Finance Club

IIM Ranchi
Workshop for 2014-16 Batch

financeclub@iimranchi.ac.in
https://www.facebook.com/FinClub.IIMRanchi

Todays Agenda

Different Corporate Structures

Role of Financial Statement Analysis
Balance Sheet
Income Statement
Cash Flow Statement
Affects on three Statements due to financial transactions

Role of Financial Statement Analysis

To make use of companys information along with other relevant information to

make economic decisions. To evaluate a companys past performance along with
current Financial position to form opinions about the ability of the company to earn
profits and generate cash flow in the future
For Investors :- To decide whether to invest in the company or not
For Analysts :- To recommend the company to the investors
For Banks :- To decide whether to give credit
For Managers :- To assess the companys performance and taking future
decisions

Balance Sheet

Tells the financial condition or financial position of the firm

Defined at a point of time
Three parts to Balance Sheet :- Assets, Liabilities and Owners Equity
Each transaction requires double entry so that both the sides of the balance
sheet matches
Assets

Liabilities

The valuable resources that

a company owns
Expected to provide future
economic benefits

Obligations to outside parties

Require outflow in the future

+
Owners Equity

Residual Interest in the assets

Basic Accounting Equation
Assets = Liabilities + Owners Equity after deducting the liabilities

Balance Sheet - Assets

Resources controlled by the firm which provide future economic benefits
Current and Non Current Assets
Current Assets
Cash and other assets that will be converted into cash or will be used in year or one
operating cycle, whichever is greater
Presented in the order of the liquidity; Cash presented first being most liquid
Reveals information about the operating activities of the firm
Non Current Assets
Assets which cannot be converted into cash or used up in one year or one operating
cycle; illiquid assets
Reveals Information about the firms investing activities

Balance Sheet - Assets

Current Assets
Cash and Cash Equivalents :- Cash equivalents are short term, highly liquid
investments that are easily converted into cash. Reported at fair value
Examples :- Treasury bills, commercial paper etc.
Accounts Receivable :- Economic resources owed to the firm by the customers for
goods and services sold on credit
Inventories :- Finished goods held for sale to the customers or raw material used for
the manufacture of finished goods. There are three inventory accounts :- Raw
material, work in process (WIP) and finished goods inventory. LIFO, FIFO and
weighted average method
Prepaid Expenses :- Operating costs paid in advance.
Deferred Tax Assets :- Taxes payable in excess of income tax expense reported in
Income Statement

Balance Sheet - Assets

Non - Current Assets
Property Plant & Equipment :- Tangible Assets used in the production of goods and
services. Includes land and building, machinery and equipment
Financial Assets :- Includes equities, bonds, loans and receivable given; Held for
long term
Identifiable Intangible Assets :- Non-monetary assets that lack physical substance.
Can be acquired separately or are the result of rights and privileges conveyed to the
owner. Examples :- Patents, Trademarks and Copyrights
Non Identifiable Intangible Assets/Goodwill :- Excess of purchase price over the fair
value of identifiable assets acquired.

Balance Sheet - Liabilities

Obligations on the firm to outside parties which require future outflows
Current and Non Current Liabilities
Current Liabilities
Obligations that will be satisfied within one year or one operating cycle
Could be held primarily for Trading purposes
Non Current Liabilities
Liabilities that dont meet the criteria of current liabilities
Reveals information about the firms long term financing activities

Balance Sheet - Liabilities

Current Liabilities

Accounts Payable :- Amount the firm owes to suppliers for good or services
purchased on credit
Notes Payable :- Short term debt obligations and current portion of long term debt
Accrued Liabilities :- Expenses that are recognized in the income statement but not
yet paid or contractually due. Examples include wages payable, interest payable,
taxes payable
Unearned Revenue :- Cash collected in advance of providing goods and services

Balance Sheet - Liabilities

Non Current Liabilities
Long Term Financial Liabilities :- Includes bank loans, notes payable, bonds payable,
whichever are not be paid in one year
Deferred Tax Liabilities :- Arises when income tax expense is greater than tax
payable

Balance Sheet Owners Equity

Contributed Capital :- It is the amount contributed by the common shareholders
Includes Paid in Capital and Addition Paid in Capital
Preferred Stock :- Hybrid Security having rights and privileges different from
Common Stock
Non Controlling Interest :- It is the minority shareholders pro rata share of the net
assets of a subsidiary that is not fully owned by the parents
Retained Earnings :- Undistributed earnings of the firm that have not been paid out
to shareholders as dividends
Accumulated Other Comprehensive Income :- All changes in owners equity except
for those recognised in the income statement and transaction with shareholders.
Includes income from foreign currency translation, unrealised gains and losses

Balance Sheet Contra Accounts

Contra accounts are entries that offset some part of the value of another account
Accumulated Depreciation :- Contract account to Property, Plant and Equipment
Allowance for Doubtful Accounts :- Contra account for accounts receivable
Treasury Stock :- Contra account to contributed capital

Income Statement

Income Statement

Income Statement-Depreciation

Depreciation methods:
Straight-line: Equal amount of depreciation expense in each year of the asset's useful life.
SL depreciation expense = (cost-Residual value)/useful life
Declining balance: Apply a constant rate of depreciation to the declining book value
until
book value equals residual value.
DDB depreciation = ( 2/useful life) (cost - accumulated depreciation)

Income Statement-Quarterly Results

Revenues - expenses = Net income

Common-size income statements are useful in examining a firm's business strategies.

Income Statement- Non-Recurring Items

Results of discontinued operations are reported below income from continuing
operations, net of tax, from the date the decision to dispose of the operations is made.
These results are segregated because they likely are non-recurring and do not affect
future net income.
Unusual or infrequent items are reported before tax and above income from
continuing operations. An analyst should determine how "unusual" or "infrequent" these
items really are for the company when estimating future earnings or firm value.
Extraordinary items (both unusual and infrequent) are reported below income from
continuing operations, net of tax under U.S. GAAP, but this treatment is not allowed
under IFRS. Extraordinary items are not expected to continue in future periods.
Changes in accounting standards
Changes in accounting methods applied, and corrections of accounting errors require
retrospective restatement of all prior-period financial statements included in the current statement.
A change in an accounting estimate, however, is applied prospectively (to subsequent periods)
with no restatement of prior-period results.

Cash Flow Statements

Provides information beyond that available from the income
statement, which is based on accrual, rather than cash, accounting.
Provides :Information about a companys cash receipts and cash payments during an
accounting period
Information about a companys operating, investing and financing activities
An understanding of the impact of accrual accounting events on cash flows
Uses:
Regular operations generate enough cash to sustain the business
Enough cash is generated to pay off existing debts as they mature
The firm is likely to need additional financing
Unexpected obligations can be met
Firm can take advantage of new business opportunities

Cash Flow Statements

Cash flow from operating activities
- Resulting from transactions affecting net income
Inflows
- Cash collected from customers
employees and suppliers
- Interest and dividends received
expenses
- Sale proceeds from trading activities
securities
Cash flow from Investing activities

Outflows
- Cash paid to
- Cash paid for other
- Acquisition of trading

- Interest paid
- Resulting from acquisition or disposal of long-term assets and
- Taxes paid
certain investments
Inflows
- Sales proceeds from fixed assets
assets
- Sale proceeds from debt and equity
equity
- Principal received from loan made
to others

Outflows
- Acquisition of fixed
- Acquisition of debt and
- Loan made to others

Cash Flow Statements

Cash flow from financing activities
- Resulting from transactions affecting capital structure
Inflows
- Principal amounts of debt issued
- Proceeds from issuing stock
stock

Outflows
- Principal paid on debt
- Payments to reacquire

Examples:
shareholders
Purchase of building
Repurchase of common stock
Taxes paid
Dividends paid
Paid off long term borrowings
Profit on sale of building
Debt retired through issuance of common stock

- Dividends paid to

Cash Flow Statements

Direct Method
Beginning Cash Balance
+ CFO
+ CFF
+ CFI
= Ending Cash Balance

Cash Flow Statements

Indirect Method
Beginning Cash Balance
+ Net income
(+/-) Losses/ gains resulting from investing and financing cash flows
(+ /-) Non cash charges
- Increase in operating assets
+ Decrease in operating assets
+Increase in operating liabilities
- Decrease in operating liabilities
+ CFF
+ CFI
= Ending Cash Balance

Cash Flow Statements

Problem 1
Item

Amt ($)

Net Income

45

Depreciation

75

Taxes paid

25

Interest paid

Dividends paid

10

Cash received from sale of company

building

40

Sale of preferred stock

35

Repurchase of common stock

30

Purchase of machinery

20

Issuance of bonds

50

Purchase of land through financing

45

Paid off long term debt

15

Cash Flow Statements

Problem 2
Item
Net Income

Amount ($)
120

Decrease in accounts receivable

20

Depreciation

25

Increase in inventory

10

Increase in accounts payable

Decrease in wages payable

Increase in deferred tax liabilities

Profit from sale of land

15
2

Identify the following items as Assets, Liabilities, Owners

Equity, Revenues and Expenses

Accounts Receivable

Unearned Revenue

Bonds Payable

Allowance for Doubtful

Account

Common Stock
COGS

Gain/Loss from Foreign

Currency Translation

Depreciation

Goodwill

Deferred Taxes
Dividends Payable
Gain on Sale of Assets
Prepaid Expense

Integration of the three statements

XYZ is a Shoe making company established on 3rd July 2014. Plant and
Equipment depreciates on straight line basis in 5 years with no
residual value. All shares have Rs 10 face value. Following are next
one month activities
3rd July - Promoter puts Rs 2 Cr and gets 2 lakhs new shares
3rd July - Borrows Rs 10 lakhs at 8% annual interest
3rd July - Machinery worth Rs 1.5 Cr is bought
3rd July - Buys Office equipment worth Rs 20 lakhs
5th July- Raw material worth Rs 30 lakhs is bought (10 L on credit)
5th July to 30th July - Manufactures 3000 pair of shoes with following
expenses :- Rs 10 lakhs of raw material is used, Electricity bill is Rs 2
lakhs, Employee salaries are Rs 5 lakhs
30th July to 2nd August - Sells 300 pair of shoes at Rs 600 each with Rs
400 received as cash and Rs 200 to be received by August end
3rd August - Repays 2 lakhs of its loan in interest and principal repayment
3rd August - XYZ gives 20% of its earnings back to promoters as
dividends

Thank
You

Aman Vij
9608983826
Saurabh Jain
Viswajeeth Thippeswamy

+91+91-8404884578
+91-7762924663