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Financial appraisal

Financial Appraisal
Financial Appraisal is a method of assessing the feasibility of a proposed project on the basis of the value of net cash flows resulted from implementation of the projects. Financial appraisal involves estimating the project cost, working capital requirements, and sources of funds

Financial Appraisal
Estimation of capital cost
Whether proper quotations are obtained from potential supplier? Whether contingencies are provided? Whether inflation factor is considered?

Estimation of working results


Whether price computation of input and output is proper? Whether cost projections and distinction between fixed and variable cost is proper?

Financial Appraisal
Adequacy of rate of return
IRR

Financing pattern
Debt equity ratio Promoters contribution should be in the range of 30 to 50 %

Financial Appraisal
Project Cost Estimation- It is the process of determining the total cost of the project which is supported by long term funds.
Land and site development Building and civil works Plant and machinery Technical know how and engineering fees Expenses on foreign and local technicians

Financial Appraisal
Working Capital Requirement- It is the difference between current assets and current liabilities.
Raw material and components Stocks of goods in process Stocks of finished goods Debtors Operating expenses Consumable stores

Financial Appraisal
Sources of Funds
Share Capital- equity capital and preference capital Term loans- Loans provided by the banks and financial organization. (Rupee and Foreign currency loans) Debenture capital- Capital produces by Debentures. (Non convertible and Convertible) Deferred Credits- Credit taken from suppliers. Incentive Sources- Financial support provided by the government agencies. Miscellaneous sources- Public deposits, unsecured

Financial Appraisal
Appropriate composition of Funds (Capital Budgeting)
Material Cost- Cost of raw materials, chemicals, components, and consumable stores necessary for production. Utilities- Utilities Cost include the cost incurred on power, water and fuel. Labour- Labour Cost is the cost of manpower employed in a factory. Factory overheads- It includes the repair and maintenance, rent , taxes, insurance on factory assets.

Project Cost Accounting System


A project cost accounting system is a method of keeping track of all of the revenues and costs associated with a specific project, so you can run financial analyses on that project. Project accounting (sometimes referred to as job cost accounting) is the practice of creating financial reports specifically designed to track the financial progress of projects, which can then be used by managers to aid project management.

Preparation for Project Financial Statement


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All the financial activity via a series of numerical reports that is called, in general, financial statements. A Financial Statement includes balance sheet, an income statement, a statement of cash flows and an auditors report. It is a detailed description of the company operations and prospects for the upcoming year.

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders' Equity Projected Balance Sheet Balance Sheet is the snap shot of financial strength of any company at any point of time.

A liability is an obligation, which legally binds an individual or an organization to pay off its debt. Liabilities in the balance sheet are the financial obligations of an organization, which it owes to other parties. Liabilities also include amounts received in advance for future services. Since the amount received (recorded as the asset Cash) has not yet been earned, the Projected Balance Sheet company defers the reporting of revenues and instead Liabilities reports a liability such as Unearned Revenues or Customer Deposits.

Share Capital- It comprises of authorized capital, issued capital, subscribed capital, called up capital, paid up capital.

Authorized capital: It is the maximum amount of capital which a company can collect or raise by selling it's shares to the general public. Authorized capital is known as nominal capital or registered capital. Issued capital: It is that part of the authorized capital which is actually issued to the general public. Projected Balance Sheet Liabilities Unissued capital: It is that part of the authorized capital which is not being issued to the general public.

Share Capital

Unsubscribed capital: It is that part of the issued capital which is not subscribed by the general public. Called up capital: It is that part of the subscribed capital which is actually called up by the company. Uncalled up capital: It is that part of the subscribed capital which is not being called up by the company. It may be called up as and when the company need funds. Projected Balance Sheet Reserve capital: Reserve capital is that part of the Liabilities uncalled capital which is reserved to be called up only at the time of winding up or liquidation of the

Share Capital
Paid up capital: It is that part of the called up capital which is actually paid up by the shareholders. Unpaid up capital: It is that part of the called up capital which is not being paid by the shareholders. Unpaid up capital is also known as Calls in Arrears.

Projected Balance Sheet Liabilities

Reserves and Surplus- They are the accumulated retained earnings and consists of capital reserve, investment allowance reserve, share premium, general reserve and other reserve Reserve and Surplus are profits which have been retained in the firm. There are two types of reserves - revenue reserves and capital reserves. Revenue reserves represent accumulated retained earnings from the profits of normal business operations. These are held in various forms like general reserve, investment allowance reserve, dividend equalization reserve, etc. Capital reservesProjected Balance Sheet arise out of gains which are not related to normal business operations. For example, premium on issue of shares or gain Liabilities on revaluation of assets.

Types Of Reserves Capital reserves When the assets of a company are revalued to a higher value than the present net book value, the difference between them is a notional gain and shown as Revaluation Reserve. Revaluation Reserve is a capital reserve. A company is prohibited to pay dividends from the capital reserve. Share Premium Account When the shares of a profitable company are offered to public, the company may decide to offer the shares at a price higher than par value. Also at times the shares maybe issued at discount. The shares when offered at premium, the Projected Balance in a 'Premium Account'. amount of premium collected is shownSheet Dividend cannot be paid from this reserve. Liabilities

Types Of Reserves General Reserve The total earnings of a company after deducting dividends paid out and any losses suffered, is called retained earnings. Retained earnings can be appropriated to create reserves for such things as future declines in inventory value, future plant expansion. Sinking fund reserve or the retained earnings not transferred to any specific reserve account is appropriated to general reserve. In other words, undistributed profit not required to be transferred to any specific reserve account is usually Projected Balance Sheet accumulated in the General Reserve Account.

Liabilities

Secured loan- A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower. Unsecured loan- An unsecured loan means the lender relies on your promise to pay it back. They're taking a bigger risk than with a secured loan, so interest rates for unsecured loans tend to be higher. You normally have set payments over an agreed period and penalties may Projected Balance Sheet apply if you want to repay the loan early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if Liabilities you want a short-term loan (one to five years).

Projected Balance Sheet Liabilities


Current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer. A more complete definition is that current liabilities are obligations that will be settled by current assets or by the creation of new current liabilities. For example, accounts payable for goods, services or supplies that were purchased for use

Projected Balance Sheet Liabilities Provision made for known or specified liabilities which may occur in future is provision for liabilities. Contingent liability is provision made for unknown liabilities which may or may not occur in future.

Projected Balance Sheet Assets


Anything of value. Assets can be in the form of money, such as cash at the bank or amounts owed to you; they can be fixed assets such as property or equipment; or they can be intangibles such as your company's goodwill or brand-names. Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other

Projected Balance Sheet Assets


Types of assets
Fixed Assets- A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture.( also called property, plant, and equipment (PP&E)).

Projected Balance Sheet Assets


Types of assets
Investment- In finance, the purchase of a financial product or other item of value with an expectation of favourable future returns. In general terms, investment means, the use money in the hope of making more money. An investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. Investments include the purchase of bonds, stocks or real estate property.

Projected Balance Sheet Assets


Types of assets
Current asset - A current asset is an asset on the balance sheet which can either be converted to cash or used to pay current liabilities within 12 months. Typical current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory and the portion of prepaid liabilities which will be paid within a year. A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business.

Projected Balance Sheet Assets


Current asset o Stock in trade- Goods held by a business for sale. o Accounts Receivable (A/R)- Money which is owed to a company by a customer for products and services provided on credit. A specific sale is generally only treated as an account receivable after the customer is sent an invoice.

Projected Balance Sheet Assets


Miscellaneous Expenditure- Miscellaneous expenses are those expenses which are very minor/small in nature. Any expense which cannot be debited to any expense account is debited to misc exp a/c. These items can be debited to any particular a/c as well. But if they are too small then they are debited to misc exp a/c. The control over this account becomes easier if all such expenses are consolidated into one account. Else if all these expenses are debited to different accounts then one will need to put a lot of efforts to ascertain how much expense really has occurred under which head. They may be carried forward to the next year if they are unpaid or paid in advance.

Projected Balance Sheet Assets


Debit Balance of Profit and loss- If there is net loss in an

organisation and general reserve is given, net loss will be deducted from it, But if there is no such reserve, then the loss will be shown under this category/head.

Projected Income Statement


An income statement, sometimes called a profit and loss

statement (P&L), is a financial document which shows income earned and expenses incurred, and the resulting difference between your income and your expense is called your net profit, which is often referred to as the bottom line, and this statement tells you if your business is profitable or not. Projected Income Statement normally includes your estimated future Business Revenues, Cost of Goods Sold, Gross Profit, Controllable Expenses, Non-Controllable Expenses and Net Profit. This statement is utilized to project your financial future in your business.

Projected Income Statement


In its simplest form, and income statement is presented

in the following format: Income (your forecasted sales) Minus Cost of Sales (your variable costs) Equals Gross Margin Minus Fixed Operating Expenses Equals Net Profit

This Projected Income Statement will assist you in forecasting the income you can expect over a twelve month period.

Projected Income Statement


An income statement includes following accounts: Profit and loss accounts- It shows the net results of the business operations in terms of net profit and loss during and accounting period. Profit and loss appropriation account- It shows how the profit earned during the period has been utilised. Funds flow statement- It shows the sources and applications of funds during an accounting period.

Projected Income Statement


Purpose of preparation of income statements: To ascertain the earning capacity or profitability To know the solvency of an organisation To make a comparative study with other firms To ascertain the financial strength To know the capability of payment of interest and dividend To know the trend of an organisation To provide useful information to the management

Projected Income Statement


Limitations of income statements: Lack of qualitative analysis Difficulty in forecasting Difference in accounting policies Ignore changes in price level Window dressing

Projected Funds Flow Statement


Why we prepare fund flow statement?
The balance sheet and income statement are the traditional basic financial statement of a business enterprise. A serious limitation of these statements is that they do not provide information regarding changes in the firms financial position during a particular period of time. They fail to answer following question

What funds were available during the accounting period and for what purpose these funds were utilized? Have long term sources been adequate to finance fixed asset purchase? Does the firm possess adequate working capital? How much funds have been generated from

Projected Funds Flow Statement



The balance sheet is merely a static statement. It is statement of asset and liabilities of the business as on particular date. The fund flow statement overcomes these limitations of basic financial statement. Fund flow statement will provide us information about different sources of fund and their various uses in particular time.

Projected Funds Flow Statement


The term Funds is used to denote the difference between

current assets and current liabilities i.e net working capital.


Working capital= current assets- current liabilities
The term flow means change or movement. Therefore, the term flow of funds means increase or

decrease in working capital

Meaning of fund flow statement


This statement reveals resources from which funds were obtain by the firm and the specific uses to which such funds were applied. The effectiveness of financial management in procuring funds from various sources & using them effectively for generating income without sacrificing the financial position of the firm is reflected in fund flow statement .

Definitions of fund flow statement


In the words of Foulke, R.A., a statement of source and application of fund is a technical device designed to analyse the changes in the financial condition of business enterprises between two dates. According to : Almond Coleman, The fund flow statement summarizing the significant financial changes which were occurred between the beginning & the end of a companys accounting periods.

Projected Funds Flow Statement


This fund flow statement has two parts :
1. 2. Sources of fund Application of fund

The difference between these two parts that is sources & uses of funds represents net changes in working capital. The excess of sources of funds over uses of fund is the net increase in working capital & excess of uses over sources of fund is net decrease in working capital. The amount of net increase or decrease as shown in fund flow statement should be equal to the amount shown by schedule of working capital changes.

Fund Flow Statement


Sources of Fund
Fund from operation Issue of share Issue of debenture long term loans Sale of fixed assets / Investment Non trading receipts Decrease in working capital (if any) Amount

Uses Of Funds
Loss from operation Redemption of preference shares Redemption of debentures Repayment of long term loans Purchase of fixed assets / Investments Payment of dividend & taxes Increase in working capital (if any)

Amount

Statement or Schedule of Changes in Working Capital.


Item (A) Current Assets Cash at bank Cash in hand Stock in trade Debtors Bills receivable Advance payment Short term investment Prepaid expense Accrued income Total (A) (B) Current Liabilities (1) Short term loans (2) Bank overdraft (3) Creditors (4) Bills payable (5) Outstanding expenses (6) Unclaimed dividend Total (B) Net Working Capital (A-B) Increase / Decrease in Working Capital Total

Previous Year

Current Year

Effect on Increase Rs.

Working capital Decrease Rs.

Projected Funds Flow Statement


Importance
Helps in analyzing financial position Provides reliable figures of profit and loss of an organization Helps to know if the finds are properly utilized or not Helps in preparing the budget for the next period Helps an organization in borrowing operations

Projected Cash Flow Statement


A projected cash flow statement is used to evaluate cash inflows and outflows to determine when, how much, and for how long cash deficits or surpluses will exist for a business during an upcoming time period. That information can then be used to justify loan requests, determine repayment schedules, and plan for short-term investments.

Projected Cash Flow Statement


A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash..

Projected Cash Flow Statement


The projected Cash Flow Statement provides management with an idea of how the firms liquidity will be impacted given the business assumption inputs for the Income Statement projection. The projected Cash Flow Statement seeks to answer questions such as:
How much working capital will we have? How much additional capital might the firm need if assumptions for growth change? Will we have enough money to make payroll?

Projected Cash Flow Statement


Aim of a cash flow statement The aim of a cash flow statement should be to assist users:
to assess the company's ability to generate positive cash
flows in the future to assess its ability to meet its obligations to service loans, pay dividends etc to assess the reasons for differences between reported and related cash flows to assess the effect on its finances of major transactions in the year.

Projected Cash Flow Statement

Objectives
Helpful in short-term financial planning: Cash Flow Statement provides useful information to a business enterprise to make decision for its short-term financial planning. Helpful in preparing Cash Budget: A Cash Budget is an estimate of cash receipts and disbursement for a future period of time. Cash Flow Statement provides help to the management to prepare Cash Budget. A comparison of cash budget and cash flow statement reveals the extent to which the sources of the business were generated and used as per the plans of the business.

Projected Cash Flow Statement Objectives


Helps to understand liquidity: Liquidity means ability of a business enterprise to pay off its liabilities when due. Cash Flow Statement helps to know about the sources where from the cash will be available to pay off the liabilities. Prediction of sickness: With the help of preparing cash from operation a business enterprise may come to know about cash losses in operation. It helps to predict this type of sickness. Dividend decisions: Dividend is paid within 42 days, when company declares it. Cash Flow Statement helps the management to know about the sources of cash to pay off dividend.

Projected Cash Flow Statement


The major sources of cash are as under: Cash from Operation Issue of Equity Share Capital for cash Issue of Preference Share Capital for cash Raising long term loans for cash Sale of Investments Sale of Fixed Assets Premium on Issue of Shares / Debentures etc. The major uses of cash are as under:

Projected Cash Flow Statement


The major sources of cash are as under: Redemption of Debentures/ Repayment of Long-term Loans Purchase of Investment Purchase of Fixed Assets Premium on Redemption of Preference Share/Debentures Dividend Paid Taxes Paid etc.

1.

Basis of Difference Funds Flow Statement Basis of Analysis Funds flow statement is based on broader concept i.e. working capital.

Cash Flow Statement Cash flow statement is based on narrow concept i.e. cash, which is only one of the elements of working capital.

2.

Source

Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put.

3.

Usefulness

Cash flow statement starts with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses. Funds flow statement is more useful in Cash flow statement is useful in assessing the long-range financial strategy. understanding the short-term phenomena affecting the liquidity of the business. In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital. In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement itself.

4.

Schedule of Changes in Working Capital

5.

Causes

Funds flow statement shows the causes of Cash flow statement shows the changes in net working capital. causes the changes in cash.

6.

Principal of Accounting

Funds flow statement is consonant with the accrual basis of accounting.

In cash flow statement data obtained on accrual basis are converted into cash basis.

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