• CAIIB - Financial Management
• Module B – Study of Financial
Statements
• - Balance Sheet Analysis
• M. Syed Kunmir
BALANCE SHEET ANALYSIS
• Sources of Funds
1) Capital
2) Reserves & Surplus
3) Term Liabilities
4) Current Liabilities
BALANCE SHEET ANALYSIS
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Uses of Funds
1) Fixed Assets
2) Intangible Asets
3) Non Current Assets
4) Current Assets
BALANCE SHEET ANALYSIS
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Capital
1) Authorised Capital
2) Issued Capital
3) Subscribed Capital
4) Paid-up Capital
BALANCE SHEET ANALYSIS
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Reserves
1) Subsidy Received From The Govt
2) Development Rebate reserve
3) Revaluation of fixed assets
4) Issue of Shares at Premium
5) General Reserves
Surplus
The credit balance in profit and loss account
BALANCE SHEET ANALYSIS
• Tangible Net Worth
• This refers to the total funds arrived by paidup capital , Reserves and P&L Surplus
• Less
• Intagible Assets
BALANCE SHEET ANALYSIS
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Term Liabilities
Redeemable preference shares
Debentures
Deferred payment gaurantees
Public Deposits(Repayable after 12 months)
Term loans and unsecured loans from friens,
relatives,directors repayable over a period of time
• Remark : The company can raise public deposits
to the extent of 25% of paid up capital plus free
reserves and 10% from share holders for the
maturity period ranging from 6 months to 3 yrs
BALANCE SHEET ANALYSIS
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Current Liabilities
Working capital bank borrowings
T.loans deferred credit inst falling due in 12 mths
public deposits maturing within 12 months
unsecured loans, unless the repayment is on
deferred terms
sundry creditors
advances from dealers and customers
interest accrued but not paid
tax provisions
Dividend declared and payable
BALANCE SHEET ANALYSIS
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Contingent Liabilities
Tax disputes
Legal litigations
Bills and cheques discounted with banks
Claims against the company not acknowledged
BALANCE SHEET ANALYSIS
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Fixed Assets
Infrastructure like land & building
plant & machinery
Vehicles
Furniture & fixtures
Depreciation
Straight line method
Written down Value Method
Remark : Dep added to profit to arrive repayment
obligation especially in term loans
BALANCE SHEET ANALYSIS
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Investments
1) Shares And Securities
2) Associate Companies
3) Fixed deposits with banks/finance companies
Remark : While analysing bal sheet we can
analyse necessity of such investments
• Remark : While fixed deposits with banks are
considered as fixed assets, the investmetns in
associate concerns are treated as non current
assets.
BALANCE SHEET ANALYSIS
• Non Current Assets
• Deferred recievables/Overdue recievables(like
disputed amounts and Over Due > 6 mths)
• Non moving stocks/inventory/un usable spares
• Investment/Lending to associate concern
• Borrowing of the directors from the company
• Telephone deposits/ ST deposits etc
BALANCE SHEET ANALYSIS
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Intangible Assets
Preliminary & Preoperative expenses
Deferred Revenue Expenditure
Goodwill
Trade mark
Patents
Rem : The o/s balance to be written off every year
by charging P&L account
BALANCE SHEET ANALYSIS
• Current Assets
• Raw materials, work-in-progress,finished
goods,spares and consumables
• Sundry debtors and recievables < 6 mths
• Advances paid to suppliers of raw materials
• Cash and bank balances
• Interest recievables
• Other current assets such as Government
securities, Bank deposits ..etc
BALANCE SHEET ANALYSIS
• Notes
• All expenses or provisions or advances or loans
etc which are accrued and payable within 12
months are current liablities
• When a company makes investments in
unconnected avenues such as shares, securites,
associate concerns are to be treated as non cur ast
• The slow moving and absolete inventory - NCA
BALANCE SHEET ANALYSIS
• Notes
• Bal Sh Analy not only to be quantitative but to be
qualitative
• It is the fin pos on a part date. Min three years bal
sh ana would be more meaningful
• It is a mixture of facts, opinions and conventions
• While opinions are of the company’s management,
the conventions are practiced by the finance
managers of the company.
• ( ex Over due recievable > 6 mths as NCA is a
acccounting convention
BALANCE SHEET ANALYSIS
• Notes
• The valuation of the stock is done as per the
opinion of the management
• Depreciation method may be changed to boost
profit
• It may be silent on key personnel and staff turnover
• Marginal changes in the classification of certain
items would lead to different results.
BALANCE SHEET ANALYSIS
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Notes
Management competence
Investment decision
Resorting to window dressing
experience of the promoters
Board comprises of only family members
The key personnel of the company
The structure of the organisation
The authority and decision making are
decentralised
BALANCE SHEET ANALYSIS
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Notes
The state of industrial relations
Financial systems and procedures
management control
planning, budgeting, forecasting
capacity utilisation
status of the technology
awareness of the market, competitions ..etc
for listed co: share prices, EPS, book value,
dividend record, public response ..etc
Profit & Loss Account
• It is a summary of revenue earned and
expenses incurred which ultimately results in
profit or loss of to the company
• No defined format in law
• Operating revenue = Sales revenue
• Non_operating revenue = Other income ( out of
sale of investments, interest, commission and
discount etc)
• Hence operating profit is a yard stick for
operating profit of the company
• Operating profit = Sales Revenue- Operating Cost
Profit & Loss Account
• Gross Sales
• Gross sales includes excise duty to be charged to
the customer, central sales tax applicable, state
sales tax applicable, the discount o be allowed to
distributors/dealers/customers. The gross sales
appears in the P&L account comprises of all the
above part from the basic unit price.
• Net Sales
• The sales figure excluding all the factors
explained above are the net sales.
Profit & Loss Account
• Cost of production
• This is the cost incurred right from the procurement
of raw material to the finished good.
• For ex in a garment firm following cost is incurred
while production
• 1) cost of raw material cloth, buttons, canvas, hooks,
zips etc
• 2) Maintenace of sewing machines
• 3) payment of wages to workers
• 4) power
• 5) washing, ironing,packing etc.
• Cost of Prod exclu selling & admn exp & int cost
Profit & Loss Account
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Selling And General Administarative Expenses
Maintaining office staff for admn & acctg
marketing effort
payment of salaries/Tr All to marktg personnel
All the expenses which are not directly connected to
manufacturing are classifed as selling and/or general
expenses
Profit & Loss Account
• Cost of goods sold
• Cost of goods sold includes all manufacturing
expenses and the adjustments for opening and
closing stock
• Cost of Goods sold = Opening stock + Purchases +
Manufacturing expenses - Closing stock
• Gross Profit is arrived deducting figure of cost of
goods sold from the sales figure
• ie Gross profit = Sales - Cost of goods sold.
Profit & Loss Account
• Operating Profit is arrived deducting selling,
administrative and general expenses , provision for
bad debts, interest and miscellaneous expenses from
the gross profit.
• ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad
debt + mis exp )
• Profit Before Tax When other income is added and
other expenses are deducted from the operating
profit we get profit before Tax
• ie PBT = Op Profit + oth Inc - oth exp
• Net Profit When provision for taxes is deducted
from the Profit Before Tax we get Net profit
• ie Net Profit = PBT - taxes
Profit & Loss Account
• Non Operating Income/Expenses
• The income earned by the unit from other than
manufacturing and seling operations is classified under
this head . i.e
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a) Interest earned on fixed deposits
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b) Dividends and profit earned by sale of assets
and share.
• All those expenses which are not directly connected
with operations of the unit are classified under this
head. i.e
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a) Preliminary expenses written off
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b) Loss suffered due to sale of assets & share