FINANCIAL REPORTING & RATIO

ANALYSIS
What is Financial Reporting?
Financial reporting is the communication of important financial
information & other activities of the organization to various
stakeholders for helping them get the idea about the actual
financial position of the organization at any point in time.

According to International Accounting Standard Board (IASB),

the objective of financial reporting is “to provide information
about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range
of users in making economic decisions.”
 Objectives of Financial Reporting
 Highlight the achievements of the company on a periodic basis

 Provide financial information about the company 

 Convey a strategic roadmap for the future of the company

 To comply with statutory requirements

 To provide information about how the company is utilizing various resources available at its

disposal

 Used to market themselves by companies which depend on external funding

 What constitutes Financial Reporting
• Which include Balance sheet, Profit & loss statement, Statement of changes in Equity, Cash flow statement and notes to
accounts
Financial
statement

• This provides the independent opinion of the statutory auditor about financials of the company as well as accounting
policies used by the company. These includes comments of CAG Auditor through Supplementary Audit.
Auditors
Report

• It incorporates methods and accounting policies company is using to record its transactions
Notes to
accounts

• It provides information on the current position of the company vis-à-vis industry peers. One gets to know about industry
Manageme trends. It also contains information about future strategies and opportunities.
nt
discussion
& reporting

• It provides an explanation of the financial statements. It provides information about operational performance and major
highlights and achievements. During the bad performance period, it provides reasons for underperformance.
Director
report

• It provides information on the composition of the board of directors and their profile. It also talks about remuneration
Corporate paid to top management and compliance with other statutory requirements.
governance
report
Users of Financial Report
Presentation of Financial Statement (IND AS 1)
IND AS 1 describes financial statements as a structured representation of the financial
position and financials performance of an entity.
Objective of the financial statement is to provide useful information about the:
 Financial Position (Assets, Liabilities & equity)
 Financial Performance (Income, Expenses including gains and Losses)
 Cash Flows (Including Cash Equivalents)
 Notes to Accounts

Scope :-
 IND AS 1 applies in preparing and presenting general purpose financial statement
 Other IND AS set out recognition, measurement and disclosure requirements of
specific transactions and events
 IND AS 1 prescribes the basis for presentation of financial statements to ensure
comparability both with:
 Entity’s own financial statements of previous periods;
and
 Financial Statements of other entities.
Key Principles of Financial Statement :-

True and Fair Compliance with Going Concern

View IND AS

Accrual Basis of Materiality and Offsetting

Accounting Aggregation

Frequency of Comparative Consistency of

Reporting information Presentation
 True and Fair View :-

 IND AS 1 requires that financial statements ‘true and fair view of’ the financial
position, financial performance and cash flows of the entity.
 A Presentation of true & fair view requires an entity to select and apply
accounting policies as per IND AS 8.
 Cannot rectify inappropriate policy by disclosure or note
 If management concludes compliance with an IND AS is misleading and
conflicts with objective, departure from that Standard requires
 Comprehensive disclosure requirements
 Only if relevant regulatory framework requires or does not prohibit
 Extremely rare
 Compliance with IND AS :-

 IND AS 1 requires an explicit and unreserved statement of compliance with IND AS to

be included in the notes.
 Compliance with all the applicable IND AS’s.

 Going Concern :-
 An entity is a going concern unless:
 Cease business trading
 Intends to liquidate or no realistic alternative but to do so.
 Management shall make an assessment of an entity’s ability to continue as a going
concern
 When financials are not prepared on a going concern basis, the financial
statements should disclose that fact together with the reason why the entity is not
considered as a going concern.
 Accrual Basis of Accounting :-
 Financial statements (except the statement of cash flows) should be prepared under
the accrual basis of accounting.

 Assets, Liabilities, Equity, Income, and Expenses are recognized only when they meet
the definitions and recognition criteria in the ICAI Framework.

 Offsetting :-

 Assets, liabilities, also income and expenses, should not be offset except:
 When required or permitted by an IND AS.
 For Example:
 Revenue recognized is after offsetting trade discounts and volume rebates. The
same is allowed by IND AS.
 Gains / losses on disposal of non current assets with selling expenses for same
 Materiality :-
 Materiality concept states that accountants account for only those items that have an
impact on business .
 For example; accountant won’t bother if they lost 50 paise , since it has no impact on
the business.
 Materiality is highly relative.
 A Rs 1,000/- transaction might be material for a small pizza shop, but would be highly
insignificant for GAIL (India) Ltd.

 Frequency of Reporting :-

 As Per IND AS 1, a complete set of financial statements should be presented at

least annually.
 When there is change in the end of reporting period and presents for a period
longer or shorter than 1 year, an entity should disclose:
 Reason for using a longer or shorter period
 The fact that the amounts presented in the financials are not entirely
comparable
 Consistency :-
 IND AS 1 requires the presentation and classification of items in financial
statements to be consistent from one period to other unless:
 Change will result in more appropriate presentation due to change in
entity operations or another presentation would be more appropriate
having regard to criteria for selection and application of accounting
policies in Ind AS 8
 Change required by an IND AS / law.

 Other Key Points :-

 IND AS 1 requires the following information:
 Identify each financial statement and the notes presented (e.g., Balance
sheet)
 Name of reporting entity
 Whether financial statements relate to an individual entity or a group of
entities
 Reporting date and reporting period
 Presentation Currency
 Level of rounding used ( e.g ‘000s)
Structure of Financial Statements :-
 Balance Sheet :-
• At a minimum, the face of the statement of financial position should include line items that
present the following amounts:
a)Property, plant equipment
b)Investment property
c)Intangible Assets
d)Financial Assets (excluding amounts under “e, h and j” items below);
e)Investment accounted for under the equity method;
f)Biological Assets;
g)Inventories;
h)Trade and other Receivables;
i)Held for Sale non- current assets and disposal groups;
j)Cash & cash equivalents
k)Trade and other payables;
l) Provisions;
m) Financial liabilities (excluding k)
n) Current tax liabilities
o) Deferred Tax Liabilities and Assets;
p) Liabilities included in held for sale disposal groups;
q) Non controlling Interests;
r) Issued equity capital and reserves (attributable to owners of the parent).
Format of Balance Sheet as per Schedule III :-
 Statement of Profit or loss :-
 Profit & Loss Statement/Account shows the profits/losses earned/incurred
by a business for a month or a year. Companies use Profit & Loss
Statement for these below mentioned reasons.
Profit & Loss Statement/Account is prepared for two main reasons.
i. To know the profits/losses earned/incurred by a business,
ii. Statutory requirements (Companies Act, Partnership Act or any other
law).
 Traditionally, there were two steps to know the profit/loss. It meant, the
preparation of :
a. Trading Account
b. Profit & Loss Account
 Trading account reflects the gross profit or loss of the business. Profit &
Loss Account shows the net profit or loss earned by the company.
Format of Profit or Loss account as per Schedule
III :-
 Ratio analysis
• The purpose and importance of ratio analysis are to evaluate or analyze the financial
performance of the firm in terms of Risk, Profitability, Solvency, and Efficiency. It helps us
to compare the trends of two or more company over a period of time.
• Every stakeholder has different interests when it comes to the result from the financial like
the equity investors are more interested in the growth of the dividend payments and the
earnings power of the organization in the long run.

Advantages of financial ratios

(i) Ratios help in analyzing the performance trends over a long period of time.

(ii) They also help a business to compare the financial results to those of competitors.

(iii) Ratios assist the management in decision making.

(iv) They also point out problem and weak areas along with the strength areas.

(v) Ratios to help to develop relationships between different financial statement items.
(vi) Ratios have the advantage of controlling for differences in size. For example, two
businesses may be quite different in size but can be compared in terms of profitability,
liquidity, etc., by the use of ratios.
Liquidity ratio :-
Liquidity ratios analyze the ability of a company to pay off both its current liabilities as
well as their long-term liabilities as they become current.
Here are the most common liquidity ratio :-
 Current ratio
 Quick ratio
 Cash ratio

 Current ratio :- The current ratio is a liquidity and efficiency ratio that measures a

firm’s ability to pay off its short-term liabilities with its current assets.
The ideal current ratio is 2: 1. It is a stark indication of the financial soundness of a
business concern
Formula - Current ratio = current assets/current liabilities

GAIL’s Current Ratio = 1 : 0.91

 Acid test ratio/Quick ratio :- The quick ratio or acid test ratio is a liquidity
ratio that measures the ability of a company to pay its current liabilities when they
come due with only quick assets.
Ideally, the acid test ratio should be 1:1 or higher, however this varies widely by
industry. In general, the higher the ratio, the greater the company's liquidity.
Formula - Quick ratio = Quick Assets/Current liabilities
Where,
Quick assets = Current Assets – Inventory – Prepaid expenses
GAIL’s Quick Ratio = 1 : 1.17

 Cash ratio :- The cash ratio or cash coverage ratio measures a firm’s ability to pay off its
current liabilities with only cash and cash equivalents. The cash ratio is much more
restrictive than the current ratio or quick ratio because no other current assets can be used
to pay off current debt–only cash.
Formula - Cash ratio = (Cash + Cash equivalents)/ total current liabilities
GAIL’s Cash Ratio = 0.13 : 1

Where,
Cash equivalents = Cash equivalents are any short-term investment securities that have
maturity periods of 90 days or less.
Turnover ratio :-
A turnover ratio represents the amount of assets or liabilities that a company
replaces in relation to its sales. The concept is useful for determining the
efficiency with which a business utilizes its assets.

A high asset turnover ratio is considered good, since it implies that

receivables are collected quickly, fixed assets are heavily utilized, and little
excess inventory is kept on hand.

A low liability turnover ratio (usually in relation to accounts payable) is

considered good, since it implies that a company is taking the longest possible
amount of time in which to pay its suppliers, and so has use of its cash for a
longer period of time.
Most commonly used turnover ratio in a company/organisation :-
 Accounts receivables turnover ratio
 Inventory turnover ratio
 Fixed asset turnover ratio
 Accounts payable turnover ratio
 Accounts receivables turnover ratio :- Accounts receivable turnover is
an efficiency ratio or activity ratio that measures how many times a business can turn its
accounts receivable into cash during a period.
Formula - Receivables turnover ratio = (net credit sales/average accounts receivables)
GAIL – 16.39 in FY 18-19, compared to 13.63 in FY 17-18
 Inventory turnover ratio :- The inventory turnover ratio is an efficiency ratio that
shows how effectively inventory is managed by comparing cost of goods sold with average
inventory for a period. This measures how many times average inventory is “turned” or
sold during a period.
Formula - Inventory turnover ratio = cost of goods sold/average inventory
where,
COGS = Opening stock + Purchases - Closing stock
GAIL – 59.60 in FY 18-19, compared to 52.11 in FY 17-18
 Fixed asset turnover ratio :- The fixed asset turnover ratio is an efficiency ratio that
measures a companies return on their investment in property, plant, and equipment by
comparing net sales with fixed assets.
Formula - Fixed asset turnover = net sales/(fixed assets-accumulated depreciation)
GAIL’s Fixed Asset Turnover Ratio = 2.52 : 1
 Accounts payable turnover ratio :- The accounts payable turnover ratio
is a liquidity ratio that shows a company’s ability to pay off its accounts payable
by comparing net credit purchases to the average accounts payable during a
period.
Formula
Accounts payable turnover ratio = (Total Purchase/Average Accounts Payable)

Operating Performance :-
Operating performance is defined as measuring results relative to the assets used
to achieve those results. Efficiently for the purposes of this presentation could be
defined as the ratio of output performed by a process or activity relative to the
total required energy spent. This category is subjective in nature.
Operating performance ratio are of two types:-
• Operating efficiency ratio
• Profitability ratio
 Profitability ratio :- Profitability ratio is used to evaluate the company’s ability to
generate income as compared to its expenses and other cost associated with the
generation of income during a particular period. This ratio represents the final result of
the company.

There are some profitability ratio which are generally used in companies/organisation :-
 Return on Equity
  Earnings Per Share
  Dividend Per Share
  Price Earnings Ratio
 Return on Capital Employed
  Return on Assets
  Gross Profit
  Net Profit
 Return on equity :- This ratio measures Profitability of equity fund invested the
company.  It also measures how profitably owner’s funds have been utilized to generate
company’s revenues. A high ratio represents better the company is.
Formula - Return on equity = Profit after Tax ÷ Net worth
GAIL – 15.43% in FY 18-19, compared to 13.14% in FY 17-18
 Earning per share :- This ratio measures profitability from the point of view of the
ordinary shareholder. A high ratio represents better the company is.
Formula - Earning per share = Net Profit ÷ Total no of shares outstanding
GAIL – Rs 26.72 in FY 18-19, compared to Rs 20.48 in FY 17-18
 Dividend per share :- This ratio measures the amount of dividend distributed by the
company to its shareholders. The high ratio represents that the company is having surplus
cash.
Formula - DPS = Amount Distributed to Shareholders ÷ No of Shares outstanding
GAIL – Rs 7.69 in FY 18-19, compared to Rs 7.76 in FY 17-18
 Price earnings ratio :- This ratio is used by the investor to check the undervalued
and overvalued share price of the company. This ratio also indicates Expectation
about the earning of the company and payback period to the investors.
Formula - Price earning ratio = Market Price of Share ÷ Earnings per share
GAIL – 12.99 in FY 18-19
 Return on capital employed :- This ratio computes percentage return in the
company on the funds invested in the business by its owners. A high ratio represents
better the company is.     
Formula - Return on capital employed = Net Operating Profit ÷ Capital Employed × 100
Capital Employed = Equity share capital, Reserve and Surplus , Debentures, long-term loans
Capital Employed = Total Assets – Current Liability
GAIL – 18.07% in FY 18-19, compared to 15.38% in FY 17-18
 Return on assets :- This ratio measures the earning per rupee of assets invested in
the company. A high ratio represents better the company is.
Formula - Return on assets = Net Profit ÷ Total Assets
GAIL – 10.18% in FY 18-19

 Net profit :- This ratio measures the overall profitability of company considering all
direct as well as indirect cost. A high ratio represents a positive return in the company
and better the company is.
Formula - Net profit ratio = (Net Profit ÷ Sales) × 100
Net Profit = Gross Profit + Indirect Income – Indirect Expenses
GAIL – 8.60% in FY 18-19
GAIL’s – Key Financial Indicators
 Net Worth Per Rupee of Paid-Up Capital (Rs) =
Net Worth / Equity Share Capital
30.00

25.00 24.20
22.77

20.00 19.13
17.32
15.58
15.00

10.00

5.00

0.00
2014-15 2015-16 2016-17 2017-18 2018-19

Higher the Better

 Debt to Equity Ratio = Debt / Equity
0.35
0.33
0.30
0.26
0.25

0.20

0.16
0.15

0.10

0.06
0.05
0.03
0.00
2014-15 2015-16 2016-17 2017-18 2018-19

Lower the Better

 Return On Capital Employed (%) = PBIT / Capital
Employed
20.00
18.00 18.07
16.00
15.38
14.00
12.00 12.55
11.07
10.00
8.00 8.18
6.00
4.00
2.00
0.00
2014-15 2015-16 2016-17 2017-18 2018-19

Higher the Better

 Return on Net Worth (%) = PAT / Net Worth
18.00
16.00
15.43
14.00
13.14
12.00
10.52 10.83
10.00
8.00
7.25
6.00
4.00
2.00
0.00
2014-15 2015-16 2016-17 2017-18 2018-19

Higher the Better

GAIL’s EBIT data of respective years
GAIL’s EPS & DPS of respective financial years
GAIL’s Return on equity & capital employed
GAIL’s Profitability of respective years
GAIL’s Financial Statement as per Schedule III :-

 For Financial Year 2018-19 :-

 GAIL Balance Sheet
 GAIL Profit & Loss Statement
Thank You !