• CAIIB - Financial Management

• Module B – Study of Financial

Statements
• - Balance Sheet Analysis

• M. Syed Kunmir
 BALANCE SHEET ANALYSIS
• Sources of Funds

1) Capital
2) Reserves & Surplus
3) Term Liabilities
4) Current Liabilities
BALANCE SHEET ANALYSIS

• Uses of Funds
• 1) Fixed Assets
• 2) Intangible Asets
• 3) Non Current Assets
• 4) Current Assets
 BALANCE SHEET ANALYSIS

• Capital
• 1) Authorised Capital
• 2) Issued Capital
• 3) Subscribed Capital
• 4) Paid-up Capital
 BALANCE SHEET ANALYSIS
• Reserves
• 1) Subsidy Received From The Govt
• 2) Development Rebate reserve
• 3) Revaluation of fixed assets
• 4) Issue of Shares at Premium
• 5) General Reserves
• Surplus
• The credit balance in profit and loss account
 BALANCE SHEET ANALYSIS

• Tangible Net Worth

• This refers to the total funds arrived by paid-
up capital , Reserves and P&L Surplus
• Less
• Intagible Assets
 BALANCE SHEET ANALYSIS
• Term Liabilities
• Redeemable preference shares
• Debentures
• Deferred payment gaurantees
• Public Deposits(Repayable after 12 months)
• Term loans and unsecured loans from friens,
relatives,directors repayable over a period of time
• 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
 BALANCE SHEET ANALYSIS
• Current Liabilities
• Working capital bank borrowings
• T.loans deferred credit inst falling due in 12 mths
• public deposits maturing within 12 months
• unsecured loans, unless the repayment is on
deferred terms
• sundry creditors
• advances from dealers and customers
• interest accrued but not paid
• tax provisions
• Dividend declared and payable
 BALANCE SHEET ANALYSIS

• Contingent Liabilities
• Tax disputes
• Legal litigations
• Bills and cheques discounted with banks
• Claims against the company not acknowledged
 BALANCE SHEET ANALYSIS
• Fixed Assets
• Infrastructure like land & building
• plant & machinery
• Vehicles
• Furniture & fixtures
• Depreciation
• Straight line method
• Written down Value Method
• Remark : Dep added to profit to arrive repayment
obligation especially in term loans
 BALANCE SHEET ANALYSIS
• Investments
• 1) Shares And Securities
• 2) Associate Companies
• 3) Fixed deposits with banks/finance companies
• Remark : While analysing bal sheet we can
analyse necessity of such investments
• Remark : While fixed deposits with banks are
considered as fixed assets, the investmetns in
associate concerns are treated as non current
assets.
 BALANCE SHEET ANALYSIS

• Non Current Assets

• Deferred recievables/Overdue recievables(like
disputed amounts and Over Due > 6 mths)
• Non moving stocks/inventory/un usable spares
• Investment/Lending to associate concern
• Borrowing of the directors from the company
• Telephone deposits/ ST deposits etc
 BALANCE SHEET ANALYSIS
• Intangible Assets
• Preliminary & Preoperative expenses
• Deferred Revenue Expenditure
• Goodwill
• Trade mark
• Patents
• Rem : The o/s balance to be written off every
year by charging P&L account
 BALANCE SHEET ANALYSIS
• Current Assets
• Raw materials, work-in-progress,finished
goods,spares and consumables
• Sundry debtors and recievables < 6 mths
• Advances paid to suppliers of raw materials
• Cash and bank balances
• Interest recievables
• Other current assets such as Government
securities, Bank deposits ..etc
 BALANCE SHEET ANALYSIS
• Notes
• All expenses or provisions or advances or loans
etc which are accrued and payable within 12
months are current liablities
• When a company makes investments in
unconnected avenues such as shares, securites,
associate concerns are to be treated as non cur ast
• The slow moving and absolete inventory - NCA
 BALANCE SHEET ANALYSIS
• Notes
• Bal Sh Analy not only to be quantitative but to be
qualitative
• It is the fin pos on a part date. Min three years bal
sh ana would be more meaningful
• It is a mixture of facts, opinions and conventions
• While opinions are of the company’s management,
the conventions are practiced by the finance
managers of the company.
• ( ex Over due recievable > 6 mths as NCA is a
acccounting convention
 BALANCE SHEET ANALYSIS
• Notes
• The valuation of the stock is done as per the
opinion of the management
• Depreciation method may be changed to boost
profit
• It may be silent on key personnel and staff turnover
• Marginal changes in the classification of certain
items would lead to different results.
 BALANCE SHEET ANALYSIS
• Notes
• Management competence
• Investment decision
• Resorting to window dressing
• experience of the promoters
• Board comprises of only family members
• The key personnel of the company
• The structure of the organisation
• The authority and decision making are
decentralised
 BALANCE SHEET ANALYSIS
• Notes
• The state of industrial relations
• Financial systems and procedures
• management control
• planning, budgeting, forecasting
• capacity utilisation
• status of the technology
• awareness of the market, competitions ..etc
• for listed co: share prices, EPS, book value,
dividend record, public response ..etc
 Profit & Loss Account
• It is a summary of revenue earned and
expenses incurred which ultimately results in
profit or loss of to the company
• No defined format in law
• Operating revenue = Sales revenue
• Non_operating revenue = Other income ( out of
sale of investments, interest, commission and
discount etc)
• Hence operating profit is a yard stick for
operating profit of the company
• Operating profit = Sales Revenue- Operating Cost
 Profit & Loss Account
• Gross Sales
• 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.
• Net Sales
• The sales figure excluding all the factors
explained above are the net sales.
 Profit & Loss Account
• Cost of production
• This is the cost incurred right from the procurement
of raw material to the finished good.
• For ex in a garment firm following cost is incurred
while production
• 1) cost of raw material cloth, buttons, canvas, hooks,
zips etc
• 2) Maintenace of sewing machines
• 3) payment of wages to workers
• 4) power
• 5) washing, ironing,packing etc.
• Cost of Prod exclu selling & admn exp & int cost
 Profit & Loss Account

• Selling And General Administarative Expenses

• Maintaining office staff for admn & acctg
• marketing effort
• payment of salaries/Tr All to marktg personnel
• All the expenses which are not directly connected to
manufacturing are classifed as selling and/or general
expenses
 Profit & Loss Account
• Cost of goods sold
• Cost of goods sold includes all manufacturing
expenses and the adjustments for opening and
closing stock
• Cost of Goods sold = Opening stock + Purchases +
Manufacturing expenses - Closing stock
• Gross Profit is arrived deducting figure of cost of
goods sold from the sales figure
• ie Gross profit = Sales - Cost of goods sold.
 Profit & Loss Account
• Operating Profit is arrived deducting selling,
administrative and general expenses , provision for
bad debts, interest and miscellaneous expenses from
the gross profit.
• ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad
debt + mis exp )
• Profit Before Tax When other income is added and
other expenses are deducted from the operating
profit we get profit before Tax
• ie PBT = Op Profit + oth Inc - oth exp
• Net Profit When provision for taxes is deducted
from the Profit Before Tax we get Net profit
• ie Net Profit = PBT - taxes
 Profit & Loss Account
• Non Operating Income/Expenses
• The income earned by the unit from other than
manufacturing and seling operations is classified under
this head . i.e
• a) Interest earned on fixed deposits
• b) Dividends and profit earned by sale of assets
and share.
• All those expenses which are not directly connected
with operations of the unit are classified under this
head. i.e
• a) Preliminary expenses written off
• b) Loss suffered due to sale of assets & share