DBFI302 Unit-02

DBFI302: Financial Statement Analysis & Business Valuation Manipal University Jaipur (MUJ)
MASTER OF BUSINESS ADMINISTRATION

SEMESTER 3
DBFI302
FINANCIAL STATEMENT ANALYSIS &
BUSINESS VALUATION
Unit 2: Financial Statements 1

Unit 2
Financial Statements
Table of Contents
SL Topic Fig No / SAQ / Page No

No Table / Activity
Graph
1 Introduction - -
3
1.1 Learning Objectives - -
2 The Concept of Fair Presentation - 1 4-5
3 Income Statement - 2, I 6-10
4 Statement of Comprehensive Income - 3, II 10-11
5 Statement of Financial Position - 4, III 12-17
6 Summary - - 18-19
7 Glossary - - 19-20
8 Terminal Questions: - - 20
9 Case Study - - 20-22
10 Answers - - 22-24
11 Suggested Books and e-References - - 25

1. INTRODUCTION
Accounting standards setters in many jurisdictions around the world, including the United
States, India, the United Kingdom, Australia, and the European Union, have issued standards
requiring recognition of balance sheet amounts at fair value, and changes in their fair values
in income. One key issue is whether fair values of financial statement items can be measured
reliably, especially for those financial instruments for which active markets do not readily
exist (e.g., specialised receivables or privately placed loans). Both the FASB and IASB state in
their concepts statements that they consider the cost/benefit trade-off between relevance
and reliability when assessing how best to measure specific accounting amounts, and
whether measurement is sufficiently reliable for financial statement recognition. A cost to
investors of fair value measurement is that some or even many recognised financial
instruments might not be measured with sufficient precision to help them assess adequately
the firm’s financial position and earnings potential. This reliability cost is compounded by
the problem that in the absence of active markets for a particular financial instrument,
management must estimate its fair value, which can be subject to discretion or manipulation.
Assessing the costs and benefits of fair value accounting for financial reporting to investors
and other financial statement users in particular reporting regimes is difficult. To improvise
on the concept of fair value, standards were issued and constantly amended to meet the need
of end users of financial statements to reflect ‘true & fair’ view position.
1.1 Learning Objectives

After studying this chapter, you will be able to:
❖ Understand concept of fair value

❖ Components of income statement, comprehensive income statement and financial
position
❖ Structure and presentation of income statement, comprehensive income statement and
financial position

2. CONCEPT OF FAIR VALUE

In accounting and in most schools of economic thought, fair value is a rational and unbiased
estimate of the potential market price of a good, service, or asset. The derivation takes into
account such objective factors as the costs associated with production or replacement,
market conditions and matters of supply and demand. Subjective factors may also be
considered such as the risk characteristics, the cost of and return on capital, and individually
perceived utility.
Definition of fair value

The Financial Accounting Standards Board (FASB) defines “fair value” as “the price at which
an asset or liability could be exchanged in a current transaction between knowledgeable,
unrelated willing parties on its measurement date”
International Standards/Accounting standards issued in relation to fair value

presentation of Financial Statements
The Financial Accounting Standards Board (FASB) has issued several standards that
mandate disclosure or recognition of accounting amounts using fair values. Among the most
significant in terms of relevance to financial institutions are those standards that explicitly
relate to financial instruments. Two important standards are SFAS 107 Disclosures about
fair value of financial instruments (FASB, in 1991) and SFAS 119, Disclosure about
derivative financial instruments and fair value of financial instruments (FASB, in 1994).
International Accounting Standards Committee (IASC) issued IAS 1 Presentation of Financial

Statements in September 1997 to bring about more compliance in reporting of financial
statements.
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 1.
NOTE: The IASB was formed in 2001 to replace IASC. The standards issued by IASC till
31.03.2001 are known as IASs and the standards issued by IASB since 01.04.2001 are known
as IFRSs.
The standard issued by IASB (formerly known as IASC) IAS 1 Presentation of Financial
Statements prescribe the basis for presentation of general-purpose financial statements, to

ensure comparability both with the entity's financial statements of previous periods and
with the financial statements of other entities. IAS 1 sets out the overall requirements for the
presentation of financial statements, guidelines for their structure and minimum
requirements for their content. The standard requires a complete set of financial statements
to comprise a statement of financial position, a statement of profit or loss and other
comprehensive income, a statement of changes in equity and a statement of cash flows.
Further, in May 2011 IASB issued IFRS 13 Fair Value Measurement which applies IFRSs
that require or permit fair value measurements or disclosures and provides a single IFRS
framework for measuring fair value and requires disclosures about fair value measurement.
The Standard defines fair value on the basis of an 'exit price' notion and uses a 'fair value
hierarchy', which results in a market-based, rather than entity-specific, measurement.
IFRS 13 was originally issued in May 2011 and applies to annual periods beginning on or
after 1 January 2013.
Central Government of India under the supervision and control of Accounting Standards
Board (ASB) of ICAI and in consultation with National Advisory Committee on Accounting
Standards (NACAS) issued Indian Accounting Standard 113 (Ind AS 113) Fair Value
Measurement which helps companies with a unified procedure to define the fair value of
assets while declaring their financing statements. The standard, apart from setting a single
framework for measuring fair value, also prescribes the methods of disclosures of fair value
measurements.
SELF-ASSESSMENT QUESTIONS – 1
State whether the below statements are true or false.
1. SFAS standard are issued by Central Government of India.

2. IFRS 13 was issued in May 2016.

3. INCOME STATEMENT
The Income Statement is one of a company’s core financial statements that shows their profit
and loss over a period of time. The profit or loss is determined by taking all revenues and
subtracting all expenses from both operating and non-operating activities.
The income statement is one of three statements used in both corporate finance (including
financial modelling) and accounting. The statement displays the company’s revenue, costs,
gross profit, selling and administrative expenses, other expenses and income, taxes paid, and
net profit in a coherent and logical manner.
The statement is divided into time periods that logically follow the company’s operations.
The most common periodic division is monthly (for internal reporting), although certain
companies may use a thirteen-period cycle. These periodic statements are aggregated into
total values for quarterly and annual results.
Components of an Income Statement

The income statement may have minor variations between different companies, as expenses
and income will be dependent on the type of operations or business conducted. However,
there are several generic line items that are commonly seen in any income statement.
The most common income statement items include:

1. Revenue/Sales: Sales Revenue is the company’s revenue from sales or services,
displayed at the very top of the statement. This value will be the gross of the costs
associated with creating the goods sold or in providing services. Some companies have
multiple revenue streams that add to a total revenue line.
2. Cost of Goods Sold (COGS): It is a line-item that aggregates the direct costs associated
with selling products to generate revenue. This line item can also be called Cost of
revenue if the company is a service business. Direct costs can include labour, parts,
materials etc.,
3. Gross Profit: Gross profit is calculated by subtracting Cost of Goods Sold (or Cost of
Revenue) from Sales Revenue.

4. Operating expenses: Includes general. Administrative & selling and all other indirect
costs associated with running the business. This includes salaries and wages, payroll,
rent and office expenses, insurance, travel expenses
5. Marketing, Advertising, and Promotion Expenses: Most businesses have some
expenses related to selling goods and/or services. Marketing, advertising, and
promotion expenses are often grouped together as they are similar expenses, all related
to selling.
6. EBITDA: While not present in all income statements, EBITDA stands for Earnings
before Interest, Tax, Depreciation, and Amortization. It is calculated by subtracting
SG&A expenses (excluding amortization and depreciation) from gross profit.
7. Depreciation & Amortization Expense: They are non-cash expenses that are spread
on cost of capital assets such as Property, Plant, and Equipment (PP&E) over a period
of asset. Depreciation is the deduction in the price of a tangible asset which reduces the
asset’s monetary value due to a variety of reasons like wear and tear that is caused by
a prolonged use of the asset. which reduces the asset’s monetary value due to a variety
of reasons like wear and tear that is caused by a prolonged use of the asset.
8. Operating Income (or EBIT): Operating Income represents what’s earned from
regular business operations. In other words, it’s the profit before any non-operating
income, non-operating expenses, interest, or taxes are subtracted from revenues. EBIT
is a term commonly used in finance and stands for Earnings Before Interest and Taxes.
9. Interest Expense: It is common for companies to split out interest expense and
interest income as a separate line item in the income statement. This is done in order
to reconcile the difference between EBIT and EBT. Interest expense is determined by
the debt schedule.
10. Other Expenses: Businesses often have other expenses that are unique to their
industry. Other expenses may include fulfilment, technology, research and
development (R&D), stock- (SBC), impairment charges, gains/losses on the sale of
investments, foreign exchange impacts, and many other expenses that are industry or
company-specific. (SBC), impairment charges, gains/losses on the sale of investments,
foreign exchange impacts, and many other expenses that are industry or company-
specific.

11. EBT (Pre-Tax Income): EBT stands for Earnings Before Tax, also known as pre-tax
income, and is found by subtracting interest expense from Operating Income. This is
the final subtotal before arriving at net income.
12. Income Taxes: Income Taxes refer to the relevant taxes charged on pre-tax income.
The total tax expense can consist of both current taxes and future taxes.
13. Net Income: Net Income is calculated by deducting income taxes from pre-tax income.
This is the amount that flows into retained earnings on the balance sheet, after
deductions for any dividends.
3. EBIT refers to Earnings Before Income Tax. State whether the statement is true or
false.
Fill up the blank for the below:
4. Depreciation is a ____________________expense.
Activity 1
Refer to any income statement of any company of your choice and analyse the
components of income statement

Format of ‘Income Statement’
Income Statement
Name of the company:
Income Statement for the period:
Currency in words:
Note
Particulars No. 20X2 20X1
A) Income
Revenue from sale of goods & services - -
Total revenue - -
B) Cost of Goods Sold - Direct Costs - -
C) Gross Profit (A-B) - -
D) Operating Expenses - Indirect costs - -
E) Marketing, Advertising and Promotion Expenses - -
F) Other Expenses - -
G) EBITDA (C-D-E-F) - -
H) Depreciation & Amortization - -
I) Operating Income - EBIT (G-H) - -
J) Interest Expense - -

K) EBT (I-J) - -
L) Income Tax - -
M) Net Income (K-L) - -
4. STATEMENT OF COMPREHENSIVE INCOME

The statement of comprehensive income is a financial statement that summarizes both
standard net income and other comprehensive income (OCI). The net income is the result
obtained by preparing an income statement. Whereas, other comprehensive income consists
of all unrealized gains and losses on assets that are not reflected in the income statement. It
is a more robust document that often is used by large corporations with investments in
multiple countries.
One of the most important components of the statement of comprehensive income is the
income statement.
Unfortunately, net income carried from income statement only accounts for the earned
income and incurred expenses. There are times when companies have accrued gains or
losses resulting from the fluctuations in the value of their assets, that are not recognized in
net income.
Some examples of these unrealized gains or losses are:

• Gains or losses from pension and other retirement programs
• Adjustments made to foreign currency transactions
• Gains or losses from derivative instruments
• Unrealized gains or losses from debt securities
• Unrealized gains or losses from available-for-sale securities
The statement of comprehensive income reports the change in net equity of a business
enterprise over a given period. The statement of retained earnings includes two key parts:
net income, and other comprehensive income, which incorporates the items excluded from
the income statement.

Format of ‘Comprehensive Income Statement’
Comprehensive Income Statement

Income Statement for the period:
Currency in words:
20X2 20X1
O) Net Income (as calculated above per income
statement) - -
P) Other Comprehensive income - -
Q) Comprehensive Income - -
5. Interest expense is an item of Statement of Comprehensive Income. State whether

the statement is true or false.
Fill up the blank for the following statement:

6. Statement of Comprehensive income comprise _________________ and
_____________________
7. Unrealised gains is a classic example for _______________________
8. Changes in ___________________ is reported in comprehensive income statement.
Activity 2
Refer to any comprehensive income statement of any company of your choice and
analyse the components of income statement.

5. STATEMENT OF FINANCIAL POSITION – BALANCE SHEET

Statement of Financial Position is popularly called as ‘Balance Sheet’. It reflects the position
of the company as on date.
The balance sheet is one of the three fundamental financial statements and is key to both
financial modelling and accounting. The balance sheet displays the company’s total assets
and how the assets are financed, either through either debt or equity. It can also be referred
to as a statement of net worth or a statement of financial position.
The balance sheet is based on the fundamental equation: Equity + Liabilities = Assets
As such, the balance sheet is divided into two sides (or sections). The left side of the balance
sheet outlines all of a company’s assets. On the right side, the balance sheet outlines the
company’s liabilities and shareholders’ equity.
The assets and liabilities are separated into two categories: current asset/liabilities and non-
current (long-term) assets/liabilities. More liquid accounts, such as Inventory, Cash, and
Trades Payables, are placed in the current section before illiquid accounts (or non-current)
such as Plant, Property, and Equipment and Long-Term Debt.
Components of Balance Sheet

Balance sheets, like all financial statements, will have minor differences between
organizations and industries. However, there are several “buckets” and line items that are
almost always included in common balance sheets. Balance Sheet is dived into parts:
I) Equity and Liabilities and

II) Assets
The most common Balance Sheet items include:
On liabilities side of the Balance Sheet:

A) Shareholders’ Equity
1. Share Capital: Share capital is the money that a company raises through the
issuance of common or preferred stock. The term share capital can mean slightly
differ depending on the context. In general share capital is the value of funds that

shareholders have invested in the company. When a company is first formed,

shareholders will typically put in cash. For example, an investor starts a company
and seeds it with $10M. Cash (an asset) rises by $10M, and Share Capital (an equity
account) rises by $10M, balancing out the balance sheet.
2. Reserves & Surplus/Retained Earnings: Retained earnings are the accumulated
portion of business profits. This is the total amount of net income the company
decides to keep. Every period, a company may pay out dividends from its net
income. Any amount remaining (or exceeding) is added to (deducted from) retained
earnings.
3. Money received against share warrants: As the name suggests, money received
by the company against share warrants are to be disclosed separately in balance
sheet under shareholder’s equity.
B) Share application pending for allotment: Money received by the company against
share application which are pending for allotment to be disclosed in balance sheet
separately and not be clubbed under equity. This will express it as distinct from equity
and reserves. Any user of the balance sheet information will have a clear view of the
extra funds since they are separately identified.
C) Non-Current Liabilities
1. Long-Term Borrowings : Long term borrowings are financial obligations and
loans lasting longer than one year. This account includes the total amount of long-
term debt excluding the current portion, if that account is present under current
liabilities. E.g., Loans & advance taken from financial institutions or banks which are
payable more than one year.
2. Deferred Tax Liability (DTL): Deferred tax arises if there is difference between
tax calculated per books and tax calculated per income tax laws. If book profit is
more than the taxable profit, we pay less tax now and more tax in future, which
creates DTL. It is tax debt which need to be paid in future. It is tax credit for future
taxes.
3. Other long-term Liabilities: These are the liabilities which cannot be classified
under long term borrowings and thus classified as Other long-term liabilities. E.g.,
Pension liabilities, deferred revenue, capital leases.

4. Long term provisions: Provisions created by the company to meet future liabilities
or expenses which will arise after one year. E.g., Provision for bad and doubtful
debts
D) Current Liabilities
5. Accounts Payable: Accounts Payables, or AP, is the amount a company owes
suppliers for items or services purchased on credit. As the company pays off its AP,
it decreases along with an equal amount decrease to the cash account.
6. Short-term borrowings: Includes non-AP obligations that are due within one
year’s time or within one operating cycle for the company (whichever is longest).
7. Other current liabilities: The liabilities which cannot be classified under point 8
and 9 are classified under other current liabilities. E.g., Advance from customers
8. Short-term provisions: Provisions created by the company to meet future
liabilities or expenses which will arise for the period less than one year. E.g.,
Provision for income tax
On the asset side of the Balance Sheet:

A) Non-Current Assets
1. Tangible Assets: Property, Plant, and Equipment (also known as PP&E) capture
the company’s tangible fixed assets. The PP&E is accounted for net of accumulated
depreciation. Some companies will class out their PP&E by the different types of
assets, such as Land, Building, and various types of Equipment. All PP&E is
depreciable except for Land.
2. Intangible Assets: An intangible asset is an identifiable non-monetary asset
without physical substance. Such an asset is identifiable when it is separable, or
when it arises from contractual or other legal rights. Separable assets can be sold,
transferred, licensed, etc. Examples of intangible assets include computer software,
licences, trademarks, patents, films, copyrights and import quotas. Unidentifiable
intangible assets include brand and goodwill.
3. Non-current investments: Non-current investments are also called as long-term
investment. These investments are held by the company for more than one year.
E.g., Mutual funds, Stocks

4. Long-term loans and advances: Long-term loans and advances are those which
are receivable by the company for more than one year.
5. Deferred Tax Asset (DTA): Deferred tax arises if there is difference between tax
calculated per books and tax calculated per income tax laws. If book profit is less
than the taxable profit, we pay more tax now and less tax in future, which creates
DTA.
6. Other Non-current Assets: Other current assets are those assets which cannot be
classified under assets mentioned from point 1 to 4. E.g., Prepaid expenses
B) Current Assets
1. Cash and Equivalents: The most liquid of all assets, cash, appears on the first line
of the balance sheet. Cash Equivalents are also lumped under this line item and
include assets that have short-term maturities under three months or assets that
the company can liquidate on short notice, such as marketable securities.
Companies will generally disclose what equivalents it includes in the footnotes to
the balance sheet.
2. Inventory: Inventory includes amounts for raw materials, work-in-progress goods,
and finished goods. The company uses this account when it reports sales of goods,
generally under cost of goods sold in the income statement.
3. Accounts Receivable: This account includes the balance of all sales revenue still on
credit, net of any allowances for doubtful accounts. As companies recover accounts
receivables, this account decreases, and cash increases by the same amount. E.g.,
Amount receivable from customers for the sales made by the company.
4. Current investments: Current investments are the investments held by the
company for the period less than one year. E.g., Deposits is banks for less than one
year.
5. Short-term loans and advances: Short-term loans and advances are such loans
which are receivable by the company for a term less than one year. E.g., Salary
advances to employees, advance to vendors etc.,
6. Other Current assets: Other current assets are those assets which cannot be
classified under assets mentioned from point 7 to 11. E.g., Prepaid expenses.

Format of Balance Sheet
BALANCE SHEET
Balance sheet as at:
Currency in words:
Figures as of the Figures as of the end

Particulars Note No. end of the current of previous reporting
reporting period period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholder's funds - -
(a) Share capital
(b) Reserves and surplus
(c) Money received against
share
warrants
(2) Share application money

pending allotment - -
(3) Non-current liabilities - -

(a) Long-term borrowings
(b) Deferred tax liabilities
(Net)
(c) Other long-term liabilities
(d) Long-term provisions
(4) Current liabilities - -

(a) Accounts Payable
(b) Short-term borrowings
(c) Other current liabilities
(d) Short-term provisions
Total - -
II. ASSETS
Non-current assets - -
(1) (a) Fixed assets - -
(i) Tangible assets

(ii) Intangible
assets
(b) Non-current investments
(c) Long-term loans and

advances
(d) Deferred tax assets
(Net)
(e) Other non-current
assets
(2) Current assets - -

(a) Cash and cash equivalents
(b) Inventory
(c) Accounts receivable
(d) Current investments
(e) Short-term loans and
advances
(f) Other current assets
Total - -
Fill up the blank for the below:
7. Financial position is reflected as on date in _______________

8. Intangible is a __________________asset.
9. Deferred tax liability is a _______________________liability
10. __________________________ is the most liquid of all assets.
Activity 3
Refer to any balance sheet of any company of your choice and analyse the components
of income statement

6. SUMMARY
Financial Statements includes Balance Sheet, Income Statement and Statement of
Comprehensive income. Financial Statements shall present true and fair view of the financial
position, financial performance and cashflows of an entity. Presentation of true and fair view
requires the faithful representation of effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and
expenses set out in the Conceptual Framework. The application of accounting standards,
with additional disclosure, when necessary, is presumed to result in financial statements
that present a true and fair view.
Income Statement is a statement that summarises the details of income and expenses of an
entity for a particular reporting period.
Comprehensive Income Statement is a statement that summarises the details of income

arrived from income statement and comprehensive income for the reporting period. It is
continuation of income statement.
Balance Sheet summarises the details of assets and liabilities (closing balances) as of
reporting date. It provides the information about financial position of an entity as of
particular date.

Financial Statements
I
Expenses Income Statement Income/revenue
Comprehensive
Income Statement
Laibilities Balance Sheet Assets
7. GLOSSARY
1. FASB: The Financial Accounting Standards Board
2. IASC: International Accounting Standards Committee
3. IASB: International Accounting Standards Board
4. ASB: Accounting Standards Board
5. ICAI: Institute of Chartered Accountants of India
6. NACAS: National Advisory Committee on Accounting Standards
7. IAS: International Accounting Standards
8. IFRS: International Financial Reporting Standards
9. IND AS: Indian Accounting Standards
10. Exit Price: Exit price is the price that a seller would receive in exchange for the sale of
an asset or would pay to transfer a liability.
11. Fair value hierarchy: Fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities and the lowest priority
to unobservable inputs.
12. True and fair view: True and fair view in auditing means that the financial statements
are free from material misstatements and faithfully represent the financial
performance and position of the entity

13. Conceptual Framework: Is a basic document that sets objectives and the concepts for
general purpose financial reporting.
8. TERMINAL QUESTIONS
A) Short Answer Questions
1. Define fair value.
2. List out the main components of Financial Statements.
3. Brief about IFRS 13.
B) Long Answer Questions
1. Explain the concept of fair value
2. Explain any six components of Statement of Income
3. What are the current assets items of Balance Sheet?
9. CASE STUDY
1. An asset is sold in two different active markets at different prices. An entity enters into
a transaction in both markets and can access the price in those markets for the asset at
the measurement date.
In Market A:
The price that would be received is Rs 2,600, transaction costs in that market are Rs. 300 and
the cost to transport the asset to that market are Rs. 200.
In Market B:
The price that would be received is Rs 2,500, transaction costs in that market are Rs. 100 and
the cost to transport the asset to that market are Rs. 200.
You are required to calculate fair value of the asset.

Answer: The fair value of the asset would be measured using the price in the most
advantageous market. The most advantageous market is the market that maximises the
amount that would be received to sell that asset, after taking into account transaction costs
and transport costs (i.e., the net amount that would be received in the respective markets).

Particulars Rs. Rs.

Market A Market B
Price receivable 2,600 2,500
Less: Transaction cost (300) (100)
Less: Transportation (200) (200)
cost
Fair value of the asset 2,100 2,200
Since the entity would maximise the net amount that would be received for the asset in
Market B i.e., Rs. 2,200, the fair value of the asset would be measured using the price in
Market B.
2. Company J acquires land in a business combination. The land is currently developed for
industrial use as a factory site. Although the land’s current use is presumed to be its
highest and best use unless market or other factors suggest a different use, Company J
considers the fact that nearby sites have recently been developed for residential use as
high-rise apartment buildings.
On the basis of that development and recent zoning and other changes to facilitate that
development, Company J determines that the land currently used as a factory site could
be developed as a residential site (e.g., for high-rise apartment buildings) and that
market participants would take into account the potential to develop the site for
residential use when pricing the land.
Determine the highest and best use of land.
Answer: The highest and best use of the land is determined by comparing the following:
a) The value of the land currently developed for industrial use (i.e., an assumption that the
land would be used in combination with other assets, such as the factory, or with other
assets and liabilities) and
b) The value of the land as a vacant site for residential use, taking into account the costs
of demolishing the factory and other costs necessary to convert the land to a vacant
site. The value under this use would take into account risks and uncertainties about
whether the entity would be able to convert the asset to the alternative use (i.e., an
assumption that the land would be used by market participations on a stand-alone
basis).

The highest and best use of the land would be determined on the basis of the higher of these
values. In situations involving real estate appraisal, the determination of highest and best
use might take into account factors relating to the factory operations (e.g., the factory’s
operating cash flows) and its assets and liabilities (e.g., the factory’s working capital).
10. ANSWERS
A) Self-Assessment Questions
1. False
2. False
3. False
4. Non-cash
5. False
6. Net Income and Other Comprehensive Income
7. Comprehensive income
8. Equity
9. Balance Sheet/ Statement of Financial Position
10. Non-current
11. Non-current
12. Cash and Cash Equivalents
B) Short Answer Questions
1. “Fair Value” is defined as the price at which an asset or liability could be exchanged
in a current transaction between knowledgeable, unrelated willing parties on its
measurement date.
2. Balance Sheet, Statement of Comprehensive Income and Income Statement
3. IFRS 13 Fair Value Measurement outlines fair value measurements or disclosures
and provides a single IFRS framework for measuring fair value and requires
disclosures about fair value measurement.
C) Long Answer Questions

1. Fair value is a broad measure of an asset's worth and is not the same as market value,
which refers to the price of an asset in the marketplace. In accounting, fair value is a

reference to the estimated worth of a company's assets and liabilities that are listed on
a company's financial statement.
Fair value refers to the actual value of an asset – a product, stock, or security – that is
agreed upon by both the seller and the buyer. Fair value is applicable to a product that
is sold or traded in the market where it belongs or under normal conditions – and not
to one that is being liquidated. It is determined in order to come up with an amount or
value that is fair to the buyer without putting the seller on the losing end.
For example, Company A sells its stocks to company B at Rs. 300 per share. Company
B’s owner thinks he could sell the stock at Rs. 500 per share once he acquires it and so
decides to buy a million shares at the original price. Despite the large profit potential
for Company B, the sale is considered fair value because the price was agreed by both
sides and they both benefit from the sale.
2. Some of the items of Statement of income are detailed as under:
a) Revenue/Sales: Sales Revenue is the company’s revenue from sales or services,
displayed at the very top of the statement. This value will be the gross of the costs
associated with creating the goods sold or in providing services. Some companies
have multiple revenue streams that add to a total revenue line.
b) Cost of Goods Sold (COGS): It is a line-item that aggregates the direct costs
associated with selling products to generate revenue. This line item can also be
called Cost of Sales if the company is a service business. Direct costs can include
labour, parts, materials, and an allocation of other expenses such as depreciation (see
an explanation of depreciation below).
c) Gross Profit: Gross profit is calculated by subtracting Cost of Goods Sold (or Cost of
Sales) from Sales Revenue.
d) Marketing, Advertising, and Promotion Expenses: Most businesses have some
expenses related to selling goods and/or services. Marketing, advertising, and
promotion expenses are often grouped together as they are similar expenses, all
related to selling. General and Administrative (G&A) Expenses
e) Selling, General & Administrative Expenses: Includes all other indirect costs
associated with running the business. This includes salaries and wages, rent and
office expenses, insurance, travel expenses, and sometimes depreciation and

amortization, along with other operational expenses. Entities may, however, elect to
separate depreciation and amortization in their own section.
f) Depreciation: Depreciation is the deduction in the price of a tangible asset which
reduces the asset’s monetary value due to a variety of reasons like wear and tear that
is caused by a prolonged use of the asset.
3. At the minimum current portion of balance sheet shall include the following items:
On the asset side of the Balance Sheet:

1. Cash and Equivalents: The most liquid of all assets, cash, appears on the first line of
the balance sheet. Cash Equivalents are also lumped under this line item and include
assets that have short-term maturities under three months or assets that the
company can liquidate on short notice, such as marketable securities. Companies will
generally disclose what equivalents it includes in the footnotes to the balance sheet.
2. Inventory: Inventory includes amounts for raw materials, work-in-progress goods,
and finished goods. The company uses this account when it reports sales of goods,
generally under cost of goods sold in the income statement.
3. Accounts Receivable: This account includes the balance of all sales revenue still on
credit, net of any allowances for doubtful accounts. As companies recover accounts
receivables, this account decreases, and cash increases by the same amount. E.g.,
Amount receivable from customers for the sales made by the company.
4. Current investments: Current investments are the investments held by the company
for the period less than one year. E.g., Deposits is banks for less than one year.
5. Short-term loans and advances: Short-term loans and advances are such loans
which are receivable by the company for a term less than one year. E.g., Salary
advances to employees, advance to vendors etc.,
6. Other Current assets: Other current assets are those assets which cannot be
classified under assets mentioned from point 1 to 4. E.g., Prepaid expenses.

11. BOOKS AND E-REFERENCES

Books:
➢ The Professionals Guide to Fair Value. Preparing and Reading Financial Statements by
James. P. Catty
e-References:
➢ International Financial Reporting Standards (IFRS) and IFRIC Interpretations. (2022,
September 22). International Financial Reporting Standards (IFRS) and IFRIC
Interpretations.
➢ IFRS - Who we are. (n.d.). IFRS - Who We Are. Retrieved September 23, 2022
➢ Tamplin, T. (2018, October 24). Components of the Balance Sheet | Definition,
Explanation and Examples. Finance Strategists.
➢ Obasogie, A. (n.d.). Income Statement - Its Definition, Examples, Component, Layout &
Format. Income Statement - Its Definition, Examples, Component, Layout & Format.
Retrieved September 23, 2022

DBFI302 Unit-02

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DBFI302: Financial Statement Analysis & Business Valuation Manipal University Jaipur (MUJ)

MASTER OF BUSINESS ADMINISTRATION

Unit 2: Financial Statements 1

SL Topic Fig No / SAQ / Page No

Unit 2: Financial Statements 2

1.1 Learning Objectives

❖ Understand concept of fair value

Unit 2: Financial Statements 3

2. CONCEPT OF FAIR VALUE

Definition of fair value

International Standards/Accounting standards issued in relation to fair value

International Accounting Standards Committee (IASC) issued IAS 1 Presentation of Financial

Unit 2: Financial Statements 4

State whether the below statements are true or false.

1. SFAS standard are issued by Central Government of India.

Unit 2: Financial Statements 5

Components of an Income Statement

The most common income statement items include:

Unit 2: Financial Statements 6

Unit 2: Financial Statements 7

Unit 2: Financial Statements 8

Format of ‘Income Statement’

Revenue from sale of goods & services - -

B) Cost of Goods Sold - Direct Costs - -

C) Gross Profit (A-B) - -

D) Operating Expenses - Indirect costs - -

E) Marketing, Advertising and Promotion Expenses - -

H) Depreciation & Amortization - -

I) Operating Income - EBIT (G-H) - -

Unit 2: Financial Statements 9

M) Net Income (K-L) - -

4. STATEMENT OF COMPREHENSIVE INCOME

Some examples of these unrealized gains or losses are:

Unit 2: Financial Statements 10

Format of ‘Comprehensive Income Statement’

Comprehensive Income Statement

P) Other Comprehensive income - -

5. Interest expense is an item of Statement of Comprehensive Income. State whether

Fill up the blank for the following statement:

Unit 2: Financial Statements 11

5. STATEMENT OF FINANCIAL POSITION – BALANCE SHEET

Components of Balance Sheet

I) Equity and Liabilities and

The most common Balance Sheet items include:

On liabilities side of the Balance Sheet:

Unit 2: Financial Statements 12

shareholders have invested in the company. When a company is first formed,

Unit 2: Financial Statements 13

On the asset side of the Balance Sheet:

Unit 2: Financial Statements 14

Unit 2: Financial Statements 15

Format of Balance Sheet

Figures as of the Figures as of the end

(2) Share application money

(3) Non-current liabilities - -

(4) Current liabilities - -

Unit 2: Financial Statements 16

(b) Non-current investments

(c) Long-term loans and

(2) Current assets - -

Fill up the blank for the below:

7. Financial position is reflected as on date in _______________

Unit 2: Financial Statements 17

Comprehensive Income Statement is a statement that summarises the details of income