The Income Statement

Learning Objectives After studying this chapter, you should be able to understand following Income Statement Income Expenses All receipts are not income All payments are not expense Difference between expenses and asset Earning per shares Basic EPS and Diluted EPS

INTRODUCTION The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. The balance sheet shows the financial position of a company, the income statement shows the financial performance, and the cash flow statement shows the inflow and outflow of cash. The focus of this chapter is the financial performance of a company as reflected by the income statement. Income statement is also known as the statement of profit and loss. The income statement of a company shows the net result of the activities undertaken during a particular period of time. The income statement is also known as the Profit and Loss Account (P/L Account) or the statement of profit and loss. It tells us the financial results of business activity how successful the operation of the business is. If income exceeds expenses during the period, it is profit and if the expenses exceeds the income it will be treated as loss. . WHYA SEPARATE INCOME STATEMENT? The chapter on the accounting equation and the balance sheet has demonstrated that every transaction can be captured through the accounting equation and balance sheet. The financial position of a company can be analysed by comparing the accounting equation or balance sheet on two different dates. So where is the need for another statement called income statement. To answer the above question, let us take and example and understand the limitations of accounting equation and balance sheet. Example 7.1 ABC ltd started business with Rs. 100,000 and during the first quarter had the following transactions: Took 12% loan = 100,000 Purchased stock of goods for cash = 50000 Purchased furniture (life =5 years) = 20,000 Sold 50% stock for cash = 80,000 Expenses paid for the quarter = 20000

Accounting equation for after each transaction is given in the table 7.1:
Table 7.1 Accounting Equation Profit + 12% Loan+ 100000 100000 55000 35000 32000 31000 100000 100000 100000 100000 100000 Capital = 100000 100000 100000 100000 100000 100000 100000 100000 Cash + 100000 200000 150000 130000 210000 190000 187000 187000 50000 50000 25000 25000 25000 25000 20000 20000 20000 20000 19000 Goods+ Furniture

And table 7.2 shows the balance sheet at the end of the quarter as reflected by the last accounting equation
Table 7.2 Balance Sheet of ABC ltd ( in 000) Sources Assets
Capital 12% IDBI Loan Profit 100000 100000 31000 Cash Goods Furniture 187000 25000 19000

231000

Total

231000

Though Table 7.1 and Table 7.2 show the profit, but how did the company arrive at that profit is not very clearly visible. Accounting equation and balance sheet treats the change in equity as profit. Equity (Capital + Profit) at the beginning of the quarter = 100,000 Equity (Capital + Profit) at the end of the quarter = 131,000 Change in equity = 31,000 is treated as capita However, the management would like to know the reasons for the change in the equity. Equity changes due to profit or infusion of capital or buy back of capital. Profit, which changes equity, is the focus of this chapter. Profit can also be explained as the excess of revenue over the expenses. See the income statement of ABC ltd. shown as table 7.3.

Table 7.3 Income Statement Sales COGS Gross Profit Less Expense Profit Before Depreciation Interest and Tax (PBIT) Depreciation Profit Before Interest and Tax (PBIT) Interest Profit Before Tax (PBT) 80000 25000 55000 20000 35000 1000 34000 3000 31000

So the income statement very clearly shows various expenses and different profits. Income statement helps in evaluating the performance of a company or a division or a company or a manager of company or division. It helps in understanding the composition of expenses and get an idea about profit at different levels. UNDERLYING ASSUMPTIONS According to the framework for preparation and presentation of the financial statements issued by the Institute of Chartered Accountants of India , following are the underlying assumptions for preparing the income statement:
information.

Accrual Basis Financial statements are prepared on the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognised when they occur (and not as cash or a cash equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Financial statements prepared on the accrual basis to inform users not only of past events involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future. Hence, they provide the type of information about past transactions and other events that is most useful to users in making economic decisions.

Example 7.2 4

ABC ltd started business with cash Rs. 50,000 on 1st April. Took 12% loan of Rs. 50,000. Purchased goods on credit= 50,000; Sold 50% of goods on credit for 50,000 during the first month. Table 7.4 show the accounting equation and the financial statements for the first month.

Table 7.4 Balance Sheet of ABC ltd ( in 000) Sources Capital 12% IDBI Loan Creditors Profit Outstanding Interest 50000 50000 50000 24500 500 175000 Assets Cash 100000 Goods 25000 Debtors 50000 Income Statement Sales COGS Less Interest Total 175000 Profit 50000 25000 25000 500 24500 Cash Flow Statement Receipts Capital Loan Payments Cash in hand

50000 50000 100000 0 100000

One can see from the table 7.4 that because of the accrual concept the following credit transactions are recorded: Credit purchases shown as creditors Credit Sales shown as debtors Interest due but not paid shown as outstanding interest Going Concern The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed. Consistency In order to achieve comparability of the financial statements of an enterprise through time, the accounting policies are followed consistently from one period to another; a change in an accounting policy is made only in certain exceptional circumstances.

INCOME According to the framework income is increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Example 7.3 Following is the accounting equation of ABC ltd as on 1st April 2005
Shareholders Fund + 2079 Accounting Equation as on 1st April Long Term Loans+ Current Liabilities = Fixed Assets + 1500 2000 600 Current Assets 4979

Let us examine the implications of the following transactions: Sold fixed asset costing Rs.200 for Rs. 200: In this case one asset is converted into another asset. Fixed asset decreases by 200 and current asset increases by 200. No change in the shareholders fund. No in income as per the above definition. Repaid 40% of loan: Decrease in the long term liability and decrease in the cash. No change in the shareholders fund. No in income as per the above definition Sold stock of goods costing 1000 for 1500 for cash. Stock ( part of the CA) reduces by 1000 and cash (part of CA) increases by 1500. The shareholders fund increases by the balancing figure i.e. Rs. 500. Such a change in the shareholders fund is called income as per the above definition. The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an enterprise and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. Gains represent other items that meet the definition of income and may,or may not, arise in the course of the ordinary activities of an enterprise. Various kinds of assets may be received or enhanced by income; examples include cash, receivables and goods and services received in exchange for goods and services supplied. Income may also result in the settlement of liabilities. For example, an enterprise may provide goods and services to a lender in settlement of an obligation to repay an outstanding loan. Table 7.5 shows the possible effects of income
Table 7.5 Effect of Income Transaction Effect Sale of goods for cash Receipts of cash Sale of goods on credit Creation of debtor Sale of goods to write of a liability Reduction of a debt Sale of goods to pay off a creditor Reduction of creditor

In this text, revenue, sales, turnover are treated as income. Income is classified into two categories: operating income and other income.

Tata Steel: Sale of steel is the operating income. Sale of shares of other companies is non-operating income. Bajaj Auto Limited: Sale of scooters is the operating income. Sale of old furniture or sale of shares or bonds or debentures of another company is non-operating incomes Table 7.6 shows income from other sources (other income) as percentage of total income of some of the well-known companies of India.
Table 7.6 Other Income as % of Total Income (2006) Tata Steel Ltd. 1% Wipro Ltd. 1% Reliance Energy Ltd. 12% Videsh Sanchar Nigam Ltd. 3% Siemens Ltd. 5%
CMIE Data base

Income and Receipt Is every receipt an income? Of course, it is not. Receipt is the inflow of cash and every inflow of cash is not an income. A company receives money for several reasons: Capital Loan Donations Sale of assets Advance Similarly due to the accrual principles, incomes which are not received in cash immediately are also recorded in the books. So there are some receipts which are not incomes and there are some incomes which may not be receipt in a particular accounting period as shown by the Table 7.7.
Table 7.7 Income and Receipt Raised capital through fresh issue of shares Capital receipt and not an income Raised 12% loan for a bank Creation of a liability not an income Sold sold on credit Income but not a receipt Interest on investments received Income and a receipt Sold goods for cash Receipt is an income

Recognition of Income
Income is recognised in the statement of profit and loss when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. Income should be recognised, if the following conditions are met:

Completion of earning process: The firm must have provided all the goods or services for which it is to be paid.

Assurance of payment: The firm should be in position to quantify the cash or other assets expected to be received for the goods or services provided.

EXPENSE Expense is decrease in economic benefits during the accounting period in the form of outflow or reduction of assets or decreases of liabilities that result in decreases in equity, other than those relating to distribution to equity participants. Example 7.4 Following is the accounting equation of ABC ltd as on 1st April 2005
Shareholders Fund + 2079 Accounting Equation as on 1st April Long Term Loans+ Current Liabilities = Fixed Assets + 1500 2000 600 Current Assets 4979

Let us examine the implications of the following transactions: Purchase of fixed asset costing Rs.1000 : In this case one asset is converted into another asset. Fixed asset increases by 1000 and current asset decreases by 1000.. No change in the shareholders fund. No expense as per the above definition. Repaid 40% of loan: Decrease in the long term liability and decrease in the cash. No change in the shareholders fund. There is a payment but no expense as per the above definition. Repayment of loan is reduction of liability and reduction of cash. No change in the shareholders fund. No expense as per the above definition Sold stock of goods costing 1000 for 1500 for cash. Stock ( part of the Current Assets) reduces by 1000 and cash (part of Current Assets) increases by 1500. The decrease in stock is an expense and such expense is called cost of goods sold. o o o o Cost of Goods Sold (expense): 1000 Reduction of stock (decrease in asset): 1000 Increase in cash (increase in asset): 1500 Increase in shareholders funds (profit): 500

Expenses and Losses The framework also treats losses as expenses. Losses represent decreases in economic benefits and as such they are no different in nature from other expenses. Following are some of the common losses that appear in the income statement: Bad debt: Loss due to the insolvency of debtors Loss due to theft Loss of stock due to fire or natural calamities Loss on the sale of non-current assets The definition of expenses also includes unrealised losses. When losses are recognised in the statement of profit and loss, they are usually displayed separately because knowledge of
them is useful for the purpose of making economic decisions.

Expense and Payment Is every payment an expense? Of course, it is not. Payment is outflow of cash. A company makes payment for several reasons: Buy back of capital Redemption of loan Donations Purchase of assets Advances to the suppliers Expenses Similarly due to the accrual principles, expenses which are not paid in cash immediately are also recorded in the books. One can also use the matching principle to understand the relationship between payments and expenses. Payments the benefit of which expires in the current accounting period are called expenses Payment the benefit of which will continue for more than one accounting period will be partly treated as an expense and partly shown as an asset. However, one has to define the period of benefit as shown in table 7.8
Table: 7.8 Expense and the Matching Principle Advertisement 100,000 100,000 100,000 Period of benefit 1 2 4 Expenses of the period 100,000 50,000 25,000 Asset 0 50,000 75,000

100,000 10 10,000 90,000

So there are some payments which are not expenses and there are some payments which may not result in payments in a particular accounting period as shown by the Table 7.9.
Table 7.9 Payment and Expense Salary paid An expense Advance rent paid Benefit not expired so it will be an asset Payment for acquiring a plant Not an expense. Interest on loan due but not paid Expense but not a payment Depreciation Expense but not a payment Repayment or buy-back of shares Not an expense.

Recognition of Expense

According to the Framework, expenses are recognised in the statement of profit and loss when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase of liabilities or a decrease in assets. See the following transactions: Paid salaries for the period: Salary is an expense and there is a corresponding decrease in
asset cash. Salaries for the period due but not paid: Salary is an expense but there is no corresponding decrease in the asset. However, there is an increase in the liabilities in the form of outstanding salaries. Advance rent paid in the previous period: Rent is an expense. No change in the cash in the current period. No creation of liability. However, there is a decrease in the asset advance rent.

According to the Framework, sometimes expenses are also recognised in the statement of profit and loss on the basis of a direct association between the costs incurred and the earning of specific items of income. This process, commonly referred to as the matching of costs with revenues, involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events; for example, the various components of expense making up the cost of goods sold are recognised at the same time as the income derived from the sale of the goods. The Framework further stresses that when economic benefits are expected to arise over several accounting periods and the association with income can only be broadly or indirectly determined, expenses are recognised in the statement of profit and loss on the basis of systematic and rational allocation procedures. This is often necessary in recognising the expenses associated with the using up of assets such as plant and machinery, goodwill, patents and trademarks; in such cases, the expense is referred to as depreciation or amortisation. These allocation procedures are intended to recognise expenses in the accounting periods in which the economic benefits associated with these items are consumed or expire. Purchased goods for sale: shown as an asset When the goods are sold: Value of sales is shown as income and the corresponding cost of goods sold is treated as expense Purchased plant: shown as an asset Depreciation on plant: value of the asset is reduced to the extent of depreciation and depreciation is treated as an expense.

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Example 7.5 ABC ltd. had capital represented by goods costing Rs. 40,000 and furniture costing 10,000. Capital = Goods + Furniture 50,000 = 40,000 + 10,000 Transactions during the period are as follows: Sold 50% of good for 50,000 for cash Salary paid = 1000 Depreciation = 2000 Table 7.10 shows the financial statement at the end of the accounting period.

Table: 7.10 Balance Sheet of ABC ltd ( in 000) Sources Assets Capital 50,000 Goods 20,000 Profit 27000 Furniture 8,000 Income Statement Sales 50000 Less Cash Flow Statement Receipts Sales 50000

COGS
Depreciation Salary Profit

CIH 77,000

49,000 77,000

20000 2000 1000 27000

Less
Salary CIH

1000 49000

Some times an expense is recognised immediately in the statement of profit and loss when an expenditure produces no future economic benefits. An expense is also recognised to the extent that future economic benefits from an expenditure do not qualify, or cease to qualify, for recognition in the balance sheet as an asset. If a company spends money on research and development and such expense does not result in any benefit then the entire

PROFIT 11

Profit is the excess of income over the expenses for a period. Profit for the period is determined using the accrual principle and matching principle. According to the matching principle, revenue for a period should be compared with the corresponding expenses. Example 7.6 Sales per month = 10,000 (60% on credit) Cost of goods per month = 25% Salaries per month = 2000 Depreciation for the year = 6000 Interest per month= 100 Tax rate = 25% Table 7.11 shows profit for different accounting periods using the principles of accrual and matching.
Table 7.11 Income Statement Accounting Period (months) 1 3 Sales 10,000 30,000 COGS 2,500 7,500 Gross Profit 7,500 22,500 Salaries 2,000 6,000 PBDIT 5,500 16,500 Depreciation 500 1,500 PBIT 5,000 15,000 Interest 100 300 PBT 4,900 14,700 Tax 1,225 3,675 PAT 3,675 11,025

6 60,000 15,000 45,000 12,000 33,000 3,000 30,000 600 29,400 7,350 22,050

12 120,000 30,000 90,000 24,000 66,000 6,000 60,000 1,200 58,800 14,700 44,100

Gross profit: Excess of sales over the cost of goods is called gross profit. This is also called the gross margin from the business. Profit before depreciation, interest , tax (PBDIT): If the operating expenses like salaries, rent are deducted from the gross profit we will get PBIT. Profit before interest and tax (PBIT): If depreciation is deducted from PBDIT, we will get PBIT: PBIT shows the profit generating ability of a company. It is the surplus available for the lenders, government, and shareholders. Profit after tax (PAT): If interest and tax are deducted from PBIT, we will get PAT. PAT is the money available for distribution among the shareholders. PAT shows profit generating ability of a company.

Table 7.11 A shows different profits of some of the well known companies of India.
Table 7.11 A Different Profit of the selected Indian Companies (Rs. In crores) for the year ending 2006

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Company Name Oil & Natural Gas Corp. Ltd. Reliance Industries Ltd. State Bank Of India Steel Authority Of India Ltd. Tata Steel Ltd.

PAT 14,431 9,069 4,407 4,013 3,506

PBDI T 32,284 15,007 27,829 7,628 6,144

PBIT 25,463 11,606 27,065 6,420 5,410

PBT 21,745 10,712 6,906 5,953 5,241

Cash profits 24,405 12,494 5,170 5,408 4,293

Retain ed profits 7,114 7,480 3,567 3,071 2,686

INCOME STATEMENT AND ACCOUNTING EQUATION We can understand the process of determining the income for the period by using the accounting equation. Example 7.7 Following are the financial items of ABC ltd.. Capital: Rs 10000 12% Loan: Rs. 30000 Fixed Assets: Rs. 20000 Stock: Rs. 15000 Cash: 5000 Above items can be represented in the form of an accounting equation as follows: Accounting Equation Loan = Fixed Assets + Stock + 10000 20000 15000

Capital + 30000

Cash 5000

Suppose the stock is sold at 20000 and expenses in cash are 2000. The equation will be as follows: 13

Capital + 10000

Profit + 1800

Accounting Equation Loan = Fixed Assets + 30000 20000

Stock + 0

Cash 21800

Now let us see the income statement. We can see that it is possible to determine the profit by using the accounting equation. However, to get a clear picture of the process of determining profit and to see the various of components of expenses and income it may be useful to prepare a separate income statement.

Income Statement Sales 20000 Less COGS 15000 Gross Profit 5000 Less Other Expenses 2000 PBIT 3000 Interest 1200 PBT 1800 Tax 0 PAT 1800

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FORMAT OF INCOME STATEMENT Income statement can be presented in vertical or horizontal format:
Sample income Statement Expenses Income COGS 3000 Sales Salary and Rent 2000 General Expenses 1500 Depreciation 500 Interest 2000 Taxes 2500 Profit 3500 5000

15000

5000

Sample Income Statement Revenue 15000 Plus Other incomes 0 Less COGS 3000 Salary and Rent 2000 General Expenses 1500 Depreciation 500 Interest 2000 Provision for Tax 2500 PAT 3500

Sample Income Statement Revenue 15000 Less COGS 3000 Gross Profit 12000 Operating Expenses 3500 Profit Before Depreciation Interest and Tax (PBDIT) 8500 Depreciation 500 Profit Before Interest and Tax (PBIT) 8000 Interest 2000 Profit Before Tax (PBT) 6000 Tax Provision 2500 Profit After Tax (PAT) 3500

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COMPONENTS OF INCOME STATEMENT Revenue or Sales Revenue represents sale of products and services produced or traded by an enterprise. These are usually recorded at gross value, including excise duty if any. When an organisation provides services or sells goods it receives cash immediately or receives commitment to be paid on some future date. Such commitments are called debtors or receivables. The excise duty is then separately deducted from the gross sales. Revenue can be generated by a firm in a variety of ways. According to the Schedule VI (see Appendix 7.1 for the details of Schedule VI) of the Companies Act, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the company, and indicating the quantities of such sales for each class separately. In 2006, NALCO generated a revenue of 4851 crores as shown in Exhibit: 7.1 . Other income of NALCO was less than 5% of the total income for the year 2006.

Exhibit: 7.1: NALCO

Other Incomes The income received by a company from sources other than sales of its main products and services is mentioned separately. In many companies the other income constitutes a significant portion of the profit before tax. Other incomes on average account for around 2% of the sales and less than 20% of the profit after tax as shown by the Table 7.12,

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Table: 7.12 Position of Other Incomes of the companies forming a part of Nifty 2004 2005 2006 As % of Sales 2% 2% 2% AS % of PAT 18% 16% 19%

Source: CMIE data base Other incomes include dividend and interest from the investments made by the company in other companies. Expenditure Side The expenditure side of income statement shows the details of all the revenue expenses whether accrued or paid for during a year. Revenue Expenses Revenue expense are those transactions (reduction of assets or increase in liabilities) the benefit of which expires within an accounting period. The accounting period may be a year, half year, quarter, or a month. According to the matching concept of accounting, expenses of an accounting period should be charged against the income of that period to determine profit for the period. See the Table 7.13 to get a better understanding of revenue expenses and the accounting period:
Table 7.13 Expense, Cash Outflow, Asset, and Liability Accounting Period 3 months 6 months Expense Per Month 1000 1000 Expense Paid 6000 6000 Expense for the period 3000 6000 Liability (Outstanding Expense) 0 0 Asset (Advance Expense) 3000 0

12 months 1000 6000 12000 6000 0

In the following section we will understand the various components of expenditure.

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Cost of Goods Sold/Consumed (COGS) The cost of goods consumed is arrived at after making suitable adjustments for opening and closing stocks. According to the matching concept, when the goods are sold, the corresponding cost will be treated as an expense and it is called cost of goods sold (COGS). Example 7.8 ABC Ltd had an opening stock of 800 units @ 20. During the first quarter it purchased 3000 units @ 40 and sold 3300 units @ 50.
Cost of Goods Sold Qty Price Opening Stock 800 20 Add Purchase 3000 40 Value 16,000 120,000 136,000 126,000

Cost of Goods Sold

3300

Cost of goods sold = Opening stock + Purchases Closing stock It is important to note that the cost of goods consumed depends of the value of the closing stock. Value of closing stock depends on the methods of issuing inventory. Following are some of the common methods of issuing inventory. Last-in-first-out (LIFO). Under this method the goods purchased last will be used first. So the unsold stock is generally from the past purchases or the opening stock. Example 7.9 ABC Ltd had an opening stock of 1000 units @ 10. During the first quarter it purchased 3000 units @ 20 and sold 2500 units @ 40.
Cost of Goods Sold using LIFO Qty Price Value Opening Stock 800 20 16000 Add Purchase 3000 40 120000 136000 COGS 3000 @40 120000 300 @ 20 6000 126,000 Closing Stock 500 20 10,000

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First-in-first-out (FIFO): Under this method, the oldest purchase is used first. So the unsold stock is from the latest purchases. Example 7.10 ABC Ltd had an opening stock of 1000 units @ 20. During the first quarter it purchased 3000 units @ 40 and sold 3300 units @ 60.
Cost of Goods Sold using FIFO Qty Price Opening Stock 800 20 Add Purchase 3000 40 COGS 800 2500 500 20 40 40 Value 16000 120000 136000 116,000 20,000

Closing Stock

Profit = Sales COGS = 198,000 116,000 = 82,000

Simple Average Method Under this method, the material issued or used during the period are valued at the simple average price. Example 7.11 ABC Ltd had an opening stock of 2000 units @ 20. During the first quarter it purchased 3000 units @ 40 and sold 3300 units @ 60. Simple average price = (P1 + P2 + P3 + Pn)/n
Cost of Goods Sold using FIFO Qty Price Opening Stock 2000 20 Add Purchase 3000 40 COGS Closing Stock 3300 1700 30 30 Value 16000 120000 136000 99,000 51,000

Profit = Sales COGS = 198,000 99,000 = 99,000

Weighted Average Method: 19

Under this method, the material issued or used during the period is valued at the weighted average price. Weighted average price =( p1*q1 + p2*q2 +p3*q3)/q1+q2+q3 Example 7.12 ABC Ltd had an opening stock of 2000 units @ 20. During the first quarter it purchased 3000 units @ 40 and sold 3300 units @ 60. Simple average price = (P1 + P2 + P3 + Pn)/n
Cost of Goods Sold using FIFO Qty Price Opening Stock 2000 20 Add Purchase 3000 40 5000 COGS 3300 27.2 Value 16000 120000 136000 89,760 Closing Stock 1700 27.2 46,240

Profit = Sales COGS = 198,000 89,760 =108,240

Inventory Valuation in NALCO

Finished goods are valued at lower of cost or net realisable value. Cost is determined on the basis of current year's average cost of production and excludes selling and distribution overheads, interest, exchange variation and depreciation on capitalised exchange variation. Raw materials, stores, spare parts and tools are valued at weighted average cost net of CENVAT credit wherever applicable.

Example 7.13

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Following are the details of the purchases made by ABC ltd on different dates at different rates.
Purchase Date 1.5.2006 2.5.2006 4.5.2006 Stock 3000 1000 2000 Rate (Rs.) 4.5 5 6

Suppose the company sells 2500 units at Rs. 10 per unit. Accounting profit of the company is equal to the sales less the cost of goods sold. However, the COGS depends on the method of valuing inventories.
Gross Profit and Inventory Valuation Sales COGS FIFO 25,000 11,250 LIFO 25,000 14,500 Simple Average 25,000 12,917 Weighted Average 25,000 12,708 G. Profit 13,750 10,500 12,083 12,292

It is important to note that the change in profit not because of the change in the operating efficiency, but just because of the change in the valuation method. FIFO results in higher profits because of lower cost of goods sold and a higher closing stock. LIFO results in lower profits because of higher cost of goods sold. By changing the method of inventory valuation one is able to shuffle between expenses and assets. See the following table:
LIFO 1450 0 1600 0 3050 0 FIFO 11250 19250 3050 0 Simple Average 12917 17583 30500 Weighted Average 12708 17792 30500

COGS (Expense) Stock (Asset) Total value of purchase

Excise Duty This is the amount paid to the government as a tax, before the goods are dispatched from the factory. Generally excise duty is deducted from the gross sales. Salaries and Wages Salaries and wages and all other employee benefits and amenities are included in this expenditure. They include provident fund, ESI (Employees State Insurance) contributions, and medical benefits, leave travel benefits, bonus, gratuity, pension, other superannuation

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benefits etc. Table 7.14 shows salaries and wages as percentage of total sales of some of the well known Indian companies.
Table 7.14 Salaries and Wages as % of Sales (2006) IT Pharma Wipro Ltd. 42% Sun Pharmaceutical Inds. Ltd. Tata Consultancy Services Ltd. 46% Ranbaxy Laboratories Ltd. Satyam Computer Services Ltd. 59% Glaxosmithkline Pharmaceuticals Ltd. Infosys Technologies Ltd. 47% Cipla Ltd. H C L Technologies Ltd. 35% Dr. Reddy'S Laboratories Ltd.

6% 9% 10% 5% 9%

Administrative Expenses Administrative expenses include head office expenditure, secretarial costs, postage and telephones, directors remuneration and other administrative expenses. Cost of Production Income statement will not show the cost of production as a separate item. However, one can calculate the cost of production by collecting the relevant information. Cost of production includes raw material cost, energy, salaries and wages etc. and other operating expenses. Selling expense and the interest cost are not the part of the cost of production. Table: 7.15 shows the cost of production advertisement as a percentage of sales of some Indian companies.

Table 7.15 Cost of production as % of Sales (2006) Hindustan Petroleum Corpn. Ltd. 94% Steel Authority Of India Ltd. 69% Tata Motors Ltd. 73% Reliance Industries Ltd. 73% National Aluminium Co. Ltd. 44% Hero Honda Motors Ltd. 68% I T C Ltd. 35%
Source: CMIE Data base

Selling Expenses Selling expenses include freight, advertising and sales promotion, commissions and discounts and other selling and distribution costs. Table: 7.16 shows advertisement as a percentage of sales of some Indian companies.

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Table:7.16 Advertisement as % of Sales (2006) Tata Tea Ltd. 9% Hindustan Lever Ltd. 8% Dabur India Ltd. 11% Bharti Airtel Ltd. 4% Ranbaxy Laboratories Ltd. 6%
Source: CMIE Data base

Borrowing Cost According to the Accounting Standard -16, borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. Borrowing cost may include the following items: interest and commitment charges on bank borrowings and other short-term and long-term borrowings; amortisation of discounts or premiums relating to borrowings; amortisation of ancillary costs incurred in connection with the arrangement of borrowings; finance charges in respect of assets acquired under finance leases or under other similar arrangements; and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

According to the AS- 16, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Statement. Other borrowing costs should be recognised as an expense in the period in which they are incurred. The interest cost consists of interest on long-term loans, debentures, bank loans for working capital, interest on public deposits and other loans. Table 7.17 shows interest as a percentage of sales of some Indian companies.
Table 7.17 Interest as % of Sales (2006) Williamson Magor & Co. Ltd. G V K Power & Infrastructure Ltd. J C T Electronics Ltd. Indiabulls Financial Services Ltd. R P G Cables Ltd. Mukand Engineers Ltd.
Source: CMIE Data base

138% 74% 43% 30% 23% 18%

Depreciation Depreciation is the charge for using the assets. It can be described as the cost of the assets used during the year. Depreciation is the wear and tear of the asset. It is the decrease in the 23

value of the asset with the passage of time. Depreciation is the allocation of the cost over the life of the asset. Depreciation will be shown as an expense in the income statement and as reduction in the value of the asset in the balance sheet. Table 7.18 shows depreciation as percentage of sales of the well known companies of India.
Table 7.18 Depreciation % of Sales (2006) A B B Ltd. A C C Ltd. Bajaj Auto Ltd. Bharat Heavy Electricals Ltd. Bharat Petroleum Corpn. Ltd. Bharti Airtel Ltd.
Source: CMIE Data base

1% 4% 2% 2% 1% 14%

Two popular methods of calculating depreciation are : Straight line method (SLM), Reducing balance method (RBM). Straight Line Method (SLM) In the SLM depreciation is determined by allocating the cost over the life. The total cost of the asset less salvage value, if any, will be distributed over the life of the asset. Depreciation = (Cost of the asset Salvage Value)/Life Depreciation = (Cost of the asset Salvage Value)*Rate This method is called SLM because the amount of depreciation remains constant over the life. Example 7.14: A limited started business with capital of Rs. 100,000. Purchased plant costing 50,000 on credit from Mr.X and stock worth of 75,000 for cash. Life of the plant is 5 years. No salvage value. Table 7.19 shows the depreciation, accumulated depreciation and the written down value of the asset.

Table 7.19 Depreciation: SLM

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Year 1 2 3 4 5

Cost 50,000

Depreciation 10,000 10,000 10,000 10,000 10,000

Accumulated Depreciation 10,000 20,000 30,000 40,000 50,000

Written Down Value 40,000 30,000 20,000 10,000 0

Reducing Balance Method In the Reducing balance method (RBM), depreciation is calculated on the opening balance of the asset or in other words, it is calculated on the written down value of the asset. Written down value of the asset is cost of the asset less the accumulate depreciation. In this method, the amount of depreciation goes on reducing over the life. Unlike the SLM, the written down value of the asset will not become zero. Example 7.15: A limited started business with capital of Rs. 100,000. Purchased plant costing 50,000 on credit from Mr.X and stock worth of 75,000 for cash. Rate of depreciation =40 %. No salvage value. Table 7.20 shows the depreciation, accumulated depreciation and the written down value of the asset.

Table 7.20 Depreciation: RBM Accumulated Depreciation 20,000 32,000 39,200 43,520 46,112 Written Down Value 30,000 18,000 10,800 6,480 3,888

Year 1 2 3 4 5

Cost 50,000

Depreciation 20,000 12,000 7,200 4,320 2,592

For details of depreciation please refer to the chapter on the fixed assets. Depreciation and Financial Statements Let us see the impact of depreciation on the financial statements.

Example 7.16

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ABC ltd started business with Capital of 100,000; Purchased stock of goods for Rs. 50,000; Purchased plant on credit from Mr. X for Rs. 50,000; 60% of the stock of goods sold for Rs. 50,000 for cash. Rate of depreciation = 10% Table 7.21 shows the financial statements at the for the first year
Table:7.21- Financial Statement Balance Sheet at the end of the first year Capital 100,000 Accumulated Profit 15,000 X 50,000 165,000 Cash 100,000 Stock 20,000 Plant 50,000 Less Accumulated Depreciation -5,000 165,000 Income Statement Sales 50,000 Less COGS Depreciation Cash Flow Statement Capital 100,000 Sales 50,000 150,000 Stock 50,000

30,000 5,000 35,000

Profit

15,000

CIH Total

100,000 150,000

Depreciation = Costs * Rate = 50,000 * 10% = 5000 Depreciation is shown as an expense in the income statement Depreciation is reduced from the value of the plant in the balance sheet Accumulated depreciation = Depreciation for the first year

Example 7.17: Let us continue with the information given in the example 7.16. Second year: Transactions are as follows: Sold entire stock for 50,000 Took a new show room and paid Rs. 15,000 for three years Table 7.22 shows the financial statements.
Balance Sheet Capital Accumulated Profit X Cash Stock Advance Rent Plant Less Accumulated Depreciation Table:7.22- Financial Statement Income Statement 100,000 35,000 50,000 185,000 135,000 0 10,000 50,000 -10,000 185,000 Sales Less COGS Depreciation Rent 50,000 Cash Flow Statement Opening CIH 100,000 Sales 50,000 150,000 Rent 15,000

20,000 5,000 5,000 30,000

Profit

20,000

CIH Total

135,000 150,000

Depreciation = Costs * Rate = 50,000 * 10% = 5000 Depreciation is shown as an expense in the income statement Depreciation is reduced from the value of the plant in the balance sheet

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Accumulated depreciation = Depreciation for the first year + Depreciation for the second year Advance Rent = Rent Paid Rent for the current year Accumulated Profit = Profit of the first year + Profit for the second year

Bad Debts: When a company extends credit to customers, there is always the risk of not getting the amount. Bad debt is the loss due to the non-payment by the customers. Each year the company is required to estimate amount of bad debt and do the following: Show it as a loss in the income statement, or charge it against the provisions for bad and doubtful debt; Reduce the debtors to that extent Example 7.18: Assets and the corresponding sources of ABC as on 1st April 2006 are as follows: Capital of ABC ltd = 50,000; 12% Loan = 70,000; Cash = 20,000; Stock = 25,000; Debtors (Mr. Y) = 75,000. During the year 2006, the company sold entire stock for Rs. 35,000 to Mr. X on credit. Mr. Y became insolvent and could pay only 75% of the money due. Table 7.23 shows the necessary financial statements.
Table- 7.23: Financial Statement Cash Flow Income Statement Statement sales 35,000 CIH 20,000 Y 56,250 COGS 25,000 Total 76,250 Bad Debts Interest 18,750 8,400 52,150 -17,150

Opening Balance Sheet Capital 50,000 12% Loan 70,000 120,000

Cash Stock Y

20,000 25,000 75,000 120,000

Interest CIH Total

8,400 67,850 76,250

Profit

Closing Balance Sheet Capital 50,000 12% Loan 70,000 Profit -17,150 102,850 Cash 67,850 Stock 0 Y 0 X 35,000 102,850

Money due from Mr. Y = 75,000 Money received from Mr. Y = 75% = 56,250 Bad Debt = 75,000 56,250 = 18,750

Provisions for Bad and Doubtful Debts Sometimes companies keep aside a part of the current profit to meet future bad debt. Such amount kept aside is called provisions for bad and doubtful debts. Example 7.19: On 1st April 2005, ABC started business with capital of Rs. 50,000. Purchased stock of goods for cash = 20,000 and sold 50% of goods for 35000 on credit. Rent paid for the period = 5000 and the company created a provision of 5% of the debtors to meet

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unexpected loss due to the bad debts. Table 7.24 show the financial statements at the end of the accounting period. Table-7.24: Financial Statements
Income Statement for the year ending March 2006 Sales 35,000 COGS Rent Provisions for Doubtful Debts 10,000 5,000 1,750 16,750 Stock Rent CIH Profit 18,250 Total 20,000 5,000 25,000 50,000 Cash Flow Statement for the year ending March 2006 Capital 50,000 Total 50,000 Balance Sheet as on 31st March 2006 Capital 50,000 Profit 18,250 Total 68,250

Stock Debtors Less Provision for Doubtful debts Cash Total

10,000 35,000 -1,750 25,000 68,250

Example 7.19 Refer to the financial statements shown in the table 7.24. During the year 2006-07 the company had following transactions: Sold 60% of the stock for 15,000 for cash. One of the debtors who had to pay Rs. 2000 became insolvent. She could pay 60% of the amount due. Rent paid for the two years: 10000 Table 7.25 show the financial statements at the end of the year 2007
Income Statement Sales COGS Rent Provisions for Doubtful Debts Table- 7.25: Financial Statements Cash Flow Statement Opening 15,000 CIH 25,000 Capital Sales 15,000 Profit 6,000 Collection 1,200 Total 5,000 41,200 0 11,000 Rent CIH 10,000 31,200 Closing Balance Sheet 50,000 22,250 72,250 4,000 33,000 -950 5,000 31,200 72,250

Profit

4,000

Total

41,200

Stock Debtors Less Provision for Doubtful debts Advance Rent Cash Total

Rent paid = 10,000 Rent for the current year (Expense) = 5000 Advance Rent (Asset) = 5000 Opening Provision for doubtful debt = 1750 Bad debt for the current year = 40% of 2000 = 800 28

Bad debt for the current year is not charged against the income once again since the company is already having the Provisions. Bad debt is charged against the Provisions. So the balance sheet will show the balance provisions to be carried forward. Since the company has no further credit sales, it has not creas Other Expenses The other expenses include auditors remuneration, petty expenses, small donations, if any etc. Appropriation of Profit Appropriation of profit is the distribution of profit. Profit after tax (PAT) is available for distribution among the shareholders as dividend. However, the management is under no obligation to distribute the profit. Profit appropriation statement, which is generally incorporated in the income statement, shows the profit retained for reinvestment, profit distributed as dividend, tax on dividend distributed, profit transferred to some specific reserves. Exhibit 7.3 shows the profit for the year and the appropriations of Wipro Limited for the year ending March 2006 and the March 2005 Exhibit 7.3: Wipro Limited (Rs. Million) 2006 2005

Source: Annual Report of Wipro Limited

Earning Per Share According to AS -20, a company should present basic and diluted earnings per share on the face of the statement of profit and loss for each class of equity shares that has a different right to share in the net profit for the period. An enterprise should present basic and diluted earnings per share with equal prominence for all periods presented. Basic earnings per share should be calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

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For the purpose of calculating basic earnings per share, the net profit or loss for the period attributable to equity shareholders should be the net profit or loss for the period after deducting preference dividends and any attributable tax thereto for the period. According to AS-20, the weighted average number of equity shares outstanding during the period reflects the fact that the amount of shareholders' capital may have varied during the period as a result of a larger or lesser number of shares outstanding at any time. It is the number of equity shares outstanding at the beginning of the period, adjusted by the number of equity shares bought back or issued during the period multiplied by the time-weighting factor. The time-weighting factor is the number of days for which the specific shares are outstanding as a proportion of the total number of days in the period; a reasonable approximation of the weighted average is adequate in many circumstances. For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares. Diluted earning per share reflects the existence of stock options or other rights that can be converted into shares in the future. Exhibit 7.4 shows the basic and diluted EPS of Wipro Limited for the year ending March 2006 and March 2005.

Exhibit 7.3: Wipro Limited

2006

2005

Source: Annual Report of Wipro Limited

LIMITATIONS OF INCOME STATEMENT Though, the income statement is an important statement, it has the limitation of not being able to show the cash position. This limitation can be attributed to one of the important concepts of accounting i.e. Accrual Concept. The Income statement does not tell us how much cash has been received and how cash has been paid during the period. All it does is to summarise the incomes and expenses. While preparing the balance sheet we have seen that when the company has sold 20 computers @ 30

Rs.25000, of which only 10% was received immediately. For the purpose of determining the profit or loss, the entire sale value i.e. Rs. 500,000 was shown as the income. Similarly, when an item bought on credit, it is recognized as an expense immediately, though the cash is yet to flow out of the business.

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Key Terms

Accrual Basis: Under this basis, the effects of transactions and other events are recognised when they occur (and not as cash or a cash equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Going concern assumption According to this assumption, the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed Income Income is increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Receipt Receipt is the inflow of cash and every inflow of cash is not an income. A company receives money for several reasons: Capital, Loan, Donations, Sale of assets, Advance Expense Expense is decrease in economic benefits during the accounting period in the form of outflow or reduction of assets or decreases of liabilities that result in decreases in equity, other than those relating to distribution to equity participants. Loss Losses represent decreases in economic benefits and as such they are no different in nature from other expenses. Following are some of the common losses that appear in the income statement: Bad debt, Loss due to theft, Loss of stock due to fire or natural calamities, Loss on the sale of non-current assets Recognition of Expense Expenses are recognised in the statement of profit and loss when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Profit Profit is the excess of income over the expenses for a period. Profit for the period is determined using the accrual principle and matching principle. According to the matching principle, revenue for a period should be compared with the corresponding expenses.

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Revenue or Sales Revenue represents sale of products and services produced or traded by an enterprise. These are usually recorded at gross value, including excise duty if any. When an organisation provides services or sells goods it receives cash immediately or receives commitment to be paid on some future date. Revenue Expenses Revenue expense are those transactions (reduction of assets or increase in liabilities) the benefit of which expires within an accounting period. The accounting period may be a year, half year, quarter, or a month. Cost of Goods Sold/Consumed (COGS) According to the matching concept, when the goods are sold, the corresponding cost will be treated as an expense and it is called cost of goods sold (COGS). Cost of goods consumed is arrived at after making suitable adjustments for opening and closing stocks. Last-in-first-out (LIFO). Under this method the goods purchased last will be used first. So the unsold stock is generally from the past purchases or the opening stock. First-in-first-out (FIFO): Under this method, the oldest purchase is used first. So the unsold stock is from the latest purchases. Cost of Production Income statement will not show the cost of production as a separate item. However, one can calculate the cost of production by collecting the relevant information. Cost of production includes raw material cost, energy, salaries and wages etc. and other operating expenses. Borrowing Cost According to the Accounting Standard -16, borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. Depreciation Depreciation is the charge for using the assets. It can be described as the cost of the assets used during the year. Depreciation is the wear and tear of the asset. It is the decrease in the value of the asset with the passage of time. Depreciation is the allocation of the cost over the life of the asset. Depreciation will be shown as an expense in the income statement and as reduction in the value of the asset in the balance sheet. Straight Line Method (SLM) In the SLM, depreciation is determined by allocating the cost over the life. The total cost of the asset less salvage value, if any, will be distributed over the life of the asset.

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Reducing Balance Method In the Reducing balance method (RBM), depreciation is calculated on the opening balance of the asset or in other words, it is calculated on the written down value of the asset. Written down value of the asset is cost of the asset less the accumulate depreciation. In this method, the amount of depreciation goes on reducing over the life. Bad Debts: When a company extends credit to customers, there is always the risk of not getting the amount. Bad debt is the loss due to the non-payment by the customers. Provisions for Bad and Doubtful Debts Sometimes companies keep aside a part of the current profit to meet future bad debt. Such amount kept aside is called provisions for bad and doubtful debts. Appropriation of Profit Appropriation of profit is the distribution of profit. Profit after tax (PAT) is available for distribution among the shareholders as dividend. However, the management is under no obligation to distribute the profit. Profit appropriation statement, which is generally incorporated in the income statement, shows the profit retained for reinvestment, profit distributed as dividend, tax on dividend distributed, profit transferred to some specific reserves. Earning Per Share Profit after tax if distributed over the number of share, it is called earning per share (EPS). Basic EPS Basic earnings per share should be calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. Diluted EPS For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders is divided by weighted average number of shares outstanding during the period.

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Theoretical Questions 1. What is income? 2. How is income different from profit? 3. When is income recognized in the income statement? 4. What are expenses? 5. What is an income statement? 6. Explain some of the important items of an income statement. 7. Distinguish between expense and asset? 8. All payments are not expenses. Explain. 9. All receipts are not incomes. Explain 10. Examine the impact on expenses due but not paid on the financial statements. 11. What is depreciation? 12. Answer the following questions: i. Why arent purchase of equipment shown in the income statement? ii. Why is credit sales shown in the income statement? iii. Why is dividend not shown in the income statement? iv. What is premium on issue of shares not shown in the income statement? v. Why is depreciation on furniture an expense? vi. Why is interest due but not paid shown as an expense? 13. Explain the impact of depreciation on the financial statements. 14. What are the different methods of charging depreciation? 15. Examine the impact of provision for bad and doubtful debts on the income statements. 16. Explain the process of determining EPS. 17. What is relevance of diluted EPS? 18. What is weighted average number of share? 19. What is appropriation of profit? 20. What is the composition of borrowing cost? 21. Examine the impact of borrowing cost on the financial statement. 22. What is the difference between revenue and profit? 23. Explain the relationship between income statement and accounting equation.

Numerical Questions 1. Classification: Classify the following items into Revenues, Cost of Goods Sold, Selling Overheads, Non-operating incomes, Administration Expenses, Not an Income Statement Item: Credit sales, Discount received, Interest paid, insurance, Consultants Salary, Interest received, Bad Debt, Bad Debt Recovered, Capital Raised, Money borrowed from bank, Sales Tax, Income Tax, Furniture purchased. Depreciation

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on furniture, Loss due to the fire, Winnings from lottery tickets, Purchase of land, Expense on the MDs Son studies, Cash received from customers. 2. Sales, 100,000; COGS = 40% of sales; operating expenses = 20%; interest = 5% of sales; depreciation = 2000; Profit = 20% of sales. Balance is the provision for bad debts. Required: Income Statement 3. XYZ started business with capital of 50,000; Other transactions are follows: took 12% loan of Rs. 100,000; Pur 4. A ltd makes both cash and credit sales. Prepare the income statement from the following information: i. Credit sales for November: 230000 ii. Cash received in November; a. From Octobers credit sales: 90000 b. From Novembers credit sales: 45000 c. From Novembers cash sales: 76000 iii. Gross profit: 32% of Sales iv. Net Profit: 16% of Sales 5. Comment on the profitability of the following companies Profit Position A B C PBIT 50,000 50,000 -25000 PBT 5000 45,000 PAT 3000 30,000 Dividend 2700 0 5,000 6. Following are financial items of D ltd. i. Cash: 15000, Accounts Receivables: 42000, Inventory: 33000, Accounts Payables: 24000, Capital: 45000, Retained Earning: 21000 ii. Following are the transactions during the year: Borrowed 30000 on a long term basis Interest expense for the year: 3000. However, not paid. Inventory purchased: 400000 on credit Sales: 500000. 40% for cash. Cost of goods sold: 75% Paid to suppliers: 20% Paid wages: 120000

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7. Following are the transactions of transactions of XYZ ltd.

Transactions for the year Started business with capital 100,000 Purchased plant on credit 50,000 Purchased stock for cash 50,000 Sold 60% stock for 50,000 Depreciation 10%

Required: Income Statement, Balance Sheet, Cash Flow Statement

8. Following are the transactions of transactions of XYZ ltd.

Transactions for the year Started business with capital Took 12% loan on 1st July Purchased plant on credit Purchased stock for cash Purchased stock on credit from X Sold 50% stock for Salary per month Salaries paid Depreciation per annum 100,000 200,000 50,000 50,000 100,000 200,000 3,000 24,000 10%

Required: Income Statement, Balance Sheet, Cash Flow Statement

9. Refer to question 7. Prepare the financial statement for the first quarter (Q1) , and the second quarter (Q2), 10. Following are the transactions of transactions of XYZ ltd.
Transactions for the year ending 2005 Started business with capital 100,000 Took 12% loan on 1st July 200,000 Purchased plant on credit 50,000 Purchased stock for cash 50,000 Purchased stock on credit from X 100,000 Sold 50% stock on credit 200,000 Rent per month 2,000 Rent paid 24,000 Depreciation 10% Create a provision for doubtful debts 5%

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Required: Income Statement, Balance Sheet, Cash Flow Statement for the year. 11. Refer to the question no. 9. Following are the transactions during 2006 Sold balance stock 175,000 on credit Received 50% of the opening balance of debtors Mr. X, one of the debtors, who owes Rs. 5000 becomes insolvent. He could pay only 40% of the money due. Balance money was treated as bad debt. Company decides to maintain provision for doubtful debt = 5% on the closing debtors. Required: Income Statement, Balance Sheet, Cash Flow Statement for the year. 12. Following is the Wipro Limited for two years:
WIPRO LIMITED Profit and Loss Account for the year ending Mar 31 (All figures in rupees million) 2001 Income Sales and Services Other Income Expenditure Cost of goods sold Selling, general and administrative expenses interest Interest Profit before taxation and non Recurring / extraordinary items Provision for taxation Profit after tax before non-recurring/ Extraordinary items Non recurring / extraordinary items Profit for the period Appropriations Interim Dividend on Preference Shares Interim Dividend on Equity Shares Proposed Dividend on Equity Shares Corporate tax on dividend Transfer to Capital Redemption Reserve Transfer to general reserve 116 13 250 6251 2379 10 18 26 69 16 6648 -523 2484 18103 5404 68 23575 7656 992 6664 15203 3995 286 19484 3508 501 3007 30539 692 31231 22735 257 22992 2000

Required:

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Study the change in the income statements over the two years and explain how profit for the period has increased by 168% . Visit the web site of Wipro Limited and collect the latest two years income statement and compare with the above income statement.

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