Chapter 4: Profit and Loss Account

Solution to problems and cases

1. Expense recognition in profit and loss account:

The impact of the following transaction on the Profit & Loss Account for the financial
year 2010-11:
a. The interest for the period 1st July 2010 to 31st March 2011 will be accounted for
in Profit & Loss Account. Accordingly interest amounting to `9 Crores will be
charged to the Profit & Loss A/c using accrual basis of accounting.
b. Stationary consumed = Opening Inventory + Stationary Purchased Closing
Inventory. Accordingly `13.5 million will be debited to the Profit and Loss A/c as
stationary consumed. (`2.3 million + `13 million `1.8 million).
c. Employee Cost = Paid during the year advances + salary outstanding +
provision for retirement benefits; = `134.75 million - `2 million + `15.35 million
+ `2.35 million = `150.45 Million

2. a) Operating Income
b) Other Income
c) Other Operating Income
d) Other Operating Income
e) Other Income
f) Extra-ordinary Income
g) Not an Income
h) Extra-ordinary Income
i) Other Operating Income
j) Other Income
3. Various measures of profits:
Pre tax profit (PBT) = PAT + Provision for Tax = `743 + `131 = `874 Crores.
Operating Profit (EBIT) = PBT + Interest and Finance Charges = `874 + `160 = `1034
Crores
Cash Operating Profit (EBITDA) = EBIT + Depreciation = `1034 + 130 = `1164 Crores
4. Preparation of Profit & Loss Account: The Profit & Loss Account for the Jack
Paints Limited for the year 2010-11 is given below:
1

Profit & Loss Account for the year 2010-11

Gross Sales

` Crores
5528.8
2

Less: Excise Duty

403.74

Particulars

Net Sales

5125.08

Other Income
Interest Earned

131.3

Dividend Received

1.85

Profit on Sales of fixed assets

10.7

Total Income

143.85
5268.93

Expenses
Material Consumed

2840.2
4

Employee Cost

280.84

Manufacturing Expenses

718.73

Administrative and Marketing Expenses

295.27

Earnings Before
Amortization

Interest,

Tax,

Depreciation

4135.08

and
1133.85

Depreciation and Amortization

60.74

Earnings Before Interest and Tax

1073.11

Interest on borrowed funds

13.76

Profit Before Tax and Extra Ordinary Items

1059.35

Extra-Ordinary Income

25.46

Profit Before Tax

1084.81

Provisions for Tax

- for Current Year

336.46

- for earlier year written back

-6.29
2

330.17

Profit After Tax

754.64

Appropriations
Interim Dividend
Proposed Dividend
Tax on Dividend
Balance Carried to Balance Sheet

81.53
177.45
44.03

303.01
451.63

5. Computing Earnings Per Share:

Basic Earnings Per Share = PAT / Number of Equity Shares = `754.64 Crore / `9.6 Crore
= `78.61
Diluted Earnings Per Share = PAT / Number of Existing Shares + Number of Dilutive
Shares = `754.64 Crore / (`9.6 + 0.58) Crore = `74.13
6.
Profit and Loss Statement of Solid Steels Limited
For the year ended 31st March 2013
Income
Revenue from Operations
Sale of Steel
Other Operating Income
Other Income
Interest Earned
Dividend Received

13120
235

13355

180
23

203

Total Income

13558

Expenses
Raw Material Consumed
Opening Stock
+ Raw Material Purchased
- Closing Stock
Purchase of Stock in Trade
Change in Stock
Opening Stock
Work in Progress
Finished Goods
Less: Closing Stock
Work in Progress
Finished Goods

554
8332
662

8224
233

328
205
432
156

-55

Employee Benefit Expenses

Salary & Wages
Contribution to Employees Funds
Training & Development Cost

1120
212
34

1366

Financial Cost
Interest
Bank Charges

191
14

205

Depreciation and Amortisation

Depreciation
Amortisation

331
12

343

Other Expenses
Freight Outwards
Handling Cost
Loss on Sales of Assets
Power & Fuel
Provisions and Write offs
Repair & Maintenance
Stores and Spares
Other Expenses

356
130
12
462
17
168
518
809

2472

Total Expenses
Profit Before Tax and Exceptional Items
Exceptional Item
Profit Before Tax
Tax Expenses
Profit After Tax

12788
770
6
764
258
506

7. Preparation of Profit & Loss Account from a trial balance:

Profit & Loss Account of Star Limited for the year ended 31st March 2011
Amount (` Million)

Amount (` Million)

Income
Sales

1,602.76

Less: Sales Returns

17.37

Interest

8.56

Add: Accrued Interest

3.43

1,585.39

11.99

Total

1,597.38

Expenditure
Opening Stock

255.40

Add: Purchases

983.95

Less : Purchase Return

13.49

Less: Closing Stock

171.03

1,054.82

Wages

152.93

Salaries

26.13

Freight

6.73

General Expenses

34.58

Auditors Fees

11.78

Directors Fees

35.96

Depreciation
Premises

5.48

Plant & Machinery

33.39

Furniture

0.93

Interest on Bank Loan

39.81
6.17

Total Expenditure

1,368.90

Profit Before Tax

228.48

Provision for Tax

68.54

Profit After Tax

159.94

Appropriations
Profit After Tax

159.94

Add: Profit carried from Balance Sheet

60.81

Profits available for appropriations

220.75

Less:
Transfer to General Reserves

8.00

Proposed Dividend

41.10

Dividend Distribution Tax

6.17

Profit carried to Balance Sheet

55.26
165.49

Cases
Case 4.1: Preparation of Profit & Loss Account for Infosys Limited
Profit & Loss Account for the year ended 31st March
Income
Income from software services and products
Interest Income
Dividend Income
Other income / (loss)
Total Income

` Crores
2010
21140
743
101
66
22050

2009
20264
836
2
-334
20768

Expenses
Software development expenses
Selling expenses
Salaries, wages and other employee benefits
Managerial remuneration
Depreciation and amortization
Auditor's remuneration
Provision for doubtful debts
Provision for post-sales client support and warranties
Other expenses
Total Expenses
Profit Before Tax and Extra-Ordinary Items
Provision for Taxation
Profit Before Extra-Ordinary Items
Extra-ordinary Income, net of taxes
Profit After Tax

2317
215
10340
16
807
1
-1
-2
885
14578
7472
1717
5755
48
5803

2111
247
9960
15
694
1
74
39
913
14054
6714
895
5819
0
5819

Appropriations
Interim Dividend on Equity Shares
Final Dividend on Equity Shares
Tax on dividend
Total Appropriations
Balance Carried to Balance Sheet

573
861
240
1674
4129

572
774
228
1574
4245

Case 4.2: Preparation of Profit & Loss Account for Cipla Limited based upon the Trial
Balance and additional information
Profit & Loss Account of Cipla Limited for the year ended 31st
March 2010
` Crores
` Crores
Gross Sales
Less : Excise Duty
Other Income

5411.68
52.16

Total Income

5359.52
353.72
5713.24

Expenses
Material Consumed
Opening Stock
+ Purchases
- Closing Stock
Employee Cost
+ Salary Outstanding
+ Provisions for Retirement Benefits

1398.32
2567.24
1512.58
263.01
26.74
29.12

2452.98

318.87

Provision for doubtful debts

Manufacturing Expenses
Other Expenses
Research & Development Expenses
Provision for Depreciation
Interest Cost
Total Expenses

83.61
231.05
957.85
250.69
165.25
22.95
4483.25

Profit Before Tax and Extra-Ordinary Income

Extra Ordinary Income
Profit Before Tax
Less : Provision for Tax

1229.99
95.00
1324.99
243.5

Profit After Tax

1081.49

Less : Appropriations
Proposed Dividends
Dividend Distribution Tax

160.58
26.67

Balance Carried to the Balance Sheet

894.24

Note: Colored entries depict adjustment entries.

Case 4.3: Preparation of Profit & Loss Account for Siemens Limited based upon the Trial
Balance and additional information
The Profit & Loss Account of Siemens Limited for the year ended 30 th September 2009 is given
below:
Profit & Loss Account of Siemens Limited for the year ended 30th September 2009

Particulars

` '000

Income
85,554,11
4

Gross Sales & Services Income

Less : Excise Duty
Other Income

2,186,779

Commission Income

520,410

Other Operating Income

697,219

Interest Earned

523,002

Profit on Sale of Investment in Subsidiaries

2,059,459

Other Income

2,341,188

83,367,33
5

6,141,278
89,508,61
3

Total Income
Expenses
Raw Material, Stores and Components Purchased

20,200,72

5
Add: Opening Stock - Raw Material, Stores &
Components

1,526,726

Less: Closing Stock - Raw Material, Stores &

Components

2,531,516

19,195,93
5
11,335,32
6

Traded Goods Purchased

Personnel Cost

5,445,792

Add: Provisions for Employees Benefits

53,197

5,498,989

Other Cost of Sales & Services

28,535,47
4

Provisions for Warranties and Contingencies

5,237,014

Provisions for doubtful debts

769,201

Other Costs

4,877,553

Depreciation

777,794

Interest Expense

58,772

Add: Opening Stock - WIP & Finished Goods

Less: Closing Stock - WIP & Finished Goods

6,094,417
7,190,455

(1,096,03
8)
14,318,59
3

Profit Before Tax

Tax
Current

4,007,464

Deferred

(208,879)

Fringe Benefit Tax

71,500

3,870,085
10,448,50
8

Profit After Tax

Appropriations
9

Proposed Dividend

1,685,801

Tax on Dividend

286,502

Balance carried to Balance Sheet

1,972,303
8,476,205

Red entries are based upon the adjustments.

Case 4.4
Profit & Loss Statement of TCS Limited for the year ended 31st
March 2012
` Crores
Income
Revenue from Operations
Other Income
Dividend
Interest
Other Income
Total Income

38,858.54
2,428.00
658.57
31.43

Expenditure
Employee Benefit Expenses
Other Expenses
Exchange Loss
Finance Cost
Depreciation
Amortisation
Total Expenditure

3,118.00
41,976.54

14100.41
13372.41
432.82
16.4
681.23
6.94
28610.21

Profit Before Tax

13,366.33

Provision for Tax

2390.35

Profit After Tax

10,975.98

10

Case 4.5: Comparison of Profit & Loss Account of Hero Honda Motors Limited and Tech
Mahindra Limited for the year 2009-101
Hero
Honda
Motors
Limited
(` Crores)

Particulars

i.
the

Net Sales/ Income from

Operations
Other Income
Total Income
Personnel Expenses
Material Consumed
Operating and Other
Expenses
Depreciation and
Amortization
Finance Charges
Exceptional Items
Profit Before Tax
Provision for Tax
-Current
-Deferred
Net Profit After Tax
Balance of Profit brought
forward
Interim Dividend
Proposed Dividend
Tax on Dividend
Transfer to Reserves
Balance Carried to Balance
Sheet

Tech
Mahindra
Limited
(` Crores)

15,758
341
16,099
560
10,736

4,484
91
4575
1,599
0

1,800

1,803

191
-20
0
2,832

130
160
9
874

592
8
2,232

138
-7
743

2,707
1,598
599
371
225

1,350

2,146

1,774

Compare

43
7
269

composition of expenses for the two companies.

Hero Honda is a manufacturing company whereas Tech Mahindra is in services.
Accordingly the main differences in the cost structure are as follows:
a) Tech Mahindra has comparatively higher personnel cost
b) For Hero Honda material cost is the major element of cost which is missing in case of
Tech Mahindra
c) Proportionately Operating and Other Expenses are higher in case of Tech Mahindra
1 Annual Reports of Hero Honda Motors Limited and Tech Mahindra Limited for the
year 2009-10
11

d) Tech Mahindra has higher Finance Charges signifying higher reliance on borrowed
funds.
ii.

Hero Honda Motors Limited has negative finance charges. What does it indicate?
The interest earned is netted from interest paid and finance charges. Hero Honda being a
cash rich company might have kept surplus funds in bank deposits etc. on which it is
earning interest. The negative finance charges indicate that the interest earned in higher
than interest paid.

iii.

How are these two companies appropriating their profits?

Tech Mahindra is paying relatively lower dividends and retaining more in Reserves &
Surplus. Hero Honda on the other hand is paying larger dividends and retaining less in
Reserves and Surplus.
Case 4.6
Identify the key differences:
a. Proportion of `Other Income in the total income
b. Fuel Cost (NTPC) and `Electricity Cost (PTC) vs. Nil cost of raw material for
NHPC and PG
c. Higher depreciation in PG whereas lowest in case of PTC
d. Higher Interest/Finance Cost in case of PG/NTPC
e. Impact of Prior Period Items (NTPC)

12