Financial Statements Guide to Understanding Profit and Loss, Balance Sheets, and Cash Flow

The Financial Statements

In the end, the AR will showcase the financial statements of the firm. Without a doubt, these are some of the most integral components of an Annual Report, presenting three documents:

1. The Profit and Loss (P&L) statement
2. The Balance Sheet and
3. The Cash flow statement

We’ll be delving into the details of these statements in the upcoming chapters. It’s crucial to remember that they come in two different formats at this point.

1. Standalone financial statements or simply standalone numbers and
2. Consolidated financial statement or simply consolidated numbers

We must comprehend a company’s structure to grasp the difference between standalone and consolidated numbers.

Typically, a company such as Credit Rating Information Services of India Limited or simply known as CRISIL Limited, which has been established for an ample amount of time, usually holds ownership of a number of subsidiary businesses. 

Additionally, the company generally functions as a controlling party for various other well-established businesses. To better illustrate this notion, CRISIL’s shareholding structure provides an ideal example. This information can be accessed in their annual report. It is widely known that their primary focus is on credit rating services for companies in India.

The shareholding structure can be seen in the chart above. It illustrates the ownership levels of each stakeholder.

1. Standard & Poor’s (S&P), a US-based rating agency, is the main shareholder in CRISIL as it holds a 51% stake. Therefore, they are deemed the ‘Holding company’ or the ‘Promoter’.
2. Financial institutions, including public entities, hold a total of 49% of CRISIL’s shares.
3. S&P is wholly owned by The McGraw-Hill Companies. McGraw Hill has complete control over S&P, while S&P holds a majority stake in CRISIL.
4. CRISIL has a 100% shareholding in ‘Irevna’. 

Keeping the above in mind, let’s take a look at this hypothetical situation. Suppose CRISIL posted a loss of Rs.1000 Crs in the 2022 financial year, and its full subsidiary, Irevna, recorded a profit of Rs.700 Crs. What could be the overall profitability of CRISIL?

CRISIL itself had an unprofitable result of Rs.1000 Crs. However, its sister company Irevna saw a positive turnaround with a net gain of Rs.700 Crs. Therefore, the closing balance on CRISIL’s P&L comes to a total of Rs.300 Crs.

Thanks to its subsidiary, CRISIL was able to reduce its loss from Rs.1000 Crs to Rs.300 Crs. Overall, on a standalone basis, CRISIL had a loss of Rs.1000 Crs, while when it is taken into account with the subsidiary, the amount decreased to Rs.300 Crs.

Standalone financial statements present the company’s figures, not considering its subsidiaries. In contrast, consolidated numbers include not only the company’s figures but also those of its subsidiaries.

Looking at the consolidated financial statements gives me a better overview of the company’s financial position.

– Schedules of Financial Statements

When the company dispenses its financial statements, they usually convey the full account and then gives a comprehensive explanation.

Examine this financial statement of ARBL. This balance sheet reveals many important details regarding the company’s financial activities. It provides insight into the assets, liabilities and equity of the organisation.

The line item in a financial statement can be referred to as, for example, the first item seen in the Balance Sheet (marked with a green arrow), which is share capital. A note number related to this can be found. This then forms part of the Schedules attached to the financial statement. 

ARBL’s share capital is declared at Rs.17.081 Crs (or Rs.170.81 Million). To understand how this figure was reached, you must look at Schedule 2, which accompanies the statement. The snapshot below can help in doing so:

Of course, considering this may be your first time tackling financial statements, terms like share capital may seem confusing. Over the coming chapters, you will gain familiarity with how to interpret financial documents and make sense of them. 

For now, just remember that the primary financial statement provides an overview, and the corresponding schedules go into greater detail for each item.