Two perspectives can be used to view financial statements:
A maker prepares financial statements. A maker is usually an accountant. His duties include preparing ledger entries and matching bills and receipts, tally the inflows and outflows, as well as auditing. The final goal is to create transparent financial statements that accurately reflect the company's financial position. Certain skills are necessary to prepare such a statement. These skills are usually acquired through rigorous training programs for Chartered Accountants.
The user, on the other hand, needs to be able to comprehend what the maker has prepared. He is only the one who uses the financial statements. He doesn't need to know all the details about the audit procedures or journal entries. He is only interested in what is being said and how it can be used to help him make decisions.
Google is a good example of this. Google's backend search engine algorithm is complex and most of us don't understand it. We all know how Google works. This is how you can tell the difference between the user and the maker of financial statements.
Market participants often believe that the fundamental analyst must be proficient in financial statement preparation concepts. Although this knowledge is helpful, it is not essential. Fundamental analysts must be users, not financial statement makers.
A company must present three major financial statements to show its performance.
In the following chapters, we'll be able to understand each statement from the perspective of the user.
Popularly, the is also known as the Income Statement, P&L statement, or Statement of Operations. The Profit and Loss Statement shows what happened over a period of time. The P&L statement provides information about:
My experience has taught me that financial statements can be best understood by reading the actual statement and deciphering the information. Here is Amara Raja Batteries Limited's P&L Statement (ARBL). Let's look at each line item.
Analysts may have spoken of the company's top line. Analysts refer to the revenue side in the P&L statement when they say this. The company's first set of numbers in the P&L is the revenue side.
Let's first look at the revenue side before we get to the actual revenue.
The header clearly states:
The revenue side's first line item is the product Sales.
We know that we are dealing directly with a battery company. The Rupee value for all battery sales during FY14 is determined by the sale of products. The company's sales total Rs.38.041,270,000/-, or approximately Rs.3,804 Cr. In the previous financial year (i.e. FY13.
Note: I will recite all numbers in Rupee Crore because I find it easier to understand.
Next is the excise tax. This is the amount that the company would pay the government (Rs.400 Crs); therefore, the revenue must also be adjusted.
After the excise duty, the revenue is adjusted to the following: Net sales. ARBL's net sales for FY14 were Rs.3403 Crores. For FY13, the same was true for Rs.2943 Cros.
The company makes revenue through services, as well as the sale of products. This could be the annual battery maintenance. For FY14, the revenue from services sales was Rs.30.9Crs.
At Rs.2.1crs, the company also includes "other operational revenues". This could include revenues from the sale of products and services that do not core to its operations.
The company's final revenue comes from the sale of products and services, as well as other operating revenues. Total operating revenue. This figure is Rs.3436 Crs in FY14 and Rs.2959Crs in FY13. It is interesting to note that a note numbered 17 titled "Net Revenue From Operations" will allow us to examine this aspect more.
Remember, we discussed in the previous chapter notes and schedules for the financial statement.
Below is a snapshot of note 17.
These notes provide a detailed analysis of the splitting-up operation revenues(Does not include any other income details. You can see in the details that section 'a" talks about the division under sales of products.
You will notice that the P&L statement reports ARBL's 'Other Income' at Rs.45.5 Crs. Below is note number 18. It explains the meaning of the other income.
We can see that the income from other sources is income not directly related to the main business. This includes dividends, interest on bank deposits, insurance claims, royalties income, and dividends. The other income is usually a small part of the total income. An excessive amount of 'other income' is usually a red flag and should be investigated further.
We have FY14 total revenue of Rs.3482Crs if we add up the revenue from operations (Rs.3436 Cros) and other income(Rs.45 Cros).