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Balance sheet analysis
1. ⢠CAIIB - Financial Management
⢠Module B â Study of Financial
Statements
⢠- Balance Sheet Analysis
⢠M. Syed Kunmir
2. BALANCE SHEET ANALYSIS
⢠Sources of Funds
1) Capital
2) Reserves & Surplus
3) Term Liabilities
4) Current Liabilities
3. BALANCE SHEET ANALYSIS
⢠Uses of Funds
⢠1) Fixed Assets
⢠2) Intangible Asets
⢠3) Non Current Assets
⢠4) Current Assets
4. BALANCE SHEET ANALYSIS
⢠Capital
⢠1) Authorised Capital
⢠2) Issued Capital
⢠3) Subscribed Capital
⢠4) Paid-up Capital
5. BALANCE SHEET ANALYSIS
⢠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
6. BALANCE SHEET ANALYSIS
⢠Tangible Net Worth
⢠This refers to the total funds arrived by paid-
up capital , Reserves and P&L Surplus
⢠Less
⢠Intagible Assets
7. BALANCE SHEET ANALYSIS
⢠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
8. BALANCE SHEET ANALYSIS
⢠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
9. BALANCE SHEET ANALYSIS
⢠Contingent Liabilities
⢠Tax disputes
⢠Legal litigations
⢠Bills and cheques discounted with banks
⢠Claims against the company not acknowledged
10. BALANCE SHEET ANALYSIS
⢠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
11. BALANCE SHEET ANALYSIS
⢠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.
12. 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
13. BALANCE SHEET ANALYSIS
⢠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
14. 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
15. 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
16. 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 companyâs management,
the conventions are practiced by the finance
managers of the company.
⢠( ex Over due recievable > 6 mths as NCA is a
acccounting convention
17. 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.
18. BALANCE SHEET ANALYSIS
⢠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
19. BALANCE SHEET ANALYSIS
⢠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
20. 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
21. 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.
22. 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
23. Profit & Loss Account
⢠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
24. 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.
25. 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
26. 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
⢠a) Interest earned on fixed deposits
⢠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
⢠a) Preliminary expenses written off
⢠b) Loss suffered due to sale of assets & share