FinEssence | The Finance Primer

A sneak-peek into the world of Finance

Batch of 2018
Date of publication

13th June, 2016

Contents
1

OVERVIEW ............................................................................................................................................. 1

1.1 About Us................................................................................................................................................ 1

1.2 Team Members ..................................................................................................................................... 2
1.3 Purpose of the Document ..................................................................................................................... 2
2

FINANCIAL SERVICES INDUSTRY ............................................................................................................ 3

FINANCIAL STATEMENTS....................................................................................................................... 5

3.1 Balance Sheet ........................................................................................................................................ 6

3.2 Income Statement................................................................................................................................. 9
3.3 Interlinkage between Balance Sheet and Income Statement ............................................................ 11
4

ASSIGNMENTS FOR YOU! .................................................................................................................... 13

OVERVIEW

At the onset, we would like to congratulate you on making it to one of the premier
management institutions of the country. Over the course of the next 2 years, we look forward
to you becoming a part of the legacy of this place better known as the Red Building of Dreams!
We, the Finance Society at FMS, welcome you to FMS Delhi and wish you the very best for all
your future endeavors.

1.1

About Us

We are the Finance Society at FMS, popularly known as FinSoc. Our aim is to develop a finance
oriented learning environment in the campus that enables students to be better prepared to
face the industry rigor in the future years. The society strives to develop the finance acumen
required to succeed in the industry by providing insights into the different aspects of the
finance domain through study sessions, events, workshops, corporate interaction with alumni
and industry experts etc. Some key highlights of our past activities are
o
o
o
o
o

Investment Banking workshop organized by Deutsche Bank

Fundamentals of Stock Market workshop by ICICI Securities
Equity Valuation workshop by Dun and Bradstreet
Organizing Finance certification exams NCFM, FLIP, CFAT/CGAT etc
Senior Analyst Quarterly magazine giving an outlook of the recent global happenings
in the world of Finance
o Finalyze and Ad Honorem - Flagship events involving participants from the top B-schools
of the country, organized during Fiesta - the annual management festival of FMS

1.2

Team Members
Name

Designation

Details
Undergraduate

B. Tech, NIT Kurukshetra

Prashant Roy Sharma

President

Praveen Dasari

Executive
Member

Shriram Sunder

Executive
Member

Undergraduate

B. E. , NSIT, DU

Kartikey Vaid

Executive
Member

Undergraduate

B. Tech, NIT Calicut

Avishek Saha

Executive
Member

Undergraduate

B.E. (Hons), BITS Pilani

1.3

Work Experience Inductis EXL

Undergraduate

B. Tech, UPES Dehradun

Work Experience EeTee

Work Experience IMS Health

Purpose of the Document

We understand that for many, this will be their first exposure to Finance. This primer is
intended to give you an overview of the world of Finance and explore what makes this domain
so challenging and rewarding at the same time. Hence, it is highly advisable that you go through
the document thoroughly before joining FMS.
For a thorough understanding, you are also advised to go through supplementary material
available on the internet on the topics given in the primer. This will help you better grasp the
concept and make lives easier for you once you are inside the campus.
Happy learning!

FINANCIAL SERVICES INDUSTRY

The Financial services industry provides a plethora of opportunities for interested individuals to
work with people from varied backgrounds and in different settings. The finance industry is
multifaceted, offering a variety of positions catering to a number of different skills and
interests. A career in finance is not solely about money but does depend heavily on it. This
makes it quite challenging and at the same time interesting. Despite the heavy ups and downs
in the past, the industry has always remained a sought after career option for MBA graduates
Broadly, the career opportunities can be grouped in the following categories
o Investment Banking The grand-daddy of all Finance careers. Investment banks
typically work with corporations, governments, institutional investors and crazily rich
individuals to help them multiply their money and provide avenues for investments. The
work revolves around mergers and acquisitions for firms, raising money for companies,
trading of stocks for rich individuals as well as companies etc. This happens to be one of
the most sought after roles post MBA owing to the huge paychecks and lavish lifestyles.
The Bulge Bracket investment banks are-

o Corporate and Retail Banking Corporate Banking caters to the banking needs of
corporate houses whereas, retail banking cater to the banking needs of the general
public. A career in this domain involves handling the cash dealings with traders and
businesses, devising strategies to help customers seize growth opportunities etc.
Some of the large banks include-

o Venture Capital/Private Equity Venture Capitalists (VC) and Private Equity (PE) firms
help companies raise money in exchange for partial ownership of the firm. The firm
researches on the companies which are expected to show potential in the future and
make investments. The rise of startups has led to an unprecedented boom in the PE/VC
industry. The best finance minds from the top B- Schools across the country are clawing
for a spot in these tiny, highly profitable enterprises.
Some of the major PE firms are-

Some of the VC firms are-

o Corporate Finance Corporate Finance department of a firm looks after the financial
activities for the company. This involves making the decisions on how and when to raise
money, creating avenues so as to ensure maximum profitability for the company,
implement strategies to ensure optimum levels of inventory, manage financial issues
etc.
Firms offering corporate finance roles are-

o Capital Markets- A career in the capital markets can be a roller coaster ride, fuelled by
the volatility and unpredictability of the financial markets. This role would involve using
the excess cash with companies and wealthy individuals (clients) as well as cash with the
bank (proprietary trading) to invest in the financial markets to make profits. Some of the
leading banks involved in this role includeo

For further data regarding placements at FMS, you are advised to go through the latest
Placement Reports available on the FMS website

FINANCIAL STATEMENTS

Every company or individual for that matter is involved in financial transactions in the course of
his life. Financial statements provide an efficient manner of capturing and presenting this
information. Analysis of financial information of any company gives an insight into the financial
position of the company. Financial statements can be used by different stakeholders for
different purposes
o Owners To understand the financial health of their company and design strategies so
as to improve and sustain the condition of the firm
o Employees To predict the short term performance of the company which can be
helpful in taking day to day decisions for running the company more efficiently and
determining compensation, promotion etc.
o Investors To assess the viability of investing in a given company and take a call on the
long term goals of the company
o Financial institutions To decide whether to grant funds to a company or not on the
basis of its performance in the previous years and its expected future performance
As managers you will not be expected to create the financial statements for the companies.
However, you will be required to read and understand the financial statements and more
importantly, draw useful conclusions from them. You are expected to keep this at the back of
your mind while studying this topic.
The financial statements at the broadest level can be categorized into three categories1. Balance Sheet2. Income Statement / Profit & Loss Statement
3. Cash Flow Statement
In this primer, we have discussed briefly about the first 2 financial statements. Cash flow
statements and in-depth overview of all the financial statements will be covered in future study
material.
Basic Accounting PrinciplesBefore we get on with the analysis of financial statements, it is key to understand certain
accounting principles (or assumptions) that one needs to keep in mind while preparing or
analyzing financial statements of a company. It is advisable that you understand these concepts
before going forward, in order to better appreciate the concepts explained in subsequent
sections 1. Economic Entity Assumption- This assumption implies that the company is a separate
entity and the accounts of the company are treated separately from those running it.
2. Going Concern Assumption- This assumption implies that the entity will be in existence
for an indefinitely long period in the future.
3. Accounting Period- The time between two successive presentations of financial
statements for which transactions are recorded.
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4. Matching Principle- This principle means that the revenues and expenses for a given
period must be matched. For e.g. sales commission must be recognized as an expense
in the period where corresponding sale is made and not when payment for it is
received.
5. Accrual Concept- According to this concept, income and expenses need to be
recognized when the transaction occurs and not when actual cash is received/given out.
6. The Accounting Equation and the Dual Aspect Concept- The dual aspect concept states
that every business transaction requires recordation in two different accounts. This
concept is the basis of double entry accounting, which is required by all accounting
frameworks in order to produce reliable financial statements. The concept is derived
from the accounting equation, which states that:
Assets = Liabilities + Equity
This might sound a bit confusing right now, but hang in there! All this will make much
more sense once understand the financial statements in greater detail.

3.1

Balance Sheet

The balance sheet gives the financial position of the firm at a specified moment in time. Listed
companies require disclosing their financial position at the end of every quarter (3 months) or
every year (12 months).
Given below is the a sample balance sheet for the periods ending on 31st March 2016, 2015
and 2014-

Balance Sheet
Mar 16

Mar-15

Mar-14

(in Rs. Crores) (in Rs. Crores) (in Rs. Crores)

Shareholder's Equity
Share Capital
Reserves and Surplus

197.04

195.87

195.87

65163.52

50438.89

48998.89

65,360.56

50,634.76

49,194.76

862.04

1539.9

1220.84

Deferred Tax Liabilities [Net]

441.17

342.96

308.8

Other Long Term Liabilities

745.1

825.02

743.07

2,048.31

2,707.88

2,272.71

112.96

185.56

127.09

Trade Payables

7,539.93

8,830.93

5,536.02

Other Current Liabilities

5,357.45

3,646.59

3,621.24

21,975.51

20,318.24

15,670.31

T otal Shareholder's Equity

Liabilities
Non Current Liabilities
Long Term Borrowings

T otal Non-Current Liabilities

Current Liabilities
Short Term Borrowings

T otal Current Liabilities

T otal Liabilities

24,023.82

23,026.12

17,943.02

T otal Liabilities and Shareholder's Equity

89,384.38

73,660.88

67,137.78

Assets
Non- Current Assets
Tangible Assets
Intangible Assets
Capital Work-In-Progress
Fixed Assets
Non-Current Investments
Deferred Tax Assets [Net]
Long Term Loans And Advances
Other Non-Current Assets
T otal Non-Current Assets

10,606.61

9,376.12

7,034.81

119.35

168.83

240.74

1,671.20

2,766.37

3,168.48

12,397.16

12,311.32

10,444.03

226.45

169.18

2,275.27

822.94

593.94

420.06

10,395.48

9,154.92

7,286.62

525.3

1,545.33

26,316.99

574.41

24,847.88

24,240.09

22,359.15

1,492.60

1,158.47

16.27

16.07

15.21

Current Assets
Current Investments
Inventories
Trade Receivables

24,069.71

20,437.94

18,230.40

Cash And Cash Equivalents

6,784.76

18,556.04

14,441.84

Short Term Loans And Advances

5,582.35

4,146.45

4,310.80

OtherCurrentAssets

4,255.15

4,163.90

4,740.97

T otal Current Assets

63,067.39

48,813.00

42,897.69

T otal Assets

89,384.38

73,660.88

67,137.78

The Balance sheet has the following three components1

1. Shareholders Funds- This constitutes the owners share in the entity. The total
shareholders funds in a company can be broken down into 2 parts Share capital and
reserves/surplus.
Share capital is the initial amount that shareholders have invested in
2

the firm while reserves and surplus is the profits that the company has generated over
the years.
2. Liabilities- Liabilities can be of two typesa. Non-Current (Long Term) Liabilities - Long term liabilities are those which have to
be repaid more than one year into the future. These can be in the form ofi. Long term Borrowings- They are the principles associated with loans that the
company has taken and hose repayment doesnt need to be done in the next
one year.
ii. Deferred Tax Liabilities- Due to differences between taxation laws and the
accounting standards adopted by the company, differences in the taxation
amount can arise. This temporary difference between the same is mentioned as
a liability that the firm may need to pay in the future.
b. Current (Short Term) Liabilities- These are the items which need to be paid within
the accounting period of one year. It includesi. Short-term Borrowings - Loans that the company may take for raising short term
capital, and whose maturity is within the accounting period.
ii. Amount/trade payables This accounts for any good or service that the
company has used in the current accounting period but payment for the same
has not been made in the same accounting period
iii. Accrued Expenses Expenses that have been incurred, but not yet paid for such
as salaries, wages, and utility charges (water, electricity)
iv. Current portion of long-term debt - The principle portion of a long term debt
that the company needs to pay in the current accounting period.
v. Other current liabilities
3. Assets- An asset is anything that the company owns and is likely to provide benefits to
the company for a period beyond the time at which the balance sheet has been
prepared. Assets can also be classified into two a. Non-Current (Long-Term) Assets- A long term asset is one that will not turn into
cash or be consumed in the next one year. It can be in the form ofi. Property Plant & Equipment (Tangible Assets) PP&E is often the largest line
item on a firm's balance sheet. That makes sense, considering that many
companies make huge investments in things like factories, computer equipment
and machinery.
ii. Intangible Assets An intangible asset is something without a physical
substance. Examples include trademarks, copyrights and patents.
iii. Goodwill Goodwill is just an accounting construct to balance the excess
amount (over fair value) a company pays when it acquires another company. It
can't be bought or sold, and is gradually amortized to income over its useful life
(which cannot exceed 5 years in India)
b. Current Assets- These are assets, which can be converted into cash within the
accounting period. These include-

i.

ii.

iii.

iv.

3.2

Trade (Accounts) Receivables The amount to be received for the goods/

services that the company has rendered but hasnt got paid yet (for e.g. - from
customers who have taken products on credit)
Inventories - The raw materials, work-in-process goods and completely finished
goods that are considered to be the portion of a business's assets those are
ready or will be ready for sale.
Prepaid Expenses This is opposite to Accrued expenses. These include future
expenses that have been paid in advance but have not yet been incurred. For
e.g. Insurance premium, advance rent etc. As and when the benefits are
realized, these are reflected as expenses in income statement.
Cash and cash equivalents - Cash equivalents are extremely safe assets, like
government bonds, that can be easily transformed into cash .

Income Statement

The income statement summarizes a firm's financial transactions over a defined period of time
(notice the difference between a balance sheet and an income statement here), whether it's a
quarter or a whole year. The income statement shows how the money is coming in (revenues,
also known as sales) and the expenses that are tied to generating those revenues. The
difference between the expenses and revenues is the profit that the company earns. The basic
equation underlying the income statement is
Revenue - Expense = Net Income
The income statement is also known as a "profit & loss statement", or a "P&L". Revenue is also
known as top line. Net income is also known as "earnings" and "profit," in addition to being
called "the bottom line".
Refer to the income statement given below to better understand the different data points
captured in an income statement.

Let us start by understanding some of the most important things to look for in an income
statement Total Revenue: This is the total money that a company earns over a defined period of time. A
company needs to sell its product in order to stay in business, and this is where you can see
that process in action. If you compare total revenue from one year (or quarter) to the next, you
should be able to see patterns. Are revenues growing? Are they shrinking?
Gross profit: Gross profit is the difference between sales price and the cost of producing the
products. Thus it is the difference between total revenues and cost of goods sold. Cost of the
goods sold is the cost of the raw materials that are used in making the finished items that the
company sells to generate revenues. If this is negative, the company is in real trouble.
Operating Expenses: Operating expenses are costs that a company must pay in the normal
course of business. A company needs to pay employees, research & develop new products, pay
rent, and so on.
Operating Profit: Operating Profit = Gross Profit Operating Expenses. Operating profits are
earned from a company's everyday core business operations. Operating profits also are called
"Earnings Before Interest and Taxes (EBIT).
Finance Cost: Well, if you take a debt to run your business, you need to pay interest. This
interest payment is often referred to as Finance cost.

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Net Income: Always found towards the bottom of the income statement (hence, also called the
bottom line), it is the most-watched number in a P&L. Net income is, in theory, the amount of
sales that are left over to be distributed to shareholders.
Concept of Depreciation and Amortization: As per the matching principle, expenses must be
matched to the revenues in a period. Hence for all large, onetime expenses such as building of a
plant, purchase of machinery, furniture, computers, or promotion of a new product, the
expense is spread over time. That is, a portion of the expense is recorded each year. This
expense is called Depreciation or Amortization. The logic behind using such a technique is that
although a machine is bought in a given year, its benefits are reaped over the next few years.
So, it makes sense to distribute the expense incurred in purchasing the machinery over a span
of the machines working life.
The term Depreciation is used when physical assets are purchased, whereas the term
amortization is used when intangible assets are purchased, or for reasons such as the one
mentioned above one time promotion/advertising expenses for the launch of a new product.
Amortization is also used for land.
Lets look at an example to better understand the concept of depreciation and amortization.
Assume you bought a machine for INR 5 Lacs and it was used to produce XYZ product for 4
years. According to the matching principle, a portion of this INR 5 Lacs expense has to be
attributed to each of these 4 years annually. This needs to be captured under the Depreciation
and Amortization head. One way of distributing the expense over 4 years is to evenly distribute
the cost of the machine over 4 years. Another technique suggests that the benefits (and hence
the costs) of a machine are more in its initial years, so an accelerated depreciation technique
needs to be used. Details about the methods mentioned here will be covered at a later point of
time.
The layout of an income statement can be summarized as follows
Sales (Top Line)
- Cost of Goods Sold
= Gross Profit
- Operating Expenses (includes SG&A, Depreciation & Amortization, etc.)
= Operating Profit (also known as EBIT; if you add back Depreciation and Amortization from
Operating Expenses, youll get EBITDA)
- Interest
= PBT (Profit before Taxes)
- Taxes
= Net Income (Bottom Line or PAT (Profit After Tax))

3.3

Interlinkage between Balance Sheet and Income Statement

The connection between the balance sheet and the income statement arises due to the use of
double-entry accounting (mentioned in Section 3 Basic Accounting Principles).

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Income Statement

Balance Sheet

Though the nature of linkages between balance sheet and income statements can be complex,
for the sake of simplicity, we have mentioned the following major ones1. The profit for the year from the income statement that is retained by the company is
added back in the reserves and surplus at the end of the year. This amount belongs to
the shareholders but is kept by the company for certain strategic requirements.
2. The depreciation and amortization that the assets of a company goes through during
the course of operation in the period are recognised as an expense in the income
statement. This amount is deducted from the total of tangible and intangible assets
from the balance sheet, at the end of the period.
3. According to the accrual concept, even though revenues need to be recognised when a
transaction occurs, the actual payment could be received later. Hence, the entire
revenue from sales is recognised in the income statement once the sale occurs, but the
part of the sale for which the customer is yet to pay for goes into the accounts (trade)
receivable line item of the balance sheet.
4. Similar to point 3, in case of expenses, if the company uses a good or a service in the
accounting period, the entire cost for it is mentioned in the income statement. The
portion of this that the company is yet to pay its suppliers is mentioned in the Balance
sheet under accounts (trade) payables

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ASSIGNMENTS FOR YOU!

We hope that after going through the document, you have got a glimpse of what the domain of
Finance has to offer. In the coming days, we will be coming up with further such study material
and sessions to help prepare you better for building a career in Finance. As mentioned
previously, this document is only meant to be a guiding source for you. The final effort needs to
come from your end. Hence, we encourage you to extensively explore the internet for a
thorough understanding of the concepts mentioned here. Also, you are advised to read up on
the latest happenings in the world of Finance to understand the real life applications of these
concepts. Trust us, these will go a long way in helping you in the days to come.
Some popular websites that you can refer are
o
o
o
o
o

www.investopedia.com
www.moneycontrol.com
www.seekingalpha.com
www.forbes.com
Online finance courses offered on websites like Khan Academy

Thats all from us at this point of time. We are looking forward to meeting and interacting with
you at FMS and work towards fulfilling your career goals. In the meantime, here are a few
assignments you can work on to further build your interest in this domain.

Choose any ONE of the domains of Finance (Section 2) that you find interesting, go
through the websites of some of the major players in that segment to see what they do
and accordingly make a one pager about that domain. Be as creative as you want!
We would like you to look at Mylan (Global Pharmaceutical Company) and let us know
your thoughts on the following topics in a Word document. (No elaborate answers. Be
specific and to the point. Hint: You can refer to Mylans latest 10-K. Google to know
more on what a 10-K is!)
o General
What is a 10-K?
What is Mylan's ticker? Which exchange does it trade on?
What is Mylan's fiscal year end?
What are the total shares outstanding as of 10th June 2016?
Recent News (2-bullet points)
o Financials (for FY 2015. Please answer in US million dollars)
For Mylan, what were the Shareholders Equity
Total Cash and Cash Equivalents
Net Income attributable to shareholders
Basic and Diluted EPS
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2013 2015 Revenue CAGR (Compound Annual Growth Rate)

Capital Expenditure
Prepare a 2-slide presentation on the following topic
o Slide 1: Company overview of Mylan. (Information can be sourced from the latest
10-K document and the company website)
o Slide 2: Overview for Mylans acquisition of Meda. (You could source information
from http://newsroom.mylan.com/2016-02-10-Mylan-to-Acquire-Meda. You are
encouraged to gather data from multiple authentic sources. Mention the sources
wherever necessary)
The templates for both the slides are attached as a reference. However, relevant
modifications in each will be highly appreciated. You are advised to be coherent and to
the point in your approach to the presentation. Focus more on the content, rather than
the aesthetic aspects of the document.

Enroll for Introduction to Financial Accounting MOOC on Coursera website and start
watching video tutorials. Refer to the following link for enrollment. The enrollment
window for this course ends on 13th June, 2016, 11:59:59 AM. Please enroll before that.
Lastly, fill this google form before 13th June, 2016, 11:59:59 PM.

The deadline for submitting the first 2 documents is 16th June, 2016, 11:59:59 PM. The deadline
for submitting the 2-slide presentation is 19th June, 2016, 11:59:59 PM. All entries have to be
mailed to finsoc@fms.edu with subject as OIL Assignment - <student name>. Submission is
MANDATORY for all the students receiving this document before the start of the session.
For any queries or concerns, drop a mail at finsoc@fms.edu or contact Shriram (+919650682793) or Avishek (+91-8377024890)

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