PURPOSE OF FINANCIAL STATEMENTS

Financial statements are a structured representation of the

financial position (Balance Sheet) and financial performance
(Income Statement) of an entity.

The objective of financial statements is to provide information

about the financial position, financial performance and cash flows
of an entity that is useful to a wide range of users in making
economic decisions.

Financial statements also show the results of management’s

stewardship of the resources entrusted to it. To meet this objective,
financial statements provide information about an entity’s:
 COMPONENTS OF FINANCIAL STATEMENTS:
(a) assets
(b) liabilities
(c) equity
(d) income and expenses, including gains and losses
(e) other changes in equity; and
(f) cash flows

This information, along with other information in the notes, assists

users of financial statements in predicting the entity’s future cash
flows and, in particular, their timing and certainty.
 FINANCIAL STATEMENTS

A complete set of financial statements comprises:

• a balance sheet;
• an income statement;
• a statement of changes in equity showing either:
• all changes in equity, or
• changes in equity other than those arising from transactions with equity holders acting in
their capacity as equity holders;
• a cash flow statement; and
• notes, comprising a summary of significant accounting policies
and other explanatory notes.
 REPORTING FRAMEWORK
The reporting frame work is applicable in Pakistan while preparing and presenting of
financial statements is as follows:
Applicable Laws and Regulations Regulating Authority
Listed Companies other than, •Companies Ordinance 1984. Securities and Exchange
Insurance, NBFCs’, •International Financial Reporting Framework (IFRS) as applicable in Pakistan Commission of Pakistan
Modaraba and Bank •Stock Exchange Listing Regulations (SECP)

Banking Companies
Insurance Companies
•International Financial Reporting Framework (IFRS) as applicable in Pakistan Securities and Exchange
•Companies Ordinance 1984. Commission of Pakistan and
•Stock Exchange Listing Regulations (Particularly Code of Corporate State Bank of Pakistan.
Governance)
•Banking Ordinance 1962
•Prudential Regulations (Corporate, SMEs’ and Consumers)
•International Financial Reporting Framework (IFRS) as applicable in Pakistan Securities and Exchange
•Companies Ordinance 1984 Commission of Pakistan.
•Stock Exchange Listing Regulations
•Insurance Ordinance and Rules
 REPORTING FRAMEWORK
Applicable Laws and Regulations Regulating Authority

Non Banking •International Financial Reporting Framework Securities and Exchange

Finance Companies (IFRS). Commission of Pakistan.
(Leasing Companies, •Companies Ordinance 1984.
Investment •Stock Exchange Listing Regulations (Particularly
Companies, Code of Corporate Governance)
•NBFC Rules.
•Prudential Regulations for NBFCs’
•Prudential Regulations for Leasing Company
Modarba •International Financial Reporting Framework Securities and Exchange
(IFRS). Commission of Pakistan and
•Companies Ordinance 1984. Registrar of Modarba
•Stock Exchange Listing Regulations (Particularly
Code of Corporate Governance)
•Modarba Act and Rules
ELEMENTS OF A COMPANY ASSESSED BY THE FINANCIAL ANALYSTS
Elements Definition
Profitability It is the ability to earn income and sustain growth in both the
short- and long-term.

Solvency It is the ability to pay its obligation to creditors and other third
parties in the long-term

Liquidity It is the ability to maintain positive cash flow, while satisfying

immediate obligations

Stability he firm's ability to remain in business in the long run, without

having to sustain significant losses in the conduct of its business
 USER OF FINANCIAL STATEMENTS
User of the financial statements
Equity investors (existing and potential)
Loan creditors ie, existing and potential holders of The amount will be paid when due and for continuation of the business.
debentures and loan stock, and providers of
short-term loans
Employees (existing, potential and past)
Business contacts including customers, trade
creditors, competitors and potential take-over
bidders
Government, including tax authorities,
government departments and local authorities
Public, including tax payers, ratepayers and
environmental groups
Management
Interest of the user
They are interested whether buy, hold or sell the shares in hand and also
enable them in payment of dividends.
Interested in stability and profitability for employment opportunities,
remuneration and retirement benefits.
Whether the payment of loan will be made in due dates and enable
sustainability of business for future business with the enterprise.
Interested in allocation of resources and also to regulate the activities of
an enterprise and determining tax policies and as a basis for national
income.
Trends and recent development in the prosperity of the entity and range
of it’s activities.
The company controller prepares an ongoing analysis of
the company's financial results, particularly in relation to a number of
operational metrics that are not seen by outside entities
 OBJECTIVES
•Assessment of Past Performance
•Assessment of current position
•Prediction of profitability and growth
prospects
•Prediction of bankruptcy and failure
•Assessment of the operational efficiency
•Provide reliable financial information
 DEFINITIONS
A. Non-Current Assets
1. Capital work in progress
2. Operating fixed assets
3. Operating fixed assets after deducting
accumulated depreciation
4. Intangible Assets
5. Long term investment
6. Other Non- current assets
 DEFINITIONS
A. Non-Current Assets
1. Capital work in progress

•Work in progress consists of the unfinished

products in a production process.

•They must be accounted for as funds

(capital) that have been invested for future
enhancement in production.
 DEFINITIONS
A. Non-Current Assets
2. Operating fixed assets
•These are owned by an enterprise engaged in
production of items (directly or indirectly); which
will be available for sale.

•These are not readily convertible into cash

during the course of normal operations of
an enterprise.
 DEFINITIONS
A. Non-Current Assets A. Non-Current Assets
2. Operating fixed assets 2. Operating fixed assets
(a) Real Estate

i. Freehold and leasehold land (c) Furniture, Fixtures, Fittings and Allied
Equipment
ii. Factory and office buildings
iii. Residential buildings
iv. Capital projects in progress at cost i. Electric fans, refrigerators, air conditioners, electric
heating, sanitary and other fittings.
ii. Laboratory equipment
(b) Plant, Machinery and Rolling Stock iii. All types of office furniture and equipment
iv. Advertising, fixtures and fittings
i. All types of plant and m
ii. Crockery, cutlery, silverware and enamelware in hotels
iii. Construction tools
iv. Livestock in farming company
v. Cars, lorries, trucks, ships, launches etc.
vi. Railway siding and trolley lines
vii. Computers and other electronic equipment's
viii. Machinery used for production and not for sale
 DEFINITIONS
A. Non-Current Assets
3. Operating fixed assets after deducting accumulated
depreciation

Deducting the accumulated depreciation from the operating fixed

assets of the company gives this item.
 DEFINITIONS
A. Non-Current Assets
4. Intangible Assets
Intangible assets are defined as identifiable assets that cannot be seen,
touched or physically measured.

These are created through time and/or efforts and that are identifiable as a
separate asset.

i. Patents
ii. Trademarks
iii. Goodwill
iv. Exploration accounts
v. Knowledge accounts
vi. Computer software accounts
 DEFINITIONS
A. Non-Current Assets
4. Long term investment

Investment is acquisition of financial, physical or technology based assets by

an investor for their potential future income, return, yield, profits, or capital
gains. More than a year.

i. Long-term stocks
ii. Long-term bonds
iii. Long-term investment in real estate
iv. Long-term Government and corporate securities
v. Long-term Savings and Unit Trust Certificates
vi. Long-term Debentures stock of local or foreign companies
Long term investments are further categorized in investments in subsidiaries and associated
 DEFINITIONS
A. Non-Current Assets
4. Long term investment
Long term investments are further categorized in investments in subsidiaries and associated

Investment in subsidiaries
A subsidiary is a company with voting stock that is more than 50% controlled
by another company, usually referred to as the parent company or the holding
company.

Investment in associates
An associate company is a corporation whose parent company possesses only
a minority stake in the ownership of the corporation.
The parent company or companies do not consolidate the associate company's
financial statements.
 DEFINITIONS
A. Non-Current Assets
5. Other Non- current assets
These include all residual non-current assets items left from the above
coverage, but remain in the balance sheet.

i. Deferred costs
ii. Long-term deposits
iii. Long- term loans and advances
iv. Security deposits
 DEFINITIONS
B. Current Assets
1. Cash & bank balances
2. Inventories
3. Trade debt /Account receivable
4. Short term loans and advances
5. Short term investments
6. Other current assets
 DEFINITIONS
B. Current Assets
1. Cash & bank balances
Cash & bank balances is an integral part of a company's overall operations.

i. Cash in hand
ii. Cash in transit
iii. Current deposits
iv. Saving deposits
v. Saving deposits and call
vi. Deposits held abroad
 DEFINITIONS
B. Current Assets
2. Inventories

Inventory or stock refers to the goods and materials that a business holds for
the ultimate purpose of sale after processing

i. Raw materials
ii. Work in process
iii. Finished Goods
 DEFINITIONS
B. Current Assets
3. Trade debt /Account receivable

This refers to an entity from which amounts are due for goods sold or services
rendered or in respect of contractual obligations

4. Short term loans and advances

In general, when a company gives any loan to its employee or its sister
concerns or to its director which are recoverable in future as per term and
conditions mentioned there in.

Advances on the other hand are given by a company to its employee or its
sister concerns or to its director for particular purposes against either goods
are to be received by company or services are to be received in near future
 DEFINITIONS
B. Current Assets

5. Short term Investments

Unlike long term investments, short term investments have to be matured
within the same accounting cycle.

i. Short-term stocks
ii. Short -term bonds
iii. Short -term investment in real estate
iv. Short-term Government and corporate securities
v. Short-term Savings and Unit Trust Certificates
vi. Short-term Debentures stock of local or foreign companies
 DEFINITIONS
B. Current Assets

5. Other current assets

These are all remaining items of current assets left from the above coverage,
but remained in the balance sheet

i. Book debts including bad and doubtful debts

ii. Stores, spare parts and loose tools
iii. Work in progress(current)
iv. Trade deposit and prepayments
v. Balances due to tax department
vi. Tax refundable
vii. other receivables
 DEFINITIONS
B. Current Assets

5. Other current assets

Following items are separately mentioned in the analysis format against other
current assets.

i. Stores, spare parts and loose tools

Spare parts and loose tools are not part of any fixed assets but facilitate the
process of production.

ii. Trade deposits & prepayments

Trade Deposits are used to cover any potential losses in the event that the
market moves against a given trade position whereas prepayments are
settlement of debts or installment payments before its official due date.
 DEFINITIONS
C. Shareholder’s equity
1. Issued, subscribed & paid up capital
i. Ordinary Shares
ii. Preference Shares

2. Reserves
i. Capital Reserves
ii. Revenue Reserves
iii. Un-appropriated profit (loss)/retained earnings

3. Surplus on revaluation of fixed assets

 DEFINITIONS
C. Shareholder’s equity
2. Reserves
i. Capital Reserves
Share premium reserves, Merger reserves, Development reserves, Reserve for
issue of bonus shares, Reserve for re-issue of forfeited shares, Capital gain on
sale of fixed assets, Dividend equalization reserves, Non-controlling interest
(minority interest), Fair value Reserve, Subordinated Loans, Interest rate swap
revaluation reserve, Hedge reserve, Advance against subscription for right
shares, Undistributed percentage return reserve, Exploration and evaluation
reserve, Investment revaluation reserve, Share deposit money, Exchange
difference on translation of foreign subsidiaries, Statutory Reserve, Gain on
re-measurement of forward foreign exchange contracts- cash flow hedge
 DEFINITIONS
C. Shareholder’s equity
2. Reserves
ii. Revenue Reserves
a. General reserves
b. Un-appropriated reserves
c. Retained reserves
d. Reserves on profit & loss account
e. Deferred income
f. Retained Earnings
 DEFINITIONS
C. Shareholder’s equity
3. Surplus on revaluation of fixed assets
Revaluation of fixed assets is a technique that may be required to accurately describe the true
value of the capital goods that a business owns. The revaluation surplus has been included in
equity because capital goods like property, plant and equipment's participate directly in the
revenue generation and transferred directly to retained earnings.
 DEFINITIONS
D. Non-Current Liabilities
i. Long term borrowings
ii. Subordinated loan/Sponsor’s loan
iii. Debentures/TFC’s
iv. Employees benefit obligations
v. Other non-current liabilities
 DEFINITIONS

D. Non-Current Liabilities
i. Long term borrowings
a) Long-term secured loan
b) Long-term unsecured loan
c) Long-term lease finance
 DEFINITIONS

D. Non-Current Liabilities
i. Long term borrowings
a) Long-term secured loan (obtained on the basis of secured collaterals )

1. Loans from financial institutions.

2. Loans from non bank financial institutions.
3. Loans from specialized financial institutions
4. Redeemable capital finance
5. Foreign loans
6. Vendors account
 DEFINITIONS

D. Non-Current Liabilities
i. Long term borrowings
b) Long-term unsecured loan (obtained without any secured collaterals )

1. Loan to various organizations by governments.

2. Loan to a company by directors
3. Long term loan by creditors
4. Long term loan by supplierst
 DEFINITIONS

D. Non-Current Liabilities
i. Long term borrowings
b) Long-term lease finance

These are liabilities for assets being acquired through lease financing from a
financial institution for period more than one year

1. Assets under lease finance

2. Lease finance obligation
 DEFINITIONS
D. Non-Current Liabilities
ii. Subordinated loan/Sponsor’s loan
Subordinated loan is a security loan that ranks below than other loans with
regard to claims on a company's assets or earnings. Subordinated loan is also
known as a junior security.

iii. Debentures/TFC’s
These are bonds/certificates issued by a company to raise funds for
long-term period (generally more than one year) for a specific purpose
(usually for capital expenditures)
 DEFINITIONS
D. Non-Current Liabilities
vi. Employees benefit obligations
These include benefits provided either to employees or their dependents,
and may be settled by payments (or the provision of goods or services)
made either directly to the employees, their spouses, children, other
dependents.

a. Employees salaries
b. Employees gratuity fund
c. Pension fund.
d. Staff compensated absence
e. Staff retirement benefits
 DEFINITIONS
D. Non-Current Liabilities
v. Other non-current liabilities
These are residuals of non-current liabilities left from the above coverage, but
remained in the balance sheet of the company.

i. Deferred liabilities
ii. Deferred liabilities/ taxation
iii. Long term deposits/key deposits
iv. Retention money payable
 DEFINITIONS
E. Current Liabilities

1. Trade credits and other accounts payables

2. Short term borrowing
3. Current portion of non-current liabilities
4. Other current liabilities
 DEFINITIONS
E. Current Liabilities

1. Trade credits and other accounts payables

Accounts payable or trade credit are what businesses owe to their suppliers of
inventory, products, and other types of goods that are necessary to operate the
business
 DEFINITIONS
E. Current Liabilities
2. Short term borrowing

i. Short term secured loans (obtained against secured collaterals )

ii. Short term unsecured loans (obtained without secured collaterals )

a. Short term loan from various organizations by governments.
b. Short term loan from a company by directors
c. Short term loan by creditors
d. Short term loan by suppliers

iii. Short term lease finance

Short term lease finance consists of lease to be matured within the period of
one year
 DEFINITIONS
E. Current Liabilities
3. Current portion of non-current liabilities
The current portion of long term liabilities is amount of principal that will be due
to pay within one year of the date of the balance sheet.

i. Current maturities of secured long term loan.

ii. Current maturities of redeemable capital finance
iii. Current maturities of lease finance
 DEFINITIONS
E. Current Liabilities
4. Other current liabilities

These are all remaining items of current liabilities left from the above
coverage, but remained in the balance sheet.

i. Sundry Creditors
ii. Payment become due but outstanding
iii. Loans, Deposits and Advances
 DEFINITIONS
E. Current Liabilities
4. Other current liabilities
i. Sundry Creditors
• For expenses
• For other finance
• Bills payable
• Advances from customers against orders
 DEFINITIONS
E. Current Liabilities
4. Other current liabilities
ii. Payment become due but outstanding
• Income tax payable
• Proposed, unpaid and unclaimed dividends
• Estimated liabilities in respect of outstanding claims whether
• Gratuities becoming payable
• Provident Fund becoming payable
• Current installment and interest payable on fixed liabilities
• Provision for taxation estimated on current profits
• Workers profit participation fund
 DEFINITIONS
E. Current Liabilities
4. Other current liabilities
iii. Loans, Deposits and Advances
• Loans secured by stock or other current assets
• Bank overdrafts and other unsecured loans
• Short term loans acquired against the security of fixed assets
• Unsecured loan from directors, parent company, and subordinate loan
• Due to managing agents
• Advances by directors
• Guarantee and security deposits of customers and staff
 DEFINITIONS

For balance sheet, income statement and cash

flow statement go to the official document of
SBP
 KEY PERFORMANCE INDICATORS
1. Liquidity Ratio
2. Profitability ratios
3. Gearing ratios
4. Coverage ratios
5. Efficiency/ activity ratios
6. Growth ratios
7. Financing ratios
8. Volatility ratios
9. Valuation ratios
 KEY PERFORMANCE INDICATORS
1. Liquidity Ratio

Liquidity position of the company helps to assess the short term financial
health of a company. Liquidity is closely related to cash flows and its short term
assets.

a) Current Ratio
b) Quick (Acid Test) Ratio
c) Cash Ratio
 KEY PERFORMANCE INDICATORS
2. Profitability ratios
Profit is the surplus income in raw form it is the total revenue minus total costs.
It is mostly concentrated from the information of income statement or profit and
loss account.

a) Gross Profit Margin / Gross Profit to Sales

b) Net Profit Margin
c) Operating profit margin ratio
d) Return on Assets
e) Return on Equity
f) Return on capital employed
g) Asset Turnover Ratio
 KEY PERFORMANCE INDICATORS
3. Gearing ratios
These ratios tells about the financial mix of company

a. Debt to equity ratio

b. Debt to total asset ratio
 KEY PERFORMANCE INDICATORS
4. Coverage ratios
These ratios that tells us about the ability of the company to
pay the recourse provider.

a) Interest coverage ratio

b) Dividend coverage ratio
 KEY PERFORMANCE INDICATORS
5. Efficiency/ activity ratios
Activity ratios help to assess the level of productivity in business cycle of an
enterprise.

a) Inventory Turnover
b) No. of days Inventory
c) Receivables Turnover Ratio
d) No. of days Receivables
e) Payables Turnover Ratio
f) No. of days Payable
g) Working Capital Turnover
h) Cash Conversion Cycle
 KEY PERFORMANCE INDICATORS
5. Efficiency/ activity ratios
Activity ratios help to assess the level of productivity in business cycle of an
enterprise.

g) Raw material turnover

h) Raw material turnover in days
i) Work in process turnover
j) Work in process turnover in days
k) Finished goods turnover
l) Finished goods turnover in days