Professional Documents
Culture Documents
Chapter 4
Chapter 4
This account is prepared to calculate the gross profit or gross loss of the organization
on the basis of purchases and sales. To find out the gross profit the cost of goods sold
is deducted by sales, where cost of goods is calculated by adding opening stock,
purchases, and all direct expenses which includes expenses created during purchases
and bringing the goods to the specific location and then deducting it with closing
stock.
a. The trading account shows the Gross Profit of the organization which plays a
major role in meeting all the business expenses. So, it is important that the gross
profit should be such that it can meet the indirect expenses of the organization.
b. The total amount of net sales is calculated through this account. Ledger depicts the
gross sales of the organization through sales account but net sales are obtained
from trading account. Since the actual sales of the business is net sales and not the
gross sales.
c. The comparison of net sales of current year with previous year ascertains the
62
success or failure of the organization. It should also be taken into consideration
that there can be increase in the sales amount due to increase in price level.
d. Gross Profit Ratio is ascertained through trading account. It also plays as a major
parameter for the measurement of success and failure of the business.
e. Stock Turnover Ratio is determined through trading account. The higher the ratio
better it is which shows that the sale of goods take place as soon as they are
purchased.
Profit and Loss account is an account which helps in disclosing the net profit or loss
earned by the organizations. The Gross Profit of the organization is determined
through trading account whereas net profit is determined through profit and loss
account after deducting all the indirect expenses of the business from the gross profit.
It can be concluded that profit and loss account starts with the gross profit which is the
result of trading account. The items which are required to create profit and loss
account are provided in trial balance of the business. Out of the many revenue and
expenses only indirect revenue and indirect expenses are considered. The gross profit
of the organization is shown is the credit side with all the indirect revenue and indirect
expenses are shown in the debit side. If it is found that the total of credit side exceeds
the total of debit side then the resultant will be net profit and if the situation is reversed
then the resultant will be net loss.
a. The major purpose of making profit and loss account is to ascertain the profit and
loss of the organization. It is the actual profit of the organization which is held by
the proprietor which is calculated after charging the indirect expenses.
b. It is the parameter for profitability. It plays an important in comparing the results
of current year with previous year and concludes that whether the business is
running efficiently or not.
c. The comparison made with the expenses of the profit and loss account of current
year with the expenses of the profit and loss of the previous year will guide the
management to take necessary action to control the expenses.
d. The net profit ratio is calculated by comparing net profit with the net sales. It
63
depicts the short coming of the organization which can be removed.
Out of the three major financial statements, profit and loss account is one of the
statement which gives clear picture of the business profitability. The other two
statements are balance sheet and cash flow statement. Income statement depicts that
how much the company is able to convert its revenue into the net profit of the
organization. The purpose of profit and loss account is to illustrate whether the
organization has earned or lost money for the financial year reported.
The income statement is branched into operating and non−operating activities.
Operating items shown in Profit and Loss account are studied by the investors and
analyst, since it discloses the information related to revenue and expenses of the
organization which are the resultant of the regular business operations whereas the
non-operating items are the items which does not the directly related to business.
Interest Earned
a. Interest / discount on advances / bills
b. Income from investments
c. Interest on balance with RBI and other inter-bank funds
d. Others
Other Income
a. Commission, exchange and brokerage
b. Profit on sale of land, buildings and other assets
c. Profit on exchange transactions Profit on sale of investments(net)
d. Profit on revaluation of investments
e. Lease finance income
f. Overdue charges
g. Interest on lease rent receivables
h. Miscellaneous income.
64
Items in Income side of Profit and Loss Account of Allahabad Bank
Interest Expended
a. Interest on deposits
b. Interest on RBI / inter-bank borrowings
c. Other interest
Operating Expenses
a. Payments to and provisions for employees
b. Rent, taxes and lighting
c. Printing and stationery
d. Advertisement and publicity
e. Depreciation on bank's property
f. Depreciation on Leased Assets
g. Directors' fees, allowances and expenses
h. Auditors' fees and expenses
i. Law charges
j. Postage, telegram, telephone etc.
k. Repairs and maintenance
l. Insurance
m. Other expenditure
65
4.4 Income Statement For The Year Ended 31st March 2015
Table 4.1: Profit & Loss A/c of Allahabad Bank
Consolidated Profit & Loss account of Allahabad Bank ------------------- in Rs. Cr. -------------------
Mar 15 Mar 14
12 mths 12 mths
INCOME
Interest / Discount on Advances / Bills 14,965.79 13,911.82
Income from Investments 4,493.14 4,591.02
Interest on Balance with RBI and Other Inter-Bank funds 202.50 116.38
Others 87.63 156.38
Total Interest Earned 19,749.06 18,775.60
Other Income 2,124.58 2,274.20
Total Income 21,873.64 21,049.80
EXPENDITURE
Interest Expended 13,537.34 13,434.56
Payments to and Provisions for Employees 2,324.45 2,260.66
Depreciation 101.10 84.05
66
4.4.1 Interpretation of Profit & Loss Account of Allahabad Bank
a. The Net Interest Income of the organization has increased from Rs. 477.26 crore to
Rs. 1428.45 crore in current year which shows a good growth which shows that the
bank is able to pay low rate to the depositor and is able to charge higher rate to the
borrower.
b. The Net Profit is found to be decreased to Rs. 631.14 crore during the financial
year ended 2015 as against Rs. 1180.75 crore as compare to last year.
c. Operating Expenses of the organization has been observed a minor increase from
Rs. 3583.91 crore to Rs. 3857.02 crore.
d. The other income has decreased from Rs. 2274.20 crore to Rs. 2124.58 crore
which is around 6.56%.
67
Employees
Depreciation 84.05 101.10 17.05 20.24
Operating Expenses (excluding
1239.20 1431.47 192.27 15.51
Employees cost and depreciation)
Total Operating Expenses 3583.91 3857.02 273.11 7.62
Provision and Contingency 2850.58 3848.14 997.56 34.99
Total Expenses 19869.05 21242.50 1373.45 6.91
Net Profit 1180.75 631.14 (549.61) (46.54)
Net Profit / Loss after EI and prior
1180.75 631.14 (549.61) (46.54)
year item
68
4.5.2 Interpretation of Comparative Profit and Loss Account of
Allahabad Bank
a. Interest earned as compared to 2014 has increased by Rs. 973.46 crore which is
around 5.18% in 2015.
b. Similarly interest expended is also observed to increase slightly by Rs. 102.78
crore which is 0.77% as compared to previous year.
c. The total operating expenses of the bank is observed to be increased from Rs.
3583.91 crore to Rs. 3857.02 crore that is around 7.64%.
d. Due to higher expenses booked under “other provision & Contirgence”, it was
observed that the bank faced reduction in income in 2015.
e. It was also seen that the total appropriation has decreased from Rs. 1561.76 crore
to Rs.1168.96 crore which shows a decrease of 25.15 %
Overview:
The Net Profit ratio is the most important ratio which is considered while analyzing
the financial statement. The ratio shows the relationship between the net profit after
tax and net sales of the organization. The net profit after tax is divided by net sales to
find out net profit ratio. The calculation of Net Profit is done by deducting gross profit
with operating expenses and income tax. The Net Profit Ratio is stated in terms of
percentage. The ratio is also known as Net Profit Margin.
Formula:
The Net Profit Ratio is a significant tool to calculate the total productivity of the
organization. The higher ratio is better in the efficiency of management. The ratio is
69
used by the analyst to compare the results of current year with the results of previous
year.
a. It is likely that the organization may postpone their flexible expenses for example,
repair, maintenance, so that the organization can show better net profit.
b. The organization can voluntarily keep the net profit less than the actual profit
which will help the organization to hold the market and though they will be
earning less profit, according to low pricing strategy.
c. It is the short term ratio which is not capable of revealing the working of the
company in case of maintaining the profitability for wider period of time.
Table 4.3
Statement of Net Profit to Net Sales
(In Rs. Crore)
Year Net Profit (Rs.) Net Sales Ratio
(Rs.) (%)
2013−2014 1180.75 18775.60 6.28
2014−2015 1631.14 19749.06 3.30
5
Percentage
4
6.8 Net Profit Margin
3
2
3.2
1
0
2014 2015
Year
70
Interpretation:
The Net Profit Ratio of the Allahabad Bank showed the decreasing trend in 2015
which was 3.2% as compared to the year ended 31st March 2014 which was 6.8%. It
shows that bank needs to work on its policies so that efficient management takes place
and cost is reduced and bank earn larger profit.
Overview:
Net Interest Margin is a ratio similar to Gross Profit Margin ratio considered in non−
financial organization. It is calculated when Interest earned by the organization is
subtracted by Interest expended and then it is divided by the total assets. It is presented
in percentage format. The higher the ratio better is the investment strategy. On
contrary, if the ratio is less, it will show that the investment is costing higher than its
return. Through this ratio, it can analysed that whether the investments are really
making money or not so that the interest expended can be vindicated or to decrease
interest expense the company is paying off its debt.
Formula:
Net Interest Margin is a major ratio in banking sector as bank lends to their customer
at different rate and pay the depositor at different rate. But, due difference in working
pattern, comparison between the net interest margin is not possible between various
banks.
The major failure of the ratio is that it is incapable of measuring the total profitability
of the bank, as there are other incomes which the bank earns in the form of fees,
brokerage and commission which is not considered. Moreover, operating expenses are
also not considered.
71
Table 4.4
Statement of Net Interest Margin
(In Rs. Crore)
Year Net Interest Total Assets Ratio
Income (Rs.) (Rs.) (%)
2013−2014 5341.04 220951.94 2.42
2014−2015 6211.72 227679.66 2.73
% 2.35 2.42
2.3
)
2.25
2013−2014 2014−2015
Year
Interpretation:
From the above graph, it can be observed that the percentage of the Net Interest
Margin has increased from 2.42% to 2.73% in 2015, which shows that the bank has
experienced more demand for loan, mutual funds and trust.
Overview:
The Operating Expense Ratio is the ratio which calculates the amount which is
required for the working of the organization in comparison to the income earned by it.
The ratio is calculated in the percentage format by dividing operating expense with
72
income generated. The ratio depicts the financial efficiency and efficiency of the
management. Lower percentage is more profitable for the organization.
Formula:
6.4
6.2
5.6 5.89
5.4
2013−2014 2014−2015
73
Interpretation:
It is observed that the Operating Expense Ratio has increased from as compared to
previous i.e., from 5.89% to 6.54% which shows the unfavorable condition for the
bank and also depicts that there is decrease in efficiency.
Overview:
Return on Capital Employed is a significant profitability ratio which calculates not
only the basic profitability but also provides the in-depth details related to the
performance of the business and utilization of the capital in such a way that more
profit is earned out of the investments done by the stakeholders. It is measured by
dividing EBIT by Capital Employed. The higher the ratio, more efficient the
utilization of capital is.
Formula:
74
Table 4.6
Statement of Return on Capital Employed
(In Rs. Crore)
Year EBIT Net Capital Ratio
(Rs.) Employed (%)
(Rs.)
20
R
a 19.5
t
i 19
o 20.21
Return On Capital Employed
18.5
(
%
18.69
)
18
17.5
2013−2014 2014−2015
Year
Interpretation:
The ratio is observed to increase due to increase in earnings before interest and tax in
the bank. The ratio was 18.69% in the year 2014 and 20.21% in the year 2015 which
means that the investments of the shareholders are efficiently utilized by the
management.
75
4.6.5 Return On Equity (ROE)
Overview:
The Return on Equity is return on the amount which has been invested by the
shareholders of the organization. The ratio is usually used by the investors to calculate
the current and potential investment in the organization. To improve the ratio the
organization buys back its own stock from its shareholders or the organization uses
more debts and less equity for performing its operations. To calculate the ratio, net
income is divided by the Equity and depicted in percentage form.
Formula:
76
Table: 4.7
Statement ofReturn on Equity
(In Rs. Crore)
Year Net Income Shareholders’ Ratio
(Rs.) Equity (%)
(Rs.)
2013−2014 1180.75 12041.29 9.80
2014−2015 631.14 12906.72 4.89
Return On Equity
12
R 10
a
8
t
i 6
o 9.8 Return On Equity
4
(
% 2 4.89
)
0
2013−2014 2014−2015
Year
The chapter covers the Income Statement of Allahabad Bank and through
comparative analysis and ratio analysis study is done for 2014 and 2015. The
Comparative analysis included the comparison of all the items of the profit and loss
account including interest earned, operating expenses, interest expended and other
income. It is observed that some item records are positive while some are negative
and the bank has to make change in the working style as well as in the management
77
policies to overcome the negative aspect. The ratios covered in this chapter were Net
profit margin, Net Interest Margin, Operating Expense Ratio, Return on Capital
Employed and Return on Equity. The graphical representation of all the ratios was
done for the analysis.
The next chapter will cover the analysis of the balance sheet through comparative
analysis and ratio analysis.
78