BENGAL ALUMINIUM COMPANY CASE

Depreciation

Presented by: Anvesh Lanka Fenella Andrade Mallesh Goudar Nipun Jain

Masters in European Studies and Management (MESM)

2010-2012Manipal Centre for European StudiesManipal University, Karnataka, India

Question 1

Accounting for Decrease in Depreciation Expense Profit After Tax = 2,570,000,000 - 141,586,327

= 2,428,413,673

Accounting for the effect of ‘Depreciation Written Back’ Profit After Tax = 2,428,413,673 – 782,312,370

= 1,646,101,303

All details in Rupees INR

Question 2

Bengal Aluminium Company

2005 10.61% 2006 10.42% 2007 10.26% 2008 12.44% [Including change in depreciation valuation]

11.75% [Without change in depreciation valuation]

National Aluminium Company

2005 9.19% 2006 10.78% 2007 18.86% 2008 15.10%

Question 3

Decrease in Depreciation Expense Should have been 923,898,697 instead of 782,312,370

Increase in Net Profit Value Firstly, It should have been 2,428,413,673 instead of

2,570,000,000 More importantly, in this case, 782,312,370 must have

been added back to the profit and loss account Therefore Actual Profits for 2008 would be

1,646,101,303 instead of 2,428,413,673 Actual Percentage of Net Profit Would be 7.9%

All details in Rupees INR

Question 4

The company’s disclosure of the accounting change is adequate, provided that it can justify the reasons for its change. However, the money credited to the profit and loss account should not be considered as inflow of cash. It is merely an accounting change.

Question 5

Based on the percentages from Question 2, it is clear that BAC has been lagging behind NAC in terms of net profit margin, specially after it installed the new smelter

However, one would have to consider that those figures may not be truly representative of the actual situation and could just be bloated figures

Based on our estimation the actual profit/sales percentage would be closer to 7.9 than the calculated value

Since it has been mentioned that the other aluminium firms practice similar accounting practices, one could assume that the figures for these other companies could also just be bloated figures

Caution is advised in investing in such firms. A clearer understanding of these companies’ account books

would be mandatory