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

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

2. BALANCE SHEET ANALYSIS • Sources of Funds 1) Capital 2) Reserves & Surplus 3) Term Liabilities 4) Current Liabilities

3. BALANCE SHEET ANALYSIS • Uses of Funds • 1) Fixed Assets • 2) Intangible Asets • 3) Non Current Assets • 4) Current Assets

4. BALANCE SHEET ANALYSIS • Capital • 1) Authorised Capital • 2) Issued Capital • 3) Subscribed Capital • 4) Paid-up Capital

5. BALANCE SHEET ANALYSIS • 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

6. BALANCE SHEET ANALYSIS • Tangible Net Worth • This refers to the total funds arrived by paid-up capital , Reserves and P&L Surplus • Less • Intagible Assets

7. 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

8. 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

9. BALANCE SHEET ANALYSIS • Contingent Liabilities • Tax disputes • Legal litigations • Bills and cheques discounted with banks • Claims against the company not acknowledged

10. 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

11. 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.

12. BALANCE SHEET ANALYSIS • 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

13. BALANCE SHEET ANALYSIS • 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

14. 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

15. BALANCE SHEET ANALYSIS • 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

16. 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

17. BALANCE SHEET ANALYSIS • 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.

18. BALANCE SHEET ANALYSIS • Notes • 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

19. BALANCE SHEET ANALYSIS • Notes • 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

20. 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

21. 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.

22. 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

23. 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

24. 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.

25. 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

26. 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