Profit before Tax

This article explains how to calculate profit before tax for a bank using available information in a spreadsheet. It also provides an understanding of the assumptions made and the different financial terms used such as monthly turnover, annual fee, total revenue, annual operating costs, and provision.

Running head: PROFIT BEFORE TAX
Profit before Tax
Name of the Student:
Name of the University:
Authors Note:

1PROFIT BEFORE TAX
Contents
Profit before tax:..............................................................................................................................2
Description:......................................................................................................................................7
References:......................................................................................................................................8

2PROFIT BEFORE TAX
Profit before tax:
Taking into consideration the available information in the spreadsheet the profit before
tax of the concerned bank is calculated below. Certain assumptions have been made in
calculating the profit before tax of the bank which have been provided at the end of the
calculation.
Particulars Amount (₤) Amount (₤) Amount (₤)
Revenue
Open accounts 200,000.
00
5,000.0
0
5,000.0
0
Accounts overdue (10% per month) 20,000.
00
20,500.0
0
21,000.0
0
Late fee (299000 x 12) 3,588,000.0
0
Over limit
fees
Open accounts 200,000.
00
5,000.0
0
5,000.0
0
Accounts over limit (15% per month) 30,000.
00
30,750.0
0
31,500.0
0

3PROFIT BEFORE TAX
Over limit fees (448500 x 10) 4,485,000.0
0
Cash fees
Average balance 900.
00
Add: expected growth in average balance (900 x
10%)
90.
00
Expected average balance in 2018 990.
00
Number of accounts in 2018 (200000 + 60000) 260,000.
00
Total month end balances (260000 x 990) 257,400,000.
00
Monthly turnover (257400000 x 5%) 12,870,000.
00
Cash advances (12870000 x 20%) 2,574,000.
00
Cash fees (2574000 x 3%) 77,220.0
0

4PROFIT BEFORE TAX
Annual fee (260000 x 25) 6,500,000.0
0
Interchange
Average balance 900.
00
Add: expected growth in average balance (900 x
10%)
90.
00
Expected average balance in 2018 990.
00
Number of accounts in 2018 (200000 + 60000) 260,000.
00
Total month end balances (260000 x 990) 257,400,000.
00
Monthly turnover (257400000 x 5%) 12,870,000.
00
Interchange (12870000 x 1%) 128,700.0
0
Total revenue 14,778,920.0

5PROFIT BEFORE TAX
0
Expenditures:
Annual operating cost {(200000 x 50} 10,000,000.0
0
Cost of acquisition (200000 x 11% x 50) 1,100,000.0
0
Provision {(200000 x 11% x 990) x 9%} 1,960,200.0
0
Annual cost of funds
Average balance 900.
00
Add: expected growth in average balance (900 x
10%)
90.
00
Expected average balance in 2018 990.
00
Number of accounts by the end of 2017 200,000.
00

6PROFIT BEFORE TAX
Month end balance for annual cost of funds
(200000 x 11% x 990)
21,780,000.
00
Annual cost of funds (21780000 x 5%) 1,089,000.0
0
14,149,200.0
0
Profit before tax 629,720.0
0
Thus profit before tax of the concern bank is ₤629,720.00 for the year 2018 on the basis of the
information provided in the spreadsheet. The following assumptions have been made to calculate
the amount of profit before tax of the concern bank1.
I. Annual operating costs of ₤50 per open account thus the 200,000 accounts that were opened
in 2017 have been considered for calculating annual operating costs.
II. Cost of acquisition has been calculated by considering the 11% of 200,000 open accounts of
2017 as it was specifically mentioned 0% charge off for accounts booked in 2018.
III. Provision has been made on the 11% of 200,000 accounts with average month end balance of
₤990 after considering the expected growth in average balance of 10% in 2018.
IV. Again annual cost of funds for the 11% of 2017 year end open accounts have only been
considered with average yearend balance of ₤990 per account2.
1 Loughran, Tim, and Bill McDonald. "Textual analysis in accounting and finance: A
survey." Journal of Accounting Research 54, no. 4 (2016): 1207.
2 Maskell, Brian H., Bruce Baggaley, and Larry Grasso. Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press, 2016.

7PROFIT BEFORE TAX
Description:
Monthly turnover: It is the aggregate amount of balance withdrawn and deposited in an accounts
over a month.
Annual fee: Annual fee is the amount charged by the bank from account holders for managing
their accounts in the bank.
Total revenue: It is the amount of revenue earned by the bank from its account holders for
different types of financial services provided to them.
Annual operating costs: It is the annual cost of operating an account.
Provision: Provision is made for accounts in respect of which there is significant doubt of full
recovery for the balance that is recoverable by the bank.

8PROFIT BEFORE TAX
References:
Loughran, Tim, and Bill McDonald. "Textual analysis in accounting and finance: A
survey." Journal of Accounting Research 54, no. 4 (2016).
Maskell, Brian H., Bruce Baggaley, and Larry Grasso. Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press, 2016.