change in method

8/3/2019 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)





Percentage

Revenue*

Expense

Income

But 2001 remains unchanged as it is already accounHence Revised Income Statement is:

Cost incurred (CY)


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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




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)


5/34

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


6/34

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


9/34


10/34

INCOME STATEMENT 2005 2006 2005

Sales revenue 400 0 200cost of goods sold 220 0 110

Gross profit 180 0 90

DELIVERY METHOD INSTALLME


11/34

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


19/34

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


22/34

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


25/34

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


26/34

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


31/34

%

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


32/34

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


34/34

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

change in method

Documents