Balance Sheet Analysis - Sources and Uses of Funds

BALANCE SHEET ANALYSIS

Sources of Funds

1) Capital

2) Reserves & Surplus

3) Term Liabilities

4) Current Liabilities

Uses of Funds

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Surplus
The credit balance in profit and loss account
Tangible Net Worth
This refers to the total funds arrived by paid-up capital , Reserves and P&L Surplus
Less
Intagible Assets

Term Liabilities
Redeemable preference shares
Debentures
Deferred payment gaurantees
Public Deposits(Repayable after 12 months)
Term loans and unsecured loans from friens, relatives,directors repayable over a period of time
Remark : The company can raise public deposits to the extent of 25% of paid up capital plus free reserves and 10% from share holders for the maturity period ranging from 6 months to 3 yrs

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Depreciation
Straight line method
Written down Value Method
Remark : Dep added to profit to arrive repayment obligation especially in term loans

Investments
1) Shares And Securities
2) Associate Companies
3) Fixed deposits with banks/finance companies
Remark : While analysing BS we can analyse necessity of such investments
Remark : While fixed deposits with banks are considered as fixed assets, the investmetns in associate concerns are treated as non current assets.

Non Current Assets
Deferred recievables/Overdue recievables(like disputed amounts and Over Due > 6 mths)
Non moving stocks/inventory/un usable spares
Investment/Lending to associate concern
Borrowing of the directors from the company
Telephone deposits/ ST deposits etc

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Notes
All expenses or provisions or advances or loans etc which are accrued and payable within 12 months are current liablities
When a company makes investments in unconnected avenues such as shares, securites, associate concerns are to be treated as non cur ast
The slow moving and absolete inventory - NCA
Bal Sh Analy not only to be quantitative but to be qualitative
It is the fin pos on a part date. Min three years bal sh ana would be more meaningful
It is a mixture of facts, opinions and conventions
While opinions are of the company’s management, the conventions are practiced by the finance managers of the company.
( ex Over due recievable > 6 mths as NCA is a acccounting convention
The valuation of the stock is done as per the opinion of the management
Depreciation method may be changed to boost profit
It may be silent on key personnel and staff turnover
Marginal changes in the classification of certain items would lead to different results.
Management competence
Investment decision
Resorting to window dressing
experience of the promoters
Board comprises of only family members
The key personnel of the company
The structure of the organisation
The authority and decision making are decentralised
The state of industrial relations
Financial systems and procedures
management control
planning, budgeting, forecasting
capacity utilisation
status of the technology
awareness of the market, competitions ..etc
for listed co: share prices, EPS, book value, dividend record, public response ..etc

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Profit & Loss Account

It is a summary of revenue earned and expenses incurred which ultimately results in profit or loss of to the company
No defined format in law
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

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 above are the net sales.

Cost of production
This is the cost incurred right from the procurement of raw material to the finished good.
For ex in a garment firm following cost is incurred while production
1) cost of raw material cloth, buttons, canvas, hooks, zips etc
2) Maintenace of sewing machines
3) payment of wages to workers
4) power
5) washing, ironing,packing etc.
Cost of Prod exclu selling & admn exp & int cost

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

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.

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
ie Net Profit = PBT - taxes

Non Operating Income/Expenses
The income earned by the unit from other than manufacturing and seling 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
b) Loss suffered due to sale of assets & share