FINANCIAL STATEMENT

ANALYSIS
 Content
□ Financial Statement

• Balance Sheet
• Income Statement
• Cash Flow Statement
• Fund Flow Statement
 Learning Objectives
➢To study, analyze, and interpret financial statements to enhance their
understanding of business performance and operations.

➢To use financial information to make informed decisions related to

investments, sources of finance, cost management, and resource
allocation.
 FINANCIAL STATEMENT
• Financial statements are formal records that provide an overview of a
company's financial position over a specific period.

• To present a company’s financial performance, cash flows, and

financial position to various stakeholders, including management,
investors, creditors, and regulators.

• Financial statements are essential for evaluating a company's financial

health and making informed business decisions.
Balance Sheet
(Assets and Liabilities)

Income Statement
(Income and Expenses)

Cash Flow Statement

(Cash Inflows and Outflows)

Fund Flow Statement

(Sources and Application of funds)
OBJECTIVE OF FINANCIAL STATEMENTS
 BALANCE SHEET
➢ Balance sheet is considered as one of the core financial statements that
provides a snapshot of a company's financial position at a specific point in time
➢ shows the position of
• assets,
• liabilities, and
• equity at the end of an accounting period.
➢ Called a balance sheet because it follows the accounting equation:
ASSETS = LIABILITIES + EQUITY
 Assets Liabilities Equity
Current Assets Current Liabilities Shareholders’ Equity:
Cash and Cash Equivalents Accounts Payable Owner’s Equity
Accounts Receivable Short-Term Loans Preferred Stock
Inventory Accrued Expenses Common Stock
Prepaid Expenses Unearned Revenue (Deferred Additional Paid-In Capital
Marketable Securities Revenue) Retained Earnings
Non-Current Assets Taxes Payable
Property, Plant, and Equipment Non-Current Liabilities
(PPE) Long-Term Loans
Intangible Assets (e.g., patents, Bonds Payable
trademarks, goodwill) Deferred Tax Liabilities
Investments
 Formats of Balance Sheet
• Horizontal Form: In this format, the balance sheet is presented with Assets
(Current And Non-current Assets) on the left side and Liabilities (Current
And Non-current) and Equity (Share Capital and Reserves and Surplus) on
the right side.

• Vertical Form: In this format, the balance sheet is presented in a top-to-

bottom order, with Equity (Share Capital and Reserves and Surplus),
liabilities (Current And Non-current), and Assets (Current And Non-
current).
HORIZONTAL
FORMAT
VERTICAL
FORMAT
QUESTION
From the following ledger balances of Sunshine Co. Ltd., prepare the Balance Sheet of the
company as on 31st March 2024.
SOLUTION: Balance Sheet of
Sunshine Company Limited as
on 31st March 2023
SOLUTION
 INCOME STATEMENT

• It tracks a company's revenue, expenses, gains, and losses over

a specific period.
• Also known as the Profit and Loss (P&L) Statement or the
Statement of Revenue and Expense.
• Provides insight into a company’s operational performance,
efficiency, management, and performance relative to others in
the same industry.
Income Statement
QUESTION: PREPARE PROFIT AND LOSS ACCOUNT

Closing Stock 35,000

 Particulars Amount (Rs)
Revenue:
Sales 4,40,000
Less: Sales Returns (6,000)
Net Sales 4,34, 000

Cost of Goods Sold (COGS) :

Opening Stock 40,000
Add: Purchases 1,60,000
Add: Carriage Inwards 7,200
Less: Purchase Returns (8,000)
Less: Closing Stock (35,000)
Total COGS 1,64,200

SOLUTION Gross Profit 2,69,800

Operating Expenses:
Waaes 84,000
Salaries 53,000
General Exoenses 29,000
Rent and Taxes 14,400
Lighting (Factory) 2,800
Carrige Outwards 1,600
Travelling Exoenses 7,400
Total Operating Expenses 1,92,200

Operating Profit 77,600

Non-Operating Income:
Discount Received 10,400

Net Profit 88,000

CASH FLOW STATEMENT
➢ Provides aggregate data regarding all cash inflows
the company receives from:
• Ongoing operations
• External investment sources.

➢ Also includes all cash outflows:

• Business activities
• Investments during a given period.

➢ Helps to identify the availability of liquid funds with

the organization in a particular accounting period.
THREE PARTS OF CASH FLOW
STATEMENT
 CASH FLOWS FROM OPERATING
ACTIVITIES
Examples of cash flows from operating activities are:
• cash receipts from the sale of goods and the rendering of services;
• cash receipts from royalties, fees, commissions, and other revenue;
• cash receipts and cash payments of an insurance enterprise
for premiums and claims, annuities, and other policy benefits;
• cash refunds of income taxes unless they can be specifically
identified with financing and investing activities
• cash receipts relating to futures contracts, forward contracts,
option contracts, and swap contracts when the contracts are held for
dealing or trading purposes.
 Cont..
• cash payments to suppliers for goods and services;
• cash payments to and on behalf of employees;
• cash payments of income taxes unless they can be specifically
identified with financing and investing activities; and
• cash payments relating to futures contracts, forward contracts,
option contracts, and swap contracts when the contracts are held for
dealing or trading purposes.
Method for calculating operating activities
Steps for the Indirect Method:
1. Start with NET INCOME (going to convert accrual net income into cash from operations)
2. ADD (+) noncash expenses such as depreciation, amortization, and depletion.
3. ADD (+ ) losses on sale of long-term assets.
4. DEDUCT (-) gains on sale of long-term assets.
5. Analyze changes to noncash CURRENT ASSET
A. DEDUCT increases in current asset account.
B. ADD decrease in a current asset account.
Current Assets INCREASE, then you are going to DECREASE Net Income.
Current Assets DECREASE, then you are going to INCREASE Net Income.
6. Analyze changes to noncash CURRENT LIABILITY ACCOUNTS.
C. ADD increases in current liability account.
D. DEDUCT decrease in current liability account.
Current Liabilities INCREASE , then you are going to INCREASE Net Income.
Current Liabilities DECREASE , then you are going to DECREASE Net Income.
 Cont..
Net income
+ noncash expenses: depreciation, amortization, uncollectible account
expense, etc.
+ loss on sale of asset
+ increase in current liabilities
+ decreases in current assets
- gain on sale of asset
- decrease in current liabilities
- increase in current assets
= Cashflow from operating activities
 CASH FLOWS FROM INVESTING ACTIVITIES
Examples of cash flows arising from investing activities are:
Add:
□ Cash receipts from disposal of fixed assets(including intangibles);
□ Cash receipts from disposal of shares, warrants, or debt instruments of other
enterprises and interests in joint ventures (other than receipts from those instruments
considered to be cash equivalents and those held for dealing or trading purposes);
□ cash receipts from the repayment of advances and loans made to third parties
(other than advances and loans of a financial enterprise);
□ cash receipts from futures contracts, forward contracts, option contracts and
swap contracts except when the contracts are held for dealing or trading purposes,
or the receipts are classified as financing activities.
 CASH FLOWS FROM INVESTING
Subtract:
ACTIVITIES
□ cashadvances and loans made to third parties (other than advances and loans made by a
financial enterprise);
□ cashpayments for futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
payments are classified as financing activities; and
□ cash payments to acquire fixed assets (including intangibles). These payments include
those relating to capitalized research and development costs and self-constructed fixed
assets;
□ cashpayments to acquire shares, warrants, or debt instruments of other enterprises
and interests in joint ventures (other than payments for those instruments considered to be
cash equivalents and those held for dealing or trading purposes);
 CASH FROM FINANCING
ACTIVITIES
Examples of cash flows arising from financing activities are:
Add:
□ cash proceeds/receipts from issuing shares or other similar
instruments;
□ cash proceeds/receipts from issuing debentures, loans, notes,
bonds, and other short or long-term borrowings; and
CASH FROM FINANCING
ACTIVITIES
Subtract:
□ cash repayments of amounts borrowed, buy-back of equity
shares, redemption of preference shares, debentures, notes,
bonds, etc., and
□ cash payment of interest and dividend
Cash Flow
Statement
format
QUESTION 1
• Anand Ltd., arrived at a net income of ₹ 5,00,000 for the year ended
March 31, 2024. Depreciation for the year was ₹ 2,00,000. There
was a profit of ₹ 50,000 on assets sold which was transferred to
Statement of Profit and Loss account. Trade Receivables increased
during the year ₹ 40,000 and Trade Payables also increased by ₹
60,000. Compute the cash flow from operating activities by the
indirect approach.
SOLUTION:
Cash Flows from Operating Activities as on March 31st, 2024
Question 2
Solution
Cont..
FUND FLOW
STATEMENT
The Institute of Chartered Accountants (ICAI) of India defines Fund
flow as:

"A statement prepared to analyze the reasons for changes in the

financial position of a company between two balance sheet dates.
It explains the sources from which funds were obtained and the uses
to which these funds were put during a particular period."

Purpose of the Fund Flow Statement:

Understanding the movement of funds within an organization over a
specific time frame.
It is also called "Statement of Sources and Application of Funds."
 Objective of Fund Flow Statement
• To analyze the changes in financial position between two
balance sheet dates.

• To identify the sources and uses of funds, showing how

resources were obtained and utilized over a period.
 Meaning of Funds and Flow
□ Funds:
• Refers to the difference between current assets and current liabilities.
• Known as "Net Working Capital"
• Includes any financial resource or money available to the business like
cash, investments, loans, and other resources convertible to cash.
□ Flow:
• Refers to the movement or transfer of funds within the business over a
specific period.
• Inflow (Source): The sources from which the company receives or
generates funds, such as income from operations, sales of assets, or
loans.
• Outflow (Application): The uses or applications of funds, including
expenses, asset purchases, debt repayments, and other expenditures.
 Fund Flow Analysis:
Usually, three statement are prepared in the modern technique
of fund flow analysis:

1. Schedule of Changes in Working Capital

2. Funds from Operations
3. Funds Flow Statement
 Schedule of Changes in Working Capital:
This schedule consist only current assets and current liabilities, at the beginning and
end of the year. It shows either increase or decrease in working capital.
The following rules are followed:
• Rule 1: An increase in current assets results in an increase in working capital.

• Rule 2: A decrease in current assets results in a decrease in working capital.

• Rule 3: An increase in current liabilities results in a decrease in working capital.

• Rule 4: A decrease in current liabilities results in an increase in working capital.

 Calculation of Funds from Operations
Start with Net Profit Before Tax:
Net Profit Before Tax (A): This is the profit before tax as shown in the Income Statement.

Add Back Non-Fund Items (Non-Operating and Non-Cash Charges):

Depreciation and Amortization (B): Non-cash expense that reduces profit but does not involve cash outflow.
Non-Trading Losses(C): Losses do not involve an actual outflow of funds; such as loss on sale of fixed assets,
appropriation of profits (transfer to general reserve, redemption fund etc), proposed dividend, provision for taxation.

Subtract Non-Fund Incomes (Non-Operating and Non-Cash Incomes):

Profit on Sale of Fixed Assets (D): Profits are not cash inflows related to operations, so they are subtracted.
Other Non-Operating Incomes (E): Includes items like interest or dividend income, which are not operating cash
inflows.

Funds from Operations (FFO) = Net Profit Before Tax + Depreciation and Amortization + Non-Trading Losses -
Profit on Sale of Fixed Assets - Non-Operating Income (FFO= A + B + C - D – E)
SOURCES OF FUNDS
• Items to be shown under the head Sources of Funds are as follows:-
□ Issue of Shares and Debentures for Cash: – The total amount received from the Issue of Shares
or Debentures is to be shown under this head. But, the Issue of bonus Shares or Conversion of
Debentures into Equity Shares or Shares issued to vendors shall not be shown here as there is no
inflow of Cash
□ Long Term Loans: The Amount received on raising Long Term Loans is shown under this head.
Short Term Loans are not to be shown here as their treatment has already been done while
preparing the Statement of Changes in Working Capital.
□ Sale of Investments and other Fixed Assets: The Total Amount received on the sale of
Investments and other Fixed Assets is to be shown under this head.
□ Funds from Operations: The Funds generated from Operations as computed are also required to
be shown here.
□ Decrease in Working Capital: This would be the Balancing Figure of the Statement and will
come from change in Working Capital Statement
APPLICATION OF FUNDS
• Items to be shown under Application of Funds are as follows:-
□ Purchase of Fixed Assets and Investments: The Cash Payment made for purchase of Fixed
Assets and Investments is an application of Funds. But if the purchase if made by issue of
shares or debentures, such a transaction will not constitute application of funds. Similarly, if
the purchases are on credit, these will not constitute fund applications.
□ Redemption of Debentures, Preference Shares and Repayment of Loan:- Payment made
including Premium (less: Discount) is to be taken as fund application
□ Payment of Dividend & Tax: Payment of Dividend and Tax are to be taken as applications
of fund if the provisions are excluded from Current Liabilities and Current Provisions are
added back to profit to determine the “Funds from Operations”
□ Increase in Working Capital: This would be the Balancing Figure of the Statement and will
come from change in Working Capital Statement
 QUESTION
The following are the Balance Sheets of Modern Limited as on 31st March 2023 and 2024
Liabilities 2023 2024 Assets 2023 2024
Equity Share Capital 480000 620000 Machinery 273600 458400
P&L A/c 43200 92800 Sundry Debtors 180000 259200
Sundry Creditors 185200 248800 Stock 204000 187200
Bills Payable 14000 27200 Bank 30600 50000
Cash 10200 17200
Preliminary Expenses 24000 16800

Total 722400 988800 Total 722400 988800

Prepare a Schedule of Changes in Working Capital and Statement of Flow Of Funds.

 Statement of Changes in Working Capital
Particulars 2023 2024 Increase Decrease
Current Assets:
Sundry Debtors 1,80,000 2,59,200 79,200 -
Stock 2,04,000 1,87,200 - 16,800
Bank 30,600 50,000 19,400 -
Cash 10,200 17,200 7,000 -
Total Current Assets (A) 4,24,800 5,13,600 1,05,600 16,800
Current Liabilities:
Sundry Creditors 1,85,200 2,48,800 - 63,600
Bills Payable 14,000 27,200 - 13,200
Total Current Liabilities (B) 1,99,200 2,76,000 - 76,800
Working Capital (A-B) 2,25,600 2,37,600
Net Increase in Working Capital 12,000
 Statement of Funds from Operations
Particulars Amount

Net profit as per P&L A/c (Rs.92,800-Rs.43,200) 49,600

Add: Preliminary Expenses Written off (Rs. 24,000-Rs.16,800) 7,200

Funds from Operations 56,800

 Fund Flow Statement
Particulars Amount
Sources of Funds:
Funds from Operations 56,800
Issue of Share Capital 1,40,000
Total 1,96,800
Applications of Funds:
Purchase of Machinery 1,84,800
Increase in Working Capital 12,000
Total 1,96,800