FINANCIAL ACCOUNTING AND FINANCIAL STATEMENT ANALYSIS Assignment
Devangana Arora GMP-17-15
1. What are the objectives of Financial Statements? The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. There are 3 types of financial statements a. Income Statement: The Income Statement shows a company’s revenues and expenses over a period of time. It helps in determining the financial success or failure of a company based on the Net Income or Loss. It also helps investors determine the viability of the business and lenders to know the ability of the company to pay interest expense. The subtotals in the Income statement can help in determining how a profit or loss was generated. b. Balance Sheet: The Balance sheet shows what a business owes and owns. What the business owes is shown on the balance sheet as liabilities and what it owns is shown as assets. Thus, the balance sheet shows the financial position of a company at any point of time. It gives information about the shareholder’s equity, giving the net worth of the company and also helps the firm to make provisions against future losses. c. Statement of Cash Flows: The Statement of Cash Flows shows a company’s cash inflows and outflows from its inverting, operating and financing activities. It portrays a company’s net increase or decrease in cash over a specific period of time.
2. What are the shortcomings of financial statements in terms of the disclosures they provide? Disclosures are the communication of information related to firm performance and governance by people inside to the people outside. There are various shortcomings of the financial statements in terms of disclosures they provide. The users of these statements should be aware of these shortcomings while relying on the financial data provided by a company to make effective decisions. Below are some of the shortcomings: a. Usefulness of Information provided: Although the firms are required by regulations to provide information, the usefulness of the information provided is not regulated. Thus, the information disclosed may or may not be of value to the third parties. b. Fraud: Disclosing of information does not guarantee the truthfulness of the information provided. There may be several reasons behind falsifying accounting documents, such as, overestimating results, over valuing shares, concealing difficulties and misleading investors.
c. Manipulation: Accounting regulations can be used to manipulate data and thus provide the most favorable balance sheet. This is done with the objective to transfer information on future profits to shareholders, and to avoid price volatility. Many companies are willing to sacrifice future benefits in order to smooth out the current results. d. Too much information: Many companies in order to increase transparency or to compete with other companies in the market place, tend to provide too much information in the disclosure. This is a huge cost to the company. It also clouds the actual information thus misleading the stakeholders. Many also multiply the number of items appearing in the balance sheet, making it difficult to read, or multiply very detailed and incomprehensible footnotes. This makes it difficult to filter out the relevant information. e. Complex Information: If the information provided by companies is too complex, it may conceal the more important and relevant information or make it difficult to find. f. Information Asymmetry: Firms disclose numerous and complex information and uniformed traders do not have the incentives to understand them. Due to the heterogeneity of agents’ ability to process information, it is possible that information asymmetries are increased between shareholders. g. Illusion of Knowledge: Corporate disclosures do not inevitably lead to shareholders having better knowledge of the company’s ability to create value. It is possible that the company discloses false information, conceals important information, or manipulates information to make them more favorable.
3. What are the contents of Director’s Report and MD&A? How are they useful? Director’s Report: The Director’s report is a statement by a company's directors, as part of the annual consolidated reports, giving the directors' opinion of the state of the company, and how much should be paid to people owning shares in the company. Director’s Report includes the following: The general state of company’s affairs Information about the amounts, if any, it proposes to carry to any reserves in the balance sheet The amount recommended to be paid in the form of dividends Summary of firm’s trading activities and future prospects Any material changes occurred during the period that may affect the firm’s finances Significant changes in the value of fixed assets Explanation for any adverse remark or reason of failure
The Director’s report has the following uses: Helps to analyze the operational parameters of the company such as capacity additions, capex plan / executed during the year, order book as on financial year end, average length of stay, occupancy rates, etc. Analyzing reports of past 3-4 years helps to validate if the company has achieved the set revenue targets over the years, adopted favorable strategies and how it has performed in times of economic slowdown. The tone of the director’s report helps in understanding the performance of the company in good and bad performance years. It helps stakeholders determine he market potential an whether the company has he structural capacity to expand into new opportunities. Helps shareholders make informed decisions about their vote in the annual meetings. It is a form of social accounting as it is disclosed to the public. These reports are used for credit-checking uses, to assess investorworthiness and to gain background information on an individual. Management Discussion and Analysis (MD&A): MD&A is a section of company’s annual report written by the management for the shareholders. It explains how the entity has performed in the past, its financial condition and its future prospects. MD&A includes the following: Current capital structure of debt and equity of the company Additional stock or bond offerings planned Net Income and sales separated by company divisions SWOT analysis of the company MD&A has the following uses: Powerful tool for management to communicate how the entity has created value and how it plans to continue doing so. Provides opportunity for an entity to communicate the effectiveness of its stewardship of resources, and, further, progress towards its stated strategic objectives. MD&A can be used to integrate and accumulate in one location important information about the entity that investors need to know. Help orient new directors and others interested in knowing about an entity’s performance and prospects. Deliver significant benefits to entities by sharpening organizational focus, providing new insights into key performance drivers, promoting accountability and control, and facilitating benchmarking of performance.
4. What is the genesis of creation of capital reserve for BPCL?
Capital reserve is created when there is capital profit (capital surplus) i.e. profit on sale of assets or upward revaluation of assets. These profits are held under capital reserve heading and are not for distribution of dividends to shareholder. It is used to meet capital loss, if required. In case of BPCL, their capital reserve reported in 2015-16 was Rs. 12.33 Cr. This resulted from a profit reported in the previous years. The creation of this surplus is traced back by analysing the data for past 5 years. Capital Reserve Analysis:
2011-12 2012-13 2013-14
Capital Reserve as per last Balance Sheet (in Cr.) 16.32 16.15 16.27
2014-15 2015-16
Period
Grant Received during the Year (in Cr.)
Amortization of Capital Grant (in Cr.)
0 0.30 6.30
(0.17) (0.18) (0.87)
12.33
4.98
(2.30)
12.33
0
(1.93)
Capital Reserve (in Cr.)
16.15 16.27 CR = 12.33 CG = 9.37 CR = 12.33 CG = 12.05 CR = 12.33 CG = 10.12
5. What are the constituents of Reserves and their movement in the past 5 years? Reserves are any part of stockholders' equity, except for basic share capital. Reserves are retained in the business and not distributed to owners or shareholders. Reserves comprise of the following: a. Capital Reserve b. Capital Grant c. Debenture Redemption Reserve d. General Reserve e. Foreign Currency Monetary Item Translation Difference Account Movement in Reserves of BPCL in the past 5 years are represented in the table below: Period Type of Reserve Capital Reserve Capital Grant Debenture Reserve General Reserve
2011-12 2012-13 2013-14 2014-15 2015-16 16.15 16.27 12.33 12.33 12.33 0 1000
0 126.3
9.37 323.14
12.05 517.49
10.12 586.24
13036.17
15,268.37
17706.59
20675.54
25406.12
Foreign Currency Monetary Item Translation Difference Account
0
0
184.25
Capital Reserve (in Cr.) 18
₹16.15
₹16.27
16 14
₹12.33
₹12.33
₹12.33
2013-14
2014-15
2015-16
12 10 8 6 4 2 0 2011-12
2012-13
Capital Grant (in Cr.) 14
₹12.05
12
₹10.12
₹9.37
10 8 6 4 2
₹0.00
₹0.00
0 2011-12
2012-13
2013-14
2014-15
2015-16
26.99
(79.2)
Debenture Reserve (in Cr.) 1200 ₹1,000.00 1000 800 ₹517.49
600
₹586.24
₹323.14
400 ₹126.30
200 0 2011-12
2012-13
2013-14
2014-15
2015-16
General Reserve (in Cr.) 30000 ₹25,406.12 25000
₹20,675.54 ₹17,706.59
20000 ₹15,268.37 15000
₹13,036.17
10000 5000 0 2011-12
2012-13
2013-14
2014-15
2015-16
Foreign Currency Monetary Item Translation Difference Account (in Cr.) ₹184.25
200 150 100
₹26.99
50 ₹0.00
₹0.00
0 2011-12 -50 -100
2012-13
2013-14
2014-15
2015-16 (₹79.20)
6. What is the background of the loan given by the Government to the Oil industry? As per the mandate given by Oil Industry Development Act of 1974, OIDB (Oil Industry Development Board) provides financial and other assistance for the development of Oil Industry. The development includes many activities such as prospecting or exploring for or production of mineral oil, refining, processing, transportation, storage, handling and marketing, etc. So, OIDB has been provisioning loans to to all PSUs since its inception in 1974. The quantum of loan disbursed by OIDB has increased from Rs 16.01 crore in 1974-75 to an average of about Rs 1900 crores during the recent years. GAIL, IOC, HPCL, BPCL and MRPL are the major beneficiaries of the loans released by OIDB. The loan has been primarily utilised to fund gas and oil pipeline projects, setting up of new refineries and quality improvement of existing refineries, single point mooring projects and city gas distribution projects
7. What’s the movement in Redeemable Debenture account? Redeemable Debenture is an agreement under which a firm issuing a debenture agrees to repay the borrowed amount on a certain date or after a specific period of notice. These are the debentures which the company has issued for a limited period of time. On completion of the time for which they were issued, principal amount will be returned to the debenture holders (that means redemption of debentures). BPCL had allotted redeemable non-convertible 8.65% Debentures of face value of ` 700 crores on 8th October 2012 redeemable on 8th October 2017 with a put call option which was exercised on 8th October 2015. Accordingly Corporation has redeemed the debentures during the year. These were secured by first legal mortgage by way of a Registered Debenture Trust Deed over the fixed assets of the Company, mainly Plant and Machinery at Mumbai Refinery. The relevant charge has been satisfied. The Redeemable Debentures of BPCL show the following trend in the last 5 years: Period Account Debenture Redemption Reserve
2011-12 1000
2012-13 126.3
2013-14 323.14
2014-15 517.49
2015-16 586.24
Debenture Redemption Reserve (in Cr.) 1200 ₹1,000.00 1000 800 ₹517.49
600
₹586.24
₹323.14
400 ₹126.30
200 0 2011-12
2012-13
2013-14
2014-15
2015-16
