Comprehensive Guide to Financial Statements: Balance Sheets, P&L, and Ratio Analysis, Study notes of Financial Statement Analysis

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FINANCIAL STATEMENT ANALYSIS

UNIT IV

FINANCIAL MANAGEMENT

BBA 4 Semester

Financial Statements

• Financial statements provide information about the financial activities and position of a firm.
• Important financial statements are:
  • Balance sheet
  • Profit & Loss statement
  • Cash flow statement

Assets

• Assets are economic resources or properties owned by the firm.
• There are two types of assets:
  • Fixed assets
  • Current assets

Current Assets

• Current assets (liquid assets) are those which can be converted into cash within a year in the normal course of business. Current assets include: - Cash - Tradable (marketable) securities - Debtors (account receivables) - Stock of raw material - Work-in-process - Finished goods

Liabilities

• Liability is a firm’s obligation to pay cash or provide goods or services in the future.
• Two types of liabilities are:
  • Current liabilities
  • Long-term liabilities

Current Liabilities

• Current liabilities are payable within a year in the normal course of business.
• They include:
  • Accounts payable (creditors)
  • Outstanding expenses
  • Advances from customers
  • Provision for tax
  • Provision for dividend

Shareholders’ Funds or Equity

• Share capital is owners’ contribution divided into shares.
• A share is a certificate acknowledging the amount of capital contributed by the shareholder.
• Shareholders’ equity has two parts:
  • ( i) paid-up share capital, and
  • (ii) reserves and surplus (retained earnings)— representing undistributed profits.
• Paid-up share capital and reserve and surplus together are called net worth.

Balance Sheet Relationship

• Total assets (TA) equal net fixed assets (NFA) plus current assets (CA): TA = NFA + CA
• Net current assets (NCA) is the difference between current assets (CA) and current liabilities (CL): NCA = CA – CL

Profit & Loss Statement

• Profit & Loss statement provides information about a firm’s: - revenues, - expenses, and - profit or loss.

Nature of Revenues

• Revenue is the amount received or receivable within the accounting period from the sale of the firm’s goods or services.
• Operating revenue is the one that arises from main operations of the firm, and the revenue arising from other activities is called non-operating revenue.

Concepts of Profit

• Gross profit = sales – cost of goods sold (CGS)
  • CGS = raw material consumed + manufacturing expenses of goods that have been sold
• PBDIT = Profit before dep., interest and tax = sales – expenses, except dep., interest and tax
• Operating profit (OP), OP = GP – OEXP – DEP
• PBIT = Profit before interest and tax= PBDIT – DEP
• PBT = Profit before tax = PBIT – Interest
• PAT = Profit after tax = PBT – Tax
• Net operating profit after tax (NOPAT)= PBIT × (1 – Tax rate)

Economic Vs. Accounting Profit

Accounting profit is a result of the arbitrary allocation of expenditures between expenses (revenue expenditure) and assets (capital expenditure).

Economic profit is the net increase in the wealth of the firm, and it is measured in cash flow.

USERS OF FINANCIAL ANALYSIS

• Trade creditors
• Suppliers of long-term debt
• Investors
• Management

TYPES OF FINANCIAL STATEMENT

ANALYSIS

• Short term analysis include Working capital position analysis,
• Liquidity analysis,
• Return analysis,
• Profitability analysis,
• Activity analysis.
• Long term analysis include
• Profitability analysis,
• Capital structure analysis,
• Financial position,
• Future prospects.