Balance Sheet and Cash Flow

Balance Sheet

A balance sheet lists the assets, liabilities and capital structure of a company as of a specific date, usually the last day of the financial period. Here, this date will be 31st March 2018. It helps understand what the company owns, what it owes and the amount of money invested by shareholders and debt holders.

Cash and Short-term Investments

Cash & short-term investments is the sum of cash available with the company and amount invested by the company in short-term investment options. Short-term investment options include investments made in liquid securities that usually have a maturity of less than 1 year and can be easily converted into cash. Excess cash amount, which is not required for daily business operations, is usually invested in liquid securities.  

In case of banks, the data item also includes cash that has been lent to other banks on a short-term basis.

Cash & short-term investments is on the assets side of the balance sheet in the current assets section.

Total Receivables

Total receivables is the total amount of money that is owed to the business by its customers. Most business sell their goods/services to customers on a credit basis. The customer will be required to pay the due amount to the business within a specific period of time. Between the date of sales and the date on which the customer pays for the goods or services, the due amount is recorded under the total receivables head.

The data item is relevant only in case of industrial, utility and insurance companies.

Total receivables is marked on the assets side of the balance sheet under the current assets section.

Total Inventory

Inventory is the sum of finished goods waiting to be sold, work-in-progress items and raw materials that will be used to manufacture finished goods.

This data item is relevant only in case of industrial and utility companies.

Total inventory is marked on the assets side of the balance sheet under the current assets section.

Other Current Assets

Other current assets in case of industrial & utility companies refers to the sum of all the other current assets apart from cash & short-term investments, total receivables and total inventory. This might include items like overpaid taxes or taxes paid in advance, current assets of discontinued business, assets being held for sale, etc.

In case of insurance companies, this data item includes prepaid expenses. Prepaid expense refers to the future expense for which the company has already paid money. For example, if the company has paid in advance for 1 years’ supply of printer cartridge, the expense will be recorded as prepaid expense.

This data item is not relevant for banks.  

Other current assets is marked on the assets side of the balance sheet under the current assets section.

Total Current Assets

Total current assets refers to the sum of all data items like cash and short-term investments, receivables, inventory and other current assets.

Net Loans

This data item is specific to banks and financial institutions. It refers to the total amount of loans lent by the company minus possible default losses.

Let’s say a bank has 10 customers and it has lent Rs.10,000 to each one of them. It estimates that about 2% of the total loan amount might never be returned and makes provisions for the same. So, the total loan amount is Rs.1,00,000 (10,000 * 10). Loan loss provision is Rs 2,000 (2% * 1,00,000). Hence, the net loan amount will be Rs.98,000 (1,00,000 – 2,000).

Net loans is recorded on the assets side of the balance sheet.

Net Property/Plant/Equipment

Property, plant and equipment refers to the total fixed assets held by the business. These assets are vital to the business and cannot be easily converted to cash. The assets are expected to generate economic benefits for the business over a period greater than 1 year.

Let’s say a business owns 2 pizza baking ovens valued at Rs.35,000 each, furniture valued at Rs.25,000, a car valued at Rs.6,00,000, fridge valued at Rs.12,000 and an a/c unit valued at Rs.18,000. The property, plant and equipment value of the business would be Rs.7,25,000 (35,000 * 2 + 25,000 + 6,00,000 + 12,000 + 18,000).

This data item is recorded on the assets of the balance sheet.

Goodwill and Intangibles

Intangible assets refer to assets that a company derives benefit from, but unlike fixed assets these assets cannot be physically touched or counted. Copyrights, patents and trademarks are all examples of intangible assets. A publishing company has copyright to lots of different books. These books can be printed and sold exclusively by the company due to the copyright, and that is how the business earns revenue. The copyright here is an asset, albeit an intangible one, because it allows the company to generate economic benefit.

Goodwill is a special category of intangible assets. Let’s say a pizza company, Roma, decides to buy out another pizza outlet named “Italiano”. The total assets of Italiano amounts to Rs.10,00,000 and this is the amount that would ideally be paid to the owners of Italiano for buying out their business. However, since Italiano has a loyal customer base and is located in an area that attracts lot of footfalls, the owners demand a premium of Rs.3,00,000 to sell their business. If Roma decides to pay the higher price and purchase the business, the additional Rs.3,00,000 paid will be recorded as goodwill on the assets side of Roma’s balance sheet.

Long Term Investments

Long-term investment refers to the investment made by the company in debt papers, stocks, real estate, etc with the purpose of holding them for more than 1 year. Companies that generate a significant amount of cash may sometimes decide to invest the excess money, which cannot be deployed back into the business, in real estate or debt or equity instruments. If the idea is to stay invested in these assets for more than 1 year, then they are classified as long-term investments.

This data item appears on the assets side of the balance sheet.

Other Assets

Other assets refers to all assets of the company that are not part of current assets, property, plant & equipment, goodwill & intangibles and long-term investments.

Total Assets

This data item indicates the sum of all assets of the company. The sum of total current assets, property, plant & equipment, goodwill & intangibles, long-term investments and other assets should be equal to the amount of total assets.

Accounts Payable

Accounts payable refers to the total amount of money that a company owes its creditors for materials and services sold on credit. The due amount should usually be paid off within a short period of time and is different from other short- and long-term business debt. The accounts payable head also includes the amount of accrued expenses. Accrued expenses refers to the expenses that the company has incurred but not yet paid.

For example, a pizza company buys pizza dough, cheese and vegetables in bulk from a single vendor. The vendor supplies the required raw materials every week but receives payment for the same only once in 2 months. Suppose the company orders about Rs.15,000 worth of goods every week, then at the end of every alternate month the accounts payable of the company would be Rs.1,20,000 (15,000 * 8).

The utilities bill of the company is Rs.2,000 every month. The company pays the total bill amount of Rs.6,000 at the end of each quarter. So at the end of 1st month, the accrued expense is Rs.2,000 and it is Rs.4,000 at the end of second month.

Total Deposits

This data item is specific to banks and financial institutions. It refers to the sum of all deposits (like savings bank deposits, fixed deposits etc) that have been made with the institution.

Other Current Liabilities

This data item refers to all other current liabilities that are not part of the accounts payable & accrued expenses heading. It includes items like short-term debt, dividends payable, advances received from customers, income taxes payable etc.

Total Current Liabiities

Total current liabilities refers to the sum of accounts payable and other current liabilities. In case of banks and financial institutions the data item also includes total deposits.

Total Long Term Debt

Total long-term debt indicates the debt taken on by the company that is due to be paid after more than a year. The debt might be in the form of borrowings from banks/financial institutions, bonds issued by the company, etc.

If a company has taken up a debt of Rs.12,00,000 from a bank and Rs.1,00,000 is up for repayment within 1 year then the balance Rs.11,00,000 is the long-term debt on the books of the company.  

Total Debt

Total debt refers to the sum of short- and long-term debt of the company. Short-term debt is the debt of the company that needs to be repaid within 1 year.

Deferred Income Tax

Deferred income tax refers to the taxes that will have to be paid by the company at the end of the fiscal year but has not yet been paid. A deferred income tax item recognises that the company will in the future pay more tax because of a transaction that took place during the current period.

For example, let’s say a pizza comapny receives an order for 1,000 pizzas at a party that will be held next quarter. The sale price of each pizza is Rs.200 and the cost of revenue per pizza is Rs.75. The person who ordered the pizza pays an advance of Rs.50,000 for 250 pizzas. This is the revenue that the company has already received without providing service. The profit on each pizza is Rs.125 (200 – 75). So the advance profit earned is Rs.31,250 (250 * 125). Suppose the tax rate is 25%, then the company owes the government Rs 7,813 (31,250 * 25%). This is the tax amount that has not yet been paid but will have to be paid once the order is fulfilled and revenue is recognised, and will be recorded as deferred income tax.

Minority Interest

Minority interest refers to the amount of interest of subsidiaries that belongs to shareholders other than the parent company.

A subsidiary is a company that is owned or controlled by the holding company. Let’s say Roma, as a business entity, owns 100% of shares of Italiano. Here, Roma is the holding company and Italiano is the subsidiary company. In this case, the holding company has complete right over the profits as well as assets of Italiano.

If Roma holds 75% of shares of Italiano whereas 25% of the shares are held by the previous owner, Roma will still be the holding company and Italiano the subsidiary. Roma will be  entitled to only 75% of the profits and assets of Italiano whereas the rest accrues to the other shareholders. 25% of the value of the company is shown in the balance sheet of Roma as minority interest under liabilities.

Other Liabilities

Other liabilities includes liabilities arising from discontinued operations, underfunded pension benefits, etc.

Total Liabilities

Total liabilities refers to the sum of all liabilities of the company. The sum of total current liabilities, total debt, deferred income tax, minority interest and other liabilities should be equal to the amount of total liabilities.

Common Stock

Common stock is a security that gives the holder of that security ownership of the portion of the company. Holders of common stock have a say in the running of the company and the power to vote on corporate policies and decisions. All the profits of the company accrues to the common stockholders. Common stock of the company is issued at a certain face value like Rs.1, Rs.5 or Rs.10. Total common stock refers to the sum of face value of all shares of common stock issued.

For example, if a company issues 10,000 shares of common stock at a face value of Rs.10, the total common stock will be Rs.1,00,000 (10,000 * 10).

Additional Paid-in Capital

Sometimes, a company issues shares of common stock at a premium to the face value. Though the face value of the common stock is Rs.10, the company might issue the stock at a premium of Rs.5. So the buyer will now have to pay Rs.15 for each share of common stock instead of the earlier Rs.10.

If 10,000 shares have been issued at a price of Rs.15, with the premium being Rs.5. Rs.1,00,000 (10,000 * 10) will be the total common stock and Rs.50,000 (10,000 * 5) will be the additional paid-in capital.

Retained Earnings

When a company earns profits, it can either decide to retain the same and invest it in the business or distribute the profits to the shareholders of the company. This retained profit is called retained earnings. It is the residual earnings from operations that is not distributed to shareholders.

Other Equity

Other equity-related data items that are not part of the above mentioned list are accommodated under the head “Other Equity”.

Total Equity

Total equity is the sum of common stock, additional paid-in capital, retained earnings and other equity.

Total Liabilities & Shareholders Equity

Total liabilities and shareholders equity refers to the sum of total liabilities and total equity.

Total Common Shares Outstanding

Common shares outstanding is the total shares of common stock of the company that have been issued.

Total Preferred Shares Outstanding

Preferred stock refers to a class of stock that ranks higher than common stock. In case the company decides to pay dividends, the preferred shareholders are paid before common stockholders. In case of bankruptcy as well, preferred shareholders are entitled to be paid from the company’s assets before common stockholders get any compensation. However, the downside is that while common stockholders have the right to vote on company policy, preferred stockholders do not get to do the same.

Total preferred shares outstanding refers to the sum of total shares of preferred stock of the company.

Policy Liabilities

This data item is specific to insurance companies and represents the total liabilities related to insurance operations of an insurance company. It includes payables for claims & losses to policyholders, reserves created for policy benefits, payables by the insurance company to reinsurers etc. 

Cash Flow Statement

A cash flow statement helps understand the actual amount of money that has entered the bank accounts of the company and the money that went out. It provides information about all the cash inflow that a company received via its ongoing operations, investments received by the company, assets sold as well as cash outflow via asset purchase, dividends paid etc. Just like an income statement, cash flow statement is also calculated for a specific period like quarter or year.  

Changes in Working Capital

Working capital refers to the difference between total current assets and total current liabilities. Working capital helps us understand the short-term financial health of the company. If the working capital is positive it indicates that the company has enough short-term assets to pay off its short-term liabilities.

Cumulative effect of change in current asset and current liability over the past year is captured in the data item changes in working capital.  

Components of working capitalChangeEffect on working capital
Current assetsIncreaseIncrease
DecreaseDecrease
Current liabilitiesIncreaseDecrease
DecreaseIncrease

When current assets of a business are increasing, it is usually because items like accounts receivable, inventory and prepaid expenses are increasing. This means cash is going out of the business as sales are not being made or it is being made on credit. Because of this, change in working capital is positive.

When current liabilities of a business are increasing, it is because accounts payable, accrued expenses etc. is increasing i.e. company has been slowing down the payment of dues and retaining cash. Change in working capital is negative because of this.

Cash Flow from Operating Activities

Cash flow from operating activity refers to the amount of money that a company has earned from its regular business activity such as selling goods/services. It excludes any money brought into the business via borrowings or sale of assets.

Cash flow from operating activity can be calculated by using the following formula:

Profit before interest & taxes + depreciation & amortization expense  + gains & losses from financing & investment activities + changes in working capital

Cash flow from operating activities should always be compared with the company’s net income. If the cash flow from operating activities is consistently higher than the net income, then the company’s earnings are of high quality. If that is not the case, then one has to attempt to understand why reported net income is not being converted into cash inflow by the company.

Capital Expenditures

Capital expenditure (capex) refers to the amount of money that the company has spent on purchasing property, plant & equipment that will be utilised in business operations. The assets purchased are expected to generate economic benefit for the business over the long-term. Usually, the amount spent on capex will be high compared to the total amount of fixed assets held by the business.

For example, if a pizza company decides to purchase another pizza baking oven, the amount spent on the same will be considered as capital expenditure. However, money spent on buying a spare part for the oven will be considered as operational expense because of its low significance and associated low cost.

Cash from Investing Activities

Cash from investing activities refers to the cash flow generated by the company via purchase and sale of plant, property & equipment (PP&E) or purchase & sale of subsidiaries or investments in marketable securities. For example, if a company has made any purchase of PP&E, then money moves out the company and proportional amount of assets comes in. On the contrary, if a company has sold an asset then PP&E amount will decrease and cash balance will increase.

A positive cash from investing activities balance indicates that money has flown into the company because of net sales of assets whereas a negative balance indicates that assets have been bought by the company.

Total Cash Dividends Paid

This refers to the actual dividend amount that has been paid to common share and/or preferred shareholders of a company. While a company might declare dividends during a particular quarter or financial year, the actual payment of dividends might not always happen during the same financial period.

This data item only considers the actual cash payment made towards dividends during a specific period. Higher the cash dividends paid, greater the cash outflow from the business and lower the cash from financing activities.

Cash from Financing Activities

Cash from financing activities refers to the amount of money that the company has raised by issuing bonds and stocks or the amount of borrowed money that has been repaid. It helps understand the transactions that have taken place within the capital structure, i.e debt and equity.  

Increase/decrease of long-term and short-term borrowings and share repurchase as well as share sale are considered while calculating cash from financing activities.

A positive cash from financing activities balance indicates that money has flown into the company either via sale of common stock or debt instruments, i.e. the company has raised money from the market. A negative balance indicates that the company has either paid dividends or repaid a part of its debt or repurchased shares.

Foreign Exchange Effects

It is possible that a company has subsidiaries in foreign locations and the financial statements of such subsidiaries are reported in the currency of the country in which it is located. If an Indian company owns an outlet in New York through a subsidiary, then the subsidiary will report its numbers in USD whereas the Indian company will report numbers of its Indian operations in INR. If the company has to prepare a consolidated financial statement, then it has to convert the numbers of its New York subsidiary into INR.

So if the consolidated statement is being prepared for the 1st Jan 2018 – 31st March 2018 period, cash flow and income statement items are converted into INR using average INR/USD exchange rate between the before mentioned dates.

However, balance sheet items will have to be converted using spot INR/USD rate as of 31st March 2018. The previous periods consolidated balance sheet will be prepared as of the period ending dates INR/USD rate.

Because of the average rate and the sport rate used for conversion, an imbalance is caused that could either increase or decrease the amount of the data item. This increase or decrease will have nothing to do with the actual cash flow and will be caused due to foreign currency fluctuation. This imbalance caused due to fluctuation will be captured in the data item foreign exchange effects.

Net Change in Cash

This data items indicates the difference in cash balance between the start and end of a financial period. If the financial period runs between 1st Jan 2018 and 31st March 2018, net change in cash considers the cash the business holds on 31st Dec 2017 and 31st March 2018 and states the difference between the two. A positive balance indicates that the cash with the company has increased and vice versa.