S5 Revenue and Inventories 1

Bombay Dyeing surges 12% on strong Q4 results

May 03, 2019, 10:35 AM IST

NEW DELHI: Shares of Bombay Dyeing & Manufacturing climbed 12 per cent in Friday’s trade
after the company reported multifold jump in March quarter profit at Rs 1,253.33 crore, boosted by
real estate activities.

In a filing to BSE, the company said the nature of real estate activities it carries out is such that gains
from the transactions do not necessarily accrue evenly over the year and, hence, results for a quarter
and year may not be representative of profits and loss for the year.

The company had posted Rs 10.95 crore profit in the year-ago quarter. Following the development,
the scrip jumped 11.57 per cent to hit a high of Rs 134 on BSE.

Total income for the quarter rose to Rs 2,791.08 crore from Rs 765.21 crore in the corresponding
quarter last year. Revenue from polyesters stood at Rs 367.30 crore and retail and textile divisions at
Rs 65.31 crore. They were at Rs 300.36 crore and Rs 51.62 crore, respectively, in the corresponding
quarter a year ago

Q4 Results: The Reason Behind Bombay Dyeing’s Stellar Fourth Quarter Aman
Kapadia @ bloombergquint. May 08 2019, 4:19 PM May 08 2019, 4:19 PM

Bombay Dyeing & Manufacturing Company Ltd. had an unbelievable fourth quarter as its revenue
surged more than threefold and profit soared 11,000 times. But a change in accounting standards is
the reason behind its stellar run. The Wadia Group company reported a profit after tax of Rs
1,253.33 crore in the quarter ended March, according to its May 2 exchange filings. That compares
with a profit of Rs 10.95 crore a year earlier. Revenue jumped 267 percent on a yearly basis to Rs
2,791.08 crore. The company switched to Ind Accounting Standard 115 in the quarter. Its revenue
would have been lower by Rs 1,883.05 crore at Rs 908.3 crore under the earlier standards, according
to a note in the financial statement. That represents a growth of 18.66 percent from the year-ago
period. Profit before tax will fall by Rs 1,033.65 crore to Rs 227.32 crore under the old accounting
standards compared with Rs 4.95 crore in the fourth quarter of the previous fiscal. The tax outgo,
computed under the provisions of the Income Tax Act, will stay the same irrespective of the
changes in accounting standard.
 S5 Revenue and Inventories 2

Revenue and Inventories

Annual Report 2019-20 Hindustan Unilever Limited
STATEMENT OF PROFIT AND LOSS
Particulars Note Year ended Year ended 31st
31st March, March, 2019
2020
INCOME
Revenue from 24 38,785 38,224
operations
Other income 25 733 664
TOTAL INCOME 39,518 38,888

NOTES to the financial statements for the year ended 31st March, 2020
NOTE 24 REVENUE FROM OPERATIONS
Year ended Year ended
31st March, 2020 31st March, 2019
Sale of products 38,273 37,660
Other operating revenue Income 255 300
from services rendered
Others (including Government 257 264
grant, scrap sales, etc.)
38,785 38,224
NOTE 25 OTHER INCOME
Interest income
on Bank deposits 281 232
Current investments 39 70
Others (including interest on IT refunds) 180 95
Dividend income
from Subsidiaries 95 102
Non-current investments 1 1
Fair value gain/(loss)
Investments measured at
fair value through profit or loss* 137 164
733 664

(i) Revenue Recognition:

Revenue from sale of goods is recognised when control of the products being sold is transferred to
our customer and when there are no longer any unfulfilled obligations.

The Performance Obligations in our contracts are fulfilled at the time of dispatch, delivery or upon
formal customer acceptance depending on customer terms.
 S5 Revenue and Inventories 3

Revenue is measured on the basis of contracted price, after deduction of any trade discounts,
volume rebates and any taxes or duties collected on behalf of the Government such
as goods and services tax, etc. Accumulated experience is used to estimate the provision for such
discounts and rebates.

Revenue is only recognised to the extent that it is highly probable a significant reversal will not
occur. Our customers have the contractual right to return goods only when authorised by the
Company. An estimate is made of goods that will be returned and a liability is recognised for this
amount using a best estimate based on accumulated experience.

Income from services rendered is recognised based on agreements/arrangements with the

customers as the service is performed and there are no unfulfilled obligations.

Interest income is recognised using the effective interest rate (EIR) method. Dividend income on
investments is recognised when the right to receive dividend is established.

Ind AS 18 -Revenue
Revenue Vs Income
Ind AS 18 defines revenue as the gross inflow of economic benefits during the period arising in the
course of the ordinary activities of an entity when those inflows result in increases in equity, other
than increases relating to contributions from equity participants.
Income is defined as increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
Revenue is a subset of Income. Revenue includes only economic benefits arising in the course of
ordinary activities of an entity, whereas Income includes such benefits that arise from all activities,
whether ordinary or otherwise.

Measurement of Revenue
Measurement of revenue means the value at which revenue should be recognised. Ind As-18
prescribes that revenue shall be measured at the fair value of the consideration received or receivable
considering the amount of any trade discounts and volume rebates allowed by the entity.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.
Revenue is recognised only when it is probable that the economic benefits associated with the
transaction will flow to the entity. In some cases, this may not be probable until the consideration is
received or until an uncertainty is removed.
However, when an uncertainty arises about the collectability of an amount already included in
revenue, the uncollectible amount or the amount in respect of which recovery has ceased to be
probable is recognised as an expense, rather than as an adjustment of the amount of revenue
originally recognised
 S5 Revenue and Inventories 4

Sale of Goods
Revenue from the sale of goods shall be recognised when all the following conditions have been
satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the
goods;
(b) the entity retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the entity;
and
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Disclosure
An entity should disclose:
(a) the accounting policies adopted for the recognition of revenue, including the methods adopted to
determine the stage of completion of transactions involving the rendering of services;
(b) the amount of each significant category of revenue recognised during the period, including
revenue arising from:
(i) the sale of goods;
(ii) the rendering of services; and
(iii) royalties
(c) the amount of revenue arising from exchanges of goods or services included in each significant
category of revenue

IND AS 115: Revenue from Contracts with Customers

In March 2018, the Ministry of Corporate Affairs issued the Companies (Indian Accounting
Standards) (Amendments) Rules, 2017, notifying Ind AS 115, ‘Revenue from Contracts with
Customers’.
Revenue from Contracts with Customers Ind AS 115 establishes a single comprehensive model for
entities to use in accounting for revenue arising from contracts with customers. Ind AS 115 will
supersede the current revenue recognition standard Ind AS 18 Revenue, Ind AS 11 Construction
Contracts when it becomes effective.
The core principle of Ind AS 115 is that an entity should recognise revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. Specifically, the standard
introduces a 5-step approach to revenue recognition:
• Step 1: Identify the contract(s) with a customer
• Step 2: Identify the performance obligation in contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance obligations in the contract
• Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
 S5 Revenue and Inventories 5

Annual Report 2019-20 Hindustan Unilever Limited

NOTES to the financial statements for the year ended 31st March, 2020
EXPENSES Year ended Year ended
31st March, 2020 31st March, 2019
Cost of materials consumed 26 11,572 13,240
Purchases of stock-in-trade 27 6,342 4,708
Changes in inventories 28 (121) 12

BALANCE SHEET Current assets

As at as at
31st March, 2020 31st March, 2019

Inventories 11 2,636 2,422

(d) Inventories:
Inventories are valued at the lower of cost and net realizable value. Cost is computed on a weighted
average basis. Cost of finished goods and work-in-progress include all costs of purchases, conversion
costs and other costs incurred in bringing the inventories to their present location and condition. The
net realisable value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and estimated costs necessary to make the sale.

Ind AS 2 -Inventories
Ind As-2 does not apply to the measurement of inventories held by: producers of agricultural and
forest products, agricultural produce after harvest, and minerals and mineral products, to the extent
they are measured at net realisable value in accordance with well-established practices in those
industries. When such inventories are measured at net realisable value, changes in that value are
recognised in profit or loss in the period of the change.

Key Requirements of Ind AS 2

Inventories shall be measured at the lower of cost and net realisable value. Cost of inventories
comprises all costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.

The costs of purchase of inventories comprise the purchase price, import duties and other taxes
(other than those subsequently recoverable by the entity from taxing authorities), and transport,
handling and other costs directly attributable to the acquisition of finished goods, materials and
services. Trade discounts, rebates and other similar items are deducted in determining the costs of
purchase.
 S5 Revenue and Inventories 6

The costs of conversion of inventories include costs directly related to the units of production,
such as direct labour. They also include systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished goods. The allocation of fixed
production overheads to the costs of conversion is based on the normal capacity of the production
facilities. Variable production overheads are allocated to each unit of production on the basis of
actual use of production facilities.

Other costs are included in the cost of inventories only to the extent that they are incurred in
bringing the inventories to their present location and condition. For example, cost of designing
products for specific customers.

Service providers shall measure their inventories at the costs of their production. These costs consist
primarily of the labour and other costs of personnel directly engaged in providing the service,
including supervisory personnel, and attributable overheads. Labour and other costs relating to sales
and general administrative personnel are not included but are recognised as expenses in the period in
which they are incurred. The cost of inventories of a service provider does not include profit
margins or nonattributable overheads.

Cost Formulae
The costs of inventories of items that are not ordinarily interchangeable and goods and services
produced and segregated for specific projects shall be assigned by using specific identification of
their individual costs.
The cost of inventories, other than above, shall be assigned by using the first-in, first-out (FIFO) or
weighted average cost formula. An entity shall use the same cost formula for all inventories having a
similar nature and use to the entity.

Nature of Inventory and Cost of Goods Sold

 Inventory: Asset items held for sale in the ordinary course of business or goods that will be
consumed in the production of goods to be sold. When the goods are sold, the costs of the
inventory become an expense, COGS.
o Supplies: Tangible items that will be consumed in the course of normal operations. e.g.
lubricants, repair parts. Not sold and not accounted for as part of COGS.
Inventory Accounting: Types of Companies
 Trading / Merchandising (Sells goods in same form as acquired):
o Only Merchandise Inventory
 Manufacturing: Converts raw material into finished goods.
o Raw Materials, Work in Progress (3 Cost Components: Raw Materials, Direct Labour,
Factory OH), and Finished Goods
 Service organizations (hotels, beauty parlors, plumbers)
o May have materials inventories.
 Professional service firms (accounting firms, legal firms)
 S5 Revenue and Inventories 7

o Intangible inventory: costs incurred for client but not yet billed called jobs-in-progress or
unbilled costs..
 Net Purchase Cost
o Cost of merchandise, and expenditures necessary to make goods ready for sale:
 Freight (i.e., freight-in), Handling, processing, assembling, etc.
 Adjust for returns and allowances, cash (purchase) discounts from supplier.
Beginning inventory + Purchases – Ending inventory = Cost of goods sold
Gross Profit and Cost of Goods Sold
 Gross profit = sales revenues - COGS. The inventory valuation method chosen might have a
significant affect on a company’s gross profit.
Inventory Costing Methods (Cost Flow Assumptions)
 What if inventory prices fluctuate? Will need to choose a cost flow assumption:
 Specific identification.
 Average cost.
 First-in, first-out (FIFO).
 Last-in, last-out (LIFO).
o If unit prices did not change, all four methods would show identical results. Because prices
change, COGS (income measurement) and inventories (asset measurement) are affected.
o The ending inventory in units is the same in all three methods: the cost is different.
Average cost.
o Computes a unit cost by dividing the total COGAS by the number of units available for sale
o (Beginning inventory amount + purchases) / units available for sale = per unit inventory
costs = per unit cost of goods sold
o Periodic method: Computed for the entire period.
o Perpetual method: calculated after each purchase.
o The weighted-average method produces a gross profit somewhere between gross profit under
FIFO and LIFO.
First-In, First-Out (FIFO)
o FIFO (first in, first out) method - assigns the cost of the earliest acquired units to cost of
goods sold
o This might not be the actual physical flow of goods within the company.
o Under FIFO, the oldest units are deemed to be sold, regardless of which units are actually
given to the customer.
 S5 Revenue and Inventories 8

o The costs of the newer units in stock are included in ending inventory. The inventory tends
to closely approximate that actual market value of the inventory at the balance sheet date.
o Also, in periods when prices are rising, FIFO leads to higher net income because the costs of
the older, lower costing items are included in cost of goods sold.
Last-In, First-Out (LIFO)
o LIFO (last in, first out) method - assigns the most recent costs to COGS. The costs of the
older units in stock are included in ending inventory.
o This might not be the actual physical flow of goods within the company.
o In periods when prices are rising, LIFO yields lower net income because the higher costs of
more recent purchases are put into COGS first. The value of the inventory at the balance
sheet date may be significantly lower from the actual market.
o Not permitted by IFRS.
o US IRC requires that if a company uses LIFO to compute its taxable income, the company
must also use LIFO to compute its financial net income. The result is lower income taxes and
lower reported earnings figures to investors.
 Other LIFO Features
o LIFO layers.: Can distort income if company reduces level of inventory (i.e., old
costs being expensed).
o LIFO Reserve.: Difference between LIFO valuation and FIFO (or average cost)
valuation.
FIFO Vs LIFO
 Arguments for FIFO
o Usually follows physical flow of goods and More accurate balance sheet valuation.
o If prices are based on oldest cost, results in best matching.
o Non-theoretical/practical argument: Results in highest income during periods of rising prices.
o In periods of rising prices, FIFO results in the highest ending inventory, gross profit, (tax expense), and net
income, and the lowest COGS.
 Arguments for LIFO
o If prices are based on current costs, results in best matching of revenues and costs.
o Closest to reflecting current or replacement costs of goods sold. However, it is still historical
costs and does differ from current costs.
o In periods of rising prices, LIFO results in the lowest ending inventory, gross profit, (tax
expense), and net income, and the highest COGS.
o LIFO presents an economic reality on the income statement, but FIFO presents a more up-
to-date valuation on the balance sheet.
 S5 Revenue and Inventories 9

Why not more LIFO?

 Most countries use IFRS (therefore, do not permit use of LIFO). Ind AS permits use of FIFO
or Weighted Average Cost.
 Only beneficial in periods of rising prices.
 Because of LIFO conformity rule in US, lower earnings will also be reported to shareholders.

Comparison
Computers, Inc. Mouse Pad Inventory
Date Units Rs. /Unit Total (Rs.)
Beg. Inventory 1,000 5.25 5,250.00
Purchases:
Jan. 3 300 5.30 1,590.00
June 20 150 5.60 840.00
Sept. 15 200 5.80 1,160.00
Nov. 29 150 5.90 885.00
Goods Available for Sale 1,800 9,725.00
Ending Inventory 1200 ?
Cost of Goods Sold 600 ?

Computers, Inc.
Income Statement For Year Ended December 31, 2001
W. Avg FIFO LIFO
Net sales 25000 25000 25000
Cost of goods sold:
Merchandise inventory, 12/31/98 5250 5250 5250
Net purchases 4475 4475 4475
Goods available for sale 9725 9725 9725
Merchandise inventory, 12/31/99 6483 6575 6310
Cost of goods sold 3242 3150 3415
Gross profit from sales 21758 21850 21585
Operating expenses: 750 750 750
Income before taxes 21008 21100 20835
Income taxes expense (30%) 6302.4 6330 6250.5
Net income 14705.6 14770 14584.5
* Tax expense amounts were rounded.
 S5 Revenue and Inventories 10

Cost Flow Assumptions

 Because three out of the four methods are not linked to the physical flow of the goods,
inventory valuation methods are often called cost flow assumptions.
 No matter which cost flow assumption is picked, the cumulative gross profit over
the life of a company remains the same. The four cost flow assumptions affect
inventory only (and COGS); they do not affect purchases and liabilities for those
purchases.
 Consistency - Although companies can choose any cost flow assumption, they have to be
consistent over time. Companies may change inventory methods for justifiable reasons, such
as changes in market conditions.
Exercise 1
At the end of January, Zach Company had 50 units of inventory on hand which cost $25 each. On
February 3, Zach purchased 10 units of inventory at a unit cost of $28. On February 7, Zach
purchased another 100 units at a unit cost of $30 and on February 18 purchased another 40 units at
a unit cost of $35. During the month of February, Zach sold 170 units of inventory for $55 per
unit. Zach uses a periodic inventory system.

Required: Based on the information provided, calculate Zach’s cost of goods sold, ending
inventory, inventory turnover and days in accounts receivable (assuming 365 days) under each of
the following cost flow assumptions:
LIFO, FIFO, Weighted Average Cost
Exercise 2
Jones Company and Jack Company sell the exact same product. The quality, style, cost and selling
price of the product are exactly the same. The two companies also have the same income tax rate.
The two companies differ in that Jones has chosen to use LIFO for an inventory cost flow
assumption and Jack has chosen to use FIFO. Based on this information and assuming that we are
comparing the companies during an inflationary period (period of rising prices), how would the two
companies differ in terms of:

a. Ending inventory
b. Cost of goods sold
c. Income taxes
d. Net Income
Exercise 3
1. In an inflationary environment, which inventory cost flow assumption would produce the lowest
inventory balance?
a. LIFO
 S5 Revenue and Inventories 11

b. FIFO
c. Weighted Average
d. Specific Identification

2. The LIFO conformity rule (in US) indicates that if a firm uses LIFO for taxes, then it
a. must use FIFO for its financial statements
b. must use LIFO for its financial statements
c. must use Weighted Average for its financial statements
d. can use any method for its financial statements

3. Which inventory cost flow assumption will produce a cost of goods sold that closely resembles
the replacement value?
a. Weighted-Average inventory costing method
b. First-in-First-Out inventory costing method
c. Last-in-First-Out inventory costing method
d. Gross Margin inventory costing method

4. Optima Corporation applies the lower of cost or market rule for inventory valuation purposes on
an individual product basis. On December 31 2006, the following data was available for its two
products:

Product Quantity Cost/unit Market/unit

VHS 100 $5.00 $3.20
DVD 200 $7.50 $8.00
Based on this information, what should Optima report as its ending inventory balance on its balance
sheet on December 31, 2006?

a. $2,100 b. $2,000 c. $1,920 d.$1,820

5. Which inventory method(s) will yield the same results for the ending inventory and the cost of
goods sold under both the periodic and perpetual inventory systems?
a. Weighted-Average inventory costing method
b. First-in-First-Out inventory costing method
c. Last-in-First-Out inventory costing method
d. None of the above

Profitability Analysis
An analyst can instantly tell whether a company is profitable or not based on whether net income is
positive. Of course, net income alone does nothing to describe the efficiency with which profit was
generated or the level of investment required to generate that profit. To conduct a more thorough
analysis of profitability, analysts examine various margins and return-on-investment ratios.

Margins
 S5 Revenue and Inventories 12

We use margins to compare components of income with revenues; these ratios give us an idea of
what makes up a company’s income and are usually expressed as a portion of each dollar of
revenues.
The profit margin ratios discussed here differ only in the numerator. It’s in the numerator that we
reflect and thus evaluate performance for different aspects of the business.

The gross profit margin is the ratio of gross profit to revenues. Gross profit is the
difference between revenues and the cost of goods sold. We use this ratio to see how much of
every dollar of revenues is left after the cost of goods sold:.

The operating profit margin is the ratio of operating income (i.e., income before
interest and taxes) to revenues. This ratio indicates how much of each dollar of revenues is left
over after both cost of goods sold and operating expenses are considered.

The EBITDA margin is the ratio of EBITDA (i.e., Earnings before Interest Taxes Depreciation
and Amortization) to revenues.

The net profit margin is the ratio of net income (a.k.a. net profit) to revenues and
indicates how much of each dollar of revenues is left over after all expenses.

Profit margins alone do not tell us much about the company’s performance or its ability
to generate profits in the future. Additional information that we would need includes the
trends in these profit margins over time, the company’s turnover ratios and the trends in these
ratios, and the industry norms for these ratios.

Exercise 4
The income statements for Silverlight Company are shown below. Calculate the following ratios
for Year 2:
(a) net profit margin (b) gross margin (c) Operating Margin

Silverlight Company
Income Statements
For Years Ended December 31,
Year 2 Year 1
Net sales $720,000 $607,500
Cost of goods sold 450,000 382,700
Gross profit $270,000 $224,800
Operating expense 168,500 134,900
Income from operations $101,500 $ 89,900
Interest expense 22,300 11,200
Income before taxes $ 79,200 $ 78,700
Income taxes 28,000 27,000
Net income $ 51,200 $ 51,700