Vinu: Sir, I have a basic doubt. A customer has come for an enhancement of his CC limit from ₹4.15 crores to ₹5.00 crores. His balance sheet shows capital as ₹2.00 crores. How can we know where his capital amount is and how it was utilized?

Manu: Sure, Vinu. To understand where the capital amount of ₹2.00 crores is and how it was utilized, we need to review several aspects of the financial statements.

Vinu: Where should I start?

Manu: First, review the balance sheet. Look at the assets side to see how the capital has been allocated. This includes current assets like cash, inventory, and receivables, as well as non-current assets like property, plant, equipment, and investments.

Vinu: What about the liabilities?

Manu: Yes, ensure that all liabilities are accurately recorded. This includes loans, payables, and other obligations. Next, analyze the capital account under the owner’s equity section on the balance sheet. Check for retained earnings, additional paid-in capital, and any drawings or dividends paid out.

Vinu: Should I also look at the income statement?

Manu: Absolutely. The income statement will show the profit and loss over time and help you see if the business has retained earnings that have been reinvested. Also, review the cash flow statement to understand how cash has moved in and out of the business, showing investments in assets, payment of liabilities, and any financing activities.

Vinu: What about the notes to financial statements?

Manu: The notes are crucial. They often provide detailed information about significant items, including the use of capital and investments made.

Vinu: Is there any analysis I should perform?

Manu: Yes, conduct a financial ratios analysis. Compare the debt and equity to understand the financial leverage with the debt-to-equity ratio. Also, measure the company’s profitability relative to its equity with the return on equity (ROE).

Vinu: How do I verify this information?

Manu: Verify with supporting documents like bank statements to check for substantial cash transactions or investments. Look at asset purchase receipts to verify significant purchases or investments in assets. Review any loan agreements to understand loans taken or repaid which might affect the capital.

Vinu: So, to summarize, I should check the balance sheet, analyze the owner’s equity, review the financial statements, examine the notes, conduct financial ratios analysis, and verify with supporting documents?

Manu: Exactly, Vinu. Following these steps will help you trace the capital amount and understand how it has been utilized in the business.