Financial Statements Spd
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Transcript of Financial Statements Spd
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Finance For Non-Finance Managers
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Final Accounts
` Final Accounts are prepared at the end of theyear to find out results of the business during theyear in terms of Profit or Loss
And the financial Position of the business at theyear end in terms of Assets and liabilities.
` In preparing final accounts the accountingprinciple of showing all the Revenue Expenditure
and receipts in the Trading or Profit and LossAccount where as the Capital Expenditure andreceipts in the Balance sheets is as followed.
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Profit and Loss Account
It is the Account prepared to find out net profit orloss of the business during the period.
This is Nominal Account in Nature.
Hence All the other expenses and losses should bedebited where as all the other incomes and gainsshould be credited to Profit & loss account.
The balance of Profit & Loss Account will beconsidered as Net Profit(Credit Balance) or NetLoss (Debit balance) and will be transferred toCapital Account.
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Balance Sheet
`Balance sheet of an entity represents the position
at a particular point of time .i.e, Assets and
liabilities of a concern on a given data.
` It is a statement not an account prepared by
considering all real accounts and personal
accounts.
` Its shows the true and fair view of the concern.Assets = Liability + Equity.
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Items Of Balance sheet
Assets
Current assets
Intangible assets Liabilities
Current assets
Contingent liabilities
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Assets
` It is a probable future economic benefit obtained
or controlled by a particular entity as a result of
past transactions or events.
Assets are classifies as:
1. Long term Assets or Fixed Assets
2. Short term Assets or Current Assets.
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Long-term Assets Or Fixed
Assets
Long term assets are those which are held for,
with objective of use in the business. A tangible long-lived asset.
Usually having a life more than one year.
Includes items such as land, buildings, plant and
machinery, motor vehicles, furniture and fittings
etc.,
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Short term Assets or Current
Assets All those held by a firm with the objective of
conversion into cash with in the operating cycle or
an accounting period. Usually includes items such as cash, accounts
receivables, inventory, and prepayments etc..
Apart from fixed and current assets, may beclassified into tangible and intangible assets.
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Intangible Assets
Any long-term assets useful to the business and
having no physical characteristics.
Covers items such as Goodwill, patents, and
copyrights.
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Liabilities
Probable future sacrifice of economic benefit
arising from a present obligation of a particular
entity to transfer assets or provide services to
other entities in the future as a result of past
transactions or events.
In the balance sheet, all the claims against the
assets of the entity, other than the owner(s)claims are liabilities.
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Long term Liabilities
Long-term liabilities are usually for more than one
year. They cover almost all the liabilities not
included in the current liabilities and provisions.
These liabilities are secured or unsecured.
Usually include items such as Share capital,
Debentures and Bonds, Capital reserves, reserves
and surpluses.
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Short-term Liabilities Currents
Liabilities All those claims against the assets of the firm that
are to be met out of cash or other currents assets,
within an accounting period or within the
operating cycle.
Usually include items such as accounts payable,
tax or other claims payable, and accrued oroutstanding expenses.
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Contingent liabilities
A liability which materialises only on thehappening of a future event.
`Example: A liability which may arise out of a
pending lawsuit.` Such items are not listed as liabilities in the body
of the balance sheet.
`However, in order to give a fair view of all knownfacts about the affairs of the firm, contingentliabilities are disclosed as FOOTNOTES to thebalance sheet.
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How to analyze, What to interpret??
What to analyze, How to interpret??
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This can be done, if one is clear with DOs
and DONTs of FINANCIAL
STATEMENTS.
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Profit & Loss Account.
Convey :
Trading Performance.
Primary & Secondary Sources.
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Profit & Loss Account.
Does notConvey :
Future Performance.
Net Income.
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Balance Sheet
Convey :
Assets and Claims against those Assets.
Liquidity.
Owners Claims Residual.
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Balance Sheet
Does notConvey :
Process of making Profits. Specific Claims.
True and Fair Worth of the Business.
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DEFINITION
Ratio analysis refers to methods of calculating and interpreting financial ratios to
assess a firms performance.
WHY IS RATIOANALYSIS USEFUL?
Provide details for financial planning.
Put details into perspective. Manage expectations(creditors and investors).
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TYPES OFRATIO COMPARISIONS
1.Cross-sectional analysis2.Time series analysis
3.Combined(mixed)
1.Cross-sectional analysisCompares different firms financial ratios at the
same time.
2.Time series analysis
Evaluate a firms financial performance over time.3.Combined/mixed
Uses both cross-sectional and time series analysis.
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TYPES OF FINANCIAL RATIOS
1.Liquidity Ratios2.Activity Ratios
3.Leverage Ratios
4.Profitability RatiosNote : when commenting on the performance of a
firm, be sure to
Organize your ideas by these four types of ratios
Compare these ratios of the firm over time
Compare with the industry averages
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LIQUIDITYRATIOS
Definition:
Liquidity measures a firms ability to satisfy itsshort-term obligations as they come due.
Types ofratios used foranalyzing liquidity
1.Current ratio
2.Quick ratio(acid test ratio)
Currentratio=current assets/current liabilities
Current assets=inventory + debtors + cash & bank +
receivables + short term loans + marketableinvestments
Current liabilities=creditors + outstanding expenses +short term loans + bank overdraft/cash credit +
provision for taxation + proposed dividend
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Ideal currentratio= 2:1
Quick Ratio=Quick assets/Quick liabilities
Quick assets=current assets inventory RBD prepaid expenses
Quick liabilities=current liabilities bank overdraft cash credit
SIGNIFICANCE:
Ability to meet immediate liabilities
Ideal quickratio=1:1
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Activity Ratios(expressed inno. of times)
Definition:Activity ratios measure the firms
effectiveness at managing accounts receivables ,inventory , accounts payable ,fixed assets and
total assetsFour ratios
1.Average age of inventory
2.Average collection period
3.Average payment period
4.Fixed assets turnover
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Average age of inventory=
(no . of days/months *average stock)costofgoods sold
Average stock=(opening stock + closing stock)
2Cost of goods sold=opening stock + purchases +
direct expenses closing stock
Significance : Indicates the number of daysnormally the stock are holding
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Average collection period =
no . of days /months*average debtorscredit sales
Credit sales = total sales cash sales salesreturns
Indicates the no . Of days normally the
debtors are paying
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Average payment period =
no . Of days/months * average creditors
credit purchases
Credit purchases = total purchases cash purchases purchase returns
Indicates the no .of days normally paying to creditors
Fixed assets turnoverratio = turnover
fixed assets
Fixed assets = net fixed assets after providing
depreciation
Ability to generate sales per rupee of fixed assets
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LEVERAGE RATIOS(expressed in a:b form)
DEFINITION:Amount of debt used in an attempt tomaximize shareholders wealth
Debt equityratio = debt/equity
Debt= long term borrowed funds i.e, debentures , long
term loansEquity= equity share capital + preference share capital
+ reserves & surplus
Indicates relationship between debt and equityidealratio = 2:1
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Coverage ratio (expressed inno .of times)
Assess the firms ability to service the source of
financingInterest coverage ratio=
earnings before interest & tax
intereston long term borrowings
Indicates ability to meet interest obligation of thecurrent year
idealratio = 6 to 7 times
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PROFITABILITYRATIOS(expressed in %)
Concerning with evaluating a firms earnings withrespect to a given level of sales/assets/ownersinvestment or share value
Return on total assets = earnings/net assets
Net assets = total assets fictitious assets
It indicates whether assets are being utilizedproperly or not. In other words it indicates netincome per rupee of average fixed assets
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Return on equity = earnings aftertax
networth
Net worth = net fixed assets + net working
capital
external liabilities
Indicates profitability of equity funds invested
in the business
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Earnings pershare(EPS) =
earnings available to equity shareholders
numberof equity shares
Price earnings(P/E) ratio =
market price of share
earnings pershare
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INVESTMENT PROCESS
1. Set Investment Policy
2. Security Analysis(Fundamental and
Technical analysis)
3. Portfolio Construction
4. Portfolio Revision
5. Portfolio Performance Evaluation
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FUNDAMENTAL ANALYSIS
Fundamental analysis is a method used to determine
the value of a stock by analyzing the financial data
that is 'fundamental' to the company.
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Analysis of fundamental analysis
Understanding the Macro-economic
environment and developments.
Analyzing the prospects of the industry towhich the firm belongs.
Assessing the projected performance of the
company.
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Industry analysis
The objective of this analysis is to assess the
prospects of various industrial groups which
helps in suggesting which industries have a
brighter future than others and which
industries are plagued with problems that are
likely to persist for a while.
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Three parts of industry analysis
Industry life cycle analysis
Study of the structure and characteristics of an
industry Profit potential of industries : Porter model
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Industry life cycle analysis
Pioneering stage
Rapid growth stage
Maturity and stabilization stage Decline stage
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Study of the structure and characteristics of
an industry
Structure of the industry and nature of
competition
Nature and prospects of demand
Cost, efficiency, and profitability
Technology and research
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Profit potential of industries :
Porter Model
Threat to new entrants
Rivalry among existing firms
Pressure from substitute products Bargaining power of buyers
Bargaining power of suppliers
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Company Analysis
a) Study of Financials (Quantitative Factors)
b) Study of other factors (Qualitative Factors)
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Quantitative Factors
Earnings and Dividend Level
ROE = Equity Earnings/Equity
EPS = Equity Earnings/No. of outstanding sharesDPR = Equity dividends/Equity earnings
DPS = EPS * DPR
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Risk Exposure
BetaRequired Return = Risk - free return +
Beta[Market Risk Premium]
Volatility of return on equity
= Range of return on equity over n years
Average return on equity over n years
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Valuation Multiple
Price to Earnings Ratio
= Earnings per share for year n
Price Per share at the end/beginning or year n
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Qualitative Factors
Sizing up the present situation of prospects
Availability and cost of inputs
Order position
Regulatory framework Technological and production capabilites
Marketing and distribution
Finance and Accounting
Human Resources and Personnel Evaluation of management
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Estimation of Intrinsic Value
Steps:
1. Estimate the expected earnings per share
2. Establish PE ratio3. Develop a value anchor and a value range
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EPS = PAT
No. of outstanding shares
Constant growth dividend modelPE ratio = Dividend payout ratio
Required return - Expected growth
on equity rate in dividends
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Tool for judging undervaluation and
overvaluation
Undervalued Promises of
growth
Dividend of
Cows
Overvalued
High
Low
Low
High
EPS
Duration(1/Dividend Yield)
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Thank You