Reworking of Data
As explained above, the data of two or more firms may not be comparable because of non-synchronizing of accounting periods or non-uniformity of accounting policies. For the purpose of cross-sectional analysis, such diversified data has to be put on a common scale. This is done by readjusting the Profit and Loss Account or the balance sheet to remove the variations that are present in the data.
Methodology
-
Restrict the sample to only firms having uniform accounting policies.
-
Where the accounting policies in the sample of firms, differ, use the information supplied in the company reports (look into notes to accounts, management discussion, auditor's report) to identify the diversity in the accounting policies of individual items.
-
Adjust the reported information to those derived by using a common method.
-
Use appropriate techniques for adjusting the information.
Illustration 1
The following is the Profit and Loss Account of A Ltd. and B Ltd. for the year ended March 31, 2007 and June 30, 2007.
(Rs. in '000s)
|
Particulars
|
A Ltd.
(March 31, 2007)
|
B Ltd.
(June 30, 2007)
|
|
Sales
|
164
|
172.4
|
|
Excess of closing stock over opening stock
|
14
|
33
|
|
|
177
|
205.40
|
|
Less: Raw material consumed
|
48.60
|
50.46
|
|
Wages
|
83
|
82
|
|
Direct expenses
|
17
|
16.4
|
|
Indirect manufacturing expenses
|
20
|
16.2
|
|
Administration expenses
|
10
|
13
|
|
Selling & distribution expenses
|
3
|
4
|
|
181.60
|
182.06
|
|
Profit
|
(-4.60)
|
23.34
|
The following additional information is supplied:
-
A 10% increasing trend of sales has been observed in April-June, 2007 in comparison to last year's figures.
-
There is an increase in selling price by 10% and raw materials price by 5% from January, 2007.
-
A Ltd. followed FIFO method of stock valuation whereas B Ltd. followed LIFO method. A Ltd. charges depreciation using Straight Line Method whereas B Ltd. followed WDV method.
-
Stock valuation and depreciation charges of the companies under different methods are given below:
(Rs. in '000s)
|
Particulars
|
A Ltd.
|
B Ltd.
|
|
Opening Stock (FIFO)
|
33
|
40
|
|
(LIFO)
|
46
|
50
|
|
Closing stock (FIFO)
|
47
|
60
|
|
(LIFO)
|
80
|
83
|
|
Depreciation (SLM)
|
10
|
13
|
|
(WDV)
|
9
|
12
|
A Ltd. has plans to switch over to WDV method of depreciation. B Ltd's fixed manufacturing expenses were Rs.8,000.
Compute the adjustments that are to be made in the accounts of both the companies for the purpose of cross-sectional analysis.
Reworked Profit & Loss Account of A Ltd. and B Ltd. for the Purpose of Cross-sectional Analysis
(Rs. in '000s)
|
Particulars
|
A Ltd.
|
B Ltd.
|
|
Rs.
|
Rs.
|
Rs.
|
Rs.
|
|
Sales
|
|
164
|
172.4
|
|
|
Less: Adjustment for 3 months price raise
|
|
|
8.4
|
164
|
|
Excess of closing stock over opening stock
|
13
|
|
|
33
|
|
Add: Adjustment for FIFO
|
20
|
33
|
|
|
|
|
|
197
|
|
197
|
|
Less: Raw material consumed
|
|
48.60
|
50.46
|
|
|
Adjustment for price and trend adjustment
|
|
|
1.86
|
48.60
|
|
Less: Wages
|
|
83
|
82
|
|
|
Adjustment for price and trend adjustment
|
|
|
2
|
80
|
|
Less: Direct expenses
|
|
17
|
16.4
|
|
|
Adjustment for trends
|
20
|
|
0.40
|
16
|
|
Indirect manufacturing expenses
|
|
|
16.20
|
|
|
Adjustments for trends
|
|
|
0.20
|
16
|
|
Less: Depreciation adjustment for straight line method
|
1.00
|
19
|
|
|
|
Less: Administration expenses
|
|
10
|
|
13
|
|
Less: Selling & distribution expenses
|
|
3
|
|
4
|
|
|
|
180.60
|
|
177.60
|
|
Profit
|
|
16.40
|
|
19.40
|
Working Notes:
-
Adjustment for price rise and trend
B Ltd. is closing its books of accounts 3 months after the A Ltd's closing date. To make the figures of both companies comparable, three months' sales figure is to be adjusted for price effect and trend effect and they are as follows:
Suppose the monthly sales of B Ltd. is x
Total Sales = 6x + 3x (11/10) + 3x (11/10)(11/10)
= 6x + 3.3x + 3.63x = 12.93x
If monthly sales of A Ltd. are taken as x, its total sales will be
= 9x + 3x(11/10) = 12.30x
Adjustment required = 12.93x - 12.30x = 0.63x
= 172.40 (0.63x/12.93x) = 8.40
2. Adjustment for raw materials
B Ltd. = 6y + 3y(105/100) + 3y (105/100) (11/10)
= 6y + 3.15y + 3.465y = 12.615y
A Ltd. = 9y + 3y (105/100) = 12.15y
Adjustment required = (12.615y - 12.15 y / 12.615y) 50.46 = 1.86
3. Adjustment for wages
B Ltd. = 9z + 3z(110/100) = 12.3z
A Ltd. = 12 z
Adjustment required = (12.3z - 12.0z / 12.3z) 82 = 2.0
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