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Financial Statements and

Cash Flow Analysis

Financial Statements
Financial statements provide information about the
financial activities and position of a firm.
Important financial statements are:
Balance sheet
Profit & Loss statement
Funds flow statement
Cash flow statement

Balance Sheet
Balance sheet indicates the financial condition of a
firm at a specific point of time. It contains information
about the firms: assets, liabilities and equity.
Assets are always equal to equity and liabilities:
Assets = Equity + Liabilities

Assets
Assets are economic resources or properties owned
by the firm.
There are two types of assets:
Fixed assets
Current assets

Current Assets
Current assets (liquid assets) are those which can
be converted into cash within a year in the normal
course of business. Current assets include:
Cash and bank balance
Accounts receivable (debtors)
Inventory (stocks)
Advances to suppliers
Prepaid expenses

Fixed Assets
Fixed assets are long-term assets.
Tangible fixed assets are physical assets like
plant.
Intangible fixed assets are the firms rights and
claims, such as patents, copyrights, goodwill etc.
Gross block represent all tangible assets at
acquisition costs.
Net block is gross block net of depreciation.

Liabilities
Liability is a firms obligation to pay cash or provide
goods or services in the future. Two types of liabilities
are:
Current liabilities
Long-term liabilities

Current Liabilities
Current liabilities are payable within a year in the
normal course of business. They include:
Accounts payable (creditors)
Outstanding expenses
Advances from customers
Provision for tax
Provision for dividend

Long-term Liabilities
Long-term liabilities are payable after a year. They
include:
Borrowings from financial institutions and banks
etc.
Debentures/bonds:
Non-convertible
Fully convertible
Partly convertible

Shareholders Funds or Equity


Share capital is owners contribution divided into
shares. A share is a certificate acknowledging the
amount of capital contributed by the shareholder.
Reserves and surplus or retained earnings are
undistributed profits.
Shareholders funds or equity is the sum of share
capital plus reserves & surplus. It is also called net
worth.

Balance Sheet Relationship


Total assets (TA) equal net fixed assets (NFA) plus
current assets (CA):
TA = NFA + CA
Net current assets (NCA) is the difference between
current assets (CA) and current liabilities (CL):
NCA = CA CL

Balance Sheet Relationship


Net assets (NA) equal net fixed assets (NFA) plus net
current assets (NCA):
NA = NFA + NCA
Capital employed (CE) is the sum of net worth or
equity (E) and borrowing/debt (D) and it is equivalent
of net assets:
CE = Net Worth + Borrowing = E + D
Capital Employed = Net Assets

Functions of Balance Sheet


Stewardship role
Measurement of liquidity
Measurement of solvency

Profit & Loss Statement


Profit & Loss statement provides information about a
firms:
revenues,
expenses, and
profit or loss.

Nature of Revenues
Revenue is the amount received or receivable within
the accounting period from the sale of the firms goods
or services.
Operating revenue is the one that arises from main
operations of the firm, and the revenue arising from
other activities is called non-operating revenue.

Nature of Expenses
Expense is the amount paid or payable within the
accounting period for generating revenue.
Examples: raw material consumed, salary and
wages, power and fuel, repairs and maintenance,
rent, selling and marketing expenses, administrative
expenses.
Expenses are expired costs and capital expenditures
represent un-expired costs and appear as assets in
balance sheet.

Depreciation
Depreciation is a charge for the use of fixed assets;
it is an expense. It is a non-cash expense since cash
was paid at the time fixed assets were acquired.
Expenditures incurred on acquiring assets are called
capital expenditures. Depreciation is allocation of
these expenditures over the life of assets that have
helped in generating revenue.

Methods of Depreciation
Depreciation may be provided on
straight line basis or
written down value basis (DWV). DWV basis is
allowed for taxation in India.

Concepts of Profit
Gross profit = sales cost of goods sold (CGS)
 CGS = raw material consumed + manufacturing
expenses of goods that have been sold
PBDIT = Profit before dep., interest and tax
= sales expenses, except dep., interest and tax
PBIT= Profit before interest and tax
= PBDIT DEP
PBT= Profit before tax = PBIT Interest
PAT = Profit after tax = PBT Tax

Functions of Income Statement


Summary of revenues and expenses
Measurement of profitability

Relationships: B/S and P&L A/C


Net profit = Equity (end) Equity (begin)
Equity (end) = Equity (begin) + Net profit + Equity
issued Dividend
Net profit = [Equity (end) Equity (begin)] [Equity
issued Dividend]
Change in equity = Equity (end) Equity (begin) = Net
profit + Equity issued Dividend

Economic Vs. Accounting Profit


Accounting profit is a result of the arbitrary allocation of
expenditures between expenses (revenue
expenditure) and assets (capital expenditure).
Economic profit is the net increase in the wealth of the
firm, and it is measured in cash flow.

Standards of Financial Reporting


Full disclosure
Materiality
Consistency
Conservatism
Fairness

Accounting Principles and Concepts


Business entity concept
Money measurement concept
Going concern concept
Cost concept
Duality concept
Accounting period concept
Matching concept

Balance Sheeet as at M arch 31


2006
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share capital
Reserves and surplus
Net Worth
BORROWINGS
Capital Employed
AP P LICATION OF FUNDS
FIXED ASSETS
Original cost
Less: Depreciation
Net book value
Add: Capital work-in-progress
INVESTM ENTS
DEFFERED TAX ASSET
CURRENT ASSETS, LOANS & ADVANCES
Sundry debtors
Cash and bank balances
Loans and advances
Less: Current liabilities
P rovisions
NET CURRENT ASSETS
Net Assets

2005

Rs. Crore
2004

33.09
2047.22
2080.31
0.00
2080.31

33.08
1,356.56
1389.6392
0.00
1389.64

33.08
800.23
833.30
0.00
833.30

960.6
393.03
567.57
150.67
718.24
44.44
24.22

631.14
244.13
387.01
170.65
557.66
34.12
0.00

284.03
133.65
150.38
56.96
207.34
13.83
0.00

336.73
772.22
643.87
1752.82
126.11
333.3
1293.41
2080.31

302.37
385.06
430.28
1,117.71
134.92
184.93
797.86
1,389.64

136.18
431.79
210.13
778.10
67.15
98.82
612.13
833.30

P rofit and Loss Account for the year ended M arch 31


2006
INCOM E
Software development services and products
Overseas
Domestic
EXP ENDITURE
Software development expenses
GROSS P ROFIT
Selling and M arketing Expenses
Administrative and other expenses
Operating profit (P BIDT)
Interest
Depreciation
OP ERATING P ROFIT AFTER INTEREST & DEP RECIAION
Other income
P rovision for investment
P ROFIT BEFORE TAX & EXTRA ORDINARY ITEM
P rovision for taxation
P ROFIT AFTER TAX BEFORE EXTRA ORDNARY ITEM
Extraordinary item -- transfer of intellectual property right (net of tax)
Net profit after tax and extraordinary item
AM OUNT AVAILABLE FOR AP P ROP RIATION
Dividend
Interim
Final (P roposed)
Dividend Tax
Amount transferred - general reserve

Rs crore
2005

2,552.47
51.12
2,603.59

1,874.03
26.54
1,900.57

1,224.82
1,378.77
129.79
211.35
341.14
1,037.63
0.00
160.65
876.98
66.41
0.00
943.39
135.43
807.96
0.00
807.96
807.96

870.83
1,029.74
92.07
172.82
264.89
764.85
0.00
112.89
651.96
59.37
15.29
696.04
72.71
623.33
5.49
628.82
628.82

132.36
49.63
82.73
5.06
670.54
807.96

66.16
16.54
49.62
8.70
553.96
628.82

Financial Ratios
2006

2005

Activity Ratios
Income/Assets
Income/Debtors

1.25
7.73

1.37
6.29

Current Ratios
CA/CL
CA/Assets
NCA/Assets

3.82
0.84
0.62

3.49
0.80
0.57

39.85%
33.68%
31.03%

40.24%
34.30%
32.80%

49.88%
42.16%
38.84%

55.04%
46.92%
44.86%

Profitability Ratios
Margin
PBDIT/Income
PBIT/Income
PAT/Income
Return on Investment
PBDIT/Assets
PBIT/Assets
PAT/NW

XYZ Company Ltd.


BALANCE SHEET
AS AT 31ST MARCH, 2006
SOURCES OF FUNDS
1. Shareholders' Funds
Share Capital
Advances against Share Capital
Reserves & Surplus
2. Loan Funds
Secured Loans
Unsecured Loans
TOTAL
APPLICATION OF FUNDS
1. Fixed Assets
Gross Block
Less: Depreciation
Net Block
Capital Work -in-Progress
Pre-operative exp. etc.
2. Investments
3. Current Assets, Loans & Advances
Inventories
Sundry Debtors
Cash & Bank Balances
Loans, Advances & Deposits
Less: Current Liabilities & Provisions
Liabilities
Provisions
Net Current Assets
4. Miscellaneous Expenditure
(To the extent not written off or adjusted)
5. Profit and Loss Account Debit balance
TOTAL

Rs crore
2006

2005

978.07
244.3
746.77
1969.14

901.55
96.46
874.08
1872.09

4989.26
630.09
5619.35
7588.49

3582.6
1088.29
4670.89
6542.98

3470.36
704.01
2766.35
2093.31
1715.74
6575.4
130.87

1640.28
498.14
1142.14
2740.66
2231.85
6114.65
135.79

257.37
389.69
53.9
1018.31
1719.27

259.48
250.4
77.7
907.61
1495.19

1150.7
18.86
1169.56
549.71
134.37

1185.39
18.61
1204
291.19
1.35

198.14
7588.49

_
6542.98

XYZ Company Ltd.


PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31ST MARCH
(Rs. crores)
2006
2005
INCOME
Sales & Job Work (Net)
Other Income
TOTAL (A)
EXPENDITURE
Decrease in stocks
Raw Materials Consumed
Purchases of Finished Goods
Payments to & Provisions for Employees
Excise Duty
Mfg., Dist., Sell. & Admin. Expenses
Interest & Finance Charges
Depreciation
Less: Transfer from Revaluation Reserve
TOTAL (B)
Profit/(Loss) before Taxation (A+B)
Less: Provision for Taxation
Add: Provision for Taxation written back
Profit/(Loss) after taxation
Less: Balance brought forward from Previous Year
Transfer from Debenture Redemption Reserve
Transfer from Taxation Reserve
Transfer from General Reserve
Profit/(Loss) available for appropriation
APPROPRIATIONS:
Transfer to Debenture Redemption Reserve
Balance carried to Balance Sheet
TOTAL

2238.89
25.18
2264.07
3.95
3.95
823.04
7.77
43.99
269.94
890.84
345.96
206.33
15.32
2576.5
312.43
0.03
312.46
100.52

1425.48
11.65
1437.13
33.7
33.7
778.15
9.32
21.79
118.83
306.72
100.13
79.89
15.32
1433.21
3.92
0.32
0.07
3.67
106.59
8.09

0.73
13.07
-198.14

_
118.35

_
-198.14
-198.14

17.83
100.52
118.35

Cash Flow
Liquidity refers to resources currently available with the
firm. It is reflected by the cash flows rather than the
stock of current assets and liabilities.
Cash flow is a change in the firms cash position. Cash
flows occur due to changes in items in the balance
sheet and profit & loss statement. Thus liquidity
analysis involves measurement of changes in assets,
liabilities and equity.

TABLE 1. ABC Co.: Balance Sheet Changes,


March 31, 2005-March 31, 2006

2005
ASSETS
Cash
Debtors
Stock (inventory)
Total current assets
Fixed assets (net)
Other assets
Total Assets
LIABILITIES & NET WORTH
Bank borrowing
Creditors
Provision for taxes
Accrued expenses
Total current liabilities
Long-term debt
Total liabilities
Paid-up share capital
Reserves and surplus
Total Liabilities

2006

(Rs 000)
Change

54
6,750
10,125
16,929
2,970
945
20,844

135
8,235
22,680
31,050
6,075
1,890
39,015

81
1,485
12,555
14,121
3,105
945
18,171

3,510
2,835
270
810
7,425
1,944
9,369
8.37
3,105
20,844

8,664
6,615
972
2,700
18.951
1,404
20,355
8,370
10,290
39,015

5,154
3,780
702
1,890
11,526
-540
10,986
7,185
18,171

Sources and Uses of Funds


and Cash Flows
Sources of funds or cash flows:
Cash from operations
sale of fixed assets
issue of share capital
Borrowings
Uses of funds are:
losses
purchase of fixed assets
repayment of borrowings
payment of dividends

Cash from Operations


Cash flow from operations
+ PAT ( loss)
+ Depreciation
+ Other non-cash expenses
Non-cash incomes
+ Loss from the sale of fixed assets
Gain from the sale of fixed assets
+ Increases in net working capital
Decreases in net working capital

Uses of Funds and Cash Flow


Statements
Liquidity position
Capital expenditures
Dividends paid
Retained earnings
External financing
Repayment of loans
Non-performing assets