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ABOUT MYSELF

• Name : Sarbesh Mishra.


• Qualifications : 1. B.Com.(Hons)
2. Post-graduate Commerce.
3. M.Phil (Commerce)
4. Ph.D. (Commerce) submitted.
• Experience : Joined University of Delhi as
Lecturer in Commerce in 2001 and
continued till 2005 and then joined
Army Institute as Senior Faculty,
Finance Area prior to current
appointment at NICMAR.
Need of Knowing Finance – A
Managerial Perspective

by
Mr. Sarbesh Mishra,
Assistant Professor, Finance Area.
National Institute of Construction Management
& Research (NICMAR)
COVERAGE UNDER THIS TOPIC
• INTRODUCTION
• BASIC CONCEPTS
• LEGAL FRAMEWORK & BRIEF REVIEW OF
PROVISIONS
• THE BALANCE SHEET & ITS KEY ELEMENTS
• THE PROFIT & LOSS A/C & ITS KEY ELEMENTS
Qs:- If I have no intention of becoming a financial
manger, why do I need to, understand financial
applications / Analyse of Financial statements?

• The successful manager will need to be much


more of a team player that has the knowledge
and ability to move not just vertically within an
organization but horizontally as well.
Developing cross-functional capabilities
will be the rule, not the exception.
Contd….
• The mastery of basic financial management skills
is key ingredient that will be required in the work
place of yours not in too distant future.

• Finance is the study of money management, the


acquiring of funds (cash) and the directing of these
funds to meet particular objectives. Good financial
management helps businesses to maximize returns
while simultaneously minimizing risks.
Hierarchy of Finance in any Project

• Technical Appraisal
• Financial Appraisal
Goal Of The Firm

Goal

“STAKEHOLDER WEALTH MAXIMISATION”


Goal Of The Firm

Creating the
Firm

EQUITY DEBT

ASSETS
Goal Of The Firm

Building Up
The Firm

ASSETS SALES
Goal Of The Firm

Building Up
The Firm

ASSETS SALES EARNINGS


Goal Of The Firm

Building Up
The Firm
INTEREST

ASSETS SALES EARNINGS


DIVIDEND
Goal Of The Firm

The Key Links *

INTEREST

A T/O NPM
*
ASSETS * SALES EARNINGS
* DIVIDEND
Payout

Rate???
Goal Of The Firm

Dividend Policy And Re-investment Rate:


The Critical Factor
INTEREST

A T/O NPM
*
ASSETS * SALES EARNINGS
* DIVIDEND
Payout

At what rate /
cost ???
Finance Measures

 Cost

 Revenue

 Profit

 ROI

 EVA
UNDERSTANDING
FINANCE & ACCOUNTS

What is the NEED for this ?


MANAGERS, SHAREHOLDERS,
CREDITORS, ETC. WANT TO KNOW :

• WHAT IS THE FINAN- • ANSWER GIVEN BY


CIAL POSITION OF THE THE FIRM’S
FIRM AT A GIVEN BALANCE SHEET
POINT OF TIME ?

• HOW HAS THE FIRM


PERFORMED • ANSWER GIVEN BY
FINANCIALLY OVER A THE FIRM’S PROFIT
GIVEN PERIOD OF & LOSS ACCOUNT
TIME ?
BASIC CONCEPTS UNDERLYING
FINANCIAL ACCOUNTING

• ENTITY CONCEPT
• GOING CONCERN CONCEPT
• MONEY MEASUREMENT CONCEPT
• COST CONCEPT
• CONSERVATISM CONCEPT
• DUAL ASPECT CONCEPT
• ACCOUNTING PERIOD CONCEPT
• REALIZATION CONCEPT
• MATCHING CONCEPT
• MATERIALITY CONCEPT
LEGAL FRAMEWORK
WITHIN COMPANIES’ ACT, 1956 :

• Compulsory for Cos.


to keep proper books
of accounts & to
prepare annual
statements in the
prescribed form &
time. (Secs.209-223)
BRIEF REVIEW OF PROVISIONS
• PREPARATION OF FINAL STATEMENTS (Sec.210) :
- To present B/S & P&L A/c at every AGM.
- Period for A/cs is “Financial Year”.
- Responsibility fixed on co.’s Directors.
- Punishment laid down for non-compliance.
• FORM & CONTENTS OF P&L A/C & B/S (Sec.211) :
- To give a TRUE & FAIR view of state of affairs.
- B/s to be in form set out in Sch.VI or as near thereto.
- Slightly diff. forms for banking, insurance &
electricity companies governed by special statutes.
• REPORTS REQUIRED TO BE ATTACHED WITH B/S :
- Auditor’s (including special or supplementary,if any)
- Directors’.
BRIEF REVIEW (Contd.)

• AUTHENTICATION OF B/S & P&L A/C (Sec.215) :


- Reqd. to be signed by atleast 2 Directors (including
MD, if there is one) & Secretary.
• FILING OF ACCOUNTS (Sec.220) :
- 3 sets of final accounts & other documents to be
filed with the Registrar of Companies within 30 days
of annual general meeting.
BALANCE SHEET

Sec 211 : Form to be as prescribed in Part I


of Schedule VI

- Horizontal form
- Vertical form
HORIZONTAL FORM OF B/S
LIABILITIES ASSETS
• Share Capital • Fixed Assets
• Reserves and Surplus • Investments
• Secured Loans • Current Assets, Loans
• Unsecured Loans and Advances
• Current Liabilities and • Misc. Expenditures
Provisions and Losses
SIS LTD. ANNUAL ACCOUNTS
BALANCE SHEET
(Figs. in Rs./Lacs)
Sources of Funds as at 30th as at 30th
Sep., 2004 Sep., 2003
1. Shar ehold ers’ Funds
(i) Capital 736.95 736.95
(ii) Reserves And Surplus 14,856.94 14,464.92
15,593.89 15,201.87
2. Loan Funds
(i) Secured Loans 2,107.36 1,321.86
(ii) Unsecured Loans 2,976.21 3,063.95
5,083.57 4,385.81

14. Current Liabilities & Provisions


(i) Current Liabilities 9,118.41 7,484.91
(ii) Provisions 1,947.67 863.30
11,066.08 8,348.21

TOTAL 31,743.54 27,935.89


Application of Funds (Figs. in Rs./Crores)
as at 30th as at 30th
Sep.,2004 Sep., 2003
1. Fixed Assets
(i) Gross Block 9,175.71 8,647.11
Less : Depreciation 5,809.88 5,341.47
Net Block 3,365.83 3,305.64
(ii) Capital Work in Progress 97.13 16.52

Sub-total a 3,462.96 3,322.16

2. Investments b 7,989.60 8,375.57

3. Current Assets, Loans & Advances


(i) Inventories 6,823.34 5,686.30
(ii) Sundry Debtors 8,880.50 5,803.17
(iii) Cash & Bank Balances 754.80 283.25
(iv) Loans And Advances 3,832.34 4,465.44
Sub-total c 20,290.98 16,238.16

TOTAL a+b+c = 31,743.54 27,935.89


Liabilities (or Equities)
= What the Business Owes Others
Equity Theoretical owners of co.
• Share Capital Capital No fixed rate of dividend.
Risk capital.

Preference Dividend payable at fixed rate


Capital

• Reserves Revenue Reserves & Surplus


- general reserve
- capital redemption
reserve, etc.
Bal. of P&L A/c
Capital Reserve (not appropriated)
- share premium a/c
- assets revaluation res Note :
Share Capital + Reserves & Surplus = Owners’ Equity
OTHER LIABILITIES
• Secured Loans : 1) Debentures, 2) Loans from Financial Institu-
(i.e. borrowings against tions and 3) Loans from Commercial Banks.
specific securities)

• Unsecured Loans: 1) Fixed Deposits, 2) Loans & Advances from


(i.e. borrowings without Promoters, 3) Inter-corporate Borrowings and 4)
any specific securities) Short-term Loans & Advances from Banks.

• Current Liabilities & Provisions : 1) Bills Payable, 2) Payments


(obligations maturing Received in Advance, 3) Accrued Expenses, 4)
within the next 1 year) Unclaimed Dividends & 5) Provisions for Taxes,
Insurance Premia, Pensions, Dividends, etc.
ASSETS
• Fixed Assets : Used over relatively long periods for the business
Ordinarily not meant for resale
e.g. Land, Buildings, Plant & Machinery, Patents & Copy-
rights, Goodwill, etc.
• Investments : Financial securities owned by the firm
e.g. Investments in govt. securities, equity shares of other
companies, debentures, etc.
• Current Assets, Loans: Resources convertible into cash during
and Advances operating cycle of firm
e.g. Cash in hand or bank, Sundry Debtors (Bills
Receivable) Inventories, Loans & Advances and Prepaid
Expenses.
• Miscellaneous Expenditures and Losses :
e.g. Preliminary or Pre-operative Expenses not written off,
Commission/ Brokerage on underwriting or subscription of
shares/debentures, Net Loss carried forward from P&L A/c.
PROFIT & LOSS ACCOUNT
(Also known as INCOME STATEMENT)
⇒ NO STANDARD OR SPECIFIED FORMAT UNDER
INDIAN COMPANIES ACT. However, as per Part II of
Schedule VI, any format must disclose the following :

⇒ Net Turnover or Sales


⇒ Cost of Goods Sold
⇒ Gross Profit
⇒ Operating Expenses
⇒ Operating Profit
⇒ Non-operating Surplus/Deficit
⇒ Profit Before Interest and Tax (PBIT)
⇒ Interest
⇒ Profit Before Tax (PBT)
⇒ Tax
⇒ Profit After Tax (PAT)
FORMAT OF A TYPICAL P&L A/C
EXPENSES INCOME
• Raw Materials Consumed
• Sales
• Salaries & Wages
• Other Income
• Power, Fuel & Water
• Repairs & Maintenance
• Insurance
• Depreciation
• Miscellaneous Expenses
• Profit Before Interest & Tax
• Interest
• Profit Before Tax
• Provision for Tax
• Profit After Tax (i.e. Net Profit)
PROFIT & LOSS A/C

INCOME (Figs. in Rs.lakhs)

For the year ended


30th Sep., 30th Sep.,
2004 2003

6. Sales 28,420.39 23,868.13


2. Other income 2,137.68 1,539.64

Total Income 30,558.07 25,407.77


EXPENDITURE For the year ended
30th Sep., 30th Sep.,
2004 2003

1. Cost of Goods for Resale 6,702.12 8,150.64


2. Manufacturing Expenses 15,279.08 10,623.13
3. Employee Cost 4,059.15 2,756.30
4. Admn. & Selling Exp. 2,204.27 2,231.06
5. Depreciation 593.71 562.21
Total Expenditure 28,838.33 24,323.34

PBIT 1,719.74 1,084.43


Interest 743.91 530.52

Profit before Tax 975.83 553.91


Tax 375.49 (-)995.92

Profit after tax 332.88 1,549.83


DETAILS OF CONTENTS OF P&L A/C
• Net Sales : Sales - Sales Inwards (i.e. Returns) - Sales Discounts
• Cost of Goods Sold : Sum of costs incurred for manufacturing
the goods SOLD during the accounting period.
Consists of DIRECT MATERIAL COST, DIRECT LABOUR
COST and FACTORY OVERHEADS.
• GrossProfit : Net Sales - Cost of Goods Sold
• Operating Expenses :
- General Administrative Expenses
- Selling & Distribution Expenses
- Depreciation
• Operative Profit : Gross Profit - Operating Expenses
• Non-operating Surplus/Loss : Gains/Losses Sources Other
Than Normal Business of the Co. e.g. income/loss from
investments, disposal of assets, etc.
DETAILS OF P&L A/C (Contd.)

• PBIT (or EBIT) : Operating Profit + Non-operating Surplus


• Interest : Expense incurred for borrowed funds like Long-term
Loans, Debentures, Public Deposits & Working
Capital Advances.
• PBT : = PBIT - I
• Tax : Income Tax payable on the taxable profit of the year.
• PAT : = PBT - T
• Dividends : Amount earmarked for distribution to shareholders.
• Retained Earnings : = PAT - Dividends
TO ASSESS THE FINANCIAL HEALTH

OF ANY COMPANY, ONE REQUIRES

A GOOD UNDERSTANDING OF THE

FINANCIAL STATEMENTS OF THE COMPANY

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