Chapter#1
INTRODUCTION
THE COMPANY AND ITS OPERATIONS
The company was incorporated in Pakistan on 03 December, 1989 as a Public Limited Company. Its shares are quoted on Stock Exchanges in Pakistan. It is principally engaged in manufacturing and sale of yarn. The Company is also setting-up a Textile Weaving Unit
The head office of the company is Multan. The company manufactures and exports the yarn. This is in fact spinning mill that buys cotton from outside and then converts into yarn. The company manufactures yarn of export quality.
The major importers of yarn are America, Hong Kong, and Sirilanka. Major part of the
sale involves exports. Local sales are very small in quantity, reason behind this is 15% sales tax that company has to pay on local sales, while on exports company has to pay only 1.25% with holding tax to government including some bank charges. More over some times thereof are chances of exchange gain and loss, which results from increase and decrease in foreign exchange rates.
MANAGEMENT OF THE COMPANY
q BOARD OF DIRECTORS
Mian Muhammad Javed Anwar (Chairman)
Mian Muhammad Parvez (Chief Executive)
Mrs. Salma Javed
Mrs. Waheeda Parvez
Mr. Muhammad Haris
Mrs.Haleema Haris
Mr. Muhammad Aurangzeb
Mr. Manzoor Ahmad (Rep. N. I.T)
Mr. Abdul Latif Uqaili (Rep. I.C.P)
q ACCOUNTS MANAGER: Mr. Kamran Shahzad
q COMPANY SECRETARY: Mr. Shamsur Rahman
OTHER INFORMATION
q REGISTERED OFFICE: 46-Hassan Parwana Colony,
Multan.
q MILLS: Chowk Sarwar Shaheed, Distt. M.Garh
q BANKERS: Bank Al-Habib Limited.
Habib bank Limited.
Emirates Bank International
Limited.
Bank Alfalah Limited.
Metropolitan Bank Limited.
AUDITORS OF THE COMPANY
The auditors of the company are M/S Hameed Chaudhri and company. Ahmad Hassan Textile Mills Limited has head office in Multan.
Company has a chairman, a chief executive, and five directors. The directors are responsible for:
· Planning
· Finance
· Personnel
· Exports
The company has centralized management system. Except production, all major activities are performed in Head Office. Professional management manages the company. The relationship between workers management is cordial. The employees are quite satisfied with their management. The workers are drawing handsome salaries. The management is also satisfied with the performance of employees.
PLANT CAPACITY AND PRODUCTION
2001 2000
Number of spindles installed 17640 17640
Number of spindles Worked 17592 14708
Number of shifts 1092 1095
Installed capacity 5788072 4480782
(After conversion into 20/s count Kgs.)
Actual production of Yarn 5193531 4653159
(After conversion into 20/s count Kgs.)
q FINANCIAL YEAR
The financial year of the company begins from first October and ends at 30th September.
FIVE YEARS FINANCIAL REVIEW AT A GLANCE
YEAR | 2001 | 2000 | 1999 | 1998 | 1997 |
Sales | 801123552 | 659377818 | 594163559 | 533430865 | 454999407 |
Cost of sale | 713147170 | 487739015 | 523927463 | 489401704 | 389070984 |
Gross profit | 87976382 | 171638803 | 70176096 | 44029161 | 65928423 |
Profit/(loss)before tax | 38636574 | 129226824 | 28570898 | 7416772 | 25109125 |
Profit/(loss) after tax | 23054574 | 101821104 | 27658406 | 7416772 | 25109125 |
Fixed Assets | 185989882 | 195295297 | 195295297 | 158190222 | 169171197 |
Chapter#2
COMMERCIAL DEPARTMENT
The commercial department involves two most important departments of the company i.e. purchase department and sales department. Mian Naveed Ahmed who is director of the company and one of the owners of company controls this important department.
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Purchase Department
The purchase department is divided into to two sections, cotton purchase department and store purchase department.
Cotton Purchase Department
Cotton purchase department is most important department in textile industry. Quality of yarn depends upon cotton that has been purchased. It becomes most important when there is business of export. There is no question of compromise on quality. Because your minor mistake may result in huge losses. Moreover you will loss your credibility. From director to cotton selectors all are involved in cotton purchase process.
In AHMAD HASSAN TEXTILE Multan office cotton selector Mr.Qaisar Abbas is receiving maximum salary in the office.
The set up of cotton purchase department is as under
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(i)
Purchase Process
The following steps are involved in the purchase of raw material i.e. cotton.
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Visit of cotton selectors
The cotton selectors of Ahmad Hassan Textile Mills visit the cotton factories. Cotton selectors may visit the factories on their own behalf and some times the cotton factories call them. Their visits are very important because purchase process starts from here.
Selection of sample
Samples are selected from huge amounts of cotton. Samples are taken from different suppliers. These samples are then tested. The most suitable sample at lowest price is selected for Purchase of cotton.
As there is centralized management system so the Director himself takes the decision of selection and purchase of cotton. In other words Director is final authority in making decision.
Store Purchase Department
The store purchase department is headed by Mr. Zafar Bhutter. The setup of purchase department is as under:
Director
Purchase Officer
Assistant Purchase Officer
Purchase Clerk
The store purchase department is responsible for the purchase of items like
Spare parts of machinery, store and Packing material spares, electric items, oil and lubricants, Stationery items, Building Material, and General Store,
DOCUMENTS
· Demand Requisition.
· Invoice of Purchase
· Delivery Order
· In Gate Pass
PROCEDURE
The following is the procedure for local purchase department.
The purchase department receives the demand requisition from store in charge at store at mills this is in fact an intention or requirement of commodities at mill
The purchase demand requisition contains a full detail of quality and quantity of commodities required. It also contains price detail of goods purchased previously
The purchase department on the basis of indent does an inquiry for rate from at least two suppliers from approved suppliers list.
After inquiry Purchase Manager discusses with Director for approval of rate and other necessary requirement.
After the approval the Purchase Department purchases the items from suppliers and sent them to the mill with three copies of delivery orders
In case of no rejection of items store in charge send one copy of delivery order back to the purchase department along with one copy of In Gate Pass. Store in charge also keeps a copy of delivery order and in Gate Pass for his own record.
In case of rejection of items store in charge sends all copies of Delivery Orders with items back to the purchase department at Multan Office of Ahmad Hassan Textile.
Chapter#3
SALES DEPARTMENT
Sales department is one of the important departments in any industry. If a unit produces best quality goods but have not competitive staff then it would be difficult to sell the products. The structure of sales department is as under.
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Ahmad Hassan Textile Mills is selling its product to local as well as in international market. Thus the sales department of the Ahmad Hassan Textile Mills is divided in to two sections
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Local Sales Department
In the beginning Ahmad Hassan Textile Mills Limited its major portion of product to the local market and then it gradually entered in the international market. In 1991 ratio of local sales to total sales was 97.74% but this ratio decreased to 44.90%to total sales of the year 1997.
Procedure
· The following activities are performed in the local sales department.
· The directors receives the order of yarn by Tele phone, fax or e.mail.
· Directors evaluate the capability to fulfill the order by consulting daily stock repot from mills.
· Directors give the instructions to local sales manager that transfer the information on local sale contract slip.
· Before issuing contract slip, sales manager checks the selling limits of the particular party and discusses the matter with Director if it is selling limit
· Sales department writes the three copies of delivery order signed by director
· One copy is dispatched to the mill for issuing goods . after reading the particulars of delivery order store in charge in the factory will issue the goods .
· One copy of delivery order is send to the accounts department and third one is kept for record.
Chapter#4
EXPORT DEPARTMENT
Ahmad Hassan Textile Mills started sales from local market and now major portion of
Production is exported outside Pakistan. The export sales of the company went up
55.08% in 1997 from 2.26 % in1991. The export department is headed by Mian Shahzad Ahmed who is director of the company .The structure of this department is as under:
Export Process
The export process starts from bargaining. A buyer contacts the company for
the purchase of yarn. The contact may directly or through middleman.
When the price and quality of yarn is settled then contact form is filled. The director of the company settles the terms and conditions.
After the settlement of terms and conditions the buyer bank opens L.C. L.Cis of two types. L.C at sight and L.C at usance. L.C at sight means the L.C opening bank shall make the payment as soon as the shipping documents are presented on its counter by the negotiating bank. On the other hand L.C at usance has different periods of maturity varying from 30 days to 150 days.
On receiving original L.C from buyer, seller will dispatch the goods as per detail given in the L.C. After shipment usually following documents are presented to negotiating bank for onward submission to L.C opening bank counter:
1. Commercial Invoice
2. Bill of Lading
3. E Form
4. Bill of Exchange
5. Certificate of Origins
6. Benificiary’sCerificate
7. Certificate from Shipping Company
8. Packing List
1. Commercial Invoice
It is a sort of list which shows what are they exporting showing the
1. Contract
2. LC
3. E Form
4. Shipping Company Name
This commercial invoice is sent to the buyer’s Central Bank. One copy of this invoice is kept in Ahmad Hassan Textile Mills.
2. Bill of Lading
It is a list of goods issued by the shipping line stating that the goods have been loaded on board, freight prepaid and other specifications
3. E Form
Form E is the basic document of export. Government controls foreign exchange through this document. This is most important document. Exporter fills and signs it. Bank also counter signs this form It has four copies The original and duplicate copy is sent to the Custom Department for clearance. After verification the custom department sends the duplicate to Ahmad Hassan and original copy is held by Custom department. The third copy is sent to the negotiating bank. The fourth copy is office copy
4. Bill Of Exchange
A bill of exchange has been defined as an unconditional order in writing by one person to another, signed by the person giving it , requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time , a certain some of money to or to the order of a specified person or to the bearer
5. Certificate of Origin
Chamber of commerce and industry issue this certificate. This certificate only certify the origin
6. Beneficiary’s Certificate
Seller as required by the buyer issues beneficiary’s certificate. Usually the wording of this certificate is as following:
“Certified that goods have been shipped per vessel, shipping company name and the shipping documents have been dispatched to the applicant under L.C#____
7. Certificate from Shipping Company
Shipping company issues this certificate on the request of buyer.
8. Packing List
Packing list contains the detail of all the items being exported. This list shows the carton number, goods description, and gross and net weight of total cartons and each carton
Chapter#5
IMPORT DEPARTMENT
Ahmad Hassan Textile has also an import department. The import department is responsible to import those items, which are not available in Pakistan. The structure of this department is as under:
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Procedure
Senior Manager is responsible for import of machinery, equipment, spare parts, raw material, etc.
· An indent for import of item after the approval of Chief Executive is sent to import department.
· The Senior Manager Import selects a subcontractor from approved suppliers list.
· In reply, a quotation from the subcontractor is received .A copy of quotation is sent to concerned department for evaluation and checking of specification.
· The received items are sending to the mills where these are opened.
The items are checked against quotations. In case of any damage, the import department is informed immediately. Import department do the necessary arrangements for survey of goods from insurance agencies
Chapter # 6
ACCOUNTS DEPARTMENT
Accounting is the art or science of interpreting, measuring, and communicating the results of economic activities whether you are paying your phone bill, balancing your checkbook, preparing your income tax return or managing an international corporation, you are working with accounting. Accounts Manager makes the important financial decisions with consultation of Director and Chief executive of company.
Record of all departments like import department, Export department, Purchase and sale department, are maintained here. So this department feels a burden of work. Accountant is very much busy person who gives instructions to six members of finance department and checks their work time-to-time .His ten-year experience has made the work easier for him. All types of tax rates, recent changes in tax policies, different codes, companies’ names are on his fingertips.
The accounts department is responsible for the entire accounting process of the organization regarding the recording of transactions, designing the accounting policies and accounting system, preparing financial statements and computer application. If we consider a company a cell then we can say that accounts department has role of nucleus.
Without accounts department there is no possibility of doing business even sight weakness’ on the part of accounts department can badly effect the performance of whole organization.
Functions of the Department
Very first and an important function of accounting department is recording the business transactions on vouchers. This is also called process of vouching. This is made for internal record keeping. Auditors specifically audit vouchers. Wrong vouching will lead to error in the system and ultimately create problems.
From vouchers information is recorded in daybook and cashbook. As each voucher along with its invoice, DO and other necessary documents are kept in the record room so daybook is one that can give information about parties DR and name of account CR along with amount.
In order to see accounts in condense form ledger is used. From daybook all the entries are posted in ledger. Ledger represents DR or CR balance of each party. So from ledger we can see amount that is to be paid to a party or the amount that is to be received and the balance at the end of the month.
After this all the DR balances and CR balances of all the parties are posted in trial balance. The trial balance must be equal at both sides. Otherwise there is any error in recording the transactions.
Now trial balance becomes the source of profit and loss and balance sheet.
This department also designs the accounting policies. All the work in this department is being take place on accrual basis.
The department prepares trial balance at the end of every three months and Profit and loss accounts and balance sheet are prepared at the end of year. The financial year ends on september30 of each year. The financial statements are presented to shareholders
The Setup of Department
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The accounting department is mainly divided in to following three sections:
1. Stores section
2. Salaries and Wages Section
3. General Accounting
Store Section:
Store section is mainly concerned with store accounting. This section deals with many accounts heads that are concerned with stores. Such as stores &spare A/C, oil and Lubricant, Packing material A/C, General Store A/C, Building Material A/C and many others. The major responsibilities of this department are
· To record the store purchases
· To record all store issues
· To prepare various reports relating to store i.e. material consumption report, party wise purchase report
To keep a check on all stores by surprisingly checking their record and physical existence of items stored. Because of the above mentioned duties. This section has a key position in the company. No payment is made to any body unless it is checked and verified by this section.
Salaries and Wages Section
This section is responsible of making payments to the employees. This section plays an important role in safeguarding the interest of the company as well as employees. This section also insures all the labor laws; certain laws relating to company are as under:
Leave Procedure
There are three types of leaves.
Sick Leaves
Sick Leaves are eight in year
Casual Leaves
Casual Leaves are ten in each year
Annual or Earned Leaves
There are twelve earned leaves. Company’s rule doesn’t allow any employee to do four-day leave without application. In case any employee does so then he can’t avail annual leaves
Attendance Allowance
Leave encashment is given to those employees who save their holidays and don’t avail them. This is given according to their per day salary multiply with number of days of holidays not availed.
Salaries and Wages
Minimum salary is not less than Rs1950. The breakup of salary is as under
Basic Salary ________
Badli allowance 50
Cost of living Allowance 18% of basic salary
House Rent Allowance 10%of basic salary
Utility Allowance 10% of basic salary
Special Allowance 300
Income Tax
Income tax is deducted from salary of all those employees whose annual salary is greater than Rs.40000.An entry is passed on voucher while deducting income tax and this is paid to tax department
Advances and Loans
Advances and loans are given to the Employees on their application and are adjusted against their salaries every month. It is the sole discretion of the management whether they approve advances and loans are not
Gratuity
Amount of gratuity is deducted from salary of employee with passage of time and he gets a lump sum amount at retiring time
Accounting System
Accounting System at here is centralized and on accrual basis. All accounts are maintained in Multan head office. The process of accounting system starts from the preparation of voucher. The following are different types of vouchers prepared at Ahmad Hassan Textile Mills:
· Journal Voucher
· Bank Voucher
· Payment Voucher
· Credit Voucher
Journal Voucher (JV)
As accounting system is on accrual basis, so accounting entries are passed on journal voucher at first step. This is also known adjustment voucher. This is prepared for adjusting entry. Vouchers are prepared after every transaction. Accounts Manager and Director verify the voucher respectively. If they have any question they can ask relevant person if there is no enquiry then they will put their signatures on voucher. Now it is time to record these vouchers in books of accounts.
Bank Voucher (BV)
Bank voucher is used when any transaction is made with bank . Amount may be drawn from bank and can be deposited in bank. You can receive DR advice or CR advice from bank
DR Advice
When issued by bank, it means bank has deducted some amount from your account or when has been made through your account
CR Advice
When issued by bank to you, it means some amount has been added in your account .It normally takes place when some foreign remittances has been received by bank in your account. This is usually sent by your customer in foreign country to which exports has been made.
Payment Voucher
This voucher is prepared at the time of making payments to any party. Party name is debited with the amount to which payment has been made. Payment vouchers are used for the payment up to Rs.5000. Payments more than this are made through bank
Credit Voucher
As name of voucher represents, this voucher is prepared when some amount is received from any party. In this case party name is credited by the amount that has been received
Important Books
· Cash Book
· Bank Book
· Bought Day Book
· Sale Day Book
Cash Book
In this book cash payment and cash receipt vouchers are recorded on daily basis. The vouchers are numbered serial wise and cash-closing balance is calculated on daily basis.
Bank Book
This book is maintained for all the bank accounts of the company. When any amount is withdrawn or deposited in the bank that amount is also recorded in the bankbook. At the end of month bank account is reconciled with the statements of the banks
Bought Day Book
The bought daybook is maintained for recording the purchases made by the company. The balances from the bought daybook are entered in the relevant supplier ledgers. At the end of the month the balances from the bought day book is posted in the main ledger for control purposes
Sale Day Book
In this book sale bills are entered and then posted in the customer ledger. At the end of month balances are posted in the main ledger for control purposes.
When the transaction is properly recorded in the books of accounts then these balances are posted in the ledgers.
The following are the types of ledgers maintained in this organization.
Main ledger
Profit &Loss Ledger
Customer Ledger
Supplier Ledger
Staff Ledger
Main Ledger
It is a control ledger, which maintain all heads of accounts from which balance sheet is prepared. All assets and liabilities accounted, profit&loss, customer, supplier and personal Ledger are maintained in it. Posting of sub ledger is made in main ledger on closing of month. From basic books like cashbook, bank book, bought daybook and sale daybook. At the end of month trial balance is prepared to check the accuracy of accounts maintained during the month by observing the debit and credit balance as they are equal or not.
Profit and Loss Ledger:
In profit and loss ledger all accounts of income and expenses are maintained .The following are the heads of accounts maintained in the profit and loss ledger:
· Sales Account
ü Local Sales
ü Export Sales
· Commission on sales
· Excise duty on yarn
· Export development Charges
· Manufacturing Expenses
· Administration Expenses
· Selling Expenses
· Financial Charges
· Miscellaneous Charges
Manufacturing Expenses
They are like purchase of cotton, wages and salaries, fuel and power, insurance, repair and maintenance of plant, packing material and depreciation.
Administration Expenses
These are traveling expenses, salaries, communication expenses like fax, phone and telex, rent, electricity, entertainment, advertising, vehicleup charges, depreciation, printing and stationary expenses
Selling Expenses
These include export expenses, corporate freight, ocean freight, trailer freight and local selling expenses
Financial Charges
They are like interest on long term loan , markup on short term finances , exchange risk coverage fee , commission on bank guarantees , letter of credit commission , excise duty on long term and short term finances.
Miscellaneous Charges
Miscellaneous charges include auditors fee, legal and professional charges, donations, fines and penalties.
Customer Ledger
It is maintained by company in which all accounts are opened to whom the company sells yarn. Posting in customer ledger is made from cashbook, bankbook and daybook. The balances of customers are worked out daily and the report of receivables is prepared daily and submitted to the management.
Supplier Ledger
In supplier ledger the goods supplied by the parties is recorded. Party’s account is credited and goods purchased are debited.
Personal Ledger
To record all transactions relating to the personal accounts of employees of the company, this ledger is used. Advances and loans made to the employees, and the monthly deductions from their accounts of loans are recorded.
Illustration of important Accounting Entries
Purchases:
DR CR
Packing Material 122740
Sale tax 18411
Ghani Packages 141151
Description:
ü Purchases of packing material from supplier (Ghani Packages).
ü Sale Tax amount is 15%of agreed amount.
ü Sale tax treatment is as expense because company is paying to supplier.
ü This entry is made on (JV)
Ghani Packages 141151
I. Tax Payable 4296
MCB 1840—3 136855
Description:
ü This entry will be recorded on payment
ü Income tax rate is 3.5% on amount excluding sale tax i.e. (122740x3.5%)
ü Here income tax is collected from the party and paid to the CBR
ü Bank is credited because payment is being made and amount is reducing from bank account.
ü The entry will be made on (B.V)
ü This entry is contra to first one
Sales:
DR CR
IDM 792350
Sale of Yarn 689000
Sale Tax 103350
Description
ü This is sale made to buyer (IDM)
ü Here again rate is 15% (689000x15%)
ü Sale tax is collected from the buyer and will be paid to sale tax department that is why sale tax is not treated as expense, but was credited
ü This entry will be made on (JV)
Bank (1840—3) 764617
Advance I. Tax 27732
IDM 792350
Description:
ü This entry is made on receipts from buyer.
ü Advance income tax is paid to the buyer @3.5% on amount including sale tax.
ü I. Tax is calculated on amount excluding sale tax.
ü This entry will be made on (BV).
Adjustment of Realization:
Name of Party: Bolan Trading
Bank Ref: 53/102
Contract no: 010
Invoice Number: 027
Exchange Rate: 63.95
Calculation of amount of Realization in case of exports to Bolan Trading situated in America.
$ Rs
Invoice Value 37758.06
Realized Value 37713.06
Foreign Bank Charges 45.00 2878
Local Bank Charges 4035
Total Export Bank Charges 6913
With holding charges 30147
Credit Advice 2377568
Total 2441628
Sale Already Booked 2337224
Exchange Gain /Loss 77404
Calculation of with holding tax and Bank charges
With holding Tax @ 1.25%
Realized value X Exchange rate
37713.06 X63.95 = 241175X1.25%=30147
Bank Charges @ .13%
Realized value X Exchange rate
37713.06X63.95= 241175X.13% = 3135
Postage +900
Local Bank Charges = 4035
Description
This is calculation of exchange gain or loss. This gain or loss occurs due to change in foreign exchange rate, increase in rate result gain and decrease in rate result in loss.
Invoice value is agreed price at which sale has been decided
Realized value is the amount received after deduction of foreign bank charges
DR CR
MCB 2377568
With holding 30147
Export bank charge 6913
Bolan Trading 2337224
Exchange gain 77404
Description
ü The amount Rs.2377568 is written on credit advice sent by bank
ü Bolan trading is credited with the amount written on sale invoice
ü Exchange gain is difference of sum of credit advice amount, withholding tax, export bank charges and sum of invoice value.
ü This entry is recorded on (B.V)
Chapter#7
INTERNAL AUDIT DEPARTMENT
Audit means checking the accounts prepared by others with a view to express an opinion. An auditor is appointed to go through the accounting and other records.
Internal audit is essential for large-scale companies. It is a review of operations and records under taken within a business by specially assigned staff. The management can appoint staff to go through the business activities. The suggestions given by auditors can be applied for the business benefit.
This organization has also a separate department for performing the internal audit. The internal auditor heads this department. The audit department develops audit program before conducting an audit. this department works on continual basis. The internal auditor of the company visits the mill on weekly basis and conducts the audit according to the checklist framed by the internal audit department. The department is responsible to keeps its eyes on the implementation of management policies. This department is also responsible to inform the top management regarding the accuracy of all accounting information and their analysis
Main Functions of the Internal Audit Department
Following are the main functions of internal audit department:
Revision of the System
The internal audit department revises the system if there arises any discrepancy.
Check on the System
The internal audit department checks whether the revised system is being followed or not, if there arises any deviation that is reported to the management.
Check on the Management Policies
This department also examines whether management policies are being followed or not
Proper maintenance of books of accounts
The internal audit department also examines that whether books are being properly maintained as required by the Companies Ordinance 1984.
Assets Safeguarding
This department also safeguards the company’s assets.
Main Functions of Internal Audit Department at the Head Office Multan.
q Checking of posting from clock cards to wages sheets
q Price Checking
q Recovery of advances
q Checking of rebates and discounts
q Continuous checking of assets of the company
q Checking of Bank vouchers, Journal vouchers, Payment vouchers, Credit vouchers
q Checking of trial balance statement after every three months.
q Checking of bank reconciliation statements every month.
q An internal auditor can check any document at any time or can ask the accountant to provide the necessary documents.
Chapter # 8
RATIO ANALYSIS
An index that relates two accounting numbers and is obtained by dividing one number by the other.
To evaluate a firm’s financial condition and performance, the financial analyst needs to perform “checkups” on various aspects of the firm’s financial health. A tool frequently used during these checkups is a financial ratio, or, index, which relates two pieces of financial data by dividing one quantity by the other.
Why bother with a ratio? Why not simply look at the raw numbers themselves?
We calculate ratios because in this way we get comparison that may prove more useful than the raw numbers themselves. For example, suppose that a firm had a net profit figure this year of $1 million. That looks pretty profitable. But what if the firm has $100million invested in total assets. Dividing net profit by total assets, we get$1M/$100M= .01, the firms return on total assets. The .01 figure means that each dollar of assets invested in the firm earned a 1 percent return. A saving account provides a better return on investment than this, and with less risk. In this example the ratio proved quite informative.
Expression of Ratios:
Ratios can be expressed in the following ways:
· Actual ratios are arrived at by dividing one number by another e.g. current assets to current liability is 2:1
· Ratio between two numerical facts usually over a period of time e.g. Stock turnover is three times a year.
· Ratio between two numerical may be expressed in percentage.
Advantages of Ratio Analysis.
Through ratio analysis we can evaluate the financial health, operation efficiency and profitability.
It gives a chance of inter firm comparison to measure efficiency and helps management to resort some remedial measures.
Trend analysis helpful toward planning and forecasting.
It provides good help in decision making for investors and to the financial institutions.
Classification of ratios:
· Liquidity Ratios
· Financial Leverage or Debt Ratios
· Activity Ratios
· Profitability Ratios
1. Liquidity Ratios
Liquidity ratios are used to measure a firm’s ability to meet short-term obligations. From these ratios, much insight can be obtained into the present cash solvency of the firm and the firm’s ability to remain solvent in the event of adversity.
a. Current Ratio:
One of the most general and frequently used of these ratios is the current ratio:
Formula:
Current Assets/ Current Liabilities
Year 1999 2000
Ratio .81 1.04
Description
Above figures show that in 1999 firms ability to covers its current liabilities is much lower and firm has more current liabilities than its current assets.
In year 2000 firm’s condition is much better than year 1999 and firm’s current ratio is 1.04. That shows, the firm has 1.04 times more current assets than current liabilities. The standard of this ratio is 2:1
b. Acid Test Ratio:
A more conservative measure of liquidity is acid test or quick ratio. It shows a firm’s ability to meet current liabilities with its most liquid assets.
Formula.
Current Assets-Inventories/Current Liabilities
Year 1999 2000
Ratio .42 .71
Description
This ratio serves as a supplement to the current ratio in analyzing liquidity. This ratio is same as current ratio except that it excludes inventories. The ratio concentrates primarily on the more liquid current assets, cash, and receivables. In relation to current liabilities.
Thus this ratio provides a more penetrating measure of liquidity than current ratio.
Above figure show that in 1999 quick ratio is .42, which means company’s liquid assets, are less than ½ of its liabilities. While in year 2000 the condition is better than it was in 1999.The standard of this ratio is 1:1.
2. Financial Leverage (Debt) Ratios.
Ratios that simply show the extent to which firm is financed by debt.
a. Debt to Equity Ratio
To assess the extent to which the debt financing is used relative to the equity financing. The debt to equity ratio is computed by simply dividing the total debt of the firm by its shareholders equity:
Formula
Total debt/Shareholders’ Equity
Year 1999 2000
Ratio 8.6 2.01
Description.
Above figure in 1999 of 8.6 shows that total debt including current liabilities is 8.6 times greater than total shareholder’s equity. It means company dependence on debts is much higher and there is very small portion of shareholders equity.
While in year2000 the company has improved its performance by lowering its dependence on loans. The figure2.01 shows that total debt is 2.01 higher than shareholders equity.
b. Debt to total Assets Ratio
This type of leverage ratio shows the percentage by which firm’s assets are financed by debt. This is calculated by dividing Total debt to Total asset.
Formula
Total Debt/Total Asset
Year 1999 2000
Ratio 66% 44%
Description:
Thus in 1999 66% of the firms assets are financed by with the debt while remaining 33% assets are financed by shareholders equity. Similarly in 2000 44% of the firms assets has been financed with the debt and remaining 56% assets are financed by shareholders equity.
3. Activity Ratios:
These ratios are also known as efficiency or turnover ratios. Measures how effectively a firm is using its assets. It is calculated by dividing cost of goods sold by average inventory or by dividing Net sales by Inventory.
a. Inventory turnover Ratio:
Formula
Cost of Goods Sold/Average Inventory OR
Net Sales/Inventory
Year 1999 2000
Ratio 7.69 15.06
Description:
In 1999 the figure of 7.69 shows that inventory is being converted in to sales 7.69 times in a given year. While in year 2000 this turnover has increased to 15.06. Generally, the higher the inventory turnover, the more efficient the inventory management of the firm, and the “fresher” more liquid, the inventory.
Relatively low inventory turnover is often a sign of excessive, slow moving or obsolescence items in inventory.
b. Total Assets turnover:
The total asset turnover ratio tells us the relative efficiency with which a firm utilizes the total assets to generate sales. this is calculated by dividing the net sales with total assets.
Formula:
Net Sales/Total assets
Year 1999 2000
Ratio 1.6 1.99
Description:
In the above figure, in the year 1999 total asset turnover ratio is 1.6 that means each Rupee of company assets is generating Rs1.6 of sales. While in year 2000 each Rupee of company assets is generating Rs 1.99 of sales. This shows that the company has improved its performance in the year2000.
4. Profitability Ratios:
Profitability Ratios are of two types --- those showing profitability in relation to sales and those showing profitability in relation to investment. Thes ratios indicate the firm’s overall effectiveness of operation.
Profitability in Relation to Sales
a. Gross profit ratio
This ratio tells us the profit of the firm relative to sales, after we deduct the cost of producing goods. It also shows how much a firm is effective in producing and selling goods above cost.
Formula:
Gross Profit/Net Sales
Year 1999 2000
Ratio 13.08% 20.92%
Description:
In year 1999 the gross profit ratio is 13.08% which means gross profit is 13.08% of total net sales of company in the year 1999.In the year 2000 the firm’s gross profit ratio shows that firm is more effective in producing and selling goods above cost by showing its gross profit ratio 20.92%.
b. Net Profit Ratio
The net profit margin is a measure of the firm’s profitability of sales after taking account of all expenses and income taxes. It tells us a firm’s net income per dollar of sales
Formula
Net profit/Net Sales
Year 1999 2000
Ratio 2.19% 8.19%
Description:
In the year 1999 the firm’s profitability after taking account of all expenses and income taxes is 2.19% of net sales. We can say that firm’s net income per Rs of sales is 2.19%.
In the next year firm’s net income per Rs of sales is 8.19%. This is about four times greater than it was in last year.
Profitability in Relation to Investment
The second group of profitability ratios relates profit to investment.
Return on Investment (ROI)
Measures overall effectiveness in generating profits with available assets, earning power of invested capital.
Formula:
Net profit after tax/Total asset
Year 1999 2000
Ratio 3.5% 16.34%
Description:
In the year 1999 the firm has earned profit after tax 16,702,282 and in2000 the profit after taxation was Rs 70,626,918. Due to this there is large difference in both ratio figures. In year 1999 the figure 3.5% shows that each Rs of total assets is generating 0.035 paisa of net income. Similarly in year 2000 each Rs of asset is generating 0.163 paisa of net income.
Contents
Chapter 1 Introduction 1
Chapter 2 Commercial Department 5
Chapter 3 Sales Department 11
Chapter 4 Export Department 13
Chapter 5 Import Department 17
Chapter 6 Accounts Department 19
Chapter 7 Internal Audit Department 36
Chapter 8 Ratio Analysis 39
Acknowledgement
All praises to Allah who is the most gracious, merciful and beneficent. Blessing to Muhammad (Sallalla-ho-alai-hi-Wassallam) the last prophet of Allah. I am highly grateful to my Lord, The blessing of whose enabled me to complete my internship report at this level.
I have great affection and fondness for Mr. Muhammad Kamran Shahzad, Accounts Manager a genius, cool and polite personality. I shall remember his ample co-operation.
I am grateful to my supervisor Mr. Javid Anjum and co-coordinator Mr. Muhammad Rizwan. He directed me in a precise way in every nick and corner of my work. His direction and valuable remarks during the internship programme eased many of my difficulties.
PREFACE
Practice makes man perfect. A student must be given an opportunity to work in the practical environment. During the two years of my M.Com, I think these two months of training period have provided me that knowledge, which perhaps was impossible through only reading books and solving the questions. I am thankful to my department of commerce that gave me a chance to work in the practical environment.
INTERNSHIP REPORT
OnAHMAD HASSAN TEXTILE MILLS LIMITED
Prepared By:
ABDUL REHMAN AKBAR
M.Com (Final)
Examination Roll # 119
Session 1999-2001
Department of Commerce
BAHAUDDIN ZAKARIYA UNIVERSITY, MULTAN
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