Analysis of Financial Statements-11july10-Agrimba

8/3/2019 Analysis of Financial Statements-11july10-Agrimba

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Objectives ofObjectives of

Financial Statements (FSs)Financial Statements (FSs)

To provide information about the financial

position, performance and cash flows of an

enterprise

Useful to a wide range of users, in makingeconomic decisions and to ensure Statutory

compliances.

Effect of past events and transactionsAccounting policies and methods adopted by an

enterprise


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Scope ofScope of


TWO major issues for Analysts -

How is the liquidity of the enterprise measured ?

What financial and other criteria are to be used to

judge the safety of other loans ?


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Scope ofScope of


FS indicates 3 broad areas:

Checking the investment (or deployment) of funds

made by the enterprise.

Verifying the financing(funding) decision of the

enterprise.

Examining the operating efficiency


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Users ofUsers of


Investors

Employees

Customers and other trade creditors Govt the allied agencies and the public in general

Public

Lenders


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Building Blocks of Financial Statements (FSs)Building Blocks of Financial Statements (FSs)

Fundamental concepts

Local Accounting Standards

International Accounting Standards

US GAAP & IFRS


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COMPONENTS OF AUDITED FINANCIALS

Audited Financials comprise:

1. Directors Report

2. Auditors Report

3. Profit & Loss Account

4. Balance Sheet

5. Schedules

6. Notes to Accounts

7. Cash Flow Statement


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FORMATS OF BALANCE SHEET

2 types of formats:

Horizontal Format (No provision for schedules)

Vertical Format


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P&L A/CP&L A/C Income StatementIncome Statement

Insight into

Companys revenues and expenses.

Compare it with similar companies

Compare performance of a company with previousyears

A company makes continous profit, it is a stable

company.


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P&L ITEMSP&L ITEMS

Gross Sales

Net Sales

Cost of Production & Cost of Goods Sold Depreciation-Lease,Hire Purchase,

Partnership, Intangibles

Other income

Operating Income

Capitalisation


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What to LOOK FOR IN A FINANCIALWhat to LOOK FOR IN A FINANCIAL

STATEMENT(S)STATEMENT(S)

Income levels -Look for growth, rate of growth

Gross ProfitIs it growing at a faster/slowerrate than previous years?

Growth of net profit is higher than gross profit ? Selling, Mktg, General and Admn expenses

Growth, rate of growth and comparison withgrowth of income

EBDITA--? Compare with peers and rivals EPSGrowth and a comparison with peers.


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FACTS DISCLOSED BYBALANCE SHEETFACTS DISCLOSED BYBALANCE SHEET

Can the firm meet its financial obligations

How much money has already been invested in thiscompany

Is the company overly indebted What kind of assets has the company purchased with

its financing

Movement of stocks

The policy of credit to customers and the promptness

with which the creditors are being paid

ASSETS=LIABILITLIES + SHAREHOLDERS EQUITY


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BALANCE SHEET ITEMSBALANCE SHEET ITEMS

Capital Reserves or Surplus

Capital Reserve and Revenue reserve

Provision and Reserve Revaluation of Assets

Deferred Tax Liability

Investments

Assets TNW/Adj TNW

Dividend


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CHAPTER 2

RE-CLASSIFICATIONUNDER CMA FORMAT


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RE-CLASSIFICATION UNDER CMA

For our analysis, we re-classify underCMA format:

CURRENT LIABILITIES

TERM LIABILITIES

NET WORTH

CURRENT ASSETS

FIXED ASSETS

NON-CURRENT ASSETS

INTANGIBLE ASSETS

LIABILITIES ASSETS


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NET WORKING CAPITAL (NWC)

The excess of Long Term Sources over Long Term

Uses is known as Net Working Capital (NWC) or

Liquid Surplus.

NWC represents that portion of WC which has beenprovided from Long Term Sources.


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IMPORTANCE OF APPROPRIATE CLASSIFICATION

Appropriate treatment / classification of items in the

Borrowers Profit & Loss Account and Balance Sheet

in the CMA Data format:

Wrong classification will lead to wrong ratios.

Wrong ratios will lead to wrong financial decisions.

Wrong financial decisions will lead to loss to the

Bank, which should be prevented.

Therefore, there is no margin for errors in CMA

Data, the basic building block in Advances.


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CURRENT ASSETS (C/A)

Current Assets are those assets that in ordinary

course of business can be or will be converted into

cash, or sold or consumed or turned over without

undergoing diminution in value and without

disrupting the operations during the operating cycle

of the business usually not exceeding one year.


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CURRENT ASSETS (C/A)

Examples:

Cash & Bank balances

Investments

Receivables (Other than Deferred Receivables)

Raw Materials & Components used in the process of

manufacture

SIP (Stock-in-process)

Finished Goods

Advance for purchase of Raw Material, etc.

Others like advance payment of tax, etc.


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CURRENT LIABILITIES (C/L)

Current Liabilities are liabilities intendedto be paid within a year out ofC/A or out

of the income of the business.


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CURRENT LIABILITIES (C/L)

Examples:

Short term borrowings from banks & others

Unsecured Loans

Public Deposits maturing within 1 year

Sundry Creditors (Trade)

Interest accrued

Deposits from dealers

Instalments of TL, etc. (Due within 1 year)

Statutory Liabilities and otherCurrent Liabilities


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Shall we break for

Tea !!

Analysis of Financial Statements-11july10-Agrimba

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