Full balance sheet_&_profit_&_loss_analysis

CAIIB - Financial Management

Module B – Study of Financial Statements

- Balance Sheet Analysis

M. Syed Kunmir

BALANCE SHEET ANALYSIS

Sources of Funds

1) Capital2) Reserves & Surplus3) Term Liabilities4) Current Liabilities


Uses of Funds

1) Fixed Assets

2) Intangible Asets

3) Non Current Assets

4) Current Assets


Capital

1) Authorised Capital

2) Issued Capital

3) Subscribed Capital

4) Paid-up Capital


Reserves

1) Subsidy Received From The Govt

2) Development Rebate reserve

3) Revaluation of fixed assets

4) Issue of Shares at Premium

5) General Reserves

Surplus

The credit balance in profit and loss account


Tangible Net Worth

This refers to the total funds arrived by paid-up capital , Reserves and P&L Surplus

Less

Intagible Assets

BALANCE SHEET ANALYSISTerm Liabilities

Redeemable preference shares

Debentures

Deferred payment gaurantees

Public Deposits(Repayable after 12 months)

Term loans and unsecured loans from friens, relatives,directors repayable over a period of time

Remark : The company can raise public deposits to the extent of 25% of paid up capital plus free reserves and 10% from share holders for the maturity period ranging from 6 months to 3 yrs

BALANCE SHEET ANALYSISCurrent Liabilities

Working capital bank borrowings

T.loans deferred credit inst falling due in 12 mths

public deposits maturing within 12 months

unsecured loans, unless the repayment is on deferred terms

sundry creditors

advances from dealers and customers

interest accrued but not paid

tax provisions

Dividend declared and payable


Contingent Liabilities

Tax disputes

Legal litigations

Bills and cheques discounted with banks

Claims against the company not acknowledged

BALANCE SHEET ANALYSISFixed Assets

Infrastructure like land & building

plant & machinery

Vehicles

Furniture & fixtures

Depreciation

Straight line method

Written down Value Method

Remark : Dep added to profit to arrive repayment obligation especially in term loans

BALANCE SHEET ANALYSISInvestments

1) Shares And Securities

2) Associate Companies

3) Fixed deposits with banks/finance companies

Remark : While analysing bal sheet we can analyse necessity of such investments

Remark : While fixed deposits with banks are considered as fixed assets, the investmetns in associate concerns are treated as non current assets.


Non Current Assets

Deferred recievables/Overdue recievables(like disputed amounts and Over Due > 6 mths)

Non moving stocks/inventory/un usable spares

Investment/Lending to associate concern

Borrowing of the directors from the company

Telephone deposits/ ST deposits etc


Intangible Assets

Preliminary & Preoperative expenses

Deferred Revenue Expenditure

Goodwill

Trade mark

Patents

Rem : The o/s balance to be written off every year by charging P&L account

BALANCE SHEET ANALYSISCurrent Assets

Raw materials, work-in-progress,finished goods,spares and consumables

Sundry debtors and recievables < 6 mths

Advances paid to suppliers of raw materials

Cash and bank balances

Interest recievables

Other current assets such as Government securities, Bank deposits ..etc


Notes

All expenses or provisions or advances or loans etc which are accrued and payable within 12 months are current liablities

When a company makes investments in unconnected avenues such as shares, securites, associate concerns are to be treated as non cur ast

The slow moving and absolete inventory - NCA

BALANCE SHEET ANALYSISNotes

Bal Sh Analy not only to be quantitative but to be qualitative

It is the fin pos on a part date. Min three years bal sh ana would be more meaningful

It is a mixture of facts, opinions and conventions

While opinions are of the company’s management, the conventions are practiced by the finance managers of the company.

( ex Over due recievable > 6 mths as NCA is a acccounting convention


Notes

The valuation of the stock is done as per the opinion of the management

Depreciation method may be changed to boost profit

It may be silent on key personnel and staff turnover

Marginal changes in the classification of certain items would lead to different results.


Management competence

Investment decision

Resorting to window dressing

experience of the promoters

Board comprises of only family members

The key personnel of the company

The structure of the organisation

The authority and decision making are decentralised


The state of industrial relations

Financial systems and procedures

management control

planning, budgeting, forecasting

capacity utilisation

status of the technology

awareness of the market, competitions ..etc

for listed co: share prices, EPS, book value, dividend record, public response ..etc

PROFIT & LOSS ACCOUNTIt is a summary of revenue earned and expenses incurred which

ultimately results in profit or loss of to the company

No defined format in law

Operating revenue = Sales revenue

Non_operating revenue = Other income ( out of sale of investments, interest, commission and discount etc)

Hence operating profit is a yard stick for operating profit of the company

Operating profit = Sales Revenue- Operating Cost

PROFIT & LOSS ACCOUNTGross Sales

Gross sales includes excise duty to be charged to the customer, central sales tax applicable, state sales tax applicable, the discount o be allowed to distributors/dealers/customers. The gross sales appears in the P&L account comprises of all the above part from the basic unit price.

Net Sales

The sales figure excluding all the factors explained above are the net sales.

PROFIT & LOSS ACCOUNTCost of production

This is the cost incurred right from the procurement of raw material to the finished good.

For ex in a garment firm following cost is incurred while production

1) cost of raw material cloth, buttons, canvas, hooks, zips etc

2) Maintenace of sewing machines

3) payment of wages to workers

4) power

5) washing, ironing,packing etc.

Cost of Prod exclu selling & admn exp & int cost

PROFIT & LOSS ACCOUNT

Selling And General Administarative Expenses

Maintaining office staff for admn & acctg

marketing effort

payment of salaries/Tr All to marktg personnel

All the expenses which are not directly connected to manufacturing are classifed as selling and/or general expenses


Cost of goods sold

Cost of goods sold includes all manufacturing expenses and the adjustments for opening and closing stock

Cost of Goods sold = Opening stock + Purchases + Manufacturing expenses - Closing stock

Gross Profit is arrived deducting figure of cost of goods sold from the sales figure

ie Gross profit = Sales - Cost of goods sold.

PROFIT & LOSS ACCOUNTOperating Profit is arrived deducting

selling, administrative and general expenses , provision for bad debts, interest and miscellaneous expenses from the gross profit.

ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad debt + mis exp )

Profit Before Tax When other income is added and other expenses are deducted from the operating profit we get profit before Tax

ie PBT = Op Profit + oth Inc - oth exp

Net Profit When provision for taxes is deducted from the Profit Before Tax we get Net profit

ie Net Profit = PBT - taxes


Non Operating Income/Expenses

The income earned by the unit from other than manufacturing and seling operations is classified under this head . i.e

a) Interest earned on fixed deposits

b) Dividends and profit earned by sale of assets and share.

All those expenses which are not directly connected with operations of the unit are classified under this head. i.e

a) Preliminary expenses written off

b) Loss suffered due to sale of assets & share

Business

Full balance sheet_&_profit_&_loss_analysis