fsa

financial
statement
analysis
fsa

Who are interested in FSA?

fsa

Management

Other
Shareholders
Groups

Creditors
fsa

What are their interests?

fsa What are their interests?

1 What is the financial position of the firm at a given point of time?

2 How the firm performed financially over a given period of time ?

3 What have been the sources/ uses of Cash over a given period
of time?
fsa
What statements may match these Questions?

1 Balance Sheet

2 Profit & Loss Account

3 Statement of Cash Flows

fsa
BALANCE SHEET

BS Shows the financial condition of a business

at a given point of time

Can be shown in Account or Report form

Companies Mostly use Report Form

fsa Structure of Balance Sheet as Per the Companies Act
Account Form
Liabilitie Assets
s Fixed Assets
Share Capital
Reserves & Surplus Investments
Secured Loans Current Assets,
Unsecured Loans Loans & Advances
Current Liab. & Provisions Current Assets
Loans & Advances
Current Liabilities
Provisions Misc Exp & Losses
fsa Structure of Balance Sheet as Per the Companies Act
Account Form
Liabilities 20x1 Assets 20x1 20x0
20x0 Fixed Assets 330 322
Share Capital 150 150
Equity 150
Pref -
Investments 15 15
Reserves & Surplus 112 106
Secured Loans 143 131 CA,loans & Adv 234 156

Unsecured Loans 69 25 Misc Exp - .

C Liabilities & Prov 105 81

579 579 493

493
fsa Structure of Balance Sheet as Per the Companies Act
Report Form
I Sources of Funds
1 Share Holders’ funds
a) Share Capital
b) Reserves & Surplus
2 Loan Funds
a) Secured Loans
b) Unsecured Loans
Current Assets
II Application of Funds Loans & Advances
Current Liabilities
1 Fixed Assets
Provisions
2 Investments
3 Current Assets, Loans and Advances
Less CL and Provisions
Net Current Assets
4 Misc Expenditure and Losses
fsa Structure of Balance Sheet as Per the Companies Act
Report Form 20x1 20x0
I Sources of Funds
1 Share Holders’ funds 262 256
a) Share Capital 150
b) Reserves & Surplus 112
2 Loan Funds 212 156
a) Secured Loans 143
b) Unsecured Loans 69
Total 474
Current Assets 412
II Application of Funds Loans & Advances
1Current Liabilities
Fixed Assets 330 322
2Provisions
Investments 15 15
3 CA, Loans and Advances 234 156
Less CL and Provisions 105 81
Net Current Assets 129 75
4 Misc Expenditure and Losses -- --
Total 474 412
fsa Balance Sheet of Horizon Ltd as on March31,20x1
Liabilities 20x1 20x0 Assets 20x1 20x0
Share Capital 150 150 Fixed Assets 330 322
Equity 150 Gross Block 500 462
Depreciation 170 140
Reserves & Surplus 112 106 Investments 15 15
Secured Loans 143 131
Term Loans 70 58 CA,loans & Adv 234 156
Cash Credit 73 73 Cash at Bank 10 6
Debtors 114 68
Inventories 105 72
Unsecured Loans 69 25 Advances 5 10
Bank Credit 25 25
Deposits 44 --
Misc Exp - .
C Liabilities & Prov 105 81
Trade Credit 75 60
Advances 20 13
Provisions 10 8 579
493
579 493
fsa Liabilities

Share Capital
Reserves & Surplus
Secured Loans
Unsecured Loans
Current Liabilities & Provisions
fsa Assets

Fixed Assets
Investments
CA, Loans and Advances
• inventories
• Sundry Debtors
• Cash and Bank Balances
• Other Cash Assets
• Loans & Advances
Misc. Expenditure & Losses
fsa Accounting Values & Economic Values

Use of Historical Cost Principle

Exclusion of Intangible Assets

Understatement or omission of certain Liabilities

fsa Profit & Loss Account
•Sales
•Cost of Goods Sold
•Gross Profit
•Operating Expenses
•Operating Profit
•Non Operating Surplus/Deficit
•Profit before interest and Tax
•Interest
•Profit before Tax
•Tax
•Profit after Tax
•Prior Period Adjustments
•Amount Available for Appropriation
•Appropriations
•Balance Carried forward
 Profit and Loss Account of Horizon Ltd.
fsa for the year ending on March 31,20x1 Rs in Million
20x1 20x0

Net Sales 701 623

Cost of Goods Sold 552 475
Stock 421
Wages and Salaries 68
Other Mfg Expenses 63
Gross Profit 149 148
Operating Expenses 60 49
Depreciation 30
G Administration 12
Selling 18
Operating Profit 89 99
Non Operating Surplus/Deficit -- 6
Profit before interest & Tax 89 105
Interest 21 22
Profit Before Tax 68 83
Prov for Tax 34 41

Profit after Tax 34 42

fsa NET CASH FLOW

Non Cash Rev

Net Cash Profit after _
Flow
= Tax
+
Non Cash Exp

OR

Depreciation
Net Cash Profit after +
Flow
= Tax
+
Amortization
fsa Accounting Income Versus Economic Value

Use of Accrued Principle

Omission of Changes in Value

Depreciation
Inflation

Creative Accounting
Treatment of R&D &
Adv Expenditure
fsa Balance Sheet Related Finance Topics

•What should be the capital structure of the company?

•What is the cost of capital of the firm?

•What should be the WC Financing Policy of the Firm?

•How should capital budgeting decisions be taken?

•What is the rational approach to portfolio management?

•How can cash management be made more effective?

•What is a sensible framework for credit Management?

•How should the firm develop its inventory policy?

fsa Balance Sheet Related Finance Topics

Share Capital
Equity
Preference
Capital Structure &
Reserves and Surplus
Cost Of Capital
Secured Loans
Debentures
Loans and Advances

Unsecured Loans
Current liabilities and
Provisions Working Capital
Financing Policy
Trade Creditors
Provisions
fsa Balance Sheet Related Finance Topics

Fixed Assets (Net)

Gross Block Capital Budgeting

Less Depreciation

Investments Portfolio Management

Current Assets, Loans & Advance

Cash and Bank Cash Management

Receivables Credit Management

Inventories Inventory Management

Misc Expenditure and Losses

fsa Profit & Loss Related Finance Topics

•What is the Revenue Risk of the firm?

•What is the gross profit margin of the firm?

•Is the Depreciation policy of the firm reasonable?

•How much is the business Risk of the firm?

•What is the degree of financial risk?

•What is the scope of Tax planning?

•What is the return on equity?

•What should be the dividend policy of the firm

 Profit & Loss Account & Finance Topics
fsa
Net Sales Revenue Risk
COGS
Stock
Wages & Salaries
Other Mfg Exp
Gross Margin GP Risk

Operating Expenses
Selling and Administration
Depreciation Depreciation policy
Operating Profit

Non Operating surplus/deficit

Earnings Before income Tax Business Risk

Interest Financial Risk

 Profit & Loss Account & Finance Topics
fsa
Profit Before Tax

Tax Planning
Tax

Profit after Tax Return on Equity

Dividends
Dividend policy

Retained Earnings Mgt. Of Retained Er

fsa

How BOTTOM LINE can be manipulated ?

fsa Manipulation of Bottom Line

Inflate Sales
Alter other income
Fiddle with depreciation
Valuation of Stock
Capitalize certain Expenses
Defer Discretionary Expenses
Treat certain Liabilities as Contingents
Extra Provisions in prosperous years
Revalue assets to create reserves
Lengthen Accounting Year
fsa Why do companies Manipulate their F Statements?

Project as low Risk Company

To promote management Competence

To show growth

To enhance compensation
fsa

What Can you do?

Acquire knowledge, how accountants prepare FS

Pursue notes to the statements

Auditors report

Analyzing Financial Performance

over a period of time