Financial Statements Spd

8/3/2019 Financial Statements Spd

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Finance For Non-Finance Managers


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Final Accounts

` Final Accounts are prepared at the end of theyear to find out results of the business during theyear in terms of Profit or Loss

And the financial Position of the business at theyear end in terms of Assets and liabilities.

` In preparing final accounts the accountingprinciple of showing all the Revenue Expenditure

and receipts in the Trading or Profit and LossAccount where as the Capital Expenditure andreceipts in the Balance sheets is as followed.


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Profit and Loss Account

It is the Account prepared to find out net profit orloss of the business during the period.

This is Nominal Account in Nature.

Hence All the other expenses and losses should bedebited where as all the other incomes and gainsshould be credited to Profit & loss account.

The balance of Profit & Loss Account will beconsidered as Net Profit(Credit Balance) or NetLoss (Debit balance) and will be transferred toCapital Account.


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Balance Sheet

`Balance sheet of an entity represents the position

at a particular point of time .i.e, Assets and

liabilities of a concern on a given data.

` It is a statement not an account prepared by

considering all real accounts and personal

accounts.

` Its shows the true and fair view of the concern.Assets = Liability + Equity.


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Items Of Balance sheet

Assets

Current assets

Intangible assets Liabilities

Current assets

Contingent liabilities


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Assets

` It is a probable future economic benefit obtained

or controlled by a particular entity as a result of

past transactions or events.

Assets are classifies as:

1. Long term Assets or Fixed Assets

2. Short term Assets or Current Assets.


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Long-term Assets Or Fixed

Assets

Long term assets are those which are held for,

with objective of use in the business. A tangible long-lived asset.

Usually having a life more than one year.

Includes items such as land, buildings, plant and

machinery, motor vehicles, furniture and fittings

etc.,


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Short term Assets or Current

Assets All those held by a firm with the objective of

conversion into cash with in the operating cycle or

an accounting period. Usually includes items such as cash, accounts

receivables, inventory, and prepayments etc..

Apart from fixed and current assets, may beclassified into tangible and intangible assets.


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Intangible Assets

Any long-term assets useful to the business and

having no physical characteristics.

Covers items such as Goodwill, patents, and

copyrights.


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Liabilities

Probable future sacrifice of economic benefit

arising from a present obligation of a particular

entity to transfer assets or provide services to

other entities in the future as a result of past

transactions or events.

In the balance sheet, all the claims against the

assets of the entity, other than the owner(s)claims are liabilities.


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Long term Liabilities

Long-term liabilities are usually for more than one

year. They cover almost all the liabilities not

included in the current liabilities and provisions.

These liabilities are secured or unsecured.

Usually include items such as Share capital,

Debentures and Bonds, Capital reserves, reserves

and surpluses.


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Short-term Liabilities Currents

Liabilities All those claims against the assets of the firm that

are to be met out of cash or other currents assets,

within an accounting period or within the

operating cycle.

Usually include items such as accounts payable,

tax or other claims payable, and accrued oroutstanding expenses.


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Contingent liabilities

A liability which materialises only on thehappening of a future event.

`Example: A liability which may arise out of a

pending lawsuit.` Such items are not listed as liabilities in the body

of the balance sheet.

`However, in order to give a fair view of all knownfacts about the affairs of the firm, contingentliabilities are disclosed as FOOTNOTES to thebalance sheet.


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How to analyze, What to interpret??

What to analyze, How to interpret??


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This can be done, if one is clear with DOs

and DONTs of FINANCIAL

STATEMENTS.


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Profit & Loss Account.

Convey :

Trading Performance.

Primary & Secondary Sources.


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Profit & Loss Account.

Does notConvey :

Future Performance.

Net Income.


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Balance Sheet

Convey :

Assets and Claims against those Assets.

Liquidity.

Owners Claims Residual.


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Balance Sheet

Does notConvey :

Process of making Profits. Specific Claims.

True and Fair Worth of the Business.


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DEFINITION

Ratio analysis refers to methods of calculating and interpreting financial ratios to

assess a firms performance.

WHY IS RATIOANALYSIS USEFUL?

Provide details for financial planning.

Put details into perspective. Manage expectations(creditors and investors).


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TYPES OFRATIO COMPARISIONS

1.Cross-sectional analysis2.Time series analysis

3.Combined(mixed)

1.Cross-sectional analysisCompares different firms financial ratios at the

same time.

2.Time series analysis

Evaluate a firms financial performance over time.3.Combined/mixed

Uses both cross-sectional and time series analysis.


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TYPES OF FINANCIAL RATIOS

1.Liquidity Ratios2.Activity Ratios

3.Leverage Ratios

4.Profitability RatiosNote : when commenting on the performance of a

firm, be sure to

Organize your ideas by these four types of ratios

Compare these ratios of the firm over time

Compare with the industry averages


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LIQUIDITYRATIOS

Definition:

Liquidity measures a firms ability to satisfy itsshort-term obligations as they come due.

Types ofratios used foranalyzing liquidity

1.Current ratio

2.Quick ratio(acid test ratio)

Currentratio=current assets/current liabilities

Current assets=inventory + debtors + cash & bank +

receivables + short term loans + marketableinvestments

Current liabilities=creditors + outstanding expenses +short term loans + bank overdraft/cash credit +

provision for taxation + proposed dividend


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Ideal currentratio= 2:1

Quick Ratio=Quick assets/Quick liabilities

Quick assets=current assets inventory RBD prepaid expenses

Quick liabilities=current liabilities bank overdraft cash credit

SIGNIFICANCE:

Ability to meet immediate liabilities

Ideal quickratio=1:1


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Activity Ratios(expressed inno. of times)

Definition:Activity ratios measure the firms

effectiveness at managing accounts receivables ,inventory , accounts payable ,fixed assets and

total assetsFour ratios

1.Average age of inventory

2.Average collection period

3.Average payment period

4.Fixed assets turnover


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Average age of inventory=

(no . of days/months *average stock)costofgoods sold

Average stock=(opening stock + closing stock)

2Cost of goods sold=opening stock + purchases +

direct expenses closing stock

Significance : Indicates the number of daysnormally the stock are holding


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Average collection period =

no . of days /months*average debtorscredit sales

Credit sales = total sales cash sales salesreturns

Indicates the no . Of days normally the

debtors are paying


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Average payment period =

no . Of days/months * average creditors

credit purchases

Credit purchases = total purchases cash purchases purchase returns

Indicates the no .of days normally paying to creditors

Fixed assets turnoverratio = turnover

fixed assets

Fixed assets = net fixed assets after providing

depreciation

Ability to generate sales per rupee of fixed assets


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LEVERAGE RATIOS(expressed in a:b form)

DEFINITION:Amount of debt used in an attempt tomaximize shareholders wealth

Debt equityratio = debt/equity

Debt= long term borrowed funds i.e, debentures , long

term loansEquity= equity share capital + preference share capital

+ reserves & surplus

Indicates relationship between debt and equityidealratio = 2:1


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Coverage ratio (expressed inno .of times)

Assess the firms ability to service the source of

financingInterest coverage ratio=

earnings before interest & tax

intereston long term borrowings

Indicates ability to meet interest obligation of thecurrent year

idealratio = 6 to 7 times


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PROFITABILITYRATIOS(expressed in %)

Concerning with evaluating a firms earnings withrespect to a given level of sales/assets/ownersinvestment or share value

Return on total assets = earnings/net assets

Net assets = total assets fictitious assets

It indicates whether assets are being utilizedproperly or not. In other words it indicates netincome per rupee of average fixed assets


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Return on equity = earnings aftertax

networth

Net worth = net fixed assets + net working

capital

external liabilities

Indicates profitability of equity funds invested

in the business


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Earnings pershare(EPS) =

earnings available to equity shareholders

numberof equity shares

Price earnings(P/E) ratio =

market price of share

earnings pershare


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INVESTMENT PROCESS

1. Set Investment Policy

2. Security Analysis(Fundamental and

Technical analysis)

3. Portfolio Construction

4. Portfolio Revision

5. Portfolio Performance Evaluation


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FUNDAMENTAL ANALYSIS

Fundamental analysis is a method used to determine

the value of a stock by analyzing the financial data

that is 'fundamental' to the company.


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Analysis of fundamental analysis

Understanding the Macro-economic

environment and developments.

Analyzing the prospects of the industry towhich the firm belongs.

Assessing the projected performance of the

company.


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Industry analysis

The objective of this analysis is to assess the

prospects of various industrial groups which

helps in suggesting which industries have a

brighter future than others and which

industries are plagued with problems that are

likely to persist for a while.


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Three parts of industry analysis

Industry life cycle analysis

Study of the structure and characteristics of an

industry Profit potential of industries : Porter model


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Industry life cycle analysis

Pioneering stage

Rapid growth stage

Maturity and stabilization stage Decline stage


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Study of the structure and characteristics of

an industry

Structure of the industry and nature of

competition

Nature and prospects of demand

Cost, efficiency, and profitability

Technology and research


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Profit potential of industries :

Porter Model

Threat to new entrants

Rivalry among existing firms

Pressure from substitute products Bargaining power of buyers

Bargaining power of suppliers


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Company Analysis

a) Study of Financials (Quantitative Factors)

b) Study of other factors (Qualitative Factors)


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Quantitative Factors

Earnings and Dividend Level

ROE = Equity Earnings/Equity

EPS = Equity Earnings/No. of outstanding sharesDPR = Equity dividends/Equity earnings

DPS = EPS * DPR


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Risk Exposure

BetaRequired Return = Risk - free return +

Beta[Market Risk Premium]

Volatility of return on equity

= Range of return on equity over n years

Average return on equity over n years


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Valuation Multiple

Price to Earnings Ratio

= Earnings per share for year n

Price Per share at the end/beginning or year n


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Qualitative Factors

Sizing up the present situation of prospects

Availability and cost of inputs

Order position

Regulatory framework Technological and production capabilites

Marketing and distribution

Finance and Accounting

Human Resources and Personnel Evaluation of management


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Estimation of Intrinsic Value

Steps:

1. Estimate the expected earnings per share

2. Establish PE ratio3. Develop a value anchor and a value range


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EPS = PAT

No. of outstanding shares

Constant growth dividend modelPE ratio = Dividend payout ratio

Required return - Expected growth

on equity rate in dividends


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Tool for judging undervaluation and

overvaluation

Undervalued Promises of

growth

Dividend of

Cows

Overvalued

High

Low

Low

High

EPS

Duration(1/Dividend Yield)


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Thank You

Documents

Financial Statements Spd