ch_24 ppt fm
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FINANCIAL STATEMENTS AND CASH FLOWANALYSIS
CHAPTE
R 24
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LEARNING OBJECTIVES
Introduce financial statementsbalance sheet and profit and loss
account
Distinguish between accounting profit and economic profit
Discuss the meaning of funds flow and working capital flow
Highlight the need for analyzing the changes in a firm's funds and cash
flow position
Explain the mechanism of preparing funds flow and cash flow
statements
Emphasize the need and utility of preparing a comprehensive
statements of financial position that explains changes in cash flow from
operations, investment activities and financing activities
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Financial Statements
Financial statements provide information aboutthe financial activities and position of a firm.
Important financial statements are: Balance sheet
Profit & Loss statement
Cash flow statement
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Balance Sheet
Balance sheet indicates the financial condition of
a firm at a specific point of time. It contains
information about the firms: assets, liabilities
and equity.Assets are always equal to equity and liabilities:
Assets = Equity + Liabilities
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Assets
Assetsare economic resources or properties
owned by the firm.
There are two types of assets:
Fixed assets
Current assets
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Current Assets
Current assets (liquid assets) are those which
can be converted into cash within a year in the
normal course of business. Current assets
include: Cash
Tradable (marketable) securities
Debtors (account receivables) Stock of raw material
Work-in-process
Finished goods
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Fixed Assets
Fixed assets are long-term assets. Tangible fixed assets are physical assets like land,
machinery, building, equipment.
Intangible fixed assets are the firms rights and claims,such as patents, copyrights, goodwill etc.
Gross block represent all tangible assets at acquisitioncosts.
Net block is gross block net of depreciation.
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Liabilities
Liability is a firms obligation to pay cash or
provide goods or services in the future.
Two types of liabilities are:
Current liabilities
Long-term liabilities
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Current Liabilities
Current liabilities are payable within a year inthe normal course of business.
They include:
Accounts payable (creditors) Outstanding expenses
Advances from customers
Provision for tax
Provision for dividend
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Long-term Liabilities
Long-term liabilities are the obligations or
debts payable in a period of time greater than the
accounting period.
They include - Debentures, bonds, and securedlong-term loans from financial institutions.
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Shareholders Funds or
Equity
Share capital is owners contribution divided into
shares.
A share is a certificate acknowledging the amount of
capital contributed by the shareholder.
Shareholdersequity has two parts:
(i) paid-up share capital, and
(ii) reserves and surplus (retained earnings)representing undistributed profits.
Paid-up share capital and reserve and surplus
together are called net worth.
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Gujarat Narmada Valley Fertilizers
Company Balance Sheet as on 31 March
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Balance Sheet Relationship
Total assets (TA) equal net fixed assets (NFA)
plus current assets (CA):
TA = NFA + CA
Net current assets (NCA) is the difference
between current assets (CA) and current
liabilities (CL):
NCA = CACL
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Balance Sheet Relationship
Net assets (NA) equal net fixed assets (NFA)plus net current assets (NCA):
NA = NFA + NCA
Capital employed (CE) is the sum of net worthor equity (E) and borrowing/debt (D) and it isequivalent of net assets:
CE = Net Worth + Borrowing = E + D
Capital Employed = Net Assets
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Profit & Loss Statement
Profit & Loss statement provides information
about a firms:
revenues,
expenses, and
profit or loss.
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Nature of Revenues
Revenue is the amount received or receivable
within the accounting period from the sale of the
firmsgoods or services.
Operating revenue is the one that arises from mainoperations of the firm, and the revenue arising
from other activities is called non-operating
revenue.
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Nature of Expenses
Expenseis the amount paid or payable within theaccounting period for generating revenue.
Examples: raw material consumed, salary and wages,power and fuel, repairs and maintenance, rent, selling andmarketing expenses, administrative expenses.
Expenses are expired costs and capitalexpenditures represent un-expired costs andappear as assets in balance sheet.
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Concepts of Profit
Gross profit = salescost of goods sold (CGS)
CGS= raw material consumed + manufacturing expenses of goodsthat have been sold
PBDIT = Profit before dep., interest and tax = salesexpenses, except
dep., interest and tax Operating profit (OP), OP = GPOEXPDEP
PBIT= Profit before interest and tax= PBDITDEP
PBT= Profit before tax = PBITInterest
PAT= Profit after tax = PBTTax Net operating profit after tax (NOPAT)=PBIT (1Tax rate)
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Gujarat Narmada Valley Fertilizers Company Ltd
Prof i t & Lo ss Acco un t for the year ended on 31 March
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Economic Vs. Accounting
Profit
Accounting profit is a result of the arbitrary
allocation of expenditures between expenses
(revenue expenditure) and assets (capital
expenditure).Economic profit is the net increase in the wealth
of the firm, and it is measured in cash flow.
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CHANGES IN FINANCIAL
POSITION The statement of changes in financial position summarizes:
Changes in assets and liabilities resulting from financial and
investment transactions during the period, as well as those
changes which resulted due to change in ownersequity; and
the way in which the firm used its financial resources during the
period
The most commonly used forms of the statement of changes in
financial position are called the funds flow statement and the cash
flow statement.
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Definition of FundsFunds may mean change in financial resources,
arising from changes in working capital items and
from financing and investing activities of the
enterprise, which may involve only non-currentitems.
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Concept of Working Capital
FlowThe net working capital increases or decreases
when a transaction involves a current account and a
non-current account.
It remains unaffected when a transaction involvesonly current accounts.
It remains unaffected when a transaction involves
only non-current accounts.
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Effect of Changes in
Accounts on Working Capital24
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Sources of Working Capital1. Funds from operations (adjusted net income)
2. Sale of non-current assets:
sale of long-term investments (shares, bonds/debentures, etc.)
sale of tangible fixed assets like land, building, plant orequipments
sale of intangible fixed assets like goodwill, patents or
copyrights
3. Long-term financing: long-term borrowings (institutional loans, debentures, bonds, etc.)
issuance of equity and preference shares
4. Short-term financing such as bank borrowings
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Uses of Working Capital1. Adjusted net loss from operations
2. Purchase of non-current assets:
purchase of long-term investments like shares, bonds/debentures,
etc.
purchase of tangible fixed assets like land, building, plant,
machinery, equipment, etc.
purchase of intangible fixed assets like goodwill, patents,
copyrights, etc.
3. Repayment of long-term debt (debentures or bonds) andshort-term debt (bank borrowing)
4. Redemption of redeemable preference shares
5. Payment of cash dividend
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F f F d Fl
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Forms of Funds Flow
Statement27
XY CompanyStatement of Changes in Working Capital for the year
ended 31 December 20X1
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ompre ens ve un s ow
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ompre ens ve un s owStatement:
Financial Resources BasisACME Company
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CASH FLOW STATEMENTA statement of changes in financial position on cash basis,
commonly known as the cash flow statement, summarizes the
causes of changes in cash position between dates of the two
balance sheets.
It indicates the sources and uses of cash.
This statement analyzes changes in noncurrent accounts aswell as current accounts (other than cash) to determine the
flow of cash.
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Sources of Cash The profitable operations of the firm,
Decrease in assets (except cash),
Increase in liabilities (including debentures or bonds), and
Sale proceeds from an ordinary or preference share issue.
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Uses of Cash
The loss from operations
Increase in assets (except cash)
Decrease in liabilities
Redemption of redeemable preference shares
Cash dividends
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Statement:
Financial Resources Basis32ACME Company
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OF CHANGES IN FINANCIAL
POSITIONIt helps to answer the following questions:1. What is the liquidity position of the firm?
2. What are the causes of changes in the firms working capital or cash position?
3. What fixed assets are acquired by the firm?
4. Did the firm pay dividends to its shareholders or not? If not, was it due to shortage of
funds?
5. How much of the firms working capital needs were met by the funds generated from
current operations?
6. Did the firm use external sources of finances to meet its needs of funds?
7.If the external financing was used, what ratio of debt and equity was maintained?
8. Did the firm sell any of its non-current assets? If so, what were the proceeds from such
sales?
9. Could the firm pay its long-term debt as per the schedules?
10. What were the significant investment and financing activities of the firm that did
not involve working capital?
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