UNIT-2UNDERSTANDING CORPORATE FINANCIAL REPORTS AND STATEMENTS Corporate reports Corporate governance reports Horizontal statement analysis Vertical statement analysis

FORMATS OF FINANCIAL STATEMENTSThe two main financial statements, viz the Income Statement and the Balance sheet, can either be presented in the horizontal form or the vertical form where statutory provisions are applicable, the statement has to be prepared in accordance with such provisions.Income Statement:There is no legal format for the profit and loss A/C. Therefore, it can be presented in the traditional T form, or vertically, in statement form. An example of the two formats is given as under.(i) Horizontal, or T form:Manufacturing, Trading and profit and loss A/C of .. for the year ending ...............DrCrParticularsRs.Particulars Rs.

To opening stock By cost of finished Goods c/dXxxx

Raw materials xxxBy closing stock

Work in progress xxxRaw materials xxx

Work in progress xxx

To purchases of raw materials xxx

To manufacturing wages xxx

To carriage inwards xxx

To other Factory Expenses xxx

xxxxxx

By sales xxx

To opening stock of finished xxxBy closing stock of finished xxx

goods goods

To cost of Finished goods b/dxxxBy Gross Loss c/dxxx

To Gross Profit c/dxxx

xxxxxx

To Gross Loss b/d xxxBy Gross profit b/dxxx

To office and Admn. Expense xxxBy Miscellaneous Receipts xxx

To Interest and financial expenses xxxBy Net Loss c/dxxx

To provision for Income-taxxxx

To Net Profit c/dxxx

xxxxxx

To net loss b/d xxxBy Balance b/dxxx

To general reserve xxx(from previous year)

To Dividend xxxBy Net profit b/dxxx

To Balance c/fxxx

xxxxxx

(ii) Vertical Form Income statement of for the year ending ...Particulars Rs.Rs.

Sales xxxx

Less: Sales Returns xxx

Sales Tax/ Exise Dutyxxxxxxx

Net sales (1)xxxx

Cost of Goods Sold

Materials Consumed xxxx

Direct Labourxxxx

Manufacturing Expenses xxxx

Add / less Adjustment for change in stock (2)xxxx

xxxx

Gross Profit (1) (2)xxx

Less: Operating Expenses

Office and Administration Expenses

Selling and Distribution Expenses xxx

xxxxxx

Operating Profit Xxxx

Add: Non-operating Income Xxx

Less: Non-oprating Expenses (including Interest)xxxx

Profit before Tax xxx

xxxx

Less : Taxxxx

Profit After Taxxxxx

Appropriations

Transfer to reserves

Dividend declared /paid xxxx

Surplus carried to Balance sheetxxx

xxx

xxxx

Balance SheetThe Companies Activities, 1956 stipulates that the Balance sheet of a joint stock company should be prepared as per part I of schedule VI of the Activities. However, the statement form has been emphasized upon by accountants for the purpose of analysis and Interpretation. The permission of the Central Government is necessary for adoption of the 'statement* form.(i) Horizontal FormBalance sheet of .................... as on ....................LiabilitiesRs.AssetsRs.

Share CapitalxxxFixed Assets:

(with all paticulars of Authorized, Issued, Subscribed capital) Called up capital

xxx1. Goodwill2. Land & Building 3. Leasehold property4. Plant and Machinery 5. Furniture and Fittingsxxxxxxxxxxxxxxx

Less: Calls in Arrears xxx6. Patents and Trademarks xxx

Add: Forfeited Shares xxx7. Vehicles xxx

Reserves and Surplus :Investments

1. Capital ReservexxxCurrent Assets, loans and

2. Capital Redemption Advances

reserve xxx(A) Current Assets

3. Share premium xxx1. Interest accured on

4. Other premium xxxInvestments xxx

Less: debit balance of Profitxxx2. Loose tools xxx

and loss A/C (if any)3. Stock in tradexxx

5. Profit and Lossxxx4. Sundry Debtors xxx

Appropriation A/CLess: Provision for doubtful

6. Sinking Fund xxxdebts

5. cash in hand xxx

6. cash in Bankxxx

Secured Loans (B) Loans and Advances

Debenturesxxx7. Advances to subsidiariesxxx

Add: Outstanding Interest xxx8. Bills Receivable xxx

Loans from Banks xxx9. Prepaid Expensesxxx

Unsecured Loans Miscellaneous Expenditure (to the extent not written off or

Fixed Deposits xxxadjusted)xxx

Short-term loans and advancesxxx

Current Liabilities and Provisions 1. Preliminary expenses2. Discount on Issue of sharesxxxxxx

and debentures

A. Current Liabilites 3. Underwriting Commssion xxx

1. Bills Payable xxx

2. Sudnry Creditors xxxProfit and Loss account (Loss),

3. Income received in advancexxxif any

4. unclaimed Dividendsxxx

5. Other Liabilities xxx

B. Provisions

6. Provisions for Taxation xxx

7. Proposed Dividendsxxx

8. Proposed funds & pension xxx

fund contingent liabilities not

Provided for

xxxxxx

(ii) Vertical Form:Balance sheet of . as on Particulars Schedule No.Current yearPrevious Year

I. Source of funds

1. Share holders funds

a. capital xxxxxxxx

b. Reserves and surplus xxxxxxxx

2. Loans funds

a. Secured Loansxxxxxxxx

b. Unsecured Loans xxxxxxxx

Total

II. Application of funds

1. Fixed Assets

a. Gross Block xxxxxxxx

b. less Deprciation xxxxxxxx

c. Net block xxxxxxxx

d. Capital work in progressxxxxxxxx

2. Investments xxxxxxxx

3. Current Assets, Loans and Advances

a. Inventions xxxxxxxx

b. Sundry Debtors xxxxxxxx

c. Cash and Bank balancexxxxxxxx

d. other current assets xxxxxxxx

e. Loans and Advances xxxxxxxx

Less : current Liabilities and Provisions

a. Current Laibilities xxxxxxxx

b. Provisions xxxxxxxx

xxxxxxxx

Net Current Assets

4. a. Miscellaneuos Expenditure to xxxxxxxx

the extent not written off or adjusted

b. Profit and Loss Account (debit)xxxxxxxx

Total xxxxxxxx

Illustration: 1 From the following information, prepare a vertical Income Statement.

Sales2,00,000

Opening stock10,000

Closing stock15,000

Purchases40,000

Operating Expenses12,000

Rate of Tax 50%

Solution:Income StatementParticularsRs.Rs.

Sales 2,00,000

Less : cost of goods sold:

Opening stock10,000

Add: Pruchases 40,000

50,000

Less: closing Stock15,000

35,000

Gross Profit 1,65,000

Less: operating expenses 12,000

Operating profit 1,53,000

Less: non-operating expenses4,000

Profit before tax1,49,000

Less: Income tax (50%)74,500

Net profit after tax74,500

Illustration: 2 From the following information Prepare P& L Accounts And Balance sheet For the year ended March 31, 2015

ParticularsDebitCredit

Purchase and sales6000001200000

Carriage on Purchase 25000

Wages and Salary120000

office expence44000

Rent24000

Insurance40000

Audit Fees24000

Accounts Receivable/ payable280000125000

Printing and Advertising33000

Commission20000

Opening Stock 72000

Cash in hand36000

Cash at bank55000

Bank Loan240000

Interest On Loan24000

Share Capital500000

Reserves132000

Fixed Assets888000

22410002241000

Adjustments:1. Stock at the end of the year 120 0002. Depreciate Fixed Assets by 10%3. Unpaid salary at the end of the year are 20 000 4. Tax rate is 30%

Illustration: 3

particular debitcredit

Purchase and sales9000001800000

Carriage on Purchase 37500

Wages and Salary180000

office expense66000

dividend received36000

Insurance60000

Audit Fees36000

Accounts Receivable/ payable420000187500

Printing and Advertising49500

Interest received30000

Opening Stock 108000

Investment54000

Cash at bank82500

Bank Loan360000

Interest On Loan36000

Share Capital750000

Reserves198000

Fixed Assets1332000

33615003361500

Financial statement, Boards report(1) The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorized by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he isa director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.(2) The auditors report shall be attached to every financial statement.(3) There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include(a) The extract of the annual return as provided under sub-section (3) of section 92;(b) Number of meetings of the Board;(c) Directors Responsibility Statement;(d) A statement on declaration given by independent directors under sub-section of section 149;(e) in case of a company covered under sub-section (1) of section 178, companys policy on directors appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;(f) Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made(i) By the auditor in his report; and(ii) By the company secretary in practice in his secretarial audit report;(g) Particulars of loans, guarantees or investments under section 186;(h) particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form; (i) the state of the companys affairs;(j) The amounts, if any, which it proposes to carry to any reserves;(k) The amount, if any, which it recommends should be paid by way of dividend;(l) Material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;(m) The conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;(n) a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;(o) The details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;(p) in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors;(q) such other matters as may be prescribed.(4) The report of the Board of Directors to be attached to the financial statement under this section shall, in case of a One Person Company, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.(5) The Directors Responsibility Statement referred to in clause (c) of sub-section (3) shallstate that(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;(b) the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;(c) the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;(d) the directors had prepared the annual accounts on a going concern basis; and(e) the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.Explanation.For the purposes of this clause, the term internal financial controls means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to companys policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.(6) The Boards report and any annexures thereto under sub-section (3) shall be signed by its chairperson of the company if he is authorized by the Board and where he is not so authorised, shall be signed by at least two directors, one of whom shall be a managing director, or by the director where there is one director.(7) A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of(a) any notes annexed to or forming part of such financial statement;(b) the auditors report; and(c) the Boards report referred to in sub-section (3).(8) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.Auditors report

Managements discussion and analysis

Corporate Governance Report

UNIT-3FINANCIALSTATEMENTSANALYSIS

AN INTRODUCTION

You have already learnt about the preparation of financial statements i.e. Balance Sheet and Trading and Profit and Loss Account. After preparation of the financial statements, one may be interested in analyzing the financial statements with the help of different tools such as comparative statement, common size statement, ratio analysis, trend analysis, fund flow analysis, cash flow analysis, etc. In this process a meaningful relationship is established between two or more accounting figures for comparison. In this lesson you will learn about analyzing the financial statements by using comparative statement, common size statement, trend analysis and ratio Analysis.

OBJECTIVES

After studying this lesson, you will be able to: explain the meaning, need and purpose of financial statement analysis; identify the parties interested in analysis of financial statements; Explain the various techniques and tools of analysis of financial statements.

TECHNIQUES AND TOOLS OF FINANCIAL STATEMENT ANALYSIS

Financial statements give complete information about assets, liabilities, equity, reserves, expenses and profit and loss of an enterprise. They are not readily understandable to interested parties like creditors, shareholders, investors etc. Thus, various techniques are employed for analysing and interpreting the financial statements. Techniques of analysis of financial statements are mainly classified into three categories :Cross-sectional analysisIt is also known as inter firm comparison. This analysis helps in analysing financial characteristics of an enterprise with financial characteristics of another similar enterprise in that accounting period.For example, if company A has earned 15% profit on capital invested. This does not say whether it is adequate or not. If we analyse further and find that a similar company has earned 16% during the same period, then only we can make a conclusion that company B is better.Thus, it turns into a meaningful analysis.

Time series analysisIt is also called as intra-firm comparison. According to this method, the relationship between different items of financial statement is established, comparisons are made and results obtained. The basis of comparison may be : Comparison of the financial statements of different years of the same business unit. Comparison of financial statement of a particular year of different business units.(iii) Cross-sectional cum time series analysisThis analysis is intended to compare the financial characteristics of two or more enterprises for a defined accounting period. It is possible to extend such a comparison over the year. This approach is most effective in analysing of financial statements.

The analysis and interpretation of financial statements is used to determine the financial position. A number of tools or methods or devices are used to study the relationship between financial statements. However, the following are the important tools which are commonly used for analyzing and interpreting financial statements :

Comparative financial statements Common size statements Trend analysis Ratio analysis Funds flow analysis Cash flow analysis

Comparative financial statementsIn brief, comparative study of financial statements is the comparison of the financial statements of the business with the previous years financial statements. It enables identification of weakpoints and applying corrective measures. Practically, two financial statements (balance sheet and income statement) are prepared in comparative form for analysis purposes.

1. Comparative Balance SheetThe comparative balance sheet shows the different assets and liabilities of the firm on different dates to make comparison of balances from one date to another. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show change(increase/decrease) in figures. The fourth column may be added for giving percentages of increase or decrease. While interpreting comparative Balance sheet the interpreter is expected to study the following aspects :(i) Current financial position and Liquidity position(ii) Long-term financial position (iii) Profitability of the concern

(i) For studying current financial position or liquidity position of a concern one should examine the working capital in both the years. Working capital is the excess of current assets over current liabilities.(ii) For studying the long-term financial position of the concern, one should examine the changes in fixed assets, long-term liabilities and capital.(iii) The next aspect to be studied in a comparative balance sheet is the profitability of the concern. The study of increase or decrease in profit will help the interpreter to observe whether the profitability has improved or not.After studying various assets and liabilities, an opinion should be formed about the financial position of the concern.

The following is the Balance Sheets of MS Gupta for the years 2014 and 2015.Prepare the comparative Balance Sheet and study the financial position of the concern.

Balance Sheet as on 31stDecember

Liabilities2014Rs2015RsAssets2014Rs2015Rs

Equity share capital500,000700,000Land and Building270,0001,70,000

Reserve and surplus330,000222,000Plant and Machinery400,000600,000

Debentures200,000300,000Furniture20,00025,000

Long term loan100,000150,000Other fixed assets25,00030,000

mortgage

Bill Payables50,00045,000Cash in hand20,00040,000

Sundry creditors100,000120,000Bill Receivables100,00080,000

Other current liabilities500010,000Sundry debtors200,000250,000

Stock250,000350,000

Prepaid Expenses2000

1285000154700012850001547000

Solution:Comparative Balance Sheet of MS Gupta for the year ending December 2014 and 2015

Year ending 31st DecIncrease/DecreaseIncreaseDecrease

Assets

Current Assets Cash in hand Bill Receivables Sundry Debtors2014

20,000100,000200,0002015

40,00080,000250,000(Amount)(Rs)

+20,00020,000+50,000(Percentage)

+10020+25

Stock250,000350,000+100000+40

Pre paid expenses2000+2000+100

Total current assets570,000722,000+152,00026.67

II.Fixed Assets

270,000

170,000

100000

37.03

Land and Building

Plant and Machinery400,000600,000+200,000+50.00

Furniture20,00025,000+5000+25.00

Other fixed assets2500030,000+5000+20.00

Total Fixed Assets715000825000+110000+13.49

Total Assets12850001547000+26200020.39

Liabilities & Capital:

50,000

45,000

5,000

10

Current liabilities

Bill Payables

Sundry creditors100,000120,000+20,000+20

Other current liabilities5,00010,000+5,000+100

Total current liabilities155,000175,000+20,000+12.9

II.

200,000

300,000

+100,000

+50

Debentures

Long term loan on mortgage100,000150,000+50000+50

Total long term liabilities300,000450,000+150,000+50

Total liabilities455000625000+170,000+37.36

III.

500,000

7,00,000

+200,000

+40.00

Equity share capital

Reserve & surplus330,0002,22,000108,00032.73

Total owned equities8,30,0009,22,000+82,000+50

Total capital & liabilities12850001547000+262,000+20.39

Interpretation

(i) The comparative balance sheet of the company reveals that during 2015 there has been an increase in fixed assets of 110,000 i.e. 13.49%. Long term liabilities to outsiders have relatively increased by Rs 150,000 and equity share capital has increased by Rs 200000. This fact indicates that the policy of the company is to purchase fixed assets from the long term sources of finance.

(ii) The current assets have increased by Rs 152000 i.e. 26.67% and cash has increased by Rs 20,000. The current liabilities have increased only by Rs 20000 i.e. 12.9%. This further confirms that the company has used long-term finances even for the current assets resulting into an improvement in the liquidity position of the company.

(iii) Reserves and surplus have decreased from Rs 330,000 to Rs 222,000 i.e. 32.73% which shows that the company has utilized reserves and surplus for the payment of dividends to shareholders either in cash or by way of bonus.

(iv) The overall financial position of the company is satisfactory.

Comparative Income statement

The income statement provides the results of the operations of a business. This statement traditionally is known as trading and profit and loss A/c. Important components of income statement are net sales, cost of goods sold, selling expenses, office expenses etc. The figures of the above components are matched with their corresponding figures of previous years individually and changes are noted. The comparative income statement gives an idea of the progress of a business over a period of time. The changes in money value and percentage can be determined to analyze the profitability of the business. Like comparative balance sheet, income statement also has four columns. The first two columns are shown figures of various items for two years. Third and fourth columns are used to show increase or decrease in figures in absolute amount and percentages respectively.

Illustration: 2

From the following particulars, pertaining to Mohan Ltd., you are required to prepare a comparative Income Statement and interpret the changes.

ParticularsRs.Rs.

Sales58,00065,200

Cost of goods sold47,60049,200

Administration expenses1,0161,000

Selling expenses1,8401,920

Non -operating expenses140155

Non-operating expenses96644

Sales returns20001,200

Tax rate43.75%43.75%

Solution:Comparative Income Statement of Mohan Ltd., for the years 2000 and 2001.

Particulars2000Rs.2001Rs.

Sales58,00065,200

Less Returns 2,0001,200

Net sales56,00064,000

Less: Cost of Goods sold47,60049,200

Gross Profit(A)8,40014,800

Less: Operating expenses

Administration expenses1,0161,000

Selling expenses1,8401,920

Total operating expenses (B) 2,8562,920

Operating profit(A)-(B) 5,54411,880

Add: non - operating incomes96644

Less: non- operating expenses5,64012,524

140155

Net profit before tax5,50012,369

Less: Tax2,4065,411

Net profit after Tax30946,958

Techniques of Financial Statement Analysis:The following techniques are adopted in analysis of financial statements of a business organization: Comparative Statements Common size Statements Trend Analysis Funds flow Analysis Cash flow Analysis Ration Analysis Value Added Analysis.

The first three topics are covered in this chapter and the rest are discussed in the subsequent chapters in detail.Comparative Financial StatementsComparative financial statements are statements pf financial position of a business designed to provide time perspective to the consideration of various elements of financial position embodied in such statements. Comparative Statements reveal the following: .i. Absolute data (money values or rupee amounts) ii. Increase or reduction in absolute data (in terms of moiwy values) iii. Increase or reduction in absolute data (in terms of percentages)iv. Comparison (in terms of ratios) v. Percentage of totals.

a. Comparative Income Statement or Profit and Loss Account:

A comparative income statement shows the absolute figures for two or more periods and the absolute change from one period to another. Since the figures are shown side by side, the user can quickly understand the operational performance of the firm in different periods and draw conclusions.

b. Comparative Balance Sheet

Balance sheet as on two or more different dates are used for comparing the assets, liabilities and the net worth of the company Comparative balance sheet is useful for studying the trends of analysis undertaking.Financial Statements of two or more firms can also be compared for drawing inferences. This is called interfirm Comparison.Illustration 3:The following is the profit and loss account of Ashok Ltd., for the years 2000 and 2001. Prepare comparative Income Statement and comment on the profitability of the undertaking.

Particulars20002001Particulars20002001

Rs. Rs. Rs. Rs.

To Cost of goods sold2,31,6252,41,950By Sales 3,60,7284,17,125

To Office expenses 23,26627,068Less Returns 5,7946,952

To Interest expenses 45,91257,8163,54,9344,10,173

To Loss on sale of fixed6271,750By Other incomes :

To Income Tax21,51940,195By Discount on purchase2,1251,896

To Net Profit35,37144,425By Profit on sale of land1,500

3,60,4574,13,3793,60,4574,13 ,379

Solution:ASHOK LTD.Comparative Income Statement for the years ending 2000 and 2001

Particulars 2000 Rs.2001 Rs.Increase (+)Decrease (-)Amount (Rs.)Increase (+)Decrease (-)Percentages

Sales3,60,7284,17,125+56,397+15.63

Less: Sales returns5,7946,952+1.158+19.98

3,54,9344,10,173+55,239+15.56

Less: Cost of goods sold2,31,6252,41,950+ 10,325+4.46

Gross Profit1,23,3091,68,223+44.914+36.42

Operating Expenses:

Office expenses23,26627,068+3,802+ 16.34

Selling expenses45,91257,816+11,904+25.93

Total operating expenses69,17884,884+15,706+22.70

Operating profit 54,13183,339+29,208+53.96

Add: Other incomes 5,5233,206-2,317-41.95

59,65486,545+26.891+45.08

Less: Other expenses 2,7641,925-839-30.35

Profit before tax56,89084,620+27,730+48.74

Less: Income tax 21,51940,195+18,676+86.79

Net Profit after tax 35,37144,425+9,054+25.60

The comparative Income statement reveals that while the net sales has been increased by 15.5%, the cost of goods sold increased by 4.46%. So gross profit is increased by 36.4%. The total operating expenses has been increased by 22.7% and the gross profit is sufficient to compensate increase in operating expenses. Net profit after tax is 9,054 (i.e., 25.6%) increased. The overall profitability of the undertaking is satisfactory.

Illustration: 4The following are the Balance Sheets of Gokul Ltd., for the years ending 31s1 December, 2000,2001.

Particulars20002001

Rs.Rs.

Liabilities

Equity share capital2,00,0003,30,000

Preference share capital1,00,0001,50,000

Reserves20,00030,000

Profit and Loss a/c15,00020,000

Bank overdraft50,00050,000

Creditors40,00050,000

Provision for taxation20,00025,000

Proposed Dividend15,00025,000

Total4,60,0006,80,000

Fixed Assets

Less: Depreciation2,40,0003,50,000

Stock40,00050,000

Debtors1,00,0001,25,000

Bills Receivable20,00060,000

Prepaid expenses10,00012,000

Cash in hand40,00053,000

Cash at Bank10,00030,000

Total4,60,0006,80,000

Solution:Comparative Balance SheetParticulars

31st Dec.2000Rs.31st Dec.2001Rs.Inerease(+) Decrease(-) Amount(Rs.)Increase(+) Decrease(-) Percentages

ASSETSCurrent Assets:

Cash at bank and in hand Bills receivable50,000 20,00083,000 60,000+33,000 +40,000+66 +200

Debtors1,00,0001,25,000+25,000+25

Stock40,00050,000+10,000+25

Prepaid expenses Total Current Assets 10,0002,20,0012,0003,30,000+2,000+1,10,000+20+50

Fixed Assets2,40,0003,50,000+1,10,000+45.83

Total Assets4,60,0006,80,0002,20,00047.83

LIABILITIES

Current Liabilities:

Bank overdraft50,00050,000

Creditors40,00050,000+10,000+25

Proposed dividend15,00025,000+10,000+66.67

Provision for taxationTotal Current Liabilities20,0001,25,00025,0001,50,000+5,000+25,000+25+20

Capital and Reserve:

Equity share capital2,00,0003,30,000+1,30,000+65

Preference share capital1,00,0001,50,000+50,000+50

Reserves20,00030,000+10,000+50

Profit and Loss a/c15,00020,000+5,000+33.33

3,35,0005,30,000+1,95,000+58.21

Total Liabilities4,60,0006,80,000+2,20,000+47.83

Interpretation:1. The above comparative Balance sheet reveaJs the current assets has been increased to 50%, while current liabilities increase to 20% only. Cash increased to Rs.33,000 (i.e. 66%), There is an improvement in liquidity position.

2. The fixed assets purchased was for Rs, 1,10,000. As there are no long-term funds, it should have been purchased partly from Share Capital.

3. Reserves and Profit and Loss a/c increased by 50% and 33.33% respectively. The company may issue bonus shares in near future.

4. Current financial position of the company is satisfactory. It should issue more long-term funds.

COMMON SIZE STATEMENTS

The figures shown in financial statements viz. Frofit and Loss Account and Balance sheet are converted to percentages so as to establish each element to the total figure of the statement and these statement are called Common Size Statements. These statements are useful in analysis of the performance of the company by analyzing each individual element to the total figure of the statement. These statements will also assist in analyzing the performance over years and also with the figures of the competitive firm in the industry for making analysis of relative efficiency. The following statements show the method of presentation of the data.

Illustration: 5Common Size Income Statement of XYZ Ltd., for the year ended 31st March, 2001.

ParticularsAmount (Rs.)% to Sales

Sales(A) 14,00,000100

Raw materials5,40,00016.4

Direct wages2,30,00016.4

Faciory expenses1,60,00011.4

(B)9,30,00066.4

GrossProfit (A) - (B)4,70,00033.6

Less: Administrative expenses1,10,0007.9

Selling and distribution expenses80,0005.7

Operating Profit2,80,00020.0

Add: Non-operative income40,0002.9

3,20,00022.9

Less: Non-operating expenses60,00043

Profit before tax2,60,00018.6

Less: Income tax80,0005.7

Profit after tax1,80,00012.9

Common Size Balance Sheet of XYZParticularsAmount (Rs.)% to Total

ASSETS

Fixed Assets

Land 50,0005.3

Buildings 1,10,00011.7

Plant and Machinery2,50,00026.6

Current Assets :

Inventory

Raw materials80,0008.5

Work-in-progress50,0005.3

Finished goods1,60,00017.0

Sundry debtors2,10,00022.4

Cash at Bank30,0003.2

Total 9,40,000100.0

Capital and Liabiltiies

Euqity Share capital 2,50,00026.6

Preference Share Capital 1,00,00010.6

General reserve 1,60,00017.0

Debentures80,0008.5

Current Liabilities

Sundry Creditors 2,20,00023.4

Creditors for expenses 40,0004.3

Bills payable 90,0009.6

9,40,000100.0

Analysis of performance and position can be made from the above Common Size Statements.

llustration: 6From the following P&L A/c prepare a Common Size Income Statement-Particulars20002001Particulars20002001

Rs.Rs.Rs.Rs.

To Cost of goodssold12,000

1 5,000

By Net Sales

16,000

20,000

To Administrative400400

expenses

To Selling expenses600800

To Net Profit3,0003,800

16,00020,00016,00020,000

Common Size Income StatementParticulars20002001

Rs.%Rs.%

Net sales16,000100.0020,000100.00

Less: Cost of goods sold12,00075.0015,0007500

Gross Profit4,00025.005,00025.00

Less: Operating expenses

Administration expenses4002.504002.00

Selling expenses6003.758004.00

Total Operating expenses1,0006.251,2006.00

Net Profit3,00018.753,80019.00

Illustration: 7Following are Balance sheet of Vinay Ltd. for the year ended 31st December 2000 and 2001.

Liabilities20002001Assets2000 2001

Rs.Rs.Rs.Rs.

Equity capital1,00,0001 ,65,000Fixed Assets (Net)1 ,20,0001,75,000

Pref. Capital50,00075,000Stock20,00025,000

Reserves10,00015,000Debtors50,00062,500

P&L A/c7,50010,000Bills receivable10,00030,000

Creditors20,00025,000Cash at Bank20,00026,500

Provision for taxation10,00012,500

Cash in hand5,000

15,000

Proposed dividends7,50012,500

2,30,0003,40,0002,30,0003,40,000

Prepare a common size balance sheet and interpret the same.

Solution;

Common Size Balance Sheet of Vinay Ltd. for the year ended 31.12.2001 & 2002

Particulars20002001

Rs.%Rs.%

Capital & Reserves:

Equity Capital1,00,00043,481 ,65,00048.53

Pref. Capital50,00021,7475,00022.05

Reserves10,0004.3415,0004.41

P&L A/c7,5003.2610,0002.95

(i)1,67,50072.822,65,00077.94

Current Liabilities:

Bank overdraft25,00010.8725,0007.35

Creditors20,0008.7025,0007.35

Provisions for taxation10,0004.3512,5003.68

Proposed dividends7,5003.2612,5003.68

(ii)62,50027.1875,00022.06

Total Liabilities (ij + (ii)2,30,000100.003,40,000100.00

Fixed Assets (Net) (a)1,20,00052.171,75,00051.47

Current Assets:

Stock20,0008.7025,0007.35

Debtors50,00021.7462,50018.38

Bills receivable10,0004.3430,0008.82

Cash al bank20,0008.7026,5007.79

Cash in hand5,0002.1815,0004.41

(b)1,10,00047.831,65,00048.53

Total Asses (a + b)2,30,000100.003,40,000100.00

Interpretation :(1)In 2001 Current Assets were increased from 47.83% to 48.53%. Cash balance increased by Rs. 16,500.

(2) Current Liabilities were decreased from 27.18% to 22.06%. So, the company can pay off the Current Liabilities from Current Assets. The liquidity position is reasonably good.

(3) Fixed Assets were increased from Rs. 3,20,000 in 2000 to Rs. 1,75,000 in 2001. These were purchased from the additional share capital issued.

(4) So, the ove.all financial position is satisfactory.

TREND ANALYSIS

In trend analysis ratios of different items are calculated for various periods for comparison purpose. Trend analysis can be .done by trend percentage, trend ratios and graphic and diagrammatic representation. The trend analysis is a simple technique and does not involve tedious calculations.

Illustration: 8From the following data, calculate trend percentage taking 1999 as base.

Particulars199920002001

Rs.Rs.Rs.

Sales 50,00075,0001,00,000

Purchases 40,00060,00072,000

Expenses 5,0008,00015,000

Profit 5,0007,00013,000

Solution:Particulars1999 Rs.2000 Rs.2001 Rs.Trend Percentage Base 1999

Rs.Rs.Rs.199920002001

Purchases40,00060,00072,000100150180

Expenses5,0008,00015,000100160300

Profit 5,0007,00013,000100140260

Sales 50,00075,0001,00,000100150200

Illustration: 9From the following data, calculate trend percentages (1999 as base)

Particulars199920002001

Rs.Rs.Rs.

Cash200240160

Debtors400500650

Stock600800700

Other Current Assets450600750

Land8001,0001,000

Buildings1,6002,0002,400

Plant2,0002,0002,400

Solution:

Particulars20002001(Base Year 1999)

Rs.Rs.Rs.199920002001

Cash20024016010012080

Debtors400500650100125163

Other Current Assets450600750100133167

Total Current Assets1,6502,1402,260100130137

Fixed Assets:

Land8001,0001,000100125125

Buildings1,6002,0002,400100125150

Plant2,0002,0002,400100100120

Total Fixed Assets4,4005,0005,800100114132

The verdict is finally out on Indias biggest corporate fraud.A special court under Indias Central Bureau of Investigation (CBI) on April 10held the foundersand former officials of outsourcing firm, Satyam Computer Services, guilty in an accounting scam worth Rs7,000 crore ($1.1 billion). B Ramalinga Raju, the companys former chairman, has been sentenced to seven years in jail.The case, which isalso called theEnron of India, dates back to 2009. Six years ago, Raju wrote a letter to the Securities and Exchange Board of India (SEBI) and his companys shareholders, admitting that he had manipulated the companys earnings, and fooled investors. Nearly $1 billionor 94% of the cashon the books was fictitious.In an immediate reaction to the confession, investorslost as muchas Rs14,000 crore ($2.2 billion) as Satyams shares tanked.Raju explained his reasons for inflating earning in the letter thus: As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap.What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years, Rajusaid in the letter. It has attained unmanageable proportions as the size of the company operations grew significantly.Raju was once the poster boy of Indias IT revolutionrubbing shoulders with top CEOs and politicians across the world,including Bill Clinton.Heres a timeline of what went wrong at Satyam.1987:Thirty three-year-old Raju establishes Satyam Computerwith his brotherand a brother-in-law in Hyderabad.1991:The company is listed on the Bombay Stock Exchange, where its initial public offering is oversubscribed by as much as 17 times.1993:Satyam Computer signs a deal with US-based Dun & Bradstreet to set up Dun & Bradstreet Satyam Software. Satyam holds 24% stake in the venture, while Dun & Bradstreet holds the remaining. In 1996, Satyamsells its stake toDun & Bradstreet, ahead of a restructuring, and the new company is called Cognizant Technologies.1999:Satyam Infoway,a subsidiaryof Satyam Computer, becomesthe first Indianinformation and communication technology company to be listed on Nasdaq, and Satyam expands footprint to 30 countries.2006:Satyams revenues cross $1 billion. Raju becomes the chairman of industry body, The National Association of Software and Services Companies.2007:Raju is named Ernst & Young Entrepreneur of the Year. Thecompany bags contractto be the official IT services provider of the FIFA World Cups in 2010 and 2014.2008:Satyams revenues cross $2 billion. In December, the company decides to buy out Maytas Infraowned by Rajus sonsfor $1.6 billion. The deal fallsthroughafter investors and board members object, and in aspan of four days, four directors of the company quit. (Maytas is Satyam spelt backwards.)January 2009:Satyam is barred from doing business with the World Bank for eight years. The World Bank alleges that Satyamwas involved indata thefts and staff bribery. Shares fall to record low in four years. Satyam employeesreceive a letter fromRaju admitting to the fraud, following which he resigns as chairman.Raju and his younger brother B Rama Raju are arrested by police, while the Indiangovernment steps inand disbands Satyam board.June 2009:Tech Mahindra, owned by the Mahindra Group, and Satyam merge to form Indias fifth largest IT exports company. The merged entity is called Mahindra Satyam.November 2011:Raju gets bailfromIndias supreme court after the CBI fails to file charge-sheet.October 2013:Indias enforcement directorate files a charge-sheet against Raju and 212 othersunder money-launderingcharges.July 2014:Indias market regulator SEBIbars Raju fromthe capital markets for 14 years, and also seeks Rs1,849 crore as fine.April 2015:The special CBI court holds Raju and nine other officials guilty of cheating. Among those held guilty are two former partners at PwC. We are disappointed with this verdict given by the court of the Additional Chief Metropolitan Magistrate at Hyderabad, accounting firmPwC said in a statement.Raju, who also has to pay a fine of about $800,000 (Rs5 crore), has served 32 months in prison so far

B Ramalinga Raju, one of the pioneers in the industry and Satyam's founder and then chairman, allegedly confessed to manipulating his company's account books and inflating profits over many years to the tune of crores of rupees. The confession sent shockwaves across the industry.He was arrested by Andhra Pradesh Police's Crime Investigation Department along with his brother Rama Raju and others on January 11. All the 10 accused in the case are currently out on bail. Around 3,000 documents were marked and 226 witnesses examined during the trial that began nearly six years ago.Satyam scam untangled:- 2003-2008: False clients, projects and invoices created to boost companies profile- 2009: Satyam reports Rs 5200 cr sales vs real sales of Rs 4100 cr- 2009: Satyam reports 24% profits vs real profits of 3%- Damages calculated at Rs 7900 crSatyam scam probe:- Concurrent probe by CBI, ED, SEBI- 53,000 employees, millions of investors impacted- Accused charged with cheating, forgery, faking accounts and IT violations- 3000 documents, 223 witnesses examined- Verdict postponed twiceThe timeline:January 7, 2009: Ramalinga Raju resigns, discloses a Rs 7000-crore accounting fraud in balance sheets about cash which never existed in the company.January 8, 2009: Satyam's bank Citibank freezes its 30 accounts. Interim CEO Ram Mynampati says company in severe cash crunch and may not be able to pay salaries. Satyam's auditor PwC faces ire.January 9, 2009: Ramalinga Raju and his younger brother B Rama Raju arrested by Police. Central Govt disbands Satyam board, to appoint its own 10 directors.Jan 9, 2009: Satyam removed from Sensex, Nifty; NSE excludes F&Ocontracts on expiry of Jan contract.Jan 10, 2009: Satyam former CFO Srinivas Vadlamani arrested.Jan 11, 2009: Government appoints Deepak Parekh, Kiran Karnik and CAchuthan to Satyam board.February 2009: CBI takes over investigation, goes on to file 3 chargesheetsMar 6, 2009: Gets SEBI nod for bidding process to select investorApril 22, 2009: Tech Mahindra makes open offer to Satyamshareholders at Rs 58/share, offer to close Jun 9.June 22, 2009: Mahindra unveils new brand identity for Satyam,Mahindra Satyam.2010: Raju retracts confession statement, says charges levelled by CBI are falseNovember 2, 2011: Supreme Court grants bail to Raju since CBI failed to file chargesheet on time.October 28, 2013: Enforcement Directorate filed a chargesheet against Raju and 212 others. The filed report states that "it transpires that the accused resorted to inter-connected transactions, so as to ensure that crime proceeds were distanced from its initial beneficiaries, and laundered the said proceeds under the cover of the corporate veil, with an ulterior motive to project the properties so acquired as untainted onesDecember 8, 2014: Ramalinga Raju and 3 others given 6 months jail term by SFIODecember 23, 2014: Judge adjourns verdict citing voluminous documentsMarch 9, 2015: Special court adjourns verdict till April 9April 9, 2015: All 10 accused found guilty