Income Statement

Readings: Chapter 3 Text Book P&L Statement of ACC / TCS Income Statement AS 1, 2, 6, 7,9, 11, 15, 16, 20,

Basic Concepts
Accounting Period Accrual Matching Conservatism Consistency Materiality

Profit and Loss Account of XYZ Ltd. for the Year ended March 31st 20XX Income Sales Other Income Expenditure Material and Other Expenditure Interest Depreciation Profit Before Tax Provision for Tax Profit After Tax Prior period adjustments Extra Ordinary Items Profit available for appropriations Appropriations Dividend Dividend Distribution Tax General Reserve Surplus carried to Balance Sheet Schedule No. Previous Year Current Year xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Profit and Loss A/c

Prepared for a period (Accounting Period Concept)  Summary of income and expenses over a period of time Format prescribed by law (Schedule VI, Part II of Companies Act, 1956)  May be in a horizontal format / vertical format  Vertical Format more popular Uses a reporting currency (Money Measurement Concept)  All transactions done in other currencies are translated into the reporting currency using the than prevailing exchange rate

Profit and Loss A/c

Sale Other Income Total Income Less: Expenses Manufacturing Administrative Selling and Marketing Depreciation / Amortisation Interest Profit Before Tax (PBT) Less: Tax Profit After Tax (PAT) Sale Other Income Total Income Less: Expenses Manufacturing Administrative Selling and Marketing EBITDA Less : Depreciation/ Amortisation EBIT Interest Profit Before Tax Less: Tax Profit After Tax PAT Add: Taxes PBT Add: Interest EBIT Add: Depreciation / Amortisation EBITDA

Revenue Recognition
Revenue
 Sales of Goods  Rendering of Services  Use by others of enterprise resources yielding interest, royalties and dividends

Sales of Goods
 Seller has transferred property in goods to the buyer for a consideration  Transfer of significant risk and rewards of ownership to the buyer

Revenue Recognition
Rendering of Services Recognise revenue when services are performed
 Proportionate Completion Method Performance consists of a series of acts Revenue recognised proportionately by reference to performance of each act  Completed Service Contract Method Performance consists of a single act; or Performance cant be deemed to be completed unless fully executed

Revenue Recognition
Interest
 On a time proportion basis taking into account amount outstanding and the interest rate

Royalties
 On an accrual basis with the terms of the relevant agreement

Dividend
 When the right to receive payment is established

Impact of uncertainties
If there is uncertainty regarding the amount of the consideration at the time of sale or rendering of services
 Postpone revenue recognition till it is reasonably certain

If uncertainty arises subsequently

 Make a separate provision to reflect uncertainty rather than adjust the amount of revenue originally recorded

Revenue Recognition (Summary)

Revenue is recognised using Accrual Concept (AS 9)  Sale of Goods transfer of ownership  Provision of Services either upon completion or proportionate completion Uncertainty about amount of realisation  If exists at the time of transaction defer accrual till uncertainty is resolved  If arises subsequently make provision Transactions are recorded in reporting currency by applying appropriate exchange rate prevailing on the date of transaction (AS 11) Turnover is shown net of excise duty

Revenue Recognition
ACC
 Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer. Excise duties deducted from turnover (gross) are the amounts that are included in the amount of turnover (gross) and not the entire amount of liability that arose during the year  Interest income is recognised on a time proportion basis taking into account the amount outstanding and the rate applicable.  Dividend income is recognised when the shareholders right to receive dividend is established by the Balance Sheet date.

TCS
Revenues from contracts priced on a time and material basis are recognised when services are rendered and related costs are incurred. Revenues from turnkey contracts, which are generally time bound fixed price contracts, are recognised over the life of the contract using the proportionate completion method, with contract costs determining the degree of completion. Foreseeable losses on such contracts are recognised when probable. Revenues from the sale of equipment are recognised upon delivery, which is when title passes to the customer. Revenues from sale of software licences are recognised upon delivery where there is no customisation required. In case of customisation the same is recognised over the life of the contract using the proportionate completion method.

TCS
Revenues from maintenance contracts are recognised pro-rata over the period of the contract. Revenues from Business Process Outsourcing (BPO) services are recognised on time and material, fixed price and unit priced contracts. Revenue on time and material and unit priced contracts is recognised as the related services are rendered. Revenue from fixed price contracts is recognised as per the proportionate completion method with contract cost determining the degree of completion. Dividends are recorded when the right to receive payment is established. Interest income is recognised on time proportion basis taking into account the amount outstanding and the rate applicable.

Revenue Recognition
NDTV

 Advertisement revenue from broadcasting is recognised, net of agency commissions when the advertisements are displayed.  Revenue from services provided is recognised when persuasive evidence of an arrangement exists; the consideration is fixed or determinable; and it is reasonable to expect ultimate collection. Such revenues are recognised as the services are provided.  Subscription Revenue from direct-to-home satellite operators and other distributors for the right to distribute is recognised when the service has been provided as per the terms of the contract.  Revenue from equipment given out on lease is accounted for on accrual basis our the period of use of equipment

Expenses
Expenses are recorded on accrual basis (Accrual Concept) irrespective of when paid Revenue is matched (Matching Concept) against the expenses incurred Interest on Loans is recorded on accrual basis (AS 16) Employees Cost including retirement benefits are recorded on accrual basis (AS 15)
 Actuarial Valuation based upon the number of employees, current wages, retirement age, iteration rate etc.

Employee Cost - ACC

Defined Contribution Plan
 Contribution to Officers Superannuation Fund, ESIC and Labour Welfare Fund are recognised as an expense in the Profit and Loss Account, as they are incurred.

Defined Benefit Plan and Other Long Term Benefits

 Retirement benefits in the form of gratuity, additional gratuity, provident fund, post retirement medical benefit schemes, medical benefits under voluntary retirement scheme and other long term benefits in the form of leave encashment, silver jubilee and long service awards are determined using the projected unit credit method as at Balance Sheet date. Actuarial gains / losses are recognized immediately in the Profit and Loss Account.

Depreciation (AS 6)
Most of the Fixed Assets have limited useful life The cost of a Fixed Assets needs to appropriated on a systematic basis over its useful life This process of appropriation is called depreciation Based upon the `Matching Principle Different Terms  Depreciation
Real Assets with limited useful life

 Depletion
Natural resources

 Amortization
Intangible assets

Determinants of Depreciation
Amount of depreciation depends upon
 Cost of Acquisition  Expected Useful Life  Estimated Residual Value

Expected Useful Life

 Period / Production Units Physical Life Extent of use Legal / Contractual Requirements Technological Changes Obsolescence Past experience

Determinants of Depreciation
Estimated Residual Value
 Amount expected to be realized on disposal  If considered insignificant taken as Nil  Otherwise based upon the past experience

Depreciable Value
 Cost of Acquisition Estimated Residual Vale

Depreciation
Cost of Acquisition Residual Value Useful Life

Depreciation Methods
Method of allocating the cost of assets over its useful life
   

Straight Line Method (SLM) Written Down Value Method (WDV) Unit of Production Method Sum of Digits Method

The Management is free to use any method The method chosen must be applied consistently from period to period

Straight Line Method

Depreciable amount is amortized equally over the useful life of the asset Depreciation = Cost RV Useful Life Depreciation charge in each period remains same over the useful life of the asset Simple to operate / understand

Accelerated Methods
Written Down Value (WDV) Method
 Higher depreciation in the earlier years

 Depreciation is calculated by applying a rate to the net book value in the beginning of the year

Sum of years digit Method

 Depreciation for 1st year = n/SYD  SYD = n(n+1)/2

Depreciation Rates - Schedule XIV of the Companies Act

WDV
Building - Factory Other Temporary Plant & Machinery- Single shift Double Shift Triple Shift Electrical Fittings Vehicles (Motor Carr, Motor cycles, scooters) Buses & Lorries (other than used for hire) Furniture & Fittings Individual assets costing less than Rs.5000 10.00 5.00 100.00 13.91 20.87 27.82 13.91 25.89 30.00 18.10 100%

SLM
3.34 1.63 100 4.75 7.42 10.4 4.75 9.50 11.31 6.33 100%

Depreciation - ACC
Depreciation is provided on the straight line method at the rates prescribed in Schedule XIV of the Companies Act, 1956, on a pro-rata basis. Cost of leasehold land is amortised over the period of the lease. In respect of quarry freehold land, amortisation reserve is created by amortising the cost over the number of years of the mining rights of the quarries.

Depreciation - NDTV
Depreciation on fixed assets including intangibles is provided using the Straight Line Method based on the useful lives as estimated by the management. Depreciation is charged on a pro-rata basis for assets purchased/ sold during the year. Individual assets costing less than Rs. 5,000 are depreciated at the rate of 100% on a prorata basis. In case of Plant and machinery where the aggregate actual cost of individual items of plant and machinery costing Rs. 5,000 or less constitutes more than 10 per cent of the total actual cost of plant and machinery, rates of depreciation is applicable based on the useful lives as estimated by the management. Leasehold land are amortised over the period of lease. The rates of depreciation derived from these estimates of useful lives are higher than those mandated by Schedule XIV of the Companies Act, 1956 after considering the impact of shift workings.

Inventory
AS 2 `Valuation of Inventories issued by the ICAI in June 1981 What is inventory
 Assets
Held for sale in the ordinary course of business In the process of production for such sale In the form of materials or supplies to be consumed in the production process or in the rendering of services

Valuation of Inventory
Inventories should be valued at the lower of cost and net realisable value Valuation process
 Ascertain cost  Ascertain net realisable value  Value at lower of cost and net realisable value

Cost of Inventories
Comprises of cost of purchase, costs of conversion and other cost incurred to bring inventories to their present location and condition Cost of Purchases
 Includes purchase price, duties and taxes, freight inwards and other expenses directly attributable to the acquisition  Trade discounts, rebates, duty drawbacks etc are deducted

Cost of Conversion
Cost directly related to the production Systematic allocation of fixed and variable production overheads Costs not to be considered for valuation
 Interest & borrowing costs  Abnormal wastages  Storage costs (unless necessary in the production process before further production)  Administrative overheads  Selling & Distribution Overheads

Importance
Profit = Sales - COGS Cost of Goods Sold = (Opening Stock + Purchases Closing Stock)  Opening Stock + Purchases = Closing Stock + COGS Closing Stock (inventories) appears in the Balance Sheet as Current Assets Inventories often constitute (except in case of a Services Company) a significant portion of the total assets of a company Problem  How to apportion goods available for sale between ending inventory and cost of good sold ?

Cost Formulas
For identifying the cost
   

Specific Identification FIFO LIFO Weighted Average Method

AS 2 permits use of Specific Identification, FIFO and Weighted Average Cost Method

Specific Identification Methods

Cost of inventories, that are not ordinarily interchangeable and can be identified or for specific project Not practical when a large number of inventory items which are interchangeable Some form of approximation is used
 The formula used should reflect the fairest possible approximation to the cost incurred

Methods
First in First Out (FIFO)
     
Assumes that the items of inventory purchased or produced first are consumed or sold first Items remaining in the inventory are those that were purchased or produced recently Assumes that the items of inventory purchased or produced recently are consumed or sold first Items remaining in the inventory are those that were purchased or produced first Weighted average of the cost of similar items at the beginning of a period and cost of similar item produced or purchased during the period Either on a periodic basis or for each shipment

Last in First Out (LIFO)

Weighted Average Method

Net Realisable Value

Estimated selling price in the ordinary course of business less the estimated cost of completion and estimated cost to make the sale  On an item to item basis  Estimate based upon the most reliable evidence that may be available at the time estimates are being made

Material are not written down below cost if the finished products in which they will be used are expected to be sold above cost.

Disclosure
Accounting policies and cost formula used Total carrying amount of inventory and its classification
Raw Material, Components, WIP, Finished Goods, Stores and Spares, Loose Tools

Prior Period Adjustments and Extra-ordinary Items

Disclose separately on the face of the Profit & Loss Statement
   

Result of Ordinary Activities Extra Ordinary Items Prior Period Items Impact of Change in Accounting Policies

Prior Period Adjustments and Extra-ordinary Items

Ordinary activities  Activities which are undertaken as part of its business and related activities Extraordinary items  Income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities  Not expected to recur frequently or regularly. Prior period items  Income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods

Summary
Profit & Loss A/c is an account showing income and expenses Revenue/ Income is recognised when earned Expenses are recorded when incurred Basic Concepts
     
Accounting Period Conservatism Accrual Matching Consistency Materiality

Show the result of ordinary activities, extra-ordinary items, prior-period items and impact of change of accounting policies separately