QA Series No 19 - Financial Statements – Part 04

 

The Banking Tutor

Question Answer Series 2025

S No 19                                                                    07-07-2025

Financial Statements – Part 04 

72. What are Prepaid Expenses ? 

Prepaid expenses are future expenses that have been paid in advance. 

73. In Balance Sheet, how we treat Prepaid Expenses ? 

Pre-paid expenses are treated as Current Asset. 

74. What are Pre-operative expenses ? 

Preoperative expenses are those expenses incurred by a company before commencement of commercial operations; or before starting to earn income. 

75. What are Preliminary Expenses ? 

Preliminary expenses (also known as Formation Expenses) are those that are incurred before incorporation of a company or commencement of business. 

76. How Pre-operative expenses are different from Preliminary expenses ? 

Preliminary expenses are costs incurred before a company is legally formed (pre-incorporation), while pre-operative expenses are incurred after incorporation but before the company starts its regular business operations. 

77. How we treat Preliminary Expenses in the context of Balance Sheet ? 

Preliminary expenses (Formation Expenses)  are treated as Intangible Assets. 

78. How we treat Pre-operative Expenses in the context of Balance Sheet ? 

Pre-operative expenses are treated as Intangible Assets. 

79. In the context of Balance Sheet, what is the term we use to indicate Original Value of a Fixed Asset ? 

Gross Block 

80. In the context of Balance Sheet what is Net Block. 

Depreciated value of fixed asset is called Net Block. 

81. What is the relation between Current Ratio and Net Working Capital (NWC) ?

 

a) When CR is 1 – NWC is zero

b) When CR is above 1 – NWC is positive.

c) When CR is less than 1 – NWC is negative.

 

82. What is the full form of DSCR? What is the other name to DSCR and in what context we use DSCR? 

“DSCR” stands for Debt Service Coverage Ratio. It is also known as DCR (Debt Coverage Ratio). We make use this Ratio in the Appraisal of Term Loans. 

83. What is Debt Service Coverage Ratio and what it indicates? 

DSCR is a ratio of cash available to cash required for debt servicing. It indicates repayment capacity. 

84. What is the formula to arrive at DSCR? 

                  Net profit after tax + depreciation + interest on term loans

DSCR = --------------------------------------------------------------------------

                     interest on term loans + principal repayment instalment

 

85. What are Non-Cash Expenses ? 

Noncash expenses are those expenses which are charged to the profit and loss account for which payment has already been done in the past years. 

86. Give some examples of Non Cash Expenses 

Following are the noncash expenses: 

a)   Writing off of preliminary expenses, pre-operative expenses etc,

b)   Depreciation on the fixed assets.

c)    Amortization of the intangible assets like goodwill , trademark etc. 

87. What is Depreciation? 

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It reflects the gradual decrease in the asset's value due to wear and tear, obsolescence, or usage. 

88. What is Amortisation ?

Amortization is the process of spreading out the cost of an intangible asset or the reduction of a loan balance over a specific period. It involves systematically reducing the book value of an asset or loan over time through regular payments. 

89. What is the difference between Depreciation and Amortisation ? 

Both Amortization and Depreciation are methods of spreading the cost of an asset over its useful life, but they apply to different types of assets. Depreciation is used for tangible, physical assets like buildings and equipment, while amortization is used for intangible assets like patents and trademarks. 

90. Why we add back Depreciation while calculating DSCR? 

Depreciation is a noncash charge and it does not reflect any actual out go of funds. It is generally entered in the books in order to satisfy certain accounting conventions and sometimes to provide for replacement of the assets. Since depreciation does not reflect any actual outgo of funds it is added back to the operating profit in order to arrive at the real funds from operation. 

91. How to interpret DSCR? 

DSCR is an absolute figure. Higher this figure better is the debt serving capacity. If the ratio is less than 1, it is considered bad because it simply indicates that the cash of the firm are not sufficient to service its debt obligations.  The acceptable norm for a debt service coverage ratio is between 1.5 to 2.

92. What is a Funds Flow Statement ? 

A funds flow statement is a statement that analyzes the movement of funds within a company over a specific period, typically between two balance sheet dates. It reveals the sources from which funds are obtained (inflows) and how they are used or applied (outflows). It shows how a company's working capital changes over time. 

93. What is a Cash Flow Statement ? 

Cash flow statement is a report that summarizes the movement of cash both into and out of a company over a specific period. It details how cash is generated and used by the business through operating, investing, and financing activities. 

94. What is the difference between Cash Flow and Funds Flow ? 

Cash flow tracks the movement of actual cash and cash equivalents in and out of a business, emphasizing liquidity and short-term obligations. Fund flow, on the other hand, examines changes in working capital, providing a broader view of how funds are sourced and utilized, including both cash and non-cash transactions. 

95. What is meant by Diversion of Funds ? Gove two explanations. 

Diversion of funds refers to the act of using money for purposes other than those it was intended. 

Also it refers to using short-term funds for long-term investments. 

96. How to identify whether the Firm resorted to Diversion of Funds? 

When Long Term Uses are more than Long Term Sources, it indicates that Short Term Sources are used to meet Long Term Uses. Using ST Sources to meet LT Uses is not acceptable to Banker as this situation may lead to Liquidity Crunch in near future and once the Firm faces Liquidity Shortage, it is very difficult to come out of this Liquidity Trap. 

97. What is Return on Equity ? (ROE) 

Return on Equity (ROE) is a ratio that measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested. It's calculated by dividing net income by shareholders' equity. A higher ROE generally indicates that a company is more efficient at using shareholder investments to generate profit. 

98. What is Return on Investment ? (ROI) 

Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment. It indicates the gain or loss generated from an investment relative to its cost, expressed as a percentage. A higher ROI signifies a more profitable investment. 

99. What is the main difference between ROE and ROI ? 

The main difference is Debt is included while arriving at Return on Investment (ROI) and whereas outside debt is not taken into account while calculating Return on Equity (ROE). 

100. What is full form of EBIT and what is it? 

EBIT stands for Earnings Before Interest and Taxes, It  represents a company's profitability before accounting for interest and income tax expenses. It reflects the profit generated from a company's core operations, excluding the impact of financing costs and taxes. 

Next Issue  will be shared on 9^th   July 2025.

Sekhar Pariti

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