ACCOUNTING IN ACTION

Definition of Accounting:

“Accounting is a services activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is to be useful in making economic decisions, in making reasoned choices among alternative courses of action.” ---- AICPA (1970).

Accounting is defined as “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.” --- AAA (1966).

Objectives of Accounting:

Making decisions concerning the use of limited resources, including the identification of crucial decision areas and determination of objectives and goals.
Effectively directing and controlling an organization’s human and material resources.
Maintaining and reporting on the custodianship of resources.
Facilitating social functions and controls (with respect to taxation, detection and protection of frauds, government control on public utility services, government incentives for encouraging trade and commerce, statistics on economic activities, et.).

Scope of Accounting:

Data Creation and Collection: Historic and Predictive
Data Recording using Accounting Methods (GAAP) and Data Processing (Manual, Mechanical and Electronic)
Data Evaluation that includes:
(a) Budgetary Control including Standard Costing and Variance Analysis
(b) Performance Analysis
(c) Cash Flow Analysis
(d) Analysis and Interpretation of Accounting Information (for external and internal decision makers)
(e) Auditing
Data Reporting to internal management (according to their demand) and external stakeholders (financial statements and notes accompanying those statements)
Accounting Theory in the heart of the above.

Information Needs of the Users of Financial Statements

According to paragraph 9 of the Framework for the Preparation and Presentation of Financial Statements of the IASB (International Accounting Standards Board), the users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their different needs of information. These needs include the following:
(a) Investors: The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the enterprise to pay dividends.
(b) Employees: Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.
(c) Lenders: Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.
(d) Suppliers and other trade creditors: Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuation of the enterprise as a major customer.
(e) Customers: Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise.
(f) Governments and their agencies: Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and as the basis for national income and similar statistics.
(g) Public: Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.
Role of Accounting:

Role as watchdogs – scorekeeping function (recording data for a later evaluation of performance)
Role as helpers – (1) attention directing function (reporting and interpretation of information for the purpose of focusing on inefficiencies of operation or opportunities for improvement); and (2) problem solving function (presenting a concise analysis of alternative courses of action)
Role as decision maker – regarding information decision for choosing needed information for action choice
Role as an associate with business world – maintaining records and documents of organizations, preparation and presentation of financial statements through which capital investments are invited, credit-worthiness is verified and basis for income tax determination is found
Role as a professional – doing auditing, tax consultancy, other professional services as a ‘person of trust’
Role as technicians – being skilled in business management techniques working as a part of management and as an external consultant on different issues such as accounting system design, short- and long-term planning, etc.

Functions of Accounting:

Types of Accountants
Areas of Accounting
Financial Accounting
Management Accounting
Tax Accounting
Private Accountants (accountants employed in private firms)
Preparation of financial statements
General accounting, Cost accounting, Preparation of budgets, Internal audit
Preparation of tax return, Tax planning
Public Accountants (independent professional accountants for public services)
Audit of financial statements
Advisory services to management
Preparation of tax return, Tax planning
Government Accountants (accountants employed in government units)
Preparation of financial statements, Review of financial statements, Writing regulation, Investigation of violation of laws
General accounting, Cost accounting, Preparation of budgets, Internal audit
Review of tax return, Help to taxpayers, Writing regulation, Investigation of violation of laws
Forensic Accountants (accountants hired by both private and government units)
1. Detection of:
· Preparators of theft and frauds in corporate entities;
· money-laundering;
· identity-theft;
· tax evasion;
· insurance frauds such as arson;
2. Identification of materials assets in divorces

Parties involved with Accounting and Users of Accounting Information:

Generally Accepted Accounting Principles (GAAP)
Accounting Standards-Setters

Auditors
Users of Accounting Information
Financial Statements
Audit Reports
Auditing Standards-Setters
Generally Accepted Auditing Standards (GAAS)
Preparers of Financial Statements
Internal Users:
Management
External Users:
- Investors (owners)
- Employees
- Lenders
- Suppliers and other trade creditors
- Customers
- Government and its representatives
- Public
- Regulatory agencies



















Accounting as an Information System:

An accounting system consists of the personnel, procedures, devices, and records used by an organization (1) to develop accounting information and (2) to communicate this information to decision makers. The basic purpose of the accounting is to meet the organization’s needs for accounting information as efficiently as possible.

Many factors affect the structure of the accounting information system (AIS) within a particular organization. Among the most important are (1) the organization’s needs for accounting information and (2) the resources available for operation of the system.

Viewing accounting as an information system focuses attention on the information accounting provides, the users of the information, and the support for financial decisions that is provided by the information. These relationships are depicted below:


Decisions Supported:
- Performance evaluations
- Stock investments
- Tax strategies
- Labour relations
- Resource allocations
- Lending decisions
- Borrowing

Information Users:
- Managers
- Investors (owners)
- Employees
- Lenders
- Suppliers and other trade creditors
- Customers
- Government and its representatives
- Public
- Regulatory agencies

ACCOUNTING AS AN INFORMATION SYSTEM




Financial Information Provided:
- Profitability
- Financial Position
- Cash Flows


Output of Accounting – Financial Statements:

The output of accounting process is called ‘financial statements.’ In the general sense of the word, a statement is simply a declaration of something believed to be true. A financial statement is simply a monetary declaration of what is believed to be true about an enterprise. When accountants prepare financial statements, they are describing in financial terms certain attributes of the enterprise that they believe fairly represent its financial activities.

According to paragraph 7 of International Accounting Standard (IAS) 1, a complete set of financial statements includes: (a) balance sheet; (b) income statement; (c) statement of changes in equity; or statement of changes in retained earnings; (d) cash flow statement; and (e) accounting policies and explanatory notes.

Accounting Process/Cycle:

The sequence of accounting procedures used to record, classify and summarize accounting information is often termed as accounting cycle. In another way, the procedures established by every business unit to provide the data to be reported on the financial statements are collectively referred to as the accounting process or accounting cycle. The term ‘cycle’ indicates that these procedures must be repeated continuously to enable the business to prepare new up-to-date financial statements at reasonable intervals. In a broader coverage, the accounting cycle includes the following steps:

1. Identification of transactions: Occurrence of transactions explicitly (affecting the concerned business unit for an involvement with an external party) or implicitly (such as depreciation occurring as the result of ownership of a fixed asset, consumption of office supplies purchased earlier and recorded as asset), where the financial effect is measurable in definite monetary terms and then preparation or collection of source documents of those transactions to ensure their objectivity of occurrence.
2. Journalizing (Journalize or record transactions): Enter all transactions in the journal by analyzing them into debit(s) and credit(s) accounts, thus creating a chronological record of events.
3. Posting to the ledger (Posting to ledger accounts): Post debits and credits from the journal to the proper ledger accounts with a running balance, thus creating a record classified by accounts.
4. Preparation of a trial balance: Prove the equality of debits and credits in the ledger.
5. Adjusting entries (Make end-of-period adjustments): Make adjusting entries in the general journal and post to ledger accounts. The purpose is to assign to each accounting period appropriate amounts of revenue and expenses Adjusting entries are made to: (i) convert assets to expenses result from cash being paid prior to an expense being incurred, (ii) convert liabilities to revenues result from cash being received prior to revenue being earned, (iii) accrue unpaid expenses result from expenses being incurred before cash is paid, and (iv) accrue uncollected revenue result from revenue being earned before cash is received.
6. Preparation of an adjusted trial balance: Prove again the equality of debits and credits in the ledger. Note that the figures mentioned in the adjusted trial balance are the amounts used in the preparation of financial statements.
7. Preparation of financial statements and appropriate disclosures: Financial statements prepared include: income statement (showing the results of operations of the concerned enterprise for the period concerned), statement of changes in retained earnings (showing the changes in the retained earnings during the period), balance sheet (showing the financial position of the enterprise at the end of the period), and cash flow statement (showing the results of cash activities for the period). Financial statements should be accompanied by notes disclosing facts and accounting policies necessary for the proper interpretation of those statements.
8. Closing entries (Journalize and post the closing entries): The closing entries “zero” the revenue, expense, and dividends accounts, making them ready for recording the events of the next accounting period. These entries also bring the balance in th Retained Earnings account up-to-date.
9. Preparation of a post-closing trial balance: This step ensures that ledger remains in balance after posting of the closing entries.
10. Reversing entries: Reversing entries eliminate those accounts originated at the time of giving adjusting entries, which are not listed in the chart of accounts (the complete list of all ledger accounts). This step ensures that ledger remains with the accounts listed in the chart of accounts.


Financial Statements

According to paragraph 7 of IAS 1 (revised 1997), Presentation of Financial Statements, a complete set of financial statements includes the following components:
(a) balance sheet;
(b) income statement;
(c) a statement showing either:
(i) all changes in equity [i.e., statement of changes in equity]; or
(ii) changes in equity other than those arising from capital transactions with owners and distributions to owners [i.e., statement of changes in retained earnings];
(d) cash flow statement; and
(e) accounting policies and explanatory notes.

Balance Sheet:

It refers to the list of an entity’s (enterprise’s) assets, liabilities and owner’s equity as of a specific date. It is also called a statement of financial position. Asset means a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Liability means a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Equity means the residual interest in the assets of an enterprise after deducting all its liabilities.

Income Statement:

It refers to the list of an entity’s (enterprise’s) revenues, expenses and net income or loss for a specific period. It is also called a operating statement or a statement of operation. Income is defined as the increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. The term revenue means the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Expenses means the decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Statement Changes in Retained Earnings:

It refers to the financial statement showing summary of changes in the retained earnings during a specific period. Retained earnings is the portion of owners’ (shareholders’) equity created by earning net income and retaining the related resources in the business.

Statement Changes in Equity:

It refers to the financial statement showing summary of changes in owners’/shareholders’ equity (i.e., the capital and retained earnings) during a specific period.

Cash Flow Statement (CFS):

It is the financial statement that reports the impact of a firm’s operating, investing, and financing activities on cash flows during a specific period (between two balance sheet dates). Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the equity capital and borrowings of the enterprise. The main purpose of a CFS is to provide information to decision makers about a company’s cash inflows and outflows during the period.

Accounting Policies and Explanatory Notes:

According to paragraph 21 of IAS 1, “Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements.” Explanatory Notes are the important accompanying part of the basic financial statements. According to the principle of adequate disclosure (the most important accounting policy to the users of accounting information), the financial statements should be accompanied by any information necessary information for the statements to be interpreted properly. Since the basic components of the financial statements are always a summary presentation, most disclosures appear within the several pages of notes that accompany the financial statements. The explanatory notes to the financial statements of an enterprise should (i) present information about the basis of preparation of the financial statements and the specific accounting policies selected and applied for significant transactions and events; (ii) disclose the information required by regulatory provisions that is not presented elsewhere in the financial statements; and (iii) provide additional information which is not presented on the face of the financial statements but that is necessary for a fair presentation.

Relationships among Financial Statements:

All the financial statements are related to an accounting period, which is usually a year. At the beginning and ending points in time of that accounting period, an enterprise prepares the balance sheet that gives a static look in financial terms of where the enterprise stands. The other financial statements (income statement, statement of changes in equity/retained earnings, and cash flows statement) cover the intervening period of time between the two balance sheets and help explain important changes that occurred during the period.

From balance sheet, we understand where an enterprise stands financially at two points in time. From income statement, we understand the changes that occurred during the intervening period in terms of the enterprise’s profit-seeking activities. From statement of changes in retained earnings, we understand the changes that occurred during the intervening period in terms of the enterprise’s earnings and distribution/appropriation of those earnings. From statement of changes in equity, we understand the changes that occurred during the intervening period in terms of the enterprise’s earnings and distribution/appropriation of those earnings and in addition the changes in terms of capital transactions of the owners. From cash flows statement, we understand the changes that occurred during the intervening period in terms of the enterprise’s cash activities.

Specimen Financial Statements of BEXIMCO INFUSIONS LTD.:

Below is the presentation of two-year comparative financial statements of Beximco Infusions Ltd.
INCOME STATEMENT
For the Year Ended 31 December

STATEMENT OF CHANGES IN RETAINED EARNINGS
For the Year Ended 31 December

2002
2001


2002
2001

Taka
Taka


Taka
Taka
Revenue from Sales
328,288,005
314,977,227

Retained Earnings at


Cost of Goods Sold
(192,857,430)
(172,353,390)

beginning of the year
117,600,234
80,411,015
Gross Profit
135,430,575
142,623,837

Add: Net Profit after Tax
35,003,485
51,168,724
Operating Expenses
(76,119,117)
(66,464,723)

Less: Appropriation for


Profit from Operation
59,311,458
76,159,114

Tax-holiday Reserve
(12,180,260)
(13,979,505)
Finance Cost
(20,509,022)
(19,847,934)

Less: Appropriation for


Net Profit before



Dividend of Previous Year
(10,000,000)
-
Contribution to WPPF
38,802,436
56,311,180

Retained Earnings at


Contribution to WPPF
(1,847,735)
(2,681,485)

end of the year
130,423,459
117,600,234
Net Profit before Tax
36,954,701
53,629,695




Income Tax Expense
(1,951,216)
(2,460,971)




Net Profit after Tax
35,003,485
51,168,724


















BALANCE SHEET
As on 31 December

CASH FLOWS STATEMENT
For the Year Ended 31 December

2002
2001


2002
2001
ASSETS:
Taka
Taka


Taka
Taka
Non-Current Assets
322,788,211
328,278,824

Cash Flows from


Property, Plant and



Operating Activities
24,878,144
50,141,380
Equipment - Carrying Value
322,189,061
327,679,674

Cash Flows from


Long-term Security Deposit
599,150
599,150

Investing Activities
(6,368,182)
(249,754)
Current Assets
232,219,916
189,808,694

Cash Flows from


Inventories
84,028,954
65,958,351

Financing Activities
(24,057,003)
(46,287,461)
Accounts Receivable
105,971,668
81,833,340

Net Increase/(Decrease)


Advances and Deposits
41,624,542
35,875,210

in Cash & Cash Equivalents
(5,547,041)
3,604,165
Cash and Cash Equivalent
594,752
6,141,793

Cash & Cash Equivalents


Total Assets
555,008,127
518,087,518

at beginning of the Year
6,141,793
2,537,628
EQUITY & LIABILITIES



Cash & Cash Equivalents


Shareholders' Equity
341,666,665
316,663,180

at end of the Year
594,752
6,141,793
Issued Share Capital
100,000,000
100,000,000




Tax-holiday Reserve
111,243,206
99,062,946




Retained Earnings
130,423,459
117,600,234




Non-Current Liabilities
16,342,110
34,629,164




Long-term Borrowing
12,790,437
31,561,454




Deferred Liability -






Provision for Gratuity
3,551,673
3,067,710




Current Liabilities
196,999,352
166,795,174




Short-term Borrowings
103,616,455
81,156,940




Long-term Borrowing -






Current Maturity
38,371,311
31,561,454




Loan from Associated






Undertaking
-
10,775,000




17% Debenture -






Current Maturity
1,363,964
3,222,673




Creditors and Other






Payables
35,472,186
22,428,730




Accrued Expenses
10,965,723
10,502,897




Dividend Payable
415,000
1,145,350




Provision for Income Tax
6,794,713
6,002,130




Total Liabilities
213,341,462
201,424,338




Total Liabilities and






Shareholders' Equity
555,008,127
518,087,518











Profit versus Cash Flow:

There is a misconception that a profitable enterprise has no liquidity (cash availability) problem. Under conventional accrual basis accounting, in measuring periodic profit, periodic revenue is offset by all the expenses incurred in producing that revenue. Revenue is the price of goods and services rendered during a given accounting period. Expenses are the costs of the goods and services used up in the process of earning revenue. Here the accounting principle followed is called the matching principle which ascertains the relationship between revenues and expenses. Here timing is an important factor in matching (offsetting) revenue with related expenses. In case of preparing annual income statement, one year’s expenses are offset against only that year’s revenues. Thus it is often required at year-end to provide adjusting entries to calculate the periodic revenues and expenses. Adjusting entries are made to: (i) convert assets to expenses result from cash being paid prior to an expense being incurred, (ii) convert liabilities to revenues result from cash being received prior to revenue being earned, (iii) accrue unpaid expenses result from expenses being incurred before cash is paid, and (iv) accrue uncollected revenue result from revenue being earned before cash is received. Due to this type of adjusting entries, profit and cash flows are not an alternative to other. In case of full cash transactions (that means, there is no credit transactions), profit will be fully realized in cash, but this is only cash inflow from operating activities (in case of loss, this will be an operating outflow of cash). Here, cash flow from operating activities can be shown as follows:

Cash flow from operating activities
=
Net Profit
–
Noncash Income
+
Noncash Expense
–
Non-operating
Income
+
Non-operating
Expense

Cash flows (inflow or outflow) may be generated by financing activities and also by investing activities. Thus, due to cash flows from other activities (financing or investing), an enterprise may have adequate liquidity but that does not mean that it is a profitable enterprise. It is noted here that the wealth of the owners of an enterprise (shareholders in case of corporate entities) is based upon the movement of cash and accounting policies and conventions should have no effect upon the value of the enterprise. This means that pure accounting or book entries (noncash items) should be excluded in case of financial management decisions.

Analysis of Financial Statements

Financial Statement Analysis

Financial statement analysis involves the application of analytical tools to financial statements and supplemental data included with the financial statements to enhance the ability of decision makers to make optimal decisions.

How can we determine:
The ability of an organization to pay loans?
Whether we are earning a fair return on our investment?
The adequacy of cash flow to pay operating expenses?
How to improve the overall performance of the company?
The best answer is: Financial Statement Analysis.

Limitations of Financial Statement Analysis

· When comparing companies and interpreting financial statement analysis, differences in accounting methods and cost flow assumptions need to be considered.
· Ratios of a company should be compared with industry standards.
· Rather than focus on a single ratio, decision makers need to evaluate a company by comparing ratios to those of previous years, budgeted amounts, and industry standards.
· Financial statements, and thus financial ratios, are prepared using historical costs and are not adjusted for the effects of increasing prices.

Horizontal analysis

Horizontal analysis is used to analyze changes in accounts occurring between years.
Example
BEXIMCO INFUSIONS LIMITED
INCOME STATEMENT for the Year Ended December 31, 2001 and 2002



2002
2001
Increase
Increase





(Decrease)
(Decrease)



Taka
Taka
Taka
%
Revenue from Sales


328,288,005
314,977,227
13,310,778
4.2
Cost of Goods Sold


(192,857,430)
(172,353,390)
(20,504,040)
11.9
Gross Profit


135,430,575
142,623,837
(7,193,262)
(5.0)
Operating Expenses


(76,119,117)
(66,464,723)
(9,654,394)
14.5
Administrative Expenses


(2,829,105)
(2,534,032)
(295,073)
11.6
Selling & Distribution Expenses

(73,290,012)
(63,930,691)
(9,359,321)
14.6
Profit from Operation


59,311,458
76,159,114
(16,847,656)
(22.1)
Finance Cost


(20,509,022)
(19,847,934)
(661,088)
3.3
Net Profit before Contribution to WPPF
38,802,436
56,311,180
(17,508,744)
(31.1)
Contribution to WPPF


(1,847,735)
(2,681,485)
833,750
(31.1)
Net Profit before Tax


36,954,701
53,629,695
(16,674,994)
(31.1)
Income Tax Expense


(1,951,216)
(2,460,971)
509,755
(20.7)
Net Profit after Tax


35,003,485
51,168,724
(16,165,239)
(31.6)

Changes in the Income Statement are analyzed above using the horizontal analysis.

A few results with respect to the income statement items of Beximco Infusions Ltd. have been given below to show the changes from 2001 to 2002:

Sales increased by 04.2%
Cost of goods sold increased by 11.9%
Total operating expenses increased by 14.5%
Operating income decreased by 22.1%
Net income decreased by 31.6%

Note that focusing on net income without looking at other changes in income statement items would definitely be a mistake in this case. From 2001 to 2002, although sales revenue has been increased by an small amount (4.2%), the gross profit has been decreased by higher figure (5.0%) and operating income decreased by over 22%. Net after-tax income has been decreased by a greater amount (31.6%).

Changes in the other financial statements are analyzed below using the horizontal analysis.

BEXIMCO INFUSIONS LIMITED
STATEMENT OF CHANGES IN RETAINED EARNINGS
For the Year Ended December 31, 2001 and 2002



2002
2001
Increase
Increase




(Decrease)
(Decrease)



Taka
Taka
Taka
%
Retained Earnings at beginning of the year
117,600,234
80,411,015
37,189,219
46.2
Add: Net Profit after Tax


35,003,485
51,168,724
(16,165,239)
(31.6)
Less: Appropriation for Tax-holiday Reserve
(12,180,260)
(13,979,505)
1,799,245
(12.9)
Less: Appropriation for Dividend of Previous Year
(10,000,000)
-
(10,000,000)
-
Retained Earnings at end of the year

130,423,459
117,600,234
12,823,225
10.9

BEXIMCO INFUSIONS LIMITED
BALANCE SHEET as on December 31, 2001 and 2002



2002
2001
Increase
Increase





(Decrease)
(Decrease)
ASSETS:


Taka
Taka
Taka
%
Non-Current Assets


322,788,211
328,278,824
(5,490,613)
(1.7)
Property, Plant and Equipment - Carrying Value
322,189,061
327,679,674
(5,490,613)
(1.7)
Long-term Security Deposit


599,150
599,150
0
0.0
Current Assets


232,219,916
189,808,694
42,411,222
22.3
Inventories


84,028,954
65,958,351
18,070,603
27.4
Accounts Receivable


105,971,668
81,833,340
24,138,328
29.5
Advances and Deposits


41,624,542
35,875,210
5,749,332
16.0
Cash and Cash Equivalent


594,752
6,141,793
(5,547,041)
(90.3)
Total Assets


555,008,127
518,087,518
36,920,609
7.1


EQUITY AND LIABILITIES
2002
2001
Increase
Increase





(Decrease)
(Decrease)



Taka
Taka
Taka
%
Shareholders' Equity


341,666,665
316,663,180
25,003,485
7.9
Issued Share Capital


100,000,000
100,000,000
0
0.0
Tax-holiday Reserve


111,243,206
99,062,946
12,180,260
12.3
Retained Earnings


130,423,459
117,600,234
12,823,225
10.9
Non-Current Liabilities


16,342,110
34,629,164
(18,287,054)
(52.8)
Long-term Borrowing - Net of Current Maturity (Secured)
12,790,437
31,561,454
(18,771,017)
(59.5)
Deferred Liability - Provision for Gratuity
3,551,673
3,067,710
483,963
15.8
Current Liabilities


196,999,352
166,795,174
30,204,178
18.1
Short-term Borrowings (Secured)

103,616,455
81,156,940
22,459,515
27.7
Long-term Borrowing - Current Maturity (Secured)
38,371,311
31,561,454
6,809,857
21.6
Loan from Associated Undertaking (Unsecured)
-
10,775,000
(10,775,000)
(100.0)
17% Debenture - Current Maturity (Secured)
1,363,964
3,222,673
(1,858,709)
(57.7)
Creditors and Other Payables

35,472,186
22,428,730
13,043,456
58.2
Accrued Expenses


10,965,723
10,502,897
462,826
4.4
Dividend Payable


415,000
1,145,350
(730,350)
(63.8)
Provision for Income Tax


6,794,713
6,002,130
792,583
13.2
Total Liabilities and Shareholders' Equity
555,008,127
518,087,518
36,920,609
7.1


Trend Analysis:

It is also a horizontal analysis of financial statements over several years.

It can be used to build prediction models to forecast financial performance in the future and to identify problem areas by looking for sudden or abnormal changes in accounts.

Vertical Analysis

Vertical analysis compares financial statements of different companies and financial statements of the same enterprise across time after controlling for differences in size. Common size financial statements are statements in which all items have been restated as a percentage of a selected item on the statement. Vertical analysis uses common size financial statements to remove size as a relevant variable in ratio analysis.

Comparative Balance Sheet

Individual asset accounts are stated as a percentage (%) of total assets.
Individual liability and stockholder’s equity are stated as a percentage (%) of total liabilities and shareholders’ equity (L & SE).







BEXIMCO INFUSIONS LIMITED
COMMON SIZE BALANCE SHEETS
As on December 31, 2001 and 2002



2002
2001
2002
2001





Common Size
Common Size
ASSETS:


Taka
Taka
%
%
Non-Current Assets


322,788,211
328,278,824
58.2
63.4
Property, Plant and Equipment - Carrying Value
322,189,061
327,679,674
58.1
63.2
Long-term Security Deposit

599,150
599,150
0.1
0.1
Current Assets


232,219,916
189,808,694
41.8
36.6
Inventories


84,028,954
65,958,351
15.1
12.7
Accounts Receivable


105,971,668
81,833,340
19.1
15.8
Advances and Deposits


41,624,542
35,875,210
7.5
6.9
Cash and Cash Equivalent


594,752
6,141,793
0.1
1.2
Total Assets


555,008,127
518,087,518
100.0
100.0
EQUITY AND LIABILITIES





Shareholders' Equity


341,666,665
316,663,180
61.6
61.1
Issued Share Capital


100,000,000
100,000,000
18.0
19.3
Tax-holiday Reserve


111,243,206
99,062,946
20.0
19.1
Retained Earnings


130,423,459
117,600,234
23.5
22.7
Non-Current Liabilities


16,342,110
34,629,164
2.9
6.7
Long-term Borrowing - Net of Current Maturity (Secured)
12,790,437
31,561,454
2.3
6.1
Deferred Liability - Provision for Gratuity
3,551,673
3,067,710
0.6
0.6
Current Liabilities


196,999,352
166,795,174
35.5
32.2
Short-term Borrowings (Secured)

103,616,455
81,156,940
18.7
15.7
Long-term Borrowing - Current Maturity (Secured)
38,371,311
31,561,454
6.9
6.1
Loan from Associated Undertaking (Unsecured)
-
10,775,000
-
2.1
17% Debenture - Current Maturity (Secured)
1,363,964
3,222,673
0.2
0.6
Creditors and Other Payables

35,472,186
22,428,730
6.4
4.3
Accrued Expenses


10,965,723
10,502,897
2.0
2.0
Dividend Payable


415,000
1,145,350
0.1
0.2
Provision for Income Tax


6,794,713
6,002,130
1.2
1.2
Total Liabilities and Shareholders' Equity
555,008,127
518,087,518
100.0
100.0


Common Size Comparative Income Statements

Percentages are based on net sales.
The gross profit percentage is usually closely watched.

BEXIMCO INFUSIONS LIMITED
COMMON SIZE INCOME STATEMENTS
For the Year Ended December 31, 2001 and 2002



2002
2001
2002
2001





Common Size
Common Size



Taka
Taka
%
%
Revenue from Sales


328,288,005
314,977,227
100.0
100.0
Cost of Goods Sold


(192,857,430)
(172,353,390)
(58.7)
(54.7)
Gross Profit


135,430,575
142,623,837
41.3
45.3
Operating Expenses


(76,119,117)
(66,464,723)
(23.2)
(21.1)
Administrative Expenses


(2,829,105)
(2,534,032)
(0.9)
(0.8)
Selling & Distribution Expenses

(73,290,012)
(63,930,691)
(22.3)
(20.3)
Profit from Operation


59,311,458
76,159,114
18.1
24.2
Finance Cost


(20,509,022)
(19,847,934)
(6.2)
(6.3)
Net Profit before Contribution to WPPF
38,802,436
56,311,180
11.8
17.9
Contribution to WPPF


(1,847,735)
(2,681,485)
(0.6)
(0.9)
Net Profit before Tax


36,954,701
53,629,695
11.3
17.0
Income Tax Expense


(1,951,216)
(2,460,971)
(0.6)
(0.8)
Net Profit after Tax


35,003,485
51,168,724
10.7
16.2


Beximco Pharmaceutical Ltd. (BPL) & Beximco Infusions Ltd. (BIL)
COMMON SIZE INCOME STATEMENTS
For the Year Ended December 31, 2002



BPL
BIL
BPL
BIL





Common Size
Common Size


Taka
Taka
%
%
Revenue from Sales


2,522,942,523
328,288,005
100.0
100.0
Cost of Goods Sold


(1,620,493,149)
(192,857,430)
(64.2)
(58.7)
Gross Profit


902,449,374
135,430,575
35.8
41.3
Operating Expenses


(357,339,989)
(76,119,117)
(14.2)
(23.2)
Administrative Expenses


(79,926,759)
(2,829,105)
(3.2)
(0.9)
Selling & Distribution Expenses

(277,413,230)
(73,290,012)
(11.0)
(22.3)
Profit from Operation


545,109,385
59,311,458
21.6
18.1
Other Income


7,266,435
0
0.3
0.0
Finance Cost


(170,994,495)
(20,509,022)
(6.8)
(6.2)
Net Profit before Contribution to WPPF
381,381,325
38,802,436
15.1
11.8
Contribution to WPPF


(19,148,862)
(1,847,735)
(0.8)
(0.6)
Net Profit before Tax


362,232,463
36,954,701
14.4
11.3
Income Tax Expense


(20,552,415)
(1,951,216)
(0.8)
(0.6)
Net Profit after Tax


341,680,048
35,003,485
13.5
10.7



Beximco Pharmaceutical Ltd. (BPL) & Beximco Infusions Ltd. (BIL)
COMMON SIZE BALANCE SHEETS
As on December 31, 2002



BPL
BIL
BPL
BIL





Common Size
Common Size
ASSETS:

Taka
Taka
%
%
Non-Current Assets


4,780,464,825
322,788,211
70.7
58.2
Current Assets


1,982,226,375
232,219,916
29.3
41.8
Total Assets


6,762,691,200
555,008,127
100.0
100.0
EQUITY AND LIABILITIES





Shareholders' Equity


4,441,096,192
341,666,665
65.7
61.6
Non-Current Liabilities


812,591,999
16,342,110
12.0
2.9
Current Liabilities


1,509,003,009
196,999,352
22.3
35.5
Total Liabilities and Shareholders' Equity
6,762,691,200
555,008,127
100.0
100.0

Ratio Analysis

Ratio analysis is useful in assessing the impact of transactions on ROI, residual income, EVA, and other key measures of performance.

Ratio analysis provides additional information necessary to enhance the decision-making ability of the users of the information.

Ratios
Formula
What the ratio measures
Liqu-idity Ratios
Current Ratio (CR)
Current Assets ÷ Current Liabilities
Measures the entity’s liquidity.
This ratio tells us the amount of current assets for every Taka of current liabilities.
2.0 is considered to be a good CR.
Quick Ratio
Quick Assets ÷ Current Liabilities
This ratio is a stricter test of a company’s ability to pay its current debts with highly liquid current assets.
This ratio removes inventories and prepaid assets from the CA amount used in the calculation.
A quick ratio of less than 1.0 should be of concern.
Cash Flow from Operations to Current Liabilities Ratio
Net Cash Provided by Operating Activities ÷ Average Current Liabilities
Cash flow from operations is sometimes used as the numerator because all debt is paid with cash.
The ratio is indication of whether enough cash is being generated from operations to pay current obligations.
Working Capital per Taka of Sales
(Working Capital – Cash) ÷ Sales
This gives an indication of the additional finance necessary upon an expansion of sales.











Ratios
Formula
What the ratio measures
Activity Ratios
Accounts Receivables Turnover
Net Credit Sales ÷ Average Accounts Receivable
This ratio tells that on average, how much was sold on account and subsequently collected accounts receivable.
Number of Days Sales Are in Receivables
Number of Days in the Period ÷ Accounts Receivable Turnover
This number is the average number of days to collect a credit sale.
This may vary according to the credit policy of the particular business and the industry standards.
This ratio has an impact on ROI as part of the turnover of assets.
Inventory Turnover Ratio
Cost of Goods Sold ÷ Average Inventory
Determines how many times during the time period that the value of the inventory was sold.
Determining what is good is dependent on the industry and company standards.
Grocery stores would have a much higher expected turnover than car dealerships.
Number of Days Inventory Is Held Before Sale
Number of Days in the Period ÷ Inventory Turnover
Another way to look at inventory turnover is to calculate the number of days inventory is held before it is sold.
This may vary according to the particular business and industry standards.
This ratio has an impact on ROI as part of the turnover of assets.
Cash-to-Cash Operating Cycle Ratio
Number of Days in Inventory + Number of Days in Receivables
Measures the length of time between the purchase of inventory and the collection of cash from sales.
Solve-ncy Ratios
Debt to Equity Ratio
Total Liabilities ÷ Total Stockholders’ Equity
A solvency ratio which measures the ability to stay financially healthy over the long-run.
Indicates the preference of debt or equity financing of the entity.
Times Interest Earned
(Net Income + Interest Expense + Income Tax) ÷ Interest Expense
Measures a company’s ability to meet current interest payments to creditors by specifically measuring its ability to meet current-year interest payments out of current-year earnings.
Especially important to bankers and other lenders.
Debt Service Coverage Ratio
Cash Flow from Operations Before Interest and Taxes ÷ Interest and Principle Payments
Measures the amount of cash generated from operating activities that is available to repay principal and interest in the upcoming year.
The ratio indicates the amount of cash generated for every Taka 1 interest and principal paid.
Cash Flow from Operations to Capital Expenditures Ratio
(Cash Flow from Operations – Total Dividends Paid) ÷ Cash Paid for Acquisitions
Measures a company’s ability to use cash flow from operations to finance its acquisitions of property, plant, and equipment.
The ability to use cash from operations diminishes the need to acquire outside financing such as debt.
Degree of Financial Leverage[1]
(Net Income + Interest Expense + Income Tax) ÷ (Net Income + Income Tax)
Measures the impact of a change in operating income on change in earning on equity capital.
Employed to plan the ratio between debt and equity so that earning per share (EPS) is improved.


Ratios
Formula
What the ratio measures
Profit-ability Ratios
Return on Assets
[Net Income + Interest Expense (net of tax)] ÷ Average Total Assets
Considers the return to investors on all assets invested in the company.
Interpretation is based on the company’s required return on assets, industry standards, and trends.
Return on Common Stockholders’ Equity
(Net Income – Preferred Dividends) ÷ Average Common Stockholders’ Equity
Measures the return to common stockholders as a percentage of stockholders’ equity.
Adequacy of return is dependent on a number of factors including the risk of the investment.
Earnings Per Share (EPS)
(Net Income – Preferred Dividends) ÷ Average Number of Common Shares Outstanding
Used to measure performance.
Used to compare the performance of companies across different industries.
Price Earnings Ratio
Current Market Price ÷ EPS
Important for investors as it is the relationship of earnings to dividends and the market price of a company’s stock.
P/E is very dependent on the industry.

Basic Data for Calculating Ratios

BEXIMCO INFUSIONS LIMITED
2002
2001
Symbol

Taka
Taka
A
Total Current Assets
232,219,916
189,808,694
B
Quick Assets
148,190,962
123,850,343
C
Total Current Liabilities
196,999,352
166,795,174
D
Net Cash Provided by Operating Activities
24,878,144
50,141,380
E
Average Current Liabilities
181,897,263
151,693,085
F
Cash
594,752
6,141,793
G
Working Capital
35,220,564
23,013,520
H
Sales
328,288,005
314,977,227
I
Working Capital – Cash
34,625,812
16,871,727
J
Net Credit Sales (80% of total sales)
262,630,404
251,981,782
K
Accounts Receivable
105,971,668
81,833,340
L
Average Accounts Receivable
93,902,504
40,916,670
M
Accounts Receivable Turnover (Times)
2.80
6.16


Taka
Taka
N
Cost of Goods Sold
192,857,430
172,353,390
O
Ending Inventory
84,028,954
65,958,351
P
Average Inventory
74,993,653
56,923,050
Q
Number of Days in the Period (Days)
365
365
R
Inventory Turnover (Times)
2.57
3.03
S
Number of Days in Inventory (Days)
142
121
T
Number of Days in Receivables (Days)
131
59


Taka
Taka
U
Total Liabilities
213,341,462
201,424,338
V
Total Stockholders’ Equity
341,666,665
316,663,180
W
Net Income before Interest & Tax
57,463,723
73,477,629
X
Interest Expense
20,509,022
19,847,934
Y
Cash Flow from Operations before Interest & Taxes
48,533,142
71,888,497
A1
Interest and Principle Payments
46,940,033
42,406,031
B1
Cash Flow from Operations – Total Dividends Paid
37,802,792
56,898,447
C1
Cash Paid for Acquisitions
6,368,182
249,754
D1
Net Income + Interest Expense (net of tax)
55,512,507
71,016,658
E1
Total Assets
555,008,127
518,087,518
F1
Average Total Assets
536,547,823
499,627,214
G1
Net Income – Preferred Dividends
35,003,485
51,168,724
H1
Average Common Stockholders’ Equity
329,164,923
304,161,438
I1
Average Number of Common Shares Outstanding (No.)
1,000,000
1,000,000


Taka
Taka
J1
Current Market Price
232
250
K1
EPS
35.00
51.17
L1
Net Income before Tax but after Interest
36,954,701
53,629,695

Ratios Calculated from the above Data
BEXIMCO INFUSIONS LIMITED
Ratios
Formula
Symbols
2002
2001
Current Ratio
Current Assets ÷ Current Liabilities
A÷C
1.18
1.14
Quick Ratio
Quick Assets ÷ Current Liabilities
B÷C
0.75
0.74
Cash Flow from Operations to Current Liabilities Ratio
Net Cash Provided by Operating Activities ÷ Average Current Liabilities
D÷E
0.14
0.33
Working Capital per Taka of Sales
(Working Capital – Cash) ÷ Sales
I÷H
0.11
0.05
Accounts Receivables Turnover
Net Credit Sales ÷ Average Accounts Receivable
J÷L
2.80
6.16
Number of Days Sales Are in Receivables
Number of Days in the Period ÷ Accounts Receivable Turnover
Q÷M
131
59
Inventory Turnover Ratio
Cost of Goods Sold ÷ Average Inventory
N÷P
2.57
3.03
Number of Days Inventory Is Held Before Sale
Number of Days in the Period ÷ Inventory Turnover
Q÷R
142
121
Cash-to-Cash Operating Cycle Ratio
Number of Days in Inventory + Number of Days in Receivables
S+T
272
180
Debt to Equity Ratio
Total Liabilities ÷ Total Stockholders’ Equity
U÷V
0.62
0.64
Times Interest Earned
(Net Income + Interest Expense + Income Tax) ÷ Interest Expense
W÷X
2.80
3.70
Debt Service Coverage Ratio
Cash Flow from Operations Before Interest and Taxes ÷ Interest and Principle Payments
Y÷A1
1.03
1.70
Cash Flow from Operations to Capital Expenditures Ratio
(Cash Flow from Operations – Total Dividends Paid) ÷ Cash Paid for Acquisitions
B1÷C1
5.94
227.82
Degree of Financial Leverage
(Net Income + Interest Expense + Income Tax) ÷ (Net Income + Income Tax)
Y÷L1
1.31
1.34
Return on Assets
[Net Income + Interest Expense (net of tax)] ÷ Average Total Assets
D1÷F1
0.10
0.14
Return on Common Stockholders’ Equity
(Net Income – Preferred Dividends) ÷ Average Common Stockholders’ Equity
G1÷H1
0.11
0.17
Earnings Per Share (EPS)
(Net Income – Preferred Dividends) ÷ Average Number of Common Shares Outstanding
G1÷I1
35.00
51.17
Price Earnings Ratio
Current Market Price ÷ EPS
J1÷K1
6.63
4.89



[1] The term leverage is used in financial management to describe an enterprise’s ability to use fixed cost assets or funds to increase the returns to its owners (equity shareholders in case of a company). The leverage associated with the employment of fixed cost assets is referred to as operating leverage, while the leverage resulting from the use of fixed cost sources of funds is known to as financial leverage. The degree of operating leverage is calculated by dividing contribution margin (i.e., sales revenue minus variable costs) with earning before interest and income tax.