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financial

statement
analysis

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Who are interested in FSA?

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Management

Shareholders

Other Groups

Creditors

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What are their interests?

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What are their interests?

1 What 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?

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What statements may match these Questions?

1 Balance Sheet 2 Profit & Loss Account 3 Statement of Cash Flows

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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

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Structure of Balance Sheet as Per the Companies Act

Account Form Liabilities Assets

Fixed Assets Share Capital Reserves & Surplus Investments Current Assets, Secured Loans Loans & Advances Unsecured Loans
Current Liab. & Provisions
Current Liabilities Provisions Current Assets Loans & Advances

Misc Exp & Losses

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Structure of Balance Sheet as Per the Companies Act

Liabilities
Share Capital Equity 150 Pref -

Account Form 20x1 20x0 Assets

150 150 Fixed Assets

20x1
330

20x0
322

Investments 106 131 25 81 493 CA,loans & Adv Misc Exp

15 234 -

15 156 .

Reserves & Surplus 112 Secured Loans 143 Unsecured Loans C Liabilities & Prov 69 105 579

579

493

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Structure of Balance Sheet as Per the Companies Act

Report Form
I Sources of Funds 1 Share Holders funds a) Share Capital b) Reserves & Surplus 2 Loan Funds a) Secured Loans b) Unsecured Loans

II Application of Funds

Current Assets Loans & Advances

Current Liabilities 1 Fixed Assets Provisions 2 Investments 3 Current Assets, Loans and Advances Less CL and Provisions Net Current Assets 4 Misc Expenditure and Losses

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Structure of Balance Sheet as Per the Companies Act

Report Form
I Sources of Funds 1 Share Holders funds a) Share Capital 150 b) Reserves & Surplus 112 2 Loan Funds a) Secured Loans 143 b) Unsecured Loans 69 Total

20x1
262

20x0
256

212

156

II Application of Funds

Current Liabilities 1 Fixed Assets Provisions 2 Investments 3 CA, Loans and Advances Less CL and Provisions Net Current Assets 4 Misc Expenditure and Losses

474 Current Assets 412 Loans & Advances 330 322 15 15 234 156 105 81 129 75 ---

Total

474

412

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Balance Sheet of Horizon Ltd as on March31,20x1

Liabilities
Share Capital Equity

20x1
150 150

20x0
150

Assets
Fixed Assets Gross Block Depreciation Investments CA,loans & Adv Cash at Bank Debtors Inventories Advances

20x1
330 500 170 15 234 10 114 105 5

20x0
322 462 140 15 156 6 68 72 10

Reserves & Surplus 112 Secured Loans 143 Term Loans 70 Cash Credit 73 Unsecured Loans Bank Credit Deposits C Liabilities & Prov Trade Credit Advances Provisions 69 25 44 105 75 20 10 579

106 131 58 73 25 25 -81 60 13 8 493

Misc Exp

579

493

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Liabilities

Share Capital Reserves & Surplus Secured Loans Unsecured Loans Current Liabilities & Provisions

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Assets
Fixed Assets Investments CA, Loans and Advances inventories Sundry Debtors Cash and Bank Balances Other Cash Assets Loans & Advances Misc. Expenditure & Losses

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Accounting Values & Economic Values

Use of Historical Cost Principle

Exclusion of Intangible Assets

Understatement or omission of certain Liabilities

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Profit & Loss Account

Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Non Operating Surplus/Deficit Profit before interest and Tax Interest Profit before Tax Tax Profit after Tax Prior Period Adjustments Amount Available for Appropriation Appropriations Balance Carried forward

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Profit and Loss Account of Horizon Ltd. for the year ending on March 31,20x1
20x1 Net Sales Cost of Goods Sold Stock Wages and Salaries Other Mfg Expenses Gross Profit Operating Expenses Depreciation G Administration Selling Operating Profit Non Operating Surplus/Deficit Profit before interest & Tax Interest Profit Before Tax Prov for Tax Profit after Tax 701 552 421 68 63 149 60 30 12 18 89 -89 21 68 34 34

Rs in Million 20x0 623 475

148 49

99 6 105 22 83 41 42

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NET CASH FLOW

Non Cash Rev + Non Cash Exp

Net Cash Profit after _ = Flow Tax

OR

Net Cash Profit after + = Flow Tax

Depreciation + Amortization

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Accounting Income Versus Economic Value

Use of Accrued Principle

Omission of Changes in Value

Depreciation
Inflation

Creative Accounting

Treatment of R&D & Adv Expenditure

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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 for credit Management?

How should the firm develop its inventory policy?

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Balance Sheet Related Finance Topics

Share Capital Equity Preference Reserves and Surplus Secured Loans Debentures Loans and Advances

Capital Structure & Cost Of Capital

Unsecured Loans Current liabilities and Provisions

Trade Creditors Provisions

Working Capital Financing Policy

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Balance Sheet Related Finance Topics

Fixed Assets (Net) Gross Block Less Depreciation

Capital Budgeting

Investments

Portfolio Management

Current Assets, Loans & Advance Cash and Bank

Cash Management Credit Management Inventory Management

Receivables

Inventories

Misc Expenditure and Losses

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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 of financial risk? What is the scope of Tax planning?

What is the return on equity?

What should be the dividend policy of the firm

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Profit & Loss Account & Finance Topics

Net Sales
COGS
Stock Wages & Salaries Other Mfg Exp Gross Margin

Revenue Risk

GP Risk

Operating Expenses Selling and Administration Depreciation Depreciation policy Operating Profit
Non Operating surplus/deficit Earnings Before income Tax
Business Risk Financial Risk

Interest

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Profit & Loss Account & Finance Topics

Profit Before Tax

Tax Planning

Tax

Profit after Tax

Return on Equity

Dividends

Dividend policy

Retained Earnings

Mgt. Of Retained Er

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How BOTTOM LINE can be manipulated ?

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Manipulation of Bottom Line

Inflate Sales Alter other income Fiddle with depreciation Valuation of Stock Capitalize certain Expenses Defer Discretionary Expenses Treat certain Liabilities as Contingents Extra Provisions in prosperous years Revalue assets to create reserves Lengthen Accounting Year

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Why do companies Manipulate their F Statements?

Project as low Risk Company To promote management Competence

To show growth
To enhance compensation

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What Can you do?

Acquire knowledge, how accountants prepare FS Pursue notes to the statements Auditors report Analyzing Financial Performance over a period of time