Ahmad Hassan Textile Mills 2n3t25

Chapter#1

INTRODUCTION THE COMPANY AND ITS OPERATIONS The company was incorporated in Pakistan on 03 December, 1989 as a Public Limited Company. Its shares are quoted on Stock Exchanges in Pakistan. It is principally engaged in manufacturing and sale of yarn. The Company is also setting-up a Textile Weaving Unit The head office of the company is Multan. The company manufactures and exports the yarn. This is in fact spinning mill that buys cotton from outside and then converts into yarn. The company manufactures yarn of export quality. The major importers of yarn are America, Hong Kong, and Sirilanka. Major part of the sale involves exports. Local sales are very small in quantity, reason behind this is 15% sales tax that company has to pay on local sales, while on exports company has to pay only 1.25% with holding tax to government including some bank charges. More over some times thereof are chances of exchange gain and loss, which results from increase and decrease in foreign exchange rates.

MANAGEMENT OF THE COMPANY 

BOARD OF DIRECTORS Mian Muhammad Javed Anwar (Chairman) Mian Muhammad Parvez (Chief Executive) Mrs. Salma Javed Mrs. Wahe eda Parve z Mr. Muhammad Haris Mrs.Haleema Haris Mr. Muhammad Aurangzeb Mr. Manzoor Ahmad (Rep. N. I.T) Mr. Abdul Latif Uqaili (Rep. I.C.P)



S MANAGER:

Mr. Kamran Shahzad



COMPANY SECRETARY:

Mr. Shamsur Rahman

OTHER INFORMATION 

ED OFFICE: 46-Hassan Parwana Colony, Multan.



MILLS:



BANKERS:

Chowk Sarwar Shaheed, Distt. M.Garh Bank Al-Habib Limited.

Habib bank Limited.

Emirates Bank International Limited. Bank Alfalah Limited. Metropolitan Bank Limited.

AUDITORS OF THE COMPANY The auditors of the company are M/S Hameed Chaudhri and company. Ahmad Hassan Textile Mills Limited has head office in Multan. Company has a chairman, a chief executive, and five directors. The directors are responsible for: • Planning • Finance • Personnel • Exports The company has centralized management system. Except production, all major activities are performed in Head Office. Professional management manages the company. The relationship between workers management is cordial. The employees are quite satisfied with their management. The workers are drawing handsome salaries. The management is also satisfied with the performance of employees.

PLANT CAPACITY AND PRODUCTION 2001 Number of spindles installed 17640

17640

2000

Number of spindles Worked

17592

14708 Number of shifts

1092

Installed capacity

5788072

1095

4480782 (After conversion into 20/s count Kgs.) Actual production of Yarn

5193531

4653159 (After conversion into 20/s count Kgs.)



FINANCIAL YEAR

The financial year of the company begins from first October and ends at 30 th September.

FIVE YEARS FINANCIAL REVIEW AT A GLANCE YEAR

Sales Cost of sale

2001 2000 801123552 65937781

1999 59416355

1998 53343086

1997 454999407

8 48773901

9 52392746

5 48940170

389070984

5 8797638 17163880

3 70176096

4 44029161

65928423

28570898

7416772

25109125

4 101821104 27658406

7416772

25109125

18598988

19529529

19529529

15819022

169171197

2

7

7

2

71314717 0

Gross profit Profit/(loss)befor

2 38636574

e tax Profit/(loss) after 23054574

3 12922682

tax

Fixed Assets

Chapter#2

COMMERCIAL DEPARTMENT The commercial department involves two most important departments of the company i.e. purchase department and sales department. Mian Naveed Ahmed who is director of the company and one of the owners of company controls this important department. COMMERCIAL

PURCHASE DEPARTME

SALES DEPARTME

Purchase Department The purchase department is divided into to two sections, cotton purchase department and store purchase department.

PURCHASE DEPARTMENT

COTTON PURCHASE

STORE PURCHASE

Cotton Purchase Department Cotton purchase department is most important department in textile industry. Quality of yarn depends upon cotton that has been purchased. It becomes most important when there is business of export. There is no question of compromise on quality. Because your minor mistake may result in huge losses. Moreover you will loss your credibility. From director to cotton selectors all are involved in cotton purchase process. In AHMAD HASSAN TEXTILE Multan office cotton selector Mr.Qaisar Abbas is receiving maximum salary in the office.

The set up of cotton purchase department is as under

irector VICE PRESIDENT FIELD (i) MANAGER COTTON SELECTOR

Purchase Process The following steps are involved in the purchase of raw material i.e. cotton.

Demand of purchase from mill Purchase Requisition

Sample from different suppliers and quotations Sample Testing Decision-making

Agreement with the Party Receiving Writing delivery order for factory

InGate + D.O + Purchase Invoice + Purchase Requisitions are supplied to s department

Visit of cotton selectors The cotton selectors of Ahmad Hassan Textile Mills visit the cotton factories. Cotton selectors may visit the factories on their own behalf and some times the cotton factories call them. Their visits are very important because purchase process starts from here.

Selection of sample Samples are selected from huge amounts of cotton. Samples are taken from different suppliers. These samples are then tested. The most suitable sample at lowest price is selected for Purchase of cotton. As there is centralized management system so the Director himself takes the decision of selection and purchase of cotton. In other words Director is final authority in making decision.

Store Purchase Department The store purchase department is headed by Mr. Zafar Bhutter. The setup of purchase department is as under:

Director Purchase Officer Assistant Purchase Officer Purchase Clerk The store purchase department is responsible for the purchase of items like Spare parts of machinery, store and Packing material spares, electric items, oil and lubricants, Stationery items, Building Material, and General Store,

DOCUMENTS • Demand Requisition. • Invoice of Purchase • Delivery Order • In Gate

PROCEDURE The following is the procedure for local purchase department. The purchase department receives the demand requisition from store in charge at store at mills this is in fact an intention or requirement of commodities at mill The purchase demand requisition contains a full detail of quality and quantity of commodities required. It also contains price detail of goods purchased previously The purchase department on the basis of indent does an inquiry for rate from at least two suppliers from approved suppliers list. After inquiry Purchase Manager discusses with Director for approval of rate and other necessary requirement. After the approval the Purchase Department purchases the items from suppliers and sent them to the mill with three copies of delivery orders In case of no rejection of items store in charge send one copy of delivery order back to the purchase department along with one copy of In Gate . Store in charge also keeps a copy of delivery order and in Gate for his own record.

In case of rejection of items store in charge sends all copies of Delivery Orders with items back to the purchase department at Multan Office of Ahmad Hassan Textile.

Chapter#3

SALES DEPARTMENT Sales department is one of the important departments in any industry. If a unit produces best quality goods but have not competitive staff then it would be difficult to sell the products. The structure of sales department is as under.

Director Manager Local Sales

Manager Export

Commercial Asst

Export Asst

Ahmad Hassan Textile Mills is selling its product to local as well as in international market. Thus the sales department of the Ahmad Hassan Textile Mills is divided in to two sections

Sales Department

Local sales Deptt

Export Deptt

Local Sales Department In the beginning Ahmad Hassan Textile Mills Limited its major portion of product to the local market and then it gradually entered in the international market. In 1991 ratio of local sales to total sales was 97.74% but this ratio decreased to 44.90%to total sales of the year 1997.

Procedure • The following activities are performed in the local sales department. • The directors receives the order of yarn by Tele phone, fax or e.mail. • Directors evaluate the capability to fulfill the order by consulting daily stock repot from mills. • Directors give the instructions to local sales manager that transfer the information on local sale contract slip. • Before issuing contract slip, sales manager checks the selling limits of the particular party and discusses the matter with Director if it is selling limit • Sales department writes the three copies of delivery order signed by director • One copy is dispatched to the mill for issuing goods . after reading the particulars of delivery order store in charge in the factory will issue the goods . • One copy of delivery order is send to the s department and third one is kept for record.

Chapter#4

EXPORT DEPARTMENT Ahmad Hassan Textile Mills started sales from local market and now major portion of Production is exported outside Pakistan. The export sales of the company went up 55.08% in 1997 from 2.26 % in1991. The export department is headed by Mian Shahzad Ahmed who is director of the company .The structure of this department is as under:

Director Manager Export Export Assistant Typist

Export Process The export process starts from bargaining. A buyer s the company for the purchase of yarn. The may directly or through middleman. When the price and quality of yarn is settled then form is filled. The director of the company settles the and conditions. After the settlement of and conditions the buyer bank opens L.C. L.Cis of two types. L.C at sight and L.C at usance. L.C at sight means the L.C opening bank shall make the payment as soon as the shipping documents are presented on its counter by the negotiating bank. On the other hand L.C at usance has different periods of maturity varying from 30 days to 150 days. On receiving original L.C from buyer, seller will dispatch the goods as per detail given in the L.C. After shipment usually following documents are presented to negotiating bank for onward submission to L.C opening bank counter: 1. Commercial Invoice 2. Bill of Lading 3. E Form 4. Bill of Exchange 5. Certificate of Origins 6. Benificiary’sCerificate 7. Certificate from Shipping Company 8. Packing List

1. Commercial Invoice It is a sort of list which shows what are they exporting showing the

1. Contract 2. LC 3. E Form 4. Shipping Company Name This commercial invoice is sent to the buyer’s Central Bank. One copy of this invoice is kept in Ahmad Hassan Textile Mills.

2. Bill of Lading It is a list of goods issued by the shipping line stating that the goods have been loaded on board, freight prepaid and other specifications

3. E Form Form E is the basic document of export. Government controls foreign exchange through this document. This is most important document. Exporter fills and signs it. Bank also counter signs this form It has four copies The original and duplicate copy is sent to the Custom Department for clearance. After verification the custom department sends the duplicate to Ahmad Hassan and original copy is held by Custom department. The third copy is sent to the negotiating bank. The fourth copy is office copy

4. Bill Of Exchange A bill of exchange has been defined as an unconditional order in writing by one person to another, signed by the person giving it , requiring the person to

whom it is addressed to pay on demand or at a fixed or determinable future time , a certain some of money to or to the order of a specified person or to the bearer

5. Certificate of Origin Chamber of commerce and industry issue this certificate. This certificate only certify the origin

6. Beneficiary’s Certificate Seller as required by the buyer issues beneficiary’s certificate. Usually the wording of this certificate is as following: “Certified that goods have been shipped per vessel, shipping company name and the shipping documents have been dispatched to the applicant under L.C#____

7. Certificate from Shipping Company Shipping company issues this certificate on the request of buyer.

8. Packing List Packing list contains the detail of all the items being exported. This list shows the carton number, goods description, and gross and net weight of total cartons and each carton

Chapter#5

IMPORT DEPARTMENT Ahmad Hassan Textile has also an import department. The import department is responsible to import those items, which are not available in Pakistan. The structure of this department is as under:

Chief Executive Director Senior Manager Import Assistant

Procedure Senior Manager is responsible for import of machinery, equipment, spare parts, raw material, etc. • An indent for import of item after the approval of Chief Executive is sent to import department. • The Senior Manager Import selects a subcontractor from approved suppliers list.

• In reply, a quotation from the subcontractor is received .A copy of quotation is sent to concerned department for evaluation and checking of specification. • The received items are sending to the mills where these are opened. The items are checked against quotations. In case of any damage, the import department is informed immediately. Import department do the necessary arrangements for survey of goods from insurance agencies

Chapter # 6

S DEPARTMENT ing is the art or science of interpreting, measuring, and communicating the results of economic activities whether you are paying your phone bill, balancing your checkbook, preparing your income tax return or managing an international corporation, you are working with ing. s Manager makes the important financial decisions with consultation of Director and Chief executive of company. Record of all departments like import department, Export department, Purchase and sale department, are maintained here. So this department feels a burden of work. ant is very much busy person who gives instructions to six of finance department and checks their work time-to-time .His ten-year experience has made the work easier for him. All types of tax rates, recent changes in tax policies, different codes, companies’ names are on his fingertips. The s department is responsible for the entire ing process of the organization regarding the recording of transactions, deg the ing policies and ing system, preparing financial statements and computer application. If we consider a company a cell then we can say that s department has role of nucleus. Without s department there is no possibility of doing business even sight weakness’ on the part of s department can badly effect the performance of whole organization.

Functions of the Department Very first and an important function of ing department is recording the business transactions on vouchers. This is also called process of vouching. This is made for internal record keeping. Auditors specifically audit vouchers. Wrong vouching will lead to error in the system and ultimately create problems. From vouchers information is recorded in daybook and cashbook. As each voucher along with its invoice, DO and other necessary documents are kept in the record room so daybook is one that can give information about parties DR and name of CR along with amount. In order to see s in condense form ledger is used. From daybook all the entries are posted in ledger. Ledger represents DR or CR balance of each party. So from ledger we can see amount that is to be paid to a party or the amount that is to be received and the balance at the end of the month. After this all the DR balances and CR balances of all the parties are posted in trial balance. The trial balance must be equal at both sides. Otherwise there is any error in recording the transactions. Now trial balance becomes the source of profit and loss and balance sheet. This department also designs the ing policies. All the work in this department is being take place on accrual basis. The department prepares trial balance at the end of every three months and Profit and loss s and balance sheet are prepared at the end of year. The financial year ends on september30 of each year. The financial statements are presented to shareholders

The Setup of Department Chief ant ant Asst ant Computer Operator Cashier Record Keeper The ing department is mainly divided in to following three sections:

1. Stores section 2. Salaries and Wages Section 3. General ing

Store Section: Store section is mainly concerned with store ing. This section deals with many s heads that are concerned with stores. Such as stores &spare A/C, oil and Lubricant, Packing material A/C, General Store A/C, Building Material A/C and many others. The major responsibilities of this department are • To record the store purchases • To record all store issues • To prepare various reports relating to store i.e. material consumption report, party wise purchase report To keep a check on all stores by surprisingly checking their record and physical existence of items stored. Because of the above mentioned duties. This section has a key position in the company. No payment is made to any body unless it is checked and verified by this section.

Salaries and Wages Section This section is responsible of making payments to the employees. This section plays an important role in safeguarding the interest of the company as well as employees. This section also insures all the labor laws; certain laws relating to company are as under:

Leave Procedure There are three types of leaves.

Sick Leaves Sick Leaves are eight in year

Casual Leaves Casual Leaves are ten in each year

Annual or Earned Leaves There are twelve earned leaves. Company’s rule doesn’t allow any employee to do four-day leave without application. In case any employee does so then he can’t avail annual leaves

Attendance Allowance Leave encashment is given to those employees who save their holidays and don’t avail them. This is given according to their per day salary multiply with number of days of holidays not availed.

Salaries and Wages Minimum salary is not less than Rs1950. The breakup of salary is as under Basic Salary

________

Badli allowance

50

Cost of living Allowance

18% of basic salary

House Rent Allowance

10%of basic salary

Utility Allowance

10% of basic salary

Special Allowance

300

Income Tax Income tax is deducted from salary of all those employees whose annual salary is greater than Rs.40000.An entry is ed on voucher while deducting income tax and this is paid to tax department

Advances and Loans Advances and loans are given to the Employees on their application and are adjusted against their salaries every month. It is the sole discretion of the management whether they approve advances and loans are not

Gratuity Amount of gratuity is deducted from salary of employee with age of time and he gets a lump sum amount at retiring time

ing System ing System at here is centralized and on accrual basis. All s are maintained in Multan head office. The process of ing system starts from the preparation of voucher. The following are different types of vouchers prepared at Ahmad Hassan Textile Mills:

• Journal Voucher • Bank Voucher • Payment Voucher • Credit Voucher

Journal Voucher (JV) As ing system is on accrual basis, so ing entries are ed on journal voucher at first step. This is also known adjustment voucher. This is prepared for adjusting entry. Vouchers are prepared after every transaction. s Manager and Director the voucher respectively. If they have any question they can ask relevant person if there is no enquiry then they will put their signatures on voucher. Now it is time to record these vouchers in books of s.

Bank Voucher (BV) Bank voucher is used when any transaction is made with bank . Amount may be drawn from bank and can be deposited in bank. You can receive DR advice or CR advice from bank

DR Advice When issued by bank, it means bank has deducted some amount from your or when has been made through your

CR Advice When issued by bank to you, it means some amount has been added in your .It normally takes place when some foreign remittances has been received by bank in your . This is usually sent by your customer in foreign country to which exports has been made.

Payment Voucher This voucher is prepared at the time of making payments to any party. Party name is debited with the amount to which payment has been made. Payment vouchers are used for the payment up to Rs.5000. Payments more than this are made through bank

Credit Voucher As name of voucher represents, this voucher is prepared when some amount is received from any party. In this case party name is credited by the amount that has been received

Important Books • Cash Book • Bank Book • Bought Day Book •

Sale Day Book

Cash Book In this book cash payment and cash receipt vouchers are recorded on daily basis. The vouchers are numbered serial wise and cash-closing balance is calculated on daily basis.

Bank Book This book is maintained for all the bank s of the company. When any amount is withdrawn or deposited in the bank that amount is also recorded in the bankbook. At the end of month bank is reconciled with the statements of the banks

Bought Day Book The bought daybook is maintained for recording the purchases made by the company. The balances from the bought daybook are entered in the relevant supplier ledgers. At the end of the month the balances from the bought day book is posted in the main ledger for control purposes

Sale Day Book In this book sale bills are entered and then posted in the customer ledger. At the end of month balances are posted in the main ledger for control purposes. When the transaction is properly recorded in the books of s then these balances are posted in the ledgers. The following are the types of ledgers maintained in this organization.

Main ledger Profit &Loss Ledger Customer Ledger Supplier Ledger Staff Ledger

Main Ledger It is a control ledger, which maintain all heads of s from which balance sheet is prepared. All assets and liabilities ed, profit&loss, customer, supplier and personal Ledger are maintained in it. Posting of sub ledger is made in main ledger on closing of month. From basic books like cashbook, bank book, bought daybook and sale daybook. At the end of month trial balance is prepared to check the accuracy of s maintained during the month by observing the debit and credit balance as they are equal or not.

Profit and Loss Ledger: In profit and loss ledger all s of income and expenses are maintained .The following are the heads of s maintained in the profit and loss ledger:

• Sales  Local Sales  Export Sales

• Commission on sales • Excise duty on yarn • Export development Charges • Manufacturing Expenses • istration Expenses • Selling Expenses • Financial Charges • Miscellaneous Charges

Manufacturing Expenses They are like purchase of cotton, wages and salaries, fuel and power, insurance, repair and maintenance of plant, packing material and depreciation.

istration Expenses These are traveling expenses, salaries, communication expenses like fax, phone and telex, rent, electricity, entertainment, advertising, vehicleup charges, depreciation, printing and stationary expenses

Selling Expenses These include export expenses, corporate freight, ocean freight, trailer freight and local selling expenses

Financial Charges They are like interest on long term loan , markup on short term finances , exchange risk coverage fee , commission on bank guarantees , letter of credit commission , excise duty on long term and short term finances.

Miscellaneous Charges Miscellaneous charges include auditors fee, legal and professional charges, donations, fines and penalties.

Customer Ledger It is maintained by company in which all s are opened to whom the company sells yarn. Posting in customer ledger is made from cashbook, bankbook and daybook. The balances of customers are worked out daily and the report of receivables is prepared daily and submitted to the management.

Supplier Ledger In supplier ledger the goods supplied by the parties is recorded. Party’s is credited and goods purchased are debited.

Personal Ledger To record all transactions relating to the personal s of employees of the company, this ledger is used. Advances and loans made to the employees, and the monthly deductions from their s of loans are recorded.

Illustration of important ing Entries Purchases: DR

CR

Packing Material 122740 Sale tax

18411 Ghani Packages

141151

Description:  Purchases of packing material from supplier (Ghani Packages).  Sale Tax amount is 15%of agreed amount.  Sale tax treatment is as expense because company is paying to supplier.  This entry is made on (JV) Ghani Packages 141151 I. Tax Payable

4296

MCB 1840—3

136855

Description:  This entry will be recorded on payment  Income tax rate is 3.5% on amount excluding sale tax i.e. (122740x3.5%)  Here income tax is collected from the party and paid to the CBR  Bank is credited because payment is being made and amount is reducing from bank .  The entry will be made on (B.V)  This entry is contra to first one

Sales: DR

CR

IDM 792350 Sale of Yarn 689000 Sale Tax

103350

Description  This is sale made to buyer (IDM)  Here again rate is 15%

(689000x15%)

 Sale tax is collected from the buyer and will be paid to sale tax department that is why sale tax is not treated as expense, but was credited  This entry will be made on (JV) Bank (1840—3) 764617 Advance I. Tax

27732

IDM

792350

Description:  This entry is made on receipts from buyer.  Advance income tax is paid to the buyer @3.5% on amount including sale tax.  I. Tax is calculated on amount excluding sale tax.  This entry will be made on (BV).

Adjustment of Realization: Name of Party:

Bolan Trading

Bank Ref:

53/102

Contract no:

010

Invoice Number:

027

Exchange Rate:

63.95

Calculation of amount of Realization in case of exports to Bolan Trading situated in America. $ Rs Invoice Value

37758.06

Realized Value

37713.06

Foreign Bank Charges 2878 Local Bank Charges 4035 Total Export Bank Charges 6913 With holding charges 30147 Credit Advice 2377568 Total 2441628 Sale Already Booked 2337224 Exchange Gain /Loss 77404

45.00

Calculation of with holding tax and Bank charges With holding Tax @ 1.25% Realized value X Exchange rate 37713.06 X63.95 = 241175X1.25%=30147 Bank Charges @ .13% Realized value X Exchange rate 37713.06X63.95= 241175X.13% = 3135 Postage

+900

Local Bank Charges

=

4035

Description This is calculation of exchange gain or loss. This gain or loss occurs due to change in foreign exchange rate, increase in rate result gain and decrease in rate result in loss. Invoice value is agreed price at which sale has been decided Realized value is the amount received after deduction of foreign bank charges

DR MCB

CR

2377568

With holding Export bank charge

30147 6913

Bolan Trading

2337224

Exchange gain

77404

Description  The amount Rs.2377568 is written on credit advice sent by bank  Bolan trading is credited with the amount written on sale invoice  Exchange gain is difference of sum of credit advice amount, withholding tax, export bank charges and sum of invoice value.  This entry is recorded on (B.V)

Chapter#7

INTERNAL AUDIT DEPARTMENT Audit means checking the s prepared by others with a view to express an opinion. An auditor is appointed to go through the ing and other records. Internal audit is essential for large-scale companies. It is a review of operations and records under taken within a business by specially assigned staff. The management can appoint staff to go through the business activities. The suggestions given by auditors can be applied for the business benefit. This organization has also a separate department for performing the internal audit. The internal auditor heads this department. The audit department develops audit program before conducting an audit. this department works on continual basis. The internal auditor of the company visits the mill on weekly basis and conducts the audit according to the checklist framed by the internal audit department. The department is responsible to keeps its eyes on the implementation of management policies. This department is also responsible to inform the top management regarding the accuracy of all ing information and their analysis

Main Functions of the Internal Audit Department Following are the main functions of internal audit department:

Revision of the System The internal audit department revises the system if there arises any discrepancy.

Check on the System The internal audit department checks whether the revised system is being followed or not, if there arises any deviation that is reported to the management.

Check on the Management Policies This department also examines whether management policies are being followed or not

Proper maintenance of books of s The internal audit department also examines that whether books are being properly maintained as required by the Companies Ordinance 1984. Assets Safeguarding This department also safeguards the company’s assets.

Main Functions of Internal Audit Department at the Head Office Multan. 

Checking of posting from clock cards to wages sheets



Price Checking



Recovery of advances



Checking of rebates and discounts



Continuous checking of assets of the company



Checking of Bank vouchers, Journal vouchers, Payment vouchers, Credit vouchers



Checking of trial balance statement after every three months.



Checking of bank reconciliation statements every month.



An internal auditor can check any document at any time or can ask the ant to provide the necessary documents.

Chapter # 8

RATIO ANALYSIS An index that relates two ing numbers and is obtained by dividing one number by the other. To evaluate a firm’s financial condition and performance, the financial analyst needs to perform “checkups” on various aspects of the firm’s financial health. A tool frequently used during these checkups is a financial ratio, or, index, which relates two pieces of financial data by dividing one quantity by the other. Why bother with a ratio? Why not simply look at the raw numbers themselves? We calculate ratios because in this way we get comparison that may prove more useful than the raw numbers themselves. For example, suppose that a firm had a net profit figure this year of $1 million. That looks pretty profitable. But what if the firm has $100million invested in total assets. Dividing net profit by total assets, we get$1M/$100M= .01, the firms return on total assets. The .01 figure means that each dollar of assets invested in the firm earned a 1 percent return. A saving provides a better return on investment than this, and with less risk. In this example the ratio proved quite informative.

Expression of Ratios: Ratios can be expressed in the following ways: • Actual ratios are arrived at by dividing one number by another e.g. current assets to current liability is 2:1

• Ratio between two numerical facts usually over a period of time e.g. Stock turnover is three times a year. • Ratio between two numerical may be expressed in percentage.

Advantages of Ratio Analysis. Through ratio analysis we can evaluate the financial health, operation efficiency and profitability. It gives a chance of inter firm comparison to measure efficiency and helps management to resort some remedial measures. Trend analysis helpful toward planning and forecasting. It provides good help in decision making for investors and to the financial institutions.

Classification of ratios: • Liquidity Ratios • Financial Leverage or Debt Ratios • Activity Ratios • Profitability Ratios

1. Liquidity Ratios Liquidity ratios are used to measure a firm’s ability to meet short-term obligations. From these ratios, much insight can be obtained into the present cash solvency of the firm and the firm’s ability to remain solvent in the event of adversity.

a.

Current Ratio:

One of the most general and frequently used of these ratios is the current ratio:

Formula: Current Assets/ Current Liabilities

Year

1999

2000

Ratio

.81

1.04

Description Above figures show that in 1999 firms ability to covers its current liabilities is much lower and firm has more current liabilities than its current assets. In year 2000 firm’s condition is much better than year 1999 and firm’s current ratio is 1.04. That shows, the firm has 1.04 times more current assets than current liabilities. The standard of this ratio is 2:1

b. Acid Test Ratio: A more conservative measure of liquidity is acid test or quick ratio. It shows a firm’s ability to meet current liabilities with its most liquid assets.

Formula. Current Assets-Inventories/Current Liabilities

Year Ratio

1999

2000 .42

.71

Description This ratio serves as a supplement to the current ratio in analyzing liquidity. This ratio is same as current ratio except that it excludes inventories. The ratio concentrates primarily on the more liquid current assets, cash, and receivables. In relation to current liabilities. Thus this ratio provides a more penetrating measure of liquidity than current ratio. Above figure show that in 1999 quick ratio is .42, which means company’s liquid assets, are less than ½ of its liabilities. While in year 2000 the condition is better than it was in 1999.The standard of this ratio is 1:1.

2. Financial Leverage (Debt) Ratios. Ratios that simply show the extent to which firm is financed by debt.

a. Debt to Equity Ratio To assess the extent to which the debt financing is used relative to the equity financing. The debt to equity ratio is computed by simply dividing the total debt of the firm by its shareholders equity:

Formula Total debt/Shareholders’ Equity

Year Ratio

1999

2000

8.6

2.01

Description. Above figure in 1999 of 8.6 shows that total debt including current liabilities is 8.6 times greater than total shareholder’s equity. It means company

dependence on debts is much higher and there is very small portion of shareholders equity. While in year2000 the company has improved its performance by lowering its dependence on loans. The figure2.01 shows that total debt is 2.01 higher than shareholders equity.

b. Debt to total Assets Ratio This type of leverage ratio shows the percentage by which firm’s assets are financed by debt. This is calculated by dividing Total debt to Total asset.

Formula Total Debt/Total Asset

Year Ratio

1999

2000

66%

44%

Description: Thus in 1999 66% of the firms assets are financed by with the debt while remaining 33% assets are financed by shareholders equity. Similarly in 2000 44% of the firms assets has been financed with the debt and remaining 56% assets are financed by shareholders equity.

3. Activity Ratios: These ratios are also known as efficiency or turnover ratios. Measures how effectively a firm is using its assets. It is calculated by dividing cost of goods sold by average inventory or by dividing Net sales by Inventory.

a. Inventory turnover Ratio: Formula Cost of Goods Sold/Average Inventory OR Net Sales/Inventory

Year

1999

2000

Ratio

7.69

15.06

Description: In 1999 the figure of 7.69 shows that inventory is being converted in to sales 7.69 times in a given year. While in year 2000 this turnover has increased to 15.06. Generally, the higher the inventory turnover, the more efficient the inventory management of the firm, and the “fresher” more liquid, the inventory. Relatively low inventory turnover is often a sign of excessive, slow moving or obsolescence items in inventory.

b. Total Assets turnover: The total asset turnover ratio tells us the relative efficiency with which a firm utilizes the total assets to generate sales. this is calculated by dividing the net sales with total assets.

Formula: Net Sales/Total assets

Year Ratio

1999

2000

1.6

1.99

Description: In the above figure, in the year 1999 total asset turnover ratio is 1.6 that means each Rupee of company assets is generating Rs1.6 of sales. While in year 2000 each Rupee of company assets is generating Rs 1.99 of sales. This shows that the company has improved its performance in the year2000.

4. Profitability Ratios: Profitability Ratios are of two types --- those showing profitability in relation to sales and those showing profitability in relation to investment. Thes ratios indicate the firm’s overall effectiveness of operation.

Profitability in Relation to Sales a. Gross profit ratio This ratio tells us the profit of the firm relative to sales, after we deduct the cost of producing goods. It also shows how much a firm is effective in producing and selling goods above cost.

Formula: Gross Profit/Net Sales

Year

1999

2000

Ratio

13.08%

20.92%

Description: In year 1999 the gross profit ratio is 13.08% which means gross profit is 13.08% of total net sales of company in the year 1999.In the year 2000 the firm’s gross profit ratio shows that firm is more effective in producing and selling goods above cost by showing its gross profit ratio 20.92%.

b. Net Profit Ratio The net profit margin is a measure of the firm’s profitability of sales after taking of all expenses and income taxes. It tells us a firm’s net income per dollar of sales

Formula Net profit/Net Sales Year

1999

2000

Ratio

2.19%

8.19%

Description: In the year 1999 the firm’s profitability after taking of all expenses and income taxes is 2.19% of net sales. We can say that firm’s net income per Rs of sales is 2.19%. In the next year firm’s net income per Rs of sales is 8.19%. This is about four times greater than it was in last year.

Profitability in Relation to Investment The second group of profitability ratios relates profit to investment.

Return on Investment (ROI) Measures overall effectiveness in generating profits with available assets, earning power of invested capital.

Formula: Net profit after tax/Total asset

Year Ratio

1999 3.5%

2000 16.34%

Description: In the year 1999 the firm has earned profit after tax 16,702,282 and in2000 the profit after taxation was Rs 70,626,918. Due to this there is large difference in both ratio figures. In year 1999 the figure 3.5% shows that each Rs of total assets is generating 0.035 paisa of net income. Similarly in year 2000 each Rs of asset is generating 0.163 paisa of net income.

Contents Chapter1

Introduction

1 Chapter2

Commercial Department

Chapter3

Sales Department

5

11 Chapter4

Export Department

Chapter5

Import Department

17 Chapter6

s Department

19 Chapter7

Internal Audit Department

36 Chapter8 39

Ratio Analysis

13

Acknowledgement All praises to Allah who is the most gracious, merciful and beneficent. Blessing to Muhammad (Sallalla-hoalai-hi-Wassallam) the last prophet of Allah. I am highly grateful to my Lord, The blessing of whose enabled me to complete my internship report at this level. I

have

great

affection

and

fondness

for

Mr.

Muhammad Kamran Shahzad, s Manager a genius, cool and polite personality. I shall his ample co-operation. I am grateful to my supervisor Mr. Javid Anjum and co-coordinator Mr. Muhammad Rizwan. He directed me in a precise way in every nick and corner of my work. His direction and valuable remarks during the internship programme eased many of my difficulties.

PREFACE Practice makes man perfect. A student must be given an opportunity to work in the practical environment. During the two years of my M.Com, I think these two months of training period have provided me that knowledge, which perhaps was impossible through only reading books and solving the questions. I am thankful to my department of commerce that gave me a chance to work in the practical environment.

INT ERNSHIP REPOR T ON

MADINA JUTE MILLS (PVT.) LTD. M. GARH

PRESENTED BY: INTEZAR HUSSAIN

Roll # 27

M.Com (Final)

Session 2001-2003

DEPARTMENT OF COMMERCE BAHAUDDIN ZAKARIYA UNIVERSITY, MULTAN