Financial Statement

Balance Sheet
Profit & Loss
 Elements of a Balance Sheet

A balance sheet, also called the statement of financial

position, lists:
IN
Assets
OUT
Liabilities
?
Owners Equity
as of a specific date. It gives an idea of what the company is
worth.
Let us now look at these terms in more detail.
 Elements of a Balance Sheet
IN
Assets
Assets are all those things a company owns, which are of
value to the business.
Assets can be tangible like e.g. a manufacturing plant,
computers or cash in the bank.
Tangible assets like cash or goods for sale that can
easily (i.e. within an accounting year) be converted
into cash are called current assets while other assets
like properties and equipment are called fixed assets.
Assets can also be intangible like e.g. copyrights.
 Elements of a Balance Sheet
Liabilities OUT

Liabilities are all those things for which the company

eventually needs to pay. There are two types of liabilities:
Current Liabilities need to be paid within one
accounting year. Examples are: Outstanding rent,
goods bought on credit.
Long Term Liabilities are those liabilities which will
not be paid during the current accounting year.
Examples are: Long term debts, bank loans.
 Elements of a Balance Sheet
Owners Equity ?

Owners Equity is by definition the difference between the

Assets of a company and its Liabilities. Owners Equity is
the sum of two parts:
Contributed Capital is the money that the owners
invested in the company.
Retained Earnings are those earnings which were not
distributed to the owners. These can accumulate to a
large sum over the years.
 Elements of a Balance Sheet

Let me stress again: A Balance Sheet must balance the

assets, liabilities and owners equity.

Assets Liabilities = Owners Equity

IN OUT

Most commonly, the assets are on top and the liabilities

and owners equity on the bottom.

Lets now have a look at a balance sheet.

 A Simple Balance Sheet
A B C D E F G
2
3 Golden Win Double Dragon International
4 Balance Sheet
5
6 Assets
7 Cash and Equivalents 10000
8 Accounts Receivable 1200
9 Inventory 8300
10 Total Current Assets 19500 =G7+G8+G9
11 Plant and Equipment 800
12 Accumulated Depreciation 500 Cheer Up!
13 Net fixed assets 300 =G11-G12
14 Total Assets 19800 =G10+G13
15 Liabilities and Owner's Equity
16 Accounts Payable 7600
17 Other Current Liabilities 900
18 Total Current Liabilities 8500 =G16+G17
19 Long Term Debt 1200
20 Total Liabilities 9700 =G18+G19
21 Common Stock 6000
22 Retained Earnings 4100
23 Total Shareholder's Equity 10100 =G21+G22
24 Total Liabilities and owner's Equity 19800 =G20+G23
 Some Notes
Note how the top and bottom parts balance

Presentation indeed makes a big difference. In a sense

design is an important ingredient of financial modeling.
After all, what is the use of great information if no-one
understands it?

Now, let us look at the items in the balance sheet one by one.
 Elements of a Balance Sheet
IN
Assets Current Assets
Cash and Cash Equivalents
Cash is all the cash the company has, be it in bank accounts or in
the
cash box. Cash Equivalents are short term investments that can be
converted to cash with no or very little delay. Examples of Cash
Equivalents are: Money Market Investments, Government Bonds.
Accounts Receivable
Most businesses do not immediately receive payment for (some or
all) of the goods or services they sell. Assuming that payment will
indeed be made in the near future, a receivable account is an asset.
 Elements of a Balance Sheet
Assets:Total Current Assets
In this case, of course, its just the sum of Cash and
Equivalents and Accounts Receivable, but there could
be many more current items.

Total current assets is an important item since it indicates

how much money the company has to run its business.
 Elements of a Balance Sheet
Assets: Fixed Assets
Plant and Equipment
In order to run a business one usually will need to buy some equip-
ment (even when one is in the service business) like e.g. machines
and computers. The total cost price of the bought equipment is listed
in this item (note, the fact that equipment becomes worth less is
accounted for in the next item).
Accumulated Depreciation
Naturally, when one uses equipment it will get old and thus become
worth less. It is therefore necessary to subtract a certain amount
from the original equipment value every year. Since one would like
to keep the original value listed above, one needs to accumulate
i.e. sum up all the previous years depreciations.
 Elements of a Balance Sheet
Assets: Net Fixed Assets
In this case the net fixed assets are Plant and Equipment
minus Accumulated Depreciation, but there could be
many more items.

Note that having a lot of fixed assets does not necessarily

mean that the company is rich. It is also important to
realize that fixed assets do not provide cash for running
the business (though they could be use as collateral for a
loan).
 Elements of a Balance Sheet
Assets: Total Assets
Total Assets = Current Assets + Net Fixed Assets

Note: While total assets in a sense represent the current

value of the business, they do not necessarily represent the
resale value or the liquidation value of the business.

The total assets are the value of the business as seem from
the perspective of a continuation of the currently operating
business.
 Elements of a Balance Sheet
$ OUT
Liabilities: Current Liabilities
Accounts Payable
Just as there are accounts receivable, there are also accounts
payable. Businesses usually do not need to pay immediately upon
delivery but have e.g. 30 or 60 days credit-terms.
In other words, accounts payable are unpaid bills due soon.

Other Current Liabilities

All the liabilities which are due within one accounting year and
which are not separately listed (in this case only accounts payable)
are lumped together here. Examples are: unpaid salaries, interest,
short term loans.
 Elements of a Balance Sheet
Liabilities: Total Current Liabilities

The total current liabilities are an important indicator of

how much money a company will need in the near future.

If the total current liabilities are much bigger than the total
current assets great caution is warranted.
 Elements of a Balance Sheet
Liabilities: Long Term Liabilities
Long Term Debt
While in daily life having debts (especially credit card debts!) is
usually not a good thing, the proper use of long term loans is an
essential part of many business activities. It is for example very
rare that a company has enough cash to build a new state of the art
manufacturing plant. The idea is of course that you earn more than
you pay in interest. (This is somewhat similar to buying a condo
with a mortgage).
Other Long Term Liabilities
All other liabilities which do not need to be returned within one
accounting year and which are not separately listed. E.g. Royalties,
asbestos claims.
 Elements of a Balance Sheet

Liabilities: Total Liabilities

Total Liabilities = Total Current + Long Term Liabilities
Note: If the Total Liabilities exceed the Total Assets, the
company is almost certainly in some sort of danger. But
there are exceptions to this! (Especially companies in new
hot industries like e.g. dot.coms or genetics).
 Elements of a Balance Sheet
Liabilities: Shareholders Equity
Common Stock
When a corporation is set up or when it needs money and desires to
do so, it can issue common stock. The amount received is entered
under this item. Note that the value printed on the stock certificate
may be quite different from what one actually pays.
Retained Earnings
At the end of an accounting year, a company can have a profit or
a loss. The profit or loss (in case of loss, naturally with a minus
sign) is added to the retained earnings.
The retained earnings sum up all the profits and losses since the
inception of the company (minus paid out dividends).
 Elements of a Balance Sheet

Liabilities: Total Shareholders Equity

This is the amount the company owes its shareholders.

Note that from an operational point of view, these debts

have no impact on the daily running of the business since
they do not need to be repaid.
 Elements of a Balance Sheet
Liabilities: Total Liabilities and Owners
Equity
As such this item is mainly a cross check for the accuracy
of the balance sheet. It must be exactly the same number
as the total assets or something is wrong!
 Profit & Loss Account
It is a summary of revenue earned and expenses
incurred which ultimately results in profit or loss of
to the company
Operating revenue = Sales revenue
Non-operating revenue = Other income ( out of sale of
investments, interest, commission and discount etc)
Hence operating profit is a yard stick for operating
profit of the company
Operating profit = Sales Revenue- Operating Cost
 Profit & Loss Account
Gross Sales
Gross sales includes excise duty to be charged to the
customer, central sales tax applicable, state sales tax
applicable, the discount o be allowed to
distributors/dealers/customers. The gross sales
appears in the P&L account comprises of all the above
part from the basic unit price.
Net Sales
The sales figure excluding all the factors explained
 Profit & Loss Account
Cost of production
This is the cost incurred right from the procurement
of raw material to the finished good.
For eg. in a garment firm following cost is incurred
while production
1) cost of raw material cloth, buttons, canvas,
hooks, zips etc
2) Maintenance of sewing machines
3) payment of wages to workers
4) power
5) washing, ironing,packing etc.
 Profit & Loss Account
Selling And General Administarative Expenses
Maintaining office staff for admn & acctg
marketing effort
payment of salaries/Tr All to marktg personnel
All the expenses which are not directly connected to
manufacturing are classifed as selling and/or general
expenses
 Profit & Loss Account
Cost of goods sold
Cost of goods sold includes all manufacturing expenses
and the adjustments for opening and closing stock
Cost of Goods sold = Opening stock + Purchases +
Manufacturing expenses - Closing stock
Gross Profit is arrived deducting figure of cost of goods
sold from the sales figure
ie Gross profit = Sales - Cost of goods sold.
 Profit & Loss Account
Operating Profit is arrived deducting selling,
administrative and general expenses , provision for bad
debts, interest and miscellaneous expenses from the gross
profit.
ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad debt
+ mis exp )
Profit Before Tax When other income is added and other
expenses are deducted from the operating profit we get
profit before Tax
ie PBT = Op Profit + oth Inc - oth exp
Net Profit When provision for taxes is deducted from the
Profit Before Tax we get Net profit
 Profit & Loss Account
Non Operating Income/Expenses
The income earned by the unit from other than manufacturing
and selling operations is classified under this head . i.e
a) Interest earned on fixed deposits
b) Dividends and profit earned by sale of assets and
share.
All those expenses which are not directly connected with
operations of the unit are classified under this head. i.e

a) Preliminary expenses written off

 l e I n c om e
Samp
Sta te m e n t
 Financial Planning

Investment
Risk-reward
 Contribution to approved Savings (Sec 80C)
1. Insurance Premium
Paid on his life or on the life of the spouse or any of his child (dependent or independent).
Premium paid in excess of 20% of Actual Sum Assured.
Policy not to be discontinued before the expiry of 2 years

2. Contribution to Recognised/Statutory Provident Fund.

3. Contribution to Public Provident Fund.
The deposit may be made by the individual in his own name or in the name of his spouse or in
the name of any of his child, major or minor.
During a financial year, you can contribute a minimum of Rs 500 and a maximum of Rs
1,00,000. If you are putting in money in instalments,remember that you can't make more than
12 installment
a year.
Investment made on or before 5th of a calendar month is only eligible for interest for the month.
Interest rate is 8.8% compounded annually.
Term of PPF is 15 years.
Contd

4. Subscription to National Savings Certificates, VIII Issue.

Term of the plan is 6 years and no premature withdrawals allowed. Principal and Interest is repaid only after
6 years
Interest allowed is 8.6% p.a. Last year interest is taxable.
NSC , IX issue is 10 years with interest rate 8.9%.

5. Investment in units of Mutual Fund

Popularly known as ELSS (Equity Linked Savings Scheme).
Lock in period is 3 years.
Investment is predominantly in equity shares.
These schemes have the potential to deliver high returns but the risk is also high.

6. Any sum paid as tuition fees (not including any payment towards development fees/donation/payment of
similar nature) whether at the time of admission or otherwise to any university/college/educational
institution in India for full time education of any two children of the assessee.
Contd

7. Any payment towards the cost of purchase/construction of a residential property (including repayment of
loan taken from Government, bank, cooperative bank, LIC, National Housing Bank, assessees
employer where such employer is public company/ public sector company/ university/ co-operative
society)
The assessee cannot transfer the house property, in respect of which deduction has been claimed, before the
expiry of 5 years from the end of the financial year in which possession of such properties obtained by him.
Any expenditure incurred towards stamp duty, registration charges for purchase of the house is also eligible.

8. Term deposit for a period of not less than 5 years with a scheduled bank in accordance with a scheme
framed by the Central Government / 5 years time deposit scheme in post office.

9. Amount invested in approved debentures of, and equity shares, in, a public company engaged in
infrastructure including power sector.

10. Contribution for participating in ULIP of notified concern e.g. LIC . The assessee cannot terminate the
policy within 5 years.
 Deduction U/S 80 D - Health Insurance premium:

Investment in Health Insurance plans offered by both Life Insurance

as well as General Insurance Companies is eligible for deduction from
income u/s 80 D up to a limit of Rs 30,000 (Rs 15,000 on
self+spouse+children & Rs 15,000 for parents). This deduction is
apart from the Rs.1,00,000.

Investment can be made in the name Self, spouse, dependent

children and parents. If the person on whose health the policy is taken
is above the age of 65 years then deductions allowed up to Rs
20,000.

Premium to be paid in any mode other than cash.

 Repayment of loan taken for higher education [ Sec.80E ]

Under section 80E is available if the following conditions are satisfied:

The assessee is an individual.
He had taken a loan from any financial institution [ a banking company or notified financial
institution] or an approved charitable institution [ an institution approved for the purpose of section
1 0(23C) or 80G(2)(a)].
The Section 80E of the Income Tax Act has been amended w.e.f. assessment year 2010-11 so as
to extend its scope to cover all fields of studies (including vocational studies) pursued after
passing the Senior Secondary Examination from any school, board or university recognized by the
Central Government or State Government or local authority. Presently the deduction is available
only for pursuing full time studies for any graduate or post-graduate course in engineering,
medicine, management or for post-graduate
The loan was taken by the taxpayer for the purpose of pursuing his own higher education the
purpose of higher education of his relatives, i.e., spouse/any child)
Amount is paid by the individual during the previous year by way of interest on such loan.
Such amount is paid out of his income chargeable to tax.
The deduction is allowed in assessment year relevant to the previous year in which the assessee
starts paying the interest on the loan and 7 immediately succeeding assessment years or until the
above interest is paid in full, whichever is earlier.
Deduction in respect of donations to certain fund,
charitable institutions etc [Sec 80 G]

Donation paid in kind is not eligible.

Proof of donation should be submitted.
Donation to any approved institution is subject to 50%
deduction subject to 10% of adjusted Gross Total
Income.
 Income exempted from Tax
Dividend received from Indian Company
exempted from tax.
Capital gain on transfer of listed Equity share
exempted from tax.
Any sum ( including bonus) on life insurance
policy exempted from tax.
 Gifts
Under Section 56(2)(vi) of the Income Tax Act, 1961 Presently
any sum of money in excess of Rupees 50,000/- received
without consideration by an individual or HUF is chargeable to
income tax in the hands of the recipient, subject to some
exceptions. At present anything which is received in kind having
moneys worth i.e. property is outside the purview of the
existing provisions of Section 56(2)(vi).
Therefore Section 56(2)(vi) of the Income-tax Act has been
proposed to be amended to provide that the value of any
property received without consideration or for inadequate
consideration will also be included in the computation of total
income of the recipient. Such properties will include immovable
property being land or building or both, shares and securities,
jewellery, archaeological collections, drawings, paintings,
sculptures or any work of art. Other movable properties such as
motor car, gold bar, personal effects, furniture etc. are still
 Rajiv Gandhi Equity Savings
Scheme
A new scheme called Rajiv Gandhi Equity Savings Scheme, is proposed in the Union Budget 2012-
13 to encourage flow of saving in financial instruments and improve the depths of domestic capital market.
The scheme has been introduced for the first time in stock market. The specifications of this scheme are:
New investors with income below Rs 10 Lakh can buy stocks up to Rs 50,000 into direct equity market.
The scheme will have lock-in period of three years.
You get an income tax deduction of 50% of Rs.50000 (Rs 25000)
Hold this investment for three years to save a tax over above 80c deduction (80CCG)
An investor who is any resident individual and who has not opened a demat account as on the date of
notification of the scheme or any individual who has opened a demat account before the notification of the
scheme but has not made any transactions till the date of notification of the scheme or any individual who is
not the first account holder of an existing joint demat account.
However, an investor who has claimed a deduction under this section in any assessment year will not be
allowed any deduction under this scheme for any subsequent assessment year.
 Interest on Bank Savings Account

The Reserve Bank of India decided to help holders of savings bank

accounts by directing all scheduled commercial banks in the country
to compute the interest rate on such deposits daily and not on the
basis of an antiquated 69-year-old system through which the interest
rate used to be computed on the minimum balance that was
maintained in an account between the tenth day and the last day of a
calendar month. In April 2009, the RBI voluntarily directed all
scheduled commercial banks to start calculating interest on deposits
in savings bank on a daily basis with effect from April 1, 2010. It was
first proposed that the interest would be deposited half-yearly even if
it was calculated on a daily basis. The period was then reduced to a
quarter and finally, every month .
Power Your Savings
The Road to Rs 1 Crore

Impossible as it may seem, you can become a zero-risk crorepati if you start
investing early and stick to a disciplined investment plan.

How many years it takes to accumulate Rs 1 crore , at various rates of interest, on

investments of Rs 5,000 a month*

SAFE MEDIUM RISK HIGH RISK

Interest
6.5 8 9 10 11 12 14 16 18 20
rate (%)

No. of
39 35 32 30 28 27 24 22 21 19
years
Alternative Investment Option In India
Stock Market
Investing in share market yields higher profits. Influenced by unanticipated
turn of market events, stock market to some extent cannot be considered
as the safest investment options. However, to accrue higher gains, an
investor must update himself on the recent stock market news and
events.
Real Estate
Real Estate has long been considered the most tangible source of wealth
accumulation. With land growing increasingly scarce in India, the value of
real estate holdings is expected to grow. Apart from a few bubbles such
as the mid-90s, this has largely been true. Termed as the "money making
industry", realty sector of India promises annual profits of 30% to 100%
through real estate investments.
 Gold
Gold is regarded as one of the best hedging tools be it against inflation, currency,
stocks or fixed income. Gold retains its value in times of hyper inflation and currency
weakness. Gold is known to have a low correlation with other asset classes such as
equities and debt and is considered a safe haven during times of economic crises. It
is even regarded as an alternate currency. Gold protects ones portfolio from volatility
as micro-economic and macro-economic factors that tend to have significant impact
on other asset classes have virtually no or little impact on gold prices. One can
invest in gold through Gold ETF also.
Advantages of Investing in Gold ETFs
Potentially cheaper to have price exposure to gold price as compared to other
available avenues.
Quick and convenient dealing through demat account.
No storage and security issue for investors.
Transparent pricing
 Commodities
Commodity investing can be a potentially rewarding option and can provide
the much-needed diversification your portfolio needs. Commodity trading
provides an ideal asset allocation, while helping you hedge against inflation
and buying into a piece of global demand growth. Commodity exposure can
be taken either directly through the commodity exchange or through various
mutual funds with a mandate of investing in commodities.
Private Equity
Private equity funds typically make investments in companies not listed on
public stock exchanges. They offer high return opportunities due to their
access to dynamic, privately held companies and their ability to create value
in them. We help you choose exceptional private equity funds with high
growth potential.
 What is a Mutual Fund?
A Mutual Fund is a trust that pools the savings of a number of investors who share
a common financial goal.
Anybody with an investible surplus of as little as a few thousand rupees can invest
in Mutual Funds.
These investors buy units of a particular Mutual Fund scheme that has a defined
investment objective and strategy.
The money collected is invested by the fund manager in different types of
securities. These could range from shares to debentures to money market
instruments, depending upon the schemes stated objectives.
The income earned through these investments and the capital appreciation realized
by the scheme are shared by its unit holders in proportion to the number of units
owned by them.
 TYPES OF MUTUAL FUNDS
Type of
Mutual Fund
Schemes

Special
Investment
Structure Schemes
Objective

Open Ended Industry Specific

Growth Funds
Funds Schemes
Close Ended Index
Income Funds
Funds Schemes
Sectoral
Interval Funds Balanced Funds
Schemes
Money Market
Funds
Risk-Return of Investment
 Financial Derivative

Forward
Future
 Derivative

The financial derivative is an asset whose

value is derived from the value of some
other asset(s) or derivatives, known as
underlying asset(s).
Example:
An orange juice can be considered as a
derivative of the oranges since its price can
be derived from that of oranges.
 Forward Contract

The agreement to pay for and pick up,

Something at a pre-determined date and or
time, for a pre-determined price. Usually traded
off of the trading floor between two firms.
 An Example

An agreement on Monday to buy a book, from a

bookstore on Friday for Rs.1000.00.On Friday,
you return to the bookstore and take delivery of
the book and pay the Rs.1000.00.
The contract is actually the agreement.
 Futures

Similar to forwards in length of time. However,

profits and losses are recognized at the close of
business daily, Mark-to-market. Transactions
go through a clearinghouse to reduce default
risk. 90% of all futures contracts are delivered to
someone other than the original buyer.
 Example

On Monday we enter into a futures contract to buy our

book on Friday. We are required to place a deposit for
the book of 50% (Rs.500.00). We are told that if the
book appreciates in value we may be required to
increase the deposit. If the book depreciates in value,
we may take back some of the money. Wednesday the
book goes to Rs.1500.00. We must deposit another
Rs.250.00. On Thursday the book drops to Rs.750.00.
We can collect Rs.375.00. On Friday the book value is
Rs.800.00, therefore we owe Rs.425.00 on the
remaining balance.
Any Questions?