how to read a financial statement - an overview
TRANSCRIPT
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How to read a
FINANCIAL STATEMENTan Overview
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Associates, Investors, Customers and Society / External entities
Raise the 2 Questions!
How well the
organization is performing?
Where does the
organization stand?
Where do you find these Answers!
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Financial Statement and InvestorFact Sheet
Income Statement, Balance Sheet, Cash Flow
Statement, significant accounting policies,notes & schedules to accounts are collectively
known as Financial Statements. Most of the
companies share the critical data points in the
form of a Fact Sheet to the investors
IncomeStatement
Balance Sheet
Cash flow
Statement Investor
Fact sheet
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What isan Income Statement ?
Theincomestatement reports thecompanys
revenues,expenses,and net incomeornet loss for theperiod
Profits (orearningsorincome)are the
excessofrevenuesoverexpenses.
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Structureofa Income Statement
P/L Items
A Revenue
B Expenditure
- Compensation & Benefits
- Selling , General & Admn. Exps. ( SG&A)
C=A-B EBITDA ( Earnings before Interest, Tax, Depreciation & Amortization)
D Depreciation & Amortization
E=C-D EBIT ( Earnings before Interest and Tax)
F Financial Expenses (Interest)
G Other Income
H=E-F+G EBT/PBT ( Earnings before Tax)
J Tax
K=H-J PAT ( Profit after Tax)
L Dividends
M=K-L Retained Earnings
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What isa Balance Sheet?
Threecomponentsof balancesheet
1. Shareholders funds(i.e. what the
owners of the entity own)
Share Capital
Reserve & Surplus
2. Liability (i.e. what the entity owes)
3. Assets (i.e. what the entity owns)
In simple terms a balance sheet
may be defined as a sheet
of balances
It is the snapshot of the financial
status of an organization ata point in time
Assets =
Liabilities +
Stockholders Equity
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Fixed assets
Those assets which the company expects to hold longer than a year
Land & Building, Plant & Machinery
Current assetsThose assets which the company expects to convert to cash, sell, orconsume during the next 12 months or within the business's normaloperating cycle if longer than a year
Cash, Accounts receivable, Merchandise inventory, Prepaid expenses
Good will & intangibleassets
These are not in physical form
Trade Marks, Patents , Good Will etc.,
Assets
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Equity
The amount invested in the corporation by its owners , comprised
basically of common stock and the retained earnings.
A Current LiabilitiesDebts payable within one year or within the businesss normal operating
cycle if longer than a year
Bonds payable (short term ), Accounts payable, Accrued expenses
payable, Income taxes payable
Borrowings / Long Term Liabilities
Debts not payable within one year or within the businesss normal
operating cycle if longer than a year
Secured Term Loans, Bonds payable, etc.,
Liabilities
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What is the Structureofa Balance Sheet
Account Form : LIABILITIES = ASSETS
Report Form : SOURCES OF FUNDS = APPLICATION OF FUNDS
Sourcesof Funds (or) Liabilities
Equity
Share Capital
Reserves & Surplus
Borrowings:
SecuredLoans
Unsecured Loans
Current Liabilities & Provisions
Applicationof Funds (or) Assets
Fixed Assets (Gross less
depreciation)
Investments
Current Assets
Inventory
Receivables
Loans & Advances
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What is theperiod ofreference?
Balance Sheet
March 31
2009
Balance Sheet
March 31
2009
Balance Sheet
March 31
2010
Balance Sheet
March 31
2010
Balance Sheet
June 30
2010
Balance Sheet
June 30
2010
IncomeStatementforFY 2010
IncomeStatement
forQ1/FY2011
Time Time
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What isa Cash flow Statement?
It reports Companyscash inflowsand outflowsunder3 heads
FROM OPERATING ACTIVITIES
Cash flows from the core operations of the
company
FROM INVESTINGACTIVITIES
Cash flows from the investing activities, namely
purchase/sale of assets, investments, etc.
FROM FINANCING ACTIVITIES
Fresh issue of capital, debentures, or redemptionof pref. capital/debentures or fresh
borrowings/redemption, etc.
This Statement
shows the
effectivenessof theCash Deployment
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A typical Cash Flow Cycle forOperating Activities
CUSTOMERS
Collection
Services /
Products
Out
YOUR
BUSINESS VENDORS/EMPLOYEES
Pymt.
Services /
Products
In
Money In Money Out
Anoperationisconsidered efficient ifit generatecash surplus.
Investingactivities demonstrateefficient deployment of thecash surplus.
Financingactivities demonstrate thesourceof borrowing to fund the deficit.
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P/L & PL Metricsof Competition
Cost ofRevenue / Direct Cost
Simpleobservation Better GM % in case of TCS/Infosys/CTS could be attributed to :
Higher price realization
Optimal direct cost spend or right resource mix and utilization
Non-linear engagement , optimal FB projects , entry into niche consulting
SG&A is in the range of 10 14% ; while TCS and CTS are out of range, CTS could be
attributed to high cost resources deployed in S&M to win more business
Wipro-IT services and Product business has been picked from segmental reports. Other expenses & taxes are allocated based on revenue ( assumption made for meaning comparison)
Selling & Genl. Admn.cost
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P/L & P/L Metricsof Mahindra Satyam forFY10
When we have more detailed P/L we can identify areas for improvement.
However at Project /Customer Level one does have a P/L upto EBDITA level, so we should focus on the same
to improve it at dis-aggregate level
Note: Due to the restatement efforts, there are certain exceptional items in the financial statements.
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Headsin Profit & Loss Account
1) Provision for Contingencies: A company can anticipate various claims which
may not be determinable with certainty; hence estimation may be made for
such contingences.
2) Provision forDiminution in the value of investments: A company can assess
the value of its investments in its subsidiaries or other entities. Suchvaluation is done by an external entity and based on their recommendation,
a provision for loss in the value of investments will be made.
3) Prior Period Adjustments: If a company identifies significant transactions
which pertain to earlier accounting period, all such amounts are required to
be disclosed as prior period adjustments. While in the case of US GAAP,companies are required to restate the financials in respective years. Under
Indian GAAP, they need to be disclosed as prior period adjustments in the
year in which they are identified. In the case of Msat, the Honourable
Company Law Board, has given orders to account for such earlier year
transactions as prior period adjustments
Income Statement: The Bottom Line fora Corporation
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Income Statement: The Bottom Line for a Corporation
Various Items that appearin the NotesorFinancial Statements
1) Provision for Doubtful Debts: If the company doubts realization of any
receivables from customers, it is required to identify such amounts and make
a provision. If they are finally proved to be not recoverable we need to write
off such receivables. However due to regulatory requirements, we can write
off such debts only after receiving approval from RBI.
2) Percentage Completion Method: Any fixed price project executed by the
company should be evaluated for progress in performance. Revenue for
such contracts can be recognized only to the extent of the progress certified.
This exercise is required to be done on a monthly basis, so as to recognize
revenue correctly at the end of every month.
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Income Statement: The Bottom Line for a Corporation
Various Items that appearin the NotesorFinancial Statements
3) Multiple Deliverables: A contract may have multiple commercial/delivery terms
peculiar to such contract e.g. the contract may have a non returnable clause, higher
warranty than usual warranty given, discounts or service credits with varying
conditions, supply of hardware and software either as a sale or in the nature of
deferred payment etc., such peculiarities need to be addressed as per the applicable
accounting standards under Indian GAAP and US GAAP.
4) Unbilled Revenue: Services delivered but not yet invoiced is called unbilled revenue,
it may be pertaining to T&M, efforts delivered but not yet invoiced or partly executed
fixed price contract. They are required to be recognized in the period when the
service is delivered.
5) Unearned Revenue Adjustments: If we raise invoices on customer without deliveringefforts or without confirming the hours in Ontime and push to IMS for invoicing, we
raise advance invoices and will be treated as unearned. Revenue can be recognized
in such cases only when efforts are confirmed in the system and pushed for invoicing.
Till such time, the revenue cannot be recognized by the company.
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Latest Balancesheet of Competition a comparison
One key input which we
all influence outside of
profitability in the balance
sheet is the Accounts
Receivables.
A quick snapshot of the
same clearly indicates our
unbilled at max. should be
in the range of 15 days
and at max DSO shouldbe below 80 days.
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mahindrasatyam.com
Safe Harbor
This document contains forward-looking statements within the meaning of section 27A of Securities Act of 1933, as amended, and
section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to dif fer materially from those reflected in the forward-lookingstatements. We undertake no duty to update any forward-looking statements. For a discussion of the risks associated with our
business, please see the discussions under the heading Risk Factors in our report on Form 6-K concerning the quarter ended
September30, 2008, furnished to the Securities and Exchange Commission on 07 November, 2008, and the other reports filed with
the Securities and Exchange Commission from time to time. These filings are available at http://www.sec.gov
Thank you