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Finance Primer

PGP Participants 2016-18

Brief Overview of
Equit-I, the
Finance Club of
IIM Indore

About Equit-I
Income Statement
Balance Sheet

Ratios

Finance Club-IIM
Indore
Valuation Methods

Equit-I: The Finance Club, IIM Indore, is a PGP participants' initiative to create a finance
oriented learning environment within the campus that eventually helps the students'
community brace up for the industry rigor.
The club provides opportunities for hands on learning through workshops and mentorship
programs. Also, it facilitates a fun learning experience in the form of events and
competitions organized all year round.
Equit-I assists participants in exploring financial career opportunities by organizing interactive
sessions on various finance related topics and setting up career panels specifically for finance
roles.
The club assists participants in preparing for their summer and final placements by publishing
special articles and newsletters. Also, Equit-I members conduct lectures on fundamentals of
finance for the PGP1 participants once they are inducted to the course.
Additionally, the club helps companies increase their brand equity and visibility on campus
through various initiatives like talks, newsletters and different on-campus competitions.

INTRODUCTION
TO ACCOUNTING
CONCEPTS AND
BASICS OF
FINANCIAL
STATEMENTS

Accounting
Concepts
Income
Statement

Balance
Sheet
Balance
Sheet

Income Statement Valuation


Ratios
Cash FlowMethods
Statement

Money Measurement : Financial Accounting records only that information which can be expressed in monetary terms. The
purpose of this is to provide a common unit to measure and operate on heterogeneous entities
Entity : An entity is any organization or activity for which accounting reports are prepared. The entity concepts treats the
accounts of businesses separately from those of the persons running them
Going Concern : Accounting assumes that the organization is question will continue to operate for an indefinitely long period
in the future
Cost : The values of assets are generally recorded at the amount paid to acquire them rather than at their current fair value
Accounting period : This is the time between two successive presentations of financial statements by an organization.
Dual Aspect : Every transaction has a dual affect and impacts at least two items. It preserves the fundamental accounting
equation
Assets = Liabilities + Owners Equity
Matching : When a given event affects both revenues and expenses, the effect on each should be recognized in the same
accounting period
Conservatism : Revenues are recognized only when they are reasonably certain and expenses are recognized as soon as
they are reasonably possible
Materiality : Accounting should involve disclosure of all important and relevant information

Income
Statement
Accounting
Concepts

Balance
Sheet
Balance
Sheet

Income Statement Valuation


Ratios
Cash FlowMethods
Statement
Balance Sheet gives the financial position of an
accounting entity at a specified moment in time. It is
also known as statement of financial position
Components of Balance Sheet
Assets : Assets are economic resources that are
owned and controlled by the entity and whose cost
is objectively measurable. Economic resources are
those that provide future benefits to the entity
Liabilities : Liabilities are obligations of the entity to
transfer assets or provide services to outside parties
arising from events that have already happened
Owners Equity : This represents the amount
owners have invested in the entity. It consists of
paid-in capital(amount invested directly) and
retained earnings(earnings to the firm minus
dividends paid out by the firm)

Assets = Liabilities + Owners Equity

Income
Statement
Accounting
Concepts

Balance
Sheet
Balance
Sheet

Income
Ratios Statement

Valuation
Cash FlowMethods
Statement

The income statement summarizes the revenues


earned and the expenses incurred by the entity over a
specified period of time
The primary purpose of income statement is to show
whether the entity made or lost money during the
specified period
The components of income statement are
Revenues : Revenues primarily demonstrate cash
inflows and enhancements in assets from the
companys ongoing operations during the period
Expenses : Expenses involve cash outflows,
depreciation in the values of assets or incurrence of
liabilities from the companys ongoing operations during
the period
Revenues Expenses = Net Income

Income
Statement
Accounting
Concepts

Balance
Sheet
Balance
Sheet

Income
Ratios Statement

Valuation
Cash FlowMethods
Statement

The cash flow statement provides information about the cash flows associated with the periods
operations, and also about the entitys investing and financing activities during the period
It shows the impact of balance sheet accounts and income on cash and cash equivalents
Cash flow statements are considered objective as they are not influenced by judgments and estimates
that are made in arriving at revenues and expenses
Change in Cash flows = Cash flows from operating + investing + financing activities

FINANCIAL
STATEMENT
ANALYSIS AND
FINANCIAL
RATIOS

Statement Balance Sheet Balance Sheet


IncomeIncome
Statement
Ratios

Ratios
Valuation
Methods

COGS
Linkages
to Balance
Sheet

Main
Components
of the Income
Statement

EBITDA

Operating
Profit

Operating
Revenue

IncomeIncome
Statement
Ratios
Statement Balance Sheet Balance Sheet

Ratios
Valuation
Methods

Cost of Goods Sold


(COGS)
Comprises of :A. Cost of Materials Consumed
B. Purchases of Finished Goods
C. Changes in Inventory
(Opening Stk Closing Stk)
Traditional formula for COGS
COGS = Opening stock of
RM+WIP +FG
(+)
Purchases of
RM+WIP+FG
(-)
Closing Stock of
RM+WIP+FG
COGS of HUL = 11,159.81 +
3350.19 - 166.38 = 14,343.62

Income Statement

Balance Sheet

(a)

(b)
(c)

Ratios
Operating Revenue
Income from companys everyday
business operations
In Financials , comprises of : Revenue from Operations (-)
Excise Duty (if any)
Operating Revenue for HUL =
29,557.90-1638.77 =28,019.13
Operating Profit
Profit earned from Normal
Business Operations
Operating Profit = Profit Before
Exceptional Items and Taxes
(-) Other income,
(+) Depreciation and Finance Cost
Interest Expense
Operating Profit of HUL =
4,799.71+(b)+(c)-(a) = 4,475.25

Balance Sheet

Income Statement

(a)

(a)
(b)

Ratios
EBITDA
EBITDA is Earnings Before Interest,
Tax, Depreciation and
Amortisation.
In Financials, EBITDA = Profit
before exceptional items and tax
(+) Depreciation/Amortisation
(+) Finance Cost
EBITDA in HUL = 4,799.71+ (a) +
(b) = 5,096.29

Income Statement

Balance Sheet
Relation

Between

Income

Statement

and the

Balance

Sheet

Ratios

Balance Sheet

Income Statement

(a)

(a)
(b)

Ratios

Equity
Common stock of company, preferred
stock.
In Financials :- Share Capital
Equity of HUL :- 216.27
Liabilities
Three conditions for defining liability:A. Obligation of the Firm
B. Obligation arises from past events
C. Results in transfer of economic
benefits
Type of Liabilities :A. Short-Term/Current Liabilities :- Liability
which is payable in Less than 1 year
B. Long-Term/Non-Current Liabilities :- Any
liability which is not short term
Long Term Liabilities of HUL:278.82 + 838.69 = 1,117.51
Short Term Liabilities of HUL :6,793.89 + 862.94 + 1,957.01 = 9,613.84

Balance Sheet

Income Statement

(a)

(a) (b)
(b)

Ratios

Contingent Liability : Three conditions for defining contingent


liability:A. May or may not be obligation of the firm.
B. Existence can be only confirmed by
occurrence or non-occurrence of future
event
C. Reasonable estimate of liability is not
known.
In Financials :- Below the Balance Sheet
Contingent Liability of HUL :- 991.20 (As
per Note 24,25)
Working Capital : It is Current Assets (-) Current Liabilities
Working Capital of HUL = (a) (b) =
Sum of Current Assets =
8,852.47
(-) Sum of Current Liabilities = (8,603.84)
Working Capital =
248.63

(a)

Balance Sheet

Income Statement

(a)

(a)
(b)

Ratios

Fixed Asset: Three Types of Fixed assets :


(a) Tangible :- Asset which has a physical
form.
(b) Intangible :- Assets that are not
physical in nature eg :- goodwill,
patents etc.
(c) Capital WIP/Intangible Assets under
Development:- Assets which are under
construction.
In Financials :- Tangible Assets + Intangible
Assets + Capital WIP + Intangibles under
development.
Fixed Assets of HUL :(2,397.94 + 24.12 + 312.04 + 7.7 = 2,741.80)
Deferred Tax Asset / Liability
Difference between taxes on profit as per
books of accounts (Accounting Profit) and
as per tax books.
In Financials :- Deferred Tax Asset/Liability
Deferred Tax Asset of HUL :- 161.73

Balance Sheet

Income Statement

(a)

(a)
(b)

Ratios

Current and Non Current Assets: Current Assets


Assets which are due to be received within
a period of 1 year.
Eg :- Short Term loans and advances, cash
and bank balance, trade receivables,
debtors, inventories etc.
In Financials :- Current Assets
Current Assets of HUL :- 8,852.47

Non Current Assets


Assets which do not fall under current
assets
Eg :- Long Term loans and advances.
In financials :- Non Current Assets + Long
Term
Non Current Assets :- 606.19

Balance Sheet

Income Statement

(a)

(a)
(b)

Ratios

LIQUIDITY RATIO: Current Ratio


Best measure of liquidity
Current Ratio :- Current Assets / Current
Liabilities.
Current Assets of HUL :- 8,852.47
Current Liabilities of HUL :- 8,603.84
Current Ratio of HUL :- 8852.47/8603.83 =
1.03

Quick Ratio/Acid Test Ratio


Assets which do not fall under current
assets
It is a more stricter version of the ratio as it
takes only the assets which are readily
convertible in cash i.e. inventory and
prepaid expenses are excluded
Quick Assets of HUL :- 8,852.47 2,747.53
= 6,104.94
Quick liabilities of HUL :- 8,603.84
Quick Ratio :- 0.71

Balance Sheet

Income Statement

Ratios

CAPITAL STRUCTURE RATIOS:

(a)

(a)
(b)

Debt Equity Ratio:Also Know of leverage ratio.


Indicates the proportion of debt to equity of the
company
D/E Ratio = Debt / Equity
In Financials, Debt = Long Term Borrowings +
Short term borrowings
Equity = Equity Share Capital + Preference Share
Capital+ Reserves & Surplus
Debt of HUL :- 0 (Since there is no mention of
long term/short term borrowing)
Equity :- 216.27 + 3060.78 = 3,277.05
D/E of HUL :- 0/3,277.05 = 0
Capital Gearing Ratio
Stricter version of D/E Ratio.
It treats preference share capital as a debt
Formula = (Debt + Preference share Capital) /
Equity
In Financials, Equity = Equity Share Capital +
Reserves & Surplus.
Capital Gearing Ratio of HUL = Debt + Pref. Cap
Equity
Preference Share & Debt = 0 Hence Capital
Gearing ratio of HUL = 0

Balance Sheet

Income Statement

(a)
(a)

(b)
(a)
(c)
(b)

Ratios

PROFITABILITY RATIOS: Operating Profit Ratio : Formula = Operating Profit/Sales


Operating Profit of HUL = 4,799.71+ (b) +
(c) (a) = 4,475.25
Sales = Revenue from Operations Net =
28,019.13
Operating Profit Margin =
4,475.25/28,019.13 * 100 = 15.97%

Net Profit Ratio


Formula = Net Profit / Sales
In Financials, Net Profit = Profit for the
year.
Net Profit of HUL = 3,867.49
Sales of HUL = 28,019.13
Net Profit Margin = 3,867.49 / 28,019.13 *
100 = 13.80 %

Balance Sheet

Income Statement

(a)

(a)
(a)
(b)

Ratios

PROFITABILITY RATIO OWNERS POINT OF


VIEW: Return on Capital Employed (ROCE)
Formula = Total Earnings / Capital
Employed
In Financials , total earnings = Profit Before
Exceptional Items and tax + Finance Cost
Capital Employed = Equity Share Cap + Pref.
Share Cap + Reserves & Surplus + Long
Term Borrowings
Total Earnings of HUL = 4,799 + (a) =
4,835.74
Capital Employed of HUL = Equity Share
cap + Reserves & Surplus = 3,277.09
ROCE = 4,835.74 / 3,277.09 *100 =147.56%

Return on Equity (ROE)


Formula = Profit After Tax / (Equity Share
Cap + Reserves & Surplus)
In Financials, PAT = Profit for the year .
Return on Equity of HUL = 3,867.49 /
3,277.09* 100 = 118.01%

Balance Sheet

Income Statement

Ratios

TURNOVER/PERFORMANCE RATIOS:-

(a)

(a)
(b)

Stock Turnover Ratio


Explains how many times a companys
inventory is sold and replaced over a
period.
Formula = COGS / Average Inventory
Average Inventory =( Opening Stock +
Closing stock) / 2
COGS as per HUL = 14,343.62
Average Inventory (Finished Goods) =
(1,344.83 + 1,280.66)/2 = 1,312.74
Stock Turnover ratio of HUL =
14,343.62 / 1,312.74 = 10.92 times

Balance Sheet

Income Statement

(a)

(a)
(b)

Ratios

TURNOVER/PERFORMANCE RATIOS:Debtor Turnover Ratio


Shows effectiveness in extending credit as
well as collecting debts
Formula = Net Credit Sales/ Average
Debtors (Also called Trade Receivable)
Average Debtors =( Opening Debtors +
Closing Debtors) / 2
Net Credit Sales of HUL (Since credit sales
is not available, we take complete sales) =
28,019.13
Average Debtors =(816.43 + 833.48)/2 =
824.95
Debtors turnover ratio = 28,019.13/ 824.95
= 33.96
Creditors Turnover Ratio
Similar to Debtors turnover ratio
Used to measure the rate at which
company pays off its creditors
Formula = Purchases / Average Creditor
(Also called Trade Payables)

Assignment to gauge your Interest !

You are required to download the consolidated Financial Statements of ITC


Limited for the year ended 31 March 2015 and calculate all the ratios which have
been mentioned in the primer for the year 2015 and 2014.
Few pointers:1. Make the calculation in an excel sheet. Word document or pdf containing the
calculation will not be considered for evaluation.
2. In case you differ from the ratio formula used in the primer, kindly write down
the formula that you have used as a note below the calculations in the excel
sheet
3. Do attach the copy of the financial statements used by you for calculation of
ratios
4. Naming Convention for the excel sheet: - Full Name_PGP2016-18.xls

Send your answers to equiti@iimidr.ac.in with your name and contact no


Deadline :- July 3rd, 2016 (EOD)
Winners will be announced on the Equit-I Facebook page

See You at IIM


Indore !