Study of Financial Statements

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Study of Financial Statements

• Module B
• Financial Management
• CAIIB

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Unit 10 Learning Objectives

• Broad Scope and Coverage of Financial Management
• Objective of Financial Management
• Increasing Importance of Financial Management

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Scope

• Designing and Implementing Business Plans
• Ensuring Effective Fund Utilisation
• Resource Allocation
• Investment decisions
• Profit generation
• Wealth creation

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Objectives

• Maximise the wealth of the firm
• Maximise Shareholder value
• Owner-Manager- Employee conflict
• Profit Maximisation vs Wealth Maximisation
• Risk and uncertainty

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Important Decisions

• Financing
• Investment
• Dividend Policy
• Current Asset Management

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Unit 11 Capital Expenditure

• Learning Objectives
• Capital Expenditure
• Phases of Capital Budgeting
• Levels of decision making
• Facets of Project Analysis
• Feasibility Study

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Capital Expenditure- Importance

• Long term Effects
• Irreversibility
• Substantial outlays

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Capital Expenditure- Difficulties

• Measurement Problems
• Uncertainty
• Temporal Spread

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Capital Budgeting Phases
Planning
Analysis
Selection
Implementation
Review
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Planning

• Planning is concerned with the articulation of a
  broad Investment Strategy and the generation and
  preliminary screening of project proposals.
• The investment Strategy of a firm delineates the
  broad areas or types of investments the firm
  plans to undertake.

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Analysis

• A detailed anlaysis of the marketing, technical,
  financial, economic and ecological aspects is
  undertaken.
• At this pint the focus is on gathering
  information, preapring and summarising
  information about various proposal being
  considered for inclusion in the capital budget.
• Based on this the projections may be made.

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Selection
Criterion Accept Reject
Payback Period( PBP) PBP lt target period PBP gt target period
Accounting Rate of Return ( ARR ) ARR gt target rate ARR lt target rate
Net Present Value( NPV) NPV gt 0 NPV lt 0
Internal Rate of Return ( IRR) IRR gt cost of capital IRR lt cost of capital
Benefit Cost Ratio( BCR) BCR gt 1 BCR lt 1
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Implementation

• Stages
• Project Engineering Design
• Negotiations and Contracting
• Construction
• Training
• Plant commissioning

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Tools for expeditious Implementation

1. Adequate formulation of projects
2. Responsibility Accounting
3. Network Techniques
4. Profit Centre Concepts

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Decision making levels
Operating Administrative Strategic
Where is it taken? Lower Level Management Middle Level Management Top Level Management
How structured is it? Routine Semi- structured Unstructured
Level of Resource Commitment Minor Resource Moderate Resource Major Resource
What is the time horizon? Sort term Medium term Long term
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Profitability Analysis

• Market
• Technical
• Financial
• Economic
• Ecological

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Key Issues in Project Analysid
Market Analysis Potential Market Market Share
Technical Analysis Technical Viability Sensible Choices
Financial Analysis Risk and Return
Economic Analysis Benefits Costs in Shadow Prices- Other Impacts
Ecological Analysis Environmental Damage Restoration measures
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Preliminary Work
Idea Generation
Initial Screening
Prima Facie analysis
NO
YES
Feasibility Analysis
Terminate
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Analysis
Market Analysis
Technical Analysis
Financial Analysis
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Evaluation
Economic Ecological Analysis
Is it Worthwhile?
NO
YES
Funding Proposal
Terminate
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Decisions, Return, Risk, Market Value
Return
Market Value
Investment Decisions
Risk
Financing Decisions
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UNIT 12- Sources of Finance

• Learning Objective
• Sources of Finance- Long term Short Term
• Advantages and Disadvantages
• Various Types of Funding

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Sources of Company Finance
Permanent Sources Long-term Sources Medium Term Sources Short-term Sources
Share Capital Redeemable Preference Shares Medium Term Loans Cash Credit
Retained Profits Debentures Deferred Credit Overdraft
Bonds Public Fixed Deposit Bills Discounting
Long term Loans- Indian Rupees or Foreign Currency Loans Working Capital Term Loans Commercial Paper
Seed Capital Trade Credit
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Matching Sources to Uses
Types of Capital Uses Matching Assets Sources
Permanent Broaden borrowing base/major financing/takeover/merger Freehold or long term property/shares of acquired or merged company, Share Capital, retained profits
Long Term Financing assets with long life/Plant machinery/Permanent Working capital Freehold or leasehold property long term/Permanent stock or debtor requirement Redeemable preference shares/Long term loans
Medium Term Fixed assets/working capital Vehicles/Plant/fittings, stock, debtors, leasing Medium term loans/Hire purchase
Short term Working Capital/financing seasonal fluctuations/export orders/bridging finance/minor fixed assets Stock/debtors Cash credit/overdraft/bill discounting/LC/Export credit/creditors
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Equity Financing

• Nature
• Advantages
• Disadvantages

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Retained Profits

• Nature
• Advantages
• Disadvantages

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Preference Shares

• Nature
• Advantages
• Disadvantages

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Debentures and Bonds

• Nature
• Advantages
• Disadvantages

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Term loans

• Nature
• Advantages
• Disadvantages

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Term Loans

• Maturity
• Security
• Repayment
• Interest Rate

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Seed Capital

• Venture Capital
• Seed Capital Assistance Schemes of IDBI

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Medium Term Sources

• Loans
• Deferred Credit Bill Discounting Scheme of IDBI
• Fixed Deposits
• Working Capital Term Loan

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Short Term Sources

• Bank loans
• Trade Credit
• Cash Credit and Overdraft
• Bill discounting
• Commercial Paper
• Lease

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Cost of Capital

• Minimum return
• Weighted average cost of projected sources of
  finance

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Unit 13 Financial Statements

• Learning Objectives
• Understand the meaning of Financial Statements
• Uses of Financial Statements for decision making
• Financial Analysis
• Interpretation of Statements
• Meaning of Fund Flows

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Key Financial Statements

• Balance Sheet
• Profit Loss or Income Statement
• Sources Uses of Funds Statement

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Balance Sheet
Liabilities Assets
Share Capital Fixed Assets
Reserves and Surplus Investments
Secured Loans Current Assets, Loans and Advances
Unsecured Loans Current Assets
Current Liabilities and Provisions Loans and Advances
Current Liabilities Miscellaneous expenditures
Provisions
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Balance Sheet
1. Sources of Funds
1. Shareholders Funds
a. Share Capital
b. Reserves and Surplus
2. Loan Funds
a. Secured Loans
b. Unsecured Loans
II. Application of Funds
1. Fixed Assets
2. Investments
3. Current Assets Loans and Advances
Less Current Liabilities and Provisions
4. Miscellaneous Expenditure
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Income Statement
 Revenue Commission actually Received 230000.00
Less Expenses    
Cost of Goods Sold Inventory expenses for the year 2950.00
Gross Profit    
  Depreciation/General Admin/Selling 4000.00
S,G A Overhead    
Total Expenses    
Profit Before Interest and Taxes    
Less Interest Interest on loan 10000.00
  Other Income/Loss 0.00
Profit Before Tax    
Tax_at_30    
     
Net Profit- Bottomline    
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Balance Sheet-Financial Management
Balance Sheet Items Finance Topics
Share Capital/Reserves and Surplus/Loans/Debentures Capital Structure and Cost of Capital
Loans and Advances/Current Liabilities/Trade Credit/Provisions Working Capital Financing Policy
Fixed Assets( Net) Gross Block-less depreciation Capital Budgeting
Investments Security Analysis
Current assets, loans and advances, cash and bank Working Capital mgt/cash management
Receivables Credit Management
Inventories Inventory Management
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Income Statement- Financial Management
Income Statement Item Finance Topic
Net Sales Revenue Risk
Cost of Goods Sold- Stocks/ Wages and Salaries/other manufacturing Expenses
Gross Profit Gross Profit Margin
Operating Expenses- SGA/Depreciation Depreciation Policy
Operating Profit- non operating surplus/deficit- EBIT Business Risk
Interest Financial Risk
Profit Before Tax
Tax Tax Planning
Profit After Tax Return on Equity
Dividends Dividend Policy
Retained Earnings
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Funds Flow Statement- Working Capital Basis
Operations
Dividend Payment
Issue of Share Capital
Repayment of long term borrowing
Working Capital Pool
Long Term Borrowing
Purchase of non current assets
Sale of non current assets
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Funds Flow- (WC basis)
Sources of Working Capital Uses of Working Capital
Operations Dividends
Profit after tax Purchase of Fixed assets
Depreciation Repayment of term loan
Issue of Share Capital Total working capital used
Long term borrowings
Sale of fixed assets
Total working Capital generated

Net change in working capital
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Funds Flow- Cash Flow Statement

• Sources of Cash
• Operations
• Net Income
• Depreciation
• Issue of Share Capital
• Long term borrowings
• Sale of non current liabilities
• Decrease in current assets other than cash

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Funds Flow Statement- Cash Flow

• Uses of Cash
• Payment of Dividends
• Purchase of non current assets
• Repayment of long term borrowings
• Decrease in current liabilities
• Increases in current assets other than cash

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Financial Statement Analysis

• Assessment of Past Performance and current
  Position
• Protection of Net Income and growth prospects
• Prediction of Bankruptcy and failure
• Loan decisions by FIs and banks

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Techniques

• Horizontal analysis
• Vertical Analysis
• Trend Analysis
• Ratio Analysis
• Common size Analysis

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Focus of Financial Statements Analysis

1. Liquidity or short term solvency anlysis
2. Profitability Analysis
3. Capital Structure or gearing analysis
4. Market strength or Investor analysis
5. Growth and stability analysis

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Projected Statements

• Projected Balance Sheet
• Projected Income Statements
• Projected cash flows

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• Thanks You
• Indian Institute of Banking and Finance