Financial Statements

Introduction
A financial statement is a collection of data organised according to logical and consistent accounting procedures. The term financial statement generally refers to the two statements: 1. The position statement or the balance sheet; and 2. The income statement or the profit and loss account. Financial statements can be prepared A. Horizontal Form (T shape) or B. Vertical Form (Statement type). Financial Statements are the outcome of summarising process of accounting. Financial statement are also called financial reports.

Nature of Financial Statements

The financial statement s are prepared on the basis of recording facts. The recorded facts are those which can be expressed in monetary terms. The statements are prepared for a particular period, generally one year. The transactions are recorded in a chronological order, as and when the events happen. The following points explain the nature of financial statements. I. Recorded Facts. II. Accounting Conventions III. Postulates. IV. Personal Judgements.

Objectives of Financial Statements.

The primary objective of financial statements is to assist in decision making. i. To provide reliable financial information about economic resources and obligations of a business firm. ii. To provide other needed information about changes in such economic resources and obligations. iii. To provide reliable information about changes in net resources arising out of business activities. iv. To provide financial information that assists in estimating the earning potential of business. v. To disclose, to the extent possible, other information related to the financial statements that is relevant to the needs of the users of these statements.

Anatomy/Types of financial statements.

a) A balance sheet b) An income statement c) A statement of changes in owners account, and d) A statement of changes in financial position.
i. Funds Flow statement. ii. Cash flow statement.

Financial Statements Analysis

Financial Statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. Financial analysis is the process of identifying the financial strength and weaknesses of the firm by properly establishing strategic relationship between the items of the balance sheet, profit and loss account and other operative data.

Methods or Devices of Financial Analysis

1) 2) 3) 4) 5) 6) Comparative statements; Trend analysis; Common size statements; Funds flow analysis; Cash flow analysis; Ratio analysis.

Comparative Statements
The comparative financial statements are statements of financial position at different periods; of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. The comparative statement may show: i. Absolute figures (Rs.) ii. Change in absolute figures i.e. , increase or decrease in absolute figures. iii. Absolute data in terms of percentages. iv. Increase or decrease in terms of percentages. The two comparative statements are 1. Balance Sheet, and 2. Income Statement

Comparative Statements (Balance Sheet)

1
Particulars

2
Values at the begging of the year

3
Values at the end of the year

4 = (3-2)
Absolute change

5 = (4/2)x 100
Percentage of change (%)

ASSETS A. Current Assets: Total C. Assets (A) B. Fixed Assets Total Fixed Assets (B) TOTAL ASSETS (A+B)

xxxx XXXX xxxx XXXXX XXXX xxxx xxxx xxxx xxxx xxx xxxx xxxx

xxxx XXXX xxxx XXXX XXXX xxxx xxxx xxxx xxxx xxx xxxx xxxx

xxx XXX xxx XXX XXX xxx xxx xxx xx xx xx xx

xx XX xx XX XX xx xx xx Xx Xx Xx xx

LIABILITIES &CAPITAL Current Liabilities

Total C. Liabilities (C) Long Term debts Total Long term debts (D) Share holders funds (E) Outside Liabilities ( C+D) Total Liabilities (C+D+E)

1. Following are the Balance Sheets of a company for the year 2009 and 2010. prepare, a comparative balance sheet and study its financial position. Liabilities Equity share capital Reserves & surplus Debentures 2009 (Rs.) 4,00,000 3,12,000 50,000 2010 (Rs.) 6,00,000 3,54,000 1,00,000 Assts Land & buildings 2009 (Rs.) 2010 (Rs.) 2,70,000 1,70,000 7,86,000 77,000

Plant & machinery 3,10,000 Furniture 55,000

Long-term loan
Accounts payable Other current liabilities

1,50,000
2,55,000 7,000

2,55,000
1,17,000 10,000

Other fixed assets

Cash in hand Sundry Debtors Inventory Prepaid expenses Other C. assets

20,000
1,18,000 2,09,000 1,60,000 3,000 29,000

30,000
10,000 1,90,000 1,30,000 3,000 40,000

11,74,000

14,36,000

11,74,000 14,36,000

2. Following are the Balance Sheets of a company for the year 2008 and 2009. prepare, a comparative balance sheet and study its financial position. (HW) Liabilities Share capital Reserves 6% Debentures Bills payable Dividends payable Taxation provision 8,000 2008(Rs.) 2009(Rs.) 5,25,000 1,75,535 1,25,000 3,750 5,75,000 59,070 1,00,000 3,000 1,43,000 25,000 48,000 Assts Goodwill Plant & machinery Patents Investments Cash in hand Sundry Debtors Inventory Prepaid expenses Debenture discount 9,49,285 9,53,070 2008 (Rs.) 80,000 1,74,000 30,000 1,05,000 1,70,650 1,38,760 2,35,800 3,200 6,875 9,49,285 2009 (Rs.) 5,000 1,61,000 24,000 25,800 2,87,000 1,53,000 2,87,670 4,600 5,000 9,53,070

Sundry creditors 1,12,000

3. Following income statements are given for the years ending 2008 and 2009. rearrange them in a comparative form and make comments. 2008 To cost of goods sold To administrative expenses To selling exp. To Interest paid To loss on sale of machinery 9,00,000 93,250 2009 9,50,000 95,980 By sales By Interest and dividend By profit from sale of land 2008 15,25,000 7,500 2009 17,00,000 6,200

1,90,000 8,000 2,500

2,09,000 7,000 800

6,000

8,000

To income-tax
To net profit

85,000
2,59,750 15,38,500

1,68,000
2,83,420 17,14,200 15,38,500 17,14,200

DOUBT

4. The following are the income statements of Swastik Ltd. for the years 2007 and 2008. prepare, a comparative income statement and comment on the profitability of the company. 2007 Opening stock Purchases less returns Wages Salaries Rent , rates Depreciation Selling expenses Loss on sale of plant Discount allowed Interest paid Net profit 5,000 12,000 4,26,000 12,17,000 85,000 5,00,000 60,000 42,000 35,000 40,000 12,000 2008 2,00,000 5,50,000 80,000 64,000 40,000 60,000 12,000 8,000 7,000 14,000 4,12,500 14,47,500 12,17,000 14,47,500 Sales less returns Closing stock Dividends Income from Inv 2007 2,00,000 5,000 12,000 2008 2,25,000 7,500 15,000 10,00,000 12,00,000

5. Following are the balance sheets of A Ltd and B Ltd on 30st December 2011. prepare a common size statements. (Rs. In lakhs) A Ltd. (Rs.) Cash Sundry debtors 27 220 B Ltd (Rs.) 72 226

Stock
Prepaid expenses Other current assets Fixed assets

100
11 10 635

174
21 21 513

Total assets
Liabilities &Capital Sundry creditors Other current liabilities

1003
42 78

1027
154 62

Long term liabilities

Capital Total liabilities

225
658 1003

318
493 1027

Funds Flow Statement

Funds flow statement consists of 1. Statement of Changes in Working capital 2. Statement showing funds from operation or (profit and loss adjustment account) 3. Statement of sources and application of funds or Funds flow statement.

Statement of changes in Working capital Particulars A. Current Assets Cash xxx xxx Xxx Year 1 Year 2 Working Capital

Increase

Decrease

Stock S Debtors
Other Current Assets B. Current Liabilities S Creditors Bills Payable Provision for Taxation Other current liabilities Net Working Capital (A-B) Increase or Decrease in W.C

xxx xxx
xxx XXXX xxx xxx xxx xxx XXXX xxxx XXXX

xxx xxx
xxx XXXX xxx xxx xxx xxx XXXX xxxx xxx XXXX

Xxx Xxx
xxx

Xxx xxx Xxx Xxx

xxx XXXX XXXX

Adjusted Profit and Loss Account Particulars To Depreciation on Fixed Assets Rs. Xxx Particulars By Balance b/d P&L a/c balance or Reserves and surplus bal or Retained earnings bal. By dividend received By profit on sale of fixed assets By income from investment Rs. xxxx

To Goodwill written off To Transfer to reserves To loss on sale of fixed assets To provision for taxation To proposed dividend

Xxx Xxx Xxx Xxx Xxx

Xxx Xxx Xxx

To Preliminary exp. Written off Xxx

By Funds from operations (Bal. Fig) xxx

To Funds lost in operation (Bal.Fig)

To Closing balance c/d P&L a/c balance or Reserves and surplus bal or Retained earnings bal.

Xxx
xxx

xxxx

xxxx

Fund Flow Statement or Statement of Sources and Application of Funds Sources Issue of Share Capital Issue of Debentures Raising of Long-term loans Rs. Xxx Xxx Xxx Applications Redemption of Preference Share Capital Redemption of Debentures Repayment of long-term loan Rs. Xxx Xxx Xxx

Sale of Fixed Assets

Non-trading receipts Sale of Long term investment Funds from operations Net Decrease in W. Capital

Xxx
Xxx Xxx Xxx Xxx xxxx

Purchase of Fixed Assets

Purchase of long-term Inv. Payment of dividend Payment of tax Funds lost in operations Net increase in W. Capital

Xxx
Xxx Xxx Xxx Xxx Xxx xxxx

5. The following are the summarised balance sheets of A. Ltd. , 31st Dec. , 2009 & 10 Liabilities Share capital 2009 Rs. 6,00,000 2010 Rs. 8,00,000 Assets Plant & machinery (at cost) Land & buildings (at cost ) Stock 2009 Rs. 4,00,000 2010 Rs. 6,45,000

Debentures Profit and loss a/c

2,00,000 1,25,000

3,00,000 2,50,000

3,00,000 3,00,000

4,00,000 3,50,000

Creditors
Provision for bad debts Provision for depreciation - On land & Buildings - On plant & machinery

1,15,000
6,000

90,000
3,000

Bank
Preliminary expenses Debtors

20,000
7,000 69,000

40,000
6,000 61,000

20,000 30,000 10,96,000

24,000 35,000 15,02,000 10,96,000 15,02,000

Additional information: i. During the year a part of machinery costing Rs. 70,000 (accumulated depreciation there on Rs. 2,000) was sold for Rs. 6,000 ii. Dividends of Rs. 50,000 were paid during the year. You are required to ascertain:
a. Changes in Working capital. b. Funds flow statement.

7. The following are the summarised trial balances of ABC Ltd. as at 31st March 2009 and 2010. 2009 Dr Rs. Fixed assets Current assets Debenture discount Issued capital Equity Preference Share premium Debentures 15,00,000 3,00,000 30,000 5,00,000 15,00,000 4,00,000 10,000 5,00,000 23,36,960 9,60,540 30,000 Cr Rs. 2010 Dr. Rs. 24,60,500 7,91,800 25,000 Cr. Rs.

Current liabilities
Provision for Dep. Provision for D/D Dividend

6,20,000
1,80,000 6,000 1,50,000

4,40,000
1,95,000 5,000

Balance of P&L a/c from pre. year

Net profit for the year

24,400
1,67,100

1,91,500
1,55,800

During the year ended 31st March 2010 machinery cost- Rs. 2,00,000 ( accumulated provision for depreciation Rs. 60,000 was sold for Rs. 1,50,000. II. Rs. 1,00,000 preference share capital was issued during 2009-10 of premium of Rs. 10,000. III. The net profit for the was arrived at after taking credit for the profit on sale of machinery, reduction in the provision for doubtful debts and written off the discount of debentures. You are required to prepare: a. A statement showing the net increase in working capital during the year 2009-10 and b. A statement showing the sources of the funds and application there of during the period.(6.124) I.

8. The following Balance Sheets related to M/s XL Ltd. Assets: Cash Previous year 800

(Rs. 000) Current year 888

Sundry Debtors
Raw material and stores Finished goods Plant and Machinery

200
160 140 300

370
224 120 340

Land
Buildings Patents Discount on issue of debentures Liabilities & Capital Current liabilities Provision for depreciation

80
400 20 40

80
320 18 36

2140
600 100

2396
640 56

Debenture
Reserves and surplus Share capital

440
300 700 2140

440
390 870 2396

The following additional information is available : Rs. Net profit after tax Dividend Depreciation charged to profit Ordinary shares issued Bonus shares issued Building sold 2,00,000 40,000 16,000 1,00,000 70,000 28,000 Original Cost Rs. 80,000 Net book value Rs. 20,000

The following are the summaries of the Balance Sheet of a limited company as at 31st Dec 2010 & 2011. Liabilities Sundry creditors Bills payable Bank overdraft 2010 Rs. 39,500 33,780 59,510 2011 Rs. 41,135 11,525 Assets Cash at bank Sundry debtors Sundry advances 2010 Rs. 2,500 85,175 2,315 2011 Rs. 2,700 72,625 735

Prov. for taxation

Reserves P&L A/c Share Capital

40,000
50,000 39,690 2,00,000 4,62,480

50,000
55,000 41,220 2,55,000 4,53,880

Stock
Land and buildings Goodwill

1,11,040
1,48,500 4,62,480

97,370
1,44,250 1,16,200 20,000 4,53,880

Plant and machinery 1,12,950

The following additional information is obtained from the general ledger: 1. During the year ended 31st Dec 2011, an interim dividend of Rs. 26,000 was paid. 2. The asset of another company were purchased for Rs. 60,000 payable in fully paid share of the company. There assets consisted of Stock Rs. 21,640, Machinery Rs. 18,360 and Goodwill Rs. 20,000. in addition, sundry purchases of plant were made totaling Rs. 5,650 3. Income tax paid during the year amounted to Rs. 25,000. You are required to prepare a statement showing the sources and application of funds and a schedule setting out changes in working capital.

Cash Flow Statement A. Cash Flow From Operating Activities Net Profit/Loss before tax and extraordinary items Adjusted for: Non cash and Non operating items i. e. , Dep., loss on sale of fixed assets, goodwill written off etc. Operating profit before working capital changes Adjustment for Current Asset and Current Liabilities, Add: increase in C. Liabilities &Decrease in C. Assets Less: Decrease in C. Liabilities & Increase in C. Assets Cash generated from operations before Tax & extraordinary items Less: tax and extraordinary items B. Cash Flow From Investing Activity Purchase of Fixed assets Sale of Fixed Assets Purchase of Investment Sale of investment Interest received (xxx) Xxx (xxx) xxx Xx Xxx (xxx) Xxxx (xxx) Xxx Xxx Xxx xxx

Dividend received

xx

Xxx

C. Cash Flow From Financing Activity Proceeds from issue of share capital Proceeds from long-term borrowings Payment of long term loans Dividend paid Redemption of preference share capital Net increase/Decrease in Cash and Cash Equivalents Cash and Cash equivalents at the beginning Cash and Cash Equivalents at the end Xxx Xxx (xxx) (xxx) (xxx) Xxxx Xxxx Xxx Xxx

8. The following are the summarised Balance sheets of a company as on 31st Dec, 2008 and 2009. Liabilities Share capital General reserve 2008 1,00,000 25,000 2009 1,25,000 30,000 Land Machinery 2008 1,00,000 75,000 2009 95,000 85,500

Profit and loss a/c

Bank loan(long term) Sundry creditors Provision for taxation

15,250
35,000 75,000 15,000

15,300
67,600 17,500

Sundry debtors
Cash Bank Good will(at cost) Furniture

50,000
250

37,000
300 4,000 1,500

40,000 2,65,250

32,100 2,55,400

2,65,250

2,55,400

Additional information During the year ended 31st December 2009: 1). Dividend of Rs. 11,500 was paid. 2). depreciation charged on land Rs. 5,000. 3). Machinery was further purchased for Rs. 19,000. 4). Depreciation written off on machinery Rs. 6,000. 5). Income tax paid during the year Rs. 16,500. 6). Loss on sale of machinery Rs. 100 was written off to general reserve. You are required to prepare a Cash Flow Statement.

9. Prepare a cash flow statement of Atlantic Business Corporation from the following information Liabilities Current liabilities Bonds payable Discount on Bonds Rs. 30,000 22,000 (2,000) Rs. 32,000 22,000 (1,800) Assets Cash and bank Debtors Inventories Rs. 40,000 10,000 15,000 Rs. 44,400 20,700 15,000

Capital stock
Retained earnings

35,000
15,000

43,500
19,500

Land
Business premises Plant Accumulated Dep. Patents

4,000
20,000 15,000 (5,000) 1,000 1,00,000

4,000
16,000 17,000 (2,800) 900 1,15,200

1,00,000

1,15,200

Additional Information: 1). income for the period Rs. 10,000 2). a building that cost Rs. 4,000 and which had a book value of Rs. 1,000 was sold Rs. 1, 400. 3). The depreciation charged for the year was Rs. 800. 4). There was Rs. 5,000 issue of capital stock. 5). Cash dividends of Rs. 2,00 and stock dividend of Rs. 3,500 were paid were declared.

10. From the following particulars a Cash Flow Statement for the year ended 31st March, 2010. (page no. 7.56) 1. Total sales for the year were Rs. 20,50,000 out of which cash sales amounted to Rs. 14,20,000. 2. Total purchases for the year were Rs. 15,30,000 out of which cash purchases totalled Rs. 10,20,000. 3. Cash collected from customers during the year amounted to Rs. 4,80,000. 4. Cash paid to suppliers of goods on credit was Rs. 4,50,000. 5. Depreciation for the year was Rs. 40,000 where as salaries and other expenses amounted to Rs. 1,80,000 out of which Rs. 20,000 are outstanding. 6. Redeemable preference shares of the face value of Rs. 1,00,000 were redeemed during the year at a premium of 10%. 7. Income tax paid Rs. 80,000 8. New machinery was purchased for Rs. 30,000 9. Rs. 25,000 was paid as dividend for the year ended 31st March 2009. 10. Equity shares of the face value of Rs. 2,00,000 were issued at a premium of 5% during the year. 11. The balance of cash and bank as on 1st April ,2009 was Rs. 85,000.

Ratio Analysis
A ratio is a simple arithmetical expression of the relationship of one number to another. The ratio of two figures 200 and 100 may be expressed in any of the following ways: (a) 2:1 (b) 2 (c ) 2/1 (d) 2 to 1 (e) 200% In all these cases the inference is that the first figure is double, 200% or 2 times than the second. Classification of Ratios Functional Classification or Classification according to Tests I. Liquidity Ratios II. Long-term Solvency and Leverage Ratios III. Activity Ratios IV. Profitability Ratios

Liquidity Ratios
1. Current Ratio Current Ratio = current assets/ current liabilities Rule of thumb = 2:1 2. Quick or Acid Test or Liquid Ratio Quick Ratio = Quick or liquidity asset/ current liabilities. Quick Assets = Current Assets stock prepaid expenses Rule of thumb = 1:1 3. Absolute Liquidity or Cash Ratio Absolute Liquid Ratio = Absolute Liquid Assets/ current liabilities. Absolute Liquidity Assets = cash &Bank + short-term securities Rule of thumb = 0.5: 1

Long-term Solvency and Leverage Ratios

1. Debt Equity Ratio Debt Equity Ratio = long term debt (outsiders Funds)/ Shareholders funds Share holders funds = Eq. Sh. Capital+ Pr. Sh. Capital+ capital reserve + revenue reserve + P&L account Fictitious assets Rule of thumb = 2:1 2. Proprietory Ratio or Equity Ratio Proprietory Ratio = Shareholders Funds/ Total Assets 3. Fixed assets to net worth ratio Fixed assets to net worth ratio = fixed assets/ net worth or share holders funds

4. Capital Gearing Ratio: = Fixed Interest- bearing Securities Equity Shareholders Fund 5. Interest Coverage Ratio: = PBIT Interest 6. Dividend Coverage Ratio: = PAT Preference dividend

Turnover or Activity Ratio

1. Capital Turnover Ratio: = sales/ capital employed 2. Fixed Assets Turnover Ratio: = sales/ net fixed assets 3. Total Assets Turnover Ratio: = sales/ total assets 4. Working Capital Turnover Ratio: = sales/ net working capital 5. Stock Turnover Ratio: = cost of goods sold/ average stock 6. Debtors turnover Ratio: = net credit sales/ average debtors 7. Debt collection period: = 365/debtors turnover ratio or Average debtors X no. of days in a period/ net credit sales

8. Creditors Turnover Ratio: = net credit purchases/ average creditors 9. Debt payment period: = 365 days / creditors turnover ratio or average creditors X no. of days in a year/ net credit purchases

Profitability Ratios
1. Gross profit ratio: = gross profit X 100 net sales 2. Net profit ratio: = net profit X 100 net sales 3. Operating ratio: = cost of goods sold + operating expenses X 100 net sales 4. Operating profit ratio: 100 operating ratio

5. Return on capital employed: = PBIT/ capital employed 6. Return on shareholders funds: = PAT/ shareholders funds 7. Return on total assets: = net profit after tax X 100 total assets 8. Earning per share:
= net profit after tax and preference dividend Number of Equity shares

9. Price earning ratio: = Market price per equity share Earning per share 10. Payout Ratio: = Dividend per equity share Earning per share

Problems
1. The following is the Balance Sheet of a limited company as on 31st March, 2011. Liabilities Share capital P& La/c Rs. 2,00,000 30,000 Assets Land and buildings Plant and machinery Rs. 1,40,000 3,50,000

General reserve
12% Debenture Sundry creditors Bills payable

40,000
4,20,000 1,00,000 50,000 8,40,000

Stock
Sundry debtors Bills receivable Cash at bank

2,00,000
1,00,000 10,000 40,000 8,40,000

Calculate : a. Current ratio b. Quick ratio c. Inventory to working capital ratio d. Debt to equity ratio e. Proprietory ratio f. Capital gearing ratio g. Current asset to fixed assets ratio

2. The following are summarised profit and loss a/c for the year ended 31st Dec. 2010 and Balance Sheet as at that date: TRADING AND PROFIT & LOSS ACCOUNT To opening stock To purchases 10,000 55,000 By sales By closing stock 1,00,000 15,000

To gross profit

50,000
1,15,000 1,15,000 By gross profit 50,000

To administration Exp. To interest To selling expenses

15,000 3,000 12,000

To net profit

20,000
50,000 50,000

Additional information: 1. Average Debtors Rs. 12,500 2. Average Creditors Rs. 40,000. You are required to calculate: 1. stock turnover ratio. 2. debtors turnover ratio. 3. creditors turnover ratio 4. sales to working capital 5. sales to fixed assets 6. sales to capital employed 7. return to shareholders. 8. current ratio 9. acid test ratio 10. gross profit ratio 11. net profit ratio 12. operating ratio.

BALANCE SHEET Capital Profit & Loss a/c Creditors Bills payable 1,00,000 20,000 25,000 15,000 Land and buildings Plant and machinery Stock Sundry debtors Bills receivable Cash at bank Furniture 1,60,000 50,000 30,000 15,000 15,000 12,500 17,500 20,000 1,60,000

3. The following information is given: Current ratio: 2.5 Liquidity ratio: 1.5 Ne working capital : Rs. 3,00,000 Stock turnover ratio: 6 times (cost of sales/ closing stock) Gross profit ratio 20% Fixed assets turnover ratio : 2 times Average debt collection period: 2 months Fixed assets: Shareholders Net worth 1:1 Reserves: share capital 0.5: 1 Draw up a Balance Sheet from the above information.(8.102)

4. Using on the following information and the form given below,

compute the Balance Sheet items for a firm having a sales of Rs. 36 lakhs. 8.109
Sales/Total assets Sales/ Fixed assets Sales/ Current assets Sales/ Inventories Sales/ Debtors Current ratio Total Asset/ Net Worth Debt/ Net Worth Net worth Long-term debt Current liabilities Xx Xx Xx 3 5 7.5 20 15 2 2.5 1 Balance Sheet Fixes Assets Inventories Debtors Liquid assets Xx Xx Xx xx

5. From the following information, you are required to prepare balance sheet:8.113 Current ratio Liquidity ratio Stock turnover ratio ( cost of sales/closing stock) Gross profit ratio Debt collection period Reserves and surplus to capital Turnover to fixed assets Capital gearing ratio Fixed assets to net worth Sales for the year 1.75 1.25 9 25% 1 months 0.2 1.2 0.6 1.25 Rs. 12,00,000