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Transcript of Change in Method
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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 -PERCENTAGEAssets
Cash(Cumulative Cash recd.-Cumulative Cost incurred)
Production in process
Total
Liabilities
Production in process=Advance billingsRetained earnings(Balancing figure)
Total
Workings
INCOME STATEMENT (in $ thousands)
PERCENTAGE COMPLETION METHOD
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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 accounHence Revised Income Statement is:
Cost incurred (CY)
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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 receive
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
PercentageRevenue*(%*cum cash recd)
Expense
Income
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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 recdcan be asset or (liability)
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2001 2002 2003
800 2800 1200
800 3600 4800
4000 1200 0
1300 2500 2200
1300 3800 6000
16.6666667 75 100
1000 3500 1500
800 2800 1200
200 700 300
500 200 1200
0 700 0
500 900 1200
300 0 0200 900 1200
500 900 1200
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800 3600 4800
200 700 1200
1000 4500 6000
-300 700 0
2001 2002 2003800 2800 1200
800 3600 4800
4000 1200 0
1300 2500 2200
1300 3800 6000
16.6666667 75 100
1000 3500 1500
800 2800 1200
200 700 300
ed
2001 2002 2003
800 2800 1800
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800 3600 5400
4000 1400 0
1300 2500 2200
1300 3800 6000
16.6666667 0.666666667 100
1000 3000 2000
800 2800 1800
200 200 200
2001 2002 2003
800 2800 1200800 3600 4800
4000 1200 0
1300 2500 2200
1300 3800 6000
16.6666667 75 1000 0 6000
0 0 4800
0 0 1200
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500 200 1200
0 0 0
500 200 1200
500 200 0
0 0 1200
500 200 1200
800 3600 4800
0 0 1200
800 3600 6000
-500 -200 0
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INCOME STATEMENT 2005 2006 2005
Sales revenue 400 0 200cost of goods sold 220 0 110
Gross profit 180 0 90
DELIVERY METHOD INSTALLME
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2006
200110
90
T
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Let us assume that the company changes its method of depre
Analyse the impact of change in the financial statements
3 year
Cost 5200000
Accumulated Depreciationas per WDV 707148
Additional Depreciation as per wdv 1655001
Total Dep 2362149
Accumulated Dep SLM at end of 2 year 1976000
Accumulated Dep WDV
Total 4338149
Net Book Value 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 ch
2362149 as against 988000 i
Net Book value in the Balance sheet will be the same as if WD
4th and 5th year will have WDV dep and profits will be higher
This method will be advantageous for companies in expansion
higher dep will help them acquire new assets
ReVALUATION
Let us assume that the company following SLM goes for reval
4th year a valuer appraises the machine worth Rs 65 lacs with
residual value of 3.25 lacs.
4
Cost 5200000
add increase in revaluation 1300000
Accumulated depreciation beg of year 2964000
add dep on revalued valued At 19% 741000
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1300000
19%
3
741000
add dep on revalued amount6500000*19/100
1235000 1235000
net book value
Revaluation Reserve 4
65000001235000*3=
3705000
2795000
Net Book value as per revaluation
2795000
Net Book value as per historical cost
5200000
2964000
2236000
Surplus on revaluation 559000
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iation from SLM to WDV
4 5
5200000 5200000
Dep WDV388436 213368 1- n sqrt of
1-5sqrt of 260000/52
388436 213368
WDV Dep
4338149 4726585
4726585 4939953
473415 260047
Accumulated
ange in method is
n slm method.
V is implemented from the 1 year
s dep is lower than SLM
modernization mode as
ation
estimated
end 4 year 5
6500000 6500000
4940000 (6500000-325000)/5
1235000
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1235000 0.19
6500000
1 1235000
2 2470000
3 37050004 4940000
4940000 1235000 5 6175000
1560000 325000
5
559000
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(Estimated residual value/cost of asset)
00000
0.4507
WDV SLM Additional
1 5200000 2343640 988000 1355640
2 2856360 1287361 988000 299361.5
3 1568999 707147.6 988000 1655001
4 861850.9 388436.2 988000
5 473414.7 213368 988000Annual Accu WDV
1 5200000 988000 988000 2343640
2 988000 1976000 3631001
3 988000 2964000 4338149
4 988000 3952000 4726585
5 988000 4940000 4939953
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Arpit Industries purchased a machineDetails AmountList price 50 00 000Trade Discount 1 00 000Sales Tax and Excise Duty 6 00 000
CENVAT Credit available on excise duty 4 00 000transportation charges to factory 25 000Special Installation charges 75 000Expected useful life of the asset(years) 5Expected disposal 280000estimated cost of removal of Disposal 20000Estimated realisable value 260000determine cost of machine
accounting policyon valuation of machine
rate of dep as per SLM
annual and accumulated Dep for all the years SLMdisclosure of Machine in balance sheet
Accounting policy on dep
1 COST OF MACHINE
List priceless: Trade discount
add : sales tax and excise dutyNet Invoice Price
less CENVATAdd:transport
add: installation
2 Policy
company valuesits machine on net invoice
price etc.
3 RATE as per SLMannual dep
Hence rate4
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5000000100000
4900000600000
5500000
4000002500075000
5200000
988000
0.19
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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
hence it estimates the future cash flows expected to arise from the continuing use of this machine and from it
estimated pre tax operating cash flows(lacs) estimated disposal2006-07 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 pv at 16% pv2006-07 21.5 0.862 18.53
2007-08 20.85 0.743 15.492008-09 19.67 0.641 12.60
2009-10 17.44 0.552 9.63
2010-11 16.38 0.476 7.80
2011-12 16.23 4.86 0.410 6.66
70.72
1.99
72.71Recoverable amount is rs 65.50 lacs
so impairment loss
Net book value 95.32
less recoverable amount 72.71
loss 22.61
Analysis of impact on the financial statementsthe 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 y
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
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market conditions.
disposal at the end of useful life is as follows
1.99
ear
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Total
Asset
Asian Hotels 633 8 1% 328
Bharti Airtel 19030 18 0.09 11229
indraprastha Medical 259 6 2 205Indraprastha Gas 517 18 3 521
ITC 13084 2636 20 9791
jk CEMENT 1466 84 6 874
Ranbaxy 4661 891 19 3570
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 1100Q2 150 12 1800
Q3 150 13 1950
Q4 100 14 1400
500 6250
BI+P=6250+2000=8250
Cl.Stk Cl.stk/T
A
sales
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an assumption is made
FIFO
400 units are sold is COGS + 300 units ending i
200 10 2000 50 12
100 11 1100 150 13100 12 1200 100 14
400 4300
8250
Weighted average method
11.78571429
COGS 4714
EI 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 L
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
FIFO LIFO
Sales 10000 10000 0
purchases 6250 6250 0
Inflow before tax 3750 3750 0
IT Paid 2280 1940 -340Operating cash flow 1470 1810 -340
Changes in Assets for W Cap FIFO LIFO
op cash 1470 1810 340
inventory (pur-cogs) 1950 1100 -850
1950 3420 2910 -510
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RETAINED EARNINGS
Net income for the period 3420 2910
Income difference 510 (1-taxrate)*COGS Differenc
Cash flow difference 340 (tax rate)*COGS difference
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all values in crores
9 days
0.59
1113
98
35
91
Inventory
holding
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LIFO
ventory
600 100 14 1400 100 11 1100
1950 150 13 1950 200 10 20001400 150 12 1800
3950 400 5150 3100
8250
ower by
taxes are to be met immediately. Then cash flow
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510
340
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FINANCIAL STATEMENT ANALYSIS
Tools and Techniques
Multi step income statement
FORMAT OF MULTI STEP INCOME STATEMENT
Gross sales
Less: Excise DutyNet Sales
Material Cost
Manufacturing expenses
Cost of Goods Sold
GPEmployees remuneration(other than factory)
Administrative Exp, Selling and other Expenses
add: other incomes(operating)
PBDITDepreciation
Amortisationimpairment
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 yearadd or Less:prior year adjustments
PBTprovision for tax:Current Income tax
add or less: Deffered Tax liability /asset
add: fringe benefitsadd or less: tax adjustments for previous year
Total Income TaxNP/PAT
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2007 2006
Sales 106060.9 85498.6
Less: Excise Duty 13138.6 10804.8
Net Sales 92922.3 74693.8wind power generated and captively consumed 330.5 199.5
other income(includes op 1047.1 and 88.37) 7507.7 6170.2
100760.5 81063.5Expenditure
Materials 69010.1 53246
other expenses 12344.8 10118.4
Interest Charges and finance charges 53.4 3.4
Depreciation 1902.6 1910
83310.9 65277.8
Less: Expenses capitalised 320.5 248.1
82990.4 65029.7
Compensation paid under VRS 385.7 226.4
Export incentives incurred in previous year written off 103.9
83480 65256.1
PBT -Y 17280.5 15807.4provision for tax:Current Income tax 5005.5 5135.5
add or less: Deffered Tax liability /asset -134.1 -394.4
add: fringe benefits tax 30 50
add or less: tax adjustments for previous year 8.6 8.7
4910 4799.8
Add: Tax credits for earlier years 225.1
NP/PAT 12370.5 11232.7
MULTI STEP ANALYSIS2007 2006
Sales 106060.9 85498.6
Less: Excise Duty 13138.6 10804.8Net Sales 92922.3 74693.8Materials 69010.1 53246
other expenses 12344.8 10118.4
Less: Expenses capitalised 320.5 248.1
Add:other operating incomes
wind power generated and captively consumed 330.5 199.5
other income 1047.1 88.37
PBIDT 13265.5 11865.37Depreciation 1902.6 1910
OP/PBIT 11362.9 9955.37Interest Charges and finance charges 53.4 3.4
other income 6460.6 6081.83PBTEOT 17770.1 16033.8Extraordinary items
Compensation paid under VRS 385.7 226.4
Export incentives incurred in previous year written off 103.9
PBT Y 17280.5 15807.4add or less: tax adjustments for previous year 8.6 8.7
PBT 17271.9 15798.7provision for tax:
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Current Income tax 5005.5 5135.5
add or less: Deffered Tax liability /asset -134.1 -394.4
add: fringe benefits tax 30 50
Tax credits for earlier years -225.1
total tax 4901.4 4566
NP/PAT 12370.5 11232.7
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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 18228.5Materials 69010.1 53246 15764.1
other expenses 12344.8 10118.4 2226.4
Less: Expenses capitalised 320.5 248.1 72.4Add: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 1400.13Depreciation 1902.6 1910 -7.4
OP/PBIT 11362.9 9955.37 1407.53Interest Charges and finance charges 53.4 3.4 50
other income 6460.6 6081.83 378.77
PBTEOT 17770.1 16033.8 1736.3Extraordinary items
Compensation paid under VRS 385.7 226.4 159.3
Export incentives incurred in previous year written 103.9 103.9PBT Y 17280.5 15807.4 1473.1add 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
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%
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
0.009.32
-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
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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 74693.8Materials 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 11865.37Depreciation 1902.6 2.05 1910
OP/PBIT 11362.9 12.23 9955.37Interest Charges and finance charges 53.4 0.06 3.4
other income 6460.6 6.95 6081.83
PBTEOT 17770.1 19.12 16033.8Extraordinary itemsCompensation 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 15807.4add or less: tax adjustments for previous year 8.6 0.01 8.7
PBT 17271.9 18.59 15798.7
provision for tax: 0.00Current 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
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%
114.47
14.47
10071.29
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
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Ratios can be classsified as
Return on Investment
Solvency
Liquidity
Resources efficiency or Turnover ratios
profitability or profit
du pont analysisvaluation or capital market ratios