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PROJECT REPORT ON

" STUDY OF THE PRINCIPLES AND PROCEDURES

FOLLOWED IN FINANCIAL ACCOUNTS DEPARTMENT "

AT

LARSEN & TOUBRO LIMITED( MACHINERY & INDUSTRIAL PRODUCTS DIVISION )

KANSBAHAL WORKS

For the Partial fulfilment of the degree of Master of Business Administration ( M.B.A ) (2009-11)

FACULTY GUIDE:

Mr. Pitabash RoySUBMITTED BY:

Prof. Nituj Gupta

Natraj Agrawal.PROJECT GUIDE:

Sec.: A1

KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Roll No.: 9202001

ACKNOWLEDGEMENTTo undertake such an important project and to accomplish it, one needs quite a lot of guidance and support. The time, which I spent in L&T, Kansbahal, during training, was a wonderful experience in itself and it is a great pleasure and honour for me to take this opportunity to thank all those who have helped and provided able guidance all along the project. I would like to thank MR.V.N. Shrivastava (GM, Finance) for providing me with an opportunity of carrying out my summer training at this esteemed organization. I would like to express my deep sense of gratitude to Mr. P. Roy (Manager, Finance) whose support and guidance helped me in converting my conception into visualization and also for the continuous guidance throughout the project. I would also like to thank Mr. S.S. Sahoo and Mr. Prashant Patra, who helped me in making me understand about all the concepts of taxation and their application in the organisation. And also my deepest sense of gratitude goes to Mr. R. K. Mishra, Mr. Amit Parashar and Mr. T. N. Biswal. Without their co-operation it would have been difficult for me to complete the project. I would like to thank my Faculty guide Prof. Amiya Sahu for his guidance and co-operation. I would also like to express my deep gratitude to my parents for providing me with necessary facilities and guidance. Lastly, I would like to express my gratitude towards our prestigious institute KIIT School Of Management ( KSOM ), KIIT University, Bhubaneswar for providing me with this lifetime opportunity.

Natraj Agrawal.2KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Roll No.: 9202001

DECLARATIONI Swarup Samal, Student of MBA (2009-11) of KIIT School of Management, KIIT University, Bhubaneswar do hereby declare that the Summer Internship project report entitled STUDY OF THE PRINCIPLES AND PROCEDURES FOLLOWED IN FINANCIAL ACCOUNTS DEPARTMENT, at Larsen & Toubro Ltd., Kansbahal is a true and original work done by me. It is not duplicated from anywhere else. This Project Report is my own and is not submitted to any other institution or is not being published anywhere. This is going to be used for academic purpose only. This is being submitted in partial fulfilment of the requirement for the award of Master of Business Administration (MBA).

Place: Date:

Swarup Samal Roll No.: 9202001

3KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

PROJECT OBJECTIVESTo make a thorough study of the accounting principles, procedures involved and the process of documentation by the various sections in financial accounts dept. of Larsen and Toubro Limited., Kansbahal works. The following are the main objectives of the study: a) To check the feasibility of the project i.e., Calculation of Net present value and Payback period. b) Analyse the capital budgeting process. c) Taxation and their application. d) Analysis of Working Capital Management e) Analysis of Operating and Cash cycle f) Ratio analysis of the different components of working capital

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METHODOLOGYThis Project Report is prepared at L&T, Kansbahal Works with the help of Data collected from various sources: I. Collection of data from the people of Finance department and Store department by discussion. II. Collection of data from the system maintained by L&T, Kansbahal Works. i.e. (ERP, People Soft) III. Collection of data from the Annual Accounts and Annual Report from 2006 to 2010. IV. Collection of data from the PMS. V. Collection of data from magazines, Journals of L&T, Kansbahal. VI. Collection of data through Internet Service. The collected data are analyzed and prepared, with the help of the people of Finance Department.

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LARSEN & TOUBRO Ltd. ( COMPANY PROFILE )

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INTRODUCTION TO THE COMPANYLarsen & Toubro Limited (L&T) is India's largest engineering and construction conglomerate with additional interests in electrical, electronics and IT. A strong customer-focus approach and constant quest for top-class quality have enabled L&T to attain and sustain leadership over 7 decades. L&T's international presence is on the rise, with a global spread of over 30 offices and joint ventures with world leaders. Its large technology base and pool of experienced personnel enable it to offer integrated services in world markets. Joint ventures with world leaders have enhanced its presence. Its large technology base and a pool of professionally qualified and experienced personnel enable it to offer integrated services in world market. It is possible for them to remain as leaders in the business world due to their regular transformation of resources with changing trends in the business environment. L&T believes that progress must necessarily be achieved in harmony with the society. This is evident from the total commitment of L&T in the form of excellent Corporate Social Responsibility programs (CSR) going on in various parts of the country. L&T has integrated its strengths in basic and detailed engineering, process technology, project management, procurement, fabrication and erection, construction and commissioning, to offer single point responsibility under stringent delivery schedules. Strategic alliances with world leaders enable L&T to access technical know-how and execute process intensive, large scale turnkey projects to maintain its leadership position. L&T enjoys a brand image in India and several countries offshore. With factories and offices located all over the country and abroad, L&T operations are supplemented by a comprehensive distribution network and nationwide ramifications for customer service and delight!

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THE BEGINNING:Henning Holck Larsen and Soren Kristen Toubro, both Danish nationals, came to India in 1934, as employees of FL Smidth, Denmark, to provide engineering services to cement plants in India. During their stay they became fond of India and its culture. They realized the growing business potential in this country and laid the foundation of their partnership firm in the year 1938, christened as Larsen & Toubro. In the early years, they represented Danish manufacturers of diary equipment for a modest retainer. But with the start of the Second World War in 1939, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities. Germanys invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognized as a reliable fabricator with high standards. Again the sudden interment of German engineers (because of the war) who were to put up a soda ash plant for the TATA, gave L&T a chance to enter the field of installation an area where their capability became well respected. The company had its humble beginning in a tiny room in South Mumbai near to the corporate headquarters. With time the company took huge achievement strides and the marshy land in South Mumbai was transformed to a sprawling enterprise spread over 99 acres, employing more than 24,000 people and catering to the engineering needs of the world with a diverse product line. Today, the enterprise of the company lies in Engineering and Construction but it is constantly leveraging its knowledge in other areas like Information Technology. In India, it has a visible and vibrant presence. Some of Indias most sophisticated projects and most complex industrial equipment carry the L&T8KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

insignia of excellence. The adventure that began so humbly surpassed even the well established companies, the evidence of which is contained in the following milestones: 1940's: Engineering Construction Corporation (ECC) was incorporated. The partners signed a dealership agreement with the Tractor Company, Caterpillar Inc., USA - one of the largest manufacturers of earthmoving equipment. L&T Pvt. Ltd. came into being on February 07, 1946. L&T acquires 55 acres of land at Powai in 1948.

1950's: L&T became public limited company on December 1950, with a paid-up share capital of Rs. 20 lakhs. Sales turnover being Rs. 109lakhs. Tractor Engineers Limited (TENGL) & Caterpillar Inc., USA were incorporated as a joint venture of L&T on September 18, 1952. On 1956, the company moved to IC office at Ballard Estate which is today known as L&T House, Corporate headquarters. L&T receives a substantial order from Rourkela Steel Plant for the erection of 3 blast furnaces and a pig casting machine. 1960's: L&T emerges as the largest and most outstanding erection contractor in India. Switch gear workshop was set up. Prestigious contracts include turnkey construction of the Radiological Laboratories for the Atomic Energy Establishment, Trombay - which was one of the largest in Asia. Receives a contract for the erection of an Iron ore plant for Hindustan Steel Ltd. at Barsua, Orissa.

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1970's: Manufactures India's first indigenous Nuclear Reactor Vessel for Rajasthan Atomic Power Plant. Manufactures hydraulic excavators in collaboration with Poclain, S.A., France. Manufactures a high speed bottling plant (Capacity: 24,000 bottles per year) for the Delhi Milk Scheme. Supplies and Commissions India's largest indigenous cement plant. Fabricates and delivers motor casings for Indian Space Research Organization (ISRO). 1980's: Manufactures the first multi-wall vessel for ammonia separation for Hindustan Fertiliser Corporation Limited, Namrup. Manufactures India's 1st indigenous adjustable throat armour, at Kansbahal, for the blast furnace at TISCO. Receives national recognition for its path breaking achievement in developing the tri-junction welding technique for critical parts of nuclear reactors. L&T secures an order from ISRO for the manufacture of rocket motor casing made from maraging steel for the Polar Satellite Launch Vehicle (PSLV). Establishes itself as India's largest manufacturer of low tension switchgear, with the widest range. Sets up cement plants at Awarpur. Heavy Engineering facilities are set up in 1987 at Hazira near Surat for the manufacture of heavy and large equipment. 1990's: Emerges as India's largest integrated engineering and Construction Company. Ventures into Software development.10KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Fabricated giant oil platforms, including India's biggest marine structure. Emerges as the largest producer of cement and sets up plants at Gujarat, Madhya Pradesh and Andhra Pradesh. Fabricates India's 1st indigenous hydrocracker reactor. Fabricates India's largest slab caster for Bokaro Steel Plant. Builds India's first open-sea jetty.

Today L&T is one of the Indias biggest and best known industrial organizations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence. There cannot and must not be an end. And thus L&T saga continues.

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DIVISIONSL&T businesses have been broadly grouped into six business divisions viz: Engineering & Construction Projects (E&C) Engineering & Construction Corporation (ECC) Heavy Engineering Division (HED) Electrical & Electronics Business Group (EBG) Information Technology (IT) Machinery & Industrial Products Division (MIPD)

I)

ENGINEERING & CONSTRUCTION PROJECTS (E&C):Largest business segment Serves to process technology, basic and detailed engineering, heavy engineering and modular fabrication, procurement, logistics, construction, erection, commissioning and project management. Executes projects on turnkey basis. Serves the core sectors & infrastructure of the economy, viz., oil exploration & refinery, sulphur recovery units, diesel hydrotreaters, hydro power, fertilizer, petrochemical, steel, cement, mining, aerospace, nuclear power, roads, ports, bridges, telecommunication, food and pharmaceuticals. Landmark projects:i. Gas and crude distillation unit at Zirku Island in Abu Dhabi. ii. FCC Regenerator and Combustor (worlds largest) supplied to Reliance Refinery in India iii. The 24,000 tons Giant Gas Injection Platform at L&Ts Modular Fabrication Facility in Hazira, Gujarat, loaded onto the barge and ready to sail.

II)

ENGINEERING & CONSTRUCTION COMPANY DIVISION (ECC):12KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

ECC as its Construction Division was conceived as Indias leading construction organization.

Engineering

Construction Corporation Limited in April 1944. It has today emerged as Prized landmarks: Its exquisite buildings, tallest structures, largest industrial projects, longest flyovers, and highest viaducts have been built by ECC. The famous Lotus Temple is built by ECC.

III)

HEAVY ENGINEERING DIVISION (HED):Activities are organized under self-reliant Strategic Business Units (SBUs). Cater to the needs of core sector industries. Supplies equipment to Process Plant Industries and Defence, Nuclear Power & Aerospace Sectors. Its pioneer in the field of technology development, equipment manufacture and site / plant services. It has achieved the prestigious INS Industrial Excellence Award for outstanding contribution in the nuclear sector. L&T also has had a long and close association with the Indian Space Research Organization. It developed the Naval Multi- Barrel Rocket Launcher.

IV)

ELECTRICAL & ELECTRONICS BUSINESS GROUP (EBG):Its engaged in the business of low voltage Switchgear products, Electrical Systems, Energy meters, Medical equipments, Petroleum dispensing pumps, Automation solutions and Enterprise networking. Largest manufacturer of low voltage switchgear and control gear in India. EBG products cater to the needs of diverse customers comprising farmers, urban households and commercial buildings. Its products are required in health-care equipments as advanced protection, control and automation in a number of industries.

V)

INFORMATION TECHNOLOGY:L&T InfoTech Limited provides comprehensive, end-to-end software solutions to clients all over the world.13KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

It focuses on: Manufacturing, Banking, Securities & Insurance, Utilities and Communications, Embedded systems. The services provided are package implementation and support,

Application development and Maintenance, Application testing, Enterprise application engineering, Data Warehousing and Business Intelligence, Infrastructure Management services, Strategy Consulting, Value Added services.

VI)

MACHINERY & INDUSTRIAL PRODUCTS DIVISION (MIPD):Caters to the needs of the industrial machinery, construction equipments and industrial products business segments. It enjoys market leading capabilities in product design, process technology, procurement, project management, marketing and services support including commissioning. It offers products and services for all business verticals, maintaining stringent delivery schedules.

ACHIEVEMENTS In 2009 14KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Mr. A. M. Naik receives Padma Bhushan from the President of India. CII honours L&T with Corporate Wellness Award. L&T wins D&B-Rolta Top Indian Company Award. L&T-Chiyoda Management. L&T Wins Golden Peacock Award for Corporate Social Responsibility. Chemtech Business Leader of the Year. L&T bags FICCI Award for Outstanding Corporate Vision. L&T bags FICCI Award for Outstanding Corporate Vision. Technology Block at Hazira wins LEED Platinum Rating. L&T is Best for Investor Relations: Asiamoney. ET Business Leader of the Year for Mr. A. M. Naik. Mr. A.M. Naik Conferred Gujarats Highest State Honour - Gujarat Garima Award. bags ICWAI Award for Excellence in Cost

In 2008

Krishnamurthy Award for Excellence. Industrial Excellence Award. E&Y Entrepreneur of the Year Award. Transformational Leader Award. All India Engineering Export Award. Most Admired Infrastructure Company in India. The International Trade Awards.

LIST OF SUBSIDIARY COMPANIES

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1. Tractor Engineers Limited (TENGL) 2. L&T Komatsu Limited (LTK) 3. L&T-Case Equipment Private Limited 4. L&T Infrastructure Development Projects Limited 5. Larsen & Toubro Electromech LLC 6. HPL Cogeneration Limited 7. L&T-Sargent & Lundy Limited 8. L&T-Chiyoda Limited 9. L&T-Valdel Engineering Pvt. Limited 10. Audco India Limited (AIL) 11. L&T-Demag Plastics Machinery Limited 12. EWAC Alloys Limited 13. L&T Finance Limited 14. L&T International FZE 15. L&T Urban Infrastructure Limited 16. L&T Infrastructure Finance Limited 17. L&T Capital Company ltd. (LTCCL) 18. L&T Infrastructure Development Projects Ltd. (L&TIDPL)

OVERVIEW ON THE CAPITAL STRUCTURE:

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REVENUE OPERATING INCOME NET INCOME TOTAL ASSETS EMPLOYEES WEBSITE

: US$ 8.50 billion (2009) : US$ 900 million (2009) : US$ 0.58 billion (2009) : US$ 9.92 billion (2009) : 35,000 : www.larsentoubro.com

BOARD OF DIRECTORS

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L&T have two types of Directors i.e. Executive Directors and NonExecutive Directors.

EXECUTIVE DIRECTORS:1. A.M. Naik (Chairman & Managing Director) 2. J.P. Nayak (Whole-time Director & President Machinery & Industrial Products) 3. Y.M. Deosthalee (Whole-time Director & Chief Financial Officer)

4. K. Venkataramanan (Whole-time Director & President Engineering &Construction Projects) 5. R.N. Mukhija (Whole-time Director & President Electrical & Electronics)

6. K.V. Rangaswami (Whole-time Director & President Construction)7. V.K. Magapu (Whole-time Director & Senior Executive Vice President IT & Technology Services) 8. M.V. Kotwal (Whole-time Director & Senior Executive Vice President Heavy Engineering)

NON-EXECUTIVE DIRECTORS:1. S. Rajgopal 2. S. N. Talwar 3. M. M. Chitale 4. Lt. Gen. Surinder Nath (Retd.) 5. U. Sundararajan 6. Thomas Mathew 7. N. Mohan Raj 8. Subodh Bhargava

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LARSEN & TOUBRO Ltd. ( KANSBAHAL WORKS )

L&T - KANSBAHAL WORKS19KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

( PROFILE )Kansbahal works is located near Rourkela (Orissa), is states largest heavy engineering unit. Kansbahal Works, a unit under the Machinery & Industrial Products Division of L&T, is a world class Integrated Machine Building Centre with facilities for Casting, Fabrication, Machining and Assembly, complimented by excellent design, engineering, quality control and logistics support. Set up in 1962 as an Indo-German Venture, under the name of Utkal Machinery Limited (UTMAL) to serve the steel and paper industries to substitute imports. On inception it had four partners viz., GHH, VOITH, KOOPERS and L&T. In the year 1982, it finally came under the umbrella of L&T group after full acquisition of shares. It however remained a cost centre for L&T serving several business divisions of the company and in October 1999, it was structured as a Strategic Business Unit (SBU). L&T, Kansbahal works is situated in sylvan surroundings of Kansbahal, Orissa. It is 25 km away from Rourkela and 15 km from Rajgangpur in the district of Sundergarh, Orissa. It is well connected by roads and railways. Kansbahal works is one of the oldest factories in the arsenal of L&Ts manufacturing bases. It has licensed annual capacity of 12000 tones. It is an ISO 9001 certified works. It has evolved into a world class integrated manufacturing centre with facilities for Fabrication, Machining, Assembly and Casting. This is complemented by excellent design, engineering, quality control and logistic expertise. Kansbahal works manufactures and supplies Heavy machinery, Crushing equipments, Paper machinery and Foundry equipments for Power plants and Windmill. The commitments to quality and customer satisfaction are the driving forces for all its activities. The concern for environment is an integral part of the company's vision. It manufactures a range of steel, Iron and Alloy Iron including spheroidised graphite iron castings as well as paper drying cylinders in vertical20KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

pits up to 2000-mm dia and 7500 mm length. Approved by Lloyds register of hipping, London, for manufacture of various grades of ferrous castings, the foundry can manufacture a single piece casting of maximum 14 tons in steel, 22 tons in cast iron and 18 tons in spherodized graphite iron. The fabrication shop has a built-up area of 9525 sq.m and can handle a single unit of maximum 100tons. The L&T Kansbahal Works has four main shops and they are: 1. Foundry Shop 2. Machine Shop 3. Fabrication Shop 4. Assembly Shop Products: 1. Paper and pulp machineries 2. Crushing equipments for mining, limestone and minerals 3. Various Foundry Castings 4. Steel plant equipment 5. Surface Minor 6. Hub Casting and Fabrication items for Windmill power sector

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VISION

L&T shall be A professionally-managed Indian Multinational, committed to total customer Satisfaction and enhancing shareholders value. L&Tites shall be An innovative, entrepreneurial and Empowered team, constantly creating value And attaining global benchmarks. L&T shall Foster a culture of caring, trust and Continuous learning while meeting Exceptions of employees, Stakeholders and society.

LARSEN & TOUBRO LIMITED

ORGANIZATION STRUCTURE

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ORGANIZATION STRUCTURE OF FINANCE & ACCOUNTS DEPARTMENT ( KANSBAHAL )V.N SRIVASTAVA ( General Manager )23KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

T.N. BISWAL ( C.L )

B.B. DAS ( MANAGER )[ Costing system, Inventory Valuation and Control, Auditing, Sales Accounting, Customer Ledger ]

S.C. MOHANTY ( E3 )[ Suppliers Payment ]

N. AGRAWAL ( MANAGER )[ Excise, Service tax, VAT, CST, General ledger, Final A/c's, Capital budget ]

P.K. PANI ( E2 )[ Employee related Payment Provident Fund ]

B.C.RANA ( EXECUTIVE )

R.L. PRADHAN ( OFFICER )

P. ROY ( OFFICER )

A.K. PRASAD ( OFFICER )

M.M. SINGH ( OFFICER )

K. PARIJA ( OFFICER )

P.C. ROUT ( OFFICER )

S.S. SAHOO ( OFFICER )

S.K. DAS ( C.L )

P. PODDAR ( OFFICER )

D.K. SWAIN ( OFFICER )

P.K. PATRA ( OFFICER )

S. BEURA ( C.L )

24KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

CAPITAL BUDGETING

CAPITAL BUDGETINGCapital budgeting is the planning process used to determine whether a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is the budget for major capital, or investment, expenditures.25KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Capital Budgeting is the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Capital Budgeting of an organisation includes the budgeting of all the capital expenditures incurred in it. A capital expenditure is an expenditure that is shown as an asset on the balance sheet. This asset, except in the case of a nondepreciable asset like land, is depreciated over its life. Capital expenditures have long term consequences.Capital Expenditures include purchase of fixed assets.

Fixed Assets have 2 characteristics: They are acquired for use over relatively long periods for carrying on the operations of the firm and They are not ordinarily meant for sale.

These fixed assets that are used at L&T are: a) Factory Building b) Non Factory Building c) Plant and Machinery d) Computer items e) Furniture and Fixtures f) Office Equipmentg) Air Conditioning and Refrigeration

h) Photographic Equipment i) Laboratory equipment j) VehiclesOF

GUIDELINES

FOR

PREPARATION

CAPITAL

EXPENDITURES

AND

INVESTMENT BUDGET: A) CLASSIFICATION:The Capital Expenditure (CAPEX) Budget will be analysed in the following categories:

26KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Real Estate i.e., Land (Free hold or Lease hold ) Real Estate i.e., Buildings ( Factory or Office / Commercial or Residential Flats ) Plant and Machinery - General or specific Information Technology (IT) related items - PC's, Laptops, Servers, Photo copiers / Printers, Softwares, etc. Special items - Transit houses and holiday homes, Vehicles, Equipment for Medical/Welfare centres, Cars under employee car scheme, Personal computers for employees under the company's scheme, Aircraft, Others Other office equipment Furniture and Fixtures

The proposals should be entered in the appropriate subcategories under respective categories. The proposals for Real Estate and Plant & Machinery should contain detailed item wise justification. All proposals should be substantiated and collaborated with the complete plan. Specific plant and machinery items refer to: a) New investments, b) Expansion and c) Items bought for targeted jobs The specific and general P/M are budgeted under the aforesaid three subcategories with a detailed rationale covering all norms, such as Net Present Value (NPV), Payback period, Project Internal Rate of Return (IRR). The above norms should be justified with respect to probability of award of job and its expected use and residual value post completion of the job.

B) BUDGET PROPOSALS:

27KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

A detailed justification for the purchase of the new asset should be submitted. The increase in revenues, contribution and cost savings that will be achieved should also be given, wherever applicable. The proposals should be comprehensive and must include cost of consequential proposals such as stamp duty, registration charges, material handling equipment, stores, land / site clearing, etc. In case of proposal for general P&M costing Rs.150 lakhs or more & specific P&M budgeted under new investments or expansion, Payback Period, Net Present Value ( NPV ), and Project Internal Rate of Return (IRR ) calculations should be furnished. NPV should be arrived at using Weighted Average Cost of Capital (WACC). Proposals for acquiring Plant & Machinery in anticipation of customer orders should indicate the customer orders, the probability of getting these orders and the redeployment plan for these assets after execution of the orders. For real estate proposals covering construction", breakup of cost into civil, electrical and air conditioning along with area and rate per sq. meter should be provided. Cost of land, if applicable, should also be separately disclosed along with likely stamp duty, registration charges, land development expenses, etc.

Proposals for replacement of asset: Details of existing asset:a) Type of equipment b) Year of purchase c) Original cost, Written Down Value (WDV ) d) Present Capacity Utilization e) Breakdown hours f) Annual maintenance cost trend g) Any major cost to be incurred h) Estimated net realizable value

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Proposed replacement:a) Improvements expected including additional production anticipated, cost saving, efficiency improvements, etc.

b) Cost of replacement

C) CARRY OVER PROPOSALS: There will be no automatic carryover of proposals sanctioned for the current year. Carryover of proposals will be allowed only for partly committed jobs / sanctions and the carry over proposals should be budgeted based on the latest prices / costs. In case of items where the cost is likely to exceed the amount already sanctioned, a detailed justification should be given for amounts exceeding 5% of the original estimate or Rs. 10 lakhs (whichever is more).

D) HIRE OR LEASE OF ASSETS: At times capital assets are taken on a long term hire, which is similar to leasing of the assets. It is suggested that these proposals should also be submitted to the finance dept. where the annual outgo of rentals on account of such assets exceeds Rs. 20 lakhs. Such assets should form part of the proposals for the capital sanction.

E) COSTS: The amount to be indicated against each proposal should include all taxes, duties, cost of accessories, spares, installation charges, etc. The cost of office space should include cost of modification, transfer expenses, stamp duty, registration charges, etc.

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F) PROPOSAL EVALUATION: The CAPEX budget would be approved based on the Company's cash flow position for the budget year. All capital expenditure proposals are evaluated and sanctioned on the basis of information given along with the Budget proposals. It is therefore necessary that complete description and justification of the proposals are given to facilitate sanction. Further, it may be noted that a proposal sanctioned towards a particular asset cannot be utilized for any other asset . In case for requirement for substitution prior approval of the H.O Finance dept. will be necessary.

G) MONTHLY REPORTING OF CAPITAL EXPENDITURE: Budgeting units should ensure that they report to the H.O Finance dept. on a monthly basis, about the item wise commitments and cash flows for the sanctioned projects through utilization statements.

CAPITAL BUDGETING PROCESS:Capital Budgeting is a complex process which may be divided into the following phases:

Identification of potential investment opportunities:

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The capital budgeting process begins with the identification of potential investment opportunities. Typically, the planning body develops estimates of future sales which serve as the basis for setting production targets. This information, in turn, is helpful in identifying required investments in plant & machinery and equipment.

Assembling of Investment Proposals:Investment proposals identified by the production department and other department are routed through several persons. The purpose of routing a proposal through several persons is primarily to ensure that the proposal is viewed from different angles. It also helps in creating a climate for bringing about coordination of interrelated activities. Then the proposals are usually submitted in a standardised capital investment proposal form.

Project Classification:Normally projects are classified into different categories to have a detailed analysis. Project analysis entails time and effort. The costs incurred in this exercise must be justified by the benefits from it. a) Mandatory Investments: These are expenditures required to comply with statutory requirements such as pollution control equipment, medical dispensary, fire fitting equipment and so on. These are often non revenue producing investments. In analysing such investments the focus is mainly on finding the most cost-effective way of fulfilling a given statutory need. b) Replacement Projects: The Company routinely invest in equipments meant to replace obsolete and inefficient equipments, even though they may be in a serviceable condition. The objective of such investments is to reduce costs of labour, raw material, and power. And also to increase yield and improve quality.

c) Expansion Projects: These investments are meant to increase capacityand widen the distribution network. Such investments call for an31KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

explicit forecast of growth. Since this can be risky and complex, expansion projects normally warrant more careful analysis. Decisions relating to such projects are taken by the top management.

d) Diversification Projects: These investments are aimed at producingnew products or services. Often diversification projects entail substantial risks, involve large outlays and require considerable managerial effort and attention. Given their strategic importance, such projects call for a very thorough evaluation, both quantitative and qualitative. Further they require a significant involvement of the board of directors.

e) Research and Development Projects: R&D projects are characterised bynumerous uncertainties and typically involve sequential decision making. Such projects are decided on the basis of managerial judgement.

f) Miscellaneous Projects: This is a catch-all category that includes itemslike interior decoration, recreational facilities, landscaped gardens, and so on. There is no standard approach for evaluating these projects and decisions regarding them are based on personal preferences of top management.

Investment Criteria:Investments in most of the projects should fulfil some criteria's so that the project is accepted or else the project will be rejected. The investment criteria that are followed at L&T, Kansbahal works are Net Present Value (NPV) and Payback Period.

ANALYSIS OF CAPITAL BUDGETING PROCESS FOR THE INSTALLATIONOF VERTICAL LATHE M/C IN MACHINE SHOP AT L&T, KANSBAHAL

WORKSMachine shop is a vital link that concretizes and fructifies the parts which are to be assembled in the assembly shop.32KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

The machine shop can be divided into : 1) Lathe shop a) Centre lathe b) Vertical lathe c) Facing lathe 2) Boring group a) Table borer b) Floor borer c) CNC borer 3) Central group a) Marking b) Miscellaneous machines The operations that can be performed in Lathe shop are: OD and ID Turning Taper Turning External threading Internal Threading Parting Grooving Chamfering, etc.

There were 4 vertical lathe machines available in the machine shop: a) M/C No. - 021 b) M/C No. - 037 c) M/C No. - 032 d) M/C No. - 033 M/C No. - 033 was windmill component machinery.33KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Chuck dial - 4770 mm. Height - 4 m. Weight carrying capacity - 80 tons

But due to a major order from Bokaro Steel Plant, the Chuck Dial required for the specified job was 5300 mm. Hence the new Vertical Lathe was proposed to be bought, so as for the completion of the order and to work out more no. of such orders. The estimated total expenditure of the Vertical Lathe M/C was calculated to be 600 lakhs. Availing of the new machinery will result in: 1. Improving productivity 2. Increasing existing capacity 3. Creating new capacity and 4. Getting more no. of specific sales order This particular investment was categorised as an Expansion project and the Net present value (NPV) and Payback period were calculated to check the feasibility of the project. a) Net Present Value (NPV): The Net present value of a project is the sum of the present values of all the cash flows that are expected to occur over the life of the project. Net present value of an investment/project is the difference between present value of cash inflows and cash outflows. The present values of cash flows are obtained at a discount rate equivalent to the cost of capital. The decision rule associated with the net present value criterion is: Accept the project if NPV is positive and reject the project if NPV is negative. If NPV is zero, it is a matter of indifference. The vertical lathe's present value of cash inflows is equal to Rs. 2191.19 lakhs which is much greater than Rs. 600 lakhs. Thus it generates a positive net present value of Rs.1591.18 lakhs. Hence, this project adds to the wealth of owners; therefore, it should be accepted.34KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

b) Payback Period: Payback period is the time duration required to recoup the investment committed to a project. It is the length of time required to recover the initial cash outlay on the project. According to the payback criterion, the shorter the payback period, the more desirable is the project. Firms using this criterion generally specify the maximum acceptable payback period. If this is 'n' years, projects with a payback period of 'n' years or less are deemed worthwhile and projects with a payback period exceeding 'n' years are considered unworthy. Preparation of Capital Expenditure Budget Proposals: According to the requirement of materials by the different departments of the unit, the Head of the Dept. writes a letter to the Accounts Dept. mentioning the description, quantity and justification for the purchase of those. Then the A/c's dept. prepares a budget proposal in the mentioned format:Cash Outflow Sl. No. Description Qty. Amount ( in lakhs ) Dept. 1st qtr. 2nd qtr. 3rd qtr. 4th qtr. Justification For a specific & repetitive order Increase in capacity

1

Vertical Lathe Machine

1

600

Machine shop

0

0

600

0

Submission of Budget:Then the Budget proposals that are prepared in the unit are submitted to the Head Office, Mumbai on the CAPEX System operating on the intranet (http://172.25.11.2/capex/Login.aspx). This system will be the platform for the submission of the CAPEX requests, release of sanctions, monitoring of actual commitment and cash outflow. All the requests are submitted through this35KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

proposal only. After the acceptance from the head office the H.O. sends a letter of Capital sanction.

Capital Sanction:The Head office then analyzes the proposal sent by its units and sanctions capital accordingly. This is then sent to the individual units A/c's dept... The A/c's department of the units then informs the individual units whether their budgets are sanctioned or not.

Capital Sanction Format:Capital Sanction No. Project No. Description Sanctioned ( in lakhs ) Vertical 04378 56453 Lathe Machine 600 P/M Machine shop Category Dept.

Capital Job Requisition:This is prepared by the individual departments of the unit after the project sanction and also according to the amount sanctioned; mentioning the description, quantity, expected time for its use and the justification of the requirement. For ex: To improve productivity, to increase existing capacity or Replacement. And is then sent to the concerned heads such as A/c's Head and Vice-President of Management for approval.

Capital Job Requisition ( CJR ) Format:For DepartmentMachine shop

Initiated by

Date

For Cost CentreKBL Works

Asset Group Description Vertical Lathe Machine Quantity 1 Supplier When Reqd. Expected Delivery 36KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Execution Departmental Estimated Cost } Landed Cost } Installation }Total(GrossValue) Month Justification 1 2 3 4 Improving Productivity Increasingexistingcapacity Creating new capacity No. of Shifts Single Grade : Area Sq m. Double No: Location YES if NO ; Reason for this proposal Departmental Head (ACCOUNTS) 1. Cash flow Certified 2 3 (Date) 1. Approved. 2. Rejected. 3. Postponed ( Vice President) (Accounts Department) (MANAGEMENT) 1. Appropriation noted 2. Project No. : 3. Head of account 4. Accounts advised on (Date) (Date) (Budget Section) 5 6 7 8 StatutoryObligation Welfare of Workmen/Community Replacement(state disposal of old assets) Others(specify) Horse Any Incidental Power capital outlay required (Specify) Month ContractIndigenous

Import Estimated Month In Checked

Cash Outlay Month

Specific sales order No. Extra Extra Man Power Space

TrebleIs the estimated cost within the NO approved budget ? if No reason for Excess Divisional Head (BUDGET) 1. Is this item approved in the Capital budget ? 2. Is the Estimate within budget allocation? 3. Is budget over-run for any other item for Dept./CC? 4. Other Comments (Date) Yes (Budget Section) (BUDGET) YES NO

Is the item included in your approved Budget:

Purchase Requisition:After the approval of the Capital Job Requisition ( CJR ) by the Department heads, a Purchase Requisition ( PR ) is prepared and is sent to the Purchase dept. for the purchase of the required materials mentioning the quantity of those, the suppliers and the date of requirement.37KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Requisition Date: Estimated Value: Larsen and Toubro Ltd., Kansbahal works Project: EO Number: Item Line no. No. Cost Centre: 401 A/C No.: 7402 Description Quantity Unit Cost Required Date Group: Total Cost

Delivery Instructions:

Purchase Order:Now Purchase order is placed by the Purchase dept. to the Suppliers for those items. Purchase Order No.: Date: AMD No.: Vendor's Reference

Larsen &Toubro Ltd., Machinery & Industrial Products Division, Kansbahal Works, Kansbahal-770034, Dist.: Sundergarh

Vendor's Name & Address

Terms of payment:

Material Stock Item no. code/ Description

Delivery Delivery Qty. Schedule Unit rate Total price

Capital Work In Progress (CWIP ):CWIP is done on quarterly basis. and as the order is received, the product is installed and commissioned and is then put into Capital Work In Progress (CWIP ).CWIP list as on 16-03-201038KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Deletion during Original Project No. Description Category Capital Dept. Sanctioned Amount as on Jan 1st Jan 1st to Mar 31st Addition during Jan 1st to Mar 31st CWIP as on Feb 16th

Job Closure Report:Larsen & Toubro Limited, Kansbahal Works JOB CLOSURE REPORTCODE ISSUED TO : DEPT : ISSUED : DATE WARD CC ORDER NO : PROJECTNO: ACCOUNTS JOB : GR. DRG. ITEM NO : DATE OF FINISH : DELIVERED TO : NET WEIGHT : APPX. DIMENSION :

ITEM PURCHASED : ( SIGNITURE )

Capitalization:It is a process in which a product or a sanctioned budget is capitalized or converted into a fixed asset from the amount available in Capital Work In Progress ( CWIP ).

39KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

CWIP to Fixed Asset:

i.

Asset schedule for Land and Plant & Machinery:Asset Schedule for the period April 2008 to March 2009Book value (1st April ) REP DEP SLM WDV ( March31st) REP VALUE WDV OPN BOOK DEPN REP WDV CLO REV RES OPN RECUPE MENT REV RES CLO

Asset No.

Original cost

ii.

Asset schedule for Furniture& Fixtures, Office equipment and Vehicles:

Asset Schedule for the period April 2008 to March 2009WDV WDVCL OPN ( 31st Further Description Particulars Dt. Of Purchase Qty. Original Value (April 1st) Dep. SLM March )

Asset No.

Thus the Asset is converted from CWIP to a fixed asset of the company and the process is termed as Capitalization where a fixed amount is depreciated each year.

Fixed Assets Register:After the asset is capitalized, a Fixed Asset Register is maintained to keep a record of all the assets of the organization. Here all the details of the asset are recorded to keep a track on those.40KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Install Dept. code Description ation date Asset category Quantity Original value Dep. Rate WDV OPN DEP SLMD WDV CLO REP VALUE

Depreciation:L&T, Kansbahal follows two types of depreciation methods: Straight Line Method ( SLM ) - used for Book depreciation. Written Down Value ( WDV ) - used for IT depreciation.

Depreciation on revalued assets is calculated on Straight Line basis on the values and at the rates given by the valuers. The difference between depreciation on the assets based on revaluation and that on original cost is transferred from Revaluation A/c to Profit-Loss A/c. a) Tangible Assets: I) Building: Residential Purpose Non Residential Purpose Temporary Erections 2.5% 5% 50% Rate of Depreciation

II)

Furniture & Fixtures : General ( including electrical fittings ) Colleges & other educational Institutions, Library,41KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

5%

Welfare centres, City malls III) Plant & Machinery: General installed in the factory Premises Motor cars & other vehicles Air pollution control equipment Water pollution control equipment Computers Energy saving devices Renewable energy devices Furnace Railway sidings Ships Laboratory equipments Canteen equipment Air conditioning & Refrigeration Office equipment -

5%

7.5% 7.5% 50% 50% 30% 40% 40% 40% 7.5% 10% 12.5% 12.5% 8.33% 6.67%

b) Intangible assets: Computer software Other intangible assets 30% 12.5%

Depreciation Statement for an assessment year:Depreciation Statement ( WDV method ) ( Assessment Year 2008-09 ) [ Previous year ended 31-03-2008 ]

42KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

WDV Additions during the year Sale during the year Normal before dep. rate of dep. Dep. allowable

WDV as on 31-03-2009

Asset description

Opening WDV

Grinder

1,78,63,776

27,670

-

17,891,446

5%

894,572

16,996,874

Sale of Fixed assets:After a use for a defined time-period, when an asset is no longer in use the unit decides to sell the asset.

Sale of Fixed Assets during Oct-09 to Dec-09Insta Original Asset no. Description llation Date Qty. Value Dep. Rate WDV OPN Sale Date Dep SLM WDV CLO Sale value Profit/ Loss Sold to

43KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

TAXATION

TaxA Tax is a payment made by the person who has earned income during a year to the government. Tax is nothing but it is a charge made by the government on the goods, travelling, medicine, etc. that is a sort of income to the government and this money is used for developing purpose. Tax is a major source of revenue44KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

to the government. Tax is the price which we pay for a civilised society. Broadly, Tax is divided into 2 categories:

A) Direct Tax:Direct taxes are those which the taxpayer pays directly from his income/ wealth/ estate, etc... Direct taxes are those which are paid after the income reaches the hands of the tax-payer. Income Tax: An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. As per section-14, income of a person is computed under the following heads: 1) Salaries: The term salary includes: a) b) c) d) Wages Any annuity or pension Gratuity Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages e) Any advance of salary f) Leave encashment g) Annual accretion to the credit balance in a recognised provident fund 2) Income from house property: Rent received from building or land appurtenant (i.e., land attached to the building) 3) Profits and gains of business or profession: a) Income derived by a trade or profession b) Compensation or other payment received c) Profit on sale of a licence granted under the imports order d) Cash assistance received against exports45KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

e) Value of any benefits or perquisites arising from a business or the exercise of a profession f) Interest, salary, bonus, commission or remuneration due to or received by a partner of a firm 4) Capital gains: Any profit or gain arising from the sale or transfer of a capital asset. Capital asset is defined to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Short term capital assets are: a) Equity or preference shares b) Securities like debentures or government securities c) Units of UTI d) Units of Mutual fund e) Zero coupon bonds An asset other than a short term capital asset is regarded as long term capital asset. 5) Income from other sources: Incomes from other sources include: a) Dividends b) Income from subletting c) Interests on bank deposits and loans d) Income from royalty e) Director's fees f) Director's commission g) Ground rent h) Agricultural income i) Examination fees received by a teacher j) Insurance commission k) Winning from lotteries, etc. Tax Rates that are currently applicable are:46KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

For Resident woman ( who is below 65 years):Secondary and Higher education cess Nil 1% of income tax 1% of income tax 1% of income tax

Net income range ( Rs.) = 8,00,000

Income tax rate ( % ) Nil 10% 20% 30%

Education cess Nil 2% of income tax 2% of income tax 2% of income tax

For Resident senior citizen ( who is 65 years or more ):Secondary and Higher education cess Nil 1% of income tax 1% of income tax 1% of income tax

Net income range ( Rs.) = 8,00,000

Income tax rate ( % ) Nil 10% 20% 30%

Education cess Nil 2% of income tax 2% of income tax 2% of income tax

For any other individual:Secondary and Higher education cess Nil 1% of income tax 1% of income tax 1% of income tax

Net income range ( Rs.) = 8,00,000

Income tax rate ( % ) Nil 10% 20% 30%

Education cess Nil 2% of income tax 2% of income tax 2% of income tax

B) Indirect Tax:Indirect taxes are those which the tax-payer pays indirectly i.e., while purchasing goods and commodities, paying for services, etc... Indirect taxes are paid before the goods or a service reaches the tax payer. a) Central Excise Duty or Central Value Added Tax ( CENVAT ):47KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Central Excise is a tax on act of manufacture or production. Central Excise Duty is imposed and collected on excisable goods ( that are movable and marketable ) which are manufactured or produced in India. Excisable goods are those that are included in Central Excise Tariff Act, 1985. It is collected by Central Govt. of India. Basic Excise Duty Education Cess Secondary & Higher Education Cess For example: Line Filter is a product that is manufactured and supplied by L&T, Kansbahal. Total cost of the machine is Rs. 33,040/-and after addition of excise duty amount the total value went up to Rs.36, 443.12. The excise duty is charged as the product is been manufactured here.Item 880339 Excise Duty (%) 10% CSH No. 84314990 Excise Duty Amount 3,304.00 Description Line Filter Quantity 4 Rate(Rs.) 8,260.00 Amount(Rs.) 33,040.00 Assessable Value 33,040.00 E-Cess Rate (%) 2% E-Cess Amount 66.1 SHE-Cess Rate (%) 1% SHE-Cess Amount 33.04 Total Excise 3,403.12 Duty Net Amount 36,443.12

- 10% - 2% on Basic excise duty (w.e.f. 9-7-2004) - 1% on Basic excise duty (w.e.f. 1-3-2007)

Source: L&T Tax Invoice (Reference: Annexure)

b) Value Added Tax ( VAT ): It is an act to provide for the imposition and collection of tax on the sale or purchase of goods in the state. It extends to the whole of the state of Orissa. It is collected by State Government. VAT is applicable on a product after excise duty is imposed on it. It is a consumption tax as it is paid by the final customer. All business transactions carried on within a state by individuals, partnerships,48KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

companies, etc. will be covered under VAT. Annual turnover of Rs. 2, 00,000/- or more will be covered under VAT. Under the VAT system, 550 goods are covered. Tax rates under VAT: Zero Rate: Exempted goods such as flood relief goods. 1%: Part I of the schedule. 4%: Part II of the schedule covering 210 items such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods. Item 880339

12.5%: Part III of the schedule covering all remaining goods.Description Quantity Line Filter 4 Rate(Rs.) 8,260.00 Amount(Rs.) 33,040.00

CSH No. 84314990

Excise Duty (%) 10%

Excise Duty E-Cess Rate Amount (%) 3,304.00 2%

E-Cess Amount 66.1

Assessable Value 33,040.00 SHESHE-Cess Cess Rate (%) Amount Total 1% 33.04 3,403.12 Excise Duty Amount on which VAT is payable 36,443.12 VAT @ 12.5% 4,555.39 Net Value 40,998.51

Source: L&T Tax Invoice (Reference: Annexure)

VAT is a multipoint tax system with provision for input tax credit / setoff tax paid on purchase at each point of sale.VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month). c) Entry Tax:

49KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

An act to provide for the levy and collection of tax on the entry of goods into the local areas of the state of Orissa for consumption, use or sale therein and matters incidental thereto and connected therewith. It is a tax collected for local development. A local area means the areas within the limits of any: i) Municipal corporation ii) Municipality iii) Notified area council iv) Gram panchayat v) Industrial township vi) Other local authority by whatever name called, constituted or continued in any law for the time being in force. Rate of tax: The tax payable by a dealer or any other person under the act shall be at the following rates: i) Subject to the provisions, the goods specified in Part I of the schedule (116 items) to the act shall be charged at the rate of 1% of the purchase value. L&T Products: Coal & coke Cotton yarn Iron and steel Furnace oil Kerosene Sheets & rods Bricks & roofing tiles Paper LPG & Natural gases items ) to the act shall be charged at the rate of 2% of the purchase value.50KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Telephone & accessories Petrol, Diesel and lubricants Cement & asbestos Doors and shutters Plywood Sheet glass Computer & Softwares Office stationary

ii) Subject to the provisions, the goods specified in Part II of the schedule ( 43

L&T Products: Electrical goods including motors, conductors & cables Electrical appliances Voltage stabiliser Machinery and equipments and spare parts Furniture including steel, plastic and aluminium Elevator and lift Generator and transformer Copier, Xerox machine, Fax TV, VCD, DVD, Camera All motor vehicles Marbles and Tiles Air conditioners, Refrigerators Air coolers Ferro alloys

Entry Tax Procedure:Item 880339 CSH No. 84314990 Description Line Filter Quantity 4 Rate(Rs.) 8,260.00 Amount(Rs.) 33,040.00

Excise Duty (%) 10%

Excise Duty Amount 3,304.00

E-Cess Rate (%) 2%

E-Cess Amount 66.1

SHE-Cess Rate (%) 1%

Assessable Value 33,040.00 SHE-Cess Amount Total 33.04 Excise 3,403.12 Duty VAT @ 12.5% Entry Tax @ 2% 4,555.39 819.97

Amount on which VAT is payable 36,443.12 Net Value 40,998.51 Net Payable 41,818.00Source: L&T Tax Invoice (Reference: Annexure)

Entry tax in case of intra state transactions (i.e., within a state), the tax is given by the buyer to the seller of the goods and it is mentioned in the invoice. After the buyer collects the tax he deposits it to the Govt. But in case of interstate transactions (i.e., one state to another), the tax is given by the buyer to the Govt. directly and it is not mentioned in the invoice. d) Central Sales Tax ( CST ):

51KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

It is an act to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-state trade or commerce or outside a state or in the course of import into or export from India, to provide for the levy, collection and distribution of taxes on sale of goods in the course of interstate trade or commerce and to declare certain goods to be of special importance in interstate trade or commerce and specify the restrictions and conditions to which state laws imposing taxes on the sale or purchase of such goods of special importance shall be subject. Rate of Central Sales Tax (CST) is 2%. It extends to the whole of India.

Item

CSH No.

Description

Quantity

Rate(Rs.)

Amount(Rs.)

880339

84314990

Line Filter

4

8,260.00

33,040.00

Assessable Value 33,040.00 Excise Duty(%) 10% Excise Duty Amount 3,304.00 E-Cess Rate(%) 2% E-Cess Amount 66.1 SHE-Cess Rate(%) 1% SHE-Cess Amount 33.04 Total Excise Duty 3,403.12

Amount on which CST is payable 36,443.12 CST @ 2% 728.86

Net Value 37,171.98 Entry Tax 0

Net Payable 37,171.98

In case of Central Sales Tax (CST), ), the Entry tax is given by the buyer to the Govt. directly and it is not mentioned in the invoice. e) Service Tax:

52KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Service tax is a form of indirect tax imposed on specified services called "taxable services". Service tax cannot be levied on any service which is not included in the list of taxable services. Service tax is levied on the value of such taxable service that shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration. Over the last few years, service tax has been expanded to cover new services. The intention of the government is to gradually increase the list of taxable services until most services fall within the scope of service tax. Till now 100 services have been made taxable. The common services that are included are: Advertisement services Asset management services Auction services ATM operation & management services Banking services Broadcasting services & other financial Business support services Cargo and port handling services Cleaning services Construction services Courier services Insurance services Internet telephony services Stock broking services

Presently the rate of service tax that is levied is: Basic Service Tax Education Cess Secondary & Higher Education CessItem 880339 CSH No. 84314990 Service Tax Amount 3,304.00 Description Commissioning of Line Filter E-Cess Rate (%) 2%

- 10% - 2% on Basic excise duty (w.e.f. 9-7-2004) - 1% on Basic excise duty (w.e.f. 1-3-2007)Rate(Rs.) 8,260.00 Amount(Rs.) 33,040.00 Assessable Value 33,040.00

Quantity 4

Service Tax (%) 10%

E-Cess Amount 66.1

SHE-Cess Rate (%) 1%

SHE-Cess Amount 33.04 Total Service 3,403.12 tax Net Amount Payable 36,443.12

53KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL MANAGEMENT54KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

INTRODUCTION Proper management of working capital is very important for the success of an enterprise. It aims at protecting the purchasing power of assets and maximizing the return on investment. Constant management is required to maintain appropriate levels in the various working capital components. Sales expansion, dividend declaration, plant expansion, new product line, increased salaries and wages, rising price levels etc. put added strain on working capital maintenance. Business concerns need funds for carrying on the business. These funds are acquired either from equity or on borrowed basis. Concern utilizes a part of the funds for acquiring fixed assets and other for long term purposes. Apart from financing for investing in fixed asset, every business concern also require funds on a continual basis for carrying on its day-to-day operations. These include amount incurred for purchase of raw materials, for processing them, constructions work, etc.. Working capital refers to the sources of financing required to by business on continual basis for meeting these needs.

MEANING OF WORKING CAPITAL: Working capital typically means the firms holding of current or short-term assets such as cash, cash receivables, inventory, and marketable securities. Working capital focuses on the efficient management of the individual current assets in the day-to-day operation of the business. Working capital is that part of firms current assets which are financed by long term funds when we take working capital as excess of current assets over current liabilities. The net working capital provides an accurate assessment of the liquidity position of the firm. With the liquidity and profitability dilemma solidly authenticated in the financial scheme of management, concerned efforts are made to ensure the ability of the firm to meet the obligations, which mature within twelve month period. Management must always ensure the solvency and viability of the firm.

55KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

The definition of working capital is fairly simple; it is the difference between an organization's current assets and its current liabilities. Of more importance, is it's function which is primarily to support the day-to-day financial operations of an organization, including the purchase of stock, the payment of salaries, wages and other business expenses, and the financing of credit sales. Working capital comprises a number of different items and its management is difficult since these are often linked. Hence altering one item may impact adversely upon other areas of the business. For example, a reduction in the level of stock will see a fall in storage costs and reduce the danger of goods becoming obsolete. It will also reduce the level of resources that an organization has tied up in stock. However, such an action may damage an organization's relationship with its customers as they are forced to wait for new stock to be delivered, or worse still may result in lost sales as customers go elsewhere.

NEED OF WORKING CAPITAL MANAGEMENT: The working capital management refers to Management of working capital ", or, to be more precise The management of current assets". A firms working capital consists of its investment in current assets which include short term assets such as cash and bank balance, inventories, receivable and marketable securities, etc. So the working capital refers to the management of the level of all these individual current assets. The need for working capital management arises from two considerations: i. Firstly, existence of working capital is imperative in any firm. The fixed assets, which usually require a large chunk of total funds, can be used as an optimal level of only if supported by sufficient working capital, and ii. Secondly, the working involves investment of funds of the firm. If the working capital level is not properly maintained and managed, then it may result in unnecessary blocking of scarce resources of the firm. The insufficient working capital, on the other hand, put different hindrances in

56KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

smooth working of the firm. Therefore, the working capital management needs attention of all financial managers. Proper management of Working Capital is very important for the success of an enterprise. It aims at protecting the purchasing power of assets and maximizing the return on investment. Constant management is required to maintain appropriate levels in the various working capital components. It has been found that the major portion of a financial managers time is utilized in the management of working capital. Current assets are a large portion of the total investment of a firm. In some of the industries, current assets account for a very large portion of the total investment of a firm. In some of the industrial current assets on an average represent over three-fifth of the total assets. In the case of trading concerns they account for about 80 percent.

CONCEPTS OF WORKING CAPITAL: There are two concepts regarding the meaning of Working Capital: Gross Working Capital Net Working Capital.

i. Gross Working Capital includes investment of a firm only in current assets. Current assets are those which can be converted into cash within an accounting year. They are cash, Sundry debtors, Inventories and Short term securities, etc.. Current assets are of circulating nature so it should be considered as working capital. There would be an automatic increase in the Working Capital with every increase in the funds of the company.

Gross Working Capital = Current Assets

57KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

GROSS WORKING CAPITALYEARS. (2005-2009) CURRENT ASSETS: INVENTORY: Raw Materials Work-InProgress As On 31-032010 60,93,96,591

OF

L&T, KANSBAHAL WORKS

FOR LAST FIVE

As On 31-032009 90,37,34,909

As On 31-032008 77,24,35,692

As On 31-032007 62,66,18,535

As On 31-032006 67,10,58,974

24,39,09,257

27,34,76,341

27,74,11,232

19,64,69,859

21,24,39,125

26,41,31,520

49,80,05,436

33,76,71,000

32,71,20,950

34,96,27,890

Components

5,71,13,408

9,98,69,097

10,97,03,495

5,01,78,739

8,12,46,579

Stores and Spares

3,51,89,225

2,15,96,355

1,24,03,765

79,30,291

85,08,020

Finished Goods SUNDRY DEBTORS CASH AND BANK BALANCE LOANS AND ADVANCES WIP SUSPENSE TOTAL CURRENT ASSETS

90,53,182

1,07,87,680

3,52,46,200

4,49,18,696

1,92,37,360

79,19,16,010

75,18,68,597

90,56,40,467

76,32,29,126

43,99,44,793

37,325

46,629

31,82,292

-10,89,505

-34,790

19,46,36,758

13,34,51,167

14,20,21,170

14,67,04,521

11,03,89,478

-

20,53,89,590

-

-

-

1,59,59,86,683 1,99,44,90,892 1,82,32,79,621 1,53,54,62,677

1,22,13,58,455

Source-Financial records, L&T, Kansbahal Works

58KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

From the above table it is clear that the Gross Working Capital is increasing in a very smooth way. It means the companys liquidity position is well. ii. Net Working Capital refers to the excess of current assets over current liabilities. Current liabilities are claims of outsiders expected to mature within an accounting year. It includes Bills payable, Sundry Creditors, Bank overdraft, Outstanding Expenses.etc. This concept of Working Capital enables the shareholders to judge the financial soundness of the concern and the extent of protection affordable to them. It is particularly because with an increase in short term-borrowings the, Working Capital does not increase. It is increase only by following the policy by ploughing back of profits or conversion of fixed assets into liquid assets or by procuring fresh capital from Shareholders.

Net Working Capital = Current Assets Current Liabilities.

NET WORKING CAPITAL OF L&T, KANSBAHAL WORKS FOR LAST FIVE YEARS (2005-2009)CURRENT ASSETS: INVENTORY: As On 3103-2010 60,93,96,591 As On 3103-2009 90,37,34,909 As On 31-032008 77,24,35,692 As On 3103-2007 62,66,18,535 As On 3103-2006 67,10,58,974

Raw Materials Work-InProgress Components Stores and Spares Finished Goods

24,39,09,257

27,34,76,341

27,74,11,232

19,64,69,859

21,24,39,125

26,41,31,520

49,80,05,436

33,76,71,000

32,71,20,950

34,96,27,890

5,71,13,408

9,98,69,097

10,97,03,495

5,01,78,739

8,12,46,579

3,51,89,225

2,15,96,355

1,24,03,765

79,30,291

85,08,020

90,53,182

1,07,87,680

3,52,46,200

4,49,18,696

1,92,37,360

59KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

SUNDRY DEBTORS CASH AND BANK BALANCE LOANS AND ADVANCES WIP SUSPENSE TOTAL CURRENT ASSETS CURRENT LIABILITIES: ACCEPTANCE SUNDRY CREDITORS ADVANCE FROM CUSTOMER PROVISIONS TOTAL CURRENT LIABILITIES NET WORKING CAPITAL

79,19,16,010

75,18,68,597

90,56,40,467

76,32,29,126

43,99,44,793

37,325

46,629

31,82,292

-10,89,505

-34,790

19,46,36,758 -

13,34,51,167 20,53,89,590

14,20,21,170 -

14,67,04,521 -

11,03,89,478 -

1,59,59,86,68 3

1,99,44,90,89 2

1,82,32,79,62 1

1,53,54,62,67 7

1,22,13,58,45 5

49,22,756 69,46,83,732 19,20,17,663 89,16,24,150

4,87,02,959 66,69,63,221 31,95,86,708 35,77,635 1,03,88,30,52 3

7,02,10,424 58,32,79,469 25,18,07,664 36,09,716 90,89,07,273

4,54,92,432 46,80,24,418 16,02,57,352 30,90,608 67,68,64,810

4,56,04,223 27,96,14,624 19,89,65,696 41,50,660 52,83,35,183

70,43,62,533

95,56,60,369

91,43,72,348

85,85,97,867

69,30,23,272

Source-Financial records, L&T, Kansbahal Works

From the above table it can be seen that the amount of net working capital for the company for the previous five years is fluctuating. The net working capital is high in the year 2008-09. The net working capital is always positive in nature i.e. current assets are always more than current liabilities. The greater the amount of net working capital, the greater the liquidity of the company.

60KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

MANAGING OF WORKING CAPITALWorking Capital Management is the process of planning and controlling the level of mix of current assets of the firm as well as financing these assets. Specifically, Working Capital management requires financial managers to decide what quantities of cash, other liquid assets, Accounts receivables & inventories; the firm will hold at any point of time. Management must always ensure the solvency and viability of the firm. Management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. Cash and liquidity management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management: Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and minimizes reordering costs and hence increases cash flow. Credit management: Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa). The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities. Working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient working capital61KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

management must be considered in relation to other aspects of the department's financial and non-financial performance.

Elements of Working Capital are:1. Cash 2. Marketable Investments 3. Receivables 4. Inventories 5. Creditors

Factors influencing the Working Capital requirement of L&T, Kansbahal Works:1. Scale of Operation. 2. Technology. 3. Volume of Order in hand 4. Market condition 5. Working Capital Cycle. 6. Credit policies.

IMPORTANCE OF GOOD WORKING CAPITAL MANAGEMENT :From a company's point of view, excess working capital means operating inefficiencies. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations. A large investment in current assets under certainty would mean a low rate of return on investment for the firm, as excess investment in current assets62KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

will not earn enough return. The two important aim of the working capital management are: Profitability and Solvency. Solvency refers to the firms continuous ability to meet maturing obligations. To ensure solvency, the firm should be very liquid, which means larger current assets holdings.

Interpreting the level of the Current Assets to Fixed Assets Ratio:The level of the Current Assets can be measured by relating Current Assets to Fixed Assets. Dividing Current Assets by Net Fixed Assets gives CA/FA ratio. Assuming a constant level of fixed assets, a higher CA/FA ratio indicates aconservative Current Assets policy and a lower CA/FA ratio means an aggressive Current Assets policy assuming other factor to be constant. A "conservative policy

implies greater liquidity and lower risk; while "an aggressive policy indicates higher risk and poor liquidity". Moderate current assets policy fall in the middle of conservative and aggressive policies. Current Assets to Fixed Assets of L&T, Kansbahal Works. Year 2009-10 2008-09 2007-08 2006-07 2005-06 Current Assets 1,595,986,683 1,994,490,892 1,823,279,621 1,535,462,677 1,221,358,455 Net Fixed Assets 1,725,796,584 655,784,255 439,803,577 310,744,935 294,351,357 Ratio 0.92 3.04 4.15 4.94 4.15

Source-Financial records, L&T, Kansbahal Works

As per the above data, it can be clearly seen that L&T, Kansbahal Works follows a Aggressive Current Assets policy in the financial year 2009-10 than in the other years. The management believes on the Liquidity and lower risk rather than Profitability with higher risk.

63KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

OPERATING CYCLE

64KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

OPERATING CYCLEThe Working Capital Cycle or Operating Cycle is the length of time between a company paying for materials entering into stock and receiving the inflow of cash from sales. Investment in working capital is influenced by 4 key events in the production and sales cycle of the firm: i) Purchase of raw materials ii) Payment for raw materials iii) Sale of finished goods iv) Collection of cash from sales

RMCP

WIPCP

RCP

FGCP

The firm begins with the purchase of raw materials which are paid for after a delay which represents the accounts payable period. The firm converts the raw materials into finished goods and then sells the same. The time lag between the purchase of raw materials and the sale of finished goods is the inventory period. Customers pay their bills sometime after the sales. The period that elapses between the date of sales and the date of collection of receivables is the accounts payable period (debt period).65KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Order placed

Stock arrives Inventory period Accounts payable period Firm receives Cash paid for invoice materials Operating cycle Cash cycle

Cash Received Accounts Receivable period

The time that elapses between the purchase of raw materials and the collection of cash for sales is referred to as the operating cycle, whereas the time length between the payment for raw material purchases and the collection of cash for sales is referred to as the cash cycle. The operating cycle is the sum of the inventory period and the accounts receivable period, whereas the cash cycle is equal to the operating cycle less the accounts payable period. Longer the working capital cycle period, larger the requirement of working capital. The determination of operating cycle is helpful for control purposes with a view to improve previous working capital ratios.

Determination of the length of Operating & Cash Cycle:The length of Operating cycle of a manufacturing firm is the sum of:

Operating Cycle = Inventory Conversion Period + Receivables conversion Period = RMCP + WIPCP + FGCP + RCP

66KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

I) Inventory Conversion Period: It is the total time needed for producing and selling the product. Typically, it includes: a) Raw material Conversion Period( RMCP ): It is the average time period taken to convert material into work in process. RMCP depends on: Raw material consumption per day and Raw material inventory.

Raw material consumption per day is given by the total raw material consumption divided by the number of days in a year ( 365 days). Hence, RMCP = Raw Material Conversion Period. = Average Stock of Raw Material Material Consumption Per day b) Work-in-Process Conversion Period( WIPCP ): It is the average time taken to complete the semi-finished or work in process. Hence, WIPCP = Work-In-Progress Conversion Period. = Average Stock of Work In - Progress Total Cost of Production per Day c) Finished goods Conversion Period (FGCP): It is the average time taken to sell the finished goods. Hence, FGCP = Finished Goods Conversion Period. = Average Stock of Finished Goods Total Cost of Goods Sold Per Day

67KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

II) Receivables or Debtors Conversion Period (RCP): It is the average time taken to convert debtors into cash. RCP represents the average collection period. It is the time required to collect the outstanding amount from the customers. Hence, RCP = Receivable Conversion Period. = Average Accounts Receivables Net Credit Sales Per day

CASH CYCLE:It is the difference between operating cycle and payables deferral period.

Cash Cycle = Operating Cycle PDP

Payables or Creditors Deferral Period (PDP): It is the average time taken by the firm in paying its suppliers or creditors. Hence, PDP = Payable Defferal Period = Average Accounts Payable Net Credit purchase Per Day

68KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Comparative Analysis of Operating & Cash Cycle from 2006-07 to 2009-10:

Year Raw material conversion period (days)

2006-07 2546 13589 / 365 = 68.39 3271 21009 / 365 = 56.83 449 19345 / 365 = 8.47

2007-08 3995 15428 / 365 = 94.53 3376 24141 / 365 = 51.04 352 21414 / 365 = 5.99 151.57 9056 28543 / 365 = 115.81

2008-09 3949 16641 / 365 = 86.62 4980 27872 / 365 = 65.22 108 24229 / 365 = 1.63 153.47 7518 31880 / 365 = 86.08

2009-10 3,191 14,739 / 365 = 79.02 2592 26887 / 365 = 35.19 91 27854 / 365 = 1.19 115.4 8089 34929 / 365 = 84.52

WIP conversion period (days)

FG conversion period (days) Inventory Period

133.69 (days) Debtors conversion period (days) 7632 25294 / 365 = 110.22

Operating Cycle(days)

243.913213 13115 / 365 = 89.42

267.383794 16878 / 365 = 82.05

239.554015 16597 / 365 = 88.30

199.923850 13981 / 365 = 100.52

Creditors conversion period (days)

Cash Cycle(days)

154.49

185.33

151.25

99.4

Source: PMS, L&T, KansbahalThe table shows that Operating & Cash Cycle for the year 2007-08 was maximum and hence forth it is decreasing which is good for the company. This indicates efficient utilization of working capital within the organization.

69KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

RATIO ANALYSIS

70KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

RATIO ANALYSISAccounting ratios is used to describe significant relationships which exist between figures shown on a balance sheet, in a profit & loss account, in a budgetary control system or in any other part of the accounting organisation. Ratios are simply a means of highlighting in arithmetical terms the relationship between figures drawn from financial statements. Ratio Analysis is the technique of analysis and interpretation of the financial statements. Ratio Analysis facilitates the presentation of information of financial statements in simplified and concise and summarized form. It is the process of establishing and interpreting various ratios for making certain decisions.

Nature of Ratio Analysis:Ratios, by themselves, are not an end but only one of the means of understanding the financial health of a business entity. Ratio analysis is not capable of providing precise answers to all the problems faced by any business unit. Ratio analysis is basically a technique of: (i) Establishing meaningful relationship between significant variables of financial statements; and (ii) Interpreting the relationship to form judgement regarding the financial affairs of the unit.

71KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

LIQUIDITY RATIOSLiquidity ratios measure the ability of the firm to meet its current obligations as they fall due. Liquidity is the case with which assets may be converted into cash without loss. The failure of a company to meets its obligation due to lack of sufficient liquidity, will result in a poor credit worthiness, loss of creditor's confidence. Liquidity ratios usually consist of Current ratio, Quick ratio, Cash ratio etc.

A) Current Ratio:This ratio expresses the relationship between current assets and current liabilities. This ratio is an indication of the companys ability to meet its short term liabilities. It is the ratio of current assets and current liabilities. The most ideal current ratio of a company is 2:1. This means every current liability should be covered by at least twice the amount of current assets. Here the current liabilities also consider the bank borrowings i.e., secured loans mentioned in the balance sheet. Current Ratio = Current Asset Current Liabilities Current Ratio Year 2009-10 2008-09 2007-08 2006-07 2005-06 Current Assets 1,595,986,683 1,994,490,892 1,823,279,621 1,535,462,677 1,221,358,455 Current Liabilities 860,675,005 1,022,286,575 863,491,435 681,312,393 539,325,732 Ratio 1.85 1.95 2.11 2.25 2.26

Source-Financial records, L&T, Kansbahal Works

L&T has a current ratio of 1.85:1 and 1.95:1 for the financial year 2009-10 and 2008-09 respectively. This is interpreted to be insufficiently liquid but the previous years have maintained high liquidity. The current ratio of L&T, Kansbahal reveals that the obligations of the company can be met on time.

72KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

B) Quick ratio or Acid-test ratio or Liquid ratio:This is the ratio of quick assets or liquid assets to current liabilities. Quick assets are defined as current assets excluding inventories. An asset is liquid if it can be converted into cash within a short period without loss of value. Inventory by nature cannot be converted into ready cash abruptly. The term liquid assets does not include inventory. Here the current liabilities also consider the bank

borrowings i.e., secured loans mentioned in the balance sheet. A ratio of 1:1 isconsidered as ideal.

Quick Ratio = Liquid Asset Current Liabilities Current Ratio Year 2009-10 2008-09 2007-08 2006-07 2005-06 Liquid Assets 986,590,092 1,090,755,983 1,050,843,929 908,844,142 550,299,481 Current Liabilities 860,675,005 1,022,286,575 863,491,435 681,312,393 539,325,732 Ratio 1.15 1.07 1.22 1.33 1.02

Source-Financial records, L&T, Kansbahal Works

The company has been maintaining a little more than necessary quick ratio of 1:1. Thus, if the L&Ts inventories do not sell and it has to pay all current liabilities it can easily meet its obligations because its quick assets are 1.15 times of current liabilities. High Quick ratio indicates the liquidity position of the firm. The quick ratio of the company reveals satisfactory liquidity position since it also has considerably fast moving debtors.

C) Activity / Efficiency / Turnover Ratios:"Activity" ratios are concerned with measuring the efficiency in assets management. "Efficiency" implies effective utilization of available resources. "Turnover" refers to the utilization of a resource or an asset in the process of73KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

business activity. The ratios of this kind, attempt to find out the efficient utilization of asset by relating the same to sales/cost of goods sold.

Inventory / Stock Turnover RatioInventory turnover ratio indicates the velocity with which stock of finished goods is sold i.e., replaced. Generally it is expressed as number of times the average stock has been turned over or rotated during the year. Inventory turnover ratio measures the velocity of conversion of stock into sales. It would indicate whether inventory has been efficiently used or not. Inventory turnover ratio indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. Inventory Turnover Ratio = Net Sales Inventory

Inventory Turnover Ratio Year 2009-10 2008-09 2007-08 2006-07 2005-06 Net Sales 3,38,49,58,254 2,97,83,53,765 2,58,72,04,708 2,31,50,28,433 1,70,92,98,528 Inventory 60,93,96,591 90,37,34,909 77,24,35,692 62,66,18,535 67,10,58,974 Ratio 5.55 3.30 3.35 3.69 2.55

Source-Financial records, L&T, Kansbahal Works

This shows that L&T is turning its inventory into sales 5.5 times in the year 2009-10 which is more as compared to the previous years which indicates there is an efficient management of Inventory. In 2005-06 the ratio is very low i.e. 2.55 times. It indicates there is an inefficient management of Inventory. A low

ratio implies over-investment in inventories, possibility of stock comprising ofobsolete items, slow moving products & poor selling policy; whereas a high ratio74KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

implies efficient inventory control, sound sales policies, trading in quality goods, better competitive capacity & less money required to finance the inventory. Days of Inventory Holdings (DIH):

Days of Inventory Holdings (DIH) = Days in a year Inventory turnover ratio Days of Inventory Holdings (DIH) Year 2009-10 2008-09 2007-08 2006-07 2005-06 Days in a year 365 365 365 365 365 Inventory Turnover Ratio 5.55 3.3 3.35 3.69 2.55 DIH ( in days ) 65.77 110.61 108.96 98.92 143.14

L&T holds average inventory of 66 days in the year 2009-10 which is the minimum than in comparison to the previous years which is good for the company.

Debtors / Receivables Turnover RatioDebtor is an important constituent of current assets. Perhaps no business can afford to make sales only thus extending credit to the customers is a necessary evil. But care must be taken to collect book debts quickly and within the period of credit allowed. Therefore the quality of debtors to a greater extent determines the companys liquidity and efficiency. This is one of the ratios used by financial analysis to judge the efficiency of the company. The debtor turnover ratio indicates the velocity of debt collection of firm. It indicates the number of times of the average that debtors turnover each year. Generally higher the value of debtor turnover, the more the efficiency is the credit management.

75KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

Debtors Turnover Ratio

=

Net Sales Debtors

Debtors Turnover Ratio Year 2009-10 2008-09 2007-08 2006-07 2005-06 Net Sales 3,38,49,58,254 2,97,83,53,765 2,58,72,04,708 2,31,50,28,433 1,70,92,98,528 Debtors 79,19,16,010 75,18,68,597 90,56,40,467 76,32,29,126 43,99,44,793 Ratio(times) 4.27 3.96 2.86 3.03 3.89

Source-Financial records, L&T, Kansbahal Works

Debtor turnover is high in the year 2009-10. i.e. 4.27 times in a year than in the other years which implies that Efficiency of management of debtors is good in the year than other. There is consistency maintained by L&T, Kansbahal and has an average of 3.60 times. The lowest ratio indicates the poor management of debtors. Average Collection Period: The ACP measures the quality of debtors since it indicates the speed of their collection. The shorter the ACP, the better the quality of debtors, since a short collection period implies the prompt payments by debtors. Average Collection Period (ACP) Year 2009-10 2008-09 2007-08 2006-07 2005-06 Days in a year 365 365 365 365 365 Debtors Turnover Ratio 4.27 3.96 2.86 3.03 3.89 ACP (in days) 85.48 92.17 127.62 120.46 93.83

76KIIT SCHOOL OF MANAGEMENT, BHUBANESWAR

L&T is able to turnover its debtors 4.27 times in a year. In other words, its debtor remains outstanding for 86 days. But in the previous years, its debtor remains outstanding for more number of days. This shows the efficient utilization of debtors.

Creditors / Payable Turnover RatioIt indicates the speed with which the payments are made to the trade creditors. It establishes relationship between net credit annual purchases and average accounts payables. Accounts payables include trade creditors. Creditors Turnover Ratio = Net Purchases Creditors

Creditors Turnover Ratio Year 2009-10 2008-09 2007-08 2006-07 2005-06 Purchases 1,66,05,50,137 1,78,99,98,563 1,70,28,31,690 1,32,97,00,660 94,70,09,225 Creditors 88,67,

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