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Corporate Financial Reporting

Session 6 and 7: PGP 2017-19


Preparing and understanding Income Statement

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Learning Goals - Income Statement
Revenue Vs Gains, Expenses Vs Losses
Expenditure and Expense
Product cost and Period Cost
Flow of costs perpetual and periodic
Understanding and computation of :
Net Sales, Purchase and Sales Returns, Purchase and Sales
discounts, Freight Costs, COGS, Gross Profit, Operating
Expenses, Operating Profit, Non-operating Activities, EBIT,
Interest Expense, EBT, Tax Expense, Net Income, Income for
equity holders
Income Statement Hindalco, Infosys
Earning Per Share (EPS) Basic and Diluted
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Revenues and Expenses
Revenues: Expenses:
Economic resources earned by an entity Resources consumed in the process of
during a given accounting period generating revenue during a given accounting
period
These result from core operating (earning)
These are incurred in the process of creating
activities or ordinary activities of an entity revenues & involve decrease in economic
It involves gross inflow or increase in benefits in the form of :
economic benefits in the form of Outflow or consumption of assets or
Inflow or enhancement of assets Incurrence of liabilities or
(A/R) or A combination of both
Settlement of liabilities or Example: Cost of goods sold, rent expense

A combination of both They result in decrease in Equity


So, if an entity has Revenues > Expenses,
Example: For a manufacturer - Sale of
It has made a profit and the same goes to
goods to customers
Increase owners equity
They result in increase in Equity This profit can be called Net income or
Net earnings
But, if Revenues < Expenses, it has made a
Net Loss 3
Revenues and Gains
Revenue:
Increases Equity
Result from Core or major central Activities of the entity
Recorded at gross and are recurring in nature

Gains :
Increases in Equity
Result from peripheral or incidental transactions (i.e. other than those which
generate revenue or are new contribution by owners)
Might be beyond entitys control (change in Market Value of an investment)
Described by the source , Measured at Net amounts, Realizability
Example: Gain on sale of equipment
Expected to be non-recurring
Includes Non-reciprocal transactions like compensation received on winning a case

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Expenses and Losses
Expenses:
Decreases Equity (not by way of distribution to owners)
Result from core operations of the entity
Are resources consumed or used in the process of generating revenue

Losses:
Decreases Equity
Results from peripheral or incidental transactions (i.e. other than those generating
expenses for earning revenue or distribution to owners)
Opposite of Gains: Source, Net Amount, Recognized when Loss is evident (lost a
lawsuit and fine is payable)
Includes Non-reciprocal transactions like loss by fire

Net Income = (Revenues + Gains) (Expenses + Losses)

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Revenue Recognition Principle
1. Persuasive Evidence of an arrangement between buyer and seller
Contract with the buyer : Simple delivery of the product just before the year end,
without evidence of a prior order not a revenue
2. Product has been delivered/ service has been rendered
A Ltd received advance payment of Rs 50,000 for delivery of goods not yet produced
- should recognize the amount as unearned revenue (CL) till the goods are delivered
3. Price is determined or determinable (revenue can be measured reliably)
Precludes recognition if price depends upon contingency
4. Collectability is reasonable certain : How much ? (economic benefits probable to flow in)
The buyer has not become insolvent : Has the ability to pay REALIZABILITY
The buyer is not deliberately escaping payment by fleeing : Has the intention to pay
Uncertainty till embargo imposed on remittance to the sellers country not lifted
postpone revenue till collectability is certain
Recognize only to the extent, ultimate collection from customer is reasonably assured

IFRS: When significant risks & rewards of ownership of the goods have been passed, No
control on the goods sold, Amount of revenue and expected associated costs can be
measured reliably, economic benefits probable to flow in
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Expense Recognition

Expense Recognition :
Expenses need to be matched with the revenue in the period when the
company makes efforts to generate those revenues
Let the expenses follow the revenues
Also referred to as Matching Principle

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Are Cost, Expenditure and Expense same ?

Cost: is a monetary measurement of resources consumed for some purpose

Expenditure : Cost of all goods and services acquired during the year
Results in decrease in assets (Cash) or increase in liability (on credit - A/P) associated
with cost incurrence
Apply Matching Principle, the associated cost is either an asset or an expense
If cost benefits future periods Asset In BS (Capital expenditure)
Otherwise Expense in IS (Revenue expenditure)

Expense: is an item of cost applicable to current accounting period, benefits have expired

What is the effect on Owners Equity (OE) ?


If Asset: OE remains unaffected; If Expense: OE reduces
What happens if you recognized an asset as an expense & Matching
Principle violated ?
Overstatement of Expenses, Understatement of Assets and Shareholders Equity

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Capital and Revenue Expenditure
Two companies C and E started with cash and equity share capital of Rs 1000
Capitalize Rs 900; SLM Dep, UL=3, RV=0 Expense Rs 900 in year 1
C E
Year 1 2 3 Year 1 2 3
Revenue 1500 1500 1500 Revenue 1500 1500 1500
Cash Exp 500 500 500 Cash Exp 1400 500 500
Depn 300 300 300 Depn 0 0 0
PBT 700 700 700 PBT 100 1000 1000
Tax @30% 210 210 210 30 300 300
PAT 490 490 490 70 700 700

Retained Retained
Earnings 490 980 1470 Earnings 70 770 1470
Share Capital 1000 1000 1000 1000 1000 1000
Shareholders'
Equity 1490 1980 2470 1070 1770 2470

Asset -Net Asset -


Block 900 600 300 Net Block 0 0 0

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Recognition of Expense
A cost is an expense for the year in case of either of the three situations:

It has cause and effect relationship with revenues for the year
Direct Matching : Cost of goods sold, commission to sales person

It relates to the activities for the accounting period which might have no direct
cause and effect relation with sales volume for the period
Office Salary, Other Administrative Expenses, Advertising Expense, Training
Expense
Association with revenue can only be broadly or indirectly determined (like
systematic and rational allocation of cost of Plant bought during the current or
previous periods)
Even if cant be associated with operations of a period, it can be an expense if
It cant be associated with future revenues and therefore is recognised in the
immediate period (like inventory assessed obsolete, Loss due to fire)
There is no future economic benefits from it to meet asset recognition criteria
(like, outcome of research might be uncertain, difficult to measure reliably)
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Income Statement: US GAAP and IFRS
Two ways of grouping income statement items (particularly operating and other
expenses)
by Function
by Nature
Classification by nature identifies costs and expenses in terms of their character,
leads to descriptions such as salaries and wages, raw materials consumed,
depreciation expense, utilities expense etc.
Classification by function presents the expenses in terms of the purpose of the
expenditure, such as for manufacturing, administration, selling & distribution etc
Note that finance costs, tax expense must be identified separately regardless of
which classification is employed.

Under US GAAP, companies classify income statement items by function


Under IFRS, companies can classify expenses by either nature or function.
However, if a company uses the functional classification on the income
statement, disclosure by nature is required in notes to financial statements.
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Classification
Functional Classification : Cost of sales is deducted from Revenues to calculate gross profit.
So, it can provide more relevant information useful for analysis of Financial Statements
But allocating costs to functions may require arbitrary allocations based on judgment.

Income Statement Income Statement


For the Year Ended December 31, 2008 For the Year Ended December 31,
(classification of expense by nature) 2008

(in Rs Crores ) (classification of expense by function)


Revenue 800,000 (in Rs Crores )
Other income 100,000 Revenue 800,000
Changes in inventories of finished goods
and work in progress 50,000 Cost of sale 500,000
Raw materials and consumables used 110,000 Gross profit 300,000
Utility Expenses 60,000 Other income 100,000
Employee benefits expense 350,000
Selling and distribution expenses 100,000
Depreciation expense 200,000
Administrative expenses 170,000
Other expense 10,000
Finance costs 30,000 Other expenses 10,000

Total expenses 810,000 Finance costs 30,000


Profit before tax 90,000 Profit before tax 90,000
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Name of the Company.
Profit and loss statement for the year ended
Particulars Note No. Figures for
As per Schedule III of Companies Act 2013
(Rupees in)
Current Previous
Year Year
I. Revenue from operations
II. Other income
III. Total Revenues (I + II)
IV. Expenses:
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished goods, work-in-progress, and Stock-in-Trade
Employee benefits expense
Finance costs
Depreciation and amortization expense
Other expenses
Total expenses (IV)
V. Profit before exceptional and extraordinary items and tax (III-IV)
VI. Exceptional items
VII. Profit before extraordinary items and tax (V - VI)
VIII. Extraordinary Items
IX. Profit before tax (VII- VIII)
X Tax expense:
(1) Current tax
(2) Deferred tax
XI Profit/ (Loss) for the period from continuing operations (IX-X)
XII Profit/(loss) from discontinuing operations
XIII Tax expense of discontinuing operations
XIV Profit/(loss) from Discontinuing operations (after tax) (XII-XIII)
XV Profit (Loss) for the period (XI + XIV)
XVI Earnings per equity share:
(1) Basic
(2) Diluted
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Name of the Company. Revision: As per MCA Notification (6th April 2016)
Profit and loss statement for the year ended
Particulars Note No. Figures for (Rupees in)
Current Year Previous Year
I. Revenue from operations
As per Schedule III of Companies Act 2013
II. Other income
III. Total Income (I + II)
IV. Expenses:
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished goods, work-in-progress, and Stock-in-Trade
Employee benefits expense
Finance costs
Depreciation and amortization expense
Other expenses
Total expenses (IV)
V. Profit before exceptional items and tax (III-IV)
VI. Exceptional items
VII. Profit before tax (V- VI)
VIII Tax expense:
(1) Current tax
(2) Deferred tax
IX Profit/ (Loss) for the period from continuing operations (VII-VIII)
X Profit/(loss) from discontinuing operations
XI Tax expense of discontinuing operations
XII Profit/(loss) from Discontinuing operations (after tax) (X-XI)
XIII Profit (Loss) for the period (IX + XII)
XIV Other Comprehensive Income (OCI)
A (i) Items that will not be reclassified to profit or loss
(ii) Income tax relating to items that will not be reclassified to profit or loss
B (i) Items that will be reclassified to profit or loss
(ii) Income tax relating to items that will be reclassified to profit or loss
XV Total Comprehensive Income for the period (XIII+XIV)
[ Profit/(loss) + OCI for the period ]
XVI Earnings per equity share (for continuing ops, for discontinued ops & for both)
(1) Basic
(2) Diluted
Hindalco: Statement of Profit and Loss for the year ended March 31st
Particulars (in Rs. Crore) Note 2016 2015 2014
INCOME
Gross Revenue from Operations 23 36759.9 36,869.21 30,101.34
Less: Excise Duty 2442.24 2,344.18 2,250.41
Net Revenue from Operations 34317.66 34,525.03 27,850.93
Other Income 24 1066.21 882.21 1,124.42
Total Income 35383.87 35,407.24 28,975.35
EXPENSES
Purchases of Stock-in-Trade 25 1.48 37.04 0.03
Natural Classification

Cost of Raw Materials Consumed 26 19209.45 21,056.29 18,804.28


Changes in Inventories (WIP, FG, SIT) (Opening closing) 27 191.7 67.81 -676.21
Employee Benefits Expenses 28 1698.06 1,589.48 1,345.47
Power and Fuel 29 6508.06 5,200.77 3,557.61
Finance Costs 30 2374.76 1,637.09 711.65
Depreciation and Amortization 31 1277 837.03 823.29
Impairment Loss/(Reversal) (Net) 32
Other Expenses 33 3390.75 3,157.12 2,327.87
Total Expenses 34651.26 33,582.63 26,893.99
Profit Before Exceptional Items and Tax 732.61 1,824.61 2,081.36
Exceptional Items(Net) 34' 577.7 395.98
Profit before Tax 732.61 1,246.91 1,685.38
Tax Expenses: 35
Current Tax 119.63 321.52 314.72
MAT Credit Entitlement -119.63 -602.97
Deferred Tax 125.36 636.48 -16.83
Tax adjusted for earlier year(Net) -33.26 -25.84
Profit for the year 607.25 925.16 1,413.33
Earnings per Equity Share: 36
Basic and Diluted (Rs) 2.94 4.48 7.09
Income Statement Presentation
Income Statement Forms : Single Step and Multi-Step
Single-Step Income Statement (Functional Classification)
Cruz Corporation
A condensed income statement Income Statement
For the Year Ended December 31, 2010
that arrives at net income in a
single step Revenues
All major categories
Net sales $1,248,624
of revenues
Interest income 5,600
Subtract total expenses from Total revenues $1,254,224
total revenues
Costs and expenses
Cost of goods sold $815,040 All major categories
Two reasons for using the Selling expenses 219,120 of expenses
single-step format: General and administrative 138,016
Interest expense 10,524
Total costs and expenses 1,182,700
No profits until total revenues
exceed total expenses. Income before income taxes $71,524
Income taxes Income Tax listed separately 13,524
Format is simpler and easier
Net income $58,000
to read.
Earnings per share $2.90
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INFOSYS: Statement of Profit and Loss
Particulars Note 2017 2016 2015
Single Step Income Statement (Natural Classification)
Revenue from operations 2.18 59,289 53983 47,300
Other income, net 2.19 3,062 3006 3,337
Total income 62,351 56,989 50,637
Expenses
Employee benefit expenses 2.20 30,944 28207 25,115
Deferred consideration pertaining to acquisition 149 219
Cost of technical sub- contractors 4,809 4417 2,909
Travel expenses 1,638 1655 1,360
Cost of software packages and others 2.20 1,235 1049 979
Communication expenses 372 311 384
Consultancy and Professional charges 538 563 396
Depreciation and amortization expense 2.3 & 2.4 1,331 1115 913
Other expenses 2.20 2,546 1923 1,976
Total expenses 43,413 39,389 34,251
PROFIT BEFORE TAX 18,938 17,600 16,386
Tax expense
Current tax 2.17 5,068 4898 4,537
Deferred tax 2.17 52 9 97
Profit for the period 13,818 12,693 12,164
Earnings per equity share
Equity shares of par value Rs 5 each
Basic and Diluted 60.16 55.26 52.96 17
Profit for the period INFOSYS: 13,818.00 12,693.00
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Remeasurement of the net defined benefit liability / asset -42.00 -2.00
Equity instruments through other comprehensive income 2.5&2.17 -5.00 -
-47.00 -2.00
Items that will be reclassified subsequently to profit or loss
Fair value changes on cash flow hedges, net 39.00 -
Fair value changes on investments, net 2.5 -10.00 -
29.00 -
Total other comprehensive income, net of tax -18.00 -2.00
Total comprehensive income for the period 13,800 12,691
The Statement of Profit and Loss shall include (Sch. III of Companies Act 2013) :
(1) Profit or loss for the period(NI); (2) Other Comprehensive Income (OCI) for the period.
The sum of (1) and (2) above is Total Comprehensive Income
Comprehensive Income = Net Income +OCI
Comprehensive Income : All changes in the equity (or Net Assets) of the company due to
transactions with non-owners:
Transactions that affect stockholders equity, but are not stock transactions
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(OCI) includes items not allowed to be recognized in the Income Statement
Income Statement Presentation
Multiple-Step Income Statement
Presented in a series of
steps, or subtotals, to
arrive at net income

Highlights the components


of net income
Separates sources of
operating income from
non-operating sources
Three important line items:
Gross profit,
Income from operations
(Operating Income)
Net income.

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Multiple-Step IS : Infosys
12-07-2017 IIMC 2015 Prof. Arpita Ghosh
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Types of companies and their Operations
Merchandising or Trading Companies Retailer or Wholesaler
Buy and Sell products in the same form in which acquired
Merchandise Inventory: Cost of goods acquired but not sold
Manufacturing Companies
Converts raw material and purchased parts into finished goods
Makes and Sells products
Three types of Inventories RM, WIP, FG
Service Companies
Do not sell a physical product
Furnishes intangible services rather than tangible products
Example: Hotels, Legal firms
Might have some material inventories
like service of the plumber, Job in progress, but no FG

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Multistep Income Statements : Components
Service Merchandising/ Manufacturing
Revenues Net Sales
minus
Cost of Goods Sold
minus
Not used in a equals
Service business
Step 1: Gross Profit
minus
Operating Expenses Operating Expenses
equals equals
Operating
Step 1: Income from Operations Income Step 2: Income from Operations
plus or minus plus or minus
Other Revenues and Expenses Non-Operating Other Revenues and Expenses
minus minus
Interest Expense Interest Expense
equals equals
Step 2: Inc. Bef. Income Taxes EBT Step 3: Inc. Before Income Taxes
minus minus
Income Taxes Expense Income Taxes Expense
equals equals
Step 3: Net Income PAT Step 4: Net Income 22
Gross Sales and Net Sales
Gross sales equal the total cash sales and total credit sales during a given
accounting period
Revenue is recorded when earned under Revenue recognition rule
Revenue is recognized even though cash may not be collected until the
following accounting period
Net Sales - Amount of sales and trends in net sales over time are used to analyze a
companys progress
Payment Terms: n/15/EOM: Payment due in 15 days from the end of the month
Gross Sales (Cash and Credit sales) 1,20,000 Sales Returns and Allowances Dr
Less: Taxes, If any (like Excise Duty) 20,000 Accounts Receivables Cr.
Less: Sales Returns and Allowances 600
Sales Discount eg. 1/10, n/30:
Net Sales 99,400 Buyer gets 1% discount if pays in 10 days,
o.w. he can pay full amt in 30 days
Trade Discount Cash Dr. 990
Sales Discount Dr. 10
Hindalco Trade Receivables Cr 1,000
23. Revenue from Operations: 3/31/2016 3/31/2015
Sale of Products 36,364.28 36,438.59 INFOSYS As at March 31,
Other Operating Revenues 395.62 430.62 2.18 Revenue from operations 2017 2016
Gross Revenue from Operations 36,759.90 36,869.21 Revenue from software services 59,257 53,334
2,442.24 2,344.18 Revenue from software products 32 649
Less: Excise Duty
59,289 53,983
Net Revenue from Operations 34,317.66 34,525.03
Cost of Goods Purchased : Merchandising company
Purchase Price * Quantity Purchased
Exclude: Purchase Returns & Allowances and Purchase Discounts
= Net Purchases
Include: Freight in, Taxes (like Customs duty, Road Taxes) Transit Insurance,
Handling Charges (Unloading etc)
= Cost of Goods Purchased ( or Net Cost of Purchase)

Purchases ( Rs 6 * 10,000) 60,000


Less: Purchase Returns 800
and Purchase Discounts
Add: Freight-In, Taxes, If
any (like Customs Duty),
Handling Charges, Transit 5,000
Insurance Premium
Cost of goods Purchased 64,200

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Freight Costs Terms of Sale

Title passes when shipped


Ownership passes to the buyer
when the public carrier accepts the
goods from the seller
Buyer bears freight-in
Goods in transit : Buyers
Inventory
Freight-in costs incurred by the buyer is part of cost of goods purchased.

Title passes at destination


Ownership remains with the seller
until the goods reach the buyer
Seller bears freight-out
Goods in transit : Sellers Inventory

Freight costs incurred by the seller are an operating expense.


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Cost of Goods Sold: Merchandising Company

Beginning inventory $ 15,000


Beginning Purchases of
inventory + merchandise
+ Cost of goods purchased 63,000
= Cost of goods available for sale 78,000
Ending inventory (18,000)
= = Cost of goods sold $ 60,000
Goods Available for Sale

Pool of goods
Less: Ending inventory available to sell
during the period

Cost An increase in ending


of goods inventory means more
was bought than sold
sold
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Merchandising Operations - Flow of Costs and COGS
Beginning Inventory + Cost of goods Purchased
= Cost of goods Available for Sale = Cost of goods Sold + Ending Inventory

Ins Beginning Inventory Cost of goods Purchased

Cost of Goods
Available for Sale
Outs Cost of Goods Sold Ending Inventory

Calculation of Cost of goods sold (COGS) - For Merchandising Company


Purchases net of Purchase Returns and Discounts 300000
Add: Freight inwards, Transit Insurance , Others like handling 4000
Charges (related to Purchases)
= Cost of goods Purchased 304000
Add: Opening Inventory 10000
= Cost of goods available for sale 314000
Less: Closing Inventory 4000
= Cost of goods sold 310000

Companies use either a perpetual inventory system or a periodic inventory system to


account for inventory. 27
Cost of Goods Sold : Manufacturing Company

Raw Material : Direct Material Cost Total Manufacturing Costs


Opening RM + Opening WIP
+ RM Purchases (net) + Direct Labour Costs - Closing WIP
+ Freight-in, if any
- Closing RM + Manufacturing Exp
Incl. depreciation on = Cost of goods
= Raw Material
factory assets manufactured
Consumed in
production + Opening FG
= Total Manufacturing Costs
= Goods available for
Sale
- Closing FG
Conversion Costs
= Cost of Goods
Sold (COGS)
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Calculation of Cost of goods sold (COGS) - For Manufacturing Company
Opening Raw Material 10000
Add: Raw Material Purchased net of Sales returns and Discounts 200000
Add: Freight in etc. 4000
Less: Closing Stock of Raw Material 7000
= Raw Material Consumed 207000

Add : Direct Labour cost or Direct wages 50000


Add: Manufacturing Expenses Conversion Cost 35000
= Total Manufacturing Costs 292000
Adjustment for WIP :
Add: Opening WIP 20000
Less: Closing WIP 30000
Adjustment for FG :
= Cost of goods manufactured 282000
Add: Opening Finished Goods 8000
= Cost of goods available for sale 290000
Less: Closing Finished Goods 10000
= Cost of goods sold 280000

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Product Cost and Period Cost
Product costs
Are connected with production of goods
Includes Material cost, Labour cost and other costs incurred to convert the RM
into Finished Goods
Also called Inventoriable Cost
Added to Inventory (assets) till the products are sold
Charged to IS as and when goods are sold (Matching Principle)
Cause and Effect relation with Sales, Important for ascertaining Gross Profits
Do not have an impact on income until the product has been sold
Period Costs
Are costs associated with a given accounting period which are expenses in the
period in which they are incurred
Can not be traced to any revenue transaction during the period, No Cause & Effect
relationship with Revenues
General costs of being in the business like General and Administrative Expenses
What if there is difference of opinion in classifying a cost like Production Administration
as Period cost or Product cost ?
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Merchandising Operations - Flow of Costs
Perpetual System Periodic System
Maintain detailed records of the cost of Do not keep detailed records of the
each inventory purchase and sale. goods on hand.
Records continuously show inventory No Running account of changes in
that should be on hand. inventory as and when sales occur

Company determines cost of goods sold


each time a sale occurs. At the end of the accounting period,
the ending inventory on hand is
Physical inventory count for verification
of accuracy of records determined by physical count
and Cost of goods sold is calculated
Traditionally used for merchandise with at that time as follows :
high unit values. Beginning inventory $ 100,000
Provides better control over inventories Add: Cost of goods
identifies Inventory Loss purchased 800,000
Goods available for sale 900,000
Requires additional clerical work and Less: Ending inventory 125,000
additional cost to maintain inventory Cost of goods sold $ 775,000
records.
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Comparison

Transactions related to Sales

32
Gross Profits
Cost of Goods Sold (COGS) :
Aggregate of cost of purchase or production of units sold and cost
incurred to bring them to the location and condition of sales
Matched with Revenues generated during the period, Product Cost

Gross Profits
= Net Sales Cost of Goods Sold

Comparison with past, Industry


Gross Profit : Absolute
Gross Profit/ Net Sales
Shows efficiency of
Pricing, Purchasing
& Manufacturing Process
Can also be improved by Operating Exp
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25. Purchases of Stock-in-Trade: 31-03-2016 31-03-2015
Other Materials 1.48 37.4

Hindalco
26. Cost of Materials Consumed 31-03-2016 31-03-2015
Copper Concentrate 13,231.19 16,155.19
Alumina 2,218.61 1,255.78
Bauxite 258.76 234.3
Caustic Soda 497.23 515.85
Calcined Petroleum Coke 928.45 784.81
Rock Phosphate 484.97 417.39
Anode 522.52 380.57
Others 1,078.81 1,347.49
19,220.54 21,091.38
Less: Transfer to Capital Work-in-Progress 11.09 35.09
19,209.45 21,056.29

27. Change in Inventories of Finished Goods, WIP, & Stock-


in-Trade 31-03-2016 31-03-2015
Opening Inventories
Finished Goods 556.94 525.68
Work-in-Progress 3,842.98 3,924.04
4,399.92 4,449.72
Less: Closing Inventories
Finished Goods 849.80 556.94
Work-in-Progress 3,355.74 3,842.98
4,205.54 4,399.92
194.38 49.80
Add: (Increase)/Decrease of Excise Duty on Inventories -2.68 18.01
191.70 67.81
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Operating Expenses and Operating Income
Expenses other than COGS that are incurred in running a business

Selling Expenses
Store Rent, Salary, travel
expenses of Sales staff, Sales
Commission, Delivery Expense
Promoting sales, Advertising
Freight out expense (FOB-D),
Deprectn. on store equipment
General & Administrative Expenses
Accounting, Personnel (Salaries)
Credit & Collections
Office rent, Dep on Office Equipm
Expenses related to overall
operations (Stationery, Telephone)
General Occupancy Expenses: Rent,
Utilities, Insurance (To be allocated:
Selling and Gen & Admn Expenses)
Operating Income: Gross Profit - Operating Expenses
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28. Employee Benefits Expenses 31-03-2016 31-03-2015
Salaries and Wages 1,377.29 1,251.64
Hindalco Contribution to Provident and other Funds 175.36 227.99 Factory or
Employee Share-Based Payments 6.91 7.22 Admin?
Employee Welfare 146.46 135.71
1,706.02 1,622.56
Less: Transfer to Capital Work-in-Progress 7.96 33.08
1,698.06 1,589.48
29. Power and Fuel 31-03-2016 31-03-2015
Power and Fuel 6,549.29 5,270.09 Factory or
Less: Transfer to Capital Work-in-Progress 41.23 69.32 Admin?
6,508.06 5,200.77

31. Depreciation and Amortization 31-03-2016 31-03-2015


Depreciation and Amortization 1,278.10 842.27 How
Less: Transfer to Capital Work-in-Progress 1.1 5.24 much wrt
Factory ?
1,277.00 837.03

32. Impairment Loss/(Reversal) (Net) 31-03-2016 31-03-2015


Impairment Loss 561.7 95.26
Adjusted with Business Reconstruction Reserve Rs
62.29 crore and Deferred Tax of Rs 32.97 crore 561.7 95.26
- -

34. Exceptional Items (Net) 31-03-2016 31-03-2015


Exceptional Expenses - 967.74
Exceptional Income - -390.04
- 577.7
33. Other Expenses 3/31/2016 3/31/2015 INFOSYS As at March 31,
Consumption of Stores and Spares 684.92 599.58 2.20 Expenses 2017 2016
Employee benefit expenses
Repairs to Buildings 58.42 47.47
Salaries including bonus 30,111 27,551
Repairs to Machinery Factory or 471.68 479.85 Contribution to provident and other funds 640
Hindalco

548
Admin?
Rates and Taxes 23.13 23.27 Share-based payments to employees (Refer to 107Note 2.12) 7
Rent 53.65 38.46 Staff welfare 86 101
30,944 28,207
Insurance 121.84 106.76
Cost of software packages and others
Payments to Auditors - (a) 5.06 4.46 For own use 729 663
Research and Development 19.44 23.46 Third-party items bought for service delivery506
to clients 386
Freight and Forwarding Expenses (Net) - (b) 607.24 607.12 1235 1049
Provision for Doubtful Loans, Advances and Receivables (Net) -7.7 48.73 Other expenses
Power and fuel 180 179
Bad Loans, Advances and Receivables written off/(written back) (Net) 23.41 2.8
Brand and marketing 276 229
Prior Period Items (Net) 1.87 -0.62 Operating lease payments 284 175
Donation - (c) 6.16 18.36 Rates and taxes 118 99
Directors' Fees and Commission 2.25 4.19 Repairs and maintenance 1,073 873
Loss on assets held for sale -2.25 8.36 Consumables 31 28
Insurance 45 48
(Gain)/Loss on Change in Fair Value of Derivatives (Net) 13.26 -29.29 Provision for post-sales client support and warranties
84 18
Cost of own Manufactured Products Capitalized/Used -22.6 -21.23 Commission to non-whole-time directors 9 8
Miscellaneous Expenses - (d) 1,339.63 1,224.67 Impairment loss recognized (reversed) on financial
140 assets-45
Statutory audit fees 2 2
3,399.41 3,186.40
Contributions towards corporate social responsibility
215 202
Less: Transfer to Capital Work-in-Progress 8.66 29.28 Others 89 107
3,390.75 3,157.12 2546 1923
Earnings Before Interest and Taxes (EBIT)
= Operating Income
+ Other Revenues and Gains
Other Expenses and Losses

Other Income and Expenses: Non- operating Activities, EBIT


Various revenues, expenses, gains and losses unrelated to companys main line
of operations, Not part of a companys operating activities
Other income and gains
Interest Income on securities (in case of a company other than a finance company)
Dividend Income (from investment in capital of other companies)
Gain on sale of investments, plant & equipment
Other non-operating income (net of expenses directly attributable to such income)
like Rent income
Other expenses and losses
Casualty losses from causes like vandalism, accidents
Loss from sale of investment, plant & equipment
Loss from strikes by employees, suppliers

38
Other Revenues and Expenses: Non- operating Activities
24. Other Income: 31-03-2016 31-03-2015 2.19 Other income 2017 2016
Interest Income
Hindalco

Interest received on financial assets carried at amortized cost


On Long-term Investments 8.28 8.84 Tax-free bonds, government bonds
On Current Investments 170.46 148.34 and debentures 320 168
On Others - (a) 274.94 169.6 Deposits with banks and others 2028 2338
Dividend Income Interest received on financial assets fair valued through OCI
On Long-term Investments - (b) 154.78 41.46 Non-convertible debentures and
On Current Investments 14.82 20.44
certificates of deposit 182 0
Gain/(Loss) on sale of Investments (Net)
Dividend received on investments carried at fair value through PL
On Long-term Investments 17.37 -
On Current Investments 379.65 425.16 Mutual fund units 23 57
Adjustments to the carrying amount of Investments (Net) Gain / (loss) on investments carried at
On Long-term Investments 0.82 -0.11 fair value through profit 111 0
On Current Investments -0.38 16.05
Profit/(Loss) on Fixed Assets sold/discarded (Net) -1.18 -15.25 Exchange gains / (losses) on foreign
Rent Income 4.9 4.63 currency forward and options contracts 551 26
Liabilities no longer required written back 39.01 64.36
Other Non-Operating Income (Net) 2.74 1.06 Exchange gains / (losses) on translation
1,066.21 884.58 of other assets and liabilities -324 141
Less: Transfer to Finance Costs - (c) - 2.37 Miscellaneous income, net 171 276
1,066.21 882.21 3062 3006
EBIT and EBT
Income before income taxes (EBT) = EBIT Interest Expense/Finance cost

Hindalco
30. Finance Costs 31-03-2016 31-03-2015
Interest Expenses - (a) 2,328.07 2,415.65
Other Borrowing Costs 17.55 13.69
Loss on Foreign Curreny Transactions and Translation (Net) 29.14 20.39
2,374.76 2,449.73
Less: Income on Specific Borrowing - (b) - 2.37

Less: Transfer to Capital Work-in-Progress - 810.27


2,374.76 1,637.09
EBITDA (Earning before interest, tax , depreciation and amortization)

= EBIT + Depreciation & Amortization


40
EBT, Taxes and Net Income (PAT)
Income before income taxes Amount a company has earned from all activities: operating and
(EBT) non-operatingbefore taking into account the amount of income
taxes it incurred
Less Provision for income taxes, represent the expense for taxes on
Income taxes expense corporate income

Net income Bottom line is what remains of the gross margin after
operating expenses are deducted,
other revenues and expenses are added or deducted, and
income taxes expense are deducted
Represents earnings that accrue to stockholders
Amount transferred to Retained Earnings from IS
Hindalco
35. Tax Expenses 31-03-2016 31-03-2015
Current Tax 119.63 321.52
MAT Crdeit Entitlement - (a) -119.63 -602.97
Deferred Tax - (b) & 125.36 636.48
Tax adjustments for earlier years (Net) - -33.28
125.36 321.75

Net income = Income before income taxes (EBT) Income taxes expense
PAT = EBIT Interest Expense Income taxes expense 41
Income
Statement
Presentation

Net Profit Margin


= Net Income
Net Sales

Measures the
extent by which
selling price covers
all expenses

Show
separately
as finance
cost

42
Income Statement 20XX
Multiple Step Income Statement
Sales Revenue
Continuation 20XX
Gross Sales (Price per unit * Units sold)
Less: Taxes, Sales Returns
OPERATING PROFIT
or Profit from Operations
Net Sales ***
Add: Other Income (Non-Operating- **
Less: Cost of Goods Sold (COGS) : like Gain on sale of equipment)
Raw Material Consumed (includes Interest Income)
(Opening + Purchases(Net of returns + Freight In) Less: **
Closing) Other Expenses (Non-Operating)
Direct Labour Cost EBIT
(Earnings Before Interest and Taxes )
Manufacturing Expenses (related to Factory) Less: Interest Expense
Adjustment for WIP EBT (Earnings Before Tax)
(Add: Opening WIP Less: closing WIP)
Less: Income Tax
Adjustment for FG
(Add: Opening FG, Less: closing FG) PAT
(Earnings or Profits After Tax)
COGS ***
or (Net Income or Net Profits)
GROSS PROFIT
Add: Other Operating Income (if any) ** Less: Dividend to Preference SH
Less: Operating Expenses (SG&A) ** Profits Available to Equity SHs
OPERATING PROFIT EPS 43
Missing Figures
E-5-7 (page 221) YANIK NUNNEZ

Sales 90,000 105,000


Sales returns and allowances (6,000) (5,000)
Net sales 84,000 100,000 Assignments:
Cost of goods sold (58,000) 60,000 E 4-6 (p173)
Gross profit 26,000 40,000
Operating expenses (14,380) 23,000
Net income 11,620 17,000

Yanik Nunez

$11,620 $84,000 $17,000 $100,000 =


Profit margin = 14% 17%

$26,000 $84,000 $40,000 $100,000 =


Gross profit rate = 31% 40%

44
Missing Figures
E-5-7 (page 221) YANIK NUNNEZ

Sales 90,000 105,000


Sales returns and allowances (6,000) (5,000)
Net sales 84,000 100,000 Assignments:
Cost of goods sold (58,000) 60,000 E 4-6 (p173)
Gross profit 26,000 40,000
Operating expenses (14,380) 23,000
Net income 11,620 17,000

Yanik Nunez

$11,620 $84,000 $17,000 $100,000 =


Profit margin = 14% 17%

$26,000 $84,000 $40,000 $100,000 =


Gross profit rate = 31% 40%

45
KAFFEN COMPANY
Income Statement
For the Six Months Ended April 30, 2014 E 4-6, Page 173
Revenues
Repair services
(Cash $32,150 + Accrued $540) $32,690
Expenses
Salaries and Wages expense KAFFEN COMPANY
(cash $2,600 + accrued $420) 3,020 Balance Sheet as on April30, 2014
Rent expense Assets
(Payment $1,225 Prepaid $175) 1050 Current Assets
Utilities expense 970 Cash $27,780
Depreciation expense [$9,200 Accounts receivable 540
*6/48] 1150
Prepaid rent 175
Advertising expense 375 6,565
Total current assets $28,495
Profit before tax (PBT) $26,125
Property, plant, and equipment
Income tax expense 10,000
Equipment 9,200
Net income $16,125
Less: Accumulated
depreciationequipment 1,150 8,050
Total assets $36,545
Liabilities and Stockholders Equity
Current Liabilities
Salaries and wages payable $420
Stockholders equity
Common stock $20,000
Retained earnings 16,125 $36,125
Total stockholders equity
Total liabilities and
46
stockholders equity $36,545
Assignment Questions for Chemalite Case:

1. Prepare T accounts to record the transactions of Chemalite during its pre-operation


period as well as for the full year 2003. Compute the closing balances of each account
and prepare the Adjusted Trial Balance.

2. Recording of the some of these transactions would have involved you making one or
more assumptions. Identify such transactions and explain the assumptions.

3. Prepare Multi-Step Income Statement, Classified Balance sheet, and Statement of


Retained Earnings for the year ended 31st Dec 2003.

4. Explain the change in cash. How much of the total change in cash is related to
operations? How much is related to financing? How much is related to investing?

5. Use 3) and 4) above to help perplexed Alexander explain to the stockholders why
Chemalites bank account did not support Alexanders feeling that things were going
well.

Assignment related to Income Statement of Hindalco:


- Prepare Multi-Step Income Statement (including calculation of Gross Profit)
47
Thank You

48
Comprehensive Income
All changes in the equity (or Net Assets) of the company due to transactions
with non-owners
Transactions that affect stockholders equity, but are not stock
transactions
Comprehensive Income (CI)
= Net income + Other Comprehensive Income (OCI):

Other Comprehensive Income (OCI) includes items not allowed to be


recognized in the Income Statement like
Changes in unrealized investment gains and losses
Foreign currency translation adjustments
Comprehensive income can be shown as part of the statement of
stockholders equity or in a separate statement or by way of reconciliation
of Net Income to CI in IS

49
Extra: Other Comprehensive Income India
( REVISED Sch III of companies Act 2013 )
Other Comprehensive Income shall be classified into

(A) Items that will not be reclassified to profit or loss


(i) Changes in revaluation surplus;
(ii) Re-measurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive Income;
(iv) Fair value changes relating to own credit risk of financial liabilities designated at fair
value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent
not to be classified into profit or loss; and
(vi) Others (specify nature).

(B) Items that will be reclassified to profit or loss;


(i) Exchange differences in translating the financial statements of a foreign operation;
(ii) Debt Instruments through Other Comprehensive Income;
(iii)The effective portion of gains and loss on hedging instruments in a cash flow hedge;
(iv) Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent to
be classified into profit or loss; and
(v) Others (specify nature).

50
Discontinued Operations
A component of an entity that has been disposed of, or is classified as held for sale
Represents a separate major line of business or geographical area of
operations
Is part of a single coordinated disposal plan

Extraordinary Gains or Losses (Not there in Indian format as per revised IS format)
Income or expenses that arise from events which are
Unusual in nature, Infrequent in occurrence
Clearly distinct and not related to ordinary business of the entity
Examples: Uninsured losses from a major casualty (Earthquake, Volcano,
Tornado), Losses from expropriation by foreign government
US GAAP recognizes the concept, IFRS has withdrawn it

Exceptional Items:
Items of Revenue or expense which are of such size, nature or incidence that
their disclosure is relevant to explain the performance of the entity for the period.
Example: Restructuring charges

51
Additional Exercise: Missing Figures

Case 1 Case 2 Case 3 Case 4 Case 5


Sales 79,000 43,700 96,100 13,900 63,500
Beginning inventory 2,400 850 8,500 280 9,600
Net cost of purchase 58,900 34,700 79,400 14,710 87,400
Cost of goods available for sale 61,300 35,550 87,900 14,990 97,000
Ending Inventory 4,700 960 2,300 110 2,000
Cost of goods sold 56,600 34,590 85,600 14,880 95,000
Gross profit 22,400 9,110 10,500 -980 -31,500
Operating expenses 16,800 9,470 9,200 1,720 4,000
Net profit(loss) 5,600 -360 1,300 -2,700 -35,500

52
Solution to Additional Exercise: Missing Figures

Case 1 Case 2 Case 3 Case 4 Case 5


Sales 79,000 43,700 96,100 13,900 63,500
Beginning inventory 2,400 850 8,500 280 9,600
Net cost of purchase 58,900 34,700 79,400 14,710 87,400
Cost of goods available for sale 61,300 35,550 87,900 14,990 97,000
Ending Inventory 4,700 960 2,300 110 2,000
Cost of goods sold 56,600 34,590 85,600 14,880 95,000
Gross profit 22,400 9,110 10,500 -980 -31,500
Operating expenses 16,800 9,470 9,200 1,720 4,000
Net profit(loss) 5,600 -360 1,300 -2,700 -35,500

53