Part 1 : Foundations of

Finance
Chapter 1 : Basics of Economics
Chapter 2 : Banking in India
Chapter 3 : Orientation on Financial Statements
Chapter 4 : Basics of Financial Planning

Dr. Rakesh Nadig H S M.Com., MBA., M.Phil., SLET., Ph.D.

SOC, SJCC
 Part 1 : Foundations of
Finance
Chapter 1 : Basics of Economics
• Sahara India Pariwar Scam
• Overview: Sahara Group collected deposits from millions of small
investors under various schemes, promising high returns. The
company operated largely in unregulated sectors, and investors were
unaware of the associated risks.
• Impact: The Securities and Exchange Board of India (SEBI) later
ordered Sahara to return over $3 billion to investors. The complexity
of the case highlighted how lack of financial awareness among rural
and low-income investors allowed for the exploitation of millions.
• Financial Literacy Aspect: Many small investors were unaware of SEBI
regulations and didn’t understand the difference between regulated
and unregulated investment schemes.
Saradha Group Chit Fund Scam
Overview: This Ponzi scheme targeted low-income investors across
West Bengal and neighboring states, promising unusually high returns
through chit fund investments.
Impact: Saradha Group raised an estimated $5 billion from investors
before collapsing. Thousands of investors lost their savings, many of
whom were financially vulnerable and depended on informal savings.
Financial Literacy Aspect: Many investors were unaware of the risks of
Ponzi schemes or the importance of regulated investment vehicles. They
were swayed by promises of quick returns, lacking knowledge of due
diligence practices for investments.
Pearl Agrotech Corporation Limited (PACL)
Overview: PACL ran a large-scale Ponzi scheme in the guise of real
estate and agricultural land investments. It promised high returns on
land investments, primarily targeting rural and semi-urban
populations.
Impact: Over 58 million investors lost money in the scheme, which
SEBI ultimately declared illegal. SEBI ordered PACL to refund an
estimated $8.1 billion to investors.
Financial Literacy Aspect: Most investors lacked understanding of real
estate investments and regulatory oversight. This scam exploited
people’s trust in land ownership as a “safe” investment, as well as
their lack of knowledge about fraudulent investment schemes.
GainBitcoin Cryptocurrency Scam
Overview: Promoted by Amit Bhardwaj, this scheme promised fixed
monthly returns through Bitcoin investments. However, it was a Ponzi
scheme, with returns paid from new investments.
Impact: Over 8,000 people lost money, totaling around $300 million.
Cryptocurrency's lack of regulation further complicated recovery.
Financial Literacy Aspect: Financial literacy in cryptocurrency and
blockchain could have helped investors recognize the risks and red
flags. Misunderstanding the nature of cryptocurrency investments led
many to falsely believe in guaranteed returns.
Introduction
The word “economics” is derived from the ancient Greek work
“oikomikos” or “oikonomia” meaning “the task of managing a
household”.
Economics seeks to determine the most logical and effective use of
resources to meet private and social goals.
Production and employment, investment and savings, health,
money and the banking system, government policies on taxation
and spending, International trade, industrial organization and
regulation, urbanization, environmental issues and legal matters
(such as the design and enforcement of property rights) are some of
the concerns at the heart of the science of economics
• Adam Smith – Often considered the father of modern economics, Smith defined
economics as the study of "an inquiry into the nature and causes of the wealth
of nations." This approach focuses on wealth creation and how nations can grow
and prosper.
• Alfred Marshall – Marshall, a prominent British economist, defined economics as
"a study of mankind in the ordinary business of life." He emphasized economics
as the study of individuals and societies managing limited resources to fulfill their
needs, blending social science with market analysis.
• Lionel Robbins – Robbins offered a widely accepted modern definition, stating
that economics is "the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses." This definition
focuses on the concepts of scarcity, choice, and opportunity cost.
• John Maynard Keynes – Keynes, known for his work in macroeconomics, defined
economics broadly as the study of "the administration of the resources and
wealth of a country." This definition emphasizes the importance of managing
resources to achieve macroeconomic stability.
Key Economic Terms
• Income: The money received regularly for work or through investments, typically from
employment, business activities, or government benefits.
• Expenditure: The total amount of money spent on goods, services, or investments.
• Savings: The portion of income that is not spent on immediate expenses. It is calculated
as:
Savings = Income – Expenditure
• Factors of Production: The resources used to produce goods and services. There are four
main factors:
• Land: Natural resources used in production, such as soil, water, minerals, and forests.
• Labour: The human effort (physical and mental) used in the production process.
• Capital: The tools, equipment, and machinery used to produce goods and services.
• Entrepreneurship: The ability and willingness to take risks and organize the other factors
of production to create and run businesses. Entrepreneurs combine land, labor, and
capital to produce goods and services.
Gross Domestic Product

Gross Domestic Product (GDP) is the total monetary value of all final goods
and services produced within a country's borders in a specific time period,
typically a year or a quarter.

GDP measures how much a country produces and earns. It's like the "report
card" of a country's economy, showing how big or small the economy is and
how well it is performing.
 Comparing India's GDP with other major economies in 2024:

Country Nominal GDP (USD Trillion)

United States 25.43
China 14.72
Japan 4.25
Germany 3.85
India 3.41
United Kingdom 2.67
France 2.63
Russia 2.24
Canada 2.16
Italy 2.04
Country 2024 GDP Growth Rate (Projected) Notes
Strong growth due to domestic
India 6.3% demand, services sector strength,
and government investments.
Growth slowdown due to
China 4.5% - 5% structural changes and external
trade challenges.
Slower growth with inflation
United States 1% - 2% control and tight monetary
policies.
Modest growth impacted by
European Union 1% - 2% inflation and energy market
disruptions.
Stagnant growth due to aging
Japan ~1% population and limited workforce
expansion.
 Time Value of Money

A Bird in the Hand is Worth Two in the Bush

Money left idle is like a candle left burning—it will eventually disappear without
adding value

Inflation is the silent thief that robs your money of its power as time passes

Benjamin Franklin:
"Time is money.“

Warren Buffett:
"The rich invest in time, the poor invest in money.“

Albert Einstein:
"Compound interest is the eighth wonder of the world. He who understands it,
earns it; he who doesn’t, pays it."
Time Value of Money
• The time value of money (TVM) is a fundamental financial principle
that states a sum of money is worth more today than the same sum
will be at a future date. This is due to its potential earning capacity
through investment and the concept of opportunity cost.
• The money available at the present time is worth more than the
same amount in the future since it has the potential to ear returns.
All investors would prefer to receive the cash flow now, rather than
wait for a year, though the amount to be received has the same value.
This preference is attributed to the following reasons:
• Instinctive preference for current consumption over future
consumption.
• Ability to invest the amount received and earn a return so that it
grows in value to more than Rs.100 after one year.
The value associated with the same sum of money
received at various points on the timeline is called the time
value of money.
Since money has time value, it is not possible to compare cash flows
received in different time periods.
 Time Value of Money
Investment Type Initial Investment (₹) Annual Return (%) Compounding/Method Total Value (₹)
(₹)

Fixed Deposit 1,00,000 6% Quarterly Compounding 4,17,580 3,17,580

Price increase (₹4,400

Gold 1,00,000 Based on price growth ~13,63,636 ~12,63,636
to ₹60,000/10g)

Stock Market (Sensex) 1,00,000 ~12% Annual Compounding ~14,84,700 ~13,84,700

Real Estate 1,00,000 ~8% Annual Growth ~6,34,400 ~5,34,400

Bonds (Government) 1,00,000 ~7% Annual Compounding ~5,42,743 ~4,42,743

Mutual Funds 1,00,000 ~10% Annual Compounding ~10,83,471 ~9,83,471

Annual Growth
Cryptocurrency 1,00,000 ~20% (highly volatile) ~38,33,760 ~37,33,760
(approx.)

Public Provident Fund 1,00,000 ~7.1% Annual Compounding ~5,65,390 ~4,65,390

Time Value of Money
Consider the example:
Suppose the Rs.100 received now is placed in a one-year bank
deposit yielding 6.5% p.a. After year, the value would grow to
Rs.106.50.
When time values are taken into account, the following points need
to be noted:
• Future inflows are discounted by a relevant rate to reach their
present value (PV); this rate is known as the discount rate.
• Present inflows are increased at a relevant rate to reach their future
values (FV): this rate is known as the compound rate.
Time Value of Money
To find out the amount at the end of the period, on compound interest
basis, the following formula is used:
A = P {1 + (R / 100)\} ^ N)
A = Amount at the end of the period when interest is compounded annually
P = Principal at the beginning of the period (also the original investment
amount)
R = Rate of interest
N = No. of periods
Once the amount is calculated, we can then calculate the Compound
Interest (CI) using the following formula:
CI = A-P
A = Amount after applying compound interest
P = Principal amount
Compounding & Discounting , CAGR
Compounding is a technique used to calculate the future value of the present cash flows.

Discounting is a technique used to calculate the present value of the future cash flows

CAGR measures the annualized growth rate of an investment over a specified period,
assuming that profits are reinvested. It’s a smoothed growth rate that eliminates volatility.
The Compound Annual Growth Rate (CAGR) is the Rate of Return (RoR) that would be
required for an investment to grow from its beginning balance to its ending balance,
assuming the profits were reinvested at the end of each period of the investment’s life
span.
CAGR, or Compound Annual Growth Rate, is a measure used to express the average
annual growth rate of an investment, business, or metric over a specific period of time,
assuming the profits are reinvested at the end of each year. It smoothens out the growth
rate and gives you a single consistent rate of return.
Taxation – Direct & Indirect
Taxation is the levy or financial obligation imposed by the government
on its citizen or residents.
Types:
a) Direct Tax
b) Indirect Tax
Factors Influencing Decision Making in Investments
Business Environment factors impact how a business/ industry operates and generates
returns. These factors have an impact on the investment and their returns.
They can be divided into – Macro Environment and Micro Environment factors
Macro Environment Factors –
It comprises a range of external factors like:
1. Demographic factors
2. Technology factors
3. Natural and physical factors
4. Political and legal factors
5. Social and cultural factors
6. Economic Factors
7. Inflation (Indicators – Wholesale Price Index & Consumer Price Index)
8. Interest Rates (Boom phase – Hike Interest Rates, Recession period – Reduce Interest
Rates)
Factors Influencing Decision Making in Investments
Micro-Environment Factors
The micro environment of the organisation consists of those elements which are
controllable by the management.
Some of the key micro-environment business factors are listed below:
1) Customers
2) Suppliers
3) Competitors
4) The General Public
When it comes to investment decisions, the micro factors are focused on the individual’s
attributes like:
a) Desire, want and demand (aspiration, strong feeling, craving, ability to purchase)
b) Disposable personal income (DPI) (money an individual has to spend or save after
income taxes have been deducted)
c) Financial goals and their timing
 Part 1 : Foundations of Finance
Chapter 2 : Banking in India
Banking in India
DEFINITION OF BANKING
Banking Company: The Banking Regulation Act, 1949 defines "a banking
company as a company which transacts the business of banking in India
(Section 5 (C)".
Banking: Section 5(6) defines banking "as accepting for the purpose of
lending or investment of deposits of money from the public, repayable on
demand or otherwise and withdrew able by cheque , draft, order or
otherwise".
• Banking is considered to be the nerve centre of trade, commerce, and
business in a country. It plays a vital role in distributing the capital required
for the development of trade, industry and commerce.
• In other words, we may say that banking is the life- blood of modern
commerce. Bankers are not only dealers in money but also leaders in the
economic development of a country.
 Banking History in India
Ancient Period
• Indigenous Banking: Money lending was the primary banking activity carried out by private individuals or groups in
ancient India.
• Merchant Banking: Merchants offered credit to traders and lent money to kings for wars and infrastructure
development.
• Medieval Period
• Emergence of Hundis: Hundis, traditional financial instruments, were used as a form of credit or remittance during the
Mughal period.
• Role of Jagat Seths: Wealthy banking families like the Jagat Seths played a significant role in financing trade and political
affairs.
Colonial Period
• 1786 - Establishment of the First Bank: The General Bank of India, India's first bank, was established but failed within a
few years.
• 1806 - Bank of Calcutta: Later renamed Bank of Bengal, this was the first presidency bank established under British rule.
• 1840s - Presidency Banks: Three presidency banks (Bank of Bengal, Bank of Bombay, and Bank of Madras) were set up.
• 1921 - Formation of the Imperial Bank of India: The presidency banks were merged to form the Imperial Bank, which
later became the State Bank of India in 1955.
• 1935 - Establishment of the Reserve Bank of India (RBI): The RBI was created as India's central bank to regulate banking
and monetary policy.
Post-Independence Period
• 1949 - Banking Regulation Act: Empowered the RBI to regulate banks
and laid the foundation for a formal banking system.
• 1955 - Nationalization of the Imperial Bank: It was renamed the
State Bank of India to serve rural areas better.
• 1969 - Nationalization of 14 Major Banks: To promote financial
inclusion, the government nationalized 14 banks with large deposits.
• 1980 - Second Phase of Nationalization: Another six banks were
nationalized, bringing the total number to 20.
Need for Banking
1) Savings and Capital Formation
2) Channelization of Savings
3) Implementation of Monetary Policy
4) Encouragement of Industries
5) Regional Development
6) Development of Agriculture and Other Neglected Sectors
Functions of Bank
1. Acceptance of Deposit
2. Giving Advances/ Loans
3. Payment and Withdrawal
4. Ever increasing functions including agency and utility services
Types of Bank Deposits

Deposits

Demand Time
Deposits Deposits

Current Fixed
Account Deposit

Savings Recurring
Account Deposit
Types of Bank Deposits
 Current Account
 Savings Account
 Fixed Deposit
 Recurring Deposit
Non Resident Accounts
Foreign Currency (Non-Resident) Accounts (Banks) Scheme (FCNR
Accounts)
Deposit Insurance (PMJDY)
Insurance of Bank Deposits
• To assure the depositor about the security of their deposit in any type of account with banks, the Deposit
Insurance and Credit Guarantee Corporation was created by the Government of India in 1961, through an
act of parliament.
• Under this scheme, which came into effect from 1st January 1962, a depositor having a deposit in any bank,
which is not able to meet its liability of paying back the deposit amount to its depositors due to bankruptcy,
can approach the corporation for remedy.
• As per the provision of the act, the corporation will pay the aggrieved depositor a sum of Rs. 5 lac per
account in the same capacity.
• Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure access to
financial services, namely, a basic savings & deposit accounts, remittance, credit, insurance, pension in an
affordable manner.
• Under the scheme, a basic savings bank deposit (BSBD) account can be opened in any bank branch or
Business Correspondent (Bank Mitra).
Benefits under PMJDY
One basic savings bank account is opened for unbanked person
There is no requirement to maintain any minimum balance
Interest is earned on the deposit
RuPay debit card
Accident insurance cover of ₹1 lakh
Overdraft facility upto ₹10,000 poor eligible customers
PMJDY accounts are eligible for Direct Transfer(DBT), Pradhan mantri
Jeevan Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana
(PMSBY), Atal Pension Yojana (APY), Micro Units Developemnt and
Refinance Agency (MUDRA) Scheme
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
Objective:
To provide affordable life insurance coverage to individuals, particularly
from lower-income groups.
Key Features:
Coverage:
Life insurance coverage of ₹2 lakh in case of the subscriber's death (any cause).
Eligibility:
Individuals aged 18-50 years.
Must have a savings bank account linked with Aadhaar.
Premium:
₹436 per year (automatically debited from the savings account).
Pradhan Mantri Suraksha Bima Yojana (PMSBY)
Objective:
To provide accident insurance coverage for death or disability due to
accidents.
Key Features:
Coverage:
₹2 lakh for accidental death or total permanent disability.
₹1 lakh for partial permanent disability.
Eligibility:
Individuals aged 18-70 years.
Must have a savings bank account linked with Aadhaar.
Premium:
• ₹20 per year (automatically debited from the savings account).
Micro Units Development and Refinance Agency (MUDRA)
Loan Categories:
• Loans are provided under three categories, depending on the stage and
size of the business:
• Shishu: Up to ₹50,000 (for startups and early-stage enterprises).
• Kishor: Between ₹50,001 and ₹5,00,000 (for growing businesses).
• Tarun: Between ₹5,00,001 and ₹10,00,000 (for established businesses).
Eligibility:
• Entrepreneurs running small businesses, such as manufacturing, trading, or
services.
• Sectors covered include agriculture, handicrafts, food processing, retail,
and more.
No Collateral:
• MUDRA loans are collateral-free, making them accessible to small business
owners.
Traditional and New Age Banking

Traditional banks are well-established institutions with physical

presence, offering a full range of services.
Neo banks are digital-first, technology-driven banks with no physical
branches, focusing on lower fees and user-friendly mobile banking
services.
 Traditional and New Age Banking
Feature Traditional Banks Neo Banks
Sometimes slower due to legacy
Speed of Service Quick services via mobile and app
systems
Generally higher fees due to
Fees and Costs Lower fees due to lack of branches
overheads
Customer Experience In-person customer support 24/7 online and mobile support
Physical branches for in-person
Branch Presence No physical branches, online only
service
Primarily savings, payments, and
Services Full range of banking services
loans

Technology Older, sometimes slower systems Cutting-edge, tech-driven systems

Differences between Credit Card and Debit card
In India, as of 2024:
• Credit Cards: Approximately 10.1 crore cards in circulation.
• Debit Cards: Around 91.7 crore active cards.
The CIBIL score is a three-digit numerical representation of an individual's creditworthiness. It is issued by the
Credit Information Bureau (India) Limited (CIBIL),

Ideal CIBIL Score for Different Loans

Loan Type Recommended CIBIL Score

Home Loan 700 and above
Personal Loan 750 and above
Car Loan 700 and above
Credit Card Approval 750 and above
Business Loan 700 and above
Education Loan 650 and above
Digital Payment System
Payment and Settlement Systems in Indian Banking Sector in India, the RBI oversees the
payment systems.
The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS),
chaired by the Governor, RBI, spearheads this responsibility.
The creation of a new department viz., Department of Payment and Settlement Systems
(DPSS) by RBI in the year 2005 to focus exclusively on payment and settlement systems,
and subsequent legislation of the Payment and Settlement Systems Act, 2007 (PSS Act)
set the stage for a new era in the history of payment systems in the country.
The Bank for International Settlements' (BIS), Committee on Payments and Market
Infrastructures (CPMI) defines payment systems transactions to include the total
transactions undertaken by all payment systems in the country.
Digital Payment System
Considering this definition, payment systems transactions in India would comprise of transactions processed
and settled through:
a) Paper Clearing [Magnetic Ink Character Recognition (MICR), Non-MICR, Cheque Truncation System (CTS),
ExpressCheque Clearing System (ECCS)];
b) Bulk electronic transaction processing systems like Electronic Clearing Service (ECS), with its variants
Regional ECS and National ECS; National Automated Clearing House (NACH)-Debit and Credit;
c) Card Payments (Debit, Credit and Electronic);
d) Large Value [Real Time Gross Settlement (RTGS)];
e) Retail [National Electronic Funds Transfer (NEFT)];

f) Fast Payments [Immediate Payment Service (IMPS), Unified Payments Interface (UPI)]; and
g) e-Money [Prepaid Payment Instrument (PPI) Cards and Wallets)

Except (a) above and cash transactions, all other payments constitute digital transactions In addition to the
above payment and settlement systems, RBI has also institutionalised a well-established clearing and set-
lement system for Government Securities.
RBI – Reserve Bank of India
RBI was established on April 1, 1935 in accordance with the Reserve
Bank of India Act 1934.
The Preamble of the Reserve Bank of India describes the basic
functions of the Reserve Bank as:
"to regulate the issue of Bank notes and keeping of reserves with a view
to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage; to have a
modern monetary policy framework to meet the challenge of an
increasingly complex economy, to maintain price stability while keeping
in mind the objective of growth."
Board for Financial Supervision
• The Reserve Bank of India performs this function under the guidance
of the Board for Financial Supervision (BFS). The Board was
constituted in November 1994 as a committee of the Central Board
of Directors of the Reserve Bank of India.
• Primary objective of BFS is to undertake consolidated supervision of
the financial sector comprising commercial banks, financial
institutions and non-banking finance companies.
Main Functions of RBI
• Monetary authority:
Formulates, implements, and monitors the monetary policy.
Objective: Maintaining price stability while keeping in mind the objective of growth.
• Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country's banking and
financial system functions.
Objective: Maintaining public confidence in the system, protect depositors' interest and provide
cost-effective bank services to the public.
• Manager of Foreign Exchange:
Manages the Foreign Exchange Management Act, 1999.
Objective: Facilitating external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
Main Functions of RBI
• Issuer of currency:

Issues, exchanges and destroys currency notes as well as puts into circulation coins minted by Government of India.

Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

• Developmental role

Performs a wide range of promotional functions to support national objectives.

• Regulator and supervisor of payment and settlement systems:

Introduces and upgrades efficient mode of payment systems in the country to meet the requirement of public at large

Objective: Maintaining public confidence in the payment and settlement system.

• Related Functions

Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their
Banker to banks: maintains banking accounts of all scheduled banks.
 The process of issuing currency in India
Design and Denomination
• The design, security features, and denominations of Indian currency are determined jointly by the RBI and the
Government of India.
• The Ministry of Finance has the authority to approve the design on recommendations from the RBI.
Printing of Currency Notes
• Currency notes are printed in four presses located in:
• Nashik (Maharashtra)
• Dewas (Madhya Pradesh)
• Salboni (West Bengal)
• Mysuru (Karnataka)
Minting of Coins
• Coins are minted in four mints located in:
• Mumbai
• Kolkata
• Hyderabad
• Noida
Currency Distribution
• Once printed or minted, the currency is distributed through the RBI’s currency chests and branches of banks across the
country.
• The RBI ensures that enough currency is in circulation to meet the needs of the economy.
Reasons We Cannot Issue Unlimited Currency
Inflation Control:
• If too much currency is issued without corresponding economic growth or production of goods and services,
it leads to inflation. The value of money decreases, causing prices of goods to rise uncontrollably.

Backing of Currency (Minimum Reserve System):

• In India, currency issuance is governed by the Minimum Reserve System.
• The Reserve Bank of India (RBI) must hold a minimum reserve of ₹200 crores, with at least ₹115 crores in
gold and the rest in foreign securities, as backing for currency issuance.
 Key Policy Rates
Liquidity Rates/ Ratios
• Cash Reserve Ratio (CRR):
• The percentage of a bank's total deposits that must be maintained as reserves with
the Reserve Bank of India (RBI) in cash.
• Purpose: To ensure liquidity and control inflation.
• CRR funds do not earn interest for the banks.
• Statutory Liquidity Ratio (SLR):
• The percentage of a bank's net demand and time liabilities (NDTL) that must be
maintained in the form of cash, gold, or approved securities (e.g., government
bonds).
• Purpose: To maintain solvency and control credit expansion.
RBI Lending Rates
• Bank Rate:
• The interest rate at which the RBI lends money to commercial banks without
requiring collateral.
• Purpose: Used as a long-term monetary policy tool to regulate liquidity.
• Repo Rate:
• The interest rate at which the RBI lends funds to commercial banks in exchange for
securities (repurchase agreements) to manage short-term liquidity needs.
• Purpose: To control inflation and ensure sufficient funds in the banking system.
• Reverse Repo Rate
The Reverse Repo Rate is the interest rate at which the Reserve Bank of India (RBI)
borrows money from commercial banks.

• Marginal Standing Facility (MSF):

• A rate higher than the repo rate, allowing banks to borrow overnight funds from the
RBI in case of an emergency or severe liquidity shortage.
• Purpose: Acts as a last-resort borrowing mechanism for banks.
Lending/ Deposit Rates
• Base Rate:
• The minimum interest rate below which banks cannot lend to customers,
except in specific cases like government-sponsored schemes.
• Purpose: Ensures transparency in lending rates and fair borrowing costs.
• Savings Deposit Rate:
• The interest rate paid by banks to customers on their savings bank (SB)
accounts.
• Purpose: Encourages savings among individuals and serves as a low-cost
deposit for banks.
Part 1 : Foundations of Finance

Chapter 3 : Orientation to
Financial Statements
Introduction
Accounting
Stakeholders of a company
Key Financial Statements
• Income Statement (Profit and Loss Statement)
• Balance Sheet : Assets = Liabilities + Shareholder’s Equity
Cash flow statement
• Cash from operating activities (revenue generating activities like sale &
purchase of raw materials, goods, labour cost, advertising, shipping etc)
• Cash from Investing activities (purchase of P&M, assets, furniture)
• Cash from financial activities (loans, offering new shares etc)
Accounting Equation
Assets = Liabilities + Shareholder’s Funds

Shareholder’s Funds = Equity + Reserves & Surplus + Retained Earnings

of the year – Debit balance in P&L a/c (Losses, if any)

Retained Earnings = Earning After Tax – Dividend

Earnings After Tax = EBITDA – Interest – Taxes – Depreciation -

Amortization
Assets
• Tangible assets and Intangible assets
• Current assets and Non-current assets
Liabilities
• Current and Non-Current Liabilities
Expenses
• Revenue Expenditure
• Capital Expenditure
IMPORTANT RATIOS
Liquidity Ratios
• Companies use liquidity ratios to measure working capital
performance – the money available to meet your current, short-term
obligations .
• Simply put, companies need liquidity to pay their bills. Liquidity ratios
measure a company’s capacity to meet its short-term obligations and
are a vital indicator of its financial health.
IMPORTANT RATIOS
Liquidity Ratios

Quick ratio (Acid-test Cash ratio/Liquid Ratio

Current ratio ratio)
=
= =
Cash and cash
Current Assets / Current Current Assets – equivalents or Liquid
Liabilities Inventories / Current Assets / Current
Liabilities Liabilities
Leverage Ratios
• Companies often use short and long-term debt to finance business
operations. Leverage ratios measure how much debt a company has.
• A leverage ratio is any one of several financial measurements that
look at how much capital comes in the form of debt (loans) or
assesses the ability of a company to meet its financial obligations.
• The leverage ratio category is important because companies rely on
a mixture of equity and debt to finance their operations, and
knowing the amount of debt held by a company is useful in evaluating
whether it can pay off its debts as they come due.
IMPORTANT RATIOS

Leverage Ratios

Debt ratio Debt to equity ratio

= =
Total Debt / Total Total Debt / Total
Assets Equity
Efficiency Ratios
• The efficiency ratios are the financial ratios used to measure the
efficiency of the operation of a business.
• It measures an entity's ability to use its assets to cover its liabilities.
If the ratio is higher, the business is efficiently using its assets to cover
its liabilities. If the ratio is lower, the company is not covering its
liabilities with current assets and may have liquidity problems.
• Efficiency ratios show how effectively a company uses working
capital to generate sales.
• Efficiency ratios measure the ability of a business to use its assets
and liabilities to generate sales
IMPORTANT RATIOS

Efficiency Ratios

Asset turnover ratio Inventory turnover

= =
Net sales / Average Cost of goods sold /
total assets Average inventory
Profitability Ratios
• A business’s profit is calculated as net sales less expenses.
• Profitability ratios measure how a company generates profits using
available resources over a given period.
• Higher ratio results are often more favorable, but these ratios provide
much more information when compared to results of similar
companies, the company’s own historical performance, or the
industry average.
IMPORTANT RATIOS

Profitability Ratios

Return on Capital
Gross margin Net Margin Return on assets Return on equity Employed (ROCE)
Ration (ROA) (ROE)
= =
= = =
Gross profit / Net ROCE = Profit
sales Net Profit/ Total Net income / Net income / Before Interest
Sales Total assets Total equity and Tax / Total
Capital Employed
Market Value Ratios
• Market value ratios are used to measure how valuable a company is.
• These ratios are usually used by external stakeholders such as
investors or market analysts but can also be used by internal
management to monitor value per company share.
IMPORTANT RATIOS
Market Value
Ratios

Earnings per share Price earnings ratio

ratio (EPS) (P/E) Dividend yield ratio
= = =
Net earnings / Total Share price / Earnings Dividend per share /
shares outstanding per share Share price
FINANCIAL ANALYSIS
Trend Analysis

 It is a technique used to make future projections/ predictions based on the past data

 It usually enables the user of financial data points over a given period of time and identify uptrend or
downtrend

Trend analysis can show the following outcomes

• Consistency

• Inconsistency

 This trend analysis provide the key elements/ components that the management should focus on the
future.

 There are two types of trend analysis – horizontal analysis and vertical analysis
Horizontal Analysis
• Horizontal analysis, also known as trend analysis or time series
analysis, financial analysts look at financial trends over periods of
time—especially quarters or years.
• In horizontal analysis, you can compare figures from one time period
to figures from a base time period to get an overview of changes over
time.
• Analyzing financial trends over periods or years can help you track
how a company's financial state has changed, find patterns in its data
and spot potential problems and opportunities.
• The comparisions across the financial years/ periods can be done on
every timeline or ratios
Vertical Analysis (Common Size Analysis)
Vertical analysis, which is also known as common-size analysis, is similar to
horizontal analysis and can be performed on the same financial documents.
However, financial analysts perform vertical analysis vertically inside of a column
rather than horizontally across time periods.
Vertical analysis translates figures in financial statements to percentages of a
base figure, which has a value of 100%.
Percentage of Base = Amount of individual item/ amount of base item x 100
Using percentages can make the data easier to visualize and understand.
For income statement, common base is the total revenue
For balance sheet, common base item is total assets
Vertical analysis is used for the same financial period.
 Part 1 : Foundations of Finance

Chapter 4 : Basics of Financial

Planning
Introduction
Financial Planning includes all the activities that apply general
management standards to the financial resources of a firm such as
planning, directing, organizing, procurement of funds, investment,
and return of the funds
 Understand the Need for Financial Planning
• Financial planning aims at ensuring that a household has adequate income or
resources to meet current and future expens and needs.
• The regular income for a household may come from sources such as profession,
salary or businessFinancial planning refers to the process of streamlining the income,
expenses, assets and liabilities of the household to take care of both current and
future need for funds.
• There may be unexpected expenses which are not budgeted, such as a large medical
expense, or there may be needs in the future that require a large sum of money, such
as education of children or buying a home, all of which require adequate fund to be
made available at the right time.
• A portion of the current income is therefore saved and applied to creating assets
the will meet these requirements.The normal activities of a household and the
routine expenses are woven around the regular income.
• However, there are of charges that may also have to be met out of the available
income.
• The current income of the household must also provide for a time when there will
be no or low income being generated, such as in the retirement period.
Key Points of Financial Planning
Financial planning is a fundamental exercise towards securing financial
independence.
 It enables better management of personal financial situation
It is the exercise of ensuring that a household has adequate income or
resources to meet current and future expense and needs.
 It is a holistic approach that considers the existing financial position,
evaluates the future needs, puts a process to fund the needs and reviews
the progress.
It puts in place and action plan to realign the finances to meet financial
goals.
 It works primarily through identification of key goals
Sources of Income
• Income from Profession / Employment
• Income from Investments

Financial Goals
• Goal Value
Future Value (FV) of goal = Current Value of the goal x (1+rate of
inflation)^years to goal
• Time to Goal or Investment Horizon