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MGT101 - Financial Accounting - I - Lecture Handout 45

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FINANCIAL STATEMENTS OF LISTED COMPANIES AND FINANCIAL RATIOS

Question # 1

Following is the trial balance and balance sheet of Sheraz Ltd. as on June 30, 2002.

Sheraz Ltd.
Trial Balance
As On June 30 2002
      DEBIT CREDIT
      Rs'000 Rs'000
Tangible Fixed Assets    
  Fixed Assts At Cost    
    Freehold Land 9,550  
    Building 15,815  
    Plant and Machinery 54,636  
    Furniture and Fixture 2,698  
    Motor Vehicles 24,111  
    Leased Vehicles 22,123  
  Accumulated Dep.    
    Building   10,775
    Plant and Machinery   47,315
    Furniture and Fixture   2,474
    Motor Vehicles   12,347
    Leased Vehicles   12,186
  Capital Work in Progress 4,075  
Long Term Investments    
  Investment in Shares of Co. A 20,000  
  Investment in Shares of Co. B 2,500  
  Prov. For Diminution in Value Co. B   1,250
Long Term Deposits    
  Long Term Deposits 3,069  
Current Assets    
  Stores and Spares 1,114  
  Stock in Trade Jul 01 2001    
    Raw Material 13,264  
    Packing Material 42,189  
    Finished goods 85,296  
  Trade Debts    
    Trade Debts 18,185  
    Provision for Doubtful Debts   223
  Adv. Dep. & Prepayments    
    Advances 2,434  
    Deposits 816  
    Prepayments 1,637  
    Accrued Profit on Bank Dep 388  
    Advance Excise Duty 2,601  
    Sales Tax Refundable 8,492  
    Other Receivables 375  
    Dividend Receivable 25,000  
  Cash and Bank    
    Cash in Hand 3,330  
    Cash at Bank - Current 25,024  
    Cash at Bank - Savings 16,521  
Current Liabilities    
  Short Term Running Finance   5,257
  Creditors, Accrued & Other L.    
    Creditors   63,016
    Customers Deposits   22,571
    Accrued Exp.   22,448
    Other Liabilities   1,826
  Tax Payable   3,858
  Dividends   200
Long Term and Deffered. Lia    
  Deffered. Tax   3,000
  Oblig. Under Lease Finance   15,282
Share Capital   50,000
General Reserve   104,000
Sales      
  Gross Sale - Domestic   751,244
  Gross Sale - Export   93,305
  Sales Tax 106,158  
Cost of Sales    
  Purchases. During the Year Raw M 291,569  
  Purchases. During the Year Packing M 190,295  
  Overheads    
    Wages 23,155  
    Stores Consumed 7,922  
    Traveling and Conveyance. 158  
    Repairs and Maintenance. 10,267  
    Insurance 345  
    Fuel and Power 23,339  
    Bottle Breakage 6,552  
    Excise Duty 49,671  
    Misc. Expenses 7,412  
Admin. Expenses    
  Salaries and Wages 36,117  
  Postage and Telegram 1,652  
  Traveling and Conveyance 1,075  
  Repairs and Maintenance. 1,272  
  Insurance 1,179  
  Printing and Stationery 1,121  
  Rent, Rates and Taxes 1,155  
  Auditors' Remuneration 161  
  Legal and Professional 768  
  Donations 81  
  General Expenses 400  
Selling and Distribution Expenses    
  Salaries and Wages 23,227  
  Postage and Telegram 1,578  
  Traveling and Conveyance 2,616  
  Repairs and Maintenance. 6,168  
  Vehicle Running 859  
  Printing and Stationery 497  
  Rent, Rates and Taxes 1,954  
  Advertising 19,254  
  Outward Freight 9,628  
  Sales Staff Incentives 1,642  
  Petrol, Oil etc. 8,561  
  Misc. Expenses 1,392  
Financial Charges    
  Markup on Loans 282  
  Finance Lease Charges 1,750  
  Bank Charges 825  
Other Expenses and Provisions    
Other Income    
  Profit on Bank Deposits   974
  Dividends Income   25,100
  Foreign Exchange Gain   5,732
  Gain on Disposal of F. Assts.   692
  Sale of Scrap   1,470
Income Tax for the year 14,800  
Unappropriated Profit B/F   5,555
         
      1,262,100 1,262,100

Adjustments

1. Provision for diminution in the value of investments to be increased to Rs. 1,875.
2. Long term deposits maturing during the year Rs. 291
3. Provision for doubtful debts to be increased by Rs. 987
4. 60% Dividend declared.
5. Liability against lease finance payable in current year Rs. 6,643
6. Authorized capital of 10,000,000 shares of Rs. 10 each.
7. Transfer to general reserve 21,000
8. Addition in Fixed Assets, Plant and Mach. 2,262
9. Furniture 989, Owned vehicles 1758
10. Cash received on disposal of vehicles Rs. 1,316
11. Dep. Building 10% Plant and Furniture 15% and Vehicles 20% on written down value
12. No depreciation on year of sale and full depericiation in the year of purchase.
13. Distribution of Depreciation
o Building and Plant to Cost of Sales
o Furniture and Owned Vehicles to Admin Expenses
o Leased Vehicles to Selling Expenses
14. Closing Stocks
Raw Material 27,545
Packing Material 74,731
Finished Goods 78,550

Sheraz Ltd.
Balance Sheet
As At June 30, 2001
    2001
  Note Rs'000
Tangible Fixed Assets    
Operating Fixed Assets   39,451
Capital Work in Progress    
Long Term Investments   21,250
Long Term Deposits   2,004
    62,705
Current Assets    
Stores and Spares   1,405
Stock in Trade   188,639
Trade Debts   24,984
Adv. Dep. And Prepayments   8,826
Cash and Bank Balances   24,437
    248,291
Current Liabilities    
Short Term Running Finances   3,111
Current Maturity of Obligation    
Under lease finance   3,425
Creditors, Accrued and Other    
Liabilities   99,109
Tax Payable   5,472
Divided Payable   30,164
    141,281
Working Capital   107,010
Total Capital Employed   169,715
Financed By    
Share Capital and Reserves    
Share Capital   50,000
General Reserve   104,000
Un appropriated Profit   5,555
Shareholders Equity   159,555
Long Term Liabilities    
Deferred Taxation   3,000
Obligation under Lease Finance   7,160
    10,160
TOTAL   169,715

Required:

Prepare a set of financial statements as on June 30, 2002.

Solution

Sheraz Ltd.
Balance Sheet
As At June 30, 2002
      2002 2001
    Note Rs'000 Rs'000
Tangible Fixed Assets      
  Operating Fixed Assets 3 37,859 39,451
  Capital Work in Progress   4,075  
Long Term Investments 4 20,625 21,250
Long Term Deposits 5 2,778 2,004
      65,337 62,705
Current Assets      
  Stores and Spares   1,114 1,405
  Stock in Trade 6 180,826 188,639
  Trade Debts 7 16,975 24,984
  Adv. Dep. And Prepayments 8 42,034 8,826
  Cash and Bank Balances 9 44,875 24,437
      285,824 248,291
Current Liabilities      
  Short Term Running Finances   5,257 3,111
  Current Maturity of Obligation      
  under lease finance 13 6,643 3,425
  Creditors, Accrued and Other      
  liabilities 10 109,861 99,109
  Tax Payable   3,858 5,472
  Divided Payable 11 30,200 30,164
      155,819 141,281
Working Capital   130,005 107,010
Total Capital Employed   195,342 169,715
Financed By      
Share Capital and Reserves      
  Share Capital 12 50,000 50,000
  General Reserve   125,000 104,000
  Un-appropriated Profit   8,703 5,555
Shareholders Equity   183,703 159,555
Long Term Liabilities      
  Deferred Taxation   3,000 3,000
  Obligation under Lease Finance 13 8,639 7,160
      11,639 10,160
      195,342 169,715
         
Sheraz Ltd.
Profit and Loss Account
For the Year Ended June 30, 2002
      2002 2001
    Note Rs'000 Rs'000
         
Sales   14 738,391 X
Cost of Sales 15 572,210 X
Gross Profit   166,181 X
Other Income 16 33,968 X
Less Administrative Expenses 17 48,980 X
  Selling and Distribution Expenses 18 79,364 X
      128,344 X
Profit From Operations   71,805 X
Less Financial Charges 19 2,857 X
         
Net Profit Before Taxation   68,948 X
Income Tax for the Year   14,800 X
         
Profit After Taxation   54,148 X
Un-appropriated Profit Brought Forward   5,555 X
         
      59,703 X
Appropriation      
  Transfer to Reserve   21,000 X
  Proposed dividend @ 60%   30,000 X
      51,000 X
Un-appropriated Profit Carried Forward   8,703 X
         
         

Sheraz Ltd.
Cash Flow Statement,
For the Year Ended June 30, 2002

2002
Note Rs'000
Cash Flow From Operating Activities
Profit Before Tax
68,948
Adjustment for:
Depreciation
5,977
Provision for Doubtful Debts
987
Provision for Diminutions in Value of
Investment
625
Profit on Bank Deposits
(974)
Dividends Income
(25,100)
Gain on Disposal of F. Assts.
(692)
(19,177)
Operating Profit Before Working Capital
changes
49,771
(Increase) / Decrease in C. Assets
Stores and Spares
291
Stock in Trade
7,813
Trade Debts
7,122
Adv. Dep. And Prepayments
(7,989)
7,237
Increase / (Decrease) in C. Liabilities
Short Term Running Finances
2,146
Creditors, Accrued and Other
liabilities
10,752
12,898
Cash Generated From Operations
69,906
Profit on Bank Deposits
(974)
Income Tax Paid
(5,100)
Net Cash Flow from Operations
63,832
Cash Flow From Investing Activities
Purchase of Fixed Assets
(5,009)
Capital Work in Progress
(4,075)
Sale Proceeds Of Fixed Assets
1,316
Dividend Received
100
Long Term Deposits
(1,065)
v
(8,733)
Cash Flow from financing Activities
Repayment of Lease Liability
(4,697)
dividend Paid
(29,964)
(34,661)
Net Increase in Cash & Cash Equivalents
20,438
O/B of Cash and Cash Equivalents
24,437
C/B of Cash and Cash Equivalents
44,875
Sheraz Ltd.
Statement of Changes in Equity
For the Year Ended June 30, 2002
  Share General Un-app. Total
  Capital Reserve Profit  
Balance as on June 30, 2000 50,000 104,000 4,119 158,119
Profit after tax for the year     31,436 31,436
Dividend     (30,000) (30,000)
Balance as on June 30, 2001 50,000 104,000 5,555 159,555
Profit after tax for the year     54,148 54,148
Transfer to reserve   21,000 21,000  
Dividend     (30,000) (30,000)
Balance as on June 30, 2002 50,000 125,000 8,703 183,703

Notes to the Accounts

1. Company and its operations
The company is a public limited company incorporated in Pakistan and manufacture --------- ---
2. Significant accounting policies
These accounts have been prepared in accordance with the requirements of the Companies Ordinance 1984 and International accounting standards as applicable in Pakistan.
Historical costs
Historical costs are used as a basis for valuing transactions.
Revenue Recognition
Sales are recorded upon delivery of goods to the customers. However Exported goods are considered sold when shipped on board.
Other Policies
• Income from bank deposits, loans and advances are recognized on accrual basis.
• Dividend income is recognized when right to receive is established.
• Research and development casts are expensed as and when incurred.
• Working of all figures, fixed assets schedule and all agreements. I.e. Lease agreements and agreements for obtaining loan from banks are included in the notes to the accounts.

Fixed Assets Schedule

Particulars Cost R
A
T
E
Accumulated Depreciation WDV
As On
Jul 01
2001
Add. Disposal As On
Jun 30
2002
As On
Jul 01
2001
On
Disposal
.
For
The
Year
As On
Jun 01
2002
As On
Jun 01
2002
Company Owned
Assets
                   
Freehold
Land
9,550     9,550           9,550
Building 15,815     15,815 10 10,775   504 11,279 4,536
Plant and
Machinery
52,374 2,262   54,636 15 47,315   1,098 48,413 6,223
Furniture
and Fixture
1,709 989   2,698 15 2,474   34 2,508 190
Vehicles 24,881 1,758 (2,528) 24,111 20 14,251 (1,904) 2,353 14,700 9,411
  104,329 5,009 (2,528) 106,810   74,815 (1,904) 3,989 76,900 29,910

Leased Assets

Vehicles 22,123     22,123 20 12,186   1,988 14,174 7,949
  22,123     22,123   12,186   1,988 14,174 7,949
Total 2002 126,452 5,009 (2,528) 128,933   87,001 (1,904) 5,977 91,074 37,859
Total 2001 x x x x   x x x x 39,451

 

Distribution of Depreciation   Working        
  2002 2001 Land = 0        
  Rs'000 Rs'000 Building = 15,818 - 10,775 = 5,040 x 10% = 504
Cost of
Goods Sold
1,602   Plant = 54,636 - 47,315 = 7,321 x 15% = 1,098
Admin
Expenses
2,387   Furniture = 2,698 - 2,474 = 224 x 15% = 34
Selling
Expenses
1,988   Vehicles = 24,111 - 14,251 + 1904 = 11,764 x 20% = 2,353
  5,977 x Vehicles = 22,123 - 12,186 = 9,937 x 20% = 1,988

 

  Note 2002 2001
    Rs'000 Rs'000
Long Term Investment      
Investment in Shares of Co. A   20,000 20,000
Investment in Shares of Co. B   2,500 2,500
Less: Prov. For Diminution in Value Co. B   1,875 1,250
    625  
    20,625 20,000
Long Term Deposits      
Long Term Deposits   3,069 2,004
Less: Current Maturity   291  
    2,778 2,004
Stock in Trade      
Raw Material   27,545 31,799
Packing Material   74,731 76,540
Finished Goods   78,550 80,300
    180,826 188,639
Trade Debtors      
Trade Debts   18,185 25,307
Less: Provision for Doubtful Debts   1,210 323
    16,975 24,984
Advances Deposits and Prepayments      
Advances   2,434 1,379
Deposits   816 1,730
Prepayments   1,637 1,305
Advance Excise Duty   2,601 2,192
Sales Tax Refundable   8,492 1,366
Other Receivables   375 394
Dividend Receivable   25,000  
Accrued Profit on Bank Depericiation   388 460
Current Maturity of Long Term Dep.   291  
    42,034 8,366
Cash and Bank      
Cash in Hand   3,330  
Cash at Bank - Current Accounts   25,024  
Cash at Bank - Savings Accounts   16,521  
    44,875  
Creditors, Accrued & Other Liabilities      
Creditors   63,016 58,997
Customers Deposits   22,571 19,866
Accrued Exp.   22,448 17,534
Other Liabilities   1,826 2,712
    109,861 99,109
Dividend Payable      
Payable from Previous Year   200 164
Accrued During the Year   30,000 30,000
    30,200 30,164
Share Capital      
Authorized Capital      
10,000,000 (2000: 10,000,000)      
ordinary shares of Rs. 10 each   100,000 100,000
Paid Up Capital      
5,000,000 (2000: 5,000,000)      
ordinary shares of Rs. 10 each   500,000 500,000
       
Obligation Under Lease Finance      
Obligation. Under Lease Finance   15,282 10,585
Less: Current Maturity   6,643 3,425
    8,639 7,160
Sales      
Gross Sale - Domestic   751,244  
Gross Sale - Export   93,305  
Less: Sales Tax   106,158  
    738,391  
Cost of Sales      
Raw Material - Opening Stock   13,264  
Raw Material - Purchases   291,569  
Less : Raw Material - Closing Stock   27,545  
Raw Material Consumed   277,288  
       
Packing Material - Opening Stock   42,189  
Packing Material - Purchases   190,295  
Less: Packing Material - Closing Stock   74,731  
Packing Material consumed   157,753  
       
Overheads      
Wages   23,155  
Stores Consumed   7,922  
Traveling and Conveyance.   158  
Repairs and Maintenance.   10,267  
Insurance   345  
Fuel and Power   23,339  
Bottle Breakage   6,552  
Excise Duty   49,671  
Misc. Expenses   7,412  
Depreciation   1,602  
    130,423  
Cost of Production   565,464  
Finished Goods - Opening Stock   85,296  
Less: Finished Goods - Closing Stock   78,550  
Cost of Goods Sold   572,210  
       
Other Income      
Profit on Bank Deposits   974  
Dividends Income   25,100  
Foreign Exchange Gain   5,732  
Gain on Disposal of F. Assts.   692  
Sale of Scrap   1,470  
    33,968  
       
Administrative Expenses      
Salaries and Wages   36,117  
Postage and Telegram   1,652  
Traveling and Conveyance   1,075  
Repairs and Maintenance.   1,272  
Insurance   1,179  
Printing and Stationery   1,121  
Rent, Rates and Taxes   1,155  
Auditors' Remuneration   161  
Legal and Professional   768  
Donations   81  
General Expenses   400  
Depreciation   2,387  
Provision for Doubtful Debts   987  
Provision for Diminution in Value of      
Investment   625  
    48,980  
Selling and Distribution Expenses      
Salaries and Wages   23,227  
Postage and Telegram   1,578  
Traveling and Conveyance   2,616  
Repairs and Maintenance.   6,168  
Vehicle Running   859  
Printing and Stationery   497  
Rent, Rates and Taxes   1,954  
Advertising   19,254  
Outward Freight   9,628  
Sales Staff Incentives   1,642  
Petrol, Oil etc.   8,561  
Misc. Expenses   1,392  
Depreciation   1,988  
    79,364  
Financial Charges      
Markup on Loans   282  
Finance Lease Charges   1,750  
Bank Charges   825  
    2,857  
       

Financial Ratio Analysis

The management of the business has to analyze several things to work out performance of the business. These analysis help the management in decision making. The management works out the performance of the business by calculating some ratios. Following are some of the important ratios, a management may calculate to get first hand knowledge about business’s performance:

Profitability Ratios

Profitability ratios contain the following ratios:

  • Gross Profit Ratio
  • Net Profit Ratio

Gross Profit Ratio

The Gross Profit ratio tells the management of the company about profitability of the company. It helps the management of the company to know about cost of production of the company. When management compares it with previous year’s ratios, it came to know, how well the business has performed and how to improve its efficiency further? Gross Profit ratio also gives information about sales. It tells the management whether sales has increased or decreased. The management takes appropriate steps accordingly. The formula for calculating this ratio is as follows:

Gross Profit Ratio = (Gross Profit / Sales) x 100

Net Profit Ratio

The benefit of net profit ratio is same as that of gross profit ratio. It helps the management to know about net profit. If gross profit ratio is greater as compared to last year and net profit ratio is lesser, it means that administrative and selling expenses of the company have increased. The management takes appropriate steps to control the expenses. The formula for this ratio is as follows:

Net Profit Ratio = (Net Profit / Sales) x 100

Stock Turnover Ratio

This ratio tells us about sale of stock. It can be calculated in days as well as in number of times. It tells us how many times in a year or in a month, the stock is sold or in how many days, the stock is sold. If it is calculated in days and the result is higher than that of previous years. This means that the stock takes more days to be sold. That means demand of the product of the company is decreasing and vice versa. The formula to calculate stock turnover in number of days is as follows:

Stock Turnover in days = (Average Stock / Cost of goods sold) x 365

Where,
Average stock = (Opening Stock + Closing Stock) / 2

This opening and closing stock may be for a year or for a month depending upon the policy for calculating this ratio.

If this ratio is calculated for number of times, it means that how many times in a given period (whether a year or a month) the stock is sold. The formula for calculating this ratio is as follows:

Stock Turnover (Number of times) = (Cost of goods sold / Average stock)

Debtors Turnover Ratio

This ratio is used to get first hand knowledge about payment received from debtors. It is evident that a company cannot meet its expenses without receiving cash from its customers. If debtors do not pay in time, how would a company pay its liabilities? Consequently its reputation will go down and nobody will place his trust on that company. This ratio helps management to identify debtors who do not pay in time and to pursue them to pay. This ratio is also calculated for number of days and number of times. The formulae for this ratio are as follows:

Debtor Turnover (Number of days) = (Average Debtors / Credit Sales) x 365

Debtor Turnover (Number of times) = Credit Sales / Average Debtors

Creditors Turnover Ratio

Creditors’ turnover means how many times or in how many days a company pays to its creditors. As mentioned above, if a company does not collect its payment in time, how would it be able to pay its creditors on time? If it does not pay its debtors on time, this situation will make bad impression on its reputation. Like debtors turnover, creditors’ turnover is also calculated for number of days and number of times. The formulae for this ratio are as follows:

Creditor Turnover (Number of days) = (Average Creditors / Credit Purchases) x 365

Creditor Turnover (Number of times) = Credit Purchases / Average Creditors

Return on Capital Employed Ratio (ROCE)

This ratio is calculated for the share holders of the company. As share holders are concerned with profit paid by companies to its share holders. This ratio gives us the proportion of net profit before tax to average capital employed by the company. The return rate of profit given to its members should be higher than current market rate. If return rate is less than current market rate than the share holders will invest their money in the market instead of investing in the company. The formula for calculating this ratio is as follows:

Return on Capital Employed Ratio (ROCE) = Net profit after tax before appropriation / Average Capital Employed

Earning Per Share Ratio

Earning per share ratio indicates the proportion of net profit; a company is getting per share. Share holders are always interested to know the proportionate rate; a company is getting per share. As price is numerator and earning in denominator, therefore lower value means better return.

The formula for calculating this ratio is as follows:

Earning per share ratio = Net profit after tax before appropriation / Number of shares

Price Earning Ratio

This ratio is calculated for those shares which have market value. This ratio compares earning per share with market value of that share. The formula for calculating this ratio is as follows:

Price Earning Ratio = Market value per share / Earning per share

Debt Equity Ratio

This ratio shows the composition of finance that has funded the asset of the company. This ratio varies for different projects. In Pakistan, maximum advised ratio is 60: 40. i.e. 40% of the assets should be bought with company, s investment and 60% should be bought with the loan taken by the company. This standard is acceptable in Pakistan. If a company’s liquidity ratio is more than the above mentioned standard, which means condition of the company is not very good. If it has to pat its liabilities, its assets would not support it to pay its liabilities. The formula for calculating this ratio is as follows:

Debt Equity Ratio = Long term Liabilities / Equity

Current Ratio

Current ratio shows the proportion of current assets and current liabilities. This ratio should be 1:1. i-e.. For every liability of one rupee, there should be an asset of one rupee to pay it. The formula for calculating this ratio is as follows:

Current Ratio = Current Assets / Current Liabilities

Acid Test Ratio

Acid test ratio is the proportion of current assets which are convertible into cash and current liabilities. The formula for calculating this ratio is as follows:

Acid Test Ratio = (Current Assets – Stock) / Current Liabilities

Mark Up Cover Ratio

This ratio shows the proportion of operating profit (Operating Profit before financial charges) and financial charges. This ratio is useful for bankers. If a company has taken loan and its financial charges are so large that all or a big part of profit is absorbed by financial charges, then how would a company repay its loans. The formula for calculating this ratio is as follows:

Mark up Cover Ratio = Operating Profit before financial charges / Financial charges

----------------THE END---------------

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