Accounting For Regulation PS

Financial statement analysis
Dr. Padmini Srinivasan Indian Institute of Management Bangalore
Accounting Principles
{
{ {
Monetary transactions and Events enter the system Process Using an Accounting Mechanism Follow certain rules or principles of Accounting called as GAAP (Generally Accepted Accounting Principles) or Accounting standards Audit to lend credibility to the reports
Primary Financial Statements

The financial statements reports on status & performance of the company in financial terms
Balance Sheet Statement of Financial Position
Profit and Loss A/c (Income Statement)
Cash Flow Statement
The Balance sheet

Resources owned and amounts owed
The Balance sheet is a status report giving the Financial Position of the Company at a particular point of time
The Profit and Loss Account

Measures Operating Performance
The profit and loss account or the Income statement, reports the companys revenues, expenses, and net income or net loss for the period. Revenues or Incomes arise from selling of goods or services to customers Expenses related to earnings are deducted from revenues
The Statement of Cash Flows
The statement of cash flows reports the companys cash inflows and Outflows from its various activities.
Balance Sheet
Balance Sheet
Gives the resources owned and their funding The assets owned and the claimants against the assets
Assets.
Liabilities
Owners equity
Balance Sheet: ASSETS

{ {
Resources owned by a firm Capable of giving future cash flows (by use or disposal value) Objectively verifiable arising from a past identifiable event
Padmini Srinivasan - iimb
LIABILITIES
{ {
Liabilities are Debts They are present obligations a firm owes. They are claims against the assets the firm. Liabilities may be to the owners or to outsiders
Balance Sheet of ABC LTD as on 31ST MARCH, 2005

{
Sources of Funds (Liabilities)

z z
Uses of Funds
{ {
Share Capital Reserves and Surplus Borrowings: Secured Unsecured Current Liabilities and Provision
Fixed Assets Investments Current Assets, Loans and Advances
FIXED ASSETS
{ { { {
Used for producing goods / services for renting out or for administrative uses Useful life of more than 1 year Not held for sale in the ordinary course of the business Disclosed : Gross book value As less: Accumulated Depreciation Net book value
FIXED ASSETS
z
Depreciation is treated as Expenses and is charged to the profit and loss account Accumulated Depreciation its the sum of depreciation charged to the profit and loss account till the end of the current financial year
INVESTMENTS
{
Are assets held as stores of value with a view to get interest, dividend or capital appreciation TYPES: Long Term/ Current (holding period) Quoted / Not Quoted Trade Investments
CURRENT ASSETS, LOANS AND ADVANCE

{
Current assets are assets that form part of the operating cycle and take interrelated form Expected to be converted into cash in next 12 months Consists of :
z z z z
Cash Sundry Debtors Inventory Others
LIABILITIES
{
They are present obligations a firm owes. They are claims against the assets the firm. Discharging the liability will result in the decline of the assets
Shareholders Funds
Share Capital { Amount contributed by owners towards the capital of the firm { They are divided into units called share { Have a face Value { RESERVES AND SURPLUS { They are the accumulated profits or retained earnings not distributed and owed by the business to the equity share holders Share Capital + R & S is called Net Worth
{
LOANS
Are borrowing to be repaid as per agreed terms on which interest needs to be paid irrespective of availability of profits. TYPES:
{
{ {
SECURED LOAN OR UNSECURED LOANS LONG TERM OR SHORT TERM
Current liabilities and Provisions

{
Arising on account of acquiring goods/services on credit or incurring expenses which are paid for later Normally they are to be settled within a period of 12 months
Two other items

{
Deferred tax
Misc Expenditure and Losses (to the extent not written off)
{
Profit and Loss Account
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31/3/2006

SALES Other Income Total income Expenses
RAW MATERIALS WAGES & SALARIES OTHER Overheads Depreciation
1579 100
700 374 100 100
Administration and Selling Exp PBIT (Operating Profit) INTEREST PBT INCOME TAX PROFIT AFTER TAX Padmini Srinivasan - iimb
100 305 38 267 59 108
Depreciation
{ { { { {
Some Myths about Depreciation It is a process of valuation It generates cash It helps in replacement to new machine
z
Truths ..
Depreciation is the allocation of cost (depreciable value) of an asset to the periods that benefit from its use. Its a charge of the asset over the useful life of an asset
Depreciation
Some Terms: { Original cost (OC) of the asset { Expected Useful life of the asset (This is not the physical life) { Residual Value (RV) at the end of the useful life { Depreciable Value of the asset (OCRV)
Depreciation
{
Methods of Charging Depreciation

z z
Straight Line Method Reducing Balance Method
Which ever method you use the total depreciation to be charged over the useful life will be the same
Depreciation
{
Straight Line Method

z z
Formula:
Cost -Residual Value Useful life
Reducing Balance Method

Formula for computation of rate
1 -
Residual value n Cost n= useful life in years

Straight Line Method

Compute Depreciation { Cost of asset Rs. 650,000 { Salvage value Rs. 50,000 { Depreciable Value = 6,50,000 50,000 = 600,000
{
Depreciation = 600,000 / 3 Rs.200,000 p.a. =200,000/650,000 * 100 30.6 %
Straight line method

Year Gross Block 1 2 3 Depr Acc. Depr Net Block 200000 450000 400000 600000 250000 50000
650000 200000 650000 200000 650000 200000
Reducing Balance method

Year Gross Block 1 2 3 650000 650000 650000 Depr 373,750 158,843 67,507 Acc. Depr 373,750 532,593 600000 Net Block 276250 117,407 50000
Financial Statement Analysis

(Analysis of Financial Performance)
Need for Financial statement analysis

How has the business performed during the year
How is the financial condition of the company How investment activities have performed during the year How does the unit stand in comparison to the industry Preparation of Forecasts Evaluation of SBUs and departments Credit rating
Where to look for data

{
The Annual reports
(An annual report and financials therein represents a snapshot at a given moment. { Directors Report - Working of the Company { Auditors Report { Management Discussion &Analysis { Profit and loss account { Balance Sheet { Cash Flow statements { Supplementary schedules and Notes { Accounting Policies { Subsidiary Company Information
TOOLS FOR EVALUATION

{ { { {
COMMON SIZE STATEMENTS HORIZONTAL ANALYSIS RATIO ANALYSIS CASH FLOW ANALYSIS
Common Size Statements

{
Common size income statement

z
Expresses each income statement category as a percentage of net sales Expresses each item on balance sheet as a percentage of total assets or equities
Common size balance sheet

z
Both statements facilitate structural analysis of the firm

HORIZONTAL ANALYSIS
Year to year changes { Changes in amounts and percentages { Reveals a trend & direction
z
For long term trends prepare a index number trend series
RATIO ANALYSIS
{
GIVES THE LINK BETWEEN INVESTMENT, FINANCING AND OPERATING ACTIVITY i.e. how various items in the financial statements relate to one and another Analysis of Past performance helps in forecasting the future performance
Financial Statement Analysis

PROFITABILITY LIQUIDITY SOLVENCY
{ { {
Note: Different authors take slightly different approach (formulas) for eg: PBIT instead of PAT etc., PBIT (NOPAT) is a good measure for inter divisions evaluation
FSA-Basic Structure
R Return on Equity E Leverage or Financial risk Return on Total Assets (ROI) Asset Turnover ratios Fixed Asset Turnover Current Ratio Current Asset TOR Inventory Turnover Debtors Turnover or Collection Period
Profit Margins Raw material/Sales Other expenses / Sales Interest / Sales
Financial Ratio Analysis

{
Profitability Ratios
z
measure the overall performance of a firm and its efficiency in managing assets, liabilities and equity
Return Ratios
{
Return on Equity
z
PAT/ AVG Stockholders Equity
Measure overall efficiency of the firm in managing investment in assets and generating return to stockholders
Return Ratios
Return on Total Assets (ROCE)
z
PAT /Avg Total Assets or - PBIT/ AVG Total Assets* - NOPAT / Total Assets
The ratio measures the overall efficiency of the firm in managing investment in assets and generating return to stockholders
Profitability Ratios
{ {
Net Profit Margin

z
Net Profit After Tax/Net Sales PBIT (Profit before interest and tax) /Net Sales Salary/Net Sales
Operating Profit Margin

z
{ {
Various Expenses to Sales

z
All measure firms ability to translate sales into profits

Turn Over Ratios(Resource Utilization)

The Ability of different assets like Fixed Assets, current assets and both to generate sales (turnover) Total Asset Turn over Ratio Sales / average Total Assets
Fixed Assets Turn Over Ratio
Sales / Avg Fixed Assets Assess the effectiveness of the fixed assets to generate sales Also reflects the investment strategies
Inventory Turnover Ratio (Not Relevant)

{
Cost of Goods Sold (Sales) / AVG Inventory
Number of Days Stock Avg Inventory / Sales(COGS) per day (Measures efficiency of inventory management (not the inventory policy of the management)
Debtors Turnover Ratio

{
Debtors Turnover Ratio

z
Net Sales/ Average Debtors
Average Collection Period

z
Accounts Receivable/Average Daily Sales (Avg daily sales = Credit sales/365) Another measure of efficiency of firms ability to collect fast Helps gauge liquidity of accounts receivable (ability to collect cash from customers)
Financial Leverage
{
It Pays to have Debt in your Capital Structure
Financing Pattern
{
Leverage Ratios
z
measure the extent of a firms financing with debt relative to equity and its ability to cover interest and other fixed charges also called as the Solvency ratios Measures the firms ability to meet cash needs as they arise
Liquidity Ratios
z
Leverage: Debt Ratios (!!)

{
Debt to Equity Ratio

z
Long Term Debt/Equity
Debt Asset Ratio Total Outside Liability / Total Assets
Interest Cover Ratio { Operating Profit/Interest Expense

Indicates how well operating earnings cover fixed interest charges They measure the extent of firms financing with debt and the financial risk
z
Liquidity Ratios
{
Current Ratio
z z
Current Assets/Current Liabilities Measures ability to meet short-term cash needs Current Assets-Inventory/Current Liabilities Measure ability to meet short-term cash needs more rigorously
Quick or Acid Test Ratio

z z
Other Ratios : For the Investor

{
Earnings
z
per Share
PAT /Average Equity Shares z Indicates return on a per share basis Book Value of the Share Net worth / Number of shares
CASH FLOW STATEMENT

{
CASH IS CASH REST IS ACCOUNTING!!! Accounting profits do not help in assessing the firms ability to meet its debts
z z
As they are based on accrual concept As they are based on subjective judgements like depreciation
CASH FLOW STATEMENT

{
Cash flow statement can be taken as a summary of the cash book Need for cash flow statement arises from the deficiencies in the profit and loss a/c and the balance sheet, as these numbers are influenced by the accounting policies etc Cash flow statement helps in forecasting future value.
Objectives of a CFS
Provide information to the user on: - ability of the enterprise to generate cash and cash equivalents and the timing and certainty of their generation. - the manner in which the enterprise puts cash and cash equivalents to use. - financial structure, liquidity, solvency,net assets and adaptability of the enterprise Padmini Srinivasan - iimb -
CASH FLOW STATEMENTS

{
Provides information on cash flow related to operation financing and investing activities Firms follow the accrual and matching principle to record transactions and hence the company's incomes/ expenses are not related to cash
CASH FLOW STATEMENTS

{
CASH FLOWS ARE DIVIDED INTO 3 SEGMENTS AS : CASH FLOW FROM OPERATING ACTIVITY CASH FLOW FROM INVESTING ACTIVITY CASH FLOW FROM FINANCING ACTIVITY
{ { {
OPERATING ACTIVITIES
Includes the cash flows derived from principal revenue producing activities of enterprise. Cash receipts from main business of company. Cash receipts from royalties, fees, etc. Cash payment to supplier. Cash payment to and behalf of employees. Cash payments or refunds of income tax.
{ { {
INVESTMENT ACTIVITIES
{
Shows the expenditure that have been made to generate future income and cash flows.
z z
Cash payment to acquire fixed assets. Cash receipts from disposal of fixed assets (including intangibles) Cash payment to acquire shares ,warrants or debt instrument of other firms. Cash receipts from disposal of shares Padmini Srinivasan - iimb etc
FINANCING ACTIVITIES
{ Cash
proceeds from issuing shares or other similar instruments { Cash received from debentures,loans bonds and other borrowings { Cash repayments of amount borrowed. Padmini Srinivasan - iimb
Profitable, yet in Trouble?

{
A firm is defined as profitable if it has a positive net income A positive net income results from revenues exceeding expenses A firm may have a positive net income, but this does not guarantee that the firm has the CASH to meet its obligations!
Cash Flow from operations

1.Started business with share capital of Rs.50000 2. Purchased goods for Rs. 50000 paid 60 % in cash, balance payable 3. Sold goods costing Rs. 40000 for Rs. 100000 on one month credit. 4. Purchased equipment for Rs. 15000 5. Depreciation of Eqpt. Rs. 3000 The month end. Prepare the Financial Statements The company wants to declare dividends of Rs. 40000 ?
Operating Results: Transaction analysis

1. 2. 3.
4. 5.
BS: Capital 50000 = Cash 50000 Capital 50000 + Crs 20000 = Inventory 50000 + Cash 20000 OE 50000+ Profit 60000+ Crs 20000 = Drs 100000 + Inv 10000 + Cash 20000 OE 50000+ Profit 60000+Crs 20000 = Eqpt 15000+DRs 100000+ Inv 10000+Cash 5000 OE 50000+ Profit 57000+Crs 20000 = Eqpt 12000+DRs 100000+ Inv 10000+Cash 5000
There is profit of 57000 after depreciation but no cash ?

Cash Flow (Direct Method)

1.
CFO: Paid Creditors CFF Capital CFI Equipment Ending Cash Balance
(30000)
+50000 (15000) 5000
Cash Flow (Indirect Method)

1.
CFO:PAT Add: Depreciation Cash flow before WC Changes Increase Creditors 20000 Increase in Drs - 100000 Increase in Inv - 10000 Net outflow CFF Capital CFI Equipment Ending Cash Balance
57000 3000 60000
-90000 -30000 +50000 (15000) 5000
2
3
Forward Contracts
{ {
Used for hedging open positions Its contract to deliver or receive at a specified rate &date a certain amount of foreign currency. Open positions hedged like foreign currency assets/liabilities or commitments eg : Receivable /Payables / loans

Accounting For Regulation PS

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Accounting For Regulation PS

Diunggah oleh

Hak Cipta:

Format Tersedia

Financial statement analysis

Dr. Padmini Srinivasan Indian Institute of Management Bangalore

Primary Financial Statements

Balance Sheet Statement of Financial Position

Profit and Loss A/c (Income Statement)

Cash Flow Statement

The Balance sheet

The Profit and Loss Account

The Statement of Cash Flows

Balance Sheet: ASSETS

Padmini Srinivasan - iimb

Padmini Srinivasan - iimb

Balance Sheet of ABC LTD as on 31ST MARCH, 2005

Sources of Funds (Liabilities)

Fixed Assets Investments Current Assets, Loans and Advances

Padmini Srinivasan - iimb

Padmini Srinivasan - iimb

CURRENT ASSETS, LOANS AND ADVANCE

Cash Sundry Debtors Inventory Others

Padmini Srinivasan - iimb

Padmini Srinivasan - iimb

SECURED LOAN OR UNSECURED LOANS LONG TERM OR SHORT TERM

Padmini Srinivasan - iimb

Current liabilities and Provisions

Padmini Srinivasan - iimb

Two other items

Profit and Loss Account

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31/3/2006

700 374 100 100

100 305 38 267 59 108

Methods of Charging Depreciation

Straight Line Method Reducing Balance Method

Padmini Srinivasan - iimb

Straight Line Method

Cost -Residual Value Useful life

Reducing Balance Method

Residual value n Cost n= useful life in years

Straight Line Method

Depreciation = 600,000 / 3 Rs.200,000 p.a. =200,000/650,000 * 100 30.6 %

Padmini Srinivasan - iimb

Straight line method

650000 200000 650000 200000 650000 200000

Padmini Srinivasan - iimb

Reducing Balance method

Padmini Srinivasan - iimb

Financial Statement Analysis

Need for Financial statement analysis

Where to look for data

The Annual reports

TOOLS FOR EVALUATION

Padmini Srinivasan - iimb

Common Size Statements

Common size income statement

Common size balance sheet

Both statements facilitate structural analysis of the firm

For long term trends prepare a index number trend series

Padmini Srinivasan - iimb

Financial Statement Analysis

Padmini Srinivasan - iimb

Profit Margins Raw material/Sales Other expenses / Sales Interest / Sales

Financial Ratio Analysis

Padmini Srinivasan - iimb

PAT/ AVG Stockholders Equity