Professional Documents
Culture Documents
The Liabilities refer to the source of funds for acquiring the assets. Here too
there are sub classifications.
After you have familiarized with the various sub classifications of both assets and
liabilities, turn to the next page which is the Balance Sheet of Reliance Industries as
of 31st March 2011. We shall discuss this statement in the class.
Case: Please attempt at answers to the questions raised at the end of the case.
The Balance Sheet reflects the financial health of an Organization. IT reflects the
assets of the Organization which are used to run the Organization. In the first
session we have discussed and arrived at a consensus as to the purpose of a
commercial entity. The excess of the Income generated from the utilization of the
assets over the expenditure to earn that Income is the Profit. In the event of the
expenditure being more than the income generated, then there is a loss situation.
The statement that reflects the surplus generated or the loss incurred is called the
Profit & Loss Statement .As in the case of the balance Sheet, a P&L Statement has
certain standard components, details of which are highlighted in the text.
After
After you have familiarized with the various sub classifications of assets and
liabilities, turn to the next page which is the Profit & Loss Statement of Reliance
Industries for the year ending 31st March 2011. We shall discuss this statement in
the class.
reserves. This is on the principle that the Corporation is a separate entity from the
Owner.
The broad heads of account in the Liabilities Section are:
A Own Funds
Equity
Reserves
B. Loan Funds
Secured
Unsecured
C Current Liabilities and Provisions
Assets
The Assets Section lists the utilization of every rupee of the Liabilities. This Section
is also called Utilization of funds .
Since every rupee owed needs to be accounted with its utilization, the combined
statement is called a Balance Sheet. A balance Sheet balances the Sources of
funds with its Utilization.
Profit &Loss
A Profit and Loss Statement (often referred as the P&L Statement) on the other hand
, records the income generated from the operations of the Corporation during a
period ( typically a year) . At the end of the period the surplus generated accrues
to the Owners.
The broad heads of Account in a P&L Statement are :
A. Sales
B. Expenditure
Raw materials
Processing
Promotion
Administration
C EBIDTA
Interest
Depreciation
D PBT
E
Taxes
F PAT
G
Dividends
I Surplus
Ideally the surplus generated should be added to the cash side of the assets Section
. In reality not all the surplus is in the form of cash. For instance some of the Sales
made may not be paid for as yet . It is due as receivables and it is shown in that sub
section of the Balance Sheet. Likewise payments may not have been made for some
of the expenses shown in the P&L Statement, like raw materials or processing .
These payments yet to be made is reflected in the Balance Sheet as Current
Liabilities.
By this time we should appreciate why the reserves on the liabilities side does not
equal the cash and bank balance on the Assets side.
Q2
5
Q3
Where should it get reflected in the Balance Sheet ?
Q4
Has this amount been been reflected in the Balance Sheet , or a lesser amount ? If a
lesser amount why is this so?
Q5
The next step is to identify the movements in the balance Sheet of the operational
heads of account .The movement to be examined is from the earlier year closing
( 2005) to the current year (2006) closing. For instance the receivables as of
December 31st 2005 was $586,000. It is $673,000 as of end 2006.There has been an
increase of USD 87000.Does this mean, that there has been a inflow of cash from
receivables during the period, or has there been an outflow ?
Q6
Study each of the operating entries in balance sheet and fill up the following
table
USD000
No Entry
Outflow
Inflow
1
Receivables
2
Inventories
3
Payables
4
Taxes payable
5
Deferred Taxes
6
Depreciation
Total
Cash Flow from Financing Activities
We now turn our focus to Financing activities. For this, similar to the earlier exercise
with operational Heads of accounts in the Balance Sheet we study the financing
heads of accounts and categorise the movement during the year ( i.e closing
balance of 2006 Vs closing balance of 2005) as cash inflows or outflows.
No
1
Entry
Short term
debt
Outflow
USD000
Inflow
2
3
4
Long Term
debt
Equity
Dividend
Total
No
1
2
Entry
Equipment
Investment
Total
Outflow
USD000
Inflow
Finally sum up the three netcash flows from the three activities.
Cash Flows
$000
From Operations
From Financing Activities
From Investment Activities
__________________________________
Net increase/decrease
Opening Balance
Closing Balance
+++
Fairway Corporation1
Balanced Sheet as of December 31st 2005 and 2006
Unit 000$
No
A
A.1
A.2
Liabilities
200
2006
5
Owners Funds
Equity
183
227
Reserves
164
1780
0
Sub Total A.1
182
2007
3
Liabilities
A.4
A
Current
Liabilities
:Payables
500
835
140
150
Assets
Fixed Assets
Gross
44
Loan Funds
Long term
Debts
A.3
Diff
Acc Depr
Taxes
payables
Short Term
Borr.
Sub Total A.3
Deferred Taxes
388
10
2000
200
6
Diff
235
0
970
138
0
350
*
30
B.
1
Net FA
1000
1000
B.
2
Investment
450
400
-50
230
326
96
586
673
87
Receivables
Inventories
610
657
47
Sub Total CA
1426
165
6
230
34
36
56
0
380
335
Current
Assets
Cash
&Bank
332
Assets
2995
56
1
147
126
-21
488
524
36
65
70
B.
3
Total B 2876
Profit & Loss For the Year ended 31Dec 2006 (000$)
No
Sales
3190
Cost Of Sales
2290
1
Contribution
900
Expenses
Other
477
1
Extract from Accounting by Anthony Hawkins and Merchant 12th edition pages 314 and 316
: Tata Mc Graw Hill
2
3
Expenses
Depreciation
PBT
Income Taxes
PAT
120
303
103
200