ABOUT MYSELF

Name
Qualifications

Sarbesh Mishra.

Experience

: 1. B.Com.(Hons) 2. Post-graduate Commerce. 3. M.Phil (Commerce) 4. Ph.D. (Commerce) submitted. : Joined University of Delhi as Lecturer in Commerce in 2001 and continued till 2005 and then joined Army Institute as Senior Faculty, Finance Area prior to current appointment at NICMAR.

Need of Knowing Finance A Managerial Perspective

by

Mr. Sarbesh Mishra,

Assistant Professor, Finance Area. National Institute of Construction Management & Research (NICMAR)

COVERAGE UNDER THIS TOPIC

INTRODUCTION BASIC CONCEPTS LEGAL FRAMEWORK & BRIEF REVIEW OF PROVISIONS THE BALANCE SHEET & ITS KEY ELEMENTS THE PROFIT & LOSS A/C & ITS KEY ELEMENTS

Qs:- If I have no intention of becoming a financial manger, why do I need to, understand financial applications / Analyse of Financial statements?

The successful manager will need to be much more of a team player that has the knowledge and ability to move not just vertically within an organization but horizontally as well.

Developing cross-functional capabilities will be the rule, not the exception.

Contd.
The mastery of basic financial management skills is key ingredient that will be required in the work place of yours not in too distant future.
Finance is the study of money management, the acquiring of funds (cash) and the directing of these funds to meet particular objectives. Good financial management helps businesses to maximize returns while simultaneously minimizing risks.

Hierarchy of Finance in any Project

1. Technical Appraisal 2. Financial Appraisal

Goal Of The Firm

Goal

STAKEHOLDER WEALTH MAXIMISATION

Goal Of The Firm

Creating the Firm

EQUITY

DEBT

ASSETS

Goal Of The Firm

Building Up The Firm

ASSETS

SALES

Goal Of The Firm

Building Up The Firm

ASSETS

SALES

EARNINGS

Goal Of The Firm

Building Up The Firm

INTEREST

ASSETS

SALES

EARNINGS

DIVIDEND

Goal Of The Firm

The Key Links *

INTEREST
A T/O * NPM *

ASSETS

SALES

EARNINGS
* Payout

DIVIDEND

Rate???

Goal Of The Firm

Dividend Policy And Re-investment Rate: The Critical Factor
INTEREST
A T/O * NPM *

ASSETS

SALES

EARNINGS
* Payout

DIVIDEND

At what rate / cost ???

Finance Measures
Cost
Revenue

Profit
ROI EVA

UNDERSTANDING FINANCE & ACCOUNTS

What is the NEED for this ?

MANAGERS, SHAREHOLDERS, CREDITORS, ETC. WANT TO KNOW :

WHAT IS THE FINANCIAL POSITION OF THE FIRM AT A GIVEN POINT OF TIME ? HOW HAS THE FIRM PERFORMED FINANCIALLY OVER A GIVEN PERIOD OF TIME ?

ANSWER GIVEN BY THE FIRMS BALANCE SHEET

ANSWER GIVEN BY THE FIRMS PROFIT & LOSS ACCOUNT

BASIC CONCEPTS UNDERLYING FINANCIAL ACCOUNTING

ENTITY CONCEPT GOING CONCERN CONCEPT MONEY MEASUREMENT CONCEPT COST CONCEPT CONSERVATISM CONCEPT DUAL ASPECT CONCEPT ACCOUNTING PERIOD CONCEPT REALIZATION CONCEPT MATCHING CONCEPT MATERIALITY CONCEPT

LEGAL FRAMEWORK
WITHIN COMPANIES ACT, 1956 :
Compulsory for Cos. to keep proper books of accounts & to prepare annual statements in the prescribed form & time. (Secs.209-223)

BRIEF REVIEW OF PROVISIONS

PREPARATION OF FINAL STATEMENTS (Sec.210) : - To present B/S & P&L A/c at every AGM. - Period for A/cs is Financial Year. - Responsibility fixed on co.s Directors. - Punishment laid down for non-compliance. FORM & CONTENTS OF P&L A/C & B/S (Sec.211) : - To give a TRUE & FAIR view of state of affairs. - B/s to be in form set out in Sch.VI or as near thereto. - Slightly diff. forms for banking, insurance & electricity companies governed by special statutes. REPORTS REQUIRED TO BE ATTACHED WITH B/S : - Auditors (including special or supplementary,if any) - Directors.

BRIEF REVIEW (Contd.)

AUTHENTICATION OF B/S & P&L A/C (Sec.215) : - Reqd. to be signed by atleast 2 Directors (including MD, if there is one) & Secretary. FILING OF ACCOUNTS (Sec.220) : - 3 sets of final accounts & other documents to be filed with the Registrar of Companies within 30 days of annual general meeting.

BALANCE SHEET
Sec 211 : Form to be as prescribed in Part I of Schedule VI - Horizontal form - Vertical form

HORIZONTAL FORM OF B/S

LIABILITIES
Share Capital Reserves and Surplus Secured Loans Unsecured Loans Current Liabilities and Provisions

ASSETS
Fixed Assets Investments Current Assets, Loans and Advances Misc. Expenditures and Losses

SIS LTD. ANNUAL ACCOUNTS

BALANCE SHEET (Figs. in Rs./Lacs) Sources of Funds
1.

Shareholders Funds (i) Capital (ii) Reserves And Surplus

as at 30th Sep., 2004 736.95 14,856.94 15,593.89 2,107.36 2,976.21 5,083.57

as at 30th Sep., 2003 736.95 14,464.92 15,201.87 1,321.86 3,063.95 4,385.81 7,484.91 863.30 8,348.21

2. Loan Funds (i) Secured Loans (ii) Unsecured Loans

4. Current Liabilities & Provisions (i) Current Liabilities 9,118.41 (ii) Provisions 1,947.67 11,066.08 TOTAL 31,743.54

27,935.89

Application of Funds
1.

Fixed Assets (i) Gross Block Less : Depreciation Net Block (ii) Capital Work in Progress Sub-total a b

as at 30th Sep.,2004 9,175.71 5,809.88 3,365.83 97.13 3,462.96 7,989.60

(Figs. in Rs./Crores)
as at 30th Sep., 2003 8,647.11 5,341.47 3,305.64 16.52 3,322.16 8,375.57 5,686.30 5,803.17 283.25 4,465.44 16,238.16 27,935.89

2. Investments

3. Current Assets, Loans & Advances (i) Inventories 6,823.34 (ii) Sundry Debtors 8,880.50 (iii) Cash & Bank Balances 754.80 (iv) Loans And Advances 3,832.34 Sub-total c 20,290.98
TOTAL a+b+c = 31,743.54

Liabilities (or Equities)

= What the Business Owes Others
Share Capital
Equity Theoretical owners of co. Capital No fixed rate of dividend.
Risk capital.

Preference Capital

Dividend payable at fixed rate

Reserves

Revenue Reserves - general reserve

- capital redemption reserve, etc.

& Surplus

Capital Reserve
- share premium a/c - assets revaluation res

Bal. of P&L A/c (not appropriated)

Note :
Share Capital + Reserves & Surplus = Owners Equity

OTHER LIABILITIES
Secured Loans :
(i.e. borrowings against specific securities)

1) Debentures, 2) Loans from Financial Institutions and 3) Loans from Commercial Banks.

Unsecured Loans: 1) Fixed Deposits, 2) Loans & Advances from (i.e. borrowings without Promoters, 3) Inter-corporate Borrowings and 4) any specific securities) Short-term Loans & Advances from Banks. Current Liabilities & Provisions : 1) Bills Payable, 2) Payments (obligations maturing Received in Advance, 3) Accrued Expenses, 4) within the next 1 year) Unclaimed Dividends & 5) Provisions for Taxes, Insurance Premia, Pensions, Dividends, etc.

ASSETS
Fixed Assets :
Used over relatively long periods for the business Ordinarily not meant for resale
e.g. Land, Buildings, Plant & Machinery, Patents & Copyrights, Goodwill, etc.

Investments :

Financial securities owned by the firm

e.g. Investments in govt. securities, equity shares of other companies, debentures, etc.

Current Assets, Loans: Resources convertible into cash during and Advances operating cycle of firm
e.g. Cash in hand or bank, Sundry Debtors (Bills Receivable) Inventories, Loans & Advances and Prepaid Expenses.

Miscellaneous Expenditures and Losses :

e.g. Preliminary or Pre-operative Expenses not written off, Commission/ Brokerage on underwriting or subscription of shares/debentures, Net Loss carried forward from P&L A/c.

PROFIT & LOSS ACCOUNT

(Also known as INCOME STATEMENT)
NO STANDARD OR SPECIFIED FORMAT UNDER

INDIAN COMPANIES ACT. However, as per Part II of Schedule VI, any format must disclose the following :

Net Turnover or Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Non-operating Surplus/Deficit Profit Before Interest and Tax (PBIT) Interest Profit Before Tax (PBT) Tax Profit After Tax (PAT)

FORMAT OF A TYPICAL P&L A/C

EXPENSES
Raw Materials Consumed Salaries & Wages Power, Fuel & Water Repairs & Maintenance Insurance Depreciation Miscellaneous Expenses Profit Before Interest & Tax Interest Profit Before Tax Provision for Tax Profit After Tax (i.e. Net Profit)

INCOME
Sales Other Income

PROFIT & LOSS A/C

INCOME
(Figs. in Rs.lakhs) For the year ended 30th Sep., 30th Sep., 2004 2003 1. Sales 2. Other income Total Income 28,420.39 2,137.68 30,558.07 23,868.13 1,539.64 25,407.77

EXPENDITURE
1. 2. 3. 4. 5.

For the year ended 30th Sep., 30th Sep., 2004 2003

Cost of Goods for Resale 6,702.12 Manufacturing Expenses 15,279.08 Employee Cost 4,059.15 Admn. & Selling Exp. 2,204.27 Depreciation 593.71 Total Expenditure 28,838.33 PBIT Interest Profit before Tax Tax Profit after tax 1,719.74 743.91 975.83 375.49 332.88

8,150.64 10,623.13 2,756.30 2,231.06 562.21 24,323.34 1,084.43 530.52 553.91 (-)995.92 1,549.83

DETAILS OF CONTENTS OF P&L A/C

Net Sales : Sales - Sales Inwards (i.e. Returns) - Sales Discounts Cost of Goods Sold : Sum of costs incurred for manufacturing
the goods SOLD during the accounting period. Consists of DIRECT MATERIAL COST, DIRECT LABOUR COST and FACTORY OVERHEADS. GrossProfit : Net Sales - Cost of Goods Sold

Operating Expenses :
- General Administrative Expenses - Selling & Distribution Expenses - Depreciation

Operative Profit : Gross Profit - Operating Expenses Non-operating Surplus/Loss : Gains/Losses Sources Other
Than Normal Business of the Co. e.g. income/loss from
investments, disposal of assets, etc.

DETAILS OF P&L A/C (Contd.)

PBIT (or EBIT) : Operating Profit + Non-operating Surplus Interest : Expense incurred for borrowed funds like Long-term
Loans, Debentures, Public Deposits & Working Capital Advances.

PBT : = PBIT - I Tax : Income Tax payable on the taxable profit of the year. PAT : = PBT - T Dividends : Amount earmarked for distribution to shareholders. Retained Earnings : = PAT - Dividends

TO ASSESS THE FINANCIAL HEALTH OF ANY COMPANY, ONE REQUIRES A GOOD UNDERSTANDING OF THE FINANCIAL STATEMENTS OF THE COMPANY