FINANCI ALMANAGEMENT

Financialmanagementdeal s wi t
ht he pr ocur ementoff unds and t heiref f
ective
util
i
zat i
oni nor dert oachi evef i
nanci al objectivesoft hebusi ness.
Object i
vesoff i
nanci almanagement
1.Tocr eat eweal thf ort hebusi ness
2.Togener atecashf ort hebusi ness
3.Topr ov i
deanadequat er etur noni nvest ment
4.ToSat i
sfyst akehol der s
5.Forgr owt h
Impor tanceoff i
nanci al management
Financei st hel ifebl oodoft hebusi nessor ganizati
on,t heref oreeachbusi nessmust
mai ntainadequat eamountoff inancesf ort hebusi nessr unningandact i
v i
ti
es.
Thei mpor tancei ncl udes;
1.Fi nanci al pl anni ng,f i
nanci al management hel ps t o det ermine t he f i
nanci al
requi rementoft hebusi ness.
2.Acqui sit
ionoff unds, thisinv olvesget tingt herequiredbusi nessf undsbyt appingt he
possi blesour ceswi thl eastcost .
3.I tensur espr operusageoff unds,byspendi ngtheacqui redf undsonact ivi
ti
est hat
increaset hev alueoft hef i
rm` sasset .
4.I thel psi nmaki ngf inancialdeci sionsi nt hebusi ness.Forexampl et heusageof
funds, i
nv estmentwhi chmayaf fecttheent i
rebusiness.
5.I t’
susedt oincr easepr ofit
abi li
tyoft hebusi ness,throughensur ingpr operbudget ing
andr egul aranal y sisofpr ofitsev eryt i
me.
6.I thel psmanagementt oassesst hebusi nessper formance,t hisisbasedonr eturns
oni nv estment ,
financi alutil
izat i
onet c.
7.I thel pst hebusi nesst ocompar eper formanceoft hebusi ness,byuseofr atios
anal ysis.
SOURCESOFFI NANCES
Thet ermf inancei sdef i
nedast hear tandsci enceofmanagi ngmoney .
Businessf inancei sdef inedast heact ivi
tyconcer nedwi thpl anni ng,r ai
sing,controll
ing
andadmi nisteringoft hef undsusedi nt hebusi ness.
Sour cesi nclude;
1.OWNSOURCE
Thi sincludesper sonal incomesav i
ngst hatonecanuset ost artabusi ness.
Adv ant ages
1.I tal l
owsanent repr eneurt omakei ndependentper sonaldeci sionsonwher et o
investt hef undandwhatt odowi t
ht hepr of i
tsreali
zed.
2.I thasnoext racoste. g.noi nterestispai df ortheuseoff unds.
3.The ent repreneurhas compl ete cont rolov ert he benef it
s ar isi
ng f r
om t he
invest ment .
4.I tisassoci at edwi thsel fdi scipli
nee. g.sav i
ngmor eandear nmor e
5.Thesour cehasnost r i
ngsat tached.
1
2
 Di sadv antages
1.I ttakesl ongper i
odoft i
met or eal i
zesubst ant i
al amountofmoney .
2.I tcanpr omot eext rav agancesi ncet heent repr eneurhasonext ernal control.
3.I t’
sdi fficultt odi st i
ngui shper sonali ncomeandbusi nesscapi t
al,t hi
sr etardt he
growt hofbusi ness.
2.SUPPLYCREDI T
Thisi swher et hesuppl ierof f
er sgoodsoncr editandcol lectscashl at eraft
ersel l
ing.
Adv ant ages
1.I tensur est hatt hebusi nessi sconst ant l
ysuppl i
edwi t
hr awmat eri
al s
2.I tpr omot esgoodr elationbet weent hecompanyandt hebusi nessr eceiv
ingcr edit.
3.Thesuppl y
ingcompanyget sal otofpr ofitssi ncegoodssol doncr edi
tar ealway s
highl ypr i
ced.
4.I thel pst hoseent repr eneur swi thoutcapi tal tost artbusi ness.
5.I tpr omot essel fdisci plinesi ncecr editpay mentneedhar dwor kandhonest y.
6.I tincr easesmar ketf orsuppl y i
ngt hecompany .
Di sadv antages
1.I t’
sassoci at edwi thhi ghcostofr ecov eri
ngcr edit.
2.I tmayl eadt obadr el ationshi psi ncei ncaset hecr editisnotcl eared.
3.I ncaseofdemandf al l
, thesuppl iersr egistergr eatl osses.
4.I tlimi tsconsumerchoi ce
5.I tincr easest hecostofdoi ngbusi ness
6.I tleadst obuy i
nggoodsofl ow qual it
ygoodsorser vices.Thi smakesbuy ert o
makel osses.
3.FAMI LYSOURCEOFFI NANCE
Thisi ncludet heuseoff ami lypr oper ty,f
ami lysav i
ngsusedt ost artabusi ness
Adv ant ages
1.I thasf ewerst r i
ngsat t ached
2.Mor eamountofmoneyi sr ai sedatonce
3.I tpr omot esaccount abi l
ityint hebusi ness.
4.Theext er nal super v i
si onl eadst oef f
iciencyi nbusi nessoper ati
ons.
5.Low costofoper ation,si ncef ami lymember sof ferthei rexper tiseatal mostno
cost .
6.I tment or sindi vidual int ot hecul t ureofsav ingandbusi nessoper ations.
Demer its
1.Fami lyconf lictsar eext endedt ot hebusi ness, thisaffecti tsgr owth
2.Somet imesper sonal i
nt er estmayaf f
ectt hebusi nesspr of i
tmaki ng
3.I tmayl ead t o bad r elat i
onshi p bet ween t hef und admi nist
erand t hef ami l
y
member s
4.Deci sionmaki ngandi mpl ement at i
oni sdel ay edanddi ffi
cul tasanumberoff ami l
y
member sar et obeconsul ted.
5.I tbr eadsConf lictofl eader shipoft hef ami lypr oper t
y .
4.SELLI NGPARTOFTHEBUSI NESSORPERSONALPROPERTY
3
Thisi swher eanent repr eneurconv ert
ssomeoft heper sonalorbusi nessproperti
es
i
ntocasht oei t
hergetst ar t
ingcapi talorexpandt heexisti
ngbusi ness.
Adv antages
1.I thasnost ringsat t ached.
2.Lar geamountofmoneyi sr ai
sedwi thinashor tperi
odoft ime.
3.I tl eadst oqui cki nvest mentdeci sionmaki ng.
4.I tpr omot eshar dwor k,inor dertomakepr ofi
tsandr eplacet hesoldpropert
y.
5.RETAI NEDEARNI NGS
Somepar tsofpr ofitswhi chbel ongt oor dinaryshar eholder smaynotbepai doutas
di
v i
dendsi nt heper i
odt heyar eear ned.Thesepr ofi
tsarer einvestedintothebusiness
orusedt ost artanewbusi nessorexpendori mpr oveont heexi stingone.
6.Commer ci
al banks
Thesepr ov idefinancesi nf orm ofl oans.Loani sthemoneybor rowedf r
om af i
nancial
i
nstit
ut ionl ikebanks, cooper ati
vecr editsocieti
es, etc
Classifi
cat i
onofl oans
Theycanbeshor tt erm orl ongt erm
Theshor tt erml oani st hemoneybor rowedwi t
hr epaymentper i
odofl essthanoney ear.
Theyi nclude:
a)Bankov erdr aft,thisi swher eacust omerwi th acur r
entaccounti sal
lowedt o
withdr awmoneyov erandabov ewhati sonhi sorheraccount .
b)Sof tl oans,t hisi st hemoneyt hatisadv ancedbycommer ci
albankswi thfewer
condi ti
onsandf orashor tper i
odoft ime.
c)Cashcr edit,thisisanar rangementbywhi chabankal lowsi tscustomer stoborrow
moneyupt ocer tainl i
mitagai nstthesecur itypledged.

LONGTERM SOURCES
a)Shar ecapi tal,thisconsi stsofor dinaryshareCapi taLandpr eferenceshar ecapi tal
b)Debent ureorl ongt er ml oans, isdef i
nedasawr ittenasawr i
tt
enacknowl edgement
oft hedebti ncur r
edbyal imitedcompany .t
histakesabout20andabov eyear s.
c)Mor tgages, thi
sr aisedbymor tgagingasset s
d)Instituti
onal investor s,thesepr ovidecapitalthr
ought heprocessofsel l
ingshar es
Adv antagesofusi ngal oanasasour ceofbusi nesscapi tal
1.Itpr ov i
deext racapi talt o anent repreneur,thi
si susedt o suppl ementont he
avai l
ablecapi t
al.
2.Mor emoneyi sr ai sed in shor tperiod oft i
me,t hisfaci l
it
ateeasyi nv estment
deci sionmaki ng.
3.Itencour ageshar dwor kont hepar toft hebor r
owersoast or epaythebor rowed
fund.
4.Itfaci li
tateeasypl anning,t hisi sbecausel ar
geamountofmoneyi srai sedi na
singl esum.
5.It’
s accompani ed by ext ernalmoni t
oring fr
om t he lender ;t hi
si mpr oves the
perf ormanceoft hebusi ness.
4
 6.I thel pst heent repr eneurt osuppl ementonhi sorhersav ings.
7.Somet i
mescer tai nl oansbearl ow i nterestr ate,t hisleadst ot hegr owt hoft he
busi nesscapi tal.
8.Fort hecaseofi nsur edl oansanychangei nbusi nessper formancecausedby
natur al fact or ,theent repr eneurasset sisnotaf fected.
9.A shor tt er ml oanhel psanent repr eneurt oof fsetshor t-
term deficite. gpaying
wor ker s, accessi ngr awmat eri
alset c.
Di sadv ant ages
1.Onecan` taccessi twi thi nt heshor tper i
odoft ime,acqui ri
ngi tisapr ocess.Thi s
delay si nv est mentdeci sions.
2.I ti saccompani edbyext ernal cont rol; t
hisaf fectst heoper ati
onoft hebusi ness.
3.I nt erestamountsomet imesi shi gh,t hisi ncreasest hebusi nessexpendi turese.g.
pay i
ngwor ker ssal ar iesont imei saf fected.
4.I ncaseofbusi nessf ailure,t hel endi ngi nstituti
onmayt akeov erowner shi pofthe
business.
5.Somet imesl endi ngi nst i
tut i
onst akepossessi onoft hesecur i
typledgedt hisaff
ect
thegr owt hofbusi ness.
6.I taf fectt hecapi t algr owt hoft hebusi ness,t hisi sbecauset heent repr eneurpay
backmor et hant heamountbor r
owed.
Procedur ef orbor r
owi ng
1.Dev el opingaf i
nanci alpl an
2.Car ryingoutmar ketsur veyont hel endi nginst i
tutions
3.Maki ngani nqui r
yont hei denti
fiedf inancial i
nstituti
ons
4.Obt ainingl endi ngt er msandcondi tionsoft hedi fferentfi
nancial i
nsti
tutions.
5.Compar ingt het er msandcondi t
ions
6.Sel ect i
ngt hef i
nanci al i
nst i
tuti
ont odeal wi t
h
7.Appl y i
ngf oral oan
8.Fi ll
i
ngt heappl icat ionl oanf orm
9. Assessi ngt heappl icantt oest abl i
shwhet hert hebusi nessi scapabl eofpay ing
backt hel oan.
10. Agr eeont het er msandcondi t
ionsf ori nvestmentandr epaymentoft hel oan.
11. Present ingt hecol later al security
12. Obt ainingt hel oan
13. Startpay i
ngt hel oan
Circumst ancesunderwhi chanent repr eneurmaygoi nf oraloan
1.Whenhewantt omakeanur gentpr ofi
tableoppor t
unitythatr equir
ei mmedi at e
fundi ng.
2.Whent her ei saf inanci al gapt obef il
led
3.Whent heent repr eneurwhatt oexpandt hebusi ness
4.I ncaset heent repr eneurwant st omeett hemar ketdemand.
5.I ncaset heent repr eneurwant st osuppl ementont heexi sti
ngcapi t
al.
6.Whent her ei sneedt oi ncreaseont hewor kingcapi t
alsoast oservet hecust omer
5
 bet ter.
7.Whenanent r
epr eneuri sf acedwi thshor tt ermf i
nancialcr
isi
se.g.f alli
ndemand
r esul ti
ngi nt
oadr opint hepr ofi
tlevel.
LOANMANAGEMENT
Thisr ef erst ot hev ariousway sofhow anent r
epreneuri st oeffect
iv elyuti
li
zet he
procur edf undpr ofit
abl yinor dertomakeapr ofitandr epaythefundsatt hesometime
maintai ningagoodr elati
onshi pwi t
hthel ender .
Thef ollowi ngway sar eused
1.Loanr epay mentschedul e
Thisi sat abledr awnbyt hel endingi nst i
tutionori ndiv
idual
sshowi ngt heagr eed
mont hlyi nstall
mentamountar etobepai dint ermsofl oanamount ,i
nterestamount .
I
t’
sdr awnusi ngt womet hodsofi nterestcal culationst hatis
Fi
xedmet hodandr educi ngmet hod
Exampl eone
Megaent erprisebor rowedshs4, 000,000f rom Bar cl
aysBankatani nter estrat
eof5%
permont handi t
’spai di nequali nstall
ment .Pr epar eal oanr epaymentschedul eusinga
fi
xedmet hodandr educi ngbal ancemet hod.
Soluti
on
DEMAKOKOMI CROFI NANCELTD
P.o.box123Mbal e
Loanr epay mentschedul e
Nameoft heclient:megaent er pri
ses accountno: 12224353
Loansi zeshs: 4,000,000.interestr at epermont h5%
Loanper i
od5y ears
Met hodofcal cul ati
nginterest: fi
xedi nstall
mentmet hod.

Peri
od Pri
nci
pal
inst
all
ment I
nter
estamount Tot
alr
epay
ment Pr
inci
pal
bal
ance
year
Shs Shs shs shs

1 800,
000 2,
400,
000 3,
200,
000 3,
200,
000

2 800,
000 2,
400,
000 3,
200,
000 2,
400,
000

3 800,
000 2,
400,
000 3,
200,
000 1,
600,
000

4 800,
000 2,
400,
000 3,
200,
000 800,
000

5 800,
000 2,
400,
000 3,
200,
000 Ni
l

Tot
al 4,
000,
000 12,
000,
000 16,
000,
000

Draft
edby ….
. Approvedby ………………….
Name………. Name………………………….
Ti
tle………. Tit
le……………………………….
Note;
I
nteresti
scalculat
edas5x12=60%pery ear(60/100x4000,000)=shs2,400,
000
Pri
ncipali
nst
allment=4000,000/
5=shs800,000pery ear
Totalrepayment=i nt
erestamount+princi
pali nstall
ment800,000+2400,000=shs3,
6
 200,
000
Reduci
ngbalancemet hod
Demakokomi crof inanceltd
Pobox123Mbal e
Loanrepaymentschedul e
Nameofthecl i
ent:megaent erprises accountno:12224353
Loansi
ze:shs4,000,000.
Interestr at
epermont h5%Loanper i
od:5y
ear
s
Br
anch:
Mbale
Methodofcalculat
ingint
erest:reducingbalanci
ngmet hod.

Peri
od Pri
nci
pal
inst
all
ment I
nter
estamount Tot
alr
epay
ment Pr
inci
pal
bal
ance
year
Shs Shs Shs shs

1 800,
000 2,
400,
000 3,
200,
000 3,
200,
000

2 800,
000 1,
920,
000 2,
720,
000 2,
400,
000

3 800,
000 1,
340,
000 2,
140,
000 1,
600,
000

4 800,
000 960,
000 1,
760,
000 800,
000

5 800,
000 480,
000 1,
280,
000 Ni
l

Tot
al 4,
000,
000 7,
100,
000 1,
1,
100,
000

Draft
edby ….. Approv edby ……………………. .
Name………. .. Name……………………………. .
Tit
le………. …… Ti t
le……………………………….
Note:
Theinterestiscal cul atedbasi ngont heout standingpr i
ncipalloanbal ancef orexampl e
i
ny earone,60/ 100x4,000, 000=shs2, 400,000,pai dl oanpr i
ncipalinst al
l
ment800, 000
andthebal ancebei ngshs3, 200,000.
Year.3,200, 000x60/ 100=shs1, 920,000.Etc
2.Document i
ngev erydetail
soft heloan
3.Infor mingt hel eadi nginstit
utionofanychangei nthebusi nessper formance
i
ncasesuchchangesmayaf fectthesales.
4.Inv esti
ngt hel oani npr oductiveactivi
ti
es, sucht hatt heprofitsreali
zedi susedto
payt heloan.
5.Ensur i
ngpr opermanagementoft hebusi ness,so ast o maket hebusi ness
profit
abletoeasel oanpay ment
6.Ensur i
ngef fect ivecommuni cat i
onwi t
ht hel enderabouti ssuesr elatedt oloan
management .
7.At tending wor kshops so as t o be equi pped wi t
hf i
nanci almanagement
i
nfor mation.
FINANCIALNEEDSOFAPOTENTI ALBUSI NESS
Thesuccessofev er ybusi nessdependsonpr operi denti
ficati
onofbusi nessneeds.Li ke
humanbei ngshav eneedssuchasf oodsecur ityist hesamecasewi thbusi ness.The
7
busi nessneedsi nclude;
INVESTMENTNEEDS
Thesear eneedt hatanent repreneurinvestsinordertogetar eturn.Theseneedsar e
eithercapi tali nv estmentneedorwor kingcapitalneeds.Capi t
alinv est
mentneeds
i
ncl ude
 Acqui si ti
onofl and
 Si tepr epar ation
 Bui l
di ngs
 Machi ner yandequi pment
 I nstal lat i
onoff ixturesandf it
ti
ngs
 Fur nitur e
 Pr ov i
si onf orinf lati
on
WORKI NGCAPI TALNEEDS
Thi sr efersi temsneededt of aci
li
tatedayt odayact i
vit
iesoft hebusi ness.These
i
ncl ude;
 Pur chaseofr awmat erial
s
 Pay ment sofl abour
 Pay mentofut i
liti
es( wat er,
power ,tel
ephone)
 Tr anspor tcost s
 Packagi ngmat erial
s
 Pay mentoft ax
 Machi ner yr epai rs
 St ationer yandpost age
 Pay mentofI nter estonl oans
PREOPERATI NGNEEDS
Thesear ebusi nessneedst hattheent r
epr
eneurmeet sbef orecommencementof
busi ness.Theyi nclude;
 Busi nessr egistration
 Tr adingl icense
 Mar ketr esear ch
 I nstal lat i
onexpenses
 Adv er tising
 Admi nistr ati
v ecost s
 Legal fees
 Super v isionexpenses
 I niti
al rent
BUSI NESSBUDGET
Abudgeti sadet ailedst at ementwhi chshowst heest i
matedbusi nessr evenueand
est i
mat edexpendi tureoft hebusi nessf oragivenfinanci
alyear.I
nf inance,af i
nanci
al
plani sv erycr iti
cal inexami ni ngthefinanciali
mpli
cationofthebusinessexpendi t
ures.
Impor tanceoff inanci al plan
8
Object
ivesofbudget i
nginbusi ness
1.Tor ai
serev enueforthebusi ness
2.Tomai ntaincompet i
tiv
eadv antageofthebusiness
3.Tocont r
ol expendit
ureoft hebusi ness
4.Tomai ntainqualit
yofpr oductsi nthebusiness
5.Toensur eef f
ecti
veutil
izationoft heprocuredfunds
6.Toachiev eeffi
ciencyint hebusiness
Typesofbudgets
1.Fixedcapitalbudget

9
 TOOTODECORATORS
Po170Mbal e
Fixedcapit
albudget
Fi
xedcapi t
al r
equi
rements shs
Acquisit
ion 100,
000
Purchaseofmachi nestool
s 100,000
Constructi
onofbusinesspremises 400,000
Purchaseoff ur
nit
ure 500,000
Truck 200,000
Total 1,
300,000
Preoperatingbudget

METHAHONEYMI LLERS
Pobox120Mbal e
Pre-
operatingbudget
Requirement s shs
Businessr equisi
ti
on 1,000,000
Tradingl i
cense 1,000,000
Marketr esear ch 1,000,000
I
nstallati
onsexpenses 3,000,000
Adver t
ising 1,000,000
Admi nistrati
vecosts 2,000,000
I
niti
al rent 1,000,000
Total 10, 000,000

2.Wor ki
ngcapi t
albudget
METHATMEATPROCESSOR
P.o.box120Mbal e
Workingcapitalbudget
Requirement shs
Purchaseofmat erial
s 1000,
000
Paymentofl abour 1000,
000
Paymentofut il
it
ieswat erpowertel
ephone 1000,
000
Transportcosts 1000,000
Packagingmat eri
als 1000,
000
Paymentoft ax 1000,
000
Total 6000,
000
OTHERBUDGETS
Market i
ngbudget
Productionbudget
Organizati
onalbudget
10
FINANCI ALSTATEMENTANALYSI S
Af inanci alst atementi sanof ficialdocumentofanent er prise, whi chexpl orest heent i
re
financi ali nf ormat ionoft heent erpr ise.Fi nanci alstat ementi sanor ganizedcol l
ect i
onof
dat aaccor dingt ol ogi calandconsi stentwi thaccount ingpr ocedur es.Itspur posei st o
conv eyanunder st andi ngoft hef i
nanci alaspect soft hebusi ness.Henceaf inanci al
stat ementi st hesummar yoft heaccount ingpr ocesswhi chpr ov idesusef ulinformat ion
tobot hi nt ernal andext ernal par ti
es.Fi nanci al statement sconsi stoft hef ollowing;
1.I ncomest atementorpr of i
tandl ossaccount
2.Bal ancesheetort heposi tionst atement
INCOMESTATEMENT
It’
sal socal ledpr of itandl ossaccountwhi chr eflect st heoper at i
onalposi ti
onoft he
busi nessdur ingapar ticularper i
odoft ime.Nor mal l
yi tconsi stsofoneaccount ingy ear .
Itdet ermi nest heent ireoper at i
onalper formanceoft hebusi nessl i
ket otalr evenue
gener atedandexpensesi ncur redf orear ningt hatr ev enue.I ncomest atementhel pst o
ascer taint hegr osspr of itandnetpr ofitoft hebusi ness.
Gr oss pr of i
ti s det er mi ned by pr epar at i
on oft rading accountand netpr ofi
ti s
det er minedbypr epar ationoft hepr ofi
tandl ossaccount .
ITEM RECORDEDI NTHETRADI NGACCOUNTANDNETPROFI TANDLOSSACCOUNT
1.Pur chases, thi sr ef erst ot hegoodsboughtbyanent repr eneurf orresal e.
2.Openi ngst ock,( inv ent ory )t hisr eferst ounsol dgoodsav ailableint hebusi nessat
thebegi nni ngofanewf inanci al year .
NB. A busi nesst hathasj ustcommencedbusi nessdoesnothav eopeni ngst ock
.hencei tspur chasesbecomest heopeni ngst ock.
3.Cl osingst ock, t
hi sr efer st ot hev al
ueofgoodsnotsol dbybusi nessatt heendoft he
financi al tradi ngper iod.I t’ssubt ractedf rom t hecostofgoodsav ai
lablef orsal e
4.Sal es,t hi sr efer st ot hev alueofgoodswhi chhav ebeensol dbyabusi ness.Ori t’
s
ther ev enueear nedf rom t hegoodssol d.Thev aluei susedt ocal culatet hegr oss
pr ofitorl oss.
5.Sal esr et ur nsorr et urnsi nwar ds,t hesear egoodspr eviousl ysol dbuthav ebeen
br oughtbackt ot hebusi ness. iesal es- retur nsinwar ds=netsal es
Reasonsgoodsar esomet imesr etur ned
- Whengoodsar eexpi red
- Whengoodsar ewr ongsi ze
- Whengoodshav ebeendamaged
- Whengoodsar eofwr ongcol or
6.Pur chasesr etur nsorr et urnout war ds,t hesear egoodspr ev i
ouslyboughtbya
busi nessbuthav ebeensentbackt ot hesuppl i
er .Thev aluei ssubt r
act edf rom t he
pur chasest ogett henetpur chasest hati s
Netpur chases=pur chases- pur chaser etur ns
7.Gr osspr of it,thi sr efer stot heexcessofnetsal esov ert hecostofgoodssol d.Ori t’
s
thet ot al pr of itobt ainedbyanent repr eneurbef orepay i
ngof ft heoper at i
ngandot her
expensest hati s;
Gr osspr of i
t=pur chases–costofgoodssol d
11
8.Gr ossl oss, thisr efer st oasi tuat ionwher ecostofsal esexceedst henetsal es.
9.Tr adingordi rectexpenses,t hesear eexpensesi ncurredbyabusi nessi nor dert o
getgoodst ot her eachpl aceandr eadyf orsal esuchexpensesar eaddedt ot he
pur chasest ogett het otal costspentongoodsbought .Tradingexpensesi nclude;
 Car riagei nwar ds
 Wagesonpur chases
 I mpor tdut yonpur chases
10.Car riage, thi sref erst ot hecosti ncurredint ranspor ti
ngt hegoodsi ntoandoutoft he
busi ness.Theyar eoft wot ypes;
 Car riagei nwar ds, thisi st hetranspor tcostofbr ingi
ngt hegoodsboughtupt o
thebusi ness.I tfor mspar toft hecostofgoodsboughtandi saddedt ot he
pur chasesi nt het radingaccount .
 Car riageoutwar ds,t hesear ecost soft ranspor t
inggoodssol dupt ot he
buy er `spr emi ses.Ther efor et
heyar eaddedt otheoper at
ingexpenses
11.Dr awi ngofgoods, thesear et hephy sicalitems( goods)t akenoutoft hebusi nessby
theent repr eneurf orpr ivateuse.Theyar esubt ractedf rom thepur chasesi nt he
tradi ng account ,because such goods ar er ecor ded int he owner s wi t
hdr awal
account .
NB: it
sonl ydr awi ngsi nf orm ofgoodst hatmustbet r
eat edint hetradi
ngaccount
12.Sal aries,thi si spay mentusual lymadt oskill
edl abourataf i
xedamountmadeaf ter
af ixedt imei nterval
13.Suppl ement aryormi scel l
aneousi ncome,t hi
si sat erm used t or ef ert o other
incomesorr ev enuet hatabusi nessear nsfrom ot hersour cesotherthansal es.They
taket hef or m of ;
 Renti ncomeorr entr eceiv
ed
 Commi ssi oni ncome
 I nt erestr ecei v ed
 Di scountr ecei ved
 Baddebt sr ecov ered
Allsuppl ement ar yincomesar eaddedt ot hegr osspr of i
tinthepr ofi
tandl ossaccount
togett het otal incomeoft hebusi ness.
Met hodsofpr epar at i
on
Ther ear et womet hodusedt hati st heT- formatandt hev erti
cal method
Howev erIhav econsi der edt hev erticalmet hodi nthef oll
owingexampl esi nt hisbook

12
Exampl eone
Thef oll
owinginformati
onwasex t
ractedfrom thebooksofFugaObul amutrader
sfor
theyearended31December2016
Parti
culars shs closi
ngst ock 6,
000shs
Openingst ock 15,000 rent 6,
000
Purchases 180,000 i
nsurance 2,
000
Sales 250,000 adverti
sement 2,
500
Returnsinwards 5,
000 wagesandsal ar
ies 4,
000
Returnsout war
ds 4,000 stati
onery 5,
000
Discountallowed 1,000
Rentreceived 80,000
Discountreceived 15000
Required;
Prepareincomest atementforFugaobul amut radersfortheyearended31December
2016.

sol
uti
on

FUGAOBULAMUTRADERS`INCOMESTATEMENT
Fort
heyearended31December2016

Par
ti
cul
ars Shs Shs Shs

Sal
es 250,
000

Lessr
etur
nsi
nwar
ds 5,
000

Netsal
es 245,
000

Lesscostofsal
es;

Openi
ngst
ock 15,
000

Andpur
chases 180,
000

Lessr
etur
nsoutwar
ds 4,
000 176,
000

Goodsav
ail
abl
eforsal
e 191,
000

Lesscl
osi
ngst
ock 6,
000

Costofsal
es 185,
000

Gr
osspr
ofi
t 60,
000

Addot
heri
ncomes;

Rentr
ecei
ved 80,
000
13
 Di
scountr
ecei
ved 15,
000 95,
000

Gr
ossi
ncome

Less:
oper
ati
ngexpenses; 6,
000
155,
000
Rent 2,
000

Adv
ert
isement 2,
500

Wagesandsal
ari
es 4,
000

St
ati
oner
y 5,
000
20,
500
Di
scountal
l
owed 1,
000

st
ati
oner
y
134,
500
t
otal
expenses

NETPROFI
TS

EXAMPLETWO
Thef ol l
owi nginf or
mat
ionwasext
ract
edfrom thebooksofHAM schoolcant
eenf
ort
he
yearended30June2017.
Purchases 400,
000shs
Sales 950,
000
Discountal lowed 5,
000
Discountr eceived 4,500
Rent 16,000
Rentr eceiv ed 55,
000
I
nsur ance 35,000
Carriageout war ds 28,000
Electrici
ty 25,000
Salaries 22,000
Baddebt s 14,000
Officeexpenses 15,000
Carriagei nwar ds 18,000
Returnsi nwar ds 5,
000
Returnsout war ds 10,000
Openi ngst ock 100,000
Closingst ock 30,
000
14
Requi
red;
prepar
eHAM cant
een`
sincomest atementfort
hey
earended30June2017
HAM CANTEEN` S
Incomest atement
Fort
hey earended30June2017
Par
ti
cul
ars Shs shs Shs

SALES 950,
000

Less;
ret
urnsi
nwar
d 5,
000

Netsal
es 945,
000

Less:
COSTOFSALES

Openi
ngst
ock 100,
000

Addpur
chases 400,
000

Addcar
ri
agei
nwar
ds 18,
000

Pur
chasesbef
orer
etur
ns 418,
000

Lessr
etur
nsoutwar
ds 10,
000

Netpur
chases 408,
000

Goodsav
ail
abl
eforsal
e 508,
000

Lesscl
osi
ngst
ock 30,
000

Costofsal
e 478,
000

Gr
osspr
ofi
t 46,
7000

Addot
heri
ncomes

Di
scountr
ecei
ved 4,
500

Rentr
ecei
ved 55,
000

GROSSI
NCOME 526,
500

LESS:
OPERATI
NGEXPENSES;

Di
scountal
l
owed 5,
000

Rent 16,
000

I
nsur
ance 35,
000

Car
ri
ageout
war
ds 28,
000

15
El
ect
ri
cit
y 25,
000

Sal
ari
es 22,
000

Baddebt
s 14,
000

Of
fi
ceexpenses 15,
000

Tot
alexpenses 160,
000

NETPROFI
T 366,
500

Exampl e3
Thef ol l
owingwasext r
actedfrom thebooksofJenni f
eragr obusi nesslt
df ortheyear
ended2017
Sales 40,000,000
Purchases 20,000,000
Purchasesr eturns 1,620,000
Salesr eturns 500,000
Openi ngst ock 10,000,000
Salari
esandwages 3,000,000
Telephone 600,000
Closingst ock 980,000
Requi redpr epareJenniferagrobusi nessltd`
si ncomest at
ementf ort heyearended31
December2017
BALANCESHEET
Balancesheeti sast atementwhi chshowst hef i
nancialposi ti
onoft hebusi nessat
parti
cul art i
me.I tshowst hemoneyv al
ueofasset s,liabil
i
tiesand capi t
aloft he
businessonagi v
endat e.Hencei t
’susedt ounder standt hestrengthandweaknessof
thebusi ness.Abal ancesheetispr eparedbasingonanequat i
oncal l
edtheaccounting
equat i
onorbookkeepi ngequat i
on.Thi sequat i
onst atest hat.Assets=l i
abil
iti
esOR
assets=capi t
al+liabi
li
ties,
C+L=A
A-L=C
A- C=L

I
mport
anceofabalancesheet
1.It’
susedindecisi
onmakingandplanningpurposes
2.Itshowstheassetsandli
abil
it
iesofthefir
m
3.Itisused to compareaf i
rm`sf i
nancialperf
ormance wi
th simi
larfi
rmsor
previ
ousperi
ods
4.It’
susedtodeterminet
hefinanci
alposit
ionoftheafi
rm atapar
ticul
ardate
5.It’
susedbycr edi
torsandbankerstodeci detheamountofcreditandloanst
o
extendtoafi
rm.
16
ELEMENTSOFBALANCESHEET
Asset st hesear et hepossessi onsofabusi ness.Ort hesear et hepossessi onsor
propertiesownedbyt hebusi ness.Theyar egroupedi ntot wo;
Fixedasset s;t hesear et hepossessi onsorpr oper t
iesoft hebusi nesswhi chareof
durablenat ur eboughtf orusei nt hebusi nessf oral ongper i
odoft i
me.Exampl es
i
nclude;
 Land
 Bui ldings
 Pl antandmachi ner y
 Vehi cles
 Fi tt
ingsandf ixtur es
 Fur ni tureet c
Currentasset s,t hesear et hepossessi onsoft hebusi nesswhi chst ayf orashorter
periodoft imeandar eeasi l
ychangedi nt ocash.Commonexampl esi nclude;
 Cash
 Cashatbank
 Debt or s
 St ock
 Rawmat erials
 Bi l
lsr ecei vabl e
 Pay ment sinadv ance.Orpr epaidexpenses
 Unusedst at ioner y
 I ncomedue/i ncomenoty etreceiv ed.
LIABILITIES
Thesear edebt soramountofmoneyt hatt hebusi nessowest oout siders.Ortheyare
clai
msofout sider sont hebusi ness.Theyar eoft wot ypes;
Longt erml iabilit
ies, thesear edebt soramountofmoneybor rowedbyt hebusinessthat
i
st ober epai daf teral ongper i
odoft i
meusual l
yaf t
ery ear.Exampl esinclude;
 Bankl oansofoney earandabov e
 Debent ures
 Mor tgages
Currentl i
abi lit
iesorshor tt erml iabi
lit
ies,t hesear eshor tdebt sofabusi nesswhichare
repaidwi thinashor ttimeusual lylesst hanoney ear .
Ort hesear ecl aimsbyout si
der sont hebusi nesst hatar erepaidwi t
hinoneaccount ing
period.
Exampl esi ncl ude;
 Cr edi tors
 Bankov erdr afts
 Expensesdue
 Bi l
lspay abl e

17
CAPI TAL
Thisi st heamountofmoneyorr esour cesi nvestedint hebusi nessbyt heowneroran
entrepreneur .
TYPESOFCAPI TAL
Ini
tialcapi talorcapi tali nvest ed,t hisr eferstot heact ualamountofmoneyorasst s
broughti ntot hebusi nessbyt heent repr eneur .
Owner `
sequi tyornetwor th,t hi
si st heamountofr esour cesint hebusinessthat
belongst ot heowneratagi vendat e.Or
It’
st heamountofmoneyt hatr emai nsi nthebusi nessaf teraddingnew i nv
estments
andnetpr of i
torl ossandsubt ractingdr awi ngsandanyl iabil
iti
esofthebusiness.or
Thisi sthedi fferencebet weent hebusi nessasset sandl iabi
li
t i
esofthebusiness.
Capi talowned=i niti
al capital +Netpr ofit+addi ti
onalinvestment–Dr awings-l
oss
Loancapi talorbor r
owedcapi tal
,t hisi sthet otalamountbor r
owedbyt hebusiness
i
nf orm ofl ongt erml iabi l
iti
es.Thati s;
 Bor rowedcapi tal =total l
ongt erml i
abil
i
ties
 Fi xedcapi t
al,thisr efer stot hev alueoff ixedasset sint hebusiness.
 Fi xedcapi t
al=tot alfixedasset s.
Liquidcapi t
al,thisr efer st ot hev alueofcur r
entasset si nf orm ofcash,cashatbank
andbi l
l
sr eceivabl e.Liqui dcapi tal=t otal curr
entasset s-closingstock

Workingcapi tal,thisi st heexcessofcur r

entasset sov ercur r
entl iabil
i
tiesoft he
business.Or
Workingcapi t
ali sthedi ff
er encebet weencur rentassetsandcur r
entl i
abil
it
ies.Thatis
tosay
 Wor kingcapi t
al =asset --
cur rentli
abi l
iti
es.
 I t
’salsoknownasnetcur rentasset swhent hev al
ueoft hecur r
entasst sexceeds
curr
entl iabili
ties
Capitalempl oyed, thisi sthet otal ofthef i
xedasset splusthewor ki
ngcapi tal
.Or
it’
sthesum oft heowner `
sequi tyandt hel ongt er
ml iabil
iti
esoft hebusi ness.Thatis
 Capi talempl oy ed=fixedasset+wor kingcapital
.Or
 Wor kingcapi t
al =capitalowned+l ongt ermliabil
iti
es
 Tr adingcapi talorgr osscapi talempl oyed=thet otalvalueofal ltheasset sinthe
business.Thati stosaysum off ixedasset sandcur r
entasset .
PREPARATI ONOFBALANCESHEET
 I tmusthav eheadi ng
 I temsshoul dbear rangedi nthecat egoryofasset s,
liabil
i
tiesandcapi tal
 Or derofper manency
 St ar
twi thf ixedasset sandcur r
entasset sandf i
nall
ycapi t
al
Methodsofpr epar ation
Therear etwomet hodusedt hati st heT- f
ormatandt hev erti
cal method
Howev erIhav econsi der edt hev erticalmet hodi nthefollowingexampl esinthisbook
Exampl e
18
Thef oll
owi ngi nf
ormat
ionwasext r
actedfr
om thebooksNORAKIricebusinessatthe
endoft hey earended31December2016
Capital 10,
000 stock 4,500
Machi nery 3,500 bankoverdr
aft
s 800
Buil
ding 4,000 bank 500
Mot orvehicle 1,500 debtor
s 3,
500
Furnit
ure 2,500
2yearloan 7,
000
Creditors 2,200
Required:pr epareNORAKÌSbalancesheetasat31December2016
Soluti
on
NORAKIRI CEBUSINESS`S
BALANCESHEET
ASAT31DECEMBER2016
PARTI CULARS SHS SHS SHS

FI
XEDASSETS

Machi
ner
y 3,
500

Bui
l
dings 4,
000

Mot
orv
ehi
cle 1,
500

Fur
nit
ure 2,
500 11,
500

CURRENTASSETS

Debt
ors 3,
500

Bank 500

St
ock 4,
500 8,
500

LESS:
CURRENTLI
ABI
LITI
ES

Cr
edi
tor
s 2,
200

Bankov
erdr
aft 800 3,
000

Wor
kingcapi
tal 5,
500

CAPI
TALEMPLOYED 17,
000

Fi
nancedby
;

Capi
tal 10,
000

19
Add2y
eael
oan 7,
000

17,
000

EXERCI SE
Thef ollowi ngi nformat i
onwasext r
act
edf rom booksofKamal uent
erpr
iseforthe
mont hofAugust .
Thef ol lowi ngi nformationwasobt ai
nedfrom t
hebooksofHopeenterpr
iseson
31-3-14
Shs
Landandbui l
dings 4,000,
000
Fur nitur e 540,
000
Jui cepr ocessor( machi ne) 900,
000
Mot orv ehicl e 180,
000
Mor tgagel oan 2,
000,
000
Debent ur e 400,
000
3y ear sl oan 500,
000
Capi tal 2900,
000
Netpr ofit 300,
000
Commi ssi oni ncomepr epai d 65,
000
St ocki nt rade 3,
000,
000
Bankbal ance 28,
000
Cashi nhand 440,
000
Pr epai dexpenses 3,
000
Cr editor s 81,
000
Interestonl anddue 145,
000
Requi red
a.Pr epar eabal ancesheetont hatdate
b.Cal cul at et hefoll
owi ngty pesofcapital
i
. Fi x edcapi t
al
ii
. Wor kingcapi tal
iii
. Capi tal empl oyed
iv. Bor rowedcapi t
al
v. Networ th
EXERCI SE
Belowar et hef inanci altransactionsofBusi r
ot r sasat31stDec2017
ader
Capital 1,
810,
000
Mot orv an 1,500, 000
Closingst ock 460,
000
Bankl oan 1,550, 000
Bankbal ance 108, 000
Debent ur es 1,200, 000
Fi
xtur es 1,400, 000
Buil
ding 1,490, 000
20
Creditors 1,
360,000
Bankov erdr aft 1,
400,000
Debtor s 1223,000
Cashbal ance 108,000
Thef ollowi nginf ormat i
onwasal socompi l
ed
Openi ngst ockasat1stJanuar y2013 1, 732,000
Purchasef ort hey ear 1,
820,000
Returnout war ds 1,082,000
Usingt heabov einf ormation,youarer equiredtocalculate
i. Fi xedcapi tal
ii. Bor r
owedcapi t
al
i
ii. Costofsal es
i
v . Av eragest ock
v . Rat eofst ockt ur
n
vi. Wor kingcapi tal
v
ii. Capi talempl oyed
PREPARI NG FI NAL ACCOUNTS ( I
NCOME STATEMENT) FROM A GI VEN TRI
AL
BALANCE
From agi vent ri
albal ancet heincomest atementandt hebalancesheetcanbeprepar
ed
usingi nformat ionf r
om thesamesour ce.
At ri
albal ancei st ablethatshowsal i
stofi t
em balancesaspert heirl
edgersatagiv
en
date.Thet ot alofdebtbal ancesisal waysequal tototalbalancesofthecredit
.

Reasonsforpr eparingat r
ail balance
1.Itis pr epared t o check t he ar i
thmetic accuracyr ecor
ding ofthe busi
ness
transactionsi nthebooksofaccount s.(
ledgerandcashbook)
2.Toshow t hev al
ueofv ar i
ousasset s,l
iabil
iti
es,expensesandr evenueit
emsof
thebusi nessatapar ticulardat e.
3.Topr ovideinf or
mat i
onf ort hepr epar
ationoft hef i
nalaccountsandbalance
sheet
4.Tot estwhet herthel edgeraccountbal anceshav ebeencor r
ectl
ypostedtothe
collectcolumnsoft het railbalance
Atrailbalancei sprepar edasast eptowardsf i
nal account
s.

St
ruct
ureoft
rail
balance
Det
ail
s Foli
o Debt(
shs) Cr
edi
t(shs)

Accountsandt hei
rbal
ancesbr
oughtdown
Capit
al (
Cr)
Assets (Dr)
Li
abil
it
ies (Cr)
Expenses/losses (Dr)
I
ncome/ gai
ns (Cr
)
Thefoll
owinginformat
ionwasext
ractedfr
om Mukkoent
erpr
iseson28.
2.2017

21
Purchases 37,
600
Sales 65,
800
Cashatbank 3,
800
Cashi nhand 700
Capital 33,
000
Drawings 9,
500
Offi
cef urnit
ure 7,
800
Rentr ates 3,
400
Wagesandsal ari
es 8,
600
Discount sall
owed 2,
300
Discount sreceiv
ed 1,
200
Debtor s 16,
400
Creditors 8,
300
Stock( openingstock) 6,
900
Commi ssionreceived 900
Deliv
er yvan 8,
000
Baddebt swritt
enof f 2,
700
Vanr unningcost s 1,
500

Requir
ed
Prepar
e.trai
lbal
anceforMukkoenter
pri
sesfortheyearended28Febr
uar
y2017
prepar
eincomest at
ementforMukkoenterpri
sesfortheyearended28Febr
uar
y2017
andbalancesheetasat28Februar
y2017

Exampl
e3
Thefol
l
owinginf
ormationt
ri
albal
ancewasext
ract
edf
rom t
hebooksofJAKst
ati
oner
y
shopasat28Februar
y2017.

22
Det
ail
s Dr Cr

Sal
e 128,
000

Pur
chases 90,
000

Ret
urns 6,
000 5,
000

Car
ri
agei
nwar
ds 10,
000

Openi
ngst
ock 28,
000

Rent 4,
000

Adv
ert
isi
ng 8,
000

Pr
emi
ses 122,
000

Machi
ner
y 75,
000

Debt
ors 18,
000

Cr
edi
tor
s 31,
000

Bankl
oan 60,
000

Cashathand 14,
000

Cashatbank 27,
000

Dr
awi
ng 10,
000

Di
scountal
l
owed 5,
000

Di
scountr
ecei
ved 6,
000

Commi
ssi
onr
ecei
vabl
e 20,
000

Capi
tal 190,
000

Car
ri
ageout
war
ds 8,
000

Wagesandsal
ari
es 15,
000

440,
000 440,
000

Requi
red:prepar
eincomestat
ementforJAKst
ati
oner
yshopf
ort
hey
earended28Feb.
2017
Andbalancesheetasat28Februar
y207

23
 JAKSTATIONERYSHOP` S
I
ncomestatement
Fort
heyearended28February2017
Par
ti
cul
ars Shs Shs Shs

Sal
e 128,
000

Less:
sal
esr
etur
n 6,
000 122,
000

Lesscostofsal
es

Openi
ngst
ock 28,
000

Add:
pur
chases 90,
000

Add:
car
ri
age 10,
000

Pur
chasesbef
orer
etur
ns 100,
000

Less:pur
chaser
etur
ns 5,
000

NETPURCHASES 95,
000

Goodsav
ail
abl
eforsal
e 123,
000

Less:
closi
ngst
ock 48,
000

Costofsal
es 75,
000

GROSSPROFI
T 47,
000

Add:
discountal
l
owed 6,
000

Commi
ssi
onr
ecei
vabl
e 20,
000 26,
000

24
Gr
ossi
ncome 73,
000

LESS:
OPERATI
NG

Rent 4,
000

Adv
ert
isi
ng 8,
000

Di
scountal
l
owed 5,
000

Car
ri
ageout
war
d 8,
000

Wagesandsal
ari
es 15,
000

Tot
aloper
ati
ngexpenses 40,
000

NETPROFI
T 33,
000

JAKSTATI
ONERYSHOP` S
Bal
ancesheet
Asat28Febr
uary2017
DETAI
LS SHS SHS SHS

FI
XED

Pr
emi
ses 122,
000

Machi
ner
y 75,
000 197,
000

25
Cur
rentasset
s

St
ock 48,
000

Debt
ors 18,
000

Cashatbank 27,
000

Cashi
nhands 14,
000 107,
000

Less:
cur
rentl
i
abi
l
iti
es

Cr
edi
tor
s 31,
000

Wor
kingcapi
tal 76,
000

CAPI
TALEMPLOYED 273,
000

FI
NANCEDBY

Capi
tal 190,
000

Add:
:
netpr
ofi
t 33,
000

Less:
drawi
ngs 10,
000 227,
000

Add:
Bankl
oan 60,
000

NETCAPI
TALEMPLOYED 273,
000

Thefol
lowingr
elat
est
othet
ri
albal
anceext
ract
edf
rom sal
ttr
adersf
ort
hey
earended
31December2015.
Par
ti
cular
s Drshs Crshs

Cashi
nhand 42,
000

Cashatbank 80,
000

St
ock1.
1.2015 100,
000

Cr
edi
tor
s 100,
000

Ret
urnsi
nwar
ds 15,
000

Sal
es 560,
000

Pur
chases 315,
000
26
Sal
ari
es 40,
000

Wat
erbi
l
ls 6,
000

Post
age 2,
000

Dr
awi
ngs 89,
000

Ret
urnout
war
ds 10,
000

Fur
nit
ure 750,
000

Mot
orv
an 350,
000

Loan 300,
000

Renti
ncome 12,
000

Car
ri
agei
nwar
ds 7,
000

Car
ri
ageout
war
d 10,
000

Capi
tal 824,
000

Cl
osi
ngst
ock 13,
500

1,
806,
000 1,
806,
000

SALTTRADERS`
INCOMESTATEMENT
Fort
hey
earended31December2015.
PARTI
CULARS SHS SHS SHS

Sal
es 560,
000

Less:
ret
urnsi
nwar
ds 15,
000

Netsal
es 545,
000

Lesscostofsal
es

Openi
ngst
ock 100,
000

Add:
pur
chases 315,
000

Add:
car
ri
agei
nwar
ds 7,
000
27
 Pur
chasesbef
orer
etur
ns 322,
000

Less:
ret
urnsout
war
d 10,
000

Netpur
chases 312,
000

Goodsav
ail
abl
eforsal
e

Lesscl
osi
ngst
ock 412,
000
COSTOFSALE 13,
500 398,
500

Gr
osspr
ofi
t

Add:
renti
ncome 146,
500

Gr
ossi
ncome 12,
000

LESSOPERATI
NGCOSTS 158,
500

Sal
ari
es

Wat
erbi
l
ls 40,
000
Post
age 6,
000
Car
ri
ageout
war
ds 2,
000
Tot
alexpenses 58,
000
10,
000
NETPROFI
TS 100,
500

SALTTRADERS`
Bal
ancesheet
Asat31December2015
Det
ail
s shs Shs shs

28
ASSETS

Fi
xedasset
s

Fur
nit
ure 750,
000

Mot
orv
an 350,
000 1,
100,
000

Cur
rentasset
s

Cashi
nhands 42,
000

Cashatbank 80,
000

Cl
osi
ngst
ock 13,
500 135,
500

LESS:
CURRENTLI
ABI
LITI
ES

Cr
edi
tor
s 100,
000

Wor
kingcapi
tal 35,
500

CAPI
TALEMPLOYED 1,
135,
500

FI
NANCEDBY:

Capi
tal 824,
000

Add:
netpr
ofi
t 100,
500

Capi
tal
bef
oredr
awi
ngs 924,
500

Less:
drawi
ngs 89,
000

Capi
tal
wor
th 835,
500

Addl
ongt
erml
i
abi
l
iti
es 300,
000

NETWORTH 1,
135,
500

YEAR–ENDADJUSTMETS
Attheendoft
hef
inanci
aly
ear
,someexpensesov
erl
apt
heper
iodsuchexpensesmust
29
beconsi deredwhent hef inalaccountsarepr eparedattheendoft heper
iod.Such
expensesinclude
ACCRUALS,
Thesear eexpensesthatr emai nunpaidattheendoft heperiod.Theseexpensesmay
alsocall
edout st
andi
ngexpensesorexpensesowi ngorexpensesdue.
Treat
mentofsuchexpenses
Intheincomest atement,theyar eaddedt otheexpensesact ual
lypaid.Int
hebalance
sheet,t
heyappearascur rentliabi
li
ti
es.
Examplesi ncl
ude
 Rentunpai d
 Out standi
ngwagesandsal ari
es
 Out standi
ngelect
ricityandwat erbi
l
lsetc

PAYMENTI NADVANCEORPREPAYMENTEXPENSES
Thesear eexpensespai dinadv ancet hatist osayexpensespai dbeyondt heper i
od
underr ev iewe. g.rentpai dinadvance, r at
esi nsur ancepai dinadvance.Thesepay ment s
aremadebef or ethebenef i
tsareenj oyed
Treatment
Inthei ncomest atementsuchex pensesar ededuct edf r
om theper iod`sexpensesand
i
nt hebal ancesheetsuchexpensesar et r
eatedascur rentassets
INCOMES
Likeexpenses,i ncomesmayber eceivedbef orewor ki
ngf orit(i
ncomei nadvance)and
somet i
messuchi ncomemaynotber eceivedasexpect edandt hereforedescri
bedas
outstandi ngi ncome.
Treatment
Incomer ecei vedi nadv ance,
Suchi ncomei ssubt r
act edfrom t hei ncomesf ortheper i
odi nthei ncomest at
ement
andi nt hebal ancesheet ;suchincomei st r
eat edascur rentli
abil
it
ies.
Incomesout st anding
Incomesout standi ngar eaddedt oi ncomesact uallyreceiv
edf ortheper i
od.Int he
balancesheeti t’
streatedascur rentasset
Incomeear nedbutnoty etrecei
ved,
It’
spossi blet hati nterestonbankdeposi tmaybeduebutnoty etcreditedortenants
havedel ay edpay ment s,suchi ncomesar etr eatedascur rentasset sandshowni nthe
balancesheet
Exampl e4
Thef ol lowi ngi nformat ionwasext ractedf r
om t hebooksofKampal acoachesf orthe
periodended30June2017
SHS
Capi t
al 1540, 000
Sales 25,000, 000
Purchases 16,000, 000
Drawi ngs 30,000
Rent 870,000
Openi ngst ock 420,000
Returnsi nwar ds 40,000
30
Retur nsout war ds 30,000
Debt or s 3,420,
000
Credit ors 270,000
Cashatbank 630,
000
Furnitur e 570,000
Transpor t 220,000
Adv ertisi
ng 590,000
Addi t
ional i
nformati
on:
Closingst ockwasv aluedatshs3, 500,
000
Rentaccr uedshs 30,000
Transpor twor t
hshs20, 000waspai dinadvance
Requi red;
Prepar eKampal acoaches`incomest at
ementfortheper
iodended30June2017and
balancesheetasat30June2017
KAMPALACOACHES`
I
ncomestatement
Fortheper i
odended30June2017
PARTI CULARS SHS SHS SHS
Sal
es 25,
000,
000
Lesssal
esr
etur
ns 40,
000
Netsal
es 24,
960,
000
Lesscostofgoodssol
d:
Openi
ngst
ock 420,
000
Addpur
chases 16,
000,
000
Lessr
etur
nsout
war
ds 30,
000
Netpur
chases 1,
5970,
000
Goodsav
ail
abl
e 16,
390,
000
Lesscl
osi
ngst
ock 3,
500,
000
Costofgoodssol
d 12,
890,
000
Gr
osspr
ofi
t 12,
070,
000
LESSOPERATI
NGEXPENSES:
Rent 870,
000
Addaccr
uedr
ent 30,
000 900,
000
Tr
anspor
t 220,
000
Lesst
ranspor
tpai
dinadv
ance 20,
000 200,
000

31
Adv
ert
isi
ng 590,
000
Tot
aloper
ati
onexpenses 1,
690,
000
NETPROFI
T 10,
380,
000

KAMPALACOACHES`
Bal
ancesheet
Asat30June2017
PARTI
CULARS SHS SHS SHS

ASSETS
Fi
xedasset
f
urni
tur
e 570,
000
bui
l
dings 6,
480,
000 7,
050,
000
CURRENTASSET
Debt
ors 3,
420,
000
Cashatbank 630,
000
Cl
osi
ngst
ock 3,
500,
000
Tr
anspor
tpai
dinadv
ance 20,
000 7,
570,
000

32
LESS:
CURRENTLI
ABI
LITI
ES
Cr
edi
tor
s 2,
700,
000
Rentaccr
ued 30,
000 2,
730,
000
Wor
kingcapi
tal 4,
840,
000
CAPI
TALEMPLOYED 11,
890,
000
FI
NANCEDBY:
Capi
tal 1,
540,
000
Addnetpr
ofi
t 10,
380,
000
Capi
tal
bef
oredr
awi
ngs 11,
920,
000
Lessdr
awi
ngs 30,
000
Netequi
ty 11,
890,
000

EXAMPLE5
Thefoll
owi
nginfor
mat
ionr
elat
estoKuny at
rader
s`t
ri
albal
ancef
ortheendoft
he31
December2017
PARTICURS DR(shs) CR(SHS)

Capi t
al 40,
000
Purchases 81,
500
Stock1Jan2015 5,
200
Wages 6,
165
Sales 108,
850
Creditor s 15,
100
Salaries 3,
780
Debt ors 6,
750
Mot orv an 18,
000
CashatBank 6,
735
El
ect ricit
y 890
Rates 2,
250
Buildings 38,000
Discountr ecei
ved 1,
050
Discountal l
owed 610
Renti ncome 3,
200
Commi ssi
oni ncome 1,
800
Cashi nhands 120
170,
000 170,
000
Addi
ti
onal
inf
ormat
ion
33
 a)Closi
ngstockwasv aluedatshs5460
b)Wagesandsal ar
iesout st
andingwasshs490and640r espect
ivel
y
c)Rateshavebeenpaidf or15mont hupto31Mar ch2018
d)Commi ssi
onduef r
om cl i
entwasshs300f ort
hejobalr
eadydone
e)Rentofshs200wasr eceivedinadv
ance.
Requi
red:prepar
eKuny atraders`incomestatementfortheyearended31December
2017
Andbalancesheetasat31December2017

KUNYATRADERS`
I
ncomestat
ement
Fort
hey
earended31December2017
PARTI
CULARS SHS SHS SHS

Sal
es 108,
850
Lesscostofgoodssol
d:
Openi
ngst
ock 5,
200
Addpur
chases 81,
500
Addwages 6,
165
Addwagesdue 490
Netpur
chases 88,
155
Goodsav
ail
abl
eforsal
e 93,
355
Less:
closi
ngst
ock 5,
460
Costofgoodssol
d 87,
895
Gr
osspr
ofi
t 20,
955
Addot
heri
ncomes
Commi
ssi
oni
ncome 1,
800
Addcommi
ssi
ondue 300 2,
100
Renti
ncome 3,
200 3,
000
Less:
rentr
ecei
vedi
nadv
ance 200 1,
050
Di
scountr
ecei
ved 6,
150

34
Gr
ossi
ncome 27,
105
Less:
oper
ati
ngexpenses: 3,
780
Sal
ari
es 640 4,
420
Addsal
ari
esdue 890
El
ect
ri
ci
ty 2,
250
Rat
e 450
1,
800
Lesspr
epai
d
610
Di
scountal
l
owed
Tot
alexpenses
NETPROFI
T 7,
720
19,
385

KUNYATRADERS`
Bal
ancesheet
Asat31December2017
PARTI
CULARS SHS SHS SHS

ASSETS
FI
XEDASSETS
Bui
l
dings 38,
000
Mot
orv
an 18,
000 56,
000
CURRENTASSET
St
ock 5,
460
Debt
or 6,
750
Rat
espai
dinadv
ance 450
Commi
ssi
ondue 300
CashatBank 6,
735
Cashi
nhand 120 19,
815

35
LESS:
CURRENTLI
ABI
LITI
ES
Cr
edi
tor
s 15,
100
Out
standi
ngwages 490
Out
standi
ngsal
ari
es 640
Rentr
ecei
vedi
nadv
ance 200 16,
430
Wor
kingcapi
tal 3,
385
CAPI
TALEMPLOYED 59,
385

FI
NANCEDBY:
Capi
tal 40,
000
Addnetpr
ofi
t 19,
385
59,
385
Netequi
ty

RESERVESANDPROVI SIONS
Inanybusi ness,i t
’snecessar yt hatsomepr ofi
tsbeputasi detocaterforunf oreseen
event st hatmayaf fectcapitalandpl anningf orthebusi
ness
Ther efor er eser vesaremadef ordepr eciati
onofcapi t
alassetsoft hebusi ness.Att he
samet imei t
’sar arecaset hatal lgoodsar esol doncashsomear esoldoncr editwhich
i
sal sodi fficulttomakeal lcreditorssettletheirobli
gat
ionsandt heref
orepr ovisionsare
madef ort hosewhomayf ailtomeett heirpay mentobl
igati
ons
PROVI SI ONFORBADDEBTSORDOUBTFULDEBTSANDDEPRECI ATION
A pr ov isioni sanamountofmoneyputasi def orapr obabl
el osswhi chcannotbe
calculat ed . the amountt o be setasi de depends on t he pastexper ience oft he
entrepr eneur .Henceapr ovisi
onmaybei ncreasedordecr eased
Allprov isionsaf fectdebtor`samount
Fort hecaseofdecr easei nprov isi
ont heamounti saddedt ot hegrosspr ofi
toft he
business.
PROVI SI ONFORDEPRECI ATIONS
Depr eci at ionr eferstothet otallossinv alueoff i
xedassets
Causes
Beingoutofdat e(obsolescence) thatisasset slossval
ueduet ochangei nfashi on
Exhaust ion
Phy sical det eriorati
onduet owearandt ear
Calcul at ionofdepr eci
ation
Reduci ngmet hod
Str
ai ghtl inemet hod
36
EXAMPLE6
Thef ollowingtri
alBal
ancewasextractedfrom t
hebooksofKumi st
rader
sassoci
ati
on
on31
December2016
DRSHS CRSHS
Capi t
al 40,000,000
Purchases 26,154, 000
Sales 36,246,000
Salaries 4,
814, 000
Openi ngstock 4,307,000
I
nsur ance 820,000
Renti ncome 965,000
Buildings 25,000, 000
Furniture 14,500,000
Debt ors 6,140,000
Otherexpenses 1,060,000
Creditors 4,638,000
Commi ssionrecei
ved 946,000

8,
2795,
000 8,2795,
000
ADDITIONALI NFORMATI ON
a)Salar
iesdueshs350, 000
b)Insur
ancewaspai df or15mont hs
c)Rentreceivedinadvancewasshs165, 000
d)Commi ssi
onaccruedbutnoty etrecei
vedwasshs120,000
e)Furni
turetobedepr eciatedby10%
f) Pr
ovi
de5% f ordebtorsar edoubt
ful
g)Stockon31December2016wasv al
uedatshs5008,
000
Requir
ed:prepareincomest atementforKumi str
ader
`sassoci
ati
onf
ort
hey
earended
31December2016andBal ancesheetasat31December2016

KUMITRADERS`ASSOCIATI
ON`S
I
ncomestat
ement
Forthey
earended31December2016

PARTI
CULARS SHS SHS SHS

Sal
es 56,
246,
000

LESSCOSTOFSALES

Openi
ngst
ock 4,
307,
000

Addpur
chases 26,
154,
000

Goodsav
ail
abl
eforsal
e 30,
461,
000

Lesscl
osi
ngst
ock 5,
008,
000
37
Costofsal
es 25,
453,
000

Addot
heri
ncomes

Rentr
ecei
ved 965,
000

Lessr
entr
ecei
vedi
nadv
ance 165,
000 800,
000

Commi
ssi
onr
ecei
ved 946,
000

Addaccr
uedcommi
ssi
on 120,
000 1,
066,
000 1,
866,
000

Gr
ossi
ncome 12,
659,
000

LESSOPERATI
NGEXPENSES

Sal
ari
es 4,
814,
000

Addaccr
uedsal
ari
es 350,
000 5,
164,
000

I
nsur
ance 820,
000

Leepr
epai
dinsur
ance 205,
000 615,
000

Ot
herexpenses 1,
060,
000

Baddebt
s 307,
000

Depr
eci
ati
ononf
urni
tur
e 1,
450,
000

Tot
aloper
ati
ngexpenses 8,
596,
000

NETPROFI
T 4063,
000

38
 KUMITRADERS`ASSOCIATI
ON`
S
Bal
ancesheet
Asat31December2016

Par
ti
cul
ars Shs shs Shs

Fi
xedasset

Bui
l
ding 25,
000,
000

Fur
nit
ure 14,
500,
000

Lesspr
ovi
sionf
ordepr
eci
ati
on 1,
450,
000 13,
050,
000 38,
050,
000

Cur
rentasset
s

St
ock 5,
008,
000

Debt
ors 6,
140,
000

Lesspr
ovi
sionf
orbaddebt
s 307,
000 5,
833,
000

Pr
epai
dinsur
ance 205,
000

Accr
uedcommi
ssi
on 120,
000

Tot
al 11,
166,
000

Lesscur
rentl
i
abi
l
iti
es

Cr
edi
tor
s 4,
638,
000

Sal
ari
esdue 350,
000

Rentr
ecei
vedi
nadv
ance 165,
000 5,
153,
000

Wor
kingcapi
tal 6,
013,
000

Capi
tal
empl
oyed 44,
063,
000

Fi
nancedby

Capi
tal 40,
000,
000

Addnetpr
ofi
t 4,
063,
000

Capi
tal
empl
oyed 44,
063,
000

Example7
Thefoll
owingi
nfor
mati
onr el
atest
othet
ri
alBal
anceofMbal
ehospi
talcant
eenf
ort
he
yearended31December2017
39
Openi ngst ock 1,046,050
Capital 12,500, 000
Sales 4,
352, 100
Retur ns11, 250 28,700
Purchases 2,070,850
Plantandmachi ner yatcost 3,500,000
Offi
cef urni tureatcost 1,
575, 000
Freehol dpr oper tyatcost 6,
577, 900
Provisi onf orbaddebt s 31,400
Mot orv anatcost 362,000
Shopf itti
ngs 64,300
Gener al expenses 18, 7250
I
nsur ance 225,000
Postageandt elephone 18,500
Powerandl ight 189.100
Stati
oner yandpr i
nt ing 29,100
Rates 176,200
Baddebt s 25,750
Wagesandsal aries 503,750
Carriageout war ds 222,100
Debt or s 642,500
Credit ors 276,000
Drawi ngs 200,000
Bank 503,200
Carriagei nwar ds 175,000
Cash 98,600
Discountr eceiv ed 21,
200
Provisi onf ordepr eci at
ion
Plantandmachi ner y 1,
161, 000
Offi
cef urni ture 33,000
Additional infor mat i
on
a)Cl osingst ockwasv al
uedatshs975, 200
b)Thepr opr ietort ookgoodswor t
hshs105, 000
c)Post ageandt elephoneoutstandingwasshs37, 500
d)Wagesout st andingshs96,250
e)Rat esofshs120, 000werepaidi nadvance
f) Pr ov isi
onf orbaddebt sistoadj ust
edt o8%ofdebt ors
g)Pr ov idef orPl antandmachi neryat15%ont hebookv alue
h)Of ficef ur nitur eat10%oncost
i) Mot orv anat20%oncost
j) Shopandf ittingsat5%oncost
Requi red
Prepar eincomest atementf orMbal ehospit
alcanteenfort hey earended31December
2017andBal anceasat31December2017

40
 MBALEHOSPITALCANTEEN`S
I
ncomestat
ement
Forthey
earended31December2017

PARTI
CULARS SHS SHS SHS

Sal
es 4,
352,
100

Less:
sal
esr
etur
ns 11,
250

NETSALES 4,
340,
850

LESSCOSTOFSALES

Openi
ngst
ock 1,
046,
050

Add:
pur
chases 2,
070,
850

car
ri
agei
nwar
ds 17,
500

Pur
chasesbef
orer
etur
ns 2245,
850

Less:
ret
urnsoutwar
ds 28,
700

Pur
chasesbef
oredr
awi
ngs 2,
217,
150

Less:
drawi
ngs 105,
000

Netpur
chases 2,
112,
150

Goodsav
ail
abl
eforsal
e 3,
158,
200

Lesscl
osi
ngst
ock 975,
200

Costofsal
es 2,
183,
000

Gr
osspr
ofi
t 2,
157,
800

Adddi
scountr
ecei
ved 21,
200

Gr
ossi
ncome 21,
759,
000

LESSOPERATI
NGEXPENSES

I
nsur
ance 225,
000

Gener
alexpenses 187,
250

Post
ageandt
elephone 18,
500
41
Add out st
andi
ng post
age and 37,
500 56,
000
tel
ephone

Powerandl
i
ght
ing 189,
100

St
ati
oner
y 29,
100

Rat
es 176,
200

Lessr
atespai
dinadv
ance 120,
000 56,
200

Baddebt
s 25,
750

Wagesandsal
ari
es 503,
750

Add outst
andi
ng wages and 96,
250 600,
000
sal
ari
es

Car
ri
ageoutwar
ds 222,
100

Pr
ovi
sionf
orbaddebt
s 20,
000

Depr
eci
ati
on

Pl
antandmachi
ner
y 350,
850

Of
fi
cef
urni
tur
e 15,
750
Shopf
it
ti
ngs 3,
215
Mot
orv
an 72,
400 583,
965
Tot
alexpenses 2,
194,
465
NETLOSS 15,
465

MBALEHOSPITALCANTEEN`S
Bal
ancesheet
Asat31December2017

Par
ti
cul
ars Shs shs Shs

FI
XEDASSETS

Pl
antandmachi
ner
y 3,
500,
000

Lesspr
ovi
sionf
ordepr
eci
ati
on 1,
511,
850 1,
988,
150

Of
fi
cef
urni
tur
e 157,
5000

Lesspr
ovi
sionf
ordepr
eci
ati
on 190,
500 1,
384,
500

Fr
eehol
dpr
oper
ty 6,
577,
900

42
Mot
orv
an 362,
000

Depr
eci
ati
on 72,
400 289,
600

Shopf
it
ti
ngs 64,
300

Less:
depr
eci
ati
on 3,
215 61,
085 10,
301,
235

CURRENTASSETS

St
ock 975,
200

Debt
ors 642,
500

Less:
prov
isi
onf
orbaddebt
s 51,
400 591,
100

CashatBank 503,
200

Cashi
nhands 98,
600

Rt
espai
dinadv
ance 120,
000

Tot
al 2,
288,
100

LESS:
CURRENTLI
ABI
LITI
ES

Cr
edi
tor
s 276,
050

Out
standi
ngpost
ageandt
elephone 37,
500

Out
standi
ngwagesandsal
ari
es 96,
250 409,
800

Wor
kingcapi
tal 1,
878,
300

Capi
tal
empl
oyed 12,
179,
535

FI
NANCEDBY:

Capi
tal 12,
500,
000

Addnetl
oss 15,
465

Capi
tal
empl
oyedbef
oredr
awi
ngs 12,
484,
535

Lessdr
awi
ngs 305,
000

CAPI
TALEMPLOYED 12,
179,
535

43
EXAMPLE8
Thef ollowi ngtrai
lbal
ancer
elat
est ot
hebooksofApuul ienter
pri
sesl
tdf
ort
het
radi
ng
yearended31December2016
Purchases shs 37,600,
000
Sales 65,
800,000
Returnsi nwar ds 45,000
Returnsoutwar ds 38,000
Cashathand 30,800,000
Cashatbank 700,000
Capital 689,707,000
Drawi ngs 90,500,000
Offi
cef urni tur
e 480,000,000
Rentandr ates 3,400,
000
Salari
es 8,600,000
Discountal l
owed 2,300,000
Discountr eceiv
ed 1,200,000
Debtor s 16,400,000
Creditors 8,300,000
Wages 1,500,
000
Stockon1Jan2016 9,900,
000
Provisionf orbaddebts 900, 000
Deliv
er yv an 80,000,000
Vanexpenses 1,500,000
Baddebt s 2,700,
000

Additi
onal i
nfor mat ion
a)Cl osingst ockwasshs11700, 000
b)Ofr atesshs400, 000r elatesto Jan2017andofr entshs500, 000wasout
standing
c)Baddebt swr i
tt
enoffattheendoft heyearwasshs300,000
d)Pr ovisionf orbaddebtstobeadj ustedto10%ofdebtors
e)Requi r
ed
f) Preparei ncomest at
ementf orApuulit
rader
s’l
tdfort
hey earended31December
2016
g)AndBal ancesheetasat31December2016
Exampl e9
Thef ol
lowingi nformationrel
atest otheObamaev entsmanagementbusi ness31Dec
2017
shs
Sales 10,500,
000
Purchases 5,400,
000
Drawings 1,250,
000
Debtors 2,100,
000

44
Creditors 1,
420,000
Stock 3,
500,000
Mot orv an 820,000
Equipment 1,
945,000
Carriagei nwar ds 340,000
Returnsi nwar ds 235,000
Returnsoutwar ds 170,
000
Rentandr at
es 543,
000
Carriageoutwar ds 168,
000
Telephone 1,
810,000
Offi
ceexpenses 920,
000
Salariesandwages 146,
000
I
nsur ance 690,
000
Postage 190,
000
Mot orexpenses 200,
000
Sundr yexpenses 306,
000
Capital 17,
567,000
El
ect rici
ty 400,000

ADDI TI
ONALI NFORMATI ON
a)St ockatcl osewasshs3, 230,000
b)Rentpr epai d45,000
c)Post agei narrears20, 000
d)Depr eci atemot orv anby5%perannum
e)I nsur anceofshs45000owi ng( outstandi ng)
Required
Prepareani ncomest atementf orObamaev entsmanagementf ort hey earended31
Dec2017and
Balancesheetasatt hatdat e
BOOKKEEPI NG
Bydef i
niti
on,bookkeepi ng i st he pr ocess ofr ecording busi ness ora company ’s
fi
nancialt ransact i
ons t he account i
ng pr ocess i nvolves cl assifyi
ng,r epor
ting and
analyzi
ngofdat aandnoneofi tcant akepl acei ftherei snoor ganizedandaccur ate
bookkeepi ng.
1.Bet terf inancialanal ysisandmanagement ,Bookkeepi ngcansy stemati
zei tup
from up- t
o-datef ollow- ups,i nvoicing and on- ti
mepay mentf orsuppl i
ersf or
anal ysis.
2.Ful fil
lmentofTaxObl igations,Bookkeepi ngkeepst rackonanyi nformationand
document si nor dert oaccompl i
shannualt ax.Taxr eturnsar ealsomadeeasi er
wi t
hanor ganizedBal anceSheet ,CashFl owandPr ofit&Loss,
3.Repor ti
ngt oInvest orsi sEasy ,From char ts,graphst ol i
stsofdat apresentedt o
thei nv estorsareal lacqui redf rom thebookofaccount .
4.I tmakesBusi nessPl anni ngeasy ,byt hehel pofBal anceSheetandPr ofi
t&Loss
isusedt ochecki fthecompanyi sont her ighttrackf inanciall
y.
5.Pr operRecor dKeepi ng makesr etri
ev ingpr ocesseasyonceaudi tti
mecomes
6.CashFl ow –  Keepi ngt r
ackofcashf l
ow i scrit
icallyi mpor t
antf oranybusiness
andi t’sonl ypossi bl ewhenabusi nesshav eaccur atef i
nancialrecords.
7.Expenses–  Solet rader scancl aim speci f
icexpenseswhi chhav ebeenwhol ly

45
 andexclusiv
elyincur r
edaspar toft heirbusi
ness.Thisensuresthattheperson
doingthebookkeepi nghasanunder standi
ngofout goingandmonitorsthem f
or
taxandaccount i
ngpur poses.
8.Profi
tabi
li
tyandGr owth, Accuratebookkeepi ngall
owsanent repr
eneurt osee
whetherornotthebusi nessi sactuallymakingaprof i
tandappropri
atemeasures
aretakentoimprov eont hebusi ness.
9.Actsasat oolf orcont rol
li
ngasset si nthebusinesssoast oeli
minatethe
possibi
li
tyoftheft,
fraud,pilf
erage,embezzl ement.

TECHNI QUESOFFI NANCI ALSTATEMENTANALYSI S

Financialst at
ementanal ysisisint
erpret
edtodet erminethef i
nanci
alandoperati
onal
performanceoft hebusi ness.ANumberofmet hodsortechniquesareusedt
oanal yze
thef i
nanci alstat
ementoft hebusiness.Thef oll
owingaret hecommonmet hodsor
techniqueswhi char ewidel yusedbythebusinessenterpr
ises
1.Rat i
oanal ysis
2.Cashf l
owst atement
3.Fundsf l
ow
4.Tr endanaly sis
5.Compar ati
vest at
ementanal ysis

FINANCI ALRATI OS
Def i
nit
ion
Financialr atios are mat hemat i
calcompar i
sons off i
nancialstat
ementaccount s or
categories.Theser el
ati
onshi psbetweent hefi
nancialstat
ementaccount shel
pinvestors,
credit
or s,and i nt
ernalcompany managementunder stand how wella business is
performi ngandofar easneedi ngimprovement.Or
Af i
nanci alr ati
oi s a mat hemat i
calcompar i
son bet ween two ormor ei t
ems from
business` sbal ancesheetori ncomest atement.Thesear eusedt omeasuretheprogress
oft hebusi ness,uncov ert rends,andpoi nttopot enti
alproblem areas.Bankersand
i
nv estorsof tenanal y
zet hesenumber stodecidewhet hertolendyoumoneyori nvestin
yourcompany .

Financi
alr ati
osarethemostcommonandwi despreadtool
susedtoanal
yzeabusiness’
fi
nancialst andi
ng.Theyarealso used to compar edif
fer
entcompani
esi ndiff
erent
i
ndust r
ies.Sincearati
oissi
mplyamat hematical
l
ycompar i
sonbasedonpropor
ti
ons,big
andsmal lcompaniescanuser at
iostocompar etheirfi
nanci
ali
nfor
mati
on,toidenti
fy
theirst
rengthsandweaknesses

I
MPORTANCEOFFI NANCIALRATI OS
1.Theyar eusefuli
ndicatorsofacompany ’
sabi l
it
yt omanageshor t-t
erm obl i
gations
astheypr ovi
deimpor tantinformat i
onaboutbusi nessst rengt
h.E.g.li
quidityratio
2.Theyhel ptomeasur et heef fi
ciencyofabusi nessi.e.howwel litusesit sasset s.
E.g.Leveragerat
ioswhi chi ndicatethelong-termf i
nancialstr
engthofabusi ness.
3.Theyar eusedt odeter minet hePr ofi
tabi
li
tyoft hebusiness,bycompar ingpr ofi
ts
toassetsorequity.
4.Ratioshelpinanalyzingt heper formancet rendsov eral ongperiodoft i
meoft he
business.
5.Theyalsohel pabusinesst ocompar ethefi
nanci alr
esultstothoseofcompet i
tors.

46
 6.Ratiosassistthemanagementi ndecisionmakingregardinginvestment
.
7.Financialrat
iosareusedt oassesst hef i
nanci
alperformanceanddet erminethe
fi
nanci alposit
ionofanent erpri
see. g.thr
oughitspr of
itabi
li
ty,li
qui
dit
y,acti
vi
ty,
l
ev erageandot herrel
evanti
ndicator
s.
8.Theyhel pmanagementt opreparebudgets,t
oformulatepol i
cy,andtoprepar
ethe
futureplanofaction.

USERSOFFI NANCI ALRATI OS

1.Banker sandLender s: Usepr ofit
abil
ity
, l
iquidit
yandi nvest mentbecauset heywantt o
know t heabi li
tyoft hebor rowingbusi nessi nregularschedul edinterestpay ments
andr epay ment sofpr i
nci palloanamount .
2.Invest ors:Usepr of itabilit
yandi nvestmentbecauset heyar emor ei nterest
edi n
profitabili
typer formanceofbusi nessandsaf et
y&secur i
tyoft hei
ri nvestmentand
growt hpot enti
al oft hei rinvestment.
3.Gov ernment :Usepr ofitabil
itybecausegov ernmentmayusepr ofi
tasabasi sfor
taxation, grantsandsubsi di
es.
4.Empl oy ees:Use pr of it
abi l
ity,li
quidi
ty and act ivi
ty because empl oyees wi l
lbe
concer ned wi thj ob secur it
y,bonus and cont i
nuance ofbusi ness and wage
bargai ning.
5.Cust omer s:Usel iqui ditybecausecust omer swi l
lseekr eassur ancethatt hebusiness
cansur viveint heshor tterm andcont inuet osupply.
6.Suppl iers:Usel i
qui ditybecausesuppl i
er saremor ei nterestedi nknowi ngtheabi l
i
ty
ofthebusi nesstoset tleitsshor t
-t
erm obl i
gationsasandwhent heyar edue.
7.Management :Useal lr atiosbecausemanagementi si nterestedinal laspectsi .
e.,
bothf inanci alperfor manceandf i
nancial conditi
onoft hebusi ness.

TYPESOFRATI OS
.Financi alrat
iosareof
tendi
vi
dedupi
ntosev
enmai
ncat
egor
ies:
Liquidi t
y
Profitabili
ty
Sol vency
Effi
ciency
Mar ketpr ospect
Invest mentl ever
age
Cov er age

LI
QUI
DITYRATI
O
1.Curr
entr
ati
o

curr
entassets
Cur
rentRatio=
curr
entli
abil
i
ties
NB.I tevaluatestheabili
tyofabusi
nesst
opayshor
t-
ter
m obl
i
gat
ionsusi
ng
currentassets

quickasset
s
2.Aci
dTestRat
io=
currentl
iabi
li
ti
es
Or

47
 qui
ckasset
s-i
nvent
ory
cur
rentl
i
abil
it
ies

Alsoknownas" quickratio"
,itmeasur estheabi l
i
tyofacompanyt opayshort-
term obligati
onsusi ngt hemor el
iqui
dt ypesofcur rentasset sor"quickassets"
(cash,mar ketablesecuriti
es,andcur r
entreceivabl
es) .
ItMeasur est heabi l
it
yofabusi nesstopayi t
scurrentl iabi
li
ti
esusingcashand
mar ketablesecur i
ties.Mar ketabl
esecur it
iesar eshor t-
ter
m debti nstr
ument s
thatareasgoodascash.I nmanybusi nessesasi gnificantpropor
tionofcurrent
assetsmaycompr i
seofi nventory
.Inventory,bynature, cannotbeconv er
tedi
nt o
readycashabr uptl
y.Thet erml i
quidassetsdoesnoti ncludeinvent
ory.
Hence t het erm liquid orqui ckasseti ncludesal lthecur r
entasset sminus
i
nv entoryatpr epai
dexpenses

3.NetWor
kingCapi
tal
=Cur
rentAsset
s-Cur
rentLi
abi
l
iti
es

Det
ermi
nesifacompanycanmeeti t
scur
rentobl
i
gat
ionswi
thi
tscur
rentasset
s;and
howmuchexcessordef
ici
encyt
her
eis.

Exampl
eone
Shs
Equi
tyshar
ecapi
tal 2,
00,000
90,
000
Gener al reser ve
Sundr ycr edi tors 60,
000
Bil
lspay abl e 20,
000
Bankov er draf t 30,
000
Provisionf ort ax 5,
000
Proposeddi v
idend 10,
000
Outstandi ngsal ar
ies 5,
000
Longt er ml oans 60,
000
Land&bui l
ding 80,
000
Machi ner y 1,
20,
000
Cash 10,
000
Bank 30,
000
Stock 1,
40,
000
Short-termi nv estments 25,
000
Sundr ydebt or s  
Lesspr ov i
sion 36,
000
Bil
lsrecei vable 10,
000
Prepaidi nsur ance 9,
000
Preli
mi nar yexpenses 20,
000
Determi necur rentrat
ioandqui
ckassetr
ati
o

Sol
uti
on

48
 cur
rentassets
Cur
rentr
ati
o=
curr
entli
abil
i
ties

ButCur rentassetsarecash,bank,st ock,investment s,sundrydebtors(net

),bi
ll
s
receivableandpr epaidinsurance.= shs10,000+30,000+1, 40,
000+25, 000+36,000
+10, 000+9, 000=shs2,60,000.
Currentl i
abili
ti
esaresundr ycredit
ors,bi
ll
spay able,bankov er
draf
t,andprovi
sionf
or
tax,proposeddi vi
dendandout standi
ngsal ari
es
=60, 000+20; 000+30,000+5, 000+10, 000+5, 000
=shs1, 30,000
Currentr ati
o=2, 60,
000/ 1,30,
000
=2: 1
cur
rentassets
Quickr atio=
curr
entli
abili
ti
es

Qui
ckassets=Cur rentassets-(
Stock+Pr
epai
dexpenses)
=2,60,
000-(1,
40,000+9,000)
=shs1,11,000
Qui
ckrati
o=1, 11,000/1, 30,
000
=0.85:
1

4.I
nterestCov
erage:Thisrati
oiscalculat
edbydivi
dingProfi
tsbefor
eInt
erestand
Taxesbytotal
Inter
estExpense.
5.Assettosal
es:Thisrat
ioiscal
culatedbydi
vi
dingAssetsbySales.
6.Div
idendPayout.Thi
srati
oiscalculat
edbydiv
idi
ngDi v
idendsbyNetProfi
t.

7.Cur
rentDebt
/Tot
alAsset
s.Thi
srat
ioi
scal
cul
atedbydi
vi
dingCur
rentLi
abi
l
iti
es
byTotal
Asset
s.

PROFITABILI
TYRATIOS
Thisisthemeasureoft heabi
lit
yoft hebusi
nesst
ogener
atesuf
fi
cientr
evenuet
o
fi
nanceit
’sundert
aki
ng.Therat
iosincl
ude

1.Gr osspr of i
tr atio
Grosspr ofitratioist heratioofgr ossprofi
ttonetsal esi .
e.saleslesssalesretur
ns.The
rat
iothusr eflectst hemar ginofpr ofitt
hatabusi nessisabl et oear nonit
st r
adingand
manuf acturingact i
v i
ty .I
tisthemostcommonl ycal cul
atedratio.Itisemployedforint
er-
fi
rm compar isonoft radingr esult
s.It’
sgivenby:
Gr osspr ofit
Grosspr ofitratio= 100
Netsal es
Exampl e:
Calcul
at egr osspr of itrati
o( GPRat io)fr
om thefollowingpar t
iculars.
 
Par t
iculars Shs Parti
cul ars Shs
Sal es 1,
55,000 Pur chases 80,000
Sal esr etur ns 5,
000 Purchasesr etur
ns 10, 000
Openi ngst ock 40,000 Closingst ock 10,000
49
Solution:
Costofgoodssol d=Openi ngst ock+Netpur chases-Closi
ngstock
=40, 000+70, 000-10, 000
=1, 00,000
Netsal es=1, 55,000-5, 000
=150, 000
Grosspr ofi
t=1, 50,000-1, 00,000
=50, 000
Grosspr ofi
tratio=( 50,000/1, 50,000)x100
=33. 33%
Ormar kupist hegr osspr ofitexpressedasaper centageofthecostofsale
I
.e.mar kup=gr osspr ofit
/costofsal esx100
2.Netpr ofitratio( NPr ati
o)expr essesther el
ati
onshi
pbet weennetprofi
tafter
taxesandsal es.Thisr ati
oi sameasur eoftheoveral
lprof
itabi
li
tyoft
hebusi
ness.
Ther atioindicateswhatpor ti
onoft henetsalesisleftfortheownersaft
erall
expenseshav e

Netpr of
it
saftert
ax
Netprof i
tratio= x100
Netsal
es
Exampl e:
From thef ol
lowinginformati
oncalcul
atenetpr
ofi
trat
io(
NPr
ati
o)
Totalsalesshs520, 000;
Salesreturnsshs20, 000;
Netpr ofitshs40,000
Netsal es=( 520,
000–20, 000)=500,000
NetPr ofi
tRat i
o=[ (
40,000/500,000)×100]
=8%

Netpr
ofi
ts
3.Ret
urnoni
nvest
ment= x100
Capit
alempl
oyed

Netpr
ofi
t
Or x100
OwnersEqui
ty

Netprof
it
Pr
ofi
ttoassett
urnov
er= x100
Tot
alsaaets
Or
netprofts
Prof
itt
oassettur
nover=
t
otalassets

EFFICI
ENCYRATIOS
Theserat
iosmeasur
ethelevelofeff
ici
encyofbusi
nessact
ivi
ti
es.Theyi
ndi
cat
ethe
numberofti
mesanasseti
sturnedi
ntosal
es.Theyi
ncl
ude

costofsal
es
1.I
nvent
oryTur
nov
er=
av
er agei
nvent
ory

Repr
esent
sthenumberoft
imesi
nvent
oryi
ssol
dandr
epl
aced.Ahi
ghr
ati
oindi
cat
es
50
t
hatt
hebusi
nessi
seffi
cientinmanagi
ngitsinvent
ori
es.
365days
2.DaysI
nvent
oryOutstandi
ng=
i
nventor
yturnover

Inventoryout standingi salsoknownas" inventoryturnoveri

nday s"
.Itr
epresentsthe
numberofday sinvent or
ysi t
si nt hebusi ness.Inot herwor ds,i
tmeasur est he
numberofday sf r
om pur chaseofi nventorytot hesaleofthesame,t heshorterthe
day sthebet t
er .
3.St ockt urnov erperiod
Thisrat iomeasur estheav er agenumberofday sstockisheldbeforebeingsoldoff
inagiv enper iodoft ime
Averagest ock
Stockt urnov er= x365day s
costofsal es
4.Debt ors`t ur nover,
Thisist her at iothatshowst henumberoft imescashcol lecti
onsaremadei na
givenper iodoft ime
Netsales
I.
e.Rat eofdebt ors`turnov er=
Totaldebtor
s
5.Credit
or s`turnov er
Thismeasur est henumberoft imesabusi nesspay sitssuppl
iersinagivenperiodof
timei.e.ay ear
Netsal es
I.
e.credi t
ort ur nover=
Tot
al credit
ors

Totalcredi
tor
NB.Cr
edi
tor
s`t
urnov
erper
iod= x365day
s
Netpurchases

Netsal
es
Fi
xedassett
urnov
er= x100
Tot
alfi
xedasset
s

Netsal
es
Orf
ixedassett
urnov
er=
Tot
alfi
xedasset
s

LEVERAGERATI OS
1.Debt orr
atio(debttoassetr
ati
o)
ThisMeasur est heportionofthebusi
ness`asset
sthatisfi
nancedbydebt
(obl
igat
ionstothirdpart
ies)
.Debtr
ati
ocanalsobecomput
edusi
ngthefor
mul
a

l
ongt
erml i
abi
l
iti
es
Debtr
ati
o=
asset
s

2.EquityRati
o
Equi
tyrati
odeterminestheporti
onoftot
alasset
sprovi
dedbyequi
ty(
i.
e.owner
s'
cont
ri
butionsandt hebusiness'accumul
atedprof
it
s).Equi
tyr
ati
ocanalsobe
computedusingthef or
mula
tot
alequity
Equi
tyRatio=
totalasst
s

51
 3.Debt -
Equit
yRatio
Thi
sev aluat
esthecapitalstruct
ureofacompany.Thati
stowhenther
ati
oi s
morethan1i mpli
esthatthecompanyi sal
ever
agedfi
rm;l
esst
han1i
mpli
esthat
i
tisaconservati
veone.
Totall
ongterml i
abi
li
ti
es
Debt-
Equi
tyRat i
o=
totalequit
y

4.TimesInter
estEarned
Measuresthenumberoft i
mesi nterestexpensei
sconver
tedtoincome,andi
f
thecompanycanpayi t
sint
erestexpenseusi ngthepr
ofi
tsgenerat
ed.EBITi
s
earni
ngsbefor
eint
erestandtaxes.It
’sgivenby

ear
ningsBeforeInt
erestAndt
ax
Ti
mesI
nter
estEar
ned=
int
erstexpenses

VALUATIONANDGROWTHRATI OS
1.Earni
ngsperShare
EPSshowst herat
eofearni
ngspershar
eofcommonst ock.Apr
efer
reddividendis
deductedfr
om netincometogettheearni
ngsav
ail
abl
et ocommonst ockholder
s.
It
’sgi
v enby

netincome-pref
err
eddiv
idends
EarningsperShar e=
averagecommonshar es
2.Price-EarningsRatio
It
’susedt oev aluat
ei fast ocki sover
-orunder-pr
iced.Arel
ati
v yl
el ow P/Erati
o
couldi ndicatethatthecompanyi sunder-
pri
ced.Conv er
sel
y,i
nvest
orsexpecthi
gh
growt hratef r
om compani eswi hhi
t ghP/Erat
io.I
t’
sgivenby

marketpricepershare
Pr
ice-Ear
ningsRatio=
Earni
ngpershar e
3.Di
videndPay -
outRati
o
I
tdeterminestheporti
onofnetincomet hatisdist
ri
but
edtoowner
s.Notalli
ncome
i
sdistri
butedsinceasi
gnif
icantport
ionisret
ainedfort
henexty
ear
'soper
ati
ons.

di
vi
dendpershare
Di
vi
dendPay
-outRat
io=
Earni
ngpershar
e

4.Divi
dendYieldRati
o
Measurestheper centageofr et
urnthr
oughdivi
dendswhencompar
edtothepri
ce
pai
df orthestock.Ahi ghyieldisatt
ract
ivet
oi nv
est
orswhoareaft
erdi
vi
dends
rat
herthanlong-
term capit
alappreci
ati
on.I
t’
sgiv
enby

div
idendpershare
Di
vi
dendYi
eldRat
io=
marketpershar
e

WORKEDEXAMPLESone
Thef
oll
owi
ngfi
nanci
alst
atement
srel
atest
omel
onent
erpr
isesLTD

52
MELONENTERPRISESLTD
I
ncomest
atementfort
heyearended30June20117

Shs
Sales 850,000,
000
Lesscostofsal es 610,
000,000
Grosspr of i
t 240,000,
000
Lessoper ati
ngexpenses
Admi nistrati
vecosts 72,000,
000
Sell
inganddi st
ribut
ioncost
s 50,000,
000
Othercost s 18,
000,000
Total costs 140,
000,
000
Profitsbef or
etax 100,
000,
000
Lesst axat i
on30% 30,
000,
000
Profitaftertax 70,000,
000

MELONENTERPRI
SESLTD
Bal
ancesheet
Asat30June20117
NETFI XED SHS
Mot orv ehi cles 120,500,000
Landandpr emi ses 100,000,000
Furnitur eandf it
tings 80,400,
000
Equipment 60,100,000
Total fixedasset s 361,000,000
Currentasset s
I
nv entor y 35,
500, 000
Debt ors 64,
900,000
Prepay ment s 6,200,
000
Bank 45,
400,000
Total cur r entasset s 152,000,
000
Total asset s 513,000,000
Capital andl i
abi l
i
ties
Capital
Owner `sequi ty 200,
500,
000
Li
abi l
ities
5yearl oan 130,
000,
000
Creditor s 152,
500,
000
Unpai dt axes 30,
000,
000
Total capi tal andl i
abilit
ies 513,
000,
000
Requi red;
a)Comput et hef oll
owingrati
os
b)Gr osspr ofitmar gin
c)Netpr of i
tmar gin
d)Pr ofitont ot alassetrat
io
e)Cur rentr atio
f) Aci dt estrat io
g)Fi xedassett urnover

53
 h)Debtor’
sturnover
Theenterpr
iseapplyf
orloanofshs40,
000,
000r
epay
abl
ewi
thi
nsi
xmont
h
Shoul
dt hebankgivegiv
enthecurr
entr
ati
o?

SOLUTI
ON

grosspr
ofi
t
Gr
osspr
ofi
tmar
gin= x100
netsal
es
240,
000,
000
= =28.
24%or28%
850,
000,
000

netprof
it 70,
000,000
Netpr
ofi
tmar
gin= x100= = 8.
24%or8%
netsal
e 850,000,
000

netprofit
s 70, 000, 000
Pr
ofi
tont
otal
assetrati
o== = =70:513or0.
14:
1
totalassets 513,000, 000
Or
netpr of
it 70,000,000
Pr
ofi
tont
otal
assetsrati
o= x100= x100=13.
64%or14%
totalassets 513, 000,
000

cur
rentassets
Cur
rentr
ati
o=
curr
entli
abil
i
ties

Butcur
rentl
i
abil
it
ies=cr edit
ors+unpai
dtax
= 152,
500,000+30, 000,
000
=182,500,
000

152,
000,
000
Ther
efor
ecur
rentr
ati
o = =0.
83:
1
182,
500,
000
Or
cur
rentassets 152,000,000
Cur
rentr
ati
o = x100= x100=83%
curr
entli
abil
i
ties 182,500,000d

cur
rentassets-
invent
ory 152,
000,
000-
35,
500,
000 116,
500,
000
Aci
dtestr
ati
o = = = =
cur
rentli
abil
it
ies 182,
500,
000 182,
500,
000
0.
6:1

Or
cur
rentasset-
inventor
y
Aci
dtestr
ati
o = x100
currentl
iabil
i
ties

152,
000,
000-
35,
500,
000
= x100
182,
500,
000

116,
500,
000
X100
182,
500,
000
54
=64%

netsal
es 850,
000,
000
Fi
xedassett
urnov
er = x100= x100
fi
xedasset
s 361,
000,
000

=235.
46%
Or
netsal
es 850,
000,
000
Fi
xedassett
urnov
er = =2.
35:
1
fi
xedasset
s361,
000,
000

netsales
Debt
orst
urnov
er = x100 =1309.
7%
debt
ors
Or
netsales 850,
000,
000
Debt
orst
urnov
er = = =13.
1:1
debt
ors 361,000,
000

TheBankshoul dr ejectt heloanapplicati

on
Ther easoni st hatt hebusi ness`scurrentassetsarelesst hanthecur
rentl
iabil
i
ties
Or
Thecur r entassetr atioisbel owthest andardrati
oof2: 1
EXAMPLE2
Thef ollowi ngbal ancewasext ractedfrom thefi
nal st
atement sofJAK`Sbusinessatt
he
endoft he2015
Shs
Sales 288,000,000
Totalf ixedasset s 65,500,
000
Averagedebt or s 90,
000,000
Openi ngst ock 40,200,
000
Closi
ngst ock 50,400,000
Costofsal es 201,600,000
Totalcur rentasset s 36,100,
000
Equit
ycapi tal 68,400,000
Totalcur rentl iabilit
ies 16,800,
000
Netpr of itbef or eint erestandt ax 40,600,
000
Longt er ml iabi lit
ies 38,500,
000
Int
erestexpensesf ort hey ear 5,700,000
Requir ed;
a)Comput et hef ollowingr at
ios
b)Gr osspr ofitmar gin
c)St ockt urnov er
d)Debt or’scol l
ect i
onday s
e)Lev er ager atio
f) Wor kingcapi talratio
g)Netpr ofitmar gin
h)I nt erestcov er

55
 SOLUTI
ON

grosspr
ofi
t
Gr
osspr
ofi
tmar
gin= x100
Netsal
es

Butgr ossprofit=Netsales–costofsal
es
Shs288, 000,000-201600,000
86,400,000
86,400,000
=30%
288, 000,000

costofsales
St
ockt
urnov
er=
averagestock

openi
ngst
ock+cl
osi
ngst
ock
Butav
eragecost=
2

40200,
000+50400,
000
=45,
300,
000
2

201600,
000
=4.
45t
imes
45,300,
000

av
eragedebt
orsxnumberofday
sinay
ear
Debtorscoll
ecti
ondays=
sal
es
90,
000,000
X365day
s=114day s
288,000,000

debt 38,
500,
000
Lev
erager
ati
o= x100= x100=56.
3%
equit
y 68,
400,
000

netpr
ofi
tbeforeint
erestandt
ax 40,600,000
I
nter
estcov
er= = =7.
12t
imes
i
nter
estexpenses 5700,000

cur
rentassets 36,100,
000
Wor
kingcapi
tal
rat
io= = =2.
15:
1
curr
entli
abil
i
ties 16,
800,
000

Netpr
ofi
taft
ertaxandi
nter
est
Netpr
ofi
tmar
gin= x100
Netsal
es

40600,000-5700,
000
X100
288,000,000

34,
900,000
X100=12.
11%
288,000,000

56
Exampl e3
Thefol l
owi ngbalanceswer
eext
ract
edf
rom BAM SHOPPI NG`
sbooksofaccounton31
122017
PARTI CULARS SHS
Netsal es 20,000,000
Netpur chases 11,000,
000
Goodsav ail
ableforsal
e 16,000,000
Stockon1. Jan2017 5,000,
000
Stockon31Dec2017 4,000,
000
Totaloper ati
ngexpenses 6,000,000
Totalfixedassets 8,000,000
Debtors 1,500,000
Credi
tor s 3,
000,000
Cash 900, 000
Outstandingr ent 1,
000, 000
Bank 1,
600, 000

Requir
ed
Cal
culateandi nter
pretthefol
lowingrati
os
a)Inventoryturnoverrat
io
b)Creditpay mentperiod
c)Rateofr eturnoncapitalemployed
d)Stockt urnoverperi
od
e)Cashr atio
f) Pr
ofitmar kup

Sol
uti
on
costofsales
I
nventor
yturnover=
aver
agestock
Butcostofsales=goodsavail
ableforsale–cl
osingstock
16,
000,000-
4000,000
5000,000+4,
000,
000/2

12,
000,000
=2.
3or3t
imes
4,
500,
000

I
nter
pret
ati
ont
hebusi
nesssel
l
sandr
epl
acesi
tsst
ock3t
imesi
nthet
radi
ngper
iod

credi
tors
i
i)Creditpaymentperi
od= xnumberofday
sinay
ear
netpurchases
3,
000,000
x365days=99.
5day s
11,
000, 000

I
nter
pret
ati
ononav
eraget
hebusi
nesst
akes100day
stopayi
tscr
edi
tor
s

57
 Netpr
ofi
ts
i
i
i)Rat
eofr
etur
nsoncapi
tal
empl
oyed= x100
empl
oyedcapi
tal

Butnetpr
ofi
t=(
netsal
es–costofsal
es)
-expenses

(
20,000,000-
12,000,000)-
6,000,
000
X100=16.
7%
8000,000+(8000,000-4,
000,000

I
nter
pret
ati
on;
for100shsofcapi
tal
empl
oyed,
thebusi
nessget
sshs16.
7asnetpr
ofi
ts

avaragestock
i
v )
.Stockturnov
erper
iod= xnumberofdaysinay ear
costofsales
4,
500,000
X365days=137day s
12,000,000
I
nterpretat
ion:t
hebusinessholdsstockfor137day
sbeforeit
’ssold

abosutel
iqui
dassets
Cash r
ati
o = =
curr
entli
abi
li
ti
es
cash+Bank shs900,
000+1,
600,
000
credit
ors+outstandi
ngrent3,000,
000+1,
000,
000
2,500,000
=0.625:
1
4,000,000
I
nt er
pretat
ion:thebusi
nesscanclear0.
6ofit
scurr
entl
i
abi
l
iti
esusi
ngi
tsabsol
utel
i
qui
d
assets

gr
ossprof
it 8,
000,
000
v
)Pr
ofi
tmar
gin= x100= x100=66.
6%or67%
costofsal
es 12,
000,000

I
nter
pret
ati
on:f
orev
eryshs100ofcostofsal
est
hebusi
nessgener
atesshs67as
gr
ossprofi
ts

Thef ollowi ngi nformationwasext r

actedf r
om ther
ecor
dsofPr
omel
atr
ader
sfort
he
periodended31/ 12/2016.
Shs
I
nv ent ory01/ 012016 6,000,000
I
nv ent ory31/ 12/2016 5,000,000
I
nv ent oryt urnov errati
o 3times
Turnov er 30,500,000
Netpr ofitratio 20%
Deliver yv an 1,
800,000
Fi
xt ur esandf it
tings 1,000,000
Debt or s 1,650,000
Credi tors 2,500,000
I
nsur ancedue 1,500,000
Equi pment 250,000
Bankbal ance 750,
000
Cashbal ance 600,
000

58
Requi
r edto
Cal
culate
a)Costofsal es
b)Netpur chases
c)Goodsav ail
ableforsale
d)Tot aloper ati
ngexpenses
b)Comput eandi nter
pret
a)Cur rentrati
o
b)Qui ckassetr atio
c)Credi tcoll
ectionperiodinweeks
d)Fixedassett urnoverrati
o
Sol
ution
a)Costofsal es=st ocktur
noverxav
eragest
ock

openi
ngst
ock+cl
osi
ngst
ock 6,
000,
000+5,
000,
000
But av
erage st
ock = = =
2 2
shs5,
500,
000

Hencecostofsal
es=3x5,
500,
000=shs16,
500,
000

i
i
)Netpur
chases=costofsal
es+cl
osi
ngst
ock-openi
ngst
ock

=shs16,
500,
000+5,
000,
000-6,
000,
000
=shs21,
500,
000-6,
000,
000
Shs15,
500,
000

i
i
i)Goodsav
ail
abl
eforsal
e=openi
ngi
nvent
ory+netpur
chases

6,
000,
000+15,
500,
000

Shs21,
500,
000

i
v)Tot
aloper
ati
ngexpenses=gr
osspr
ofi
t–netpr
ofi
t.

Butgr
osspr
ofi
t=t
urnover–costofsal
es=shs30,
500,
000-16,
500,
000=shs14,
000,
000
20
Al
sonetpr
ofi
t=netpr
ofitr
ati
oxturnover= x30, 500,
000=shs6,100,
000
100

Hencet
otal
oper
ati
ngexpenses=14,
000,
000–6,
100,
000=shs7,
900,
000

totalcur
rentassets
Cur
rentr
ati
o=
totalcurr
enliabi
li
ti
es

butcur
rentasset
s=st
ock+debt
ors+Bankbal
ance+cashbal
ance

Shs5,000,
000+1650,000+750,
000=8,000,000
Alsocurr
entl
iabi
l
iti
es=credi
tor
s+insurancedue
59
2,500,000+1, 500,000
Shs4, 000,
000
8,000,
000
Cur r
entr at
io= =2:
1
4,000,
000
Interpretat
ion:thebusinessi
sinposi
ti
ont
opayi
tscur
rentl
i
abi
l
iti
es2t
imesusi
ngi
ts
currentasset s

cur
rentassets-
closi
nginvent
ory 8,
000,000-5,000,
000 3,
000,
000
Qui
ckr
ati
o= = =
cur
rentli
abil
it
ies 4,000,000 4,
000,
000

3:
4or0.
75:
1

I
nter
pret
ati
on:t
hebusi
nessdoesnothaveenoughqui
ckasset
stocl
eari
tscur
rent
l
i
abil
it
iessi
ncet
her
ati
oisbel
owthest
andar
drati
o

Cr
edi
tcol
l
ect
ionper
iodi
nweeks

netsal
es
Fixedassettur
noverr
ati
o= =
f
ixedasset
s
30,500,000
=10:
1
3,050,
000

I
nter
pret
ati
on:
forev
ery1shsi
nvest
edi
nbusi
nessi
tgener
atesshs10assal
esr
evenue

The foll
owi ng balances wer
e ext
ract
ed f
rom MUKENE’
S books ofaccounts on
31/12/2015.
Shs(000)
Netsales 20,
000
Netpurchases 11,
000
Goodsav ail
ableforsale 16,
000
Stock(01.01.2015) 5,
000
Stock(31.12.2015) 4,
000
Totaloperatingexpenses 6,
000
Totalfi
xedasset s 8,
000
Debtors 1,
500
Credit
ors 3,
000
Cash 900
Accruedrent 1,
000
Bank 1,
600

Requi
red:
Cal
cul
at eandinter
pret
i
. I nventor
yturnov
errat
io
ii
. Cr editpaymentper
iod
60
i
i
i. Rateofret
urnonemploy
edcapi
tal
i
v. Stocktur
noverper
iod
v. Cashrati
o
v
i. Profi
tmarl–up

SOLUTI
ON
I
nvent
oryt
urnov
er(
rat
io)
/Rat
eofst
ockt
urn/st
ockt
urnov
er

=costofsales
Aver
agest ock
Costofsales=Goodsav ail
ablef
orsale–Cl
osi
ngst
ock
=16,000,
000–4, 000,000
=Shs12,000,000
Av
eragestock=openi ngstock+closi
ngstock
2

=5,
000,
000+4,
000,
000 = Shs4,
500,
000

I
nvent
oryt
urnov
err
ati
o =12,000,
000
4,
500,000
=2.7
=3times/turns

I
nter
pret
ati
on:Thebusinesssell
sandr epl
acesit
sstockapproxi
mat
ely3ti
mesina
t
radi
ngperi
od.
(
ii
)Credi
tpaymentper
iod =credi
tor
s x Numberofdays/weeks/monthsi
na
y
ear
Netpur
chases

=cr
edi
tor
s x Numberofday
sinay
ear
Netpur
chases

=3,
000,
000 x 365
11,
000,
000

= 99.
5
= 100day
s

I
nter
pret
ati
on:
Onav
eraget
hebusi
nesst
akes100day
stopayi
tscr
edi
tor
ssuppl
i
ers

(
ii
i)Rat
eofr
etur
nonempl oyedcapi
tal
= Netprofit x100
Employedcapit
al

Netpr
ofi
t= Gr
osspr
ofi
t–Tot
aloper
ati
ngexpenses

61
 = Netsal es -Costofsal es)–6,
000,
000
= (20,000,000–12,000,
000)–6,000,
000
= 8,000,000–6,000,000
= Shs2, 000,000

Empl oyedcapital =Tot alfi

xedassets/fi
xedassets+worki
ngcapit
al
Butwor ki
ngcapi t
al=Tot alcurr
entassets–Totalcur
rentl
i
abi
li
ti
es.
Totalcurrentassets=Closi
ngstock=Debt or
s=Cash+Bank
=3,
000,000=1, 000,
000
=shs4,000,000
Wor kingcapit
al =8,000,000–4,000,
000
=shs4,000,000

Employ
edcapi
tal =8,000,
000+4,000,000
Shs12,000,
000
Rat
eofret
urnonemployedcapi
tal =2,000,
000x100
12,
000,
000
16.
7%

EXERCI SEONE
Thef oll
owi nginformat
ionr
elat
estot hebooksofDingiDi
ngient
ert
ainer
sasat30June
2012
Shs
Netsal es 4,
500, 000
Costofsal es 3,
225,
000
Salari
esandwages 600,000
Discountr eceived 150, 000
Discountal lowed 225,000
Machi nery 40,000,000
Debtor s 7,200,000
Creditors 12000, 000
Cashatbank 8,
000, 000
Bankov erdr af
t 3,
200, 000
Closi
ngst ock 4,
800,
000

Cal
culat
e
i) Grossprofi
t
ii
) Netprof
it
ii
i) Li quidi
ty
iv) Qui ckacidrat
io

EXERCISETWO
Thefol
lowi
ngi
nfor
mat
ionwasobtai
nedfrom thebooksofWekasaent
erpr
isesasat31
Dec2015
OPENINGSTOCK 100,000
Capi
tal 1,000,
000

62
Cash 105,000
Bank 425,000
Premi ses 595,500
Credit ors 150,000
3yearl oan 500,000
Wagesandsal ari
es 50,000
Purchases 303,500
Carriagei nwar ds 100,000
Mot orv an 330,000
Retur nsoutwar ds 60,000
Debt or s 92,500
Sales 465,000
Retur nsinwar ds 10,000
I
nterestonl oan 20,
000
Renti ncome 115,000
Transpor t 25,
000
Rentexpenses 30,
000
Drawi ngs 131,500
Machi nery 75,
000
Commi ssi
ononsal es 10,
000
Carriageout war ds 20,000
Commi ssi
oni ncome 135,000

Additi
onalinformat ion:
a)St ockat31Dec2015wasshs 60, 000
b)Accr uedr entshs60, 000
c)Wagesshs2, 500wer epai dinadv ance
d)Commi ssionofshs15, 000wasnoty etr
eceived
e)Renti ncomeofshs50, 000waspai dinadvance
f) Depreciat emachi neryandmot orvanby10%p. aoncost
g)Netpr of itisshs78, 500
Requiredto;
Preparethebal ancesheetasat31DEC2015
Calcul
ateandi nterpretthefol
lowi ng
a)Av eragecol l
ect i
onperiodf ordebts
b)Numberofday sstockwashel dbeforesel
li
ng
c)Rat eofr et ur
nsoncapi t alemployed
d)Rat eofst ockt urn

EXERCI
SETHREE
Thefol
l
owi
ngbalanceswer
eext
ract
edf
rom t
hef
inanci
alst
atementofNabi
kool
itr
ader
s
att
heendof2016

PARTICULARS SHS
Cash 2,010,000
Bank (600,000)
Sal
es 35,000,000
Purchases 9,
500,000

63
Averagest ock 4,000,
000
Rateofst ockt ur
n 5ti
mes
Fi
xedasset s 5,
000,000
Accountspay able 450,
000
Closi
ngst ock 2,
500,
000
Accountsr eceivable 6,
590,000
Totaloperatingexpenses 8,
750,000
I
nterestreceivabledue 50,000

Requi redt o:
Calculat e;
Costofsal es
Grosspr of i
t
Netsal es
Openi ngst ock
Netpr of itrati
o
Wor kingcapi tal
Stockhol dingper i
odinweeks
Rateofcr edit
orsturnover
Quickassetr ati
o
Debt or’scol l
ectionperi
odinday
s

EXERCI SEFOUR
Thef ollowi ngbal anceswereext ractedf r
om thef i
nancialst
atementsofKal
i
romet
al
worksatt heendoft heyear2017
Detail
s shs
Turnov er 160,000,000
Netpur chases 84,000,000
Account sr eceivable 7,000,
000
Account spay able 5,800,
000
Stock1/ 1/ 2017 3,600,
000
Stock31/ 12/2017 4,200,
000
Totaloper at i
ngexpenses 12,000,000
Noncur rentasset s 14,400,000
Owner s`equi ty 48,000,000
Bank 3,200,
000
Cash 1,
000,000
Outstandi ngr entincome 2,400,
000
Accruedel ectri
cit
y 2,000,
000
I
nterestonl oanexpense 1,200,
000
Bankl oan 4,
000,000
Required: comput eandi nt
erpretthefoll
owi ngrati
osforthebusiness
Profi
tmar kup
Profi
tmar gin
Netpr ofitratio
Creditpay mentper i
odinweeks
Debtors’ day s
Returnonequi t
y

64
I
nv entoryt urnoverrat
io
Stockt urnov erperi
od
Currentr atio
I
nterestcov errati
o
Noncur rentasset sturnov
er
Gearing/ leveragerati
o
Cashr atio

2CASHFLOW STATEMENTS

DEFINI TIONOFCASHFLOW STATEMENT

‘
CashFl ows’ impl i
esmov ementofcashi nandoutduet osomenon- cashi tems.
BENEFI TSOFCASHFLOW STATEMENT
1.I tprov i
desabasi st oassesst heabi lityoft heent er priset ogener at ecashandcash
equi valent sandt heneedsoft heent er pr iset out ili
zet hosecashf lows.
2.A cashf l
ow st at ementpr ov i
desi nf or mat iont hatenabl esuser st oev aluat et he
changesi nnetasset sofanent erpr ise,i tsf inanci alst ructur e( incl udingi tsliqui dity
andsol v ency )
3.Cashf l
owi nf or mat i
oni susef uli nassessi ngt heabi lit
yoft heent erpri
set ogener ate
cashandcashequi valent s,whi chenabl esuser st odev elopmodel stoassessand
compar et hepr esentv alueoft hef ut ur ecashf lowsofdi fferentent erprises.
4.I tisusef ul inchecki ngt heaccur acyofpastassessment soff utur ecashf lowsandi n
exami ningt her elat i
onshi pbet weenpr ofitabilit
yandnetcashf l
owandt hei mpactof
changi ngpr i
ces.
5.Cash f low st atementhel pi n maki ng f inanci aldeci sions.  E.g.buy ing capi tal
equi pmentusi ngcashorpaywor kers.  
6.I thel pst hef i
nanci almanager stomakeacashf l
owpr ojectionf ori mmedi at
ef ut ure,
e.g.basi ngont hepastf inanci alproject ions.
7.CashFl owSt atementi sani mpor t
antf i
nanci altoolf orthemanagementt omakean
estimat er elatingt ocashf ort henearf ut ur e.
8.I thel pst hei nt ernalmanagementt odet er mi net hef i
nanci alpol icyt obeadopt edi n
future,si ncei tsuppl i
esi nf or mat i
onr el atingt of unds,e. g.,taki ngdeci si onaboutt he
replacementoff ixedasset sorr epay mentofl ong-t er ml i
abiliti
eset c
9.I trev eal st hecashposi ti
onf ort hebusi ness,asi tshowst hemov ementofcashi n
thebusi nessi .e.,whet hert her ei sanyi ncr easei ncashordecr easei ncashandt he
reasonsexpl aini ngso.
10.Cashf low st at ementhel pst oident ifyt hemai nfinanci alsour cesf ort hebusi ness
thati sf rom wher ecashi nf lowshav ear i
senwi thi napar ti
cul arper iodandal so
showst hev ar iousact ivit
ieswher eint hecashwasut il
izedasCashFl owSt at ement
doesnotal way sr epr esentt her eal l
iqui dposi ti
on.
11.Cashf low st atementi ssi gni fi
cantt omanagementf orpr opercashpl anningand
mai nt aini ngapr opermat chi ngbet weencashi nflowsandout fl
ows.As
Cashf l
owst atementr epor tst heamountofcashr ecei veddur ingt heper iodt hrough
variousf inanci ngact i
viti
es,suchasi ssueofshar es,debent ur esandr aisi
ngl ong-
terml oan.
12.Cashf lowst at ementhel psi nappr aisi ngoft hev ariouscapi talinv est mentpr ogr ams
todet ermi net hei rprof i
tabi l
ityandv i
abi li
ty.

65
LimitationsofCashFl owSt atement:
CashFl owSt atementis,nodoubt ,i
sani mport
antt oolinfinancialmanagementwhi ch
explainst hemov ementoff undsinvari
ousway sofaf ir
m.I tassiststhemanagementt o
under standt heamountofcapi t
albl
ockedupi naspeci fi
csegmentofaf i
rm.Alt
hough
theCashFl ow Statementper f
ormsasani mportantfinancialtool,itisevennotfree
from limitati
ons.
Someoft hem aregivenbelow:
1.CashFl ow Statementfailstopresenttheneti ncomeofaf i
rm sinceitdoesnot
consi dernon-cashit
em.
2.I tisnei t
herasubst i
tut
eofFundsFl owSt at
ementnoranI ncomeSt atement.So,
the
functionswhi chareper f
ormedbyt heFundsFl owSt atementorI ncomeSt at
ement
cannotbedonebyt heCashFl owStatement.

Terms
1.Cash, itcompr isescashonhandanddemanddeposi tswi t
hbanks.
2.Cashequi v
alents,t hesear eshor tterm,hi ghl yliquidinvestmentst hatar er eadil
y
conv ertibleintoknownamount sofcash.
3.Cashf lows, thesear einflowsandout fl
owsofcashandcashequi val
ent s.
4.Oper ating act ivi
ties,these ar et he principalr evenue-producing activi
ti
es oft he
enterpr iseandot heract i
viti
est hatarenoti nv esti
ngorf i
nanci
ngact i
v i
ti
es.
5.I nvestingact iv
iti
es,t hesear etheacqui siti
onanddi sposaloflong-term asset sand
otheri nv estment snoti ncludedi ncashequi valents.
6.Fi nanci ng act i
v i
ti
es,t hesear eact i
vit
iest hatr esul tin changesi nt hesi z
eand
composi ti
onoft heowner s’capital(i
ncludingpr eferenceshar ecapitalinthecaseof
acompany )andbor rowingsoft heenterpr i
se.
7.Cashi nflow, t
hesear eRecei ptofcashf rom anon- cashitem.
8.Cashoutf l
ows;t hisiscashpay menti nr espectt oint ermssuchas,pur chaseof
machi ner ybypay ingcash.
CLASSI FICATI ONOFACTI VI
TI ESFORTHEPREPARATI ONOFCASHFLOW
Therear eact i
viti
esofanent erpri
ser esultintocashf lows( i
nfl
owsorr eceiptsand
outfl
owsorpay ment s).Theseact i
vi
tiesaret obecl assifi
edi ntot
hreecat egories:
Oper ati
ng,
I
nv esti
ng,
Financi ngact i
vit
ies

OPERATI NGACTI VI
TIES
Cashflowsf rom oper ati
ngact i
viti
esarepri
mar i
lyderiv
edfrom t
hemai nact
ivi
ti
esofthe
enter
prise.Theygener al
lyresultfrom t
het r
ansact ionsandothereventst
hatenteri
nto
thedeterminat i
onofnetpr ofitorloss.
CashI nfl
owsr esult
ingfrom oper at
ingact
ivi
ti
esi nclude,
 Cashr ecei ptsfrom saleofgoodsandt her enderi
ngofservi
ces,
 Cashr ecei ptsfrom royalt
ies,
 Fees,
 Commi ssions
 Loanacqui si
ti
on
 Sal eofl ongterm asset,
 Andanyot herincomet hatbusinessesr eceive
66
CashOutfl
owsr esult
ingfr
om oper ati
ngacti
v i
ti
esinclude;
 Cashpay mentstosuppl i
ersforgoodsandser vices,
 Cashpay mentstoandonbehal foftheempl oyees,
 Cashpay mentstoani nsuranceenterpr
iseforpremiums,
 Clai
ms,
 Paymentf orpoli
cybenefit
s,
 Cashpay mentsofincomet axes,
 Int
erestpaymentsonacqui redloans,
 Paymentsf oruti
li
ti
es
 Purchaseoff i
xedassets

I
NVESTI NGACTI VI TIES
Transact ionsr el at edt ol ong- ter mi nvest mentar e( investingact i
v i
ti
es).
Separ atedi sclosur eofcashf lowsf rom i nv estingact iviti
esi simpor tantbecauset hey
representt heext entt owhi chexpendi tureshav ebeenmadef orresour cesi ntendedt o
gener atef uturei ncomeandcashf l
ows.Hence
CashI nflowsr esul ti
ngf rom I nv estingAct i
v i
tiesi nclude;
 Cashr eceiptf rom di sposal off i
xedasset s,
 Cashr eceiptf rom t her epay mentofadv ancesorl oansmadet ot hir
d parties
(excepti ncaseoff i
nanci al enterprise) .
 Cash r ecei ptf r
om di sposalofshar es,war r
ants ordebti nstrument s ofot her
ent erprisesexceptt hosehel dfort radingpur poses.
 I nterestr ecei v edi ncashf rom loansandadv ances.
 Di v i
dendr ecei vedf rom i nv estment sinot herent erpri
ses.
CashOut f
lowsf r om i nv est ingact i
viti
es;
 Cashpay ment st oacqui ref ixedasset s,
 Cash pay ment st o acqui re shar es,war rants or debt i nstrument s of ot her
ent erprisesot hert hant hei nst r
ument st hosehel dfort r
adingpur poses.
 Cashadv ancesandl oansmadet ot hirdpar ty( othert hanadv ancesandl oansmade
byaf inanci al ent erpr isewher einitisoper at
ingact ivi
ties).
FINANCI NGACTI VI TIES
Financi ngact ivitiesr elat et ol ong- t
er mf undsorcapi talofanent erprise,e. g.
,cash
proceeds f rom i ssue ofequi ty shar es,debent ures,r aising long-term bank l oans,
repay mentofbankl oan, et c.her e;
CashI nfl
owsf rom f i
nanci ngact ivit
iesi nclude;
 Cashpr oceedsf r
om i ssui ngshar es( equi tyor /andpr eference).
 Cashpr oceedsf r
om i ssui ngdebent ures, l
oans, bondsandot hershort /
 Long- ter m bor rowi ngs
CashOut f
lowsf r om f i
nanci ngact ivi
tiesincl ude;
 Cashr epay ment sofamount sbor r
owed.
 I nterestpai dondebent uresandl ong-ter ml oansandadv ances.
 Di v i
dendspai donequi tyandpr eferencecapi tal.

ComponentsofBal
ancesheet
Bal
ances
Tot
alinf
lows
Tot
aloutfl
ows
67
Netcashposi
ti
on

EXAMPLEONE
Thefollowingprojecti
onsr elatest oMakal andat rader sforthe2017
i
. Shar ecapitalshs600, 000as1mar ch2017
i
i
. Cashsal esforMar ch2017shs8, 250,000andexpect edt oincreasebyshs750,
000
ii
i
. Mont hl
ydebt stobecol lectedar eshs2, 000,000andexpect edtoi ncreasebyshs
200,000permont h
iv
. Al oanwor thshs7500, 000t oacquiredf r
om t ropicalbanki nApril2017
v
. Mont hl
ycreditsal eshs4, 000,000,But60%wi llbepai dint hemont hofsaleand
balancetobepai dinthef ol l
owingmont h.
vi
. St artupequipment swor thshs7, 500,000t obeboughti nApr i
l2017
v i
i
. Mont hl
yexpensesf orser vici
ngofr efri
geratorsar eexpect edtobeshs200, 000
vii
i
. Mont hl
ypay ment sar esal ari
esshs2, 250, 000secur i
tyshs750,000,i nsur
ance
shs225,000
i
x. Mont hl
yutil
itybil
lsofshs750, 000ar etobemade
x. Mont hl
yloanr epaymentshs900, 000wi l
lstartinmay
xi
. Pur chasesar eexpect edt oshs2, 000,000mont hl
y
Required;
Prepareacashf lowst atementf orMakal andaf ort heper i
odfrom Mayt oJune2017
Giveanyf i
veimpor tanceoft hecashf lowst atementt oKalandat raders

MAKALANDATRADERS`
Cashfl
owstat
ement
Fort
heper
iodfrom Mar
cht
oJune2017

DETAI
LS MARCH APRI
L MAY JUNE
SHS SHS SHS SHS

Bal
anceb/
f 775,
000 9,
800,
000 18,
150,
00
0
Addcashi
nfl
ows:
Shar
ecapi
tal 600,
000
Cashsal
es 900,
000
8,
250,
000 900,
000
Receipt
s f
rom 2,
400,
000 900,
000
debtors 2,
000,
000 2,
200,
000
2,
600,
00
Loan 7,
500,
000
4,
000,
000
Cr
edi
tsal
es 2,
400,
000 4,
000,
000
4,
000,
000
Tot
alcashi
nfl
ows

68
 Lesscashout
fl
ows: 13,
250,
000 21,
675,
000 24,
125,
000 34,
125,
00
0
St
artupequi
pment
Servi
cing 7,
500,
000
ref
ri
ger at
or
200,
000 200,
000 200,
000
Sal
ary
200,
000
2,
250,
000 2,
250,
000 2,
250,
000
Secur
it
y
2,
250,
000
I
nsur
ance 750,
000 750,
000 750,
000
750,
000
Ut
il
it
ies 225,
000 225,
000 225,
000
225,
000
St
art
upexpenses 750,
000 750,
000 750,
000
750,
000
Loanr
epay
ment 6,
300,
000
Pur
chases 900,
000
Tot
alcashout
fl
ows 900,
000
2,
000,
000 2,
000,
000 2,
000,
000
Netcashposi
ti
on 2,
000,
000

12,
475,
000 13,
675,
000 7,
050,
000 7,
050,
000

775,
000 9,
800,
000 18,
1150,
000 26,
675,
00
0

EXAMPLETWO

Mbal emai zemi l

lershadt hefollowi ngprojecti
onsf orthey ear2018
Openi ngcashbal anceasat1Januar y2018shs2, 200,000
Salesi nkg;
Januar y90,000
Februar y100,000
Mar ch80, 000
April20,000,eachkgi st obesol datshs500oncashbasi s.
Thebusi nessplanstoobt ai
nal oanofshs10, 000,000atani nt
erestrat
eof15%from
BankofBar oda.Thel oanisi nt woi nstal
lment sshs6, 000,000i nFebruar
yandshs
4,
000, 000i nApril
.
Receipt sfrom debtorsar eproj ectedatshs2,000,000,shs900, 000andshs400,
000
fr
om t hemont hsofFebr uary,Mar chandApr il
respectivel
y.
Purchasesofr awmat eri
alsinkgsi sprojectedasf oll
owsJanuar y6000,Febr
uar
y7000,
mar ch8000andApr i
l.Themat erialisexpectedt ocostshs2000perkg.
Labourcost sf orJanuar yi sshs2,000,000,Febr uaryshs1, 800,
000,March shs
1,
700, 000andApr i
lshs1, 950,000.
69
 Product ionexpensesar eproj
ectedasJanuar yshs500,000,Februaryshs400,000,
Mar chshs300, 000andApri
lshs450, 000.
Mont hlyadmi nistr
ati
veandmarketingexpensesareshs300,
000.
Agener atorisbeboughtatshs20,000,000oncrediti
nJanuar
y.50%oft hecosti
stobe
paidinmar chandt hebal
anceinApr il
2018.
Prov i
sionf orbaddebtsanduncertainti
esi
sprovidedf
oratshs70,
000,000

Requi
red:pr
epareMbalemaizemill
erscashfl
owstat
ementf
ort
hemont
hsofJanuar
y,
Febr
uary,MarchandApri
l2018
Suggestwaysofmini
mizingcashdef
ici
tint
hebusi
ness

MBALEMAI ZEMILLERS`
Cashflowst
atement
ForthemonthsofJanuar
y,Febr
uar
y,Mar
chandApr
il2018
DETAILS JANUARY FEBRUARY MARCH APRI
L
Shs Shs Shs Shs

Bal
anceb/
f 2,
200,
000 32,
400,
000 73, 000 86,
900, 500,
000
Addcashi
nfl
ows
Cashsal
es
45,
000,
000 50,
000,
000 40, 000 10,
000, 000,
000
Loan 4,
000,
000
6,
000,
000
Recei
ptsf
rom debt
ors
2,
000,
000 900,
000 400,
000
Tot
alcashi
nfl
ows
47,
200,
000 90,
400,
000 114,
800,
00 100,
900,
00
LessCASHOUTFLOWS 0 0
Pur
chaseofr
awmat
eri
als
12,
000,
000 14,
000,
000
Labourcost
s
16,
000,
000 18,
000,
000
Pr
oduct
ionexpenses 2,
000,
000 1,
800,
000
1,
700,
000 1,
950,
000
Administ
rat
ive and mar
ket
ing 500,
000 400,
000
expenses 300,
000 450,
000
300,
000 300,
000
Pur
chaseofgener
ator 300,
000 300,
000
Tot
alcashout
fl
ows 10,
000,
000 10,
000,
000
14,
800,
000 16,
500,
000
Netcashposi
ti
on 28,
300,
000 30,
700,
000

32,
400,
000 73,
900,
000 86,
500,
000 70,
200,
000

70
EXAMPLETHREE
Thefol
lowi ngwer epr oj ectionsofJohnMusogat rader sf ort hemont hsofMar ch,Apr il
,
MayandJune2017
i
. Thebusi nesshadanetcashdef i
citofshs60, 000, 000att heendofFebr uar y
2017
i
i
. Expect edmont hl ycashsal esar et oamountt oshs20, 000, 000. thecashsal esar e
expect edt odecr easeby20% af tert hef ir
stt womont hs.Cr editsal eswer e
project edatshs8, 000, 000mont hlywi t
h60%ofpay ment sexpect edint hemont h
ofsal eandt hebal ancei nt hef ollowingmont hsl ess10%di scount .
ii
i
. Mont hlycashpur chasesar eexpect edt obeshs12, 000, 000. thi
swasexpect edt o
i
ncr easeby12%mont hlybasi ngonpr ojecteddemand.
iv
. Mont hlycr edi tpur chasesar eexpect edtobe40%oft ot almont hlysal eswhose
pay ment sar et obemadei nthef ol
lowingmont hl ess5%di scount .
v
. Amont hlysal ar yf or20wor kerswasexpect edt obeshs400, 000perwor ker.Two
wor kersar et obet erminatedatt heendoft hesecondmont handnor eplacement
i
sexpect edt obemade
vi
. Thebusi nesspl annedt ogetal oanofshs16, 000, 000i nt hef ir
stmont hwi t
ha
repay mentgr aceper i
odofonemont haf teracqui sit
ion.I tspay ablei sint wo
equali nstallment swi thani nterestr ateof10% pay abl eonr educingbal ance
met hod.
v i
i
. Thebusi nesspl annedt osel lol dmachi nerywor thshs4, 000,000i nMayand
receiv einitialpay mentofshs1, 800,000andt hebal ancei nt hef oll
owingmont h.
Thedepr eciat i
oni satar ateof5%perannum
vii
i
. Rentr eceiv abl ewast oi ncreaseby10%mont hl y. rentr ecei vedatt heendof
Febr uar ywasshs1, 000,000
i
x. Acool erwor thshs10, 000, 000wast obeboughti nMar chonhi repur chasebasi s.
Downpay mentofshs4, 000,000wast obemadeandt hebal ancet obepai din
ther atioof2/ 4,1/ 4and25%t hecomi ngmont hr epet i
ti
v ely
x. Adv ertisement sofshs3, 000,000wer etobepai df oratt heendofJune2017
xi
. Cr eat ivesal esper sonsar et or eceivecommi ssi onof5% oft hemont h’scash
salesr ev enue
xii
. Anycashshor tagei st obeof fsetwi thdebent ureatt hebegi nningoft henext
mont
hwi
thani
nter
estr
ateof10%permont
hfor4mont
hspay
abl
etoget
herwi
th
t
hedebent
ureaf
ter4mont
hsf
rom t
hemont
hofdebent
ureacqui
sit
ion
Requi
red
Pr
epar
ethecashf
lowst
atementf
ort
hebusi
nessf
ort
heper
iodofMar
cht
oJune2017
Commentont
het
rendofnetcashposi
ti
onoft
hebusi
ness
Adv
iset
hebusi
nessont
hemeasur
est
oadoptt
oov
ercomeanycashdef
ici
t

71
 JOHNMUSOGATRADERS
CASHFLOW STATEMENT
FORTHEMONTHSOFMARCH, APRIL,
MAYANDJUNE2017

DETAI
LS MARCHSHS APRI
LSHS MAYSHS JUNESHS

Cashbal
ance (
60,
000,
000) (
43,
100,
000) (
7,430,
000) (18,
221,
80
0)
Addcashi
nfl
ows;
Cashsal
es 20,
000,
000 20,
000,
000 16,
000,
000
16,
000,
000
Recei
ptsf
rom debt
ors
4,
800,
000 8,
000,
000 8,
000,
000
Loan 8,
000,
000
16,
000,
000
Rentr
ecei
vabl
e
1,
100,
000 1,
210,
000 1,
331,
000
Sal
eofol
dmachi
ner
y 1,
464,
100
1,
800,
000
Debent
ure 2,
200,
000
43,
100,
000 17,
430,
000
18,
221,
800

72
Tot
alcashi
nfl
ows 18,
100,
000 29,
210,
000 27,
131,
000 22,
664,
100
Less:
cashoutf
lows
Cashpur
chases 12,
000,
000 13,
440,
000 15,
052,
800 16,
859,
136
Pay
mentt
ocr
edi
tor
s
11,
200,
000 1,
552,
800 16,
859,
136
Wor
ker
ssal
ari
es
8,
000,
000 8,
000,
000 7,
200,
000 7,
200,
000
Loanpr
inci
pal
pay
ment
8,
000,
000 8,
000,
000
I
nter
estonl
oan
1,
600,
000 800,
000
Pur
chaseofcool
er
4,
000,
000 3,
000,
000 1,
500,
000 1,
500,
000
Adv
ert
isement
s
3,
000,
000
Commi
ssi
on
1,
000,
000 1,
000,
000 800,
000 800,
000

Tot
alcashoutf
lows 25,
000,
000 36,
640,
000 45,
352,
800 47,
759,
136

Netcashposi
ti
on (
43,
100,
000) (
7,430,
000) (18,
221,
80 (20,
095,
03
0) 6)

NETCASHPOSI TION
JohnMusogahadadef i
citofshs43, 100,000byt heendofMarch2017
I
treducedt oadef i
citofshs7, 430,000byt heendofApr i
l2017
Thebusi nessalsohadadef i
citofshs18221, 800bytheeofMay
Thebusi nessper f
ormancef orfourmont hwasnotgood
WAYSOFREDUCI NGDEFI CIT
Bypost poningincreaseinexpendi t
urese.g.salar
ies
Sel
li
ngof fsomeoft hef i
xedasset s
I
ncreasingoncashsal es
Speedingupdebtcol lect
ion
Sel
li
ngoncashonl y
Obtai
ningl oanfrom lowi nterestratesources
Layi
ngof fsomewor kers
Negoti
at i
ngf orlongercreditperiodf orsuppl
ies

EXAMPLEFOUR
73
Thef ollowingi nf
or mat ionr el
atest opr ojectionsmadebyMbal ev ender s`associ ati
on
forthemont hsofJanuar y,February,mar chandApr i
l2018
Project edcashandbankbal ancesasatDecembershs20, 000,000
Saleswi llbebot hcashandcr edit.Januar ycashsal eswi l
lbe800uni tsatpr iceofshs
10,000each.Ther eafter,cashsal eswi l
lbei ncreaseatar ateof5%permont h.Credit
salesf oreachmont har eexpect edt obeshs5, 500,
000.debtor swillbeexpect edtopay
i
nt hemont hofsal e.
Thebusi nessplanst obuy15comput ersatshs650, 000eachi nMar ch.Andi mpor tdut y
of5%ont otalcostwi l
l bepai dinaddi ti
on.
Mont hlyexpect edexpensesandpay ment sincludesalari
esandwagesshs30, 000, 000,
machi neser vici
ngshs300,000,depr eciati
onshs100, 000.salari
esf orApr ilwillbepaid
i
nt hemont hofMar ch.
Thebusi nessi spay i
ngbackal oanofshs10, 000,000pr eviouslyobt ained.Mont hly
i
nst allment samountt oshs2, 000,000permont hstarti
nginFebr uary.Thel oanat tracts
i
nter estofshs100, 000permont halsopay ablestart
ingFebr uary
Thebusi nesswi llbuy900uni t
sofr aw mat eri
alsatshs6, 000eachi nt hemont hof
Januar y.Thequant i
tyofr aw mat eri
alsi sexpect edt oincreaseby10% ev erymont h.
Purchaseofr awmat erialsisst r
ictl
yoncashbasi s.
Thebusi nessexpect st or eceiveshs10, 000,000asadonat i
oni nApr i
landpl anstosel l
offanol dmot orvanatshs9, 000,000i nMar ch.

Requir
ed;pr
epareMbal evendor
s`associati
on`scashf l
ow st
atementf
ort
heper
iodof
Januaryt
oApri
l 2018
MBALEVENDORS`ASSOCI ATI
ON`S
Cashflowst atement
Fortheper
iodofJanuary
, February,
MarchandApril
2018

Det
ail
s Januar
yshs Febr
uar
y Mar
chshs Apr
il
shs
Shs

Bal
ancesb/
f 20,
000,
000 (
2,200,
000 (26,
640,
00 (75,
851,
00
) 0) 0)

Addcashi
nfl
ows
Cashsal
es
8,
000,
000
Recei
ptf
rom debt
ors 8,
400,
000 8,
820,
000 9,
261,
000
5,
500,
000
Cashdonat
ions 5,
500,
000 5,
500,
000 5,
500,
000

Sal
eofol
dvehi
cl
e 10,
000,
000

Tot
alcashout
fl
ows 9,
000,
000

74
 Lesscashout
fl
ows 33,
500,
000 11,
700,
000 (
3,320,
000) (51,
090,
50
0)
Pur
chaseofcomput
er
I
mpor
tdut
y 9,
750,
000
Sal
ari
esandwages
487,
500
Machi
neser
vici
ng
30,
000,
000 30,
000,
000 60,
000,
000
Loanr
epay
ment
300,
000 300,
000 300,
000
Loani
nter
estpay
ment 300,
000
2,
000,
000 2,
000,
000
Pur
chaseofr
awmat
eri
als 2,
000,
000
100,
000 100,
000
Tot
alcashout
fl
ows
100,
000
5,
400,
000 5,
940,
000 6,
534,
000
Netcashposi
ti
on
7,
187,
400

35700,
000 38,
340,
000 79,
171,
500 6,
677,
900

2,
200,
000 26,
640,
000

EXAMPLEFI VE
I. Nkomat r
adingcompanyl tdwhi chpl anst ost ar
tabusi nesshasav ai
ledt he
foll
owi ngpr ojecteddetail
sforthef i
rstsixmonthsofthey ear2017
I
I. Cashatbankshs4, 000,000at1Januar y2017
II
I. Cashsal esforJanuar y2016shs5, 500,000.t
hesalesareexpectedtoincreaseby
shs500, 000ev erymont h.Allsaleswi l
lbebycash
I
V. Capi t
alizati
onl oant obeacqui redf r
om bankofBar odai nFebruar
y ,
2017shs
5,000,000
V. Pur chasesofst art
upasset sduringt hemont hofFebruary2017shs5, 000,000
VI. Mont hly pay ments starti
ng wi t
h Januar y 2017,salaries and wages shs
1,500,000,rentshs500, 000adv er t
isingshs150, 000
VII. Pre–oper atingexpensest obepai dJanuar y2017shs200, 000
VII
I. Purchasesoccuri nthemont hofsal ear eexpectedtobe75%ofeachmont h`s
projectedsal es.Purchaseswi llbepai df oraf
teronemonth

NKOMATRADINGCOMPANLTD` S
CASHFLOW STATEMENT
FORTHEMONTHSOFJANUARY,
FEBRUARY,MARCH,APRI
LMAYANDJUNE2016

PARTI
CULARS JANUARY FEBRUARY MARCH APRI
L MAY JUNE
SHS SHS SHS
SHS SHS SHS

75
Bal
anceb/
f - 3,
150,
000 7,
000,
000 7, 000 7,
225, 575,
000 8,
050,
000
Addcashi
nfl
ows;
Shar
ecapi
tal 4,
000,
000
Cashsal
es 5,
500,
000 6,
000,
000 6,
500,
000 7, 000 7,
000, 500,
000 8,
000,
000
Capi
tal
i
zat
ion
5,
000,
000
Tot
alcashi
nfl
ows
9,
500,
000 14,
150,
000 13,
500,
00 14,
225,
00 15,
075,
00 16,
050,
00
Lesscashoutf
lows; 0 0 0 0
Purchase up st
art
up
assets 5,
000,
000
Sal
ari
esandwages 1,
500,
000 1,
500,
000
Rent 1,
500,
000 1,
500,
000 1,
500,
000 1,
500,
000
500,
000 500,
000
Adv
ert
isi
ng 500,
000 500,
000 500,
000 500,
000
150,
00 150,
000
Pr
eoper
ati
ngexpenses 150,
000 150,
000 150,
000 150,
000
4,
200,
000
Loanr
epay
ment
Pur
chases
600,
000

4,
125,
000 4,
500,
000 4,
875,
000 5,
250,
000
Tot
alcashout
fl
ows

6,
350,
000 7,
150,
000 6,
275,
000 76,
650,
00 7,
025,
000 8,
000,
000
Netcashposi
ti
on 0

3,
150,
000 7,
000,
000 7,
225,
000 8,
050,
000 8,
050,
000
7,
575,
000

Usesofcashf l
owt othebusiness
I
tenablesthebusinesstoforecastcashchallengesinadv ance
I
tenablesmanagementt ocompar eactualwiththeprojections.
I
tport
raystheabili
tyofthebusinesstorepayloanobligations
I
t’
susedt oshowchangesi nthenetcashposi ti
onsoft hebusi nessf
rom oneper
iodt
o
anot
her
I
tenablesthebusinesstoindenti
fythevari
ousneedsandpr ovi
dessourcesoff
undi
ng
I
tfaci
li
tat
epr operpl
anningforthebusinessregardi
ngi nvestmentdeci
sions

76
EXERCI SEONE
The followi ng pr oj ectionsr el
atet o Mbal e AGRO chemi calsent erprisesdur i
ng the
mont hsofMay ,June, Jul yandAugust2017
I. Onmay12017,t heent erprisehadacashbal anceofshs40, 000, 000andbank
bal anceofshs( 8,000,000)
I
I. Out put sof600uni ts,750,uni tsand950uni t
seachatshs1, 200wer etobesol d
int hemont hsofMayJune, Jul y,andAugustoncashbasi s
II
I. Mont hlycr edi tsaleswer epr oj ect edt obe25%ofcashsal esbutpay mentwoul d
ber ecei vednextmont hless5%di scount .
I
V. Donat ionswer epr ojectedasf oll
ows;mayshs1,000,000,Juneshs1,800,000,
Jul y1, 500, 000August3, 000,000( inform ofphysicalgoods) .
V. Thebusi nessr eceivesmont hlyr enti ncomef rom itsproperty.rentr eceivedon30
Junewasshs600, 000butt hiswasexpect edtoincreaseby10%af teronemont h.
VI. I nput sof500, 800,1100, 14uni t
swer et opurchasesatshs950eachoncash
basi s
VII. Mont hlyexpenses wer e pr oj ected as f ol
l
ow;ut i
li
ti
es shs 250, 000,VAT shs
180, 000andadv erti
singshs100, 000. howevernoVATwaspai dinJul y.
VII
I. Cr edi tpur chasesofshs900, 000wer emadei nJune, t
hebusi nesshasapol icy0f
pay i
ngf orcr edi tpurchasesi n2equal i
nstal
l
ment saf t
eronemont h.
I
X. Thebusi nesshasapol i
cyofpay i
nga5%sal escommi ssionont het otalmont hly
sal es.Nocommi ssionwaspai dint hef i
rstt
womont hs.
Required: pr epar eMbal eagr ochemi cal cashf lowstatementf orfourmont hs
Adviset heent erpriseonmanagi ngacashsur plus
EXERCI SETWO
Mooniel ect roniccent repr esent edt hef ollowingcashi nfl
owsandcashout fl
owsf orthe
mont hofAugust2017

August2017 shs
Balanceb/ d 8,400,
000
Cashi nfl
ows:
Cashsal es 250,000,000
Cashcol lectedfrom debtor
s 43,000,000
Loanf rom centenarybank 30,
000,000
Penaltiesfordelayedpay ments 1,500,000
Commi ssionincome 6,
000, 000
I
nterestoncashdeposi t
s 500, 000
Donationsandgr ant
sr ecei
ved 30,000,000
Totalcashi nfl
ow 369,400,000

77
 Cashout f
lows
Purchasesofstock 110,000,000
Labourcosts 60,000,
000
Powerandut il
it
ies 5,
000,000
Admi ni
str
ativ
ecost s 1,500,
000
Payment sofcredi
tors 50,000,
000
Purchaseofmachi nery 21,000,000
Totaloutfl
ows 247,
500,000

Additi
onal i
nf or mat ion
I. Thef ollowi ngpr oj ect ionswer epr ovidedf ort hemont hsofSept ember,Oct ober
andNov ember2017.
I
I. Cashsal esr ev enuei sexpect edt oincr easeby5%i nSept emberandOct ober.It
willdr opbyshs500, 000i nthemont hofNov ember .
II
I. Cashcol l
ect ionsf rom debt or swi l
lincreaseby10% i nSept emberandOct ober.
Nocashwi llber ecei v edf rom debt orsint hemont hofNov ember
I
V. Nof ur therl oanswi llber eceivedunt ilDecember2017
V. Commi ssi oni ncomei sexpect edt o doubl ei nt hemont hofSept emberand
reduceby1/ 3ofSept ember `scommi ssioni ncomei nt henextmont hs.
VI. Thebusi nesswi llcont inuer eceivi
ngi nterestondeposi tsequi valentt owhatwas
receiv edI nAugust
VII. Donat i
onsandgr ant swer er eceivedonl yinAugustandnof urtherpenal ti
eson
delay edpay ment swi llbechar ged.
VII
I. Decapi talisat ionofasset swi llbedonei nSept emberandt hiswi llgenerateshs
13,000, 000.
I
X. Cashpur chaseofst ockwi l
lbemai ntainedatt hesamel eveli nSept emberand
October .Howev eri twi lldropbyshs10, 000, 000i nt hemont hofNov ember .
X. Labourcost sf orSept emberOct oberandNov emberwi llalsobet hesameast hat
ofAugust
XI. Powerandut ili
ti
eswi ll al
sobet hesameast heyappearIAugust .
XII. Ther ewi llbei ncr easeofshs500, 000mont hlyinadmi nistrati
v ecost s
XII
I. Thebusi nessi sexpect edt ost artpay ingcor porationt axev erymont hofshs
2,000, 000. howev ert hiswi llbepai dasasi nglesum i nNov ember
XIV. Thel oanacqui r
edi nAugustwi llbepai dbacki nsi xi nstallment sst art
ingi nt he
mont hofSept ember
XV. Thebusi nesswi llpayamont hlyinterestont hel oanatar ateof5%onr educi ng
balanceofst artingi nSept ember .
XVI . The busi ness wi lldonat e shs 1, 000, 000 t o good hope chi ldren cent rei n
Sept ember .ti
swi ll i
ncr easeby4%ev er ymont h
XVII. Thepr opr ietori sexpect edt ouseshs1, 600,000ev er ymont hf orf amilyneeds
startingi nOct ober2017
Required:pr epar eacashf l
owst at
ementf orMooniel ectroni ccent r efort hemont hsof
September , Oct ober ,andNov ember2017.

EXERCI
SETHREE
Thefol
l
owi
nginf
ormat
ionr
elat
etot
hebooksKamboozient
erpr
isel
tdpr
oject
ionf
ort
he

78
monthsofJul y, August,SeptemberandOct ober2018
I. OnJul y12018cashbal anceis26, 000,000
I
I. Creditsal esar eprojectedtobeshs40, 000, 000mont hl
y.Howevert
hebusi ness
creditpol i
cyis60%i nthemont hofsal eandbal ancei nthefol
l
owingmont hforal
l
themont hs.
II
I. Thebusi nesshopest oacquireal oanint hemont hofAugustandOct ober2018.
I
V. Mont hlycashsal esar eproj
ect edt obeshs60, 000,000.acommissi
onof10%i s
paidtosal esmenf orthewell doneeacht imecashi sreceiv
ed
V. Mont hlycashpur chaseswor thshs40, 500, 000i sexpectedtobemade
VI. Adel i
ver yv anistobeboughti nthemont hofAugustatacostofshs35, 000,000.
VII. Mont hlywagebi llisestimatedt obeshs12, 500,000andexpectedtoincr easein
themont hofOct ober
VII
I. Al oanint erestof5%permont hispay ablest arti
ngi nthemonthofacqui sit
ionof
theloan
I
X. Expansi onoft hebusinesspr emi sesisexpect edt ocost$2000andt hepr iceof
t
hedol
l
ari
sshs3500i
nthemont
hofJul
yand$100i
ssett
obespenti
nthe
mont
hofAugust
.
X. Gener
alexpensesar
eexpect
edt
obe7,
100,
000permont
h.Al
lexpensesar
epai
d
i
nthemont
hinwhi
cht
heyar
eincur
red.
XI
. Thebusi
nessi
ssett
o payi
ncomet
axi
nthemont
h ofSept
emberofshs
12,
000,
000.
Requi
red:pr
eparecashflowst
atementf or Kamboozient
erpr
isel
tdf
ort
hemont
hsof
Jul
y,August
,SeptemberandOctober2018
Commentont henetcashposi
ti
onoft hebusi
ness
EXERCI
SEFOUR
Gi
venthef
ollowingi nformat i
onofBI GBOSSEnt erprisesLTD
() On1stJune2015,
i thebusinesshadcashi nhandshs5mi ll
ion.
(i
i) Cashsal es10mi l
li
onwasexpect edev erymont h.
(i
ii
) Cr editsal esar eexpect edt obeshs6mi l
lionpermont h.Debtorswi l
lbe
expectedt opayi nthemont hofsale.
(i
v) Mont hlycashpur chasespr ojectedtobeshs8mi lli
on.
(v) Thebusi nesspl anst ogetal oanofshs4mi ll
ionint hef i
rstmont hata
mont hlyinterestof10%pay ablebegi nningt hef oll
owingmont honr educing
balancewhi l
et hepr inci
palist obepai dinf ourequali nstall
ment sbeginning
fr
om t hethirdmont h.
(vi
) Mont hlysalaryandwagebi llestimat edatshs1mi l
l
ion
(vi
i
) Rendi ncomei sexpect edt obeshsshs2mi l
l
ionpermont handt hi
swi ll
i
ncr easeby20%af terthesecondmont h.
(vi
i
i) Mont hlyincomesf rom grant sanddonat i
onsar epr oj
ect edatshs3mi lli
on
andt hiswi l
lreduceby10%af t
erthreemont hs.
(i
x) Cor por at
iont axisest imatedt obeshs500, 000permont hbutwi lli
ncreaseby
10%ev er
ymont h.
(x) Thebusi nesspl anst obuyanof fi
cesaf eatshs8mi lli
oni nthef i
rstmont h
maki ngdownpay mentof49%.Ther emai ningamounti st obepai dinther ati
o
79
 of5:
3:2i
nthefol
lowi
ngmont hs.
(
xi) Thebusi
nesshopestoissueadebent
ureofshs4mi
l
li
onev
erymont
h.
(
xii
) Monthl
yexpect
edexpensesincl
ude;

shs
i. Sal
ariesandwages 1,
000,
000
i
i. Adverti
si
ng 200,
000
i
i
i. Depreci
ati
on 100,
000
Xi
ii Thebusi nessshal
lfi
nanceanycashshor
tfal
lwi
thaloani
nthef
oll
owi
ngmont
h.

Requir
ed:
(
a)Prepareamonthl
ycashflowst
atementf
orfourmont
hsperiod.
(
b)Advisethepr
opri
etoronwhatt
odoincaseofadefi
citi
nthenetcashposi
ti
on.

Cont
rol
stomanaget
hef
lowoff
undsi
nabusi
ness
Reduceori
ncr
easeani
nvent
oryt
omat
chsal
esr
equi
rement
s
Negot
iat
ewi
thsuppl
i
ersf
oranext
ensi
onofpay
mentdat
es
Shopf
orf
avour
abl
eint
erestr
atesf
undsandav
ail
abi
l
ityoff
undt
obor
row.
Cont
rol
recei
vabl
est
ocol
l
ectmoneyassoonaspossi
ble
Anal
yzeexpensest
oreducecost
sandel
i
minat
ewast
e
Rai
sepr
icest
oincr
easegr
osspr
ofi
tsorl
owert
hem t
oincr
easesal
esv
olume
Dev
elopgoodpur
chasi
ngpr
act
icest
otakeadv
ant
ageofspeci
alpr
iceanddi
scount
s
Takel
esssal
aryoutoft
hebusi
ness
Lear
ntousef
orecast
stodev
elopusef
ulcashbudget
ssot
hatcashi
sabl
etomeetal
l
f
utur
eobl
i
gat
ions
Donotusecashf
rom t
hebusi
nessf
orper
sonal
use

BUSINESSTAXES
Ataxi sacompul sor ychargel evi
edbyt hegov ernmentoranyothercompetentaut
hority
onper sons(indivi
duals,cor porat
ionsorot herlegalenti
ti
es)oronbusinessinorderto
fi
nancegov er nmentact i
v i
ties.Itistheamountofmoneypai dbyabusi nesstot he
taxi
ngcent r
al governmentort helocal
gov ernment .
Taxati
oni sthepr ocesst hrought hegov er
nment sobt
ainsmoneyf r
om eli
gibl
epersons
byappl i
cati
onoft hel aw.InUganda, t
her oleisperfor
medbyUgandar ev
enueauthority
(URA) f or the cent r
algov ernment r evenue and localadmi ni
str
ati
ons for local
governmentt axes.

Import
anceoftaxati
oninacountry
1.Taxesaremajorsourcesofgovernmentrevenuetof
inancet
hepr
ovi
sionofsoci
al
serv
icesandotherdevel
opmentserv
ices/
proj
ects.
80
2.Itencour agesdev elopmentofl ocali ndust ri
esandpr otectst hem agai nstf orei
gn
compet i
tionwi thav iew topr ov idi
ngempl oy mentandsav i
ngf oreignexchange,by
imposi nghighdut iesoncompet ingi mpor t
s.
3. Taxeshel ptoi mpr ov eont hebal anceofpay mentposi ti
one. g.gov ernmentcan
increasei mportdut iesoncer taincommodi tiestodi scouraget heirimpor tat i
on.
4.Itprot ectssoci etyf rom undesi rableorhar mf ulproductsandi ndust ri
esbyi mposi ng
hight axesont hem,f ori nstanceexci sedut yonci garett
esandbeeraswel las
environment allev yonusedv ehicles.
5.Taxes ar e used t or educe i ncome i nequal i
ties in an economy t hus ensur i
ng
economi cstabili
tyt hr oughst abl epr i
cesint heeconomy .Thisi sachi ev edbyl evyi
ng
hight axesonpeopl e`si ncomes.
6.Tof inanceGov ernmentr e-currentanddev elopmentexpendi ture,i.e.pay i
ngsal ari
es
forci vilservant sandf undi ngl ongt erm pr ojectssuchasconst ruct i
onofschool s,
hospi talsandr oads.
7.it’
susedt oregulat edemandandsuppl yint heeconomyi nt i
mesofi nflation.
8.Itencour agesexpor tofgoodsandser vi
cesbyr educingorr emov i
ngt axont he
expor ti nordert omaket hem mor ecompet itiv
eint hewor ldmar ket .
9.Taxat ionmayenabl eacount ryt obecomesel f-r
eliantandsel f-
sust ainingt hrough
thev arioust axest hatmaybei mposed.Sucht axeshel pt or educet heneedf or
borrowi ng.
10.
Toi nfluenceal locat ionofr esour ces,thisisdonebyt axi
ngmor esect orst hatar enot
apr iorityandgi vingt axincent ivet opriori
tysect ors.
11.
Taxesar eusedt or educer egionali mbalances, t
hisisachi evedbyencour agi ngfirms
tosetupacr osst hecount rythrought axincent iv
es

Pri
nciplesoft axat ion
Theser efert or ules/ guideli
neswhi char efol lowedwhendev elopingat axsy stem.
Theser ulesmustbef ol l
owedorobser vedwhenassessi ng, collectingandadmi nisteri
ng
taxes.Taxat ioni sai medatensur i
ngt hatev eryt axpay ercont ri
but esaf airshar et othe
costofgov er nmentact ivi
ti
es.
1.Si mpl i
cit y:Thet ypeoft axandmet hodofassessi ngandcol l
ect i
ngt axeshav etobe
simpl e enough t o be underst ood bybot ht he t axpay er s and t axcol lectors.
Compl i
cat ed.
2.Equi tyorf airness:Thi s means t hatt he t ax sy stem hast o be f airsot hatt he
dist
ribut ionoft het axbur denisequi t
able( equal /ev enlydi str
ibut ed).Thi si sappl i
ed
intwoway si .e.hor izontall
yor v
erticall
y.
Hor izont alequi t
y:Thismeanst hatpeopl ewhoear nsamei ncomepay
sameamountoft ax
.
Ver ti
cal :Thismeanst hatpeopl ewhoear nmor epaymor et ax.
3.Conv eni ence:Thi smeanst hatthepl ace,per iodandt heseasoni nwhi cht axesar eto
bepai dhav et obeconv enienttot het axpay er
.E. g.,P.A. Y.Ei sdeduct edf r
om t he
empl oy ee` si ncomeatt het imetheempl oy eri spay i
ngt hesal ar y
4.Cer tainty :Agoodt axsy stem isonewhi chensur est hatal lpar ti
esi nv olv edknow
thei
rr ight sandobl igat
ions.Agoodt axsy st em hast obecer t
aini nt imeandt he
methodandt heamountt obepai d.
5.Economi cal :Thi spr inci
pleai msatensur i
ngt hatt hecostofcol lecti
ngt axi skeptas
low aspossi bl ef orbot ht hetaxcol l
ectorandt het axpay er .Forexampl et het ax
coll
ect orshoul dnotusemor et
han5%oft heamountoft axesbei ngcol lect ed.

81
6.Abi lityt opay :Thet axpay erhast obeabl et opayt het axassessedonhi m wi t
hout
anypr oblem.Thet axest obepai ddonothav et ocur tai
lt heoper ationsoft he
busi nessoraf fectt hest andar dofl ivi
ngoft het axpay er.
7.El ast i
city:Agoodt axsy stem changesdi r
ect l
ywi thchangei ntaxbase.I fthet ax
basei ncreases, thet axy ieldhast oal soi ncrease.
8.Fl exibility:Thi spr i
nci plest at est hatt hegov ernmenthast obeabl et oi ncr easet he
taxabl er atesdependi ngoni tsobj ect ives,needsandpol ici
ese. g.ifthegov ernment
i
st or educeempl oy ment , thent het axr ateshav et ober educed.
9.Pr oduct ivity:Thi sst atest hatt het axeshav et oy iel
dr ev enuet ot hegov er nmentand
thesamet imegov er nmentcal culat escor r
ect l
yhowmucht axy iel
dt hegov ernment
i
st ogetusi ngagi v ent axr ate.
Diver sity:Thi spr inci pl estat est hatt hesy stem hast ocov erasmanyasset sasmany
aspect saspossi blei .e.thet axsy st em hast ocov eral lpeopl ewhoear ni ncomei n
diff
er entway s.
Impar ti
ality:Thi spr inci plest at est hatt het axsy stem doesnotdi scrimi nat eamong
taxpay ers.
Neut ral i
ty:Thi spr inci plest atest hatt het axsy stem hasnott ohav eser iousef f
ects
on t heeconomi cact ivi
ties.I .
e.t het axespai d do nothav et o af fectr esource
all
ocat i
oni nt heeconomy / count ry.
NB:Princi plesoft axat ionar esomet imescal l
edcanonsoft axat i
on.
Charact eristics/ at tr
ibut esofagoodt axsy stem
- Shoul dbecompr ehensi vei .e.i tshoul dcov erasmanyaspect soft heeconomyas
possi ble.
- Shoul dbesi mpl eandst raightt obeunder stoodbybot ht het axpay erandt het ax
collect or.
- Shoul dy i
el dadequat er evenuet ot hecount ry .
- Shoul dpr omot eequi tyofsacr i
ficei .e.itshoul densur et hatitensur essoci aland
economi cj ust ice.
- Shoul dav oi ddoubl et axat i
oni .
e.I tshoul dav oidt axingani t
em mor ethanonce.
- Shoul ddi rectr esour cest opr iorityar eashencest i
mul atingsav i
ngs,i nvest mentand
product ivi
ty .
- Shoul dr ecogni zebasi cr ightsoft het axpay ersi.e.t axpay ersshoul d notbe
harassed, inconv eni encedandexpl oitedbyt het axingaut hority.
- Shoul dbeconv eni enti .e.i tshoul dbemadet oknow whenandwher et opayt he
taxes.
- Shoul dbef lexiblei .e.i tshoul dbeeasyt oadj ustdependi ngont hechangesi nthe
i
ncomeoft het axpay er.
- Shoul dbei mpar tiali .e.itshoul ddi scr i
mi nat eamongt axpay ers.Ther ef ore,agood
taxsy stem shoul dbepr oduct iveandi tshoul dnotdi scour aget heef for t
soft hetax
pay ers.
- I tshoul dbeeconomi cali .
e.t hecostofcol lectingandadmi nisteringt het axshoul d
notexceed5%ofat ax.
- Shoul densur eeconomi cst abili
t yi.e.i tshoul dnotcausei nstabil
iti
esi nt heeconomy
l
ikei nf l
ation.

CLASSI
FICATI
ONOFTAXES
Taxescanbeclassi
fi
edaccor
dingt opropor
ti
onofone` sincomethati
spaidastax,
accor
dingt
othemethodofcal
culat
ionoftaxoraccor
dingtothemodeofpay
ment.

82
1.Cl
assi
fi
cati
onoft axesaccor
dingtoone`
sincomepaidast ax.
a.Pr
oport
ionalt
ax,isonewheret het
axisconstantr
egar
dlessofthedi
ff
erentl
evel
sof
i
ncomee.g.corporati
ontaxwhichi
scurr
entl
y30%.

b.Progressivetaxiswher ethetaxr at
ei ncr
easesast heincomei ncr
eases.Thebur
den
oftaxisheav ieronhigherincomeear nersandloweronl owi ncomeearners
Pr
ogressiv
et axesr educet hetaxi ncidenceofpeopl ewi t
hl owerincomeast hey
di
spr
opor t
ionatel
yshi ftt
heburdent othosewi t
hhigherincome.
c.Regressivetax, i
sonewher ethet axratedecreasesasaper son`sincomeincr
eases.
Thebur denispr oporti
onall
ygreatestonlowerear ner

2.Cl assif
icationoftaxesaccor
dingtomethod/modeofcalcul
ati
onoft
ax.
(a)
.Advorolem t axismeasur edasaper centageofthepr i
ceoftheimpor
tedgood.
Theset axesar eusuall
yonthevalueofgoodsandserv
ices
(b)
.speci fi
ct ax,i
saf i
xedmonet ar
ytaxperphysi
caluni
tofgoodi mpor
tede.
g.shs.
100,000pert oneofmai zefl
our
3.Cl assif
icationoftaxesaccor
dingtoty
pe

DI
RECTTAXES

Adir
ectt
axisdefi
nedast hetaxwheretheli
abil
it
yaswellast
heburdent opayi
t
r
esi
desonthesamei ndivi
dual
.Thatistheburdenofthetaxfal
l
sdirect
lyonthe
i
ndi
vi
dual
whoearnsataxabl
eincomeandcannotshi
ftt
het
axtoot
hers

Typesofdi r
ectt axes
I
ncomet ax,t hi
si sat axLev i
edonandpai dbyt hesameper sonaccor dingt ot ax
br
acket sasdef i
nedbyt hei ncomet axdepar tment .Incomet axtakest wof ormst hatis;
Personali ncomet ax:I sat axleviedont hei ncomeofi ndi v
idual sandi tisnormal l
ya
progr essivet ax.
Corpor at
eTax: Paidbycompani esandcor por ati
onsont heirprof i
ts.
NOTE:Thet axbasef orincomet axincludespr ofi
tsfrom busi ness, rentandr oyalt
ies
from l ett
ingasset sandi ncomef rom investment sl i
keshar es,debent ur
esandot her
secur iti
esandi ncomef rom empl oyment .
Weal thTax:t hisisat axLev iedont hev alueofpr opertythataper sonhol ds,e. g.
savingsofani ndivi
dualorbusi nessent it
y.Itmaybel eviedonl and, bui l
dings,shares
orot heri nvestment s.
Inheritance( Estate)Tax:I tisat axont heest ate,ortotalv alueoft hemoneyand
proper ty,ofaper sonwhohasdi ed.
GiftTax:I ti st het axt hatan i ndivi
dualr eceiv i
ng thet axabl egi ftpay st ot he
gover nment .

Capi
talgai
nst ax,i
sdefinedasataxchargedontheprofi
treali
zedont
hesaleofa
non-
invent
oryassetthatwaspurchasedatalowerpri
ce.Themostcommoncapital
gai
nsar er
eali
zedfrom t
hesaleofstocks,
bonds,
preci
ousmet al
sandpr
oper
ty.

Pr
oper
tyTaxormi l
lagetax,itisat axwhi
cht
heownerpaysonthev
alueoft
he
pr
oper
tybei
ngtaxed.It
sdet ermineddoest
heappr
aisalt
odet
ermi
neval
ueoft
he
pr
oper
ty,
andtaxt
obepai d.

83
 Fri
ngeBenef
itTax:Pai
dbyanemployerthatpr
ovi
desf
ri
ngebenef
it
stoempl
oyees,
andiscol
l
ectedbythestat
egov
ernment.

DETERMI
NINGI
NCOMETAXPAYABLE

Example1
Thet
ablebel
owshowst
hemont
hlyPAYEt
axr
atesi
nUganda

Mont
hlyi
ncome(
shs) Taxl
i
abi
l
ity/t
axr
ate

0 -235,
000 NI
L

235,
000–335,
000 10% oft
heamountbywhi chchar
geabl
e
i
ncomeexceedsshs235,
000

335,
000-410,
000 Shs10, 000 pl
us20% oftheamountby
which chargeabl
eincome exceeds shs
335,000

Exceedi
ngshs410,
000 (
a)Shs25,000plus30%oft heamount
by whi ch char geabl
e i ncome
exceedsshs410,
000.

(
b)Wherechar
geablei
ncomeexceeds
shs10,
000,
000anaddit
ional10%is
char
gedoni ncomeexceedingshs
10,
000,
000.

(
a)Calcul
atetheincometaxpay
abl
ebythefol
lowi
ngempl
oyeeswhoear
nedt
he
fol
l
owingincomesinthemont
hofMar
ch2016.

(
i) Dembe shs235,
000
(
ii
) Mulembe shs400,
000
(
ii
i) Makani
ka shs600,
000
(
iv) musanj
i shs 11,
000,
000

Sol
uti
on
Dembe=taxpay
abl
e=t
axr
atexmont
hlygr
osssal
ary

Dembepay
sni
ltaxbecausehi
sear
ningsi
sbel
owt
axt
hreshol
d

84
 Mul
embet
axpay
abl
e=Taxr
atexgr
ossmont
hlysal
ary

10,
000+20/100(400,
000-
335,
000)
10,
000+20/100x65,
000
10,
000+13,
000
Shs23,000

Makani
kataxpay abl
e=t axrat
exgr
ossi
ncome
25,
000+(600,000-
410,000)
25,
000+30/100x190,000
25,
000+57,
000
Shs82,000

Musanj
itaxpay
abl
e=t
axxgr
osssal
ary

25,000+30/ 100( 11, 000, 000-410,000)+10/ 100x( 11,000,

000-10, 000,
000)
25,000+30/ 100x( 10, 490,000)+( 10/100x1, 000,000)
25, 000+3, 177,000+100, 000
Shs3, 302,000
Exampl e2
Thef ollowingar emont hlysal ari
esofwor kersempl oyedbymal ikaent erpr
ises.
SefukaMoses shs200, 000
BumekeAi sha shs284, 000
Wessel AK shs820, 000
Pall
asoj uma shs11, 000,000
Eachempl oyeer ecei ves10%and5%asHousi ngandmedi calall
owancesr espect
ivel
y
Comput ePAYEEpai dbyt heabov eempl oyeesusingt axschedul eabov e
SOLUTI ON
Ssfukamoses
Taxabl eincome=basi csal ary+allowances
=200, 000+housi ngal lowances( 10/100x200,000)+medi calal l
owances( 5/100x
200,000)
=shs200, 000+28, 400+14, 200
Shs326, 000
PAYEE=10/ 100X( 326, 000- 235,000)
=10/ 100X91, 600
SHS9, 160
BumekeAi sha=t axabl ei ncome=basi csalary+all
owances
820,000+housi ngal lowances( 10/ 100x820, 000+medi calallowances( 5/100x820,
000)
=820, 000+82, 000+41, 000
Shs943, 000
PAYEE=shs25, 000+30/ 100( 943,000-410,000
25,
000+30/ 100x533, 000
25,000+159, 900
85
Shs184, 900
Pallasoj uma, t
axabl
eincome=basi csal ary+allowances
11000, 000+housi ngallowances( 10/100x11, 000,
000+medi calal
lowances(5/100
x11, 000,000)
11,000, 000+1, 100,
000+550,000
Shs12, 650,000
PAYEE=25, 000+30/ 100X( 12,650,000-410,000)+10/ 100X(12,650,
000-10,000,
000
25,000+30/ 100X12,240,000+10/ 100X2, 65,000
SHS25, 000+3, 672,
999+265,000
Shs3, 962,000
Exampl e3
Makani ka wangeear nedthef ollowingi ncomesi nshsf rom di
ffer
entsourcesforthe
year22017
Proper t
yincomeshs 800,000
Busi nessi ncomeshs 3,000,000
Empl oymenti ncomeshs 4, 380,000
Expensesandl ossesforthey earshs 3, 000,000
Incomet hati staxexemptwasshs 1,180,000

Thef
oll
owi
ngt
abl
eshowsannual
char
geabl
eincomet
axr
ate

Annual
char
geabl
eincome(
shs) Taxl
i
abi
l
ity/t
axr
ate

Notexceedi
ngshs2,
820,
000 NI
L

Exceedi
ng shs 2, 820,
000 but not 10% oft
heamountbywhi chchar
geabl
e
exceedi
ngshs4,
020,
000 i
ncomeexceedsshs2,
820,
000

Exceeding 4,
020,
000 butnotexceedi
ng Shs120,
000plus20% oft
heamountby
shs4,920,
000 whi
ch char
geabl
eincome exceeds shs
4,
020,
000

Exceedi
ngshs4,
920,
000 (
a)Shs 300,
000 plus 30% of the
amount by whi ch chargeabl
e
i
ncomeexceedsshs4,
920,
000

DetermineMakanikawange`
s
Grossincome
Chargeableincome
I
ncomet axpaid
86
Solut
ion
Grossincome=i ncomef rom allsources–t axexemptedincome
=propertyincome+busi nessi ncome+empl oymenti
ncome-i ncomeexempt
edf
rom
tax
=shs800, 000+3, 000,000+4,380,000)-1,180,000
=shs8, 180,000-1,180,000
=shs7, 000,000
Chargeableincome=gr ossincome–t otallossesandexpenses
=shs7,000,000- 3,000,
000
=shs4,000,000
I
ncomet ax=taxr atexchar geableincome
10/100x( 4,000,000-2,820,000)
10/100x1, 180,000
=Shs118, 000

Exampl
e4
Thefol
l
owi
ngi
ncomer
ecordsrel
atest
obekasahotel
I
ncomeear
ner Employment i ncome Busi
ness i
ncome Proper
ty i
ncome
shs shs shs

MUTOMBEALI 1,
000,
000 2,
000,
000 3,
400,
000

NEKESAAI
SH 800,
000 1,
900,
000 2,
700,
000

MEKKAHASSAN 1,
200,
000 2,
100,
000 3,
800,
000

OKELLOBOB 600,
000 1,
400,
000 2,
300,
000

Foreachoft heabov eincomeearnedthetaxexempt edis8% ofthei

rtotali
ncome.
Whiletheexpensest ake12%ofthetot
ali
ncome
Determine
Grossincome
Taxableincome
b)Thebusi nessaisohadthefol
lowi
ngrecordsforwor
kersearni
ngsfort
heyear
Okell
o shs 750,000
Wambwa shs 310,000
Olupot shs1,500,
000permonth
Mont hl
yincome( shs) Taxli
abil
it
y/taxrat
e

0 -235,
000 NI
L

235,
000–335,
000 10% oft
heamountbywhi
chchar
geabl
e
87
 i
ncomeexceedsshs235,
000

335,
000-410,
000 Shs10, 000 pl
us20% oftheamountby
which chargeabl
eincome exceeds shs
335,000

Exceedi
ngshs410,
000 (
a)Shs25,000plus30%oft heamount
by whi ch char geabl
e i ncome
exceedsshs410,
000.

(
b)Wherechar
geablei
ncomeexceeds
shs10,
000,
000anaddit
ional10%is
char
gedoni ncomeexceedingshs
10,
000,
000.

Comput
ePAYEEeachwor
ker

ADVANTAGESOFDI RECTORTAXES
1.Theyar eeconomi calt ocol lectbyt hegov ernmenti nt hatt hegov ernmentdoesnot
hav et ospendal otofmoneyt ocol lectt heset axesf orinst ancei ntheP. A.Y.E
syst em, thegov ernmentsi mpl ydeduct st het axf r
om t het axpay er`ssal ary
.
2.Theyar ebasedont hepr i
nci pleofeconomi cequi ty,t
hati stotheeconomi csi tuation
ofper sonsdet ermi nest her ateatwhi cht heyar etaxed.Al sot hepr ogr essi
v enat ure
ofdi rectt axationcanhel pr educei ncomei nequal iti
es.
3.Cer taintyoft axt obepai d,Thet axpay eri scer tainast ohowmucht axistobepai d,
ast het axr at esar edeci dedi nadv ance.Thesamei mpliesf ort hegov ernment
wher eitcanest imat et het axr ev enuef rom di recttaxes.
4.Collect i
onofdi rectt axesi sgener allyeconomi cal.Li keint hecaseofper sonal
i
ncomet ax,thet axcanbededuct edatsour ce( TDS)f rom thei ncomeorsal ari
esof
thei ndividuals.So,t hegov ernmentdoesnothav et ospendmuchi ntaxcol l
ection
asf arasper sonal incomet axi sconcer ned.
5.Theyar eRel ativelyEl astic,I ncreasei nt hei ncomeofi ndi
vidual sandcompani es,
l
eadst oincreasei nt hey ieldf rom di rectt axesal so.Ani ncreasei nt axrateswoul d
i
ncr easet het axr evenues.Ther eby ,directt axesar er elat i
vel
yel astic.
6.Directt axes hel p cont roli nfl
at i
on.When t he i nflation is on t he upt rend,t he
gov ernmenti ncr easest het axr ate.Wi thani ncreasei nt axr ate,t heconsumpt ion
anddemanddecl i
ne, whichi nt urnhelpr educei nflation.
7.Theyr edistri
but ei ncome ot hert han i ndirectt axes.Thi si s because t heyar e
progr essi veinnat ur e.Thi sr educesoni ncomei nequal i
ty .
8.Theyar econv enient .Thi si sbecauset heyar ecol l
ect edatt het i
mewhent het ax
pay ershav eear nedenoughf undse. g.t heP. A.Y.Ewher epay ment saremadei n
88
 i
nst allment s.
9.Theyar epr ogr essi vei nnat ur ehencet heyt endt obef airtot hel owi ncomegr oups.
Thepr ogr essi v enessofat axmakesi tequi tablei nt hespr eadi ngoft het axbur den
i
.e.i tmakespeopl et opayaccor dingt oabi li
ty/ t
axabl ecapaci ty.
10.Theyar eeasyandsi mpl etounder standbyt het axpay er sandcol l
ect
11.They ar ef lexi blei .e.t hey can be i ncr eased orr educed dependi ng on t he
requi rement soft heeconomye.g.i fthet axbaser educes, thegov ernmentcanal so
l
owert hedi rectt axes.
Di sadv ant agesofdi rectt axes
1.theyar eeasyt oev ade, thisi sduet ohi ght axr ates, poordocument ationandcor r
upt
taxadmi nist rat i
on, bysuppr essingt hecor recti nfor mat i
onabouti ncomes.
1.Di rectt axesaf fectsav i
ngsandi nv estment s.Duet ot axi mpl ications,t henet
i
ncomeofi ndi vidual sr educes,i nt ur nr educi ngt heirsav ings.Thi sr esultsi nl ow
i
nv est ment ,af fect ingt hecapi talfor mat ioni nt hecount ry.
2. Ar bitrar yr at eoft axat iont hati st her eisnoobj ecti
vedef inedf ordet er miningt he
taxr at es ofdi rectt axes.Ther efor e,di rectt axes maynotal way sf ulf
il
lt he
requi rementofequi ty.
3. I nconv eni ent ,Di rectt axesar ei nconv enientowi ngt ot hel engt hypr ocedur eof
fi
lingr etur ns.Formostpeopl epay mentofdi r
ectt axi sat askt oconv inceonesel f
topayapar toft heiri ncomeast axt ot hest at e.Thi si saboostt oev adet ax
further .
4.Thecostofcol lect ioni satt imeshi gh.Thi si sbecauset hegov ernmenthast o
empl oymanyof fi
cialsandpayal ott odot hecol lect i
onandadmi nisterdi r
ect
taxest hi st heyt endt obel esspr oduct ive.
5.Theyt endt odi scr iminat eamongt axpay er sespeci allywher etaxassessmenti s
notbasedoni mpar ti
alityi.e.t heydonothav eawi dercov erage.
6.Hi ghr at esofdi rectt axesmaket hepeopl er esentt hegov er nmenti npowerhence
maki ngi tpopul ar.
7.Theydi scour ageent r
epr eneur shipespeci allywher et her atesofcor por atet axes
arehi gh.
8.Duet ol ow t axabl ecapaci t
yi ndev elopingcount r
ies,l i
ttler evenuei scol l
ected
from di rectt axessi ncemaj orit
yoft hepeopl ear epoorwher ev eryf ew peopl e
ear nabov et het hreshol dofi ncomet ax.
INDI RECTTAXES:
Thesear et axesl ev iedongoodsandser v i
cespai dbyani ndiv idualorbusi nessent it
y
andshi ftedt ot hef inalconsumer .Theset axesar ev olunt aryi nt hesenset hatone
paysthem onl ywhenbuygoodsorconsumeser vicesonwhi cht heyar elev ied.

Forms/typesofi ndirecttaxes
CustomsDut y,thisi sat ar
iffort aximposed ongoodswhent ranspor t
ed across
i
nternati
onalbor ders.Thepur poseofiti stoprotectthecountr
y’seconomy ,j
obsby
control
l
ingthef l
owofgoods, especial
l
yt herestr
ict
iveandprohi
bitedgoods, inandout
ofthecountry.Hence, simplyput ,i
tist
het axi
mposedoni mpor
tsandexpor t
sofgoods.
NB: t
axoni mpor tsisreferr
edt oasimpor tdut
ywhi l
etaxonexportsisexpor tduty.
Exci
se dut y:Is a dut yl ev i
ed on commodi ti
es thatarelocally produced and
consumedandPay ablebyt hemanufacturerwhoshi ft
sthetaxbur dent or et
ail
ers
andwhol esal
er s.
89
 Sal est ax:I st axl eviedasaper cent ageofgoodsorser vi
cessol dandpai dbya
shopkeeperorr et ail
er ,whot henshi ftst het axbur dent ocust omer sbychar ging
sal est axongoodsandser vices.
Ent er tainmentTax:Li abili
tyi sont heci nemaowner s,whot ransf ert hebur dent o
cinemagoer s
Ser v i
cet ax:aChar gedonser vicesr ender edt oconsumer s,suchasf oodbi llina
rest aur ant ,hot els.
Val ueaddedt ax( VAT)
Isani ndi r
ectt axt hati spai dbyaper sonwhoconsumesori mpor tsgoodsand/ or
ser vicesi nUganda.TheTaxi schar gedont hev alueaddedatdi fferentst agesof
pr oduct ionorsuppl yofgoodsandser v ices.
Mai ni mpor tanceofVAT:
1.VATcompl etelyav oidst axcascadi ngasonl ychar gest axont heVal ueAdded.
2. VAT pr ov idet empor aryf inanci ngf orpr oducer sandser vicepr ov i
ders-bylaw,al l
VATabl eper sonsar er equi redt odeductt hei nputVATf r
om t heout putVATand
remi tt hedi fferencet ot het axaut hor i
tiesmont hlyorev erytwomont hs,sosuch
or gani zat ionscanut i
lizesuchf undst omeett heirwor ki
ngcapi tal needs.
3.Fort heGov ernment , VATi sav er itabl esour ceofr evenue, it
sbr oadbase, gener ates
mor er ev enuef ort hegov ernment ;andsecondl y,it
seaseofcol lect i
on(lit
tleorno
cost )makesi tmor eeconomi cal .
4.VATser vesasaf i
scalpol icyi nst r umentav ai l
abl et othegov ernmentandusedt o
incr easeorr educeVATr at et or edi str i
but ei ncomeandcheckt heconsumpt ionof
har mf ul commodi ti
essuchasci gar et tesandal cohol .
5.VATdoesnotdi scour agepr oduct i
on,orwor ksi ncei tisnotat axoni ncomeor
pr ofit, t
axesonpr ofit
smi ghtact ual l
ydi scour agei nv estment s.
6. VATi sapower fult ooli nhar nessi ngf undsi ndomest icmar ket senabl i
ngUganda
tobet termeett hechal l
engesf aci ngt hem suchaseducat ion,pov ertyeradicat i
on,
andpr ov isionofi nf r
ast ructur eet c
7. VAT hel ps dev eloping economi es t o be f ullyi ntegrated int he internat i
onal
economyas bei ng champi oned byI MF,Wor ld Bank ofr educi ng gov er nment
expendi tureandi ncr easingr ev enueet c.
Demer i
tsofVAT
1.I t’
scompl i
cat edt ounder standbyt het rader s
2.I t’
sdi fficultt oassess
3.I tbasedonev idencei nf orm ofr ecor ds, thisisv erydif f
iculttomai nt ain
4.I tdi scour agesi nvest ment ,asi treducesconsumpt ionandhencer educedmar ket
5.I tincr easescost sofpr oduct ione. g.Vatoni nput s
6.Ahi ghVatr atemakesgov er nmenti npowerunpopul ar
7.I t’
seasi lyev adedast rader st endt odi ffer entr ecor ds
VATCALCULATI ONS
Comput at i
onofVAToccur satt wol ev els:
(a)VATonat ransact ioni .e.asal eorapur chase
(b)VAT pay abl eorcl aimabl ebyt het axpay erot herwayputi sVAT col l
ectabl eor
refundabl ebyURA.
Keyt er msi nVATComput at i
ons
Out putTax, Thi si stheVATat axabl eper sonchar gesuponmaki ngt axabl esuppliesi .e.
90
taxchargeduponsel l
i
ngt axabl
egoodsandser vi
ces.
InputTax,Thi sistheVAT at axablepersonischar gedontaxabl
epur chasesand
expensesi ncurr
edforbusinesspurposes.Thepurchasescoul
dbef r
om l ocalsour ces
orimport ed.
TaxableSuppl y
Thisisasuppl yofgoodsand/ orservi
cesotherthananexemptsuppl y,byat axable
personf oraconsi derat
ion.ATaxablesupplyischargedt oVATateitherzer orateor
standardr ate.

TAXRATEANDFRACTI
ON

Taxrat
e
Thi
sisthepercent
agethati
sappli
edtotheconsider
ati
onforatransact
ionort
axabl
e
val
ue,soastodeter
minetheVATamount.Forexample:i
ftheconsi
derati
onort
axabl
e
val
ueisShs20,000andtheVATrat
eis18%(18/100),
thenVAT=20, 000x18/
100
=Shs3,600

Taxfract i
on
Thisreferst or
eferst ot her ati
ousedt odet ermi
net heamountofVAT wher ethe
consi
der at
ionisincl usi
veofVAT.Thef ract
ionisgivenbyt heformul
a:ofVAT.The
fr
acti
oni sgivenbyt heformula:
R/r+100
Whererist heVATr ate
Comput ati
onofVATonaTr ansacti
on
VAT=Taxabl evalue×VATRat e(
wheretaxabl
ev al
ueexcludesVAT)or
VAT=t axablev al
ue×VATr atio(wheret
heamounti sVATi ncl
usi
ve).

I
ll
ustrati
on
I
fther at
eoft
ax(r
)=18%thenthet
axf
racti
on=18/
(18+100)=18/118.
Forexampleift
heconsi
derat
ion(
VATincl
usi
ve)isShs20,000,thenVAT=20,
000×
18/118=Shs3051.

Comput ationofVATPay ableorRef undable

VAT=out putt ax–i nputtax
Wher eout putt axi
sgr eatert
hani nputt ax,t
het axpayerpayst hedif f
erence.Whereinput
taxisgr eatert hantheout puttax,thet axpayerclaimsthedifference.
Il
lustrat
ion
(a)Ifout putt ax=100, 000andi nputt ax=77,000t henVATpay able=100, 000–77, 000
=23, 000
(b)Ifout putt ax=100, 000andi nputt ax=140, 000t henVATcl ai
mabl e=140, 000–
100,000=40, 000
Exampl es
Megaent erpriseshadt hef ol
lowi ngVATexcl usivetransactionswi t
hVATr egist
ered
enterpri
sesf oronemont h
Purchasesshs236, 000,000
Sales 259,600,000
Calculatet heamountofVATpai dbymegaent erpri
sestoURAf orthatperiod(use18%
asv atrate)
91
Det
erminemegaent
erpr
ises`t
otal
sal
esv
aluev
ati
ncl
usi
ve
Sol
uti
on
VAT=outputt
ax–i
nputt
ax

18/100x259,600,000-(
18/100x236,
000,
000)
Shs46,728,
000-42,480,
000
Shs4,248,
000
Or

VAT=VATRATEXVALUEADDED

18/
100(
259,
600,
000-
236,
000,
000)

18/
100X23,
600,
000

SHS4,
248,
000

Tot
alsal
esv
alue(
VATI
NCLUSI
VE)

=SALESVALUE+VATonsal
es

259,
600,
000+(
18/
100x259,
600,
000

259,
600,
000+46,
728,
000

Shs306,
328,
000

Example2
Thef ol
lowingVATexcl usi
vet ransact ionswer eav ail
edbyVATr egi
ster
edbusi
nessf
or
themont hofJanuary2018
Mar kboughtgoodswor thshs60, 000,000
Mar ksoldthesamegoodst oFr edf orshs79, 000,000
Fredsoldthesamegoodst omaxar etail
erforshs90, 000,000
Maxsol dthesamegoodst ofinal consumerf orshs120, 000,000
DeterminetheVATchar geablef orthev al
ueaddedateachst age
SOLUTI ON
VATchar geable= VATr atexv al
ueadded
Stage1 VATchar geabl e= 18/100x60, 000,
000
Shs10, 800,000
Stage2 VATchargeable=VATr atexv alueadded
18/ 100(790,000-60,000,000)
18/100x19, 000,000
Shs3, 420,000
Stage3 VATchargeable=VATr atexv alueadded

92
 18/ 100( 90, 000, 000- 790, 000, 000
18/ 100x11, 000, 000
Shs1, 980, 000
Stage4VATchar geabl e= v atr atexv alueadded
18/100( 120, 000, 00- 90, 000, 000
18/ 100x30, 000, 000
Shs5, 400. 000
The f ollowing VAT excl usiv et r ansact i
ons wer e car r
ied outbyVAT r egist
er ed
busi nessi nFebr uar y2016atdi ff
er entchai nsofdi stribut i
ons.
(i
) Jer oboughtgoodswor t h shs9, 000,000
(i
i) Jer osol dal lthegoodst oDer ri
ckf orshs11, 000, 000
(i
ii) Der ri
cksol dthesamegoodst oJeft her etai l
erf orshs14, 000, 000
(i
v ) Jefsol dt hegoodst othef inal consumerf orshs19, 000, 000
Calculatet heVATchar geabl eateachst ageusi ngVATr ateof18%.
(b)Adv i
ceent repr eneur sont hei mpor tanceofpay ingt axes.
Adv antagesofi ndirectt axes
1.I ndirectt axesar econv enientt ot hegov ernmentandt axpay ers.Thi si sbecause
theyar ecol l
ectedwhenpeopl ehav et hemoneyt ospendonapr oductt hatat ax
hav ebeenchar ged
2.Theyt endt o cont ri
but emor et o gov ernmentr ev enue, thisi sbecauset heyar e
compr ehensivei .e.t heyhav eawi dercov er ageandt y pes.
3.Theyar eeconomi calt ocol l
ectbyt hegov ernmentsi ncet hegov ernmentdoesnot
payt het raderswhocol lectt het axes.
4.Theyar ei mpar ti
ali nt hatt heydonotdi scr imi nat eamongt axpay erst hust he
gov er nmenti sabl et or aisemor er evenue.
5.Theyar eusedt oachi ev eeconomi cst abi li
tyespeci allybyi mposi nghi ght axeson
impor tedgoodssoast omi ni mizei mpor tinf l
at ion.
6.Ther ev enuey ieldi shi gh.
7.Theyar eusedt opr otecti nf anti ndust ri
esagai nstunf aircompet iti
onf rom ef fi
cient
producer sout sidet hecount ry.Thi si sdonebyi mposi nghi ght ariffsoni mpor ts
whi chmaket hei rpr i
cesr elat iv
el yhi ghert handomest icpr iceshencemaki ngthem
lesscompet i
ti
v e.
8.Theyar eusedt osaf eguar dt heheal thandmor ali
tyofci ti
zens.Thi scanbedoneby
imposi nghi ght axesongoodsl ikel ytoaf fectt heheal thandmor alityoft heci ti
zens
e.g.dr ugs,cosmet ics,spi ritset c.t hehi ght ar i
f fsonsuchcommodi t
iesmaket heir
pricespr ohibitivelyhi ghhencer esul tingi ntof ewpeopl ewhocanaf fordt hem.
9.Theyar e diff
icul tt o ev ade/dodge because t heyar e embedded i n pr i
ces of
commodi ti
esandt hesecommodi t
iesmustbebr oughtatal lcost siedur i
ngt he
buy ingofgoodsandser v i
ces, t
axesar epai d.
10.Theyhav eav arietyoft axes.Thi si ncreasesgov ernmentr evenue
11.Theypr omot ehar dwor kamongt het axpay er s.Thi si sbecausei nanat temptt o
meett hei ncreasi ngpr i
cesofcommodi tiesandmai ntainst hest andar dofl i
ving.
Peopl ear eforcedt owor khar dsoast osust aint hei reconomi cwel far e.
12.Ar ef lexiblei .e.t het axr at ecaneasi lybeadj ust ed dependi ng ont hedesi r ed
object ivesoft hegov ernment .
Disadv antagesofi ndi r
ectt axes
1.Theyencour aget rademal -pract icesespeci all
yi nf or eignt rader si nanat temptt o
ev adet axest hr oughsmuggl i
ng,underdecl aringt hev alueofi mpor tsal lofwhi ch

93
 hav eadv er seef f ect sont heeconomy .
2.Reduceeconomi cwel far eofci tizens.Thi si sbecauseev erypr oduct ,ther ei sat ax
inv olv edi nf or m ofi ncr easedpr ices.
3.Theyl eadt oi ncr easedcost sofpr oduct ion,andt hisadv ersel yaf fectt hel ev elof
inv est ment ,pr oduct ionandempl oymentl ev elswi t
hi nt heeconomyi .e.t heyactas
disi ncent i
v esf ori nv est ment .
4.I ndi rectt axesl i
kei mpor tdut iesi nt
er fer ewi t
ht hef reedom oft r adehencer educi ng
thev olumeofi nt ernat i
onal trade.
5.Rev enuef rom i ndi rectt axesf luctuatesal ot .Thi si sbecauset heamountofr ev enue
col lect eddependsont hev olumeofpur chasesorsal eswhi chnor mal lyf luct uat es
dependi ngonpr ev ai l
ingseason,economi csi tuat i
onet c.howev er ;suchf luct uat i
ons
adv er selyaf fectpl anni ngbasedonpr oject edr ev enuef r om t axes.
6.Theyspar kof fi nflat i
on.Thi si sbecauset heyl eadt oi ncr easedcost sofpr oduct ion
whi chr esul tsi ntoi ncr easedconsumerpr ices.
7.When i mposed on necessi t
ygoods,t heybecome r egr essi ve.Thi si s because
necessi tiesar econsumedbybot ht her ichandt hepoori nal mostsi mi l
arquant i
ties
e.g.sugarand i ft heyar et axed i ndi scr imi nat elyt hepoorwi llbeadv ersel ybe
expl oited
8.Hi ghi ndi rectt axescauseconsumer st ochanget hei rconsumpt ionandexpendi ture
pat ter nswhi chmayr educet hei rstandar dsofl iv i
nge. g.i ft hegov ernmenti mposes
hight axesonbeer ,peopl emayr esor ttot hel ocal br ew.
DIFFERENCEBETWEENDI RECTTAXANDI NDI RECTTAX:
Ther ear edi fferenti mpl icat ionsofdi r
ectandi ndi rectt axesont hecount ry .Howev er,
botht y pesoft axesar ei mpor t
antf ort hegov er nmentast axesi ncl udet hemaj orpar tof
revenuef ort hegov ernment .
Keydi ff er encesbet weenDi rectandI ndirectTaxar e:
1.Di rectt ax i sl evied and pai df orby i ndi vidual s,Hi ndu undi vi
ded,f i
rms and
compani eset c.wher easi ndi rectt axi sul timat elypai df orbyt heend- consumerof
goodsandser vices.
2.Thebur denoft axcannotbeshi f
tedi ncaseofdi rectt axeswhi lebur dencanbe
shi ftedf ori ndi rectt axes.
3.Lackofadmi ni strat i
oni ncol lect i
onofdi rectt axescanmaket axev asionpossi ble,
whi lei ndi rectt axescannotbeev adedast het axesar echar gedongoodsand
ser v icesi nf or m ofi ncr easespr ices.
4.Di rectt axhel psi nr educi ngi nflati
on,wher easi ndi rectt axenhancesi nf l
at i
onas
pr i
cesofr awmat erial sincr ease.
5.Di rectt axeshav ebet teral ocat iveef fect st hani ndi rectt axesasdi r
ectt axesput
lesserbur denov ert hecol lect ionofamountt hani ndi rectt axes,wher ecol lect ioni s
scat ter edacr osspar tiesandconsumer s’pr ef er encesofgoodsi sdi stor tedf rom
thepr icev ar iationsduet oi ndi r
ectt axes.
6.Di rectt axeshel pi nr educi ngi nequal itiesandar econsi der edt obepr ogr essi vewhi l
e
indi rectt axesenhancei nequal i
tiesandar econsi der edt ober egr essiv e.
7.I ndi rectt axesi nv olv el esseradmi ni st rativ ecost sduet oconv enientandst able
col lect ions,whi l
e di rect t axes hav e many exempt ions and i nv olve hi gher
admi nist rat i
v ecost s.
8.I ndi rectt axesar eor ient edmor et owar dsgr owt hast heydi scour ageconsumpt ion
andhel penhancesav ings.Di rectt axes,ont heot herhand,r educesav i
ngsand
discour agei nv est ment s.

94
9.I ndirectt axeshav eawi dercov erageasal lmember soft hesoci et yaret axed
throught hesal eofgoodsandser vices,whi l
edi r
ectt axesar ecol lectedonl yf r
om
peopl ei nr espect ivet axbr acket s.
10.Addi tionali ndirectt axesl eviedonhar mf ulcommodi t
iessuchasci gar ettes,alcohol
etc.di ssuadesov er -consumpt ion, t
her ebyhel pingt hecount ryinasoci al context .
11.Indi rectt axesar edef inedaccor dingt ot heabi li
tyoft heendt axpay ert oshi ftthe
burdenoft axest osomeoneel se.Whi ledi rectt axesal lowt hegov er nmentt ocol l
ect
taxesdi rectlyf rom consumer s.
EMPLOYEE’ SRELI EFORTAXEXEMPT
1.Thi sr eferst ogai nsori ncomet hatisnoti ncludedi nt hechar geabl ei ncomeoft he
empl oyeeandt her ef or enott axabl eont heempl oy ee:
2.Theempl oy ee’ si ncomet hati sbel ow t het axabl et hreshol d,cur rent l
yatShs
235, 000permont h
3.Pensi on.
4.Di schar ge orr eimbur sementofmedi calexpenses act uall
yi ncur r
ed by t he
empl oyee.
5.Li fei nsur ancepr emi umspai dbyat axabl eempl oy er( company /i
ndi vidual)f orthe
benef i
toft heempl oy ee.
6.Anynon- cashbenef itwhosev alueisl esst hanShs10, 000amont h.
7.Rel iefof25%ont ermi nal benef itsforempl oyeeswhohav eser v edt heempl oy erfor
atleast10y ear s.
8.Passagecost s.
9.Empl oymenti ncomeofanexpat ri
at eempl oy eei nal i
stedI nst it
ut i
on,undera
techni cal assist anceagr eementsubj ectt ot heMi ni ster’sappr ov al.
10.Officialempl oy menti ncomeofper sonsempl oy edi nt hear medf or ces,Uganda
Pol i
ceFor ceandUgandaPr isons.I texcl udesper sonsser vi
ngt her einci vi
li
an
capaci t
y .
11.Empl oymenti ncomeofUgandanspost edt owor ki nUgandandi plomat icmi ssions
abr oad.
12.Empl oymenti ncomeofper sonsempl oyedbyEADB.
13.Allowancesf ormember sofPar l
iament
14.TheDi v
idendr ecei v edbyr esidentcompanyf r
om anot herr esidentcompanywher e
itcont rolsmor et han25%oft het otal shar e.
15.Fur nituremanuf act ur edusi ngl ocal mat erials
16.Speci alizedf ur nitur ef orusei nHospi tals
17.Thesuppl yofuni mpr ov edland
18.Interestpai dbyanat uralper sonorbyacompanyt oassoci atedcompanyorwhi ch
isexempt edf rom t ax.
19.Beerpr oducedf r om bar leygr ownandmal tedi nUganda
20.Thesuppl yofunpr ocessedf oodst uffs, i
ncl udingagr i
cul tural l
ivest ock,
21.Deposi tsint hebank

Empl
oyer
’sObl i
gation
1.Towi t
hholdt axfr
om employmentincome,todeductthecorrectt
axfrom t
he
empl oyee’stot alemploymenti
ncomeatt heti
meofeffect
ingpaymenttoever
y
li
ableempl oy ee.
2.TomakePay ment,topayt oURA thetotalt
axbythe15th dayofthemonth
immedi atelyfollowingthemont
hinwhichemploymentI
ncomewaspai d.

95
 3.Toensur
eaccountabi
li
ty:t
oaccountf orthetaxdeductedfr
om ev er
yemploy
ee
onamonthl
ybasistoUgandaRev enueAuthor
ity
.
4.ToMaint
ainEmployees’Records,andkeepthoser
ecordsforinspect
ionbyURA
ondemandforatl
eastfi
vey ear
s.

Empl
oyee`
sobli
gat
ion/
ri
ght s
1.Employeesshould decl
aret
othei
rsecond empl
oyer
sthathav
ethepr
imar
y
empl
oyeri
ncomesf
rom suchempl
oyment
2.Decl
aret
otal
taxpai
datsour
ceaspay
ee
3.Taxpay
abl
e
Empl
oyee`
sri
ght
s
1.Anempl
oyeei
snotr
equi
redt
ofur
nishar
etur
nofi
ncomei
fthei
rsour
ceof
i
ncomei
sonl
yfr
om asi
ngl
eempl
oyer
.
2.At
axpay
eri
sent
it
ledt
ocl
aimr
efundofov
erpai
dtaxwher
eappl
i
cabl
e.
3.At
axpay
eri
sent
it
ledt
oaccount
abi
l
ityf
oral
ltaxesdeduct
edandpai
datsour
ce
byt
heempl
oyer
.
4.At
axpay
eri
sent
it
ledt
opr
ieri
nfor
mat
ionbef
oreanyact
ioni
stakenby
URA.
5.At
axpay
eri
sent
it
ledt
oequal
treat
mentl
i
keanyot
hert
axpay
er.
6.At
axpay
eri
sent
it
ledt
oconf
ident
ial
i
tyf
rom URAofper
sonalt
axi
nfor
mat
iont
o
beshar
edi
npubl
i
c.
7.At
axpay
eri
sent
it
ledt
obeat
tendedt
obyURAof
fi
cial
sregar
dingt
axmat
ter
s
8.At
axpay
erhasar
ightt
oappeal
overt
axpay
menti
ncaseofneed.
PROBLEMSOFTAXATI ONI NUGANDA
(Fact or sf orthel owt axbase/t axabl ecapaci tyinUganda)
Muchast herei sneedf ort hegov ernmentt olevyt axes,thet axsystem i nUgandaf aces
al otofchal lengest hatl i
mi tgovernmentt axrev enuecol lecti
oni nt hecount ry.Such
probl emsamongot hersincludethef ollowing:
1.Lowl evelsofi ncomei ndivi
duals.Themaj ori
tyoft hepeopl einUgandaar epoordue
tol owl evelsofeconomi cactivi
ti
esi nt hecount ry.Therefore,thegov ernmentcannot
raisemor er evenueduet olowi nvest mentl evel
s.
2.Pr esenceofasmal lindustri
alsect or.Mosti ndust ri
esi nUgandaar esmal lscale
l
eadi ngt ol ow pr ofitmar gins.Consequent l
y,taxr evenuef rom cor por atetaxesi s
l
imi ted.
3.Pr esenceofweakt axadmi nistrati
v emachi ner y.Thet axadmi nistrativesy stem in
Ugandai sweakandt hisisrefl
ect edi ndishonest yandincompet enceoft axoffici
als,
l
owl ev el
sofi ntegri
tyamongt axcol lect
or sandassessor sallofwhi chaccountf or
thel owt axy ield.
4.Exi st enceofal argei nformalsect or .Wi thlimitedbookkeepi ng,t hisr esultsinto
underassessmentwhi chreducest het axescol lectedandov erassessmentwhi ch
reducest het axresent menthencet axev asionandt hisreducest axr ev enue.

96
5.Highcost sofcol l
ect ionandadmi nist r
at i
onoft axes.Thi st endst or educet hetax
revenuecol l
ect edasmor eexpensesar eincur r
edi nt axcol l
ect ion.
6.Existenceofhi ghr atesoft axev asionandt axav oidance.Thi sresul t
si ntor evenue
shor tages
7.Increasedt r
ademal -
pr actices.Thi st akesi nform ofsmuggl i
ng,underdecl arationof
thev alueofi mpor tsandexpor ts,ov eri nvoicingandunderi nv oicingofgoodsand
servicesal lofwhi chl eadt olowt axes.
8. Exist enceofhi ghdependencyr atioUganda,wher et hemaj or it
yoft hepeopl eare
notwor kingandf ew peopl ear eengagedi npr oduct i
on.Thi sr educest het axable
incomehencel owr evenuecol l
ect i
ng.
9.Thehi ghofl ev el
sofunempl oymentandunderempl oymenti nUganda,t hisreduces
thet axbaseandt axr ev enue.
10.
Existenceofal argesubsi stencesect or.Ugandai schar act erizedbyl ow out put
comi ngoutofpr edomi nantagr i
cul tur alsect ori slargel yforhomeconsumpt ionand
notcommer ci
al usehencel owt axr ev enue.
SOLUTIONSTOPROBLEMSOFTAXATI ONI NUganda
1.Massi vei ndust ri
alization, towi dent axbase, i
ncr easeempl oymentandi ncomet ax
2.Dev elopi ng and encour aging use of l abour i ntensiv et echnol ogy t or educe
unempl oymenti nmosti ndustri
al fir
ms, hencecr eat i
ngt axabl ei ncome.
3. Carry i
ngoutsensi ti
zat iont oMi nimi zechancesoft axev asionandt axav oidance.
4.Strengt heni ng t he f unct i
ons ofURA t or educe e t rade mal -practi
ces such as
smuggl i
ng.
5.Training oft ax col l
ect or st oi mpr ov e on t ax admi nistration and penal i
zing or
dismi ssi ngincompet entanddi shonest ytaxper sonnel .
6.Sensi tizationoft axpay ersaboutt hei mpor tanceofpay ingt axes.Thr oughcar ryi
ng
outsemi nars, radiot alksshowsandcommuni tywor ks.
7.Reduci nghumani nteract iont omi nimi zecor rupt i
onandi ncr easeef fici
encyi ntax
assessment. e.g.useofonl iner epor ting.
8.Prov iding account ability of t ax r ev enue by gov ernment .t hi si ncreases t he
will
ingnessoft het axt axpay ertopayt het ax
9.Impr ov ingoni nfrast r
uct ur e,tofacilitateeasyassessmentandcol lecti
onexpenses.
10.
Encour agingbusi nessment okeepr ecor dst oav oidunderassessment .

THECONCEPTOFTAXEVASI
ONANDAVOI
DANCE
Taxav
oidance
i
tinv
olv
est
heexpl
oit
ati
onofl
oophol
esandgapsi
ntaxandot
herl
egi
slat
ioni
nthet
ax
sy
stem i
ntoav
oidpay
ingt
axes.Thosel
oophol
esmaybei
ndomest
ict
axl
awal
one,
or
bet
weendomest
ict
axl
awandcompanyl
aworbet
weendomest
ict
axl
awand
account
ingr
egul
ati
ons,
forexampl
e.Thepr
ocesscanal
soseekt
oexpl
oitgapst
hat
exi
stbet
weendomest
ict
axl
awandt
hel
awofot
hercount
ri
eswhenunder
taki
ng
i
nter
nat
ional
transact
ions.
Taxevasion
Taxevasionist
hei
ll
egalnonpaymentorunder-
paymentoft
axes,
usuall
yresul
ti
ngfrom
themakingofafal
sedeclar
ati
onornodeclarat
ionatal
loft
axesduetotherel
evanttax
97
aut
hor
it
ies,
resul
ti
nginlegalpenal
ti
es(
whi
chmaybeci
vi
lorcr
imi
nal
)ift
heper
pet
rat
or
oft
axevasi
oniscaught
.

For
msoft axev asionandav oidance
1.Failuret orepor tincomeanddecl aringsour cesofi ncome.  
2.Under -reportingi ncome( claimi ng lessincomet hany ouact uall
yrecei
vedfrom a
speci ficsour ce.
3.Prov idingf alsei nformati
ont ot het axauthor i
tyabout  businessincomeorexpenses.
4.Deliber at el
y under payi
ngt axes  owed.
5.Under stat i
ngt axest obepai d byt axpay ers.
6.Failuret owi thholdtaxandr emi titt oURAaccount .
7.Pay ingempl oy eesincashandf ail
ingt orepor tsomeoral lofthesecashpayments.
8.Fil
ingf alsepay rol
l t
axrepor t
s.
9.Doubl er ecordingoft r
ansact ionswi ththeintentionofev adi
ngt axes.
10.
Bri
bi ngt axcol lectorstomakeunderassessmentoft axest obepai d.
11.
Smuggl ingofgoodsf orthei ntent i
onofev adingt axes

TAXCOMPLI ANCE
Theext
enttowhicheconomi
cagent
spayt
het
axest
hatt
hei
rgov
ernmenthasl
evi
edas
st
atedbyl
aw.

Lev elsoft axcompl iance

Thel ev eloft axcompl iancedependsont het axpay er `
sat ti
tudeandknowl edge.Ther e
arefourl ev elsoft axcompl i
ancewhi char easf ollows;
i
. Thet axpay er sf ull
ycompl ytopayt heirtaxesandwi l
li
ngt oful fi
ll t
heirobl igations
wi t
houtbei ngf or ced/ vol
unt ari
ly/mol ested.
ii
. Taxpay er
sknowt hatnon- compl i
ancei sexpensi veandt heyaccor di
ngl ycompl y .
i
ii
. Taxpay erswhoshow sl i
ghtr esi
st ancet ocompl ysayi tcomesduet ol ackof
knowl edge.When t axpay ersar eal ittl
e bi tadv ised and some pr essur ei s
exer ted/putont hem, theysi mplycompl y .
i
v. Taxpay erswhoar enon- compl i
antshow outr ightresistancewheni tcomest o
pay i
ngt hei
rt axes.Thi sgr oupi ncludessomet axpay erswhobecomepr oudaf ter
fail
ingt opayt hei rtaxes.
Fact orsinfluencingt axcompl i
ancei nacount r
y
1.Theext entt owhi cht het axsy stem i sequi table.Thet axsy st em whi chi sf air
encour ageshi ghl ev elofcompl i
ance.Ont heot herhandwhent het axsy stem i snot
fair,i tdi scour agest axpay ersf rom pay ing especi allywhen t heyf eelt hatt he
distribut i
onoft axbur deni snotf air.
2.Thet axr ates.Hi ght axr at
esmaket axationcost l
yandt hismakest axpay erst o
av oidpay ingthet axes.Lowt axratesencour aget axcompl i
ance.
3.Theext entt owhi cht het axl awsar esi mpl eandeasyt ounder stand.Compl icated
tax l aws and l ong admi nistrat
ive pr ocedur es make t ax compl iance t o be l ow
becausel ongadmi nist r
ativepr ocessesencour agedel aysanddi sput es.Ont heot her
handi ft hemet hodoft axassessmentandcol l
ect i
oni ssi mpl e,t henpeopl ear e
encour agedt opayt het axes.
4.Theext entt owhi cht axbur deni sspr eadt oal lpotentialtaxpay er
s,wher et he
bur denoft het axi sf airly distri
buted,ani ndividual ’
sfindi teasyt opayt axesand
wher et axhol i
day sar egi vent osomebusi nesses,t hent hosewhonotbeengr anted
98
 taxholi
daydon` tcompl y .
5.ThePopul ar
it
yofgov ernmentmakespeopl enott opay .Agov ernmentwhi chisnot
popularand cor ruptdi scouragespeopl ef rom compl y
ing.On t heot herhand a
populargov ernmentwi thoutcor rupt i
onencour agest axpay erstocompl y.
6.Quali
tyofbusi nessmanagement ,wher ebusinessmanager sareunet hi
calsucht hat
theydon’ tkeepr ecor dsofaccount sthent axcompl iancedoesnotexi st
.Butwher e
thebusi nessmanager spr acticebusi nesset hicsbykeepi ngr ecor dsofaccount s
thentaxcompl iancei spossible.
7.Quali
tyoft axadmi nistrati
on;t hisdependsont hel evelofi ntegrityandcust omer
careshownbyt het axcol l
ectorwher et heintegri
tyoft hetaxcol lect orsisgood, t
hen
thepayer scompl yandpayt het axes.Butont heot herhandwher et axadmi nist
ration
i
spoori nt hatthet axcompl i
ancedoesnotex i
st.
8.Theext enttowhi cht axlawsar econsi stentandf ai
r,wher ethet axl awsappl i
edar e
i
nconsist entandunf airt hent het axpay ersbecomenon- compl iant .Ont heot her
handwher etheappl icationoftaxr ulesisfairencour agescompl iance.

9.The ext entt o which the system is conveni

ent
.Thisi sfrom the pri
ncipl
e of
conveniencewhi chsaysthattheplacewher etopayt
het axhastobeknownbyt he
taxpay er,howmucht obepai dandwhent opayhaveallbeknownbyt hetaxpayer
wheret hepl ace,theamountoft axandt heti
meofpayingtaxareunknownt henthe
taxpayersbecomenon- compliant.
Manif
estationoft axcompliance

1.Timel yf i
lli
ngoft herequi redt axreturns
2.Accur at er epor ti
ngofi ncomeandt axli
abil
it
y
3.Timel ypay mentofal ltaxobl i
gati
ons
4.Fil
ingt axr eturnsr egularly
5.Settlingt axl iabili
ti
espr ompt ly
6.Carr yingoutaudi tandpr ov i
dingaudi tr
eportfort
axassessment
7.Volunt arilyr egisteri
ngf ort het ax
8.Keepi ngup- to-
dat ebooksofaccount sfort
ax
9.Compl yingwi t
hev erytaxl awsoft hecountry
Pr
ocedur
esf ort axcompl i
ance
1.Regi strat ionoft het axpay erwi t
hUgandar evenueauthor
it
y
2.Obt ainingt het axidentificationnumber
3.Prepar ationoft axrecor ds
4.Gett i
ngassessedf ortax
5.Submi tt i
ngt imel ytaxret urns
6.Pay mentoft axes
7.Recei v ingf eedbackf r
om t het axauthori
ty

Causesofnont axcompl i
ance
1.Lowl evelsofempl oyment,
2.Inadequateknowl edgeaboutt axes
3.Loopholeswi t
hint hetaxsystem
4.Inadequateskill
edst af
ftoassessandcol l
ecttaxes
5.Polit
icalsabotage
6.Desirebyt heempl oyeestoretainal
lthei
rear
nings

99
 7.Inconveni
entti
mef ort
axcoll
ection
8.Corrupti
onanddishonestbytheempl oy
eeandempl
oyer
s
9.Poormet hodsofhandli
ngtaxpay er
s
10.
Highcostofli
ving
11.
Fail
urebygovernmenttoremittaxesdeduct
edfr
om t
heempl
oyees

Measurest oencour aget axcompl i

ance
1.Educat i
ngt heempl oyeeont heneedt opayt axes
2.Timelysubmi ssionoftaxr eturnst oURA
3.Beinghonesti nissuesr el
atedt otax
4.Regular l
yissuingpaysl ips
5.Provi
di ngway sofhowt axpay ersareabletounderst
andl
awsr
elat
edtotax
6.Reducingt axr atestoencour aget axpayerstopay
7.Ensuringt hattaxreturnsar epr operl
yposted
8.Inf
ormi ngt het axpayer soft heconsequencesoff ai
li
ngt
ocomplybypayi
ngt
axes
i
nt i
me

Consequencesofnont axcompl iance/penalt

iesofnontaxcompli
ance
1.Pay i
ngsur chargeonal loutstandi
ngt axdues
2.Takingov ermanagementoft hebusinessbyt hetaxaut
hor
it
y
3.Closureofbusi ness
4.Takingcour tacti
onl eadingtoimpr i
sonment
5.Auctioni
ngbusi nesspr opertytorecov ert
axarrear
s
6.Publishi
ngt hebusinessnamei nnewspapers
7.Deny i
ngbusi nesstoaccesscont ract
s
8.Backl i
sti
ngt hebusiness

STRUCTUREOFUGANDA`
STAXSYSTEM

Thest ruct ureofUganda` staxsy stem i sdescr i

bedbyl ookingatt hemai naspect sof
country`st axes.Themaj oraspect sincl ude;
1.The body r esponsi blef orcol lect i
ng taxes i n Uganda i sthe Uganda Rev enue
Author ity
2.The t ax st ruct urei s madeup oft wo maj ordepar tment s.Thati st he i nland
depar tmenti nternalt axesandt hecust om depar tmentr esponsibl
ef orcollect i
ng
taxesoni mpor tsandexpor ts
3.Thet y
pest axescol l
ectedar ebasi callydi
rectandi ndirecttaxes
4.Themai nsour cesofdi rectt axesar ebasi callyi
ncomet ax,estateduty
,capitalgai n
tax,
et c
5.Thecommoni ndi r
ectt axesar eVAT, custom dut yandexci sedut y
6.Thenat uretaxes, mostdi rectt axesar eprogr essi
veinnat ure,thatistotheyincr ease
ast het axpay er`sincomei ncreases.
7.Thepur poseoft axation,i t’
sbasi call
ytor aiserevenuef ort hegov er
nment ,ot her
reasonsi ncludepr otecting i nfanti ndustriesand cont r
olli
ng consumpt i
oni nt he
count ry.
8.New t axesar edr aft
edbymi nist ryoff inanceanddi scussedbypar li
amentand
i
mpl ement edbyURA
THEROLEOFURAI NTAXADMI NISTRATI ONANDCOLLECTI ON

100
TheUgandaRev enueAut horit
yi sUganda’ s'onlytaxbodyt hatwasest abli
shedbyactof
Par l
iament .
Itisresponsi bleforcollectingt axesf ornat i
onal developmenti nUganda.
Thet axescol l
ectedar ebot hint er national anddomest ictaxes
TheUgandaRev enueAut horityi sani ndependenti nstit
utiont hatgetsitsmandat efrom
theconst i
tutionofUgandaAr ticl e153oft heconst i
tuti
onofUganda1995asAmended
whi chi st ot heef f
ectt hatTher eshal lbeaConsol i
datedFundi ntowhi chshallbepai d
allrev enuesorot hermoni esr aisedorr eceivedf orthepur poseof ,oronbehalfof ,
ori n
trustf ort heGov ernmentt husont hatnot ei tissal i
entt ost atet hattheRev enue
Aut hor i
tyi ssolelyresponsi blef ort heCol l
ect i
onoft axesinUganda.I t
’sresponsibl
ef or
collect i
ngbot hdomest i
candi nt er national taxes
TAXESCOLLECTEDBYURA
1.Exci seDut y
2.Exci seDut ycharged
3.l icensi ng
4.Remi ssionofexci sedut y
5.Ret urnsandpay ment s
Nont axr evenue
6.St ampdut y
7.Regi strati
onofmot orv ehicles
8.Tr ansf erofowner shipofmot orv ehicle

Roleorr
esponsi
bil
it
iesofURA
1.Toadvisegover
nmentonmat
ter
srel
atedt
otaxesandt
axpol
i
cies
2.Assessandcol
l
ectt
axese.
g.domest
icandf
orei
gnt
axes
3.Accountf
ort
axescol
l
ect
edt
opar
li
amentandmi
nist
ryoff
inance
4.Pr
ovi
depol
i
cyf
ramet
ogov
ernmentr
elat
ingt
otaxr
atesandadmi
nist
rat
ion
5.Topr
otectt
hepubl
i
cagai
nstf
orei
gnanddomest
icf
raud
6.Pr
ovi
dingi
nvest
mentoppor
tuni
ti
est
obot
hlocal
andf
orei
gnent
repr
eneur
s
7.Ver
if
ygoodsbot
himpor
tandexpor
t,t
hishel
pst
oav
oidev
adi
ngt
axes
8.Recr
uitper
sonnel
fort
axev
aluat
ionandi
mpl
ement
ati
onoft
axpol
i
cies
9.Pr
ovi
ding av
enuef
ort
axpay
ment
se.
g.encour
aget
axpay
erst
o hav
etaxt
in
numberandt
axaccount
s.Thi
spr
omot
esaccount
abi
l
ity
10.
Prov
idi
ngi
nfor
mat
ionr
elat
edt
otaxest
othepubl
i
c,t
hisi
sdonet
hroughor
gani
zi
ng
semi
nar
sandwor
kshops
11.
Dev
elopi
ng st
rat
egi
es ofi
ncr
easi
ng t
ax base f
ort
he gov
ernment
,f
orexampl
e
f
indi
ngnewt
axbase
CAUSESOFLOW TAXREVENUE
1.Lowi
ncomes,
whi
chcannotbesubj
ect
edt
otaxes
2.Hi
ghl
evel
sofcor
rupt
ionsandembezzl
ementoft
axby
thet
axof
fi
cial
sandot
her

101
 empl
oyeesofgov
ernment
3.Taxev
asi
on,
manyt
axpay
ersdel
i
ber
atel
yref
uset
opayt
het
axesi
mposed
,
ther
ebyl
i
mit
ingt
het
axr
evenuecol
l
ect
ed
4.Li
mit
eddev
elopmentoft
hel
eadi
ngsect
orsoft
heeconomi
csect
ors
5.Hi
ght
axconcessi
onsgr
ant
edbyt
hegov
ernmentt
odi
ff
erenti
nvest
ors,
thi
s
r
educest
het
axr
evenuecol
l
ect
ed.
suchconcessi
onsi
ncl
udet
axhol
i
day
s,t
ax
exempt
edet
c
6.Hi
ghcostofadmi
nist
rat
eri
ngandcol
l
ect
ingt
het
axes,
thi
sreducest
het
ax
r
evenue
7.Lowt
axr
ates,
especi
all
yont
hel
ocal
l
ypr
oducedgoods.Thi
saf
fect
sther
evenue
r
eal
i
zede.
g.v
atof18%
8.Li
mit
edv
iabl
ecommer
cial
act
ivi
ti
es,
Ugandahasabi
gsubsi
stencesect
or
compar
edt
othecommer
cial
sect
or.hencepr
oducer
spr
oducemai
nlyf
ort
hei
r
ownconsumpt
ionandl
essi
sputont
hemar
ketf
orsal
e
Sol
uti
ons
1.Dev
elopi
ngandi
mpl
ement
ingst
ri
ctt
axl
aws
2.Tr
aini
ngt
axadmi
nist
rat
orsont
heway
sofmanagi
ngt
ax
3.Dev
elopi
ngf
ri
endl
ylaws
4.Massi
vei
nvest
ment
5.Reduci
ngont
het
axconcessi
on
6.Car
ryi
ngsemi
nar
stoeducat
etaxpay
ersont
hei
mpor
tanceofpay
ingt
ax
7.Maki
ngaccount
abi
l
ityoft
axpay
er`
smoney
8.Di
ver
sif
icat
ionofeconomi
cact
ivi
ti
est
oincl
udemor
etaxbases
9.I
mpr
ovi
ngofeconomi
cinf
rast
ruct
ures,
toi
mpr
oveont
axcol
l
ect
ionandt
ax
col
l
ect
ion
10.
Prov
idi
ngsoci
alser
vicest
othecommuni
ty
TERMSUSEDI NTAXATI ON
Taxbase: I
sanyi tem oranyeconomi cacti
vi
tythatistobetaxede.g.proper
ty,
i
ncome, profitoranyeconomi cactivi
tyonwhi chtaxispaid.
Taxliabi
l
ity:Thisreferstothetotalamountofmoneyat axpay eri
sexpectedtopay
wit
hinagi venper i
odoft i
me.
Taxableincome: Thisrefer
st otheincomewhi chissupposedt obetaxed.
Taxablecapaci t
y:Referstotheextentt owhichanindivi
dualcanpaytaxesimposed
onthem wi t
houtaf fect
inghisorherst andar
doflivi
ng.
Threshol
doft hetax:Refer
st otheamountofmoneyorl evelofincomef r
om which

102
taxl iabilitybegi ns.
Impactoft ax, thisr ef erst of inal r
est ingposi tionofat axt hatt osayanent i
tyor
i
ndi v i
dual onwhi chorwhom t hetaxi simposed.
Incidenceoft ax: Ref erst ot heper son/busi nesst hatf i
nal lypayt het axi mposed.
Taxy ield: Ref erst ot het otal amountoft axr evenuecol l
ect edf rom agi v
ennumber
oft axes.
Av erager ateoft ax: Ref erst ot hepr opor tionofi ncomet hati spai doutast ax.
Av erager ateoft ax( VAT)=t axamountx100
Totalincome
Mar ginal rateoft ax: Thi sr eferst othepr opor tionofaddi ti
onal incomepai doutas
tax.
Taxev asi on: Ref erst ot hedel iberater efusal byat axpay inguni tt opayt axeslevied
oni t.
Taxav oidance: Thi sr eferst oasi tuat i
onwher eat axpay ert akesadv ant ageofthe
l
oophol es/weaknessesi nt het axsy stem soast opayl ittlet axaspossi bl
eorpayno
taxatal l.
Taxhol iday : Ref er st ot heper iodofnont axpay mentgi venbyt hegov ernmentt o
reduceconsumer sspendi ngandencour agei nv est mentspendi ng.
For war dshi fti
ngofat ax: Thisi swhent hemoneybur denoft het axi sshi f
tedbya
taxpay ert oanot herpar t
ywhobuy st heout putbei ngt axede. g.amanuf actur
ermay
shiftt hebur denoft axt ot hewhol esal erwhot henshi ftsi ttot her etailerandt he
retailert henshi ftst ot hef inal consumer .
Backwar dshi ft
ingofat ax: Thi siswhent heof ficialtaxpay ershi f
t sthemoney( t
ax)
bur denofat axt ot heper sonf rom whom hebuy s.Fori nst anceapr oducerusi nga
givenr awmat erial mayshi ftthemoneybur dent ot hesuppl ierofsuchar awmat er
ial
.
E.g.P. A. Y. E
Taxr ebat e: Ref er st ot her efundmadeunderspeci ficcircumst ances
Capi talizat ionoft ax: Asi tuationwher eat axpay inguni tusual lyaf ir
m ar ti
fi
ciall
y
i
ncr easet hev alueofi tscapi tal empl oy edsoast oreducei tst axl iabil
ity.
Hiddent ax: Ref er st oat axpai donpur chaseofgoodsandser v icesandusual l
y
i
ncl udedi nt hepr i
cesoft hecommodi ti
esbei ngboughtort axed.
Taxhav en: Thi sr ef erst oasi tuat i
onwher eacount r
ydel iber atel yof ferslowt axrates
orr elaxed/l iber atedt axl awssoast oat tractasmuchf or eigni nv estmentandt rade
aspossi bl e.

103