Engineering Economics &

Finance
BTech-Semester I
IIT(ISM) Dhanbad

Shashank Bansal
Assistant Professor
Department of Management Studies
IIT(ISM) Dhanbad
 Financial Statements
⚫ Financial statements provide information
about the financial activities and position
of a firm.

⚫ Important financial statements are:

⚫ Balance sheet
⚫ Profit & Loss statement
⚫ Cash flow statement

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 Balance Sheet
⚫ Balance sheet indicates the financial
condition of a firm at a specific point of
time. It contains information about the
firm’s: assets, liabilities and equity.
⚫ Assets are always equal to equity and
liabilities:
Assets = Equity + Liabilities

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 Assets
⚫ Assets are economic resources or
properties owned by the firm.
⚫ There are two types of assets:
⚫ Fixed assets
⚫ Current assets

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 Fixed Assets
⚫ Fixed assets are long-term assets.
⚫ Tangible fixed assets are physical assets like
land, machinery, building, equipment.
⚫ Intangible fixed assets are the firm’s rights
and claims, such as patents, copyrights,
goodwill etc.
⚫ Gross block represent all tangible assets at
acquisition costs.
⚫ Net block is gross block net of depreciation.

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 Current Assets
⚫ Current assets (liquid assets) are those
which can be converted into cash within a
year in the normal course of business.
Current assets include:
⚫ Cash
⚫ Tradable (marketable) securities
⚫ Debtors (account receivables)
⚫ Stock of raw material
⚫ Work-in-process
⚫ Finished goods

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 Liabilities
⚫ Liability is a firm’s obligation to pay cash
or provide goods or services in the future.

⚫ Two types of liabilities are:

⚫ Current liabilities
⚫ Long-term liabilities

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 Current Liabilities
⚫ Current liabilities are payable within a
year in the normal course of business.
⚫ They include:
⚫ Accounts payable (creditors)
⚫ Outstanding expenses
⚫ Advances from customers
⚫ Provision for tax
⚫ Provision for dividend

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 Long-term Liabilities
⚫ Long-term liabilities are the obligations
or debts payable in a period of time
greater than the accounting period.
⚫ They include - Debentures, bonds, and
secured long-term loans from financial
institutions.

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 Shareholders’ Funds or Equity
⚫ Share capital is owners’ contribution divided
into shares.
⚫ A share is a certificate acknowledging the
amount of capital contributed by the
shareholder.
⚫ Shareholqers’ equity has two parts:
⚫ Paid-up share capital, and
⚫ Reserves and surplus (retained earnings)—representing
undistributed profits.
⚫ Paid-up share capital and reserve and surplus
together are called net worth.

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 Balance Sheet Account Format

Dr. Shashank Bansal, IIT(ISM) Dhanbad

11 (shashank@iitism.ac.in) 07-01-2021
 Balance
Sheet
Report
Format

Dr. Shashank Bansal, IIT(ISM) Dhanbad

12 (shashank@iitism.ac.in) 07-01-2021
 Profit & Loss Statement
⚫ The earning capacity and potential of a
firm are reflected by its Profit & Loss
statement
⚫ Profit & Loss statement reflects the results
of operation for a period of time
⚫ Profit & Loss statement provides
information arout a firm’s:
⚫ Revenues (Income)
⚫ Expenses, and
⚫ Profit or Loss.

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 Nature of Revenues
⚫ Revenue is the amount received or
receivable within the accounting period
from the sale of the firm’s goods or services.
⚫ Operating revenue is the one that arises
from main operations of the firm, and the
revenue arising from other activities is
called non-operating revenue.
⚫ Sale of old equipment
⚫ Dividend and Interest income from
investment

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 Nature of Expenses
⚫ Expense is the amount paid or payable
within the accounting period for
generating revenue.

Examples: raw material consumed, salary and

wages, power and fuel, repairs and
maintenance, rent, selling and marketing
expenses, administrative expenses.

⚫ Expenses are expired costs and capital

expenditures represent un-expired costs
and appear as assets in balance sheet.
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 Gujarat Narmada Valley Fertilizers Company Ltd
16 Profit & Loss Account for the year ended on 31 March
 Concepts of Profit
⚫ Gross profit = Sales – Cost of goods sold (CGS)
⚫ CGS = raw material consumed + manufacturing
expenses of goods that have been sold
⚫ PBDIT (Profit before depreciation, interest and taxes) =
Sales – Expenses except depreciation, interest and taxes
⚫ PBIT = Profit before interest and tax= PBDIT –
Depreciation
⚫ PBT= Profit before tax = PBIT – Interest
⚫ PAT = Profit after tax = PBT – Tax

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 Economic Vs. Accounting Profit

Accounting profit is a result of the

arbitrary allocation of expenditures
between expenses (revenue expenditure)
and assets (capital expenditure).
Economic profit is the net increase in the
wealth of the firm, and it is measured in
cash flow.

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 CASH FLOW STATEMENT
⚫ A statement of changes in financial position on
cash basis, commonly known as the cash flow
statement, summarizes the causes of changes in
cash position between dates of the two balance
sheets.
⚫ Provides information regarding the liquidity of a
firm
⚫ It indicates the sources and uses of cash.
⚫ Amount of net income in a period is usually
different than the amount of increase in cash in
the same period

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Cash flows from operating
activities
⚫ Operating activities are primarily the
revenue-generating activities of a company
⚫ “Operating cash flow” is conceptually most
near to “net profit”
⚫ Examples:
⚫ Receipts from sale of goods and rendering of
services
⚫ Receipts from royalties, fees, commissions,
etc
⚫ Payments to suppliers (payment of creditors
included)
⚫ Payments to employees
Cash flows from Investing
Activities
⚫ Investing activities relate to the
acquisition and disposal of long-term
tangible and intangible assets and other
investments
⚫ Cash flows from investing activities are
an indication of the expansion or
downsizing of operating capacity
⚫ Examples:
⚫ Payments for newly acquired equipment
⚫ Receipts from the disposal of a building
⚫ Payments for new investments
Cash flows from financing activities
⚫ Financing activities relate to changes in
the size and composition of contributed
capital and financial debt of the
company
⚫ Examples:
⚫ Receipts from issuing new shares or bonds
⚫ Receipts from new bank loan
⚫ Payments for buy-back of shares
⚫ Repayments of loans
⚫ Payments of dividend
Classifying balance sheet
movements as inflows or outflows of
cash
Comprehensive Cash Flow
Statement
Comprehensive Cash Flow
Statement Cont…
References
⚫ Financial Management- I M Pandey, Vikas
Publishing
⚫ Finance Sense - Prasanna Chandra, Tata
Mc Graw Hill (CFM-TMH Professional
Series in Finance)