IQRA UNIVERSITY, QUETTA

ANALYSIS OF FINANCIAL STATEMENTS MOCK PAPER

Q. Waqar Fans (Pvt.) Limited manufactures fans and sells in open market. As per estimates, per fan manufacturing cost includes Direct Material of Rs. 1000/-, Direct Labor of Rs. 500/- and variable Factory overhead of Rs. 300/-. Waqar Fans (Pvt.) Limited is having Fixed Factory Overhead of Rs. 3 Million per year. During the 2009 - 10, Waqar Fans manufactured 15,000 fans and sold 8000 fans @ Rs. 3200/- per fan. During the year under review Admin & Selling expenses (excluding FFOH) were Rs. 5 Million. Prevailing corporate Tax rate in the country is 35%. Required: i. Prepare Income Statement and Balance Sheet for the year 2009-10, using a) Absorption Costing b) Marginal Costing ii. iii. iv. v. vi. vii. Q3. Assuming NIL production during the year 2010 11 and sales of all the left over fans (7000 in number) prepare Income Statement & Balance Sheet for the year 2010 11, with the same assumptions. Perform Vertical / Common Size analysis of Income Statement for the year 2009-10 and comment on NP Ratio if Industry Average is 40%. What was the amount of Deferred Tax during the year 2009-10? Mention the situations in which Waqar Fans would like to opt for Absorption Costing. Mention the situations in which Waqar Fans would like to opt for Marginal Costing. Are there any ratios that may be affected with the change in Costing Method?

Imran Fabrics (Pvt.) Limited had purchased locally manufactured new machinery costing Rs. 5 Millions during the year 2005. Expected useful life of Machine was 5 years. After 5 years of usage the machine was sold at Rs 2,218,527/-. The company had adopted Straight Line Method for calculating depreciation. However in compliance with Tax Laws of Pakistan the financial statements for the purpose of taxation had been prepared using Written Down Value Method at the rate of 15% per annum. Required: i. Prepare Depreciation Schedules for the year 2005 2009, using both methods (mentioned above) in the following format. S. No Year Starting Value Book Depreciation During the year Ending Book Value

ii. iii. iv. v.

Taking GP at Rs. 5 Million, Tax Rate 35% and All other P&L expense (excluding depreciation) at Rs. 3 Million, prepare Income Statements and Balance Sheets for the years 2005 2009. Discuss the year wise Tax Impact / Deferred Taxes. Ignoring useful life of machinery, perform trend analysis graphically on Net Profit and predict NP for the year 2010. List the situations in which a) The Company would like to opt Straight Line Method b) The Company would opt WDV for computing depreciation.

Q:

Following is a comparison of the affairs of Habib Pvt. Ltd. and Ahmed Karim Pvt. Ltd. as on 3006-2010.

Balance Sheet (Rs. Million)

COMPANY Cash & Equivalent* Receivables* Inventories* Other Cur Assets Total Cur Assets Gross Fixed Assets Accumulated Depreciation Net Fixed Assets Other Non-Cur Asset Tot Non-Cur Asset Total Assets Accounts Payable* Short-Term Debt Other Cur Liabilities Total Cur Liabilities* Long-Term Debt Deferred Taxes Other Non-Cur Liabilities Habib Pvt Ltd 4,102.0 3,438.0 1,697.0 6,630.0 15,867.0 18,127.0 7,461.0 10,666.0 2,347.0 13,013.0 28,880.0 1,407.0 322.0 4,291.0 6,020.0 448.0 1,076.0 2,041.0 Ahmed Karim Pvt. Ltd 4,165.0 3,723.0 1,293.0 4,503.0 13,684.0 14,262.0 5,775.0 8,487.0 1,564.0 10,051.0 23,735.0 969.0 389.0 3,505.0 4,863.0 728.0 997.0 275.0

Tot Non-Cur Liabilities Total Liabilities Preferred Equity Common Equity* Retained Earnings* Total Equity Tot Liab & SH Equity

3,565.0 9,585.0 0.0 19,295.0 15,984.0 19,295.0 28,880.0

2,000.0 6,863.0 0.0 16,872.0 13,975.0 16,872.0 23,735.0

Income Statement (Rs. Millions)

COMPANY Revenues/Sales Cost of Sales* Gross Operating Profit S&A Expenses* Op Prof before Depreciation Depreciation & Amortization Op Income after Depreciation Other Income EBIT Interest Expense* Pretax Income Income Taxes Total Net Income Preferred Div Net Income (for Common SH) Habib Pvt Ltd 25,070.0 7,753.0 17,317.0 5,238.0 12,079.0 2,192.0 9,887.0 799.0 10,686.0 27.0 10,659.0 3,714.0 6,945.0 0.0 6,945.0 Ahmed Karim Pvt. Ltd 20,847.0 7,276.0 13,571.0 4,130.0 9,441.0 1,888.0 7,553.0 406.0 7,959.0 25.0 7,934.0 2,777.0 5,157.0 0.0 5,157.0

Required:

a. Perform Common Size Analysis for the aforementioned TEN rows shown in italic (marked with *) and comment on the results / percentages.

Q2.

XYZ (Pvt.) Limited manufactures fans and sells in open market. As per estimates, per fan manufacturing cost includes Direct Material of Rs. 500/-, Direct Labor of Rs. 200/- and variable Factory overhead of Rs. 100/-. XYZ (Pvt.) Limited is having Fixed Factory Overhead of Rs. 1 Million per year. During the 2009 - 10, the company manufactured 25,000 fans and sold 18000 fans @ Rs. 2200/- per fan. During the year under review Admin & Selling expenses (excluding FFOH) were Rs. 3 Million. Prevailing corporate Tax rate in the country is 35%. Required: viii. Prepare Income Statement and Balance Sheet for the year 2009-10, using a) Absorption Costing b) Marginal Costing ix. Assuming NIL production during the year 2010 11 and sales of all the left over fans (7000 in number) prepare Income Statement & Balance Sheet for the year 2010 11, with the same assumptions. What was the amount of Deferred Tax during the year 2009-10? Are there any ratios that may be affected with the change in Costing Method? Perform Vertical / Common Size Analysis and comment.

x. xi. xii. Q3.

KK (Pvt.) Limited purchased new machinery costing Rs. 2 Millions during the year 2005. Expected useful life of Machine was 5 years. After 5 years of usage the machine was sold at Rs 887,410/-. The company had adopted Straight Line Method for calculating depreciation. However in compliance with Tax Laws of Pakistan the financial statements for the purpose of taxation had been prepared using Written Down Value Method at the rate of 15% per annum. Required: vi. Prepare Depreciation Schedules for the year 2005 2009, using both methods (mentioned above) in the following format. Year Starting Book Value Depreciation Ending During the Book year Value

vii.

viii. ix. x.

Taking GP at Rs. 2 Million, Tax Rate 35% and All other P&L expense (excluding depreciation) at Rs. .8 Million, prepare Income Statements and Balance Sheets for the years 2005 2009. Discuss the Tax Impact / Deferred Taxes. Perform Horizontal / Trend Analysis and predict NP for the year 2010. List the situations in which c) The Company would like to opt Straight Line Method d) The Company would opt WDV for computing depreciation.