R.

Ganesh

ANALYSIS OF FINANCIAL STATEMENTS

R.Ganesh, Deputy General Manager,State Bank Staff College

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CHAPTER 1

BASICS OF FINANCIAL STATEMENTS

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Objectives of Financial Statements (FSs)

To provide information about the financial position, performance and cash flows of an enterprise Useful to a wide range of users, in making economic decisions and to ensure Statutory compliances. Effect of past events and transactions Accounting policies and methods adopted by an enterprise

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Scope of Financial Statements (FSs)

TWO major issues for Analysts How is the liquidity of the enterprise measured ?

 

What financial and other criteria are to be used to judge the safety of other loans ?

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Scope of Financial Statements (FSs)

FS indicates 3 broad areas: Checking the investment (or deployment) of funds made by the enterprise.


Verifying the financing(funding) decision of the enterprise. Examining the operating efficiency


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Users of Financial Statements (FSs) Investors Employees Customers and other trade creditors Govt the allied agencies and the public in general Public Lenders

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Building Blocks of Financial Statements (FSs) Fundamental concepts Local Accounting Standards International Accounting Standards US GAAP & IFRS

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COMPONENTS OF AUDITED FINANCIALS

 Audited Financials comprise: 1. Directors Report 2. Auditors Report 3. Profit & Loss Account 4. Balance Sheet 5. Schedules 6. Notes to Accounts 7. Cash Flow Statement

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Financial Statements
Profit & Loss A/c
Debit = Expenses Credit = Income Credit minus Debit =Profit

Balance Sheet
Credit = Liabilities Share holders funds & Loans Debit = Assets Tangible & Intangibles

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FORMATS OF BALANCE SHEET

 2 types of formats:  Horizontal Format (No provision for schedules)  Vertical Format

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P&L A/C Income Statement

Insight into Companys revenues and expenses. Compare it with similar companies Compare performance of a company with previous years A company makes continous profit, it is a stable company.

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P&L ITEMS
Gross Sales Net Sales Cost of Production & Cost of Goods Sold Depreciation-Lease, Hire Purchase, Partnership, Intangibles Other income Operating Income Capitalisation

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What to LOOK FOR IN A FINANCIAL STATEMENT(S)

Income levels -Look for growth, rate of growth Gross ProfitIs it growing at a faster/slower rate than previous years? Growth of net profit is higher than gross profit ? Selling, Mktg, General and Admn expenses Growth, rate of growth and comparison with growth of income EBDITA--? Compare with peers and rivals EPSGrowth and a comparison with peers.

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FACTS DISCLOSED BY BALANCE SHEET

Can the firm meet its financial obligations How much money has already been invested in this company Is the company overly indebted What kind of assets has the company purchased with its financing Movement of stocks The policy of credit to customers and the promptness with which the creditors are being paid ASSETS=LIABILITLIES + SHAREHOLDERS EQUITY

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BALANCE SHEET ITEMS

Capital Reserves or Surplus Capital Reserve and Revenue reserve Provision and Reserve Revaluation of Assets Deferred Tax Liability Investments Assets TNW/Adj TNW Dividend
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CHAPTER 2

RE-CLASSIFICATION UNDER CMA FORMAT

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RE-CLASSIFICATION UNDER CMA

 For our analysis, we re-classify under CMA format:
LIABILITIES CURRENT LIABILITIES CURRENT ASSETS TERM LIABILITIES FIXED ASSETS NET WORTH ASSETS

NON-CURRENT ASSETS INTANGIBLE ASSETS

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NET WORKING CAPITAL (NWC)

 The excess of Long Term Sources over Long Term Uses is known as Net Working Capital (NWC) or Liquid Surplus.  NWC represents that portion of WC which has been provided from Long Term Sources.

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NET WORKING CAPITAL (NWC)

 NWC may be depicted thus:
LIABILITIES CURRENT LIABILITIES TERM LIABILITIES LONG TERM SOURCES NET WORTH FIXED ASSETS LONG TERM USES NON-CURRENT ASSETS INTANGIBLE ASSETS ASSETS CURRENT ASSETS NWC

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IMPORTANCE OF APPROPRIATE CLASSIFICATION  Appropriate treatment / classification of items in the Borrowers Profit & Loss Account and Balance Sheet in the CMA Data format:  Wrong classification will lead to wrong ratios.  Wrong ratios will lead to wrong financial decisions.  Wrong financial decisions will lead to loss to the Bank, which should be prevented.  Therefore, there is no margin for errors in CMA Data, the basic building block in Advances.

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CURRENT ASSETS (C/A)

 Current Assets are those assets that in ordinary course of business can be or will be converted into cash, or sold or consumed or turned over without undergoing diminution in value and without

disrupting the operations during the operating cycle of the business usually not exceeding one year.

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CURRENT ASSETS (C/A)

 Examples:  Cash & Bank balances  Investments  Receivables (Other than Deferred Receivables)  Raw Materials & Components used in the process of manufacture  SIP (Stock-in-process)  Finished Goods  Advance for purchase of Raw Material, etc.  Others like advance payment of tax, etc.

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CURRENT LIABILITIES (C/L)

 Current Liabilities are liabilities intended to be paid within a year out of C/A or out of the income of the business.

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CURRENT LIABILITIES (C/L)

 Examples:  Short term borrowings from banks & others  Unsecured Loans  Public Deposits maturing within 1 year  Sundry Creditors (Trade)  Interest accrued  Deposits from dealers  Instalments of TL, etc. (Due within 1 year)  Statutory Liabilities and other Current Liabilities

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Shall we break for Tea !!