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Module B (contd.) - Balance Sheet Analysis


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Module B (contd.) - Balance Sheet Analysis

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