Financial

Statements
DR. RAKESH KUMAR SHARMA

SCHOOL OF HUMANITIES AND SOCIAL SCIENCES

THAPAR INSTITUTE OF ENGINEERING AND TECHNOLOGY

Financial Statement
• According to the Financial Accounting Standards Board
(FASB), the financial statements of a firm should
provide sufficient information that is useful to
– investors and
– creditors
– in making their investment and credit decisions in
an informed way.

The financial statements are expected to be

prepared in accordance with a set of standards
known as generally accepted accounting
principles (GAAP).
Financial Statement
• Income Statement
• Balance Sheet
• Cash Flow Statement
• Fund Flow Statement
Income Statement
An income statement is a summary of the revenues
and expenses of a business over a period of time,
usually either one month, three months, or one year.
  Summarizes the results of the firm’s operating and
financing decisions during that time.
  Operating decisions of the company apply to
production and marketing such as sales/revenues,
cost of goods sold, administrative and general
expenses (advertising, office salaries)
  Provides operating income/earnings before interest
and taxes (EBIT)
Contd....
Results of financing decisions are reflected in the
remainder of the income statement.
When interest expenses and taxes are subtracted
from EBIT, the result is net income available to
shareholders.
  Net income does not necessarily equal actual
cash flow from operations and financing.
The Balance Sheet
• The balance sheet demonstrates the financial position of a
business. The left side of balance sheet represents Liabilities
and right side reflects Assets.
• Liabilities are further divided into owners funds and
external liabilities
Income Statement
Contd.....
Income Statement Specimen
AMOUNT
Sales XXXX
Less Cost of Goods sold XXXX
Gross Profit XXXX
Less Administrative Expenses and Selling and XXXX
distribution Expenses
EBIT or PBIT XXXX
Less Interest XXXX
EBT or PBT XXXX
Less Tax XXXX
EAT or PAT XXXX
Less Preference dividend (If any) XXXX
Profit available to Equity shareholders. XXXX
Balance Sheet
• It is one of the major financial statements which presents a
company's financial position at the end of a specified date.
Balance sheet has been described as a "snapshot" of the
company's financial position at a moment for e.g. the
amounts reported on a balance sheet dated March 31st, 2020
reflects that all the transactions throughout the year 3 have
been recorded.
• The balance sheet provides information related to the assets,
liabilities and the shareholders’ equity of the company as on
a specific date.
• Total Assets = Total Liabilities + Share holders’ equity
Share Capital
• Authorised Capital or Registered Capital
• Issued Capital
• Subscribed Capital
• Called Up Capital
• Paid Up Capital
Corporate Balance Sheet-Horizontal
Contd....
Vertical Form of Balance Sheet
Contd....
THE STATEMENT OF CASH FLOWS

• A cash flow statèrent présents information about the cash

flow associâ tes with the company’s main opérations and
those associated with its investing and financing activities of
the period.
Current Liabilities
• Current Liabilities are those Liabilities which are be paid into within
time period of 12 months or accounting year whichever is earlier.
• Examples :
 Creditors
 Bank Overdraft
 Bills Payable
 Short term Loans
 Others (Outstanding Expenses and incomes received in advance )
Current Assets
• Current Assets are those assets which are converted into cash within time period of
12 months or accounting year whichever is earlier.
• Examples :
 Cash in hand
 Cash at bank
 Bills Receivable
 Debtors
 Stock
 Short term Investments
 Others (Prepaid Expenses and Outstanding Incomes)
Activities which can either generate
cash or use cash for a business entity
• A. Operating activities.
• B. Investing activities.
• C. Financing activities.
Operating Activities

 All these activities are reported in the I/S (income

statement). However, I/S only provides the accrual-basis net
income (revenue –expense + gains – losses ) which very
often is not the change in cash.

 Therefore, we need to adjust from net income flows to cash

flows in order to report the net cash provided by (or used in)
operating activities.
 Operating Activities

Net Profit XXXXX

Add Non Cash and Non
operating expenses
1. Depreciation XXXXX
2. Goodwill written off XXXXX
3. Loss on sale of assets XXXXX
4. Discount on issue of shares XXXXX
5. Amount Transferred to GR XXXXX
6. Dividend Paid XXXXX
7. Other Non Cash and Non XXXXX
operating expenses
Less Non operating and non cash
incomes
Share Premium (XXXXX)

Profit on sale of assets (XXXXX)

Others (XXXXX)
Add Increase in CL XXXXX
Add Decrease in CA XXXXX
Less Decrease in CL (XXXXX)
Less Increase in CA (XXXXX)
Net Cash generated or used from XXXXX
operating activities
B. Investing Activities
• Investing activities relate to the acquisition
and disposal of long-term tangible and
intangible assets and other investments
• Cash flows from investing activities are an
indication of the expansion or downsizing of
operating capacity
• Examples:
• Payments for newly acquired equipment
• Receipts from the disposal of a building
• Payments for new investments
Cash Flows from
Investing Activities
 Transactions involving acquiring
(Investing (Cash outflows)) and selling
(Disinvesting (Cash inflows)) :
– a. Property, Plant and Equipment.

– b. Investments (current and non-current).

 Investing Activities
Sale of Fixed Assets Inflow
Land and Building Inflow
Plant and machinery Inflow
Furniture Inflow
Other Fixed assets Inflow
Sale of Investment Inflow
Purchase of Fixed Assets
Land and Building Outflow
Plant and machinery Outflow
Furniture Outflow
Other Fixed assets Outflow
Investment purchased Outflow
Net cash generated or Used from XXXXX
Investing activities
C. Financing Activities
• Financing activities relate to changes in the size and
composition of contributed capital and financial debt
of the company
• Examples:
• Receipts from issuing new shares or bonds
• Receipts from new bank loan
• Payments for buy-back of shares
• Repayments of loans
• Payments of interest and dividend
 Q.1

Liabilities 01-04-2018 31-03-2019 Assets 01-04-2018 31-03-2019

(Rs) (Rs) (Rs) (Rs)

Equity Share 14,80,000 14,90,000 Building 7,50,000 9,50,000
capital
Profit and 2,50,000 4,00,000 Land 2,00,000 4,00,000
Loss Account
Long Tem 3,00,000 2,50,000 Machnary 8,00,000 8,60,000
Debt
Creditors 3,60,000 4,10,000 Stock 2,50,000 2,20,000
Bills Payble   3,00,000 Debtors 3,50,000 3,84,000
      Cash 40,000 36,000
           
Total 23,90,000 28,50,000   23,90,000 28,50,000
Additional Information
• Depreciation on Machinery Rs. 80,000
• Depreciation on Building Rs. 75,000
• Dividend Paid Rs. 1, 50,000
• You are required to prepare cash flow statememt and
comment on the operating, investing and financial health of
company.
Operating Activities
Rs. Rs.
Net Profit 1,50,000
Add Non Cash Expenses
and NOE
Depreciation 1,55,000
Dividend paid 1,50,000 3,05,000
ADD Decrease in CA
Stock 30,000
ADD Increase in CL
Creditors 50,000
BP 3,00,000
 Rs. Rs.
LESS Increase in CA
Debtors (34,000)
LESS Decrease in CL 3.46,000
Net cash generated or 8,01,000
used
Investing activities

Purchase of Building (275,000)

(950,000-675,000)
Purchase of Land (2,00,000)
Machinery (1,40,000)
purchased
860,000-7,20,000
Net cash used in (6,15,000)
investing activities
Financing Activities
Rs. Rs.
Equity capital issued 10,000
Dividend Paid (150,000)
Long term Debt paid (50,000)
Cash used in (190,000)
Financing Activities
 Cash Flow Statement
Rs.
Opening Balance of Cash 40,000
Cash generated from OA 8,01,000
Cash used in Investing activities (6,15,000)
Cash used in Financing activities (1,90,000)
Closing balance of cash 36,000
 Question No. 2- Balance Sheet of Hind
Limited
Liabilities 01-04-2020 31-03- Assets 01-04-2020 31-03-2021
2021
(Rs) (Rs) (Rs) (Rs)
Equity Share 35,00,000 42,00,000 Building 8,00,000 12,00,000
capital
Profit and Loss 4,00,000 6,50,000 Land 20,00,000 31,40,000
Account
General Reserve 2,00,000 3,50,000 Goodwill 4,00,000 3,00,000
Long Tem Debt 7,00,000 9,00,000 Machinery 18,00,000 12,00,000
Short term Loan 1,50,000 2,50,000 Furniture 2,00,000 5,00,000
Creditors 4,50,000 6,00,000 Stock 2,50,000 2,20,000
Bills Payble 4,00,000 3,00,000 Debtors 3,50,000 6,00,000
Rent Outstading 50,000 30,000 Cash 50,000 1,20,000
Total 58,50,000 72,80,000 Total 58,50,000 72,80,000
Additional Information
• 1. Depreciate Building by 10%
• 2. Depreciate Machinery by 20%
• 3. Dividend Paid Rs. 2,00,000
• 4. Interest Paid on Long term loans Rs. 70,000
• You are required to prepare Cash flow Statement
Operating activities
Rs. Rs.
2,50,000
Add Non cash & Op Expenses
Dep on Building 80,000
Dep on Mach 3,60,0000
Dividend paid 2,00,000
Interest on Loan 70,000
General Reserves 1,50,0000
Goodwill written off 1,00,0000 9,60,000
 Rs. Rs.
ADD Decrease in CA
Stock 30,000
ADD Increase in CL:
Short term loans 1,00,000
Creditors 1,50,000
LESS Increase in CA( Debtors) (2,50,000)
LESS Decrease in CL
Bills payable (1,00,000)
Rent (20,000) (90,000)
Cash flow from operating 11,20,000
activities
INVESTING ACTIVITIES
RS.
1 Purchase of building (4,80,000)
2 Land Purchased (11,40,000)
3 Sale of Machinery 2,40,000
4. Furniture Purchased (3,00,000)
Cash Used in INVESTING ACTIVITIES (16,80,000)
FINANCING ACTIVITIES
Rs.
1. Equity share Capital Issued 7,00,000
2. Long term Debt Taken 2,00,000
3. Dividend paid (2,00,000)
4. Interest paid (70,000)
Cash flow from financing activities 6,30,000
Cash Flow Statement
Rs.
1 Opening balance of cash 50,000
2 Cash flow from operating activities 11,20,000
3 Cash Used in Investing activities (16,80,000)
4 Cash flow from financing activities 6, 30,000
Closing balance of cash 1,20,000