The Hindu Business Line : Demystifying accounts

I am an investor with no financial literacy. When I go through annual reports of companies, my mind simply boggles. There are information that simply overwhelm me and go through my head. What should I do?

Ramakant Pushkarna, Sonepat

My sympathies are with you. In an attempt to make financial statements more transparent, somewhere down the line the accounting bodies and standard setters have involuntarily and quite unintentionally made financial statements that much more complicated for the lay man. Cash flow statement is a necessary adjunct to accounts.

It is indeed helpful to people like you as it demystifies accounts and tells you in a simple language what came in and what went out during the year highlighting the results of operations and episodic events alike. More can be done in this direction. Publications of ratios should be made mandatory.

For example, fixed assets turnover ratio would tell you whether the company’s turnover is enough to justify its investments in fixed assets. Similarly, return on capital employed, earnings per share can throw considerable light on the profitability of an enterprise without clogging one’s mind. Liquidity ratios can be the harbingers of things to come.

In short, ratios are more revealing than the main accounts they are drawn from. There are investment journals and magazines which carry out inter-company analysis in a given industry as well as on an intra-industry basis. I would urge you to read them because these journals employ research experts good at demystifying accounts as well in reading between lines.

Declaration of assets

Many of the candidates during the general elections declared mind-boggling assets. Why doesn’t the income-tax department act on this information?

Priyamvada Gupta, New Delhi

I fully agree with you. The CBI routinely goes to town with announcements of seizure of documents and assets revealing ownership of assets disproportionate to one’s known sources of income. Such catches are usually from the officialdom. Often Customs and tax officials have been caught thus. But one wonders why no one has acted on the information volunteered by the candidates. Or is it that the I-T department has indeed acted and found everything alright? Unlikely.

Assets worth Rs 500 crore declared should be matched by an income of Rs 50 crore in the least with anything less inviting a deeper investigation. Of course there can be genuine reasons like the bulk of the assets being in the form of jewellery which is inherently a non-income-yielding asset. Moreover, the sources of money with which the assets were acquired themselves can be questioned.

S. MURLIDHARAN

ASK! Send in your queries to ask@thehindu.co.in

http://MentorQA.blogspot.com

More Stories on : Accountancy | Income Tax | For the Asking

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Demystifying accounts

Need for reforms in international tax

How to control manufacturing costs

60 Seconds Chief