05-06 September 2023

Understanding Naveen Singhvi,

Financial Statements Director O/o CAG of India
 Introduction to Reading Financial Statements

HELP YOU READ THE BALANCE THE STATEMENT KEY CONTENTS

FINANCIAL SHEET INCOME OF OF AN ANNUAL
STATEMENTS – STATEME CASHFLOW REPORT
Accrual Basis NT S

ANALYSING CREATIV
FINANCIAL E
STATEMENTS ACCOUNTI
NG
What
 Financial Statements
Financial statements are written records that illustrates the activities and financial
performance of an organization. In most cases they are audited to ensure accuracy for tax,
financing, or investing purposes.
.
Balance Sheet Balance Sheet is a snapshot at a point in time. On the top half you have
the company’s assets and on the bottom half its liabilities and
• Statement of financial position Shareholders’ Equity (or Net Worth). The assets and liabilities are typically
listed in order of liquidity and separated between current and non-current.

The income statement covers a period of time, such as a quarter or

Income Statement year. It illustrates the profitability of the company from an accounting
(accrual and matching) perspective. It starts with the revenue line and
• Statement of operation/profit and loss
after deducting expenses derives net income.

The cash flow statement look at the cash position of the company . It
Statement of Cash Flows
answers it answers the questions ; How much of the organisation’s cash
goes to its creditors and shareholders? Does it keep enough for its own
investment and growth? has 3 components cash from operations, cash
used in investing, and cash from financing. It “undoes” all of the
accounting principles and shows the cash flows of the business.
Balance Sheet
Income Statement
Cash Flow Statement
Balance Sheet

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 Balance Sheet

The Balance sheet has Simplified Balance Sheet Current vs non-current

3 main categories: Assets Current
Liabilities
Current assets Current liabilities Assets
Cash 20,000 Accounts payable 2,000 Expected to be converted into
Assets
Accounts receivable 3,000 Accrued expenses 1,000 cash in less than 1 year

Inventory 60,000 Total current liabilities 3,000 • Accounts receivable, inventory

Liabilities
Prepaid expenses 11,000 Non current liabilities 11,000
Total current assets 94,000 Bank loan 100,000 Liabilities
Equity
Non current assets Shareholder equity • Will be paid in less than 1 year
Property plant & 110,000 Common shares 89,000 • Trade accounts payable
equipment Retained Earnings 11,000
Intangible assets 10,000 Total liabilities and 214,000 Non-current
Total non current assets 120,000 shareholders equity
Assets
Total assets 214,000 • Expected to be held greater
than 1 year
• Property, plant, and equipment

Liabilities
• Repayment terms longer than
1 year
• Loan repayable over a 5 year
 Illustrative Balance Sheet (Assets )

Current
Assets
• Expected to be converted into
cash in less than 1 year
• Accounts receivable, inventory

Non-current
Assets
• Expected to be held greater than
1 year
• Property, plant, and equipment

See accompanying notes.

 Intangible Assets

Trademar Patent Intangible Assets are items of

k s value that are used to
generate revenues and have
no physical substance

Copyrigh
ts
Unearned Revenue
Deferred Income Tax
 Illustrative Balance Sheet (Liabilities)

Current
Liabilities
• Will be paid in less than 1 year
• Trade accounts payable

Non-current
Liabilities
• Repayment terms longer than 1
year
• Loan repayable over a 5 year
period

See accompanying notes.

 Other liabilities

Commitments Contingencies
Commitments are future obligations that a company agrees to. Contingencies are liabilities that may or may not happen, depending
on circumstance.
e.g. lawsuit
The liability must be recorded if:
Leasehold
New buildings improvements 1. A loss will be suffered in the future
2. The loss amount can be reasonably estimated
If not, just disclose a note.
Building
improvements Contingent gains are never recorded in financial statements.
Illustrative Balance Sheet (Statement of Shareholder’s Equity)

See accompanying notes.

 Equity vs Preference Shares

Authorised shares
• The total number of shares a
company can sell

Outstanding (Issued) shares

• The total number of shares a
company has sold/issued

Common shares Preferred shares

• Allow for participation in the profits of the • Offer investors a fixed dividend
company – It may not be paid annually
– Comes in the form of a dividend • Will accumulate/pay before common share
• Allow for voting rights in a company dividends
– One vote for every share held – Dividends do not reduce taxable income
• If dissolved, any residual amount after
everyone else is paid would go to the
common shareholders
See accompanying notes.
Income Statement

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 Income Statement

The Income statement has 3 main sections:

Revenues

Expenses

Profit or loss
 Illustrative Income Statement

Operating
Profit

OCI-other
gains and
Net Operating losses
Profit

EPS –Investor
Ratio
 Cost of Sales

Cost of goods sold or Cost of sales:

• May be shown as summarised line item
• May be broken Down to its expense items

Direct Materials

(e.g. materials used in manufacturing)

Direct Labor

(e.g. professional services delivered)

Direct overhead

(to the production of the goods or services)

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 Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A contains a large number of expense

items such as:

Advertising Legal, Insurance Office Other

and and accounting supplies related
promotion expenses. expenses
cost .
 Gains and Losses

Gains and losses may appear separately or grouped

after all operating items under “other income or
expenses”. They are related to activities that are
incidental to operations such as:

Sale of Investments

Foreign exchange translations

Financial Instrument transactions

 Other aspects of Income Statement

Other comprehensive income

Other comprehensive income (OCI):

• certain company gains and losses that
are not always recorded through the
income statement

e.g. unrealised gains and losses on

investments and hedging instruments
Cash Flow Statement

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 Cash Flow Statement

Statement of cash flows demonstrates:

• Where cash is being generated
• Where cash is being used in the business Day-to-day business operations;
Revenues and expenses that have been
Operating collected and paid during the year
Depreciation and amortisation are not included.

Non-current assets that support the business:

Investing • Property, plant and equipment
• Business acquisitions

Financing Transactions regarding shares or debt.

Company raises funds by either borrowing or
issuing shares.
 Key Elements in Cash Flow Statement

Net cash provided Represents operating ‘lifeblood’ of business after paying necessary outgoings for financing
by operating and tax
activities

Shows whether business is absorbing funds for working capital or releasing them. Trend
Changes in working capital may indicate ether financial stress or loose control over working capital

Companies must invest in PPE to maintain their productive capacity.

PPE Investment A downward trend may indicate a declining company. Identify the necessary sustainable
level of expenditure.

Shows whether internally generated funds are sufficient to cover investments made in fixed
Financing
assets and businesses. Continuous deficits indicate that growth depends on regular
requirement/
injections of external finance.
surplus
 Direct Method vs Indirect Method

Direct method Indirect method

Direct method of cash flow starts with cash transactions. Indirect method of cash flow starts with net income.
(Transactions are separated into cash received and cash (Non-cash adjustments are then added.)
paid.)
Key Contents of
Annual Report

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 The Full Disclosure Principle

For full disclosure:

Notes are provided to allow the

reader of the financial statements to
understand and make judgements of
financial activities of the company.

See accompanying notes.

 Three Key Financial Statements Notes

Significant Accounting Policies Direct Information Indirect Information

Indirect Information
Notes of indirect information:
• Help provide the entire financial picture of
Company How inventory & an organisation
accounting investments are Debt and financial
standards valued
A breakdown of the instruments • Not related to the numbers in the financial
types of investments
statements

What is included in:

Financial Revenue is
instruments recognized
Inventory Intangible assets Commitments Contingencies

Stock based
PP&E Income taxes
compensation plans
Property, plant & Any other
equipment is policies
amortized
 Benefits of Annual Report

The annual report contains a significant amount of information:

Operational Financial
Financial Non-financial
performance performance

• Management discussion & • Messages from the Chair, CEO

analysis(MD&A) • Corporate profile
• Financial statements • MD&A
Strategic
• Notes to financial statements • Risk and control processes and analysis
direction
 Contents of Annual Report

The annual report will include:

01. 02. 03. 04. 05.

Management’s
Letters to the Reporting on internal
Business description Discussion and Audit report
shareholders controls
Analysis (MD&A)

06. 07. 08. 09.

Balance sheet,
Listing of directors of
Income Statement Notes to the financial
Earnings per share the company
and Statement of statements
Cash Flows
Analysing Financial
Statements

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Creative Accounting

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Thank You

Thanks to:
https://corporatefinanceinstitute.c
om/