financial statements and their analysis; financial statements mean, the reports that are published

by different companies at the end of a particular accounting period; why do we need this financial

statement? It is because when the investors have invested lot of money in the company

they like to know about the performance of the company at the end of the particular period;

having kept that in mind and also taking into consideration different other stake holders

interest like government, suppliers, creditors, banks and all, the companies report their

financial performance at certain points of time.

In this particular session we are going to discuss about what the financial statements

are and what is their typical content, why we should go for financial statement analysis,

why it is the purpose and what are the tools that we can use for financial statement analysis.

As we discussed financial statements are supposed to provide information that bridge the gap

between the company and the investors in terms of what the company is doing so that the investors

come to know at certain period of time.

In this, coming to the first one regarding what the financial statements that we have

are - financial statements we have…one of the major statements is called the balance

sheet, then we have another called income statement and then we have got a cash flow

statement. Balance sheet, income statement and cash flow statement - they are published

regularly; if it is annual accounting year then at the end of the particular year we

will find these three reports getting published. What happens is that at the end of the year

- after the accounts are audited - the company comes with the financial results and also

comes with something documental - annual report; annual report will have these things and at

the same time if the company is also listed in the stock exchange, as per Indian law,

the companies are supposed to disclose their financial status every quarter - they will

be disclosing the summary balance sheet or summary income statement at the end of every

quarter. They will disclose to stock exchange and also they will publish the same thing

in the leading news papers - financial news papers and other news papers; through that

the investors can come to know about it. Coming to the major aspect of balance sheet

- balance sheet is essentially a statement of financial position; it says what the company

has at a particular point of time, it is also a statement of assets and liabilities; assets

are what the business owns and only with those things can the business prosper, can generate

revenue. So, assets indicate what the company has, how well it can do, what revenue it can

generate, what the source of revenue and all those things can be known.

That means, how efficiently an asset can be utilized, whether these assets are relevant

assets are not; investors can come to know from these financial statements called balance

sheets - these assets. Liabilities are something, which the business owes to non-owners; then,

we have something called equities - it is what the business owes to the owners.

In fact, whatever the business owes to the owners or outsiders, it is broadly known as

liability - it is liability of the business to the outsiders assess; broadly outsiders

can include the owners, but in a very management point of view the owners are the insiders

of the company and they have invested in the company they also expect something from the

company - to that extent the business is liable to the owners.

Broadly owners’ stake is a liability for the company, but they are insiders of the

company because they own the company assets; otherwise whatever they owe to the banks,

suppliers - because they have taken certain credit - banks, because they have taken a

loan or other investors like debenture holders, bond holders from whom they have borrowed

money they come under liabilities of the business. Then, we have another major statement, which

talks about the periodic financial performance - how this company did, that is called income

statement; income statement essentially gives a summary of revenues and expenses; revenue

from the main line of activity, revenue from other sources of income; like, the company

might have invested some thing in securities and other investments in some other companies;

from that the company might have got some interest or dividends; that also comes as

one of the sources of revenue and then something called expenses also is there.

Revenues and expenses are the major part of income statement and expenses will be given

a broad classification like manufacturing expenses, other operating expenses, financial

expense like interest, then tax provision and subsequently after the tax is paid by

the company then one has the profit after tax and how the profit is distributed; all

these things are given in the income statement. Another major statement that we have is, called

cash flow statement; it talks about where the cash has come from and where the cash

has gone; this cash flow statement classifies the cash flows in three ways: one is operating,

another investing and next is financing.

We will be discussing about these typical statements one by one in detail; coming to

the balance sheet which give the assets, the assets are actually classified on different

heads and the first asset is called the fixed asset, then we have got investments; fixed,

then we have got current assets, then we have got intangible assets; when we talk about

fixed assets, fixed assets means the company owns this particular asset or holds on to

the asset for a long period of time. It is not necessary that asset should be fixed with

the land or something like that rather the company has the intention of holding this

asset for a long period of time for a particular purpose.

One simple example could be the plant and machine for a manufacturing company or building

for a manufacturing company or any company for that matter - that becomes a fixed asset,

because this plant and machine could operate for long period of time and generate goods

which can be sold over a period of time. That is why plant and machinery is called

a fixed asset, but these same plant and machineries which are sold by an outlet is like a trading

concern - it is not a fixed asset, it is like a short term asset because they are not be

held for a long period of time. Next, in the assets category is investment;

investment means the investments made by the company in group companies or some other company

or subsidiary companies, where the intention of the investment is for a long term; the

company does not make short term investments rather it has made the investment for a long

period of time - like a strategic control - they have another company.

If they have made some investment equity of the company, they are stake holders of a particular

company - may be inside the country or outside country - or a certain joint venture they

have participated in - some ownership, in that case investments where they are supposed

to get certain income in terms of may be dividend or interest from that company where they have

invested their money. The next thing that we have is called the

current assets; current assets typically mean the assets which can be converted into liquid

cash over a short period of time - typically it is one year; whatever asset that they have

- the company has - that can be converted to into cash or the company has intention

to convert it in to cash in a short period of time - that is called current assets; current

assets have got different types of assets - the first type of asset is cash and cash

equivalents. Whatever cash there is with the company or

whatever is with the bank by the company that is called cash; cash equivalent is - the company

might have put some short term deposits with the intention that instead of keeping the

money idle they can earn some small amount of interest on that; they may have put the

money in some short investments, but the idea is to get back the money whenever we need;

in that case, they will sell the investments and get the cash.

Then we have the receivables; receivables mean…where we have got the…companies made

some credit sales and after the credit sales whatever amount is not collected they are

known as receivables or daters; that is also supposed to be collected back within a short

period of time, that is why it is called as current assets.

We also have one more aspect - marketable securities, which are also like cash equivalent

where the company has invested in treasure bill or some certificate deposit or commercial

paper and this money can come whenever the company needs; the temporary investments can

be sold and cash can be generated to meet the regular requirement.

The next category of current asset is the inventory; inventory means that which is kept

for production or for sales; inventory can be like raw material of the company, it can

be the working process of the company, it can be the finished goods of the company,

it can also be spare parts of the company; but, the inventory is supposed to be converted

into finished goods and sold. If the company is a trading concern typically their inventory

will be the finished goods, which they have procured from suppliers and they are going

to sell them. Like some retail outlets or some shopping

malls where they hold so many types of stock for the customers - those things are called

the inventory; they do not produce them rather they procure from different suppliers and

sell them, but they are categorized as inventory and they are supposed to be sold in a very

short period of time that is why it is called a current asset.

The next that we have is loans and advances; loans and advances is short term loans or

short term advances given to the group companies or employees have been given some advances

which they are going to pay back within a very short period of time, that is called

the loan advances and this is also known as a current asset.

Then, we have what other current assets which is not covered under this earlier category

- like, some company might have paid some expense in advance that is called pre paid

expenses; that is also called a current asset, because having paid the expense earlier we

are going to get the benefit of that expense within a very short period of time that is

why it is called pre paid expense. Any other current asset is also part of this

particular group; essentially, this current asset talks about that how liquid the company

is; that means, if the there is a need for meeting certain expenses does this company

have the to meet the expenses or not; or the company will either go for liquidating some

other non-current assets or fixed assets and meet the obligation or maybe it will go for

borrowing or something, which is not a proper sign - it is not a good sign for the company;

if there is a need and you have to meet the regular expenses - you should have the liquid

assets in your hand so that you can get the expenses on time.

Another category of assets is called intangible assets; for instance the fixed assets investments,

current assets - they are tangible, because you can feel that and you can see those assets;

whereas, intangible assets are something which you can feel, but you cannot see that and

intangible assets can be classified as like goodwill of the company; if the company has

got some patents, or company has got some copyrights, company has made some R &D and

technology has been developed and patented; all those things come under intangible assets;

as long as this…but all the assets which have got some economic benefit to accrue to

the company then this company can report as an asset.

If there is no economic benefit to come from this particular holding of the asset then

it is better that company does not show that; rather, it should write off this asset for

at a particular period of time; asset means that which can give some economic benefit

in future, which can be classified into all this types that we have discussed just know.

Next, we go to the balance sheet that is called liabilities; the liabilities we have…again

the classification we have are: first one is called current liabilities and provisions;

current liability is something which the company has to pay within a very short period of time

- typically, one year; just like the current assets can be converted into cash within one

year and similarly current liability is liability which the company has to meet within one year

period of time. There we have the categories like creditors,

then we have accounts or notes payable; creditors mean…the company might have purchased certain

goods from the supplier on credit which has to be paid may be within one month or two

months or something or whatever the supplier has asked; till the money is paid, that is

a liability of the company; it is a short term liability it has to be taken care of

within a certain period - a short period of time.

Accounts and notes payable are something…which are certain instruments which indicate that

the company owes something to someone over a short period of time, which has to be honored

within a short period of time. The next item is called accrued liabilities, where the company

has incurred the expense, but it has not been paid in cash; till it is paid in cash - may

be something like this, that some employees have worked for the company where their salary

is yet to be paid, till the salary is paid it is called a accrued liability or outstanding

expense for that matter and it is a short term liability; it is also current liability

where this has to be taken care of within a very short period of time.

Another type of asset - the liability we have, current liability is called the taxes payable

or income tax payable; the company has made a provision to pay the tax, but it is yet

to be paid by the company till it is paid the provision has been created and that is

called the income tax payable. The next category of liability we have is

the debt or loan; debt means where the company has borrowed some money and the company is

going to repay the amount over a period of time; also periodically the company is supposed

to pay certain interest and the debt can be short term or long term; short term can one

to three years period then you can also have medium term - three to five years, more than

five years can be taken as long term. Long term or short term depends upon the tenure