JAIIB MAY 2023 | AFM | ANALYSIS OF BALANCE SHEET – PART 2 | JAIIB PAPER 3 LATEST SYLLABUS

AFM | ANALYSIS OF BALANCE SHEET – PART 2 | JAIIB PAPER 3 LATEST SYLLABUS 2023

In this post, we will further continue with the analysis of the balance sheet to pass the JAIIB MAY exams 2023 as per the latest syllabus 2023.

Because we know that the Junior Associate of the Indian Institute of Bankers Syllabus 2023’s – Accounting & Financial Management for Bankers paper is quite difficult, therefore, we have provided notes on some topics from the syllabus.

By using these notes, you will learn how to analyze the balance sheet, which is a component of the financial statements. Then we will provide you details about Learning Sessions’ Latest JAIIB AFM study material, prepared at a very affordable price for the candidates!

In the previous article, we understood the objectives of financial statement analysis, the Users of financial statements i.e. the people who are kept in mind while presenting the financial statements, the Structure of the Balance Sheet, the meaning of Financial Statements Analysis & its typical Components. 

LINK: ANALYSIS OF BALANCE SHEET – PART 1

ANALYSIS OF BALANCE SHEET – PART 2

To understand the balance sheet, we first need to understand its structure. A company’s balance sheet has two parts:

• Equity & Liabilities i.e. sources of funds 
• Assets i.e. use of funds

The elements of the balance sheet vary depending on the type of business; however, there are three basic categories named, Assets, Liabilities & Equity.

The balance sheet generally begins with the sources of funds, showing all current liabilities of the company, as well as its long-term debts and other long-term liabilities.

Here is a performa of the Balance Sheet for reference purposes:

EQUITY

Equity is another item on a company’s balance sheet representing the share of shareholders, owners, of the company. They have a larger stake in the company than the borrowers & their investments are riskier which entitles them to have more rights in the company.

Equity is also known as net assets i.e. Assets minus Liabilities.

Below are some of the components often found in the equity section of the balance sheet:

Share Capital:

Preference share capital & Equity Share Capital are 2 types of stock that represent ownership of a company. Preference shareholders have priority over ordinary shareholders, which means they receive a dividend payment or distribution of assets first in certain events e.g. liquidation of company.

Paid by Capital:

Paid-up share capital refers to money provided by shareholders in exchange for shares in the company i.e. the part of the money that is paid of face Value of the share.

Retained Earnings:

This figure shows the company’s net profit available with the company after dividends have been paid to shareholders.

The main highlights of Equity are:

• Equity gives its holders an ownership stake in a company. It is initially contributed by the founders/promotors of the company. 
• Then Promoters sell some shares to investors or to the general public through Stock exchanges to raise more funds. These shares are sold at a premium over the original Face Value. 

Some other important components of equity are:

• Reserves & surplus includes: Undistributed profit (retained earnings) of the company’s net profit – not been distributed to shareholders, Capital reserve, i.e. part of their retained earnings that has been set aside for future investment in fixed assets.

LIABILITIES

Understanding what a company owes is one of the starting point of analyzing the balance sheet. All outstanding financial obligations that a company has – are its liabilities.

Long-term liabilities mostly include debt that the company has raised for long-term usage, i.e. > 1 year & are repayable over a longer time period. It could be – money borrowed from a bank or funds raised through bonds or debentures.

Current liabilities include the following:

• Short-term debt & the current part of long-term debt, i.e. funds borrowed for a period < 1 year and part of long-term loans to be repaid within 1 year& Repayments of deposits/DPG/bonds due within one year
• Due from Creditors: The amount to be paid to the suppliers for the material supplied by them, creditors for supplies of raw materials and other expenses
• Accrued liabilities, e.g. The service a company is yet to provide but has already been paid to the company.
• Deposit received
• Dividend payable
• Any other liability which is due within the next 12 months

ASSETS:

Assets are the heart of a business & they take most of your time in analyzing the balance sheet. Anything a company owns whether tangible or intangible, that can generate income in the future amounts to an asset.

The assets side presents what a company owns, and the liabilities side presents what the company owes. Assets and liabilities could either be ‘non-current’ i.e. long-term or ‘current’.

Non-current assets and liabilities remain with the company for > 1 year such as plant and machinery, land and buildings, etc. while Current assets and liabilities usually have a life of < 1 year.

Accounting standards (AS) require property to be recognized as an asset only if its value can be measured reliably & if it can be sold separately.

In addition to tangible or “hard” assets such as Land and Machinery. All fixed assets, except land, lose value over time. This loss in value is called depreciation which is reported as an expense on the income statement each year. The value at which a fixed asset is recorded on the balance sheet = purchase price less total depreciation charged till the balance sheet date.

Companies also own several Intangible Assets that can be considered assets & includes patents, copyrights & trademarks i.e. cannot be touched or felt. But they generate income, & can be reliably valued and sold separately. For intangible assets, the annual reduction in value is called amortization. It is treated identically to depreciation & charged to Profit & Loss Statement.

Current assets include Cash, Short-term investments in financial products, such as commercial papers, certificates of deposit (CDs) & t-bills, Inventory of unsold goods, raw material, and unfinished goods, Accounts receivable, i.e. the amount the company is yet to receive for the goods it has sold on credit. These assets are not depreciated.

The meaning of the balance sheet

The balance sheet is a very important financial statement for – it can be viewed on its own as well as in conjunction with other statements such as the income statement & cash flow statement to get a complete picture of the company’s health.

There are 4 important financial performance metrics that include:

Liquidity –

Liquidity can be determined by comparing the current assets of a company with its current liabilities. For a company to be able to cover its short-term liabilities, current assets should be greater than current liabilities. In order to measure liquidity, financial metrics such as the Current Ratio and Quick Ratio are used.

Efficiency –

A company’s efficiency can be determined by comparing the income statement with the balance sheet. A company’s asset turnover ratio, for instance, can be calculated by dividing revenues by average total assets. Moreover, the working capital cycle indicates how well a company manages its short-term money.

Leverage –

By examining how a company is financed, we can determine how much leverage it has, thus what financial risks it is taking. Balance sheet leverage is commonly assessed by comparing debt-to-equity ratios and debt-to-equity ratios.

Rate of return –

In order to evaluate the profitability of a company, one must first analyze the balance sheet. For example, dividing net income by stockholders’ equity yields (ROE), dividing net income by total assets yields (ROA), and dividing net income by debt & return on invested capital (ROIC).

Thus, the balance sheet is the most important source of information about a company’s financial health & one of the most important skills one need to have as an investor is knowing how to analyse one.

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Now, you can learn much more in detail about Balance sheet & other topics with the help of Learning Sessions provided Video classes for JAIIB & CAIIB papers. Thousands of candidates pass their exams every year with these & all these classes are available at the most affordable prices online. 

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