Professional Documents
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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?
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.
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.
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 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.
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.
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.
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.
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
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.
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
Previous Year
Current Year
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.
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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.
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Source
Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put.
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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.
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Causes
Funds flow statement shows the causes of Cash flow statement shows the changes in net working capital. causes the changes in cash.
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Principal of Accounting
In cash flow statement data obtained on accrual basis are converted into cash basis.