FM-financial statement analysis

8/14/2019 FM-financial statement analysis

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f sa

f inancial

statement

analysis



f sa

Who are interested in FSA?



f sa

Management

Shareholders

Creditors

Other

Groups



f saWhat are their interests?

1 What is the financial position of the firm at a given point of time?

2 How the firm performed financially over a given period of time ?

3 What have been the sources/ uses of Cash over a given period

of time?



f sa

What statements may match these Questions?

1 Balance Sheet

2 Profit & Loss Account

3 Statement of Cash Flows



f sa

BALANCE SHEET

BS Shows the financial condition of a business

at a given point of time

Can be shown in Account or Report form

Companies Mostly use Report Form



f saStructure of Balance Sheet as Per the Companies Act

Account Form

Liabilities

Assets

Share CapitalReserves & SurplusSecured LoansUnsecured LoansCurrent Liab. & Provisions

Current Liabilities

Provisions

Fixed AssetsInvestments

Current Assets, Loans & Advances

Misc Exp & Losses

Current AssetsLoans & Advances




Account Form

Liabilities 20x1

20x0Assets 20x1 20x0

Share Capital 150 150

Equity 150

Pref -

Reserves & Surplus 112 106

Secured Loans 143 131

Unsecured Loans 69 25

C Liabilities & Prov 105 81

579

493

Fixed Assets 330 322

Investments 15 15

CA,loans & Adv 234 156

Misc Exp - .

579 493




Report Form

Current Liabilities

Provisions


I Sources of Funds1 Share Holders’ funds

a) Share Capital

b) Reserves & Surplus

2 Loan Funds

a) Secured Loans

b) Unsecured Loans

II Application of Funds

1 Fixed Assets

2 Investments

3 Current Assets, Loans and Advances

Less CL and Provisions

Net Current Assets

4 Misc Expenditure and Losses




Report Form 20x1 20x0

Current Liabilities

Provisions


I Sources of Funds1 Share Holders’ funds 262 256

a) Share Capital 150

b) Reserves & Surplus 112

2 Loan Funds 212 156

a) Secured Loans 143

b) Unsecured Loans 69

Total 474 412

II Application of Funds1 Fixed Assets 330 322

2 Investments 15 153 CA, Loans and Advances 234 156

Less CL and Provisions 105 81

Net Current Assets 129 75

4 Misc Expenditure and Losses -- --

Total 474 412



f saBalance Sheet of Horizon Ltd as on March31,20x1

Liabilities 20x1 20x0 Assets 20x1 20x0

Share Capital 150 150Equity 150

Reserves & Surplus 112 106

Secured Loans 143 131

Term Loans 70 58

Cash Credit 73 73

Unsecured Loans 69 25

Bank Credit 25 25

Deposits 44 --

C Liabilities & Prov 105 81

Trade Credit 75 60

Advances 20 13

Provisions 10 8

579 493

Fixed Assets 330 322 Gross Block 500 462

Depreciation 170 140

Investments 15 15

CA,loans & Adv 234 156

Cash at Bank 10 6Debtors 114 68

Inventories 105 72

Advances 5 10

Misc Exp - .

579

493



f sa Liabilities

Share CapitalReserves & SurplusSecured Loans

Unsecured LoansCurrent Liabilities & Provisions



f sa Assets

Fixed AssetsInvestmentsCA, Loans and Advances

• inventories• Sundry Debtors• Cash and Bank Balances

• Other Cash Assets• Loans & AdvancesMisc. Expenditure & Losses



f sa Accounting Values & Economic Values

Use of Historical Cost Principle

Exclusion of Intangible Assets

Understatement or omission of certain Liabilities



f sa Profit & Loss Account

•Sales

•Cost of Goods Sold•Gross Profit•Operating Expenses•Operating Profit•Non Operating Surplus/Deficit•Profit before interest and Tax•Interest•Profit before Tax•Tax

•Profit after Tax•Prior Period Adjustments•Amount Available for Appropriation•Appropriations•Balance Carried forward

P fit d L A t f H i Ltd



f saProfit and Loss Account of Horizon Ltd.

for the year ending on March 31,20x1

20x1 20x0

Rs in Million

Net Sales 701 623

Cost of Goods Sold 552 475

Stock 421

Wages and Salaries 68

Other Mfg Expenses 63

Gross Profit 149 148

Operating Expenses 60 49

Depreciation 30

G Administration 12

Selling 18

Operating Profit 89 99

Non Operating Surplus/Deficit -- 6

Profit before interest & Tax 89 105Interest 21 22

Profit Before Tax 68 83

Prov for Tax 34 41

Profit after Tax 34 42



f sa NET CASH FLOW

Net Cash

Flow

Profit after

Tax

Non Cash Rev

+

Non Cash Exp=

_

Net Cash

Flow

Profit after

Tax

Depreciation

+

Amortization= +

OR



f sa Balance Sheet Related Finance Topics

•What should be the capital structure of the company?

•What is the cost of capital of the firm?

•What should be the WC Financing Policy of the Firm?

•How should capital budgeting decisions be taken?

•What is the rational approach to portfolio management?

•

How can cash management be made more effective?

•What is a sensible framework for credit Management?

•How should the firm develop its inventory policy?




Share Capital

Equity

Preference

Reserves and Surplus

Secured Loans

Debentures

Loans and Advances

Unsecured Loans

Current liabilities and

Provisions

Trade Creditors

Provisions

Capital Structure &

Cost Of Capital

Working Capital

Financing Policy




Fixed Assets (Net)

Gross BlockLess Depreciation

Investments

Current Assets, Loans & Advance

Cash and Bank

Receivables

Inventories

Misc Expenditure and Losses

Capital Budgeting

Cash Management

Portfolio Management

Credit Management

Inventory Management



f sa Profit & Loss Related Finance Topics

•What is the Revenue Risk of the firm?

•What is the gross profit margin of the firm?

•Is the Depreciation policy of the firm reasonable?

•How much is the business Risk of the firm?

•What is the degree of financial risk?

•What is the scope of Tax planning?

•What is the return on equity?

•What should be the dividend policy of the firm



f saProfit & Loss Account & Finance Topics

Net Sales

COGS Stock

Wages & Salaries

Other Mfg Exp

Gross Margin

Operating Expenses

Selling and Administration

Depreciation

Operating Profit

Non Operating surplus/deficit

Earnings Before income Tax

Interest

Revenue Risk

GP Risk

Depreciation policy

Business Risk

Financial Risk



f saProfit & Loss Account & Finance Topics

Profit Before Tax

Tax

Profit after Tax

Dividends

Retained Earnings

Tax Planning

Return on Equity

Dividend policy

Mgt. Of Retained Er



f sa

How BOTTOM LINE can be manipulated ?



f sa Manipulation of Bottom Line

Inflate Sales

Alter other income

Fiddle with depreciation

Valuation of Stock

Capitalize certain ExpensesDefer Discretionary Expenses

Treat certain Liabilities as Contingents

Extra Provisions in prosperous years

Revalue assets to create reservesLengthen Accounting Year



f sa Why do companies Manipulate their F Statements?

Project as low Risk Company

To promote management Competence

To show growth

To enhance compensation



f sa

What Can you do?

Acquire knowledge, how accountants prepare FS

Pursue notes to the statements

Auditors report

Analyzing Financial Performance over a period of time

FM-financial statement analysis

Documents

Transcript of FM-financial statement analysis