BENU’S COMMERCE Ger pied CCE & PROFESSIONALIZED COACHING CENTRE FOR :2 COM., +2 SC. +2 ARTS, +3 COM, +3 AKTS BBA, MBA, CMAGRCA FSAR FOR +3 5" SEMESTER UNIT — 1,2,364 ‘ BY CM& BENUMADHAB NAYAK / (GBa&, MBA, MCOM &CMAI OFLAHOO 958400 OONTACT NO. 9861385335, 7008 GANDHINAGAR 3" LANE EXTENSION, NEAR BARACKS HiGt SCHOGLBENU’S COMMERCE UNIT -1 snot ie 8 EINANCIAL STATEMENT ANALYSIS L Se Statement? Explain the objective and limitation of financial ing of Final When ® for a year, he/she wants to know how much he/she has learnt during that riod. Similarly, every business enterprise wants vants to know the result of it a pa period which is generally one year and what i Se aie aman Terie end oft is period. For this, it prepares various statements which are called the financi nancial statements are the statements that are prepared at the end of t which is generally one year, These include income statement i.e. Tradin ‘Account and Position statement at specified period. Bh comprises of Trading ice Sheet. business concern on a particular di Position statement i.e. Balance Sheet Wy i s constitute an important source of information ‘ich helps the finance manager to plan the financial activities ion of the funds. isiotiptfdking: The Manager can make comparative study of the by comparing the results of the current year with the results of the 1 managerial decisions accordingly. the concern: Financial statements also show the short term as well as long “cern. This helps the business enterprise in borrowing money from bank and Ritions and/or buying goods on credit. paring Budgets: Financial statement provides information regarding the “oF the business so that the management can take corrective measures 10 remove these ‘ements help the management to make forecast and prepare budgets. Comparison and Selection of Appropriate Policy: To make a comparative study of the profitability of the entity with other entities engaged in the same trade, financial statements help the management to adopt sound business policy by making intra firm comparison. & Judging the Growth of the Business: Through comparison of data of two or more years of ‘we can draw a meaningful conclusion as regard to growth of the business. For faneous increase in the profits of the business, indicates @ of the business and maki 4. Helps in managerial gs. Financial stat business entity, example, increase in sales with simult healthy sign for the growth of the business. Levey Poying Long f eam SHO v4 16° gy cma BENUMADHAB NAYAK aancial Statements: / Dressing: Some business enterprises resort to manipulate the financial statements so as to cover up their bad or weak financial fh financial statements may be misleading due to window Limitations of Fin: }. Manipulation or Window information contained in the Thus the analysis based on suc! position dressing, , ; 2, Use of Diverse Procedures: There may be more than one way of treating @ particular item and ‘chen two different business enterprises adopt different accounting policies, it becomes very difficult to make a comparison between such enterprises. For example, depreciation can be charged under straight line method or written down value method. However, results provided by comparing the financial statements of such business enterprises would be misleading. 3. Qual Aspect Ignored: The financial statements incorporate the informati expressed in monetary terms. Thus, they fail to assimilate the transactionsqw! converted into monetary terms. For example, a conflict between the market manager cannot be recorded in the books of accounts due to its non-1 certainly affect the functioning of the activities adversely and consequi 4, Historical: Financial statements are historical in nature as they ret continuous changes in the demand of the product, poli based on past information does not serve any usefull purpose, 5. Price Level Changes: Figures contained in financial stagem in the price level, i.e. price index in one year may differ misleading picture may be obtained by making a é year figures. | 6 Subjectivity & Personal Bias: Conclusiot ooeeectrd = genent etc, analysis, stmortem report. % in other years. As a result, igures of past year with current Y analysis of figures given in financial 3, ige of an analyst. For example, the term ‘Net profit’ may be interpreted by a it as net profit after tax. Lack of Reg sorded in a chronological order, as and when the events happen. cords and financial statements prepared from these records are based on hist | an 6 are prepared periodically, generally for the accounting period. ‘rican Institute of Certified Public Accountants states the nature of financial statement: as “FinatW{ Statements are prepared for the purpose of presenting a periodical review of report of progress by the management and deal with the status of investment in the business and the result! achieved during the period under review. They reflect a combination of recorded facts, accounting principles and personal judgments.” 3. The American Accounting Association expresses in its statement, “Every corporate statemenFin should be based on accounting principles which are sufficiently uniform, objective and well understootby to justify opinions as to the condition and progress of business enterprise. Its basic assumption was tha> the purpose of periodic financial statements of a corporation is to furnish information that is necessary > for the formation of dependable judgments.” he BY CMA BENUMADHAB NAYAK‘according to John N. Myer, “The financial statements are composed of data which are the result of combinations of: ‘Recorded facts concerning the business transactions, 4 Conventions adopted to facilitate the accounting technique, 4 Postulates, or assumptions made to and 4 Personal judgments used in the application of the conventions and postulates,” The following points explain the nature of financial statements: 1. Recorded Facts:The term ‘recorded facts’ refers to the data taken out from the accounting records. The records are maintained on the basis of actual cost data. The original cost or historical cost is the basis of recording various transactions. The figures of various accounts such as cash in, id, cash in bank, bills receivables, sundry debtors, fixed assets etc. are taken as per the figuresfécorded in the accounting books. The assets purchased at different times and at different prices shown at cost prices. As recorded facts are not based on replacement costs, t do not show current financial condition of the concer, 2. Accounting Conventions: Certain accounting conventions are follo statements. The convention of valuing inventory at cost or marl followed. The valuing of assets at cost less depreciation pri ¢ sheet purposes is followed. The convention of materiality is followed in dealig jig ms like pencils, pens, postage stamps, etc. These items are treated as expenditure i Awhich they are purchased even though they are assets in nature. The stationery sand not on the principle of cost or market price whichever is less. The statements comparable, simple and realistic. 3. Postulates: The accountant makes certain ihg concern. The other alternative to this tenable if management shows an intention Von a going concern basis. Another important 'y will remain the same in different periods. Though Of money the assets purchased at different times will ‘m. While preparing profit and loss account, the revenue is Vas undertaken even though the sale price may be received in a ion'ts known as realization postulate. though certain standard accounting conventions are followed in postulate is that the concer is to be I to Tiguidate the concern. So the as§et assumption is to presume that the val there is a drastic change in i be shown at the amo treated in the year in number of years. examples where judgment of the accountant will play an important role in choosing the most appropriate course of action. 5. What is financial statement? Explain the components of financial statement? “inancial Statements or Final Accounts are the summaries of financial accounts prepared periodically ya business. These are the end products of Financial Accounting, It includes the following: © Income statement or Profit and Loss Account. * Balance sheet or Position Statement. * Fund flow statement. * Cash flow statement.r 5. Go : i Government: The financial statements are used to assess tax liability of business enterprises. Porc ak fOnal Trem x Account / 2 ‘ eT is and busi or Profit and Loss . Income statement oF rr ne of the major financial statements used by accountan ‘ m fit and loss statement (P&L. ome stateme f The income Seame statement is sometimes referred to as the pro : The It is prepared according to the matching concept ‘or statement of income. expenses and incomes relating to an accounti owners. statement of operati ting principle ions, It is a summary of all revenue cc oun : cas yme statement is either net profit or net loss. period. The result of Balance Sheet or Position Iris list ofall balances of ition Statement ‘accounts left after preparing the Income Statement together with the balance pe income statement. It discloses the financial position of the business on the last day of ® counting period. Balance sheet always satisfies the accounting equation ; “ “Shareholders Equity + Long term debt = Fixed assets + Working Capit ‘Fund flow statements ; risa statement which discloses the sources and applications of funds or working 4p! reasons for changes in working capital during an accounting year. It is also known'¢j state: changes in financial position prepared on working capital basis. Cash flow statement: A cash flow statement discloses the movement i jalance sheet dates. The term cash includes cash in hand, cash at bé Government Securities, Treasury Bills etc. 4, Explain the Importance of Financial Statemei |, Management: The financial statements are useful centres. The management is able to exercise cost inefficient spots are brought to the notice o course of action to be adopted in future. Creditors: The trade creditors are t assets. The creditors will be interest ratio and liquid ratio will enable the in relation to their debts. ‘ 3, Bankers: The banker is it to pay the interest rly. th€fintancial statements that a banker can keep a watch on the business pl: ‘customers. These statements also help the banker to determine the amo as from the customers as a cover for the loans, Avestors include both short-term and long-term investors. They are interested in tl ‘principal amount of loan and regular interest payments by the concern. The invest ithe long-term solvency of the concern with the help of financial statements. The investor bf only analyze the present financial position but will also study future prospects a expansion plans of the concern. The possibility of paying back the loan amount in the face iquidation of the concern is also taken into consideration. ove! i eae studies econor of the country from these statements. These statement ¢ government to business is following various rules and regulations not. f i it i ™ —— statements also become a base for framing and amending various laws for the regulati s. BY CMA BENUMADHAB NavanTrade Associations: These associations provide service and protection to the members. Tosa snalyze the financial statements for the purpose of providing facilities to these members. They may develop standard ratios and design uniform system of accounts. | ‘stock Exchange: The stock exchanges deal in purchase and sale of securities of different companies. The financial statements enable the stock brokers to judge the financial position of different concems. The fixation of prices for securities, ete, is also based on these statements. Lenders: Lenders to the business like debenture holders, suppliersof loans and lease are interested to know short term as well as longterm solvency position of the entity. Suppliers and trade creditors: The suppliers and other creditors are interested to know about the solvency of the business ice. the abilityof the company to meet the debts as and when t fall due. 0, Tax_authorities: Tax authorities are interested in financial statements for dete liability. Researchers: They are interested in financial statements in undertakingrese; affairs and practices. 2, Employees: They are interested to know the growth of better remuneration and good working environment. profit. As aresFINANCIAL STATEMENT ANALYSIS What is financial statement analysis? Explain the purpose and need of financial statement _ analysis? j Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. _ Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Need or purpose of financial statement analysis: Financial analysis serves the following purposes: > Measuring the profitability: The main objective of a business is to earn a satisfact funds invested in it. Financial analysis helps in ascertaining whether adequat. eamed on the capital invested in the business or not. It also helps in knowing interest and dividend, > Indicating the trend of Achievements: Financial statements of the pre and the trend regarding various expenses, purchases, sales, gross ascertained. Value of assets and liabilities can be compared and, can be envisaged > Assessing the growth potential of the business: The provides sufficient information indicating the growth » Comparative position in relation to other firms: to help the management to make a comparative similar businesses. Such comparison also hel respect of sales, expenses, profitability an > Assess overall financial strength: strength of the business. Analysis ibility of various firms engaged in to study the position of their firm in So helps ‘ing decisions, whether funds required for the t are\provided from internal sources of the business or not ich funds have been received from extemal sources. AWhich is also known as ‘analysis and interpretation of financial sof determining financial strength and weaknesses of the firm by stabilizing items of balance sheet, profit & loss a/c and other operative data. The purpo: {o diagnose the information context in financial statement so as to judge th cial position of the firm. understanding of a firm s position and performance. “ analysis 1 On the basis of information used On the basis opin involved cthet neal ation +a Internal External Thter firm Intta firm Horizontal Vertal Analysis analysis analysis analysis analysis analys BY CMA BENUMADHAB NAYAK> External analysis. This analysis is done by outsiders who do not have access to the detailed internal accounting records of the business firm, (Investors, creditors, government agencies, credit agencies and general publi records of a business firm. (Executives and employees of the government agencies which have statutory powers vested in them.) n the basis of method of operation: Horizontal analysis. Comparison of financial data of a company for several years, The figures for this type of analysis are presented horizontally over a number of columns. The figures gf the various as it is based on the data from year to year rather than on data of any one year. Yertical_analysis: It refers to the study of relationship of the various i statements of one accounting period. In this type of analysis the figures ft 'statement of a year are compared with a base selected from the same year’s s| Static Analysis, @n the basis of firms involved: > Cross sectional or inter e rm analysis: cross sectional data of a firm with other firms (competitors) or industry > Time series or intar-firm analysis: time series analysis same firm over a period of time i.e. current year with preyiou! 3. Explain the traditional and modern approach’ a Traditional Approach to Financial Statemer * Meaning: Traditional approach to financid Ment Analysis includes the Profit and Loss Account (ie. Income Statement) and the Balay€e Sheet) ime time period. study of performance of the ‘Method of Preparation: Preparationof these\staiements are very simple. Supplying Information: These stateméas arv hot so informative, Reliability: Traditional aj financial statement analysis are neither so reliable nor so dependable for the pur \of financial statements. 4 Information: The detaligd information relating to financial information is not available from these t Nibit the required material information. n of these statements is very old. oo statements as thi Ineome Statement helps us to know the result of the operation at the end of the year. The ent, viz. the Balance Sheet, helps us to understand the financial position as a whole at the en@6f the financial year. “ Preparation and Presentation: Preparation and presentation of these statements are quite simple and mandatory for all firms. jodern Approach to Financial Statement Analysis: Meaning: Modern approach to financial statement analysis includes Cash Flow Statement, Funds Flow Statement, Ratio Analysis, Budgetary Control ete. Method of Preparation: Preparation of these statements are not so simple Reliability: These statement are quite informative. Reliability: These statements are proved to be quite reliable and dependable for the purpose of analysis of financial statements. * oot BY CMA BENUMADHAB NAYAK—— hibit the required material information for the purpo Information: These statements, no doubt, ex! of analysis of financial statements Presentation: Presentation of these statements is quite new and more informative than th Traditional Approach. & Specificity: Modern approach to financial statement analysis is quite possible to understand anyf ) specific information from these statements, say, the liquidity position, 4 Use: These statements are usually prepared by the big business houses, Area of Application: Under Modern approach to financial statement analysis, in addition to th benefits that are available under traditional approach, the other material information viz liquidi position, solvency position, profitability and management efficiency position understood accurately. 4 Preparation and Presentation: Preparation and presentation of these statements. and the preparation of these statements are not mandatory for all firms. 4, Explain the methods or devices of financial analysis? \arious methods are used for financial analysis. The most widely used Given are the important methods of financial analysis: ‘Comparative Financial Statement analysis or Horizontal Analysis Common Size Statement analysis or Vertical Analysis and ‘Trend Analysis Funds flow analysis Cash flow Analysis Ratio Analysis Cost Volume Profit Analysis Comparative Financial Statement Comparative Financial Statement analy; business. Financial statements are pres VV VVVvy also interested in knowing whether the business is movin For this purpose, figures of current year have to be compai analyzing this way, comparative financial statements are prepared. Analysis is also called as Horizontal analysis. The Comparativ Financial St decrease fecreased from its previous year, despite an increase in sales during the year, is a mi ncern. Comparative financial statement analysis in such situations helps to find o wher increased which has resulted in lower net income than the previous year. The two cOmparative statements are 1. Comparative Balance Sheet 2. Comparative Income Statement} * Comparative balance sheet: Comparative balance sheet as on two different dates can be used for comparing assets and liabilities finding out on increase or decrease in those items, While interpreting comparative balance sheet, t interpreter is expected to consider the following points. > Current financial position For studying the current financial position, one should see the worki capital for both the year. A study of increase or decrease in current assets and current liabiliti enable to see the current financial position, BY CMA BENUMADHAB NAYAK oS7 —— Page 9 ¢ long term financial position of the concem can be analyzed by studying the changes in fixed assets, long term liabilities & capital. An increase in fixed assets should be compared to the increase in long term loans and capitals. > Profitability of the concern- The study of increase or decrease in retained earnings will enable the | interpreters to see cheater the profitability has improved or not. Comparative income statement The income statement shows net profit or net loss on accounts of operations of a business. The comparative income statement gives an idea of the progress of a business over a period of time, The interpretation of income statements will involve > The increase or decrease in sales should be compared with the increase or decrease of sold. > The second step is to study the operational profits. > The effect of non-operating expenses such as interest, loans on profit should Common size statements ‘Common size statements are those in which the figures are converted into! basis. The use of these helps in making inter period & inter firm coy trisol upon the trends in performance, efficiency & financial position, > Long term financial position st of goods Studi me common in high lighting ins{Bhiificant tool of financial analysis, > Common size balance sheet- A statement in wi ling trends of several years The methods of calculating trend percentage involve the sn of percentage relationship that each items bears to idiyery im from the point of view of forecasting or budgeting. It ialpand operating data between specific periods. However, no. of items are expressed as the percentage of its total. » Common size statements are shown as percentage of sale Trends analysis The financial statement may be anal important method of determination of financial capabilities and alysis is based on the information given in the financial statements Some of the Pats follows ports only. (cial statements of one firm with another is not possible. frawn from one year financial statements is worthless. loss account is prepared on the basis of ‘old conventions due to which correct information of net profit is not provided.- ~ uNIT3 RATIO ANALYSIS Meanin, Generally ratio means esta numeric relation between two or more items of financial statement. The ratio is an arithmetical expression i.e. relationship of one number to another. It may be cated quotient of the mathematical expression. It is expressed as a proportion or a fraction or in percentage or in terms of number of times. A financial ratio is the relationship between two accounting figures expressed mathematically. Ratio analysis: Ratio analysis is a techniques of analysis and interpretation of financial statem« establishing various ratios and their interpretation, to help top management it not an end in itself but it is a means of understand strength and weakness of Interpretation of the ratio: As the calculations of ratios from the data given in the financial st the same manner interpretation of these ratios is also the most i blishment of logical relationship between two or more variable. Thus ratio is defined as an indi Objectives of Ratio Analysi: Ratio analysis is indispensable part of interpretatio provides users with crucial financial informati Ratio analysis is a technique which inyplvgs. regi 5 mgtter. It requires a fine understanding of the way §;, and the rules used for preparing fin: rents. Once done effectively, it provides a lot of ¢., information which helps the anal fin ‘iness,which need more attention; f che ‘ch can be improved with the effort in the desired direction; fir profitability, liquidity, solvency and efficiency levels in the st > ing cross-sectional analysis by comparing the performance with the, e user's understanding of the efficiency with which ‘he numerical relationships throw light on many latent aspects of th¢ £ properly analyzed, the ratios make us understand various problem areas as well as the bri ‘business, The knowledge of problem areas help management take care of them in future: > 2 you improve the situation further. It must be ‘The -d sh are working better helps emphasized that ri ‘means to an end rather than the end in themselves. Their role is essentially indicative and that of a whistle blower. There are many advantages derived from ratio analysis. Thest are summarized as follows: > Helps to understand tbusiness firm has taken the right kind of operating, how far they have helped in improving the performance. ing“ conducted. TI ions: The ratio analysis helps you to understand whether the > investing and financing decisions. It indicates5 — _ —_—_——— Page 11 > Simplify complex figures and establish relationships: Ratios help in simplifying the complex Jccounting figures and bring out their relationships. They help summarize the financial information effectively and assess the managerial efficiency, firm’s credit worthiness, earning capacity, ete. > Helpful in comparative analysis: The ratios are not be calculated for one year ‘only. When many year figures are kept side by side, they help a great deal in exploring the trends visible in the business. The knowledge of trend helps in making projections about the business which is a very useful feature Identification of problem areas: Ratios help business in identifying the problem areas as well as the bright areas of the business. Problem areas would need more attention and bright areas will need polishing to have still better results. > Enables SWOT analysis: Ratios help a great deal in explaining the changes ing in the business. The information of change helps the management a great deal in under 1 qurrent threats and opportunities and allows business to do its own SWOT (Sffength " Yyexness- Opportunity-Threat) analysis. > Various comparisons: Ratios help comparisons with certain bench firm’s performance is better or otherwise. For this purpose, the Pro) ofa business, may be compared: C Y Over a number of accounting periods with itsel J to whether /, solvency, etc. Analysis), Y- With other business enterprises (Inter-firm Comfatiggp\tis-sP Data: Accounting data give an unwarranted impression of precision and finality. ting data “reflect a combination of recorded facts, accounting Hagmens which affect them materially. For example, profit of the S™Msc and final figure. It is merely an opinion of the accountant based on Doiting policies. The soundness of the judgment necessarily depends on the fegrity of those who make them and on their adherence to Generally Accepted fnciples and Conventions”. Thus, the financial statements may not reveal the true fairs of the enterprises and so the ratios will also not give the true picture. ’Price-level Changes: The financial accounting is based on stable money measurement principle. It implicitly assumes that price level changes are either non-existent or minimal. But the pth is atherwise. We are normally living in inflationary economies where the power of money declines constantly. A change in the price-level makes analysis of financial statement of different accounting years meaningless because accounting records ignore changes in value of money. > Ignore Qualitative or Non-monetai ‘Aspects: Accounting provides information about quantitative (or monetary) aspects of business. Hence, the ratios also reflect only the monetary aspects, ignoring completely the non-monetary (qualitative) factors. > Variations in Accounting Practices: There are differing accounting polici inventory, calculation of depreciation, treatment of intangibles Assets definition of certain financial ies for valuation ofca he _ 7 ———_Fagety aspects of business transactions. These variations leave a big. available for various cross-sectional analysis. As there ate variations in accounting practices enterprises, a valid comparison of their financial statements is not ce variables etc., question mark on the followed by different business possible. z > Forecasting: Forecasting of future trends based only on historical analysis is not feasible. Proper) th forecasting requires consideration of non-financial factors as well, ke Now let us talk about the limitations of the ratios, The various limitations a | 'd: Ratios are means to an end rather than the end by itself. e Means and not the En to resolve problems: Their role is essentially indicative and of whistle blowing and Pe im > Lack of abilit not providing a solution to the problem. Lack of standardized definitions: There is a lack of standardized definitions of, . Ur 8 concepts > tied in ratio analysis. For example, there is no standard definition of liquid lia i jncludes all current liabilities, but sometimes it refers to current liabilities less y? sin > Lack of universally accepted standard levels: There is no universal yardsti fies the th level of ideal ratios, There is no standard list of the levels universally, India, the fit industry averages are also not available. . bade > Ratios based on unrelated figures: A ratio calculated for unr uld essentially bea meaningless exercise. 3. m Introduction: When it comes to the level of analysis in statistics, exist. These are — + Univariate analysis + Bivariate analysis 7 uw tr + Multivariate analysis The selection of the data analysis te and focus of the statistical inqui analysis — Univariate analysis the data. This is be done by looking into the mean, median, mode, dispersion, dard deviation ete. ‘te analysis is slightly more analytical than Univariate analysis. When the data se contains two variables and researchers aim to undertake comparisons between the two data set thet Bivariate analysis is the right type of analysis technique. For example In a survey of a classroom, the researcher may be looking to analysis the ratio students who scored above 85% corresponding to their genders. In this case, there are two variables ~ gender ~ X (independent variable) and result = Y (dependent variable). A Bivariate analysis is wil measure the correlations between the two variables. ariate analysis, i xx form of statistical analysis technique and used whe! more than two variables in the data set. BY CMA BENUMADHAB NAYAK‘A doctor has collected data on cholestero| Page 13 collected data on the eating habits of the subjects (¢-¢. oe sai weight. She also produets, and chocolate consumed per week). She wants to pee eo Three measures of health and eating habits? relationship between the 4, Difference betnsen Univariate and multivariate financial analvsis? Tmancial analysis is defined as an assessment of the going co a business or a joint venture. It is often referred to as an sccounting es and profitability of perform financial analysis, many analysts use models, and these models can be either rear or multivariate. Univariate ‘A univariate analysis is the most basic type of quantitative analysis. It is cargé single variable. For example, if the Variable revenue per reporting period was the subje then the researcher would look at how many reporting periods showed a high, ay rag evenue figure. The main quantitative method for univariate analysis is the median, med or avtya describes the dispersion of data: the range, maximum and minimur standard deviations, as well as frequency distributions. Multivariate ‘A multivariate analysis is based on two or more variableg more sophisticated financial analysis as it can take intg ariate analyses describes causes 4 For example, interdependencies. Multiv highlight relationships. Univariate analysis is primarily used at th available. Multivariate analysis is used for il unknown or approximated. Univariate analy$ multivariate analysis is aimed towards ¢: yoy analyzing data that is alread ¢h, as two or more variables can t tilized for descriptive purposes, where:a) CASH FLOW STATEMENT hh flow statement? Explai What is cas) ; OL Whe flow activity’? classification of « Anteouellen important role in the eonomic life of a business. A firm needs cash to make pay Cash Pay, wo incur day-londay expenses and to pay salaries, wages, interest and dividends ne os hat blood in to a human body, cash is to a business enterprise. Thus, it is very essential for business to maintain an adequate balance of cash, For example, a concern operates profital but it not have sufficient cash balance to pay dividends, what message does it convey to the. public in general, Thus, management of cash is very essential. There should be fo cash and its equivalents, Cash means, cash in hand and demand deposits consists of bank overdraft, cash credit, short term deposits a ivale w 0 Cash Flow Statement deals with flow of cash which includes cash statement is an additional information to the users of Financial S incoming and outgoing of cash, The statement assesses the cap, and utilize it, Thus a Cash-Flow statement may be disbursements of cash for a particular period of time. position of the firm o r According to Khan and Jain, “Cash Flow st prepared on the basis of funds defined as cash Pjitines Cash Flow statement as “a statem ‘of sources of funds and their utilisation provision.” Thus, a cash flow statements firm’s cash balance during partic it which provides a detailed explanation for the changes in riod by indicating the firm’s sources and uses of cash outflows, Transactions which increase the eash position of the enti and those which decrease the cash position as outflows of cash, Cash fl ‘ous sources which bring in cash such as cash from operating activities, shP§uch as loss from operations, purchase of current and fixed assets, redemption ¥ference shares and other long-term debt for cash. So in short, a cash flow statemer Cash flow activities are to be classified into three categories This is done to show separately the c: flows generated or used by these activities, thereby helping to assess the impact of these activities the financial position and cash and cash equivalents of an enterprise. > Operating activities > Investing activities > Financing activities— Page 1 Cash from Operating Activiti Operating activities are the activities that comprise of the primary or main activities of an enterprise during an accounting period. For example, for a garment manufacturing company, operating activities jnclude procurement of raw material, sale of garments, incurrence of manufacturing expenses, etc. ‘These are the principal revenue generating activities of the enterprise. Profit before tax as presented in the income statement could be used as a starting point to calculate the cash flows from operating activities. Cash Inflows from operating activities: ‘Cash sales 4 Cash received from debtor 4 Commission received ‘Fees received 4 Royalty received 4 Other operating receipts. Cash Outflows from operating activities: ‘Cash payments to suppliers for goods and services. Cash payments of income taxes Cash paid to creditor Payment of wages, salary, commission, fees ete. Other operating expenses paid. The amount of cash from operations indicates the it indicator of the extent to which the operations to maintain its operating potential. Cash from Investing Activitis Cash flow from investing activities inclug of assets. It relates to purchase and sale and and building, ete. Cash Outflows from investin: Peeees {Of cash flows owing to the purchase and sale s or fixed assets such as machinery, furniture, ets including intangibles and capitalized R&D. ird party (other than advances and loans made by a financial those held for trading purposes. Cash from Financing Activities: It includes financing activities related to long-term funds or capital of an enterprise. Financing activities are activities that result in changes in the size and composition of the owners’ capital and borrowings of the enterprise. e.g., cash proceeds from issue of equity shares, debentures, raising long-term loans, repayment of bank loans, ete. Cash Inflows from financing activities * Cash proceeds from issuing shares (equity / preference). + Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings, BY CMA BENUMADHAB NAYAKCash Outflows from financing activities: ‘Cash repayments of amounts borrowed. 4 Interest paid on debentures and long-term loans and advances. + Dividends paid on equity and preference capital Q2. Explain the feature and objective of cash flow statement? Features of Cash Flow Statement: The features or characteristics of Cash Flow Statement may be summarised in the following way: Itisa periodical statement as it covers a particular period of time, say, month or year. It shows movement of cash in between two balance sheet dates. Itestablishes the relationship between net profit and changes in cash position of the fi It does not involve matching of cost against revenue. A It shows the sources and application of funds during a particular period of time, It records the changes in fixed assets as well as current assets. A projected cash flow statement is referred to as cash budget. Itis an indicator of cash earning capacity of the firm. It reflects clearly how financial position of a firm changes over @ activities, investing activities and financing activities. 10, It shows the cash earning capacity of the firm. 11. It indicates different sources from which cash been coll has been utilised during the year. > 12. It classifies cash flows during the period from operafifi@ inveaut and financing activities. 13. Ithelps the management in cash planning and c are no shortage or surplus of c at any point of time bligatts 8 tatQhjent to ensure that his investment gets regul PRPMABDeYDPE 14, It evaluates the ability of the firm to meet di 15. A prospective investor consults the returns in future. 16. It discloses the reasons for difference: 17. It helps the management in 18. Itensures optimum use of Objective of cash flow stftement: ber of objectives which are as follows: of cash and outflows of cash can be measured annually which ar ting activities and financial activities ‘ash: Timing and certainty of generating the inflow of cash can be kno the management to take financing decisions in future ities: All the activities are classified into: operating activities, inv ‘management to take various financing deci ions since synchronization of cash is possible. 5, Assessing Liquidity and Solvency Position: Both the inflows and outflows of eash and equivalent ean be known, and, as such, liquidity and solvency position of a firm can also intained as timing and certainty of cash generation is known, i. it helps to assess the ability of SOA firm to generate cash. 6. Evaluation of Future Cash Flows: Whether the cash flow from operating activities are quité 3 sufficient in future to meet the various payments ¢.g. payment of expenses/debts/dividends/taxes. 7. Supply Necessary Information to the Users: A Cash Flow Statement supplies various informati relating to inflows and outflows of cash to the users of accounting. BY CMA BENUMADHAB NAYAK§, Helps the Mana management © Prepare it cash planning a fs he future and th voi c bl lain the ‘and thereby avoid any unnecessary trouble. 3, Ex amportance and advanta es of cash flow statement? {Uses or Importance of Cash Flow Statement : Cash Flow Statement is useful for g cient amount of cash to meet Short-term Planning and control of cash. A business entity needs ined a8, payment of rn tious ablgaions inthe nea future such as payment for purchase of fixe : mea Ht OF debts, operating expenses ofthe business ete. lps the financial m; $ hk : I bs a pep ‘© make a cash flow projection for the immediate future taking the data relating At cash outflows from past records. As such, it becomes easy for him to know cash position whi it the cash position which may cither result in a surplus or a deficit one. Thus, cash floyystatement is another important tool of financial analysis for the management, Its main advantages or importance are: |. Evaluation of Cash Position: I is very helpful in understanding the cash cas business operations smoothly, the cash fl i sition of the business, 2. Planning and Control: A projected cash flow statement nab] coordinate the financial Operations properly. The financial m: ill be derived, how much can be g¢ the nt to plan and can’ yy how much cash is fy, and how much could be obtained from outside. Performance Evaluation: A comparison of actual ft Statement will disclose the failure ot success of Deviations will indicate the need for corrective a 4. Framing Long-term Planning: The proj exploring the possibility of repayment of cash, ith the projected cashflow in managing cash resources. Yatement helps financial manager in which depends upon the availability of statement also helps the management in taking capital budgeting decisions. Liquidity Position: Liquidi such as payment of wa; im refers to its ability to meet short-term obligations erating expenses etc, From cash flow statement the financial ll the firm is meeting these obligations. At the same time the ink can be known from cash flow statement. As a matter of fact, a dependent upon its cash earning capacity. Estions: Cash flow statement is able to explain some questions often cial manager such as, why is the firm not able to pay dividend in spite of Why there is huge cash balance in spite of loss etc. jtefent is, no doubt, an important tool of financial analysis which discloses the complete Hnanagement. The inerease in—or deerease of—cash and reasons thereof, can be known, has its own limitation, ‘hese limitations are: . Since cash flow statement does not consider non-cash items, it cannot reveal the actual net income of the business, Cash flow statement cannot replace fund flow statement or income statement. Each of them has a Separate function to perform which cannot be done by the cash flow statement. The cash balance as disclosed by the projected cash flow statement may not represent the real liquid Position of the business since it can be easily influenced by the managerial decisions, by making certain payments in advance or by post ponding payments. BY CMA BENUMADHAB NAYAK4. 5, It cannot be used for the purpo: the current year than the previous year because its cash flow has increased. It is not helpful in measuring the economic efficiency in certain cases e.g. where generally heavy capital expenditure is involved. of comparison over a period of time. A company is not better off jy) public utility servigg In spite of these limitations, it can be said that cash flow statement is a useful supplementary instrument, It helps management in knowing the amount of capital blocked up in a particular segment of the business. The technique of cash flow analysis—when used in conjunction with ratio analysis—serves ag a barometer in measuring the profitability and financial position of the business. Q5. What is a Statutory Report According to Compan before the Registrar of Joint Stock Companies. Examples of Statutory Reports The followings are the examples of statutory report. % Statutory Report submitted at the statutory meeting of the com * Directors’ Report to the Annual General Meeting. “Annual Returns. ‘Auditors’ Report, Contents of St tory report The statutory report contains the following information. *% Total number of shares allotted whether fully“pai *% Total cash received for shares allotment, “An abstract of cash receipts and payme + The name, address, occupation o| ‘© Material information of a contra: 6. What is a Non-Statutory repo! Act 2013, a report is prepared by the board of directors of every public limite _ company and forward the same to its every shareholder, called statutory report, at lea the day on which the statutory meeting is to be held. A copy of statutory report the reportannexed with the Profit Contents of the Directors’ Report d in order to help the board of directors or top executives to ®) control and management of business organization but not . These reports are prepared whenever demanded by the fficers of the company i.e. Secretary, Auditor, Manager etc. etors to Shareholders: The Board of Directors are preparing the report with regard Jproblems or any new projects and presented in the Annual General Meeting. Sometimes, and Loss Account and Balance Sheet of preceding accounting year Generally, the directors report contains the following information. The state of affe The declaration of dividend. of the company. % Amount proposed to be carried on to reserved capital. + Any major changes in the financial commitment of last accounting period. 2. Reports of Committees of Directors: The committees are formed by the Board of Directors in order to help them for able administration of the company. Such committees are standing committees. Examples for standing committees are Finance Committee, Project Committee, Share Allotment BY CMA BENUMADHAB NAYAKcording 10 the need in Committee, Share Transfer Committee etc., These committees are reconstit basis. These committees submit their reports directly to the Board. ¢ individual officers of Le "3 Reports of Individual officers of the Company: The term reports © ote, Out of these company includes Company Secretary, Auditor, General Manager. following matters. t. persons, secretary is asked to prepare the report frequently with regard to the Selection of suitable site for new branch. Complaints from branch offices. Complaints of customers. Complaints of suppliers. ‘Suspected irregularities in anyone or more departments. Improvements in office organization. General behavior of the employees. a Causes of discontent among the employees. _ ( Valuation of stocks and their levels of stocks in terms of quantities. Threatened strikes. Prospects and position of a business which is going to be taken beooeeseeeaes