Why Analysis? Why Analysis? To answer these questions To answer these questions related with-- related with-- The factors responsible for The factors responsible for the difference in the owner’s the difference in the owner’s equity, assets and liabilities equity, assets and liabilities of the firm at two consecutive of the firm at two consecutive balance sheet dates. balance sheet dates. The premier financing and The premier financing and investment activities of the investment activities of the firm during this period. firm during this period.
Transcript
Why Analysis?Why Analysis?To answer these questions related To answer these questions related with--with--The factors responsible for the The factors responsible for the difference in the owner’s equity, assets difference in the owner’s equity, assets and liabilities of the firm at two and liabilities of the firm at two consecutive balance sheet dates.consecutive balance sheet dates.The premier financing and The premier financing and investment activities of the firm during investment activities of the firm during this period.this period.
Are long term sources adequate to Are long term sources adequate to finance fixed assets purchases?finance fixed assets purchases?
Does the firm posses adequate WC?Does the firm posses adequate WC? Why did the firm not pay the dividend Why did the firm not pay the dividend
in spite of adequate profits?in spite of adequate profits? How much funds have been generated How much funds have been generated
from operations?from operations? Has the liquidity position improved?Has the liquidity position improved?
FUNDS FLOW STATEMENTFUNDS FLOW STATEMENT
What is FFS?What is FFS?
The funds flow statement or The funds flow statement or statement of changes in financial statement of changes in financial position is a statement of flows, position is a statement of flows, it measures the changes that it measures the changes that have taken place during two have taken place during two balance sheet datebalance sheet dates. s.
A summary of a firm’s changes in A summary of a firm’s changes in financial position from one period to financial position from one period to
another; it is also called a another; it is also called a sources and sources and uses of funds statement uses of funds statement or a or a statement statement
of changes in financial positionof changes in financial position..
What are “funds”?What are “funds”?
All of the firm’s All of the firm’s investments and claims investments and claims against those investments. against those investments.
Extends Extends beyond just beyond just transactions transactions involving involving cashcash..
Analyzing the Sources and Uses Analyzing the Sources and Uses StatementStatement
SourcesSourcesPrimarily through net profit from Primarily through net profit from operations and long-term debt increases.operations and long-term debt increases.
UsesUsesPrimarily through an increase in Primarily through an increase in inventories and expenditures on capital inventories and expenditures on capital assets.assets.
UsesUsesPrimarily through an increase in Primarily through an increase in inventories and expenditures on capital inventories and expenditures on capital assets.assets.
Sources and usesSources and uses SourceSource Funds from business Funds from business
operations.operations. Other incomesOther incomes Sale of non current Sale of non current
assets.assets. Long term borrowingsLong term borrowings Issue of additional Issue of additional
share capital.share capital. Decrease in WCDecrease in WC
UsesUses Loss from business Loss from business
operations.operations. Purchase pf non Purchase pf non
current assets.current assets. Redemption of Redemption of
debentures or pref. debentures or pref. shares.shares.
Payment of dividend Payment of dividend and tax.and tax.
Increase in WCIncrease in WC
Rule for sources and uses ofRule for sources and uses of funds funds
AA LL
SS -- ++
UU ++ --
Transactions not affecting WCTransactions not affecting WC A simultaneous increase in CA and A simultaneous increase in CA and
increase in CL does not affect WC.increase in CL does not affect WC. A simultaneous decrease in CL and A simultaneous decrease in CL and
decrease in CA does not affect WC.decrease in CA does not affect WC. A simultaneous increase/ decrease in A simultaneous increase/ decrease in
CA and CL does not affect WC.CA and CL does not affect WC. Eg. Payment of cr. (-cash and – Cr.) Eg. Payment of cr. (-cash and – Cr.)
General RulesGeneral Rules
Transactions affecting WC:Transactions affecting WC: An increase in CA –Increases WCAn increase in CA –Increases WC A decrease in CA- Decreases WCA decrease in CA- Decreases WC An increase in CL- Decreases WCAn increase in CL- Decreases WC A decrease in CL – Increases WC.A decrease in CL – Increases WC.
Step 1: Step 1: Schedule of changes in WCSchedule of changes in WC..ParticularsParticulars Amt. PYAmt. PY Amt. CYAmt. CY Inc.Inc.
RsRs
Dec.Dec.
Rs.Rs.
A.A. Current AssetsCurrent Assets
e.g. Cashe.g. Cash
InventoryInventory
10,00010,000
12,00012,000
12,00012,000
8,0008,000
2,0002,000
NilNil
NilNil
4,0004,000
Total current assetsTotal current assets
B. Current LiabilitiesB. Current Liabilities
CreditorsCreditors
Bills PayableBills Payable
22,00022,000
7,0007,000
5,0005,000
20,00020,000
5,0005,000
8,0008,000
2,0002,000
NilNil
NilNil
3,0003,000
Total current liabilitiesTotal current liabilities
Net WC(A-B)Net WC(A-B)
12,00012,000
10,00010,000
13,00013,000
7.0007.000
Net Increase/ Decrease in Net Increase/ Decrease in WC.WC. 10,00010,000
3,0003,000
10,00010,000
3,0003,000
7,0007,000 7,0007,000
Calculation of FFO/FLOCalculation of FFO/FLOA. Net income as per A. Net income as per
P&L a/c P&L a/c B. Add:B. Add: Dep. ExpensesDep. Expenses Amortization of Amortization of
Goodwill, Patents Goodwill, Patents and other and other intangibles.intangibles.
Discount on Discount on debenture or share.debenture or share.
Extraordinary Extraordinary losses.losses.
Loss on sale of non Loss on sale of non current assets. current assets.
C . Less:C . Less: Premium on Premium on
Debenture.Debenture. Revaluation of non Revaluation of non
CA.CA. Dividends and Dividends and
interest interest received.received.
D. Funds from /lost in D. Funds from /lost in Operations:Operations:(A+B-C)(A+B-C)
Alternative methodAlternative method A. Sales RevenueA. Sales Revenue B. Less:B. Less: ExpensesExpenses
Cost of RMCost of RMWages and SalaryWages and SalaryManu. ExpensesManu. ExpensesAdvt. Exp.Advt. Exp.Insurance exp.Insurance exp.Office exp.Office exp.other operating exp.other operating exp.interestinterestIncome TaxIncome Tax
C. Funds form Operations (A-B)C. Funds form Operations (A-B)
The cash flow statement The cash flow statement simultaneously provides an simultaneously provides an explanationexplanation of why a firm’s cash of why a firm’s cash position has changed between position has changed between successive balance sheet dates and successive balance sheet dates and explainsexplains changes that have taken place changes that have taken place in the firm’s noncash asset, liability, in the firm’s noncash asset, liability, and stockholders’ equity accounts over and stockholders’ equity accounts over the same time period.the same time period.
Revised cash flow AS-3Revised cash flow AS-3
Net Cash flow from operating activities.Net Cash flow from operating activities.
(Cash in flows – cash out flows)(Cash in flows – cash out flows) Net Cash flow from investing activities.Net Cash flow from investing activities.
(Cash in flows – cash out flows)(Cash in flows – cash out flows) Net Cash flow from financing activities.Net Cash flow from financing activities.
(Cash in flows – cash out flows)(Cash in flows – cash out flows)
Solution statement of changes in Solution statement of changes in working capitalworking capital
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