8.4 – A brief on the financial statements

As you can see, ARBL has consumed Rs.344.8 Crs in its investing activities. This is quite intuitive as investing activities tend to consume cash. Also, remember healthy investing activities foretells the investor that the company is serious about its business expansion. Of course, how much is considered healthy and how much is not, is something we will understand as we proceed through this module.

ARBL consumed Rs.53.1Crs through its financing activities. If you notice the bulk of the money went in paying dividends. Also, if ARBL takes on new debt in the future, it would increase the cash balance (remember the increase in liabilities, increases cash balance). We know from the balance sheet that ARBL did not undertake any new debt.

This means the company consumed total cash of Rs. Crs for the financial year 2013 -2014. Fair enough, but what about the cash from the previous year? As we can see, the company generated Rs. Crs through all its activities from the previous year. Here is an extract from ARBL’s cash flow statement:

Look at the section highlighted in green (for the year 2013-14). It says the opening balance for the year is Rs.Crs. How did they get this? Well, this happens to be the closing balance for the previous year (refer to the arrow marks). Add to this the current year’s cash equivalents (Rs.) Crs along with a minor forex exchange difference of Rs.2.58 Crs we get the company’s total cash position which is Rs. Crs. This means, while the company guzzled cash every year, they still have adequate cash, thanks to the previous year’s carry forward.

Note, the closing balance of 2013-14 will now be the opening balance for the FY 2014 – 15. You can watch out for this when ARBL provides its cash flow numbers for the year ended 31 st .

1. What does Rs. Crs actually state?
   1. This literally shows how much cash ARBL has in its various bank accounts.
2. What is cash?
   

   While the Cash flow and P&L statement are prepared on a standalone basis (representing the given year’s financial position), the Balance Sheet is prepared on a flow basis

   1. Cash comprises cash on hand and demand deposits. Obviously, this is a liquid asset of the company.
3. What are liquid assets?
   

   While the Cash flow and P&L statement are prepared on a standalone basis (representing the given year’s financial position), the Balance Sheet is prepared on a flow basis

   1. Liquid assets are assets that can be easily converted to cash or cash equivalents.
4. Are liquid assets similar to ‘current items’ that we looked at in the Balance sheet?
   

   While the Cash flow and P&L statement are prepared on a standalone basis (representing the given year’s financial position), the Balance Sheet is prepared on a flow basis

   1. Yes, you can think of it that way.
5. If cash is current and cash is an asset, shouldn’t it reflect under the Balance sheet’s current asset?
   

   While the Cash flow and P&L statement are prepared on a standalone basis (representing the given year’s financial position), the Balance Sheet is prepared on a flow basis

   1. Exactly and here it is. Look at the balance sheet extract below.

Clearly, we can now infer that the cash flow statement and the balance sheet interact with each other. This is in line with what we had discussed earlier, i.e. all the three financial statements are interconnected.

Over the last few chapters, we have discussed the company’s three important financial statements, i.e. the P&L statement, the Balance Sheet and the Cash Flow statement of the company.

The P&L statement discusses how much the company earned as revenues versus how much the company expanded in terms of expenses. The company’s retained earnings, also called the surplus of the company, are carried forward to the balance sheet. The P&L also incorporates the depreciation number. The depreciation mentioned in the P&L statement is carried forward to the balance sheet.

The Balance Sheet details the company’s assets and liabilities. On the liabilities side of the Balance sheet, the company represents the shareholders’ funds. The assets should always be equal to the liabilities; only then do we say the balance sheet has balanced. One of the key details on the balance sheet is the cash and cash equivalents of the firm. This number tells us how much money the company has in its bank account. This number comes from the cash flow statement.