class understanding fs
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Module III
Understanding of FinancialStatements
WHAT IS AN ACCOUNTING?
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Accounting is a Language of Business
Accounting is an information processingsystem and the products of this process
are Financial Statements
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Sources of Information
Private Information Public Information
Annual Reports Quarterly Results Prospectus Others
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Quarterly Results
SEBI WHAT ? SEBI asks companies to mandatorily publish
and file quarterly results
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Prospectus
What is a Prospectus?
What is red herring prospectus?
What does it contain?
Examples, if any
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http://www.sebi.gov.in/sebiweb/home/list/3/15/11/0/Red-Herring-Documents-filed-with-ROC
SEBI
Sources of red herring prospectusand final prospectus
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Question
What does an Annual Report
Consists of
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Financial Statements
Balance Sheet Profit and Loss Account
Cash Flow Statement
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Balance Sheet consists of Chairmans message
Key Financials Executive team profile Highlights & Objectives Driving sustained growth MDA or MAD Directors reports Report on Corporate Governance Auditors report Financial Statements Schedules Notes to Accounts
Consolidated Financial Statements
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Analysis of Financial Statement
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Analysis
Depends upon the need of the users andinformation available
Users Availability of information
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Analysis
Quantitative Analysis
Qualitative Analysis
Annual Reports/Quarterly results/Otherinformation
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Types of Quantitative Analysis
Cash Flow Statement Analysis Comparative Statement Analysis
Common size Statement Analysis Trend Analysis Ratio Analysis Dupont Analysis
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Cash Flow Statement Analysis
Cash from Operations activities (A)
Cash from Investments activities (B)
Cash from Financing activities (C)
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Relation and Comparison of Data
Accounting data in absolute terms do not provide muchmeaning the analysis involves comparison and relation
Ratio Whenever one item is expressed (as a fraction or adecimal fraction or an integer) in terms of another item
Example A firm earns a net profit of Rs. 20,000 on a sale ofRs. 500,000. We could express this relationship as ____?
4 percent or 4% profit margin Comparisons could be made
With Companys past performance With Competing Firms With an Absolute Standard With Industry/Economy trend With Budgets (Planning and Control)
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But In most cases, there are no standards against which a
particular ratio value could be tested We make relative conclusions bycomparing the ratios with
industry averages Thus, at best the conclusions could be better than or worse
than or average Possible pitfalls in these comparisons could be the different
accounting conventions Inventory valuation (LIFO vs. FIFO) Different methods of depreciation Typical items (eg. Retirement benefits)
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Ratio Analysis
1. Liquidity Ratios2. Profitability Ratios
3. Leverage Ratios4. Coverage Ratios5. Efficiency Ratios
6. Investors Ratios 7. Dupont Analysis
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Profitability Ratios
Marginon sales
Gross Profit Margin
Operating Profit Margin
Earnings Before Interest & Tax
Profit before tax
Net Profit Margin (i.e., Profit after tax)
Return onInvestment
Operating Profit to Operating Assets
Net Income to Total AssetsReturn on Equity
Efficiency
Total Asset Turnover
Operating Asset Turnover
Working Capital Turnover
Shareholder Equity Turnover
Returnper share
Earnings per share
Earnings to price
Dividends per share
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Solvency Ratios
Short-term
Net Working Capital
Current Ratio
Quick Ratio
Accounts Receivable Turnover
Collection Period
Inventory Turnover
Conversion Period
Long-term
Total Debt to Total Capital
Long Term Debt to Total Capital
Long Term Debt to Fixed Assets
Interest Cover
Times Fixed Charges Covered
Gearing
Equity Multiplier
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Liquidity Ratios
Current Ratio
Quick Ratio
Net Working Capital
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Profitability Ratios
Gross margin or Operating Profit Ratio
Net Profit Ratio
ROCE
ROE
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Leverage Ratios
Debt Equity Ratios
Debt to Capital Employed
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Efficiency Ratios/Turnover Ratios
Receivables or Debtors Turnover
Inventory or Stock Turnover
Assets Turnover
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Investors Ratios
EPS
PE ratio
DPS
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Implied growth rate equation
Also called sustainable growth rate
= Return on Shareholders equity X Profitretention rate
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Du Pont Analysis
A combination of margin on sales ratio, efficiency ratio, andlong-term solvency ratio is popularly known as the DuPontanalysis
Return on Equity (ROE) =Net Profit Margin (defined as Net Profit/Sales) x AssetUtilization Ratio (defined as Sales/Total Asset) x EquityMultiplier Ratio (Total Assets/Owners Equity)
The DuPont analysis approach helps in identifying andpinpointing the reasons behind high or low profitability of afirm vis--vis its competitors
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Dupont Analysis
ROE = NPM X Asset Turnover X Leverage
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Qualitative Analysis
Look at handout on questions to be asked
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Basics of Accounting
Understanding
Analyzing
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Questions
Thank you