CFR tutorial Session 1
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Transcript of CFR tutorial Session 1
Corporate Financial Reporting
Week 1 Session One
Manju JaiswallIIM Calcutta
Contact - [email protected] C block 305 Ext 297
Week 1 Learning Goals
• Understand the Users & Principle Uses of Accounting (Chapter 1)
• Understand qualitative characteristics of Accounting Information (Reading handout 1)
• Understand Accounting Cycle & Process (Chapter 1)
• Understand GAAP – Principles & Concepts (Chapter 1,3)– Separate Entity, Going Concern, Money Measurement, Accounting Period,
Materiality, Realisation, Matching, Conservatism, Historical Cost, Fair Value
– Cash & Accrual Accounting
– Assets, Liabilities, Equity, Income, Expenses, Dividend, Retained Earnings.
• Apply Accounting Equation: (Chapter 1)– to understand the impact of selected transactions on Income, Expenses,
Assets, Liabilities and Shareholder’s Net worth.
1–2
Why CFR?
• Hertz Penalized for Accounting Mishap, Stock Down 9.1%.
• “The last Bastion falls”- Macquarie Equities Research downgrades HDFC for using aggressing accounting practices inflating earnings and ROE – shares were down by 1.6%.
• “ A House of cards” - Veritas Investment Research describes Reliance Communications.- plagued by high debt & “whimsical” accounting practices – shares down to 52 week low.
• Espirito Santo Downgrades Biocon, questions its “objectionable” Accounting Practices.
1–3
Powergrid Corporation (PGCIL)
• A capex of about Rs 17,814 crore was incurred with Rs 14,100 crore of assets being commissioned in FY 2013.
• Assets are getting commissioned at a faster pace, thus improving the overall Return on Equity (ROE) for the company.
• Net sales were up by 20% to Rs 10,035.33 crore and PAT rose 21% to Rs 3254.95 crore in FY 2013. We expect PGCIL to register sales of Rs 12283.24 crore and net profit of Rs 3934.16 crore in FY 2013.
• EPS works out to Rs 8.50. The share price trades at Rs 112, which discounts the projected FY2013 EPS by 13.1 times.
1–4
Infosys
• Consolidated revenue increased 8% to Rs 8099 crore. OPM was up 200 basis points (bps) to 31.1% due to 257 bps decrease in cost of sales to 58.6% of sales in the September 2011 quarter over the June 2011 quarter.
• The resultant OP grew 16% to Rs 2516 crore. Other income (OI), however, fell 13% to Rs 387 crore due to forex loss of Rs 33 crore as against gain of Rs 45 crore, which saw the PBDT jump 11% to Rs 2903 crore.
• Depreciation charges went up 5% to Rs 235 crore and tax rate inched up 46 bps to 28.56%. Thereby, net profit grew 11% to Rs 1906 crore.
1–5
1–6
Oil India Ltd.Financial Performance in Rs croresYear End 13-Mar 12-Mar 11-Mar 10-Mar 9-MarEquity 601.14 240.45 240.45 240.45 214Networth 19,211.48 17,721.34 15,601.87 13,765.68 9,332.47Capital Employed 20,717.42 18,143.98 16,953.76 13,803.18 9,388.92Gross Block 4,043.65 3,534.03 3,320.24 3,211.05 2,972.04Sales 9,947.57 9,863.23 11,613.68 9,470.54 7,256.28Other Income 1,508.75 1,416.67 873.89 954.18 957.29PBIDT 6,123.46 5,996.47 5,146.00 4,119.01 3,563.75PBDT 6,120.86 5,987.10 5,132.87 4,115.36 3,555.01PBIT 5,285.83 5,111.23 4,326.33 3,898.70 3,395.67PBT 5,283.23 5,101.86 4,313.20 3,895.05 3,386.93RPAT 3,589.34 3,446.92 2,887.73 2,610.52 2,161.68APAT 3,589.34 3,446.92 2,887.73 2,610.35 2,161.62CP 4,426.97 4,332.16 3,707.40 2,830.83 2,329.76Rev. Earnings in FE 1.63 1.64 1.56 1.87 0.06Rev. Expenses in FE 273.45 214.11 262.02 389.38 272.86Book Value (Rs) 319.58 737.01 648.86 572.5 436.1EPS (Rs.) 54.79 135.65 113.94 102.85 95.83Dividend (%) 300 475 375 340 305Payout (%) 54.76 35.02 32.91 33.06 31.83
1–7
NTPC Ltd. Financial Performance in Rs croes
Year End 13-Mar 12-Mar 11-Mar 10-Mar 9-MarEquity 8,245.46 8,245.46 8,245.46 8,245.46 8,245.50Networth 80,387.51 73,291.17 67,892.25 62,437.42 57,370.10Capital Employed 142,483.55 127,332.93 114,546.89 101,906.33 91,937.90Gross Block 103,245.70 81,828.26 72,755.15 66,850.07 62,353.00Sales 66,200.24 62,480.88 55,340.66 46,623.58 42,196.80Other Income 4,860.73 2,961.58 2,400.96 2,991.29 3,339.10PBDT 19,975.39 15,117.86 14,535.29 13,535.52 11,724.00PBIT 18,511.64 14,040.75 13,477.17 12,694.39 11,355.70PBT 16,578.63 12,326.16 12,049.60 10,885.46 9,359.50Book Value (Rs) 97.49 88.89 82.34 75.72 69.58EPS (Rs.) 14.36 10.55 10.42 9.95 9.34Dividend (%) 57.5 40 38 38 36Payout (%) 40.05 37.93 36.48 38.21 38.55Debt-Equity 0.71 0.66 0.62 0.6 0.56Current Ratio 1.65 1.95 2.4 2.41 2.32Invtry Turnover 17.06 17.02 15.73 13.94 14.07Debtors Turnover 11.82 17.19 13.69 9.11 12.85Interest Cover 9.58 8.19 9.44 7.02 5.69ROCE (%) 13.72 11.61 12.45 13.1 13.22RONW (%) 16.42 13.07 13.97 14.57 14.91
Rs crores VodafoneIdea Cellular MTNL
Equity 404.09 2635.36 630
Net worth 9248.31 3542.27 11921.36
Capital employed 12262.06 10057.02 11921.36
Sales 2733.66 6719.99 4722.52
Fixed Assets 1577.30 13888.89 15842.58
Total Assets 13138.33 15912.58 20834.01
Working Capital 4273.01 -1121.43 4406.53
PBT 357.64 1116.86 811.46
Snapshot view
1–9
Role of Accounting
• Accounting is an Information system that provides information on:– Amounts of resources.
– How resources were financed.
– How were the resources invested.
– Results achieved by using those resources.
• For:– Decision makers inside and outside the
organization.
Business Activities
1–10
All businesses are involved in three types of activities
• Financing,
• Investing, &
• Operating
The accounting information system measures, processes & communicates the results of these business activities for business decision makers.
1–11
The Accounting
process
Decision makers
Economic activities
Fin/Inv/Op
Actions (decisions)
Accounting connects decision makers with economic activities
and the cycle continues with the
results of their decisions
Accounting Information(Financial
Statements)
Users & Uses of Accounting Information
1–12
Management
Human Resources
Taxing Authorities
Labor Unions
Regulatory Agencies
Marketing
Finance
Investors
Creditors
Customers
Internal Users
External Users
Who Uses Accounting Data
Questions Asked by Internal Users User
1. Can we afford to give our employees a pay raise?
Human Resources
2. What price for our product will maximize net income?
3. Which product line is most profitable?
4. Is cash sufficient to pay dividends to the stockholders?
Marketing
Management
Finance
Users & Uses of Accounting Information
Questions Asked by External Users User
1. Is the company earning satisfactory income?
Investors
2. How does Vodafone compare in size and profitability with MTNL?
3. Will Kingfisher Airlines be able to pay its debts as they come due?
Investors
Creditors
Users & Uses of Accounting Information
4. Will Yes Bank have a credit downgrade?
Credit Rating Agencies
1–15
Process of Accounting
• Creating Accounting heads– Asset, Liability, Equity, Income & Expense
• Double Entry system
• Accounting Equation
Assets = Owner’s/Stockholder’s Equity + Liabilities
• Resources financed by = business creditors + lenders + capital provided by owners.
• Resources Invested in = Fixed Asset + Investment + Current Assets
• LHS = RHS
• Yields Financial Statements
1–16
Financial Statements: Elements
• Elements measuring financial position:
– Assets
– Liabilities
– Equity
• Elements measuring performance
– Revenue / Income (includes gains)
– Expenses (includes losses)
1–17
ASSETS 2013 2012 2013 2012Cash 85,632 7,282 Sales 7,035,600 6,034,000Accts Receivable / Debtors 878,000 632,160 COGS (5,875,992) (5,528,000)Inventories 1,716,480 1,287,360 Other expenses (550,000) (519,988)Total Current Assets 2,680,112 1,926,802 EBITDA 609,608 (13,988)
Deprn. & Amortn. (116,960) (116,960)Gross Fixed Assets 1,197,160 1,202,950 EBIT 492,648 (130,948)Less: Deprn. 380,120 263,160 Interest Exp. (70,008) (136,012)Net Fixed Assets 817,040 939,790 EBT 422,640 (266,960)
Taxes (169,056) 106,784Total Assets 3,497,152 2,866,592 Net income 253,584 (160,176)
Dividend 63,396 0
LIABILITIES 2013 2012 Retained Earnings 190,188 (160,176)
Accts payable / Creditors 436,800 524,160Short term Bank loan 300,000 636,808Accrued Expenses 408,000 489,600Total Current Liabilities 1,144,800 1,650,568Long-term debt 400,000 723,432Total External Liability 1,544,800 2,374,000
Common stock/Share Capital 1,721,176 460,000Retained earnings 222,780 32,592Total Owner's Equity 1,952,352 492,592
Total Liab & Owner's Equity 3,497,152 2,866,592
Balance Sheet Income Statement
1–18
Financial Elements - Definition
• Assets are Probable Future economic benefits.
• Liabilities are probable Future Sacrifices of economic benefits.
• Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. In business enterprises, the equity is the ownership interest.
1–19
Vagabond Travel AgencyBalance Sheet
December 31, 2007Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' EquityOffice equipment 15,000 Capital stock 150,000
Retained earnings 70,000 Total 300,000$ Total 300,000$
Assets = Liabilities + Owners’ Equity
$300,000 = $80,000 + $220,000
Assets = Liabilities + Owners’ Equity
$300,000 = $80,000 + $220,000
Accounting Equation
Accounting Equation cont’d
1–20
Stockholder’s Equity
• Change in Stockholder’s Equity = • Change in Common Stock
• Amount collected from issuing New Shares
• Add Change in Retained Earnings • Net Income
• Revenue
• Less Expenses
• Less Dividend
• ∆ SE = ∆ Common Stock + ∆ RE = $ from Shares Issued + (Revenue – Expenses) –
Dividend 1–21
1–22
Financial Elements - Definition
• Revenues / Incomes inflows that result from an entity’s central operation or core activities or principal business. – Examples: Sales for Manufacturing & Trading
Companies, Interest & Investment Income for Banks.
– Increase Owner’s Equity
• Expenses outflows that result from an entity’s central operations. – Examples: Raw Material Expenses, Personnel
Expenses, Manufacturing Expenses, Selling Expenses, etc.
– Decreases Owner’s Equity
Communicating with Users
1–23
Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:
Income Statement
Balance Sheet
Statement of Cash Flows
Retained Earnings
Statement / Statement of Changes in
Owner’s Equity
Communicating with Users
1–24
Retained Earnings Statement
Net income is needed to determine the ending balance
in retained earnings.
Income Statement
Communicating with Users
1–25
Retained Earnings Statement
Ending balance in retained earnings is needed in
preparing the balance sheet.
Balance Sheet
1–26
Financial Accounting Regulations (GAAP)
GAAP
Assumptions Conventions/Principles
Standards
Going Concern
Accounting period
Money measurement
Separate Entity
Full Disclosure
Materiality
Conservatism
Historical Cost
Accrual & Cash basis
Revenue RecognitionMatching
Basic Accounting Assumptions
• An understanding of basic accounting assumptions is vital to understand the process of accounting.
• Accounting concepts underlying the recording of transactions:– Separate Entity Concept
– Money Measurement Concept
– Going Concern Concept
– Accounting Period Concept
1–27
1–28
Accounting equation in balance- an illustration
• Few of us jointly promote a trading Co. on 1-1-13 to buy & sell few consumer durable items, contributing 5 lakhs each (6 of us) to the share capital.
Assets = Liabilities + Owner’s Equity
Cash (30 lakhs) = 0 + Equity share capital (30 lakhs)Business Entity Concept
1–29
Cont’d
• Took a bank loan Rs 20 lakhs.
Assets = Liabilities + Owner’s Equity
Cash (20) = Bank Loan (20)
Cumulative Impact
Cash (50) = Loan (20) + Equity share capital (30)