Adom Ltd, is a private company in Ghana operating in the manufacturing sector. Below is a Statement of financial position and a summarized statement of income with comparatives for the year ended 31st December 2019. statement of financial position as at 31st December 2019: Non-current assets 2019 GH¢ 2018 GH¢ PPE 200,000 250,000 R &D 40,000 - Total Non-current assets 240,000 250,000 Current assets Available for sale 12,000 20,000 Inventory 70,000 45,000 Trade receivables 30,000 23,000 Cash & cash equivalents 18,000 17,000 Total current assets 130,000 105,000 Total assets 370,000 355,000 Equity Equity share capital (GH¢1 per share) 150,000 100,000 10% preference share capital 50,000 50,000 Retained earnings 60,000 55,000 Total equity 260,000 205,000 Non-current liabilities 10% loan notes 50,000 90,000 12% debentures 5,000 3,000 Total non-current liabilities 55,000 93,000 Current liabilities Trade & other payables 30,000 20,000 Bank overdraft 25,000 37,000 Total current liabilities 55,000 57,000 Total equity & liabilities 370,000 355,000 Income statement for the year ended 31st December 2019 2019 GH¢ 2018 GH¢ Sales 365,000 219,000 Cost of Sales (219,000) (156,000) Gross profit 146,000 63,000 Operating expenses (55,000) (4,000) Operating profit 91,000 59,000 Income Tax Expense (17,000) (8,000) Finance Cost (9,000) (6,000) Profit for the period 65,000 45,000 Additional Information Industry Ratios Current Ratio: 2.0 times Acid test ratio: 1.0 time Debt to Equity Ratio: 50% Gross Profit Margin: 32% Net Profit Margin: 20% Return on Capital Employed: 22% Required: Prepare a report and address it to the Chief Executive Officer, analyzing the financial performance and financial position of Adom Ltd based on the industry ratios above for the years 2018 and 2019
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Adom Ltd, is a private company in Ghana operating in the manufacturing sector. Below is a
statement of financial position as at 31st December 2019:
|
Non-current assets |
2019 GH¢ |
2018 GH¢ |
|
PPE |
200,000 |
250,000 |
|
R &D |
40,000 |
- |
|
Total Non-current assets |
240,000 |
250,000 |
|
Current assets |
|
|
|
Available for sale |
12,000 |
20,000 |
|
Inventory |
70,000 |
45,000 |
|
Trade receivables |
30,000 |
23,000 |
|
Cash & cash equivalents |
18,000 |
17,000 |
|
Total current assets |
130,000 |
105,000 |
|
Total assets |
370,000 |
355,000 |
|
Equity |
|
|
|
Equity share capital (GH¢1 per share) |
150,000 |
100,000 |
|
10% |
50,000 |
50,000 |
|
|
60,000 |
55,000 |
|
Total equity |
260,000 |
205,000 |
|
Non-current liabilities |
|
|
|
10% loan notes |
50,000 |
90,000 |
|
12% debentures |
5,000 |
3,000 |
|
Total non-current liabilities |
55,000 |
93,000 |
|
Current liabilities |
|
|
|
Trade & other payables |
30,000 |
20,000 |
|
Bank overdraft |
25,000 |
37,000 |
|
Total current liabilities |
55,000 |
57,000 |
|
Total equity & liabilities |
370,000 |
355,000 |
Income statement for the year ended 31st December 2019
|
|
2019 GH¢ |
2018 GH¢ |
|
Sales |
365,000 |
219,000 |
|
Cost of Sales |
(219,000) |
(156,000) |
|
Gross profit |
146,000 |
63,000 |
|
Operating expenses |
(55,000) |
(4,000) |
|
Operating profit |
91,000 |
59,000 |
|
Income Tax Expense |
(17,000) |
(8,000) |
|
Finance Cost |
(9,000) |
(6,000) |
|
Profit for the period |
65,000 |
45,000 |
|
Additional Information Industry Ratios |
2.0 times |
|
|
Acid test ratio: |
1.0 time |
|
|
Debt to Equity Ratio: |
50% |
|
|
Gross Profit Margin: |
32% |
|
|
Net Profit Margin: |
20% |
|
|
Return on Capital Employed: |
22% |
|
Required:
Prepare a report and address it to the Chief Executive Officer, analyzing the financial performance and financial position of Adom Ltd based on the industry ratios above for the years 2018 and 2019.
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