INSTITUTE OF MANAGEMENT SCIENCES| KUST

FINANCIAL STATEMENT ANALYSIS

Assignment No.2
Instructions:
1. The dead line for this assignment is JUNE 10, 2011(Friday)
2. It should be hand written
3. After dead line there would be 20% deductions in marks each day.

Q.No.1 Explain the following terms

i- Historical Cost ii- Going concern iii- Prudence iv- Stable currency Assumption
b. Name the parties that demand financial statement and explain any three.

Q.No.2. Using the following information, complete the balance sheet that is given below;

Long term debt to Equity 0.5 to 1

Total asset turnover 2.5 times
Average collection period 18 days
Inventory turnover 9 times
Gross Profit Margin 10%
Acid-Test ratio 1 to 1

Particulars Rs Particulars Rs
Cash ? Notes & Account payables 100,000
Account Receivable ? Long-Term Debt ?
Inventory ? Common Stock 100,000
Plant & equipment ? Retained Earning 100,000
Total Assets Total Liab. & S/Equity

Q.No.3. Orient Pakistan is home appliances company. Shown below for the current year are
the statement of the company and common size summary for the industry in which the
company operates.

Particulars Orient Industry Average

------Rs ----- %
Sales 40,000,000 100
Cost of Goods Sold 19,600,000 57
Gross Profit 20,400,000 43
Operating Expenses:
Selling 8,400,000 16
General & Admin 6,800,000 20
Total Operating Expenses 15,200,000 36
Operating Income 5,200,000 7
Income Tax 2,400,000 3
Net Income 2,800,000 4

Required: a. Prepare two columns common size income statement the first column should
show for Orient, all items expressed as percentage of net sales and 2nd column showed for
industry average as given.
b. Comments specifically on differences between Orient and Industry average with respect to
gross profit, selling expenses, general & Admin Expenses, operating income & Net income.
Q.No.4. The Sammi DAEWOO company has current assets of Rs.8000,000 and current
liabilities of Rs.5000,000. What effect would the following transactions have on the firm’s
current ratio (and mentioned the resulting figure)? Deal each case separately.
1. Two new buses are purchased for total of Rs.1000,000 in cash
2. The company borrows Rs.1000,000 short term to support the increase in receivables
of the same amount?
3. Additional common stock of Rs.2000,000 is sold and proceeds invested in expansion
of several terminals.
4. The company increases its accounts payable to pay dividend of Rs.400,000 out of
cash.

Q.No.5. Shown below are the selected financial data for Mondo & Global corporations at the
end of the current year.

Particulars MONDo Co Global Co

Net Sales (All on Credit) Rs.1,440,000 Rs.1,190,000
Cost Of Goods Sold 1,260,000 825,000
Cash 36,000 70,000
Account Receivable 180,000 140,000
Inventory 504,000 165,000
Current Liabilities 240,000 150,000

Assume that the year end balances shown for accounts receivable and Inventory also represent the
average balances of these accounts through the years.
Requirement:
a. For each of the following compute the following;
1. Working Capital 2. Current Ratio 3. Quick Ratio 4. Inventory turnover in days
5. Accounts Receivable turnover in days
b. From the view point of a short term creditors, comments upon the calculation in part a. To which
company would you prefer to sell the merchandise of Rs.50,000 on 30 days credit.

Q.No.6. You have been furnished with information of Aditya Mills Limited for the current year.

Balance Sheet, June 30 2010

Liabilities Rs in 000 Assets Rs in 000
Equity Shares Capital (100 each) 1,000 Plant & Equipment 640
Retained Earning 368 Land & Building 80
Sundry Creditors 104 Cash 160
Bills Payables 200 Sundry Debtors 360
Other Current Liabilities 20 Less: Allowances for BDebt 40 320
Stock 480
Prepaid Insurance 12

Total 1,692 Total 1,692

Profit & Loss Account, June 30, 2010

Particulars Rs in 000
Sales 4,000
Less: Cost of Goods Sold 3,080
 Gross Profit 920
Less: Operating Expenses 680
Profit 240
Less: Taxes (35%) 84
Net Profit 156

Sundry Debtors & Stock at the beginning of the year were Rs.300,000 and Rs,400,000 respectively.
Requirement: Determine the following;
1. Gross Profit ratio to sales 2. Net Profit Ratio to sales 3. Earning Per Share 4. Return
on capital Employed 5. Market Value of the shares if Price Earning (P/E) ratios is 10 times

Q.No.7. Two companies have the same amount of working capital. The current Debt paying ability of
one company is much weaker than the other. Explain how this could occure?