CAIIB - Financial Management

Module B Study of Financial

Statements
- Balance Sheet Analysis

M. Syed Kunmir

BALANCE SHEET ANALYSIS

Sources of Funds
1) Capital
2) Reserves & Surplus
3) Term Liabilities
4) Current Liabilities

BALANCE SHEET ANALYSIS

Uses of Funds
1) Fixed Assets
2) Intangible Asets
3) Non Current Assets
4) Current Assets

BALANCE SHEET ANALYSIS

Capital
1) Authorised Capital
2) Issued Capital
3) Subscribed Capital
4) Paid-up Capital

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

BALANCE SHEET ANALYSIS

Tangible Net Worth
This refers to the total funds arrived by paidup 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

BALANCE SHEET ANALYSIS

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.

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

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

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

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

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 companys management, the
conventions are practiced by the finance managers of
the company.
( ex Over due recievable > 6 mths as NCA is a
acccounting convention

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.

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

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

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

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