Corporate Financial Statements I

Lecture-6
FINANCIAL STATEMENTS
ACC 306
Financial Statements
and Analysis
Dr. ARPIT SIDHU

(Ph.D, UGC-NET, HP-SET, MBA,
MCOM, BCOM)
Learning Outcomes:
To identify and construct financial
statements based on their
elements and interpret the
information accordingly
Corporate FINANCIAL STATEMENTS
BALANCE SHEET
Format of BALANCE SHEET
Important items of Balance Sheet (Liability)
Equity Capital
Non Current/Long term Liability
Current/Short Term Liability
Deferred Tax Asset/ Liability (Business Loss, Differences in

the Depreciation Method in Accounting and Tax Purpose)
Provisions
Financing
• 1. Equity Financing- Process of raising capital through the sale of
shares in a company. With equity financing comes an ownership
interest for shareholders.
• Other Reserves (Reserves and Surplus) are all the cumulative amount
of retained earnings recorded as a part of the Shareholders Equity and
are earmarked by the company for specific purposes like buying of
fixed assets, payment for legal settlements, debts repayments or
payment of dividends etc.
HUL Equity Capital
Financing
2. Debt Financing (Other Non current Financial Liability)-

When a firm raises money for capital by selling debt instruments, it is
known as debt financing. In return for lending the money, the
individuals or institutions become long term creditors and receive
the principal and interest on the debt.
• A. Bank Loans
• B. Debentures
Debentures
• Debentures are a debt instrument used by companies and government to

issue the loan.
• Companies use debentures when they need to borrow the money at a
fixed rate of interest for its expansion
HUL Other Non current Liabilities(Long term)
Explanation
• Employee Related Liabilities
• means all liabilities, losses, Claims, Damages, costs and expenses

(including attorneys fees) arising at any time (whether before, on or
after the Closing) that are attributable to, associated with or related
to, or that arise out of or in connection with any employee benefit or
compensation plan, program.
Explanation
• Contingent consideration
• is the amount of consideration to be paid by an acquirer to the
acquiree in a business combination on future date.
• In most cases, the purchase consideration is fixed in terms of the
sum of cash transferred or the number of shares allotted.
• In some cases, however, a portion of the total consideration is linked
to a future event or future value of a benchmark.
Poll 1
Identify the false statement in the context of debenture?
(A) Debenture is written instrument under common seal of company

(B) Debenture is part of the owned capital of company
(C) Payment of interest is charged against the profits of the company
(D) Creditors of the Company
•B
Deferred Tax Asset
A deferred tax asset is an item on the balance sheet that results from overpayment or advance
payment of taxes. It also arises in a case where the company has paid extra tax to the
department. Deferred tax assets are recognized as an asset in the balance sheet
Paying more tax today for paying less tax tomorrow.
Example:- XYZ which produces mobile phones. The company XYZ assumes that the
probability of a mobile phone being sent for warranty repairs is 2%. If XYZ’s revenue for
financial year 2018 is Rs.10,00,000, then the following discrepancy arises in the income
statement and the tax authority statement.
Deferred Tax Asset
In the example above, the difference obtained between the two taxes payable is the deferred tax asset.
The deferred tax asset in this case is (Rs.3,00,000 – Rs.2,94,000) = Rs.6,000
Deferred Tax Liability
It is a tax that is due for payment in the current period but has not yet
been paid. This means that the tax will eventually be due in future
periods.
Paying less tax today for paying more tax tomorrow.
Example:
The company XYZ assumes that a manufacturing machine that costs Rs.60,000 will last for 3
years and it pays a 30% tax on profits. However, regular financial accounting will take into
account the Rs.20,000 depreciation per year for the next 3 years. Hence, each year income is
reduced by Rs.20,000 and Rs.6,000 reduction in tax.
However, suppose the tax accounting allows depreciation in such a way that Rs.30,000 is the
depreciation in the first year, Rs.20,000 in the next and Rs.10,000 in the third year. So for the
first year, company can claim Rs.30,000 as depreciation and it gets a tax benefit of Rs.9000.
Although in doing so it creates a tax liability of:
• Rs.9,000 – Rs.6,000= Rs 3000
Provisions
• Provisions in Accounting are an amount set aside to cover a probable future expense, or
reduction in the value of an asset.
• Liability is known to exist but amount is not known. It is estimated with substantial accuracy.
• Examples of provisions include, Provision for doubtful debts, Provision for taxes, Provision
for employee benefits.
• Provision can be short term and long term.
Provisions created by HUL
Current Liabilities
The current liabilities section of a balance sheet shows the debts a
company owes that must be paid within one year.
• Examples of the descriptions used to report a company's current

liabilities include:
Short-term loans payable, Accounts payable/ Creditors, Accrued compensation

and benefits, Other accrued liabilities
Current Liabilities of HUL
Current Vs Non Current Liability
Contingent Liability
Example:
• If you took an educational loan of Rs 10,00,000 from your bank to
fund your child’s higher studies. That amount could well become a
contingent liability if your child fails to make monthly payments after
getting a job. You might have to pay the amount because you have
taken the loan from your bank.
• Example- Guarantees given by a company, Product warranty,

Adverse judgment in cases regarding any financial dispute
Explanation
• Lease Liability
• means the obligation of such person, as lessee, to pay rent or other
payment amounts under a lease of real or personal property which
is accounted for as a lease liability on a consolidated balance sheet
Poll
Identify from the following statements which does not define current
liabilities?
A. Payment owned to creditors

B. Expense accrued but not yet paid
C. Liability due for payment with in a span of six months
D. Employee related liability for five years
•D
Important items of Balance Sheet (Assets)
Noncurrent assets are a company’s long-term investments that have a longer

useful life and cannot be converted to cash easily. They are required for the
long-term needs of a business and include things like land and heavy
equipment. These are adjusted for Depreciation.
• Noncurrent assets may include items such as:

• Land
• Property, plant, and equipment (PP&E)
• Trademarks
• Goodwill
Non current asset HUL
Property, Plant & Equipment
Other Intangible Assets
Investments in Subsidiaries
Current assets
A current asset is an asset that a company holds and

can be easily sold or consumed and further lead to the
conversion of liquid cash.
 For a company, a current asset is an important factor as
it gives them a space to use the money on a day-to-day
basis and clear the current business expenses.
 In other words, the meaning of current assets can be
explained as an asset that is expected to last only for a
year or less is considered as current assets.
Current asset HUL
Inventory
Current asset HUL
Trade Receivables (Debtors)
Current asset HUL
Cash & Cash Equivalents
Current asset HUL
Other Current Assets- Assets held for sale
Poll
When Nils Bohlin (Engineer) started his job at Volvo’s safety department, his task
was to make the cars safer. He succeeded and created a seat belt having three
points and it started to be used in Volvo’s cars in 1959. According to Volvo’s
calculations, the three-point seat belt has saved hundreds of thousands of lives.
Volvo filed for a patent for this seat belt. Identify the category of the asset created
by Volvo?
A. Current Asset
B. Fixed Asset
C. Intangible Asset
D. Investment
Thank You

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Lecture-6

Dr. ARPIT SIDHU

Non Current/Long term Liability

Current/Short Term Liability

Deferred Tax Asset/ Liability (Business Loss, Differences in

2. Debt Financing (Other Non current Financial Liability)-

• Debentures are a debt instrument used by companies and government to

• means all liabilities, losses, Claims, Damages, costs and expenses

Identify the false statement in the context of debenture?

(A) Debenture is written instrument under common seal of company

• Examples of the descriptions used to report a company's current

Short-term loans payable, Accounts payable/ Creditors, Accrued compensation

• Example- Guarantees given by a company, Product warranty,

A. Payment owned to creditors

Noncurrent assets are a company’s long-term investments that have a longer

• Noncurrent assets may include items such as:

A current asset is an asset that a company holds and

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