How to read a

FINANCIAL STATEMENT
an Overview

© Mahindra Satyam 2010

 Associates, Investors, Customers and Society / External entities
Raise the 2 Questions!

How well the

organization is performing?

Where does the

organization stand?

Where do you find these Answers !

© Mahindra Satyam 2010
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Financial Statement and Investor Fact Sheet

Income
Statement
Balance Sheet
Cash flow
Statement
Investor
Fact sheet

Income Statement, Balance Sheet, Cash Flow

Statement, significant accounting policies,
notes & schedules to accounts are collectively
known as Financial Statements. Most of the
companies share the critical data points in the
form of a “Fact Sheet” to the investors

© Mahindra Satyam 2010

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What is an Income Statement ?

The income statement reports the company’s

revenues, expenses, and net income or net loss for the period

Profits (or earnings or income) are the

excess of revenues over expenses.

© Mahindra Satyam 2010

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Structure of a Income Statement

P/L Items
A Revenue
B Expenditure
- Compensation & Benefits
- Selling , General & Admn. Exps. ( SG&A)
C=A-B EBITDA ( Earnings before Interest, Tax, Depreciation & Amortization )
D Depreciation & Amortization
E=C-D EBIT ( Earnings before Interest and Tax)
F Financial Expenses (Interest)
G Other Income
H=E-F+G EBT/PBT ( Earnings before Tax)
J Tax
K=H-J PAT ( Profit after Tax)
L Dividends
M=K-L Retained Earnings

© Mahindra Satyam 2010

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What is a Balance Sheet?

Three components of balance sheet In simple terms a balance sheet

1. Shareholders’ funds (i.e. what the
owners of the entity own)
 Share Capital
 Reserve & Surplus
may be defined as a sheet
of balances
It is the snapshot of the financial
status of an organization at
a point in time

2. Liability (i.e. what the entity owes)

Assets =
3. Assets (i.e. what the entity owns)
Liabilities +
Stockholders’ Equity

© Mahindra Satyam 2010

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Assets
Fixed assets
Those assets which the company expects to hold longer than a year
Land & Building, Plant & Machinery

Current assets
Those assets which the company expects to convert to cash, sell, or
consume during the next 12 months or within the business's normal
operating cycle if longer than a year
Cash, Accounts receivable, Merchandise inventory, Prepaid expenses

Good will & intangible assets

These are not in physical form
Trade Marks, Patents , Good Will etc.,

© Mahindra Satyam 2010

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Liabilities

Equity
The amount invested in the corporation by its owners , comprised
basically of common stock and the retained earnings.

A Current Liabilities
Debts payable within one year or within the business’s normal operating
cycle if longer than a year
Bonds payable (short term ), Accounts payable, Accrued expenses
payable, Income taxes payable

Borrowings / Long Term Liabilities

Debts not payable within one year or within the business’s normal
operating cycle if longer than a year
Secured Term Loans, Bonds payable, etc.,

© Mahindra Satyam 2010

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What is the Structure of a Balance Sheet

Account Form : LIABILITIES = ASSETS

Report Form : SOURCES OF FUNDS = APPLICATION OF FUNDS

Sources of Funds (or) Liabilities Application of Funds (or) Assets

 Equity  Fixed Assets (Gross less
– Share Capital depreciation)
– Reserves & Surplus  Investments
 Borrowings:  Current Assets
– Secured Loans – Inventory
– Unsecured Loans – Receivables
 Current Liabilities & Provisions – Loans & Advances

© Mahindra Satyam 2010

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What is the period of reference?

Balance
Balance Sheet
Sheet Balance
Balance Sheet
Sheet Balance
Balance Sheet
Sheet
March
March 31
31 March
March 31
31 June
June 30
30
2009
2009 2010
2010 2010
2010

Time Time

Income Income
Statement Statement
for FY 2010 for Q1/FY2011

© Mahindra Satyam 2010

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What is a Cash flow Statement?

It reports Company’s cash inflows and outflows

under 3 heads

 FROM OPERATING ACTIVITIES

Cash flows from the core operations of the
company

 FROM INVESTING ACTIVITIES

Cash flows from the investing activities, namely
purchase/sale of assets, investments, etc. This Statement
shows the
effectiveness of the
 FROM FINANCING ACTIVITIES
Fresh issue of capital, debentures, or redemption
Cash Deployment
of pref. capital/debentures or fresh
borrowings/redemption, etc.

© Mahindra Satyam 2010

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A typical Cash Flow Cycle for Operating Activities

Money In Money Out

Collection Pymt.

CUSTOMERS YOUR
VENDORS/
BUSINESS
EMPLOYEES

Services /
Products Services /
Out Products
In

An operation is considered efficient if it generate cash surplus.

Investing activities demonstrate efficient deployment of the cash surplus.

Financing activities demonstrate the source of borrowing to fund the deficit.

© Mahindra Satyam 2010

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P/L & PL Metrics of Competition

Cost of Revenue / Direct Cost

Selling & Genl. Admn. cost

Simple observation
 Better GM % in case of TCS/Infosys/CTS could be attributed to :
– Higher price realization
– Optimal direct cost spend or right resource mix and utilization
– Non-linear engagement , optimal FB projects , entry into niche consulting
 SG&A is in the range of 10 – 14% ; while TCS and CTS are out of range, CTS could be
attributed to high cost resources deployed in S&M to win more business

Wipro-IT services and Product business has been picked from segmental reports. Other expenses & taxes are allocated based on revenue ( assumption made for meaning comparison)
© Mahindra Satyam 2010
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P/L & P/L Metrics of Mahindra Satyam for FY10

When we have more detailed P/L we can identify areas for improvement.

However at Project /Customer Level one does have a P/L upto EBDITA level, so we should focus on the
same to improve it at dis-aggregate level

© Mahindra Satyam 2010 Note: Due to the restatement efforts, there are certain exceptional items in the financial statements.
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Income Statement: The “Bottom Line” for a Corporation
Heads in Profit & Loss Account
 
1) Provision for Contingencies: A company can anticipate various claims which
may not be determinable with certainty; hence estimation may be made for
such contingences.

2) Provision for Diminution in the value of investments: A company can assess

the value of its investments in its subsidiaries or other entities. Such
valuation is done by an external entity and based on their recommendation,
a provision for loss in the value of investments will be made.

3) Prior Period Adjustments: If a company identifies significant transactions

which pertain to earlier accounting period, all such amounts are required to
be disclosed as prior period adjustments. While in the case of US GAAP,
companies are required to restate the financials in respective years. Under
Indian GAAP, they need to be disclosed as prior period adjustments in the
year in which they are identified. In the case of Msat, the Honourable
Company Law Board, has given orders to account for such earlier year
transactions as prior period adjustments
© Mahindra Satyam 2010
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 Income Statement: The “Bottom Line” for a Corporation

Various Items that appear in the Notes or Financial Statements

1) Provision for Doubtful Debts: If the company doubts realization of any

receivables from customers, it is required to identify such amounts and make
a provision. If they are finally proved to be not recoverable we need to write
off such receivables. However due to regulatory requirements, we can write
off such debts only after receiving approval from RBI.

2) Percentage Completion Method: Any fixed price project executed by the

company should be evaluated for progress in performance. Revenue for
such contracts can be recognized only to the extent of the progress certified.
This exercise is required to be done on a monthly basis, so as to recognize
revenue correctly at the end of every month.

© Mahindra Satyam 2010

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 Income Statement: The “Bottom Line” for a Corporation

Various Items that appear in the Notes or Financial Statements

3) Multiple Deliverables: A contract may have multiple commercial/delivery terms

peculiar to such contract e.g. the contract may have a non returnable clause, higher
warranty than usual warranty given, discounts or service credits with varying
conditions, supply of hardware and software either as a sale or in the nature of
deferred payment etc., such peculiarities need to be addressed as per the applicable
accounting standards under Indian GAAP and US GAAP.

4) Unbilled Revenue: Services delivered but not yet invoiced is called unbilled revenue,
it may be pertaining to T&M, efforts delivered but not yet invoiced or partly executed
fixed price contract. They are required to be recognized in the period when the
service is delivered.

5) Unearned Revenue Adjustments: If we raise invoices on customer without delivering

efforts or without confirming the hours in Ontime and push to IMS for invoicing, we
raise advance invoices and will be treated as unearned. Revenue can be recognized
in such cases only when efforts are confirmed in the system and pushed for invoicing.
Till such time, the revenue cannot be recognized by the company.

 
© Mahindra Satyam 2010
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Latest Balancesheet of Competition – a comparison

 One key input which we

all influence outside of
profitability in the balance
sheet is the Accounts
Receivables.

 A quick snapshot of the

same clearly indicates our
unbilled at max. should be
in the range of 15 days
and at max DSO should
be below 80 days.

© Mahindra Satyam 2010

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 Thank you

mahindrasatyam.com

Safe Harbor
This document contains forward-looking statements within the meaning of section 27A of Securities Act of 1933, as amended, and
section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking
statements. We undertake no duty to update any forward-looking statements. For a discussion of the risks associated with our
business, please see the discussions under the heading “Risk Factors” in our report on Form 6-K concerning the quarter ended
September 30, 2008, furnished to the Securities and Exchange Commission on 07 November, 2008, and the other reports filed with
the Securities and Exchange Commission from time to time. These filings are available at http://www.sec.gov

© Mahindra Satyam 2010

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