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Overview of Financial
Statements
B N Bhattacharyya, AICMA
Ex Joint Financial Advisor, Damodar Valley
Corporation
Consultant World Bank India
Visiting Prof Jadavpur University

Basic Financial Statements

Balance Sheet -The Balance sheet summarizes what a
firm owns and What a firm owes at a given point of
time.
The income statement- Income statement reports on
how much a firm earned in the period of analysis.

Cash Flow Statement - Cash Flow statement reports

on cash inflows and outflows to the firm during the
period of analysis

Statement of Changes in Equity

A Typical Balance Sheet

EQUITY AND LIABILITIES
1. Shareholders fund
(a) Equity Share capital
(b) Preference share capital
(c) Capital reserve
(d) Reserves and Surplus
2.

Non-current liabilities
(a) Long-term borrowings
(c) Other Long term liabilities
(d) Long-term provisions
3. Current Liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Total

Form of a Balance sheet

ASSETS
Non-current assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
Non-current investments
(a) Long-term loans and advances
(b) Other non-current assets /Investments
Current assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
Total

Balance Sheet in Normal T form

Long Term
Assets
Short Term
Assets
Investment in
securities and
assets of other
firms
Intangible
Assets

Current liability
Debt
Other liabilities
Equity

The Classification of Operating & Financing Items

in the Balance Sheet for Non-financial Firms

Revenue Statement
I

REVENUE FROM OPERATION

II MANUFACTURING EXPENSES:
(a) Cost of material consumed ( Op Stock + Purchase +wages
+ carriage inwards Direct Manufacturing Expenses Closing
Stock)
III GROSS PROFIT (I-II)
IV EXPENSES
(a) Employees cost/ benefits expenses
(b) Depreciation and amortization expenses
(c) Product development expenses/Engineering expenses
(d) Other expenses
(e) Selling and Distributing Expenses
TOTAL EXPENSES (IV)
V OTHER INCOME

Revenue Statement Contd..

VI- PROFIT BEFORE INTEREST, EXTRAORDINARY ITEMS AND TAX ( III-IV
+V)
VII- EXCEPTIONAL AND EXTRAORDINARY ITEMS (LOSS)
VIII -PROFIT BEFORE INTEREST AND TAX (VI-VII) PBIT
IX -INTEREST
X

- PBT (VIII- IX)

XI - TAX EXPENSES
XII- PROFIT AFTER TAX (PAT) (X-XI)
XIII- DIVIDEND
XIV- RETAINED EARNINGS (XII-XIII)

Expenses

Administrative Expenses.
Financial Expenses
Maintenance, depreciations and Provisions etc.
Selling and distribution expenses.

Incomes as on Profit & Loss Account

(a) Discount received
(b) Commission received
(c) Rent received
(d) Interest received
(e) Income from investments
(j) Profit on sale of assets
(g) Bad debts recovered
(h) Dividend received
(i) Apprenticeship premium etc.

Measurement of income
Transaction Approach (Normal Trading P&L A/C)
Income (I) = [Revenue earned from operating
activities (R) + Other revenue gains (G)] [Expenses (E) + Other revenue losses (L)]
i.e., I = (R + G)-(E + L)
Balance Sheet Approach
Income (I) = Net Assets at the end of the period
(NA1) - Net Assets at the beginning of the period
(NA0) + Withdrawal of capital during the period
(W) - Fresh capital introduced during the period (F)
i.e., I = NA1 NA0 + W - F
Alternatively , I= Cl.Cap-Op. Cap + Withdrawal of
capital New capital introduced

CASH FLOW STATEMENT

Cash Flow Net of Cash Inflow and Cash Outflow

during the period of analysis.
Three Types
1. Cash Flow due to operational activities
2. Cash Flow due to Investing activities
3. Cash Flow due to Financing activities

The Statement of Cash Flows

1. Net cash flow from operations,
Net Profit before Tax + non financial and non
operational expenses - non operating income increase in Working Capital or( + decrease in Working
Capital) Tax paid during the year
2. Cash Flows From Investing
Includes divestiture and acquisition of real assets
(capital expenditures) and disposal and purchase of
financial assets. Also includes acquisitions of other firms
3 . Cash Flow from Financing
Net cash flow from the issue and repurchase of equity,
from the issue and repayment and servicing of debt
and dividend payments
= Net Change in Cash Balance

Statement of Changes in Equity

Statement of Changes in Equity, also known as

theStatement of Retained Earnings, details the
movement in owners' equity over a period.
The movement in owners' equity is derived from the
following components:
I. Net Profit or loss during the period as reported
II. Share capital issued or repaid during the period
III. Dividend payments
IV. Gains or losses recognized directly in equity (e.g.
revaluation surpluses)
V. Effects of a change in Accounting policy or
Correction of accounting error

Example of Changes in Equity

Analysis of Financial StatementsWhy?

Decision About Performance
Trend Analysis
Strategic Decision about Investment, Divestiture ,
Expansion, Market Penetration , Amalgamation,
Merger , Pricing of issues etc.
Policy Changes
Manipulation

Manipulation
Changes in depreciation policy
Changes in valuation of Closing Stock
Capitalize certain expenses like Research and
Development costs
Convert Repair & Maintenance, Advertisement ,
R&D expenditure of huge amount to Deferred
Revenue expenditure
Make inadequate provision of certain liabilities like
gratuity etc
Make Extra provision in prosperous years and
reverse it in lean years
Revaluation of Assets to create apparent reserve .

Why Manipulation

To keep MPS (Market Price of Share) High

To maintain Investors confidence
To augment image to Banks/ lender institution
To make the shareholders happy
To make an impending issue ( equity /preferred)
success
To strengthen the perception that management is
competent.
To enhance managerial compensation .