Understanding Financial Statements

Mahindra Satyam 2009

Agenda

Financial Statements basic understanding Some key terms in Financial statements

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Financial Statements

Balance Sheet

Statement of Cash Flows

Financial Statements

Statement of Changes in Shareholders Equity

Income Statement

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The Balance Sheet

Balance Sheet Equation A = L + OE Asset = Liability + owners Equity

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WHAT the Balance Sheet Tells Us

A snapshot of a firms financial position on a specific day f f f f Shows the value of what the firm owns (ASSETS) Shows the claims on those assets by creditors (LIABILITIES) and by owners (EQUITY) Shows from whom the firm obtained its funds (CREDITORS and Shows OWNERS) and the purposes to which the funds were used (CURRENT and FIXED ASSETS) )

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Balance Sheet Liabilities and Owners Equity

Current Wages Payable Accounts Payable Notes Payable Long-term Bonds

Assets

Current Cash Inventory y Accounts Receivable

Fixed ed Property Owners Equity Plant Shares Equipment Outstanding Intangible Assets Retained Profit

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Summary: What does the balance sheet tell us?

Assets Where does it go?

Cash Accounts Receivable Inventories Property Plant Equipment Intangible Assets

Liabilities + OwnersEquity
Payables Bank Loans Bonds Shares Outstanding Retained Profit

Where does the cash come from? Debt

Capital Equity

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Typical Balance Sheet

Sources of Funds/Liabilities
Total Share Capital Equity share capital Share application money Preference share capital Reserves Revaluation reserves Networth Secured loans Unsecured loan Total debt Total Liabilities

Application of Funds/Assets
Gross block Less: Accum. Depreciation Net block Capital work in progress Investments Inventories y Sundry debtors Cash & bank balance Total current assets Loans & advances Fixed deposits Total CA, Loans & advances Deferred credit Current liabilities Provisions Total CL & provisions Net current assets Misc Mi expenses Total assets

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Terms
Assets: Tangible and Non-tangible resources of a business that have future value Usually sub classified as follows: value. sub-classified

Quick Assets (Liquid Assets)

Cash Petty Cash Receivables - Securities

Current Assets (Turn into cash/use annually)

All the above + Inventories, Supplies , pp

Fixed Assets (Depreciated over several yrs.)

Buildings, Equipment, Natural Resources

Land (Fixed, but never depreciate) Intangible Assets: Patents, Trademarks, Copyrights
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Liabilities
Other peoples claims against the assets!

What you owe!! Debts! Classified as:

Current Liabilities (one year debt)

Accounts Payable

Long Term Liabilities

Mortgage, N t P M t Note Payable bl

Unearned revenues Bonds (usually super long term) ( y p g )

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Capital or Owners Equity

Assets Liabilities = Owners Equity (or Capital) Example ( E l (purchased a b ildi f $500 000 with a 10% d h d building for $500,000 ith down payment t ($50,000)

Cost of a building (sales price = Asset amount) $500,000 $500 000 Less: What you still owe on the building (Liability) $450,000 Equals: Your equity in the building (Capital) or your net worth in the
building. $50,000 Formula universally used: y

Assets = Liability + Owners Equity (Balance Sheet Equation) (Resources you have) =(What you owe on them) + (the principle you
have paid on them.)
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Income Statement What does it contain? Matches Expenses with Revenues for a specific period of time. (Only the temporary type of accounts are on the income statement.) (O l th t t f t th i t t t) No Assets/Liabilities Income Statement accounts are closed out at the end of the reporting period and started over again the next period.so comparisons can be made.

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Typical Income Statement

OperatingRevenue Operating Revenue TotalRevenue Adjustmenttorevenue Costofsales Costofsaleswithdepreciation C t f l ith d i ti Grossmargin Grossoperatingprofit R&D SG&A Advertising Operatingprofit Operatingprofitbeforedpereciation(EBITDA) Depreciation Operatingincomeafterdepreciation Interestincome Earningsfromequityinterest Otherincome,net Totalincomeavailableforinterestexpense Interestexpenses Incomebeforetax(EBT) ( ) NetIncome Extraordinaryincome/losses Totalnetincome
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Mahindra Satyam 2009

Income Statement: The Bottom Line for a Corporation

Heads in Profit & Loss Account 1) Provision for Contingencies: A company can anticipate various claims which may not b d t t be determinable with certainty; h i bl ith t i t hence estimation may b made f ti ti be d for such contingences. ) p y 2) Provision for Diminution in the value of investments: A company can assess the value of its investments in its subsidiaries or other entities. Such valuation is done by an external entity and based on their recommendation, a provision for loss in the value of investments will be made. 3) Prior Period Adjustments: If a company identifies significant transactions which pertain to earlier accounting period, all such amounts are required to be disclosed as prior period adjustments. While in the case of US GAAP, companies are required to restate the financials in respective years. Under Indian GAAP, they need to be disclosed as prior period adjustments in the year in which they are identified. In the case of Msat, the Honourable Company Law Board has given orders to account for such earlier year Board, transactions as prior period adjustments
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Income Statement: The Bottom Line for a Corporation

Various Items that appear in the Notes or Financial Statements 1) Provision for Doubtful Debts: If the company doubts realization of any receivables from customers, it is required to identify such amounts and make a provision. If they are finally proved to be not recoverable we need to write off such receivables. However due to regulatory requirements, we can write off such debts only after receiving approval from RBI. 2) Percentage Completion Method: Any fixed price project executed by the company should be evaluated for progress in performance Revenue for performance. such contracts can be recognized only to the extent of the progress certified. This exercise is required to be done on a monthly basis, so as to recognize revenue correctly at the end of every month.

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Income Statement: The Bottom Line for a Corporation

Various Items that appear in the Notes or Financial Statements 3) Multiple Deliverables: A contract may have multiple commercial/delivery terms peculiar to such contract e.g. the contract may have a non returnable clause, higher warranty than usual warranty given, discounts or service credits with varying conditions, supply of hardware and software either as a sale or i th nature of d f l in the t f deferred payment etc., such peculiarities need t b d t t h li iti d to be addressed as per the applicable accounting standards under Indian GAAP and US GAAP. 4) Unbilled Revenue: Services delivered but not yet invoiced is called unbilled revenue, it may be pertaining to T&M, efforts delivered but not yet invoiced or partly executed fixed price contract. They are required to be recognized in the period when the service is delivered delivered.

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Income Statement: The Bottom Line for a Corporation

Various Items that appear in the Notes or Financial Statements 5) Unbilled Revenue: Services delivered but not yet invoiced is called unbilled revenue, it may be pertaining to T&M, efforts delivered but not yet invoiced or partly executed fixed price contract. They are required to be recognized in the period when the service is delivered. 6) Unearned Revenue Adjustments: If we raise invoices on customer without delivering efforts or without confirming the hours in Ontime and push to IMS for invoicing, we raise advance invoices and will be treated as unearned. g, Revenue can be recognized in such cases only when efforts are confirmed in the system and pushed for invoicing. Till such time, the revenue cannot be recognized by the company.

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Mahindrasatyam.com
Safe Harbor This document contains forward-looking statements within the meaning of section 27A of Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. S t t t t Satyam undertakes no d t t update any f d t k duty to d t forward-looking statements. F a di d l ki t t t For discussion of th risks associated with our i f the i k i t d ith business, please see the discussions under the heading Risk Factors in our report on Form 6-K concerning the quarter ended September 30, 2008, furnished to the Securities and Exchange Commission on 07 November, 2008, and the other reports filed with the Securities and Exchange Commission from time to time. These filings are available at http://www.sec.gov

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