finance club session 2

7/21/2019 Finance Club Session 2

1/27

Finance ClubIIM Ranchi

Workshop for 2014-16 Batch

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2/27

Different Corporate Structures

Role of Financial Statement Analysis

Balance Sheet

Income Statement

Cash Flow Statement

Affects on three Statements due to financial transactions

Todays Agenda


3/27

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

make economic decisions! To ealuate a companys past performance along with

current Financial position to form opinions a"out the a"ility of the company to earn

profits and generate cash flow in the future

For Inestors #$ To decide whether to inest in the company or not

For Analysts #$ To recommend the company to the inestors

For Banks #$ To decide whether to gie credit

For %anagers #$ To assess the companys performance and taking future

decisions

Role of Financial Statement Analysis


4/27

Balance Sheet

Tells the financial condition or financial position of the firm Defined at a point of time Three parts to Balance Sheet #$ Assets& 'ia"ilities and (wners )*uity )ach transaction re*uires dou"le entry so that "oth the sides of the "alance

sheet matches

Assets

The alua"le resources that

a company owns

)+pected to proide future

economic "enefits

Liabilities

("ligations to outside parties

Re*uire outflow in the future

Owners Equity

Residual Interest in the assets

after deducting the lia"ilities

=+

Basic Accounting Equation

Assets = Liabilities + Owners Equity


5/27

Balance Sheet $ Assets

Resources controlled "y the firm which proide future economic "enefits Current and ,on Current Assets

Current Assets

Cash and other assets that will "e conerted into cash or will "e used in year or one

operating cycle& whicheer is greater-resented in the order of the li*uidity. Cash presented first "eing most li*uidReeals information a"out the operating actiities of the firm

Non Current Assets

Assets which cannot "e conerted into cash or used up in one year or one operating

cycle. illi*uid assetsReeals Information a"out the firms inesting actiities


6/27


Cash and Cash )*uialents #$ Cash e*uialents are short term& highly li*uid

inestments that are easily conerted into cash! Reported at fair alue

)+amples #$ Treasury "ills& commercial paper etc!

Accounts Receia"le #$ )conomic resources owed to the firm "y the customers for

goods and serices sold on credit

Inentories #$ Finished goods held for sale to the customers or raw material used for

the manufacture of finished goods! There are three inentory accounts #$ Raw

material& work in process /0I-1 and finished goods inentory! 'IF(& FIF( andweighted aerage method

-repaid )+penses #$ (perating costs paid in adance!

Deferred Ta+ Assets #$ Ta+es paya"le in e+cess of income ta+ e+pense reported in

Income Statement

Current Assets


7/27


-roperty -lant 2 )*uipment #$ Tangi"le Assets used in the production of goods and

serices! Includes land and "uilding& machinery and e*uipment

Financial Assets #$ Includes e*uities& "onds& loans and receia"le gien. 3eld forlong term

Identifia"le Intangi"le Assets #$ ,on$monetary assets that lack physical su"stance!

Can "e ac*uired separately or are the result of rights and priileges coneyed to the

owner! )+amples #$ -atents& Trademarks and Copyrights

,on Identifia"le Intangi"le Assets45oodwill #$ )+cess of purchase price oer the fair

alue of identifia"le assets ac*uired!

Non - Current Assets


8/27

Balance Sheet $ 'ia"ilities

("ligations on the firm to outside parties which re*uire future outflows Current and ,on Current 'ia"ilities

Current Liabilities

("ligations that will "e satisfied within one year or one operating cycleCould "e held primarily for Trading purposes

Non Current Liabilities

'ia"ilities that dont meet the criteria of current lia"ilitiesReeals information a"out the firms long term financing actiities


9/27


Accounts -aya"le #$ Amount the firm owes to suppliers for good or serices

purchased on credit

,otes -aya"le #$ Short term de"t o"ligations and current portion of long term de"t

Accrued 'ia"ilities #$ )+penses that are recogni6ed in the income statement "ut not

yet paid or contractually due! )+amples include wages paya"le& interest paya"le&

ta+es paya"le

7nearned Reenue #$ Cash collected in adance of proiding goods and serices

Current Liabilities


10/27


'ong Term Financial 'ia"ilities #$ Includes "ank loans& notes paya"le& "onds paya"le&

whicheer are not "e paid in one year

Deferred Ta+ 'ia"ilities #$ Arises when income ta+ e+pense is greater than ta+

paya"le

Non Current Liabilities


11/27

Balance Sheet 8 (wners )*uity

Contri"uted Capital #$ It is the amount contri"uted "y the common shareholders

Includes -aid in Capital and Addition -aid in Capital

-referred Stock #$ 3y"rid Security haing rights and priileges different from

Common Stock

,on Controlling Interest #$ It is the minority shareholders pro rata share of the netassets of a su"sidiary that is not fully owned "y the parents

Retained )arnings #$ 7ndistri"uted earnings of the firm that hae not "een paid out

to shareholders as diidends

Accumulated (ther Comprehensie Income #$ All changes in owners e*uity e+ceptfor those recognised in the income statement and transaction with shareholders!

Includes income from foreign currency translation& unrealised gains and losses


12/27

Balance Sheet 8 Contra Accounts

Accumulated Depreciation #$ Contract account to -roperty& -lant and )*uipment

Allowance for Dou"tful Accounts #$ Contra account for accounts receia"le

Treasury Stock #$ Contra account to contri"uted capital

Contra accounts are entries that offset some part of the alue of another account


13/27

Income Statement


14/27

Income Statement


15/27

Income Statement$Depreciation

Depreciation meto!s"#traigt-line# )*ual amount of depreciation e+pense in each year of the asset9s useful life!

S' depreciation e+pense : /cost$Residual alue14useful lifeDeclining balance# Apply a constant rate of depreciation to the declining "ook alue until

"ook alue e*uals residual alue!DDB depreciation : / ;4useful life1 /cost $ accumulated depreciation1


16/27

Income Statement$


17/27

Income Statement$ ,on$Recurring Items

$esults o' !iscontinue! operations are reported "elow income from continuing

operations& net of ta+& from the date the decision to dispose of the operations is made!These results are segregated "ecause they likely are non$recurring and do not affect

future net income!

(nusual or in'requent items are reported "efore ta+ and a"oe income from

continuing operations! An analyst should determine how =unusual= or =infre*uent= these

items really are for the company when estimating future earnings or firm alue!

E&traor!inary items )bot unusual an! in'requent* are reported "elow income from

continuing operations& net of ta+ under 7!S! 5AA-& "ut this treatment is not allowed

under IFRS! )+traordinary items are not e+pected to continue in future periods!

Canges in accounting stan!ar!s

Changes in accounting methods applied& and corrections of accounting errors re*uire

retrospectie restatement of all prior$period financial statements included in the current statement!

A change in an accounting estimate& howeer& is applied prospectiely /to su"se*uent periods1

with no restatement of prior$period results!


18/27

Cash Flow Statements

-roides information "eyond that aaila"le from the incomestatement& which is "ased on accrual& rather than cash& accounting!

ro%i!es "-Information a"out a companys cash receipts and cash payments during an

accounting periodInformation a"out a companys operating& inesting and financing actiitiesAn understanding of the impact of accrual accounting eents on cash flows

(ses"Regular operations generate enough cash to sustain the "usiness)nough cash is generated to pay off e+isting de"ts as they matureThe firm is likely to need additional financing7ne+pected o"ligations can "e metFirm can take adantage of new "usiness opportunities


19/27

Resultin! rom transactions a"ectin! net income

In#ows $ut#owsCash collecte% rom customers Cash pai% toemplo&ees an% suppliersInterest an% %i'i%en%s recei'e% Cash pai% or other

e(penses)ale procee%s rom tra%in! acti'ities *cuisition o tra%in!securities Interest pai% ,a(es pai%

Cash ow from operating activities

Cash ow from Investing activities

Resultin! rom acuisition or %isposal o lon!term assets an%certain in'estments

In#ows $ut#ows)ales procee%s rom f(e% assets *cuisition o f(e%assets)ale procee%s rom %ebt an% euit& *cuisition o %ebt an%euit&

-rincipal recei'e% rom loan ma%e oan ma%e to others to others



20/27

Resultin! rom transactions a"ectin! capital structure

In#ows $ut#ows -rincipal amounts o %ebt issue% -rincipal pai% on %ebt-rocee%s rom issuin! stock -a&ments to reacuirestock

i'i%en%s pai% tosharehol%ers

Cash ow from nancing activities

Eamp!es"

-urchase o buil%in!

Repurchase o common stock

,a(es pai%

i'i%en%s pai%

-ai% o" lon! term borrowin!s

-roft on sale o buil%in!

ebt retire% throu!h issuance o common stock



21/27

0e!innin! Cash 0alance

+ CF$

+ CFF

+ CFI

= 1n%in! Cash 0alance

#irect $etho%



22/27

0e!innin! Cash 0alance

+ 2et income3+/4 osses/ !ains resultin! rom in'estin! an% fnancin! cash #ows3+ /4 2on cash char!es

Increase in operatin! assets+ ecrease in operatin! assets+Increase in operatin! liabilities ecrease in operatin! liabilities

+ CFF

+ CFI

= 1n%in! Cash 0alance

In%irect $etho%



23/27

&ro'!em 1

Item (mt )*+

2et Income 56

epreciation 76

,a(es pai% 86

Interest pai% 6i'i%en%s pai% 9

Cash recei'e% rom sale o compan&buil%in!

5

)ale o preerre% stock ;6

Repurchase o common stock ;

-urchase o machiner& 8

Issuance o bon%s 6

-urchase o lan% throu!h fnancin! 56

-ai% o" lon! term %ebt 96



24/27

&ro'!em 2

Item (mo,nt )*+

2et Income 98

ecrease in accounts recei'able 8

epreciation 86Increase in in'entor& 9

Increase in accounts pa&able 7

ecrease in wa!es pa&able 6

Increase in %eerre% ta( liabilities 96

-roft rom sale o lan% 8



25/27

Identify the following items as Assets& 'ia"ilities& (wners

)*uity& Reenues and )+penses

Accounts Receia"le

Bonds -aya"le

Common Stock

C(5S

Depreciation

Deferred Ta+es

Diidends -aya"le

5ain on Sale of Assets

-repaid )+pense

7nearned Reenue

Allowance for Dou"tful

Account

5ain4'oss from ForeignCurrency Translation

5oodwill


26/27

,. is a #oe ma/ing company establise! on 0r!1uly 23456 lant an!

Equipment !epreciates on straigt line basis in 7 years wit no

resi!ual %alue6 All sares a%e $s 43 'ace %alue6 8ollowing are ne&t

one mont acti%ities

Integration of the three statements

>rd?uly $ -romoter puts Rs ; Cr and gets ; lakhs new shares

>rd

?uly $ Borrows Rs @ lakhs at annual interest >rd?uly $ %achinery worth Rs @! Cr is "ought >rd?uly $ Buys (ffice e*uipment worth Rs ; lakhs th?uly$ Raw material worth Rs > lakhs is "ought /@ ' on credit1 th?uly to >th?uly $ %anufactures > pair of shoes with following

e+penses #$ Rs @ lakhs of raw material is used& )lectricity "ill is Rs ;

lakhs& )mployee salaries are Rs lakhs >th?uly to ;ndAugust $ Sells > pair of shoes at Rs E each with Rs

receied as cash and Rs ; to "e receied "y August end >rdAugust $ Repays ; lakhs of its loan in interest and principal repayment >rdAugust $ GH gies ; of its earnings "ack to promoters as

diidends


27/27

hank.o,

*man 9

>?>;8?)aurabh Bain +>955567977?8>85??;

finance club session 2

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