FR111

Fundamentals of
Financial Accounting

Session 1
 Part-D: Accounting for Single Entities [WEIGHT 40%]
D1. Accounting for different business types [40%]

D2. Preparation and interpretation of financial statements [60%]

Discussion Topics_ D1
10.1 Introduction
10.2 Types of business entities
10.3 Accounting for merchandising business
10.4 Accounting for manufacturing business
10.5 Single and multiple-step income statements
10.6 Accounting for corporation
10.7 Accounts from incomplete records
 Types of Business Entities
Based on ownership structure
1. Sole proprietorship: Number of owner: 1
2. Partnership: Number of owners limited between 2 and 20
3. Corporation: Private limited company (PVT) 2-50; public limited company
(limited or LTD or Ltd. in Bangladesh; plc globally) 7 to limited by shares

Based on nature of operation

1. Manufacturing: produce goods
2. Merchandizing/Trading: buy goods from manufacturer and sell to
customers
3. Service: provide or render service
 Accounting for Trading/Merchandizing Business
Perpetual inventory system Periodic inventory system

Real time recording- Records transactions instantly Record transactions at the end of a period…at the end of
each week, month or year
Purchase of inventories are recorded as (current) assets Purchase of inventories are recorded as an expense
[Inventories account] [purchase account)
Purchase returns, discount, freights and other costs Purchase returns, discount, freights and other costs
associated with the purchase of goods are all associated with the purchase of goods are recorded in
recorded/adjusted to the inventories account separate accounts
To record sales transaction as revenue, corresponding Only sales revenues are recognized; corresponding costs
costs and inventories are recognized immediately are determined later at the end of the reporting period
Cost of goods sold/cost of sales and ending inventory Cost of goods sold/cost of sales can be determined only
data are readily available after paying substantial effort, while the valuation of
ending inventory requires physical count
Suitable for large companies Suitable for small companies or enterprises with low
volume of transactions
 Recording merchandizing transactions
Nature of transactions Perpetual inventory system Periodic inventory system
Purchase of Merchandize inventory Dr. Purchase Account Dr.
goods/merchandize Trade or Accounts Payable/cash Cr. Trade/Accounts Payable/cash Cr.
Freight on purchase Merchandize inventory Dr. Freight-in A/C Dr.
Accounts Payable/cash Cr. Accounts Payable/cash Cr.
Return goods to Trade or Accounts Payable/cash Dr. Trade or Accounts Payable/cash Dr.
supplier Merchandize inventory Cr. Purchase return Cr.
Make payments to Trade or accounts payable Dr. Trade or accounts payable Dr.
suppliers Cash…………………………………..Cr. Cash…………………………………..Cr.
Merchandize inventory ……..Cr. (with the amount of discount Purchase discount ……..Cr. (with the amount of discount received
received at the time of paying dues to suppliers) at the time of paying dues to suppliers)
Sales goods to (1) Trade or accounts receivable Dr. Trade or accounts receivable Dr.
customers Sales revenue Cr. [with the selling price] Sales revenue Cr.
(2) Cost of goods sold Dr.
Merchandize inventory Cr. [with the costs of inventory]
Return from customers (1) Sales return (and allowance) Dr. Sales return Dr.
Trade receivable Cr. Trade receivable Cr.
(2) Merchandize inventory Dr.
Cost of goods sold Cr.
Grant allowance to Sales (return and) allowance Dr. Sales (return and) allowance Dr.
customer Trade receivable Cr. Trade receivable Cr.
Receive payments from Cash Dr. Cash Dr.
customer Sales or cash discount Dr. Sales or cash discount Dr.
Trade or accounts receivable Cr. Trade or accounts receivable Cr.
 For example, consider the following transactions:
Nasir Enterprise identified the following transactions for the month of April 2021.
• April 5: Purchase merchandise/goods for cash Tk 50,000 from X Ltd. FOB destination (Home delivery, freight
cost paid by seller), paid freight cost Tk 200 by the relevant party.
• April 6: Purchase merchandise/goods on account 80,000 from X Ltd, term 2/15, n/30, invoice no. 3890.
Paid freight cost Tk 500 by the relevant party, FOB shipping point.
• April 9: Returned goods to X LTD for Tk 4,000 and send a debit note.
• April 10: Sold merchandise on account for Tk 85,000 to Mr. Tarek, terms 1/15, n/EOM (cost of goods sold
70%). Paid freight cost Tk 2,000, FOB destination. [Freight out Dr. Cash Cr. Same for both method]
• April 12: Received return of damaged merchandise from Mr. Tarek Tk. 5,000.
• April 13: Grant allowance to Mr. Tarek for fully damaged goods Tk 2,000.
• April 14: Sold merchandise for cash Tk 100,000 to Mr. Kalam (cost of goods sold 70%). FOB shipping point,
paid freight Tk. 1,000 by relevant party.
• April 15 : Collect payments from Mr. Tarek in full and final settlement.
• April 18 : Paid X Ltd for goods purchased on April 6 in full and final settlement.
• April 28: Received cash in advance from Mr. Khan Tk 60,000 for merchandise to be delivered in the next
month.
Required:
Record the above transactions in a General Journal in the books of Nasir Enterprise under:
I. Perpetual inventory system
II. Periodic inventory system
 Accounting for Manufacturing Business
Cost of goods sold statement
Titles Tk Tk
Direct materials used/consumed:
Beginning/opening Raw Materials
+ Net Purchase of RM during the year
- Ending/closing RM

Direct labor
Manufacturing/factory/works overhead:
Indirect materials
Indirect labor (supervisor, factory manger’s salary)
Other indirect factory expenses (such as utility, depreciation)

Manufacturing costs
+ Beginning work-in-process
- Ending/closing work-in-process
Cost of goods manufactured
+ Beginning finished goods
Cost of goods available for sale
-Ending finished goods
Cost of goods sold
 Income Statement/Statement of Profit or Loss /Statement of Comprehensive Income

• Single step: First, report all types of revenues at the top of the profit or loss
statement and sum up them in a single amount titled ‘total revenue’
irrespective of whether they arise from operating or non-operating activities.
Then, deduct all the expenses and losses regardless of whether they arise from
operating or non-operating activities.
• Multiple-step: Report gross revenue arises from main/major ongoing/central
operation and deduct direct costs/expenses [e.g., costs of goods sold in a
manufacturing or merchandizing entities, direct expense in a service
organizations]; the resulting figures is gross profit. Then deduct operating
expense [selling and administrative, and finance costs] from gross profit to find
out operating profit. From operating profit deduct or add non-operating or
infrequent gain or loss to derive net profit before tax. After deducting tax, we
will find profit after tax for the period. Then report extraordinary or other
comprehensive income or loss [exchange gain or loss, revaluation gain or loss,
change in accounting policies] to derive total comprehensive income.
Single-step Income Statement
Multiple step Income Statement
 Equity/Share Capital transactions
• GP issued 1,000,000 shares @ Tk 70; face value Tk 10.
Bank Dr. 70,000,000
Share capital Cr. 10,000,000
Share premium (additional paid-in capital) Cr. 60,000,000
• GP reports its profit 100 million BDT during 2020.
Income summary Dr. 100
Retained earnings Cr. 100
• 20% of profit is declared or paid as dividend.
Retained earnings Dr.
Bank Cr.
• Bonus share/stock dividend 20% stock dividend is declared.
Retained earnings Dr.
Share capital Cr.
 Types of share
• A company's capital is divided into small equal units of a finite
number. Each unit is known as a share. In simple terms, a share is a
percentage of ownership in a company or a financial asset. Investors
who hold shares of any company are known as shareholders. Note
that a lot of share that can be traded on a stock exchange is known as
stock.
• Shares can be broadly divided into two categories:
1. Preference share [get preference in receiving dividend payment, and in the
event of bankruptcy]
2. Ordinary equity share: they are entitled to enjoy/suffer residual profit or
loss.
 Debentures
• Debenture
• Share vs. debenture
• Types of debenture
• Issue of debenture
• Redemption of debenture
 Accounting for incomplete records

• Features of incomplete records

• Reasons for incompleteness
• Ascertainment of profit or loss from incomplete records
• Preparing statement of affairs from incomplete records
• Preparing profit and loss statement from incomplete records
 Comprehensive Example of Preparing Financial Statements from Incomplete Records
ABC enterprise is in business but does not keep full accounting records. For the year ended 31 December
2021, the business is able to provide you the following information:
At 1 January At 31 December
Inventories 2,950 3,271
Receivables 325 501
Payables for purchases 736 1,014
Accrued wages payable 74 83
You are able to prepare the following summary of cash and bank transactions for the year:
Cash A/C
Beginning balance 49 Payments:
Receipts: Payables/Purchases 340
Receivable/Shop takings 5,360 Wages 102
Cheques cashed 260 Other expenses 226
Drawings 820
Paid/deposited into bank 3,995
Balance c/d 186
5,669 5,669
 Bank A/C
Beginning balance 920 Payments:
Receipts: Payables/Purchases 2,950
Receivables (Cheques from customers) 1,733 Wages 371
Shop takings paid in/cash deposited Other expenses 770
into bank 3,995 Purchases of Van 1,250
Cash withdrawn 260
Balance c/d 1,047
6,648 6,648

Adjustment to be made:
It is found that one customer owing BDT 27 will definitely not pay. On the basis of past experience, the
owner believes that about 4% of the remaining receivable may not pay. The van is to be depreciated at
the 20% per annum, straight line, assuming no residual value.
Required:
Prepare ABC’s financial statements which comprises of a statement of financial position as at December
31, 2021 and a statement of profit or loss for the year 2021.
 Sample Answer
Statement of profit or loss /Income statement of ABC Enterprise for the year ended 31 December 2021

Sales (W1) 7,269

Cost of goods sold:
Beginning inventories 2,950
Purchases (W2) 3,568
Ending inventories (3,271)
3,247

Gross profit 4,022

Operating expenses:
Wages (W3) 482
Other expenses (226+770) 996
Bad debt expenses:
Written off 27
New allowance created for outstanding receivables 19 46
Depreciation (20% of 1,250) 250
1,774

Net profit for the year 2,248

 Statement of Financial Position of ABC Enterprise as at 31 December 2021
Particulars Tk Tk
Assets
Non-current assets/fixed assets:
PPE-Van 1,250
Less: Accumulated Depreciation 250 1,000

Current Assets:
Inventories 3,271
Trade receivables (474-19) 455
Bank 1,047
Cash 186 4,959
Total assets 5,959
Equity and liabilities:
Equity:
Beginning capital (W4) 3,434
Net profit for the period 2,248
Drawing (820)
Ending capital 4,862
Current liability :
Payables 1,014
Accrued wages 83 1,097
Total equity and liabilities 5,969
 W1. Receivables Account

Balance b/d 325 Cash- Shop takings 5,360

Sales (balancing figure) 7,269 Bank-receipt from customers 1,733
Bad debt 27
Balance c/d (501-27) 474
7,594 7,594

W2. Payables Account

Cash 340 Balance b/d 736

Bank 2,950 Purchases (balancing figure) 3,568
Balance c/d 1,014
4,304 4,304
 W3. Wages Payable Account

Cash 102 Balance b/d 74

Bank 371 Income statement (balancing figure) 482
Balance c/d 83
556 556

W4. Computation of Beginning Capital:

Inventories 2,950 Payable for purchases 736

Receivables 325 Accrued wages payable 74
Bank 920 Beginning capital (balancing figure) 3,434
Cash 49
4,244 4,244
 Part D2: Preparation and Interpretation of Financial Statements

11.1 Introduction
11.2 Presentation of financial statements [IAS 1]
11.3 Statement of financial position
11.4 Income statement
11.5 Statement of changes in equity
11.6 Statement of cash flows
11.7 Basic financial ratios
IAS 1: Presentation of Financial Statements
Q1. What is about IAS 1/ Objective of IAS 1?

The objective of IAS 1 (2007) is to prescribe the basis for presentation of general
purpose financial statements, to ensure comparability both with the entity's
financial statements of previous periods and with the financial statements of other
entities. IAS 1 sets out the overall requirements for the presentation of financial
statements, guidelines for their structure and minimum requirements for their
content.
 Q2. Objectives of financial statements:

The objective of general purpose financial statements is to provide

information about the financial position, financial performance, and
cash flows of an entity that is useful to a wide range of users in making
economic decisions.
 Q3. Elements of Financial statements:
Financial statements provide information about an entity's:
i) Assets
ii) Liabilities
iii) Equity
iv) Income and expenses, including gains and losses
v) Contributions by and distributions to owners (in their capacity as owners)
vi) Cash flows.
• That information, along with other information in the notes, assists users of financial
statements in predicting the entity's future cash flows and, in particular, their timing and
certainty.
Q4. Types or Components of financial statements:
• A complete set of financial statements includes:
i) a statement of financial position (balance sheet) at the end of the period
ii) a statement of profit or loss and other comprehensive income for the period (presented as a single
statement, or by presenting the profit or loss section in a separate statement of profit or loss, immediately
followed by a statement presenting comprehensive income beginning with profit or loss)
iii) a statement of changes in equity for the period
iv) a statement of cash flows for the period
v) notes, comprising a summary of significant accounting policies and other explanatory notes
vi) Comparative information prescribed by the standard.
• An entity may use titles for the statements other than those stated above. All financial statements are required to
be presented with equal prominence.
 Q5. Underlying assumptions of financial statements
Going concern
The Conceptual Framework notes that financial statements are normally prepared
assuming the entity is a going concern and will continue in operation for the
foreseeable future.
Accrual basis of accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow
information, using the accrual basis of accounting. In accrual basis, an event or
transactions that can change the financial position of an entity are to be
recognized, recorded and reported regardless of whether cash is received or paid.
 Q6. Other principles:
Consistency of presentation
The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in
circumstances or a requirement of a new IFRS.
Materiality:
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial
statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.
Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if they are individually immaterial.

Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS.

Comparative information
IAS 1 requires that comparative information to be disclosed in respect of the previous period for all amounts reported in the financial statements, both on the face of the
financial statements and in the notes, unless another Standard requires otherwise. Comparative information is provided for narrative and descriptive where it is relevant
to understanding the financial statements of the current period.
An entity is required to present at least two of each of the following primary financial statements:
i) Statement of financial position*
ii) Statement of profit or loss and other comprehensive income separate statements of profit or loss (where presented)
iii) Statement of cash flows
iv) Statement of changes in equity
v) Related notes for each of the above items.
* A third statement of financial position is required to be presented if the entity retrospectively applies an accounting policy, restates items, or reclassifies items, and
those adjustments had a material effect on the information in the statement of financial position at the beginning of the comparative period.
Q7. Structure of Statement of financial position (balance sheet)
• Current and non-current classification
An entity must normally present a classified statement of financial position, separating current and non-current assets
and liabilities, unless presentation based on liquidity provides information that is reliable. [IAS 1.60] In either case, if an
asset (liability) category combines amounts that will be received (settled) after 12 months with assets (liabilities) that
will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from
the 12-month amounts. [IAS 1.61]
Current assets are assets that are: [IAS 1.66]
• expected to be realized in the entity's normal operating cycle held primarily for the purpose of trading expected to
be realized within 12 months after the reporting period cash and cash equivalents (unless restricted).
• All other assets are non-current. [IAS 1.66]
• Current liabilities are those: [IAS 1.69]
• expected to be settled within the entity's normal operating cycle held for purpose of trading due to be settled within
12 months for which the entity does not have the right at the end of the reporting period to defer settlement beyond
12 months.
 Line items in the Statement of Financial Position
Property, plant and equipment
Investment property
Intangible assets

Financial assets (excluding amounts shown under (e), (h), and (i))

Investments accounted for using the equity method

Biological assets

Inventories

Trade and other receivables

Cash and cash equivalents

Assets held for sale

Trade and other payables

Provisions

Financial liabilities (excluding amounts shown under (k) and (l))

Current tax liabilities and current tax assets, as defined in IAS 12

Deferred tax liabilities and deferred tax assets, as defined in IAS 12

Liabilities included in disposal groups

Non-controlling interests, presented within equity

Issued capital and reserves attributable to owners of the parent.

 Q7. Line items of statement of financial position (balance sheet) ne items
The line items to be included on the face of the statement of financial position are: [IAS 1.54]

• Share capital and reserves:

Regarding issued share capital and reserves, the following disclosures
are required: [IAS 1.79]
Numbers of shares authorized, issued and fully paid, and issued but not
fully paid par value (or that shares do not have a par value)
A reconciliation of the number of shares outstanding at the beginning
and the end of the period description of rights, preferences, and
restrictions
Treasury shares, including shares held by subsidiaries and associates
shares reserved for issuance under options and contracts
A description of the nature and purpose of each reserve within equity.
 Q8. Statement of profit or loss and other comprehensive income
• Comprehensive income for the period = Profit or loss + Other comprehensive income
• Examples of items recognized outside of profit or loss
 Changes in revaluation surplus where the revaluation method is used under IAS 16 Property, Plant and Equipment and
IAS 38 Intangible Assets
 Remeasurements of a net defined benefit liability or asset recognized in accordance with IAS 19 Employee Benefits
(2011)
 Exchange differences from translating functional currencies into presentation currency in accordance with IAS 21 The
Effects of Changes in Foreign Exchange Rates
 Gains and losses on remeasuring available-for-sale financial assets in accordance with IAS 39 Financial Instruments:
Recognition and Measurement
 The effective portion of gains and losses on hedging instruments in a cash flow hedge under IAS 39 or IFRS 9 Financial
Instruments
 Gains and losses on remeasuring an investment in equity instruments where the entity has elected to present them in
other comprehensive income in accordance with IFRS 9
 The effects of changes in the credit risk of a financial liability designated as at fair value through profit and loss under
IFRS 9.
 Q9. Statement of changes in equity
• IAS 1 requires an entity to present a separate statement of changes in equity. The statement must show: [IAS 1.106]
• total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to
non-controlling interests the effects of any retrospective application of accounting policies or restatements made in
accordance with IAS 8, separately for each component of other comprehensive income reconciliations between the
carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:
• profit or loss other comprehensive income* transactions with owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control
• * An analysis of other comprehensive income by item is required to be presented either in the statement or in the
notes. [IAS 1.106A]
• The following amounts may also be presented on the face of the statement of changes in equity, or they may be
presented in the notes: [IAS 1.107]
• Amount of dividends recognized as distributions
• The related amount per share.
 Q9. Statement of changes in equity
• IAS 1 requires an entity to present a separate statement of changes in equity. The statement must show: [IAS 1.106]
• total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to
non-controlling interests the effects of any retrospective application of accounting policies or restatements made in
accordance with IAS 8, separately for each component of other comprehensive income reconciliations between the
carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:
• profit or loss other comprehensive income* transactions with owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control
* An analysis of other comprehensive income by item is required to be presented either in the statement or in the
notes. [IAS 1.106A]
• The following amounts may also be presented on the face of the statement of changes in equity, or they may be
presented in the notes: [IAS 1.107]
• Amount of dividends recognized as distributions
• The related amount per share.
 Q10. Notes to the financial statements
• The notes must: [IAS 1.112]

i) Present information about the basis of preparation of the financial statements and the specific accounting policies used
ii) Disclose any information required by IFRSs that is not presented elsewhere in the financial statements and provide
iii) Additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any
of them
• Notes are presented in a systematic manner and cross-referenced from the face of the financial statements to the relevant note.
• IAS 1.114 suggests that the notes should normally be presented in the following order:*
i) a statement of compliance with IFRSs a summary of significant accounting policies applied, including: the measurement basis
(or bases) used in preparing the financial statements
ii) the other accounting policies used that are relevant to an understanding of the financial
iii) statements supporting information for items presented on the face of the statement of financial position (balance sheet),
statement(s) of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows,
in the order in which each statement and each line item is presented other disclosures, including: contingent liabilities (see
IAS 37) and unrecognized contractual commitments non-financial disclosures, such as the entity's financial risk management
objectives and policies (see IFRS 7 Financial Instruments: Disclosures)
 Judgments and key assumptions

• An entity must disclose, in the summary of significant accounting policies or other

notes, the judgments, apart from those involving estimations, that management
has made in the process of applying the entity's accounting policies that have the
most significant effect on the amounts recognized in the financial statements
Preparing a Complete set of Financial
Statements as per IAS 1
 XL Limited
Statement of Profit or Loss and Other Comprehensive Income
For the year ended 31 December 2020
Particulars Notes Amount in Taka
2019-2020 2018-2019
Net sales [Sales – sales return, allowance and discount] 1
Cost of goods sold 2
Gross profit 3
Operating expenses:
Distribution expense
Administrative expense
Finance cost
Total operating expense
Operating profit/ profit from operations
Other Income and loss/ non-operating income:
[Investment income, gain or loss on disposal of PPE]
Net profit before tax
Income tax
Net profit after tax
Other comprehensive income:
Exchange gain (loss)
Revaluation gain/loss
Change in accounting policy/methods
Total comprehensive income for the period
EPS
 Components of owner’s/shareholders’ equity/capital

• For a sole proprietorship or partnership business owner’s (owners’)

equity comprises:
Amount in Tk
Beginning/ opening Capital
+/- Net profit (loss)
+ Additional investment
- Drawing
Ending/closing capital
EC= BC+P+AI-D
EC-BC-AI+D = P
Components of owner’s/shareholders’ equity/capital
• For a corporation (private or public limited company) shareholders’
equity comprises the following items:
1. Share capital [face value or par value of shares outstanding]
2. Share premium/additional paid in capital [issue price - face value]
3. Retained earnings/accumulated profit or loss [share or portion of profit not
distributed among the shareholders]
4. General reserve [profit transferred for unspecified purpose]
5. Revaluation reserve: excess of fair value over net book value of non-current
assets
6. Other reserves whether or not required by regulators [statutory reserve for
financial institutions]
 Statement of Changes in Equity
A typical statement of changes in equity looks like as follows
Particulars Share capital Share Retained Revaluation reserve General Statutory Total equity
premium earnings reserve reserve

Beginning balance 10 60 2 12

Net profit for the period ×

Other comprehensive
income (exchange gain)

New issue of share × ×

Cash Dividends (×)

Stock dividend × (×)

Ending balance
 Statement of Financial Position
Particulars Tk Tk Tk
Assets
Non-current assets:
Property plant and equipment [Workings Note 3]
Investment property
Patent

Current Assets:
Inventories
Trade receivables
Cash (9,000+23,000+25,000)

Total assets

Equity and liabilities:

Equity:
Share capital
Share premium
Retained earnings
Total equity

Non-current liability :
Loan / Notes payable
Current liability :
Loan/Notes payable
Payable on machinery
Trade payable
Accruals
Interest accrued [80,000 × 12%= 9,600 -5,000]
Income tax payable
Exercise 1. The following information has been extracted from the books of XL Ltd for the year ended 31 December, 2020:

Accounts Title Dr. (BDT) Cr. (BDT)

Administrative expenses 160,000
Interest paid/ Finance cost 5,000
Distribution costs 250,000
Share capital (Ordinary Tk 10/shares) 200,000
Dividends paid 6,000
Cash and cash equivalents 9,000
Land and Buildings (cost) 210,000
Accumulated depreciation (Building) 48,000
Plant and machinery (cost) 125,000
Accumulated depreciation (plant and machinery) 75,000
Accruals 90,000
Investment income (dividend or interest received) 10,000
Retained earnings 260,000
Trade receivables and payables 538,000 52,000
Investment property 125,000
Patent 75,000
Inventory as at 1.1.2020 140,000
Purchase 480,000
12% Loan 80,000
Exchange gain 8,000
Sales revenue ---------- 1,300,000
2,123,000 2,123,000
Additional information:
• Inventory at 31.12.2020 was valued at Tk 220,000.
• Buildings (cost Tk. 110,000) are depreciated on a straight-line basis
@ 5% and plant and machinery @ 20%.
• A piece of used machinery which had originally cost BDT 25,000 was sold during the year for Tk 23,000.
Accumulated depreciation of 5,000 had been charged on this machinery. The transaction has not been recorded in the
books of accounts
• Additionally, new machinery has been purchased on credit Tk 40,000 which has not been recorded yet.
• The depreciation charges for the year are to be apportioned as follows: cost of sales 60%, distribution costs 30%, and
administrative expenses 10%.
• Income tax for the year is estimated @ 25% on profit before tax.
• The company issued 1,000 new shares during the year @ Tk 25 per share (face value Tk 10) which has not yet been
recorded.
• The loan is repayable in five installments starting on December 31, 2021.

Requirements: Produce the following financial statements as per IAS 1:

1. A statement of profit or loss and other comprehensive income for the period,
2. A statement of changes in equity for the period, and
3. A statement of financial position (Balance sheet) as at December 31, 2020. Show all workings clearly.
Note: To prepare the statement of profit or loss, you have to do some workings first. Alternatively you can
present these computations in the body of the financial statements in the answer scripts.

Working Note 1: Schedule of Operating Expenses

Particulars Cost of sales Administrative expense Distribution expense
Beginning inventory 140,000
Purchase 480,000
Ending inventory (220,000)
Administrative expense 160,000
Distribution expense 250,000
Depreciation on building 3,300 550 1,650
Depreciation on machinery 16,800 2,800 8,400
Total 420,100 163,350 260,050

Working 2: Calculation of Depreciation expense:

Particulars Amount of depreciation Cost of sales Administrative Distribution
(60%) expense (10%) expense (30%)

Building (110,000×5%)=5,500 3,300 550 1,650

Machinery (125,000-25,000+40,000)×20%=28,000 16,800 2,800 8,400
 XL Limited
Statement of Profit or Loss & Other Comprehensive Income
For the year ended 31 December 2020
Particulars Tk Tk
Sales revenue 1,300,000
Cost of sales/cost of goods sold (Working Note 1) (420,100)
Gross profit 879,900
Operating expenses:
Distribution expense (Working Note 1) 260,050
Administrative expense (Working Note 1) 163,350
Total operating expense (423,400)
Net operating Income/ profit 4,56,500
Non-operating income/expense:
Investment income [Interest revenue, dividend received, rental income] 10,000
Gain on disposal [23,000-(25,000-5,000)]= 3,000

Finance cost/Interest expense (paid 5,000 and the remaining left due) (80,000×12%) = (9,600)
Net profit before tax 459,900
Income tax (459,000×25%)= (114,975)
Net profit after tax 344,925
Other comprehensive income:
Exchange gain (loss) 8,000
Revaluation gain/loss
Change in accounting policy/methods
Total comprehensive income 352,925
 XL Limited
Statement of Changes in Equity
For the year ended 31 December 2020

Particulars Share Share Retained Revaluation OCI Statutory Total

capital premium earnings reserve reserve equity
Beginning balance 200,000 260,000 460,000
Net profit for the period 344,925 344,925
Other comprehensive 8,000 8,000
income (exchange gain)
New issue 10,000 15,000 25,000
Dividends paid (6,000) (6,000)
Ending balance 210,000 15,000 606,925 831,925
 Working Note 3:
Property, plant and equipment schedule [also known as fixed assets schedule]

Land Building Plant and Machinery Total

Beginning balance (cost) 100,000 110,000 125,000 335,000
Addition [purchase] during the period 40,000 40,000
Disposal [sales] during the period (25,000) (25,000)
Ending balance (cost) 100,000 110,000 140,000 350,000

Accumulated Depreciation beginning 48,000 75,000 123,000

balance

Charged during the year 5,500 28,000 33,500

Disposal (5,000) (5,000)
Ending accumulated depreciation 53,500 98,000 151,500

Net book value of PPE 100,000 56,500 42,000 198,500

 XL Limited
Statement of Financial Position
As at 31 December 2020
Particulars Tk Tk Tk
Assets
Non-current assets/fixed assets:
Property, plant and equipment [Workings Note 3] 198,500
Investment property 125,000
Patent 75,000
398,500
Current Assets:
Inventories 220,000
Trade receivables 538,000
Cash (9,000+23,000+25,000) 57,000
815,000
Total assets 1,213,500

Equity and liabilities:

Equity:
Share capital 210,000
Share premium 15,000
Retained earnings 606,925
Total equity 831,925

Non-current liability :
Loan / Notes payable 64,000
Current liability :
Loan/Notes payable 16,000
Payable on machinery 40,000
Trade payable 52,000
Accruals 90,000
Interest accrued [80,000 × 12%= 9,600 -5,000] 4,600
Income tax payable 114,975
 CMA January 2022

5. Mr. Jacktion started his own consulting firm, Jacktion Company, on June 1, 2020. The trial balance at
June 30 is shown below:
Jacktion Company
Trial Balance June 30, 2020
Accounts Debit (Tk.) Credit (Tk.)
Cash…………………………… 8000
Accounts Receivable………. 6000
Supplies……………………. 2000
Prepaid Insurance……………. 3000
Equipment……………………. 15000
Accounts Payable……………. 4500
Unearned Service Revenue….. 4000
Owner’s Capital………………. 22600
Service Revenue……………… 7900
Salaries and Wages Expense…. 4000
Rent Expense…………….. 1000
Total 39000 39000
Other data:
(i) Supplies on hand at June 30 are Tk.750.
(ii) A utility bill for Tk. 150 has not been recorded and will not be paid until next month.
(iii) The insurance policy is for a year.
(iv) Tk. 2,800 of unearned service revenue has been earned at the end of the month.
(v) Salaries of Tk. 1,900 are accrued at June30.
(vi) The equipment has a 5-year life with no salvage value. It is being depreciated at Tk. 250 per month for
60months.
(vii) Invoices representing Tk. 1,200 of services performed during the month have not been recorded as of
June30.

Required:
(i) Prepare the adjusting entries for the month of June.
(ii) Prepare an adjusted trial balance at June30, 2020
(iii) Prepare a classified balance sheet as at June 30, 2020.
 Solution to Q. 5.
(i) Adjusting Entries
(i) Supplies Expenses Dr. 1250
Supplies Cr. 1250
(ii) Utilities Expenses Dr. 150
Accounts Payable Cr. 150
(iii) Insurance Expenses Dr. 250
Prepaid Insurance Cr. 250
(iv) Unearned Service Revenue Dr. 2,800
Service Revenue Cr. 2,800
(v) Salaries Expenses Dr. 1900
Salaries and wages payable Cr. 1900
(vi) Depreciation Expenses Dr. 250
Accumulated Depreciation: Equipment Cr. 250
(vii) Accounts Receivable Dr. 1200
Service Revenue Cr. 1200
 ii. Adjusted Trial Balance at June 30, 2020

Accounts Debit (tk.) Credit (tk.)

Cash 8000
Accounts Receivable [6000+1200] 7200
Supplies [2000-1250] 750
Prepaid Insurance [3000-250] 2750
Equipment 15000
Accounts Payable [4500+150] 4650
Unearned Service Revenue [4000-2800] 1200
Owner’s Capital 22600
Service Revenue [7900+2800+1200] 11900
Salaries and Wages Expense [4000+1900] 5900
Rent Expense 1000
Supplies Expenses 1250
Utility Expenses 150
Insurance Expenses 250
Salary and Wages Payable 1900
Depreciation Expenses 250
Accumulated Depreciation: Equipment 250
Total 42500 42500
 iii. Classified Balance sheet as at June 30, 2020

Particulars Tk. Tk.

Assets :
Current Assets:
Cash 8000
Accounts Receivable 7200
Supplies 750
Prepaid Insurance 2750
Total Current Assets 18700
Non-Current Assets:
Equipment 15000
[-] Acc. Depreciation (250) 14,750
Total Non-current Assets 14750
Total Assets 33450
Liabilities:
Current Liabilities:
Accounts Payable [4500+150] 4650
Unearned Service Revenue [4000-2800] 1200
Salaries and Wages payable 1900
Total Current Liabilities 7,750
Non-Current Liabilities: 00
Total Liabilities 7,750
Owner’s Capital [+] 22,600
Profit during year [Note] 3100
Total Stockholders’ Equity 25700
Total Liabilities and Stockholder equity 33,450
 Note: Profit during year

Service Revenue 11,900

Rent expenses 1000
Salaries and wages expenses 5900
Utilities Expenses 150
Insurance Expenses 250
Depreciation Expenses 250
Supplies Expenses 1250 (8,800)
Profit During the year 3,100
 CMA December 2020
The trial balance of Universal Company contained the following accounts on June 30, 2020 theend of the company’s fiscal year.
Universal CompanyTrial Balance June
As on 30, 2020
Debit (BDT) Credit (BDT)
Cash 1,25,400
Accounts Receivable 1,37,600
Merchandise Inventory 2,90,000
Land 1,92,000
Building 9,97,000
Accumulated Depreciation – Building 1,54,000
Equipment 2,83,500
Accumulated Depreciation – Equipment 1,42,400
Notes Payable 70,000
Accounts Payable 1,39,000
Capital 10,57,800
Sales Discount 6,100
Sales 19,04,100
Cost of Goods Sold 11,09,900
Salaries Expenses 1,69,800
Utilities Expenses 1,19,400
Repair Expenses 15,900
Gas and Oil Expenses 7,200
Insurance Expenses 13,500
Totals 34,67,300 34,67,300
Adjustment data:
(a) Depreciation is Tk. 20,000 on Building and Tk. 9,000 on Equipment (Both are administrativeexpenses).

(b) Interest of Tk. 5,000 is due and unpaid on notes payable on June 30.

(c) Merchandise inventory actually on hand is Tk. 1,38,900.

Other Data:
(a) Salaries are 80% selling and 20% administrative.

(b) Utilities expenses, repair expenses, and insurance expenses are 100% administrative.

(c) Tk. 10,000 of the notes payable is payable to next year.

(d) Gas and oil expenses are selling expenses.

Required:
Prepare a multiple-step income statement and a classified balance sheet on June 30, 2020.
 Solution to CMA December 2020
Universal CompanyIncome Statement
For the year ended June 30, 2020

Sales Revenue 19,04,100

Less: Discount 6,100
Net Sales 18,98,000
Cost of goods sold 11,09,900
Adjustment for Inventory 1,51,100 12,61,000
Gross profit 6,37,000
Operating expenses:
Selling expenses:
Salaries expenses 135,840
Gas and Oil expenses 7,200
Total selling expenses 1,43,040
Administrative expenses:
Salaries expenses 33,960
Utilities expenses 1,19,400
Repair expenses 15,900
Insurance expenses 13,500
Depreciation:
Building 20,000
Equipment 9,000 29,000
Total administrative expenses 2,11,760
Total operating expenses 3,54,800

Income from operations 2,68,200

Less: Other expenses and losses:
Interest expense 5,000
Net Income 2,77,200
 Universal Company
Balance Sheet as on June 30, 2020
Assets:
Current Assets:
Cash 1,25,400
Accounts Receivable 1,37,600
Merchandise Inventory 1,38,900
Total current assets 4,01,900
Property, Plant and Equipment:
Land 1,92,000
Building 9,97,000
Less: Accumulated Depreciation 1,74,000 8,23,000
Equipment 2,83,500
Less: Accumulated Depreciation 1,51,400 1,32,100
Total Property, Plant and Equipment 11,47,100
Total Assets 15,49,000
Liabilities and Owners Equity:Current liabilities:
Notes Payable 10,000
Accounts Payable 1,39,000
Interest Payable 5,000
Total current liabilities 1,54,000
Long term liabilities (Notes Payable) 60,000
Total Liabilities 2,14,000
Owners’ equity:
Capital 10,57,800
Add: Net Income during the year 2,77,200
Total Owners’ equity 13,35,000
Total Liabilities and Owners Equity 15,49,000
 CMA December 2019
The account balances taken from the ledger of Al – Tawaf & Co. on December 31, 2017 are -

Debit Taka Credit Taka

Accounts Receivable 53,000 Share Capital 275,500
Cash 210,500 Accounts Payable 21,800
Merchandise Inventory 55,000 Sales 180,000
Unexpired Insurance 800 Accrued property taxes 440
Sales discount 1,250 Purchase discount 1,650
Purchase 112,000 Interest income 3,000
Freight in 3,400 Foreign Loan 40,860
Advertising expenses 1,100 Allowance for bad debt 1,500
Delivery expenses 2,300 Allowance for dep. on store equipment 16,000
Sales salaries 18,000
Rent 3,600
Interest expenses 2,000
Store Equipment 57,800
Office supplies 20,000
Total 540,750 Total 540,750
Adjustments:
(i) The merchandise inventory on December 31, amounts to Tk. 75,000.
(ii) The Allowance for bad debts are to be increased to Tk. 2,000.

(iii) Sales salaries accrued amounting to Tk. 3,000.

(iv) Office supplies on hand Tk. 5,520.

(v) Depreciation– 10% p.a.

(vi) Tk. 3,000 is reported as interest income from which Tk. 1,200 is unearned.

(vii) Tk. 2,000 is reported as interest expense of which Tk. 500 represents a payment for the year 2018.

Required:
Prepare a multiple step Income Statement and Classified Balance Sheet for the period concerned.
 Solution to CMA December 2019
Al –Tawaf & Co.
Income Statement For the year ended 31st December 2017
Particulars Taka Taka Taka
Sales 180,000
Less: Sales discount 1,250
Net sales 178,750
Cost of goods sold:
Beginning Merchandise inventory 55,000
Add purchases (net):
Purchase 112,000
Freight in 3,400
Less: Purchase discount (1,650) 113,750
Cost of goods available for sales 168,750
Less: Ending Merchandise Inventory (75,000)
Total cost of goods sold 93,750
Gross profit 85,000
Operating expenses:
Administrative & General expenses:
Rent 3,600
Office supplies expenses (20000-5520) 14,480
D/P on store equipment 5,780
Bad debts (2000-1500) 500
Total Administrative & General expenses 24,360
Selling expenses:
Delivery expenses 2,300
Salaries (18000+3000) 21,000
Advertising expenses 1,100
Total Selling expenses 24,400
Total Operating expenses 48,760
Operating Income 36,240
Financial Income & Expenses:
Interest income (3000-1200) 1,800
Financial expenses:
Interest expenses (2000-500) (1,500) 300
Net Income before Tax 36,540
 Al – Tawaf& Co.
Balance Sheet As of 31st December 2017
Assets:
Current Assets:
Cash in hand 210,500
Accounts Receivable 53,000
Less: Allowance for bad debts (2,000) 51,000
Merchandise Inventory 75,000
Office supplies on hand 5,520
Prepayment:
Unexpired insurance 800
Interest 500 1,300
Total Current Assets 343,320
Non-Current Assets:
Store Equipment 57,800
Less: Accumulated Depreciation (21,780)
Total Non-Current Assets 36,020
Total Assets 379,340
Liabilities & Owners Equity:
Current Liabilities:
Accounts payable 21,800
Accrued expenses:
Property Tax 440
Sales Salaries 3,000 3,440
Unearned Interest Income 1,200
Total Current Liabilities 26,440
Non-Current Liabilities:
Foreign Loan 40,860
Total Liabilities 67,300
Owners’ Equity:
Share capital 275,500
Retained Earnings 36,540
Total owners’ Equity 312,040
Total Liabilities & Owners’ Equity 379,340
 Statement of Cash Flows
• IAS 7 — Statement of Cash Flows
• Overview
• IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of
its primary financial statements. Cash flows are classified and presented into operating activities (either using
the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories
generally presented on a gross basis.
• Objective of IAS 7
• The objective of IAS 7 is to require the presentation of information about the historical changes in cash and
cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the
period according to operating, investing, and financing activities.
 Presentation of the Statement of Cash Flows
• Cash flows must be analyzed between operating, investing and financing activities. [IAS 7.10]
• Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:
 operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so
operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14]
 investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to
be cash equivalents [IAS 7.6]
 financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]
 interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that
they are classified consistently from period to period [IAS 7.31]
 cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with
financing or investing activities [IAS 7.35]

• for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18]
The direct method shows each major class of gross cash receipts and gross cash payments.
The operating cash flows section of the statement of cash flows under the direct method would appear
something like this:

Cash receipts from customers = [Sales revenue + (-) Decrease (Increase) in accounts receivables] xx,xxx
Cash paid to suppliers = [(Cost of goods sold + Ending inventory – Beginning inventory) + (-) Decrease
xx,xxx
(Increase) in accounts payables]
Cash paid to employees = [Wages and salaries expenses + (-) Decrease (Increase) in wages and salary
xx,xxx
payables]
Cash paid for other operating expenses = [Operating expenses + (-) Increase (Decrease) in prepaid
xx,xxx
expense + (-) Decrease (Increase) in accrued expenses]

Interest paid = Interest expense/finance cost + (-) Decrease (increase) in interest expense payable xx,xxx

Income taxes paid = Income tax expense + (-) Decrease (increase) in income tax payable xx,xxx

Net cash from operating activities xx,xxx

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash
flows section of the statement of cash flows under the indirect method would appear something like this:
the exchange rate used for translation of transactions denominated in a foreign currency should be the rate in effect at
the date of the cash flows [IAS 7.25]
cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place

Profit before interest and income taxes xx,xxx

Add back depreciation xx,xxx
Add back impairment of assets xx,xxx
Increase in receivables xx,xxx
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
Interest expense xx,xxx
Less Interest accrued but not yet paid xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
Lecture: 23 Preparation of Statement of Cash Flows: Direct Method Vs. Indirect Method
ABC LTD
Illustration 1. Comparative Statement of Financial Position December 31
2021 2020
Assets
Non-current assets:
Property plant and equipment:
Land 130,000 20,000
Buildings 160,000 40,000
Accumulated depreciation-Buildings (11,000) (5,000)
Equipment 27,000 10,000
Accumulated depreciation- Equipment (3,000) (1,000)
Current Assets:
Inventory 15,000 10,000
Prepaid expenses 5,000 1,000
Accounts receivable 20,000 30,000
Cash 45,000 33,000
Total assets 388,000 138,000
Equity and liabilities:
Equity:
Share capital 70,000 50,000
Retained earnings 164,000 48,000
Bonds payable 120,000 20,000
Current liability :
Accounts payable 28,000 12,000
Income tax payable 6,000 8,000
 ABC LTD
Statement of Profit or Loss for the year ended December 31, 2021
Particulars Tk Tk
Sales revenue 507,000
Cost of sales/cost of goods sold 150,000
Operating expense (excluding depreciation) 111,000
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Interest expense 42,000 315,000
Income before tax 192,000
Income tax 47,000
Net income after tax 145,000

Additional information for 2021:

i. Depreciation expenses comprises of Tk 6,000 for building and 3,000 for equipment.
ii. The company sold equipment with book value of 7,000 (cost 8,000, less accumulated depreciation
1,000) for cash 4,000.
iii. Issued Tk 100,000 of long term bonds in direct exchange for land.
iv. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in
accumulated depreciation.

Required: Prepare a statement of cash flows using both the indirect and direct method as per IAS 7.
 ABC LTD
Statement of Cash Flows (Indirect Method), For the Year Ended December 31, 2021
Cash flows from operating activities:
Net income 145,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense 9,000
Loss on sale of equipment 3,000
Increase in inventory (5,000)
Increase in prepaid expense (4,000)
Decrease in accounts receivable 10,000
Increase in accounts payable 16,000
Decrease in income tax payable ) (2,000)
Net cash provided by operating activities 172,000
Cash flow from investing activities:
Sale of equipment 4,000
Purchase of equipment [27,000- (10,000-8,000)] (25,000)
Purchase of building (120,000)
Purchase of land (10,000)
(151,000)
Net cash used by investing activities
Cash flows from financing activities:
Issuance of equity shares 20,000
Payments of cash dividend [48,000+145,000-164,000] (29,000) (9,000)
Net cash used by financing activities
Net change in cash during the period 12,000

Cash at the beginning of the period 33,000

Cash at the end of the period 45,000
Non-cash investing and financing activities:
Issuance of bonds payable to purchase land 100,000
 ABC LTD
Lecture: 24 Statement of Cash Flows (Direct Method), For the Year Ended December 31, 2021
Cash flows from operating activities:
Cash receipts from customers [507,000 +30,000-20,000] 517,000
Cash paid to suppliers [(150,000+15,000-10,000)+12,000-28,000] (139,000)
Cash paid for operating expenses [111,000 +4,000] (115,000)
Income taxes paid [47,000+2,000] (49,000)
Interest paid (42,000)
Net cash provided by operating activities
172,000
Cash flow from investing activities:
Sale of equipment 4,000
Purchase of equipment (25,000)
Purchase of building (120,000)
Purchase of land (10,000)
Net cash used by investing activities (151,000)
Cash flows from financing activities:
Issuance of equity shares 20,000
Payments of cash dividend (29,000)
Net cash used by financing activities (9,000)
Net change in cash during the period 12,000
Cash at the beginning of the period 33,000
Cash at the end of the period 45,000
Non-cash investing and financing activities:
Issuance of bonds payable to purchase land 100,000
 [Sample working to find out cash dividend paid if not given in the question]
Retained Earnings
Tk Tk
Balance b/d 48,000
Cash/Bank (Dividend paid) (Balancing 29,000 Net income after tax 145,000
figure)
Balance c/d 164,000
193,000 193,000
 [Sample working to find out income tax paid if not given in the question]
Income tax payable
Tk Tk
Balance b/d 8,000
Cash/Bank (Income tax paid) 49,000 Income tax expense 47,0000
Balance c/d 6,000
55,000 55,000
 CMA January 2022
6.b. Muldur Corporation’s comparative balance sheets are presented below.
MULDUR CORPORATION
Comparative Balance Sheets
December 31

2020 2019
Cash Tk. 15,200 Tk. 17,700
Accounts receivable 25,200 22,300
Investments 20,000 16,000
Equipment 60,000 70,000
Accumulated depreciation (14,000) (10,000)
Total Tk.106,400 Tk.116,000
Accounts payable Tk. 14,600 Tk. 11,100
Bonds payable 10,000 30,000
Common stock 50,000 45,000
Retained earnings 31,800 29,900
Total Tk.106,400 Tk.116,000
Additional information:
i. Net income was Tk.18,300. Dividends declared and paid were Tk.16,400.
ii. Equipment which cost Tk.10,000 and had accumulated depreciation of Tk.1,200 was sold for Tk.3,300.
iii. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in
accumulated depreciation.
Required:
(i) Prepare a statement of cash flows for 2020 using the indirect method.
(ii) Compute free cash flow.
 6.b.i) MULDUR CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ............................................................. Tk. 18,300)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense................................ Tk. 5,200* )
Loss on sale of equipment ...................... 5,500**
Increase in accounts payable................. 3,500)
Increase in accounts receivable ............ (2,900) 11,300)
Net cash provided by operating activities....... 29,600)
Cash flows from investing activities
Sale of equipment................................................ 3,300)
Purchase of investments .................................. (4,000)
Net cash used by investing activities............... (700)
Cash flows from financing activities
Issuance of common stock .............................. Tk. 5,000
Payment of dividends......................................... (16,400)
Retirement of bonds ........................................... (20,000)
Net cash used by financing activities............... (31,400)
Net increase in cash ............................................... (2,500))
Cash at beginning of period................................. 17,700
Cash at end of period ............................................. Tk. 15,200
========
*[Tk.14,000 – (Tk.10,000 – Tk.1,200)]
**[Tk.3,300 – (Tk.10,000 – Tk.1,200)]

6.b. (ii) Tk. 29,600 – Tk. 0 – Tk.16,400 = Tk.13,200

Lecture: 25
Financial Statements Analysis and Interpretation
Three basic tools of financial statement analysis are:
1. Horizontal analysis
2. Vertical analysis
3. Ratio analysis

Horizontal analysis (also known as trend analysis) evaluates a series of financial statement data (e.g., sales,
assets) over a period of time to determine the increase or decrease (absolute amount or percentage) that has
taken place.

Vertical analysis (also known as common-size analysis) evaluates financial statements data by expressing each
item in a financial statement as a percentage of a base (net sales or total assets) amount.

• Ratios denote relationship between different items/elements of financial statements which indicates a specific aspect of
financial health [e.g., liquidity, solvency, profitability, assets management efficiency] of an entity.
• Ratios can be grouped under several heads including:
1. Profitability ratio
2. Liquidity ratio
3. Solvency ratio
4. Assets management efficiency/turnover/activity ratio
5. Valuation ratio
Group of ratios Specific ratio
1. Profitability (Performance) ratio Gross profit margin = Gross profit/sales
Operating profit margin = Net operating profit/Sales *100
Net profit margin = Net profit tax/ sales revenue
Return of assets= net profit after tax/assets
Return on equity = net profit after tax /shareholders’ equity
Return on capital employed/Return on investment = Net operating profit / Average operating assets
[Capital employed= Shareholders’ equity + Long term loan]
2. Liquidity ratio Working capital = Current assets – current liabilities
Current ratio = Current Assets/Current Liabilities
Quick ratio = [Current assets – Inventories]/ Current liabilities
3. Solvency ratio Debt-equity ratio = Total liabilities/ total shareholders’ equity
Debt-assets ratio = Total liabilities / total assets
Times interest earned or Finance cost coverage ratio = Profit before interest/interest expense
Financial leverage ratio
Fixed charge coverage
Free cash flow = Net cash provided by operating activities- capital expenditures – cash dividends
4. Asset management Inventory turnover = Cost of goods sold/ average inventory
ratio/Activity/Efficiency ratio Receivable turnover = Credit sales/ average receivable
Payables turnover = Credit purchase or cost of goods sold / average accounts payables
Working capital turnover = Sales revenue / average working capital
Fixed asset turnover = Sales / fixed assets
Asset turnover = Sales / Total assets = 5/1= 5 times
5. Valuation/Investors ratio Price/earnings (P/E) ratio = Market price per share / Earnings Per Share
Basic EPS = Earnings available for equity shareholders/ Number of ordinary shares outstanding
Net asset value per share = Shareholders’ equity / Number of ordinary shares outstanding
Dividend payout ratio = Dividend per share / Earnings per share
 Interpretation of Ratios
• Interpretation on a specific ratio requires consideration of several
factors including:
o Prior periods ratio
o Benchmark set for the ratio
o Industry average
o Changes in the internal and external contexts during the periods
o Economic condition
 Review Problem 1. Financial Statement Analysis
ABC LTD
Comparative Statement of Financial Position December 31
2021 2020
Assets
Non-current assets:
Property plant and equipment (net) 2,990 2,816
Intangible and other assets 5,690 5,471
Current Assets:
Inventory 924 824
Prepaid expenses 243 247
Accounts receivable 1,026 945
Cash 524 411
Total current assets 2,717 2,427
Total assets 11,397 10,714
Equity and liabilities:
Stockholders’ Equity 2,526 2,069
Bonds payable 4,827 4,625
Current liability-Accounts payable 4,044 4,020
Total Equity and liabilities 11,397 10,714
 ABC LTD
Statement of Profit or Loss for the year ended December 31

Particulars 2021 2020

Sales revenue (net) 11,776 10,907
Cost of sales/cost of goods sold 6,597 6,082
Gross profit 5,179 4,825
Operating expense 3,311 3,059
Income from operation (operating profit) 1,868 1,766
Interest expense 321 294
Income before income tax 1,547 1,472
Income tax expense 444 468
Net income after tax 1,103 1,004

Additional information:
2021 2020
Weighted-average number of shares 418.7 418.5
Stock price at year end 52.92 50.06
 ABC LTD
Statement of Cash Flows, For the Year Ended December 31
2021 2020
Cash flows from operating activities:
Cash receipts from operating activities 11,695 10,841
Cas payments for operating activities 10,192 9,431
Net cash provided by operating activities 1,503 1,410

Cash flow from investing activities:

Purchase of PPE (472) (453)
Other investing activities (129) 8
Net cash used by investing activities (601) (445)
Cash flows from financing activities:
Issuance of equity shares 163 218
Issuance of debt 2,179 721
Reductions of debt (2,011) (650)
Payments of cash dividend (475) (450)
Repurchase of common stock and other items (645) (612)
Net cash used by financing activities (789) (773)
Net change in cash during the period 113 192
Cash at the beginning of the period 411 219
Cash at the end of the period 524 411
Required: Compute relevant ratios for ABC LTD for the year 2021 and 2020.
 Sample Answer Profitability Ratios:
Ratio Formula ABC Ltd. XYZ Industry
Ltd. average
2021 2020
2021 2021
Gross profit (GP) ratio Gross profit ÷ net sales 5,179/11,776 = 44.23% 38%* 36%
43.98%
Operating profit ratio Operating profit ÷ net sales 1,868/11,776= 16.19% 12% 10%
15.86%
Net profit (NP)/profit Net profit ÷ net sales 1,103/11,776= 9.21% 8.2% 6.1%
margin 9.37%
Return on assets (ROA) Net profit ÷ Total assets 1,103/11,397= 9.37% 6.2% 5.3%
9.67%
Return on equity (ROE) Net profit ÷ Stockholders’ 1,103//[(2,526+2, 46% 25% 19%
equity 069)/2]= 48%
Return on Capital Net profit ÷ [stockholders’ 1,103//[2,526+4,8 15% 12% 11%
employed (ROCE) or Return equity + long term interest 27]= 15%
on investment (ROI) bearing debt]

*Will be given in the question…

 Liquidity Ratios:

Ratio Formula ABC Ltd. XYZ Ltd. Industry

2021 2020 2021 average
Current ratio Current assets ÷ current liabilities 2,717/4,044 = 0.67 0.60 0.80 1.06
Quick or liquid or [Current assets – Inventory] ÷ [2717-924]/4,044 0.40 0.50 0.85
acid test ratio current liabilities = 0.44
Working capital Current assets - Current liabilities (1,327) (1,593) NA NA

Solvency Ratios:
Ratio Formula ABC Ltd. XYZ Ltd. Industry
2021 2020 2021 average

Debt-equity ratio Total liabilities÷ total shareholders’ equity 8,871/2,526=351% 418% 150% 120%
Debt-assets ratio Total liabilities ÷ total assets 8,871/11,397=78% 81% 55% 55%

Times interest Profit before interest and tax ÷ interest 1,868/321=5.8 6 9.9 5.5
earned expense
Free cash flow Net cash provided by operating activities- 1,503-472- 507 895 M NA
capital expenditures – cash dividends 475=556
Lecture: 26 Activity/Assets management efficiency/ Turnover Ratios:

Ratio Formula ABC Ltd. XYZ Ltd. Industry

2021 2020 2021 average

Inventory turnover Cost of goods sold ÷ average 6,597/[(924+824)/2]=7.55 7.9 7.4 6.7
inventory
Inventory holding period 365/Inventory turnover 365/7.55=48.34 46.2 49.3 54.5
Receivable turnover Credit sales ÷ average 11,776/[(1,026+945)/2]= 12 12.2 11.2
receivable 11.95
Average collection period or 365/Receivable turnover 365/11.95=30.54 30.4 29.9 32.6
receivable days
Payable turnover Credit purchase or cost of 6,597/[(4,044+4,040)/2]= 1.51
goods sold ÷ average payable 1.64
Average payment periods or 365/payable turnover 365/1.64=223 242
payables day
Assets turnover Sales ÷ Total assets 11,776/[(11,397+10,714)/ 1.02 0.76 0.87
2]= 1.07
 Valuation ratio:

Ratio Formula ABC Ltd. XYZ Ltd. Industry

2021 average
2021 2020
Basic EPS Earnings available for equity shareholders/ 1,103/418.7=2.63 2.40 2.90 NA
Weighted average common shares outstanding
Price/earnings (P/E) ratio Market price per share / Earnings Per Share 52.92/2.63=20.10 20.90 24.30 35.80
Net asset value per Shareholders’ equity / Number of ordinary shares 2,526/418.7=6.03 4.94 5.00 5.50
share outstanding
Dividend payout ratio = Cash dividends per share / Earnings per share or 475/1,103=43% 45% 54% 37%
Cash dividend/net income
Lecture: 27 Review Problem 2: Financial Statements Analysis

The Income Statements and Statements of Financial Position of the Target Corporation andWal-Mart Incorporation for
the year 31st December 2018 are given below:

Income Statement

Target Corp Wal-Mart Inc

Sales 62,000 3,75,000

Less: Sales returns and allowances (529) (474)
Net Sales 61,471 3,74,526
Less: Cost of goods sold (41,895) (2,86,515)
Gross Profit 19,576 88,011
Less: Selling and Administrative
expenses (16,200) (70,847)
Less: Interest expense (647) (1,798)
Other Income 1,896 4,273
Less: Income Tax expense (1,776) (6,908)
Net Income 2,849 12,731
 Balance Sheet
Target Wal-Mart
Assets Corp Inc
Cash 5,000 10,000
Accounts Receivables 6,000 15,000
Inventories 5,000 20,000
Prepaid expense 2,906 2,585
Total current assets 18,906 47,585
Non Current Assets 25,654 1,15,929
Total Assets 44,560 1,63,514
Liabilities and Equities
Accounts Payable 3,000 25,000
Notes payable 5,000 25,000
Accrued expenses 3,782 8,454
Total current liabilities 11,782 58,454
Long term debt 17,471 40,452
Total Liabilities 29,253 98,906
Share Capital 12,000 60,000
Retained Earnings 3,307 4,608
Total equity 15,307 64,608
Total liabilities and equity 44,560 1,63,514
 Target Corp Wal-Mart Inc
Beginning of year balances
Total Assets 37,349 1,51,587
Total stockholder’s equity 15,633 61,573
Current Liabilities 11,117 52,148
Total Liabilities 21,716 90,014

Other Data
Average net accounts receivables 7124 3,247
Average Inventory 6,517 34,433
Net cash provided by operating
activities 4,125 20,354

Required:
1. What is the importance of financial statement analysis? What are the tools used infinancial
statement analysis?
2. For each company, calculate the following ratios:
Current ratio, Accounts receivables turnover, Average collection period, Inventory turnover, Days in
inventory, Profit margin, Asset turnover, Return on assets, Return on common stockholders’ equity,
Debt to assets.
3. Compare the liquidity, profitability and solvency of the two companies.
Req. 2. Ratio Target Wal-Mart
1 Current 1.6:1 (Tk.18,906 ÷ Tk.11,782) 0.8:1 (Tk.47,585 ÷ Tk.58,454)

2 Accounts receivables 8.6 (Tk.61,471 ÷ Tk.7,124) 115.3 (Tk.374,526 ÷ Tk.3,247)

turnover

3 Average collection 42.4 (365 ÷ 8.6) 3.2 (365 ÷ 115.3)

period
4 Inventory turnover 6.4 (Tk.41,895 ÷ Tk.6,517) 8.3 (Tk.286,515 ÷ Tk.34,433)
5 Days in inventory 57.0 (365 ÷ 6.4) 44.0 (365 ÷ 8.3)
6 Profit margin 4.6% (Tk.2,849 ÷ Tk.61,471) 3.4% (Tk.12,731 ÷ Tk.374,526)
7 Asset turnover 1.5 (Tk.61,471 ÷ Tk.40,954.5*) 2.4 (Tk.374,526 ÷ Tk.157,550.5***)
8 Return on assets 7.0% (Tk.2,849 ÷ Tk.40,954.5*) 8.1% (Tk.12,731 ÷ Tk.157,550.5***)
9 Return on common 18.4% (Tk.2,849 ÷ Tk.15,470**) 20.2% (Tk.12,731 ÷ Tk.63,090.5****)
stockholders’ equity
10 Debt to assets 65.6% (Tk.29,253 ÷ Tk.44,560) 60.5% (Tk.98,906 ÷ Tk.163,514)

*(Tk.44,560 + Tk.37,349) ÷ 2
**(Tk.15,307 + Tk.15,633) ÷ 2

*** (Tk.163,514 + Tk.151,587) ÷2

**** (Tk.64,608 + Tk.61,573) ÷ 2
Req. 3.

The comparison of the two companies shows the following:

Liquidity—Target’s current ratio of 1.6:1 is significantly better than Wal-Mart’s .8:1. However,
Wal-Mart has a better inventory turnover ratio than Target and its accounts receivable
turnover issubstantially better than Target’s.

Profitability—With the exception of profit margin, Wal-Mart betters

Target in all of the profitability ratios. Thus, it is more profitable than Target.

Solvency—Wal-Mart betters Target in both of the solvency ratios. Thus, it is more solvent
than Target.
Lecture: 30 Assessment

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