Chapter - 24

Financial Statements and

Cash Flow Analysis
Financial Statements
 Financial statements provide information
about the financial activities and position of a
firm.
 Important financial statements are:
 Balance sheet
 Profit & Loss statement
 Funds flow statement
 Cash flow statement

BY Akash Saxena
Balance Sheet
 Balance sheet indicates the financial
condition of a firm at a specific point of time. It
contains information about the firm’s: assets,
liabilities and equity.
 Assets are always equal to equity and
liabilities:
Assets = Equity + Liabilities

BY Akash Saxena
Assets
 Assets are economic resources or properties
owned by the firm.
 There are two types of assets:
 Fixed assets
 Current assets

BY Akash Saxena
Current Assets
 Current assets (liquid assets) are those which
can be converted into cash within a year in
the normal course of business. Current
assets include:
 Cash and bank balance
 Accounts receivable (debtors)
 Inventory (stocks)
 Advances to suppliers
 Prepaid expenses

BY Akash Saxena
Fixed Assets
 Fixed assets are long-term assets.
 Tangible fixed assets are physical assets like
plant.
 Intangible fixed assets are the firm’s rights and
claims, such as patents, copyrights, goodwill etc.
 Gross block represent all tangible assets at
acquisition costs.
 Net block is gross block net of depreciation.

BY Akash Saxena
Liabilities
 Liability is a firm’s obligation to pay cash or
provide goods or services in the future. Two
types of liabilities are:
 Current liabilities
 Long-term liabilities

BY Akash Saxena
Current Liabilities
 Current liabilities are payable within a year in
the normal course of business. They include:
 Accounts payable (creditors)
 Outstanding expenses
 Advances from customers
 Provision for tax
 Provision for dividend

BY Akash Saxena
Long-term Liabilities
 Long-term liabilities are payable after a year.
They include:
 Borrowings from financial institutions and banks
etc.
 Debentures/bonds:
 Non-convertible
 Fully convertible
 Partly convertible

BY Akash Saxena
Shareholders’ Funds or Equity
 Share capital is owners’ contribution divided
into shares. A share is a certificate
acknowledging the amount of capital
contributed by the shareholder.
 Reserves and surplus or retained earnings
are undistributed profits.
 Shareholders’ funds or equity is the sum of
share capital plus reserves & surplus. It is
also called net worth.

BY Akash Saxena
Balance Sheet Relationship
 Total assets (TA) equal net fixed assets
(NFA) plus current assets (CA):
TA = NFA + CA
 Net current assets (NCA) is the difference
between current assets (CA) and current
liabilities (CL):
NCA = CA – CL

BY Akash Saxena
Balance Sheet Relationship
 Net assets (NA) equal net fixed assets (NFA)
plus net current assets (NCA):
NA = NFA + NCA
 Capital employed (CE) is the sum of net
worth or equity (E) and borrowing/debt (D)
and it is equivalent of net assets:
CE = Net Worth + Borrowing = E + D
Capital Employed = Net Assets

BY Akash Saxena
Functions of Balance Sheet
 Stewardship role
 Measurement of liquidity
 Measurement of solvency

BY Akash Saxena
Profit & Loss Statement
 Profit & Loss statement provides information
about a firm’s:
 revenues,
 expenses, and
 profit or loss.

BY Akash Saxena
Nature of Revenues
 Revenue is the amount received or receivable
within the accounting period from the sale of
the firm’s goods or services.
 Operating revenue is the one that arises from
main operations of the firm, and the revenue
arising from other activities is called non-
operating revenue.

BY Akash Saxena
Nature of Expenses
 Expense is the amount paid or payable within
the accounting period for generating revenue.

Examples: raw material consumed, salary and

wages, power and fuel, repairs and maintenance,
rent, selling and marketing expenses, administrative
expenses.

 Expenses are expired costs and capital

expenditures represent un-expired costs and
appear as assets in balance sheet.

BY Akash Saxena
Depreciation
 Depreciation is a charge for the use of fixed
assets; it is an expense. It is a non-cash
expense since cash was paid at the time
fixed assets were acquired. Expenditures
incurred on acquiring assets are called capital
expenditures. Depreciation is allocation of
these expenditures over the life of assets that
have helped in generating revenue.

BY Akash Saxena
Methods of Depreciation
 Depreciation may be provided on
 straight line basis or
 written down value basis (DWV). DWV basis
is allowed for taxation in India.

BY Akash Saxena
Concepts of Profit
 Gross profit = sales – cost of goods sold (CGS)
 CGS = raw material consumed + manufacturing expenses of
goods that have been sold
 PBDIT = Profit before dep., interest and tax
= sales – expenses, except dep., interest and
tax
 PBIT= Profit before interest and tax
= PBDIT – DEP
 PBT= Profit before tax = PBIT – Interest
 PAT = Profit after tax = PBT – Tax

BY Akash Saxena
Functions of Income Statement
 Summary of revenues and expenses
 Measurement of profitability

BY Akash Saxena
Relationships: B/S and P&L A/C
 Net profit = Equity (end) – Equity (begin)
 Equity (end) = Equity (begin) + Net profit +
Equity issued – Dividend
 Net profit = [Equity (end) – Equity (begin)] –
[Equity issued – Dividend]
 Change in equity = Equity (end) – Equity
(begin) = Net profit + Equity issued – Dividend

BY Akash Saxena
Economic Vs. Accounting Profit
Accounting profit is a result of the arbitrary
allocation of expenditures between expenses
(revenue expenditure) and assets (capital
expenditure).
Economic profit is the net increase in the wealth
of the firm, and it is measured in cash flow.

BY Akash Saxena
Standards of Financial Reporting
 Full disclosure
 Materiality
 Consistency
 Conservatism
 Fairness

BY Akash Saxena
Accounting Principles and Concepts
 Business entity concept
 Money measurement concept
 Going concern concept
 Cost concept
 Duality concept
 Accounting period concept
 Realisation concept
 Matching concept

BY Akash Saxena
INFOSYS
Balance Sheeet as at March 31
Rs. Crore
2002 2001 2000
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share capital 33.09 33.08 33.08
Reserves and surplus 2047.22 1,356.56 800.23
Net Worth 2080.31 1389.64 833.30
BORROWINGS 0.00 0.00 0.00
Capital Employed 2080.31 1389.64 833.30
APPLICATION OF FUNDS
FIXED ASSETS
Original cost 960.6 631.14 284.03
Less: Depreciation 393.03 244.13 133.65
Net book value 567.57 387.01 150.38
Add: Capital work-in-progress 150.67 170.65 56.96
718.24 557.66 207.34
INVESTMENTS 44.44 34.12 13.83
DEFFERED TAX ASSET 24.22 0.00 0.00
CURRENT ASSETS, LOANS & ADVANCES
Sundry debtors 336.73 302.37 136.18
Cash and bank balances 772.22 385.06 431.79
Loans and advances 643.87 430.28 210.13
1752.82 1,117.71 778.10
Less: Current liabilities 126.11 134.92 67.15
Provisions 333.3 184.93 98.82
NET CURRENT ASSETS 1293.41 797.86 612.13
Net Assets 2080.31 1,389.64 833.30

BY Akash Saxena
INFOSYS
Profit and Loss Account for the year ended March 31 Rs crore
2002 2001
INCOME
Software development services and products
Overseas 2,552.47 1,874.03
Domestic 51.12 26.54
2,603.59 1,900.57
EXPENDITURE
Software development expenses 1,224.82 870.83
GROSS PROFIT 1,378.77 1,029.74
Selling and Marketing Expenses 129.79 92.07
Administrative and other expenses 211.35 172.82
341.14 264.89
Operating profit (PBIDT) 1,037.63 764.85
Interest 0.00 0.00
Depreciation 160.65 112.89
OPERATING PROFIT AFTER INTEREST & DEPRECIAION 876.98 651.96
Other income 66.41 59.37
Provision for investment 0.00 15.29
PROFIT BEFORE TAX & EXTRA ORDINARY ITEM 943.39 696.04
Provision for taxation 135.43 72.71
PROFIT AFTER TAX BEFORE EXTRA ORDNARY ITEM 807.96 623.33
Extraordinary item -- transfer of intellectual property right (net of tax) 0.00 5.49
Net profit after tax and extraordinary item 807.96 628.82
AMOUNT AVAILABLE FOR APPROPRIATION 807.96 628.82

Dividend 132.36 66.16

Interim 49.63 16.54
Final (Proposed) 82.73 49.62
Dividend Tax 5.06 8.70
Amount transferred - general reserve 670.54 553.96
807.96 628.82
BY Akash Saxena
INFOSYS
Financial Ratios
2002 2001
Activity Ratios
Income/Assets 1.25 1.37
Income/Debtors 7.73 6.29

Current Ratios
CA/CL 3.82 3.49
CA/Assets 0.84 0.80
NCA/Assets 0.62 0.57

Profitability Ratios
Margin
PBDIT/Income 39.85% 40.24%
PBIT/Income 33.68% 34.30%
PAT/Income 31.03% 32.80%
Return on Investment
PBDIT/Assets 49.88% 55.04%
PBIT/Assets 42.16% 46.92%
PAT/NW 38.84% 44.86%

BY Akash Saxena
 ISPAT INDUSTRIES LIMITED
BALANCE SHEET
AS AT 31ST MARCH, 2001 Rs crore
2001 2000
SOURCES OF FUNDS
1. Shareholders' Funds
Share Capital 978.07 901.55
Advances against Share Capital 244.3 96.46
Reserves & Surplus 746.77 874.08
1969.14 1872.09
2. Loan Funds
Secured Loans 4989.26 3582.6
Unsecured Loans 630.09 1088.29
5619.35 4670.89
TOTAL 7588.49 6542.98
APPLICATION OF FUNDS
1. Fixed Assets
Gross Block 3470.36 1640.28
Less: Depreciation 704.01 498.14
Net Block 2766.35 1142.14
Capital Work -in-Progress 2093.31 2740.66
Pre-operative exp. etc. 1715.74 2231.85
6575.4 6114.65
2. Investments 130.87 135.79
3. Current Assets, Loans & Advances
Inventories 257.37 259.48
Sundry Debtors 389.69 250.4
Cash & Bank Balances 53.9 77.7
Loans, Advances & Deposits 1018.31 907.61
1719.27 1495.19
Less: Current Liabilities & Provisions
Liabilities 1150.7 1185.39
Provisions 18.86 18.61
1169.56 1204
Net Current Assets 549.71 291.19
4. Miscellaneous Expenditure 134.37 1.35
(To the extent not written off or adjusted)
5. Profit and Loss Account Debit balance 198.14 _
TOTAL 7588.49 6542.98

BY Akash Saxena
 ISPAT INDUSTRIES LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31ST MARCH
(Rs. crores)
2001 2000
INCOME
Sales & Job Work (Net) 2238.89 1425.48
Other Income 25.18 11.65
TOTAL (A) 2264.07 1437.13
EXPENDITURE 3.95 33.7
Decrease in stocks 3.95 33.7
Raw Materials Consumed 823.04 778.15
Purchases of Finished Goods 7.77 9.32
Payments to & Provisions for Employees 43.99 21.79
Excise Duty 269.94 118.83
Mfg., Dist., Sell. & Admin. Expenses 890.84 306.72
Interest & Finance Charges 345.96 100.13
Depreciation 206.33 79.89
Less: Transfer from Revaluation Reserve 15.32 15.32
TOTAL (B) 2576.5 1433.21
Profit/(Loss) before Taxation (A+B) 312.43 3.92
Less: Provision for Taxation 0.03 0.32
Add: Provision for Taxation written back 0.07
Profit/(Loss) after taxation 312.46 3.67
Less: Balance brought forward from Previous Year 100.52 106.59
Transfer from Debenture Redemption Reserve 8.09
Transfer from Taxation Reserve 0.73
Transfer from General Reserve 13.07 _
Profit/(Loss) available for appropriation -198.14 118.35
APPROPRIATIONS:
Transfer to Debenture Redemption Reserve _ 17.83
Balance carried to Balance Sheet -198.14 100.52
TOTAL -198.14 118.35

BY Akash Saxena
INFOSYS
Balance Sheeet as at March 31
in Rs.
2,001 2,000
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share capital 330,792,085 330,755,000
Reserves and surplus 13,565,599,903 8,002,273,248
Capital Employed 13,896,391,988 8,333,028,248
APPLICATION OF FUNDS
FIXED ASSETS
Original cost 6,311,444,025 2,840,305,143
Less: Depreciation 2,441,315,982 1,336,520,594
Net book value 3,870,128,043 1,503,784,549
Add: Capital work-in-progress 1,706,504,250 569,603,505
5,576,632,293 2,073,388,054
INVESTMENTS 341,154,821 138,348,469
CURRENT ASSETS, LOANS AND ADVANCES
Sundry debtors 3,023,702,417 1,361,781,253
Cash and bank balances 3,850,610,285 4,317,935,730
Loans and advances 4,302,793,623 2,101,277,161
11,177,106,325 7,780,994,144
Less: Current liabilities 1,349,181,176 671,506,459
Provisions 1,849,320,275 988,195,960
NET CURRENT ASSETS 7,978,604,874 6,121,291,725
Net Assets 13,896,391,988 8,333,028,248

BY Akash Saxena
INFOSYS
Profit and Loss Account for the year ended March 31
in Rs.
2001 2000
INCOME
Software development services and products
Overseas 18,740,266,421.00 8,696,980,931.00
Domestic 265,392,386.00 126,256,042.00
Other income 593,714,915.00 391,411,095.00
19,599,373,722.00 9,214,648,068.00
EXPENDITURE
Software development expenses 9,581,766,650.00 4,662,684,578.00
Administrative and other expenses 1,775,470,971.00 694,850,282.00
Provision for investments 152,898,608.00
Provision for contingencies 33,300,000.00
Provision for e-inventing the company 35,000,000.00
11,510,136,229.00 5,425,834,860.00
Operating profit (PBIDT) 8,089,237,493.00 3,788,813,208.00
Interest
Depreciation 1,128,945,152.00 532,327,389.00
Profit before tax and extraordinary item 6,960,292,341.00 3,256,485,819.00
Provision for tax
earlier years 14,000,000.00 2,400,000.00
current year 713,100,000.00 394,600,000.00
Profit after tax before extraordinary item 6,233,192,341.00 2,859,485,819.00
Extraordinary item -- transfer of intellectual property right (net of tax) 54,944,000.00
-- provision no longer required 75,670,846.00
Net profit after tax and extraordinary item 6,288,136,341.00 2,935,156,665.00
AMOUNT AVAILABLE FOR APPROPRIATION 6,288,136,341.00 2,935,156,665.00
BY Akash Saxena
 SBU PROFIT & LOSS ACCOUNT
USD in '000 For the Year 2002
Q1 Q2 Q3 Q4 YTD % of
Tar. Act. Tar. Act. Tar. Act. Tar. Act. Tar. Act. Rev.

Total Revenue 1871 1843 1950 2013 2126 14850 1868 100.0%
Onsite revenue 1804 1782 1853 1910 2047 12600 1782 84.8%
Offshore revenue 66 85 97 104 79 2250 85 15.2%
Service Credit 25
- Onsite Revenue % 96% 95% 95% 95% 96% 85% 95%
CONTROLLABLE COSTS
CGS A
Salaries & Related Costs:
Onsite Salaries 880 723 944 968 1028 6375 723 42.9%
Offshore Salaries
GRP Allocated 0 0 0 0 0 0 0 0.0%
Offshore Salaries 36 62 47 43 28 840 62 5.7%
Other Salary Overheads 1 3 2 2 1 34 3 0.2%
Subcontractor Costs
Salaries-Onsite 38 0 38 0.0%
Salaries-Offshore 0 0 0 0.0%
Foreign Travel 17 8 17 18 19 250 8 1.7%
Incentives
Project Incentives 0 0 0 0 0 0 0 0.0%
SBU Special Incentives 0 1 0 0 0 0 1 0.0%
Data Communication Charges 0 0 0 0 0 0 0 0.0%
Legal Immigration Fees 47 36 49 50 53 333 36 2.2%
Other Professional Fees 0 0 0 0 0 0 0 0.0%
Total CGS A Cost 982 872 1060 1080 1130 7832 872 52.7%
CGS B
Data Communication Charges 1 2 2 2 1 90 2 0.6%
Medical Insurance 47 33 48 49 52 300 33 2.0%
Depreciation: CGS 26 28 28 28 26 223 28 1.5%
Others CGS 0 0 0 0.0%
Total CGS B Cost 74 63 78 79 80 613 63 4.1%
TOTAL CGS A + CGS B Costs 1056 935 1138 1159 1210 8445 935 56.9%
Gross Margin 814 908 812 854 916 6405 933 43.1%
BY Akash Saxena
 SBU PROFIT & LOSS ACCOUNT, YTD 2002
USD in '000
% of
YTD Re v.

Tota l Re ve nue 14850 100.0%

Onsite re ve nue 12600 84.8%
Offshore reve nue 2250 15.2%
Se rvice Cre dit
- Onsite Re ve nue % 85%
CONTROLLABLE COSTS
CGS A
Sa la rie s & Rela te d Costs:
Onsite Sa la rie s 6375 42.9%
Offshore Sa la rie s
GRP Alloca ted 0 0.0%
Offshore Sa larie s 840 5.7%
Othe r Sa la ry Ove rhe a ds 34 0.2%
Subcontra ctor Costs
Sa la rie s-Onsite 0 0.0%
Sa la rie s-Offshore 0 0.0%
Fore ign Tra vel 250 1.7%
Incentive s
Proje ct Incentive s 0 0.0%
SBU Spe cia l Ince ntive s 0 0.0%
Da ta Communica tion Charge s 0 0.0%
Le ga l Immigra tion Fe e s 333 2.2%
Othe r Profe ssiona l Fe e s 0 0.0%
Tota l CGS A Cost 7832 52.7%
CGS B
Da ta Communica tion Charge s 90 0.6%
Me dica l Insura nce 300 2.0%
De pre cia tion: CGS 223 1.5%
Othe rs CGS 0 0.0%
Tota l CGS B Cost 613 4.1%
TOTAL CGS A + CGS B Costs 8445 56.9%
Gross Ma rgin 6405 43.1%
BY Akash Saxena
Funds and Cash Flow
 Liquidity refers to resources currently available
with the firm. It is reflected by the funds or cash
flows rather than the stock of current assets
and liabilities.
 Funds flow is a change in a firm’s net current
assets while cash flow is a change in the firm’s
cash position. Funds or cash flows occur due to
changes in items in the balance sheet and
profit & loss statement. Thus liquidity analysis
involves measurement of changes in assets,
liabilities and equity.

BY Akash Saxena
 TABLE 1. ABC Co.: Balance Sheet Changes,
March 31,19Xl-March 31, 19X2

(Rs ‘000)
19X1 19X2 Change
ASSETS
Cash 54 135 81
Debtors 6,750 8,235 1,485
Stock (inventory) 10,125 22,680 12,555
Total current assets 16,929 31,050 14,121
Fixed assets (net) 2,970 6,075 3,105
Other assets 945 1,890 945
Total Assets 20,844 39,015 18,171
LIASBILITIES & NET WORTH
Bank borrowing 3,510 8,664 5,154
Creditors 2,835 6,615 3,780
Provision for taxes 270 972 702
Accrued expenses 810 2,700 1,890
  Total current liabilities 7,425 18.951 11,526
Long-tenn debt 1,944 1,404 -540
  Total liabilities 9,369 20,355 10,986
Paid-up share capital 8.37 8,370
Reserves and surplus 3,105 10,290 7,185
  Total Liabilities 20,844 39,015 18,171

BY Akash Saxena
Sources and Uses of Funds and
Cash Flows
 Sources of funds or cash flows:
 funds from operations
 sale of fixed assets
 issue of share capital
 borrowings
 Uses of funds are:
 losses
 purchase of fixed assets
 repayment of borrowings
 payment of dividends

BY Akash Saxena
Funds from Operations
 Funds flow from operations
+ PAT (– loss)
+ Depreciation
+ Other non-cash expenses
– Non-cash incomes
+ Loss from the sale of fixed assets
– Gain from the sale of fixed assets

BY Akash Saxena
Cash from Operations
 Cash flow from operations
+ PAT (– loss)
+ Depreciation
+ Other non-cash expenses
– Non-cash incomes
+ Loss from the sale of fixed assets
– Gain from the sale of fixed assets
+ Increases in net working capital
– Decreases in net working capital

BY Akash Saxena
Uses of Funds and Cash Flow
Statements
 Liquidity position
 Capital expenditures
 Dividends paid
 Retained earnings
 External financing
 Repayment of loans
 Non-performing assets

BY Akash Saxena