Guidelines for Profit screening

Areas to be covered

Ratio analysis

Budgeting

Cash Flow & Fund Flow

Income Tax Planning

Knowledge of various types of Industry

Points to be considered while screening the profit :

Compare all the expenses with the earlier year.

Check the payment policy of the enterprise.

Check that all the payment through cheques has been recorded.

Check the nature of the business, which will help in determining various
expenses, related to that business.

Check whether the daily expenses are provided or not.

Remember that you cannot change the bank figure.

Try to make changes in those areas where the documents can be created
internally.

Check that the selling & distribution expenses change in proportion with sale.

Check that the all the government payments should not be touched.

If you are showing further expenses then make sure that these are shown in
cash or corresponding creditors are created against these expenses.

The friends can arrange short finance & family members but make sure that
the limit of 20000/-.as sec 269SS & 269T would be applicable. Give a brief
knowledge of the sections to the students.

If you want you may include some dummy loans but the same must be repaid
as soon as possible.

To increase salary, include one or two dummy employees.

Always try and change in the operating expenses only

You may vary the stock if the enterprise deals in numerous items &
maintenance of all the stock records is almost impossible.

If there are a lot of cash sale then you may omit the cash memos to deflate
the sales figures.

To increase the amount of depreciation one can show the assets such as car
of the owner in the name of the business so as to claim depreciation as well
as to get the deduction of car maintenance as operating expenses.

Verify ratios of various items with the one, which was prevailing last year, and
then compare them. These should be in the line of turnover if the expenses
are variable.

If the cash position is not very strong so as to accommodate all the expenses
then show the expenses of the later months of the year pending so that the
same can be paid out next year.

Always keep in mind that the cash position should never be negative at any
point of time. So, when you are adjusting the expenses, keep that in mind
that cash position is always above the danger level.

Always maintain a cash balance, which will suffice your day-to-day expenses.

Whenever there is no other way out to generate cash then take introduction
of capital from owner but the same should be checked with the owners
accounts.

You must be having some amount of knowledge on the various industry such
as service industry, FMCG, etc which will help you in knowing what type of
expenditure you can add and to what extent.

While increasing expenses, always keep in mind the effect of FBT. Compare
the heads and chose that one which will attract less FBT. Also compare the
FBT liability with the income tax liability for any change in any expense.

The above guidelines are not conclusive in nature. There are other various factors that you
have to take into account while screening through the profit and arriving at the convincing
figure.
To do the Profit screening one should know about the nature of the organization very well &
its policies. Step by step the following should be briefed to the student:
a) The ratios mainly highlighted are Net Profit ratio, Gross Profit ratio, Operating Ratio
etc;
b) Then the different types of expenses i.e. Fixed, Variable & Semi-variable*;
c) The different departments in which the final a/cs are sent & where a co-relation can
exist i.e. Sales Tax / Excise / I. Tax;
d) Concept of supporting documents;
e) Nature of Expenses Flexible / Non-Flexible;
f) Availability of Cash & means of arranging funds;
g) Reference of GP, if sales have risen exceptionally;
h) How the Balance Sheet is affected by any change in profit and loss account;
i) What care should be taken before going for any change in Balance sheet items like
Loans, Current assets and so on;
j) Nature of Business;
k) Cost Component Analysis Raw Material
Labour
Overheads
Marketing Expenses
Profit
l) Depreciation
m) Items which effect cash / creditors
n) Comparison of B/S and P/L of various Companies in the same Industry
o) Comparison of B/S and P/L of same Company of different years.
p) Comparison of B/S and P/L of various branches of the same Company
q) Vouchers
r) Importance of supporting documents.
s) Stock impact of valuation methods on P/L & B/S.
t) Debtors Bad debts.
u) Revenue Reorganization Policy matters.
Give examples of current year to make a projected balance sheet, P&L for next year with
same sale achieving more / less net profit as may be needed by Banks and for other
purposes.
*Details are attached in separate sheets enclosed with this handbook.
A list of most expenses is given below. The faculties are required to discuss profit screening
in respect of each of them.
Nature of Various Expenses
Expenses
Fixed/Variable
Flexible / Non flexible
Addition exp
Raw Material purchase
Labour charges
Power and fuel
Carriage Inward
Loading / Unloading
_________________
(Gross Profit)
Salary and bonus
Rent rates & taxes
office / godown/staff quarter
Telephone Exp
landline/cash card/tel.allowance
Electricity
Repair & maintenance
Printing & stationary
Postage & courier
Staff Welfare
Delivery charges
General exp.
Consultancy

Commission/brokerage
Interest
Depreciation
Car hire charges
Traveling
Conveyance
Audit fees
Advertisement
Books & periodicals
Bank charges
Bad debt
Carriage outward
Donation & subscription
Packing charges (Secondary)
Insurance
Meeting exp
Regarding preparation of vouchers please highlight the following matters to be kept in mind
while preparing vouchers
1. Same type of vouchers (papers)
2. Ink / Pen
3. Calendar to check for holidays / weekly holiday
4. Revenue stamp for expense more than 5,000

We hope that these guidelines would help you know the insight & purpose of our module.
For further clarification you may always approach us.
With warm regards
R&D Division
The Institute of Computer Accountants