CHAPTER - III COMMON SIZE INCOME STATEMENT. 3.2 Common Size profit and Loss Account of Individual

Transcription

1 CHAPTER - III COMMON SIZE INCOME STATEMENT 3.1 Concept 3.2 Common Size profit and Loss Account of Individual Companies 3.3 Common-size Profit and Loss Appropriation Account 3.4 Findings [75]

2 3.1 CONCEPT It has always been emphasized that the relative importance of various items in financial statements can be highlighted by relating them to a common base. Thus, total assets, total liabilities and capital in the balance sheet and net sales in the income statement are each converted into a base of 1. Each item within each base is expressed as a percentage of the base. Since these bases represent 1 percent in all the statements in the comparison, there is a common basis for the analysis and the statements. Therefore, are referred to as common size statements. Common size statements are also designated (labeled) as, components percentage statements or 1 percent statements because each statement is reduced to the total of 1 and each individual item on the statement is expressed as percentage of total 1. The statement of common size, in fact, are concerned with the evaluation of relationships among items at a specific date. It merely means to determine the percentage of each figure in each year s financial statements to a related total i.e., each item of income and expenditure account and also the net income may be expressed as a percentage of total revenue from operation. This type of research or the study of the financial profits of a company is static. A percent wise comparison is prepared of each item listed here with the amount signifying not sales in case of an income statement. The analysis of income - statements of a company with the common size statement method would reveal whether the profits are increasing in comparison to sales; whether the changes are made in the various items of expenses: whether retained earnings are increasing more than proportionate change in profit and also as to what the percentage change of the cost of goods sold is over the period of comparison. The common size income statement does not give information about the trends of the individual items but the trends of their relationship to the total. 2 Common size statement supplemented by additional analytical financial date is the effective tools of a historical financial study of a business or industry 3.This method of analysis is beneficial when we wish to compare two or more companies having dissimilarity in the organizations size. The trend depicted by common size is more authentic as it shows the qualitative assessment shown [76]

3 by absolute figures. However, the objectives of preparing common size income statements are as follows: (1) It is beneficial in comparing two or more periods or two or more companies when the productive capacity is not the same. (2) The comparative significance of each individual item of expenses and incomes stands out clearly. (3) A study of common size percentage of a company indicates the structure of profit and loss account. (4) The common size income statement also shows the distribution of profit in form of interest, taxes and dividends. This technique is not free from limitations. In computing percentages, if the number is undesirable, the percentage cannot be calculated and likewise, if the amendment is from or to a zero balance in account; it is not probable to compute the percentages. Describing the complications in common size analysis. John N. Myer has rightly remarked. it is doubtful whether the observation of the trends of these relationships is of any value to the analyst because the total is affected by variations in all its components and, therefore, the trends of the relationships are too complex for interpretation. If it could be established in any particular business that, for example, the inventory of merchandise (stock on hand) should normally be a certain percentage of total liabilities and capital, the common size balance sheet would be useful, but it is usually impossible to establish such a norm. 4 For preparing the common size income statement of the cement companies under study, the following method has been accepted: (i) The numbers of various items in the profit and loss account have been reordered under various heads and the total of each items has been rounded off to lakhs of rupees up to two decimal places for the sake of convenience and simplicity. (ii) The figure of net sales has been taken as a hundred and the percentage of every group of item has been calculated. [77]

4 (iii) The common size income statement for every separate cement company has been prepared individually. 3.2 COMMON- SIZE STATEMENT OF PROFIT AND LOSS OF INDIVIDUAL COMPANIES It is not easy to understand statement of profit and loss when read with complete figures and sometimes it is quite confusing. It is, therefore, necessary that figures reported in this statement should be converted into percentage to some common base. 5 In this statement sales figure is assumed to be equal to 1 and all other figures are expressed as percentage of sales. a comparison of common size profit and loss account ratio is significant in as much as it shows that a large particular or smaller relative amount of net sales figures was used in meeting costs or expenses. Variations in sales prices, higher or lower cost of goods acquired or both, however, may influence the percentage. Analysis of Common-size Statement of Profit and Loss: To prepare common-size profit and loss account of the selected cement companies, net sales have been treated as a hundred and the percentage of each item of profit and loss account has been calculated. Table Common Size Profit and Loss of J.K. Cement Ltd. (In %) Year INCOME Gross Sales (Gross Revenue) Less: Excise Duty & Sales Tax Less: Cost of Good Sold (Operating Cost) Operating Profit Less: Interest (Finance cost) Interest but before Tax [78]

5 Less : Tax Tax Adj. Non-Operating Surplus/Deficit Net Profit Source: Computed from annual reports and accounts of respective companies. Figure -3.1 : J.K.Cement - Net Profit Table 3.1 shows that cost of goods sold has varied from to 82.1 percent of gross revenue during the research period. Operating profit before Tax has recorded variation from 6.63 percent in to percent in The table reveals the sudden fall in operation profits in the year due to surprising increase in operating cost. The cost of Interest constituted 1.4 percent to 4.15 percent during the period of research. It also reveals that the cost of operation as well as financial cost has been the least in The Net profit of the company has shown the erratic behavior throughout the study period. It was fluctuating drastically and touched the dip of 3.97 percent in and the high of percent in The overall picture reveals varied profitability of the company studied in the research period. [79]

6 Table Common Size Profit and Loss of Madras Cement Ltd. (In %) Year INCOME Gross Sales (Gross Revenue) Less: Excise Duty & Sales Tax Less: Cost of Good Sold (Operating Cost) Operating Profit Less: Interest (Finance cost) Interest but before Tax Less : Tax Tax Adj. Non Operating Surplus/Deficit Net Profit Source: Computed from annual reports and accounts of respective companies. Figure : Madras Cement - Net Profit [8]

7 Table 3.2 reveals that cost of goods sold ranged from percent to 84.4 percent during the research period. Operating profit before interest and tax has recorded variation to percent in 27-8 from percent in 25-6 indicating a fluctuating trend. The table reveals the increment in operating profit in the year 27-8 due to control and improvement in cost of goods sold. The cost of interest varied from 1.26 percent to 5.32 percent of the gross revenue during research period. Operating profit after interest before tax also reveals the same trend as in case of operating profit. The net profit of the company has shown erratic behavior throughout the research period. It was fluctuating drastically and touched the 6.63 percent in 25-6 and the high of percent in The overall picture reveals high fluctuation profitability of the company studied in the research period. Table Common Size Profit and Loss of Shree Cement Ltd. (In %) Year INCOME Gross Sales (Gross Revenue) Less: Excise Duty & Sales Tax Less: Cost of Good Sold (Operating Cost) Operating Profit Less: Interest (Finance cost) Interest but before Tax Less : Tax (-) Tax Adj. Non Operating Surplus/Deficit (-) Net Profit Source: Computed from annual reports and accounts of respective companies. [81]

8 Figure : Shree Cement - Net Profit Table 3.3 indicates cost of goods sold was percent of the gross revenue in It was improved by came down to percent in 28-9 then increased to percent in Operating profit before interest and tax varied from 4.1 percent to 23.7 percent during the study period. The table reveals the sudden fall in operating profit in the year due to increase in operating cost. The finance cost ranged from.76 percent to 4.3 percent during the research period. Operating profit before interest and tax was 6.73 percent in 25-6 increased to 2.66 percent in 28-9 then sudden fall came down to 1.61 percent in likewise in operating profit before interest and tax. The net profit of the company has varied from 2.75 percent to percent during the study period. It came down to 5.33 percent in the year from percent in 29-1.The overall picture shows high variation and inconsistent profitability of the company during the research period. [82]

9 Table Common Size Profit and Loss of The India Cement Ltd. (In %) Year INCOME Gross Sales (Gross Revenue) Less: Excise Duty & Sales Tax Less: Cost of Good Sold(Operating Cost) Operating Profit Less: Interest (Finance cost) Interest but before Tax (-) Less : Tax Tax Adj. Non Operating Surplus/Deficit (-) (-)1.34 (-) Net Profit Source: Computed from annual reports and accounts of respective companies. Figure : The India Cement - Net Profit [83]

10 Table 3.4 presents cost of goods sold varied from percent to percent of gross revenue during the study period. Operating profit before interest and tax has recorded variation from 2.73 percent in to percent in The table show the sudden fall in operating profit in due to surprising increase in operating cost. The finance cost (Interest) ranged from 2.84 percent to 8.11 percent during the research period. Operating profit before tax was positive and recorded progressive trend except It varied from 2.2 percent in 25-6 to percent in The net profit of the company shows increasing trend during the research period last with high variation. It varied drastically and touched the bottom level of 1.75 percent in and the top level of percent in The overall performance of the company show varying profitability during the research period. Table Common Size Profit and Loss of Ultratech Cement Ltd. (In %) Year INCOME Gross Sales (Gross Revenue) Less: Excise Duty & Sales Tax Less: Cost of Good Sold(Operating Cost) Operating Profit Less: Interest (Finance cost) Interest but before Tax Less : Tax Tax Adj. Non Operating Surplus/Deficit Net Profit Source: Computed from annual reports and accounts of respective companies. [84]

11 Figure 3.5 : Ultratech Cement - Net Profit Table 3.5 explains cost of goods sold varied from percent to percent during the research period. The table reveals slight variation in cost of goods sold during the research period. Operating profit before interest and tax has recorded variation from 8.94 percent in 25-6 to percent in Interest constituted 1.9 percent to 2.37 percent. Operating profit before tax was 6.57 percent in 25-6 reached to percent in 27-8 and fell down to 1.9 percent in The net profit of the company has shown wondering behavior throughout the study period. It was fluctuating and touched the 16.3 percent in 27-8 from 6.7 percent in The overall picture has shown inconsistent profitability of the company studied in the research period. [85]

12 Table : 3.6 Consolidated Common Size Profit and Loss of Cement Companies(In %) Year INCOME Gross Sales (Gross Revenue) Less: Excise Duty & Sales Tax Less: Cost of Good Sold (Operating Cost) Operating Profit Less: Interest (Finance cost) Interest but before Tax Less : Tax Tax Adj. Non Operating Surplus/Deficit Net Profit Source: Computed from annual reports and accounts of respective companies. Figure- 3.6 : Consolidated Net Profit [86]

13 Table 3.6 presents cost of goods sold varied from 62.9 percent to 8.63 percent during the study period. While it was lowest in the Madras Cement Ltd. i.e percent in the year 27-8 and highest in the Shree Cement Ltd. i.e.91.35% in the year Table reveals operating profit before interest and tax has ranged from 9.76 percent to percent during the research period. While sudden fall in operating profit of the India Cement Ltd. to 2.73 percent during due to increase in cost of goods sold has been recorded maximum profit recorded by Madras Cement Ltd. at percent during the year Table shows that financial cost of all selected companies varied from 1.98 percent to 3.73 percent during the research period. While minimum cost of interest was.76 percent in case of Shree Cement Ltd. during the year 26-7 due to reduction in debt the highest cost of interest paid by the India Cement Ltd. was 8.11 percent during the year 25-6 due to long term debt. Operating profit before tax of all studied companies ranged from 6.3 percent to percent during the research period. The India Cement Ltd. suffered loss.92 percent during the year and Madras Cement Ltd. earned highest operating profit percent during the year The table reveals that net profit, on an average of all selected cement companies was 5.23 percent in the year 25-6 increased to percent in the year While the India Cement Ltd. recorded lowest net profit 1.75 percent during the year and Shree Cement Ltd. touched highest net profit percent during the year Common-size Profit and Loss Appropriation Account The Common size profit & loss appropriation account shows the relation of retained earning and proposed dividend (Including dividend tax) to total net profit after tax in a year. In this statement, net profit after tax figure is assumed to equal to 1, whereas other figures are expressed as percentage of net profit after tax. A comparison of percentage in common-size profit and loss appropriation account is significant in as much as it shows variation from year to year in retained earnings and proposed dividend. [87]

14 Table Common Size Profit and Loss Appropriation Account of Cement Companies (In %) Year J.K. Cement Retained Earnings Proposed Dividend Total Madras Cement Retained Earnings Proposed Dividend Total Shree Cement Retained Earnings Proposed Dividend Total The India Cement Retained Earnings Proposed Dividend Total Ultratech Cement Retained Earnings Proposed Dividend Total Source: Computed from annual reports and accounts of respective companies. [88]

15 Figure Common Size Profit and Loss Appropriation Account of Cement Companies Figure 3.7 (A) : J.K. Cement Retained Earnings Proposed Dividend Figure (B) : Madras Cement Retained Earnings Proposed Dividend [89]

16 Figure 3.7 (C) : Shree Cement Retained Earnings Proposed Dividend Figure (D) : The India Cement Retained Earnings Proposed Dividend [9]

17 Figure- 3.7 (E) : Ultratech Cement Retained Earnings Proposed Dividend Table 3.7 shows that in the Madras Cement Ltd. retained its earnings ranged from percent in to percent in It displays an increasing trend in first two years and a declining trend in rest period of the study except during With regard to the payment of dividend, the company has paid dividends ranging from 1.41 percent in to percent in The Shree Cement Ltd. retained its earnings percent in and above 86 percent in rest of the period of study. The dividend paid by the company was percent in with a declining trend during the study period except in Less than 5 percent of the earning were distributed in 28-29, and The J.K. Cement Ltd. retained its 1 percent earnings in The retention ranged from percent in to 1 percent in It demonstrated a fluctuated trend. The company did not distributed dividends in and later dividend distribution ranged from 2.96 percent in to percent of total earnings in An Erratic trend was recorded in the dividend throughout the study period. [91]

18 The Ultratech Cement Ltd. retained its earnings ranged from percent in to percent in 29-21, which shows an increasing trend up to However, it later recorded a declining trend in last three years of the study. The proposed dividend ranged from 2.47 percent in to 1.36 percent in It has registered a declining trend in first five years of the study after than an increasing trend in last two years of the study. The India Cement Ltd. retained its earnings ranged from percent in to 1 percent in It shows erratic trend during the study period as no dividend was declared during It shows a declining trend throughout the study period except in Findings The cost of goods sold has been the critical component on overall profitability of the companies under study during the study period. It has varied drastically with no definable trend. It is because of varied cost of raw materials. This has resulted in varied operating profits throughout the period in all the companies. Interest has also been varying but the changes have not been that critical and may be accounted to routine debt. Policy of the companies and changes in interest rates. Concluding the profitability of the selected companies lacks consistency and depends broadly on cost of raw material consumed. It is evident from the analysis that the companies studied have no similarity on account of dividend policy and the decision regarding disbursement of dividends are not industry influenced. [92]

19 References: 1- R.D. Kennedy and S.Y. Mc Muller, Financial Statements from, Analysis and Interpretation, (Richard D. Irwin, Inc., 1968). p J.R. Monga, Topics in Financial Accounting, (New Delhi: National Publishing House, 198),p Harry Simons, Revised by joy M. smith and K. Fred skonsen, Intermediate Accounting,( South Western Publishing Co., 1977 ), p Jhon N. Myer, Financial Statement Analysis, ( New Jersey : Prentice Hall Inc., Eaglewood Cliffs, 1969), p R.L. Gupta and M. Radhaswamy, Advanced Accountancy, ( New Delhi: Sultan Chand and Sons, 1982), p.fsa-23 [93]