Accounting Practice in Real Estate a Perspective in Vision Living Limited
Chapter -1
Introduction
1.1 Introductory thoughts: The real estate sector is one of the fastest growing and thrusting sectors in Bangladesh. Infrastructural development is highly important for a country to rise as a develop nation and to ensure housing facilities for the citizen of the country. But compared to that there have been a few studies which are far below the required number on the real estate sector and its accessibility to financing. Consequently, this sector requires an extensive study to find out the future potentiality, problems and solutions of the real estate sector and the availability of financing in this respect. This study may work as the basis of knowing the present scenario and for any future study. 1.2 Objectives of the Study: The broad objective of the study is to identify the pattern, problems and potentials of Real estate sector of Bangladesh. The specific objectives of the study are summarized below: •
To assess the role and contribution of apartment business to meet the housing
•
Needs in the Metropolitan city areas.
•
To identify the demand pattern of apartment buildings in metropolitan areas
•
To identify the pricing situation of the sector in the light of soaring construction materials price.
•
To identify the pricing situation of the sector in the light of soaring construction materials price.
•
To identify the sources of funds of apartment business.
•
To identify the factors motivating the buyers to buy apartment.
•
To identify the sources of funds of the buyers for buying flats
•
To identify the factors motivating the buyers to buy apartment.
•
To identify the sources of funds of the buyers for buying flats
•
To identify the socio-economic characteristics of apartment buyers.
In short, the objective of the study is to find out the current condition, growth, market
structure,
financing condition and future prospects of the real estate sector in Bangladesh containing comparative scenario analysis with the global real estate market. 1.3 Scopes and Coverage of the Study: In our country real estate is a growing and profitable sector in business arena. There are many dimensions of study of this industry. But the main focus of the study is to identify the problem and prospects of this sector in Bangladesh from the view point of developers (Real Estate Companies), apartment buyers (Consumers or ultimate beneficiaries) and the financial institution providing housing loans. So, the study tries to explore the problem and prospects of apartment business. The apartment companies are mostly concentrated in Dhaka City and to some extent in Chittagong city. But Dhaka city is the main center of apartment development, so the study is confined to apartment projects within the Dhaka City and suburb of Dhaka City. 1.4 Methodologies: An explorative research has been conducted in preparing this paper. Pure basic research approach has been used. Theoretical and practical studies have also been incorporated. Multiple methods were used to collect data for identifying the pattern of apartment projects of Bangladesh and their problems: Review of relevant literature, survey, in-depth interviewing, informal interviews, and observation methods were some of them. Respondents of the study consist of apartment buyers and executives of the apartment companies, executives of the housing finance institutions. Collection of Data: Data have been collected through face-to-face and telephone interview. Questionnaire has been used in gathering primary information from real estate participants. Information has been used from different secondary sources – Internet, Newspapers, annual reports, online and printed articles, journals and previous research papers on real estate sector and editorials & special housing supplement of news papers etc. Opinions have been collected from experts and participants in the real estate sector, which have been very useful in analyzing the data & information and to reach a conclusion. The raw data also collected from Real Estate & Housing Association of Bangladesh (REHAB), Real Estate Yellow Pages (A Residential & Commercial Real Estate Directory), Annual Report of REHAB 2008, Ministry of Housing & Public Works, Rajdhani Unnoyon Kortipokkho (RAJUK), Imarot Nirmaan Bidhimala 2008, Daily Ittefaq (Weekly Report on Real Estate, Monday on every week), Weekly Bangladesh Shaptahik, Bangladesh Real Estate Law 2008
Graphical Presentation: The data were presented in Bart Chart (Fig-1), Line graph Fig. 1. This graph also described in statistically and possible cause and result.
Number of flat hand over
Fig: 1 Yearly Number of flat hand over by the real estate company
Year Growth of2003 Real Estate Business 2005 2004
2006
2007
2008
Observation & guideline preparation Seni economic 20 20%
Luxarious 30 30%
Dhaka Chittogong Sylhet Bogra Comilla
Economic 35 35%
Luxary suprim 15 15%
Cox` Bajar Others Prime Location
Area Specialization of Real Estate sector Classification of Real Estate Product At the beginning, Sale of Real estate companies is low. Might be then, buyers were unaware of Real estate product 1
The flat sale of 2000-2007 show a positive skew ness curve where the highest number (Mode) of flat sale Tk. 40-55 lac. The flat sale of apartment deviate Tk. 21.61 lack With the mean value of Tk. 53.61 lac
2
In establishment year 2000-2002, flat sold 28 % and in 2003-2004, it was 72%.
3
Flat was sold in Dhaka (55%), Chittogong 25%, Sylhet 5%, others 15% flat was sold.
4
Banani Gulshan and Dhanmondi, Kulshi (Chittogong) are treated as most exclusive area.
5
The land Owners of Banani, Gulshan, Dhanmondi and Kulshi (Chittogong) zone are very much aware for developing their land
6
Buyers are feeling comfort to buy flats in Banani,Gulshan, Dhanmondi, & Kulshi (Chittogong) zones. Uttara is now becoming prime zone.
7
At the very beginning 15-25 lac prices flat were sold more but in the year 2004 number of flat sale of this range gone down.
8
40-55 lac prices flats became very much popular and buyers felt comfort to buy it. 55-70 lac prices flats are next popular to buyers.
• Tools Used: In analyzing the data and information gathered, a few Microsoft Excel tools were used such as mathematical functions, trend analysis etc. Moreover when forecasting future scenario based on current situation, gathered data and information have been assumed to have linear relationship and thus linear forecasting of different facts has been incorporated. • Interpretation & Substantiation: Numerical data have been analyzed and interpreted with concentration and relation to the main issue. Data and information collected from different sources were compared critically and found negligible mismatching. Theoretical analysis along with numerical evidence has been used to substantiate the findings of the report.
1.5 Limitation of the study: •
Inadequacy of data: Till now, the sector is developing in a scattered way. For this reason it is very difficult to obtain data about participants of this sector. As very competitive and private sector enterprises, they maintain strict secrecy about their finance related information. Information regarding finance of the industries can not be gathered as desired. Recent data and information was not available in many cases where it was necessary. Linear relationship has been assumed in analyzing the information, which may not apply in many cases.
•
Primary data prone to inaccuracy: had significant dependence on the primary sources, so there might be some level of inaccuracy with those collected information. Though, adequate verification and cross-checking was used to minimize the error level.
•
Interpretation problem: Many of the analyses on the obtained data are based upon my sole interpretation. As a result it might bring in some biases, as lack of knowledge and depth of understanding might hinder me to produce an absolute authentic and meaningful report.
•
Literature constraint: No major work has so far been done in this sector. So there is a dearth of literature in this field.
Chapter-2 Company’s General Information
2.1 THE COMPANY Name of the company: VISION LIVING LIMITED. Established and Incorporated as a private company in 25 th February, 2007. 2.2 Company Logo:
2.3 Over view of Vision Living Limited: Vision Living Ltd. is 100% Bangladeshi Developer and Real Estate rising company in Bangladesh. The company started its activities in 2006 named Vision Living Ltd which registered with Joint Stock Company by the company’s act 1994. The company started its work with only one project. Now it has more than 20 projects. The company wants to establish itself not only for earning money but the company wants to build up the nations by creating working capacity. The organization had a wonderful vision about the nation. 2.4 Corporate Structure: The overall Management of the company will be with the Board of Directors (BOD). It will run according to the provision of the articles of association and the Memorandum of association of the company. Mr. A.Q.M. Rashidul Ahsan and Delwar Hossain have been appointed as the Chairman and Managing Director of the company respectively. Execuitve Commitee Members of Vision Living Ltd. (2009-2010) The following Directors the EC Members of Vision Living Ltd. as on 2009-2010 sessions: Sl
Name
Designation
1
A.Q.M.Rashidul Ahsan
Chairman
2
Delwar Hossain
Managing Director
3
Farid Hossain
Director Finance
4
Md. Abdul Latif
Director Engineering
5
Shahidur Rahman Chowdhury
Director
6
Md. Nesar Uddin
Director
7
A.G.M. Shahidul Islam
Director
8
Shabbir Ahmed Osmani
Director
9
Md. Mahabubur Rahman
Director
10
ANM Anwar Hossain
Director
11
Mostafa Amin Khan
Director
12
Oliur Rahman Sheraji
Director
Management & finance Commitee of Vision Living Ltd(2009-2010) The following Directors are the Management & Finance Committee Members of Vision Living Limited on 2009-2010 sessions: Sl
Name
Designation
1
A.Q.M.Rashidul Ahsan
Chairman
2
Delwar Hossain
Managing Director
3
Farid Hossain
Director Finance
4
Md. Abdul Latif
Director Engineering
5
Shahidur Rahman Chowdhury
Director
6
Md. Nesar Uddin
Director
7
A.G.M. Shahidul Islam
Director
8
Shabbir Ahmed Osmani
Director
Units of Vision Living Limited The following Units are Vision Living Limited : 1) Construction Unit and 2) Land Unit Supporting Professional Services In addition to the management Vision Living Ltd. has identified the following as persons who will contribute greatly to the success of the company. 1. Lawyer:
To look after the legal side of the company the Management establish an advisory
Law Board for the company Board consists of the following Law Board : 1) G.M. Monir Ahmed FCA 2) Moni Mala(Tax consultant) 3) Eng. Md. Selim(Consultant Engineering) 4) Adv. Abdullah Mohammed Zubair 2. Consultant: The following consultants of our Company, they assist our projects such as architectural, electrical and structural drawing, design, and layout plan: 1) Archden 2) Aline 3) ESI 4) Arc Lab 5) Farvent 6) Volume Zero 2. Auditor: Ata Khan & Co. (Chartered Accountant) for the year of 2009-2010. 4. Banker: Vision Living is service and Finance oriented for financial support and investment it is fully supported by the following Bank: 1) Islami Bank Bangladesh Ltd. 2) Standard Chartered Bank Ltd. 3) Prime Bank Ltd.
Staffing Plan Dept. Name Admin Accounts Marketing Developers
Number of Employee 60 12 20 125
Bank Correspondent As renounced companies, Vision Living Ltd. operates 3 accounts in different Banks. There is a close relation between the Bank and the company. Vision Living Ltd. received investment facilities from different Banks and refunded the investment in due time. 2.5 Nature of Business: As renounced companies, Vision Living Ltd. has different Apartment and Land business. Activities of Vision Living Ltd are described bellow. Apartment Unit: Most of our apartment projects are located in the prestigious places. One of the best residential area of the elites, having the important places, best educational institutions, shopping centers and bank of Dhaka city, as the area has clean climate and well planned model town and fast communication network, multi directional roads & highways, international airport, railway station and river port facilities. Land Unit: Vision Living Ltd. has Land project at Vhuighar, Narayangonj name “Vision South Valley’’. There are about 2000 plot for incumbent. This project considering the incumbent necessities of exclusive and luxurious living, where reputed schools, colleges, universities and aristocratic hospitals and shopping malls with wonderful communication system are rudimental requirements. Vision Living Ltd. (VLL) is best because: 1.
Vision ensures best quality, attractive architecture and quality construction.
2.
Reliability & Responsibility.
3.
Well planned, organized, environment friendly and space effective yet airily, internal lay out etc.
4.
Working experienced and highly qualified construction Management team.
The company Vision Living Ltd. is constructing multi storied building and selling it as a flat. Projects of Vision Living Ltd. are as follows: Ongoing Projects of Vision Living Limited: Vision Cassandra at Uttara Vision Casselia at Uttara Vision Cressida at Uttara Vision D’Wealth at Uttara Vision Absolon at Uttara Vision Meherab Garden at Dhaka Cantonment Vision Deacon at Bashundhara R/A Vision Decidela at Bashundhara R/A Outgoing Projects Vision Living Limited: Vision Organza at Uttara Vision Cressida at Uttara Upcoming Projects Vision Living Limited: Vision Montrose at Bashundhara R/A Vision Meherab Garden at Dhaka Cantonment 2.6 Vision: To earn the distinction from our clients as satisfying their commercial real estate needs better than anyone else. 2.7 Mission: Is” Quality-the unit we count” And by quality we never mean only product quality, it extends to our all business activities as well. 2.8 Our Strength: Is the support that we have gained from their people, their customers and their other stakeholder around us. 2.9 Objective of the Company: Our objectives are to conduct transparent business operations within the legal & social frame work with aims to attain the mission reflected by our vision. 2.9.1 Long-range objective: The long-term objective is to gain leadership globally in the home appliance industry. 2.9.2 Short term objective: Their short-range objective is profit maximization by providing quality product.
2.9.3 Strategic Intent: To be the global leader in this sector. 2.9.3.1 Corporate Strategy: To earn more profit by applying marketing policy. 2.5.3.2 Operational Strategy: To promote corporate image establish good production facilities and to setup a good marketing channel. Corporate Head Office: Plot # 15 (Fifth Floor), Dhaka Mymensing Road, Sector#03, Uttara Model Town, Dhaka-1230, Bangladesh. Tel: (880-2) 8922263, 8911252, Fax: 880-2-8834695 e-mail:admin@visionbd.com Web: www.visionbd.com 2.10 Organizational Structure of the Company: Chairman/President VISION LIVING LIMITED.
Consultant
In Charge MD
Advisor/Lawye r
Director
Director
Director
Director
Director
Engineering
Marketing
Finance
Human Resource
Research & Development
Project Manager Project Eng.
Store Keeper
Store Officer
Regional Sales Manager District Sales Manager
Tax Officer
Controller GM/CFO
Controller Labor Relation
Accounting Manager
Financial Manager
Cash Officer
VAT Officer
Laboratory In charge
Manager Plant Human Resource
Training Coordinator
Technician/ IT Officer
Chapter-3 Literature Review of Accounting 3.1 Origin of Accounting 3.1.1 Token accounting in ancient Mesopotamia Map of the Middle East showing the Fertile Cresent circa. 3rd millennium BC The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned.
Accounting tokens made of clay, from Susa, Uruk period, cira 3500 BCE. Department of Oriental Antiquities, Louvre. During the period 8000–3700 BCE, the Fertile Crescent witnessed the spread of small settlements supported by agricultural surplus. Tokens, shaped into simple geometric forms such as cones or spheres, were used for stewardship purposes in relation to identifying and securing this surplus, and are examples of accounts that referred to lists of personal property. Some of them bore markings in the form of incised lines and impressed dots. Neolithic community leaders collected the surplus at regular intervals in the form of a share of the farmers’ flocks and harvests. In turn, the accumulated communal goods were redistributed to those who could not support themselves, but the greatest part was earmarked for the performance of religious rituals and festivals. In 7000 BCE, there were only some 10 token shapes because the system exclusively recorded agricultural goods, each representing one of the farm products levied at the time, such as grain, oil and animals. The number of token shapes increased to about 350 around 3500 BCE, when urban workshops started contributing to the redistribution economy. Some of the new tokens stood for raw materials such as wool and metal and others for finished products among which textiles, garments, jewelry, bread, beer and honey. The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind. The cognitive significance of the token system was to foster the manipulation of data. Compared to oral information passed on from one individual to the other, tokens were extra-somatic, that is outside the human mind. As a result, the Neolithic accountants were no longer the passive recipients of someone else's knowledge, but they took an active part in encoding and decoding data. The token system substituted miniature counters for the real goods, which eliminated their bulk and
weight and allowed dealing with them in abstraction by patterning, the presentation of data in particular configurations. As a result, heavy baskets of grains and animals difficult to control could be easily counted and recounted. The accountants could add, subtract, multiply and divide by manually moving and removing counters.
Globular token envelope with a cluster of accounting tokens. Clay, Susa, Uruk period (4000 to 3100 BCE). Department of Oriental Antiquities, Louvre.
Economic tablet with numeric signs. Proto-Elamite script in clay, Susa, Uruk period (3200 BC to 2700 BCE). Department of Oriental Antiquities, Louvre. The Mesopotamian civilization emerged during the period 3700–2900 BCE amid the development of technological innovations such as the plough, sailing boats and copper metal working. Clay tablets with pictographic characters appeared in this period to record commercial transactions performed by the temples. Clay receptacles known as bullae (Latin: 'Bubble'), were used in Elamite city of Susa which contained tokens. These receptacles were spherical in shape and acted as envelopes, on which the seal of the individuals taking part in a transaction were engraved. The symbols of the tokens they contained were represented graphically on their surface, and the recipient of the goods could check whether they matched with the amount and characteristics expressed on the bulla once they had received and inspected them. The fact that the content of bulla was marked on its surface produced a simple way of checking without destroying the receptacle, which constituted in itself an exercise in writing that, despite being born spontaneously as a support for the existing system for controlling
merchant goods, ultimately became the definitive practice for non-oral communication. Eventually, bullae were replaced by clay tablets, which used symbols to represent the tokens. During the Sumerian period, token envelop accounting was replaced by flat clay tablets impressed by tokens that merely transferred symbols. Such documents were kept by scribes, who were carefully trained to acquire the necessary literary and arithmetic skills and were held responsible for documenting financial transactions. Such records preceded the earliest found examples of cuneiform writing in the form of abstract signs incised in clay tablets, which were written in Sumerian by 2900 BCE in Jemdet Nasr. Therefore "token envelop accounting" not only preceded the written word but constituted the major impetus in the creation of writing and abstract counting. 3.1.2 Accounting in the Roman Empire
Part of the Res Gestae Divi Augusti from the Monumentum Ancyranum (Temple of Augustus and Rome) at Ancyra, built between 25 BCE - 20 BCE. The Res Gestae Divi Augusti (Latin: "The Deeds of the Divine Augustus") is a remarkable account to the Roman people of the Emperor Augustus' stewardship. It listed and quantified his public expenditure, which encompassed distributions to the people, grants of land or money to army veterans, subsidies to the aerarium (treasury), building of temples, religious offerings, and expenditures on theatrical shows and gladiatorial games. It was not an account of state revenue and expenditure, but was designed to demonstrate Augustus' munificence. The significance of the Res Gestae Divi Augusti from an accounting perspective lies in the fact that it illustrates that the executive authority had access to detailed financial information, covering a period of some forty years, which was still retrievable after the event. The scope of the accounting information at the emperor's disposal suggests that its purpose encompassed planning and decision-making. [16] The Roman historians Suetonius and Cassius Dio record that in 23 BC, Augustus prepared a rationarium (account) which listed public revenues, the amounts of cash in the aerarium (treasury), in the provincial fisci (tax officials), and in the hands of the publicani (public contractors); and that it included the names of the freedmen and slaves from whom a detailed account could be obtained. The closeness of this information to the executive authority of the emperor is attested by Tacitus' statement that it was written out by Augustus himself.
Roman writing tablet from the Vindolanda Roman fort of Hadrian's Wall, in Northumberland (1st-2nd century AD) requesting money to buy 5,000 measures of cereal used for brewing beer. Department of Prehistory and Europe, British Museum. Records of cash, commodities, and transactions were kept scrupulously by military personnel of the Roman army. An account of small cash sums received over a few days at the fort of Vindolanda cira 110 CE shows that the fort could compute revenues in cash on a daily basis, perhaps from sales of surplus supplies or goods manufactured in the camp, items dispensed to slaves such as cervesa (beer) and clavi caligares (nails for boots), as well as commodities bought by individual soldiers. The basic needs of the fort were met by a mixture of direct production, purchase and requisition; in one letter, a request for money to buy 5,000 modii (measures) of braces (a cereal used in brewing) shows that the fort bought provisions for a considerable number of people. The Heroninos Archive is name given to a huge collection of papyrus documents, mostly letters, but also including a fair number of accounts, which comes from Roman Egypt in 3rd century CE. The bulk of the documents relate to the running of a large, private estate is named after Heroninos because he was phrontistes (Koine Greek: manager) of the estate which had a complex and standarised system of accounting which was followed by all its local farm managers.Each administrator on each subdivision of the estate drew up his own little accounts, for day to day running of the estate, payment of the workforce, production of crops, the sale produce, the use of animals, and general expetidirure on the staff. This information was then summarized as pieces of papyrus scroll into one big yearly account for each particular sub—division of the estate. Entries were arranged by sector, with cash expenses and gains extrapolated from all the different sectors. Accounts of this kind gave the owner the opportunity to take better economic decisions because the information was purposefully selected and arranged. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents. 3.1.3 Islamic accounting & algebra In the Holy Qur’an, the word hesab (Arabic: account) is used in its generic sense, relating to one's obligation to account to God on all matters pertaining to human endeavour. According to the Holy Qur’an, followers are required to keep records of their indebtedness (Sura 2, ayah 282), thus Islam thus provides general approval and guidelines for the recording and reporting of transactions. The Islamic law of inheritance (Sura 4, ayah 11) defines exactly how the estate is calculated after death of an individual. The power of testamentary disposition is basically limited to one-third of the
net estate (i.e. the assets remaining after the payment of funeral expenses and debts), providing for every member of the family by allotting fixed shares not only to wives and children, but also to father and mothers.[24] The complexity of this law served as an impetus behind the development of algebra (Arabic: al-jabr) by Muhammad ibn Mūsā al-Khwārizmī and other medieval Islamic mathematicians. Al-Khwārizmī's Hisab al-jabr w’al-muqabala (Arabic: "The Compendious Book on Calculation by Completion and Balancing", Baghdad, c. 825) devoted a chapter on the solution to the Islamic law of inheritance using linear equations.[25] In the twelfth century, Latin translations of al-Khwārizmī's Kitāb al-Jamʿ wa-l-tafrīq bi-ḥisāb al-Hind (Arabic: Book of Addition and Subtraction According to the Hindu Calculation) on the use of Indian numerals, introduced the decimal positional number system to the Western world. The development of mathematics and accounting was intertwined during the Renaissance. Mathematics was in the midst of a period of significant development in the late 15th century. HinduArabic numerals and algebra were introduced to Europe from Arab mathematics at the end of the 10th century by the Benedictine monk Gerbert of Aurillac, but it was only after Leonardo Pisano (also known as Fibonacci) put commercial arithmetic, Hindu-Arabic numerals, and the rules of algebra together in his Liber Abaci in 1202 that Hindu-Arabic numerals became widely used in Italy. While there is no direct relationship between algebra and bookkeeping, the teaching of the subjects and the books published addressed the same group, namely the children of merchants who were sent to reckoning schools (in Flanders and Germany) or abacus schools (known as abbaco in Italy), where they learned the skills useful for trade and commerce. There is probably no need for algebra in performing bookkeeping operations, but for complex bartering operations or the calculation of compound interest, a basic knowledge of arithmetic was mandatory and knowledge of algebra was very useful. 3.1.4 Luca Pacioli and double-entry bookkeeping Main articles: Luca Pacioli and Double-entry bookkeeping system Bartering was the dominant practice for traveling merchants during the Middle Ages. When medieval Europe moved to a monetary economy in the 13th century, sedentary merchants depended on bookkeeping to oversee multiple simultaneous transactions financed by bank loans. One important breakthrough took place around that time: the introduction of double-entry bookkeeping,which is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form.The historical origin of the use of the words ‘debit’ and ‘credit’ in accounting goes back to the days of single-entry bookkeeping in which the chief objective was to keep track of amounts owed by customers ( debtors) and amounts owed to creditors. ‘Debit,’ is Latin for ‘he owes’ and ‘credit’ Latin for ‘he trusts’. The earliest extant evidence of full double-entry bookkeeping is the Farolfi ledger of 1299-1300. Giovanno Farolfi & Company were a firm of Florentine merchants whose head office was in Nîmes who also acted as moneylenders to Archbishop of Arles, their most important customer.The oldest discovered record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the city of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contains balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.
Pacioli's portrait, a painting by Jacopo de' Barbari, 1495, (Museo di Capodimonte).The open book to which he is pointing may be his Summa de Arithmetica, Geometria, Proportioni et Proportionalità . Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità " (Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (Italian: "Details of Calculation and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra. Although Luca Pacioli did not invent double-entry bookkeeping, ]his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today.Even though Pacioli's treatise exhibits almost no originality, it is generally considered as an important work, mainly because of its wide circulation, it was written in vernacular Italian language, and it was a printed book. According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale (Italian: memorandum), the giornale (journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index. Pacioli's treatise gave instructions in how to record barter transactions and transactions in a variety of currencies – both being far more commonplace than they are today. It also enabled merchants to audit their own books and to ensure that the entries in the accounting records made by their bookkeepers complied with the method he described. Without such a system, all merchants who did not maintain their own records were at greater risk of theft by their employees and agents: it is not by accident that the first and last items described in his treatise concern maintenance of an accurate inventory. The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription
and calculation. One of its social effects was to proclaim the honesty of merchants as a group; one of its epistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system's precision and the normalizing effect that precision tended to create the impression that books of account were not only precise, but accurate as well. Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers. 3.2 Modern Accounting Information System 3.2.1 Introduction: Being an accounting professional today requires far more than just a textbook understanding of debits and credits. Journalizing and posting steps and the latest accounting and auditing pronouncements. The accounting professional of 21st century must also stay abreast of the many technological advances, which continually reshape the business world. These advances have sparked an information revolution, which in the past few decades has transformed almost every aspect of accounting. Perhaps the greatest impact of the information evolution has bee on the accounting system itself indeed, accounting systems and the world of computers and data processing has become inseparable. Recognition of this has given rise to a new accounting specialty area known as accounting information system (AIS). The AIS area encompasses many potential topics such as general system theory control structure and specific computer applications. Developments in AIS area have substantially affected accounting practice and consequently accounting education. The modern business world is dramatically changing their accounting systems. They update their systems with the computerized systems. In computerized systems they have to keep accounting and non-accounting transaction for providing required information to the users of the organization. But Accounting Information Systems (AIS) is more complex and integrated each other which are as follows: 3.2.2 Accounting: Accounting is an information system that identifies records and communicates the economic events of an organization to interested users. That is, it employees various systemic operations to generate relevant information. Among the operations that it encompasses are: 1. Recording economic data (Data Collection) 2. Maintaining stored data (Data maintenance) and 3. Presenting quantitative information in financial terms. 3.2.3 Information: In the broadest sense, information is intelligence that is meaningful and useful to persons for whom it is intended. It is necessary for making sound decisions and inducing desired actions. Usually, information is derives from the processing of data. Data are the raw facts and figures and even symbols that together from the inputs to an information system. Generally information reduces the uncertainty of future events. 3.2.4 System: A system is a unified group of interacting that function together to achieve its purposes. Each system has a boundary that separates it form its environment. Most systems are open, in that they accept inputs from their environments and provide outputs to the environments. In particular, I will be
concerned with the fact that a system contains interdependent parts that have system characteristics and are called subsystems. Objectives
Sources
System (including components/ resources) Boundary.
Users
Basic Characteristic of a tangible open system. 3.3 Accounting Information systems (AIS): An accounting information system is a unified structure within an entity, such as a business firm, that employs physical resources and other components to transform economic data into accounting information, which purpose of satisfying the information needs of a variety of users. Information system is defined as the function that – performs the design, Construction, and maintenance of human/ machine systems that• • •
Utilize information-processing technology (Computers, Telecommunications and office automation.) To support the information processing needs and information access requirements. The management and the various function within an organization
So, the purpose of the system function is to support the test of the organization (including accounting) with information processing and information access to a brand spectrum of users, from clerical to managers. The information systems applications range from large corporate transaction and reporting systems of individual support systems and end-user computing. An accounting information system is a unified structure within an entity, such as a business firm that employs physical resources and other components to transform economic data into accounting information, with the objective of satisfying the information needs of a variety of users. In fact the AIS is a subsystem of a broader information system that encompasses all information generating activities. Other component of information systems includes the management information system (MIS), decision support system (DSS) expert systems (ES) & executive information systems (EIS). Each of these types of information System serves purposes that are similar yet different. Firms employ information systems as required to fulfill their total information needs. In a typical firm I will find an intermingling of the systems. Smaller firms are likely to emphasize the AIS, since they tend to be simple, with the managers gathering more of their decision making information informally. Medium sized firms, being more complex and having more than one level of management tend to require more formalized MIS as well as AIS degree firms being extremely complex tend to emphasize DSS &ES as well as MIS & AIS. Another thing is that, firms employ a mixture of computer based and manual processing within their transaction & information processing activities. But in general we can say that the medium & large firms emphasize to a higher degree than small firms.
3.4 FUCTIONS OF AIS A system is a set of two or more interrelated components that interact to achieve a goal. Systems are always composed of small subsystems each performing a specific function important to and supportive of the larger system of which it is part. AIS consist of people procedure and information technology. It performs 3 functions in any organization. 1. It collects and stores data about activities and transaction so that the organization can review what has happened. 2. It processes data into information that is useful for making decision that enable management to plan, execute and control activities. 3. It provides adequate controls to safe guard the organization assets, including its data. These controls ensure that the data is available when needed and that it is accurate & reliable.
Strategy
Organization Culture
AIS
Information Tech.
Figure: Factors influencing the design of AI Figure shows that corporate strategies are one of the factors that should influence the design of AIS. It also shows that new development in IT affects the design of AIS. Indeed in the past decades, IT has profoundly changed the way that Accounting and many other business activities are performed. Moreover, that impact is likely to continue in the future. There are many opportunities to invest in IT so that AIS can be improved to add value to an organization. Most organization however, do not have unlimited resources. Therefore, an important decision involves identifies which potential AIS improvements are likely to yield the greatest return.
Marking this decision wisely requires that accountants and information systems professionals this organization strategy. Moreover, because an AIS functions within an organization, it should be designed to reflect the values of that organizational culture. Organizational culture influences the design of AIS. Again the AIS influence the organization culture. One way it does so, is through choice on how to who, it disseminates information. For example, AIS that makes information easily accessible and widely available is likely to increase pressures for more decentralization and autonomy. 3.5 HOW AIS CAN ADD VALUE TO AN ORGANIZATION AIS is part of the firm infrastructure that supports the performance of an organization’s other value chain activities. For example, the expenditure cycle capture and process information about the purchasing and inbound logistics activities. The human resources cycle and production cycle support the resources and operation portions of the value chain, respectively. The revenue cycle captures and processes information about the outbound logistics, sales and marketing and service activities. The financing cycle supports the other firm infrastructure activities necessary to any organization. One way the AIS add value is by providing accurate & timely information to perform the various value chain activities. Well-designed AIS can further improve the efficiency & effectives of those activities by: 1. Improving the quality & reducing the cost of product or services. 2. Improving operations efficiency by providing more timely information. 3. Improved decision making by providing accurate information in a timely manner to appropriate employees. 4. Sharing of knowledge & expertise, thereby improving operation & even providing & competitive advantage. A well – designed AIS can also help an organization profit by improving the efficiency and effectiveness of its value system. For example, customer to directly access the company’s inventory and sales order entry system can reduce the cost of sales & marketing and reduce customer coast & time of ordering. Of course, creating such inter organizational information system raiser new control concerns. 3.6 BUSINESS EVENTS AND TRANSACTION PROCESSING SYSTEM. Most organization engaged in many similar and repetitive transactions. These transaction types can be grouped into the file basic cycles, each of which constitutes a basis subsystem in the AIS: 1. The expenditure cycle consists of the activities involved in buying and paying for goods or services used by the organization. 2. The production cycle consists of the activities involved in converting RM and labor into F.G- (for manufacturing business.) 3. The Human resources consist of the activities involved in hiring and paying employees. 4. The revenue cycle consists of the activities involved in selling goods or services and collecting payment for those sales.
Chapter -4 REVENUE CYCLE 4.1 Introduction: • •
Revenue Cycles tend to be similar for all types of firms. Two subsystems perform the processing steps within the Revenue Cycle: • •
The Sales Processing System; The cash Receipts Processing System.
4.2 Objectives of the Revenue Cycle: • • • • • • • •
To record sales orders promptly and accurately; To verify that the customers are worthy of credit; To ship the products or perform the service by agreed dates; To bill for products or services in a timely & an accurate manner; To record & classify cash receipts promptly & accurately; To post sales & cash receipts to proper customers accounts in the accounts receivable ledger; To safeguard products until shipped; To safeguard cash until deposited;
4.3 Input documents pertaining to the Revenue Cycle: • • • • • • • • • • • • • • • •
Customer Order Sales Order Order Acknowledgement Bill of lading Shipping Notice Sales Invoice Remittance advice Deposit Slip Back Order Credit memo Credit Application Salesperson call report Delinquent Notice Write- off Notice Cash register receipts.
Order OrderData Data
Customer Customer Credit CreditData Data Customer CustomerData Data
Shipping ShippingData Data
Inventory InventoryData Data
1. Receive & Enter Sales Orders
2. Ship Goods to Customers.
General GeneralLedger Ledger Account AccountBata Bata Customer CustomerData Data
3. Bill Customer
Sales SalesData Data
Pricing PricingData Data
4. Prepare Accounting Analyses & Report
Receivable ReceivableData Data
Sales SalesHistory History Data Data
Data Flow Diagram of a Sales & Receivable Processing System. 4.4. Credit Sales processing system: •
Order entry • Customer order • Flat & Plot list
• Shipping • •
•
Bill of Lading
• •
Preparing analyses & Reports Invoice Register Accounts Receivables Summary
♦
Handling Sales Returns & Allowances Credit Memos
•
Processing Back orders
4.5 Cash Receipts Processing System: • •
•
♦
Remittance Entry Remittance List
♦ ♦
Depositing Receipts Deposit Slips Cash Receipts Transaction Listing
♦ ♦
Posting Receipts Balance Forward Method Open Invoice Method
•
Preparing Analyses & Reports
•
Collection Delinquent accounts ♦ Write- off Notice
4.6 Information Output: • • • •
Operational Listings & Report Inquiry Display Screens Scheduled Managerial Reports Demand Managerial Reports.
4.6.1 Operational Listing & Reports: • • • • •
Monthly statement Open order report Sales Invoice register Cash receipts journal Credit memo register.
4.6.2 Scheduled Managerial Reports: • •
Accounts receivable aging schedule reports on critical factors • Average dollar value per order • Average number of days between the order data.
o
Sales Analyses • • • • •
o
Sales person Sales region Product lines Customer Markets
Cash flow statements
4.6.3 Demand Managerial Reports: o
Demand reports are ad hoc non-scheduled reports” what if “scenarios.
4.7. Typical files Associated with the Revenue Cycle: o
Master files • • •
Customer master file Accounts Receivable master file Merchandise inventory master file
o
Transaction Receivable master file
o
• • • • Other files • • • • • •
Sales order file Open sales order file Sales Invoice transaction Cash receipts Transaction file
Shipping & Price data reference file Credit Reference file Salesperson file Sales history file Cash receipts history file Accounts receivable report file.
4.8. Revenue Cycle Business Activity 8.1 Sales order entry: The first step in the revenue cycle is sales order entry. Key decisions and information Needs: The sales order entry function obtains needed information about inventory availability and customer credit status from the inventory control and accounting functions, respectively. Decisions concerning credit policies, including the approval of credit for new customers and increasing the credit limits of existing customers, however are made. • • •
Responding to Customer Inquiries. Credit Approval. Checking Inventory Availability.
4.8.1 Billing and accounts receivable: This third step in the revenue cycle is billing. To activities are performing at all this stage of the revenue cycle: invoicing customer and maintaining customer’s accounts. Key decisions and information Needs: Accurate billing for shipped merchandise is crucial. This required information from the sipping department identifying the items and quantities shipped and information about prices and any special sales terms from the sales department. 4.8.2 Cash Collection: The fourth step in the revenue cycle is cash collections. Key decisions and information Needs: because cash can be stolen easily, it is important to take appropriate measures to reduce the risk of theft. Cash collection must be accurately recorded and customer’s accounts must be properly credited for all remittances. CHAPTER-5 EXPENDITURE CYCLE 5.1 Introduction: Expenditure cycle involves the outflow of cash; it is the counterpoint to the revenue cycle expenditure cycles tend to be similar for all types of firms-merchandising to manufacturing to services. Two subsystems include: • •
The purchases processing system. The cash disbursements processing system.
5.2 Objectives of the expenditure cycle: • • • • • • • •
To ensure that all goods and services are ordered as needed. To receive all ordered goods and verify that they are in good condition. To safe guard goods until needed; To ensure that invoices pertaining to goods and services are valid and correct. To record and classify the expenditure promptly and accurately. To post obligations and cash disbursements to proper suppliers accounts in The accounts payable ledger. To ensure that all cash disbursements are related to authorize expenditure.
5.3 Documents pertaining to the expenditure cycle: • • • • • • • • •
Purchase requisition; Purchase order; Receiving report; Suppliers invoice; Disbursement voucher; Disbursement check; Debit memorandum; New supplier form; Request for proposal.
5.4 Purchasing and payables processing system: 5.4.1. Purchases: • •
Request for proposal Inventory status report.
5.4.2 Receiving: • Receiving report. 5.4.3 Payable: • Disbursements voucher file. 5.4.4. Preparing analyses and report: 5.4.5. Handling purchase return and allowances: • Debit memorandum. 5.5 Cash disbursements processing system: 5.5.1 Processing petty cash disbursements: • Imparts system. 5.5.2 Disbursing cash for miscellaneous purposes: 5.6 Operational listings and reports: • Voucher Register; • Check Resister; • Open purchase order report; • Open Invoices report; • Inventory status report; • Overdue deliveries report. Scheduled Managerial report: • A payable aging report; • Purchase analyses; • Vendor performance report; • Cash-flow statement; • Critical Factors report. Data Management: 5.6.1. Master Files: • • •
Supplier Master File; Accounts payable master file; Merchandise inventory master file.
5.6.2 Transaction and Open Document Files: • • • •
Purchase order file; Open purchase order file; Suppliers invoice file; Open Vouchers file;
•
Cash disbursements file.
5.6.3 Other files: • A supplier reference and History file; • A Buyer file; • An accounts payable detail file. a. Purchase Procedure Acknowledgement
Supplier
Inventory Data Requisitioned items and quantities
Purchase order Supplier reference and history data
Purchase goods when requisitione d
Order data Ordered quantities Approved Order
Inventory data
b. Receiving procedure Supplier Data
Received goods from supplier
Receiving data Receipts
Shipped goods c. Payables procedure Order quantities
Supplier Amount of obligation
Approved Obligation for payment
General Ledger data Accounts balance
Accountants & Managers
Prepare accounting Analyses Analyses and and Reports reports
Figure: Purchases and Payables Processing System
Open voucher &
Invoice
Payable data Supplier historyPurchase data Summaries
Logistics
Finance/ Accounting
Vice-precedent Logistics Purchasing
Receiving
Inventory Stores
Budgeting & Cash Planning
Inventory Control
Vice-precedent Finance Production
Accounts Payable
Cash Disbursements
General Ledger
ments
Recognize Need for goods or services
Price Order
Receive And store Goods
Determine Validity of Payment obligation
Make cash Payments
Maintain Accounts Payable
Figure: Relationships of organizational units to expenditure cycle
Post Transactions & prepare Financial
5.7 Expenditure cycle business activities: One function of the AIS is to support the effective performance of the organization’s business activities by efficiently processing transaction data. The five basic business activities in the expenditure cycle: • • • • •
Requesting the purchase of needed goods. Ordering goods to be purchased. Receiving ordered goods. Approving vendor invoices for payment. Paying for goods purchased.
Key decision: vendor selection The crucial operating decision in the purchasing activity involves the selection of vendors for inventory items. Several factors should be considered in making these decisions: • • •
Price Quality of materials Dependability in making deliveries
Receive and store goods: The third business activity in the expenditure cycle involves the receipt and storage of ordered items. Key decisions and information Needs: The receiving department has two major responsibilities deciding whether to accept a delivery and verifying the quantity and quality of the goods delivered. Approved vendor invoices for payments: The fourth activity in the expenditure cycle entails approving vendor invoices for payment. The accounts payable department performs this process. Key decision and information needs: Legally, an obligation to pay vendors arises at the time goods are received. For practical reasons, however, most companies’ record accounts payable only after receipt and approval of the vendor’s invoices. This timing difference ins usually not important for daily decision making but it does require making appropriate adjusting entries to prepare accurate financial statements at and of a fiscal period. Pay for goods: The final activity in the expenditure cycle the payment of approved invoices. Key decision: Taking vendor discounts: A key decision in the cash disbursement process is determining whether to take advantage of any vendor discounts offered for prompt payment.
5.8 Threats, exposure and control procedure in the revenue cycle: Transactions with in the expenditure cycle are exposed to several types of risks. Some risk may expose in the revenue cycle, which are as follows: Threat
Exposure
1. Stock outs
. Production delays lost sales.
Application control procedure . Inventory control system and . Vendor performance analyses
2. Purchasing . increased inventory unnecessary goods or in costs. too great a quantity.
. . . .
Accurate perpetual inventory Approve purchase requisitions Pre numbered purchase requisitions Restricted access to blank purchase requisitions.
3. purchasing . Cost overrun goods at inflated prices
. . . .
Price list consultation Solicitation of written bids Approve purchase orders Budgetary control
4.Purchasing goods of inferior quality.
. . . . .
. Production delays . Cost overruns
5. purchasing . Inferior quality of form unauthorized vendors purchase goods . Inflated prices . Violation of laws . Import quotas 6. kick backs . Inferior quality of purchase goods . Inflated prices . Violation of laws
7. Receiving . Increased inventory unordered goods. costs 8. Received
9. inventory
Theft
10. Errors vendor invoices
of
. Payment for items not received. . Inaccurate inventory records. . Lost of assets . Inaccurate records
in . Inaccurate records . Inaccurate payment
11. Paying for goods not received
. Loss of cash . Over stated cost
CHAPTER – 6 PRODUCTION CYCLE
Use of vendor lists Review of purchase order Vendor performance analyses Approval of purchase order Restricted access to approved vendor list and approval of any changes made to that list. . Pre numbered purchase orders . Prohibition of gifts from vendors . Requirement that purchasing agents disclose financial interest in suppliers . Vendor audits
. Approve purchase order for all deliveries. . Blank quantity field on copy of the purchase order sent to receiving . Incentives to count all deliveries . Physical access controls. . Documentation of all internal transfers of inventory. . Recheck of all invoice accuracy. . Comparison of invoice to purchase order and receiving report. . Requirement of voucher package to support payment of invoices.
6.1 Introduction: The production cycle consist of the activities involved in converting raw materials and labor into finished goods. 6.2 Production cycle activities: • • • •
Product design Planning and scheduling Production operations Cost accounting
6.2.1 Product design: The first step in the production cycle is product design. The objective of this activity is to design a product that meets customer requirements for quality, durability and functionality while simultaneously minimizing production costs. Some of these criteria conflict with one another, making the product design task a challenging one. 6.2.2 Planning and scheduling: The second step in the production cycle is planning and scheduling. The objective of this step is a production plan efficient enough to meet exciting orders and anticipated short-term demand without creating excess finished goods inventories. Planning methods: Two common methods of production planning are: • •
Manufacturing Resource Planning (MRP) Just in time (JIT) manufacturing System.
Revenue cycle
Expenditure Cycle
Finished goods Sales For Casts Customer order
Raw materials Bill Billofofmaterials materials
1. 1. Product Product design design
2.2.Planning Planning and and Scheduling Scheduling
Operations Operationslist list
Production orders Materials Requisitions & Move tickets
Work in Process goods
Labor available
Finished Labor cost Accounting
4. 4. Cost Cost
Production costs
management Payroll cycle Human resource
Job time tickets and materials requisitions
Operations
3. 3. Production Production
Raw material and overhead costs Cost of goods manufactured
Management Management
General Generalledger ledger&& reporting reportingsystem system
Figure: Data flow diagram of production cycle 6.2.3 Production operations: The third step in the production cycle is the actual manufacture of products. The manner in which this activity is accomplished varies greatly across companies. Differing according to the type of product being manufactured and the degree of automation used in the production process.
6.2.4 Cost accounting: The final step in the production cycle is cost accounting. The tow principal objectives of the cost accounting system are: . To provide information for planning, controlling and evaluating the performance of production operations; and . To provide accurate cost data about products for use in pricing and product mix decisions. In addition, the cost accounting system provides the information used to calculate the inventory and cost of goods sold values that appear in the company’s financial statements. 6.3 Threats, exposure and control procedure in the production cycle: Threat Exposure 1. Unauthorized . Over production and excess Transactions inventories . Obsolescence . Under production Exposure . Stock outs . Loss sales . Excess investment in fixed assets 2.
Theft or . Loss of assets destruction of . Overstated inventory records inventories and fixed assets.
3. Recording posting errors
4. Inefficient quality problems
and . Ineffective scheduling and planning . Decision errors (Product mix, product pricing over/under production . Increased expenses and taxes on fixed assets that are incorrectly valued
and . Increase expenses (scrap, rework, control warranty, repairs, sales return and allowance) . Loss of customer goodwill and future sales.
Applicable control procedure . Accurate sales of forecast . Accurate inventory records . Authorization of production . Restricted access to production Applicable control procedure . planning program . Review an approval of capital asset expenditures . Restricted physical access . Documentation of all internal movements of inventory . Proper segregation of duties . Periodic physical counts of inventory . Reconcile to records . Assignment of accountability and responsibilities for fixed assets . Proper approval and documentation
. . . .
Insurance Source data entry edit controls Online data entry edit controls Periodic physical counts of inventory fixed assets and reconciliation of those counts corresponding record.
. Regular performance reports . Exception reports . Highlighting variances from budget plan . Measure throughput . Measure cost of quality control.
to
5. Loss of data
. Loss of assets . Ineffective decision making
. Backup and disaster recovery procedure . File labels . Access control . Creation and review of logs of all computer activity.
CHAPTER- 7 PAYROLL CYCLE 7.1 Payroll cycle activities: The seven basic activities performed in the payroll cycle. Payroll is one AIS application that continues to be processed in batch mode because: • Paychecks are prepared periodically (weekly/ monthly) • Most employees are paid at the same time • Update master payroll file • Update tax rate and deductions • Validated time and attendance data • Prepare payroll • Disbursement of payroll • Calculate employer-paid benefit and taxes • Disbursement of payroll taxes and miscellaneous deductions
Employees
Pay checks
Time keeping Time data
Payroll Payroll
Management
Payroll processing processing summaries system system
Personal Personal Employee data
Government Agencies Tax information Figure: A Context Diagram for a payroll processing system
Time keeping
Process Employee Employee hour’s data hours
Time card data
Payroll Master file
Status & rate data
Personnel Process Employee Status & rate
Personnel data
Process Payroll reports
Process Pay check
Gross and net pay
Pay check
Employee
Government
Management
Figure: Data flow diagram for the payroll processing system.
7.2 Table examples of commonly generated HRM/ payroll cycle reports: Report Contents 1. Communicative earnings . Communicative year to date register gross pay, net pay and deduction for each employee 2. work force inventory . List of employees by department 3.Position control inventory
Purpose . Used for employee information and annual payroll reports. . Used in preparing laborrelated reports for Govt. agencies . List of each authorized . Used in planning future works position, job qualification, and force needs budgeted salary
4. Skills inventory report
List of employees and current . Useful in planning future skills works and training programs 5. Various other reports to Data on compliance with . To documents compliance Govt. agencies various regularity provision with applicable regulation state and local report etc. Threats, exposures and control procedures in the HRM/payroll cycle: Threat 1. Hiring of unqualified or larcenous employees
Exposure . Increased expenses . Lower productivity . Theft 2. Violation . Fine employment law. . Civil Suits 3. Unauthorized . Increased expense changes to the master . Inaccurate reports & records. payroll file 4. Inaccurate time data . Incorrect expenses & internal reports . Over/Under payment of employees. 5. Inaccurate processing . Inaccurate records and poor of payroll. decision making . Penalties for violation of tax law . Reduced morale, if all employees not paid. 6. Theft or fraudulent . Increased expense distribution of paycheck. . Loss of assets 7. Loss or unauthorized . Loss of assets disclosure of payroll . Reduced morale data. . Employee law suits.
Applicable control procedure . Sound hiring practices, including verification of job applicant’s skills, references and employment history. Through documentation of hiring procedures . Segregation of duties . Access controls . Automation of data collection . Application control . Reconciliation of time card and job time tickets . Batch totals and other application controls . Payroll clearing account . Direct deposit . Access controls . Backup procedures Encryption
CHAPTER – 8 GENERAL LEDGER CYCLE 8.1 Introduction: The main inputs to the general ledger and financial reporting cycle are the outputs of all other cycles; it is the linchpin that ties together all the component transaction processing cycles and systems. Transactions from all cycles and systems are ultimately posted to the general ledger regardless of the extent to which the system is computerized. 8.2 Sources of Input: 1. Routine External Transactions. 2. Routine Internal Transactions. 3. Non- routine Transactions. 4. Adjusting entries 5. Accruals are recurring entries. 6. Deferrals 7. Reevaluations 8. Corrections 9. Closing entries
8.3 Forms of input: Journal Voucher the primary source document to the general ledger system is the journal voucher (JV). This input form abstracts pertinent details to support postings to the general ledger. A single journal voucher generally concerns either: 1. A non-routine, adjusting, reversing, or correcting transaction, such as a transaction to amortize and annual portion of patent costs. 2. A Summarization of a batch of routine transactions. 8.4 Chart of accounts: A chart of accounts is a coded listing of the account-assets, equities, revenues, and expenses pertaining to a firm. In addition to the account code, each listing in a sound chart of accounts describes the contents of an account, including the specific transactions that affect its balance. The composition of the chart of accounts is determined mainly by the information needs of external and internal users. These needs are reflected through the financial statements, other financial reports that must be designed first. 8.4.1 Classification within the chart of accounts: A firm’s of accounts should provide sufficient classifications to allow analyses of transaction data as needed. For instance sales transactions should be classified in a manner that enables the output of information concerning the region where the sales took place as well as the product lines should. A firm must also consider the information needs to external parties for example; accounts must be classified to meet the requirements of governmental agencies. Finally accounts classifications should also reflect the activities and customers of the industries in which the firms reside. Chapter – 9 ACCOUNTING INFORMATION SYSTEM OF VISION LIVING LTD ACCOUNTING INFORMATION SYSTEM OF VISION LIVING LTD 9.1 INTRODUCTION: Vision Living Limited (VLL) is the local company who dares to invest in Real Estate sector. Vision Living Limited is committed to cater to the growing residence care needs of the nation. This commitment demands immense social responsibility of ensuring quality Apartment of the highest strength, proper stability, excellent safety and super efficiency. Every stage of production, stringent control mechanism involving raw material testing, in process quality control, finished product testing as well as stability monitoring and documentation is maintained. VLL utilizes AIS in which the bookkeeper, clerks, cashiers and others perform all the activities. The AIS of VLL can be described under the following cycles. 9.2 REVENUE CYCLE ACTIVITIES: The revenue cycle activities consist of four activities: • Sales Contract • Billing • Cash collection • Handover of Flat The activities are shown in a graph in the next page. 9.2.1 SALES CONTRACT: This is the first step in the revenue cycle. This function includes all the activities involved in soliciting and processing customer orders.
• •
Bank Directly
9.2.1.1 Sales Contract Information: An internally generated document prepared from the contract sheet, which lists. • • • •
The Unit numbers Area Prices Terms of the sale
One copy of it is kept in the sales section, another copy is sent to the customer. Copies are also sent to the billing department. Order
Customer Acknowledgement
Receive & enter sales order Approve Contract
Handover of Flat to customer
Sales data
Customer Sales invoice
Sales Billing General ledger reporting system
Remittance
Cash Collectio n
Figure: Revenue cycle of Vision Living Ltd.
Cash receipt
9.2.1.2 KEY DECISION & INFORMATION NEEDS: • • •
About inventory availability Customer credit status Decision concerning credit policies including the approved of credit forward customers and increasing the credit limits of exciting customers are made.
9.2.1.3 RELATED ACTIVITIES OF THIS STEP: The three main activities are involved: • Responding to customer inquiries-customer inquiries are handled directly by the sales assistants. • Inquiries about current account balances. •
Credit approval is required in case of credit sale.
9.2.1.4 DOCUMENTATION: Related document and records of the order entry function are as follows: Order sheet: • Name & address of the party • Name & address of the intermediary bank advances that are made by customers • Advances that are made by customers • Date of Flat handover etc. 9.2.2 BILLING: Bill is prepared before the handover date. In case of direct sales bill are prepared first as per the contract form. Flats are handover after receiving the money in cash or through demand draft (DD). 9.2.2.1 Information needs: Accurate billing for flat handover or that is to be handover is required. 9.2.2.2Documentation: Sales register: • •
Sales are transferred to the sales register The monthly statement summarizes all transactions during the past month & informs customer of their current account balances.
9.2.3 CASH COLLECTIONS: This is the last step in the revenue cycle. Here the cashier handles the remittances and deposits it in the bank; the customer accounts are credited for payments received. In case of sales through bank; the intermediary bank collects money from the customer, bank issues DD in favor of VLL. Again in case of credit sales the department collects money from customers. The sales department issue money receipt in this regard.
Documentation: Money receipt (MR): Receipt that is issued to the bank/ customers on receipt of cash, check, DD etc. The account clerk also prepares • Remittance list • Bad debtors list • Doubtful debtors list etc. 9.2.4Handover of Flat: Each Flat contains• Name & Address of the party • Name & Address of the bank through which the sales are made. But in case of direct sales, Flats are handover after receiving cash or DD for the amount cited in the bills. Information: Accurate information is regarding for flat handover. Chapter-10 FINANCIAL PERFORMANCE ANALYSIS OF VLL Analysis of Financial Statement 10.1 Introduction: Financial statement analysis involves careful selection of data from financial statement for all primary purpose of forecasting the financial position of the company. This is accomplished by examine trends in key financial data comparing financial data across companies and analyses key financial ratios they constitute a report on managerial performance attesting to managerial success or failure and flashing warning signals of impending difficulties in this report I was collects five year balance sheet and other important ratio of that are used in attempting to predict the future course of events in the organization. Here I have collect balance sheet and income statement of Vision Living Limited and analysis their financial statement ratios with comments to predict the future course of action in this organization. Auditors’ Report of Vision Living Ltd. Auditor have audited the accompanying Financial statement of Vision Living Limited comprising balance sheet as at the 30th June, 2009 and the related income statement, statement of change in Equity, cash flow statement together with related notes and schedule there to the year ended. The preparations of these financial statements are responsibility of the company’s management. Their responsibility is to express an independent opinion on these financial statements based on their audit. They conducted their audit in accordance with the BSA. Those standards require that they plant and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. They include examining, on a test basis, evidence supporting the amount and disclosures in the financial statements. They also include assessing the accounting principles used and significant estimates and judgments made by the management, as well as evaluating the overall presentation of financial statements. They believe that their audit provides a reasonable basis for their opinion.
Their opinions, the financial statement, prepared in accordance with the BAS, give a true and fair view of the state of affairs of the company as at 30 th June, 2009 and of the results of its operation and its cash flow for the year then ended and comply with the companies act 1994 and other applicable laws and regulations. They also repot that: •
They have obtained all the information and explanations which to the best of their knowledge and belief were necessary for the purpose of their audit and made due verification thereof;
•
The company management has followed relevant provision of law and rules in managing the affairs of the company and proper books of account records and other statutory books have been maintained so far as it appeared from their examining of those books;
•
The company’s balance sheet and income statement deals with by the report are in agreement with the books of account and returns.
Approach to Analysis The financial statements are analyzed and interpreted by differences classes of persons from different angles and to serve their respective purposes. am analysis of these statements, though the basic technique of appraisal remains the same in all the cases but the approach and emphasis in analysis vary. Approach to the analysis of these statements is essentially different from that of the investors and the management. As a lender and creditor of his/her borrower/customers, interested in assessing the solvency or the repaying capacity of the borrower as is evident his/her financial statements. I was analyses and interpret the financial statements so as to evaluate: •
The financial soundness and stability.
•
The liquidity position.
• The profitability or earning capacity of the borrowing concerned. Analysis of balance sheet and profit and loss accounts of the company, it is most important financial statement prepared annually. There are two stages in the evaluation of the financial statements: 1. The analysis of the balance sheet, i.e., examining of individual items of assets and liabilities and their classification into well-define categories 2. Interpretation of the balance sheet of the ratio analysis But analysis to the second one that means ratio analysis of the company. And find out the current position of the company. Turnover & other Income Brought -in-Materials & Services
2009 97,103,666 22,376,727
%
Value Added
1,374,726,939
100
2008 34,893,735 87,826,683 1,147,067,05 2
APPLICATIONS Retained by the Company Salaries and Benefits to Employees Interest to Lenders
8,453,100 5,976,823 2,054,306
15 21 13
7,550,839 3,765,125 6,601,506
%
100
18 21 14
Dividend to Shareholders Duties & Taxes to Govt. Exchequer
1,928,750 713,960
12 39
1,775,000 504,582
9 38
Total
1,374,726,939
100
1,147,067,05 2
100
10.2 TOOLS OF FINANCIAL STATEMENT ANALYSIS Various tools are used to evaluate the significance of financial statement date. Three commonly used tools are these: o o
Horizontal analysis evaluates a series of financial statement date over a period of time. Vertical analysis evaluates financial statement data by expressing each item in a financial
Vision Living Limited Vertical Analysis of Financial Statement As at 30 June, 2009 30-06-09
30-06-08
amount
%
amount
%
Income Statement Net Sales Revenue Cost of Goods Sold Gross Profit
2,402,700,962 1,430,590,446 972,110,516
100 59.54 40.45
2,183,829,795 1,355,748,848 828,080,947
100 62.08 37.91
Operating Expanses: Administrative Expenses Selling and Distribution Expenses
470,837,493 88,095,645 382,741,848
19.59 3.66 15.92
397,998,572 84,329,332 313,669,240
18.22 3.86 14.36
Profit form operations other Income Finance Cost Net Profit Before Contribution to WPPF Contribution to workers Profit participation
501,273,023 5,298,876 172,054,306 334,517,593
20.86 0.22 7.16 13.92
430,082,375 3,318,590 156,601,506 276,799,459
19.69 0.15 7.17 12.67
15,929,409
0.662979
13,180,926
0.60
Net Profit Before Tax Income Tax Expense Current Tax Deferred Tax Income/(Expense)
318,588,184 24,285,250 28,469,983 -4,184,733
13.25 1.01 1.18 0.17
263,618,533 56,478,167 38,975,206 17,502,961
12.07 2.58 1.78 0.80
Net profit After Tax 294,302,934 Earning per Share 5.26 Number of share used to compute EPS 55,976,250 statement as a percent of a base amount.
12.24 2.19 2.32
207,140,366 4 55,976,250
9.48 1.69 2.56
o
Ratio analysis expresses the relationship among selected items of financial statement data.
Vision Living Limited Vertical Analysis of financial Statement Income Statement: Vertical Analysis of the income statements shows the following changes, vertical analysis of Vision Living Limited shows in illustration I see that cost of goods sold as a percentage of net sales decline 62.08% to 59.54%. Vision Living Limited Vertical Analysis of Financial Statement As at 30 June 2009 Date Balance Sheet ASSETS Non-Current Assets Property, Plant & Equipment -Carrying value Investment in shares Current assets Inventories Accounts Receivable Loans Advance & Deposits Cash and Cash Equivalents Total Assets Equity and Liabilities Shareholders Equity Issued share capital Share premium Tax-Holiday Reserve Retained Earnings Non- Current Liabilities Long Term borrow or Gratuity & WPPF Deferred Tax Liability Current Liabilities & Provisions Customs Debentures Short term Borrowing from Banks Long term borrowing-Current Maturity Creditors & Other Payables Accrued Expenses Dividend Payable Income Tax Payable Total Liabilities &shareholders' Equity
30-06-09
30-06-08
amount
%
amount
%
6,088,867,207
71.12
5,940,092,996
74.13
6,043,243,087 45,624,120
70.59 0.53
5,895,916,746 44,176,250
73.58 0.55
2,471,513,225 1,394,794,907 600,028,183 468,680,833 8,009,302 8,560,380,432
28.87 16.29 7.00 5.47 0.09 100
2,072,764,870 1,143,710,812 499,677,576 424,464,615 4,911,867 8,012,857,866
25.86 14.27 6.23 5.29 0.06 100
483,4747,661 559,762,500 1,489,750,000 445,355,048 2,339,880,113 2,066,372,169 1,864,767,749 158,595,611 43,008,809 1,659,260,602 1,758,387 1,121,910,904 256,179,379 170,176,125 81,230,153 1,065,437 26,940,217 8,560,380,432
56.47 0.06 17.40 5.20 27.33 24.13 21.78 1.85 0.50 19.38 0.02 13.10 2.99 1.98 0.94 0.01 0.31 100
4,596,420,977 508,875,000 1,489,750,000 1,090,052,509 1,507,743,468 2,186,575,901 1,996,908,089 142,474,270 47,193,542 122,986,988 1,758,387 939,872,641 39,313,860 139,591,269 81,568,363 1,206,751 26,549,717 8,012,857,866
57.36 6.35 18.59 13.60 18.81 27.28 24.92 1.77 15.34 0.02 11.72 0.49 1.74 1.01 0.01 0.33 100
• • • • • •
Gross profit increased from 23.96% to 17.07% of net sales revenue Operating expenses increased from 13.37% to 16.52% Administrative expenses increased from 8.29% to 9.74% Income tax expenses decreased from 1.97% to 0.21% Net profit after tax increased from 0.85% to 1.00% Earning per share increased from 0.08% to 1.00%
Comment: Vision Living Limited appears to be a profitable enterprise that is becoming even more successful. Balance sheet: Vertical analysis shows the relative size of each category in the balance sheet. It also can show the percentage change in the asset, liabilities, & stockholders equity items. Vertical analysis of the balance sheet statements shows the following changes. Assets-I can see that in 2008 to 2009 non-current assets decrease from 74.13% to 71.12% of total assets Current assets :( 1) inventories- increased from 14.27% to 16.29% of total assets. Accounts receivable- increased from 6.23% to 7.0% of total assets. Loan and advance- increased from 5.29% to 5.47% of total assets.
Equity & liability: Share holders’ equity decreased from 57.36% to 56.47% of total liability & share holders’ equity. Issued share capital- decreased from 6.35% to 0.26% of total liability & share holders’ equity. Share premium decreased from 18.59% to 17.40% of total liability & share holders’ equity. Retained earning increased from 18.81% to 27.33% of total liability & share holders’ equity. Long-term borrow decreased from 24.92% to 21.18% of total liability & share holders’ equity. Accrued expenses decreased from 1.02% to .94% of total liability & share holders’ equity. Dividend payable decreased from 0.02% to 0.2% of total liability & share holders’ equity. Income tax payable decreased from .33% to .31% of total liability & share holders’ equity.
Comment: Vision Living Limited choosing to finance through to retained earnings rather than through issuing additional debt.
Vision Living Limited Horizontal Analysis of Financial Statement As at 3o June 2009 increasing or decreasing Date
30-06-09 Amount
30-06-08 Amount
Amount
2,402,700,962 1,430,590,446 972,110,516
2,183,829,795 1,355,748,848 828,080,947
218,871,167 74,841,598 144,029,569
10.02 5.52 17.39
397,998,572 84,329,332
72,838,921 3,766,313
18.30 4.46
382,741,848
313,669,240
69,072,608
22.02
Profit form operations Other Income Finance Cost Net Profit Before Contribution to WPPF Contribution to workers Profit participation
501,273,023 5,298,876 172,054,306
430,082,375 3,318,590 156,601,506
71,190,648 1,980,286 15,452,800
16.55 59.67 9.86
334,517,593
276,799,459
57,718,134
20.85
15,929,409
13,180,926
2,748,483
20.85
Net Profit Before Tax Income Tax Expense Current Tax Deferred Tax Income/ (Expense)
318,588,184 24,285,250 28,469,983
263,618,533 56,478,167 38,975,206
54,969,651 -32,192,917 -10,505,223
20.85 -57.00 -26.95
4,184,733
17,502,961
-13,318,228
-76.09
Net profit After Tax Earning per Share Number of share used to compute EPS
294,302,934 5.26
207,140,366 4
87,162,568 2
42.07 42.16
55,976,250
55,976,250
0
0
Income Statement Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expanses: Administrative Expenses Selling and Distribution Expenses
470,837,493 88,095,645
%
Vision Living Limited Horizontal Analysis of financial Statement Income Statement: Horizontal analysis of the Income Statement shows the following changes.
Vision Living Limited Horizontal Analysis of Financial Statement As at 30June, 2009 Date
30-06-09
30-06-08 increasing or decreasing Amount %
Balance Sheet ASSETS Non-Current Assets Property, Plant & EquipmentCarrying value Investment in shares Current assets Inventories Accounts Receivable Loans, Advanced & Deposits Cash and Cash Equivalents Total Assets Equity and Liabilities Shareholders Equity Issued share capital Share premium Tax-Holiday Reserve Retained Earnings Non- Current Liabilities Long Term borrow or Gratuity & WPPF Deferred Tax Liability Current Liabilities & Provisions Customs Debentures Short term Borrowing from Banks Long term borrowing-Current Maturity Creditors & Other Payables Accrued Expenses Dividend Payable Income Tax Payable Total Liabilities &shareholders' Equity •
6,088,867,207
5,940,092,996
148,774,211
2.50
6,043,243,087 45,624,120
5,895,916,746 44,176,250
147,326,341 1,447,870
2.49 3.27
2,471,513,225 1,394,794,907 600,028,183 468,680,833 8,009,302 8,560,380,432
2,072,764,870 1,143,710,812 499,677,576 424,464,615 4,911,867 8012857866
398,748,355 251,084,095 100,350,607 44,216,218 3097435 547,522,566
19.23 21.95 20.08 10.41 63.06 6.83
4,834,747,661 559,762,500 1,489,750,000 445355048 2,339,880,113 2,066,372,169 186,476,749 158595611 43,008,809
4,596,420,977 508,875,000 1,489,750,000 1090052509 1,507,743,468 2,186,575,901 1,996,908,089 142,474,270 47,193,542
238,326,684 50,887,500 0 -644,697,461 832,136,645 -120,203,732 -132,140,340 16,121,341 -4,184,733
5.18 10 0 -59.14 55.19 -5.49 -6.61 11.31 -8.86
1,659,260,602 1,758,387
1,229,860,988 1,758,387
429,399,614 0
34.91 0
1,121,910,904
939,872,641
182,038,263
19.36
256,179,379 170,176,125 81,230,153 1,065,437 26,940,217
39,313,860 139591269 81568363 1206751 26549717
216,865,519 30,584,856 -338,210 -141,314 390,500
551.62 21.91 -0.41 -11.71 1.47
8,560,380,432
8,012,857,866
547,522,566
6.83
Net sales revenue increased from 2008 to 2009 218871167 or 10%.
• • • • • • • • •
Cost of good sold increased 5.52%. Gross profit increased 17.39%. Operating expanses increased 18.30% Administrative expenses increased 22.02% Other income increased 59.67% Finance cost increased 9.86% Income Tax Expense decreased 57.00% Net profit after tax increased 42.07% Earning per share increased 42.16%
Balance Sheet: Horizontal analysis of the balance sheet statements shows the following changes. Vision Living Limited finance structure from 2008 to 2009 in the assets section non current asset increased 2.50% • • • • • • • • • • • •
Property, Plant, & equipment-carrying value increased 2.49% Current assets increased 19.23% Inventories increased 21.95% Accounts receivable increased 20.08% Loans, advance & Deposits increased 10.41% Total assets: Shareholders equity increased 10% Retained earnings increased 55.19% Long term borrow decreased 6.61% Accrued expenses decreased 0.41% Dividend payable decreased 11.71% Income tax payable increased 1.41% Total Liabilities & shareholders equity increased 6.83%
Here I see that the company expanded its assets during 2009 and financed this expansion primarily by retained earning income rather than long term debt. Ratio Analyses: Ratio analysis is undertaken to intercept the data to derive useful conclusions. Ratios show in arithmetical terms the relationship between figures drawn from the financial statements. Ratio analysis is useful only when the figure selected for comparison or for establishing the ratio are relevant to each other and have meaningful relation. Ratio analysis will prove much more useful if ratios are computed for a number of the consecutive years so that definite trend may be noted and interpreted. Several types of ratios may be worked out from the financial statements. No one ratio will give a clear picture of the inherent soundness or weakness of a business unit. I am calculates the several ratio analyses that are the describe below: Current ratio This ratio between the current assets and the current liabilities is known as the current ratio. If the current assets are larger than the current liabilities, the borrower ability to meet his current liabilities without default may easily be established. The current ratio shows the short-term financial strength of a business concern. This ratio of 2:1 is generally considered quit satisfactory as the current liabilities are sufficiently covered by the current assets and the surplus is a short of buffer for the creditors. This is true from the viewpoint of a creditor but not from that of product management, because excess of cash balance or stock-in-trade over what is needed, may not be considered desirable by the
management. The current ratio may also fluctuate because seasonal characteristic of business. This ratio is to be calculated The current ratio =
Total Current Assets Total Current Liabilities
Now I analysis of two years current ratio of the Vision Living Limited, follow their financial statements. These analyses are below: Current Assets Current Liability
Current Ratio 2009 =
2471513225 = 1659260602 Current Ratio 2008 =
= 1.48
Current Assets Current Liability
=
2072764870 = 1.6 1229860988
Note: This ratio is indicating the company has how much current asset to repay their current liabilities. This ratio of 2:1 is the satisfaction level of the creditors. But my analysis of the financial statements, I see that this ratio is standard of the satisfaction level to the investors. But the management wants to do properly manage the current assets and current liabilities. Quick Ratio This ratio is the similar to the current ratio except that the inventories are excluded from the current assets because they may not be so easily marketable assets as the other liquidity assets are. This ratio measures the short-term liquidity of a business concern. The quick ratio establishes a relationship between readily marketable assets and the current liabilities. It provides a better indication of the liquidity position and repaying capacity of borrowing concern than the current ratio. This ratio of 1:1 is generally considered excellent, as the liquid assets will be considered sufficient to meet the current liabilities. This ratio is to be calculated: The quick ratio =
Total Current Assets - Inventories Total Current Liabilities
Now I analysis of two years quick ratio of the Vision Living Limited Ltd, follow their financial statements. These analyses are below: Quick Ratio 2009 =
Current Assets - Inventory Current Liability
2471513225 −1394794907 1659260602 = 0.64 =
Quick Ratio 2008 =
Current Assets - Inventory Current Liability
=
2072764870 −1143710812 1229860988
= .75 Note: The quick ratio is the important of the analysis of the financial statements. This ratio is indicating how much quick asset to repay their current liabilities. This ratio of 1:1 is standard of the analysis of the financial statements. I am analysis of their financial statements and find out their quick ratio. It is not standard for the quick ratio. This ratio is the less for their standard to repay their current liabilities. I am analysis of their statements and saw that they large amount of the inventory to their current assets. Return on assets The return on assets (ROA), often called the return on investment (ROI), measures the overall effectiveness of management in generated profits with its available assets, the better. The return on assets is calculated as following: Return on assets = earning after taxes/ total assets Now my analysis of two years return on assets ratio of the Vision Living Limited, follow their financial statements. These analyses are below: earning after taxes Return on assets 2009 = total assets 294302934 = 8560380432 = .034 earning after taxes Return on assets 2008 = total assets 207140366 = 8012857866 = .026 Note: The return on assets ratio is the important of the analysis of the financial statements. This ratio is indicating how much earn to company for their total assets. I am analysis of their financial statements and find out their return on assets and analysis of their statements and saw that their return on assets ratio is increase. So in this case the company position is good. Fixed Assets Turnover Ratio The fixed assets turnover indicates the efficiency with which the firm’s uses its assets to generate sales. Generally, the higher a firms fixed asset turnover, the more efficiently its assets have been used. This measure is probably of greatest interest to management, because it indicates whether the firm’s operations have been financially efficient. Fixed asset turnover is calculated as follows: Fixed asset turnover = sales/net fixed assets Now I analysis of two years total assets turnover ratio of the Vision Living Limited, follow their financial statements. These analyses are below:
Fixed Assets turnover 2009 =
Sales Net fixed assets 2402700962 = 6088867207 = .394
Sales Net fixed assets 2183829795 = 5940092996 = .37 Note: The fixed assets ratio is the important of the analysis of the financial statements. This ratio is indicating the efficiency with which the firm’s uses its assets to generate sales. I am analysis of their financial statements and find out their return on fixed assets, analysis of their statements and saw that their return on assets ratio is increase. So in this case the company position is good. Fixed Assets turnover 2008 =
Debt Ratio The debt ratio measures the proportion of total assets financed by the firm’s creditors. The higher this ratio, the greater the amount of the people’s money being used to generate profits. Debt ratio is calculated as follows: Debt Ratio =
Total Debt Total Assets
Now I analysis of two years debt ratio of the Vision Living Limited., follow their financial statements. These analyses are below:
Debt Ratio 2009 =
Debt Ratio 2008 =
Total Debt Total Assets 3725632771 = 8560380432 = .44or 44% Total Debt Total Assets = 3416436889 8012857866 = .43 or 43%
Note: This ratio indicates that the company has financed close to half of its assets with debt. The higher this ratio, the greater the firm’s degree of indebtedness and the more financial leverage it has. I analysis this ratio and see that higher this ratio. So in case the company position is good. Receivable Turnover Ratio This ratio is worked out by dividing the total credit sales during the year by the amount of the debtors outstanding at the end of the year. The ratio shows the extent to which credit is granted by the business concern to its buyers and also indicates the promptness with which the debts are realized. A low turnover of receivables means higher collection period and large amount of overdue. Sales Receivable Turnover ratio = Account Receivable Now I analysis of two years receivable turnover ratio of the Vision Living Limited, follow their financial statements. These analyses are below: Receivable Turnover 2009 =
Sales Account Receivable
2402700962 600028183 = 4.00 times =
Sales Account Receivable 2183829795 = 499677576 = 4.37 times
Receivable Turnover 2008 =
Note: Debtors turnover Ratio indicted the collection period amounts of overdue. A low turnover ratio is the highest period and large amounts of overdue, and high turnover ratio is the lowest period amount of overdue. I am analysis this ratio and find out their return, but I see that this turnover is decreasing every year. So in this case, their position is good.
Inventory Turnover Ratio This is usually computed as cost of sales divided by the inventory. Like the account receivable turnover ratio, the more liquidity the asset. The basic difficult with the accounts receivable turnover ratio and inventory turnover ratio as liquidity measure is that only focus on only one assets nearness to cash, and thus by themselves do not tell about the firm’s overall liquidity position. That really what we want to measure. Cost of Goods sold Inventory
Inventory Turnover Ratio =
Now I analysis of two years inventory turnover ratio of the Vision Living Limited, follow their financial statements. These analyses are below: Inventory Turnover 2009 =
Cost of Goods sold Inventory
=
1430590446 1394794907
= 1.02 Inventory Turnover 2008=
Cost of Goods sold Inventory
=
1355748848 1143710812
= 1.19 Note: I am analysis this ratio and find out their return, but I see that this turnover is decreasing every year. So in this case, the company’s position is not good. Net profit Margin Ratio The net profit margin measures the percentages of cash sales dollar remaining after all the cost of expense, including interest, taxes, and preferred stock dividends, have been deducted. The net profit margin is a commonly size measure of the firm’s net profit margin, the better. The net profit margin calculates as follows: Net Profit Net Profit Margin Ratio = Sales
Now I analysis of two years net profits margin ratio of the Vision Living Limited, follow their financial statements. These analyses are below: Net Profit Margin 2009 =
Net Profit Margin 2008 =
Net Profit Sales 294302934 = 2402700962 = .12 Net Profit Sales 207140366 = 2183829795 = .09
Note: Net Profit margin means the company pays all the expenditure and calculated the profit in the present year. I saw that this ratio is around 10.5%, it is the normal situation of the company. Gross profit Margin Ratio The gross profit margin measures the percentage of each sales dollar remaining after the firm has paid for its goods. The higher the gross margin, the better that is, the lower the relative cost of merchandise sold. The gross profit margin calculates as follow: Gross Profit Gross Profit Margin Ratio = Sales Now I analysis of two years gross profits margin ratio of the Vision Living Limited, follow their financial statements. These analyses are below Gross Profit Margin 2009=
Gross Profit Margin 2008=
Gross Profit Sales 972110516 = 2402700962 = .40 Gross Profit Sales
828080947 = 2183829795 = .38 Note: Gross Profit margin indicate the percentage of each sales dollar remaining after the firm has paid for its goods. I see the better position of the company. Operating profit margin ratio The operating profits are the profit earned by an enterprise out of its business operations and are derived by deducting for the gross profit all expenses necessarily incurred in the course of business operations, e.g., selling expenses, general and administration expenses, interest, rent, etc. The operating profits as a percentage of net sales during the year show the profitability of the enterprise. A comparison of the ratio for the last few years will show the trend of the profitability of the business
operations. The profitability is increasing, decreasing or constants. This ratio of the borrowing concern should be compared with that of other units in the same trade or industry to have a comparative views of the performance of the borrowing concern vis-à-vis similar other units. I calculate this ratio in the basis of; Operating Profit Operating Profit Margin Ratio = ×100 Net Sales Now I analysis of two years operating profit margin ratio of the Vision Living Limited, follow their financial statements. These analyses are below: Operating Profit Margin 2009 = (Operating profit/Net sales)*100 = (501273023/2402700962)*100 = 20.87% Operating Profit Margin 2008 = (Operating profit/Net sales)*100 = (430082375/2183829795)*100 = 19.69% Note: Operating Profit Margin Ratio is not net profit; it is indicates return of the profit basis of the operating cost of the company. This operating profit return is increases; it is the better position of the company. Profit margin before taxation This ratio is the similar of the previous one except in one aspect. It also takes into account other profits income and expenses of the business, besides the operating profits and expenses. For example interest earned on investments is not included in the operating profits, but is included in the case of this ratio. This ratio thus shows the overall profits before taxation of the business and it’s expressed as a percentage of net sales. It is an index of the overall profitability of the enterprise, exclusive of the liability of the taxation. The tax ability is deliberately excluded because net profit before taxation is a better criterion to judge the profitability of a business concern over a period of time, during which the taxation rates may not remain the same. I calculate this ratio in the basis of; Profit before taxation Profit Margin before tax = ×100 Net Sales Now I analysis of two years profit margin before tax ratio of the Vision Living Limited., follow their financial statements. These analyses are below: Profit margin before tax 2009 = (Profit before tax/ Net sales)*100 = (318588184/2402700962)*100 = 13.25% Profit margin before tax 2008 = (Profit before tax/ Net sales)*100 = (263618533/2183829795)*100 = 12.07% Note: Profit before taxation means the company doesn’t pay the tax but calculated the profit in the present year. I saw that this ratio is increasing; in this case it is the better position of the company. Interest coverage ratio The investor’s point of view, the profitability of the borrowing concern must be sufficient so as to ensure payment of interest there from. Investors interested to ascertain the times the amount of interested on loans and the earnings of the borrowing concern cover advances. If the profit record high fluctuations, larger interest cover is required by the bank. I calculated to be this ratio as the bellow: Net profit Interest coverage ratio = Interest debt
Now I analysis of two years interest coverage ratio of the Vision Living Limited, follow their financial statements. These analyses are below: Interest coverage ratio 2009 = Net profit/Interest debt = 294302934/172054306 = 1.71 Interest coverage ratio 2008 = Net profit/Interest debt = 207140366/156601506 = 1.32 Note: Interest coverage ratio is the more important of the ratio analysis. This ratio show the interest payment for the bankers, they have enough or not to pay the bankers loan. This ratio is depending upon the net profit of the company. I am analysis their financial statements, and find out percentages of the profit coverage the loan. Now the last year they have enough profit and also decrease their term loans. So company position is good to achieve the loans. Chapter-: 11 Conclusion & Recommendation Conclusion & Recommendation Conclusion Ratio analysis becomes complete if the actual ratios of a firm are compared with the average ratio of the company. It is important, not to rely on one single ratio for getting a complete idea about the soundness or weakness of the business firm because each ratio tells its own story and each ratio in conjunction with the others then tells a supplementary story. Ratio analysis may not be a precise technique for ascertaining operating, liquidity, and leverage etc., of the firm because the financial statements are prepared on the basis of certain accounting conventions. It is difficult to establish a standard ratio for the industry owing to the dissimilarities of the firms in the company in several respects like business policy and the knowledge of persons preparing such statements, etc. In that case, a comparison of actual ratios with the standard ratios would not be an accurate measure. The ratio technique is also used for forecasting the business position on the basis of their previous year’s ratios, but it does not cover uncertainty of the future and other economic changes, which cannot be seen from the financial statements. In spite of certain limitations the ratios if discriminatingly calculated and wisely interpreted can be a useful tool of financial analysis. Locations
Corporate Headquarter 15 Siaam Tower (Level#05), Dhaka Mymensing Road , Sector#03, Uttara, Dhaka 1230, Bangladesh. Tel:02-8922263,8911252 e-mail:admin@visionbd.com Web:www.visionbd.com
BIBLIOGRAPHY 1. Books, Journals and News paper Annual Report Vision Living Ltd. 2009 2. Web Site http://www.visionbd.com Beximco Corporate Headquarter 3. Edward Lee Summers: Accounting Information Systems, Honghton Miffin Company, and USA. 4. Real estate & housing association of Bangladesh (REHAB) 5. www.google.com 6. Real estate yellow pages. 7. Bangladesh House Building Finance Corporation, http://bhbfc.gov.bd/eknajar.html