Understanding Financial Statements PDF

Understanding Financial Statements Day 2 Manju Jaiswall IIM Calcutta  Financial Statements Financial statements are summary of accounting transactions & are presented in a manner to enable users know the operating performance of the organ...

Understanding Financial Statements Day 2 Manju Jaiswall IIM Calcutta  Financial Statements Financial statements are summary of accounting transactions & are presented in a manner to enable users know the operating performance of the organization and also its impact on the overall value of the organization. – Balance Sheet – Profit & Loss A/c or Income Statement – Cash Flow Statement 1–2  Depreciation Gradual conversion of cost into expense. Depreciation is a cost consumed by an entity during an accounting period. Definition: – The systematic allocation of the original cost of an asset to the periods in which the asset provides benefit to the entity.  Judgments required Service life of asset. Residual value at the end of its service life. Net cost = original cost - residual value. Method of depreciation used to allocate cost over useful life of asset.  Depreciation Methods Two popular methods: Straight line method (SLM) Written down value method (WDV) While Companies Act, 1956 (Schedule XIV) recognizes both the methods, Income Tax Act, 1961 generally recognizes only one method (WDV)  Depreciation Methods Straight Line Method Depreciation = Original book value * depreciation rate, or (original cost- residual value)/n Declining Balance Method Depreciation = Net book value * depreciation rate. Depreciation Rate = 1- n√ residual value/original cost  Balance Sheet Summarizes Assets, Liabilities and Owner’s Equity at a point of time. More formally, Statement of Financial Position. Contains (and shows equality of amounts of): – Assets – Liabilities and Owners’ equity (Net Worth) 1–7  Assets Assets IFRS Current Assets Non Current Assets Fixed Investments & Assets Other Assets Property Intangible Plant & Assets Equipment Indian GAAP Assets Fixed Assets Investments Current Assets 1–8  Liabilities Liabilities IFRS Current Non Current Liabilities Liabilities Secured Unsecured Liabilities Liabilities Liabilities Indian GAAP Long Term Loans Current Liabilities & Provisions Secured Unsecured Loans Loans 1–9 Balance Sheet Format – revised Sch VI Now Sch III Sources of Funds Shareholders Funds Loan Funds Current Liabilities & Provisions including current maturities of long term debt – Application of Funds Net Block (Gross Block – Accumulated Depreciation) Capital Work in Progress Non current Investments long term loans and Advances Current Assets, Short term loans and Advances including short term investments 1–10 Infosys – following the revised Schedule VI 1–11 1–12 BEL 1–13 Infosys 1–16 1–17 Infosys 1–18 1–19 1–20 1–21 1–22 1–23  Exercise Do you agree or disagree with the following: – Machinery is a Fictitious asset – Creditors represent a long term liability – Investment in a 5 year Govt. bond is a current asset – Salary payable to employees is an expense – Interest on debt taken is an income – Capital stock is an asset – Interest earned on mutual funds is an expense – Stock is a Non current asset 1–24  Match each of the items to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA.” Current assets (CA) Current liabilities (CL) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Stockholders’ equity (SE) Intangible assets (IA) Solution CL Salaries and wages payable LTI Investment in real estate NA Service revenue PPE Equipment CL Interest payable PPE Accumulated depreciation IA Goodwill CA Debt investments (short-term) NA Depreciation expense SE Retained earnings LTL Mortgage payable CL Unearned service revenue (due in 3 years) LO 1  Practice Problem 1 An extract of closing balance of different account heads is given below. Prepare a balance sheet as per Schedule III of the companies Act, 2013. After preparing the Balance sheet, identify the industry to which the company belongs, from the following industries - manufacturing, trading and service. Particulars Mar-14 Particulars Mar-14 Capital work - in - progress 179.18 Other current Liabilities 4349.6 Cash and Cash Equivalents 790.57 Other long term liabilities 371.94 Current investments 1.9 Other non - current assets 174.11 Equity share capital 212.16 Other current assets 579.82 intangible assets 66.09 Reserves and surplus 884.83 intangible assets under development 4.45 Short term borrowings 3518.88 Inventories 1695.14 Short term loans and advances 1273.29 long term Borrowings 2472.19 Short term provisions 188.81 Long term loans and advances 1077.99 Tangible assets 1946.05 Long term provisions 131.45 Trade payables 975.19 Non current investments 4078.99 Trade receivables 1237.47 1–26  Solution 2-1 Balance Sheet as on/at March 2014 Equity and Liabilities Assets Shareholders Fund Non-current Assets Equity Share Capital 212.16 Fixed Assets Reserves and Surplus 884.83 Tangible Assets 1946.05 A 1096.99 Intangible Assets 66.09 Non-current Liabilities Capital Work-In-Progress 179.18 Long Term Borrowings 2472.19 Intangible Assets Under Development 4.45 Other Long Term Liabilities 371.94 2195.77 Long Term Provisions 131.45 Non-Current Investments 4078.99 B 2975.58 Long Term Loans And Advances 1077.99 Current Liabilities Other Non-Current Assets 174.11 Short Term Borrowings 3518.88 X 7526.86 Trade Payables 975.19 Current Assets Other Current Liabilities 4349.60 Current Investments 1.90 Short Term Provisions 188.81 Inventories 1695.14 C 9032.48 Trade Receivables 1237.47 Cash And Cash Equivalents 790.57 Short Term Loans & Advances 1273.29 Other Current Assets 579.82 Y 5578.19 Total (A+B+C) 13105.05 Total (X+Y) 13105.05 1–27  Net Income Net Income is the change in equity that results from the Operations of an entity during an accounting period. – net effect of Revenue, Expenses, Gains and Losses for the period Net Income Net Income is Positive when – (Revenue + Gains) is greater than (Expenses + Losses – This Increases the Equity of the Owners Net Income is Negative when – (Revenue + Gains) is less than (Expenses + Losses) – This Decreases the Equity of the Owners 1–28 Profit & Loss A/c or Income Statement Shows the operating results of the entity during the period. Flow report. Focuses on earnings activities (or operating activities). Assets = Liabilities + Owner(s) Equity…(1)..(from the B/S) Owner(s) Equity = Contributed Capital + Retained Earnings Retained earnings = Revenue – Expenses … (2) From (1) Assets = Liabilities + Contributed Capital + Revenue - Expenses... (3) (2) is referred to as Profit & Loss A/c 1–29  Profit & Loss Account: Single Step Sample format: – INCOME Operating income Non-operating income – EXPENDITURE Manufacturing expenses Administration expenses Selling & distribution expenses Depreciation Interest expenses – Profit before tax (INCOME- EXPENDITURE) Provision for tax – Profit after tax (Profit before tax – Provision for tax) 1–30 Income Statement Single-Step Mytrah Energy 1–34 Infosys 2019 1–35 Nestle India Ltd. 1–36 Multiple Step Income Statement/P&L a/c Revenue or Sales = TOP LINE ITEM Cost Of Goods Sold: The cost the company incurred to purchase and convert material into the finished products sold to customers. Gross Profit / Margin: The difference between revenues and cost of goods sold. Otherwise referred to as gross profit. Operating Expenses: Expenses of an operating nature, such as general, marketing, administrative expenses, incurred in the generation of revenues. Operating Profit / Income: gross margin less operating expenses EBIT/PBIT: Operating income plus other income & Gains minus other expense & Losses. Interest expenses: Debt servicing charges Income Taxes: tax as per books of accounts EAT / PAT: = On the Line Item 1–37  Infosys MULTI-STEP INCOME STATEMENT 1–40 Schedule III Indian Companies Act 2013 1–41 1–42 Asian Paints 1–43 Infosys 1–44  I/S for year ended 31/12/12 Add Other Gains / Nil Sales Revenue 2,050 Losses Less Cost of Goods -987 Interest Revenue 65 Sold Less Loss on -83.5 -18.5 Gross Profit 51.9% 1,063 Disposal Less Operating 885 EBIT 159.5 Expenses Less Interest Expenses -71.0 Administrative Exp 465 EBT 88.5 Selling Exp 420 Less Income Taxes -25.0 Operating Income 178 Net Income 3.1% 63.0 Loss on disposal of plant assets is non-recurring. Without it, NI = 63+83.5=146.5, ==> Net Profit Margin = 7.1% of Sales. Therefore, performance in 2012 is better than that in 2011. Keep Learning !! 1–46