Financial Statement Analysis

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Financial Statement Analysis

  1. 1. Have you ever wondered what an analyst does with the financial statements of a company?
  2. 2. Do you believe that the financial position of a company as revealed by its financial statements is as clear as a blue sky without any clouds?
  3. 3. A good growth of a company in the recent past implies the same story in future and hence, it represents a good investment opportunity!!! Will you like to grab it?
  4. 4. Do not you ever wonder that a company is earning good profits but they have no money to pay any dividend to the shareholders??!!!!!!!!!
  5. 5. And, so on…………………………………
  6. 6. If you are really and seriously looking answers of all these… Then ...
  7. 7. FINANCIAL STATEMENT ANALYSIS
  8. 8. Financial Statement Analysis … <ul><li>Financial Statement Analysis comprises all techniques employed by users of financial statements to show important relationships in the financial statements so as to understand business and make decisions in a better way. </li></ul><ul><li>… is a process of evaluating the relationship between components parts of financial statements to obtain a better understanding of a firm’s financial position and performance. </li></ul>
  9. 9. Steps in Financial Statement Analysis … First Step Select Information relevant to decision under consideration Second Step Process the information to Highlight significant relationships Third Step Interpret and draw Necessary inferences
  10. 10. Who are the people doing Financial Statement Analysis? <ul><li>Two sets of people… </li></ul><ul><ul><li>INTERNAL USERS </li></ul></ul><ul><ul><li>EXTERNAL USERS </li></ul></ul>
  11. 11. What is the source of information for the EXTERNAL PEOPLE? <ul><li>External users rely on publicly-available information to perform financial analysis </li></ul><ul><li>Such information is contained in a company’s annual report </li></ul>
  12. 12. Annual Report contains… THREE BASIC FINANCIAL STATEMENTS 1
  13. 13. Annual Report contains… THREE BASIC FINANCIAL STATEMENTS FOOTNOTES/SCHEDULES TO THE FINANCIAL STATEMENTS 1 2
  14. 14. Annual Report contains… THREE BASIC FINANCIAL STATEMENTS FOOTNOTES/SCHEDULES TO THE FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING METHODS 1 2 3
  15. 15. Annual Report contains… THREE BASIC FINANCIAL STATEMENTS FOOTNOTES/SCHEDULES TO THE FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING METHODS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS 1 2 3 4
  16. 16. Annual Report contains… FOUR BASIC FINANCIAL STATEMENTS FOOTNOTES/SCHEDULES TO THE FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING METHODS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS AUDITOR’S REPORT 1 2 3 4 5
  17. 17. Annual Report contains… THREE BASIC FINANCIAL STATEMENTS FOOTNOTES/SCHEDULES TO THE FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING METHODS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS AUDITOR’S REPORT COMPARATIVE FINANCIAL DATA FOR A SERIES OF YEARS 1 2 3 4 5 6
  18. 18. EXAMPLE #1………………………. THREE BASIC FINANCIAL STATEMENTS 1
  19. 19. EXAMPLE #1………………………. THREE BASIC FINANCIAL STATEMENTS 1
  20. 20. EXAMPLE #1………………………. THREE BASIC FINANCIAL STATEMENTS 1
  21. 21. EXAMPLE #2………………………. FOOTNOTES/SCHEDULES TO THE FINANCIAL STATEMENTS 2
  22. 22. EXAMPLE #3………………………. SUMMARY OF ACCOUNTING METHODS 3
  23. 23. EXAMPLE #4………………………. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS 4
  24. 24. EXAMPLE #5………………………. AUDITOR’S REPORT 5
  25. 25. EXAMPLE #6………………………. COMPARATIVE FINANCIAL DATA FOR A SERIES OF YEARS 6
  26. 26. Now, we are ready with ‘ ALL NECESSARY BAGGAGE OF FINANCIAL INFORMATION ’.
  27. 27. And, proceed for understanding financial statements of Tata Steel …
  28. 29. First, we take Balance sheet … … Sources of Funds Side
  29. 37. Innovative Ways of Funding… <ul><li>Share Warrants – a way to keep a “Source of Funds” ready for any future requirement. </li></ul><ul><li>Right Issue – a quicker way of raising funds as compared to ‘general public issue’ and with some kind of ‘underwriting’ from Tata Sons. </li></ul><ul><li>2% Cumulative Convertible Preference Shares – a way to keep a ‘least pressure on company’s cash flows’. </li></ul><ul><li>Foreign Currency Convertible Alternative Reference Securities – carrying a coupon of 1% p.a. and if it is to be redeemed then, it will be redeemable at a premium of 23.34% of the principal amount. </li></ul>
  30. 38. Now, let’s move to … … Application of Funds Side
  31. 39. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  32. 40. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  33. 41. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  34. 42. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  35. 43. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  36. 44. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  37. 45. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  38. 46. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  39. 47. 47,075.52 25,597.50 TOTAL 155.11 202.53 Miscellaneous Expenses (to the extent not written off or adjusted) 30,193.66 8,248.23 Net Current Assets 6,768.78 5,453.66   2,913.52 1,930.46 <ul><ul><li>Provisions </li></ul></ul>3,855.26 3,523.20 <ul><ul><li>Current Liabilities </li></ul></ul>    Less: CURRENT LIABILITIES & PROVISIONS 36,962.44 13,701.89   0.20 0.20 <ul><ul><li>Interest Accrued on Investments </li></ul></ul>33,348.74 3,055.73 <ul><ul><li>Loans and Advances </li></ul></ul>465.04 7,681.35 <ul><ul><li>Cash in Hand and at Bank </li></ul></ul>543.48 631.63 <ul><ul><li>Sundry Debtors </li></ul></ul>2,047.31 1,827.54 <ul><ul><li>Inventories: Stock-in-Trade </li></ul></ul>557.67 505.44 <ul><ul><li>Inventories: Stores and Spare Parts </li></ul></ul>    CURRENT ASSETS, LOANS & ADVANCES 4,103.19 6,106.18 INVESTMENTS 12,623.56 11,040.56       <ul><ul><li>Capital Work in Progress </li></ul></ul>12,623.56 11,040.56 Net Block 8,123.01 7,385.96 <ul><ul><li>Less: Depreciation </li></ul></ul>100.47 100.41 <ul><ul><li>Less: Amortization </li></ul></ul>20,847.04 18,526.93 <ul><ul><li>Gross Block </li></ul></ul>    FIXED ASSETS     APPLICATION OF FUNDS 2008 2007 Particulars (Rs. in Crores) BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
  40. 48. Have you ever thought that …… Sources of funds are not the same thing as LIABILITIES!!!!!! Application of funds is not the same thing as ASSETS!!!!!! &
  41. 49. Fund… <ul><li>… is understood as ‘LONG-TERM SOURCE’. </li></ul><ul><li>… is defined as Current Assets – Current Liabilities. </li></ul><ul><li>… remember that Fund is not the same thing as cash and hence, Funds from Operation is not the same as Cash from Operations. </li></ul>
  42. 50. Remember … <ul><li>First, Sources of Funds side of a Balance Sheet does not represent the TOTAL LIABILITIES of a company. </li></ul><ul><li>Second, Application of Funds side of a Balance Sheet does not represent ‘everything of this side’ as TOTAL ASSETS . </li></ul><ul><li>Third, the focus of representing a Balance Sheet as SOURCES OF FUND and APPLICATION OF FUNDS is ‘a long-term focus’. </li></ul>
  43. 51. Now, let’s move towards understanding of …… <ul><li>PROFIT AND LOSS ACCOUNT… </li></ul>
  44. 52. TOP – LINE OF TATA STEEL
  45. 53. BOTTOM – LINE OF TATA STEEL
  46. 54. APPROPRIATION OF PROFIT OF TATA STEEL
  47. 55. Now, we move to … <ul><li>CASH FLOW STATEMENT … </li></ul>
  48. 56. CASH FROM OPERATIONS OF TATA STEEL
  49. 57. CASH USED IN INVESTING OF TATA STEEL
  50. 58. CASH FROM FINANCING TATA STEEL
  51. 59. Is there any relation between the pattern of cash flows and business life cycle?
  52. 60. All this is ………… our beginning to a new story…………………………………………
  53. 61. WHAT NEXT IN OUR AGENDA?
  54. 62. Share Warrants… <ul><li>The preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any select group of persons under Section 81(1A) of the Companies Act 1956 on private placement basis shall be governed by these guidelines. </li></ul><ul><li>An amount equivalent to at least ten percent of the price fixed as per Chapter-XIII of DISCLOSURE AND INVESTOR PROTECTION GUIDELINES, SEBI shall become payable for the warrants on the date of their allotment. </li></ul>
  55. 63. Security Premium Account … <ul><li>The Securities Premium Account may be applied by the company- </li></ul><ul><ul><ul><li>(a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares; </li></ul></ul></ul><ul><ul><ul><li>(b) in writing off the preliminary expenses of the company; </li></ul></ul></ul><ul><ul><ul><li>(c) in writing off the expenses of, or commission paid or discount allowed on, any issue of shares or debentures of the company; or </li></ul></ul></ul><ul><ul><ul><li>(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company. </li></ul></ul></ul>
  56. 64. Deferred Tax Assets/Deferred Tax Liabilities <ul><li>ACCOUNTING STANDARD 22: </li></ul><ul><li>The differences between taxable income and accounting income can be classified into PERMANENT DIFFERENCES and TIMING DIFFERENCES . </li></ul><ul><ul><li>Permanent differences are those differences between taxable income and accounting income which originate in one period and do not reverse subsequently. </li></ul></ul><ul><ul><li>Timing differences are those differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods. </li></ul></ul><ul><li>The tax effects of timing differences are included in the tax expense in the statement of profit and loss; and as deferred tax assets or as deferred tax liabilities, in the balance sheet. </li></ul>
  57. 65. Look at the following information and suggest what should be the cost of plant and machinery purchased!!!!! Suggest at what cost the asset will be shown in the Balance Sheet.
  58. 66. What is the difference between … <ul><li>Depreciation </li></ul><ul><li>Amortization </li></ul><ul><li>Depletion </li></ul><ul><li>Impairment </li></ul>
  59. 67. All assets are subject to depreciation except freehold land.
  60. 68. Impairment Loss (AS-28) <ul><li>An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset. </li></ul><ul><li>An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. </li></ul><ul><li>This Standard defines recoverable amount as the higher of an asset’s net selling price and value in use. </li></ul>
  61. 69. Accounting for Investments…(AS 13) <ul><li>Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not 'investments'. </li></ul><ul><li>A Current Investment is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made. </li></ul><ul><li>A Long Term Investment is an investment other than a current investment. </li></ul><ul><li>An Investment Property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise. </li></ul>
  62. 70. Types of Investments…(AS 13) Current Investments Long Term Investments
  63. 71. Current Investments … <ul><li>A current investment is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made . </li></ul><ul><li>The carrying amount for current investments is the lower of cost and fair value . In respect of investments for which an active market exists, market value generally provides the best evidence of fair value. </li></ul><ul><li>For current investments, any reduction to fair value and any reversals of such reductions are included in the profit and loss account. </li></ul>
  64. 72. Long-Term Investment … <ul><li>A long term investment is an investment other than a current investment. </li></ul><ul><li>Long-term investments are usually carried at cost . However, when there is a decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to recognize the decline . </li></ul><ul><li>Where there is a decline, other than temporary, in the carrying amounts of long term investments, the resultant reduction in the carrying amount is charged to the profit and loss statement. </li></ul>
  65. 73. Disclosure – AS 13 <ul><li>Investments should be disclosed in financial statements as the aggregate amount of quoted and unquoted investments , giving the aggregate market value of quoted investments. </li></ul>
  66. 74. What’s the difference between Reserve and Provision? <ul><li>Provision is charged to Profit and Loss Account where as Reserve is an appropriation of profit. </li></ul><ul><li>Provision is charged to Profit and Loss Account before calculating the net profit or loss , but Reserve can be made only when there is profit. </li></ul><ul><li>Provision is created for specific purpose, while Reserve may be created for general purpose as well. </li></ul><ul><li>Provision are not invested in outside securities. Reserves reduces divisible profit can be invested in outside securities. </li></ul>

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