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Financial Statements

Financial statements are a collection of reports about an


organization's financial results, financial condition, and cash
flows. They are useful for the following reasons:
To determine the ability of a business to generate cash, and
the sources and uses of that cash.
To determine whether a business has the capability to pay
back its debts.
To track financial results on a trend line to spot any looming
profitability issues.
To derive financial ratios from the statements that can
indicate the condition of the business.
To investigate the details of certain business transactions, as
outlined in the disclosures that accompany the statements.

What is a 'Balance Sheet'

A balance sheet is a financial statement


that summarizes a company's assets,
liabilities and shareholders' equity at a
specific point in time. These three balance
sheet segments give investors an idea as to
what the company owns and owes, as well
as the amount invested by shareholders.
The balance sheet adheres to the following
formula:
Assets = Liabilities + Shareholders' Equity.

The Trading And Profit And Loss Account


One of the main aims of operating a business is to make profit. Profit is
calculated in a Trading and Profit and Loss Account. This is divided in a Trading
Account which calculates the Gross Profit for the period, and a Profit and Loss
Account which calculates Net profit for the period.
The Trading Account calculates the profit made strictly from trading
activities. Trading involves buying and selling. In the trading account the cost of
goods sold is subtracted from Net Sales for the period to calculate Gross Profit.
Cost of Goods Sold the value of the goods sold at cost.
Net Sales the actual sales made after all adjustments have been made for
goods returned.
Gross Profit this is the excess of Net Sales over Cost of Goods Sold.
Gross Loss this is the excess of Cost of goods sold over Net Sales.

At the end of a financial period, all expense and revenue accounts are
closed to a summarizing account usually called a Profit and Loss
Account. This is the financial statement that summarizes revenues
and expenses for a specific period of time, usually a month or a year.
The Profit and Loss Accountreflects a Period of Time Month,
Quarter, Year. It shows financial the activity of a business during that
period and indicates any profit or loss earned.
Revenue is the value of goods and serviceswhich have been
delivered to customers.
Expenses costs incurred in earning these revenues.
Net Profit is the excess of Revenue over Expenses, on the Profit
and Loss Account.
Net Loss is the excess of Expenses over Revenue, on the Income
Statement.

Introduction- Ratios
The term ratio analysis refers to
the analysis of the financial
statements in conjunction with the
interpretations of financial results of
a particular period of operations,
derived with the help of 'ratio'. Ratio
analysis is used to determine the
financial soundness of a business
concern.

Dividend Yield

What is the 'Dividend Yield'


A financial ratio that indicates how much a company pays
out individendseach year relative to itsshareprice.
Dividend yield is represented as a percentage.The formula
for calculating dividend yield may be represented as
follows:

HOW IT WORKS (EXAMPLE):

The formula fordividend yieldis:


Dividend Yield = AnnualDividend/
CurrentStockPrice.
Q following information for XYZ ltd given
to you for the year ended 31st march
10% preference share of Rs. 20 each
Equity dividend paid 20%
Market price equity share Rs. 80

Dividend yield Ratio = Dividend per


share
Market price per
share
=

2 * 100
2.5
= 80%

Concept of Book Value per Share


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Book value per share is just one of the methods for
comparison in valuing of a company. Enterprise value, or
firm value, market value, market capitalization, and other
methods may be used in different circumstances or
compared to one another for contrast. For example,
enterprise value would look at the market value of the
company's equity plus its debt, whereas book value per
share only looks at the equity on the balance sheet.
Conceptually, book value per share is similar to net worth,
meaning it is assets minus debt, and may be looked at as
though what would occur if operations were to cease. One
must consider that the balance sheet may not reflect with
certain accuracy, what would actually occur if a company
did sell all of their assets.

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Book value per share compares the amount of
stockholders' equity to the number of shares
outstanding. If the market value per share is lower
than the book value per share, then the stock price
may be undervalued. Thus, this measure is a possible
indicator of the value of a company's stock; it may be
factored into a general investigation of what the
market price of a share should be, though other
factors concerning cash flows, product sales, and so
forth should also be considered. The measurement is
rarely used internally; instead, it is used by investors
who are evaluating the price of a company's stock.

If book value per share is calculated with just common stock in the
denominator, then it results in a measure of the amount that a
common shareholder would receive upon liquidation of the
company.
The formula for book value per share is to subtract preferred stock
from stockholders' equity, and divide by the average number of
shares outstanding. Be sure to use the average number of shares,
since the period-end amount may incorporate a recent stock
buyback or issuance, and will skew the results. The formula is as
follows:

Stockholders' Equity - Preferred Stock


Average shares outstanding
For example, ABC International has $15,000,000 of stockholders' equity,
$3,000,000 of preferred stock, and and an average of 2,000,000 shares
outstanding during the measurement period. The calculation of its book
value per share is:
$15,000,000 Stockholders' equity - $3,000,000 Preferred stock
2,000,000 Average shares outstanding
= $6.00 Book value per share

Anyone using this measure should be aware of two issues, which are:
The market value per share is a forward-looking measure of what
the investment community believes a company's shares are worth;
conversely, the book value per share is an accounting measure that
is not forward-looking at all. The two measures are based upon
different information. Consequently, it is dangerous to compare the
two measures.
The book value concept tends to undervalue (sometimes to a
considerable extent) a number of assets. For example, the value of
a brand, which has been built up through many years of marketing
expenditures, may be the primary asset of a company, and yet not
appear in the book value figure at all. Similarly, the value of inhouse research and development activities could be very high, and
yet this expenditure is charged straight to expense in most cases.
These factors can yield a massive disparity between book value and
market value.