ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | ANALYSIS OF BALANCE SHEET – PART 1
In this article, we will learn to Analysis of Balance Sheet to pass the JAIIB May exams 2023 as per the latest syllabus 2023.
So, as we know the Accounting & Financial Management for Bankers paper from the Junior Associate of the Indian Institute of Bankers Syllabus 2023 is considered to be quite difficult, therefore, we have come up with notes on some of the important topics from the syllabus of the said exam.
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With the help of these notes, we will help you understand how to analyze the balance sheet which is part of the Financial Statements. Then we will tell you about the Latest JAIIB AFM study material prepared by Learning Sessions for the candidates at the most affordable price!
So, let us begin with the current topic by starting with the why i.e. why do we need to analyze the Financial statements?
What are the objectives of financial statement analysis?
The objectives of financial statement analysis are:
- To take an understanding about the company’s financial position
- To take an understanding of the earning capacity of the company i.e. cash flow & profitability
- To know status of the company’s solvency, i.e. the ability to meet short-term and long-term obligations
- To Determine sufficiency of Net Working Capital (NWC)
- To determine the sufficiency of long-term resources
- Be aware of the accumulation/disposal of long-term assets that impact on Net Working Capital units
- To suggest appropriate strategies with respect to the entity’s based on current year and prior years financial data
Who are the Users of financial statements? The people who are kept in mind while presenting the financial statements.
The different categories of financial statement users could be:
- Government Departments
The most important for the JAIIB Syllabus 2022 is the perspective of Creditors or lenders. So, let us understand why does the creditors need to analyze the financial statements.
A bank as a lenders need to analyze the financial statements of its debtors so that it is able to:
- Evaluate the company’s short-term and long-term prospects and make an appropriate credit decision.
- Verify the company’s short-term liquidity prospects.
- Know the structure of the equity capital & debt, long-term solvency and long-term ability of the company to repay debts. This concern is because i. bankers are no longer limited to financing only short-term requirements of entities. Instead, banks prefer a judicious mix of short-term and long-term loans/products.
- The concept of a working capital loan as a strictly short-term financing option is undergoing rapid change. A working capital loan is considered a perpetual long-term loan in many companies.
- A critical analysis of the financial statements of a business unit is of fundamental importance for lenders because it directly affects the safety of the funds they lend. If the analysis of the financial statement presents acceptable financial results, the creditor can make a credit decision on the exposure of the business unit.
What is the Structure of the Balance Sheet?
The balance sheet structure varies according to:
- Company law provisions
- Bank standards applicable for the classification of individual items
What is Financial Statements Analysis?
Financial Statements include financial information relating to the trading/ manufacturing company, as the case may be, which presents information in a structured way that is easy to understand & is usually prepared by management after a definite period of time.
Financial Statements Analysis:
When we normally say “Balance Sheet Analysis” we are actually referring to the audited “Financial Statements” on which the analysis is to be performed. Financial statements provide quantitative details about the company’s operations during the given accounting period and its position at the end of that accounting period.
Financial Statements’ typical Components:
- Profit and Loss Statement
- Balance sheet
- Statement of cash flows
- Explanatory Notes, notes to the accounts, as a part of the above statements
- Director’s Report
- Earnings per share (EPS) statements.
Now let us understand During the Analysis of the Balance sheet what are the above components & what they basically represent.
Profit and Loss Statement:
The profit and loss statement is prepared for a period of usually 1 year. In most cases, this period is from April 1 to March 31. It indicates the summary or net result of the business entity’s operations for the specified accounting period.
The Balance Sheet is drawn up on a certain date, at the end of the period for which the Profit and Loss Statement is drawn up, i.e. typically 31 March. It provides an overview of the company’s assets and liabilities as on he mentioned date.
Statement of cash flows:
Submission of cash flow statements is mandatory along with financial statements in case it is a listed company or if the turnover of the unit is > Rs. 50 Crores. Cash Flow Statement provides a summary of cash flows, i.e. cash flows coming in and going out during the given period of accounting.
Explanatory Schedules (Notes to Accounts):
These are shown as part of the profit and loss statment and the balance sheet. These contain any deviations from the accounting standards or norms that were observed in previous years when compiling the financial statements for the current year. It is very important to know about these variances in order to draw out meaningful comparisons with previous years data & performance.
It would be unfair & meaningless to analyse the Balance sheets without having Balance sheets of two different
The board’s report is attached to the financial statements under Section 217 of the Companies Act. It contains details of non-financial aspects of the company’s performance. For example: the environment in which the unit operates, the level of competition the industry is facing, and other such relevant facts. These details complement the quantitative financial data contained in the income statement and balance sheet and help in devising a complete picture of the company before making lenders can make credit decisions.
The data or info to be included in the director’s report pursuant to Section 217 of the Companies Act is:
- Company status (Company affairs)
- Proposed transfer amount to reserves
- Amount of dividend payment
- Significant changes and liabilities affecting the company’s financial position between 2 balance sheet dates
- Details of energy savings, technology absorption & foreign currency income and expenditure
- Disclosure of changes that occurred during the year in the nature of the company’s business or in the company’s subsidiaries
- Details of specific employees who were paid Rs. 12,00,000.00 or more in remuneration under full time employment or Rs. 1,00,000.00 or more in case their employment was < a year.
- Details of employee shareholders who, together with their spouse and dependent children, hold at least 2% of equity shares of co.
- Company director or manager-employee particulars
- Director’s Responsibility Statement as per any recent amendments.
Earnings Per Share (EPS) Statements:
Earnings Per Share (EPS) Statement is also submitted along with the Financial statements. This statement reflects the Net Profit of the company per unit of share.
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