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Study of Financial Statements

Module B Financial Management CAIIB

Unit 10 Learning Objectives

 

Broad Scope and Coverage of Financial Management Objective of Financial Management Increasing Importance of Financial Management


Akila Maheshwari



    

Designing and Implementing Business Plans Ensuring Effective Fund Utilisation Resource Allocation Investment decisions Profit generation Wealth creation
Akila Maheshwari 3


   

Maximise the wealth of the firm Maximise Shareholder value Owner-Manager- Employee conflict Profit Maximisation vs Wealth Maximisation Risk and uncertainty


Akila Maheshwari


Important Decisions
   

Financing Investment Dividend Policy Current Asset Management


Akila Maheshwari


Unit 11 Capital Expenditure       Learning Objectives Capital Expenditure Phases of Capital Budgeting Levels of decision making Facets of Project Analysis Feasibility Study 20/11/2006 Akila Maheshwari 6 .

Importance    Long term Effects Irreversibility Substantial outlays 20/11/2006 Akila Maheshwari 7 .Capital Expenditure.

Capital Expenditure.Difficulties    Measurement Problems Uncertainty Temporal Spread 20/11/2006 Akila Maheshwari 8 .

Capital Budgeting Phases Planning Analysis Selection Implementation Review 20/11/2006 Akila Maheshwari 9 .

The investment Strategy of a firm delineates the broad areas or types of investments the firm plans to undertake. Akila Maheshwari 10 20/11/2006 .Planning   Planning is concerned with the articulation of a broad Investment Strategy and the generation and preliminary screening of project proposals.

Akila Maheshwari 11 20/11/2006 . financial. economic and ecological aspects is undertaken.Analysis    A detailed anlaysis of the marketing. At this pint the focus is on gathering information. Based on this the projections may be made. preapring and summarising information about various proposal being considered for inclusion in the capital budget. technical.

Selection Criterion Payback Period( PBP) Accept PBP < target period Reject PBP > target period ARR < target rate Accounting Rate of Return ( ARR ) ARR > target rate Net Present Value( NPV) Internal Rate of Return ( IRR) NPV > 0 IRR > cost of capital NPV < 0 IRR < cost of capital Benefit Cost Ratio( BCR) 20/11/2006 BCR > 1 Akila Maheshwari BCR < 1 12 .

Implementation       Stages Project & Engineering Design Negotiations and Contracting Construction Training Plant commissioning 20/11/2006 Akila Maheshwari 13 .

2. Adequate formulation of projects Responsibility Accounting Network Techniques Profit Centre Concepts 20/11/2006 Akila Maheshwari 14 .Tools for expeditious Implementation 1. 3. 4.

structured Top Level Management Unstructured How structured is it? Routine Level of Resource Commitment What is the time horizon? 20/11/2006 Minor Resource Moderate Resource Major Resource Sort term Medium term Long term Akila Maheshwari 15 .Decision making levels Operating Administrative Strategic Where is it taken? Lower Level Management Middle Level Management Semi.

Profitability Analysis      Market Technical Financial Economic Ecological 20/11/2006 Akila Maheshwari 16 .

Other Impacts Environmental Damage & Restoration measures 20/11/2006 Akila Maheshwari 17 .Key Issues in Project Analysid Market Analysis Technical Analysis Financial Analysis Economic Analysis Ecological Analysis Potential Market & Market Share Technical Viability & Sensible Choices Risk and Return Benefits & Costs in Shadow Prices.

Preliminary Work Idea Generation Initial Screening Prima Facie analysis YES Feasibility Analysis 20/11/2006 Akila Maheshwari NO Terminate 18 .

Analysis Market Analysis Technical Analysis Financial Analysis 20/11/2006 Akila Maheshwari 19 .

Evaluation Economic & Ecological Analysis Is it Worthwhile? YES Funding Proposal 20/11/2006 Akila Maheshwari NO Terminate 20 .

Market Value Return Investment Decisions Market Value Financing Decisions 20/11/2006 Risk Akila Maheshwari 21 . Return.Decisions. Risk.

Long term & Short Term Advantages and Disadvantages Various Types of Funding 20/11/2006 Akila Maheshwari 22 .Sources of Finance     Learning Objective Sources of Finance.UNIT 12.

Working Capital Indian Rupees Term Loans or Foreign Currency Loans Seed Capital 20/11/2006 Akila Maheshwari Trade Credit 23 .Sources of Company Finance Permanent Sources Long-term Sources Medium –Term Sources Share Capital Redeemable Preference Shares Debentures Bonds Medium Term Loans Deferred Credit Public Fixed Deposit Short-term Sources Cash Credit Retained Profits Overdraft Bills Discounting Commercial Paper Long term Loans.

debtors. retained base/major property/shares of profits financing/takeover/ acquired or merged merger company. Financing assets with Freehold or leasehold long life/Plant & property long machinery/Permane term/Permanent nt Working capital stock or debtor requirement Fixed assets/working capital Redeemable preference shares/Long term loans Long Term Medium Term Vehicles/Plant/fittings. Medium term loans/Hire stock. purchase leasing Cash credit/overdraft/bill discounting/LC/Exp ort credit/creditors Short term 20/11/2006 Working Stock/debtors Capital/financing seasonal fluctuations/export orders/bridging finance/minor fixed assets Akila Maheshwari 24 .Matching Sources to Uses Types of Capital Permanent Uses Matching Assets Sources Broaden borrowing Freehold or long term Share Capital.

Equity Financing    Nature Advantages Disadvantages 20/11/2006 Akila Maheshwari 25 .

Retained Profits    Nature Advantages Disadvantages 20/11/2006 Akila Maheshwari 26 .

Preference Shares    Nature Advantages Disadvantages 20/11/2006 Akila Maheshwari 27 .

Debentures and Bonds    Nature Advantages Disadvantages 20/11/2006 Akila Maheshwari 28 .

Term loans    Nature Advantages Disadvantages 20/11/2006 Akila Maheshwari 29 .

Term Loans     Maturity Security Repayment Interest Rate 20/11/2006 Akila Maheshwari 30 .

Seed Capital   Venture Capital Seed Capital Assistance Schemes of IDBI 20/11/2006 Akila Maheshwari 31 .

Medium Term Sources     Loans Deferred Credit Bill Discounting Scheme of IDBI Fixed Deposits Working Capital Term Loan 20/11/2006 Akila Maheshwari 32 .

Short Term Sources       Bank loans Trade Credit Cash Credit and Overdraft Bill discounting Commercial Paper Lease 20/11/2006 Akila Maheshwari 33 .

Cost of Capital   Minimum return Weighted average cost of projected sources of finance 20/11/2006 Akila Maheshwari 34 .

Unit 13 Financial Statements       Learning Objectives Understand the meaning of Financial Statements Uses of Financial Statements for decision making Financial Analysis Interpretation of Statements Meaning of Fund Flows Akila Maheshwari 35 20/11/2006 .

Key Financial Statements    Balance Sheet Profit & Loss or Income Statement Sources & Uses of Funds Statement 20/11/2006 Akila Maheshwari 36 .

Loans and Advances Current Assets Loans and Advances Miscellaneous expenditures 20/11/2006 Akila Maheshwari 37 .Balance Sheet Liabilities Share Capital Reserves and Surplus Secured Loans Unsecured Loans Current Liabilities and Provisions Current Liabilities Provisions Assets Fixed Assets Investments Current Assets.

Unsecured Loans II. Current Assets Loans and Advances Less Current Liabilities and Provisions 20/11/2006 4. Sources of Funds 1. Reserves and Surplus 2. Investments 3. Loan Funds a. Application of Funds 1.Balance Sheet 1. Fixed Assets 2. Miscellaneous Expenditure Akila Maheshwari 38 . Shareholder’s Funds a. Share Capital b. Secured Loans b.

Revenue Cost of Goods Sold Gross Profit Income Statement Commission actually Received Inventory expenses for the year Depreciation/General Admin/Selling 230000.G & A Overhead Total Expenses Profit Before Interest and Taxes Less Interest Profit Before Tax Tax@30% Net Profit.00 2950.Bottomline 20/11/2006 Akila Maheshwari 39 Interest on loan Other Income/Loss 10000.00 .00 0.00 4000.00 Less Expenses S.

Balance Sheet-Financial Management Balance Sheet Items Share Capital/Reserves and Surplus/Loans/Debentures Finance Topics Capital Structure and Cost of Capital Loans and Advances/Current Working Capital Financing Policy Liabilities/Trade Credit/Provisions Fixed Assets( Net) Gross Block-less depreciation Investments Capital Budgeting Security Analysis Current assets. cashWorking Capital mgt/cash management and bank Receivables Inventories 20/11/2006 Credit Management Inventory Management Akila Maheshwari 40 . loans and advances.

EBIT Interest Profit Before Tax Tax Profit After Tax Dividends Retained Earnings 20/11/2006 Finance Topic Revenue Risk Gross Profit Margin Depreciation Policy Business Risk Financial Risk Tax Planning Return on Equity Dividend Policy Akila Maheshwari 41 .Financial Management Income Statement Item Net Sales Cost of Goods Sold.Income Statement.Stocks/ Wages and Salaries/other manufacturing Expenses Gross Profit Operating Expenses.SGA/Depreciation Operating Profit.non operating surplus/deficit.

Funds Flow Statement.Working Capital Basis Operations Dividend Payment Issue of Share Capital Working Capital Pool Long Term Borrowing Repayment of long term borrowing Purchase of non current assets Sale of non current assets 20/11/2006 Akila Maheshwari 42 .

(WC basis) Sources of Working Capital Operations Profit after tax Depreciation Issue of Share Capital Long term borrowings Sale of fixed assets Total working Capital generated Net change in working capital 20/11/2006 Akila Maheshwari 43 Uses of Working Capital Dividends Purchase of Fixed assets Repayment of term loan Total working capital used .Funds Flow.

Funds Flow.Cash Flow Statement         Sources of Cash Operations Net Income Depreciation Issue of Share Capital Long term borrowings Sale of non current liabilities Decrease in current assets other than cash Akila Maheshwari 44 20/11/2006 .

Cash Flow       Uses of Cash Payment of Dividends Purchase of non current assets Repayment of long term borrowings Decrease in current liabilities Increases in current assets other than cash Akila Maheshwari 45 20/11/2006 .Funds Flow Statement.

Financial Statement Analysis     Assessment of Past Performance and current Position Protection of Net Income and growth prospects Prediction of Bankruptcy and failure Loan decisions by FIs and banks 20/11/2006 Akila Maheshwari 46 .

Techniques      Horizontal analysis Vertical Analysis Trend Analysis Ratio Analysis Common size Analysis 20/11/2006 Akila Maheshwari 47 .

Liquidity or short term solvency anlysis Profitability Analysis Capital Structure or gearing analysis Market strength or Investor analysis Growth and stability analysis 20/11/2006 Akila Maheshwari 48 . 2. 4. 5.Focus of Financial Statements Analysis 1. 3.

Projected Statements    Projected Projected Projected Balance Sheet Income Statements cash flows 20/11/2006 Akila Maheshwari 49 .

 Thanks You Indian Institute of Banking and Finance  20/11/2006 Akila Maheshwari 50 .

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