Study of Financial
Statements
Module B
Financial Management
CAIIB
Unit 10 Learning Objectives
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Broad Scope and Coverage of
Financial Management
Objective of Financial Management
Increasing Importance of Financial
Management
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Scope
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Designing and Implementing
Business Plans
Ensuring Effective Fund Utilisation
Resource Allocation
Investment decisions
Profit generation
Wealth creation
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Objectives
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Maximise the wealth of the firm
Maximise Shareholder value
Owner-Manager- Employee conflict
Profit Maximisation vs Wealth
Maximisation
Risk and uncertainty
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Important Decisions
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Financing
Investment
Dividend Policy
Current Asset Management
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Unit 11 Capital Expenditure
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Learning Objectives
Capital Expenditure
Phases of Capital Budgeting
Levels of decision making
Facets of Project Analysis
Feasibility Study
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Capital Expenditure- Importance
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Long term Effects
Irreversibility
Substantial outlays
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Capital Expenditure- Difficulties
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Measurement Problems
Uncertainty
Temporal Spread
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Capital Budgeting Phases
Planning
Analysis
Selection
Implementation
Review
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Planning
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Planning is concerned with the
articulation of a broad Investment
Strategy and the generation and
preliminary screening of project
proposals.
The investment Strategy of a firm
delineates the broad areas or types
of investments the firm plans to
undertake.
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Analysis
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A detailed anlaysis of the marketing,
technical, financial, economic and
ecological aspects is undertaken.
At this pint the focus is on gathering
information, preapring and summarising
information about various proposal being
considered for inclusion in the capital
budget.
Based on this the projections may be
made.
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Selection
Criterion
Accept
Reject
Payback Period( PBP)
PBP < target period
PBP > target period
Accounting Rate of Return ( ARR ) ARR > target rate
ARR < target rate
Net Present Value( NPV)
NPV > 0
NPV < 0
Internal Rate of Return ( IRR)
IRR > cost of capital
IRR < cost of capital
Benefit Cost Ratio( BCR)
BCR > 1
BCR < 1
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Implementation
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Stages
Project & Engineering Design
Negotiations and Contracting
Construction
Training
Plant commissioning
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Tools for expeditious
Implementation
1.
2.
3.
4.
Adequate formulation of projects
Responsibility Accounting
Network Techniques
Profit Centre Concepts
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Decision making levels
Operating
Administrative
Strategic
Where is it taken?
Lower Level
Management
Middle Level
Management
Top Level
Management
How structured is
it?
Routine
Semi- structured
Unstructured
Level of Resource
Commitment
Minor Resource
Moderate Resource Major Resource
What is the time
horizon?
Sort term
Medium term
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Long term
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Profitability Analysis
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Market
Technical
Financial
Economic
Ecological
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Key Issues in Project Analysid
Market Analysis
Potential Market & Market Share
Technical Analysis
Technical Viability & Sensible Choices
Financial Analysis
Risk and Return
Economic Analysis
Benefits & Costs in Shadow Prices- Other
Impacts
Ecological Analysis
Environmental Damage & Restoration measures
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Preliminary Work
Idea Generation
Initial Screening
Prima Facie analysis
NO
YES
Feasibility Analysis
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Terminate
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Analysis
Market Analysis
Technical Analysis
Financial Analysis
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Evaluation
Economic & Ecological Analysis
Is it Worthwhile?
NO
YES
Funding Proposal
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Terminate
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Decisions, Return, Risk,
Market Value
Return
Investment
Decisions
Financing
Decisions
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Market Value
Risk
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UNIT 12- Sources of Finance
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Learning Objective
Sources of Finance- Long term &
Short Term
Advantages and Disadvantages
Various Types of Funding
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Sources of Company Finance
Permanent
Sources
Long-term
Sources
Medium –Term
Sources
Short-term
Sources
Share Capital
Redeemable
Preference
Shares
Medium Term
Loans
Cash Credit
Retained Profits
Debentures
Deferred Credit
Overdraft
Bonds
Public Fixed
Deposit
Bills Discounting
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Long term Loans- Working Capital
Indian Rupees
Term Loans
or Foreign
Currency
Loans
Commercial
Paper
Seed Capital
Trade Credit
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Matching Sources to Uses
Types of Capital
Uses
Permanent
Broaden borrowing
Freehold or long term
base/major
property/shares of
financing/takeover
acquired or
/merger
merged company,
Share Capital, retained
profits
Long Term
Financing assets with
long life/Plant &
machinery/Perma
nent Working
capital
Freehold or leasehold
property long
term/Permanent
stock or debtor
requirement
Redeemable
preference
shares/Long term
loans
Medium Term
Fixed assets/working
capital
Vehicles/Plant/fittings,
stock, debtors,
leasing
Medium term
loans/Hire
purchase
Short term
Working
Stock/debtors
Capital/financing
seasonal
fluctuations/expor
t orders/bridging
finance/minor
fixed assets Akila Maheshwari
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Matching Assets
Sources
Cash
credit/overdraft/bi
ll
discounting/LC/E
xport
credit/creditors
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Equity Financing
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Nature
Advantages
Disadvantages
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Retained Profits
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Nature
Advantages
Disadvantages
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Preference Shares
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Nature
Advantages
Disadvantages
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Debentures and Bonds
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Nature
Advantages
Disadvantages
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Term loans
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Nature
Advantages
Disadvantages
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Term Loans
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Maturity
Security
Repayment
Interest Rate
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Seed Capital
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Venture Capital
Seed Capital Assistance Schemes of
IDBI
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Medium Term Sources
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Loans
Deferred Credit Bill Discounting
Scheme of IDBI
Fixed Deposits
Working Capital Term Loan
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Short Term Sources
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Bank loans
Trade Credit
Cash Credit and Overdraft
Bill discounting
Commercial Paper
Lease
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Cost of Capital
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Minimum return
Weighted average cost of projected
sources of finance
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Unit 13 Financial Statements
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Learning Objectives
Understand the meaning of Financial
Statements
Uses of Financial Statements for
decision making
Financial Analysis
Interpretation of Statements
Meaning of Fund Flows
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Key Financial Statements
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Balance Sheet
Profit & Loss or Income Statement
Sources & Uses of Funds Statement
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Balance Sheet
Liabilities
Assets
Share Capital
Fixed Assets
Reserves and Surplus
Investments
Secured Loans
Current Assets, Loans and Advances
Unsecured Loans
Current Assets
Current Liabilities and Provisions
Loans and Advances
Current Liabilities
Miscellaneous expenditures
Provisions
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Balance Sheet
1. Sources of Funds
1. Shareholder’s Funds
a. Share Capital
b. Reserves and Surplus
2. Loan Funds
a. Secured Loans
b. Unsecured Loans
II. Application of Funds
1. Fixed Assets
2. Investments
3. Current Assets Loans and Advances
Less Current Liabilities and Provisions
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4. Miscellaneous Expenditure
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Income Statement
Revenue
Commission actually Received
230000.00
Less Expenses
Cost of Goods Sold
Inventory expenses for the year
2950.00
Depreciation/General
Admin/Selling
4000.00
Gross Profit
S,G & A Overhead
Total Expenses
Profit Before Interest and
Taxes
Less Interest
Interest on loan
Other Income/Loss
10000.00
0.00
Profit Before Tax
Tax@30%
Net Profit- Bottomline
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Balance Sheet-Financial
Management
Balance Sheet Items
Finance Topics
Share Capital/Reserves and
Surplus/Loans/Debentures
Capital Structure and Cost of Capital
Loans and Advances/Current
Working Capital Financing Policy
Liabilities/Trade Credit/Provisions
Fixed Assets( Net) Gross Block-less
depreciation
Capital Budgeting
Investments
Security Analysis
Current assets, loans and advances,
cash and bank
Working Capital mgt/cash
management
Receivables
Credit Management
Inventories
Inventory Management
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Income Statement- Financial
Management
Income Statement Item
Finance Topic
Net Sales
Revenue Risk
Cost of Goods Sold- Stocks/ Wages and
Salaries/other manufacturing Expenses
Gross Profit
Gross Profit Margin
Operating Expenses- SGA/Depreciation
Depreciation Policy
Operating Profit- non operating
surplus/deficit- EBIT
Business Risk
Interest
Financial Risk
Profit Before Tax
Tax
Tax Planning
Profit After Tax
Return on Equity
Dividends
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Retained Earnings
Dividend Policy
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Funds Flow Statement- Working
Capital Basis
Operations
Dividend Payment
Issue of Share Capital
Repayment of long
term borrowing
Working
Capital Pool
Long Term Borrowing
Purchase of
non current assets
Sale of non current assets
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Funds Flow- (WC basis)
Sources of Working Capital
Uses of Working Capital
Operations
Dividends
Profit after tax
Purchase of Fixed assets
Depreciation
Repayment of term loan
Issue of Share Capital
Total working capital used
Long term borrowings
Sale of fixed assets
Total working Capital generated
Net change in working capital
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Funds Flow- Cash Flow Statement
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Sources of Cash
Operations
Net Income
Depreciation
Issue of Share Capital
Long term borrowings
Sale of non current liabilities
Decrease in current assets other than cash
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Funds Flow Statement- Cash Flow
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Uses of Cash
Payment of Dividends
Purchase of non current assets
Repayment of long term borrowings
Decrease in current liabilities
Increases in current assets other
than cash
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Financial Statement Analysis
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Assessment of Past Performance and
current Position
Protection of Net Income and growth
prospects
Prediction of Bankruptcy and failure
Loan decisions by FIs and banks
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Techniques
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Horizontal analysis
Vertical Analysis
Trend Analysis
Ratio Analysis
Common size Analysis
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Focus of Financial Statements
Analysis
1.
2.
3.
4.
5.
Liquidity or short term solvency
anlysis
Profitability Analysis
Capital Structure or gearing
analysis
Market strength or Investor analysis
Growth and stability analysis
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Projected Statements
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Projected Balance Sheet
Projected Income Statements
Projected cash flows
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Thanks You
Indian Institute of Banking and
Finance
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