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Dy. Controller (Accounts & Costing) KPTCL, Bangalore.

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Financial Analysis
Accounting & Book-keeping

Investment Analysis
Capital Budgeting Techniques

Accounting Terminologies
Accounting Standards Accounting Concepts Accounting Conventions Financial Statements
Profit and Loss Account Balance Sheet Cash flow Statement

Pay Back Period


Net Present Value Internal Rate of Return

Cost Benefit Analysis

Other Topics
Budgetary Control

Cost Accounting
Auditing

Capex Funding vs IR; DSCR Annual Report

Parties interested in Accounting Information


Owners or Shareholders Government

Prospective Investors
Debenture Holders Financial Institutions Creditors Customers Management Employees

Employees
Consumers Stock Exchanges Investment Analysts Economists Researchers General Public

Basic Accounting Terms


Transactions

Debtor

Revenue

Entry

Event
Entity Equity Capital Assets

Debt
Creditor Solvent Goods Purchases Sales Inventory

Expenses
Loss Gain Profit Debit Credit Account

c/d
b/d c/f b/f CWIP Goodwill
Bottom Line

Liabilities
Net worth

Accounting and Book-keeping


Accounting is the language of business to communicate the business results to various groups of persons interested in the business.

Accounting may be defined as the identifying, measuring, recording and communicating of financial information.
Bierman and Derbin

According to J.R. Batliboi Book-keeping may be defined as the science as well as the art of

recording business transactions under appropriate


accounts."
The purpose of accountancy is to facilitate business and economic development

Basic Accounting Terms -1


Event : All happenings in an organisation can be termed as Events. All
events may not be transactions, whereas all transactions are events.

Transaction : Every financial change which occurs in the business is a


transaction. In other words, a transaction refers to any monetary or financial event or activity (i.e., an activity having value measurable in terms of money) which changes the financial position of the business.
All events may not be measurable in terms of money, but every transaction is measurable in terms of money. An event may or may not cause a change in the financial position of the business. On the other hand a transaction necessarily causes a change in the financial position of the business.

Entity : Means something or someone having a separate existence. In


business, a business enterprise having a separate entity or existence from that of owners of the enterprise.

Basic Accounting Terms - 2


Equity : Means the claims against the assets of an enterprise
or rights in the assets of an enterprise. Owners equity refers to owners capital and outsiders equity refer to liabilities of an enterprise.

Capital : The amount of money or moneys worth invested by


the proprietor into his business at the time of the commencement of business is called capital. Capital is also defined as owners equity i.e., owners claims against the assets of the business.

Assets : Means enough or sufficient economic resources


owned by a business concern for carrying on the business. According to Finney and Miller Assets are future economic benefits, the rights of which are owned or controlled by an Organisation or individuals.

Basic Accounting Terms - 3


Liabilities : Mean the claims of outsiders against the business
concern which bind the business concern to others. Examples are loans borrowed, bank overdraft, creditors, bills payable, etc.,.

Net worth : Means the excess of the total assets of a business


over its total liabilities at any particular point of time. called owners capital. It is the net value of assets that belongs to the owner. It is also

Debtor : A debtor is a person who owes money to the business.


He owes money to the business because he has received some benefit from the business. A debtor constitutes an asset for the business.

Basic Accounting Terms - 4


Debt : The amount of a business transaction due from a person
(i.e., debtor) to the business is called a debt.

Creditor : A creditor is a person to whom the business owes


money. The business owes money to him, because he has given some benefit to the business. A creditor constitutes a liability for the business.

Solvent : A businessman is said to be solvent when he is able


to pay his liabilities in full. In other words, a businessman is regarded as solvent when his assets exceed his liabilities.

Goods : Goods refers to merchandise, commodities, products,


articles, things in which a trader deals. In other words, they refer to commodities or things meant for resale.

Basic Accounting Terms - 5


Purchases : Goods purchased by a business are called
purchases. It may be cash or credit purchase.

Sales : Goods sold by a business are called sales. The sale of


goods may be cash sales or credit sales.

Inventory : Inventory or stock refers to be stock of finished


goods held for sale in the ordinary course of business, or the stock of raw materials and work-in-progress held for consumption in the production of finished goods for sale, or stock of consumable stores held for use in the factory.

Basic Accounting Terms - 6


Revenue : Revenue or income is the earning of a business
from the sale of goods or from the rendering of services to

customers during an accounting period.

Examples

are

Revenue from sale of goods, interest on investments, royalty received, discount received, etc.,

Expenses : Expenses are the costs incurred in connection


with the earnings of revenue. In other words expense is the cost of the things or services for the purpose of generating income. Examples are repair expenses, cost of goods

purchased, salary and wages, interest, etc.,

Basic Accounting Terms -7


Loss : Loss refers to money or moneys worth given up without getting
any benefit in return. Loss occurs accidentally or involuntarily. In the Income Statement, any Examples are loss of goods by fire, loss of machinery in accident, damages paid to others, etc.,. expenditure amount in excess of Income is also termed as LOSS.

Gain : Gain refers to revenue which is not generated through routine


regular business activities.
winnings in a court case, etc.,.

They are of irregular in nature.

Examples are profit on sale of fixed asset, refund of tax received,

Profit : Profit is the excess of revenues over the expenses of a given


period of time, usually a year. Profit results in increase in owners capital.

Basic Accounting Terms - 8


Debit : Means an entry on the debit side or left-hand side of an
account (when used as a noun). When it is used as an

adjective, it is termed as debit side i.e., left hand side of an


account. When it is used as a verb, it is termed as to debit which means to make an entry on the debit side of an account.

Credit : Means an entry on the credit side or right-hand side of


an account (when used as a noun). When it is used as an

adjective, it is termed as credit side i.e., right hand side of an


account. When it is used as a verb, it is termed as to credit which means to make an entry on the credit side of an account.

Basic Accounting Terms - 9


Account : An account (or its abbreviation a/c) means a
summarised record of all the transactions relating to a particular person, thing (i.e., asset) or a service (i.e., an expense or an income) which have taken place during a given period of time. It is a ledger record.

Entry : The record of a transaction in the books of accounts is


known as an entry.

CWIP : Refers to Capital Works In Progress.

It is an

intermediary account in which the expenditure on on-going works is initially booked and transferred to fixed asset account (called capitalisation) when the related asset is commissioned.

Basic Accounting Terms - 10


Goodwill : Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations,

good employee relations and any patents or proprietary


technology. Goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset such as buildings and equipment. . Bottom Line : The net profit ie., profit after tax (normally called

as PAT or Profit After Tax) is known as Bottom Line of a


Company because it is depicted as the last line in its Profit & Loss account.

Basic Accounting Terms - 11


Carried down or c/d : It is written in a ledger account, at the
time of balancing it, at the end of an accounting period, to indicate that the balance in that account has been carried down to the next period.

Brought Down or b/d : It is written in a ledger account, at


beginning of the next accounting period, to indicate that the opening balance in that account has been brought down from the previous period.

Carried Forward or c/f : It is written at the bottom of the


page of a journal or ledger, to indicate that the totals of that page have been carried forward to the next page.

Brought Forward or b/f : It is written at the top of the next


or subsequent page of a journal or ledger, to indicate that the totals shown on the top of that page have been brought forward from the previous page.

Some Accounting Terminologies


Net Worth : The net worth of an enterprise represents the excess of book value of all assets over the outside liabilities. It represents the interest of the shareholders in the enterprise. It is normally equivalent to the net equity i.e., Share capital plus Reserves plus Retained profits less Unabsorbed losses or Expenses. Earnings Per Share : The profit attributable to each share based on the consolidated profit of the period after tax. Contingent Liability : Liabilities which are dependent on a
Salary

condition which exists at the balance sheet date, where the


outcome will be confirmed only on the occurrence or nonoccurrence of one or more uncertain future events.

Some Accounting Terminologies


Generally Accepted Accounting Principles (GAAP) : Many countries have got their own GAPP. These are ground rules

covering financial accounting, prescribed by Financial


Accounting Standard Board, USA, that attempt to strike a balance between the criterion of relevance on one hand and the criteria of objectivity and feasibility on the other. Secured / Unsecured Loans : Liability secured on asset with lender having legal right to proceeds from sale of that asset on liquidation, up to the amount of the liability. Liability without any such security is Unsecured Loan.

Distinctions One should invariably know


Charged to Revenue :
All items which are taken as expenditure in P&L Account for comparing

with the Revenue and arriving at profit or loss are stated to have
been Charged to Revenue. These items have to be invariably considered for finalising the Accounts. Examples are Salaries,

interest, etc., which have to be absorbed by the Company invariably.

Appropriation of Profit :
Appropriation means distribution or taking out of profit earned. Examples are Transfer to Reserves, Payment of Dividend, etc.,. Appropriation of profit arises only when the Company has earned profit. Other-wise there is no scope for appropriation.

Distinctions One should invariably know


Capital Expenditure and Revenue Expenditure : Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment is capital expenditure. On the other hand, expenditure incurred for running and maintaining the assets or purchasing goods for resale is revenue expenditure. Capital Receipt and Revenue Receipt : Any receipt either in cash or kind meant for creation of asset is a Capital Receipt, whereas the receipt from trading or nontrading activities which towards acquisition or asset Liability secured on asset with lender having legal right to proceeds from sale of that asset on liquidation, up to the amount of the liability. Liability without any such security is Unsecured Loan.

Distinctions One should invariably know


Cash Expenditure and Non-cash Expenditure: Revenue Expenditure involving cash outgo is Cash Expenditure. Examples are Salary and wages, Repair expenses, interest, etc., . Revenue Expenditure charged to P&L A/c but not involving cash outgo is Non-cash expenditure. Examples are Deprecation and Return on Equity or Profit. Revenue Accrued and Actually Realised : Revenue accrued means revenue earned during a period. It includes both revenue accrued and received and also revenue accrued but not received during the period. On the other hand Revenue Actually Realised is the revenue actually realised in cash during the period. Revenue Demand in DCB Statement can be compared to Revenue Accrued and Collections can be compared to Revenue Actually Realised.

Double-Entry System of Accounting


Meaning : The system of making two or double entries of equal value in two different accounts in opposite sides in the books of each of the contracting parties is known as the double-entry system of accounting.

The double-entry system requires that the two


entries required for a transaction should be made in two different accounts for the same value (i.e., for the same amount) and simultaneously (i.e., at the same time).

Financial Statements
Trading (Manufacturing) Account
Profit and Loss Accounts

Balance Sheet
Cash Flow Statement
Accounting Standards

Accounting Concepts and Conventions

Accounting Standards
AS 1 Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 4 Contingencies and Events occurring after the Balance Sheet date AS 5 Net profit or loss for the period, prior period items and changes in Accounting policies. AS 6 Depreciation Accounting AS 7 Accounting for Construction contracts AS 8 Accounting for Research and Development AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 Accounting for the Effects of changes Foreign Exchange rates

Accounting Standards
AS 12 Accounting for Government Grants AS 13 Accounting for investments

AS 14 Accounting for Amalgamations


AS 15 Accounting for Retirement benefits in the Financial Statements of Employees AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosure AS 19 Leases AS 20 Earnings per Share AS 21 Consolidated Financial Statements AS 22 Accounting for taxes on income

Accounting Standards
AS 23 Accounting for Investments in Associates in Consolidated Financial Statements AS 24 Discontinuing Operations AS 25 Interim Financial Reporting AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 29 Provisions, Contingent Liabilities and Contingent Assets AS 30 Financial Instruments Recognition & Measurement AS 31 Financial Instruments Presentation

Accounting Concepts
Money measurement concept Separate entity concept

Going concern concept


Cost concept Dual aspect concept Accounting period concept Objective evidence concept

Realisation concept
Accrual concept Matching concept

Accounting Concepts
Money Measurement Concept : Means, in accounting, a
record is made only of those transactions or events which

can be measured and expressed in terms of money. Nonmonetary events are not recorded.

Separate Entity Concept : Means that, in accounting,


every business undertaking, whether it is a joint stock
company or a partnership firm or a sole trading concern, is regarded as a distinct unit or entity from the owners who

own it, and so, the business and the proprietors who own
the business are regarded as two separate entities capable of entering into transactions with each other.

Accounting Concepts
Going Concern Concept : Means that, in accounting, an
enterprise is regarded as a going-concern (i.e., concern

will continue to operate for an indefinitely long period of


time). There is neither the intention nor the necessity to wind up the concern in the foreseeable future. It is also called concept of continuity.

Cost Concept : The cost concept means that an asset


acquired by a concern is recorded in the books of accounts
at cost (i.e., at the price actually paid for acquiring the asset). The market price of the asset is ignored.

Accounting Concepts
Dual-Aspect Concept : Every business transaction always
results in receiving of some benefit of some value and giving of some other benefit or equal value. So, in accounting, a record is made of the dual or the two aspects of each transaction, and this is called dual-aspect concept.

Accounting Period Concept : Means that, for measuring


the financial results of a business periodically, the business or working life of an undertaking is split into convenient short periods or time called accounting period, and profit or loss and financial position of the business are ascertained at the end of the accounting period by preparing financial statements.

Accounting Concepts
Objective Evidence Concept : Means that all accounting
entries should be evidenced and supported by source

documents or business documents, such as invoices,


vouchers, etc.,.

Revenue Realisation Concept : Means that revenue is


earned from the sale of goods or from provision of services to customers, and revenue is to be recognised or

considered to be realised only when goods or services are


transferred to a customer and the customer becomes legally liable to pay to them.

Accounting Concepts
Accrual Concept : Under this concept, revenues accrue in that year in which they are earned, and not in the year in which they are actually received, and expenses accounted in the year in which they are incurred, and not in the year in which they are actually paid. This is the opposite of cash accounting, which recognizes transactions only when there is an exchange of cash. Matching Concept : Means that, measurement or determination of the profit or loss, the revenues and expenses are matched (i.e., compared) and resultant balance is taken as the net

profit or net loss. In other words, only expenses incurred


during a particular accounting period for earning the revenues of the related period should be considered for the computation or profit or loss for that period.

Accounting Conventions
Convention of Materiality
Convention of conservatism

Convention of consistency
Convention of full disclosure

Accounting Conventions
Convention of Materiality : Means that, in accounting, a
detailed record is made only of those business transactions which are material (i.e., significant) for the users of accounting information. No detailed record is made of transactions which are trivial. Example : Purchase and use of pencil in a office.

Convention of Conservatism : Means the convention of


caution, prudence or the policy of playing safe. In other words, it means, in the accounting records and the financial statements of a business, all the prospective losses, risks and uncertainties should be taken note of and provided for, but prospective profits should be ignored.

Accounting Conventions
Convention of Consistency : Means that, the accounting
practices and methods should remain consistent (i.e., unchanged) from one accounting period to another. It means, whatever accounting practice is followed by the business enterprise should be followed on a consistent basis from year to year.

Convention of Full Disclosure : Means that the material


facts must e disclosed in the financial statements with sufficient details. The idea behind this convention is that the financial statements are essentially meant for external users. Exclusion of material facts make the financial statements incomplete and unreliable.

Books of Accounts
Journal
The book of original entry under the conventional method of accounting is the journal. It means a day book or a daily record.

Account
Refers to a summarised record of all the transactions relating to a person, thing or a service which have taken place during a given period of time.

Ledger
Means a book where the various accounts are kept.

Trial Balance
It is a schedule or list of balances, both debit and credit, extracted from the accounts in the ledger and including cash and bank balances from the cash book.

Classification of Transactions
Transaction in a business enterprise is classified under any of the following group :
Asset Liability Income Expenditure

Trial Balance
It is a statement of ledger balances under various heads of account. All the Accounts can be classified under four heads viz., Assets, Liabilities, Income and

Expenditure.
All Assets and Expenditure heads of account show Debit balance. All Liabilities and Income heads of account show Credit balance.
Contd.,

Trial Balance An Example

Profit and Loss Account


Content : Income and Expenditure of a Company during a specified period.

What it Depicts? : Financial performance of the


Company during the said period.

Revenue : Includes Revenue from Transmission / Sale


of power, Non-Tariff Income and Subsidies if any. Expenditure : Includes Power Purchase Cost,

Employee Costs, R&M Expenses, A&G Expenses, Interest, Depreciation and Other Revenue Expenses.

Profit and Loss Account


Net Result : Difference between the Income and Expenditure may be either Profit or Loss. Bottom Line : Net Profit or Loss is also normally referred to as Bottom Line because it is the last line of the Statement / Account. Supporting Information : For each item of Income and Expenditure further break-up details are

disclosed in separate Schedules.

Accrual vs Cash Basis


Accrual Concept :
Revenues are accounted in that year in which they accrue and are earned and not in the year in which they are actually received. Expenses are accounted in the year in which they are incurred, and not in the year in which they are actually paid.

Cash basis :
Transactions are recognized and accounted only when there is an exchange of cash.

P / L A/c in Horizontal Form Format


Profit and Loss Account for the year ending 31st March, 20086

Particulars
REVENUE : Revenue from Sale of power to consumers Revenue from inter-state trading of power Wheeling Charges Open Access Charges Miscellaneous Income from consumers Non-Tariff Income Total Revenue

Amount

EXPENSES :
Purchase of Power Employee Costs Repairs and Maintenance Expenses Administration and General Expenses Interest and Finance Charges Depreciation Prior Period Expenses (or credits) Other Expenses Less : Expenses Capitalised Total Expenses Net Profit or Net Loss

Profit and Loss Account


An Example

Next Slide

Profit & Loss Account of a DISCOM A sample


Particulars
REVENUE :
Revenue from Sale of power to consumers Revenue Subsidy from the State Government Non-Tariff Income

Amount
940.91 828.25 7.46

Other Data
Energy Input :
6214 MUs Sales : 4505 MUs

Total Revenue
EXPENSES : Purchase of Power Employee Costs Repairs and Maintenance Expenses Administration and General Expenses`

1776.62
1421.51 150.65 28.21

Distribution Loss :
27.50 % Rs.3.65/unit

17.34 Average Cost :

Interest and Finance Charges


Depreciation Prior Period Expenses (or credits) Other Expenses Return on Equity

41.92 Average Realisation 82.20 :


-1.14 27.18 8.74

Rs.2.09/unit Cross Subsidy : Rs. 97 Crs. Capex : Rs.213 Crs.

Total Expenses

1776.62

Balance Sheet
Contents : Assets and Liabilities of a Company What it Depicts? : Financial position of the Company

as at the end of a period.


The figures shown in Balance Sheet are cumulative since the inception of the Company.

Assets : Broadly classified into Fixed Assets, Investments,


Current Assets and Deferred Revenue Expenditure. Liabilities : Classified as Equity Capital (Share Capital), Reserves and Surplus, Loans (Secured and Unsecured), Service Line and Security Deposits from Consumers and Current Liabilities. Contd.,

Balance Sheet
Current Assets : Inventories, Sundry Debtors (Receivables), Cash and Bank Balances, Loans and

Advances and Other Assets.


Current Liabilities : Power Purchase Liabilities, Security Deposit from Contractors/Suppliers, Bills payable and Provisions. Supporting Information : Schedules to the Balance

Sheet give detailed information for each item of Asset or


Liability.

BALANCE SHEET in Horizontal Form Format


Balance Sheet as at 31st March, 2008

Particulars
SOURCES OF FUNDS :

Amount

Share Capital Reserves and Surplus Secured Loans Unsecured Loans Deposits from Consumers
APPLICATOIN OF FUNDS :

TOTAL

Fixed Assets

Gross Block Less Accumulated Depreciation Net Block

Investments Capital Work in Progress Current Assets Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Other Assets Total Current Assts Less Current Liabilities & Prov. Net Current Assets Deferred Revenue Expenditure
TOTAL

Balance Sheet An Example

Cash Flow Statement


Why Required : To ascertain the movement of Cash and the Cash Surplus / Deficit available at the end of a given period. What it Depicts? : Cash Receipts and Cash Outflow whether capital or revenue in nature. P&L A/c vs CFS : In P&L A/c only Revenue Income and Expenditure items are taken whereas CFS captures all Cash Items. In P&L A/c even non-cash items of Revenue and Expenses are considered whereas in CFS such items are excluded. Non Cash Revenue Expenditure : Depreciation and Net profit (ROR/ROE) which remain with the Company.

Cash Flow Statement


Capital Receipts : Deposits from consumers, Augmentation charges, Capital grants received in cash, etc., are taken as Cash inflow items in CFS. Internal Resources : Sum of Depreciation, RoE and Capital Receipts (other than Borrowings). Debt Repayment : Principal repayment amount which is not

taken to P&L A/c, is a cash outgo item in CFS.


Internal Resources vs Debt Servicing : Cash surplus after Debt Repayment would be available for meeting Capital Expenditure. Shortfall to make debt repayment out of internal resources force the Company for resorting fresh borrowing for repayment of existing debt and capex funding (a debt trap position).

Cash Flow Statement An Example

Internal Resources vs Capex Funding


Power Purchase Cost Transmission Cost Employee Costs R & M Expenses A & G Expenses Depreciation Interest & Fin. Loan Principal Repayment (Existing Loans only)
If Balance is Negative

Internal Resources
Plus Deposits

Charges
Other Costs ROE Capex

External Borrowing
DSCR

Annual Report
An Annual Report is presentation of the Companys performance during a period to the Shareholders.

Contents :
Chairmans Statement Directors Report Financial Statements Comments of C&AG of India Auditors Certificate Observations of Statutory Auditor and Management Reply Disclosures Others
Corporate Governance, Directors responsibility statement, Disclosure under the Companies rules 1988 (i.e., Energy conservation, Technology absorption, Foreign Exchange earnings and outgo, etc.,), Statement pursuant to Sec.212 relating to Subsidiary, Managements discussion and analysis on industry and key issues, Committees of the Board, General Body meetings, etc.,

Metering - Importance
If you cant measure it,

you cant manage it


Unless metering is complete, whatever may be the level of accuracy in assessing the unmetered sales, the figures are susceptible for manipulation and lead to biased decisions. Tackling of distribution loss based on such un-authenticated figures may not yield

Provision Stores (Owner : Mr. X)

Purchase of Items Rs. 10000

In Cash (ie., paid in the same month) Rs.7000

By Credit (ie., to be paid next Month) Rs.3000

Sale of Items : Rs.12000

In Cash (ie., sold against Cash payments in the same month) Rs.8000

Credit Sales (i.e., sold lbut amount will be received Next month) Rs.4000

Finding Profit or Loss (in Rs.)


Particulars
Income

CASH Basis
8000

ACCRUAL Basis
12000

Costs

7000
1000

10000
2000

Transactions of First Month

Profit / Loss (-)

Provision Stores (Owner : Mr. X)

Purchase of Items Rs. 15000

In Cash (ie., paid in the same month) Rs.12000 + Rs.3000 relating to previous month
Sale of Items : Rs.18000

By Credit (ie., to be paid next Month) Rs.3000

In Cash (ie., sold against Cash payments in the same month) Rs.12000 + Rs.2000 relating to previous month

Credit Sales (i.e., sold lbut amount will be received Next month) Rs.6000

Finding Profit or Loss (in Rs.)


Particulars
Income

CASH Basis
14000

ACCRUAL Basis
18000

Costs

15000
-1000

15000
3000

Transactions of Second Month

Profit / Loss (-)

Transactions for TWO Months

Finding Profit or Loss (in Rs.)

Particulars Income Costs Profit / Loss (-)

CASH Basis 22000 22000 0

ACCRUAL Basis 30000 25000 5000

Capital Budgeting Techniques


Capital Budgeting is concerned with the
allocation of the firms scarce financial resources among the available opportunities comparing the future revenue streams with immediate or subsequent expenditure streams

CAPITAL BUDGETING
Importance :
Heavy Investments Permanent commitment for funds Long Term impact on profitability Complication of Investment decisions Paucity of Funds Debt Servicing depends on profit margin

Four Things

CAPITAL BUDGETING TECHNIQUES

Payback Period Discounted Cash flow Techniques

Net Present Value (NPV)


Internal Rate of Return (IRR)

Benefit-cost Ratio (BCR)

PAY BACK PERIOD


Meaning :
The number of years in which the total investment in a particular capital expenditure pays back itself.

How to Calculate :
If average Annual Cash inflows are equal then divide the Investment by Annual Cash Inflows to get Pay Back Period (PBP). If cash inflows are uneven, then cumulative cash inflows is compared with investment to see in which year both are equal. The period up to that point is PBP.

Merits :
Easy to understand Gives importance for speedy recovery of investment Good technique when income streams are regular and even.

Demerits :
Overplay importance on liquidity (overlooking the profitability) Ignores earnings beyond the pay back period. Ignores times value of money Overlooks the cost of capital.

PAY BACK PERIOD


PBP = Original Investments ________________

Annual Cash-inflows
Example : Original Investments Average Annual cash-inflow (savings after tax but before depreciation) 280000 ________ 80000 = 3.5 Years

Rs.2,80,000 Rs. 80,000

NET PRESENT VALUE


Concept of Present Value (PV) : If Re 1 is invested today, the return expected later on is > Re 1. Similarly, if an investment proposal earn Re.1 at the end of say 1 year, the present investment on that project should be < Re.1. Computation of Present Value (PV) : 1 _______ Present Value is calculated by formula (1+K)n where : Kis the rate of interest / discount factor in % n is the number of year after which money is received. Example : If the discount rate is 10%, then PV of Re 1 would be as follows PV of Re.1 to be received at the end of the one year is 0.909 ( ie., {1 /
(10/100)1}

PV of Re.1 to be received at the end of the two years is 0.826 ( ie., {1 /


(10/100)2}

PV of Re.1 to be received at the end of the one year is 0.751 ( ie., {1 / (10/100)3}. and so on. Net Present Value : NPV is the difference between present

value of benefits and present value of costs.

Evaluation of Financial Viability without NPV


Year Initial Investment
Cash-inflow 1st Year

Project A Rs.50000

Project B Rs.50000

Project A

Project B

Rs.15000
Rs.20000 Rs.25000 Rs.15000 Rs.10000 Rs.50000 Rs.50000 Rs.85000

Rs.5000
Rs.15000 Rs.20000 Rs.30000 Rs.20000 Rs.90000

2nd Year 3rd Year 4th Year 5th Year Total

Net Cash Inflow Project A : Rs.85000 - Rs.50000 = Rs.35000 Project A : Rs.90000 - Rs.50000 = Rs.40000 As there is positive Cash Inflows in both cases, both Projects are financially viable. However Project B is preferred than Project A as the Net cash inflow is more over five years period

Evaluation of Financial Viability using NPV Technique


Year Project A Project B Discount Factor at 10% Project A PV Project B PV

Initial Investment
Cash-inflow 1st Year

Rs.50000 Rs.15000 Rs.20000

Rs.50000 Rs.5000 Rs.15000 0.909 0.826 Rs.13635 Rs.16520 Rs. 4545 Rs.12390

2nd Year

3rd Year
4th Year 5th Year Total

Rs.25000
Rs.15000 Rs.10000 Rs.85000

Rs.20000
Rs.30000 Rs.20000 Rs.90000

0.751
0.683 0.620

Rs.18775
Rs.10245 Rs. 6210 Rs.65395

Rs.15020
Rs.20490 Rs.12420 Rs.64865

Net Present Value : Project A : Rs.65385 - Rs.50000 = Rs.15385 Project A : Rs.64865 - Rs.50000 = Rs.14865 Based on NPV, Project A is preferred than Project B as the NPV is more than that of Project B

Internal Rate of Return (IRR)


Meaning : The rate at which the Investment equates
the Present Value is the IRR of the project.

Procedure / Method of calculation :


First determine the NPV using some assumed Discount factor. By trial and error method change the rate and rework the NPV until the Original investment equate the Present Value.
The rate which the Investment equates the Present Value is the IRR of the project

The IRR is compared to the cost of capital and the project having higher difference is preferred to the other projects.

BENEFIT TO COST RATIO


Meanings : The Benefit to Cost Ratio (BCR) is an extension of NPV method wherein the present value of future cash

inflows is calculated and the resultant value is


compared with the investment to arrive at ratio of Benefit to Cost. Computation of Benefit to Cost Ratio (BCR) :
Present Value of Cash Inflows The formula for calculating BCR is ____________________ Profitability Index : Net Investment BCR is also called Profitability Index. It gives the rupee return for each rupee invested. If BCR > 1, project is acceptable, otherwise reject the project. In cases of more than one project, the project having higher BCR is preferred than the others for investment.

Benefit to Cost Ratio


(BCR or Profitability Index method)
BCR = NPV of future Cash inflows ___________________

Investments
Example : Original Investments Rs.5000 PV of future cash inflows Rs.5860 Rs.8,000 (assuming certain discount rate and number of years)

5860 ________ 5000

1.17

Higher the BCR, the more desirable is the investment.


Never Give Up

Budgetary Control

Budgetary Control
Types of Budget :
Incremental Budgeting Zero Based Budgeting (ZBB) Rolling Budget Flexible Budget Monthly, Quarterly, Yearly

Budgetary Control
Capital Budget and Revenue Budget
Revenue Budget Constituents Power Purchase Cost, Employee Costs, R&M Expenditure, A&G

Expenses, Interest and Other Expenses.


Importance of KERC Tariff Order KERC Order de facto Revenue Budget. Capital Budget or Project Monitoring process :

Necessity of taking up future projects Evaluation of proposed Capital Program Sourcing of proposed capital works Execution of Works Monitoring of Works Post Project Appraisal

Two Part Tariff


Meaning : Distinguishes the total costs as
Fixed and Variable Costs. Tariffs are determined taking Annual Fixed Cost into consideration and Variable Cost per Unit.

Basis

Marginal

Costing

Technique

principles.

Fixed Costs

Cost Total Fixed Cost

0 Level of Activity (Like Sales, Production, Generation)

Variable Costs
Total Variable Cost

Cost

0 Level of Activity (Like Sales, Production, Generation)

Break Even Point


Total Income Break Even Point Cost / Income
Even Fixed Cost not recovered

Profit Area

Total Costs
Loss Area

Fixed Costs 0 Level of Activity (Like Sales, Production, Generation)

Break Even Point Formula : {(FC) / (SP VC) }


Where FC : Total Fixed Cost, SP: Selling Price / unit and VC: Variable Cost unit)

Two Part Tariff


Components
Fixed Cost (FC) :

Amount (Rs. Crs.)

1. Interest on Loan Capital 2. Depreciation


3.Return on Equity 4. Operation and Maintenance Expenses 5. Interest on Working Capital Total Fixed Cost Fixed Cost per Unit (Total Fixed Cost / Net Energy sent out)

Variable Cost (VC) :


1. Cost of Primary Fuel (Fuel Cost / Unit) 2. Cost of Secondary Fuel (Fuel Cost / Unit) Variable Cost / Unit

Total Cost per Unit

ACPS, ARR and CoS


Average Cost of Power Supply (ACPS) : Total pooled
cost divided by Energy Sold gives the Average Cost of Power Supply.

Average Realisation Rate (ARR) : It is the average rate


at which the revenue is realised per unit. (Realisation on
accrual basis not on cash basis ie., Demand raised).

Cost to Serve (CoS) : It is the cost incurred to supply


power at specified voltage or to a specified class of consumers.

Types of Audit
1. Statutory Audit

2. C&AG Audit
3. Internal Audit

4. Cost Audit
5. Management Audit

6. Periodical Audit
7. Special Audit

Internal Audit in KPTCL / ESCOMs


Internal Audit in KPTCL and ESCOMs cover the following key areas : Revenue Audit Cash Audit Voucher Audit Audit of Turnkey Works Audit of Projects (ie., Capital Works)

Material Audit (Stores, etc.,)


Audit of Accounts (Trial Balance, M(F) Accounts,
etc.,)

Issues Normally Misunderstood


Capital or Revenue Expenditure make no difference Cash collection at Revenue Sub-divisions is our Income Profit shown in P&L Account is available in cash with the Company

Deposits collected from consumers is also our Revenue


Augmentation charges collected is also our Revenue Company can raise loan to whatever extent it desires Non-capitalisation of an asset has no financial impact As the Co.,.is making all payments in time, its financial health is good Payment of Suppliers and Contractors Bills can be met out of Revenue Collections. Sufficient cash is available at Corporate Office for transfer to Unit Offices for meeting expenditure within the budget allocation

Average Realisation Rate (ARR) means revenue realised ie., collected per unit of energy sold.

Issues Normally Misunderstood


Revenue Arrears written off would reduce the Companys burden Transmission Cost will be recovered in full irrespective of the quantum of energy handled/transmitted in the system ESCOMs will earn profit if the entire revenue demand is collected during a specified period (ignoring the cost & quantum energy purhcase & sales) Entire Depreciation is available as internal resources for taking up capital works Maintaining 100% collection efficiency i.r.o. revenue would solve all financial problems (ignoring the huge accumulated past arrears) Company is generating resources for meeting capital works program (either through support from Govt. or out of internal resources)

Thank You

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