MODULE B STUDY OF FINANCIAL STATEMENTS C.S.BALAKRISHNAN FACULTY MEMBER SPBT COLLEGE - PowerPoint PPT Presentation

Loading...

PPT – MODULE B STUDY OF FINANCIAL STATEMENTS C.S.BALAKRISHNAN FACULTY MEMBER SPBT COLLEGE PowerPoint presentation | free to download - id: 9df34-NWYzN



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

MODULE B STUDY OF FINANCIAL STATEMENTS C.S.BALAKRISHNAN FACULTY MEMBER SPBT COLLEGE

Description:

Ensuring effective funds utilisation by directing funds flow according to some plan. Serving as a necessary tool and technique for resources allocation to various ... – PowerPoint PPT presentation

Number of Views:168
Avg rating:3.0/5.0
Slides: 40
Provided by: BALAKR6
Learn more at: http://www.iibf.org.in
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: MODULE B STUDY OF FINANCIAL STATEMENTS C.S.BALAKRISHNAN FACULTY MEMBER SPBT COLLEGE


1
MODULE B STUDY OF FINANCIAL STATEMENTS C.S.BALAKRI
SHNAN FACULTY MEMBER SPBT COLLEGE
2
Scope,Functions and objective
  • Scope is
  • Designing and implementing certain plans.
  • Ensuring effective funds utilisation by directing
    funds flow according to some plan.
  • Serving as a necessary tool and technique for
    resources allocation to various projects of the
    business and providing the best guide for
    existing and prospective resource allocation.

3
  • According to Howard and Upton Financial
    management involves the application of general
    management principles to particular financial
    operation.
  • Attending to investment decisions as to when and
    how to acquire and allocate funds for short-term
    and long-term assets keeping in view the profit
    generation of the business through which
    repayment obligation can be met.

4
  • Objectives and basic consideration of
  • Financialmanagement.
  • Although profit maximisation is the objective of
    financial management,the long-term goalof the
    business entity is to achieve maximising the
    shareholder value of the firm,since the
    principle of maximisation of shareholder wealth
    provides a rational guide for running a business
    and for efficient allocation of resources in
    society.

5
  • The key objective of Financial Management is to
    maximise the value of the company.This is the
    result of good investment decisions,prudent
    financing decisions and well thought-out
    financial planning and control.
  • Maximisation of the value of the company is also
    known as maximisation of the wealth of the
    owners.To achieve this,finance manager has to
    take careful decisions in respect of
  • -Financing -Dividend
  • -Investment -Current asset management.

6
  • Financing decision-Has to decide on sources of
    funds for business.It is to be decided whether
    entire capital should be raised from equity
    capital or a part is to be raised from loan.Hence
    Debt/Equity ratio or Leverage are important since
    each source has in them associated risk factors
    involved.
  • Investment decision-It relates to acquisition of
    assets.Assets are classified into real assets
    such as land,building,plant,equipment etc.and the
    financial assets are shares and debentures etc.It
    indicates available mix of financing to fund
    companys activities.Such decisions on investment
    in projects come within the field of capital
    budgeting which is derived from net present value
    of assets.

7
  • Dividend decision-It is basically a financing
    decision.This is because profit is a source of
    fund.By not paying dividend,the retained
    earningsor reservecan be increased which could
    be otherwise available for investment.
  • This ultimately lead to maximisation of wealth
  • of the organisation provided decisions on
  • investments are correct.
  • Current Asset Management-This is necessary to
    maintain balance between current assets and
    current liability,if the liquidity of the
    business is interrupted because of holding too
    much fund in current assets.

8
Wealth maximisation value maximisation
  • The goal of financial management is to maximise
    the value of companies.This is generally
    expressed in terms of maximising the value of the
    ownership shares of the company,in
    short,maximising share price.Thus,better
    performing companies can raise additional funds
    under more favourable terms.When funds go the
    such companies the economys resources are
    directed to more efficient use.This basic
    objective of maximisingthe price of the companys
    shares is called value maximisation.

9
  • Social responsibility is also an important goal
    of
  • a company which requires
  • -Maximising share-price by efficient,well-
  • managed operations related to consumer
  • demand parameters.
  • -Efficiency innovation leads to value
  • maximisation which leads to new
  • products,new technologies and better
  • employment.
  • -External factors like pollution,product
    safety and
  • job safety have acieved added dimensions
    in
  • relation to value maximisation.

10
Profit maximisation vs.Wealth maximisation
  • Long run vs.Short run Profits.
  • Convert total corporate profits to earning per
    share(EPS).
  • EPS is total profits divided by number of shares
    outstanding.
  • Assume the firm earns Rs.10 mn.and has 1mn.shares
    outstanding.The EPS will work out to Rs.10.
  • Profit maximisation is a short-term concept,while
    wealth maximisation emphasises the long-term view
    point.

11
State whether true or false
  • The income statement depicts the financial
    position of the firm at a given point of time
  • The balance sheet gives the financial performance
    of the firm over a given period of time.
  • These statements are prepared every week.
  • Funds Flow statement gives the liquidity position
    of the firm.

12
  • Cash Flow statement tells from where the money
    comes and where it is used.
  • The prime objective of financial management is
    wealth maximisation,and not profit maximisation.
  • What is earnings per share?
  • a)Net Profit
  • b)Profit before interest and tax
  • c)Total earnings divided by investment
  • d)Net profit divided by equity

13
  • What is the difference between long term funds
    and short term funds?
  • -Difference in interest rates
  • -Difference in time of repayment
  • -Difference in the size of loan
  • -No difference

14
CAPITAL EXPENDITURE DECISIONS AND PROFITABILITY
STUDY
  • It represents the important decisions taken by
    the firm.
  • Importance due to the following issues
  • -Long-term effects
  • -Irreversibility
  • -Substantial outlays

15
  • Difficulties
  • -Measurement problems
  • -Uncertainty
  • -Temporal spread
  • Phases of capital budgeting
  • -Capital budgeting is a complex process which
  • may be divided into five broad phases.
  • Planning Implementation
  • Analysis Review.
  • Selection

16
  • Levels of Decision Making
  • -Operating decisions
  • -Administrative decisions
  • -Strategic decisions
  • Profitability Study important facets are
  • -Market analysis
  • -Technical analysis
  • -Financial analysis
  • -Economic analysis
  • -Ecological analysis

17
  • The basic characteristic of a capital project is
    that it typically involves a current outlay(or
    current and future outlays)of funds in
    expectation of a stream of benefits extending far
    into future.
  • Accounting rate of return method-A selection
    criterion using average net income and investment
    outlay to compute a rate of return for a
    project.This method ignores the time value of
    money cash flows.
  • Internal rate of return method-A selection method
    using the compounding rate of return on the cash
    flow of the project.

18
  • Net Present Value method-A selection method using
    the difference between the present value of the
    cash inflows of the project and the investment
    outlay.The method evaluates the differential cash
    flow between proposals.
  • Payback method-A selection method in which a firm
    sets a maximum payback period during which cash
    inflow must be sufficient to recover the initial
    outlay.This method ignores the time value of
    money and cash flow beyond the pay back period.

19
  • What are the three important factors which arise
    from capital expenditure decisions?
  • a)Long-term effects e)Debt
  • b)Profitability f)Substantial
    outlays
  • c)Irreversibility g)Short-term
    effects.
  • d)Risk
  • Why are capital expenditure decisions difficult?
  • i)Uncertainity in predicting costsbenefits
  • ii)Difficulty in measurement of
    costsbenefits
  • iii)Risk involved
  • iv)Problems in estimating discount rates
  • v)All the above

20
  • If the IRR of the project is 7 and the cost of
    capital is (11.4 should we reject or accept the
    project). Yes/No.
  • The firm should always make an ecological
    analysis to know the likely damage that may be
    caused by the project to the environment.
  • a)Must do b)No need.

21
Sources of finance and cost of capital
  • For what purposes a firm needs a finance?
  • Since the cash receipts lag behind cash
  • payments necessitating loans,bonds,overdrafts
  • etc.the firm needs finance for short term and
    long term requirements-fixed assets and working
    capital.
  • Permanent sources of finance
  • Share capital and retained profits.

22
  • Depreciation is not a real expenditure.It is a
    non-cash expenditure(T/F)
  • Depreciation amount increases the liquidity of
    the firm(T/F)
  • Cost of goods sold and Cost of production refer
    to the same amount(T/F)
  • Net profit is calculated before tax(T/F)
  • Balance sheet and Income statement can be
    prepared every quarter for internal use(T/F)
  • A loss is shown as asset in the balance
    sheet(T/F).

23
  • Provisions for taxes and accrued expenses to be
    paid within a year are current assets(T/F)
  • Debtors(also known as accounts receivable)represen
    t the amount of money to be paid by the firm to
    the suppliers(T/F)
  • Fund Flow statements can be prepared without the
    basis of balance sheets(T/F).
  • Fund flow statements represent only bank
    borrowing and trade credit(T/F)

24
  • State whether following are sources or uses
  • -Buying materials
  • -Payment of dividend to shareholders
  • -Advance received from buyer of goods
  • -Investment in machinery
  • -Issue of debentures
  • -Retained earnings
  • -Increase in Inventories
  • -Sale of old machinery
  • -Depreciation amount

25
Study of financial statements
  • Who are the party interested in firms financial
    condition?
  • Shareholders,creditors/suppliers,managers,tax
    authorities.
  • Different types of concerns of stakeholders
  • Profitability and earning capacity,liquidity
    and repaying loan instalments and interest.

26
  • Long term sources
  • Preferenceshares,bonds,debentures and long
  • term loans from financial institutions.
  • Various sources of short term finance-
  • Cash credit,overdraft,billsdiscounting,commercial
  • papers and trade credit.
  • Short term long term cash forecasts-
  • Time periods involved-Yearly for long term
  • forecasts,monthly for short term forecasts.

27
  • Factors considered in equity financing
  • Issue costs,servicing costs such as paying out
  • dividends, and when there is retained earnings
  • there will be capital appreciation of
    sharevalues.
  • Preference Shares-These shareholders get a
  • fixed return and their risk is less than the
    equity
  • Shareholders.They have a right to the first slice
  • of dividend.Obligation to redeem the preference
  • shares after its time period.They do not have a
  • right to vote.

28
  • Debentures or loan financing-the firm will have
    to pay fixed interest very year.There is an
    obligation to redeem it at the end of the
    period.There is also an advantage of tax
    deductibility of interest paid which makes it
    cheaper.
  • Bills rediscounting The buyer can repay in a
    long period of time,while seller gets his money
    back by discounting the bills.For the seller,this
    helps him to go ahead with production and
    increase the turnover.

29
  • Working capital term loan-A part of working
    capital has to be with the manufacturer,since
    there is a time lag between ordering and
    procuring.This particular portion (say25)can be
    financed by long term funds.When firm is not able
    to infuse its own funds for this purpose,it gets
    a long term loan from the bank.This carries fixed
    interest and for a fixed period.
  • Overdraft and bank loan-Overdraft is a running
    account whereas bank loan instalment are fixed.

30
  • Trade credit-When materials are bought from
    suppliers,the trade credit is extended for few
    days or a couple of months.The supplier is
    willing to wait to collect money.This also
    depends on the suppliersfinancial position and
    the buyers credit worthiness.
  • Commercial paper-These are short term promissory
    notes with fixed maturity period.They are issued
    by very large companies who are reputed and have
    high credit worthiness.Credit rating agencies
    certify their credit rating.

31
  • Firmscost of capital-A firms is the average
    cost of capital is the weighted average
    arithmetic mean of the cost of resources from
    various sources.
  • Questions
  • a)Long term sources are banks and financial
  • institutions (T/F)
  • b)Current liabilities should be repaid
    within a
  • financial year(T/F)
  • c)Fixed assets are generally financed with
  • current liabilities(T/F)

32
  • Equity Shareholders bear the greatest risk(T/F)
  • Bills discounting scheme has been introduced to
    ease flow of funds in the economy(T/F)
  • Trade creditors are suppliers of goods and
    services to whom the firm is yet to pay.(T/F)
  • Accounts Receivables should be less than trade
    creditors(T/F).
  • Bills of Exchange is same as cash credit(T/F).
  • Equity and Preference shares are one and the
    same(T/F)
  • A part of working capital can be financed by long
    term sources(T/F)

33
  • A firm borrows Rs.20,000 from bank _at_8 and floats
    a debenture for Rs.60,000 _at_6,for a special
    project,what is the cost of capital of the
    project?
  • a)5.5 b)6.5 c)7.5 d)8.5
  • If a firm borrows Rs.2 lac _at_10 and has a tax
    rate of 40.What is the cost of capital?
  • a)5 b)6 c)7 d)8
  • A company has issued preference share of Rs.100
    face value carrying 14 dividend repayable at par
    after 12 years.Cost of capital after tax of
    40?a)21.22 b)23.33c)24.23

34
  • Data for analyzing the situations of the firm
  • Balance Sheet,Income Statement,fund flow
    statement.
  • Basic concepts while preparing balance sheet
  • -Entity concept
  • -Money measurement concept
  • -Going concern concept
  • -Cost concept
  • -Consevatism concept
  • -Dual aspect concept

35
  • Accounting period concept
  • Accrual concept
  • Realisation concept
  • Matching concept
  • Materiality concept.
  • What is revenue reserve capital reserve?
  • Revenue reserves are accumulated earnings
    from profits and normal business
    operations.Capital reserves arise due to capital
    gains from revaluation of assets or due to
    premium on issue of shares.

36
  • Accounts payable-These are current liabilities
    payable within one year from date of balance
    sheet.
  • Fund Flow Statement-It shows the sources and uses
    of funds during a given accounting period.
  • Horizontal analysis and Vertical analysis-
  • Horizontal analysis is comparing the
    operations over a time period ie.comparing past
    performance with current position for predicting
    the future performance.

37
  • In vertical analysis we use percentages to show
  • the relationship between various items in the
  • balance sheet.
  • a)X contributes Rs.10,000 to his properietory
    concern and the amount is deposited in the
    bank.What is the nature of liability?
  • i)Owners equity
  • ii)Loan
  • iii)Short term finance
  • iv)Fixed Asset.

38
  • b)ABC co.paid Rs.30,000 as deposit to the
    suppliers for a period of 3 months.
  • i)Liability
  • ii)Current Asset
  • iii)Trade Credit
  • iv)Debenture
  • c)Materials costing Rs.2000 destroyed by fire
  • i)Asset
  • ii)Liability

39
  • Moving over to other questions.
About PowerShow.com