statements for the year ended 30 September 2010 (and 2009 comparatives) are: 2010 RM’000 2009 RM’000 Revenue 29,500 36,000 Cost of sales (25,500) (26,000) Gross profit 4,000 10,000 Distribution costs (1,050) (800) Administrative expenses (4,900) (3,900) Investment income 50 200 Finance costs (600) (500) Profit (loss) before taxation (2,500) 5,000 Income tax (expense) relief 400 (1,500) Profit (loss) for the year (2,100) 3,500
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.
Hardy's summarised financial statements for the year ended 30 September 2010 (and 2009 comparatives) are:
|
|
2010 RM’000 |
2009 RM’000 |
|
Revenue |
29,500 |
36,000 |
|
Cost of sales
|
(25,500) |
(26,000) |
|
Gross profit
|
4,000 |
10,000
|
|
Distribution costs |
(1,050) |
(800) |
|
Administrative expenses
|
(4,900) |
(3,900) |
|
Investment income |
50 |
200 |
|
Finance costs |
(600) |
(500) |
|
Profit (loss) before
|
(2,500) |
5,000 |
|
Income tax (expense) relief
|
400 |
(1,500) |
|
Profit (loss) for the year |
(2,100) |
3,500 |
Income statements for the year ended 30 September:
|
|
2010 |
2009 |
|
|
RM’000 |
RM’000 |
RM’000 |
RM’000 |
|
Assets |
|
|
|
|
|
Non-current assets |
|
|
|
|
|
Property, plant and equipment |
17,600 |
|
24,500
|
|
|
Investments at fair value through profit or loss |
2,400 |
20,000 |
4,000 |
28,500 |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
Inventory and work-in-progress |
2,200 |
|
1,900 |
|
|
Trade receivables |
2,200 |
|
2,800 |
|
|
Tax asset |
600 |
|
nil |
|
|
Bank |
1,200 |
6,200 |
100 |
4,800 |
|
Total assets |
|
26,200 |
|
33,300 |
|
|
|
|
|
|
|
Equity and liabilities |
|
|
|
|
|
Equity |
|
|
|
|
|
Equity shares of $1 each |
13,000 |
|
12,000
|
|
|
Share premium |
1,000 |
|
nil |
|
|
Revaluation reserve |
nil |
|
4,500 |
|
|
|
3,600 |
17,600 |
6,500 |
23,000 |
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
Bank loan |
4,000 |
|
5,000 |
|
|
|
1,200 |
5,200 |
700 |
5,700 |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Trade payables |
3,400 |
|
2,800 |
|
|
Current tax payable |
nil |
3,400 |
1,800
|
4,600 |
|
Total equity and liabilities |
|
26,200 |
|
33,300 |
The following information has been obtained from the Chairman’s Statement and the notes to the financial statements:
‘Market conditions during the year ended 30 September 2019 proved very challenging due largely to difficulties in the global economy as a result of a sharp recession which has led to steep falls in share prices and property values. Hardy has not been immune from these effects and our properties have suffered impairment losses of $6 million in the year.’
The excess of these losses over previous surpluses has led to a charge to cost of sales of $1·5 million in addition to the normal
‘Our portfolio of investments at fair value through profit or loss has been ‘marked to market’ (fair valued) resulting in a loss of $1·6 million (included in administrative expenses).’
‘In response to the downturn the company has unfortunately had to make a number of employees redundant incurring severance costs of $1·3 million (included in cost of sales) and undertaken cost savings in advertising and other administrative expenses.’
‘Despite the above events and associated costs, the Board believes the company’s underlying performance has been quite resilient in these difficult times.’
Calculate the following "underlying" ratio, those of 2010 from the additional information.
1)Returned on year-capital employed
2)Trade payables' collection period
3)Debt to equity
4)Net asset turnover
*Ratios should be calculated as per ACCA formula and examiers' report.
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