10 min readConcept sheetMCQ · ratio sums and cash flow classification

Financial statement analysis: ratios, funds flow, cash flow and DuPont

Ratios test liquidity, solvency, activity and profitability. Funds flow tracks working capital; cash flow tracks cash. DuPont splits ROE into margin, turnover and leverage.

Current ratioCurrent assets ÷ current liabilities; conventional norm 2:1

Quick (acid-test) ratioQuick assets ÷ current liabilities; norm 1:1

DuPont ROENet profit margin × asset turnover × equity multiplier

Cash flow standardAS 3 / Ind AS 7: operating, investing, financing

Key ratios

Group	Ratio	Formula
Liquidity	Current ratio	Current assets ÷ current liabilities
Liquidity	Quick ratio	(Current assets − inventory − prepaid expenses) ÷ current liabilities
Solvency	Debt-equity	Long-term debt ÷ shareholders' funds
Solvency	Interest coverage	EBIT ÷ interest
Solvency	Proprietary ratio	Shareholders' funds ÷ total assets
Activity	Inventory turnover	Cost of goods sold ÷ average inventory
Activity	Debtors turnover	Net credit sales ÷ average debtors; collection period = 360 (or 365) ÷ turnover
Profitability	Gross / net profit margin	Gross or net profit ÷ net sales × 100
Profitability	Return on equity	Profit after tax less preference dividend ÷ equity shareholders' funds
Market	EPS and P/E	(PAT − preference dividend) ÷ number of equity shares; market price ÷ EPS

Liquidity and activity ratios

Problem

Cash ₹60,000; debtors ₹1,40,000; inventory ₹1,80,000; prepaid expenses ₹20,000; current liabilities ₹2,00,000. Cost of goods sold ₹9,00,000; opening inventory ₹1,20,000 (closing is the ₹1,80,000 above). Credit sales ₹12,00,000; average debtors ₹1,50,000. Use a 360-day year.

Working

Current assets = 60,000 + 1,40,000 + 1,80,000 + 20,000 = ₹4,00,000
Current ratio = 4,00,000 ÷ 2,00,000 = 2:1
Quick assets = 4,00,000 − 1,80,000 − 20,000 = ₹2,00,000; quick ratio = 2,00,000 ÷ 2,00,000 = 1:1
Average inventory = (1,20,000 + 1,80,000) ÷ 2 = ₹1,50,000; inventory turnover = 9,00,000 ÷ 1,50,000 = 6 times; holding period = 360 ÷ 6 = 60 days
Debtors turnover = 12,00,000 ÷ 1,50,000 = 8 times; collection period = 360 ÷ 8 = 45 days

Answer

Current ratio 2:1; quick ratio 1:1; inventory turnover 6 times (60 days); debtors turnover 8 times (45 days).

DuPont analysis

Problem

Sales ₹20,00,000; net profit ₹1,60,000; total assets ₹10,00,000; shareholders' equity ₹4,00,000. Find ROA and ROE by the DuPont method.

Working

Net profit margin = 1,60,000 ÷ 20,00,000 = 8%
Asset turnover = 20,00,000 ÷ 10,00,000 = 2 times
ROA = 8% × 2 = 16% (check: 1,60,000 ÷ 10,00,000 = 16%)
Equity multiplier = total assets ÷ equity = 10,00,000 ÷ 4,00,000 = 2.5
ROE = 8% × 2 × 2.5 = 40% (check: 1,60,000 ÷ 4,00,000 = 40%)

Answer

ROA 16%; ROE 40%. Leverage (multiplier 2.5) lifts a 16% return on assets to a 40% return on equity.

Cash flow statement (AS 3 / Ind AS 7)

Activity	Typical flows
Operating	Cash from customers; cash paid to suppliers and employees; income tax paid
Investing	Buying or selling fixed assets and investments; interest and dividends received (non-financial firms, AS 3)
Financing	Issuing or buying back shares; raising or repaying loans and debentures; interest and dividends paid (non-financial firms, AS 3)

Funds flow versus cash flow

Funds flow statement'Funds' means working capital. It shows sources and uses of working capital between two balance sheets. A flow arises only when a transaction touches one current and one non-current item. It is not a required statement today.

Cash flow statementTracks cash and cash equivalents only. Required under AS 3 / Ind AS 7. Prepared by the direct or indirect method; the indirect method starts from net profit and adjusts non-cash items and working capital changes.

Depreciation is added back in both because it is a non-cash expense, not because it is a source of cash.

Funds and cash from operations

Problem

Net profit is ₹1,00,000 after charging depreciation ₹30,000, goodwill written off ₹10,000 and loss on sale of machinery ₹5,000, and after crediting profit on sale of investments ₹8,000. During the year debtors fell by ₹12,000, inventory rose by ₹20,000 and creditors rose by ₹6,000.

Working

Funds from operations = 1,00,000 + 30,000 + 10,000 + 5,000 − 8,000 = ₹1,37,000
Working capital changes = + 12,000 (fall in debtors) − 20,000 (rise in inventory) + 6,000 (rise in creditors) = −₹2,000
Cash from operations = 1,37,000 − 2,000 = ₹1,35,000

Answer

Funds from operations ₹1,37,000; cash from operations ₹1,35,000 (indirect method, ignoring tax).

How NET asks this

NET sets one-step ratio sums (current ratio from working capital, turnover, collection period), DuPont products, and asks you to classify cash flows as operating, investing or financing.

Exam angle

Typical MCQ: “Current ratio is 2.5 and working capital is ₹90,000. Find current liabilities.” 1.5 × CL = 90,000, so CL = ₹60,000 and CA = ₹1,50,000. Trap: dividing 90,000 by 2.5.

Typical MCQ: “Net margin 6%, asset turnover 2.5, and debt is half of total assets. What is ROE?” ROA = 15%; equity multiplier = 1 ÷ 0.5 = 2; ROE = 30%. Trap: stopping at ROA.

Remember it

DuPont = P × T × L: Profit margin × Turnover × Leverage. Cash flows are O-I-F: Operating, Investing, Financing.