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Session five

31
st
July 2014/1
st
August 2014
Major adjustments
1. Depreciation on fixed assets
2. Closing inventory
3. Expenses due but not paid
4. Prepaid expenses
5. Bad debts
6. Income accrued but not received
7. Write off of preliminary expenses
8. Provision for doubtful debts
9. Bills receivable dishonoured


Major adjustments
10.Loss due to fire
11.Correction in classification of capital expenditure as
revenue expense
12.Deferment of revenue expenditure
13.Amortisation of intangible assets
14.Managerial remuneration
15.Provision for income tax
16.Proposed dividend
17.Transfer to general reserve

Minimum questions to be solved
Page 89-139 of Ambrish gupta
3 solved questions (page no 113 to 130)
Mamta fashions (done in the class)
Shashank
Itpl
5 unsolved questions (page no 131-139)
Sanjay (done in the class), sangeeta, pushpa, mahesh
& hindustan textiles (page no 131-139)
Revision of Inventories
Inventory System
Periodic inventory system
Perpetual inventory system
Date transaction units Unit cost Total cost
Jan 1 Beginning inventory 100 2 200
Mar 27 Purchase 100 3 300
June 12 Purchase 100 4 400
Sept 19 Purchase 100 5 500
Nov 30 Purchase 100 6 600
total 500 2000
sold 350 10 3500
Dec 31 left 150
Specific identification
Dec 31 inventory constitute of
60 units from march 27 purchase
70 units from june 12 purchase
And 20 units from sept 19 purchase
Calculate value of closing inventory under
specific identification, fifo, lifo & wac.
Calculate gross profit for all the four
inventory costing methods
Effects of FIFO,WAC & LIFO
prices Ending inventory Cost of goods sold Gross profit
Increasing FIFO>WAC>LIFO LIFO>WAC>FIFO FIFO>WAC>LIFO
Constant FIFO=WAC=LIFO FIFO=WAC=LIFO FIFO=WAC=LIFO
Decreasing LIFO>WAC>FIFO FIFO>WAC>LIFO

LIFO>WAC>FIFO

Analysis
Key questions
Why analyse company/ies?
Who analysis with what objectives?
How do they analyse?
What are the sources of information?
Chapter 11 of the Text Book
1. Analyzing Financial Statements
2. Evaluate the past performance and
financial position
3. Estimation of future performance
4. Source of Information

Standards of comparison
1. Rule-of-thumb indicators business
knowledge and understanding is a must
2. Past Performance
3. Internal Standards set by the management
4. Industry / nearest competition indicators
To start the process
1. Gather reliable information
2. Consider off-balance sheet items leases,
policies, contingent liabilities, guarantees
given by the company, revaluation etc.
3. Re-arrange financial statements in a
comparable form
Other Qualitative Data
1. Chairpersons letter to the stockholders
2. Other information is available from third-parties.
3. Credit reporting services such as CRISIL, CARE etc.
4. News articles, TVs
5. On-line sources
6. http://in.finance.yahoo.com/
7. www.nseindia.com
8. www.bse.com
9. http://www.sebi.gov.in/sebiweb/edifar/edifar.jsp
(Electronic Data Information Filing and Retrieval System
edifar)
Various measures of profit
Sales
Less cost of goods sold
Gross profit
Less operating expenses
EBITDA (Cash operating profit)
Less non cash expenses (Depreciation & Amortisation)
EBIT (Operating profit)
Less Interest & finance charges
PBT
Taxes
PAT (Net Profit)
Tools of analysis
Vertical analysis (common-size
statements)
Horizontal analysis (two years)
Trend analysis (more than two years)
Ratio analysis
VERTICAL ANALYSIS/
COMMON-SIZE STATEMENTS
Tool no 1:
Common-size statements
A common size balance sheet expresses
each item on the balance sheet as a
percentage of total assets
A common size statement of profit &
loss expresses each item in the category as
a percentage of total sales revenues
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8% $ 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses $ 295,000 19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
$ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax $ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income $ 91,000 6.1% $ 76,500 6.4%


2013 2012
Amount Percent Amount Percent
Lincoln Company
Comparative and Commonsize Income Statement
For the Years Ended December 31, 2013 and 2012
Lincoln Company
Comparative & Common size Balance Sheet

Assets
Current assets $ 550,000 48.3% $ 533,000 43.3%
Long-term investments 95,000 8.3 177,500 14.4
Property, plant, & equip. (net) 444,500 39.0 470,000 38.2
Intangible assets 50,000 4.4 50,000 4.1
Total assets $1,139,500 100.0% $1,230,500 100.0%
Liabilities
Current liabilities $ 210,000 18.4% $ 243,000 19.7%
Long-term liabilities 100,000 8.8 200,000 16.3
Total liabilities $ 310,000 27.2% $ 443,000 36.0%
Stockholders Equity
Preferred 6% stock, $100 par $ 150,000 13.2% $ 150,000 12.2%
Common stock, $10 par 500,000 43.9 500,000 40.6
Retained earnings 179,500 15.7 137,500 11.2
Total stockholders equity $ 829,500 72.8% $ 787,500 64.0%
Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%
December 31, 2013 December 31, 2012
Amount Percent Amount Percent
Common-Size Income Statement
2013
Tool no 2
Horizontal analysis
Horizontal analysis
It is a financial statement analysis technique that
shows changes in the amounts of corresponding
financial statement items over a period of time.
The statements for two or more periods are used
in horizontal analysis. The earliest period is
usually used as the base period and the items on
the statements for all later periods are compared
with items on the statements of the base period.
The changes are generally shown both in amount
and percentage.
Lincoln Company
Comparative Balance Sheet
December 31, 2013 and 2012
Assets
Current assets 550,000 533,000 17,000 3.2
Long-term investments 95,000 177,500 (82,500) (46.5)
Fixed assets (net) 444,500 470,000 (25,500) (5.4)
Intangible assets 50,000 50,000
Total assets 1,139,500 1,230,500 (91,000) (7.4)
Liabilities
Current liabilities 210,000 243,000 (33,000) (13.6)
Long-term liabilities 100,000 200,000 (100,000) (50.0)
Total liabilities 310,000 443,000 (133,000) (30.0)
Stockholders Equity
Preferred 6% stock, Rs.100 par 150,000 150,000
equity stock, Rs.10 par 500,000 500,000
Retained earnings 179,500 137,500 42,000 30.5
Total stockholders equity 829,500 787,500 42,000 5.3
Total liab. & SE 1,139,500 1230,500 (91,000) (7.4)


2013 2012 Amount Percent
Increase (Decrease)
Sales 1,530,500 1,234,000 296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales 1,498,000 1,200,000 298,000 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit 455,000 380,000 75,000 19.7%
Selling expenses 191,000 147,000 44,000 29.9%
Administrative expenses 104,000 97,400 6,600 6.8%
Total operating expenses 295,000 244,400 50,600 20.7%
Operating income 160,000 135,600 24,400 18.0%
Other income 8,500 11,000 (2,500) (22.7%)
168,500 146,600 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income before income tax 162,500 134,600 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income 91,000 76,500 14,500 19.0%

Lincoln Company
Comparative Income Statement
December 31, 2013 and 2012

2013 2012 Amount Percent
Increase (Decrease)
Tool no 3
Trend analysis
Trend analysis
Trend analysis evaluates an organizations
financial information over a period of time.
Periods may be measured in months, quarters, or
years, depending on the circumstances. The goal
is to calculate and analyze the amount change
and percent change from one period to the next.

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