Module 3 Fundamental Analysis

Chapter 5

Understanding P&L Statement (Part 2)

164

M3-Ch5-title

5.1 – The Expense details

In the previous chapter we had learnt about the revenues a company generates. Moving further on the P&L statement, in this chapter we will look at the expense side of the Profit and Loss Statement along with the associated notes. Expenses are generally classified according to their function, which is also called the cost of sales method or based on the nature of expense. An analysis of the expenses must be shown in the Profit and Loss statement or in the notes. As you can see in the extract below almost all the line items have a note associated to it.

M3-Ch5-chart1

The first line item on the expense side is ‘Cost of materials consumed’; this is invariably the cost of raw material that the company requires to manufacture finished goods. As you can see the cost of raw material consumed/raw material is the largest expense incurred by the company. This expense stands at Rs.2101 Crs for the FY14 and Rs.1760 Crs for the FY13. Note number 19 gives the associated details for this expense, let us inspect the same.

M3-Ch5-chart2

As you can see note 19 gives us the details of the material consumed. The company uses lead, lead alloys, separators and other items all of which adds up to Rs.2101 Crs.

The next two line items talks about ‘Purchases of Stock in Trade’ and ‘Change in Inventories of finished goods , work–in-process & stock–in-trade’. Both these line items are associated with the same note (Note 20).

Purchases of stock in trade, refers to all the purchases of finished goods that the company buys towards conducting its business. This stands at Rs.211 Crs. I will give you more clarity on this line item shortly.

Change in inventory of finished goods refers to the costs of manufacturing incurred by the company in the past , but the goods manufactured in the past were sold in the present/current financial year. This stands at (Rs.29.2) Crs for the FY14.

A negative number indicates that the company produced more batteries in the FY14 than it managed to sell. To give a sense of proportion (in terms of sales and costs of sales) the company deducts the cost incurred in manufacturing the extra goods from the current year costs. The company will add this cost when they manage to sell these extra products sometime in future. This cost, which the company adds back later, will be included in the “Purchases of Stock in Trade” line item.

Here is an extract of Note 20 which details the above two line items:

M3-Ch5-chart3

The details mentioned on the above extract are quite straightforward and is easy to understand. At this stage it may not be necessary to dig deeper into this note. It is good to know where the grand total lies. However, when we take up ‘Financial Modeling’ as a separate module we will delve deeper into this aspect.

The next line item on the expense side is “Employee Benefit Expense”. This is quite intuitive as it includes expense incurred in terms of the salaries paid, contribution towards provident funds, and other employee welfare expenses. This stands at Rs.158 Crs for the FY14. Have a look at the extract of note 21 which details the ‘Employee Benefit Expense’.

M3-Ch5-chart4

Here is something for you to think about – A company generating Rs.3482 Crs is spending only Rs.158 Crs or just 4.5% of its sales on its employees. In fact this is the pattern across most of companies (at least non IT). Perhaps it is time for you to rethink about that entrepreneurial dream you may have nurtured.

The next line item is the “Finance Cost / Finance Charges/ Borrowing Costs”. Finance cost is interest costs and other costs that an entity pays when it borrows funds. The interest is paid to the lenders of the company. The lenders could be banks or private lenders. The company’s finance cost stands at Rs.0.7 Crs for the FY14. We will discuss more about the debt and related matters when we take up the chapter on the balance sheet later.

Following the finance cost the next line item is “Depreciation and Amortization” costs which stand at Rs.64.5 Crs. To understand depreciation and amortization we need to understand the concept of tangible and intangible assets.

A tangible asset is one which has a physical form and provides an economic value to the company. For example a laptop, a printer, a car, plants, machinery, buildings etc.

An intangible asset is something that does not have a physical form but still provides an economic value to the company such as brand value, trademarks, copyrights, patents, franchises, customer lists etc.

An asset (tangible or intangible) has to be depreciated over its useful life. Useful life is defined as the period during which the asset can provide economic benefit to the company. For example the useful life of a laptop could be 4 years. Let us understand depreciation better with the help of the following example.

Zerodha, a stock broking firm generates Rs.100,000/- from the stock broking business. However Zerodha incurred an expense of Rs.65,000/- towards the purchase of a high performance computer server. The economic life (useful life) of the server is expected to be 5 years. Now if you were to look into the earning capability of Zerodha it appears that on one hand Zerodha earned Rs.100,000/- and on the other hand spent Rs.65,000/- and therefore retained just Rs.35,000/-. This skews the earnings data for the current year and does not really reflect the true earning capability of the company.

Remember the asset even though purchased this year, would continue to provide economic benefits over its useful life. Hence it makes sense to spread the cost of acquiring the asset over its useful life. This is called depreciation. This means instead of showing an upfront lump sum expense (towards purchase of an asset), the company can show a smaller amount spread across the useful life of an asset.

Thus Rs.65,000/- will be spread across the useful life of the server, which is 5. Hence 65,000/ 5 = Rs.13,000/- would be depreciated every year over the next five years. By depreciating the asset, we are spreading the upfront cost. Hence after the depreciation computation, Zerodha would now show its earrings as Rs.100,000 – Rs.13,000 = Rs.87,000/-.

We can do a similar exercise for non tangible assets. The depreciation equivalent for non tangible assets is called amortization.

Now here is an important idea – Zerodha depreciates the cost of acquiring an asset over its useful life. However, in reality there is an actual outflow of Rs.65,000/- paid towards the asset purchase. But now, it seems like the P&L is not capturing this outflow. As an analyst, how do we get a sense of the cash movement? Well, the cash movement is captured in the cash flow statement, which we will understand in the later chapters.

Here is the snapshot of Note 23, detailing the depreciation cost.

M3-Ch5-chart5The last line item on the expense side is “other expenses” at Rs.434.6 Crs. This is a huge amount classified under ‘other expenses’, hence it deserves a detailed inspection.

M3-Ch5-chart6

M3-Ch5-chart7

From the note it is quite clear that other expenses include manufacturing, selling, administrative and other expenses. The details are mentioned in the note. For example, Amara Raja Batteries Limited (ARBL) spent Rs.27.5 Crs on advertisement and promotional activities.

Adding up all the expenses mentioned in the expense side of P&L, it seems that Amara Raja Batteries has spent Rs.2941.6 Crs.

5.2 – The Profit before tax

It refers to the net operating income after deducting operating expenses but before deducting taxes and interest. Proceeding further on the P&L statement we can see that ARBL has mentioned their profit before tax and exceptional item numbers.

Simply put the profit before tax (PBT) is:

Profit before Tax = Total Revenues – Total Operating Expenses

= Rs.3482 – Rs.2941.6

=Rs.540.5

However there seems to be an exceptional item/ extraordinary item of Rs.3.8 Crs, which needs to be deducted. Exceptional items/ extraordinary items are expenses occurring at one odd time for the company and the company does not foresee this as a recurring expense. Hence they treat it separately on the P&L statement.

Hence profit before tax and extraordinary items will be:

= 540.5 – 3.88

= Rs.536.6 Crs

The snapshot below (extract from P&L) shows the PBT(Profit Before Tax)  of ARBL:

M3-Ch5-chart8

5.3 – Net Profit after tax

The net operating profit after tax is defined as the company’s operating profit after deducting its tax liability. We are now looking into the last part of the P&L statement, which is the profit after tax. This is also called the bottom line of the P&L statement.

M3-Ch5-chart9

As you can see from the snapshot above, to arrive at the profit after tax (PAT) we need to deduct all the applicable tax expenses from the PBT. Current tax is the corporate tax applicable for the given year. This stands at Rs.158 Crs.  Besides this, there are other taxes that the company has paid. All taxes together total upto Rs.169.21 Crs. Deducting the tax amount from the PBT of Rs.536.6 gives us the profit after tax (PAT) at Rs.367.4 Crs.

Hence Net PAT = PBT – Applicable taxes.

The last line in the P&L statement talks about basic and diluted earnings per share. The EPS is one of the most frequently used statistics in financial analysis. EPS also serves as a means to assess the stewardship and management role performed by the company directors and managers. The earnings per share (EPS) is a very sacred number which indicates how much the company is earning per face value of the ordinary share. It appears that ARBL is earning Rs.21.51 per share. The detailed calculation is as shown below:

M3-Ch5-chart10

The company indicates that there are 17,08,12,500 shares outstanding in the market. Dividing the total profit after tax number by the outstanding number of shares, we can arrive at the earnings per share number. In this case:

Rs.367.4 Crs divided by 17,08,12,500 yields Rs.21.5 per share.

5.4 – Conclusion

Now that we have gone through all the line items in the P&L statement let us relook at it in its entirety.

M3-Ch5-chart11

Hopefully, the statement above should look more meaningful to you by now. Remember almost all line items in the P&L statement will have an associated note. You can always look into the notes to seek greater clarity. Also at this stage we have just understood how to read the P&L statement, but we still need to analyze what the numbers mean. We will do this when we take up the financial ratios. Also, the P&L statement is very closely connected with the other two financial statements i.e the balance sheet and the cash flow statement. We will explore these connections at a later stage.


Key takeaways from this chapter:

  1. The expense part of the P&L statement contains information on all the expenses incurred by the company during the financial year
  2. Each expense can be studied with reference to a note which you can explore for further information
  3. Depreciation and amortization is way of spreading the cost of an asset over its useful life
  4. Finance cost is the cost of interest and other charges paid when the company borrows money for its capital expenditure.
  5. PBT = Total Revenue – Total Expense – Exceptional items (if any)
  6. Net PAT = PBT – applicable taxes
  7. EPS reflects the earning capacity of a company on a per share basis. Earnings are profit after tax and preferred dividends.
  8. EPS = PAT / Total number of outstanding ordinary shares

164 comments

  1. Gurjot says:

    How do you calculate the cost of good sold using Cost of Material Consumed, Purchase of Stock-in-Trade and Changes in inventories of Finished Goods & Work-in-Progress?

    • Karthik Rangappa says:

      COGS is usually associated with the cost incurred for the manufacturing the end product. Have explained it here, please refer section 13.3.

      • Piyush says:

        Hi Karthik, I have been following this website religiously, making notes and trying to absorb each and every chapter. I had a question, I could not locate the split of the line items in the financial results. For e.g. “Other Income”, where can we find a split of such things? Can you help?

        • Karthik Rangappa says:

          Usually, the company will associate a note or a schedule for every line item, including Óther Income. Can you please double check for that note once again?

      • Nitin says:

        Hello sir,

        You doing a Good job to teach everybody in free of cost…..sir I want to know that have you any hardcopy of this book….if you have plz shre how I’ll got.

        Thanks and regards
        Nitin dey
        9969240114

  2. Amitvikram says:

    In “Change in inventory of goods” I could understand that negative number indicates, company sold products manufactured last year and hence those many products which were manufactured this year are not sold, hence the cost of that extra goods is subtracted from total expenses this year. I have got two questions. 1) Does the positive number indicate that, all the products produced this year are sold and also the remaining products of last year? In such a case will previous year manufactured expenses not be included in the previous year P&L expenses? 2)Does a zero indicate that company was able to sell all the products manufactured?

    • Karthik Rangappa says:

      The P&L statement is supposed to give a sense of proportion. A negative number here represents that the company produced more products than it managed to sell. For example assume they manufactured 100 batteries with the cost of manufacturing each battery as Rs.50. So the total expense is 5000/-. However if they managed to sell only 80 batteries out of the 100, then they will have to show the expense of manufacturing only 80 batteries. Hence they will deduct 20*50 = 1000 from 5000 to give a sense of proportion. Because they are deducting this number it will bear a -ve sign.

      Assume the next year they manufacture another 100 batteries at the same cost of Rs.5000. Also assume they manage to sell these 20 extra batteries along with the 100 batteries, then for that year they will have to add the total expense as Rs.5000 and Rs.1000. Because this number has to be added back it bears a +ve sign.

      • Amitvikram says:

        Then in the next year the 20 batteries cost will be added in the “purchase of stock in trade” am I right? What is the difference between Finished goods and stocks in trade?

        • Karthik Rangappa says:

          Yes. Thats right and it will be a +ve number.

          Finished goods are inventory that is ready to be sold. Stocks in trade usually refer to material that aids in such sales.

          • Manoj says:

            Purchase of stock in trade finished goods directly purchased….the 20 batteries aka closing stock of finished goods becomes opening stock the next year its not added to purchase of stock in trade!!!!!!!!!!!(something which is purchased but not sold is added to inventory later the next year it is treated as opening stock….cogs=os-cs)

          • Karthik Rangappa says:

            Thanks for the comments Manoj 🙂

          • Manoj says:

            *** Purchase of stock in trade is the finished goods directly purchased (would love it if there was an edit button)

          • Karthik Rangappa says:

            I know what you mean 🙂

      • Shubham Patil says:

        Hi karthik,
        What is the difference between change of inventory in finished goods and purchase of stock in trade?
        It seems to be same.

        • Karthik Rangappa says:

          Not really, Shubham. Someone had the same query, I’d suggest you go through the comments, have explained this earlier as well. Thanks.

  3. Durgesh kumar says:

    Opening stock- closing stock if it negative then it means it sold more no than manufactured (including previous year) them it should be added to stock in trade current this year like than na sir.

    • Karthik Rangappa says:

      If negative it means the company sold less than what it manufactured, hence to give a sense of proportionality the company reduced this cost from the cost of manufacturing from expenses. Hence it is negative.

    • Manoj says:

      Karthik is right…….let me give you an ex opening stock 399, manufactured 1000, closing stock 400 sales=x find x!!!!!!!
      opening stock 399
      add:manufactured 1000
      less :closing 400
      =sold 399

      change in inventory is -ve(399-400=-1)……goods sold < that manufactured

      Like karthik said the company reduces the cost of excess goods & the same is debited to inventory a/c (closing stock) …this is done to comply with the accrual concept of fundamental accounting assumptions of accounting standard 1

  4. Bandana says:

    Dear sir u are doing great job.pls explain me how Arbl shareholders equity is 1059 cr for 2013 instead of 10598 cr.pls reply sir.

    • Karthik Rangappa says:

      If you look carefully the numbers expressed in the BS is in Million Rupees, but throughout the module I have converted the numbers to INR Crs. Hence what you see is 10598 Million Rupees which is equivalent to Rs.1059.8Crs.

  5. Bandana says:

    Thank you sir, i got it.one more doubt about tax rate.how can be calculated?

    • Karthik Rangappa says:

      One quick but dirty technique is to identify this is by dividing Income tax paid by PBT. This will give you a rough idea on how much tax is being paid out.

  6. girish says:

    Dear sir..
    Doji robust strong uptredn indicator i searched is this correct na sir…….how to identify long bull run stock with a help of doji….recently i studied hitachi home stock, there i got doji open & close equal price……is this correct sir..? now i got in salzer electronics ltd same indicator..? how to confirm doji is strong bullish..?
    thanking you sir……
    regard’s
    girish

  7. girish says:

    Dear sir..
    Doji robust strong uptredn indicator i searched is this correct na sir…….how to identify long bull run stock with a help of doji….recently i studied hitachi home stock, there i got doji open & close equal price…..skm egg product ltd stock same doji signal..
    thanking you sir……
    regard’s
    girish

    • Karthik Rangappa says:

      Girish, you are posting these questions under the wrong chapter head. Request you to post them in relevant sections for the benefit of others. Anyway, on a standalone basis dojis convey indecision in the market. They cannot be used to identify trends.

  8. Chandraneel says:

    Dear Karthik, I have a doubt in NOTE20, it will be really helpful if you can clarify it.
    In FY13 for Home UPS, Closing Stock is 22.3 crores, I have understood this as 22.3 crores is the accumulated ‘Stock in Trade’ for UPS product until FY13 i.e. net ‘Stock in Trade’ for UPS from its first year till FY13 is 22.3 crores. Please correct me if I am wrong.
    So as per this data, maximum ‘Purchase of Stock in Trade’ for UPS in FY14 can be only 22.3 crores but in NOTE20, ‘Purchase of Stock in Trade’ for UPS is 49.4 crores.
    I am feeling it very difficult to understand from where the balance of 49.4-22.3=27.1 crores has come from?

    • Karthik Rangappa says:

      Chandraneel – this is a bit tricky.
      The note you are referring to is a P&L line item. Unlike a balance sheet item, P&L line items are on a year on year basis. So there is no question of accumulated figures in P&L statement – but in Balance sheet it is on a flow basis so ‘accumulated’ makes sense, like accumulated depreciation.
      So the ‘net stock in trade’ refers to the previous year closing balance + this year number.
      Purchase of stock in goods and change in inventory are 2 discrete entries on P&L, but closely related to the Balance Sheet – hence the reason why I said this is a bit tricky 
      Purchase of stock in goods refers to the value of the goods (from previous year inventory) that the company is able to sell this year. This number clearly has a balance sheet angle to this (FY 14 inventory stands at Rs.335 Crs). In the absence of a detailed note associated for Purchase of stock in trade it would be really hard to estimate how exactly ARBL arrived at 49Crs.

      • Chandraneel says:

        Dear Karthik,
        Thanks for the reply. I am getting a sense of what you mean.
        Once again thanks a lot to you and Zerodha team for this wonderful initiative which is helping us immensely.

        • Karthik Rangappa says:

          Thanks for the kind words.

          Also, do remember this – when companies provide a detailed schedule on their financial statements, it speaks volumes about transparency and accountability.

  9. civils.aditya says:

    Hello Karthik,
    Thank you for opening up a new world where I can actually see in digits what I always doubted, that it’s only a smaaalllll portion of the company’s earning that is spent on employees 🙂 . Just for the sake of info, can we see annual report of any IT company. I tried searching for Accenture but wasn’t able to get it. All I got was a statement of 6 pages. Could you help? Sorry for asking such a thing in your busy schedule 🙁 .

  10. Michael Mathew says:

    How to find out the non recurring expenses in an Income statement? & How do they calculate it?

    • Karthik Rangappa says:

      You will have to dig into the notes (or schedules) given in the financials to establish if the expense is a regular on non recurring expense. The notes will also include details on any such calculation.

  11. Michael Mathew says:

    Could you give some examples of non-recurring expenses in an income statement????

    • Suchetha says:

      Non recurring expenses on an income statement should be reported separately from the recurring expenses.

      Some examples of infrequent expenses are :-

      1. Emergency costs to repair an equipment

      2. Paying the laid off workers, due to the sudden sale of a division or department

      3. Repair costs after a natural disaster.

      4. Litigation fees

  12. Gunda Ashok Reddy says:

    Please explain the difference between opening stock-in-Process and opening stock of finished goods and Closing Stock-in-Process and Closing Stock of Finished goods.
    And please tell me in CMA whre I have to capture Change in inventories of finished goods, work-in-progess and stock-in trade

    • Karthik Rangappa says:

      Opening stock in process = Raw material being utilized for making the finished goods at the start of the year. This is same as closing stock in process of previous year

      Closing stock in process = Opening stock in process + new additions for the year

      Opening stock of finished goods = The inventory count at the start of the year, which is same as the Closing Stock of Finished goods of previous year

      Closing Stock of Finished goods = Opening stock of finished goods + additions for the year.

      You maybe interested to know that the opening year date is 1st April and closing is 31st March.

      You can capture all the details in the annual report and the schedules.

  13. Arabinda says:

    Dear Zerodha Team, your initiative on providing knowledge on investing/trading is awesome. These articles are great to start with for beginners. The information is clear and crisp. I like the way it is explained and presented.

    Great work..

  14. gowsik says:

    could you please confirm my understanding is correct.
    in the above example,company manufactured 100 batteries in current year out of that 80 only sold, so remaining 20 expenses will be added to stock in trade for next year, is that correct(20*50=1000)?

    Also please explain what is change in work in progress and finished goods? finished goods include last year stock also right?then why we are adding stock in trade separately?

    Also please explain what is the difference between purchase of stock in trade and stock in trade

    • Karthik Rangappa says:

      The remaining 20 will be treated as expense for the current year and if they manage to sell the same next year then it will be recognized as revenues. Change in work in progress & Finished Goods showcases the company’s incremental (or otherwise) change in inventory levels, which is reflected in the Balance Sheet.

      • Gowsik says:

        As per your previous post as follows.For example assume they manufactured 100 batteries with the cost of manufacturing each battery as Rs.50. So the total expense is 5000/-. However if they managed to sell only 80 batteries out of the 100, then they will have to show the expense of manufacturing only 80 batteries. Hence they will deduct 20*50 = 1000 from 5000 to give a sense of proportion. Because they are deducting this number it will bear a -ve sign.
        Assume the next year they manufacture another 100 batteries at the same cost of Rs.5000. Also assume they manage to sell these 20 extra batteries along with the 100 batteries, then for that year they will have to add the total expense as Rs.5000 and Rs.1000

        As per the above statement expenses will add only the product is sold this year, Remaining expenses (20*50=1000) will be added to next year stock in trade but in the previous chat you said The remaining 20 will be treated as expense for the current year.so please explain which one is correct?

        • Karthik Rangappa says:

          Hey, I’m sorry if I confused you. Yup, this is an accounting treatment, and most of the accounting principles work on conservatism. Capitalizing expense this way gives a sense of proportion. So when you incur expense to manufacture goods you recognize it the same year, but if you are unable to sell all the units, then you carry forward the same to the next year and show it as revenue from stock in trade.

          Also, I don’t really come from an accounting background, suggest you double check.

  15. seabird says:

    hi,,for the last one year entire collapsed,,nifty is 1000 points down..almost we are near to 2008 high. Not a single investor who rely on upon fundamental analysis make money from the market..only technical analyst can expect something…then how do define this situation with FA..is it that all companies gone bankruptcy?..I think this FA is completely fake theory…completely waste of time..expecting a reply..regards.

  16. seabird says:

    …………
    A scientist can build a spaceship n travel to moon with his calculation…another scientist knows how to build missile that can hit any city in the world.. for some extent astrology also is reliable..then why you guys(brokers/analysts) completely failed in your field…..i think you do not put enough efforts…!!

  17. rohan says:

    In balance sheet what is the meaning of ” subscribed and paid up” shares?

  18. rohan says:

    change in inventory- goods produced in previous financial yr but sold this yr.
    so why they are covered in expenses and not in revenue as goods are sold now so they are a source of revenue to company?

  19. rohan says:

    total no of shares available with company(paid up)- 200M
    no of shares issued – 175 M
    subscibed and paid up – 170M

    how come last 2 figures different? Is that means company is authorized to issue 200M shares out which it has issued 175M but only 170M has been purchased by common public/investors and 5M shares are still with company for which it has not got any buyer??

    • Karthik Rangappa says:

      Authorized share capital is the maximum share capital the company is authorized to raise. Issued share capital is the number of shares that can be issued to share holders…clearly this will be less than authorized capital. Further, subscribed share capital refers to the actual number of shares that are subscribed by shareholders. Subscribed share capital will be less than (or equal to) issued share capital.

  20. Rajeev says:

    How tangible asset write off comes under expense.boz we get money for asset sale.plz explain

  21. ROSHAN says:

    CHAPTER 5
    Understanding P&L Statement (Part 2)

    Dear sir Can you Please help me out in how to find COGS for above P&L statment given example

    • Karthik Rangappa says:

      COGS = Cost of Material consumed + employee benefit + purchases of stock in trade + other expense

  22. ROSHAN says:

    But what about begining inventory and ending inventory
    It should not be included in calculation…??

  23. RAJIV says:

    Hi, Thanks for the tutorial. query below please.
    1. the value in the line item “Change in Inventories of finished goods , work–in-process & stock–in-trade” for the current FY could/may end up in the line item “Purchases of Stock in Trade” for the next Financial Year. Is my understanding correct? Thanks.

  24. Mrs. Shetty says:

    Though broadly I know how to read an understand the funadamentals from co. B/S, P&L etc. But going thru your tutorials have got confidence and understanding of few things wh was not clear earlier became clear. Hatsoff to you and your team for taking so much efforts and research and study to make layman understand TRADING and create wealth but with full understanding .. it being your main intent.
    Again appreciate your efforts.
    I wanted to learn Options. Its available in the module. the urge has been to skip the FA and jump to Options. But after going thru few chapters on FA I wish to finish it and understand FA to build a Portfolio which will be the backbone for my trading ..I think.
    Thanks once again.

    • Karthik Rangappa says:

      Thanks for the kind words 🙂

      Yes, I’d encourage you to build a long term portfolio and then get into active trading.

  25. MSP says:

    Hi Karthik,
    For a different company, in p&l, Cost of material consumed 3261 cr, other expenses 3136 cr, while going through notes, the break up of other expenses mentions stores and spare parts consumed, packing material consumed, power & fuel etc, these should be standard operation cost, then, what might be the reason of mentioning these are under other expenses.
    Regards,
    MSP

    • Karthik Rangappa says:

      Usually the raw material cost also known as cost of material is stated separately to indicate the sensitive of the company to raw material costs. Hence it gets a separate mention.

  26. MSP says:

    Hi Karthik,
    That’s perfectly fine, my confusion is, can such a big amount as 3136 cr be shown as other expenses.
    Regards,
    Madhusudan

  27. neeraj says:

    Hi
    what is number of
    outstanding shares ?

  28. sameerkhan says:

    Hi dear Karthik Like explained the inventory with below ex
    opening stock 399
    add:manufactured 1000
    less :closing 400
    =sold 399

    change in inventory is -ve(399-400=-1)……goods sold < that manufactured

    Can you explain "Purchase of stock in tread" with such as example
    Thanks

  29. vimal says:

    while analysing the p&l statement of the banks financial statement,i have noticed that there is no tax are paid on the profit they earn.Is that the banks don’t pay taxes on income, pls explain.

  30. Surya says:

    Hi Karthik,

    First of all thank you for the great service that zerodha is doing to educate the community.
    My questions as follows

    Is there any standard which defined the period for depreciation of an element (Laptop/Servers/etc..) if so where can I get a link for that..

    Even though we assume that servers life time is 5 yrs What happens if
    i) If server is totally damaged before 5 yrs (Where does the rest of the value get adjusted)
    ii) Server life extends beyond 5 yrs

    • Karthik Rangappa says:

      Thanks for the kind words, Surya.

      1) I’ve heard its 5 years, but I’m really not sure about this.

      2) We write off the asset

      3) On the basis of accounting, the server has to die on its 5th birthday 🙂

  31. Surya says:

    Also while calculating depreciation on what percentage is it divided.

    Assume I purchase a server for 65000 and its expected life time is 5 years will the depreciation split be equal to 20% for five years or will it be in a decreasing fashion…

    • Karthik Rangappa says:

      This depends on which type of depreciation you choose to adopt. There are two popular methods – straight line method and accelerated method.

  32. Dhinakaran says:

    Karthik, Deferred tax is the difference between the tax projected for the year by the company and the IT department. Is that correct?

  33. Akash says:

    Thanks for the marvellous content. I have one query. In the last line of last table it is mentioned as “basic and diluted earnings per equity share of Re. 1/- each”. Here we are calculating earnings per share which has nothing to do with the share price of the share. Then why it is mentioned “…Re. 1/- each” ? What is the significance of stating ” …. equity share of Re. 1/- each”?

    • Karthik Rangappa says:

      I’m assuming you are referring to FV of a share here. EPS is earnings divided by total number of shares. To calculate the total number of shares you will need the face value of the share.

  34. Aleena says:

    Sir…I have no idea about purchase of stock in trade. .can you please explain this with a suitable example

    • Karthik Rangappa says:

      Have done this on couple of occasions in the chapter (and in the comments section). Request you to kind refer to the same. Thanks.

  35. Ayush says:

    Sir, i have few questions;
    1)what does opening and closing stock means(Note 20)?
    2)why we deduct closing price price from opening price?

  36. rajarshi chakraborty says:

    Hi Karthik

    I have two questions
    a) Under the Header no 20 there are two Purchases of Stock in trade(i.e under a) and one under change of inventory (under b) what is the difference between these two headers?
    b) Secondly if I take the ARBL’s number the opening stock of ARBL is 828 and closing stock is 1052.11.Now as you said the company wants to subtract the extra goods produced in the year which were not sold from there expenses.If product worth of 1052.11 million is lying in the finished goods store as stock why are we subtracting 1052 from 828?Why are we not taking the total 1052 as this the total goods unsold.

    Regards
    Rajarshi

    • Karthik Rangappa says:

      1) Purchase of stock in trade is previous year inventory being sold this year and recognized as revenue. Change in inv represents the new inventory levels.
      2) We generally consider the yearly increment/decrements

  37. kiranintouch says:

    Hi Karthik, Thank You for presenting this module. Request to clarify the following
    1. I understood “Change in inventory of finished goods” from the explanation provided in this chapter. And from your comment on “August 29, 2015 at 6:40 am”, i am interpreting “Stock-In Process” to be same as “Work-In Process” in the above provided note 20. Please confirm if my understanding is correct.
    2. Request to explain what would be “change in inventory of stock-in trade”.

    • Karthik Rangappa says:

      Oh oh….i may have created some sort of confusion here. I’ll soon put up a new supplementary note explaining these things.

  38. Arun KS says:

    Hello Karthik,

    I m quoting your words from above to set the context for my question.

    “A negative number indicates that the company produced more batteries in the FY14 than it managed to sell. To give a sense of proportion (in terms of sales and costs of sales) the company deducts the cost incurred in manufacturing the extra goods from the current year costs. The company will add this cost when they manage to sell these extra products sometime in future. This cost, which the company adds back later, will be included in the “Purchases of Stock in Trade” line item.”

    I couldn’t understand why this has to be added to “Purchase of Stock in Trade” because this years closing stock is next years opening stock. So if company has managed to sell in next year, it will reflect in the closing inventory of next year. And hence effects “Change in Inventories of finished goods , work–in-process & stock–in-trade” of next year, which will become positive. Why is it needed to add again in “Purchase of stock in Trade”?

    • Karthik Rangappa says:

      Purchase in stock in trade is a P&L item – both revenue and its respective expense has to be accounted for here. Inventory on the other hand is a balance sheet item…and technically, you can carry this forward for years.

  39. Khan says:

    When we talk about WIP and finished goods inventory, how do we calculate the cost?As per what i understand,finished goods are made from WIP inventory. Please correct me if i am wrong. So isnt the cost of finished goods inventory already there in WIP ? Aren’t we double counting the costs?

  40. Waqaar says:

    Hello Sir,
    I couldn’t understand this concept “Purchases of stock in trade” and “Change in inventory of finished goods”.
    If expenses of extra items were already added in previous year as normal raw material purchases , then why it is being added in current year even if company is able to sell it. Then it should be considered a profit rather than an expense.

    Thanks

    • Karthik Rangappa says:

      It would not, a negative number in expense means that the number actually gets added back to revenues.

  41. Venkat says:

    sir
    First of Thanks for your interest for your excellent presentation which made me to go through it

    I have some query regarding Depreciation and amortisation
    i was very clear about you example about computer.
    here Depreciation and amortisation is treated as expense . suppose this value is 10k(dep &amoriti)

    Total revenues= 50k
    expenses = 20k

    Profit before Tax = Total Revenues – Total Operating Expenses
    ie PBT = 50k-20k = 30k

    in paper it is 30k . but depreciation & amoritization amount how can it be treated as expense ans we are not paying to any one

    if you check phycially the cash of PBT will be 40k

    will this 10k will be added in the cash and reserves ? which will increase the book value ?

    Please help me to clear this

  42. Arghya Das says:

    Hi U Explained “Change in inventory of finished goods refers to the costs of manufacturing incurred by the company in the past , but the goods manufactured in the past were sold in the present/current financial year.” If The Goods Manufactured In Past But Sold In Current Fiscal, Should It Not Come Under Revenue?

  43. Ranjit says:

    hello sir,
    actually i have ur last 2 or 3 year share market winners state ment list

  44. varun says:

    When will you post the “Financial Modelling” module. Thanks for the simple explanations. Always good to re-learn.

  45. Venkat says:

    Hi Sir

    I have some querys could you please help

    1)What does tax( negative number)means in Balance sheet
    2)What does change in inventory ( number indicates EX: 10) you have explained about negative number only in the PDF

    • Karthik Rangappa says:

      1) Deferred tax – company is expecting some refund.
      2) It suggests that the company is able to convert inventory to cash sooner this year, compared to the previous year.

  46. Venkat says:

    Sir
    is it always good to check ROCE% rather than ROE

    suppose the company’s networth is zero . if ROCE is 25% then we are good like we are getting 25% of profits and is manageable to pay interests of around 15% and still the company will have the profits of 10%

    Could you please let me know

    • Karthik Rangappa says:

      Sure Venkat. Each financial ratio comes with its own set of advantages and disadvantages. You need to look at them from a case to case basis.

  47. muthu mariappan says:

    Sir, I like the way you have motivated us regarding the entrepreneurial dream by highlighting the salary to sales ratio.:-)

  48. Chetan says:

    Hi Karthik,

    For taking your time out and helping people like us to understand the things so well. I have an doubt in regards to EPS Calculation. I would request you if you could please help me with the EPS Calculation once. I know the formulae would be PAT / outstanding shares however there seems to be some correction, so would request you to help me with that.

    Thanks once again..

    Regards.

  49. abhik bhattacharya says:

    Hello Karthik,

    As per note 22 of ARBL Annual Report of 2013-14, Income Tax also forms a part of the Financial Costs. How is it different from the taxes which are considered separately during the evaluation of PAT?

  50. maverick says:

    hi Karthik ,
    Thanks a lot for for your good work of educating us in very simple and layman language . I like the way you reply each n every query.
    is it possible to give some sort of numbering to comments so that it will be easy to refer.

    • Karthik Rangappa says:

      Thanks for the kind words, Maverick. Sorting comments is on the list of things to do. Will try and do something about it.

  51. V.Vivek says:

    Hi Kartik,

    What is the difference between basic and diluted EPS?
    For stock investors like me, what is more important?

  52. vinayagamoorthy says:

    karthick sir,
    i gone through the link about eps and diluted eps, its really good to understand. my question is if there is a vast difference in value between eps and diluted eps of a stock, what we incur from that, is it bad to invest over the stock

  53. Parvesh says:

    Helo sir,

    I have started reading varsity modules and also able to give ncfm exams by studying through these modules and i really appreciate the way you created this platfor for the learners.

    And i would like to know when are you going to update the Financial modelling module??

  54. Himanshu says:

    In these lectures ,you seem to be hinting that investors should manually add up figures in one financial statement and compare with another. Is it really required or an overkill ? In other words , given that these ARs are made by top-notch CAs and presented to regulator , can there be financial discrepancy so obvious as mis-calculation ?

    • Karthik Rangappa says:

      Ah, its not really required…but I would not consider it as an overkill as well. Consider this as an OCD of sorts for reading financial statements 🙂

  55. Aashish Rana says:

    Hey karthik
    Thanks for teaching us
    How do we calculate weighted average no. Of shares?

  56. Aashish Rana says:

    Hey karthik
    What is outstanding shares? Is it Authorized,issues or subscribed? Which one?

  57. Aashish Rana says:

    Hi karthik
    Sorry to disturb u again!
    Please guide on other comprehensive income?
    What’s that?

    • Karthik Rangappa says:

      Other income includes non-operating revenue such as rent, interest, dividends, and sale of assets.

      • Aashish Rana says:

        But sir
        Here I am looking something different in this annual report of jsw energy Ltd

        Other comprehensive income
        (i) Items that will not be reclassified to profit or loss
        – Remeasurements of the net defined benefit
        liabilities / (assets)
        (ii) Income tax relating to items that will not be reclassified
        to profit or loss

  58. Aashish Rana says:

    And sir
    Can u recommend me any govt of India website,so by reading the statistics I might get to know the which sector indian govt is boosting up?

  59. Aashish Rana says:

    Hi karthik
    As I was looking the annual reports of jsw energy pvt ltd 2017 and 2016.The EPs of 2016 is different in 2017 annual report.And its quite a big difference.so isn’t it misleading? There is changes in revenue and expenditure too. Why this happens?And which one I should take into my consideration?
    Thanks

  60. Aashish Rana says:

    Thanks a lot Mr. Karthik for replying of all my queries.And soon i will disturb u again in future.

  61. AASHISH Rana says:

    Hello sir
    What is CSR expenditures?

    • Karthik Rangappa says:

      Every company of a certain size spends upto 2% of its profits on social service. This is called Corporate Social Responsibility or CSR.

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