CAIIB - Financial Management Module B – Study of Financial Statements - Balance Sheet Analysis M. Syed Kunmir

• 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 ANALYSIS• Term 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 ANALYSIS• Current 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 ANALYSIS• Fixed 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 ANALYSIS• Investments

• 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 ANALYSIS• Current 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 ANALYSIS• Notes

• 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


• 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 Account• It 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 Account• Gross 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 Account• Cost 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

Profit & Loss Account

• 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 Account• Operating 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

Profit & Loss Account• 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

Documents

CAIIB - Financial Management Module B – Study of Financial Statements - Balance Sheet Analysis M. Syed Kunmir