INCOME STATEMENT (in $ thousands) PERCENTAGE COMPLETION METHOD Cost incurred (CY) Cost incurred -Cumulative Estimated remaining

costs to complete as on 31st Dec Amounts billed and cash received in Current year Amounts billed and cash received in Cumulative Percentage Revenue* Expense Income BALANCE SHEET -PERCENTAGE Assets Cash(Cumulative Cash recd.-Cumulative Cost incurred) Production in process Total Liabilities Production in process=Advance billings Retained earnings(Balancing figure) Total Workings

1. Advance billings/Prodn in process Cost incurred Profit recognised Production in Process(cost+profit) Advance billings(Prodn in process-Cumulative cash recd) can be asset or (liability) 2. ESTIMATED INCREASE IN COSTS foreknowledge of actual costs Cost incurred (CY) Cost incurred -Cumulative Estimated remaining costs to complete as on 31st Dec Amounts billed and cash received in Current year Amounts billed and cash received in Cumulative Percentage Revenue* Expense Income But 2001 remains unchanged as it is already accounted Hence Revised Income Statement is: Cost incurred (CY)

Cost incurred -Cumulative Estimated remaining costs to complete as on 31st Dec Amounts billed and cash received in Current year Amounts billed and cash received in Cumulative Percentage(cum cost for year/total cum cost) Revenue*(cum cost for year/total cum cost*cash received) Expense Income

METHOD 2 COMPLETED METHOD Cost incurred (CY) Cost incurred -Cumulative Estimated remaining costs to complete as on 31st Dec Amounts billed and cash received in Current year Amounts billed and cash received in Cumulative Percentage Revenue*(%*cum cash recd) Expense Income

BALANCE SHEET -Completed Assets Cash(Cumulative Cash recd.-Cumulative Cost incurred) Production in process Total Liabilities Production in process=Advance billings Retained earnings(Balancing figure) Total Workings Advance billings/production in process Cost incurred Profit recognised Production in Process(cost+profit) Advance billings(Prodn in process-Cumulative cash recd) can be asset or (liability)

2001 800 800 4000 1300 1300 16.6666667 1000 800 200

2002 2800 3600 1200 2500 3800 75 3500 2800 700

2003 1200 4800 0 2200 6000 100 1500 1200 300

500 0 500 300 200 500

200

700
900 0 900 900

1200 0 1200 0 1200 1200

800 200 1000 -300

3600 700 4500 700

4800 1200 6000 0

2001 800 800 4000 1300 1300 16.6666667 1000 800 200

2002 2800 3600 1200 2500 3800 75 3500 2800 700

2003 1200 4800 0 2200 6000 100 1500 1200 300

ccounted 2001 800 2002 2800 2003 1800

800 4000 1300 1300 16.6666667 1000 800 200

3600 1400 2500 3800 0.666666667 3000 2800 200

5400 0 2200 6000 100 2000 1800 200

2001 800 800 4000 1300 1300 16.6666667 0 0 0

2002 2800 3600 1200 2500 3800 75 0 0 0

2003 1200 4800 0 2200 6000 100 6000 4800 1200

500 0 500 500 0 500

200

0
200 200 0 200

1200 0 1200 0 1200 1200

800 0 800 -500

3600 0 3600 -200

4800 1200 6000 0

INCOME STATEMENT Sales revenue cost of goods sold Gross profit

DELIVERY METHOD 2005 400 220 180

2006 0 0 0

INSTALLMENT 2005 200 110 90

TALLMENT 2006 200 110 90

Let us assume that the company changes its method of depreciation from SLM to WDV Analyse the impact of change in the financial statements 3 year Cost 5200000 Accumulated Depreciation as per WDV 707148 Additional Depreciation as per wdv Total Dep Accumulated Dep SLM at end of 2 year Accumulated Dep WDV Total Net Book Value 1655001 2362149 1976000 4338149 861851

Analysis The change in method has led to recomputation of Dep in the 3rd year.the 3rd year profits will reduce as dep due to change in method is 2362149 as against 988000 in slm method. Net Book value in the Balance sheet will be the same as if WDV is implemented from the 4th and 5th year will have WDV dep and profits will be higher as dep is lower than SLM This method will be advantageous for companies in expansion/modernization mode as higher dep will help them acquire new assets

ReVALUATION Let us assume that the company following SLM goes for revaluation 4th year a valuer appraises the machine worth Rs 65 lacs with estimated residual value of 3.25 lacs. 4 5200000 1300000 2964000 741000

Cost add increase in revaluation Accumulated depreciation beg of year add dep on revalued valued At 19%

1300000 19% 3 741000 add dep on revalued amount 6500000*19/100 1235000 net book value 1235000

Revaluation Reserve 6500000 1235000*3= 3705000 2795000 Net Book value as per revaluation 2795000 Net Book value as per historical cost 5200000 2964000 2236000 Surplus on revaluation

559000

of depreciation from SLM to WDV 4 5 5200000 5200000 388436 213368 Dep WDV 1n sqrt of 1-5sqrt of 260000/5200000

388436

213368 WDV Dep

4338149 4726585 4726585 4939953 473415 260047

Accumulated

due to change in method is 988000 in slm method. as if WDV is implemented from the 1 year e higher as dep is lower than SLM xpansion/modernization mode as

for revaluation lacs with estimated

end 4 year 5 6500000 6500000 4940000 (6500000-325000)/5 1235000

1235000 6500000 1 2 3 4 5

0.19 1235000 2470000 3705000 4940000 6175000

4940000 1235000 1560000 325000

559000

(Estimated residual value/cost of asset) 60000/5200000 0.4507 WDV SLM 1 5200000 2343640 988000 2 2856360 1287361 988000 3 1568999 707147.6 988000 4 861850.9 388436.2 988000 5 473414.7 213368 988000 Annual 1 5200000 988000 988000 2 988000 1976000 3 988000 2964000 4 988000 3952000 5 988000 4940000

Additional 1355640 299361.5 1655001

Accu WDV 2343640 3631001 4338149 4726585 4939953

Arpit Industries purchased a machine Details List price Trade Discount Sales Tax and Excise Duty CENVAT Credit available on excise duty transportation charges to factory Special Installation charges Expected useful life of the asset(years) Expected disposal estimated cost of removal of Disposal Estimated realisable value determine cost of machine accounting policyon valuation of machine rate of dep as per SLM annual and accumulated Dep for all the years SLM disclosure of Machine in balance sheet Accounting policy on dep

Amount 50 00 000 1 00 000 6 00 000 4 00 000 25 000 75 000 5 280000 20000 260000

COST OF MACHINE List price less: Trade discount

add : sales tax and excise duty Net Invoice Price less CENVAT Add:transport add: installation

Policy company values its machine on net invoice price etc. RATE as per SLM annual dep Hence rate

5000000 100000 4900000 600000 5500000 400000 25000 75000 5200000

et invoice

988000 0.19

A company is assessing as on 31-3-2006 being its latest balance sheet date, whether there is any indication that any of its assets may be impaired. It owns a machine whose net book value that is net of accumulated depreciation including that for 2005-2006 amounting to Rs 15.50 lacs and Rs 95.32 lacs. The management is of the opinion that the machine may not generate adequate returns over its remaining useful life of six years due to sluggish market condition hence it estimates the future cash flows expected to arise from the continuing use of this machine and from its disposal at the e estimated pre tax operating cash flows(lacs) estimated disposal 2006-07 21.5 2007-08 20.85 2008-09 19.67 2009-10 17.44 2010-11 16.38 2011-12 16.23 4.86 the estimated selling price of th e machine as on 31/3/2006 is Rs65.50 lacs. value of the machine in use 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 pv at 16% pv 0.862 0.743 0.641 0.552 0.476 4.86 0.410

21.5 20.85 19.67 17.44 16.38 16.23

18.53 15.49 12.60 9.63 7.80 6.66 70.72 1.99 72.71

Recoverable amount is rs 65.50 lacs so impairment loss Net book value less recoverable amount loss

95.32 72.71 22.61

Analysis of impact on the financial statements the machine will be shown in the balance sheet on 2006 march at 72.71 instead of rs 95.32 lacs. Corresponding loss over and above 15.50 will be shown in the P&L account in that year hence PBT will reduce further by (22.61-15.5)=7.11 lacs. Deprecaition will now be charged on 72.71 lacs from now onwards If revaluation reserve was 12 lacs then 12 from revaluation reserve and balance from profit and loss account. 95.32 72.71 22.61

e to sluggish market conditions. e and from its disposal at the end of useful life is as follows

1.99

ount in that year

oss account.

Total Asset Asian Hotels Bharti Airtel indraprastha Medical Indraprastha Gas ITC jk CEMENT Ranbaxy 633 19030 259 517 13084 1466 4661

Cl.Stk 8 18 6 18 2636 84 891

Cl.stk/T sales A 1% 328 0.09 11229 2 205 521 3 9791 20 874 6 3570 19

Process of allocation of BI and P If beginning inventory is 200 units@ 10 per unit 100 units per quarter sold 400 units and ending inventory 300 units When stable prices purchases unit cost TC Q1 100 10 1000 Q2 150 10 1500 Q3 150 10 1500 Q4 100 10 1000 500 5000 BI+P=5000+2000=7000 in the eq. RHS 400*10+300*10 7000 When prices are rising The problem of valuation arises purchases unit cost Q1 100 11 1100 Q2 150 12 1800 Q3 150 13 1950 Q4 100 14 1400 500 6250 BI+P=6250+2000=8250

an assumption is made FIFO 400 units are sold is COGS + 200 100 100 400

10 11 12

300 units ending inventory 2000 50 12 1100 150 13 1200 100 14 4300 8250

Weighted average method 11.78571429 COGS EI

4714 3536 8250

Continuing with the previous example, if 400 units are sold for Rs 10000(average price is 25) with a tax rate of 40% THE resulting income statement is as follows FIFO LIFO LIFO is higher or Lower by Sales 10000 10000 0 COGS 4300 5150 850 Income before Tax 5700 4850 -850 IT at 40% 2280 1940 -340 Net Income 3420 2910 -510

If we assume that sales are for cash and payments for purchases and taxes are to be met FIFO LIFO Sales 10000 10000 0 purchases 6250 6250 0 Inflow before tax 3750 3750 0 IT Paid 2280 1940 -340 Operating cash flow 1470 1810 -340 Changes in Assets for op cash inventory (pur-cogs) 1950 W Cap 1470 1950 3420 FIFO LIFO 1810 1100 2910

340 -850 -510

RETAINED EARNINGS Net income for the period Income difference Cash flow difference

3420 2910 510 (1-taxrate)*COGS Difference 340 (tax rate)*COGS difference

Inventory all values in crores holding 9 days 0.59 11 13 98 35 91

LIFO ending inventory 600 1950 1400 3950 100 150 150 400 14 13 12 1400 1950 1800 5150 100 200 11 10 1100 2000 3100 8250

igher or Lower by

ases and taxes are to be met immediately. Then cash flow

Difference ifference

510 340

FINANCIAL STATEMENT ANALYSIS Tools and Techniques Multi step income statement FORMAT OF MULTI STEP INCOME STATEMENT Gross sales Less: Excise Duty Net Sales Material Cost Manufacturing expenses Cost of Goods Sold GP Employees remuneration(other than factory) Administrative Exp, Selling and other Expenses add: other incomes(operating) PBDIT Depreciation Amortisation impairment Operating profit(OP/PBIT) Interest Charges and finance charges add: other incomes(non- operating) Profit Before tax and extra ordinary items(PBTEOT) add or Less: extraordinary items PBT for the year add or Less:prior year adjustments PBT provision for tax: Current Income tax add or less: Deffered Tax liability /asset add: fringe benefits add or less: tax adjustments for previous year Total Income Tax NP/PAT

Sales Less: Excise Duty Net Sales wind power generated and captively consumed other income(includes op 1047.1 and 88.37) Expenditure Materials other expenses Interest Charges and finance charges Depreciation Less: Expenses capitalised Compensation paid under VRS Export incentives incurred in previous year written off PBT -Y provision for tax: Current Income tax add or less: Deffered Tax liability /asset add: fringe benefits tax add or less: tax adjustments for previous year Add: Tax credits for earlier years NP/PAT MULTI STEP ANALYSIS Sales Less: Excise Duty Net Sales Materials other expenses Less: Expenses capitalised Add:other operating incomes wind power generated and captively consumed other income PBIDT Depreciation OP/PBIT Interest Charges and finance charges other income PBTEOT Extraordinary items Compensation paid under VRS Export incentives incurred in previous year written off PBT Y add or less: tax adjustments for previous year PBT provision for tax:

2007 106060.9 13138.6 92922.3 330.5 7507.7 100760.5 69010.1 12344.8 53.4 1902.6 83310.9 320.5 82990.4 385.7 103.9 83480 17280.5 5005.5 -134.1 30 8.6 4910 12370.5

2006 85498.6 10804.8 74693.8 199.5 6170.2 81063.5 53246 10118.4 3.4 1910 65277.8 248.1 65029.7 226.4 65256.1 15807.4 5135.5 -394.4 50 8.7 4799.8 225.1 11232.7

2007 106060.9 13138.6 92922.3 69010.1 12344.8 320.5

2006 85498.6 10804.8 74693.8 53246 10118.4 248.1

330.5 199.5 1047.1 88.37 13265.5 11865.37 1902.6 1910 11362.9 9955.37 53.4 3.4 6460.6 6081.83 17770.1 16033.8 385.7 103.9 17280.5 8.6 17271.9 226.4 15807.4 8.7 15798.7

Current Income tax add or less: Deffered Tax liability /asset add: fringe benefits tax Tax credits for earlier years total tax NP/PAT

5005.5 -134.1 30 4901.4 12370.5

5135.5 -394.4 50 -225.1 4566 11232.7

COMPARITIVE 2007 2006 Increase/decrease over base year Sales 106060.9 85498.6 20562.3 Less: Excise Duty 13138.6 10804.8 2333.8 Net Sales 92922.3 74693.8 18228.5 Materials 69010.1 53246 15764.1 other expenses 12344.8 10118.4 2226.4 Less: Expenses capitalised 320.5 248.1 72.4 Add:other operating incomes wind power generated and captively consumed 330.5 199.5 131 other income 1047.1 88.37 958.73 PBIDT 13265.5 11865.37 1400.13 Depreciation 1902.6 1910 -7.4 OP/PBIT 11362.9 9955.37 1407.53 Interest Charges and finance charges 53.4 3.4 50 other income 6460.6 6081.83 378.77 PBTEOT 17770.1 16033.8 1736.3 Extraordinary items Compensation paid under VRS 385.7 226.4 159.3 Export incentives incurred in previous year written off 103.9 103.9 PBT Y 17280.5 15807.4 1473.1 add or less: tax adjustments for previous year 8.6 8.7 -0.1 PBT 17271.9 15798.7 1473.2 provision for tax: Current Income tax 5005.5 5135.5 -130 add or less: Deffered Tax liability /asset -134.1 -394.4 260.3 add: fringe benefits tax 30 50 -20 Tax credits for earlier years -225.1 225.1 total tax 4901.4 4566 335.4 NP/PAT 12370.5 11232.7 1137.8

% 24.05 21.60 24.40 29.61 22.00 29.18 65.66 other income change is more than operations 1084.90 other income change is more than operations 11.80 -0.39 use of asset for higher revenues still lower dep 14.14 1470.59 6.23 10.83 70.36 0.00 9.32 -1.15 9.32 PBT is low even though incomes are high because of Int and finance charges -2.53 -66.00 -40.00 -100.00 7.35 10.13

COMMON SIZED comparison between two or more companies in the same industry or different industries with different capital structure and revenues. 2007 % 2006 Sales 106060.9 114.14 85498.6 Less: Excise Duty 13138.6 14.14 10804.8 Net Sales 92922.3 100.00 74693.8 Materials 69010.1 74.27 53246 other expenses 12344.8 13.29 10118.4 Less: Expenses capitalised 320.5 0.34 248.1 Add:other operating incomes wind power generated and captively consumed 330.5 0.36 199.5 other income 1047.1 1.13 88.37 PBIDT 13265.5 14.28 11865.37 Depreciation 1902.6 2.05 1910 OP/PBIT 11362.9 12.23 9955.37 Interest Charges and finance charges 53.4 0.06 3.4 other income 6460.6 6.95 6081.83 PBTEOT 17770.1 19.12 16033.8 Extraordinary items Compensation paid under VRS 385.7 0.42 226.4 Export incentives incurred in previous year written off 103.9 0.11 PBT Y 17280.5 18.60 15807.4 add or less: tax adjustments for previous year 8.6 0.01 8.7 PBT 17271.9 18.59 15798.7 provision for tax: 0.00 Current Income tax 5005.5 5.39 5135.5 add or less: Deffered Tax liability /asset -134.1 -0.14 -394.4 add: fringe benefits tax 30 0.03 50 Tax credits for earlier years 0.00 -225.1 total tax 4901.4 5.27 4566 NP/PAT 12370.5 13.31 11232.7

% 114.47 14.47 100 71.29 13.55 0.33 0.27 0.12 15.89 2.56 13.33 0.00 8.14 21.47 0.30 0.00 21.16 0.01 21.15 0.00 6.88 -0.53 0.07 -0.30 6.11 15.04

Ratios can be classsified as Return on Investment Solvency Liquidity Resources efficiency or Turnover ratios profitability or profit du pont analysis valuation or capital market ratios