Fin Stmnts Overview for the non finance persons .ppt

Financial Statement understanding

1. Understanding
Financial Statements
R.M.ARYA
Ex-CGM (Fin.)
CC, Scope
NTPC Ltd.
Power Management Institute
15 November 2022

2. The objective of financial statements is to provide
information about
 Financial position,
 Financial performance, and
 Cash flows
of an entity that is useful to a wide range of users in making
economic decisions.
Objective of financial statements

3. Financial elements

4. The elements of financial position are:
1.Assets,
2.Liabilities,
3.Equity
Elements of Financial Position

5. The elements of financial performance:
1.Income
2.Expenses
Elements of Financial Performance

6. • Keeping systematic records
• Protecting properties of the business
• Communicating the results
• Meeting legal requirements
FUNCTIONS OF ACCOUNTING

7. FINANCIAL STATEMENTS
Balance Sheet;
Statement of Profit & Loss;
Statement of Cash flows;
Statement of Changes in Equity;
Significant Accounting Policies;
Other Notes to Accounts;
Independent Auditors’ Report.

8. What do they show?
Balance Sheet
Shows the position of Assets & Liabilities
Shows conditions at a point in time
Income Statement
Shows profit and loss over a fiscal year
Does not represent cash flow
Cash Flow Statement
Reconciles cash flow with accounting profit
Shows all sources and uses of cash

9. Balance Sheet
- Assets
Non Current Assets
Relatively permanent resources intended for the
use of the firm or realizable after a period of twelve
months.
Includes Property, plant & equipment, Intangible
Assets, Capital work-in-progress, Intangible assets
under development, Investments, Long term loans
& advances and other non current assets.
Current assets
Assets that are realizable within the firm’s operating
cycle or twelve months period.
Includes Current Investments, Inventories, Trade
receivables, Cash & Cash equivalents, Short term
loans and advances and other current assets.

10. Balance Sheet
- Equity & Liabilities
Owners’ Equity Capital
Money that the owners invest in the business.
Owners are “residual owners” of the firm.
Creditors have first claim on the assets
of the firm.
Owners’Owners’
EquityEquity==
Owners’Owners’
investmentinvestment
––
Owners’ cashOwners’ cash
withdrawalswithdrawals
CumulativeCumulative
profitsprofits++
Owners’Owners’
EquityEquity
==
Owners’Owners’
investmentinvestment
++
Earnings retained Earnings retained
within Businesswithin Business

11. Balance Sheet
- Liabilities
Debt Capital
Financing provided by a creditor
Short-term (current) Debt
Cash credit
Commercial paper
Long-Term Debt
Loans and mortgages from
banks and other lenders with
maturities greater than one year
…continued

12. Balance Sheet
- Liabilities
Non Current Liabilities
Payable after the firm’s operating cycle or a period
of more than twelve months.
Includes Borrowings, Trade payables, Provisions
and other non-current liabilities.
Current Liabilities
Payable within the firm’s operating cycle or twelve
months period.
Includes Short term borrowings, Trade payables,
Provisions and other current liabilities.

13. Statement of Profit and Loss
Sales or Revenue from operations.
Cost of Goods Sold (COGS) - the cost of producing or
acquiring goods/services ( Raw material, Emp.Cost).
Operating expenses - Selling and marketing
expenses, administrative expenses and Depreciation.
Operating income - earnings before interest and taxes
Gross profit - sales less the COGS
Financing costs – the amount of interest owed to
lenders on borrowed money
Net income available to owners (Net profit) – Income
that may be distributed to owners or re-invested in
the company

14. Operating Activities
Sales Revenue
=
= =
Operating Income
Earnings Before Taxes Net Income Available
to Owners
Cost of producing or
acquiring product or
service
(cost of goods sold)
Gross profit
Marketing and selling
expenses, general and
administrative
expenses and
depreciation
(operating expenses)
,
–
=
–
Financing Activities
Operating Income
Interest expense
on debt
(financing costs)
–
Taxes
Earnings Before Taxes
Income taxes
–
The Income Statement

15. The relation of Income
Statement with Balance Sheet
Income statement reports the profits from
April 1, XXX1 through March 31, XXX2
XXX2 Balance Sheet
Reports the firm's
financial position as at
March 31, XXX2
April 1 March 31
XXX1 Balance Sheet
Reports the firm's
financial position as at
March 31, XXX1

16. Cash Flows
Purchase of
fixed assets
Borrowed
Funds
Interest
Payments
Borrowed
Funds
Payments for
inventory
Borrowed
Funds
Payments for
Expenses
Dividend
Payments
Owner's
Investment
Borrowed
Funds
Borrowed
Funds
Sale of
Fixed Assets
Borrowed
Funds
Collection from
Sundry Debtors
Borrowed
Funds
Other Income

17.  Under Going concern, it is assumed that the entity will continue in
operation for the foreseeable future and has neither the intention nor the
need to liquidate or curtail materially the scale of its operations.
 Under Accrual basis, the effects of transactions are recognised on
mercantile basis i.e. when they occur (and not as cash or a cash equivalent
is received or paid) and they are recorded in the accounting records and
reported in the financial statement of the periods to which they relate.
 Under Consistency, same accounting policies are followed from one
period to another so that comparability of the financial statement can be
achieved.
Underlying Assumptions

18. The Matching Principle
All costs and expenses
incurred in generating
revenues must be
recognized in the same
reporting period as the
related revenues.
This process of matching
expenses with recognized
revenues determines the
amount of net income
reported on the income
statement.
costs and expenses
related revenues

19. Time Period Concept
Time Period Concept
—the life of a business
is divided into distinct
and relatively short
time periods so that
accounting
information can be
timely prepared,
generally 12 months or
less.

20. Double Entry System
This is the most scientific system that
recognizes both the aspects of each
transaction and records the same.
This system takes into account every
business transaction in its double aspect,
i.e., receiving benefit by one party and
giving the like benefit by another.

21. Double Entry System continue…
Example:
When ‘A’ purchases a car, he receives the
benefit in the form of a car and gives the
benefit in the form of money.
Similarly, the car seller receives the
benefit in the form of money and gives
the benefit in the form of a car.

22. Double Entry System continued…
It is a complete book-keeping in the
sense that it records all the two aspects,
debit and credit in each business
transaction, in equal value.

23. Money Measurement Concept
In accounting, we record only those
transactions which are expressed in
terms of money. In other words, a fact
which can not be expressed in monetary
terms, is not recorded in the books of
accounts.

24. Business Entity Concept
Business is treated as a separate entity or
unit apart from its owner and others. All
the transactions of the business are
recorded in the books of business from
the point of view of the business as an
entity and even the owner is treated as a
creditor to the extent of his/her capital.

25. Realization Concept
Accounting is a historical record of
transactions. It records what has happened.
It does not anticipate events. This is of great
importance in preventing business firms
from inflating their profits by recording sales
and income that are likely to accrue.

26. CLASSIFICATION OF
ACCOUNTS
Every business deal with other “Person”,
possesses “Assets”, pay “Expenses” and receive
“Income”.
So from the above, we can see every business
has to keep
• An account for each person
• An account for each asset and
• An account for each expense or income.

27. CLASSIFICATION OF
ACCOUNTS
•Accounts in the names of persons are known
as “Personal Accounts”
•Accounts in the names of assets are known
as “Real Accounts”
•Accounts in respect of expenses and
incomes are known as “Nominal Accounts”

28. GOLDEN RULES OF
ACCOUNTANCY
Debit the receiver………
Debit what comes in……
Debit all expenses and losses……

29. RULES FOR DEBIT AND CREDIT
Personal Account
Debit the Receiver
Credit the Giver
Real Accounts
Debit what comes in
Credit what goes out
Nominal Accounts
Debit all Expenses and
Losses
Credit all Incomes and
Gains

30. Some fundamentals
The Fundamental Accounting
Equation
Assets = Liabilities + Owners’ Equity
Another equation
Profit = Revenue - Expenses
GAAP
The grammar of accounting

31. Concept of Substance over form /
time value of money
The concept of ‘substance over form’, refers to
economic reality of a transaction. ‘Time value of
money’ recognises the interest element due to
passage of time.
Example: Sale of Goods on Extended Credit Terms,
i.e., goods sold on terms extending more than
normal credit period. Financing element inbuilt in
price is segregated and considered as ‘interest’
income.
Say, goods normally sold at price at Rs. 100 for 3
months credit. If sold for Rs. 110 for 15 months
credit: Rs. 10 considered as ‘interest’ income.

32. Describe the Preparation of
Financial Statements
1.Finalization of trial balance.
2.Identify Revenue and Expense accounts, they
are used to produce the income statement.
3.Compute Net Income, Revenues – Expenses.
4.Compute Closing Retained Earnings.
5.Prepare Balance Sheet.

33. What are the Notes to accounts?
To meet disclosure
requirements of the
various Laws and
Accounting standards.
Give more detail about
specific items. Serve to
augment the summarized,
numerical information.

34. Tell Me About The Audit
Audits statements to
check conformity with
GAAP.
Reviews adjustments.
Reviews accounting
systems.
Report is attached and
distributed with financial
statements.

35. Accounting Cycle

Analyze and
record the
transactions
Post the
transactions and
prepare trial
balance
Adjust the
accounts
and prepare
trial balance
Close the
accounts and
prepare trial
balance
Prepare the
financial
statements

36. Schedule III to the Companies
Act, 2013
The formats of Financial Statements are prescribed
by Schedule III to the Companies Act, 2013.
Division I contains formats applicable to Companies
following Accounting Standards (AS).
Division II contains formats applicable to
Companies following Indian Accounting Standards
(Ind AS).
NTPC is covered under Division II (Ind AS).

37. BALANCE SHEET FORM

38. BALANCE SHEET FORM – contd.

39. BALANCE SHEET FORM – contd.

40. BALANCE SHEET FORM – contd.

41. BALANCE SHEET FORM – contd.

42. Statement of Profit & Loss
Format

43. Statement of Profit & Loss
Format – contd..

44. Statement of Profit & Loss
Format – contd..

45. Statement of Profit & Loss
Format – contd..

46. Statement of Profit & Loss
Format – contd..

47. Who uses financial statements?
Management
Shareholders
Lenders
Regulators
Potential investors
Donors

48. THE NEED FOR FINANCIAL
STATEMENT ANALYSIS
Financial statement analysis involves the
examination of both the relationships
among financial statement numbers and
the trends in those numbers over time.
Relationships between financial
statement amounts are called financial
ratios.

49. Financial Ratios
Indicate
How liquid is a firm?
Is management generating adequate
operating profits on the firm’s assets?
How is the firm financing its assets?
Is management providing a good
return on the capital provided by the
shareholder?

50. Groups of Financial Ratios
Liquidity
Activity
Debt
Profitability

51. Analyzing Liquidity
Liquidity refers to the solvency of
the firm's overall financial position,
i.e. a "liquid firm" is one that can
easily meet its short-term
obligations as they come due.
A second meaning includes the
concept of converting an asset into
cash with little or no loss in value..

52. Important Liquidity
Measures
Net Working Capital (NWC)
NWC = Current Assets - Current Liabilities
Current Ratio (CR)
Current Assets
CR =
Current Liabilities
Quick (Acid-Test) Ratio (QR)
Current Assets - Inventory
QR =
Current Liabilities

53. Analyzing Activity
Activity is a more sophisticated analysis of a
firm's liquidity, evaluating the speed with
which certain accounts are converted into
sales or cash; also measures a firm's
efficiency.

54. Important Activity
Measures
Cost of Goods Sold
IT =
Inventory
Accounts Receivable
ACP =
Annual Sales/360
Accounts Payable
APP=
Annual Purchases/360
Sales
FAT =
Net Fixed Assets
Sales
TAT =
Total Assets
Inventory Turnover (IT)
Average Collection Period
(ACP)
Average Payment Period
(APP)
Fixed Asset Turnover (FAT)
Total Asset Turnover (TAT)

55. Analyzing Debt
Debt is a true "double-edged" sword as it
allows for the generation of profits with
the use of other people's (creditors)
money, but creates claims on earnings
with a higher priority than those of the
firm's owners.
Financial Leverage is a term used to
describe the magnification of risk and
return resulting from the use of fixed-cost
financing such as debt and preferred stock.

56. How does Leverage work?
Suppose we have an all equity-financed
firm worth Rs.100,000. Its earnings this
year total Rs.15,000.
ROE =ROE =
100,000100,000
15,00015,000
= = 15%15%

57. Suppose the same Rs.100,000 firm is
financed with half equity and half 8%
debt (bonds). Earnings are still
Rs.15,000.
ROE = ROE =
15,000 - 4,00015,000 - 4,000
50,00050,000
= = 22%22%
How does Leverage work?

58. Measures of Debt
There are Two General Types of Debt
Measures:
Degree of Indebtedness
Ability to Service Debts

59. Important Debt Measures
Debt Ratio
(DR)
Debt-Equity Ratio
(DER)
Times Interest Earned
Ratio (TIE)
Total Liabilities
DR=
Total Assets
Long-Term Debt
DER=
Stockholders’ Equity

Earnings Before
Interest & Taxes (EBIT)
TIE=
Interest

60. Analyzing Profitability
Profitability Measures assess the firm's
ability to operate efficiently and are of
concern to owners, creditors, and
management.
A Common-Size Income Statement,
which expresses each income statement
item as a percentage of sales, allows for
easy evaluation of the firm’s profitability
relative to sales.
1994, HarperCollins PublishersCopyright

61. Important Profitability
Measures
Gross Profit Margin (GPM)
Net Profit Margin (NPM)
Return on Total Assets (ROA)
Return On Equity (ROE)
Earnings Per Share (EPS)
Price/Earnings (P/E) Ratio
Gross Profit
GPM=
Sales
Net Profit After Taxes
NPM=
Sales
Net Profit After Taxes
ROA=
Total Assets
Net Profit After Taxes
ROE=
Stockholders’ Equity
Earnings Available for
Common Stockholder’s
EPS =
Number of Shares of Common
Stock Outstanding
Market Price Per Share of
Common Stock
P/E =
Earnings Per Share

62. POTENTIAL PITFALLS
Financial statements do not contain
all information
Sometimes financial statement
numbers are not comparable
Expenses reported in different
categories
Companies in unrelated industries

63. Looking Beyond the
Numbers
Dependency on one/few
Customers
Products
Suppliers
Countries (% Foreign Business)
Competition
Future Prospects
Legal & Regulatory Environment

64. NTPC ANNUAL REPORT 2021-22
Important contents
Directors Report and MD&A
Report on Corporate Governance
CSR report
Business Responsibility Report
Standalone Financial Statements
Consolidated Financial Statements

65. THANK YOU
Questions please..