238141Fm02 Fin Statements

2-1
WELCOME TO
CHAPTER 2:
FINANCIAL STATEMENTS
Copyright © by R. S. Pradhan
2-2
CHAPTER 2: FINANCIAL STATEMENTS, & CASH
FLOWS
 Financial statements report the historical
performance of a firm & provide a basis
for making projections & forecasts for the
future.
 Scorecard for recording performance.
 The financial statements are:
1. The Balance Sheet
2. Income Statement
3. A statement of Cash Flows
 The Balance Sheet : Shows financial
position as of a certain date (Dec. 31, Year
2)
2-3
Nepal Brick Factory, Balance Sheet (‘000 Rs.)P.24
Liabilities and equity Year 1 Year 2
Accounts payable 1,200 2,000
Notes payable 400 400
Accrued wages 400 800
Other accruals 200 800
Current Liabilities 2,200 4,000
Long-term debt 6,600 6,000
Preferred stock 0 0
Stockholders’ equity:
Com. Stock (Rs.100 par) 2,000 2,000
Paid in Capital 2,000 2,000
Retained Earnings 5,200 6,000
Total Stockholders’ eq. 9,200 10,000
Total liab.& eq. 18,000 20,000
2-4
 Assets Year 1 Year 2
Cash 8001,000
Marketable securities 2001,000
A/cs receivable, net3,0002,400
Inventories 3,0003,600
Prepaid expenses 0 0
Current assets 7,0008,000
Gross fixed assets:
Land 1,0001,000
Building 5,0005,500
Plant & machinery 9,0009,500
Other fixed assets 3,0004,000
Gross fixed assets 18,000 20,000
Less accu. depreciation-7,000 -8,000
Net fixed assets 11,000 12,000
Total assets 18,000 20,000
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Note correct positioning of different items.
In assets side, the assets are arranged in order
of liquidity (convertibility into cash).
The balance sheet figures are book values & not
necessarily the same as market values.
Total Assets = Total liab.+ Owner’s equity
TA = TL + OE
CA + FA = CL + LTL + OE
C + AR + I + FA = CL + LTL + OE
AR = CL + LTL + OE - C - I - FA
 Net working capital
NWC1 = CA– CL= Rs.7,000–2,200 =4,800
NWC2 = CA– CL= Rs.8,000–4,000 =4,000
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Operating capital
 Managers must be judged & compensated for
those things that are under their control.
 NWC cannot be used to evaluate performance of
managers.
 Operating capital is the sum of ‘net operating
working capital’ & ‘net operating fixed assets’.
OC = NOWC + NOFA
 NOWC1 = Non-interest bearing CA – Non-interest
bearing CL
 = (800+3,000+3,000) – (1,200+400+200)
 = Rs.6,800 – 1,800 = Rs.5,000.
 (Note: Mkt. securities & notes payables are not
included in non-interest bearing CA & CL
respectively.)
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NOWC2 =(1,000+2,400+3,600) – (2,000+800+800)

= 7,000 – 3,600 = Rs. 3,400.
 Oper. capital = NOWC + Net oper. fixed assets
OC1 = Rs. 5,000 + 11,000 = Rs. 16,000.
OC2 = Rs. 3,400 + 12,000 = Rs. 15,400.
(Assume that all fixed assets are operating FA).
Increase (decrease) in OC = 15,400 –16,000= -600.
 NOWC decreased though NOFA increased.
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2. The Income Statement
 It shows revenues, costs & net profits.
 Or the net results of the firm’s operations
over a specified time period such as a
year.
 Note that figures are not as of a certain
date.
 Nepal Brick Factory, Income Statement
(p.30)
2-9
Nepal Brick Factory, Income Statement (‘000 Rs.)
Particulars Year 1 Year 2
Sales revenues 20,000 24,000
Cost of sales -11,000 -13,600
Gross income 9,000 10,400
Marketing expenses -5,000 -6,000
General & adm. exps. -1,000 -1,200
EBDIT 3,000 3,200
Depreciation -1,000 -1,000
Net ope. income (NOI) 2,000 2,200
Other income, net +300 +240
EBIT 2,300 2,440
Interest expenses -500 -440
EBT 1,800 2,000
Income taxes @ 40% -720 -800
Net income 1,080 1,200
2 - 10
Income Statement Equations
 Net income = Total Revenue – Total Cost
 NI = Total revenue – Cost of sales – Mktg.
exps.– Gen. & admn. exps. – Dep. + Other
income, net - interest - taxes.
 EBIT = Total revenue – Cost of sales – Mktg.
exps. – Gen. & adm. exps. – Dep. + Other
income, net
 EBT = EBIT – Interest
 Net income = EBIT – Interest – Tax
 Whether net income can be used to evaluate
managers?
2 - 11
Net operating profit after taxes (NOPAT)
 Net income cannot be used to evaluate
managers.
 NOPAT = EBIT (1 – Tax rate)
NOPAT1 = Rs.2,300 (1 – 0.4) = Rs.1,380.
NOPAT2 = Rs.2,440 (1 – 0.4) = Rs.1,464.
Free Cash Flow: Cash flow actually available
for distribution to investors after the
company has made all the investments in
fixed assets and working capital.
 FCF2= NOPAT– Net investment in OC
= Rs. 1,464 – (–600) = Rs. 2,064.
2 - 12
3. The Statement of Cash Flows
 Neither balance sheet nor income
statement shows cash flows of the firm.
 Cash + mkt. securities increased from Rs.
1,000 in year 1 to Rs. 2,000 in year 2.
Reasons?
 Uses or applications of funds: Rules:
- Increase in assets
- Decrease in liabilities
Sources of funds:
- Decrease in assets.
- Increase in liabilities.
2 - 13
Statement of cash flows (Year 2)- P.33
 I. Cash flows from operating activities: 4,000
Net income 1,200
Add depreciation 1,000
Changes in working capital:
Decrease in accounts receivable 600
Increase in inventories - 600
Increase in accounts payable 800
Increase in accrued wages 400
Increase in other accruals 600
 II. Cash flows from long-term invest. activities: -2,000
Increase in gross fixed assets - 2,000
 III. Cash flows from financing activities: -1,000
Incr./decrease in notes payables 0
Decrease in long-term debt – 600
Dividend payment (assume) – 400
 Net increase in cash & cash equiv. 1,000
Cash & cash equiv., begin. of yr. 1,000
Cash & cash equiv., end of yr. 2,000
2 - 14
Common size statements
 Difficult to directly compare the financial
statements of two firms.
 Size difference is one reason.
 Difficult if it is to be compared with a foreign
firm.
Common size statements
 Common size analysis consists of computing
percentages of each item over total assets in
case of balance sheet.
 In case of income statement, percentages are
computed over sales.
The Balance Sheet : 2 - 15
NEPAL BRICK FACTORY LTD. (‘000 Rs.)
Liabilities and equity Year 2 % of TA
Accounts payable 2,00010
Notes payable 400 2
Accrued wages 800 4
Other accruals 800 4
Current Liabilities 4,00020
Long-term debt 6,00030

Preferred stock 0 0
Stockholder’s equity:
Com. Stock (Par Rs.100) 2,00010
Paid in Capital 2,00010
Retained Earnings 6,00030
Total Stockholders’ eq. 10,00050
Total liab.& eq. 20,000 100
2 - 16
 Assets Year 2 % of TA
Cash 1,0005
Marketable securities 1,0005
A/cs. receivables, net 2,400 12
Inventories 3,600 18
Prepaid expenses 00
Current assets 8,000 40
Gross Fixed Assets:
Land 1,0005
Building 5,500 27.5
Machinery & equip. 9,500 47.5
Other fixed assets 4,000 20
Total Fixed Assets 20,000 100
Less Depreciation -8,000 40
Net Fixed Assets 12,000 60
Total Assets 20,000 100
The Income Statement 2 - 17
Particulars Year 2 % of S.
Revenues 24,000 100
Cost of sales -13,600 56.7
Gross income 10,400 43.3
Marketing expense -6,000 25
General & adm. Exps. -1,200 5
EBDIT 3,200 13.3
Depreciation -1,000 4.2
Net ope.income (NOI) 2,200 9.1
Other income, net +240 +1.0
EBIT 2,440 10.1
Interest expenses -440 1.8
EBT 2,000 8.3
Income taxes @ 40% -800 3.3
Net income 1,200 5.0
2 - 18
Solve problems (Chap.2)
SP 1 & SP 2
P1 & P 2
Quiz
Thanking you

238141Fm02 Fin Statements

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2-1

NOWC2 =(1,000+2,400+3,600) – (2,000+800+800)

Long-term debt 6,00030

Solve problems (Chap.2)

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