Study of Financial

Statements
Module B
Financial Management
CAIIB
 Unit 10 Learning Objectives
 Broad Scope and Coverage of
Financial Management
 Objective of Financial Management
 Increasing Importance of Financial
Management

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 Scope
 Designing and Implementing
Business Plans
 Ensuring Effective Fund Utilisation
 Resource Allocation
 Investment decisions
 Profit generation
 Wealth creation

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 Objectives
 Maximise the wealth of the firm
 Maximise Shareholder value
 Owner-Manager- Employee conflict
 Profit Maximisation vs Wealth
Maximisation
 Risk and uncertainty

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 Important Decisions
 Financing
 Investment
 Dividend Policy
 Current Asset Management

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 Unit 11 Capital Expenditure
 Learning Objectives
 Capital Expenditure
 Phases of Capital Budgeting
 Levels of decision making
 Facets of Project Analysis
 Feasibility Study

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Capital Expenditure- Importance
 Long term Effects
 Irreversibility
 Substantial outlays

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 Capital Expenditure- Difficulties
 Measurement Problems
 Uncertainty
 Temporal Spread

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 Capital Budgeting Phases
Planning

Analysis

Selection

Implementation

Review
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 Planning
 Planning is concerned with the
articulation of a broad Investment
Strategy and the generation and
preliminary screening of project
proposals.
 The investment Strategy of a firm
delineates the broad areas or types
of investments the firm plans to
undertake.
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 Analysis
 A detailed anlaysis of the marketing,
technical, financial, economic and
ecological aspects is undertaken.
 At this pint the focus is on gathering
information, preapring and summarising
information about various proposal being
considered for inclusion in the capital
budget.
 Based on this the projections may be
made.

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 Selection
Criterion Accept Reject

Payback Period( PBP) PBP < target period PBP > target period

Accounting Rate of Return ( ARR ) ARR > target rate ARR < target rate

Net Present Value( NPV) NPV > 0 NPV < 0

Internal Rate of Return ( IRR) IRR > cost of capital IRR < cost of capital

Benefit Cost Ratio( BCR) BCR > 1 BCR < 1

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 Implementation
 Stages
 Project & Engineering Design
 Negotiations and Contracting
 Construction
 Training
 Plant commissioning

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 Tools for expeditious
Implementation
1. Adequate formulation of projects
2. Responsibility Accounting
3. Network Techniques
4. Profit Centre Concepts

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 Decision making levels
Operating Administrative Strategic

Where is it taken? Lower Level Middle Level Top Level

Management Management Management

How structured is it? Routine Semi- structured Unstructured

Level of Resource Minor Resource Moderate Resource Major Resource

Commitment

What is the time Sort term Medium term Long term

horizon?

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 Profitability Analysis
 Market
 Technical
 Financial
 Economic
 Ecological

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 Key Issues in Project Analysid
Market Analysis Potential Market & Market Share

Technical Analysis Technical Viability & Sensible Choices

Financial Analysis Risk and Return

Economic Analysis Benefits & Costs in Shadow Prices- Other Impacts

Ecological Analysis Environmental Damage & Restoration measures

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 Preliminary Work
Idea Generation

Initial Screening

Prima Facie analysis

NO
YES

Feasibility Analysis Terminate

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 Analysis

Market Analysis Technical Analysis

Financial Analysis

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 Evaluation

Economic & Ecological Analysis

Is it Worthwhile?

NO
YES

Funding Proposal Terminate

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 Decisions, Return, Risk,
Market Value
Return

Investment Market Value

Decisions

Financing
Risk
Decisions

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 UNIT 12- Sources of Finance
 Learning Objective
 Sources of Finance- Long term &
Short Term
 Advantages and Disadvantages
 Various Types of Funding

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 Sources of Company Finance
Permanent Sources Long-term Sources Medium –Term Short-term Sources
Sources
Share Capital Redeemable Medium Term Cash Credit
Preference Loans
Shares
Retained Profits Debentures Deferred Credit Overdraft
Bonds Public Fixed Bills Discounting
Deposit
Long term Loans- Working Capital Commercial Paper
Indian Rupees Term Loans
or Foreign
Currency Loans

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Seed Capital Akila Maheshwari
Trade Credit 23
 Matching Sources to Uses
Types of Capital Uses Matching Assets Sources
Permanent Broaden borrowing Freehold or long term Share Capital, retained
base/major property/shares of profits
financing/takeover/ acquired or merged
merger company,
Long Term Financing assets with Freehold or leasehold Redeemable preference
long life/Plant & property long shares/Long term
machinery/Permane term/Permanent loans
nt Working capital stock or debtor
requirement

Medium Term Fixed assets/working Vehicles/Plant/fittings, Medium term loans/Hire

capital stock, debtors, purchase
leasing
Short term Working Stock/debtors Cash credit/overdraft/bill
Capital/financing discounting/LC/Exp
seasonal ort credit/creditors
fluctuations/export
orders/bridging
finance/minor fixed
assets
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 Equity Financing
 Nature
 Advantages
 Disadvantages

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 Retained Profits
 Nature
 Advantages
 Disadvantages

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 Preference Shares
 Nature
 Advantages
 Disadvantages

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 Debentures and Bonds
 Nature
 Advantages
 Disadvantages

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 Term loans
 Nature
 Advantages
 Disadvantages

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 Term Loans
 Maturity
 Security
 Repayment
 Interest Rate

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 Seed Capital
 Venture Capital
 Seed Capital Assistance Schemes of
IDBI

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 Medium Term Sources
 Loans
 Deferred Credit Bill Discounting
Scheme of IDBI
 Fixed Deposits
 Working Capital Term Loan

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 Short Term Sources
 Bank loans
 Trade Credit
 Cash Credit and Overdraft
 Bill discounting
 Commercial Paper
 Lease

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 Cost of Capital
 Minimum return
 Weighted average cost of projected
sources of finance

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 Unit 13 Financial Statements
 Learning Objectives
 Understand the meaning of Financial
Statements
 Uses of Financial Statements for
decision making
 Financial Analysis
 Interpretation of Statements
 Meaning of Fund Flows
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 Key Financial Statements
 Balance Sheet
 Profit & Loss or Income Statement
 Sources & Uses of Funds Statement

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 Balance Sheet
Liabilities Assets

Share Capital Fixed Assets

Reserves and Surplus Investments

Secured Loans Current Assets, Loans and Advances

Unsecured Loans Current Assets

Current Liabilities and Provisions Loans and Advances

Current Liabilities Miscellaneous expenditures

Provisions

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 Balance Sheet
1. Sources of Funds
1. Shareholder’s Funds
a. Share Capital
b. Reserves and Surplus
2. Loan Funds
a. Secured Loans
b. Unsecured Loans
II. Application of Funds
1. Fixed Assets
2. Investments
3. Current Assets Loans and Advances
Less Current Liabilities and Provisions
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4. Miscellaneous Expenditure
Revenue
Income Statement
Commission actually Received 230000.00
Less Expenses
Cost of Goods Sold Inventory expenses for the year 2950.00
Gross Profit
Depreciation/General 4000.00
Admin/Selling
S,G & A Overhead
Total Expenses
Profit Before Interest and
Taxes
Less Interest Interest on loan 10000.00
Other Income/Loss 0.00
Profit Before Tax
Tax@30%

Net Profit- Bottomline

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 Balance Sheet-Financial
Management
Balance Sheet Items Finance Topics
Share Capital/Reserves and Capital Structure and Cost of Capital
Surplus/Loans/Debentures
Loans and Advances/Current Working Capital Financing Policy
Liabilities/Trade Credit/Provisions
Fixed Assets( Net) Gross Block-less Capital Budgeting
depreciation
Investments Security Analysis
Current assets, loans and advances, cashWorking Capital mgt/cash management
and bank
Receivables Credit Management
Inventories Inventory Management
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 Income Statement- Financial
Management
Income Statement Item Finance Topic
Net Sales Revenue Risk
Cost of Goods Sold- Stocks/ Wages and
Salaries/other manufacturing Expenses
Gross Profit Gross Profit Margin
Operating Expenses- SGA/Depreciation Depreciation Policy
Operating Profit- non operating Business Risk
surplus/deficit- EBIT
Interest Financial Risk
Profit Before Tax

Tax Tax Planning

Profit After Tax Return on Equity
Dividends Dividend Policy
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Retained Earnings
 Funds Flow Statement- Working
Capital Basis
Operations Dividend Payment

Issue of Share Capital Repayment of long

term borrowing
Working
Capital Pool
Long Term Borrowing Purchase of
non current assets

Sale of non current assets

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 Funds Flow- (WC basis)
Sources of Working Capital Uses of Working Capital
Operations Dividends
Profit after tax Purchase of Fixed assets
Depreciation Repayment of term loan
Issue of Share Capital Total working capital used
Long term borrowings
Sale of fixed assets
Total working Capital generated

Net change in working capital

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 Funds Flow- Cash Flow Statement
 Sources of Cash
 Operations
 Net Income
 Depreciation
 Issue of Share Capital
 Long term borrowings
 Sale of non current liabilities
 Decrease in current assets other than cash

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 Funds Flow Statement- Cash Flow
 Uses of Cash
 Payment of Dividends
 Purchase of non current assets
 Repayment of long term borrowings
 Decrease in current liabilities
 Increases in current assets other
than cash

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 Financial Statement Analysis
 Assessment of Past Performance and
current Position
 Protection of Net Income and growth
prospects
 Prediction of Bankruptcy and failure
 Loan decisions by FIs and banks

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 Techniques
 Horizontal analysis
 Vertical Analysis
 Trend Analysis
 Ratio Analysis
 Common size Analysis

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 Focus of Financial Statements
Analysis
1. Liquidity or short term solvency anlysis
2. Profitability Analysis
3. Capital Structure or gearing analysis
4. Market strength or Investor analysis
5. Growth and stability analysis

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 Projected Statements
 Projected Balance Sheet
 Projected Income Statements
 Projected cash flows

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 Thanks You

 Indian Institute of Banking and

Finance

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