Module 02 · Solutions

All Kaveri figures are ₹ Cr from the running-example page; arithmetic verified in Python.

Warm-up

E02.01 Assets = Liabilities + Equity. (a) Buying inventory for cash: inventory up, cash down — assets only. (b) Taking a bank loan: cash up, borrowings up. (c) Issuing shares for cash: cash up, equity up (or earning a profit: assets up, retained earnings up).

E02.02 Accrual: recognising revenue/expense when earned/incurred, not when cash moves. Deferred revenue: cash received before performance — a liability. Accrued expense: cost incurred, not yet paid — a liability. Prepaid expense: cash paid before the benefit — an asset.

E02.03 Identify the contract; identify performance obligations; determine the transaction price; allocate the price to obligations; recognise revenue as each obligation is satisfied.

E02.04 Schedule III lines: revenue from operations, other income, exceptional items, PBT, OCI. Analyst conventions: EBITDA, EBIT, adjusted EPS.

E02.05 Home-grown brands and reputation; trained people and processes; contingent liabilities (disclosed, not recorded); operating capacity/market position; promoter-level risks (pledges); order books; the fair value of assets held at cost (land).

E02.06 CFO: taxes paid. CFI: purchase of liquid funds (and interest received). CFF: interest paid on term loans, dividends paid, lease payments (principal and interest, under Kaveri's policy).

E02.07 CWIP: capital work-in-progress — assets under construction, not yet depreciated. ROU asset: the right to use a leased asset, capitalised under Ind AS 116. DTL: tax that will be payable in future because book profit has been recognised ahead of taxable profit (timing differences). NCI: outside shareholders' share of a subsidiary's equity and profit. Goodwill: purchase price above the fair value of identifiable net assets acquired.

E02.08 LIFO charges the most recent (highest, in inflation) costs to COGS, reducing profit and leaving old cheap costs in inventory; Ind AS/IFRS prohibit it as not representing physical flows. A US LIFO company will show lower gross margin and lower inventory than an Indian FIFO/weighted-average company with identical economics in rising-price periods; adjust with the LIFO reserve.

Core

E02.09 EBITDA = 1,318.0 − 858.0 − 117.3 − 160.8 = 181.9; EBIT = 181.9 − 47.8 = 134.1; PBT = 134.1 + 3.9 − 17.0 = 121.0; PAT = 121.0 − 30.5 = 90.5. Margins 13.8% and 6.9%. EPS basic 90.5/6.00 = ₹15.08; diluted 90.5/6.07 = ₹14.91.

E02.10 After-tax gain = 14.0 × (1 − 0.2517) = 10.48. Adjusted PAT = 97.4 − 10.48 = 86.9; adjusted EPS = ₹14.49. Growth to FY26 EPS ₹15.08: +4.1% (reported: −6.9%).

E02.11 607.2 + 90.5 − 24.0 + 2.4 = 676.1 ✓ (balance sheet other equity FY26 = 676.1).

E02.12 Gross block 780.0 + 36.0 + 14.0 = 830.0; accumulated depreciation 295.1 + 39.6 = 334.7; net block 830.0 − 334.7 = 495.3 ✓.

E02.13 16.7 + 6.0 + 1.4 − 5.9 = 18.2 ✓. Interest ₹1.4 Cr in finance costs (P&L); ROU amortisation ₹4.7 Cr in D&A (P&L); the ₹5.9 Cr payment in CFF (Kaveri's policy); new leases are non-cash (ROU asset and liability both rise).

E02.14 Operating profit before WC = 121.0 + 47.8 + 17.0 − 3.9 + 2.4 = 184.3. Working capital: inventories −26.8; receivables −77.0; OCA −4.3; payables +11.1; OCL +7.3 → −89.7. CFO = 184.3 − 89.7 − 29.5 = 65.1 ✓.

E02.15 CFI = −48.0 − 4.0 + 15.0 (sale of current investments) + 0 + 3.9 = −33.1. CFF = (92.0 − 112.0) + (96.0 − 58.0) − 15.6 − 5.9 − 24.0 = −20.0 + 38.0 − 45.5 = −27.5. Net = 65.1 − 33.1 − 27.5 = +4.5 = 32.5 − 28.0 ✓.

E02.16 CFO′ = 65.1 + 3.9 − 17.0 = 52.0; CFI′ = −33.1 − 3.9 = −37.0; CFF′ = −27.5 + 15.6 + 1.4 = −10.5 (the lease principal ₹4.5 Cr stays in CFF). Check: 52.0 − 37.0 − 10.5 = 4.5 ✓.

E02.17 FY25: 32.8/130.2 = 25.2%; FY26: 30.5/121.0 = 25.2% — the Section 115BAA rate (22% + surcharge + cess = 25.168%) with no exempt income, disallowances or tax holidays. A 15% rate would suggest the new-manufacturing regime (115BAB), an SEZ/tax holiday, brought-forward losses, or — if unexplained in the reconciliation — profits the tax authorities do not see.

E02.18 Tax depreciation (Income-tax Act rates, often WDV) exceeds book depreciation (Schedule II lives) in the early years of an asset's life, so taxable profit is below book profit and tax is deferred; the DTL records the future liability. The ₹1.0 Cr charge is part of the P&L tax expense but is not paid, so it is excluded from taxes paid in CFO (Kaveri's CFS deducts only current tax of ₹29.5 Cr).

E02.19 Inventory = 300 × 60/365 = ₹49.3 Cr; receivables = 500 × 45/365 = ₹61.6 Cr; payables = 300 × 50/365 = ₹41.1 Cr; net trade working capital = 49.3 + 61.6 − 41.1 = ₹69.9 Cr.

E02.20 SLM: 120 × 0.95/8 = ₹14.25 Cr a year. WDV: year 1 = 120 × 25% = ₹30.0 Cr; year 2 = 90 × 25% = ₹22.5 Cr. SLM reports higher early profit (lower depreciation) — the WDV method front-loads the charge.

E02.21 Taxable profit = 100 + 10 − 15 = 95; current tax = ₹23.75 Cr; total tax expense (book) = 100 × 25% = ₹25.0 Cr; deferred tax charge = ₹1.25 Cr, increasing the DTL (tax deferred to later years).

E02.22 Liability = ROU = Σ 12/1.08ᵗ (t = 1–5) = ₹47.91 Cr. Year-1 interest = 47.91 × 8% = ₹3.83 Cr; year-1 amortisation = 47.91/5 = ₹9.58 Cr. Versus expensing rent of ₹12 Cr: EBITDA is higher by ₹12.0 Cr; EBIT higher by 12.0 − 9.58 = ₹2.42 Cr; PBT lower by 3.83 + 9.58 − 12.0 = ₹1.41 Cr in year 1 (front-loaded interest), reversing in later years. Cash is unchanged.

E02.23 Three performance obligations: pump (point in time — on delivery/control transfer, March), installation (point in time or short over-time — April), maintenance (over time — 24 months). Allocate the ₹5 lakh on stand-alone selling prices (e.g., pump 4.0, installation 0.4, maintenance 0.6). At 31 March: revenue for the pump only; a receivable (or contract asset if not yet billable); a contract liability for any maintenance/installation billed but not performed. Booking all ₹5 lakh in March would be premature recognition (09.2).

E02.24 Subsidiary: 100% of revenue (₹200 Cr) and PAT (₹20 Cr) consolidated line by line; NCI = 20% × 20 = ₹4 Cr shown below PAT; owners' share ₹16 Cr. Associate: revenue not consolidated; "share of profit of associates" = 30% × 50 = ₹15 Cr as one line above PBT. Consolidated PAT = own PAT + 20 + 15; attributable to owners = own PAT + 16 + 15.

E02.25 NII = 1,073.2 − 442.1 = 631.1; net total income = 681.9; PPOP = 681.9 − 241.3 = 440.6; PBT = 440.6 − 120.6 = 320.0; PAT = 239.5. Average loans 6,350: NIM = 9.9%; credit cost = 1.9%; cost-to-income = 241.3/681.9 = 35.4%; RoA = 239.5/6,831.4 = 3.5%; RoE = 239.5/1,590.55 = 15.1%.

E02.26 26.7 + 12.7 + 17.1 + 34.0 = 90.5 ✓. Q2 (Jul–Sep) is the monsoon quarter — lowest pump demand (revenue ₹263.6 Cr vs ₹408.5 Cr in Q4) against largely fixed costs, so operating leverage drives the margin to 12.2%.

Stretch

E02.27 Revenue jumps in the change year (contracts in progress are recognised on progress rather than completion); unbilled revenue/contract assets appear on the balance sheet; CFO is unaffected by the policy (cash collections unchanged) so CFO/PAT falls. Ind AS 8 requires disclosure of the nature and reason for the change and its effect on each line, with retrospective restatement of comparatives where practicable.

E02.28 Year 1: capitaliser shows EBITDA +30, EBIT +24 (amortisation 6), PAT +18 (at 25%), CFO +30 (or +22.5 net of tax), CFI −30, FCF (CFO − capex) identical to the expenser's. Steady state (year 6+): amortisation = 30 = the expenser's cost, so EBIT and PAT converge; EBITDA stays 30 higher; CFO stays 30 higher and CFI 30 lower; FCF equal. The difference is presentation and timing; FCF is the invariant.

E02.29 The cash sits in subsidiaries (possibly overseas, possibly with their own lenders or regulatory constraints) while the parent — the entity that pays dividends from its distributable profits and cash — has little. Standalone statements would show low parent cash, investments in and loans to subsidiaries, and perhaps dividend income only when subsidiaries upstream it.

E02.30 P&L: inside cost of materials consumed. Balance sheet: any unpaid amount in trade payables (disclosed separately as related-party payables). CFS: within operating cash flows. Ind AS 24 requires the nature of the relationship, transaction types and amounts, outstanding balances and terms, and provisions for doubtful debts; "arm's length" is the company's assertion that terms equal those available with unrelated parties — approved by the audit committee, not independently verified in the note.

E02.31 Choices: ECL allowance on receivables (₹4.0 Cr vs ~₹15–18 Cr at 25–30% coverage of overdues: PAT −₹8 to −₹10 Cr); useful lives (Schedule II — a shift to shorter lives might add ₹5–8 Cr of depreciation: PAT −₹4 to −₹6 Cr); exceptional-item classification (none in FY26); revenue timing on solar systems (unknown effect without the contract-balances note; potentially material); SBC valuation (₹2.4 Cr, small); deferred tax (small). Conservative end: PAT roughly ₹75–80 Cr vs ₹90.5 Cr reported — a 12–17% haircut, mostly provisioning.

Real-world task

E02.32–34 No single answer. Rubric: EBITDA rebuilt with other income excluded and the treatment of "other operating income" stated; CFO rebuilt to within rounding with every adjustment identified; roll-forwards reconciled with gaps explained (OCI, disposals, FX, restatements); tax reconciliation items each explained (exempt income, disallowances, rate differences, prior-year adjustments).