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Financial Statement Analysis

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Financial Statement Analysis-FIN621
VU
Lesson-10
FINANCIAL STATEMENTS
Income Statement
A typical and Standard Income Statement and Balance Sheet of a manufacturing concern
would be as follows:-
INCOME STATEMENT/PROFIT & LOSS ACCOUNT
MOOSA & CO. LTD
FOR/DURING THE PERIOD 2005-06
Rs. in _______
Net Sales *
100
Cost of Goods Sold *
Raw material
30
Salaries & wages (direct Labour)
10
Stores & spares
5
Utilities
5
Depreciation
5
Others
5
____
_____
Total
60
Gross Profit (loss)
40
_______________________________________________________________________
* Net Sales = Gross Sales ­ Sales returns ­ Sales allowances/discounts.
* Cost of Goods sold = Cost of production of goods actually sold; also called "cost of sales": largest
expense item.
Operating expenses
Selling & admin
5
Advertising
5
Depreciation & others
5
Total
15
____
Operating Profit (EBIT)
25
______________________________________________________________________
EBIT: Earning before Interest and Taxes.
Other expenses *
Financial charges i.e. interest
5
Loss on sale of assets
1
Purchase of goodwill
1
Total
7___
Profit before tax (EBT)
18
Provision for tax
5
Profit after tax
13
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Financial Statement Analysis-FIN621
VU
Other income *
Investment gains
7
Net Profit
20
===== (bottom line)
Dividend paid
5
Retained earnings
15
(Added in shareholder's equity and carried forward to Balance Sheet)
________________________________________________________________
* Other expenses: also called non-operating expenses.
* Other income: Dividend revenue, Interest revenue, Gain on Assets Sales etc.
The above is called Multiple ­ Step Income Statement.
Special items: These are one-time items that will not recur in the future, and are disclosed separately on
Income Statement. Examples are: discontinued operations (firm selling a major portion of its business),
extra ordinary transactions (unusual in nature), and cumulative effect of changes in accounting methods
of Inventory and Depreciation.
Illustration # 1
The following Trial Balance has been extracted from the books of ABC Company. on 30-06-2002.
From this, prepare an Income Statement and Balance Sheet for the year ended 30-06-2002.
Particulars
Dr.
Cr.
Sales
200,000
Purchases
180,000
purchase return
2,500
Office salaries
3,500
Furniture & Fixture
16,000
Office Equipment
11,000
Rent
5,000
Accounts Payable(creditors)
28,000
Sales Salaries
3,000
Freight & custom duty on purchases
6000
Repair of office equipment
2,000
Accounts Receivable(debtors)
52,000
Freight on sales
1,000
Capital
41,500
Cash in hand
37,000
Loan from bank(for three years)
50,000
Bank charges
500
Interest on loan
5,000
Grand Total
322,000
322,000
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Financial Statement Analysis-FIN621
VU
Solution
BC Company.
ofit & Loss Account for the year ended June 30, 2002.
Rs.
Rs.
Sales
200,000
Purchases
180,000
Purchase return
2,500
Freight,
custom
duty
on
purchases
6,000
Gross Profit
16,500
202,500
202,500
Salaries
3,500
Gross Profit
16,500
Rent
5,000
Repair of office equipment
2,000
Sales salaries
3,000
Freight on sales
1,000
Interest on loan
5,000
Bank charges
500
Net loss
3,500
Total
20,000
20,000
ILLUSTRATION #2
Following trial balance has been extracted from the books of Hassan Manufacturing Concern on June
30, 2002.
Hassan Manufacturing Concern
Trial balance
As on June 30, 2002
Particulars
Amount
Amount
Dr. (Rs.)
Cr. (Rs.)
Raw Material stock Jul. 01, 2001
35,500
Work in process Jul. 01, 2001
42,000
Finished goods stock Jul. 01, 2001
85,000
Raw material purchased
250,000
Wages
180,000
Freight inward
12,000
Plant and machinery
400,000
Office equipment
45,000
Vehicles
200,000
Acc. depreciation Plant
195,200
Acc. depreciation Office equipment
12,195
Acc. depreciation Vehicles
97,600
Factory overheads
125,000
Electricity
80,000
Salaries
140,000
Salesman commission
120,000
Rent
200,000
Insurance
150,000
General Expense
60,000
Bank Charges
8,500
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Financial Statement Analysis-FIN621
VU
Discounts Allowed
20,000
Carriage outward
35,000
Sales
1,500,000
Trade Debtors
250,000
Trade Creditors
220,000
Bank
165,000
Cash
110,000
Drawings
175,000
Capital July 01, 2001
863,005
Total
2,888,000
2,888,000
Notes:
·  Stock on June 30, 2002.
o  Raw Material
42,000
o  Work in Process
56,500
o  Finished Goods
60,000
·  50% of electricity, insurance and salaries are charged to factory and balance to office.
·  Depreciation to be charged on Plant & Machinery at 20%, Office Equipment at 10% and
Vehicles at 20%on WDV.
·  Write off bad debts Rs. 30,000.
·  All the wages are direct.
Required:
You are required to prepare profit and loss account for the year and balance sheet as on june30, 2002.
SOLUTION
Profit & Loss Account
Hassan Manufacturer Concern
Profit and Loss Account
For the Year Ending June 30, 2002
Particulars
Note
Amount Rs.
Sales
1,500,000
Less: Cost of Goods Sold
1
796,960
Gross Profit
703,040
Less: Administrative Expenses
2
518,761
Less: Selling Expenses
3
155,000
Operating Profit
29,279
Less: Bank Charges
8,500
Net Profit Before Tax
20,779
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Financial Statement Analysis-FIN621
VU
NOTES TO THE ACCOUNTS
Note # 1 Cost of Goods Sold
Stock of Raw Material Jul 01, 2001
35,500
Add. Purchases
250,000
Add. Freight Inward
12,000
297,500
Less: Closing Stock of Raw Material
(42,000)
Raw Material Consumed
255,500
Direct labour
180,000
Factory Overheads
Factory Overheads
125,000
Electricity (50% of 80,000)
40,000
Salaries (50% of 140,000)
70,000
Insurance (50% of 150,000)
75,000
Plant Depreciation (Note 5)
40,960
350,960
Total Factory Cost
786,460
Add: Work in Process Jul 01, 2001
42,000
Less: Work in Process Jun 30, 2002
(56,500)
Cost of Goods Manufactured
771,960
Add: Finished Goods Stock Jul 01, 2001
85,000
Less: Finished Goods Stock Jun 30, 2002
(60,000)
Cost of Goods Sold
796,960
Note # 2 Administrative Expenses
Salaries (50% of 140,000)
70,000
General Expenses
60,000
Rent
200,000
Insurance (50% of 150,000)
75,000
Discount Allowed
20,000
Bad Debts
30,000
Office Electricity (50% of 80,000)
40,000
Depreciation Vehicles (Note 5)
20,480
Depreciation Office Equip. (Note5)
3,281
Administrative Expenses
518,761
Note # 3 Selling Expenses
Salesman Commission
120,000
Carriage Outward
35,000
Selling Expenses
155,000
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