This document provides an overview of analyzing financial statements. It covers legal forms of business, basic accounting principles, components of financial statements like the balance sheet, income statement, and cash flow statement. It discusses understanding key elements of these statements like assets, liabilities, equity, revenue and expenses. It also describes ways to decipher financial information through ratio analysis, cash flow analysis and notes to the accounts. Examples are provided on how to evaluate companies for investment and analyze changes in income statement accounts over time.

1. Analysis of
financial
statements
CA. Dhruv Seth
FCA, DISA (ICAI)
ds@sethspro.com

2. Coverage of the presentation
• Legal forms of business
• Basic principles of accounting
• Components of financial statements
• Understanding the key elements
• Deciphering the numbers
• Illustrations

3. Legal Forms of
business

4. Legal forms of business
• Proprietorship / HUF
• Partnership Firms
• Limited Liability partnerships (LLP)
• Companies Incorporated
– Private Limited
– Public Limited
• Societies / Trusts

5. Basic principles
of accounting

6. Basic principles of accounting
• Accrual
• Matching
• Consistency
• Going Concern
• Disclosure
– Prudence
– Materiality
– Substance over form

7. Components of
financial
statements

8. Components of Audited FS
• Balance Sheet
• Profit and Loss
• Cash Flow
• Accounting Policies
• Notes to Accounts
• Board Reports
• Auditors Reports
• Auditors report on CARO

9. Legal Format and
Understanding Key
elements

10. Sch III to Companies Act, 2013
I. EQUITY AND LIABILITIES
AMOUNT
(1) Shareholders’ funds
(a) Share capital xxxx.xx
(b) Reserves and surplus xxxx.xx
(c) Money received against share warrants xxxx.xx
(2) Share application money pending allotment xxxx.xx
(3) Non-current liabilities
(a) Long-term borrowings xxxx.xx
(b) Deferred tax liabilities (Net) xxxx.xx
(c) Other Long term liabilities xxxx.xx
(d) Long-term provisions xxxx.xx
(4) Current liabilities
(a) Short-term borrowings xxxx.xx
(b) Trade payables xxxx.xx
(c) Other current liabilities xxxx.xx
(d) Short-term provisions xxxx.xx

11. Sch III to Companies Act, 2013
II. ASSETS AMOUNT
(1) Non Current Assets
(a) Fixed Assets
(i) Tangible assets xxxx.xx
(ii) Intangible assets xxxx.xx
(iii)Capital work-in-progress xxxx.xx
(b) Non-current investments xxxx.xx
(c) Deferred tax assets (net) xxxx.xx
(d) Long-term loans and advances xxxx.xx
(e) Other non-current assets xxxx.xx
(2) Current Assets
(a) Current investments xxxx.xx
(b) Inventories xxxx.xx
(c) Trade receivables xxxx.xx
(d) Cash and cash equivalents xxxx.xx
(e) Short-term loans and advances xxxx.xx
(f) Other current assets xxxx.xx

12. Sch III to Companies Act, 2013
Particulars Cr. Yr Pr. Yr.
I. Revenue from operations Xxxxx Xxxxx
II. Other income Xxxxx Xxxxx
III. Expenses:
• Cost of materials consumed
• Employee benefits expense
• Finance costs
• Depreciation and amortization expense
• Other expenses
• Total expenses
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Xxxxx
IV. Profit before exceptional and extraordinary
items and tax (I + II – III) Xxxxx Xxxxx
V. Exceptional Items Xxxxx Xxxxx
VI. Profit before extraordinary items and tax (IV –
V)
Xxxxx Xxxxx

13. Particulars Cr. Yr Pr. Yr.
VII. Extraordinary Items xxxxx xxxxx
VIII. Profit Before Tax (VI – VII) xxxxx xxxxx
IX. Tax expense:
(1) Current tax
(2) Deferred tax
Xxxxx
Xxxxx
Xxxxx
Xxxxx
X. Profit (Loss) for the period from continuing
operations Xxxxx Xxxxx
XI. Profit/(loss) from discontinuing operations Xxxxx Xxxxx
XII. Profit/(loss) for the period (X + XI) Xxxxx Xxxxx
XIII. Earnings per share
(1) Basic
(2) Dilluted
Xxxxx
Xxxxx
Xxxxx
Xxxxx
Sch III to Companies Act, 2013

14. Deciphering the
numbers

15. Ways and Means
• Ratio Analysis
– Horizontal
– Vertical
– Industry Norms
• Cash Flow statement
• Segment Report
• Change in Accounting Policies
• Notes to accounts

16. Ways and Means
• Report on Corporate Governance
• Board Report
• Deferred Tax Asset / Liability
• Contingent Liabilities
• Consolidated Financial statements
• CARO report
• Auditors report

17. Where to Invest ?
Particulars ABC Ltd XYZ Ltd
Fixed Assets 10.00 20.00
Inventory 20.00 25.00
Sundry Debtors 35.00 60.00
Cash and Bank 15.00 25.00
Deferred Revenue Expenditure 50.00 0.00
ASSETS TOTAL 130.00 130.00
Share Capital 70.00 60.00
Long Term Loans 40.00 30.00
Current Liabilities 20.00 40.00
LIABILITIES TOTAL 130.00 130.00

18. Where to Invest ?
Particulars ABC Ltd XYZ Ltd
Earning Before Interest and Tax 45.00 40.00
Interest 8.00 8.00
Tax 18.00 17.00
Net Profit 19.00 15.00
Balance Sheet - Liabilities
Share Capital 50.00 60.00
Long Term Loans 20.00 30.00
Current Liabilities 60.00 40.00
LIABILITIES TOTAL 130.00 130.00
Industry Average Debt Equity 0.60 0.60

19. Analyze
Particulars 2014 2013
Sales 150.00 160.00
Purchases 60.00 55.00
Interest Paid 12.00 15.00
Staff Salary 50.00 48.00
Administrative Expenses 20.00 22.00
Bad Debts 10.00 12.00
Staff Welfare 3.00 9.00
Electricity 6.00 7.00
Opening Stock 35.00 50.00
Closing Stock 55.00 35.00
Debtors 30.00 80.00

20. Balance Sheet
Other components of
Financial statements

21. THANK YOU
CA Dhruv Seth
ds@sethspro.com