Study of Financial Study of Financial StatementsStatements
Module BModule B
Financial ManagementFinancial Management
CAIIBCAIIB
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 22
Unit 10 Learning ObjectivesUnit 10 Learning Objectives
Broad Scope and Coverage of Broad Scope and Coverage of Financial ManagementFinancial Management
Objective of Financial ManagementObjective of Financial Management Increasing Importance of Financial Increasing Importance of Financial
ManagementManagement
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 33
ScopeScope
Designing and Implementing Designing and Implementing Business PlansBusiness Plans
Ensuring Effective Fund UtilisationEnsuring Effective Fund Utilisation Resource AllocationResource Allocation Investment decisionsInvestment decisions Profit generationProfit generation Wealth creationWealth creation
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 44
ObjectivesObjectives
Maximise the wealth of the firmMaximise the wealth of the firm Maximise Shareholder valueMaximise Shareholder value Owner-Manager- Employee conflictOwner-Manager- Employee conflict Profit Maximisation vs Wealth Profit Maximisation vs Wealth
MaximisationMaximisation Risk and uncertaintyRisk and uncertainty
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 55
Important DecisionsImportant Decisions
FinancingFinancing InvestmentInvestment Dividend PolicyDividend Policy Current Asset ManagementCurrent Asset Management
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 66
Unit 11 Capital ExpenditureUnit 11 Capital Expenditure
Learning ObjectivesLearning Objectives Capital ExpenditureCapital Expenditure Phases of Capital BudgetingPhases of Capital Budgeting Levels of decision makingLevels of decision making Facets of Project AnalysisFacets of Project Analysis Feasibility StudyFeasibility Study
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 77
Capital Expenditure- ImportanceCapital Expenditure- Importance
Long term EffectsLong term Effects IrreversibilityIrreversibility Substantial outlaysSubstantial outlays
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 88
Capital Expenditure- DifficultiesCapital Expenditure- Difficulties
Measurement ProblemsMeasurement Problems Uncertainty Uncertainty Temporal SpreadTemporal Spread
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 99
Capital Budgeting PhasesCapital Budgeting Phases
Planning
Analysis
Selection
Implementation
Review
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1010
PlanningPlanning
Planning is concerned with the Planning is concerned with the articulation of a broad Investment articulation of a broad Investment Strategy and the generation and Strategy and the generation and preliminary screening of project preliminary screening of project proposals.proposals.
The investment Strategy of a firm The investment Strategy of a firm delineates the broad areas or types delineates the broad areas or types of investments the firm plans to of investments the firm plans to undertake. undertake.
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1111
AnalysisAnalysis
A detailed anlaysis of the marketing, A detailed anlaysis of the marketing, technical, financial, economic and technical, financial, economic and ecological aspects is undertaken. ecological aspects is undertaken.
At this pint the focus is on gathering At this pint the focus is on gathering information, preapring and summarising information, preapring and summarising information about various proposal being information about various proposal being considered for inclusion in the capital considered for inclusion in the capital budget. budget.
Based on this the projections may be Based on this the projections may be made. made.
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1212
Selection Selection
Criterion Accept Reject
Payback Period( PBP) PBP < target period PBP > target period
Accounting Rate of Return ( ARR )
ARR > target rate ARR < target rate
Net Present Value( NPV) NPV > 0 NPV < 0
Internal Rate of Return ( IRR) IRR > cost of capital IRR < cost of capital
Benefit Cost Ratio( BCR) BCR > 1 BCR < 1
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1313
Implementation Implementation
StagesStages Project & Engineering DesignProject & Engineering Design Negotiations and ContractingNegotiations and Contracting ConstructionConstruction TrainingTraining Plant commissioningPlant commissioning
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1414
Tools for expeditious Tools for expeditious ImplementationImplementation
1.1. Adequate formulation of projectsAdequate formulation of projects
2.2. Responsibility AccountingResponsibility Accounting
3.3. Network TechniquesNetwork Techniques
4.4. Profit Centre ConceptsProfit Centre Concepts
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1515
Decision making levelsDecision making levels
Operating Administrative Strategic
Where is it taken? Lower Level Management
Middle Level Management
Top Level Management
How structured is it?
Routine Semi- structured Unstructured
Level of Resource Commitment
Minor Resource Moderate Resource Major Resource
What is the time horizon?
Sort term Medium term Long term
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1616
Profitability AnalysisProfitability Analysis
MarketMarket TechnicalTechnical FinancialFinancial EconomicEconomic EcologicalEcological
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1717
Key Issues in Project AnalysidKey Issues in Project Analysid
Market Analysis Potential Market & Market Share
Technical Analysis Technical Viability & Sensible Choices
Financial Analysis Risk and Return
Economic Analysis Benefits & Costs in Shadow Prices- Other Impacts
Ecological Analysis Environmental Damage & Restoration measures
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1818
Preliminary Work Preliminary Work Idea Generation
Initial Screening
Prima Facie analysis
Feasibility Analysis Terminate
NO YES
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 1919
AnalysisAnalysis
Technical Analysis
Financial Analysis
Market Analysis
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2020
EvaluationEvaluation
Economic & Ecological Analysis
Is it Worthwhile?
Funding Proposal Terminate
NO YES
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2121
Decisions, Return, Risk, Decisions, Return, Risk, Market Value Market Value
Return
Investment Decisions
Financing Decisions
Risk
Market Value
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2222
UNIT 12- Sources of FinanceUNIT 12- Sources of Finance
Learning ObjectiveLearning Objective Sources of Finance- Long term & Sources of Finance- Long term &
Short TermShort Term Advantages and DisadvantagesAdvantages and Disadvantages Various Types of FundingVarious Types of Funding
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2323
Sources of Company FinanceSources of Company Finance
Permanent Sources
Long-term Sources
Medium –Term Sources
Short-term Sources
Share Capital Redeemable Preference Shares
Medium Term Loans
Cash Credit
Retained Profits Debentures Deferred Credit Overdraft
Bonds Public Fixed Deposit
Bills Discounting
Long term Loans- Indian Rupees or Foreign Currency Loans
Working Capital Term Loans
Commercial Paper
Seed Capital Trade Credit
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2424
Matching Sources to UsesMatching Sources to UsesTypes of Capital Uses Matching Assets Sources
Permanent Broaden borrowing base/major financing/takeover/merger
Freehold or long term property/shares of acquired or merged company,
Share Capital, retained profits
Long Term Financing assets with long life/Plant & machinery/Permanent Working capital
Freehold or leasehold property long term/Permanent stock or debtor requirement
Redeemable preference shares/Long term loans
Medium Term Fixed assets/working capital
Vehicles/Plant/fittings, stock, debtors, leasing
Medium term loans/Hire purchase
Short term Working Capital/financing seasonal fluctuations/export orders/bridging finance/minor fixed assets
Stock/debtors Cash credit/overdraft/bill discounting/LC/Export credit/creditors
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2525
Equity FinancingEquity Financing
NatureNature AdvantagesAdvantages DisadvantagesDisadvantages
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2626
Retained ProfitsRetained Profits
NatureNature AdvantagesAdvantages DisadvantagesDisadvantages
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2727
Preference SharesPreference Shares
NatureNature AdvantagesAdvantages DisadvantagesDisadvantages
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2828
Debentures and BondsDebentures and Bonds
NatureNature AdvantagesAdvantages DisadvantagesDisadvantages
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 2929
Term loansTerm loans
NatureNature AdvantagesAdvantages DisadvantagesDisadvantages
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3030
Term LoansTerm Loans
MaturityMaturity SecuritySecurity RepaymentRepayment Interest RateInterest Rate
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3131
Seed CapitalSeed Capital
Venture CapitalVenture Capital Seed Capital Assistance Schemes of Seed Capital Assistance Schemes of
IDBI IDBI
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3232
Medium Term SourcesMedium Term Sources
LoansLoans Deferred Credit Bill Discounting Deferred Credit Bill Discounting
Scheme of IDBIScheme of IDBI Fixed DepositsFixed Deposits Working Capital Term LoanWorking Capital Term Loan
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3333
Short Term SourcesShort Term Sources
Bank loansBank loans Trade CreditTrade Credit Cash Credit and OverdraftCash Credit and Overdraft Bill discountingBill discounting Commercial PaperCommercial Paper Lease Lease
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3434
Cost of CapitalCost of Capital
Minimum returnMinimum return Weighted average cost of projected Weighted average cost of projected
sources of financesources of finance
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3535
Unit 13 Financial StatementsUnit 13 Financial Statements
Learning ObjectivesLearning Objectives Understand the meaning of Financial Understand the meaning of Financial
StatementsStatements Uses of Financial Statements for Uses of Financial Statements for
decision makingdecision making Financial AnalysisFinancial Analysis Interpretation of StatementsInterpretation of Statements Meaning of Fund FlowsMeaning of Fund Flows
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3636
Key Financial StatementsKey Financial Statements
Balance SheetBalance Sheet Profit & Loss or Income StatementProfit & Loss or Income Statement Sources & Uses of Funds StatementSources & Uses of Funds Statement
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3737
Balance SheetBalance Sheet
Liabilities Assets
Share Capital Fixed Assets
Reserves and Surplus Investments
Secured Loans Current Assets, Loans and Advances
Unsecured Loans Current Assets
Current Liabilities and Provisions Loans and Advances
Current Liabilities Miscellaneous expenditures
Provisions
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3838
Balance SheetBalance Sheet
1. Sources of Funds
1. Shareholder’s Funds
a. Share Capital
b. Reserves and 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 Current Liabilities and Provisions
4. Miscellaneous Expenditure
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 3939
Income Statement Income Statement Revenue Commission actually Received 230000.00
Less Expenses
Cost of Goods Sold Inventory expenses for the year 2950.00
Gross Profit
Depreciation/General
Admin/Selling 4000.00
S,G & A Overhead
Total Expenses
Profit Before Interest and Taxes
Less Interest Interest on loan 10000.00
Other Income/Loss 0.00
Profit Before Tax
Tax@30%
Net Profit- Bottomline
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4040
Balance Sheet-Financial Balance Sheet-Financial ManagementManagement
Balance Sheet Items Finance Topics
Share Capital/Reserves and Surplus/Loans/Debentures
Capital Structure and Cost of Capital
Loans and Advances/Current Liabilities/Trade Credit/Provisions
Working Capital Financing Policy
Fixed Assets( Net) Gross Block-less depreciation
Capital Budgeting
Investments Security Analysis
Current assets, loans and advances, cash and bank
Working Capital mgt/cash management
Receivables Credit Management
Inventories Inventory Management
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4141
Income Statement- Financial Income Statement- Financial ManagementManagement
Income Statement Item Finance Topic
Net Sales Revenue Risk
Cost of Goods Sold- Stocks/ Wages and Salaries/other manufacturing Expenses
Gross Profit Gross Profit Margin
Operating Expenses- SGA/Depreciation Depreciation Policy
Operating Profit- non operating surplus/deficit- EBIT
Business Risk
Interest Financial Risk
Profit Before Tax
Tax Tax Planning
Profit After Tax Return on Equity
Dividends Dividend Policy
Retained Earnings
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4242
Funds Flow Statement- Working Funds Flow Statement- Working Capital Basis Capital Basis
Operations
Issue of Share Capital
Long Term Borrowing
Sale of non current assets
Purchase of non current assets
Repayment of long term borrowing
Dividend Payment
Working Capital Pool
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4343
Funds Flow- (WC basis) Funds Flow- (WC basis)
Sources of Working Capital Uses of Working Capital
Operations Dividends
Profit after tax Purchase of Fixed assets
Depreciation Repayment of term loan
Issue of Share Capital Total working capital used
Long term borrowings
Sale of fixed assets
Total working Capital generated
Net change in working capital
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4444
Funds Flow- Cash Flow StatementFunds Flow- Cash Flow Statement
Sources of CashSources of Cash OperationsOperations Net IncomeNet Income DepreciationDepreciation Issue of Share CapitalIssue of Share Capital Long term borrowingsLong term borrowings Sale of non current liabilitiesSale of non current liabilities Decrease in current assets other than cash Decrease in current assets other than cash
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4545
Funds Flow Statement- Cash FlowFunds Flow Statement- Cash Flow
Uses of CashUses of Cash Payment of DividendsPayment of Dividends Purchase of non current assetsPurchase of non current assets Repayment of long term borrowingsRepayment of long term borrowings Decrease in current liabilitiesDecrease in current liabilities Increases in current assets other Increases in current assets other
than cash than cash
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4646
Financial Statement AnalysisFinancial Statement Analysis
Assessment of Past Performance and Assessment of Past Performance and current Positioncurrent Position
Protection of Net Income and growth Protection of Net Income and growth prospectsprospects
Prediction of Bankruptcy and failurePrediction of Bankruptcy and failure Loan decisions by FIs and banksLoan decisions by FIs and banks
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4747
TechniquesTechniques
Horizontal analysisHorizontal analysis Vertical AnalysisVertical Analysis Trend AnalysisTrend Analysis Ratio AnalysisRatio Analysis Common size AnalysisCommon size Analysis
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4848
Focus of Financial Statements Focus of Financial Statements AnalysisAnalysis
1.1. Liquidity or short term solvency Liquidity or short term solvency anlysisanlysis
2.2. Profitability AnalysisProfitability Analysis
3.3. Capital Structure or gearing Capital Structure or gearing analysisanalysis
4.4. Market strength or Investor analysisMarket strength or Investor analysis
5.5. Growth and stability analysisGrowth and stability analysis
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 4949
Projected StatementsProjected Statements
Projected Balance SheetProjected Balance Sheet Projected Income StatementsProjected Income Statements Projected cash flowsProjected cash flows
20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 5050
Thanks YouThanks You
Indian Institute of Banking and Indian Institute of Banking and FinanceFinance