FSA :Class Assignment – 08/02/2017

1. The Net worth of a company has to be always positive; I,e greater than zero.

Ans-: Net worth of the company is the promoters fund plus the accumulated profit or loss over the
years of business. It is not necessary that net worth of the company is always positive, it may be
negative because of the following reasons-:

(a) When any of the promoter and others brings away money`
(b) When there are accumulated losses in the subsequent year (when accumulated losses is more
than the promoters funds)
(c) When a company decides to pay off more dividends that its profit as in the case of Indigo and
Interglobe.
So it is not necessary that the Net worth of a company has to be always positive.
However, most of times negative net worth is a symbol of a financially unstable, sick and loss
making company.

2. The Networth of a company is as follows:

a. PY : 100
b. CY : 200

The logical inference from the above information would be that the company made profits in
the current financial year.

Ans-: As stated in the above answer net worth is not only the result of Accumulated Profit and Loss
of the company but also depends upon the infusion of the capital or the issue of fresh share by the
company. So , the above networth statement of the company does not give the logical inference of
profits in the current financial year but may also lead from issue of fresh share capital and infusion
of capital.

3. The fixed assets of the Balance Sheet of a company shows as follows:

Year 1 Year 2 Year 3

Original Cost 100 200 150

Less: Accumulated

Depreciation 20 30 25

Net Block 80 170 125

What would be the implications in the cash flow statement and where would it appear?

Ans-: In 2nd year there is out flow of Rs. 100 (100 Rs.-200 Rs.) i.e. negative cash flow, while in 3rd year
there is in flow of Rs. 50 ( 200 Rs.- 150 Rs) i.e. positive cash flow.

So, the above two will appear in investing activities in their respective year
 4. The extracts from the profit & loss and Balance Sheet of a company shows as follows:

CY PY

P&L (Expenditure side)

Deferred tax asset 150 250

Balance sheet (Asset side)

Deferred Tax assets 350 --

What would be the implications in cash flow statement and how would it get reflected in
the indirect cash flow statement.

Ans-: Deffered tax asset in the BS will not effect Indirect cash Flow statement, as it will be added back to
the cash flow (As it is non cash item)

While deferred tax asset in the P/L account for the CY will be deducted as an operating expense in the
cash flow statement.

5. Current Assets in the Balance sheet of a company shows as follows:

CY PY

Current Assets

Receivables 300 200

Extracts from the Auditors’ Report:

Receivables include an amount of Rs 75/- due from an overseas customer who has gone bankrupt.

a. What would be the implication in the cash flow statement?

b. What would be the implications from an analyst perspective?

Ans-: There will be no impact on Cash Flow Statement as both the profit as well as bills receivable
will go down by Rs. 75/-

6. Non-current assets in Balance sheets includes:

Investment in wholly owned subsidiary – 500

Extracts from the notes to accounts:

Owing to the adverse economic conditions, XYZ Ltd has been making losses over the last 3
years. A revival plan is underway, and t is expected that XYZ Ltd will turn into profits
within the next 3 years. What precautions if any would you take as an analyst?
Ans-: The precautions as an analyst would be, I would check the future return and the quality of the
subsidiary. Also there is no revival plan as it is given that it is underway so expectation of profits in
future cannot be considered . Various capital budgeting techniques like IRR can be also used.

7. P&L extracts of the company shows as follows:

CY PY

Depreciation 10 100

Extracts from the accounting policies:

During the year the company changed the method of depreciation from W.D.V. to S.L.M. This
resulted in write back of depreciation pertaining to earlier period amounting to 80.

a. What is the impact on cash flow statement and how would it appear?
b. What would be the view point of an analyst in analyzing the financial statements.

Ans-: As the method of depreciation is changed from W.D.V to S.L.M hence, there is a change in
accounting policy. It must be normalized in the profit & loss , and must be added back to operating
profit.