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 expense’s nature. An analysis of the expenses must be shown in the Profit and Loss statement or the notes. As you can see in the extract below, almost all the line items have a note associated with it.
The first line item on the expense side is ‘Cost of materials consumed’; this is invariably the raw material cost that the company requires to manufacture finished goods. As you can see, the cost of raw material consumed/raw material is the company’s largest expense. 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.
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 talk 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 the trade refer 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 the 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 sales costs), 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:
The details mentioned in 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 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 Benefits 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 Benefits Expense’.
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 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 the debt and related matters more 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 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 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 stockbroking firm generates Rs.100,000/- from the stockbroking business. However, Zerodha incurred 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 the 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 company’s true earning capability.
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 the 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 server’s useful life, 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 earnings 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.
Here is an important idea – Zerodha depreciates the cost of acquiring an asset over its useful life. However, there is an actual outflow of Rs.65,000/- paid towards the asset purchase in reality. 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? 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.
The 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.
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 advertisements 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.
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:
5.3 – Net Profit after tax
After-tax, the net operating profit is defined as its operating profit after deducting its tax liability. We are now looking into the last part of the P&L statement, the profit after tax. This is also called the bottom line of the P&L statement.
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 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:
The company indicates that 17,08,12,500 shares are 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.
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, we have just understood how to read the P&L statement at this stage, but we still need to analyze what the numbers mean. We will do this when we take up the financial ratios. The P&L statement is also 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:
- The P&L statement’s expense statement contains information on all the expenses incurred by the company during the financial year.
- Each expense can be studied concerning a note which you can explore for further information.
- Depreciation and amortization is a way of spreading the cost of an asset over its useful life.
- The cost of interest and other charges paid when the company borrows money for its capital expenditure.
- PBT = Total Revenue – Total Expense – Exceptional items (if any)
- Net PAT = PBT – applicable taxes
- EPS reflects the earning capacity of a company on a per-share basis. Earnings are profit after tax and preferred dividends.
- EPS = PAT / Total number of outstanding ordinary shares
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?
COGS is usually associated with the cost incurred for the manufacturing the end product. Have explained it here, please refer section 13.3.
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?
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?
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
No hard copy of this book, Nitin. We have PDFs though, which you can download and use.
Great job, salute you people. You are spreading the knowledge ,without any cost and your blogs are easy to read and understand. Thank you.
Thanks, Abhishek. Good luck and happy learning!
where can i find this pdf?
Scroll to the end of the page – https://zerodha.com/varsity/module/fundamental-analysis/ and click on download PDF.
Having the same question what Gurjot asked is that how can i find COGS from Cost of Materials Consumed, Purchases of Stock-in-trade, Changes in Inventories of Finished Goods and Work-in-progress ?
And i also checked section 13.3 i.e Understanding the business but can’t find it, pls help me solve this
COGS is a P&L item, add up these things and you will get the COGS.
Thank you so much Karthik. Your content really help all of us.
Good luck and keep going!
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?
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.
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?
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.
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)
Thanks for the comments Manoj 🙂
*** Purchase of stock in trade is the finished goods directly purchased (would love it if there was an edit button)
I know what you mean 🙂
Hi karthik,
What is the difference between change of inventory in finished goods and purchase of stock in trade?
It seems to be same.
Not really, Shubham. Someone had the same query, I’d suggest you go through the comments, have explained this earlier as well. Thanks.
Sir, I have added query here. So in case of negative value of COFGS, where we will add the cost of the goods Co has purchased but deferred its cost for future point when those goods will be actually sold. I was also thinking that it will be added in “Purchase of Finished Stock-in-trade” but Manoj comment and your affirmation on that suggests that later is not the cost of Inventories borrowed from last year and sold in this year but something Co purchased some finished good and sold it again. Can you please clarify.
One more query I have, don’t we add Income Tax as part of Taxes so that PAT is actual profit after income tax as well.
Thank & Regards
Yes, PAT excludes the taxes, Dan.
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.
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.
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
* sold=999
Sir. .what do you mean company reduces the cost of excess goods ?
Cost cutting maybe 🙂
I’m uable to think of where I have mentioned this. Can you please point to it? Thanks.
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.
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.
Thank you sir, i got it.one more doubt about tax rate.how can be calculated?
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.
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
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
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.
thank you sir……
Okay sir, & I apology for sent wrong chapter in question….
thank you once again sir..
Thats alright 🙂
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?
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.
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.
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.
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 🙁 .
Private unlisted companies in India (like Accenture, IBM, Flipkart, Zerodha etc) are not obligated to make their financial statements public 🙂
ohk!!! got that. Thank you.
Hi Sir,
You ppl are doing great job. it will be very helpful for new bie like me to understand Financial concepts.
I have one question Sir.
please see below part from ‘Employee Benefit Expense’ Section.
“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).”
here company generating Rs. 3482 is in million ?
I think it will come out to 348.2 in Cr.
and they are spending 158 Cr on employees. so they are spending around 50% of the profit with employees.
is this correct?
please clear my doubt.
I think its 15.8 Cr, not 158 Crs. Can you please double check? Thanks.
How to find out the non recurring expenses in an Income statement? & How do they calculate it?
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.
Could you give some examples of non-recurring expenses in an income statement????
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
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
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.
Thank You so much for your reply Sir.
Welcome!
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..
Thanks for the kind words!
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
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.
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?
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.
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.
You are certainly entitled for an opinion.
Good luck.
…………
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…!!
Maybe you should ask you astrologer for a stock tip 🙂
thank you…..instead of wasting time on FA, my astrologer suggested me read Professor Ravi Batra’s Social cycle theory..
Sure, good luck Arvind.
In balance sheet what is the meaning of ” subscribed and paid up” shares?
Paid up is the total amount of shares, subscribed refers to the number of shares being allotted.
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?
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??
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.
How tangible asset write off comes under expense.boz we get money for asset sale.plz explain
Tangible assets depreciate, and depreciation is a part of expense.
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
COGS = Cost of Material consumed + employee benefit + purchases of stock in trade + other expense
But what about begining inventory and ending inventory
It should not be included in calculation…??
You can leave this.
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.
True!
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.
Thanks for the kind words 🙂
Yes, I’d encourage you to build a long term portfolio and then get into active trading.
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
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.
Hi Karthik,
That’s perfectly fine, my confusion is, can such a big amount as 3136 cr be shown as other expenses.
Regards,
Madhusudan
Yup, it can be.
Hi
what is number of
outstanding shares ?
The total number of shares that the company has is called the ‘number of outstanding shares’.
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
Will try and get an example for one of the annual reports soon. Thanks.
waiting
Thank-you
Sure, hopefully soon.
waiting for crisp example.. feeling confused with already given one
I am confused b/w Finished goods and Stock In Trade from “Change in inventory of finished goods ,wip and sit “table.
Isn’t it same thing.
(; no reply for me
Deepak, I’ve explained all these things in the chapter itself 🙂
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.
Of course they do 🙂
Which bank are you are you referring to?
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
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 🙂
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…
This depends on which type of depreciation you choose to adopt. There are two popular methods – straight line method and accelerated method.
Karthik, Deferred tax is the difference between the tax projected for the year by the company and the IT department. Is that correct?
True.
Thank you Karthik! With an exceptional learning material and answering every simple queries of the unknown novice investors, I don’t think even a paid service would be able to execute it with this perfection. Hats off!!
Thanks for the kind words Dhinakaran! Words like these keeps the motivation going 🙂
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”?
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.
Sir…I have no idea about purchase of stock in trade. .can you please explain this with a suitable example
Have done this on couple of occasions in the chapter (and in the comments section). Request you to kind refer to the same. Thanks.
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?
Ayush, couple of readers had the same query. Can you please scroll through and check the answers?
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
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
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”.
Oh oh….i may have created some sort of confusion here. I’ll soon put up a new supplementary note explaining these things.
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”?
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.
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?
Inventory bears the complete cost of production, where as WIP does not.
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
It would not, a negative number in expense means that the number actually gets added back to revenues.
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
Ah, depreciation is just an accounting expense. It gets added back in cashflow.
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?
Yup, hence the -ve sign.
Sir, Then Whats The Difference Between Revenue (Stock In Trade) And Changes in inventories of finished goods, work-in-process and stock-in-trade?
This is a good idea for the post, will try and explain that in an article.
hello sir,
actually i have ur last 2 or 3 year share market winners state ment list
Sure.
When will you post the “Financial Modelling” module. Thanks for the simple explanations. Always good to re-learn.
No timeline on that, Varun. Sometime soon is all I’m hoping for 🙂
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
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.
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
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.
Sir, I like the way you have motivated us regarding the entrepreneurial dream by highlighting the salary to sales ratio.:-)
Glad you took notice 🙂
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.
Will be happy to do Chetan, but would you please help me understand which correction you are talking about? Thanks.
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?
Not different, its the same.
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.
Thanks for the kind words, Maverick. Sorting comments is on the list of things to do. Will try and do something about it.
Hi Kartik,
What is the difference between basic and diluted EPS?
For stock investors like me, what is more important?
Here is a good link that explains this – https://www.equitymaster.com/detail.asp?date=03/10/2011&story=1&title=Basic-EPS-vs-Diluted-EPS
I’d suggest you consider diluted EPS.
Thank you. This is exactly what I was looking for. Infact it answered my second question on EPS too….
Cheers!
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
Not really. There are multiple other factors that you need to look for. – like ROE, margins, balance sheet etc.
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??
Happy to note that 🙂
Maybe next year sometime, Pravesh.
Ok sir,
I would like to tell you that i am very intersted in equity research as i am studying for this as well and looking forward to make carrer in the same ..so is there any way i can join u as an intern or as trainee in zerodha??
Good luck, Pravesh. Unfortunately, no such roles in Zerodha 🙂
Hi Karthik, is the financial modelling module updated???
No, I’m yet to start work on it.
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 ?
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 🙂
Hey karthik
Thanks for teaching us
How do we calculate weighted average no. Of shares?
That would be –
Sum of – Number of shares * Trader Price / Total Volume.
Can u give me example on it?
Coincidently, I just gave an example earlier in the day – https://zerodha.com/varsity/comment/49095/
Hey karthik
What is outstanding shares? Is it Authorized,issues or subscribed? Which one?
Issued shares.
Hi karthik
Sorry to disturb u again!
Please guide on other comprehensive income?
What’s that?
Other income includes non-operating revenue such as rent, interest, dividends, and sale of assets.
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
I’d suggest you look into the notes, Aashish. There will be an explanation for this.
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?
You will have to keep a tab on the news and reforms for this. Not sure if there is a website for this.
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
Maybe the numbers were restated? Take the 2017 AR numbers.
Thanks a lot Mr. Karthik for replying of all my queries.And soon i will disturb u again in future.
Please do!
Hello sir
What is CSR expenditures?
Every company of a certain size spends upto 2% of its profits on social service. This is called Corporate Social Responsibility or CSR.
Does Zerodha as a company does have done any CSR project till date? Where to know if yes?
Yes, we do. Some of it is here – https://zerodha.com/cares
I work as volunteers in an NGO, along with i am ZLM parnter, So just an idea stuck in my mind, as a fastest growing company Zerodha will also love there work, may be you would you like to support? Where we can connect for ZERODHA CSR contact person?
Karthik,
How numerator of EPS is calculated?
Sorry for this naive doubt. It is PAT as mentioned in takeaway points.
Hey,
I was reading this
http://www.shekhawatiyarn.com/images/SHEKHAWATI%20POLY-YARN%20LIMITED_31.12.15.pdf
The fifth note says:
“During the quarter the company has reversed quantity discounts which was receivable from various suppliers pertaining to earlier years amounting to Rs. 6,564.36 lacs which are no more recoverable. Accordingly, the said amount has been written off and included under exceptional items.”
Can you help me understand this?
Thanks!!
Clearly, the company is writing off receivables from the previous years. Not a great sign according to me.
The paragraphs above Employee benefits expenses in Section 5.1 says ‘Financial Modelling’ as a seperate module. Can you point out the module from the chapters in Varsity?
We have not developed that yet, maybe sometime during this year.
Hello team,
i want to ask that form which side this snapshots of the income statement is taken?????
Sorry Kunal, I’m not sure what you are asking about. Can you please elaborate this? Thanks.
Hi Karthik,
I have a query related to EPS. As we know, EPS is the PBT divided by no of shares.
Due to various corporate activities like stock split, bonus, buyback, the no of shares change (increase/decrease). in this case how will be the EPS for the previous year be calculated – using the new on of shares or the old no of shares corresponding to that period?
For example, let’s say the PBT for a company XYZ for yr2017 was 100cr and no of shares 20cr, so EPS in the year 207 was=100/20=5.
now in 2018, the company declared 1:1 bonus. So, the no of shares now 40cr. The PBT for this year is 120cr. EPS for this year=120/40=3
What will be the EPS for 2017 now?
will it be same as last year i.e. 5?
or
with new on of shares, 100/40=2.5
The reason I am asking this is we have to compare the historical data. So, if I compare 5 with 3, its showing negative growth whereas if I compare 2.5 with 3, it shows positive growth.
Please clarify.
a small correction. Its PAT not PBT.
Figured as much 🙂
Valid question, Jyoti. Corporate action is something that you need to consider carefully, for this reason, it makes sense to look at this on an as-is basis. When you analyze, be aware of this and do not make an adjustment to the previous years’ data. Btw, do seek a 2nd opinion on this. Kindly share your learnings here.
Highlighted excerpt:
“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.”
It was very astonishing to come to know this fact !!
It’s also a daring, eye opener and guiding fact unravelled.
Entrepreneurs out there may take a cue from this.
Keep unravelling Sir !
You bet! The stories are always hidden deep in the numbers 🙂
I had a concept of depreciation as ‘decresase in the value of an item’ which is opposite/different to what you explained about depreciation!
I need to ask…….
1. Does ‘depreciation’ not mean ‘decrease in the value of an item’?
2. If it also mean decrease in the value of an item, then what difference is there between inflation and depreciation?
1) It roughly means the same – decrease the value systematically over a period of time
2) Inflation is a steady increase in price.
Depreciation is an accounting concept, inflation, on the other hand, is an economic concept.
if i add all the item from expenses (i.e 21011.95+2113.69+292.10+1583.16+645.71+4346.60) then sum is coming 30,000.39 million rs but in statement it is shown 29,416.19 …. am i missing something hear …???
I guess you are, request you to please recheck. Do refer to the schedule as well.
What does increase/ decrease in stock mean? Also can can pl again explain meaning of purchase of traded goods.
Tejas, have explained this couple of times in the comments above. Can you kindly run through it once? Thanks.
Is it good to look at quarterly/annual reports of the company or reports from top brokerage houses will do the needful?
I’d advise you look at the AR to avoid any sort of biases in your judgment of the business.
Hi Karthik,
Thanks for this wonderful article.
I fondly remember of me searching for some kind of this material since 2010 – a long wait put to an end.
I have got few questions related to Note 20(b)
Q1 – Work-in-progress section:
Why is the OS-CS not shown as negative in the note? 828.95-1052.11 should give us -223.16. However, it was shown as positive.
Finished-Goods Section:
Same question as above, why not -ve while the company sold lesser no.of stocks than they manufactured.
Q2 – Net increase in inventories:
How did 292.10 arrived?
Thanks in advance.
Sunil, it is in -223.16. Shown as -ve.
Net Inventory is the sum of OS, FG, and stock in trade.
Sir, have you posted pdf on financial modelling? thanks
No, have not created that module yet.
Sir , Excellent and fundamentals are explained in very simple manner.it can be understood for beginner to expert level. Thank you very much for sharing this knowledge for free of cost. I really appreciate
Happy learning, Suresh.
Sir – If the Depreciation value alone is shown from P&L while the total asset value is going out of company, how will the cash balance match ?
Senthil.
I guess you are talking about cash proceeds from the sale of assets. The cash will reflect in other income.
Sir – My concern is of during purchase of say a machinery for rs.10000 and as you mentioned P&L only reflects the depreciating value say rs.2000 per year…
In this case money going out of the company is rs. 10000 wherein we are showing only rs.2000 so wouldn’t the balance differ..?
No, in such a case the asset would be written off and hence no depreciation charges against this.
sir,
Question of EPS Viz a Viz “Face Value ” of Share
Assume there are TWO Companies A and B
1) A has an EPS of 8 and Share “Face Value ” is 1
2) B also has an EPS of 8 BUT Share “Face Value” is 10.
so, sir….. which company should be considered as having BETTER EARNING Capacity. ??????
and what is the REASONING to be used ???
THANKING YOU
I’ll assume both the companies are comparable in the first place i.e same industry, similar in size. If true, then company B obviously is better. Also, please note, the face value of the share does not really matter here.
sir,
This is in reply to your answer,
My Reasoning was that
In case of company A if they have split up the share from a FACE VALUE of 10 to 1.
Then can we reason that
“” INSPITE OF “”TEN TIMES “” more SHARES NOW…..THIS COMPANY “A” is able to GENERATE an EPS of 8
HENCE…….,COMPANY “A ” should be considered as more profitable.
( You can ASSUME both company from same industry…both offering “STAND ALONE ” Quarterely results.
please confirm OR share your views
I feel this point will help many investors n traders
thank you
The face value matters in terms of calculating the number of shares outstanding in the market. Yes, in a sense it does make sense because we get to know the extent of dilution. Now, it really boils down to which financial ratio you are looking at. Based on that you may just want to consider the face value as well.
Hello Sir
Could you please help in explaining these points:
1. Why Excise Ta is not included in the Expense Section, rather than Totals Sales first reduced by this amount and then shown in Revenue section
2. Does the closing inventory goes like Current Asset in balance sheet ?
3. What is meant by Basic and Diluted keywords in shares.
Thanks a lot for your help.
Regards
Dan
1) Excise duty is applicable to manufacturing, hence. By the way, I suspect this must have changed with GST in place. I need to check this too
2) Yes
3) Basic and Diluted are used in terms of EPS. Basic does not factor in any convertible shares, but diluted does.
Thank you !
Welcome!
Hi sir
Can u suggest me some ration for insurance company?
Sorry, I’m unable to understand that.
Hey Karthik,
What is EPS for continued and discontenued operations?
Not sure, need to check this myself.
Hey Karthik,
What is EPS for continued and discontenued operations?
oops sorry posted it double
It means EPS for a business which is functional and non-functional.
Sorry couldnt understand that.
Ram, actually, even I’m not sure 🙂
Hi Karthik,
What are you a trader or a investor?
I occasionally trade and I regularly invest.
That was a great answer
By the way Thanks.
Thanks, Ram. Thats exactly what I do 🙂
Hi Karthik,
While you were explaining Purchases in trade, one question came in my mind what if a company never manage to sell some goods? So when would they add the cost of that goods?
Yes, also it will start showing up in the P&L.
Thanks
Does a large no. of exceptional items too drag a red flag?
Of course, it would.
Thanks.
“Perhaps it is time for you to rethink about that entrepreneurial dream you may have nurtured” Can you pl explain it.
Well, its just a motivational line, drawing inspiration from the balance sheet 🙂
Sir,
Don’t this Company have any expenses towards loan repayments? Also the Interest to be paid for the loans. Where do we account these items?
Hari Narayanan
I suppose, it is the finance cost. Sorry for bothering you.
Not an issue. Happy learning!
As far as I recollect, the company had very little loan outstanding, hence very small finance charges.
Certain clarification to look into. The Chairman of ARBL gave a statement predicting or foreseeing 10% growth which can be assumed to be a bluff on his part and so the analyst decided to not invest in it. However, the EPS figures of the said company look relatively attractive. Under such circumstances how can a decision be made? and with what level of certainty?
This was not a conflict with ARBL if I’m wrong. I think this was the case with TGBL. Can you please reconfirm? Thanks.
Yes you are right. I missed the point as it came in between the discussion about ARBL. It would be helpful if you mention the name there or insert coloured font or atleast highlight the tea manufacturing company part if you do not wish to reveal the name.
One example that I explicitly remember was reading through the chairman’s message of a well established “tea manufacturing company” (double quotes inserted to highlight in this case for your kind reference, the same are missing in the article “https://zerodha.com/varsity/chapter/read-annual-report-company/”).
Thanks again for responding. It verifies the assumption that company with higher EPS can be trusted.
Point noted, will include this 🙂
Thanks for responding. This initiative of varsity must have saved tons of users from getting bankrupt. It is very very helpful. God bless everyone at zerodha. keep up the good work!!!
Thanks for the kind words 🙂
Happy learning!
Sir, when is the module for financial modeling is getting started?
Pinak, I’m working on another project related to Varsity. Will look at this module once the project takes some shape.
Thank you Sir for replying. I am eagerly waiting for the module to get started as you have a great talent to explain these complicated things in a very easier way. I appreciate your effort. Best of Luck for the Project !!!
Thanks, Pinak. Hope you will like the new project as well 🙂
Thank you so much for explaining this complex subject into easy to understand language ,
Happy learning, Subeer!
Thanks a lot for your thorough teaching. But could you please explain more about the Purchases of Stock in Trade and Changes in inventory of finished goods, WIP and stock in trade? I’m still very confused with all these terms, and the reason this concept represents the cost of goods sale.
I’ll try and put up a supplementary note on this.
Sir, can cost of raw material consumed be negative. And if it is so,what does it imply?
No, how would the be possible?
Hi Karthik.. I am in a confusion..about purchases of stock in trade and change in inventories. From the topic u have given I came to know that… 1.if the company sells less than the goods manufactured..the cost incurred for the extra manufactured goods will be taken in the column of change in inventories with negative sign. And the same amount will be added up in the next year’s purchases of stock in trade column of next year’s statement..am I right???
Thats right, Sai. The expenses are recognized in the next year.
If same thing happens in a quarter does the expenses will be recorded in the next quarter??
All balance sheet items are at the end of the year basis, P&L is on a Q on Q basis.
1.what is meant by the positive number of change in inventories.column.. As u told negative means goods are sold less than manufactured so the extra goods manufactured cost will be shown with negative sign and same amount is added up in purchase of stock in trade in next year’s statement. as u confirmed by sending ur reply to my previous question… So positive number of change in inventories means last year’s unsold goods are sold this time r8.the cost incurred for them to manufacture will be added in this r8.
If so what will be added in the next year’s column of purchase of stock in trade..
2.if zero in changes in inventories what does it mean.
1) This will depend on the way inventory moves, right?
2) Then status quo
Hi Karthik.. Kindly answer to my queries.. Thank u very much for ur support. My query Is where this 2113.69 million in the purchase of stock in trade has came from.?
This is unsold inventory, I guess I replied to your query earlier.
1.why the (pusrchase of stock in trade) unsold inventory cost is put up in the expenses column. of this year..it would become a balance sheet item r8..if not sold….
2.how to know the calculation of it in the above 2113 millions which is given right there in the column..
1) The balance sheet is on a carry basis, whereas P&L is year on year basis.
2) You can refer to the notes associated with the line item.
Hello sir, first of all thanks for your such contribution to enhance our financial knowledge.
My doubt is under 5.2 topic you defined PBT which is equal to Total operating revenue – Total operating expenses.
I want to ask why Total operating expense?? It should be Total expenses because other expense are also taxable.
Manish, the idea is to find out the profitability at the operating level for the company. Other expense could be one-off and may not reoccur.
Thank you for your reply sir.
I want to clarify about few more things:
a) Under Expenses the total expenses is Rs 29,416.19 millions but if I calculate it reflects 30000.39 millions.
b) Under extract of Note-20 (a) – total purchase of stock in trade is Rs 2113.69 millions,does it mean company buys goods worth Rs 2113.69 millions from last F/Y i.e. 2013????
c) Under the same extract of Note-20 the change in inventories of finished goods,work in process & stock in trade. I understood about how the individual figures comes from but unable to understand the Net increase in inventories figure which is 292.10 million.
d) Under topic 5.2 in which you describes the PBT= Total revenue – total Operating expenses but you take the figures of total expenses.
Sir my theses doubts may be silly doubts for you but it makes huge sense for me. Please help Sir.
a) This can be a case of minor debit and credit, I would suggest you look at the notes associated with the expenses for a more granular view
b & c) Frankly, I need to review these numbers, it has been a while now 🙂
d) PBT if you want to calculate from an operations point of view, then its Total Operating revenue – operating expense – D&A
Hi sir
In p/l statement and cash flow from operation statement tax paid figure is different .why ? No clarifiaction about it in its associated footnotes and I saw data in its annual reports of so many company.
Hmm, it should not differ. Are you sure you are comparing the consolidated data across both the statements?
Hi
Yes it’s consolidate data both side
Perhaps the deferred tax got added back?
Hi Sir,
How to find COGS of an IT Company, as unlike Amara Raja, there are no goods manufactured here?
COGS is equivalent to the expense incurred. This will mainly be the HR expenses for an IT company.
1. Sir I would like to know that what does it suggest about a company whose profit has increased more than 50% from last year just because it’s change in finished goods /inventories/wip has changed from +50lakhs (last year) to —1701laks(current year) .
2. Since you said negative sign shows the extra products company didn’t sell but has produced so a sudden shift from +50 to -1701 shows the company’s INABILITY to sell its products .
3. This sudden increase of 50% in profit before tax of current year is not a good sign if this profit is caused only due to a sudden shift in the change in inventory/wip/finished good from +50lakh(last year) to —1701lakhs (current year) .
1) This probably shows an inventory pile up
2) Yes, inventory pile-up is not a great sign. Indicates that the product is not moving, perhaps the consumer’s preferences are changing.
3) Yes, I’d agree.
Great work. Thank you. When will you publish module on Financial Modeling as mentioned by you in Part 2 of PL statement?
Trying to do some work around it, Rahu.
Hello Karthik Sir,
In the above P&L study in the lesson,
The company indicates that there are 17,08,12,500 shares outstanding in the market
How can one calculate the outstanding shares. Is it like, the number of shares in the stock market for the company on 31st March?
Kindly clarify
Continue caring and enlightening people like me
Regards
Yup, shares outstanding in the market indicates the shares which are available to trade in the market.
Sir are the batteries and home UPS purchased as part of stock in trade a trading business of amara raja batteries ? If yes, why do they undertake the manufacturing and trading of the same item ?
“how much the company is earning per face value of the ordinary share”
what per face value means regarding EPS?
like if EPS is ₹20 and face value of share is ₹5, then does it mean that company has earned ₹20 on ₹5?
EPS is earning per share. Suppose earning is 100 and the number of shares is 20, then earning per share is 100/20 = 5
Sir if change in inventories, work in progree, finished goods is positive.. Then should we include that in cost of good sold..?
Ah not really. It’s best to include the actual costs incurred.
Thank you sir and waiting for financial modelling course. Hope to see it soon..
Appreciate your work.. Keep learning and keep teaching..
Happy reading, Arjun 🙂
Hi Karthik,
Thank you for a enlightening chapters.
I was going through other company P&L statement where I came across these terms. what do these mean Would you please explain?
Other comprehensive income/(loss)
A. (i) Items that will not be reclassified to profit or loss
(a) Remeasurements of the defined benefit plans.
(b) Equity instruments through other comprehensive income.
(ii) Income tax relating to items that will not be reclassified to profit or loss.
B. (i) Items that will be reclassified to profit or loss
(a) Debt instruments through other comprehensive income…
(b) Effective portion of gains and loss on designated portion of hedging
instruments in a cash flow hedge…..
(ii) Income tax relating to items that will be reclassified to profit or loss…………………….
I’m guessing here, please refer to the associated notes for full clarity –
A (i) – Both could be something related to the market-linked product, so taking M2M into consideration
A (ii) – Deferred tax income
B (i and ii) – Same as A
I did not understand purchase of stock in trade and it cycle.
Can u please tell me in detail or reffer any website or artical so that i can understand it fully.
Thanks
Karan, do read the associated notes once.
Sir,
Many of the services based companies(IT) I do not see COGS or Cost of services then how would i calculate Gross Profit which is revenue minus COGS* . As i see in many US companies balance sheet i see either COGS or cost of services or in similar lines according to industry*. I asked many they confused me, Can you please elaborate on the same.
for example HDFC AMC : how to calculate gross Profit can you explain and generalize how to calculate for any indian company?
Revenue from Operations
Asset Management Services – 1,915.18
Other Income – 181.60
Total Income 2,096.78
Expenses
Fees and Commission Expenses 240.26
Impairment on Financial Instruments 22
Employee Benefits Expenses – 206.27
Depreciation, Amortisation and Impairment – 12.85
Other Expenses 222.70
Total Expenses 722.08
Profit Before Tax 1,374.70
Tax Expense
Current Tax 445.47
Deferred Tax (1.37)
Profit After Tax 930.60
Its simple Pradeep, everything that company mentions as an expense is the COGS or COS. That’s it.
Hi Karthik,
I want you to know there are some questions in the varsity app quiz part that have wrong answers. I’ll try making a list. For example, Fundamentals intermediate quiz question 9.
Thanks Robin, as and we get any feedback, we update the app.
Dear Karthik Sir
In Change in inventories of finished goods etc
in yr ended march 31 2014 column
Net increase in inventories ( 223.16+294.42-363.36)=154.22
how 292.10 is showing ?
while in another march 31 2013 column
Net increase in inventories ( 17.54+324.28-20.93)=320.89 this is right
Sir can you please explain the difference showed in first column
You need to inspect the associated notes in the annual report for this where a detailed explanation would be given
Dear Karthik Sir
I tried to find out every details of note 20, but i didn’t get any regarding information. may be it was mistake or you suggest .
Ah, need to check this. I’ll do as and when time permits.
Dear Karthik sir
i did research on it
actually i did wrong calculations
right is as follows
in yr ended march 31 2014 column
Net increase in inventories (294.42-223.16-363.36)= -292.10
while in another march 31 2013 column
Net increase in inventories ( 20.93-17.54-324.28)= -320.89
now both calculations are right actually i forgot to focus on negative value that’s why this happened. but now i understood . Thanks again for this wonderful contents.
I’m glad you could figure that 🙂 The annual report of good companies are usually very clear with their numbers.
Happy reading!
Sir
Purchases of stock in trade, refers to all the purchases of finished goods that the company buys towards conducting its business
From note 20 it is shown that they have bought batteries and ups
Does this means that they have bought ready to sell ups and batteries from outside.
No, these are products that they manufacture. This is stock moving from previous year inventory and getting recognised as a sale during this year.
Hi,
I was studying fundamental of delta corp Ltd…..
In that, even after showing PAT… there are some extra lines called ‘Other Comprehensive income’
And ‘profit attributes’… Etc etc….
Should we look in to it…???
Yes, do look at it, will be explained in the associated notes.
And….
If depreciation and amortisation are non cash expenses…..
And it is shown as cash going out of the company or from profits…..
But where does it actually go….
To depreciation fund a/c???
But not all company created this a/c!
It gets adjusted over the useful life of the asset. For example, if a company buys something for 1Cr today, it won show 1Cr as expense today. It will only show a part of it every year.
Hey Karthik,
Thanks a lot for all the useful information published !
Just had a small doubt
What is exactly the deferred tax and short provisions tax?
Also, the taxation in companies would have changed right? Specially after some alterations made last year to the corporate tax.
So what all taxes are required to be paid at a company to arrive at the net profit figure?
Please do let me know
The deferred tax arises out based on the way depreciation is treated. The applicable tax is kept aside and provisioned for and paid the following year when there is more clarity.
Hi Kartik,
Depreciation and armotisation expenses are divided equally for the whole life of the asset as is shown same each year but what about the time value of money.
Sorry, what about the time value? I dont seem to get your question.
How is amortization calculated on intangible assets. How can we reach out to the amortization amount deducted per year and the number of years in which it will be calculated? Thanks!
Depends on the company, they usually publish this in the amortization schedule made available in the annual report.
Dear Karthik
Thanks for sharing this details expalnation for P&L Statement
I have few Question.
1)For calculation Operational Income the formula u mentioned is
Operational Income =Operational Revenue (Sales+ other operational income) – Operational Expenses.There are some other incomes as u mentioned like Dividents, interest on deposits,etc which are non operational revenue.Does these also should be considered under Operational Revenue to calculate the Operational Income
2) If the Promoter has around 70-71% stake in an organization , what conclusions can be drawn from this.For Ex: NHPC
3)Is there any logic like if a company has zero Debt then we need to consider ROE and if a company has debt we need to consider ROCE.
4)What can be the cut off target for selection companies based on ROC and ROCE.
Kindly share your suggetion
Regards
Indranil Saha
1) I’d prefer not to consider the other income to get a sense of the operating income
2) It is just that it has a high promoter holding – so more skin in the game, in a way this is good
3) Nope
4) Depends on the sector. You really need to look at the industry and take a call. One shoe does not fit all 🙂
Hi sir,when will financial modeling will come from your pen eagerly waiting sir!!
It will take some time Mahesh, I’m still working on the personal finance module.
Thanks Kartik..for the reponse.
But do we have any site where industry specific cut off will be mentioned based on ROCE and ROE??
Regards
INSAH
Cant think of any, Indranil.
Sir what is price action strategy or price action?
Trading based on the price movements is referred to as price action trading.
hello sir,
What exactly happens when a stock falls under upper circuit/lower circuit?
For ex. Now adanigreen stock is under lower circuit. It has only sellers and no buyers. So how exactly are the sellers booking profit when no buyers are available? who is buying them now?
The circuit is like either the buyers or sellers get adamant and refuse to budge. For example, if a stock is very bullish, sellers would want the highest price because they know buyers will buy at any cost. So sellers won’t budge. Ice will break only the next day or when sellers decide to cool off the price.
Sir, Regarding previous question about circuit. Maybe a silly question. In an upper circuit we will not be able to buy that particular stock unless the upper circuit breaks right? Similarly how will the sellers be able to make profit when there are no buyers available in lower circuit.
Sellers get an opportunity to sell at a higher price when the stock hits upper circuit and buyers get to buy the stock at lesser price when the stock hits lower circuit.
Purchases of stock in trade, refers to all the purchases of finished goods that the company buys towards conducting its business. Why does a company buy its own goods towards conducting its business? Or am I interpreting it in the wrong way?
Every manufacturing company needs raw material right?
Sir, didnt understand the Purchase of stock-in-trade and the Change in inventories and their relation
Have explained this in couple of place in the article and comments, Mohit.
what is the difference between ”Basic’ and ‘diluted’ earnings per equity share ?(Basic vs Diluted)
Have explained this in couple of queries, request you to please check that. Thanks.
Thanks a lot Karthik.It resolved my query.:-)
Happy learning!
While I completed intermediate level on Fundamental Analysis, an answers at the end of intermediate quiz was marked wrong.
Q. Two parameters required for calculating EPS?
—> I choose PAT and No. of O/s Eq Shares option. But the app marked it wrong and the correct answer according to it was Share Price and No. of O/s Eq Shares, which I feel is incorrect.
Please Clarify.
That’s a mistake. What you opted is the correct answer. Will have this changed. Thanks for pointing.
Sir, your example for depreciation cost (for server purchased) was very helpful and understandable. For better understanding, could you please give us an example of amortization as well?
Will try to do that. It is just that amortization is applicable to intangible assets such as say goodwill or brand.
Dear Karthik,
Thank you for such an informative session. I have one doubt regarding the “basic and diluted earnings per equity share of Re. 1/- each”. As i understand the Face Value is assumed as Re 1/- to calculate the EPS. But, suppose the Face Value is some other value other that Re 1/-, for eg Re 5/-. Then do we need to divide the EPS by 5.
There are companies whose Face Value is not 1. So, the calculation will vary to calculate the EPS?
Thanks in advance.
Amol, you dont really consider the face value of the share to calculate the EPS, what you need to consider is the number of shares outstanding. Divide the earning by the number of shares.
Karthik, Thanks for clarification. 🙂
Good luck!
I understood how a tangible asset can depriciate but how a non tangible asset like brand name can depriciate? Because it is older the brand higher the trust 🤔🤔
Intangible assets are amortised 🙂
Hello karthik..hope your are doing great..just a small query. Couple of times companies change their accounting policies for treatment of depreciation or something else, just to change their figures of profit. i just want to know, how shall we know about these changes. Whether they mention clearly in annual report or we only have to figure it out by ourselves.
Manish, companies have to comply with the accounting norms set by the regulators, they cannot change the policies as and when they wish. Also, if there is a change, that would be explained in the AR itself.
thanks karthik 🙂
Can you please explain change in inventories of finished goods, WIP and SIT and Purchases of stock in trade with example to get more clarity?
Also explain WIP and SIT a bit.
Really appreciate your content. Very helpful and informative.
I have done that in the chapter and comments itself. Is there anything, in particular, you are looking for?
It is written, “Purchases of stock in trade, refers to all the purchases of finished goods that the company buys towards conducting its business.” I just wanted to know..why is it written as “refers to all the purchases of finished goods”.. why not “refers to all the purchases of raw materials”
Purchases of stock in trade, refers to all the purchases of finished goods that the company buys towards conducting its business, My confusion to this is that why do a company have to buy a finished good if they’ve only made it or is the statement referring to all the finished raw materials a company requires. .
Treatment of the inventory carried forward from the previous year and sold in the current financial year.
“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.”
In this paragraph, you said that the cost will be included in the “purchase of stocks in trade”, but stock in trade means the finished goods that the company buys to sell them as they are. Then why the cost of the goods that the company manufactured and was unable to sell will be added in “purchace of stock in trade” ?
By the way Thankyou very much for the articles, you are doing a great job by helping people learn for free. These articles are really amazing and helpful.
Neel, that would reflect the previous year’s excess, unsold, and included in this year. Happy learning 🙂
Can you please elaborate, I am still confused because the stock in trade is already counted in inventory and it will get reflected in changes in inventory, then why it is added as an expense again ?
Btw, this is not a standard line item in P&L, so don’t worry too much about this. Inventory is a balance sheet item, which is representative of the year on year change, it cumulative. Whereas the P&L accounts for the yearly details, hence since this is an expense, it will be reported in the P&L as well.
Thankyou sir
valuable lessons
In note 20 changes in inventories, why some of the numbers are written in brackets ()?
Usually indicates outflow.
Sir in previous chapter you have explained about stock in trade in this chapter you have wrote about purchase of stock in trade does both mean same, I read this chapter for 4th time no clarity on inventory or stock in trade scrolled through comments no use, can use brief me about this topic sir
Have explained this several time in comments, can you please check?
Sir will 65000 will be deducted as depreciation for current year only as entire amount
It is on a yearly basis.
Sir I’m asking 65000 will be shown on expense side of Profit and loss account, but in cash flow statement 15000
First of all, big thanks to team Zerodha for Zerodha versity.
I am reading Zerodha varsity and learning a lot day by day. It is very interesting to read it as the method of teaching is very simple and language as well. The journey would be more wonderful if I get a printed copy of it. Please let me know if you have any facility of providing printed copy of Zerodha versity, if not please include the same facility.
Thanks for the kind words 🙂
Unfortunately, there is no option to print the content. However, there are PDFs made available, which you can print (if required).
Very nice infosir
Happy reading.
Hi sir,
Thanks for sharing, What is difference between excise duty and tax paid on the same revenue.
Excise duty is on manufactured goods, I don’t think this is applicable anymore.
Hi karthik,
Is the Earnings per share anyway related to the share price.Say,will this amount be given to the share holders
Not really. Earnings per share is an indication of how much the earning of the company is on a per-share basis.
hi sir…
what about the transportation cost of a company…can you tell me about it?
You need to look at the annual report for that.
This is too good. I mean the whole material that too available for free, its awesome!!!!! Thank you zerodha and Karthik sir!!!!
Happy reading, Keshav!
Current FY Yr – company manufactured 100 batteries, 50 R/- each one, so total cost incurred is 5000.
But company only mangaed to sell around 80 batteries, so they decided to deduct 20 batteries cost (1000 R/-)
* Change in Inventories of finished goods, work-in-process & stock-in-trade = -1000
Now next FY Yr – company did the same output again, but this time they mangaed to sell 120 batteries (20 more in stocks). So now they needed to add 20 batteries extra cost (1000)
* Purchase of stocks in trade = +1000
Am I right?
Yes, that’s roughly how these line items are treated.
Hello Sir,
When reading the company’s quarterly report, where can I find the source of other income?
When can I classify other income as a bad thing or a red flag per say
In the associated notes. All companies have other income, its not a red flag.
Hello Sir,
What about companies that have a large amount of other income.
Way more than their operational income??
For example, holding companies like Alembic Ltd.
That could be a cause of concern, you need to figure out why such an income exisits. It could be due to an asset sales, please check if its recurring or one off.
Karthik Rangappa – Very nice work and initiative from you and Zerodha 🙂 Keep producing great content like this for everyone’s Financial and Market literacy.
Happy learning!
How do I know the auditors cost in annual report?
Do check other expenses under the expenses section in P&L.
Greetings,
In the following statement what does this line means “which is also called the cost of sales method”? Do you mean to say “which is also called the cost, of ‘sales method’ ” OR “which is also called the ‘cost of sales method’ “?
And how do I comprehend/Interpret it ? I tried google but not much help. Can you please re-word the whole sentence?
Please revert, Thank You
Main Statement => “Expenses are generally classified according to their function, which is also called the cost of sales method or based on the expense’s nature.”
Ah, let me relook at the context, but I guess I meant expenses is also the cost of sales. I’ll get back on this.
Okay. Thanks 🙂
Hi Karthik,
May I know, What is EBITDA, I here a lot about EBITDA when some is looking at company’s Announced results !! Will the Financial reports contains any details about EBITDA ?
Sorry! I’m still going through chapter by chapter, please let me know if there’s any mention about EBITDA in any chapter. Thank you.
Earnings before interest, tax, depreciation, and amortisation = EBITDA
Basically income minus the expense. Helps you get a sense of how profitable the company is at an operating level.
Thank you Karthik.
One more question! How will we know when(on what date) a particular company is going to announce their results ?
Tough Sunil. You will have to track the company and get the news around that.
Hi Sir,
The number of equity shares outstanding is shown in the liabilities side of a balance sheet correct?
Is the entire number of shares created? This would mean the sum of all Promoter + FII+DII+Public = 100?
Could you explain free float market cap?
Also lastly could you explain diulted share equity/ diluted EPS? What does diluted mean?
Yes, from the company’s perspective, this is a liability. Yes, it includes all the shares. Diluted means the shares come into existence by considering the further issue of equity.
Please Correct me if am wrong. Section 5.2 is saying about Profit before tax. “It refers to the net operating income after deducting operating expenses but before deducting taxes and interest” I guess it should be written only Tax & Not Interest. Since it PBT.
Yup, thats right.
Hello Sir,
To follow up with my previous question.
Can you explain free float market cap?
Also I don’t understand your statement of diluted shares. What exactly is it?
Will try and add a chapter on this.
Sir,
Can you pls tell me which figures in P&L we should really bothered to buy stocks. How to judge a stock from P&L??
And really thanks for the effort.
Not just the P&L, its the financial statements in its entirety that you need to consider.
Hello Sir,
I hope you are well.
For Quarter 1
Company X has a revenue of 1000 Cr.
Net PAT is 100 Cr.
How much of this 100 Cr profit is actually received by the company? Is there still money to be received from debtors??
Its 100Cr after factoring in all the costs, hence PAT is also called the bottom line of the company.
Hello Sir,
Does that mean that after the company had a turnover of 1000 cr they received a PAT of 100 Cr?
What about money they have not received? Like some of their customers have not paid up, they would still have a turnover of 1000 cr but the profits would reduce correct? Is there a way they mention this or adjust this?
That would be pending in the balance sheet, once its received, will get added to the accounts.
Hello sir,
Where would that be shown in the quarterly result?
Assume I have a sale of 1000 Cr for 1 quarter.
Out of the 1000 cr sale i only receive payment of 800 cr. The rest 200 is still pending.
On the quarterly sales do I show 800 cr or 1000 cr?
That will reflect in trade receivables of the balance sheet.
Hi Sir, thank you very much for this wonderful learning opportunity.
EPS is equal to PAT/Total No of Share or PAT/No of share outstanding in market?
i.e is it (17,08,12,500) total number of share available in market? what about the share holding by Promoter , Is should not be part of EPS?
Total number of shares, DJ.
How to find cost of goods sold in above statement?
Please look at the expense side of the balance sheet.
Sometimes, when there are operating losses, which i mean, expenses are more than revenue, and in that case we see taxes in negative number. What does negative tax mean?
Taxes cant be -ve. Can you please double-check this?
Hi Karthik, In P&L statement of most companies now I am getting two additional sections after the PAT section: Other Comprehensive Income and Total Comprehensive Income for the year.
1) Could you please tell what these means and their significance?
2)Does calculating EPS we need PAT or Total Comprehensive Income for the year?
The total comprehensible income is the net P&L, but other comprehensible income includes unrealised P&L owing to investments (FX hedge) etc.
For EPS, take the total comprehensible income.
Sir one thing that I would like to say “मजा आ गया”
Karthik, thanks for the reply. Can you please elaborate the sentence “other comprehensible income includes unrealised P&L owing to investments (FX hedge)”. Also, can you please make me understand the meaning of realised and unrealised P&L?
It includes notional profits or losses for the year arising out of investments or hedges. You can exclude this in your calculations Attraya.
key Takeaway point no. 8
It should be Total number of outstanding ordinary shares / PAT not the other way around.
Checking this.
Great information .
Very helpful for beginner .
Keep uploading these type of information.
Happy learning, Raushan!
karthik sir in above paragraphs you are saying that whatever finished goods are not sold in current year their cost of manufacturing deducted and adds in purchase of stock in trade. in comments you are supporting manoj sirs comments where they are saying something different. can you please review comments of both of you. because its making confusion to me.
Ah, I need to check the old comments. Will do that sometime soon 🙂
it’s a request to add a dark mode to the web page as it put stress on my eyes while reading.
Noted, Vaibhav.
This article is so helpful. But I am not able to find the added notes in the P and L account of a company. So it’s getting a bit difficult for me. How do I find it out?
Riya, please scroll down the AR. You will find the details.
I’m not able to understand change in inventory of finished good and how it is different from stock in trade meticulously. Sir kindly explain it explicitly.
Vineet, have explained this in the chapter and across the comments. Can you please check this once?
Hi , Karthik..wd u plz like to xplain me ,hw could u find the value of “dep and Amortization” costs which stand at Rs.64.5 Crs. Bcoz I am not able 2 find dis value from balance sheet “accumulated depreciation ” section.
Pari, please check in the expense side of the P&L statement.
Vry sry 2 say, dis is not exactly what I want 2 know..my question is how can I calculate this value 64.5 cr (63.4+1.13)..I can’t match dis value from balance sheet.. actually I don’t hv enough idea about accounting..so plz lf u clarify dis..I can solve my doubt…thnk u..
64.5 is the D&A number, it is calculated by the company’s auditors.
Sir,
what is purchase of stock in trade?
Purchases of stock in the trade refer to all the purchases of finished goods that the company buys towards conducting its business. -i found it on google.
ARBL is manufacturing company, why its purchase finished goods insted of manufacturing them on its own?
Raw materials which come in the form of finished goods.
Hi Karthik, Can Exceptional items under expenses be credit type?. Example if some company sells one of its subsidiary and this is an one-off event. In this case company gains money and will this be added in revenue side or still be under expense side.
It will show up as other income or an exceptional income item.
Hii! Karthik bro! A serious mind boggling doubt from me. Please give me a solution. If Inventory decreases, old goods would be sold now. You said that C. O. M. G will be included in purchases of Stock-In-Trade. That means same thing is being added twice. In brief, what is the difference between stock-in-trade and change in inventory?
Stock in trade includes things that will be used to make the final product. The final product if unsold will remain in the inventory. Nothing is added twice 🙂
How can i find COGS? My Questions is given:
opening inventory, Raw material consumed, Electricity/ power&fuel, Changes in Inventories of finished goods & raw material, employees benefits expenses, depreciation and amortization, other expenses, Finance costs
You just have to add all these things which make up for the COGS of the company. Thats it.
Hi Karthik Sir,
Hope u r doing great.
Small doubts:
1.Why Change in the inventory of finished goods is under expenses , however this is something which the company will anyways sell and make money.
2.Does the opening and closing stock means how much at the start of the FY and end of the FY.
3. Can you please put some light on the value of Change in the inventory of finished goods being negative or positive.
1) Yes, so it gets recognized when the sale happens. If the sale does not happen, it will remain an expense right?
2) Yes
3) It just indicates the increase/decrease in inventory position.
During the discussion on employee benefit expenses, it looked like a small expense, 5% of the revenue.
However, looking at PAT of 367 Cr, the employee benefits of 158 Cr doesn’t look that small anymore.
Indeed!
What is the difference between Purchased of Stock in Trade and Changes in Inventories of Finished Goods , as what i understood from the above article is Purchased of Stock is the Items manufactured in the last year where as sold in the Current Year so that particular cost has been added now , Similarly Changes inventories of Finished Goods also have the same meaning , can u please clarify
Yes, thats right.
Sir I have read your explanation on comments section also regarding changes on inventories but still couldn’t understand the meaning of negative value. In the example you gave, if company manages to sell 80 out of 100 manufactures (each battery cost 50), we are deducting 20*50 = 1000 Rs from current quarter. (out of Rs.5000)
1. Then where would that remaining Rs.1000 get entered?
2. Even if you add this 1000 to next quarter’s change in inventories, in the eg, you gave if company manages to sell the additional 100 + remaining 20 it produces previously, still we are deducting this number in addition to the 5000Rs only right? The how can we get a positive number. Shoudn’t it be (-6000) Rs?
I have done enough google search and forum reads, but couldn’t understand this negative number concept sir. If you could answer this, it will be of big help. Thanks.
The correct way to think about it is basically apportioning the expenses of manufacturing to the time when the inventory is sold. Also, these are balance sheet adjustments that happen on a yearly basis and not quarterly.
I understand your point sir. But ‘changes in inventories’ is reported on quarterly basis as well in P/L sheet and it keeps getting changed. That is why the confusion. Also where would ‘the number of inventories not sold’ which are not being deducted get entered? Thanks
Ah ok, Sathish. The reporting of the number of inventories not sold, I’m not sure if that’s explicitly mentioned. Needs to be extracted I guess.
Is ROCE the only criteria to see whether a company is reinvesting its profits and growing its business. Or can you suggest something in addition to ROCE?
No, you can even check the movement in cashflow Sathish to get a sense of how the company is allocating its capital.
When the company says that they have incurred an inventory gain in this quarter. what it is inventory gain and loss in that sense? Does -ve number denotes inventory gain or loss?
It just means that the old inventory has appreciate in value.
‘Purchases of stock in the trade refer to all the purchases of finished goods that the company buys towards conducting its business.’
Sir in this, what do you mean by ‘purchases of finished goods’? Why does a company need to buy its own finished goods? Are you talking about retaking their finished products in case of warranties or does it mean something else? Thanks.
Its more of a revenue recognition method where in finished goods made last year, but not sold are taken back to books the year in which its sold. Have explained in comments.
I would also like to know whether there is any quick way to calculate the interest rate of debt for the company? Thanks.
Interest paid or finance charge paid divided over total debt will give you an idea of the interest rate obligation.
I had a silly question… if we consider buildings as Assets, and since all assets must be depreciated, I wanted to know what happens to those building assets that appreciate in value over time, is there any considerations for this in the accounts?
Gian, Building as asset if this is used for Business purposes the Depreciation can be Claimed and a Depreciable asset when you sale it will be Short Term Capital Gain. And if it is in some individual name and he has plan to Exit in the Future he should not depreciate the office building.
Sir this may be a silly question but how the numbers are rounded off.Means to the higher decimal value or lower decimal value. Ex 55,30,56,456 Rs is written 55.31 Cr or 55.30Cr.
They are not rounded off, they are treated as actual. If you are unable to see in excel, that is because the decimals are hidden.
Under the expense side, the first three line items as given for Amara Raja batteries are:
Could you kindly let know if I rightly understood for the above three?
1. Cost of materials consumed: Denoting “Cost incurred to purchase against those finished products that are sold in this FY”
2. Purchases of stock-in-trade: Denoting “Cost incurred to purchase against those finished products that are prepared in last FY but sold in this FY”
3. Changes in inventories of finished goods, work-in-process and stock-in-trade: Denoting “costs incurred against those products that are produced but not yet sold/ work in progress/ produced in previous FY but yet to be sold this FY”
Yes, these are correct, Anirban.
as we know (interest, company has to pay on the loan taken) what else comes in Finance Cost?
It is just the interest component that comes in finance charges, Kushal.
Hi,
Thanks for this. But what if a company is a trading company and doesnt manufacture products in house. In that case how would the COGS look like across a) Cost of materials consumed b) Purchases of stock in trade c) Changes in inventories. Thanks in Advance.
There will be expenses even if it is a trading company right?
Profit before tax & extraodinary items should not deduct amt of extraodinary expenses because it is before not after
Yeah, we do if its usually stated in the P&L.
Hi,
Can you please check Note 24- D.Other expenses- d.Premium on Forward Contracts- 1.08 million.
What is exactly the kind of expense? Should it not form part of balancesheet.
Forward contracts are like futures contract where the company tries to hedge its forex risk by entering into agreements with banks or institutions. The margin is referred to as the premium for forwards.
Purchase of stock in trade – cost of finished goods purchased required for company.
change of inventory – cost of manufactured goods in past which are sold in this current financial year.
then from where company will withdraw the cost of extra manufactured goods and where is the negative sign ?
and when they will be sold they will be added in the purchase of stock in trade .
so the picture of expenses which is displayed
what really purchase of stock in trade shows ??- cost of finished goods purchased OR cost of extra manufactured goods of past which are sold in this year
and what really change of inventory shows ?
We have discussed this in the past in detail, request you to kindly check the comments section above.
Hello Karthik, I might be wrong but the thing is under the section 5.2 PBT & 5.3 PAT you have called them as Operating income and operating profit. But what I understand is, it cannot be that because under the Revenue section of the company there is “Other income” which comprises of interest and income from equity, mutual funds etc. which is non operating in nature.
So in my opinion exclusion of “other income” leads us towards operating income or profit. Please clarify
Its ok, as long as the other income is a tiny portion of the over all operating revenues.
EPS is mentioned as 21.51 in the last part of P/L which states that all values are in Rs(million). Shouldn’t they specifically mention it individually as Rs 21.51 for better clarity? One might assume that it is Rs21.51 million.
Ah will state it explicitly, but EPS of 21.51 Million, I hope nobody assumes that 🙂