Financial Statements

By:
Karan Bhalla -101
Yatendra Bihani -102
Apurva Dagli -103
Harshit Aggarwal -302
Siddhant Agarwal -303
Financial statement
 A financial statement is a record of the financial activities of
a person, business or other entity.
 It is written report which describes the financial strength of a
firm.
 Financial statements are usually compiled on a quarterly and
annual basis.

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User wise importance

Finance manager:
- To make rational decision
- To study growth and progress of firm.
- To study viability of projects undertaken.
- To plan further business growth
- To find achievement level of targets.
- To evaluate opportunities in relation to current position
- To fix future targets.
- To find rate of interest.

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 Creditors:
 Suppliers who provide raw materials on credit
 Short terms borrowing from market.
 Not a part of debt.
 To analyze firm liquidity to ensure that firm will be able to pay their
short term claims.
 Bond holders:
- To analyze firms capacity to service debt over a long period.
- To analyze capital structure, major sources and uses of funds, firms
profitability.

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 Lenders :
 To analyze firms capacity to pay short term debts.
 To find any diversion of funds.
 To study end use of funds.
 To find out multiple finance on same funds.
 Shareholders:
 To know about present and expected future earning and stability of
earnings.
 To analyze profitability.
 To analyze financial condition of firm for its ability to pay dividends
and avoid bankruptcy.

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 Tax Authorities:
 To analyze firm’s financial statement to arrive at correct tax liability.
 To find if firm has worked out financial statements as per it
requirements.

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Financial Accounting Concepts
 Entity Concept :
 A firm is separate entity for accounting.
 Accounts are maintained as distinct from persons connected to it.
 Transactions are recorded as they affect thi entity.
 Owners, creditors, employees are considered as regarded parties
transacting with the entities.
 Money measurement concept :
 All entities are valued in terms of money.
 Land, plant, equipment, securities can be expressed in common
denominator.

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 Stable Unit Concept :
 No inflation to be accounted for.
 Changes in purchasing power of money not considered.
 Going Concern Concept:
 Business firm will remain for identifying long period.
 Cost concept :
 Assets are reduced at their cost.
 Dual aspect concept :
 Assets are what the firm owns the
 Liabilities are what firm owes
 Equities is the residual interest of owners in assets

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 Accounting period concept :
 Time is divided into accounting period.
 Income is measured for periods and financial position is assessed at the
end of each period.
 Accrual concept:
 Revenue are recognized when when sales are made or service rendered.
 Expenses are recognized when goods are used or services received
irrespective of when cash is paid.
 Realization concept:
 Revenue is deemed to have been earned when realized.

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 Matching concept :
 Revenue for accounting period is recognized.
 Expenditure is matched with revenue and not vice-versa.

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Accounting Conventions
• Convention of Conservatism:
– Anticipate no profits but anticipate all loses.
– Recognize expenses when possible.
– Pre calculated revenue liability
– Prepaid expenses- assets.
– Current assets to be valued at cost or market price which is lower.
• Convention of full Disclosure:
– All information about final condition of activities of entity must be
disclosed.
• Convention of Consistency:
– Methods to be followed over a period of time.
– Same method of accounting should be followed every year.
• Convention of Materiality:
– Only Transaction useful and material for business are shown.
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Accounting Rules
 Every transaction has hearing on at least two accounts in
balance sheet.
 Irrespective of transaction on balance sheet,
Assets = Liabilities + equity
 Transactions which does not result in revenue or expenses
have n bearing on reserve and surplus account.
 Transactions of revenue or expenses are reflected in P&L
account and have bearing on Reserve and Surplus account.

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Trading Account
  A trading account is a part of the financial statement which determines
the gross profit or gross loss during an accounting year.

 Its main components are sales, services rendered and cost of such sales
and services rendered

Characteristics of a trading account

1. It is the first stage in preparation of final accounts of an entity

2. Records net sales and direct cost of goods sold.
3. Balance of this account discloses gross profit or gross loss
4. Balance is transferred to the Profit and loss account.

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Items to be accounted in a trading account

Debit side

1. Opening Stock: Refers to the closing stock of the previous year. The opening stock
may consist of different types of finished goods, or it can consist of raw materials,
work in progress, finished goods. It is generally the first item on the debit side of the
trading account.

2. Purchases and Purchase returns: Refers to the gross amount of purchases made of
materials, goods purchases both in cash and credit. The purchases return account will
show a credit balance showing the return of materials to the suppliers.

 Besides deducting the purchases return, following entries should also be

deducted.
• Goods taken by the proprietor for personal use.
• Goods given as Charity
• Goods given as Samples
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  Direct expenses: These are the expenses incurred on the goods purchased till they are brought to
the place of sale. Some of the direct expenses include.

1. Carriage or Freight or Cartage: Cost of bringing materials to the firms go-down. Freight paid for
assets is to be added to the cost of asset and not debited to the trading account.

2. Wages: Paid to the workers in the factory, stores. If any amount is spent on the making of an asset,
the amount is added to the cost of asset and the debit to the trading account is reduced to that
extent.

3. Power and Fuel

4. Factory Lighting

5. Factory Rent

6. Duty on Purchases

7. Royalties

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  Credit Side

1. Sales and Sales Return: Sales account always has a credit

balance, indicating the total sales made during the period.
The sales return account has a debit balance. The net of the
two amounts gives the Net sales and is entered on the credit
side of the trading account.

2. Closing Stock: Refers to the stock of unsold goods at the

end of the accounting period. Stock is valued at its cost or its
market price i.e., the net realizable value, whichever is lower.

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General Format of a Trading Account

Dr Cr

Particulars Amount( Particulars Amount(

Rs.) Rs.)

To Opening Stock --- By Sales ---

To Purchases --- Less Sales Returns--- ---

Less Purchases Returns --- --- By Closing Stock ---

To Direct Expenses --- By Abnormal Loss of stock ---

To wages and salaries --- By Gross Loss transferred to P&L A/c ---

To Freight, Carriage, Cartage, etc ---

To Gross profit transferred to P&L A/C ---

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Profit & Loss Account
 A profit and Loss account is prepared to calculate the net profit or net loss of the
business for a given accounting period.

 It is an account in which all gains and losses are collected in order to ascertain the
excess of gains over the losses or vice versa. The P&L Account starts with the credit
from the trading account (if there is a gross profit in trading account) else the P&L
account starts with the debit side.

 The Profit and Loss account is prepared to know the Net profit.

 Characteristics of the Profit and Loss Account

1. Second stage in preparation of the final accounts.

2. Balance of this account gives the net profit or net loss.
3. Accrual basis of accounting is followed while preparing this account.

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 General Format of the Profit and Loss Account
Dr Cr
Particulars Amount(Rs.) Particulars Amount(Rs.)
To Gross loss transferred from Trading A/C --- By Gross profit transferred from trading A/C ---
To Salaries --- By Rent ---
To Rent, Rates and Taxes --- By Discount received ---
To Stationery, Printing --- By Commission earned ---
To Postage, Telegrams --- By Interest ---
To Legal Charges --- By Bad debts received ---
To Depreciation --- By income from investment ---
To Audit Fees --- By dividends on shares ---
To Telephone Expenses --- By Miscellaneous revenue gains ---
To Bad debts --- By Income from other sources ---
To Travelling expense --- By Net loss transferred to Capital A/c ---
To discount ---
To advertisement ---
To Charity ---
To Conveyance ---
To Commission ---
To Loss by Fire ---
To Brokerage ---
To License Fee ---
To Repair and Renewals ---
To General Expenses ---
To Net Profit transferred to capital A/C --- 21
The Profit and Loss account is prepared

1. To ascertain net profit or net loss

2. To facilitate comparison with previous years
3. Control over expenses
4. Profit and Loss account includes items like
indirect expenses related to sales,
distribution, administration, finance, etc.

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 Items of the Profit & Loss account

Generally in a profit and Loss account, the expenses are properly grouped
according to the various functions such as administration, finance, etc.

Expenses and losses are shown on the Debit side of the P&L.
Selling and distribution expenses
Administration Expenses 1. Salesman salaries and
1. Establishment expenses commissions
2. Office salaries, rents 2. Advertising
3. Lighting 3. Packing
4. Printing, Postage 4. Export duties
5. Legal expenses 5. Taxes
6. Audit fee, General fee 6. Warehousing
7. Freight and Carriage etc.
Abnormal Losses
Losses by Fire Financial Expenses
Losses by theft Interest on loan
Interest on Capital
Interest allowed 23
Domestic household expenses, Drawings, and Personal liabilities, personal Income tax etc of
the proprietor do not appear in the Profit and Loss account.
Incomes and Items of profits are shown on the credit side of the P&L. They can be grouped as

 Income from Main Business

1.Gross profit
2.Commission receivable
3.Profit on consignment
 Financial and other income

1.Interest on fixed deposit

2.Rent received
3.Discount received
4.Interest on drawings
5.Income from investments

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Adept Chemical INC.
 
 In the case study of Adept Chemical INC, the statement of earnings,Exhibit 5, gives
the Profit and Loss Account for the company as on 31 July 2005, 2006 and 2007.

 The P&L statement as we can see is following the general format discussed above,
though the exhibit 5 is in the vertical form.

 The statement flows as:

• Revenue
• Cost of Goods sold
• Gross Profit= revenue-Cost of goods sold
• Operating Expenses
• Net earnings=Gross profit-Operating expenses.

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Balance Sheet
 Balance Sheet provides an overview of the
company’s financial strength at any point of time.
Balance sheet is divided into two parts:
 Assets
 Liabilities and share holder’s equity
 Assets are all those which the business has
acquired by the purchase or by the contribution of
owner. Assets include land, buildings, vehicles,
inventory, cash, machines, computers, copyrights,
patents, goodwill etc.
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 Liabilities are those items which business has
to repay after certain time duration. The
items in liabilities are ordered in the manner
which they are likely to be paid. The liabilities
include short- and long-term loans, bills for
utilities, rent, employee expenses, bonds,
taxes and many other items.
 Share Holders’ equity
= total assets- total liabilities
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HORIZONTAL BALANCE SHEET

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 2007
Current assets
cash 0.00
accounts receivable 132613
prepaid 4388
inventory 19908
total current assets 156909
Capital Assets
consumer equipment (net) 77952
control panels (net) 1953
computers (net) 1680
vehicles (net) 11363
total capital assets 92948
total assets 249857
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liabilities and shareholder's equity
current liabilities
operating line of credit 34327
accounts payable 113250
accrued liabilities & other current payables 5575
total current liabilities 153152
long-term liabilities
sodrox term loan 88000
shareholder loan 45000
personal loan 42240
total long term liabilities 175240
total liabilities 328392
shareholder equity
capital stock 120000
retained earnings 198535
total shareholders' equity 78535
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total liabilities & shareholders' equity 249857
 Balance Sheet determines two things for a company:
 Liquidity
 Capital Structure

 Liquidity analysis determines that whether the company has

sufficient cash resources to meet the short term obligations. To
determine this, financial ratios are calculated by the use of entries
in the balance sheet. Working capital ratio and acid test ratio are
used to determine the liquidity.

 Capital structure of the company determines the overall ways in

which company finances its operations. For this the log term debt
to equity rationof a company is calculated.
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Importance of Balance Sheet for Investors:
 Balance sheet helps the investors to analyze:
 How much cash the company has in hand.
 It helps the investor to identify the most valuable assets that
company holds.
 It also helps to determine how much money does company owes.
Balance sheet helps creditors :
 A company's creditors will often be interested in how much that
company has in current assets, since these assets can be easily
liquidated in case the company goes bankrupt. In addition,
current assets are important to most companies as a source of
funds for day-to-day operations.

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Cash Flow Statement
 Cash flow statement is a financial statement
that shows the flow of cash (and its
equivalents), inflow and outflow, in an
enterprise during a specified period of time

 Ruled compulsory by SEBI

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Uses of Cash Flow Statement

 For managers, decision about financial

policies affecting cash flows
 For lenders and creditors, analyzes
company’s ability to repay loans
 For investors, speaks of soundness and
stability of company
 For shareholders, specifies the cash left after
subtraction of investments from operations

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Three Parts of Cash Flow Statements

 Operating Activities: Principal revenue

producing activities of the firm

 Investing Activities: Include acquisitions,

disposal of long-term assets, investments
etc.

 Financing Activities: Change borrowings of

firm and change owner’s capital
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Methods to Represent

 There are two methods to represent cash

flow statements:

 Direct Method

 Indirect Method (preferred)

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Indirect Method
 Indirect method includes:
 Net income per the income statement
 Minus entries to income accounts that do not represent cash flows
 Plus entries to expense accounts that do not represent cash flows
 Equals cash flows before movements in working capital
 Plus or minus the change in working capital, as follows:

▪ An increase in current assets (excluding cash and cash equivalents) would be shown as a negative
figure because cash was spent or converted into other current assets, thereby reducing the cash
balance.
▪ A decrease in current assets would be shown as a positive figure, because other current assets were
converted into cash.
▪ An increase in current liabilities (excluding short-term debt which would be reported in the
financing activities section) would be shown as a positive figure since more liabilities mean that less
cash was spent.
▪ A decrease in current liabilities would be shown as a negative figure, because cash was spent in
order to reduce liabilities.

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Cash Flow Statement: Adept Chemical
Inc.
Details Amount (In $) Total (In $)
Cash Flow from Operating Activities

Net Profit before Tax 42,231

Amortization 10,990
Operating Profit before Working Capital Changes 53,221

Adjustments
Increase in A/c Receivables (39822)
Increase in Prepayments (905)
Increase in Inventory (1965)
Increase in A/c payables 47,306
Decrease in Operating Line of Credit (8751)

Decrease In Accrued Liabilities & Other Current Payables (673)

Operating Profit after Working Capital Changes 48,411

Tax paid by Sodrox for Adept - -

Net cash from Operating Activities 48,411

Cash Flow From Investing Activities

Purchase of Fixed Assets (32,661)

Net cash flow from investing activities (32,661)

Cash flow from financing activities

Payment of Sodrox term loan (12000)

Increase in personal loan 7240
Net cash from financing activities (4760)

Net increase in cash and cash equivalents 10,990

Cash and cash equivalents at the beginning (Not Provided) - -

Cash and cash equivalents at the end - - 43

Fund Flow Statements
What are Fund Flow Statements?

Fund Flow Statements tell us about:

 the inflow and the outflow of the funds.
 where the funds have come from and where
the funds were put to use.
 efficiency with which a company sources and
utilises the funds.

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The Format-Source and Applications

 Source: A) Any decrease in the asset.

B) Any increase in the liability
including shareholder’s liability.

 Application: A) Any increase in the asset.

B) Any decrease in the liability
including shareholder’s equity.

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Adjustments

 In Source: Net profit after dividend

Depreciation
 In Applications: Dividend
Gross Addition (It is
calculated by adding depreciation to the
difference between the Net fixed assets of
the two time periods)

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Why are they used?

 Acquisition and utility

 Long range forecasts of investments
 Comparative study
 Risk Return Character
 Communication tool
 Analysis Tool

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Fund Flow Statement for ADEPT
CHEMICAL INC.

I. Sources of funds
Net Earnings $42251
Amortization $10990
Personal Loan $7270
A/C Payable $47256

$107767

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Fund Flow Statement for ADEPT
CHEMICAL INC.

II. Applications of funds

Gross Addition $43651
Current Assets $42692
Operating Line of Credit $8751
Accrued Liabilities $673
Sodrox term Loan $12000

$10767

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Thank You