Chapter - 24

Financial Statements and Cash Flow Analysis

Financial Statements 
Financial statements provide information

about the financial activities and position of a firm.  Important financial statements are: 
  

Balance sheet Profit & Loss statement Funds flow statement Cash flow statement

BY Akash Saxena

Balance Sheet 
Balance sheet indicates the financial

condition of a firm at a specific point of time. It contains information about the firm¶s: assets, liabilities and equity.  Assets are always equal to equity and liabilities: Assets = Equity + Liabilities

BY Akash Saxena

Assets 
Assets are economic resources or properties

owned by the firm.  There are two types of assets: 


Fixed assets Current assets

BY Akash Saxena

Current Assets 
Current assets (liquid assets) are those which

can be converted into cash within a year in the normal course of business. Current assets include: 
   

Cash and bank balance Accounts receivable (debtors) Inventory (stocks) Advances to suppliers Prepaid expenses

BY Akash Saxena

Fixed Assets 
Fixed assets are long-term assets.  Tangible fixed assets are physical assets like plant.  Intangible fixed assets are the firm¶s rights and claims, such as patents, copyrights, goodwill etc.  Gross block represent all tangible assets at acquisition costs.  Net block is gross block net of depreciation.

BY Akash Saxena

Liabilities 
Liability is a firm¶s obligation to pay cash or

provide goods or services in the future. Two types of liabilities are: 


Current liabilities Long-term liabilities

BY Akash Saxena

Current Liabilities 
Current liabilities are payable within a year in

the normal course of business. They include: 
   

Accounts payable (creditors) Outstanding expenses Advances from customers Provision for tax Provision for dividend

BY Akash Saxena

Long-term Liabilities 
Long-term liabilities are payable after a year.

They include: 


Borrowings from financial institutions and banks etc. Debentures/bonds:
Non-convertible Fully convertible Partly convertible

BY Akash Saxena

Shareholders¶ Funds or Equity 
Share capital is owners¶ contribution divided

into shares. A share is a certificate acknowledging the amount of capital contributed by the shareholder.  Reserves and surplus or retained earnings are undistributed profits.  Shareholders¶ funds or equity is the sum of share capital plus reserves & surplus. It is also called net worth.
BY Akash Saxena

Balance Sheet Relationship 
Total assets (TA) equal net fixed assets

(NFA) plus current assets (CA):
TA = NFA + CA 

Net current assets (NCA) is the difference

between current assets (CA) and current liabilities (CL):
NCA = CA ± CL

BY Akash Saxena

Balance Sheet Relationship 
Net assets (NA) equal net fixed assets (NFA)

plus net current assets (NCA):
NA = NFA + NCA 

Capital employed (CE) is the sum of net

worth or equity (E) and borrowing/debt (D) and it is equivalent of net assets:
CE = Net Worth + Borrowing = E + D Capital Employed = Net Assets

BY Akash Saxena

Functions of Balance Sheet 
Stewardship role  Measurement of liquidity  Measurement of solvency

BY Akash Saxena

Profit & Loss Statement 
Profit & Loss statement provides information

about a firm¶s: 
 

revenues, expenses, and profit or loss.

BY Akash Saxena

Nature of Revenues 
Revenue is the amount received or receivable

within the accounting period from the sale of the firm¶s goods or services.  Operating revenue is the one that arises from main operations of the firm, and the revenue arising from other activities is called nonoperating revenue.

BY Akash Saxena

Nature of Expenses 
Expense is the amount paid or payable within

the accounting period for generating revenue.
Examples: raw material consumed, salary and wages, power and fuel, repairs and maintenance, rent, selling and marketing expenses, administrative expenses. 

Expenses are expired costs and capital

expenditures represent un-expired costs and appear as assets in balance sheet.
BY Akash Saxena

Depreciation 
Depreciation is a charge for the use of fixed

assets; it is an expense. It is a non-cash expense since cash was paid at the time fixed assets were acquired. Expenditures incurred on acquiring assets are called capital expenditures. Depreciation is allocation of these expenditures over the life of assets that have helped in generating revenue.

BY Akash Saxena

Methods of Depreciation 
Depreciation may be provided on  straight line basis or  written down value basis (DWV). DWV basis

is allowed for taxation in India.

BY Akash Saxena

Concepts of Profit 
Gross profit = sales ± cost of goods sold (CGS) 

CGS = raw material consumed + manufacturing expenses of goods that have been sold 

PBDIT = Profit before dep., interest and tax

= sales ± expenses, except dep., interest and tax  PBIT= Profit before interest and tax = PBDIT ± DEP  PBT= Profit before tax = PBIT ± Interest  PAT = Profit after tax = PBT ± Tax
BY Akash Saxena

Functions of Income Statement 
Summary of revenues and expenses  Measurement of profitability

BY Akash Saxena

Relationships: B/S and P&L A/C 
Net profit = Equity (end) ± Equity (begin)  Equity (end) = Equity (begin) + Net profit +

Equity issued ± Dividend  Net profit = [Equity (end) ± Equity (begin)] ± [Equity issued ± Dividend]  Change in equity = Equity (end) ± Equity (begin) = Net profit + Equity issued ± Dividend

BY Akash Saxena

Economic Vs. Accounting Profit
Accounting profit is a result of the arbitrary allocation of expenditures between expenses (revenue expenditure) and assets (capital expenditure). Economic profit is the net increase in the wealth of the firm, and it is measured in cash flow.

BY Akash Saxena

Standards of Financial Reporting 
Full disclosure  Materiality  Consistency  Conservatism  Fairness

BY Akash Saxena

Accounting Principles and Concepts 
Business entity concept  Money measurement concept  Going concern concept  Cost concept  Duality concept  Accounting period concept  Realisation concept  Matching concept

BY Akash Saxena

INFOSYS
Balance Sheeet as at March 31 2002 SOURCES OF FUNDS SHAREHOLDERS FUNDS Share capital Reserves and surplus Net Worth BORROWINGS Capital Employed APPLICATION OF FUNDS FIXED ASSETS Original cost Less: Depreciation Net book value Add: Capital work-in-progress INVESTMENTS DEFFERED TAX ASSET CURRENT ASSETS, LOANS & ADVANCES Sundry debtors Cash and bank balances Loans and advances Less: Current liabilities Provisions NET CURRENT ASSETS Net Assets
BY Akash Saxena

2001

Rs. Crore 2000

33.09 33.08 2047.22 1,356.56 2080.31 1389.64 0.00 0.00 2080.31 1389.64

33.08 800.23 833.30 0.00 833.30

960.6 393.03 567.57 150.67 718.24 44.44 24.22

631.14 244.13 387.01 170.65 557.66 34.12 0.00

284.03 133.65 150.38 56.96 207.34 13.83 0.00 136.18 431.79 210.13 778.10 67.15 98.82 612.13 833.30

336.73 302.37 772.22 385.06 643.87 430.28 1752.82 1,117.71 126.11 134.92 333.3 184.93 1293.41 797.86 2080.31 1,389.64

INFOSYS
Profit and Loss Account for the year ended March 31 2002 INCOME Software development services and products Overseas Domestic EXPENDITURE Software development expenses GROSS PROFIT Selling and Marketing Expenses Administrative and other expenses Rs crore 2001

2,552.47 1,874.03 51.12 26.54 2,603.59 1,900.57

1,224.82 870.83 1,378.77 1,029.74 129.79 92.07 211.35 172.82 341.14 264.89 Operating profit (PBIDT) 1,037.63 764.85 Interest 0.00 0.00 Depreciation 160.65 112.89 OPERATING PROFIT AFTER INTEREST & DEPRECIAION 876.98 651.96 Other income 66.41 59.37 Provision for investment 0.00 15.29 PROFIT BEFORE TAX & EXTRA ORDINARY ITEM 943.39 696.04 Provision for taxation 135.43 72.71 PROFIT AFTER TAX BEFORE EXTRA ORDNARY ITEM 807.96 623.33 Extraordinary item -- transfer of intellectual property right (net of t 0.00 5.49 Net profit after tax and extraordinary item 807.96 628.82 AMOUNT AVAILABLE FOR APPROPRIATION 807.96 628.82 Dividend Interim Final (Proposed) Dividend Tax Amount transferred - general reserve
BY Akash Saxena

132.36 49.63 82.73 5.06 670.54 807.96

66.16 16.54 49.62 8.70 553.96 628.82

INFOSYS Financial Ratios 2002 Activity Ratios Income/Assets Income/Debtors Current Ratios CA/CL CA/Assets NCA/Assets Profitability Ratios Margin PBDIT/Income PBIT/Income PAT/Income Return on Investment PBDIT/Assets PBIT/Assets PAT/NW
BY Akash Saxena

2001 1.37 6.29

1.25 7.73

3.82 0.84 0.62

3.49 0.80 0.57

39.85% 40.24% 33.68% 34.30% 31.03% 32.80% 49.88% 55.04% 42.16% 46.92% 38.84% 44.86%

s 2001

a

i a

978 07 244 3 746 77 1969.14 4989 26 630 09 5619.35 7588.49

901 55 96 46 874 08 1872.09 3582 6 1088 29 4670.89 6542.98

2

F

U

d

2. Investments 3. Current Assets, Loans & Advances Inventories Sundry Debtors Cash & Bank Balances Loans, Advances & Deposits Less: Current Liabilities & Provisions Liabilities Provisions Net Current Assets 4. Miscellaneous Expenditure (To the extent not written off or adjusted 5. Profit and Loss Account Debit balance TOTAL

3470 36 704 01 2766 35 2093 31 1715.74 6575.4 130.87 257.37 389.69 53.9 1018.31 1719.27 1150.7 18.86 1169.56 549.71 134.37

1640 28 498 14 1142 14 2740 66 2231.85 6114.65 135.79 259.48 250.4 77.7 907.61 1495.19 1185.39 18.61 1204 291.19 1.35 _ 6542.98

198.14 7588.49

BY Akash Saxena

1 1 1 1

1 1 1 1

APPLICATION OF FUNDS d Assets 1 Fi Gross Block Less: Depreci t ion Net Block Capital Work -in-Progress Pre-operati e exp. etc.   



d d

© © ©

©

© ©

6 

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S U S F FU S 1 S h a e h de s ' F n ds S ha e a i a A d a n e s a a in s S h a e ese es S s

¢£¢¡  

ISPAT INDUSTRIES LIMITED BALANCE SHEET AS AT 31ST MARCH, 2001

e 2000

4 32 1  0()( #!  %'"&%#! #!  %'"&%$ # !" !   ¢  ¢       ¥¡ ¢    ¢ £ ¢ © ¨§ ¤ ¦¥  ¤ 5

ISPAT INDUSTRIES LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH (Rs. crores) 2001 2000 INCOME Sa es J k e he n e A A EXPENDITURE e ease n s ks a a e as ns e hases n she s a en s s ns ees x se s Se A n x enses n e es nan e ha es e e a n ess ans e e a a n ese e A B ss e e axa n A B Less: Provision for Taxation Add: Provision for Taxation written back Profit/(Loss) after taxation Less: Balance brought forward from Previous Year Transfer from Debenture Redemption Reserve Transfer from Taxation Reserve Transfer from General Reserve Profit/(Loss) available for appropriation APPROPRIATIONS: Transfer to Debenture Redemption Reserve Balance carried to Balance Sheet TOTAL
BY Akash Saxena

2264.07

1437.13

2576.5 312.43 0.03 312.46 100.52 0.73 13.07 -198.14 _ -198.14 -198.14

1433.21 3.92 0.32 0.07 3.67 106.59 8.09 _ 118.35 17.83 100.52 118.35

INFOSYS Balance Sheeet as at March 31 2,001 S S S S HA H S S S ha e a a es e es an s s Capital Employed A A S X ASS S na s es s e e a n e k a e A a a k n es s S ASS S A S A S n e s as h an ank a an es ans an a an es es s en a es s ns ASS S Net Assets
BY Akash Saxena

n 2,000

s

13,896,391,988 8,333,028,248

S

A

A

S

13,896,391,988 8,333,028,248

INFOSYS Profit and Loss Account for the year ended March 31 n s

S

ae e e e seas es he n e

en se

es an

s

19,599,373,722.00 S A ae e e en ex enses ns a e an he ex enses s n n es en s s n n n en es s n e n en n he an 11,510,136,229.00 8,089,237,493.00

9,214,648,068.00

ea n B n e es e e a n e e ax an ex a na e s n ax ea e ea s en ea a e ax e e ex a na e x a na e ans e n e e a s nn n e e e a e ax an ex a na e A A A AB A A

5,425,834,860.00 3,788,813,208.00

6,233,192,341.00 e e h ne ax

2,859,485,819.00

6,288,136,341.00
BY Akash Saxena

2,935,156,665.00

S

n

SBU PROFIT & LOSS ACCOUNT For the Year 2002 Q1 Q2 Q3 Q4 Tar. Act. Tar. Act. Tar. Act. Tar. Act.

YTD Tar. Act.

% of Rev. % % %

a e en e ns e e en e sh e e en e e e Se ns e e en e % AB S S S A Sa a es ea e s s ns e Sa a es sh e Sa a es A ae sh e Sa a es he Sa a e hea s n a s s S Sa a es ns e sh e Sa a es e n a e n en es e n en es SB S e a n en es aa n a n ha es e a a n ees he ess na ees a S A s S B aa n a n ha es e a ns an e e e a n S he s S a S B s A S A S B s s ss a n

%

%

%

%

%

%

%

% % % % % % % % % % % % % % % % % % % % BY Akash Saxena

SBU PROFIT & LOSS ACCOUNT, YTD 2002 USD in '000 YTD Tota l Re ve nue Onsite re ve nue Offshore re ve nue Se rvice Cre dit - Onsite Re ve nue % CONTROLLABLE COSTS CGS A Sa la rie s & Re la te d Costs: Onsite Sa la rie s Offshore Sa la rie s GRP Alloca te d Offshore Sa la rie s Othe r Sa la ry Ove rhe a ds Subcontra ctor Costs Sa la rie s-Onsite Sa la rie s-Offshore Fore ign Tra ve l Ince ntive s Proje ct Ince ntive s SBU Spe cia l Ince ntive s Da ta Communica tion Cha rge s Le ga l Immigra tion Fe e s Othe r Profe ssiona l Fe e s Tota l CGS A Cost CGS B Da ta Communica tion Cha rge s Me dica l Insura nce De pre cia tion: CGS Othe rs CGS Tota l CGS B Cost TOTAL CGS A + CGS B Costs Gross Ma rgin 14850 12600 2250 85% % of Re v. 100.0% 84.8% 15.2%

6375 0 840 34 0 0 250 0 0 0 333 0 7832 90 300 223 0 613 8445 6405

42.9% 0.0% 5.7% 0.2% 0.0% 0.0% 1.7% 0.0% 0.0% 0.0% 2.2% 0.0% 52.7% 0.6% 2.0% 1.5% 0.0% 4.1% 56.9% 43.1%

BY Akash Saxena

Funds and Cash Flow 
Liquidity refers to resources currently available

with the firm. It is reflected by the funds or cash flows rather than the stock of current assets and liabilities.  Funds flow is a change in a firm¶s net current assets while cash flow is a change in the firm¶s cash position. Funds or cash flows occur due to changes in items in the balance sheet and profit & loss statement. Thus liquidity analysis involves measurement of changes in assets, liabilities and equity.
BY Akash Saxena

TABLE 1. ABC Co.: Balance Sheet Changes, March 31,19Xl-March 31, 19X2 (Rs µ000) Change 81 1,485 12,555 14,121 3,105 945 18,171 5,154 3,780 702 1,890 11,526 -540 10,986 7,185 18,171

19X1 ASSETS Cash ebtors Stock (inventory) Total current assets Fixed assets (net) Other assets Total Assets LIASBILITIES & NET WORTH Bank borrowing Creditors Provision for taxes Accrued expenses Total current liabilities Long-tenn debt Total liabilities Paid-up share capital Reserves and surplus Total Liabilities 54 6,750 10,125 16,929 2,970 945 20,844 3,510 2,835 270 810 7,425 1,944 9,369 8.37 3,105 20,844

19X2 135 8,235 22,680 31,050 6,075 1,890 39,015 8,664 6,615 972 2,700 18.951 1,404 20,355 8,370 10,290 39,015

BY Akash Saxena

Sources and Uses of Funds and Cash Flows 
Sources of funds or cash flows: 
  

funds from operations sale of fixed assets issue of share capital borrowings losses purchase of fixed assets repayment of borrowings payment of dividends 

ses of funds are: 
  

BY Akash Saxena

Funds from Operations 
Funds flow from operations

+ PAT (± loss) + Depreciation + Other non-cash expenses ± Non-cash incomes + Loss from the sale of fixed assets ± Gain from the sale of fixed assets

BY Akash Saxena

Cash from Operations 
Cash flow from operations

+ PAT (± loss) + Depreciation + Other non-cash expenses ± Non-cash incomes + Loss from the sale of fixed assets ± Gain from the sale of fixed assets + Increases in net working capital ± Decreases in net working capital
BY Akash Saxena

Uses of Funds and Cash Flow Statements 
Liquidity position  Capital expenditures  Dividends paid  Retained earnings  External financing  Repayment of loans  Non-performing assets

BY Akash Saxena