Introduction To Cash Flow Statements ?

Cash flows are inflows and outflows of cash and cash equivalents

Oppo physics strong pnl chicken legs low cash flow statement

there are three types of cash flow statements cash flow from operation cash flow from investing in cash flow from financing.

What Are Depreciation And Amortization ?

Depreciation depreciation is for tangible Assets and amortization is for non tangible assets.

Land and cw IPR to things for depreciation doesn't apply.

there are three types of depreciation method straight line depreciation method written down depreciation and expected pattern of consumption

Link Between Income Statement And Balance Sheet ?

there is a perfect linkage between income statement and balance sheet whatever happens in the income statement reflects in the balances and vice versa.

Sales trade receivable and cash of assets

Cogs cost of material for change in inventory inventory assets

 trade payable current liabilities finance cost borrowings liabilities depreciation tangible assets asset amortisation intangible assets assets as DNA or other expense trade payables reliability prepaid expenses assets or other income investments mutual funds equity net profits retained earnings other equity deferred revenue other current liabilities liabilities Mahindra holidays exceptional items goodwill Al

What Are Expenses In An Income Statement ?

Expenses are of two types one is cost of goods sold and selling general and administrative 

Material consumed cost incurred by

Raw material consumed warrants income in the production process formula of learning stock + purchase - closing stock change in inventory of finished goods work in progress cost included in manufacturing of finished goods excise duty on self employee benefit expenses expenses include on KMP directors and employees of the companies it includes was forbidden phones director remuneration common commission is a staff welfare expenses

Finance cost it is the interest payment of the borrowings of the company

Depreciation and amortization expenses

 impairment of PPE

Other expenses cost audit fees rent for marketing spend etc.

What Is Total Income In An Income Statement ?

Total income equals to revenue from operation + other income

Revenue is sales earned by the core business activities plus non core business other income includes income from investment interest income insurance claim provisions. Kwality dairy

Other income i x vst industries nesco

What Is Income Statement Or P&L Account

Income statement is prepared on the basis of accrual principle of accounting.

Revenues and expenses are recorded when their transaction accours rather than when payment is made.

Suppose it seem made a cell of 10 crore to its distributor but the distributor has not had any money still it sikhen so 10 crore as revenue and same goes with the expense this is the measured drawback of pnl that is why many invested prefer balance sheet and cash flow statement over pnl.

Line item in income statement

Total income expenses profit before tax profit before tax tax expense profit after tax earnings per share EPS

What Are Related Party Transactions (RPT) ?

It is an off the balance sheet item accompany those with parties related to it. Incentive caused by whose bread it is song I sync as outside does we don't know are the transaction are on arms length basis or not.

Who is a related party this is a long list of persons and entity which include directors KMP any person or entity that can give rise to vested interest risk for the company associated subsidiary company.

What is the risk

Salary given to KMP goods and services sold for purchases from related party rent from related party forces officers from related party loans given or taken from related parties or corporate guarantee

goods and services sold to related party Bharat rasayan purchases from related party Olympic former rent paid to related party ngl fine chem Indigo remedies legal / consultancy fee Parag milk foods loans / deposite given to related party brittanya Balaji amines loans taken from related party knr construction leel electricals

What Are Current Assets ?

Assets from which company will be benefited for less than one year

What Are Other Non-Current Assets ?

Advances

What Are Long Term Loans And Advances ? Loan Sundry Deposits ?

Loans and advances given by the company for more than 1 year example loans to related parties loans to employees deposits government or inter-corporate

Nesco Note 7

What Are Non-Current Investments With Example ?

Investments held by the company for more than 1 year are known as  non-current investment.

Example : Long Term Debt, Equity holding of other company, Long term bonds or debentures

Holding Companies

What is Goodwill ? How it is Created ?

Goodwill is an intangible asset, it is created when when a business acquire another business. It is the excess ammount paid by the company over the fair market value of identifiable assets and liabilities.

The value of a company’s brand, trade marks, trade secret, patents, proprietary technology, customer base, good customer / employee relations represent goodwill.

How to calculate Goodwill ??

Goodwill = P - ( A+L)

where,

P = Purchase price of the company

A = Fair market value of all identifiable assets

L = Fair market value of all identifiable liabilities

Generally IT companies will have lot of Goodwill.

Example : Quess Corp

What are Assets ? What are Types of Assets ?

Assets are resources owned or controlled by a company, which will be utilized to generate future cash flows.

Assets are application of funds in the balance sheet. For 1 rupee spent on the sources of fund side there will be 1 rupee on the application of fund side (Assets).

Assets can be classified as different types on the basis of their characteristics.

//Based On Physical Existence

1. Tangible Assets: Assets with physical existence (we can touch, feel, and see them). 

Examples : Land, PPE, Cash, Inventory, Marketable securities

 

2. Intangible Assets : Assets with no physical existence. 

Examples : Goodwill, Patents, Brand, Copyrights, Trademarks, Trade secrets, Licenses and permits, IP

 

// On The Basis Of Usage

1. Operating Assets : Assets required for daily operation. These assets generate revenue for company’s core business activities ( total sales of a company). 

Examples : Cash, Accounts receivable, Inventory, PPE, Patents, Copyrights, Goodwill

 

2. Non-Operating Assets : Assets that are not required for daily business operations but can still generate revenue ( other income of a company ).

Examples : Short-term investments, Marketable securities, Vacant land, Interest income

// Based On Convertibility Into Cash

1. Current Assets Or Liquid Assets : Assets that can be easily converted into cash and cash equivalents (typically within a year).

Example : Cash, Cash equivalents, Short-term deposits, Accounts receivables, Inventory

 

2. Fixed Assets or Non-Current Assets or Hard Assets : Assets that cannot be easily converted into cash and cash equivalents.

Example : Land, Building, Machinery, PPE

What Are Non-Current Liabilities And It's Types ?

These are financial obligations, which company is liable to pay off in more than 12 months (more than 1 year). Also called as long term liabilities. Examples : deferred tax liability, mortgage loan etc.

What Are The Types of Non-Current Liabilities ?

Non-Current Liabilities constitutes of following line items..

1. Borrowings or Debt : These are long term bank borrowings, debt borrowings or borrowings from related party. These can be secured or unsecured.

2. Deferred Tax Liabilities (DTL) : It generally appears, when the tax obligations is in one financial year, but it will be paid in next year. It is generally created when the company pay less tax than obligations.

3. Other Non-Current Liabilities : These are residual non-current liabilities (generally of small amount) that do not meet the criteria of being classified separately.

4. Provisions : It is the money kept aside for the probable contingency ( chances of converting in Liabilities is very high) in future.

What Are Current Liabilities And It's Types ?

These are financial obligations, which have to be settled within 12 months (with in 1 year). Also called as short-term liabilities. Examples : Short term borrowings, Rent etc.

What Are The Types of Current Liabilities ?

Current Liabilities constitutes of five line items. As follows..

1. Short-Term Borrowings : These are generally bank borrowings or debt borrowings.It can be secured or unsecured.

2. Accounts Payable or A/P : Money owed by the company to it's suppliers or other entity.It is opposite of accounts receivable.

It increases when the company receives a product or service, but choose to pay later.

3. Current Tax Liabilities : These are short term tax obligations that the company have to pay off within 1 year (12 months).

4. Other Current Liabilities (OCL) : These are residual current liabilities (generally of small amount) that do not meet the criteria of being classified separately.

It generally includes,

• advances from customers

• unpaid services and materials 

• Expenses payable

• Statutory dues

What is Contingent Liability And It's Types ?

Contingent Liability is the potential liability that might or might not evolve into obligations future. It is the potential future expense that depend on a triggering event to convert it into the actual loss.

It is off ghe the balance sheet item (found after the balance sheet). It is generally of three types..

1. Probable : it is recorded in the balance sheet ( generally a percentage of it ) as provisions.

2. Possible : High chance of converting into future liability. Not Recorded on the Balance Sheet

3. Remote : Low chances of converting into future liability. Not recorded in the balance sheet.

Contingent liabilities are very important, because it is very painful,when it becomes actual loss. But when making decisions It shouldn't be seen in isolation, compare with the equity (contingent liabilities % of equity). Can the equity of the company beer the loss.

Companies with contingent liabilities greater than it's market cap.Meaning these companies will go bankrupt, if it becomes actual loss.

Types of Contingent Liabilities...

1. Corporate Guarantee : Guarantee made by a company to the lender on behalf of it's subsidiary or related party, to repay the outstanding debt. If the subsidiary or related party is unable to pay.

Example : Zee Entertainment

2. Disputed Taxes( Direct / Indirect) : It is the disputed income tax or other legal tax case (sales tax, excise duty tax etc.) against the company, which are ongoing or delayed.

Example : Bharti Airtel, KRBL

3. Claims Against Company Not Acknowledged As Debt : These includes the labour union for additional wages, compensation, etc. 

Example : Noida Toll Bridge

4. Legal Cases Against Company : These are the Cases like land dispute, patent ownership, new law etc. , which are ongoing or delayed.

What Are liabilities In A Balance Sheet ?

Liabilities are company's obligation to other entity, which the company is liable to write off in the future. In simple terms it is the borrowing or debt. For example : bank loans, payables, money raised through bonds etc.

What are the Different Types of Liabilities?

Liabilities are categorised on the basis of time period , the company enjoys it. It is of two types,

1. Current Liabilities : Also called as short-term liabilities. These are financial obligations, which have to be settled within 12 months (with in 1 year). Examples : Short term borrowings, Provisions etc.

Current Liabilities play an important role in company's day to day activities. And it impacts working capital.

Working Capital = Current Assets - Current Liabilities

2. Non-Current Liabilities : Also called as long-term liabilities. These are financial obligations, which company is liable to pay off in more than 12 months (more than 1 year).

Examples : deferred tax liability, mortgage loan etc.

Contingent Liabilities : These liabilities are different from the above two. This is an off the balance sheet item. These are liabilities, which may arise in future. Refer Here

What is Face Value or Par Value In Share Market ?

Face Value (Par Value) is the value of a company on its books and share certificates. It is decided by the company during share issuance.It can be of Rs 10 or 5 or 3 or 1. It is used for calculation of the accounting value of the company's stock on Balance Sheet.

In early days, when stock are issued through paper (share certificate) which included the face value. Nowadays, however, all certificates are issued in a digital format.The importance of face value in stock market is only for legal and accounting reasons (not realted to any price appreciation)

For example : If a company issue 10 share each of Rs:100 of Face Value Rs:10. The total Share Capital Rasied is No of Shares × Value Of Each Share × Face Value

i.e. 10×100×10 = 10,000

Types Of Balance Sheet ? Which One To Choose For Investing ?

Balance it is of two types.

1. Standalone Balance Sheet

2. Consolidated Balance Sheet

Standalone Balance Sheet contains the financials of the single main entity (and no other legal entity). While Consolidated Balance Sheet contains the added financials of the main entity along with subsidiaries. In later case the single entity will be recognised as the holding company.

For example: Kotak Mahindra Bank (which is a holding company of other Kotak Group companies) has two Balance Sheet in its Annual Report. In Standalone, Only Kotak Bank financials are considered. While in Consolidated the financials of Kotak Bank along with its group companies are added up.

Note: If you go to screener.in,You will find two options. One for Standalone and other for Consolidated.

      Kotak Mahindra Balance Sheet

So which one to use for Investing ?

For general investing purpose, You should consider Consolidated Balance Sheet. Because it gives you the overall picture the company.

But to track down the Core Company (Holding Company ), You should consider Standalone Balance Sheet.

How to Calculate Book Value (BV) and Book Value Per Share ( BV/S) With Examples ?

What is Book Value (BV) ?

Book Value refers to the worth of a company according to it's Balance Sheet. It is the value of all the assets that a company holds after considering depreciation. 

For example : If a company holds an asset of Rs: 1000 and the depreciation amount is Rs:200. Then its book value will be Rs:800.

How to Calculate Book Value ??

Way 1: Add Share Capital with Other Equity (Reserves) Or Subtracting Liabilities from Assets.

i.e. Book Value = Share Capital + Other Equity ( Reserves )

Or Book Value = Assets - Liabilities

Way 2: As book value is the liquid-able value of assets, and since intangible assets can't be liquidated. Some people take Intangible Assets into consideration.

i.e. Book Value = Total Assets-(Intangible Assets + Total Liabilities)

How to Calculate Book Value Per Share (BV/S) ?

Formula For Calculating BVPS:

Book Value Per Share = (Book Value - Preferred Stock) / No of Shares

What is preferred stock ?

Preferred stock (preferred shares, preference shares) are issued to the preferred shareholders. These are shares of a company with dividends that are paid out to shareholders before common shares dividends are issued. 

And these shareholders has a priority claim on the company’s assets over common shareholders(If the company enters bankruptcy or liquidated). These shareholders are more preferred than the common shareholders and less preferred than the debt shareholders.

Example : 

What are the constituents of Equity ?

Equity is own/inside source of funding. It is the money that a promoter (s) or shareholders or both put in a company.

Equity constitutes two things,

1. Share Capital

2. Other Equity

What is Share Capital ?

Share capital is the money raised by  a company on issuing of common or preferred shares to the general public through IPO or QIP or QIB.

How to Calculate Share Capital ?

If a company issue 10 share each of Rs:100 of Face Value Rs:10. 

Share Capital = No of Shares × Value Of Each Share × Face Value

i.e. Share Capital = 10×100×10 = 10,000

What is Other Equity ?

It is the money other than equity (not obtained through issuance of shares).

It contains,

1. Retained Earnings : It represents the undistributed earnings of the company after taxes.

2. General Reserves : It is created without any specific or particular purpose, which can be used for future uncertainties or unexpected liability like fire, contingent liabilities.

3. Capital Reserves : is taken out of the capital profit and is not shared as a dividend to the shareholder. This reserve cannot be created out of the profit earned from the core operation. For example:

• Cash received through selling of assets
• Premium earned through issuance of share and debentures
• Excess on revaluation of assets and liabilities

4. Capital Redemption Reserves (CRR) : When companies engage in redemption of prefence capital or buy-back scheme, the capital base is reduced. To compensate for the reduction CRR is created.

5. Securities Premium : It represents the amount received in excess of the face value during issuance of shares (simply listing gain during IPO).

6. Reserves For Equity Instrument : It represents the cumulative gains or losses arised on the revaluation of equity instruments measured at fair value through other comprehensive income, net of amounts reclassified to retained earnings when those assets have been disposed off.

What is Equity or Net Worth ?

Equity is own/inside source of funding. It is the money that a promoter (s) or shareholders or both put in a company. Also known as the shareholders equity or owner's net-worth of the company.

For example : 

How to calculate Net Worth or Equity of company ??

Way 1: All that is leftover after the debt repayments.

i.e. Equity /Net Worth = Assets - Liabilities

Example:

Way 2: Adding up Share Capital and Other Equity (Reserves) together.

i.e. Equity / Net Worth = Share Capital + Other Equity (Reserves)

Example:

1. Voting Rights : Stakeholder of the company has the power to participate in the company’s meetings and they have the right to opinion on a company’s executive decisions. However, the power is  executed indirectly through Board of Directors.

2. Income from Equity Shares : Shareholders has right to claim on company’s profits (leftover profits after dividends paid to prefered shareholders).

3. Claim on Company’s Asset : Shareholders has claim on the company’s assets (in case liquidation). But assets are first used to fulfil the claims of prefered and debt shareholders.

4. Limited Liability : Shareholders will not be affected by the losses by the company (even at the time of its liquidation).

Why Balance Sheet Always Balance ?

Simplest answer to this would be the double entry system.

What is a Double entry system ??

We know a balance sheet contents two columns, one side sources of funds (asset+ liability ) and other side application of funds (assets).

Here comes the catch, when money comes in or goes out from company you need to entry in the both side (sources side and application side).

Suppose you borrow Rs:500. Then you need to show Rs:500 as borrowings in source side and Rs:500 as cash or bank balance in application of funds/ asset side.

Let's take an example, Suppose you are starting up your own business.

Day 1 : You put your own Rs:1000 i.e money comes in. 

Day 2 : You borrowed Rs:1000 from bank i.e money comes in.

Day 3 : You bought machinery of Rs:700 i.e money goes out.

Day 4 : You bought raw material of 1500. Wait wait .. How can I do that, i have only 1300 cash in hand.

Actually you bought on Rs:200 credit from suppier i.e Rs:1300 goes out from asset side and Rs:200 comes in as supplier credit(accounts payable).

Why Balance Sheet is Needed ?

Why you keep things in wardrobe ?

Simple , it helps you to organise things in proper manner.

Similarly balance it does the same thing it helps you to classify your sources of funds and application of funds i.e. Equity, Assets  and Liabilities.

Sources of funds ( Equity and Liabilities) in one side and Application of Funds ( Assets ) in other side.

It gives about financial of a company and its operations. It reveals a company's liabilities, assets and owners' equity net worth.

What are the types of assets you own (current or non current ).what is the nature of your debt ( short term or long term )

It gives you information about

• Physical Assets (real estate, vehicles, office equipment, etc.)
• Non Physical Assets ( Goodwill, Patent etc )
• Own sources of funding(equity)
• Outside sources of fundings ( bank borrowings, debt market borrowings )
• Revenue you expect (accounts receivable)
• Expenses you expect to pay (accounts payable)

Introduction to Balance Sheet. What is a Balance Sheet ?

And balance it is known as the financial position of a company at a particular date. It tells us about the sources of funds ( equity and liabilities ) and application of funds ( assets ).

Sources of Funds : This is what company owe to others i.e. Equity and Liabilities

Application of Funds : These are the things that company owns, Which are required to run the operation of the company i.e. Assets

A balance sheet mainly contains three things.

1. Equity 

2. Liabilities

3. Assets

    Infibeam Avenue Balance Sheet

The main characteristic of a balance sheet is, it always balances.

i.e Sources of Funds = Application Of Funds

i.e Equity + Liabilities = Assets

Why equity / fundamental analysis ? The need of equity / fundamental analysis ?

It actually starts with me. As a newbie, I used to be happy in bull days and sad in bear days. I used to buy bad companies in bull market, which I should not be buying. And ignored gems in bear market, which I should not be ignoring.

So my point is in the next bull market you should be able to minimize your mistakes. And in Bear market, you should be able to grab that multi-bagger opportunity.

Investors problem with equity market

1. It is fraud fraud and fraud..

Take example of Manapasand Beverage showing fake sales, which was exposed by 2Point2 Capitals Or 

Yes Bank showing 0.1 % of NPA, which is almost impossible for a bank, whose majority of revenue comes from wholesale lending.

So why investors get into fraud ??

Because they don't do due diligence like they do while buying properties or shirt or phone. 

And to do that in depth research ,one need to understand the language of the business i.e Accounting.

2. They don't understand economics of the business and dynamics of the industry.Hence they ended up buying cyclicals at peak valuation, value traps.

If you are buying NALCO, thinking that it is cheap. Then you need some investing pill. 

In my calming blogs I Will be giving our secret pill for creating wealth (Variant Perception ). Because India today presence us a solid growth opportunity.