Financial analysis starts by identifying the statement, its period, the units and the question you want to answer. A balance-sheet amount, a period's operating result and a cash movement describe different things. Combining them without those distinctions can produce a correct-looking ratio and an unsupported conclusion.
This guide works through independently invented figures to show a balance-sheet check, liquidity ratios, an operating extract, a cash bridge and a sensitivity calculation. All amounts are ₹thousand. The worksheet is educational practice, not audited accounts, an investment recommendation or a statement of Indian reporting requirements.
Read the scope before reading the number
The SEC's introductory financial-statement guide distinguishes a balance-sheet snapshot from period income and cash-flow information. It explains that profit and cash differ. This is a dated educational source, not current Indian regulatory guidance. The figures and worksheet below are original and do not reproduce its examples.
The snapshot is labelled end of fictional Period P. The operating and cash extracts cover fictional Period P. Its calendar dates, duration and industry are not supplied. Do not annualise a result, calculate growth or compare the period with a previous year that does not exist in the fixture.
Amounts of 25 and 60 mean ₹25,000 and ₹60,000 respectively. Ratios divide compatible amounts and have no rupee unit. Keep the unit label visible instead of describing the resulting ratio as an investment return.
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The exercise stipulates these classifications. It does not establish how an accountant would classify a real organisation's assets or liabilities.
| End-of-period item | Amount in ₹thousand |
|---|---|
| Cash | 25 |
| Receivables | 40 |
| Inventory | 30 |
| Prepaid expenses | 10 |
| Equipment, net | 95 |
| Current liabilities | 60 |
| Long-term liabilities | 50 |
| Equity | 90 |
Current assets are 25 + 40 + 30 + 10 = 105. Adding net equipment gives total assets of 200. Total liabilities are 60 + 50 = 110. The identity checks: 200 = 110 + 90, or assets equal liabilities plus equity.
The equality verifies the arithmetic of these supplied amounts. It does not certify that a real account contains every item, that valuations are correct or that an organisation is solvent. No audit, transaction verification or accounting-policy assessment occurred.
“Net equipment” is already the stipulated carrying amount in this snapshot. Do not subtract the operating extract's depreciation again from that figure without an actual roll-forward specifying what needs adjustment.
Calculate working capital and the current ratio
Working capital in the exercise is current assets minus current liabilities: 105 − 60 = 45. That is an amount, ₹45,000, rather than a percentage.
The OpenStax liquidity-ratio section defines the current ratio using current assets and current liabilities. Applying the definition to the supplied classifications gives 105 ÷ 60 = 1.75.
The numerator includes inventory and prepayments. They are not the same as cash available today. The ratio alone does not establish when an actual bill is due or when each asset will become usable funds.
A bounded statement is: “Under the supplied classifications, the current ratio is 1.75.” Avoid replacing it with “the business can safely pay every debt.” The latter needs timing, restrictions, collectibility and other evidence absent here.
Calculate the quick ratio with its stated components
The same publisher section defines quick assets using cash, short-term investments and receivables, excluding inventory and prepayments. This fixture supplies no short-term investments. Its quick assets are therefore 25 + 0 + 40 = 65, giving 65 ÷ 60 = 13/12, approximately 1.0833.
Another route reaches the same numerator: 105 − 30 − 10 = 65. Subtracting only inventory would leave prepayments included and produce a different ratio than the stated definition.
| Measure | Supplied-data result |
|---|---|
| Current assets | 105 ₹thousand |
| Working capital | 45 ₹thousand |
| Current ratio | 1.75 |
| Quick assets | 65 ₹thousand |
| Quick ratio | Approximately 1.0833 |
Keep the calculation and its component definition together. A differently defined ratio should not silently receive the same label. Neither ratio provides a universal healthy threshold, a collection forecast or an investment decision.
Read the separate operating extract
The exercise supplies period revenue of 160, cost of sales of 90, other operating expenses of 35 excluding depreciation, and depreciation of five, all in ₹thousand.
Gross profit in this extract is 160 − 90 = 70. The operating result is 160 − 90 − 35 − 5 = 30. Using revenue as the denominator, the operating margin is 30 ÷ 160 = 18.75%.
Interest, tax and other gains or losses are not supplied. Consequently, do not call the operating result net income or claim that it explains the entire change in equity. There is no earlier equity balance or complete equity-movement statement in the fixture.
A margin says what fraction of the supplied revenue remains at this defined operating stage. It is not a return on a person's investment and does not establish how the organisation compares with its industry or prior periods.
Complete the stipulated cash bridge
The cash exercise supplies all its movements and classifications separately:
| Cash-bridge item | Amount in ₹thousand |
|---|---|
| Opening cash | 15 |
| Customer receipts | 135 |
| Supplier payments | 85 |
| Other operating payments | 30 |
| Equipment purchase | 10 |
| Financing cash movement | 0 |
Operating cash movement is 135 − 85 − 30 = 20. After the equipment purchase and zero financing movement, total cash movement is 20 − 10 + 0 = 10. Closing cash is 15 + 10 = 25, matching the end snapshot.
The bridge is complete only within this stipulated toy contract: no other cash movements are supplied. It is not a full statement certified for a real company, and its classifications are given rather than inferred from documents.
Customer receipts of 135 are not the same quantity as revenue of 160. Supplier payments of 85 are not the same as cost of sales of 90. The five-unit depreciation expense is not an additional cash payment to subtract from this supplied bridge.
Keep operating result and cash distinct
The operating result is 30, while operating cash movement is 20. Their difference does not mean the arithmetic is wrong. These extracts measure different things.
A detailed reconciliation would require the relevant noncash items and changes in operating balances. One end snapshot does not tell you all those changes. This guide deliberately leaves that reconciliation unresolved rather than inventing opening receivables, payable movements or collection events.
A useful request would ask for the complete applicable statement and notes for the same period, including the movements needed to reconcile the figures. Finding a formula is not a substitute for obtaining the missing inputs.
The distinction is also important in an interview or learning artifact. You can show the two calculations and explain their limits without claiming that you forecast cash, verified income or diagnosed a real organisation's financial health.
Run a labelled sensitivity check
For a separate analytical scenario, suppose ten of the forty receivables are excluded from usable quick assets. This is an invented sensitivity assumption. The reported books remain unchanged; no collection, impairment or write-off is established.
The scenario numerator becomes 25 + 30 = 55. Against the same 60 current liabilities, the scenario ratio is 55 ÷ 60 = 11/12, approximately 0.9167. The original reported-data calculation remains approximately 1.0833.
Present both labels rather than overwriting the original quick ratio. The scenario illustrates how an assumption changes a calculation. It does not show that the receivables are actually uncollectible or dictate an accounting adjustment.
A real conclusion would need evidence about receivable age, restrictions and timing, among other relevant facts. A ratio above or below one does not automatically answer every payment question.
Write a bounded analysis note
An original result can read:
The invented Period P snapshot balances at 200 assets, 110 liabilities and 90 equity, in ₹thousand. Supplied classifications produce working capital of 45, a current ratio of 1.75 and a quick ratio of approximately 1.0833. The separate operating extract gives an operating result of 30 and margin of 18.75%; net income is not supplied. The stipulated cash bridge produces operating cash movement of 20 and closing cash of 25. Period duration, industry context, collection timing and a complete operating-cash reconciliation remain unknown.
All numerical results above were independently checked using integer and exact fraction calculations. That execution verifies synthetic arithmetic, not accounting records or business outcomes.
Keep the input table, definitions, calculations, scenario labels and unresolved questions together. The practical skill is to produce an analysis that another person can inspect without mistaking a limited worksheet for an audit, a forecast or a recommendation.