FINANCIAL STATEMENT AND CASH FLOW ANALYSIS

The three basic financial statement of significance to stake holders of an enterprise are
balance sheet, profit and loss account and cash flow statement.

BALANCE SHEET
Balance sheet is the most significant financial statement. It indicates financial condition or the
state of affairs of a business at a particular time. Balance sheet gives information about assets,
liabilities and owners equity. The balance sheet let us say prepared on 31.03.11, reveals the
firms financial position on a particular date. It provides snapshot of the financial position of
the firm at the close of accounting period.

Assets - Assets are valuable economic resources owned by the firm and measured in monetary
terms. Assets represent a) stored purchasing power (e.g. cash), b) money claims (e.g.
receivables and investments) c) tangible and intangible items which can be sold or used in
business. Tangible items include land, building, plant, equipments, stocks and all other items
which have physical substance. Intangible items do not have physical existence but they have
value to the firm and include items such as patents, copyrights, trade names or goodwill.
The assets are classified as: 1) current assets and 2) fixed (long term) assets.
Current assets also sometimes called as liquid assets, are those resources of the firm which
are likely to be converted into cash during the accounting period or operating cycle of the
business. Operating cycle is the time taken for converting cash into raw material, convert raw
material into finished goods, sale finished goods, and convert receivables into cash. Current
assets include cash, raw material, stock-in process, finished goods, trade debtors, tradable
securities, consumables and spares.
(Level of current assets trade off between profitability and liquidity)
Fixed assets are long term in nature, they are held for a period longer than accounting period.
They include tangible fixed assets like land, building, machinery, equipment, furniture etc. The
cost of tangible fixed assets are allocated over their useful life. The amount allocated over
each year is called depreciation. Cost of tangible fixed assets are reduced every year by the
amount of depreciation. Depreciating an asset is a process of allocating cost and does not
involve any cash outlay.
Intangible assets includes firms rights and includes patents, copyrights, franchises, etc. cost of
intangible fixed assets are amortised over their useful lives.
In India term gross block is used for the original cost of total fixed assets. When accumulated
depreciation is subtracted from gross block, the difference is called net block.
Firms obligations are called liabilities, representing debts payable by the firm to its lenders
and creditors. Generally borrowing money or purchasing goods or services on credit creates
liabilities. Examples of liabilities are creditors, bills payable, wages and salaries payable,
interest payable, taxes payable, bonds, debentures, borrowings from banks, financial
institutions, public deposits etc.
LIABILITIES are also of two types; 1) Current liabilities and 2) Long-term liabilities. Current
liabilities are debts payable within accounting period / twelve months. Usually current assets
are converted into cash to pay current liability. Sometimes new current liabilities are created
to liquidate the existing ones. Typical examples of current liabilities are creditors, bills payable,
bank overdraft, tax provisions (payable), provision for dividend, outstanding expenses, and
incomes received in advance. During inflation profits are earned on inventories held by the
firm and depreciation allowance based on historical costs fails to maintain the firms earning
power.
In economic sense profit would mean net increase in the wealth. This definition incorporates
the time dimension, and therefore implies the discounted value or present value of the stream
of benefits.
Long term liabilities are the obligations or debts payable beyond the accounting period or
twelve months. They include bonds, debentures, fixed deposits, long term loan taken from
banks or financial institutions.
The financial interests of the owners claim against the business entity as of the balance sheet
date. But the nature of the owners claim is not the same as that of the creditors. Creditors
claims are defined are to be met within stipulated time. The claim of owners change and the
amount payable to them can be determined only when the firm is liquidated. Since the assets
are recorded at costs, there can be considerable difference between the owners book claim
and the real claim.
Initially owners equity arises on account of funds invested by them. But it changes due
earnings of the firm and their distribution. The firms earnings do not affect the owners claims.
Whereas owners equity will increase when the firm earns profits.
Owners equity is also called as share holders equity, has two parts, i) paid up capital, ii)
reserves and surplus. Paid-up share capital is the amount of funds directly contributed by the
share holders through purchase of shares. Reserves and surplus are retained earnings are
undistributed profits.
Paid-up capital + free reserves + balance in profit and loss account intangible assets
expenses not amortiesed = net worth.
A typical balance sheet published by the Company is shown below.
(Rs. In crores)
Gujarate narmada val fer company 2001 2000
SOURCES OF FUNDS
Share holders funds
Share capital
Reserves & Surplus
Total
Loan Funds
Secured loans
Unsecured loans
Total Debts
Total Funds
Application of funds
Fixed Assets
Gross Block
Less: accumelated depreciation
Net Block
Capital work in progress


Investments
Current assets loans and advances

Inventories
Sundry debtors
Cash and Bank balances
Loans and advances

Less: Current liabilities & Provisions

Current libilities


146.48
698.03
844.51

558.22
286.94
845.16
1689.67




1724.33
903.92
820.41
134.41
954.82

227.07


243.10
235.87
17.50
354.71
851.18



146.48
636.07
782.55

524.64
343.52
868.16
1650.71




1660.18
842.71
817.47
62.43
879.90

229.72


226.51
248.25
18.16
338.82
831.74

Provisions

Net current assets
Miscellaneous expenditure
Total Assets

204.87
142.34
347.21
503.97
3.81
1689.67

167.34
128.29
295.63
536.11
4.98
1650.71
Contingent liabilities 186.20 220.82

Following significant points can be noted from the b/s for the year 2001
GNFCs sources of funds include share holders funds (equity or networth) Rs.844.51
crores and loan funds (borrowings both long and short term) Rs. 845.16 crores. GNFCs
capital employed (CE) is Rs. 1689.67 crores:
CE = NW + Borrowings
= 844.51 + 845.60
= Rs. 1689.61 crores.
GNFCs sources of funds do not include current liabilities Rs. 347.21 crores. It has
shown net current assets (NCA) the difference between current assets (CA) and
current liabilities (CL) as application of funds. GNFCs net CA are Rs. 503.97 crores:
NCA = CA-CL
= 851.18 347.21
= Rs. 503.97 crores.
GNFCs application of funds includes net fixed assets (NFA), investments (INVT), net
current assets and other assets (OA). The total application of funds represents GNFCs
net assets of Rs. 1689.67 crores:
NA = NFA + INVT + NCA + OA
= 954.82 + 227.01 + 503.97 + 3.81
= Rs. 1689.67 crores.
GNFC sources of funds are equal to application of funds. In other words, GNFCs CE
finances its NA. Note that GNFC has contingent liabilities of Rs. 186.20 crores. They
appear as note to the b/s. Contingent liabilities are not actual liabilities now; they are
liabilities contingent upon the occurance of some future events.

PART II
PROFIT AND LOSS ACCOUNT
Balance is considered as very significant statement by bankers and other lenders because it is
indicative of the firms solvency and liquidity, as measured by its resources and obligations.
Bankers are equally interested in knowing firms earning capacity as a measure of financial
strength. Earning capacity and its potential are reflected by its profit and loss account. Profit
and loss account is summery of revenue and expenditure during a particular period of
operations. Thus it a flow statement in contrast to balance sheet which is a status statement.
Profit and loss statement serves as a measure of firms profitability. Revenues are the amounts
that customers pay to the firm for providing them goods or services or both. The firm uses its
economic resources in providing the goods and services to its customers. The cost of the
economic resources used to provide goods and services during a period of time is called as
expenses. In order to determine the profit the accounting system matches the expenses
incurred during accounting period against revenues earned during this period. This is called
matching concept and period as accounting period. Net profit or net income is the difference
between revenue and expenditure. If the resulting difference is negative i.e., expenses are
more than revenues it is called as net loss.
Revenue and expenses are further categorised as operating and non-operating. Revenues
(expenses) arising from the main operations or the business of the firm is called as operating
revenues/income (expenditure). Example proceeds from the sale of manufactured items are
operating revenues/income. Revenues (expenses) which are incidental or indirect to the main
operations of the firm are called as non-operating income (expenditure). For example
proceeds from the sale of old equipment is non-operating income. Similarly dividend or
interest from temporary investments is examples of non-operating income. Expenses incurred
in generating non-operating income are called non-operating expenses.

CHANGES IN FINANCIAL POSITION
While balance sheet gives a summary of the firms resources (assets) and obligation (liabilities
and owners equity at a point of time whereas profit and loss summerises the result of
business operations during a period. Both these statements fail to explain the changes in
assets liabilities and owners equity. Balance sheet gives a static view but it does not explain
the movement of finance during a particular period. The owners equity may also change
because of more than one reason. Therefore additional statement is needed to show changes
between two dates of balance sheet.