Questions & Answers on Credit – Part 2

In this post we will let you know about various Formula on Ratio, Profits, Debt Service Coverage Ratio, Debtor Velocity Ratio, Creditor Velocity Ratio and ect., The following questions are directly asked many competitive examinations like JAIIB, CAIIB and other credit related exams. You can find simple and easily understandable answers for all the questions.

1. What is the formula for gross profit, operating profit, profit before tax and profit after tax?

The following are the formula for calculating Gross profit, Operating Profit, Profit Before Tax (PBT) and Profit after Tax (PAT)

• Gross profit = Net Sales – Cost of Sales
• Operating profit = Gross profit – Operating expenses (selling, administrative, distribution and general expenses)
• Profit Before Tax (PBT) = Operating profit – Non operating expense
• Profit After Tax (PAT) = PBT – Tax liability paid.

2. What is the formula for cash profit?

• Cash profit = Net profit + Depreciation

3. How the raw material consumption is arrived at?

• Raw material consumed = Raw material purchased + Opening stock of raw material – Closing stock raw material

4. What is cost of production?

• Cost of Production = Opening stock in progress – Closing stock in progress + Cost of raw materials consumed + Stores & spares + Power & Fuel + Direct labour + Repairs & maintenance + other manufacturing expenses + Depreciation

5. What is cost of sales?

• Cost of sales = Cost of Production + Opening stock of finished goods – Closing stock of finished goods.

6. What constitute net sales?

• Net sales = Gross sales – Returns, Discounts, Excise Duty.

7. What are long term sources?

• Long term sources = Net worth + long term liabilities.

8. Give an example for short term sources.

• Current liabilities.

9. How long term uses is calculated?

• Long term uses = Fixed assets + Non current assets + Intangible assets.

10. What are called gross block assets?

• Fixed assets without deducting depreciation.

11. What is depreciation?

• It means decline in the value of an asset as a result of wear and tear due to passage of time.

12. What is cash loss?

• Cash Loss = Amount of net loss – Depreciation

13. What are covered under liquidity ratios?

• Current ratio and Quick ratio

14. What is the other name given for quick ratio?

• Acid Test ratio

15. How to arrive Current ratio?

• Current ratio = Current Assets / Current Liabilities. Ideal ratio can be 1.33 : 1

16. What is the formula for Quick ratio?

• Current assets – inventory
• current liabilities – bank borrowings

17. What are the ratios covered under solvency ratio?

• Debt Equity ratio and Debt Service Coverage Ratio (DSCR)

18. How to arrive Debt Equity Ratio?

• Long term outside liabilities / Tangible networth.
• Ideal ratio can be 2 : 1

19. What are the components of Total Outsider’s Liability (TOL)?

• TOL = Term liability + Current liability.

20. If debt equity is on the higher side, what does it interpret?

• Higher the ratio, more pressure on the liquidity of the firm.

21. How to arrive DSCR?

The formula for Debt Service Coverage Ratio is

• DSCR = (Net Profit after tax + Depreciation + Interest on term loan) / (Instalment + Interest on Term Loan)
• The ideal DSCR will be 2

22. What are the two ratios covered under velocity ratio?

• Debtor velocity
• Creditor velocity

The formula for the Debtor velocity and Creditor velocity ratio are:
Debtor Velocity = (Sundry Debtors / Sales) X 365
Creditor Velocity = (Sundry Creditors / Purchases) X 365

23. Under activity ratio, how to arrive Inventory turnover and Fixed Assets turnover ratios.

• Inventory turnover = Sales / Average stock
• Fixed Asset turnover = Sales / Net Fixed assets

24. Under Profitability ratio, how to arrive Gross Profit ratio and Net Profit ratio.

The formula for Gross profit ratio and Net Profit ratio are

• Gross Profit ratio = (Gross Profit / Net Sales) X 100
• Net Profit ratio = (Net Profit / Net Sales) X 100

25. What is called ROCE and how to arrive the same?

• Return on Capital Employed or Return on Investment = (Profit / Investment) X 100

26. What is working capital turnover ratio?

The formula for Working capital turnover ratio is

• Working Capital turnover ratio = Cost of Sales / Net Working Capital

27. What is called a funds flow statement?

• The statement which depicts various sources of funds and their uses is called Funds Flow statement

28. What are called sources of fund?

• Increase in liability and decrease in asset are inflow and hence called sources of funds.

29. What is meant by application of funds?

• Decrease in liability and increase in asset are outflow and hence called uses or application of funds

30. What is called a funds flow statement?

• The statement which depicts various sources of funds and their uses is called Funds Flow statement

31. What are called sources of fund?

• Increase in liability and decrease in asset are inflow and hence called sources of funds.

32. What is meant by application of funds?

• Decrease in liability and increase in asset are outflow and hence called uses or application of funds

33. What do you mean by Schedule of changes in Working Capital?

• Increase/ Decrease in the amount of CA means increase/ Decrease in WC
• Increase/ Decrease in the amount of CL means Decrease/ Increase in WC

34. What can be the effect when the increase in long term sources is more than the increase in the long term uses?

Liquidity surplus and net working capital position would improve. Current ratio and quick ratio also will improve.

35. What can be the effect when the increase in long term sources is less than the increase in the long term uses?

Liquidity surplus and net working capital position would decline. Current ratio and quick ratio also will deteriorate.

36. What is called as Long Term surplus?

When the value of Long Term Sources (LTS) minus Long Term Uses (LTU) is positive, it is termed as Long Term surplus

37. What is the difference between a funds flow statement and a balance sheet?

While the funds flow statement captures the movement of funds, the balance sheet merely presents a static picture of the sources and uses of funds

38. What are the various sources of funds?

• Funds from business operations
• Long term borrowings
• Issue of additional equity or preference share capital
• Sale of non-current assets
• Sale of fixed assets
• • Other Income

39. What are the various uses of funds?

• Loss from business operations
• Payment of dividend to shareholders
• Purchase of non-current assets
• Purchase of fixed assets
• Redemption of debentures, preference shares, etc.

Charges / Security

40. What is the meaning of the term “charging a security”?

Charging a security means creating a right to payment out of the asset given as security. It gives power to the lender to take recourse to the security in case of default.

41. What is a Fixed Charge?

A fixed charge is one which is created on some specific property of the company like land, building, etc. The company cannot deal with the property without the consent of the creditor holding the charge

42. What is meant by Floating Charge?

Floating charge is an equitable charge on the assets of the company. It crystalises into fixed charge when the company ceases to carry on business or when the charge holder brings action to enforce security due to default in payment of interest or principal.

43. What is the meaning of Paripassu charge?

A charge over the securities given to more than one creditor with the condition that all will be entitled to the charge on equal footing in proportion to the amount of their lending is called paripassu charge.

44. Explain the term Lien.

A creditor in possession of goods and securities belonging to his debtor, in the absence of any contract to the contrary, can continue to retain them till his dues are paid. Such a right to retain the securities is called lien.