Corporate Financial Statement1724778772.pdf

INTRODUCTION TO CORPORATE FINANCIAL STATEMENTS Mittal Bhansali 1 1. USERS OF FINANCIAL STATEMENTS Creditors They wish to know the recoverability of their dues. Owners To provide necessary information to the owners relating to their busin...

INTRODUCTION TO CORPORATE FINANCIAL STATEMENTS Mittal Bhansali 1 1. USERS OF FINANCIAL STATEMENTS Creditors They wish to know the recoverability of their dues. Owners To provide necessary information to the owners relating to their business. For eg: The shareholders are interested in the accounting information with a view to ascertaining the profitability and financial strength of the company. Management They wish to assess how well their decisions have transformed into useful outputs and how far have they been able to achieve the targeted results Government The authorities pay heed to the figures of revenue in a financial statement so that they can calculate taxes correctly Employees They wish to create demand for an extra bonus, based on the revenue earned by a firm and judge the reasonableness of their pay. Mittal Bhansali 2 2. BALANCE SHEET It shows a statement of financial position, the entity’s assets, liabilities, and stockholders’ equity as on the report date. However, it does not show information that covers a span of time as it shows figures of assets and liabilities on a particular date. As per Schedule III, the balance sheet can be prepared only in vertical form. In short, it is what a company owns, what it owes, and what is left over. Mittal Bhansali 3 The Balance Sheet adheres to the following accounting equation, where assets on one side, and liabilities plus shareholders' equity on the other, eventually balances out. This formula is instinctively: a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholders' equity). Mittal Bhansali 4 PART I – Form of BALANCE SHEET Name of the Company______________ Balance Sheet as at _______________ (Rupees in______) Particulars Note No. Figures as at the end of Figures as at the end of the current reporting period previous reporting period 1 2 3 4 I. EQUITY AND LIABILITIES (1) Shareholders’ funds (a) Share capital (b) Reserves and surplus (c) Money received against share warrants (2) Share application money pending allotment (3) Non-current liabilities (a) Long-term borrowings (b) Deferred tax liabilities (Net) (c) Other Long term liabilities (d) Long-term provisions (4) Current liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions TOTAL Mittal Bhansali 5 II. ASSETS Non-current assets (1) (a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long-term loans and advances (e) Other non-current assets (2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f ) Other current assets TOTAL Mittal Bhansali 6 SHAREHOLDER’S FUNDS Net Worth is also known as Shareholders Funds. It means the excess of book value if the assets (other than fictitious assets) of an enterprise over its liabilities. Net worth is the same as Owners Fund or Proprietors Funds. - Share Capital (ESC, PSC) - Drawings - Reserves (Capital Reserves, - Accumulated losses Revenue Reserves, Funds) (eg: P&L A/c Dr. Balance) - Net Profit - Fictitious Assets (Misc Expenditure not written off eg: Share issue expenses, Discount on issue of shares/debentures) Mittal Bhansali 7 NON CURRENT LIABILITIES Long term Loans Other Long Term Liabilities Debentures Trade Deposits Bonds Security Deposits Loan From banks Secured Provision for Employee Loan from Financial Benefits Institutions Public deposits Unsecured Mittal Bhansali 8 CURRENT LIABILITIES Current liabilities are those that are due within one year and are listed in order of their due date. Trade Payable Other Current Liabilities Short Term Provisions Sundry Creditors Income recd in Provision for employee Bills Payable Advance benefits Income accrued but Provision for Income not due on borrowings tax Income accrued but due on borrowings Unpaid Dividend Calls in advance Taxes Payable Mittal Bhansali 9 NON CURRENT ASSETS TANGIBLE ASSETS INTANGIBLE ASSETS Tangible means that which can be ‘touched’. They are Intangible assets means something which cannot be shown at net cost i.e. cost less depreciation. seen (or ’touched’) but do earn income for the Eg: Land, Building, Machinery, Vehicle, Livestock, Plant concern. & Machinery, Furniture & Fittings Eg: Goodwill, Trademark, Patents, Copyrights (a) Fixed Assets CAPITAL WORK-IN-PROGRESS INTANGIBLE ASSETS Capital Assets which are under construction or UNDER DEVELOPMENT completion. It is valued at cost incurred till date An intangible asset which is being created or formulated. Mittal Bhansali 10 (b) Non - current Investments Long term or trade investments are those investments which are intended to be held for long term or those which are held in the normal course of business. Long-term investments are securities that will not or cannot be liquidated in the next year. Investment in Equity instruments / Investment in Investment in Preference Shares Government Property Securities Investment in Bonds Investment in / Debentures Mutual Funds Mittal Bhansali 11 (c) Deferred Tax Assets A deferred tax asset is an asset to the Company that usually arises when either the Company has overpaid taxes or paid advance tax. Such taxes are recorded as an asset on the balance sheet and are eventually paid back to the Company or deducted from future taxes. Book Profit is Creates Pay more tax Pay less tax in less than Deferred tax now future Taxable profits Asses (DTA) Mittal Bhansali 12 (d) Long-term Loans & Advances Other loans & advances not Loans & Advances expected to be Capital Advances Security Deposits to related parties realized in 12 (AS 18) months whichever is longer Mittal Bhansali 13 CURRENT ASSETS Current Assets means those assets which move through the operating cycle of the business viz through the stages of purchase of raw materials (Stock), production of finished goods (stock), sale of goods (cash/debtors), realisation of debtors (Cash) and so on. Stock / Debtors Cash and Bank Inventory (Gross amt – Provision for (Cash on hand, bank (RM, WIP, FG) bad and doubtful debts) balance, cash equivalents) Marketable Other Current Loans & Investments Assets Advances given (Temporary Investments made (Interest accrued on invst., Bills of exchange, Pre-paid expenses, out of surplus funds) advance tax paid) Mittal Bhansali 14 3. CONTINGENT LIABILITIES (To the extent not provided for) A contingent liability is defined as a liability which may arise depending on the outcome of a specific event. It is a possible obligation which may or may not arise depending on how a future event unfolds. A contingent liability is recorded when it can be estimated, else it should be disclosed as notes to accounts after the balance sheet. It is sub-classified as: Claims against company not acknowledged as debts, Guarantees, other money for which the company is contingently liable. For eg: Potential lawsuits, dividend declared after the date of balance sheet. Mittal Bhansali 15 3. DIFFERENCE BETWEEN OWN FUNDS & OWED FUNDS SR. NO. OWN FUNDS OWED FUNDS 1. Internal source of finance External source of finance 2. Represents claims of owners on assets of Represents claims of outsiders on assets of the concern. the concern. 3. Capital earns dividends Loans earn interest 4. Dividends are paid out of profits and the Interest is charged against profits at a fixed rate may vary. rate. 5. In liquidation, own funds are returned In liquidation, owed funds are repaid before last. capital. 6. Own funds are not ‘secured’ by charge on Loans may be secured by charge on fixed or assets. current assets. Mittal Bhansali 16 4. Profit & Loss Account Think of the Income Statement as a report card for your business. It is issued from time to time and gives an overview of how you are doing. A P&L statement, often referred to as the “Income Statement”, is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period of time, usually a whole year or quarter. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both. Companies have to prepare the Profit & Loss Account as per Schedule III of Companies Act, 2013. Mittal Bhansali 17  Part II – Statement of PROFIT & LOSS Name of the Company______________ Profit & Loss Statement for the year ended _______________ (Rupees in______) Particulars Note No. Figures as at the end Figures as at the end of current reporting of the previous period reporting period 1 2 3 4 I Revenue from operations xxx xxx II Other income xxx xxx III Total Revenue (I + II) xxx xxx IV Expenses: Cost of materials consumed xxx xxx Purchases of Stock-in-Trade Changes in inventories of finished goods / xxx xxx work-in-progress / Stock-in-Trade Employee benefits expense xxx xxx Finance costs Depreciation and amortization expense Other expenses xxx xxx Total expenses V Profit before exceptional and extraordinary xxx xxx items and tax (III - IV) Mittal Bhansali 18 VI Exceptional items xxx xxx VII Profit before extraordinary items and tax (V - xxx xxx VI) VIII Extraordinary items xxx xxx IX Profit before tax (VII- VIII) xxx xxx X Tax expense: (1) Current tax xxx xxx (2) Deferred tax xxx xxx XI Profit /(Loss) for the period from continuing xxx xxx operations (VII-VIII) XII Profit/(loss) from discontinuing operations xxx xxx XIII Tax expense of discontinuing operations xxx xxx XIV Profit/(loss) from Discontinuing operations xxx xxx (after tax) (XII-XIII) XV Profit /(Loss) for the period (XI + XIV) xxx xxx XVI Earnings per equity share: (1) Basic xxx xxx (2) Diluted xxx xxx Mittal Bhansali 19 I Revenue from Operations (A) In respect of a company other than a finance company revenue from operation include - Sale of products - Excise Duty - Sale of Services - Other Operating Revenues (B) In respect of a finance company revenue from operations shall include: (a) Interest; and (b) Other financial services. Mittal Bhansali 20 II Other Income Interest Income (in case of a company other than a Dividend Income finance company) Other non-operating income Net gain on sale of investments (net of expenses directly attributable to such income) Mittal Bhansali 21 IV EXPENSES Employee Benefit Expense Leave Salaries Wages Bonus Encashment Employee Employee Contribution to Gratuity Stock Option Stock Purchase Provident Fund Scheme (ESOP) Plan (ESPP) Mittal Bhansali 22 Finance Cost Finance Cost are cost to raise finance. Simply saying, when you borrow money you raise finance and hence the interest you pay on your borrowings and the other associated costs to it is your finance cost. Other Borrowing Gain / Loss on foreign Interest Expense Costs currency transactions Any other foreign exchange Interest on Commitment gain / loss should be shown borrowing from Charges separately under banks and other Loan Processing appropriate head. financial institutions Charges Interest on Bonds Guarantee Charges Interest on Loan Facilitation Debentures Charges Mittal Bhansali 23 Depreciation and Amortization Expense Sr. No. PARTICULARS DEPRECIATION AMORTISATION 1. Definition It refers to the reduction in the cost It refers to the reduction in the cost of the of the tangible fixed assets over its intangible assets over its lifespan. lifespan which is proportionate to the use of the asset in that specific year. 2. Formula Annual Depreciation = Annual Amortization = (Cost of Tangible Asset - Salvage (Cost of Intangible Asset)/Useful Life Value)/Useful Life 3. Applicability Depreciation is applicable to only Amortization is applicable to only intangible tangible assets such as Plant, assets such as patents, trademarks, Machine, Equipment, Building etc. 4. Method of Either Straight Line Method (SLM) or Mostly Straight Line Method is used for Implementation Written Down Value method can be amortization of Intangible Assets. used for depreciation of Tangible Assets. 24 Mittal Bhansali Other Expenses Expenditure on each of the following items is required to be shown separately. Consumption of stores and spare Power and Fuel Rent Repairs to building parts Repairs to machinery Insurance Rates and taxes Any item of expenditure which exceeds 1% of the Corporate Social Net loss on sale of revenue from operation Responsibility or Rs. 1,00,000, investments Expense u/s 135 whichever is higher. Mittal Bhansali 25 Payment to Auditors (MR. ATC) As Auditor Details of Payment For Taxation to Auditors Matters For Company Law Matters For Management Services For Reimbursement of Expenses Mittal Bhansali 26 VI Exceptional Items Schedule III requires separate disclosure of exceptional items on the face of the Statement. As per general instructions, the term will have to be assigned the following meaning as per AS5, Net profit or Loss for the period, Prior Period Items and Changed in Accounting Policies. When items of income and expenditure within profit or loss from ordinary activities are such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. For example: Disposal of items of fixed assets, Litigation Settlement, Abnormal losses on long term contract. Mittal Bhansali 27 VIII Extraordinary Items The Schedule III requires ‘extraordinary items’ to be distinguished from ,exceptional items’ and shown separately on the face of the statement of profit and loss. Extraordinary items consisted of gains or losses from events that were unusual and infrequent in nature Such items are rare. For example: Loss due to earthquake, Discontinuance of business segment, Profit from Insurance Claim. Mittal Bhansali 28 XI Discontinuing Operation Discontinuing, Gradual or even if relatively evolutionary abrupt, several phasing out of a products within product line or an ongoing line of class of service. business. Shifting of some production or Closing of a marketing facility to achieve activities for a productivity particular line of improvements or business from other cost one location to savings. another. Mittal Bhansali 29 XVI Earnings Per Share Earnings per share can be defined as that share of a company’s profit that is distributed to each share of stocks. Further, it is considered to be a significant financial parameter as it helps to gauge a company’s financial health. NUMBER TOTAL OF EPS EARNINGS SHARES WHY IMPORTANT How much the company is EPS is helpful to calculate Good amount of profit will earning. the market price of a share. directly impact dividend From EPS you can know the To find market price we Higher EPS means company and shareholders will be growth rate of company in have to multiply EPS with is earning more and vice happy to get more terms of profit. PE Ratio. High EPS means versa. dividend. high Market Price. Mittal Bhansali 30