“Funds flow statement is only supplementary to P/L Account and Balance Sheet, it can not substitute to P/L Account and Balance Sheet”. Do you agree to this statement? Explain your views.
: Overview of the financial statements
financial statements from two different angles:
From the maker’s perspective
From the user’s perspective
A maker prepares the financial statements. He is typically a person with an accounting background. His job involves preparing ledger entries, matching bills and receipts, tallying the inflows versus the outflows, auditing etc. The final objective of the is to prepare transparent financial statements which best represents the true financial position of the company. To prepare such a financial statement certain skills are required, usually these skills are developed through the rigor of a Chartered Accountant’s training program.
The user on the other hand just needs to be in a position to understand what the maker has prepared. He is just the user of the financial statements. He need not really know the details of the journal entries or the audit procedure. His main concern is to read what is being stated and use it to make his decisions.
To put this in context, think about Google. Most of us do not understand Google’s complex search engine algorithm that runs in the backend, however we all know how to use Google effectively. Such is the distinction between the maker and the user of financial statements.
A common misconception amongst the market participants is that, they believe the fundamental analyst needs to be thorough with concepts of financial statement preparation. While knowing this certainly helps, it is not really required. To be a fundamental analyst, one just needs to be the user and not the maker of the financial statements.
There are three main financial statements that a company showcases to represent its performance.
The Profit and Loss statement
The Balance Sheet
The Cash flow statement
Over the next few chapters we will understand each of these statements from the user’s perspective.
4.2 – The Profit and Loss statement
The Profit and Loss statement is also popularly referred to as the P&L statement, Income Statement, Statement of Operations, and Statement of Earnings. The Profit and Loss statement shows what has transpired during a time period. The P&L statement reports information on:
The revenue of the company for the given period (yearly or quarterly)
The expenses incurred to generate the revenues
Tax and depreciation
The earnings per share number
From my experience, the financial statements are best understood by looking at the actual statement and figuring out the information. Hence, here is the P&L statement of Amara Raja Batteries Limited (ARBL). Let us understand each and every line item.
The Top Line of the company (Revenue)
You may have heard analysts talk about the top line of a company. When they do so, they are referring to the revenue side of the P&L statement. The revenue side is the first set of numbers the company presents in the P&L.
The header clearly states:
- The statement of P&L for the year ending March 31, 2014, hence this is an annual statement and not a quarterly statement. Also, since it is as of March 31st 2014 it is evident that the statement is for the Financial Year 2013 – 2014 or simply it can be referred to as the FY14 numbers
- All currency is denominated in Rupee Million. Note – 1 Million Rupees is equal to Ten Lakh Rupees. It is upto the company’s discretion to decide which unit they would prefer to express their
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