Institute of Business Finance & Industry

INSTITUTE OF BUSINESS FINANCE & INDUSTRY
ABOUT THE TRAINER Muhammad Ali Shaikh MBA (Finance), B.E. (Mech.) LLB, FIE(Pak) , M.I.I.E(USA), MPMI(USA) Over 38 years of experience in Senior and Top Management positions Former EVP NDFC, Prof & Member senate NED University and Vice Chairman, Institute of Engineers Pakistan
Managing Partner of Influx Enterprises (a FM consulting firm)
ABOUT THE CONTENTS ADVANCED AND APPLIED PRACTICAL APPLICATIONS
REAL LIFE CASES

INTERPRETATIONS AND DECISION MAKING A REAL TRAINING AND GROOMING OPPORTUNITY PARTICIPATION FROM YOU IS MANDATORY
OVERVIEW
FM PROCESS
AFS
INVESTMENT DECISIONS WORKING CAPITAL MANAGEMENT
ANALYZING COMPANY PERFORMANCE

FINANCIAL PLANNING AND FORECASTING UNDERSTANDING AND MANAGING GROWTH
VALUTION OF COMPANIES, CORPORATE RESTRUCTURING, MERGERS AND ACQISITIONS

HANDLING FINANCIALLY SICK COMPAMIES
UNDERSTANDING FINANCIAL STATEMENTS
BASIS OF PREPARATION OF I/S, B/S AND CASH FLOW

DIFFERENCE B/W FINANCIAL NOS AND ECONOMIC REALITY NATURE AND PURPOSE OF VARIOUS ITEMS OF THESE STATEMENTS AND NOTES
HOW TO INTERPRET
ANALYSIS OF STATEMENTS
Owner Shareholders Board of Directors
ENTERPRISE / FIRM
Management Workers Material
EXTERNAL AGENCIES Clients Creditors Debtors Government
FINANCIAL STATEMENTS TELL FINANCIAL POSITION
INVESTORS
for
for for for
PROFITABILITY PROFITABILITY PRODUCTIVITY TAX ASSESSMENT
ACCOUNTANTS
TRADE UNIONS TAX AUTHORITIES
P R E PA R E
THE PUBLIC CREDITORS
PRODUCTIVE USE OF RESOURCES

SAFETY AND REPAYMENT OF LOANS
ASSURANCE THAT STATEMENTS REPRESENT POSITION FAIRLY
FINANCIALS For use of External STATEMENTS

Groups
for
for
EXTERNAL AUDITORS
FUNDAMENTAL ACCOUNTING CONVENTIONS
1. CONSISTENCY: Once a method or policy is adopted subsequent transactions will be treated in the same way; otherwise, changes should be explained
2. CONSERVATISM: To avoid overstatements, whenever there is choice in valuing assets or liabilities the more conservative value will be used 3. MATERIALITY: Triviality Ignored: personal judgment and common sense determine whether an item is trivial or not OBJECTIVITY: Data should be selected in as objective a manner as possible
4.
BALANCE SHEET FORMAT 1 AS OF ( DATE)

ASSETS: Current Assets: Cash / Bank Accounts Receivable Inventories Total Current Assets Fixed Assets: Plant & Equipment Less Accum. Depreciation Net Fixed Assets Other Assets TOTAL ASSETS LIABILITIES: Current Liabilities: Short-term Loans Accounts Payable Total Current Liab.
18,000 54,000 72,000 144,000
28,000 36,000 64,000
Long-term Liabilities: Long-term Debt

135,000 Equity: Capital Stock Retained Earnings
20,000
(27,000) 108,000
5,000 257,000
90,000 83,000 173,000

257,000
TOTAL Liabilities

ASSETS: Current Assets: Cash / Bank Accounts Receivable Inventories Total Current Assets Fixed Assets: Plant & Equipment Less Accum. Depreciation Net Fixed Assets Other Assets TOTAL ASSETS
18,000 54,000 72,000 144,000
135,000 (27,000) 108,000 5,000 257,000

LIABILITIES: Current Liabilities: Short-term Loans Accounts Payable Total Current Liab.
Cont..
18,000 4,000 64,000
Long-term Liabilities: Long-term Debt

Equity: Capital Stock Retained Earnings Other Assets
20,000
90,000 83,000 173,000 257,000
TOTAL LIABILITIES

ASSETS: Fixed Assets: Plant & Equipment Less Accum. Depreciation Net Fixed Assets Others Assets Current Assets: Cash / Bank Accounts Receivable Inventories Total Current Assets TOTAL ASSETS
135,000 (27,000) 108,000

5,000
18,000 54,000 72,000 144,000 257,000

EQUITY & LIABILITIES: Equity: Capital Retained Total Equity Long Term Liabilities:: Long-term Debt Current Liabilities: Short Term Loans Accounts Payable Total Current Liabilities TOTAL EQUITY & LIABILITIES
Cont..
90,000 83,000 173,000
20,000
28,000 36,000 64,000 257,000
ASSETS CURRENT
TYPE Cash EXAMPLE Money in Bank USES (ILLUSTRATIVE) Debt Payment Payment for operating Expenses & contingencies; payment for other assets
Inventories
Raw Material Maintaining Production & Spare Parts Supplies Delivery Schedules Product in Process Finished Product (Unsold) Goods & Services sold but not yet paid for To facilitate sales by giving credit
Accounts Receivable
ASSETS CURRENT
Cont.. Notes & Deposits Gaining Income on Drawing interest, Surplus Funds etc. Insurance premiums license fees rent Facilitate the normal operation on an enterprise
Short Term Investment Prepaid Expenses
Note: Assets are classified current if they are used up or cleared during a relatively short period of time usually one year
ASSETS OTHER
TYPE Intangible Assets * Research and Development Cost of prototype development & studies for improved production efficiency & process development (could also be expensed) Production Right Salaries, Training & Other Expenses prior to Regular Operations , EXAMPLE
Patents Copyrights Pre-Operating Expenses
Nonphysical possessions of an enterprise expected to yield benefits over a period of years
LIABILITIES LONG TERM
TYPE Long Term Loans
EXAMPLE Bank Loans (Term Loans) Bonds / Debentures Suppliers Credit (Deferred) Deposits (Long Term)
Liabilities Payable within a period of more than one accounting period
FIXED ASSETS IN OPERATION

A fixed asset (plant) has usefulness over a number of year
Book Value (Actual cost of Acquiring Asset)
Value of Assets used up in operation during its life (Full Depreciation)
Salvage Value
Estimated Asset Life Beginning
Full Depreciation is an Expense: An enterprise has to charge costs for the use of an asset over its estimated life
End
ACCUMULATED DEPRECIATION
Book Value
Accum. Depr. At Start of 5th A/C Period Depreciation in 5th A/C Period
Accum. Depr. At end of 5th A/C Period
Salvage Value 1 2 3 4 5 ------ - - - - N
A/C Periods
Accum. Depr. At end of period = Accum. Depr. At start of period + Depr. In Period Note: this item appears in the balance sheet only
BUSINESS TRANSACTIONS ANY EVENT THAT ACCOUNTING FIGURE TRANSACTION. AFFECTS AN IS TERMED A
A TRANSACTION PRODUCES CHANGES IN THE FINANCIAL POSITION (BALANCE SHEET) EVERY TRANSACTION THUS CHANGES TWO ITEMS OF THE BALANCE SHEET
EXAMPLE A TRANSACTION (Rs. 000)

BALANCE SHEET BEFORE TRANSACTION
Assets: Current: Cash / Bank 10,000 A/C Rec. 20,000 Inventories Raw material 30,000 Finished Goods Fixed: Plant 400,000 Accum. Depr. (100,000)
TRANSACTION
Obtain Additional Long Term Bank Loan of Rs. 50,000
CHANGE
+ 50,000
BALANCE SHEET BEFORE TRANSACTION

Assets: Current: Cash / Bank 60,000 A/C Rec. 20,000 Inventories Raw material 30,000 Finished Goods Fixed: Plant 400,000 Accum. Depr. (100,000)
Other Patent
TOTAL ASSETS LIABILITIES Current A/C Pay. Long Term Bank Loan EQUITY: Capital Ret. earnings
10,000 370,000
Other Patent
TOTAL ASSETS LIABILITIES Current A/C Pay. +50,000 Long Term Bank Loan EQUITY: Capital Ret. earnings
10,000 420,000
20,000 100,000 120,000 100,000 150,000
20,000 150,000 170,000 100,000 150,000
250,000 Total Liab. & Equity 370,000
250,000 Total Liab. & Equity 420,000
T1. T2.
Exercise II LIST OF COMPANY TRANSACTIONS Gets Long Term loan of Rs. 50K from Bank Orders and installs in own plant worth Rs10K of from Fabrik Ltd. Financed by suppliers credit from Fabrik Ltd. Purchases Rs.10K worth of raw material of which Rs. 3K is paid in cash and the balance payable to the suppliers within one year. Uses Rs5K worth of raw materials, fuel oil, etc. in the the production within one year.
T3.
T4.
T5. T6. T7. T8.
Pays labor salaries of Rs.5K Pays Rs. 2,500 for utilities Depreciates plant Rs. 1,000 in period Sells finished goods produced during period for Rs. 20K (Payments not yet received)
T9.
Pays Management Salaries of Rs5K
T10. T11. T12. T13.
Pays Rs5K in partial settlement of raw material purchased on Short Term Credit under T3 Repays Bank Loan in amount of Rs5K Customers Pay RS15K on invoices issued Pays Rs. 1,000 Interest on Loan
REPORTING ON TRANSACTIONS Transactions taking place during a period are recorded in funds flow and income statements and at the beginning and end of the period in balance sheets: 1. The cash Flow Statement Describes: What the cash was used for? Where the cash came from? The income statement shows revenues and expenses during the period The balance sheets collect these transactions as they occur and appear at the end of the period
2.
3.
CASH FLOWS
Assets Sources Applications +
Liabilities + -
Total sources Total Application = Increase or Decrease in Cash in Period Note: + indicates an increase in Assets or Liabilities - Indicates a decrease in Assets or Liabilities
THE PROFIT AND LOSS OR THE INCOME STATEMENT Flows (transactions) which affect equity are tabulated in a special statement called the Income Statement. In this statements sales, costs and expenses are matched for a specific period of time; and income (Profit) is computed for the accounting period. Like the other statements it reflects accrual transactions even though cash payment is deferred
INCOME STATEMENT
Sales:Periodic sales of company
CGS:The cost of making the goods. SG&A: Interest PBT Taxes: Current and defered. Dividends Retained earnings
EXAMPLE of TRANSACTIONS AFFECT CASH FLOW:

Current Assets. Current Liabilities. Staff Funds (Gratuity) New Capital New Loans as well as repayment of loans Acquisition of fixed assets Sales of fixed assets on loss or profit. Sale of investments on loss or profit. Dividend declaration and payment Transactions which do not flow (book entries) but create confusion and problems of adjustments. Depreciation of Fixed assets /Amortization of intangibles Write off of intangibles Provision for doubtful debts Other provisions for income and expense
DEPRECIATION IN CASH FLOW STATEMENTS Depreciation appears in income statement under expenses (it is an estimate of the portion of the capital asset used during the period)
Depreciation increases expenses and decreases equity

This transaction does not involve a change in cash. An equal flow under Sources is therefore required for balance. Although depreciation is not truly a source of funds since it exists only to the extent that revenues cover all other expenses and is notionally an allocation of income for replacement of assets.

Institute of Business Finance & Industry

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Institute of Business Finance & Industry

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INSTITUTE OF BUSINESS FINANCE & INDUSTRY

Managing Partner of Influx Enterprises (a FM consulting firm)