This document provides an introduction to a course on financial management. It outlines the syllabus which will cover topics such as financial statements, ratio analysis, working capital management, time value of money, capital budgeting, and cost of capital. The document explains what will be included in each section of the syllabus. It also presents some introductory information on key financial concepts like the balance sheet, income statement, assets, liabilities, and cash flow statements. Rules for the course emphasize the importance of group work and that the lecturer acts as a facilitator rather than teacher.
2. Your syllabus
Financial statements –
nature,limitations,analysis and
tools&techiniques
Ratio analysis
Cash and fund flow statements.
Theory and plg. Of working capital-working
capital financing
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3. Syllabus –continued.
Cash management
Inventory management
Receivables management
Time value of money.
Capital BUDGETING
Cost of capital.
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4. Rules of the game
There is no gain with out pain.
Use it or lose it
Many heads are better than one.Relie on group
discussions.
The lecturer is only facilitator of the groups and
not a teacher, only a guide and a coordinator
,aid and not an assistant ,rendering a service
and not selling a product.
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5. INTRODUCTION
THE TERM FINANCIAL STATEMENTS
STANDS FOR
THE BALANCE SHEET
THE INCOME STATEMENT /
THE PROFIT AND LOSS A/C AND
THE CASH FLOW STATEMENTS
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6. THE BALANCE SHEET
WHAT IT IS?
BRIEFLY STATED IT IS A STATEMENT OF
ASSETS AND LIABILITIES OF A
BUSINESS ORGANISATION ON A GIVEN
POINT OF TIME
IT IS A SNAP SHOT OF THE FINANCIAL
POSITION OF AN ORGANISATION
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7. ASSETS
WHAT ARE THEY ?
THEY ARE THE RIGHTS AND PROPERTIES
OWNED BY THE BUSINESS.
IT REFERS TO THE RESOURCES ACQUIRED
BY THE BUSINESS THROUGH THE FUNDS
PROVIDED BY THE SHARE HOLDERS AND
THE CREDITORS
IT APPEARS ON THE RIGHT HAND SIDE OF
THE BALANCESHEET.
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8. LIABILITIES
LIABILITIES REFER TO THE CLAIMS
AGAINST THE COMPANY INCLUDING THAT
OF THE SHARE HOLDERS AND
OUTSIDERS.
IT IS WHAT THE COMPANY OWES TO
SHARE HOLDERS AND CREDITORS.
IT APPEARS ON THE LEFTHAND SIDE OF
THE BALANCE SHEET.
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9. Classification of assets
Assets are classified into
Fixed assets-like land, building ,plant &machinery
etc.These are not meant for resale and intended for long
term use.
Current assets are those which are acquired for resale –
finished goods
Or for conversion and resale-raw materials
And others like sundry debtors,bills,cash and bank
balances
In short current asset means cash and other resources
easily convertible into cash consumed in the normal
operating cycle of business.
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10. Classification of liabilities
Long term liabilities-Also known as fixed
liabilities; which do not become due for payment
in one year and which do not involve current
assets for their payment, includes share capital
and long term debts.
Current liabilities are what the company owes to
outsiders and which may become payable with
in one year out of the sale of current assets,
example: accounts payable, sundry creditors,
etc.
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11. Income statement
or
profit&loss account
Depending upon the type of the organisation ,
inorder to ascertain the financial out
come,periodically or as and when required , a
statement of income and expenditure , or
receipt and payment a/c or manufacturing,
trading , and profit and loss a/c is prepared.
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12. Funds & Fund flow
statement
The international accounting std. no.7
recognises the absence of a single, generally
accepted definition of fund. According to the
standard , the term fund generally refers to cash
cash equivalents or working capital.
There are two concepts of working capital –the
gross concept and the net concept. The term
funds are generally used in the latter sense.
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13. Fund flow stt.continued
Fund flow statements can be prepared from
balance sheet as total resource basis and may
be prepared on amplified basis.
Fund flow statement on working capital basis
presents1)sources of working capital 2)uses of
working capital and 3) the net changes in
working capital or “as a statement showing the
changes in working capital”
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14. Cash flow statement
Cash flow statement which is also known as
“wgwgs”-where got where gone statement
depicts the flow of cash in an organisation from
different activities and used for various
purposes.
In India the cash flow statement of listed
companies will have to be prepared as per the
indirect method prescribed in AS-3.
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16. MEANING OF FINANCIAL
ANALYSIS
FINANCIAL ANALYSIS LITERALLY MEANS
BREAKING THE VARIOUS STATEMENTS
INTO SMALLER MANAGEABLE
INDEPENDENT PARTS FOR THE PURPOSE
OF EXAMINING THE DATA WITH A VIEW
TO ASSESS THE PROFITABILITY,
SOLVENCY, LIQUIDITY,VIABILITY AND
STABILITY OF A BUSINESS ENTITY.
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17. Ratios :Definition
What is a ratio?
Ratio is an indicated quotient of two
mathematical expressions.
It is a number which expresses the relationship
between two or more things.
A financial ratio is a number which expresses
the relationship between two financial figures
It can be a % or a decimal or a fraction also.
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18. Who uses?
Share holders.
Creditors.
Investors.
Financial institutions.
Bankers.
Investigators and researchers.
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19. What are the five major categories of
ratios?
What questions do they answer?
Liquidity: Are we in a position to make required
payments in time in the current period?
Asset management: Right amount of assets vs sales.
Debt management: Right mix of debt and equity.
Profitability:do sales price exceed cost of sales and
sales high enough as reflected in PM, ROE, and ROA ?
MARKET VALUES: Do investors like what they see as
reflected in P/E, and M/B ratios ?
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20. Classification of ratios
1)Traditional classification :
A) Profit & Loss a/c Ratios
B ) Balance Sheet Ratios
C) Composite ratios
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21. Groups of ratios.Functional point of
view
Liquidity ratios
Solvency ratios
Profitability ratios
Turn over ratios
Capital structure or stability ratios
Coverage ratios
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22. Liquidity Ratios/profitability
ratios
Current ratio = current assets / current
liabilities
Acid test ratio = Liquid assets / current
liabilities
Gross profit to sales
Net profit to sales
Return on assets = net profit after tax/ total
assets
Return on capital employed= NPAIT/ Total
capital employed
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23. Solvency & turn over ratios
solvency ratio = debt equity ratios
= long term debt/ shareholders equity
Capital gearing ratio = fixed interest bearing
capital/ shareholders funds
Turn over ratios
Inventory turn over ratio= cost of goods sold
/average inventory
Debtors turn over ratio = net credit sales /
average debtors
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24. Coverage ratios
Interest cover = E BI&T/ INTEREST
DIVIDEND COVER = E AT/dividend on
preference shares.
Total coverage = EBI& T/TOTAL FIXED
CHARGES
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25. Yard sticks:
Ratios express only positions , to assess
whether it is good, bad , or in between require
some yardsticks or benchmarks.
Some bench marks which are commonly used
are i) absolute standards –common to all
entities ii) historical standards-past-best
applicable to that unit iii) horizontal standards-
best of comparable entities. iv) budgetary
standards based on ideal working
conditions,based on budgets
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26. ILLUSTRATION -I
FOLLOWING IS THE BALANCE SHEET AND
PROFIT AND LOSS ACCOUNT OF
ABC.LTD.COMPUTE ABOVE RATIOS .
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27. BALANCE SHEET AS AT 31/03/2007
OF ABC.LTD
LIABILITIES.RS LAKHS
SHARE CAP
1350
RESERVES&
SURPLUS 1000
SEC-LOAN
500
S.CRS. 300
PRO.DIVIDEND 150
Total 3300
ASSETS
LAND 100
BUILDINGS 650
PLANT&M/C 1100
OTHERS 200
CURRENT ASSETS
INVENTORY 510
S.DRS. 540
CASH 200
TOTAL 3300
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31. Illustration -ii
From the following data pertaining to xyz ltd.,
draw up the companies balance sheet:
1)current ratio: 2.5 2)liquid ratio 1.5
3) net working capital Rs 3,00,000
4)cost of sales /closing stock=6
5) G.P.ratio= 20 %
6)FA/TO=2 based on cost of sales.
7)average debt collection period 2 months
8)FA/SHAREHOLDERS FUNDS=0.80
9)Reserves and Surpluses/eq=0.50
10)B.R & B.P. Rs 100,000. EACH
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32. THE TOOLS AND
TECHNIQUES
THE TOOLS AND TECHNIQUES OF
ANALYSIS FALL UNDER THE FOLLOWING
CATEGORIES:
A)VERTICAL ANALYSIS
B)HORIZONTAL ANALYSIS
C)BALANCE SHEET ANALYSIS
D)P&L ANALYSIS
E)COMPOSITE DATA ANALYSIS
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34. THE PROCEDURE
NORMALLY STARTS WITH A STUDY OF
RELATIONSHIP AMONG VARIOUS
FINANCIAL FACTORS IN A SINGLE SET OF
STATEMENTS AND A STUDY OF THE TREND
OF THESE FACTORSAS SHOWN IN A
SERIES OF STATEMENTS.
IT INVOLVES A PROCESS OF SELECTION OF
FIGURES ,STUDY OF THEIR RELATIONSHIP
AND EVALUATION
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37. COMMONSIZE BALANCE
SHEETS
INSTEAD OF ABSOLUTE
FIGURES,REDUCE THE CONSTITUENTS
INTO %S TAKING THE TOTAL AS 100
THE PREVIOUS SLIDE FIGURES WILL
APPEAR AS UNDER:
YEAR 2005 2006
SHARE+RES 88.5% 93%
LOANFUNDS 11.5% 7%
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38. CONCLUSION
WE HAVE TAKEN A SIMPLIFIED VERSION
INBOTH CASES .
THE COMPARISON FACILITATES
UNDERSTANDING THE GROWTH OF THE
CURRENT YEAR OVER THE PREVIOUS
YEAR
THE COMMON SIZE BALANCE SHEETS
QUANTIFY THE RATE OF GROWTH
OTHER TOOLS –NEXT MODULE. BYE.
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45. ADDITIONAL INFORMATION
1)INVESTMENTS COSTING RS 8000/=SOLD
DURING THE YEAR 2002 FOR RS8500
2)PROVISION FOR TAX IN 2002 RS 9000/=
3)FIXED ASSETS SOLD RS 12000/=BOOK
VALUE RS10000/=PROFIT CREDITED TO P&L
4)DIVIDEND PAID RS 40,000/=
5)FROM THE ABOVE PREPARE A
STATEMENT OF SOURCES AND
APPLICATION OF FUNDS.
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47. Fund
Meaning of fund:
What is it?
Cash and cash equivalent?
Investments of and/ or claims?
Of a business entity
Defining funds as “cash and cash equivalent “is
somewhat limiting
Broadening the definition to include investments
and claims against those investments-is a better
definition.
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48. Fund Flow statement
Is it sources and application of funds?
Does balance sheet satisfy the definition?
No.balance sheet shows the financial position
as on a given date .It is a snapshot, static
statement.
Flow is a dynamic concept, it traces the path
,the source and its flow , where it gets
invested.It is a wgwgs –where got where gone
statement
Balance sheet is stock of funds.changes in
balance sheets –two-is the net flow.
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49. Fund flow –from balance sheets
Source of funds
Any decrease in
asset item
Any increase in
claims(liability)
Uses of funds
Any increase in
asset item.
Any decrease in
claims
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