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ACCT226 Profit Before Tax

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ACCT226 Profit Before Tax

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ACCT226 Profit Before Tax

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Course Code: ACCT226
University: Centennial College

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Country: Canada

Question:
Discuss about the ACCT226 Profit Before Tax. Annual operating costs: It is the annual cost of operating an account.
Answer:

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

           5,000.00

           5,000.00

 Accounts overdue (10% per month)

           20,000.00

         20,500.00

         21,000.00

 Late fee (299000 x 12)

    3,588,000.00

 

 

 Over limit fees

 

 

 Open accounts  

         200,000.00

           5,000.00

           5,000.00

 Accounts over limit (15% per month)

           30,000.00

         30,750.00

         31,500.00

 Over limit fees (448500 x 10)

    4,485,000.00

 

 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%)

         77,220.00

 

 Annual fee (260000 x 25)

    6,500,000.00

 

 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%)

       128,700.00

 

Total revenue

 

  14,778,920.00

 Expenditures:  

 

 

 Annual operating cost {(200000 x 50}

  10,000,000.00

 

 Cost of acquisition (200000 x 11% x 50)

    1,100,000.00

 

 Provision {(200000 x 11% x 990) x 9%}

    1,960,200.00

 

 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

 

 

 Month end balance for annual cost of funds (200000 x 11% x 990)

    21,780,000.00

 

 

 Annual cost of funds (21780000 x 5%)

    1,089,000.00

 

 Profit before tax  

 

       629,720.00

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 bank.

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.
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.

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.

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 account.

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.
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.

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