Module B (contd.) - Balance Sheet Analysis
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Module B (contd.) - Balance Sheet Analysis

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Module B (contd.) - Balance Sheet Analysis Module B (contd.) - Balance Sheet Analysis Presentation Transcript

    • CAIIB - Financial Management
    • Module B – Study of Financial Statements
    • - Balance Sheet Analysis
    • M. Syed Kunmir
  • BALANCE SHEET ANALYSIS
    • Sources of Funds
    1) Capital 2) Reserves & Surplus 3) Term Liabilities 4) Current Liabilities
  • BALANCE SHEET ANALYSIS
    • Uses of Funds
    • 1) Fixed Assets
    • 2) Intangible Asets
    • 3) Non Current Assets
    • 4) Current Assets
  • BALANCE SHEET ANALYSIS
    • Capital
    • 1) Authorised Capital
    • 2) Issued Capital
    • 3) Subscribed Capital
    • 4) Paid-up Capital
  • BALANCE SHEET ANALYSIS
    • Reserves
    • 1) Subsidy Received From The Govt
    • 2) Development Rebate reserve
    • 3) Revaluation of fixed assets
    • 4) Issue of Shares at Premium
    • 5) General Reserves
    • Surplus
    • The credit balance in profit and loss account
  • BALANCE SHEET ANALYSIS
    • Tangible Net Worth
    • This refers to the total funds arrived by paid-up capital , Reserves and P&L Surplus
    • Less
    • Intagible Assets
  • BALANCE SHEET ANALYSIS
    • Term Liabilities
    • Redeemable preference shares
    • Debentures
    • Deferred payment gaurantees
    • Public Deposits(Repayable after 12 months)
    • Term loans and unsecured loans from friens, relatives,directors repayable over a period of time
    • Remark : The company can raise public deposits to the extent of 25% of paid up capital plus free reserves and 10% from share holders for the maturity period ranging from 6 months to 3 yrs
  • BALANCE SHEET ANALYSIS
    • Current Liabilities
    • Working capital bank borrowings
    • T.loans deferred credit inst falling due in 12 mths
    • public deposits maturing within 12 months
    • unsecured loans, unless the repayment is on deferred terms
    • sundry creditors
    • advances from dealers and customers
    • interest accrued but not paid
    • tax provisions
    • Dividend declared and payable
  • BALANCE SHEET ANALYSIS
    • Contingent Liabilities
    • Tax disputes
    • Legal litigations
    • Bills and cheques discounted with banks
    • Claims against the company not acknowledged
  • BALANCE SHEET ANALYSIS
    • Fixed Assets
    • Infrastructure like land & building
    • plant & machinery
    • Vehicles
    • Furniture & fixtures
    • Depreciation
    • Straight line method
    • Written down Value Method
    • Remark : Dep added to profit to arrive repayment obligation especially in term loans
  • BALANCE SHEET ANALYSIS
    • Investments
    • 1) Shares And Securities
    • 2) Associate Companies
    • 3) Fixed deposits with banks/finance companies
    • Remark : While analysing bal sheet we can analyse necessity of such investments
    • Remark : While fixed deposits with banks are considered as fixed assets, the investmetns in associate concerns are treated as non current assets.
  • BALANCE SHEET ANALYSIS
    • Non Current Assets
    • Deferred recievables/Overdue recievables(like disputed amounts and Over Due > 6 mths)
    • Non moving stocks/inventory/un usable spares
    • Investment/Lending to associate concern
    • Borrowing of the directors from the company
    • Telephone deposits/ ST deposits etc
  • BALANCE SHEET ANALYSIS
    • Intangible Assets
    • Preliminary & Preoperative expenses
    • Deferred Revenue Expenditure
    • Goodwill
    • Trade mark
    • Patents
    • Rem : The o/s balance to be written off every year by charging P&L account
  • BALANCE SHEET ANALYSIS
    • Current Assets
    • Raw materials, work-in-progress,finished goods,spares and consumables
    • Sundry debtors and recievables < 6 mths
    • Advances paid to suppliers of raw materials
    • Cash and bank balances
    • Interest recievables
    • Other current assets such as Government securities, Bank deposits ..etc
  • BALANCE SHEET ANALYSIS
    • Notes
    • All expenses or provisions or advances or loans etc which are accrued and payable within 12 months are current liablities
    • When a company makes investments in unconnected avenues such as shares, securites, associate concerns are to be treated as non cur ast
    • The slow moving and absolete inventory - NCA
  • BALANCE SHEET ANALYSIS
    • Notes
    • Bal Sh Analy not only to be quantitative but to be qualitative
    • It is the fin pos on a part date. Min three years bal sh ana would be more meaningful
    • It is a mixture of facts, opinions and conventions
    • While opinions are of the company’s management, the conventions are practiced by the finance managers of the company.
    • ( ex Over due recievable > 6 mths as NCA is a acccounting convention
  • BALANCE SHEET ANALYSIS
    • Notes
    • The valuation of the stock is done as per the opinion of the management
    • Depreciation method may be changed to boost profit
    • It may be silent on key personnel and staff turnover
    • Marginal changes in the classification of certain items would lead to different results.
  • BALANCE SHEET ANALYSIS
    • Notes
    • Management competence
    • Investment decision
    • Resorting to window dressing
    • experience of the promoters
    • Board comprises of only family members
    • The key personnel of the company
    • The structure of the organisation
    • The authority and decision making are decentralised
  • BALANCE SHEET ANALYSIS
    • Notes
    • The state of industrial relations
    • Financial systems and procedures
    • management control
    • planning, budgeting, forecasting
    • capacity utilisation
    • status of the technology
    • awareness of the market, competitions ..etc
    • for listed co: share prices, EPS, book value, dividend record, public response ..etc
  • Profit & Loss Account
    • It is a summary of revenue earned and expenses incurred which ultimately results in profit or loss of to the company
    • No defined format in law
    • Operating revenue = Sales revenue
    • Non_operating revenue = Other income ( out of sale of investments, interest, commission and discount etc)
    • Hence operating profit is a yard stick for operating profit of the company
    • Operating profit = Sales Revenue- Operating Cost
  • Profit & Loss Account
    • Gross Sales
    • Gross sales includes excise duty to be charged to the customer, central sales tax applicable, state sales tax applicable, the discount o be allowed to distributors/dealers/customers. The gross sales appears in the P&L account comprises of all the above part from the basic unit price.
    • Net Sales
    • The sales figure excluding all the factors explained above are the net sales.
  • Profit & Loss Account
    • Cost of production
    • This is the cost incurred right from the procurement of raw material to the finished good.
    • For ex in a garment firm following cost is incurred while production
    • 1) cost of raw material cloth, buttons, canvas, hooks, zips etc
    • 2) Maintenace of sewing machines
    • 3) payment of wages to workers
    • 4) power
    • 5) washing, ironing,packing etc.
    • Cost of Prod exclu selling & admn exp & int cost
  • Profit & Loss Account
    • Selling And General Administarative Expenses
    • Maintaining office staff for admn & acctg
    • marketing effort
    • payment of salaries/Tr All to marktg personnel
    • All the expenses which are not directly connected to manufacturing are classifed as selling and/or general expenses
  • Profit & Loss Account
    • Cost of goods sold
    • Cost of goods sold includes all manufacturing expenses and the adjustments for opening and closing stock
    • Cost of Goods sold = Opening stock + Purchases + Manufacturing expenses - Closing stock
    • Gross Profit is arrived deducting figure of cost of goods sold from the sales figure
    • ie Gross profit = Sales - Cost of goods sold.
  • Profit & Loss Account
    • Operating Profit is arrived deducting selling, administrative and general expenses , provision for bad debts, interest and miscellaneous expenses from the gross profit.
    • ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad debt + mis exp )
    • Profit Before Tax When other income is added and other expenses are deducted from the operating profit we get profit before Tax
    • ie PBT = Op Profit + oth Inc - oth exp
    • Net Profit When provision for taxes is deducted from the Profit Before Tax we get Net profit
    • ie Net Profit = PBT - taxes
  • Profit & Loss Account
    • Non Operating Income/Expenses
    • The income earned by the unit from other than manufacturing and seling operations is classified under this head . i.e
    • a) Interest earned on fixed deposits
    • b) Dividends and profit earned by sale of assets and share.
    • All those expenses which are not directly connected with operations of the unit are classified under this head. i.e
    • a) Preliminary expenses written off
    • b) Loss suffered due to sale of assets & share