Chapter 2 – Analysis of Financial Statement

Balance Sheet

The “Statement of Financial Position” which reveals the money value of company’s assets, liabilities and owners’ equity (Net Worth) on a particular day is known as the balance sheet.

Equity and Liability

  1. Shareholders’ Funds
    1. a) Share Capital
    2. b) Reserves and Surplus
    3. c) Money received against share warrants
  2. Share application money pending allotment
  3. Non-current Liabilities
    1. a) Long-term borrowings
    2. b) Deferred tax liabilities
    3. c) Other Long-term liabilities
    4. d) Long-term provisions
  4. Current Liabilities
    1. a) Short-term borrowings
    2. b) Trade payables
    3. c) Other current liabilities
    4. d) Short-term provisions

Assets

  1. Non-current Assets
    1. a) Fixed assets
      1. Tangible assets
      2. Intangible assets
      3. Capital work in progress
      4. Intangible assets under development
    2. b) Non-current investments
    3. c) Deferred tax assets
    4. d) Long-term loan and advances
    5. e) Other non-current assets
  2. Current  Assets
    1. a) Current Investments
    2. b) Inventories
    3. c) Trade receivables
    4. d) Cash and cash equivalents
    5. e) Short-term loans and advances
    6. f) Other current assets

Balance Sheet and Banker

A bank will not approve credit unless the balance sheet and financial statement reveal that the company has:

  • A Sound financial position (Solvency Test)
  • Good liquidity (Cash Flows)
  • A good earning capacity (Profitability) 

Current Liabilities Include

  • Short term borrowing form Banks and Others
  • Unsecured Loans
  • Public Deposits maturing within one year
  • Sundry creditors
  • Interest & other charges accrud but not due for payment
  • Advance payments from customers
  • Deposits from Dealer, selling agent etc.
  • Installment of term loan and long term deposits payable within one year
  • Statutory Liabilities
  • Current Liabilities

Current Assets Includes

  • Cash and Bank Balances
  • Investments
  • Receivables other than deferred receivables
  • Installments of deferred receivable due within one year
  • Raw materials and components used in manufacturing
  • Semi finished & finished goods
  • Other consumable spares
  • Advance payment for tax
  • Pre-paid expenses
  • Advance for purchase raw materials
  • Receivable from contracted sales of fixed assets

Profit & Loss Account

  • Gross Profit = Profit before Depreciation, Tax and other appropriating expenses
  • Net Profit = Profit after Depreciation, Tax and other appropriating expenses
  • Return on Equity = Net Profit/Equity
  • Return on Investment = Net Profit/Shareholder’s Funds
  • Net Worth = Paid up capital + General Reserve + Surplus – Intangible Assets
  • Net Working Capital = Current Assets – Current Liabilities
  • Working Capital Gap = Current Assets – Current Liabilities other than Bank Borrowings

Purpose of Analysis of Financial Statements by Bankers

  • Assessment of Performance and Financial Position
  • Projection of Future Performance
  • Detecting Danger Signals
  • Assessment of Credit Requirements
  • Examine Funds Flow
  • Cross Checking

 

 

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