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Financial Reporting & Analysis

Session One
Manju Jaiswall IIM Calcutta

Session Plan

Session Topic No. 1&2 Understanding Financial Statements-I Accounting framework, Preparation and presentation of Balance Sheet & Income Statement Maria Hernadez Associates (HBS case) 3 Understanding Financial Statements-II Cash flow statement Chemalite Inc. (HBS case) Exercises on cash flow statement 4 Corporate Accounting Policy choices Earnings Management behaviour in firms Microsoft’s Financial Reporting Strategy (HBS case)
5 Financial Statements Analysis-I Basic analytical tools for financial statements Financial Statements Analysis-II Intra & Inter firm/Industry Analysis Ratio & DuPont Analysis
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Coal India Ltd.
• Consolidated sales of the company for the fiscal ended March 2010 was higher by 14% to Rs 46689.29 crore and the net profit was up by 142% to Rs 9833.70 crore, albeit on a lower base. The EPS for the fiscal was Rs 15.2. The offer price band of Rs 225-245 discounts the FY2010 consolidated earning by 14.8-16.1 times, which is largely in line with the P/Es at which other global coal majors (especially Asian) are trading..
Particulars Quarter Ended Mar. 2012 Sales 18819.29 OPM % 42.62 PBDT 8990.49 PBT 7641.24 NP 5644.38 Mar. 2011 15396.19 33.3 6061.7 3753.36 2790.86 Year Ended % Var. Mar. 2012 Mar. 2011 % Var. 22 75758.41 65841.79 15 28 48.25 48.46 0 48 40998.58 35294.75 16 104 33502.01 27616.37 21 102 25122.92 18924 331–3

Powergrid Corporation (PGCIL)
• A capex of about Rs 17,814 crore was incurred with Rs 14,100 crore of assets being commissioned in FY 2012. • Assets are getting commissioned at a faster pace, thus improving the overall Return on Equity (ROE) for the company. • Net sales were up by 20% to Rs 10,035.33 crore and PAT rose 21% to Rs 3254.95 crore in FY 2012. We expect PGCIL to register sales of Rs 12283.24 crore and net profit of Rs 3934.16 crore in FY 2013. • EPS works out to Rs 8.5. The share price trades at Rs 112, which discounts the projected FY2013 EPS by 13.1 times.
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02 5961.87 255. Tax) 210.13 -247.84 1402.87 PAT 1263.72 2100.39 158.Ambuja Cements Ltd Industry :Cement .off) Gross Sales 8257.27 7-Dec 304.13 7016.95 2261.82 Net Working Capital ( Incl.71 554.2 2122.06 PBIT 1710.37 3490.91 1008.94 485.3 1218.96 4542.05 39.78 2922. Tax) 3200.2 2712.56 PBT 1661.6 2001.2 5597.49 1615.74 6471.05 2368.25 Capital Employed 7395.97 Networth 7330.19 1006.75 PBDT 2049.77 2256.03 Net Sales 7390.3 5231.6 1503.9 1969.96 2466.88 5447.15 1228.73 1803.29 1825.36 PBIDT 2097.84 3760.51 6167.Major .22 W.27 Selling Cost 1399.5 91.37 8-Dec 304.66 2229.48 4660.6 1131.44 2008.52 5673.35 1769.1 6-Dec 303.11 1575.05 6636. 2990.82 Current Liabilities and Provisions ( Incl.58 4355.25 7721.23 Cost of Production 3918.37 7075.62 6560. Def.42 Current Assets ( Incl.North India (Rs in Crs) Financial Performance 10-Dec Year End Equity Paid Up 305.31 2280.69 5706.75 6224.88 4991.21 Other Income 320.83 1841.28 Gross Block 8778.02 1189.67 1111.7 6396.42 7076.61 9-Dec 304.54 2948.72 1954.9 1098.7 6220.21 8890.69 2788. Tax) Total Assets/Liabilities (excl Reval & 10385.25 . Def.01 1882.67 3127.4 Def.95 2167.82 3024.96 7840.

76 0.28 9.9 695.02 832.16 5.71 12.CESC Ltd Financial Performance Year End Equity Networth Capital Employed Gross Block Sales Other Income PBIDT PBDT PBIT PBT EPS (Rs.33 7.09 7.088.69 757.823.06 6.62 40 14.29 16.64 548.23 170.7 34.972.21 753.47 639.4 2.84 40 11.91 27.93 11.32 3.47 7.36 584.) Dividend (%) Payout (%) Ratio Analysis Debt-Equity Current Ratio Invtry Turnover Debtors Turnover Interest Cover ROCE (%) RONW (%) 10-Mar 125.71 2.91 1.05 340.6 2.222.531.23 6.73 1.68 16.38 1.13 3.2 571.79 1.5 6-Mar 82.79 35 9.22 10.392.41 10.77 657.90 179.647.94 5.68 1.75 402.99 498.87 8-Mar 125.43 3.31 7-Mar 84.544.9 7.6 3.46 0.37 14.67 522.828.75 963.96 1.938.03 1.94 40 12.555.993.07 7.31 727.530.98 1.82 2.89 194.354.64 12.62 14.59 705.75 3.990.40 4.41 1.87 31.98 1.05 33.82 12.04 25 11.47 21.21 2.34 6.25 14.92 .3 451.29 4.57 464.6 3.13 74.98 1.541.42 16.635.29 98.650.35 15.91 8.01 9-Mar 125.78 13.56 4.129.6 3.32 441.120.22 11.45 197.

36 4722.52 Fixed Assets Total Assets Working Capital PBT 1577.01 4406.27 10057.36 11921.02 6719.Snapshot view Rs crores Equity Vodafone 404.58 20834.36 MTNL 630 Net worth Capital employed Sales 9248.06 2733.53 811.99 11921.01 357.33 4273.43 1116.58 -1121.66 3542.31 12262.46 .30 13138.09 Idea Cellular 2635.64 13888.89 15912.86 15842.

– Results achieved by using those resources. • For: – Parties inside and outside the organization.Role of Accounting • Accounting is a system that provides information on: – Amounts of resources. – How resources were financed. – How were the resources invested. 1–8 .

• investing. • and operating The accounting information system keeps track of the results of each of these business activities. 1–9 .Business Activities All businesses are involved in three types of activity • financing.

The Accounting process Economic activities Fin/Inv/Op Accounting connects decision makers with economic activities  and the cycle continues with the results of their decisions Accounting Information Actions (decisions) Decision makers 1–10 .

Users & Uses of Accounting Information Who Uses Accounting Data Internal Users Finance Management Customers Creditors Marketing Regulatory Agencies Investors Human Resources Taxing Authorities External Users Labor Unions 1–11 .

What price for our product will maximize net income? User Human Resources Marketing Management 3. Can we afford to give our employees a pay raise? 2. Is cash sufficient to pay dividends to the stockholders? Finance .Users & Uses of Accounting Information Questions Asked by Internal Users 1. Which product line is most profitable? 4.

Will Kingfisher Airlines be able to pay its debts as they come due? User Investors Investors Creditors . Is the company earning satisfactory income? 2. How does Vodafone compare in size and profitability with MTNL? 3.Users & Uses of Accounting Information Questions Asked by External Users 1.

Process of Accounting • Creating Accounting heads – Asset. • Resources Invested in = Fixed Asset + Investment + Current Assets • LHS = RHS • Yields Financial Statements 1–14 . Equity. Liability. Income & Expense • Double Entry system • Accounting Equation Assets = Owner’s Equity + Liabilities • Resources financed by = business creditors + lenders + capital provided by owners.

Purpose of Financial Accounting • To provide financial information about an organization. • Such parties include – Investors – Creditors – & Others including the Regulators. Researchers including Academicians & (Wall) Street Analysts. . General Public. etc. • It should be noted that all these interested parties are external to the organization. Thus Accounting Information used for decision making meets certain qualitative characteristics. its current financial position as well as it’s ability to generate earnings & cash flows. to various interested parties. Industry Associations.

Financial Statements: Elements • Elements measuring financial position: – Assets – Liabilities – Equity • Elements measuring performance – Revenue / Income (includes gains) – Expenses (includes losses) 1–16 .

(70.780 1.176) Dividend 63.950 263.632 878.152 2013 436.960) (116.374.875.144.176 222.800 300.432 2.000 1.608 (13.600 6.000 COGS (5.640 (266.160 380.040 3.592 Income Statement 2013 2012 Sales 7.866.592 492.000 1.926. (116.584 (160.188 (160.800 400.000 408.480 2.648 (130.866.012) EBT 422.721.360 1.800 1.592 2012 524.000) Other expenses (550.152 2012 7.034.112 1. & Amortn.Balance Sheet ASSETS Cash Accts Receivable / Debtors Inventories Total Current Assets Gross Fixed Assets Less: Deprn.000) (519.120 817.176) 1–17 .808 489.160 636.544.960) Taxes (169. Net Fixed Assets Total Assets LIABILITIES Accts payable / Creditors Short term Bank loan Accrued Expenses Total Current Liabilities Long-term debt Total External Liability Common stock/Share Capital Retained earnings Total Owner's Equity Total Liab & Owner's Equity 2013 85.352 3.160 1.592 2.008) (136.528.988) EBITDA 609.497.035.287.396 0 Retained Earnings 190.056) 106.948) Interest Exp.988) Deprn.202.790 2.992) (5.197.000 1.680.568 723.650.600 1.952.802 1.282 632.000 32.000 460.497.716.784 Net income 253.160 939.960) EBIT 492.

Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. the equity is the ownership interest. In business enterprises. • 1–18 . Liabilities are probable Future Sacrifices of economic benefits.Definition • • Assets are Probable Future economic benefits.Financial Elements .

000 Salaries payable 3.000 Accounts receivable 60.000 = $80.Accounting Equation Travel Assets =Vagabond Liabilities + Agency Owners’ Equity Balance Sheet December 31. 2007 $300.000 Retained earnings 70.000 Capital stock 150.000 Owners' Equity Office equipment 15.000 Supplies 2.000 Notes payable $ 41.000 + $220.000 Land 100.000 Total $ 300.000 1–19 .000 Assets Liabilities & Owners' Equity Cash $ 22.000 Building 90.000 Total $ 300.500 Liabilities: Notes receivable 10.000 Total liabilities $ 80.500 Accounts payable 36.

– Examples: Sales for Manufacturing & Trading Companies.Financial Elements . – Increase Owner’s Equity • Expenses outflows that result from an entity’s central operations. – Examples: Raw Material Expenses. Selling Expenses. Manufacturing Expenses.Definition • Revenues / Incomes inflows that result from an entity’s central operation or core activities or principal business. – Decreases Owner’s Equity 1–20 . etc. Personnel Expenses. Interest & Investment Income for Banks.

Communicating with Users Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Retained Earnings Statement Statement of Cash Flows 1–21 .

Communicating with Users Income Statement Retained Earnings Statement Net income is needed to determine the ending balance in retained earnings. 1–22 .

Communicating with Users Balance Sheet Retained Earnings Statement Ending balance in retained earnings is needed in preparing the balance sheet. 1–23 .

000. During the year.20.000 at the beginning of the year and assets of $ 4. and the company paid dividends of $ 48. there was an investment of $ 40.Exercise • Lamda Inc. What amount of net income did the company earn during the year? .80.000 at the end of the year.000 and liabilities of $ 1. had assets of $ 2.000 and liabilities of $ 1.000 in the business by the owners.40.00.

Illustration 1–25 .

the year end balance of selected accounts were as follows – cash $1890.Exercise • Tarech Corp. dividends $410. • In proper format.$4800. 1–26 . prepare the Income Statement. • In addition. total expenses $ 2450. other assets $1000.engaged in activities during the first year of its operation that resulted in the following: service revenue . accounts payable $450 & Common stock $500. statement of Retained earnings and balance sheet for the firm.

Illustration .

on 1-1-12 to buy & sell few consumer durable items.an illustration • Few of us jointly promote a trading Co. contributing 5 lakhs each (6 of us) to the share capital. Assets = Liabilities + Owner’s Equity Cash (30 lakhs) = 0 + Equity share capital (30 lakhs) Business Entity Concept 1–28 .Accounting equation in balance.

Cont’d • Took a bank loan Rs 20 lakhs. Assets = Liabilities + Owner’s Equity Cash (20) = Bank Loan (20) Cumulative Impact Cash (50) = Loan (20) + Equity share capital (30) 1–29 .

Assets = Liabilities + Owner’s Equity Advance rent (5) + Cash (-5) = 0 Cumulative Impact Advance (5) + Cash (45) = Loan (20) + Equity share capital (30) 1–30 .Cont’d • Rented a showroom.m. paid 5 lakhs as refundable advance. Rent is 1 lakh p.

Cont’d • Bought furniture for the showroom for 5 lakhs. Assets = Liabilities + Owner’s Equity Furniture (5) + Cash (-5) = 0 Cumulative Impact Furniture (5) + Advance (5) + Cash (40) = Loan (20) + Equity share capital (30) Historical Cost Assumption 1–31 .

Cont’d • Purchased inventory for 60 lakhs. Assets = Liabilities + Owner’s Equity Inventory (60) + Cash (-30) = Creditors (30) Cumulative Impact Furniture (5) + Inventory (60)+ Advance (5) + Cash (10) = Creditors (30) + Loan (20) + Equity share capital (30) 1–32 . Paid 50% in cash and agreed to pay the balance in 60 days time.

Assets = Liabilities + Owner’s Equity Inventory (-40) + Debtors (20) + Cash (30) = Sales (50) – Cost of goods sold (40) Cumulative Impact Furniture (5) + Stock (20)+ Debtors (20) + Advance (5) + Cash (40) = Creditors (30) + Loan (20) + Equity share capital (30) + { Sales (50) – Cost of goods sold (40) } 1–33 . – cash sales 30 lakhs. & balance on credit.Cont’d • Sold 40 lakhs worth of inventory for 50 lakhs.

2) + OE (-5.Cont’d • Manager informs about the following dues staff salary 2 lakhs.2) + Loan (20) + Equity share capital (30) + {Sales (50) – Cost of goods sold (40) – Expenses (5. advertisement expenses 2 lakhs.2)} 1–34 . Assets = Liabilities + Owner’s Equity 0 = Expenses payable (5.2) Cumulative Impact Furniture (5) + Stock (20)+ Debtors (20) + Advance (5) + Cash (40) = Creditors (30) + Expenses payable (5.000 & rent 1 lakh. interest 20.

Cont’d • Dividend paid to investors 1 lakh Assets = Liabilities + Owner’s Equity Cash (-1) = OE (-1) Cumulative Impact Furniture (5) + Stock (20)+ Debtors (20) + Advance (5) + Cash (39) = Creditors (30) + Expenses payable (5.2)} – Dividend (1) 1–35 .2) + Loan (20) + Equity share capital (30) + {Sales (50) – Cost of goods sold (40) – Expenses (5.

8 20 Current Assets Loans & Advances Inventory Debtors Rent Advance 20 20 5 39 84 Current Liabilities & Provisions Cash Creditors Expenses payable 30 5.8 Assets Fixed Assets Furniture 5 Owner's Equity Loan from Bank 33.Balance Sheet as at 31-01-12 Liabilities Share capital Reserves & Surplus 30 3.2 89 89 1–36 .

8 0 4.Income Statement for the month ending 31-01-12 Income Sales Other Income Total Income Expenditure Cost of goods sold 40 50 0 50 Salary Advertisement rent 2 2 1 45 PBDIT Depreciation Interest PBT Tax PAT/Disposable profit Dividend 5 0 0.2 4.8 1 Balance profit carried to B/S 3.8 1–37 .

Cash Flow Summary Receipts cash from fresh equity Bank loan cash received from customers Payments cash paid to supplier cash paid for advance rent purchase of furniture paid dividend Balance of cash closing -30 -5 -5 -1 -41 39 1–38 30 20 30 80 .

8 33.8 Current Assets Loans & Advances Inventory 20 20 Cost of goods sold Salary Advertisement rent 40 2 2 1 45 Payments cash paid to supplier cash paid for advance rent purchase of furniture paid dividend -30 Loan from Bank 20 Debtors Rent Advance PBDIT 5 39 84 Depreciation Interest Cash 30 5.8 1 3.2 -5 -5 -1 -41 Current Liabilities & Provisions Creditors Expenses payable 4.Interdependence of Financial Statements Balance Sheet as at 2012 Income Statement for the month ending 31-01-12 Cash Flow Summary Receipts 50 0 50 cash from fresh equity Bank loan 30 20 Liabilities Share capital 30 Assets Fixed Assets Furniture 5 Income Sales Other Income Total Income Expenditure Reserves & Surplus Owner's Equity cash received from customers 30 80 3.2 89 89 PBT Tax PAT/Disposable profit Dividend Balance profit carried to B/S 5 0 0.8 Balance of cash closing 39 1–39 .8 0 4.

Financial Accounting Regulations (FAR) FAR Conventions/ Principles Full Disclosure Materiality Conservatism Historical Cost Accrual & Cash basis Revenue Recognition Matching 1–40 Assumptions Going Concern Accounting period Money measurement Standards Separate Entity .

• Accounting concepts underlying the recording of transactions: – Separate Entity Concept – Money Measurement Concept – Going Concern Concept – Accounting Period Concept 1–41 .Basic Accounting Assumptions • An understanding of basic accounting assumptions is vital to understand the process of accounting.