Balance Sheet, Profit & Loss, Cash Flow Statement

[Equity Section]

Fundamental Analysis involves the understanding of the three financial statements - Balance Sheet, Profit & Loss Statement & Cash Flow Statement. We'll be talking about Balance Sheet here. A PDF file has been attached alongwith this post. Its an Annual Report of Hawkins Cookers. On page 14 is the Balance Sheet of Hawkins Cookers. New learners can have a first hand feel of Balance Sheet here and they can use it for ready reference.

Balance Sheet has two components which get balanced - Source of Funds and Application of Funds.

1. Source of Funds indicates to the origin of the money coming in the company to run its business.

2. Application of Funds indicates the application of the coming money to run its business.

Source of Funds for a company can be through two routes - Shareholders' Funds and Loan Funds.

1. Shareholders' Funds is the money of the shareholder. Its either provided by them to the company in the form of IPO subscription or its the money earned by the company by conducting its business over which the shareholders have their rights, technically, whatever money is earned by the company is the right of the shareholders.

2. Loan Funds simply represent the money that has been acquired through loans.

Shareholders' Funds involves two components - Share Capital and Reserves & Surplus.

1. Share Capital is, mathematically, Face Value of a share X No. of shares issued by the company to the shareholders. In an IPO subscription, suppose a company issues shares of Face Value of Rs. 10 at a market price of Rs. 100 per share. Share Capital only includes Rs. 10 for a share. The rest surplus Rs. 90 goes to Reserves & Surplus.

2. Reserves & Surplus include the money earned by the business since its inception as well as the premium over the face value paid by the shareholder per share (That Rs. 90 will get into Reserves & Surplus).

Loan Funds can be of two types - Secured loans and Unsecured loans.

1. Secured loans are mortgaged loans i.e. the company has raised loans against its assets.

2. Unsecured loans is that loan against which company hasn't placed its assets. It can also include commercial paper as well as corporate bonds.

Application of Funds means the fund is being applied for carrying out the business of the organisation. Application of funds is carried out generally in Fixed Assets, Investments and Net Current Assets.

1. Fixed Assets include the land, buildings, machinery, equipments, office furniture, vehicles, computers etc. which a company needs to run their business. Now, Fixed Assets lose their value over a period of time. This is termed as Depreciation. In a Balance Sheet, Fixed Assets has four components - Gross Block, Depreciation, Net Block, Capital Work-in-Progress.

(i) Gross Block means the gross total amount which the company has spent on buying fixed assets.

(ii) Depreciation means the reduction in the value of the fixed assets over a period of time.

(iii) Net Block is the existing value of the Fixed Assets.

(iv) Capital Work-in-Progress means the money currently being spent on work which is yet to be completed fully, like some building or plant being built.

2. Investments involve the money which is invested into bonds, mutual funds and stocks of other companies.

3. Net Current Assets is also called Working Capital. Its with this capital the company works out its day-to-day business with. Net Current Assets has two components - Current Assets and Current Liabilities. The difference between the two is Net Current Assets.

(i) Current Assets is the current situation of the liquidity of the company across four components - Inventories, Sundry Debtors, Cash & Bank Balances, and Loans & Advances.

- Inventories include stocks of both raw materials as well as finished products.

- Sundry Debtors indicates that money which is yet to be paid by the company's customers.

- Cash & Bank Balances involves money both in cash in current accounts and fixed deposits with banks.

- Loans & Advances involves that money which has been lent out or paid in advance to some entity and which'll be eventually returned to the company.

(ii) Current Liabilities means the liabilities which are to be borne by the company. It has two components - Liabilities and Provisions.

- Liabilities involve that money which a company has to pay to its suppliers.

- Provisions include that money which a company feels that it'll have to spend under future unforeseen circumstances, like proposed dividends etc.

Attachments:

[Equity Section]

Profit & Loss Statement is very easy to understand as compared to Balance Sheet. If one can refer to the Hawkins Cookers Annual Report, they can find that it has a total of five componenets - Income, Expenditure, Profit Before Taxation, Profit After Taxation and Appropriations.

1. Income refers to the money through operations, referred to as Operating Income, as well as apart from operations, often referred to as Other Income.

2. Expenditure refers to all kinds of expenditures faced by the company, like raw materials, salaries & wages, advertisements, administrative expenses etc. to operate their businesses.

3. Profit before Taxation (PBT) is Gross Profit before taxation.

4. Profit after Taxation (PAT) is the Net Profit earned by the company.

5. Appropriations refers to the money including PAT and balance brought from last year Profit & Loss Account. Appropriations is done by the company to allot money for specific expenses like Proposed Dividends, Tax on Proposed Dividends etc.

[Equity Section]

Cash Flow Statements indicates the actual cash flow in the company, whether its incoming or outgoing. It involves three components - Cash Flow from Operating Activities, Cash Flow from Investing Activities and Cash Flow from Financing Activities.

1. Cash Flow from Operating Activities exactly indicates the amount of cash that a company has earned by conducting its business. It can lead to a confusion relating to Net Profit. Remember, Net Profit is an amount on the books of the company and not exactly cash with the company. Net Profit doesn't mean that the amount indicated is already with the company in the form of cash. That's why Cash Flow from Operating Activities really become important as it means raw cash earned by the company while doing its business. If the amount is positive, that means there is inflow of cash. If the amount is negative, that meansthe company has lost cash.

2. Cash Flow from Investing Activities indicates cash flow from transactions of fixed assets, interest income and income from long-term investments. If the cash flow is positive, it indicates that there has been a sale of fixed assets or interest income has been received or long-term investments have matured. If the cash flow is negative, the contrary things have happened.

3. Cash Flow from Financing Activities indicates cash flow due to loans, fixed deposits, dividends etc. If the cash flow is positive, then fresh loans have been issued to the company or fixed deposits have been broken. If the cash flow is negative, it means loans have been paid, fixed deposits have been made or dividends have been paid.

The combination of these three components is called Free Cash Flow. Its a very useful indicator regarding the valuation of a company.

[rajan]

Aug 8, 2011 20:15:13 GMT 5.5 Equity Section said:

Fundamental Analysis involves the understanding of the three financial statements - Balance Sheet, Profit & Loss Statement & Cash Flow Statement. We'll be talking about Balance Sheet here. A PDF file has been attached alongwith this post. Its an Annual Report of Hawkins Cookers. On page 14 is the Balance Sheet of Hawkins Cookers. New learners can have a first hand feel of Balance Sheet here and they can use it for ready reference.

Balance Sheet has two components which get balanced - Source of Funds and Application of Funds.

1. Source of Funds indicates to the origin of the money coming in the company to run its business.

2. Application of Funds indicates the application of the coming money to run its business.

Source of Funds for a company can be through two routes - Shareholders' Funds and Loan Funds.

1. Shareholders' Funds is the money of the shareholder. Its either provided by them to the company in the form of IPO subscription or its the money earned by the company by conducting its business over which the shareholders have their rights, technically, whatever money is earned by the company is the right of the shareholders.

2. Loan Funds simply represent the money that has been acquired through loans.

Shareholders' Funds involves two components - Share Capital and Reserves & Surplus.

1. Share Capital is, mathematically, Face Value of a share X No. of shares issued by the company to the shareholders. In an IPO subscription, suppose a company issues shares of Face Value of Rs. 10 at a market price of Rs. 100 per share. Share Capital only includes Rs. 10 for a share. The rest surplus Rs. 90 goes to Reserves & Surplus.

2. Reserves & Surplus include the money earned by the business since its inception as well as the premium over the face value paid by the shareholder per share (That Rs. 90 will get into Reserves & Surplus).

Loan Funds can be of two types - Secured loans and Unsecured loans.

1. Secured loans are mortgaged loans i.e. the company has raised loans against its assets.

2. Unsecured loans is that loan against which company hasn't placed its assets. It can also include commercial paper as well as corporate bonds.

Application of Funds means the fund is being applied for carrying out the business of the organisation. Application of funds is carried out generally in Fixed Assets, Investments and Net Current Assets.

1. Fixed Assets include the land, buildings, machinery, equipments, office furniture, vehicles, computers etc. which a company needs to run their business. Now, Fixed Assets lose their value over a period of time. This is termed as Depreciation. In a Balance Sheet, Fixed Assets has four components - Gross Block, Depreciation, Net Block, Capital Work-in-Progress.

(i) Gross Block means the gross total amount which the company has spent on buying fixed assets.

(ii) Depreciation means the reduction in the value of the fixed assets over a period of time.

(iii) Net Block is the existing value of the Fixed Assets.

(iv) Capital Work-in-Progress means the money currently being spent on work which is yet to be completed fully, like some building or plant being built.

2. Investments involve the money which is invested into bonds, mutual funds and stocks of other companies.

3. Net Current Assets is also called Working Capital. Its with this capital the company works out its day-to-day business with. Net Current Assets has two components - Current Assets and Current Liabilities. The difference between the two is Net Current Assets.

(i) Current Assets is the current situation of the liquidity of the company across four components - Inventories, Sundry Debtors, Cash & Bank Balances, and Loans & Advances.

- Inventories include stocks of both raw materials as well as finished products.

- Sundry Debtors indicates that money which is yet to be paid by the company's customers.

- Cash & Bank Balances involves money both in cash in current accounts and fixed deposits with banks.

- Loans & Advances involves that money which has been lent out or paid in advance to some entity and which'll be eventually returned to the company.

(ii) Current Liabilities means the liabilities which are to be borne by the company. It has two components - Liabilities and Provisions.

- Liabilities involve that money which a company has to pay to its suppliers.

- Provisions include that money which a company feels that it'll have to spend under future unforeseen circumstances, like proposed dividends etc.

I've read this informative article. i'm so thankful to you to give me such valuable info in a very simple way. Now, tell me
1. What is face value with example
2. "Face Value of Rs. 10 at a market price of Rs. 100 per share" what is the significance of this line.
3. "Share Capital is, mathematically, Face Value of a share X No. of shares issued by the company to the shareholders." is this formula correct?? because no. of shares are normally very large.

[Equity Section]

Aug 12, 2011 12:53:27 GMT 5.5 rajan said:

I've read this informative article. i'm so thankful to you to give me such valueable info in a very simple way. Now, tell me
1. What is face value with example
2. "Face Value of Rs. 10 at a market price of Rs. 100 per share" what is the significance of this line.
3. "Share Capital is, mathematically, Face Value of a share X No. of shares issued by the company to the shareholders." is this formula correct?? because no. of shares are normally very large.

1. Face value is the nominal value of a share. This value is recorded on the books of the company as Share Capital. Face value has no relation with the market value of the share. The market value simply fluctuates depending upon the circumstances. If we talk about Hawkins Cookers, the Fave Value of each share is Rs. 10 but the stock trades around Rs. 1700. The market value of a share is determined by the company's earnings & its scaleability. The Face value is only for the books.

2. Hawkins cookers shares are of Face Value of Rs. 10 each. But the market prices them at Rs. 1700 each. That's because Hawkins Cookers has an Earning per Share (EPS) of Rs. 60. Now, a company who has an EPS of Rs. 60 definitely can't be sold at Rs. 10 per share. The market is valuing it at 30 times its EPS. As I told earlier, the face value and the market value has no relation. Face value is just the nominal value for book purposes, while the market value is due to the company's earnings & future visibility. In the above instance you quoted about the share of face value of Rs. 10 being issued at Rs 100, it means that the company is writing only Rs. 10 as Share Capital while the rest of the premium i.e. Rs. 90 is being written into Reserves & Surplus.

3. Yes, the formula is correct. Share capital of Hawkins Cookers as stated in Balance-Sheet is Rs. 5.28 crores. Like I told, Hawkins Cookers has issued 52.87 lakhs shares to the share holders at a Face Value of Rs. 10. If you scroll down the Hawkins Annual Report a couple of pages down from Balance-Sheet section, you can come to Schedule I which tells you about Share Capital. Here they give you two types of Capital - Authorised, and Issued & Subscribed.

1. Authorised - This capital indicates that the company has been authorised by its shareholders to raise the specified amount of capital. In case of Hawkins, amount stated is Rs. 10 crores from 1 crore shares of Rs. 10 each, Rs. 10 being the Face Value.

2. Issued & Subscribed - This capital means that the company has raised the specified amount of capital by issuing shares to its shareholders. In case of Hawkins, the amount ststed is Rs. 5.28 crores from 52.87 lakhs shares of Rs. 10 each, which matches the Share Capital of Hawkins Cookers.

This means that out of Rs. 10 crores of authorised capital, Rs. 5.28 crores has already been raised by the company from the shareholders. The rest amount to be raised depends upon the will of the management.

Now, if we check that formula again, Share Capital = Face Value of each Share X Total Number of shares issued by the company to its shareholders, 5.28 crores rupees = Rs. 10 X 52.87 lakhs shares that has been issued by the company to the shareholders.

[devesh]

Well written. I wanted to ask lots of questions, but they have all been answered almost. Its better than www.investopedia.com

[Equity Section]

Thanks Devesh.....

[Rohit Mishra]

I can't tell you how much I have loved this whole article here. Its wonderful. Bulk of forums just concentrate on stock talks or targets rather than fundamentals. This forum is the only one in India which is out there regarding "fundamentals". 3 cheers to you...

Aug 8, 2011 20:15:13 GMT 5.5 Equity Section said:

Fundamental Analysis involves the understanding of the three financial statements - Balance Sheet, Profit & Loss Statement & Cash Flow Statement. We'll be talking about Balance Sheet here. A PDF file has been attached alongwith this post. Its an Annual Report of Hawkins Cookers. On page 14 is the Balance Sheet of Hawkins Cookers. New learners can have a first hand feel of Balance Sheet here and they can use it for ready reference.

Balance Sheet has two components which get balanced - Source of Funds and Application of Funds.

1. Source of Funds indicates to the origin of the money coming in the company to run its business.

2. Application of Funds indicates the application of the coming money to run its business.

Source of Funds for a company can be through two routes - Shareholders' Funds and Loan Funds.

1. Shareholders' Funds is the money of the shareholder. Its either provided by them to the company in the form of IPO subscription or its the money earned by the company by conducting its business over which the shareholders have their rights, technically, whatever money is earned by the company is the right of the shareholders.

2. Loan Funds simply represent the money that has been acquired through loans.

Shareholders' Funds involves two components - Share Capital and Reserves & Surplus.

1. Share Capital is, mathematically, Face Value of a share X No. of shares issued by the company to the shareholders. In an IPO subscription, suppose a company issues shares of Face Value of Rs. 10 at a market price of Rs. 100 per share. Share Capital only includes Rs. 10 for a share. The rest surplus Rs. 90 goes to Reserves & Surplus.

2. Reserves & Surplus include the money earned by the business since its inception as well as the premium over the face value paid by the shareholder per share (That Rs. 90 will get into Reserves & Surplus).

Loan Funds can be of two types - Secured loans and Unsecured loans.

1. Secured loans are mortgaged loans i.e. the company has raised loans against its assets.

2. Unsecured loans is that loan against which company hasn't placed its assets. It can also include commercial paper as well as corporate bonds.

Application of Funds means the fund is being applied for carrying out the business of the organisation. Application of funds is carried out generally in Fixed Assets, Investments and Net Current Assets.

1. Fixed Assets include the land, buildings, machinery, equipments, office furniture, vehicles, computers etc. which a company needs to run their business. Now, Fixed Assets lose their value over a period of time. This is termed as Depreciation. In a Balance Sheet, Fixed Assets has four components - Gross Block, Depreciation, Net Block, Capital Work-in-Progress.

(i) Gross Block means the gross total amount which the company has spent on buying fixed assets.

(ii) Depreciation means the reduction in the value of the fixed assets over a period of time.

(iii) Net Block is the existing value of the Fixed Assets.

(iv) Capital Work-in-Progress means the money currently being spent on work which is yet to be completed fully, like some building or plant being built.

2. Investments involve the money which is invested into bonds, mutual funds and stocks of other companies.

3. Net Current Assets is also called Working Capital. Its with this capital the company works out its day-to-day business with. Net Current Assets has two components - Current Assets and Current Liabilities. The difference between the two is Net Current Assets.

(i) Current Assets is the current situation of the liquidity of the company across four components - Inventories, Sundry Debtors, Cash & Bank Balances, and Loans & Advances.

- Inventories include stocks of both raw materials as well as finished products.

- Sundry Debtors indicates that money which is yet to be paid by the company's customers.

- Cash & Bank Balances involves money both in cash in current accounts and fixed deposits with banks.

- Loans & Advances involves that money which has been lent out or paid in advance to some entity and which'll be eventually returned to the company.

(ii) Current Liabilities means the liabilities which are to be borne by the company. It has two components - Liabilities and Provisions.

- Liabilities involve that money which a company has to pay to its suppliers.

- Provisions include that money which a company feels that it'll have to spend under future unforeseen circumstances, like proposed dividends etc.