Balance Sheet Pca

8/8/2019 Balance Sheet Pca

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10/13/2010 Presented by: CA Prakash Agarwal

CA. Prakash Agarwal

Chartered AccountantP A S & Company

132, State Bank Colony

G T Karnal Road, Delhi-110009

Ph: 27425157, 20458457

Mobile: 9810768165

Email: [email protected]

Examination of Books of Accounts


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Part-1

Examination of Accounts


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Section 44AA of Income Tax Act (1) Every person carrying on legal, medical,

engineering or architectural profession or the

profession of accountancy or technical

consultancy or interior decoration or any other

profession as is notified by the Board in the

Official Gazette shall keep and maintain such

books of account and other documents as mayenable the [Assessing] Officer to compute his

total income in accordance with the provisions

of this Act.


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Section 44AA of Income Tax Act (2) Every person carrying on business or

profession [not being a profession referred

to in sub-section (1)] shall, (i) if his income from business or

profession exceeds one lakh twenty

thousand rupees or his total sales, turnover

or gross receipts, as the case may be, in

business or profession exceed or exceeds

ten lakh rupees in any one of the three years

immediately preceding the previous year


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Every Person includes:

Individual

Partnership Firms

AOP

Companies

Trusts

Banks

Other entities


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Prescribed Books of Accounts : Rule 6F

Cash Book

Journal

Ledger

Carbon Copies of Bills

Original bills for payment exceeding 50/-

In case of Medical Profession:

A daily case register ( Form 3 C)

Inventory ( Opening & Closing)


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Income Tax Act does not prescribe:

Method of AccountingMercantile

Cash

System of Accounting

Single Entry

Double Entry

Memorandum

Package of AccountingManual

Computer

Year of Accounting-Now prescribed


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Packages

Tally Busy

Easy

Finacle (generally for banks)

SAP (generally for PSUs)

Oracle

Specific designed softwares


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Contents of Books of Accounts

Balance Sheet with schedules Profit & Loss Account

Notes on Accounts

Directors Report

Auditors Report

CARO

Specific Report like LFAR,

Sec 619


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Other Contents of Books of

Accounts

Cash Flow Statement

Segment Reporting Corporate Governance

Subsidiary Companies


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Who are Interested in Accounts?

Stake Holders

Share HoldersInvestors

Lenders

Bankers

Financial Institutions


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Stake Holders.

ManagementCreditors

DebtorsEmployees

Trade Unions


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Stake Holders.Government Agencies

Income TaxExcise

Sales Tax/ VAT

Customs

ROC

Others


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Others:

CompetitorsContractors

AnalysersStock Exchanges

Media/ Press


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Notes on Accounts:

Divided as follows:Accounting Policies

Accounting year

Basics of Accounts & DisclosuresCapacity & Production details

Quantitative informations

Key Managerial PersonnelList of Related Parties

Related Party Transactions

Schedule VI Disclosures


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Notes on Accounts: Cont.

Accounting Policies: Method of Accounts employed Method of Depreciation

Method of Inventory

Adoption of Accounting Standards

Accounting of fixed assets and revaluation Investment accounting

Policy relating to Employees retirement benefits

Deferred tax liability

Borrowing cost-interest

Capital works in progress

Contingent liabilities


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Quantitative Information:Raw Materials:

Opening

Purchases

Sale/ dispose off Consumption

Closing Stocks

Finished Goods

Opening Purchases

Production

Sale/dispose off

Closing Stocks


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Schedule VI Requirments:Capital ContractsContingent Liabilities

Auditors Remuneration

A Note on previous year figuresForeign Currency Transactions

Frauds detected, if any

Deferred Tax Liability

Dues to Small & Medium CompaniesA Note on Subsdiary Companies

Doubtful Debts


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Directors Report:

Section 217(1):The State of Companys affairsAmount proposed to transfer to any

reserves

Recommendation of DividendMaterial change and Commitments

Effects accruing after Balance Sheetdate

Conservation of Energy

Absorption of Technology

Foreign Exchange earning & Exp


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Directors Report:

Section 217(2): Directors Report should include the opinion

of the board that the affairs of the company

shall not harmful to the business of the:

Company

or of any of its subsidiaries.


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Directors Report:

Section 217(2A)(2B): Directors Report should include the Name

of Employees getting remuneration

exceeding Rs. 12 Lacs in a year

Detail of relative employees.


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Directors Report:

Section 217(3):

Directors Report should include the

comment upon:

every qualifications or adverse remarks given

by the auditors.


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Auditors Report:

Contains Opinion of Auditors:Whether all Informations areProvided

Proper Books of Accounts

maintainedBooks of Accounts are in

Agreement

Accounting Standards are followed

Disqualification of DirectorsQualifications in audit Report

Opinion on True & fair

CARO


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CARO 2003:

Contains Auditors comments on 21points: Some are-

Fixed assets, physical verification,discrepancies etc.

Inventory, physical verification,discrepancies etc.

Loans granted or accepted from relatedparties

Internal Control systemDetail of Contracts with related parties

Internal Audit

Cost Audit


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CARO 2003:

Cont..Status of payment of Statutory dues/

Dispute if any

Accumulated Losses

Default in payment to Banks/ FinInstitutes

Loans granted on pledge of securities

Guarantees given by the company

Term loan raised during the year

Funds used for the purpose it acquired

Any Public issue during year

Any Fraud detected/reported


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Balance Sheet Definition:

Balance Sheet is a financial statement

at a given point of time. It provides a

snapshot summary of what business

owns or is owed - assets - and what it

owes - liabilities - at a particular date

The balance sheet therefore shows

how business is being funded and how

these funds are used.


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BS Definition:.. Cont..

Balance Sheet is a summary of

balances to be carried forward to next

year

The balance sheet is statement of

affairs of an entity.


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BALANCE SHEET ANALYSIS Sources of Funds

1) Capital

2) Reserves & Surplus

3) Term Liabilities

4) Current Liabilities


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BALANCE SHEET ANALYSIS

Application of Funds

1) Fixed Assets

2) Intangible Assets 3) Non Current Assets

4) Current Assets


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Capital

1) Authorised Capital

2) Issued Capital

3) Subscribed Capital

4) Paid-up Capital


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Reserves 1) Subsidy Received From The Govt

2) Development Rebate reserve

3) Revaluation of fixed assets

4) Shares Premium Reserve

5) General Reserves

Surplus

The credit balance in profit and loss account


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Tangible Net Worth

This refers to the total funds arrived by paid-up

capital , Reserves and P&L Surplus LessIntangible Assets


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BALANCE SHEET ANALYSIS Term Liabilities

Redeemable preference shares Debentures

Public Deposits (Repayable after 12 months)

Term loans Secured Loans

Unsecured loans

Remark : The company can raise public deposits to

the extent of 25% of paid up capital plus free reserves

and 10% from share holders for the maturity period

ranging from 6 months to 3 yrs


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BALANCE SHEET ANALYSIS Current Liabilities

Working capital bank borrowings T. loans deferred credit inst falling due in 12 mths

public deposits maturing within 12 months

unsecured loans, unless the repayment is on deferredterms

sundry creditors

advances from dealers and customers

interest accrued but not paid

tax payable/ provisions

Dividend declared and payable


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Contingent Liabilities

Tax disputes

Legal litigations

Guarantees given by the company

Bills and cheques discounted with banks

Claims against the company not acknowledged


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BALANCE SHEET ANALYSIS Tangible Fixed Assets

Land & building

Plant & machinery

Vehicles

Furniture & fixtures Computers

Capital works in Progress

Depreciation Straight line method

Written down Value Method


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BALANCE SHEET ANALYSIS Intangible Fixed Assets

Goodwill

Patents

Rights Including Intellectual Property Rights

Copy RightsTrade Name/ Marks

Preliminary & Preoperative expenses

Depreciation No Depreciation is generally provided on such assets.

However amortization should be done over a period

of time.


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BALANCE SHEET ANALYSIS Investments

1) Shares And Securities

2) Associate Companies

3) Fixed deposits with banks/finance companies

4) Interest accrued on investments Remark : Investments are generally shown at cost

price. In notes on Account market price may be

given for proper reading


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Non Current Assets

Deferred receivables/Overdue receivables (like

disputed amounts and Over Due > 6 mths)

Non moving stocks/inventory/un usable spares

Investment/Lending to associate concern

Borrowing of the directors from the company

Telephone deposits/ ST deposits etc


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BALANCE SHEET ANALYSIS Current Assets

Raw materials, work-in-progress, finished goods,spares and consumables

Sundry debtors and receivables > 6 mths

Advances paid to suppliers of raw materials Cash and bank balances

Interest receivables

Other current assets such as Government securities,

Bank deposits ..etc


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Notes All expenses or provisions or advances or loans

etc which are accrued and payable within 12

months are current liabilities

When a company makes investments in

unconnected avenues such as shares, securities,

associate concerns are to be treated as non current

asset.

The slow moving and absolute inventory - NCA


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BALANCE SHEET ANALYSIS Notes

Balance Sheet It is a mixture of facts, opinions andconventions

While opinions are of the companys management,

the conventions are practiced by the financemanagers of the company.

Marginal changes in the classification of certain

items would lead to different results.


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Management competence

Investment decision

Resorting to window dressing

experience of the promoters

Board comprises of only family members

The key personnel of the company

The structure of the organisation

The authority and decision making are

decentralised


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The state of industrial relations

Financial systems and procedures

Management control

Planning, budgeting, forecasting

Capacity utilization

Status of the technology

Awareness of the market, competitions ..etc

for listed co: share prices, EPS, book value,

dividend record, public response ..etc


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Profit & Loss Account It is a summary of revenue earned and

expenses incurred which ultimately results inprofit or loss of to the company

No defined format in law

Operating revenue mean Sales revenue Non_operating revenue = Other income ( out of

sale of investments, interest, commission and

discount etc) Hence operating profit is a yard stick for

operating profit of the company

Operating profit = Sales Revenue- Operating Cost


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Profit & Loss Account Gross Sales

Gross sales includes excise duty to be charged tothe customer, central sales tax applicable, state

sales tax applicable, the discount to be allowed to

distributors/dealers/customers. The gross salesappear in the P&L account comprises of all the

above part from the basic unit price.

Net Sales

The sales figure excluding all the factors

explained above are the net sales.

Profit & Loss Acco nt


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Profit & Loss Account Cost of production This is the cost incurred right from the procurement

of raw material to the finished good. Cost of Raw Material

Direct Labour

Power

Maintenance of Machines

Depreciation

Transportation

Processing cost Consumables

Factory Overhead

Key mangers salary directly involved

P fit & L A t


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Profit & Loss Account

Administrative Expenses

All Office expenses

Administrative expenses

Salary

Electricity

Other

Bonus

P fit & L A t


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Selling Expenses

All expenses relates to sale

Commission

Advertisement

Gifts/ schemes

Traveling

Salary

Discount

Other

P fit & L A t


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Cost of goods sold

Cost of goods sold includes all manufacturing

expenses and the adjustments for opening and

closing stock

Cost of Goods sold = Opening stock + Purchases +Manufacturing expenses - Closing stock

Gross Profit is arrived deducting figure of cost of

goods sold from the sales figure i.e. Gross profit = Sales - Cost of goods sold.

P fit & L A t


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Profit & Loss Account Operating Profit

Operating Profit = Gross Profit all Expenses Profit Before Tax

PBT = Operating Profit+ Other Income other

expenses before direct taxes Net Profit

Net Profit = PBT direct taxes

P fit & L A t


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Profit & Loss Account Non Operating Income/Expenses

The income earned by the unit from other thanmanufacturing and selling operations is classified under

this head . i.e

a) Interest earned on fixed deposits

b) Dividends and profit earned by sale of assets

and share.

All those expenses which are not directly connected

with operations of the unit are classified under thishead. i.e

a) Preliminary expenses written off

b) Loss suffered due to sale of assets & share

Oth R t


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Other Reports: We are not discussing other Reports here:

Cash Flow Statement Segment reporting

Subsidiary Companies

Corporate Governance Particular Requirements like

LFAR for Banking

Sec 619 for Government

Electricity Companies Cooperative Societies

Sec 25 Companies

E i ti f A t


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Examination of Accounts:

Obtain Important Documents:

M&AA

Partnership Deed

MOU

JVA

Major Contract Agreements

Franchise Agreements

Survey/ Project Reports

Agreement with Bankers/lenders

E amination of Acco nts:


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Reconciliation & Confirmation from:

Bankers

Lenders

Debtors

Creditors

Advance Payments

Security Deposits

Others



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Physical Verification Reports:

Fixed Assets

Cash Balances

FDRsSecurities/ cheques

Inventories

Stores & Consumables

Scraps/absolute items

Business Promotion Items/ Gifts



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Details in readable formats, for:

All Expenses

All types of Income

Provisions

Accruals Addition / Deletion to fixed assets

Loans with Interest calculations

Investments with Dividend, Market Value, Position,

Status etc.

Debtors >Six months and Other Debtors

Doubtful debts



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Examine Other related Reports Internal Audit Report

Concurrent Audit Report

Stocks and Receivable Audit Report MIS/ Minutes

CMA Data sent to bankers

Standards of Production

Actual Production Data



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Examine Other related Returns:Sales Tax/ VAT Returns

Excise Returns

Customs Duty ReturnsService Tax Returns

TDS Returns


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Part-2

Analysis of Accounts

Analysis of Accounts:


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Analysis of Accounts:

Comparison

Ratio Analysis

Similar Companies Performance

Market Trend

Present Value of Company

Valuation of Properties/ Investments

Future of Product

Contingent Liabilities Pending Court Cases/ Disputes

Directors Attitude

Ratios Analysis:


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Ratios Analysis: Liquidity Ratios:

Current RatioQuick/ Acid test Ratio

Defensive intervals

Solvency Ratios:Gearing Ratio

Efficiency Ratios:

Debtors TurnoverCreditors Turnover

Stock Turnover

Ratios Analysis cont :


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Ratios Analysiscont: Profitability Ratios:

G P RatioN P Ratio

Return on Investment Ratio

Expenses Ratios:

Administrative Exp Ratio

Interest Ratio

Selling Exp Ratio

Investors Ratios:

Earning Per Share

Dividend per Share

Price Earning Ratio


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Current Ratio:

Current Assets

Current Liabilities

This assesses whether you have sufficient assetsto cover your liabilities

< 1 mean poor cash flow

= 1 Mean moderate liquidity

> 1 or < 2 Good liquidity

> 2 surplus/ idle fund

A id T t R ti


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Acid Test Ratio:

Current Assets (excluding stock) divided byCurrent Liabilities.

< 1 mean poor cash flow= 1 Mean high liquidity and indication of solid

financial position

> 1 surplus/ idle fund

D f i I t l R ti


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Defensive Interval Ratio::

liquid assets divided by daily operatingexpenses.

This measures how long your business could

survive without cash coming in. Ideal should be between 30 and 75 days

G i ( L ) R ti


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Gearing ( Leverage) Ratio:

Long term loans ( Secured + unsecured)divided by Capital+ reserves + Long term

loans ( Secured + unsecured)

1 mean poor position. Lenders may refuse togive further loans.

Effi i R ti


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Efficiency Ratios:

Debtors' Ratio - average of sales divided by theaverage debtors. This shows how long it takes tocollect payments. A low ratio may mean paymentterms need tightening up.

Creditors' turnover - average Purchases divided bythe average amount of creditors. This shows how longyour business takes to pay suppliers. Suppliers maywithdraw credit if you regularly pay late.

Stock turnover - average cost of sales divided by theaverage value of stock. This ratio indicates how longyou hold stock before selling. A lower stock turnovermay mean lower profits.

G P fit R ti


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Gross Profit Ratio:

Divide Gross Profit by

Total Sale/Turnover

(Gross Profit is sale- cost of sale) Higher the ration better is

profitability/demand.

Compare it with preceding year.

N t P fit R ti


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Net Profit Ratio:

Divide Net Profit by

Total Sale/Turnover %

(Net Profit is Gross Profit - allexpenses)

Higher the ration better is

profitability/demand.

Compare it with preceding year.

R t I t t R ti


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Return on Investment Ratio:

Divide net profit before tax by

Total Capital Employed %

(Capital= Shares +Reserves)Higher the ration better is financial

position.

If less than Bank Interest Rate, implies

poor performance.

E penses Ratios:


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Expenses Ratios:

Administration Cost Ratio Divide Total Administrative cost by

Turnover/ Sales %

Interest Cost Ratio Divide Interest on borrowing by

Turnover/ Sales %

Selling expenses Ratio

Divide Selling Expenses by

Turnover/ Sales %

Investors Ratios:


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Investors Ratios:

Earning per Share (EPS) Divide Surplus Profit by

Total Nos. of Issued Equity Shares

Dividend per Share: (DPS)

Divide Dividend paid by

Total Nos. of Issued Equity Shares

Price earning Ratio: (PE) Divide Current market price of Share by

Earning Per Share (EPS)

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