FINANCIAL ACCOUNTING

AND FINANCIAL STATEMENT

ANALYSIS
Assignment

Devangana Arora
GMP-17-15
1. What are the objectives of Financial Statements?

The objective of financial statements is to provide information about the financial

position, performance and changes in financial position of an enterprise that is
useful to a wide range of users in making economic decisions. There are 3 types
of financial statements

a. Income Statement: The Income Statement shows a companys revenues

and expenses over a period of time. It helps in determining the financial
success or failure of a company based on the Net Income or Loss. It also helps
investors determine the viability of the business and lenders to know the ability
of the company to pay interest expense. The subtotals in the Income
statement can help in determining how a profit or loss was generated.

b. Balance Sheet: The Balance sheet shows what a business owes and owns.
What the business owes is shown on the balance sheet as liabilities and what
it owns is shown as assets. Thus, the balance sheet shows the financial
position of a company at any point of time. It gives information about the
shareholders equity, giving the net worth of the company and also helps the
firm to make provisions against future losses.

c. Statement of Cash Flows: The Statement of Cash Flows shows a companys

cash inflows and outflows from its inverting, operating and financing activities.
It portrays a companys net increase or decrease in cash over a specific period
of time.

2. What are the shortcomings of financial statements in terms of the

disclosures they provide?
Disclosures are the communication of information related to firm performance and
governance by people inside to the people outside. There are various
shortcomings of the financial statements in terms of disclosures they provide. The
users of these statements should be aware of these shortcomings while relying on
the financial data provided by a company to make effective decisions.

Below are some of the shortcomings:

a. Usefulness of Information provided: Although the firms are required by

regulations to provide information, the usefulness of the information provided
is not regulated. Thus, the information disclosed may or may not be of value to
the third parties.

b. Fraud: Disclosing of information does not guarantee the truthfulness of the

information provided. There may be several reasons behind falsifying
accounting documents, such as, overestimating results, over valuing shares,
concealing difficulties and misleading investors.
c. Manipulation: Accounting regulations can be used to manipulate data and
thus provide the most favorable balance sheet. This is done with the objective
to transfer information on future profits to shareholders, and to avoid price
volatility. Many companies are willing to sacrifice future benefits in order to
smooth out the current results.

d. Too much information: Many companies in order to increase transparency

or to compete with other companies in the market place, tend to provide too
much information in the disclosure. This is a huge cost to the company. It also
clouds the actual information thus misleading the stakeholders. Many also
multiply the number of items appearing in the balance sheet, making it difficult
to read, or multiply very detailed and incomprehensible footnotes. This makes
it difficult to filter out the relevant information.

e. Complex Information: If the information provided by companies is too

complex, it may conceal the more important and relevant information or make
it difficult to find.

f. Information Asymmetry: Firms disclose numerous and complex information

and uniformed traders do not have the incentives to understand them. Due to
the heterogeneity of agents ability to process information, it is possible that
information asymmetries are increased between shareholders.

g. Illusion of Knowledge: Corporate disclosures do not inevitably lead to

shareholders having better knowledge of the companys ability to create value.
It is possible that the company discloses false information, conceals important
information, or manipulates information to make them more favorable.

3. What are the contents of Directors Report and MD&A? How are
they useful?
Directors Report:
The Directors report is a statement by a company's directors, as part of the
annual consolidated reports, giving the directors' opinion of the state of the
company, and how much should be paid to people owning shares in the
company.

Directors Report includes the following:

The general state of companys affairs
Information about the amounts, if any, it proposes to carry to any
reserves in the balance sheet
The amount recommended to be paid in the form of dividends
Summary of firms trading activities and future prospects
Any material changes occurred during the period that may affect the
firms finances
Significant changes in the value of fixed assets
Explanation for any adverse remark or reason of failure
 The Directors report has the following uses:
Helps to analyze the operational parameters of the company such as
capacity additions, capex plan / executed during the year, order book as on
financial year end, average length of stay, occupancy rates, etc.
Analyzing reports of past 3-4 years helps to validate if the company has
achieved the set revenue targets over the years, adopted favorable
strategies and how it has performed in times of economic slowdown.
The tone of the directors report helps in understanding the performance of
the company in good and bad performance years.
It helps stakeholders determine he market potential an whether the
company has he structural capacity to expand into new opportunities.
Helps shareholders make informed decisions about their vote in the annual
meetings.
It is a form of social accounting as it is disclosed to the public.
These reports are used for credit-checking uses, to assess investor-
worthiness and to gain background information on an individual.

Management Discussion and Analysis (MD&A):

MD&A is a section of companys annual report written by the management for
the shareholders. It explains how the entity has performed in the past, its
financial condition and its future prospects.

MD&A includes the following:

Current capital structure of debt and equity of the company
Additional stock or bond offerings planned
Net Income and sales separated by company divisions
SWOT analysis of the company

MD&A has the following uses:

Powerful tool for management to communicate how the entity has
created value and how it plans to continue doing so.
Provides opportunity for an entity to communicate the effectiveness of
its stewardship of resources, and, further, progress towards its stated
strategic objectives.
MD&A can be used to integrate and accumulate in one location
important information about the entity that investors need to know.
Help orient new directors and others interested in knowing about an
entitys performance and prospects.
Deliver significant benefits to entities by sharpening organizational
focus, providing new insights into key performance drivers, promoting
accountability and control, and facilitating benchmarking of
performance.

4. What is the genesis of creation of capital reserve for BPCL?

 Capital reserve is created when there is capital profit (capital surplus) i.e. profit
on sale of assets or upward revaluation of assets. These profits are held under
capital reserve heading and are not for distribution of dividends to shareholder.
It is used to meet capital loss, if required.

In case of BPCL, their capital reserve reported in 2015-16 was Rs. 12.33 Cr.
This resulted from a profit reported in the previous years. The creation of this
surplus is traced back by analysing the data for past 5 years.

Capital Reserve Analysis:

Period Capital Grant Amortization Capital

Reserve as Received of Capital Reserve
per last during the Grant (in Cr.)
Balance Year (in Cr.) (in Cr.)
Sheet
(in Cr.)
2011-12 16.32 0 (0.17) 16.15
2012-13 16.15 0.30 (0.18) 16.27
2013-14 16.27 6.30 (0.87) CR = 12.33
CG = 9.37
2014-15 12.33 4.98 (2.30) CR = 12.33
CG = 12.05
2015-16 12.33 0 (1.93) CR = 12.33
CG = 10.12

5. What are the constituents of Reserves and their movement in

the past 5 years?

Reserves are any part of stockholders' equity, except for basic share capital.
Reserves are retained in the business and not distributed to owners or
shareholders.

Reserves comprise of the following:

a. Capital Reserve
b. Capital Grant
c. Debenture Redemption Reserve
d. General Reserve
e. Foreign Currency Monetary Item Translation Difference Account

Movement in Reserves of BPCL in the past 5 years are represented in the table
below:
Period
Type of Reserve 2011-12 2012-13 2013-14 2014-15 2015-16
Capital Reserve 16.15 16.27 12.33 12.33 12.33
Capital Grant 0 0 9.37 12.05 10.12
Debenture Reserve 1000 126.3 323.14 517.49 586.24
General Reserve 13036.17 15,268.37 17706.59 20675.54 25406.12
Foreign Currency
Monetary Item 0 0 184.25 26.99 (79.2)
Translation Difference
Account

Capital Reserve (in Cr.)

18
16.15 16.27
16
14 12.33 12.33 12.33
12
10
8
6
4
2
0
2011-12 2012-13 2013-14 2014-15 2015-16

Capital Grant (in Cr.)

14
12.05
12
10.12
9.37
10

2
0.00 0.00
0
2011-12 2012-13 2013-14 2014-15 2015-16
 Debenture Reserve (in Cr.)
1200
1,000.00
1000

800
586.24
600 517.49

400 323.14

126.30
200

0
2011-12 2012-13 2013-14 2014-15 2015-16

General Reserve (in Cr.)

30000
25,406.12
25000
20,675.54
20000 17,706.59
15,268.37
15000 13,036.17

10000

5000

0
2011-12 2012-13 2013-14 2014-15 2015-16

Foreign Currency Monetary Item Translation Difference

Account (in Cr.)
200 184.25

150

100
26.99
50
0.00 0.00
0
2011-12 2012-13 2013-14 2014-15 2015-16
-50 (79.20)

-100
6. What is the background of the loan given by the Government
to the Oil industry?

As per the mandate given by Oil Industry Development Act of 1974, OIDB (Oil
Industry Development Board) provides financial and other assistance for the
development of Oil Industry. The development includes many activities such as
prospecting or exploring for or production of mineral oil, refining, processing,
transportation, storage, handling and marketing, etc. So, OIDB has been
provisioning loans to to all PSUs since its inception in 1974.
The quantum of loan disbursed by OIDB has increased from Rs 16.01 crore in
1974-75 to an average of about Rs 1900 crores during the recent years. GAIL,
IOC, HPCL, BPCL and MRPL are the major beneficiaries of the loans released
by OIDB. The loan has been primarily utilised to fund gas and oil pipeline
projects, setting up of new refineries and quality improvement of existing
refineries, single point mooring projects and city gas distribution projects

7. Whats the movement in Redeemable Debenture account?

Redeemable Debenture is an agreement under which a firm issuing a

debenture agrees to repay the borrowed amount on a certain date or after a
specific period of notice. These are the debentures which the company has
issued for a limited period of time. On completion of the time for which they
were issued, principal amount will be returned to the debenture holders (that
means redemption of debentures).

BPCL had allotted redeemable non-convertible 8.65% Debentures of face value

of ` 700 crores on 8th October 2012 redeemable on 8th October 2017 with a
put call option which was exercised on 8th October 2015. Accordingly
Corporation has redeemed the debentures during the year. These were
secured by first legal mortgage by way of a Registered Debenture Trust Deed
over the fixed assets of the Company, mainly Plant and Machinery at Mumbai
Refinery. The relevant charge has been satisfied.

The Redeemable Debentures of BPCL show the following trend in the last 5
years:

Period
Account 2011-12 2012-13 2013-14 2014-15 2015-16
Debenture
1000 126.3 323.14 517.49 586.24
Redemption Reserve
 Debenture Redemption Reserve (in Cr.)
1200
1,000.00
1000

800
586.24
600 517.49

400 323.14

126.30
200

0
2011-12 2012-13 2013-14 2014-15 2015-16