Financial Statement and Cash Flow Analysis

Introduction

• Financial Information:
 To predict, compare and evaluate firms’ earning ability.
 Investment and financing decision making
• Basic Financial Statement
1. Balance Sheet
2. Profit and Loss account
3. Cash flow statement
 Balance Sheet
• Contains information on its resources and liabilities at a particular point of
time
• It communicate information about assets, liabilities and owners equity
• Assets

• Current Fixed

• Current Assets: Are held in the form of cash or expected to be converted to

cash in an accounting period/ operating cycle.
• Eg: cash, tradable secutrities,stock of raw materials…

• Fixed Assets: Are long term in nature. Tangible and intangible fixed assets

• Depreciation
• Liabilities: debt payable in the future by firm to its lenders and
creditors.
• Obligations to pay cash, to provide goods in some future date
• Current Liabilities : debts payable within an accounting period.
• Long term liabilities: borrowing for a longer period. Eg.
Debentures, bonds etc…
• Owners Equity : Excess of firms assets over its liabilities
– Claim of owners
– Difference in owners book claim and real claim
– Owners are called shareholders in case of joint stock companies
• Share holders fund: Paid -up share capital and retained earning
= Net worth
• Go
 Profit and Loss Account

• The earning capacity and potential of a firm are reflected by it P & L

account [ bankers and financial analysts]
• It’s a flow statement
• It’s a summary of revenue, expenses and net income/losses
• Revenues and expenses are categorized as operating and non
operating
• Operating revenue/ expenses: arises from the main operations. Eg:
proceeds from sale of a product
• Non-operating revenues/expenses : incidental or indirect to main
operations
 Concepts of profit

• Gross Profit (GP): difference between sales and cost of goods sold
• PBDIT: revenue- all operating expenses except (D,I & T)
• Operating Profit (OP): is the difference between gross profit and
operating expenses. OP= GP-OEXP-DEP). This is also known as
PBIT
• Profit Before Tax( PBT): Difference between PBIT and Interest
charges
• Profit After Tax (PAT) : Or Net Profit- is the difference between
PBT and Taxes
• Net operating profit after tax (NOPAT): PBIT- tax on PBIT
 Economic versus Accounting Profit
Accounting profit differs from economic profit
The recognition of revenue and expenses is the main problem
In economic terms profit means net increase in the wealth

Accounting Profit Economic profit

• Based on GAAP • Determined by economic

• TR- Explicit cost
• Is limited to time period
principles
• TR-(Explicit Cost + Implicit
Cost)
• Not limited to time period
• In one year, it cost $60,000 to maintain production,
but earned $100,000 in revenue.
• Accounting Profit = ($100,000 - $60,000)= $40,000

If the firm could have made $50,000 by renting its land and
capital, its economic profit would be a loss of

• Economic Profit = ($100,000 - $60,000- $50,000)

• =- $10,000
 Changes in Financial Position

• B. S  assets and liabilities at a point of time

• P & L  revenue and expenses at a point of time
• Changes in assets, liabilities and capital????
• Therefore this is an additional statement to show the changes
between dates of two balance sheet
• This statement summarizes:
1. Changes in assets and liabilities resulting from financial and investment
transaction
2. The way in which the firm used its financial resources during the period
• Forms of statement:- Fund flow and cash flow statements
 Funds Flow statements

• The statement of changes in financial position , prepared to

determine only the sources and uses of working capital
• Working capital: difference between current asset and current
liabilities
• Working capital flow is important to plan the repayment
schedule of its long term debt.
• Concept of working capital flow/ Fund flow:
• Arises when the net effect of a transaction is to increase or decrease
the amount of working capital.
• Eg:
• 1. Issue of ordinary shares for cash  two accounts [ cash , which is
a current asset & share capital account, which is a non current
account ] . Receives cash against owners claim . Net increase in
working capital (+).
• 2. purchase of machinery for cash  two accounts [ cash account,
which is a current asset & machinery account , a non current
account]. The company acquires a fixed asset by paying cash ,
affected working capital (-)
• Some transaction do not change working capital:
• 1. receives cash from its debtors  represent increase of cash , a
current account & decrease of debtors , again a current asset
account. No change in working capital.

• 2. pays cash to its creditors

• If both account involves current account OR non Current account

working capital will not be affected.
 Sources and use of working capital

• Sources
o Funds from operation
o Sale of machine
o Issuance of debentures
o Issuance of equity shares
• Uses
o Adjusted net loss from operations
o Purchase of long term investment
o Payment of long terms loans
o Payment of cash dividend
 Sources and use of working capital

• Sources • Sources
o Funds from operation
o 1,20,000
o Sale of machine
o 30,000
o Issuance of debentures
o 1,00,000
o Issuance of equity shares
o 1,00,000
Funds Provided
3,50,000
• Uses • Uses
o Purchase of long term investment
o 80,000
o Payment of long terms loans
o 90,000
o Payment of cash dividend
o 60,000
Funds Applied
2,30,000

Increase in working capital

1,20,000
• Working capital flow from Non-Current account
 Sale of plant
 Institutional loans
 Issuance of shares
 Cash flow statement

• A statement of changes in financial position on cash basis

• Indicates the sources and use of cash
• Sources of cash
o The profitable operation of firm
o Decrease in assets (except---)
o Increase in liabilities ( debentures and bond)
o Sale proceeds from an ordinary or preference share
o Uses of cash
o The loss from operations
o Increase in assets ( excepts….)
o Decrease in liabilities
o Cash dividends