The Vertical Form of the Revenue Statement
Chapter Eight
Syllabus topic 3, "Study of Balance sheet and Income statement / Revenue statements in vertical form suitable for analysis ii. Relationship between items in Balance Sheet and Revenue statement iii. Tools of analysis of Financial Statements (i) Trend analysis (ii) Comparative Statement (iii) Common Size Statement"
Pages 16 to 18 of 162
In one line
The vertical revenue statement runs from net sales down to profit after tax, stopping at four sub-totals, each of which answers a different question.
The form
Sunrise Industries Ltd, revenue statement for the year ended 31 March 2027, in vertical form.
| Particulars | Rs | Rs |
|---|---|---|
| Net sales | 20,00,000 | |
| Less: cost of goods sold | 14,00,000 | |
| GROSS PROFIT | 6,00,000 | |
| Less: operating expenses | ||
| Administrative expenses | 1,00,000 | |
| Selling and distribution expenses | 1,40,000 | |
| Total operating expenses | 2,40,000 | 2,40,000 |
| OPERATING PROFIT | 3,60,000 | |
| Add: non-operating income | 40,000 | |
| Less: non-operating expenses | 20,000 | |
| Net non-operating income | 20,000 | 20,000 |
| PROFIT BEFORE INTEREST AND TAX | 3,80,000 | |
| Less: interest on debentures | 40,000 | |
| Profit before tax | 3,40,000 | |
| Less: provision for taxation | 1,02,000 | |
| PROFIT AFTER TAX | 2,38,000 | |
| Less: preference dividend | 18,000 | |
| Profit available to equity shareholders | 2,20,000 |
The four sub-totals, and what each is for
| Sub-total | What it measures | Ratios that read it |
|---|---|---|
| Gross profit | The margin on trading, before any running cost | Gross profit ratio |
| Operating profit | What the business earns from its own business, before anything incidental | Net operating profit ratio, operating ratio |
| Profit before interest and tax | What the whole capital earned, before the split between lenders and owners | Return on capital employed, debt service ratio, the Du Pont chart |
| Profit after tax | What belongs to the owners | Net profit ratio, return on proprietors' fund |
Profit before interest and tax is the one to understand. Interest is the lenders' share of the year's earnings and tax is the government's. A ratio that measures what the whole capital employed produced must be taken before either is deducted, or it would compare a return that excludes lenders with a capital that includes them.
Where each item belongs
Operating or non-operating is the classification that matters, and it decides three ratios.
| Item | Operating? | Why |
|---|---|---|
| Salaries, rent, insurance, advertising, carriage outward | Yes | Costs of running the business |
| Depreciation on business assets | Yes | A cost of using them |
| Interest received on investments | No | The business is not a lender |
| Dividend received | No | Income from an investment, not from trading |
| Profit on sale of a fixed asset | No | A capital item, not trading |
| Loss by fire, or on sale of an asset | No | Not a cost of trading |
| Interest paid on borrowings | No, and shown separately | It is the cost of the capital, deducted after PBIT |
| Donations, and a write-off of preliminary expenses | No | Neither is a cost of earning the sales |
Interest paid is the one to get right. It is neither an operating expense nor a non-operating expense in this form. It has a line of its own, below profit before interest and tax, because that is what makes the return on capital employed computable.
The Vertical Form of the Revenue Statement
Cost of goods sold
Where the question gives a trading account, cost of goods sold is already there. Where it does not:
| Rs | |
|---|---|
| Opening stock | x |
| Add: purchases, net of returns outward | x |
| Add: direct expenses, carriage inward, wages, power | x |
| Less: closing stock | (x) |
| Cost of goods sold | x |
And equally, cost of goods sold is net sales less gross profit. For Sunrise, Rs 20,00,000 less Rs 6,00,000 is Rs 14,00,000.
Carriage inward is a cost of goods sold; carriage outward is a selling expense. That pair is asked, and getting it wrong moves the gross profit ratio.
The prior year, which Module II will need
Sunrise Industries Ltd, revenue statement for the year ended 31 March 2026.
| Particulars | Rs |
|---|---|
| Net sales | 16,00,000 |
| Less: cost of goods sold | 11,20,000 |
| Gross profit | 4,80,000 |
| Less: administrative expenses | 90,000 |
| Less: selling and distribution expenses | 1,10,000 |
| Operating profit | 2,80,000 |
| Add: non-operating income | 30,000 |
| Less: non-operating expenses | 10,000 |
| Profit before interest and tax | 3,00,000 |
| Less: interest on debentures | 40,000 |
| Profit before tax | 2,60,000 |
| Less: provision for taxation | 78,000 |
| Profit after tax | 1,82,000 |
| Less: preference dividend | 18,000 |
| Profit available to equity shareholders | 1,64,000 |
The check that ties the two statements together
The profit retained must equal the movement in reserves.
| Rs | |
|---|---|
| Profit available to equity shareholders, 2027 | 2,20,000 |
| Less: equity dividend, 6 per cent on Rs 10,00,000 | (60,000) |
| Retained in the business | 1,60,000 |
| Rs | |
|---|---|
| Reserves and surplus, 31 March 2027 | 3,00,000 |
| Less: reserves and surplus, 31 March 2026 | (1,40,000) |
| Movement | 1,60,000 |
The two agree. Run this check on any question that gives you both statements for two years, because if it fails, one of the figures has been misread and every ratio built on it will be wrong.
Quick revision
| Starts at | Net sales, after returns inward |
| Four sub-totals | Gross profit, operating profit, profit before interest and tax, profit after tax |
| Interest paid | Its own line, below PBIT, not an operating expense |
| Non-operating | Interest and dividend received, profit or loss on sale of assets, abnormal losses |
| Carriage | Inward into cost of goods sold; outward into selling expenses |
| The tie | Retained profit equals the movement in reserves |
Test yourself
- Name the four sub-totals in order.
- Why is interest deducted after profit before interest and tax rather than among the expenses?
- Where does a profit on the sale of machinery appear?
- For Sunrise in 2027, what is the operating profit and what is PBIT?
- What check ties the revenue statement to the balance sheet?
Answer in one sentence
1. Gross profit, operating profit, profit before interest and tax, and profit after tax.
2. Because the return on capital employed measures what the whole capital earned, and the whole capital includes the lenders' money whose reward is that interest.
3. As non-operating income, because it is a capital item and not part of trading.
The Vertical Form of the Revenue Statement
4. Operating profit Rs 3,60,000, and profit before interest and tax Rs 3,80,000 after adding net non-operating income of Rs 20,000.
5. The profit retained after dividends must equal the movement in reserves and surplus between the two balance sheets.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.