analysis of financial statements

Analysis offinancial statements

CA. Dhruv SethFCA, DISA (ICAI)ds@sethspro.com

Coverage of the presentation

• Legal forms of business

• Basic principles of accounting

• Components of financial statements

• Understanding the key elements

• Deciphering the numbers

• Illustrations

Legal Forms

of business

Legal forms of business

• Proprietorship / HUF

• Partnership Firms

• Limited Liability partnerships (LLP)

• Companies Incorporated– Private Limited– Public Limited

• Societies / Trusts

Basic principles

of accounting

Basic principles of accounting

• Accrual

• Matching

• Consistency

• Going Concern

• Disclosure– Prudence– Materiality– Substance over form

Components of

financial

statements

Components of Audited FS

• Balance Sheet

• Profit and Loss

• Cash Flow

• Accounting Policies

• Notes to Accounts

• Board Reports

• Auditors Reports

• Auditors report on CARO

Legal Format and

Understanding

Key elements

Sch III to Companies Act, 2013I. 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

Sch III to Companies Act, 2013II. 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

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

XxxxxXxxxxXxxxxXxxxxXxxxxXxxxx

XxxxxXxxxxXxxxxXxxxxXxxxxXxxxx

IV. Profit before exceptional and extraordinary items and tax (I + II – III) Xxxx

xXxxxx

V. Exceptional Items Xxxxx

Xxxxx

VI. Profit before extraordinary items and tax (IV – V)

Xxxxx

Xxxxx

Sch III to Companies Act, 2013

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

XxxxxXxxxx

XxxxxXxxxx

X. Profit (Loss) for the period from continuing operations Xxxx

xXxxxx

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

XxxxxXxxxx

XxxxxXxxxx

Sch III to Companies Act, 2013

Deciphering the

numbers

Ways and Means

• Ratio Analysis– Horizontal– Vertical– Industry Norms

• Cash Flow statement

• Segment Report

• Change in Accounting Policies

• Notes to accounts

Ways and Means

• Report on Corporate Governance

• Board Report

• Deferred Tax Asset / Liability

• Contingent Liabilities

• Consolidated Financial statements

• CARO report

• Auditors report

Where to Invest ?Particulars ABC Ltd XYZ

LtdFixed 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

Where to Invest ?Particulars ABC Ltd XYZ

LtdEarning 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

AnalyzeParticulars 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

Balance Sheet

Other components of Financial statements

THANK YOU

CA Dhruv Sethds@sethspro.com