0 09 08 07 06 5
Performance Ratios
ROA (%) 60.24 36.63 33.65 35.52 49.94 53.88
ROE (%) 61.43 37.77 35.48 38.30 55.46 61.58
ROCE (%) 76.48 50.99 49.09 51.66 72.75 81.04
Asset Turnover(x) 4.53 3.87 4.18 4.78 5.19 5.71
Inventory Turnover(x) 43.97 42.06 40.62 45.97 46.82 43.81
Debtors Turnover(x) 129.92 60.54 38.06 46.74 81.27 128.94

Efficiency Ratios
Receivable days 2.81 6.03 9.59 7.81 4.49 2.83
Inventory Days 8.30 8.68 8.98 7.94 7.80 8.33
Payable days 25.56 25.22 26.76 25.20 32.18 37.43

Financial Stability
Ratios
Total Debt/Equity(x) 0.02 0.03 0.05 0.08 0.11 0.14
Current Ratio(x) 0.76 0.66 0.71 0.88 0.77 0.55
Quick Ratio(x) 0.64 0.45 0.47 0.61 0.55 0.34

Conclusion

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The balance sheet is an important tool for investors to gain insight into a company and
its operations. The balance sheet is a snapshot at a single point in time of the
company’s accounts - covering its assets, liabilities and shareholders’ equity. The
purpose of the balance sheet is to give users an idea of the company’s financial position
along with displaying what the company owns and owes. It is important that all investors
know how to use, analyze and read this document.

The main types of ratios that use information from the balance sheet are financial
strength ratios and activity ratios. Financial strength ratios, such as the working capital
and debt-to-equity ratios, provide information on how well the company can meet its
obligations and how they are leveraged. This can give investors an idea of how
financially stable the company is and how the company finances itself. Activity ratios
focus mainly on current accounts to show how well the company manages its operating
cycle (which include receivables, inventory and payables).
These ratios can provide insight into the company's operational efficiency.

From the ratios calculated above if we try and analyze the Balance Sheet of Hero Honda
Motors Ltd, its Current Ratio shows that the Liquidity position of the company is not very
satisfactory as the current ratio is 0.46:1, which is much below the ideal ratio of 2:1. The
Company should increase the current assets and decrease the current liabilities.
Hero Honda takes 130 days to convert its debtors to cash and 44 days to convert its
inventories into sales.

Bibliography

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Hero Honda Motors Ltd. Website: http://www.herohonda.com/

Annual Report of the company: http://www.herohonda.com/invest_annual_reports.htm

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