Corporate Financial Reporting

Week 1 Session One

Manju JaiswallIIM Calcutta

Contact - manju@iimcal.ac.inOffice C block 305 Ext 297

Week 1 Learning Goals

• Understand the Users & Principle Uses of Accounting (Chapter 1)

• Understand qualitative characteristics of Accounting Information (Reading handout 1)

• Understand Accounting Cycle & Process (Chapter 1)

• Understand GAAP – Principles & Concepts (Chapter 1,3)– Separate Entity, Going Concern, Money Measurement, Accounting Period,

Materiality, Realisation, Matching, Conservatism, Historical Cost, Fair Value

– Cash & Accrual Accounting

– Assets, Liabilities, Equity, Income, Expenses, Dividend, Retained Earnings.

• Apply Accounting Equation: (Chapter 1)– to understand the impact of selected transactions on Income, Expenses,

Assets, Liabilities and Shareholder’s Net worth.

1–2

Why CFR?

• Hertz Penalized for Accounting Mishap, Stock Down 9.1%.

• “The last Bastion falls”- Macquarie Equities Research downgrades HDFC for using aggressing accounting practices inflating earnings and ROE – shares were down by 1.6%.

• “ A House of cards” - Veritas Investment Research describes Reliance Communications.- plagued by high debt & “whimsical” accounting practices – shares down to 52 week low.

• Espirito Santo Downgrades Biocon, questions its “objectionable” Accounting Practices.

1–3

Powergrid Corporation (PGCIL)

• A capex of about Rs 17,814 crore was incurred with Rs 14,100 crore of assets being commissioned in FY 2013.

• Assets are getting commissioned at a faster pace, thus improving the overall Return on Equity (ROE) for the company.

• Net sales were up by 20% to Rs 10,035.33 crore and PAT rose 21% to Rs 3254.95 crore in FY 2013. We expect PGCIL to register sales of Rs 12283.24 crore and net profit of Rs 3934.16 crore in FY 2013.

• EPS works out to Rs 8.50. The share price trades at Rs 112, which discounts the projected FY2013 EPS by 13.1 times.

1–4

Infosys

• Consolidated revenue increased 8% to Rs 8099 crore. OPM was up 200 basis points (bps) to 31.1% due to 257 bps decrease in cost of sales to 58.6% of sales in the September 2011 quarter over the June 2011 quarter.

• The resultant OP grew 16% to Rs 2516 crore. Other income (OI), however, fell 13% to Rs 387 crore due to forex loss of Rs 33 crore as against gain of Rs 45 crore, which saw the PBDT jump 11% to Rs 2903 crore.

• Depreciation charges went up 5% to Rs 235 crore and tax rate inched up 46 bps to 28.56%. Thereby, net profit grew 11% to Rs 1906 crore.

1–5

1–6

Oil India Ltd.Financial Performance in Rs croresYear End 13-Mar 12-Mar 11-Mar 10-Mar 9-MarEquity 601.14 240.45 240.45 240.45 214Networth 19,211.48 17,721.34 15,601.87 13,765.68 9,332.47Capital Employed 20,717.42 18,143.98 16,953.76 13,803.18 9,388.92Gross Block 4,043.65 3,534.03 3,320.24 3,211.05 2,972.04Sales 9,947.57 9,863.23 11,613.68 9,470.54 7,256.28Other Income 1,508.75 1,416.67 873.89 954.18 957.29PBIDT 6,123.46 5,996.47 5,146.00 4,119.01 3,563.75PBDT 6,120.86 5,987.10 5,132.87 4,115.36 3,555.01PBIT 5,285.83 5,111.23 4,326.33 3,898.70 3,395.67PBT 5,283.23 5,101.86 4,313.20 3,895.05 3,386.93RPAT 3,589.34 3,446.92 2,887.73 2,610.52 2,161.68APAT 3,589.34 3,446.92 2,887.73 2,610.35 2,161.62CP 4,426.97 4,332.16 3,707.40 2,830.83 2,329.76Rev. Earnings in FE 1.63 1.64 1.56 1.87 0.06Rev. Expenses in FE 273.45 214.11 262.02 389.38 272.86Book Value (Rs) 319.58 737.01 648.86 572.5 436.1EPS (Rs.) 54.79 135.65 113.94 102.85 95.83Dividend (%) 300 475 375 340 305Payout (%) 54.76 35.02 32.91 33.06 31.83

1–7

NTPC Ltd. Financial Performance in Rs croes

Year End 13-Mar 12-Mar 11-Mar 10-Mar 9-MarEquity 8,245.46 8,245.46 8,245.46 8,245.46 8,245.50Networth 80,387.51 73,291.17 67,892.25 62,437.42 57,370.10Capital Employed 142,483.55 127,332.93 114,546.89 101,906.33 91,937.90Gross Block 103,245.70 81,828.26 72,755.15 66,850.07 62,353.00Sales 66,200.24 62,480.88 55,340.66 46,623.58 42,196.80Other Income 4,860.73 2,961.58 2,400.96 2,991.29 3,339.10PBDT 19,975.39 15,117.86 14,535.29 13,535.52 11,724.00PBIT 18,511.64 14,040.75 13,477.17 12,694.39 11,355.70PBT 16,578.63 12,326.16 12,049.60 10,885.46 9,359.50Book Value (Rs) 97.49 88.89 82.34 75.72 69.58EPS (Rs.) 14.36 10.55 10.42 9.95 9.34Dividend (%) 57.5 40 38 38 36Payout (%) 40.05 37.93 36.48 38.21 38.55Debt-Equity 0.71 0.66 0.62 0.6 0.56Current Ratio 1.65 1.95 2.4 2.41 2.32Invtry Turnover 17.06 17.02 15.73 13.94 14.07Debtors Turnover 11.82 17.19 13.69 9.11 12.85Interest Cover 9.58 8.19 9.44 7.02 5.69ROCE (%) 13.72 11.61 12.45 13.1 13.22RONW (%) 16.42 13.07 13.97 14.57 14.91

Rs crores VodafoneIdea Cellular MTNL

Equity 404.09 2635.36 630

Net worth 9248.31 3542.27 11921.36

Capital employed 12262.06 10057.02 11921.36

Sales 2733.66 6719.99 4722.52

Fixed Assets 1577.30 13888.89 15842.58

Total Assets 13138.33 15912.58 20834.01

Working Capital 4273.01 -1121.43 4406.53

PBT 357.64 1116.86 811.46

Snapshot view

1–9

Role of Accounting

• Accounting is an Information system that provides information on:– Amounts of resources.

– How resources were financed.

– How were the resources invested.

– Results achieved by using those resources.

• For:– Decision makers inside and outside the

organization.

Business Activities

1–10

All businesses are involved in three types of activities

• Financing,

• Investing, &

• Operating

The accounting information system measures, processes & communicates the results of these business activities for business decision makers.

1–11

The Accounting

process

Decision makers

Economic activities

Fin/Inv/Op

Actions (decisions)

Accounting connects decision makers with economic activities

and the cycle continues with the

results of their decisions

Accounting Information(Financial

Statements)

Users & Uses of Accounting Information

1–12

Management

Human Resources

Taxing Authorities

Labor Unions

Regulatory Agencies

Marketing

Finance

Investors

Creditors

Customers

Internal Users

External Users

Who Uses Accounting Data

Questions Asked by Internal Users User

1. Can we afford to give our employees a pay raise?

Human Resources

2. What price for our product will maximize net income?

3. Which product line is most profitable?

4. Is cash sufficient to pay dividends to the stockholders?

Marketing

Management

Finance

Users & Uses of Accounting Information

Questions Asked by External Users User

1. Is the company earning satisfactory income?

Investors

2. How does Vodafone compare in size and profitability with MTNL?

3. Will Kingfisher Airlines be able to pay its debts as they come due?

Investors

Creditors

Users & Uses of Accounting Information

4. Will Yes Bank have a credit downgrade?

Credit Rating Agencies

1–15

Process of Accounting

• Creating Accounting heads– Asset, Liability, Equity, Income & Expense

• Double Entry system

• Accounting Equation

Assets = Owner’s/Stockholder’s Equity + Liabilities

• Resources financed by = business creditors + lenders + capital provided by owners.

• Resources Invested in = Fixed Asset + Investment + Current Assets

• LHS = RHS

• Yields Financial Statements

1–16

Financial Statements: Elements

• Elements measuring financial position:

– Assets

– Liabilities

– Equity

• Elements measuring performance

– Revenue / Income (includes gains)

– Expenses (includes losses)

1–17

ASSETS 2013 2012 2013 2012Cash 85,632 7,282 Sales 7,035,600 6,034,000Accts Receivable / Debtors 878,000 632,160 COGS (5,875,992) (5,528,000)Inventories 1,716,480 1,287,360 Other expenses (550,000) (519,988)Total Current Assets 2,680,112 1,926,802 EBITDA 609,608 (13,988)

Deprn. & Amortn. (116,960) (116,960)Gross Fixed Assets 1,197,160 1,202,950 EBIT 492,648 (130,948)Less: Deprn. 380,120 263,160 Interest Exp. (70,008) (136,012)Net Fixed Assets 817,040 939,790 EBT 422,640 (266,960)

Taxes (169,056) 106,784Total Assets 3,497,152 2,866,592 Net income 253,584 (160,176)

Dividend 63,396 0

LIABILITIES 2013 2012 Retained Earnings 190,188 (160,176)

Accts payable / Creditors 436,800 524,160Short term Bank loan 300,000 636,808Accrued Expenses 408,000 489,600Total Current Liabilities 1,144,800 1,650,568Long-term debt 400,000 723,432Total External Liability 1,544,800 2,374,000

Common stock/Share Capital 1,721,176 460,000Retained earnings 222,780 32,592Total Owner's Equity 1,952,352 492,592

Total Liab & Owner's Equity 3,497,152 2,866,592

Balance Sheet Income Statement

1–18

Financial Elements - Definition

• Assets are Probable Future economic benefits.

• Liabilities are probable Future Sacrifices of economic benefits.

• Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. In business enterprises, the equity is the ownership interest.

1–19

Vagabond Travel AgencyBalance Sheet

December 31, 2007Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' EquityOffice equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Accounting Equation

Accounting Equation cont’d

1–20

Stockholder’s Equity

• Change in Stockholder’s Equity = • Change in Common Stock

• Amount collected from issuing New Shares

• Add Change in Retained Earnings • Net Income

• Revenue

• Less Expenses

• Less Dividend

• ∆ SE = ∆ Common Stock + ∆ RE = $ from Shares Issued + (Revenue – Expenses) –

Dividend 1–21

1–22

Financial Elements - Definition

• Revenues / Incomes inflows that result from an entity’s central operation or core activities or principal business. – Examples: Sales for Manufacturing & Trading

Companies, Interest & Investment Income for Banks.

– Increase Owner’s Equity

• Expenses outflows that result from an entity’s central operations. – Examples: Raw Material Expenses, Personnel

Expenses, Manufacturing Expenses, Selling Expenses, etc.

– Decreases Owner’s Equity

Communicating with Users

1–23

Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:

Income Statement

Balance Sheet

Statement of Cash Flows

Retained Earnings

Statement / Statement of Changes in

Owner’s Equity

Communicating with Users

1–24

Retained Earnings Statement

Net income is needed to determine the ending balance

in retained earnings.

Income Statement

Communicating with Users

1–25

Retained Earnings Statement

Ending balance in retained earnings is needed in

preparing the balance sheet.

Balance Sheet

1–26

Financial Accounting Regulations (GAAP)

GAAP

Assumptions Conventions/Principles

Standards

Going Concern

Accounting period

Money measurement

Separate Entity

Full Disclosure

Materiality

Conservatism

Historical Cost

Accrual & Cash basis

Revenue RecognitionMatching

Basic Accounting Assumptions

• An understanding of basic accounting assumptions is vital to understand the process of accounting.

• Accounting concepts underlying the recording of transactions:– Separate Entity Concept

– Money Measurement Concept

– Going Concern Concept

– Accounting Period Concept

1–27

1–28

Accounting equation in balance- an illustration

• Few of us jointly promote a trading Co. on 1-1-13 to buy & sell few consumer durable items, contributing 5 lakhs each (6 of us) to the share capital.

Assets = Liabilities + Owner’s Equity

Cash (30 lakhs) = 0 + Equity share capital (30 lakhs)Business Entity Concept

1–29

Cont’d

• Took a bank loan Rs 20 lakhs.

Assets = Liabilities + Owner’s Equity

Cash (20) = Bank Loan (20)

Cumulative Impact

Cash (50) = Loan (20) + Equity share capital (30)