Table of Contents

1 - Basic terminology

2 - Income Statement

2.1 - Revenue

2.2 - Cost of Good Sold

2.3 - Gross Profit

2.4 - Operating Expenses

2.5 - Operating Profit / loss (EBIT) and (EBITDA)

2.6 - Non- Operating Expenses/ Income

2.7 - Profit/loss before Tax (PBT/EBT)

2.8 - Net Income

3 – Balance Sheet

3.1 – Assets

3.1.1 - Non-Current assets

[Link] – Tangible assets (Plant, Property and Equipment, Land etc.)

[Link] – Intangible assets (Goodwill, Trademark etc.)

[Link] – Deferred tax assets

[Link] – Long term investments

[Link] – Other non-current assets

3.1.2 – Current assets

[Link] – Cash and cash equivalents

[Link] – Inventory

[Link] – Short term investments

[Link] – Trade receivables and other receivables

[Link] – Other current assets

3.2 – Liability

3.2.1 – Non-current liabilities

[Link] – Long term financial borrowings

[Link] – Long term lease liabilities

 [Link] – Deferred tax liability

[Link] – Other non-current liabilities

3.2.2 – Current liabilities

[Link] – Trade and bills payable

[Link] – Short term borrowings

[Link] – Other current liabilities

3.3 – Equity

3.3.1 – Share capital

3.3.2 – Reserves

3.3.3 – Retained earnings

3.3.4 – Comprehensive income

3.3.5 – Non controlling interest

3.3.6 - Additional Paid-in Capital

3.3.7 – Treasury stock

4 – Cash flow statement

4.1 – Cash flow from operating activities (In direct and direct)

4.1.1 - Adjustments for non – cash expenses

4.1.2 – Change in working capital

4.2 - Cash flow from investing activities

4.3 - Cash flow from financing activities

 1 - Basic Terminology

Financial Statements - Financial statements are formal accounting reports that show a business’s
financial performance, financial position, and cash flow over a period of time. Companies prepare
financial statements for different time periods so that stakeholders can track performance regularly and
annually.

Type of financial statements

 Annual financial statements – Annual Financial Statements are the complete, official financial
reports that a company prepares once every financial year to show its overall financial
performance and position.
 Quarterly Financial Statements - Quarterly Financial Statements are financial reports prepared
for a three-month period (one quarter of a financial year) to show a company’s short-term
performance and financial position.

Financial year/Fiscal year/Budget year - A Financial Year (FY) is a 12-month accounting period used by
businesses and governments to record, report, and assess financial performance. It does not always
match the calendar year and is chosen for accounting, tax, and reporting purposes. Common Financial
Year Examples – India FY 2024–25 (1 Apr 2024 to 31 Mar 2025)

Form 10 K - Annual report filed with the SEC. Form 10-K is a U.S. SEC filing that publicly traded
companies must submit once every year. It provides a comprehensive, detailed picture of a company’s
business, financial performance, and financial position.

Form 10 Q - Quarterly financial report filed with the SEC. Form 10-Q is a U.S. SEC filing that publicly
traded companies must submit every quarter to report their financial performance and position for that
three-month period.

Subsidiary company - A Subsidiary Company is a company that is controlled by another company,

called the Parent (or Holding) Company

Parent company - A Parent Company (also called a Holding Company) is a company that controls one
or more other companies, known as subsidiaries

Consolidated financial statements - Consolidated statements combine the parent company and its
subsidiaries into one set of financial statements

Standalone financial statements - Standalone financial statements are the financial statements of one
single legal entity only, without combining or merging the financials of its subsidiaries

Example of Consolidated and Standalone financial statements in a report –

Tata Motors annual report 2024-25.

Source link - [Link]

Page number for Consolidated statements – 312

Page number for Standalone statements - 437

Depreciation - Depreciation is the systematic allocation of the cost of a tangible fixed asset over its
useful life. Examples of depreciable assets – Plant and machinery, buildings, vehicles, furniture and
equipment.

Methods of Depreciation – Straight line method, Written down value/declining balance, unit of production
method, Sum-of-the-Years'-Digits etc.

Amortization - Amortization is the systematic allocation of the cost of an intangible asset over its useful
life. Example of amortizable assets - Software, patents, trademarks etc.
Inventory valuation - is the accounting process of determining the monetary value of inventory (raw
materials, work-in-progress, and finished goods) that a company holds at the end of an accounting
period.

Common inventory valuation methods are –

 FIFO (First-in, first-out)

 LIFO (Last-in, first out)
 WAC (Weighted average cost)

2 – Income Statement

Income Statement (also called a Profit & Loss Statement or P&L) is a financial statement that shows a
company’s financial performance over a specific period of time. It shows revenue, expenses, profit and
loss for a during a period.

Income Statement Flow

Revenue / Sales

(+ Other Operating Revenue)

= Total Operating Revenue

– Cost of Goods Sold (COGS / Cost of Sales / Direct Cost)

= Gross Profit

– Operating Expenses (Selling, Administrative, R&D, Depreciation & Amortization)

= Operating Profit (EBIT)

± Non-Operating Income / Expenses (Interest, investment gains/losses, forex, etc.)

= Profit Before Tax (PBT / EBT)

– Income Tax Expense

= Net Income / Profit After Tax (PAT)

Attributable to:

• Owners of the Parent

• Non-Controlling Interest (in consolidated statements)

Example - Tata Motors annual report 2024-25

Source link - [Link]

Page number for Income statement - 312

2.1 – Revenue - total income a company earns from its normal business activities during a specific
period. Example – Sale of product, Sales of services, subscriptions income etc.

Other operating income - refers to income earned from regular business activities that are not part of
the company’s main sales of goods or services but are still operational in nature.

Other income - Other Income is income earned by a company that is not from its core operating
activities. It arises from incidental or non-operating sources.

2.2 – Cost of goods sold/cost of sales/Direct cost (COGS) - represents the direct costs incurred to
produce or purchase the goods or services that a company sells during a period. Example -

For manufacturing companies - Raw materials consumed, Direct labor, factory overheads

2.3 – Gross Profit - Gross Profit is the profit a company earns after deducting the direct costs of
producing or purchasing the goods or services it sells.

Gross Profit = Revenue − Cost of Goods Sold (COGS)

2.4 – Operating expenses - Operating expenses (OPEX) are the costs a company incurs to run its day-
to-day business operations, excluding direct production costs (COGS) and non-operating items.

Common types of operating expenses are -

 Selling expenses – Advertising and marketing, sales commission, Distribution expenses

 Administrative expenses – Office salaries, wages, rent, utilities, legal and professional fees
 Research and development expenses

What not included in operating expenses –

 Cost of goods sold / Direct expenses

 Interest expenses
 Income tax
  Loss on sale of assets

2.5 – Operating profit/loss (EBIT) - Operating Profit / Loss (EBIT) stands for Earnings Before Interest
and Taxes and measures a company’s profitability from its core business operations.

EBIT = Profit generated from operations before deducting interest and tax

EBIT = Revenue – COGS – Operating expenses

What EBIT Includes

 Revenue

 Other operating revenue

 Operating expenses

 Depreciation and amortization (Operating)

Excludes

 Interest and tax

EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization

EBITDA shows profit from core operations before interest, tax, depreciation, and amortization.

EBITDA = EBIT + Depreciation + Amortization

EBIT includes depreciation and amortization, while EBITDA excludes them to show operating
performance before non-cash charges.

2.6 – Non-Operating expenses/income - gains or costs that arise from activities not related to a
company’s core business operations. They come from peripheral or incidental activities, not from normal
business operations.

Common type of non-operating income –

 Interest income
 Dividend income
 Profit on sale of investments
 Gain on sale of fixed assets

Common type of non-operating expenses –

 Loss on sale of fixed assets

 Interest expenses on loan and borrowings
 One-time penalties or fines
 Loss on investments
 Foreign exchange losses
2.7 – Profit before tax/ Earnings Before Tax (PBT/EBT) - is the profit a company earns after accounting
for all expenses except income tax.

PBT = EBIT + Non-operating Income – Non-operating expenses

PBT = Revenue – All expenses (Except tax)

2.8 - Net Income (NI) / Net profit - is the final profit a company earns after deducting all expenses,
including taxes

Some key metrics from income statements –

 Gross Margin = Gross Profit / Revenue

 Operating Margin/ EBIT Margin = EBIT / Revenue
 EBITDA Margin = EBITDA / Revenue
 Net Profit Margin = Net Income / Revenue
 Earnings per share (EPS) = Net Income – Preference dividends / No. of outstanding shares
 Price-to-Earnings Ratio (P/E Ratio) = Market Price per Share / Earnings per Share (EPS)
o The P/E Ratio measures how much investors are willing to pay for ₹1 of a company’s
earnings.
 Enterprise Value to EBITDA (EV/EBITDA) = Enterprise Value / EBITDA
o Enterprise Value = Market Capitalization + Total debt + preference shares + non-
controlling interest – cash and cash equivalents
o It shows how much investors are paying for a company’s operating performance,
independent of capital structure.
 3 – Balance Sheet

A Balance Sheet is a financial statement that shows a company’s financial position at a particular point
in time.

The balance sheet has three main components:

 Assets
 Liabilities
 Equity (Shareholder’s fund)

Balance Sheet Equation

Assets = Liability + Equity

3.1 – Assets - Assets are resources owned or controlled by a company that are expected to provide future
economic benefits. There are two main categories of assets –

 Non-current assets
 Current assets

3.1.1 – Non-Current assets / fixed assets - are long-term assets that a company expects to use for
more than one year to run its business and generate revenue. Main type of non-current assets are – Plant
and machinery, Land, Deferred tax assets, long term financial assets.

Some common types of non-current assets

[Link] – Tangible assets - Tangible assets are assets that have a physical form and can be seen
and touched. Example – Land, Plant & machinery, Building

Tangible assets are depreciated to reflect their gradual consumption and loss of economic value
over their useful life.

Land is a tangible asset but is not depreciated because it does not lose value due to usage.

[Link] – Intangible assets - Intangible assets are non-physical assets that a company owns or
controls and that provide future economic benefits, even though they cannot be seen or touched.
Example – Software, Patents, Goodwill etc.

Intangible assets are amortized to reflect their gradual consumption and loss of economic value
over their useful life.

Goodwill is not amortized because it does not have a definite useful life; instead, it is tested for
impairment.

[Link] – Deferred tax assets - Deferred Tax Assets represent future tax benefits that a company
expects to realize in later periods. They arise due to temporary differences between accounting
income and taxable income, or from unused tax losses or credits.

A deferred tax asset means the company has paid or recognized more tax now and will pay less
tax in the future.

[Link] – Long term investments - Long-term investments are financial assets held for more
than one year to earn long-term returns or strategic benefits. Example – Long term debt
instruments, Investment properties etc.

[Link] – Other non-current assets - Other non-current assets are long-term assets that do not
fit into the main categories like Property, Plant & Equipment (PPE), Intangible Assets, or Long-
term Investments, but are expected to provide economic benefits beyond one year. Examples –
Deferred expenses (Long term), Long term advances, long term receivables

3.1.2 – Current assets – Current assets are short-term assets that a company expects to convert into
cash, sell, or consume within one year or within its normal operating cycle, whichever is longer.

Some common types of current assets

[Link] – Cash and cash equivalents - Cash and Cash Equivalents are the most liquid current
assets of a company, consisting of cash on hand and short-term, highly liquid investments that
can be quickly converted into known amounts of cash with insignificant risk of value change.
 Example – Cash in hand and bank, Demand deposits, Treasury Bills (maturity is 3 months or
less) etc.

[Link] – Inventory - goods held for sale, in the process of production, or materials to be used in
production during the normal course of business. They are expected to be sold or consumed
within one year (or within the operating cycle). Example – Raw materials, Work in progress,
Finished goods etc.

[Link] – Short term investments/Marketable securities - financial assets that a company

intends to hold for a short period, usually less than 12 months, and can be quickly converted into
cash. Treasury Bills (maturity is more than 3 months), Short-term fixed deposits, Short-term
government bonds etc.

[Link] – Trade receivable and other receivables - Trade receivables are amounts due from
customers for goods sold or services provided in the normal course of business on credit.

Other receivables are amounts due from parties other than customers or arising from non-core
activities.

[Link] – Other current assets - Other current assets are short-term assets that do not fall under
main current asset categories like cash, trade receivables, inventory, or short-term investments,
but are expected to be realized or used within one year (or the operating cycle)

3.2 – Liabilities - Liabilities are a company’s present financial obligations arising from past
transactions, which must be settled in the future by transferring cash, goods, or services.

3.2.1 – Non-Current liabilities - Company’s long-term financial obligations that are not due for
settlement within 12 months from the balance sheet date. (or beyond the normal operating cycle).

Some common types of non-current liabilities

[Link] – Long term financial borrowings – Long-term financial borrowings are interest-bearing
debts that a company raises and is obligated to repay after more than 12 months from the
balance sheet date. Example – Bank term loan, Bonds/Debentures etc.

[Link] – Long term lease liabilities - Long-term lease liabilities are the portion of a company’s
lease obligations that are payable after 12 months from the balance sheet date. They represent
the present value of future lease payments for leased assets where the lease term extends
beyond one year.

[Link] – Deferred tax liabilities - Deferred Tax Liabilities (DTL) represent future income tax
payable by a company due to temporary differences between accounting income and taxable
income.

[Link] – Other non-current liabilities - long-term obligations that do not fit into major liability
categories like borrowings, lease liabilities, or deferred tax liabilities, but are payable after 12
months from the balance sheet date. Example - Long-term employee benefit provisions, Deferred
revenue (Long term) etc.
3.2.2 - Current liabilities - Short-term obligations that must be settled within 12 months or within the
operating cycle. Example – Trade payables, Current portion of long-term debt, Accrued expenses etc.

Some common types of current liabilities

[Link] – Trade and bills payable - Amounts owed to suppliers for goods or services purchased
on credit in the normal course of business.

[Link] – Short term borrowings - Short-term borrowings are interest-bearing loans repayable
within 12 months. Example – Bank overdraft, cash credits, short-term bank loan

[Link] – Other current liabilities - Short-term financial obligations that a company must settle
within a year or within its operating cycle, whichever is longer, and are not directly classified
under more specific liability categories like accounts payable or short-term debt. Example –
Accrued expenses, deferred revenue, short-term lease liability etc.

3.3 – Equity/Shareholders equity/Owner’s equity - Equity on a balance sheet represents the residual
interest in the assets of a company after deducting its liabilities. It is what the owners (shareholders) of
the company actually "own" after all debts and obligations have been settled.

Some common components under equity

3.3.1 – Share capital (Paid-in-Capital) - This represents the amount of money that shareholders
have invested in the company in exchange for ownership shares. It includes -

 Common stock - Represents basic ownership in the company, and shareholders are
entitled to vote on major company decisions.
 Preferred stock - A type of equity that gives shareholders priority over common
stockholders for dividends and in the event of liquidation but typically does not include
voting rights.

3.3.2 – Reserves - Reserves on the equity side of the balance sheet refer to portions of a
company's equity that are set aside for specific purposes, rather than being available for
immediate distribution as dividends or reinvestment in the business. Common type of reserves –

 General reserves - is a portion of a company’s profits that is set aside for general or
unspecified purposes but are set aside to strengthen the financial position of the
company.
 Revenue reserves - profits that are set aside for specific purposes related to the
company’s operations.
 Capital reserves - created from specific sources, usually from non-operational gains or
capital transactions such as the sale of fixed assets, revaluation of assets, or the
issuance of shares at a premium. Created to cover future capital expenditures or debt
obligations.
 Revaluation reserves – created as a result of the revaluation of fixed assets to reflect
the updated market value of the assets.
 Foreign exchange reserves/ Translation Reserves - reserves are created when a
company has foreign operations and needs to account for currency fluctuations.
 3.3.3 – Retained earnings - This is the cumulative amount of net income a company has earned
over time, minus any dividends paid to shareholders. Retained earnings are typically reinvested
in the company for growth or used to pay down debt.

Retained Earnings = Beginning Retained Earnings + Net Income - Dividends

3.3.4 – Comprehensive income - This includes gains and losses that are not included in the net
income on the income statement but are still reflected in equity. Examples include foreign
currency translation adjustments, unrealized gains/losses on investments, and pension plan
adjustments.

3.3.5 – Non – Controlling interest/ Minority interest - In cases where a company owns a
majority stake in another company (subsidiary), but not 100%, the portion of equity belonging to
the minority shareholders is classified as non-controlling interest. It represents the ownership in
the subsidiary that is not owned by the parent company.

3.3.6 – Additional Paid-in capital - This refers to the amount paid by investors above the par
value of the stock. For example, if a company issues stock with a par value of $1 per share, but
investors pay $5 per share, the additional $4 is considered additional paid-in capital.

3.3.7 - Treasury Stock - Treasury stock represents shares that the company has repurchased
from the market. These shares are no longer outstanding and are not entitled to dividends or
voting rights. Treasury stock is subtracted from total equity because it represents a
reduction in the amount of equity held by shareholders.

Some key metrics from Balance Sheet –

Liquidity Ratios: Assess company's ability to meet its short-term obligations using its short-term assets.

 Current ratio = Current assets / Current liabilities

 Quick Ratio (Acid - Test Ratio) = Current assets – Inventory / Current liabilities
 Cash Ratio = Cash and cash equivalents / Current liabilities

Solvency ratios – Assess company’s ability to meet its long-term debt obligations and remain financially
stable in the long term.

 Debt to equity ratio = Total liabilities / Shareholders equity

 Debt ratio = Total liabilities / Total assets

Profitability ratios – Assess company's ability to generate earnings relative to its revenue, assets,
equity, and other financial metrics.

 Return on equity (ROI) = Net income / Shareholder’s equity

 Return on assets (ROA) = Net income / Total assets
 4 – Cash flow statement

A cash flow statement is one of the key financial statements used by businesses to track the flow of cash
in and out of the company over a specific period of time, such as a month, quarter, or year. It provides
valuable insight into a company's liquidity and overall financial health by showing how cash is generated
and used.

The statement is divided into three main sections –

 Operating Activities
 Investing Activities
 Financing Activities

4.1 - Cash flow from operating activities (CFO) - shows the cash generated or used by a company's core
business operations during a specific period (such as a month, quarter, or year). It represents the cash
inflows and outflows that directly relate to producing and selling goods or services.

There are two main methods for calculating cash flow from operating activities:

 Direct method
 Indirect method

Direct method - Under this method, directly list cash inflows and outflows from operations.

Example of cash inflow - Cash received from customers

Example of cash outflows – Cash paid to supplier, cash paid to employees

Cash Flow from Operations = Cash receipts from customers – Cash payment to suppliers

Indirect method – This method starts with net income (the profit or loss) from the income statement
and adjusts for non-cash transactions and changes in working capital (such as changes in accounts
receivable, accounts payable, and inventory)

Key Adjustments –

 Add back non-cash expenses because cash was not paid when these expenses were recorded
like depreciation, amortization, and impairment, provision for doubtful debts, stock-based
compensation.
 Subtract gains and add losses from the sale of assets (actual cash from these transactions is
shown under investing activities, not operating)
 Adjust for changes in working capital - Working capital items reflect timing differences between
cash and accrual accounting.

Cash Flow from Operations = Net Income + Non-Cash Expenses ± Changes in Working Capital –
Non-operating gains
4.1.1 – Adjustments for non – cash expenses - mean adding back expenses that reduced net profit
but did not involve any actual cash outflow during the period. Non – cash expenses reduces profit but
do not use so they must be added back to net profit.

 Depreciation and amortization – Added back as no cash is paid when depreciation is charged
 Impairment loss – added back as no cash outflow at the time of impairment
 Provisions for doubtful full debt - added back as no cash is paid when provisions are created
 Stock based compensation – employee paid in share or in option as no cash payment
 Deferred tax expenses – tax expenses recognized but not yet paid

4.1.2 – Change in working capital - Adjusting for changes in working capital bridges the gap between
accrual - based Net Income (on the Income Statement) and actual Cash Flow, because accrual accounting
records revenues/expenses when earned/incurred, not when cash moves.

 Change in current assets –

o Increase in accounts receivable → subtract
o Decrease in accounts receivable → add
o Increase in inventory → subtract
o Decrease in inventory → add
 Change in current liabilities
o Increase in accounts payable → add
o Decrease in accounts payable → subtract
o Increase in accrued expenses → add
o Decrease in accrued expenses → subtract

4.2 – Cash flow from investing activities – section of the cash flow statement that shows the cash used
for or generated from a company’s investing activities over a specific period. These activities generally
involve the purchase or sale of long-term assets and investments. Key components of cash flow from
investing activities are -

 Cash Outflows (Investments / Purchases)

o Purchase of property, plant, and equipment (PPE)
o Purchase of intangible assets (patents, software)
o Purchase of investments (stocks, bonds, subsidiaries)
o Loans given to others
 Cash inflows (Proceeds/Sales)
o Sale of property, plant, and equipment
o Sale of investments (stocks, bonds, subsidiaries)
o Repayment of loans by others

Cash flow from Investing activities = Cash inflow from assets sales – Cash outflow for assets purchases

4.3 – Cash flow from financing activities - section of the cash flow statement that shows the cash raised
from or paid to the company’s owners and creditors during a specific period. These activities relate to how
a company funds its operations and growth using debt, equity, or other financing tools. Key components of
cash flow form financing activities are –
  Cash Inflows (Raising Funds)
o Issuance of shares (equity financing)
o Borrowing money (loans, bonds, debentures)
o Other capital contributions
o Cash Outflows (Repaying or Distributing Funds)
 Cash Outflows (Repaying or Distributing Funds)
o Repayment of loans or bonds (principal amounts)
o Payment of dividends to shareholders
o Buyback of company shares
o Payment of lease liabilities (under financing lease)

Cash flow from financing activities = Cash inflow from debt/equity – Cash outflow for debt repayment
/dividends/ share buyback