7/27/2019 3124633 FMfinancial Statement Analysis
1/29
fsa
financial
statement
analysis
7/27/2019 3124633 FMfinancial Statement Analysis
2/29
fsa
Who are interested in FSA?
7/27/2019 3124633 FMfinancial Statement Analysis
3/29
fsa
Management
Shareholders
Creditors
Other
Groups
7/27/2019 3124633 FMfinancial Statement Analysis
4/29
fsa
What are their interests?
7/27/2019 3124633 FMfinancial Statement Analysis
5/29
fsaWhat are their interests?
1What is the financial position of the firm at a given point of time?
2 How the firm performed financially over a given period of time ?
3 What have been the sources/ uses of Cash over a given period
of time?
7/27/2019 3124633 FMfinancial Statement Analysis
6/29
fsa
What statements may match these Questions?
1 Balance Sheet
2 Profit & Loss Account
3 Statement of Cash Flows
7/27/2019 3124633 FMfinancial Statement Analysis
7/29
fsa
BALANCE SHEET
BS Shows the financial condition of a business
at a given point of time
Can be shown in Account or Report form
Companies Mostly use Report Form
7/27/2019 3124633 FMfinancial Statement Analysis
8/29
fsaStructure of Balance Sheet as Per the Companies Act
Account Form
Liabilities Assets
Share Capital
Reserves & Surplus
Secured LoansUnsecured LoansCurrent Liab. & Provisions
Current Liabilities
Provisions
Fixed Assets
Investments
Current Assets,Loans & Advances
Misc Exp & Losses
Current Assets
Loans & Advances
7/27/2019 3124633 FMfinancial Statement Analysis
9/29
fsaStructure of Balance Sheet as Per the Companies Act
Account Form
Liabilities 20x1 20x0 Assets 20x1 20x0
Share Capital 150 150
Equity 150
Pref -
Reserves & Surplus 112 106Secured Loans 143 131
Unsecured Loans 69 25
C Liabilities & Prov 105 81
579 493
Fixed Assets 330 322
Investments 15 15
CA,loans & Adv 234 156
Misc Exp - .
579 493
7/27/2019 3124633 FMfinancial Statement Analysis
10/29
fsaStructure of Balance Sheet as Per the Companies Act
Report Form
Current Liabilities
Provisions
Current Assets
Loans & Advances
I Sources of Funds1 Share Holders funds
a) Share Capital
b) Reserves & Surplus
2 Loan Funds
a) Secured Loansb) Unsecured Loans
II Application of Funds
1 Fixed Assets
2 Investments
3 Current Assets, Loans and Advances
Less CL and Provisions
Net Current Assets
4 Misc Expenditure and Losses
7/27/2019 3124633 FMfinancial Statement Analysis
11/29
fsaStructure of Balance Sheet as Per the Companies Act
Report Form 20x1 20x0
Current Liabilities
Provisions
Current Assets
Loans & Advances
I Sources of Funds1 Share Holders funds 262 256
a) Share Capital 150
b) Reserves & Surplus 112
2 Loan Funds 212 156
a) Secured Loans 143b) Unsecured Loans 69
Total 474 412
II Application of Funds1 Fixed Assets 330 322
2 Investments 15 153 CA, Loans and Advances 234 156
Less CL and Provisions 105 81
Net Current Assets 129 75
4 Misc Expenditure and Losses -- --
Total 474 412
7/27/2019 3124633 FMfinancial Statement Analysis
12/29
fsaBalance Sheet of Horizon Ltd as on March31,20x1
Liabilities 20x1 20x0 Assets 20x1 20x0
Share Capital 150 150Equity 150
Reserves & Surplus 112 106
Secured Loans 143 131
Term Loans 70 58
Cash Credit 73 73
Unsecured Loans 69 25
Bank Credit 25 25
Deposits 44 --
C Liabilities & Prov 105 81Trade Credit 75 60
Advances 20 13
Provisions 10 8
579 493
Fixed Assets 330 322Gross Block 500 462
Depreciation 170 140
Investments 15 15
CA,loans & Adv 234 156
Cash at Bank 10 6Debtors 114 68
Inventories 105 72
Advances 5 10
Misc Exp - .
579 493
7/27/2019 3124633 FMfinancial Statement Analysis
13/29
fsa Liabilities
Share CapitalReserves & Surplus
Secured Loans
Unsecured Loans
Current Liabilities & Provisions
7/27/2019 3124633 FMfinancial Statement Analysis
14/29
fsa Assets
Fixed Assets
Investments
CA, Loans and Advances
inventories Sundry Debtors
Cash and Bank Balances
Other Cash Assets Loans & Advances
Misc. Expenditure & Losses
7/27/2019 3124633 FMfinancial Statement Analysis
15/29
fsa Accounting Values & Economic Values
Use of Historical Cost Principle
Exclusion of Intangible Assets
Understatement or omission of certain Liabilities
7/27/2019 3124633 FMfinancial Statement Analysis
16/29
fsa Profit & Loss Account
Sales
Cost of Goods SoldGross Profit
Operating Expenses
Operating Profit
Non Operating Surplus/Deficit
Profit before interest and Tax
Interest
Profit before Tax
Tax
Profit after TaxPrior Period Adjustments
Amount Available for Appropriation
Appropriations
Balance Carried forward
P fit d L A t f H i Ltd
7/27/2019 3124633 FMfinancial Statement Analysis
17/29
fsaProfit and Loss Account of Horizon Ltd.
for the year ending on March 31,20x1
20x1 20x0
Rs in Million
Net Sales 701 623
Cost of Goods Sold 552 475
Stock 421
Wages and Salaries 68
Other Mfg Expenses 63
Gross Profit 149 148
Operating Expenses 60 49
Depreciation 30
G Administration 12
Selling 18
Operating Profit 89 99
Non Operating Surplus/Deficit -- 6
Profit before interest & Tax 89 105Interest 21 22
Profit Before Tax 68 83
Prov for Tax 34 41
Profit after Tax 34 42
7/27/2019 3124633 FMfinancial Statement Analysis
18/29
fsa NET CASHFLOW
Net Cash
Flow
Profit after
Tax
Non Cash Rev
+
Non Cash Exp=
_
Net Cash
Flow
Profit after
Tax
Depreciation
+
Amortization= +
OR
7/27/2019 3124633 FMfinancial Statement Analysis
19/29
fsa Accounting Income Versus Economic Value
Use of Accrued Principle
Omission of Changes in Value
DepreciationInflation
Creative AccountingTreatment of R&D &
Adv Expenditure
7/27/2019 3124633 FMfinancial Statement Analysis
20/29
fsa Balance Sheet Related Finance Topics
What should be the capital structure of the company?
What is the cost of capital of the firm?
What should be the WC Financing Policy of the Firm?
How should capital budgeting decisions be taken?
What is the rational approach to portfolio management?
How can cash management be made more effective?
What is a sensible framework forcredit Management?
How should the firm develop its inventory policy?
7/27/2019 3124633 FMfinancial Statement Analysis
21/29
fsa Balance Sheet Related Finance Topics
Share Capital
Equity
Preference
Reserves and Surplus
Secured Loans
Debentures
Loans and Advances
Unsecured Loans
Current liabilities and
Provisions
Trade Creditors
Provisions
Capital Structure &
Cost Of Capital
Working Capital
Financing Policy
7/27/2019 3124633 FMfinancial Statement Analysis
22/29
7/27/2019 3124633 FMfinancial Statement Analysis
23/29
fsa Profit & Loss Related Finance Topics
What is the Revenue Risk of the firm?
What is the gross profit margin of the firm?
Is the Depreciation policy of the firm reasonable?
How much is the business Risk of the firm?
What is the degree offinancial risk?
What is the scope ofTax planning?
What is the return on equity?
What should be the dividend policy of the firm
7/27/2019 3124633 FMfinancial Statement Analysis
24/29
fsaProfit & Loss Account & Finance Topics
Net Sales
COGSStock
Wages & Salaries
Other Mfg Exp
Gross Margin
Operating Expenses
Selling and Administration
Depreciation
Operating Profit
Non Operating surplus/deficit
Earnings Before income Tax
Interest
Revenue Risk
GP Risk
Depreciation policy
Business Risk
Financial Risk
7/27/2019 3124633 FMfinancial Statement Analysis
25/29
fsaProfit & Loss Account & Finance Topics
Profit Before Tax
Tax
Profit after Tax
Dividends
Retained Earnings
Tax Planning
Return on Equity
Dividend policy
Mgt. Of Retained Er
7/27/2019 3124633 FMfinancial Statement Analysis
26/29
fsa
How BOTTOM LINE can be manipulated ?
7/27/2019 3124633 FMfinancial Statement Analysis
27/29
fsa Manipulation of Bottom Line
Inflate Sales
Alter other income
Fiddle with depreciation
Valuation of Stock
Capitalize certain ExpensesDefer Discretionary Expenses
Treat certain Liabilities as Contingents
Extra Provisions in prosperous years
Revalue assets to create reservesLengthen Accounting Year
7/27/2019 3124633 FMfinancial Statement Analysis
28/29
fsa Why do companies Manipulate their F Statements?
Project as low Risk Company
To promote management Competence
To show growth
To enhance compensation
7/27/2019 3124633 FMfinancial Statement Analysis
29/29
fsa
What Can you do?
Acquire knowledge, how accountants prepare FS
Pursue notes to the statements
Auditors report
Analyzing Financial Performanceover a period of time