Understanding Financial Statements

Dr.M.Chandra Shekar
Program Head – PGDM BFS
Institute of Public Enterprise
 Learning Outcomes

To discuss key features of Financial Statements

Become familiar with the Financial Statements

Understand the significance of Financial Statements

• Balance Sheet – Assets ; Equity & Liabilities

• Income Statement – Income ; Expenses
• Cash Flow Statement – Operating, Investing, Financing
• Statement showing Changes in Equity

To understand the importance of Financial Statements in performing Analysis

 What Accounting Information
Company’s financial statements mention the following information in an
Annual Report.

• Balance Sheet – “Consolidated Balance Sheet”

Assets = Equity + Liabilities

• Income Statement – “Consolidated Statements of Operations” /

“Consolidated Statement of Profit & Loss )
Revenues – Expenses = Net Income

• Consolidated Statements of Cash Flows

Activities : Operating , Investing, Financing

• Consolidate Statement of Changes in Equity

• Auditor’s and Management’s reports

• Management Discussion and Analysis
• Footnotes

https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=678877 Institute of Public Enterprise m.chandrashekar@ipeindia.org

Key Financial Statement Users
Dr Reddys 2018 - 2019
Dr. Reddys 2019-2020
Differences:
 Balance Sheet Overview

→The balance sheet presents the financial position of a firm at a particular moment in time

→The balance sheet contains three main sections: Assets, Liabilities and Equity

→Assets are economic resources with the ability or potential to provide future benefits to the firm

→Liabilities are creditors' claims on the assets of the firm

→Shareholders' equity is the owners' claim on the assets of the firm

The basic equation of the balance sheet is:

This equation must always hold true (hence the name BALANCE sheet)!
 Balance Sheets
• Infosys 2021-2022 Annual Reports\Infosys Three Financial Statements 2021-
2022.pdf

• Dr Reddys 2021 – 2022 Annual Reports\Dr Reddy Three Pages 2021-2022.pdf

• ICICI Bank 2021 – 2022 Annual Reports\ICICI Three Pages 2021-2022.pdf

Infosys Limited Revenues – Expenses = Profit
Dr.Reddy’s Laboratories Limited

Revenues – Expenses = Profit

 Balance Sheet Equation

ASSETS = EQUITY + LIABILITIES

For Example, assume
A) Company acquired a car for $500 and financed it with a loan.
B) Company issues Common Stock (Equity Shares)for $300 in cash.
C) Company received $600 for services to be performed next month
The effect on the Balance Sheet would be:
 The Asset Accounts
The asset accounts, which represent the economic resources of the firm. To be recorded as
an asset, an economic resource must meet four requirements:
• Acquired at measurable cost
• Obtained or controlled by the entity
• Expected to produce future economic benefits
• Arises from a past transaction or event
 Asset Recognition

Acquired at Measurable Expected Future Past Transaction or

Asset cost? Obtained or Controlled Economic benefits Event

Yes: Cash can be

Yes: Cash belongs to used by the business Yes: Obtained
$50,000 cash raised from business entity to use in many economically through bank
short-term bank loan Yes: Cash Is Cash as needed beneficial ways Loan

Warehouse Property Yes : Obtained

Purchased for $70,000 Yes: Property obtained Yes: Will be used to through purchase
cash Yes: $70,000 cash paid and holds the deed store inventory transaction

Yes: Expected to
Yes:$18,000 purchase generate future
Merchandise purchased for price evidenced by Yes: Merchandise benefits when Yes: Obtained
$18,000;Paid $8,000 in cash payment and belonged to business merchandise is sold through purchased
cash, remainder on credit credit amount owed entity to use as needed to customers Transaction
 The Liability Accounts

A liability represents an obligations of the entity to other parties. To be recorded as a

liability, an obligation must meet three requirements:

• It involves a probable future sacrifice of economic resources by the entity

• The economic resource transfer to another entity
• The future sacrifice is a present obligation, arising from a past transaction or event
 Liability Recognition

Requires transfers of Present obligation as a

Probable future sacrifice economic resources to result of past transaction
Liability of economic resources another entity or event

Yes: the products or

$15000 owed to trade Yes: $15,000 trade payable Yes: Trade creditors are services have been received
creditors must be paid with cash third parties in past

$50,000 short-term debt ( Yes: the loan will have to Yes: Cash is owed, to the Yes: The amount borrowed
amount owed to bank) be paid bank a third party entity has been received