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UNIT 10

Task 1
1.1 Different users of Financial Statements and their needs:
Financial statements are a structured and orderly information in which the financial performance and
financial position of a business is provided along with the change in performance of the business over
time. It is considered as complete and best output of accounting for a business consisting of five
components which are as follows:

Income Statement

Balance Sheet

Statement of Cash Flows

Statement of Changes in Equity

Notes and other Disclosures

The basic objective of the financial statements is to provide sufficient and to the point information about
the economic entity, information for the user in decision making and full knowledge of the performance
of a business. Different users of financial statements have different purposes which vary among them. The
users of financial statements exist internally as well as externally. (Kaplan, 2014)

Internal users
Management
Management of an organization consists of people working together to achieve its vision by completing
goals and objectives. This makes management important to study the financial statements in order to work
and make decisions accordingly. Moreover, the management tends to analyze the facts and figures from
financial statements providing them a comprehensive overview of the financial position. The resources
are used effectively and efficiently by the management providing an uprise of an organization which
ultimately helps the management. (Jan, 2013)

Employees
Collective bargaining agreements are made with the help of financial statements and reports. Employees
are mainly concerned or interested in the profitability and stability of a company. Their main concern is
the return (salaries) on the work they are doing and benefits which they will receive. This concern can be
studied from the financial statements which provides the profitability and financial position of a company

through which the incentives given to the employees depend upon while more career opportunities and
expansion can also take place.

External users
Prospective investors
They basically use the financial statements to assess the financial strength and position of the company.
Financial statements provide the investors in making decision so as to invest in the company or not. They
can assess the dividend payments by analyzing the profit of a company from its reports. Also the financial
statements can help them identify risk through fluctuating profits enabling them to make decisions
positively. (Accounting Verse, 2014)

Customers
Customers are considered as the ultimate king in a business as the products or services provided are used
by them. A contract exists between the customers and the company in which the customers are interested
in the quality and sustainability of the company. For this the customers are only interested in the financial
position of a company and where it is going.

Government
Government and other regulatory bodies related are interested in the financial statements of a company
for taxation purposes in order to impose the right amount of tax resulting in revenue for the government.
Taxes are computed based on the calculations and procedures mentioned by the regulatory bodies. The
concern by the government is the right payment of tax and in accordance with the financial strength of a
company., ,

1.2 Legal and Regulatory Influence on Financial Statements:


Companies mainly are divided as privately or publicly owned companies. Mostly the private companies
are not required to disclose financial statements and information regarding it and for this they have a
benefit in providing the information of their type to the public. On the other hand, the companies which
are publicly owned have to provide detailed information on the financial condition, their management,
operations etc. These companies are also subject to raise capital by the issuance of shares to the public.
The disclosure of information is monitored and controlled by the Securities Exchange Commission
(SEC). The SEC have statutory authority over all these companies.
SEC mainly requires the publicly owned companies to disclose financial and business data regularly to it
and to the stakeholders. The disclosure of financial and business information is also required by the SEC
to the investors when issuing securities to the public in the form of stocks or bonds whereas exceptions
are made for small share issues and private placements. The laws and regulations set forward by SEC are
amended in such a way in order to ease the way for the corporations for reporting requirements. The
publicly owned companies have to prepare two annual reports, including form 10-K which is prepared for
the SEC whose content is governed by strict statutes. The requirement by the SEC for disclosing reports
to stockholders must contain certified financial statements and concerned items. Financial statements
include two year audited balance sheet and three year audited income statement. Also the financial data
consisting of net sales, profit or loss, long-term obligations, cash dividends and preferred stock must be
disclosed of five years. (Finance, 2013)

The reports must also contain the discussion of management and its analysis on the financial condition
and result of operations including the liquidity position, capital resources, operations, or other trends in
the company. The directors of the company must be identified in the reports along with the specific
market data on common stock must be given.
The private companies which want to become as publicly owned company and the companies floating
new securities must be registered with the SEC. Disclosures for the registration must include prospectus
and some additional information. The prospectus consists of information for the investors. The prospectus
must include audited financial statements, financial data and managements input and overview of the
companys operations. All the cash and non-cash compensations provided to the senior management must
be provided.
In case of financial statements disclosures, generally accepted accounting principles (GAAP) and other
specified rules are set out. These rules are not merely strict as the SEC laws and regulations but are
adopted and accepted in many areas. The generally accepted accounting principles require the financial
statements to disclose sufficient information which is for the interest of investor or creditor which include
accounting policies adopted, financial records, lease information etc. Certain methods of inventory
valuation and depreciation are to be used according to the accounting standards applicable to a company.
Also certified financial statements contains an auditors opinion stating that the financial statements were
made according to GAAP or were materially misstated. In case of material misstatement, an adverse
opinion statement is given. (Kaplan, 2014)

1.3 Implication of Financial Statements users:


Financial statements must be understood by the individuals who have interest and should obtain
considerable knowledge of the business and economic activities going on. Both internal and external
users have direct interest in the company and for this the laws and regulations prevailing must be
exercised accordingly and different methods must be followed when financial statements are made.
Conceptual framework must be applied in order to provide useful information for the transactions to be
measured accordingly in order to present and communicate better them to the users. Periodic financial
statements must be made and standards must be set in creating them. Rules based accounting sets the
standards in form of specific rules. Principle based accounting includes generally accepted accounting
principles (GAAP) which are used. When the accounting method is adopted, it must be made sure that the
information is relevant, reliable and comparable for the users of financial statements.
In the absence of this framework and accounting standards the consistency with each other is not
achieved which affects the users. This adds unimportant complexities for the users of financial statements.
(Tamayo, 2013)

1.4 How different laws/regulations are dealt with by Accounting and


Reporting Standards for different users:
Many accounting bodies exist which guides and measures the accounting environment. As the
transactions are going global at a vast range, the Security Exchange Commission (SEC) provides
standards in order to eliminate market collision and reduce instability in stock markets. It provides certain
rules and principles for the companies which fall under generally accepted accounting principles (GAAP).
The financial accounting board standards (FASB) has provide companies with a set of standards for the
preparation of financial statements to public for which the investors are protected from the owners of a
business. International accounting standards board has also set specific set of standards which consists of
international financial reporting standards (IFRS) which are widely accepted and are consistent and

comparable across the globe. Countries which mainly include United States and United Kingdom have
procedures which have independent standard setting boards but the main standards which exist fall under
generally accepted accounting principles (GAAP) which provide true and fair view and consistency in the
performance of a business.
The laws and legislation for the companies reporting in United Kingdom are mentioned in the Companies
Act 2006. In this the listed companies are required to provide their accounts to the registrar of companies
making it available to the public while the companies which are not listed have option to report under
IFRS or UK GAAP. The Companies Act 2006 has laid obligations for keeping proper accounting record
including companys transactions that must be disclosed keeping the standards set according to the
generally accepted accounting principles (GAAP). International accounting standards have laid down
certain principles providing a basis for the financial statements.
IAS standards are put up for the presentation of financial statements. They must be prepared and present
fairly the financial position of a business and should fulfill the requirements of IFRS in case of
compliance with them. Financial statements are prepared as an assessment of an organization to continue
its operations in the future termed as going concern. The ability of a company to grow and uncertainties
faced in it must be disclosed accordingly. In case the business will not run in the future, the financial
statements must be prepared according to the actual basis. Accrual basis of concept must be used in which
the transaction should be recorded when it takes place rather than cash or any benefit is received. The
international accounting standard requires the presentation of financial statements to be consistent and
any change made in them must be justified accordingly. The material items in the statements must be
presented according to their class. Also the offsetting of assets, liabilities, income and expenses must not
be done unless it is required by IFRS.(Deloitte, 2015), (Financial Reporting Council, 2015)

2.1 Prepare Financial Statements:


Bilal
Income Statement for the Year Ended 31 December 2013
PKR
Sales Revenue
Less: Cost of Sales
Opening Inventory
Purchases
Closing Inventory
Gross Profit
Less: Expenses
Shop Expenses
Wages
Rent Paid
Telephone Expenses
Interest Paid
Travel Expenses
Net Profit

50,000
420,000
(42,000)

PKR
557,500

(428,000)
129,500

6,200
33,500
750
500
4,500
550

(46,000)
83,500

Bilal
Statement of Financial Position as at 31 December 2013
PKR
Assets
Non-Current Assets
Premises
Shop Fittings

PKR
200,000
40,000
240,000

Current Assets
Inventory
Debtors
Bank
Cash
Total Assets
298,000

42,000
10,100
5,850
50

Equity and Liabilities


Equity
Net Profit
Capital
75,000
Less: Drawings
(27,000)

58,000

83,500

131,500
Non-Current Liabilities
Loan from Bank
150,000
Current Liabilities
Creditors
Value Added Tax

14,500
2,000

16,500

Total Equity and Liabilities


298,000

Nasser, Laura and Brendan


Income Statement for the Year Ended 30 April 2013
PKR
Fees charged to customers (Revenue)
Less: Expenses

PKR
142,000

Rent and Rates (5100 300)


4,800
Staff salaries
57,000
Administration expenses (14700 + 400)
15,100
Light and heat
4,600
Bad debts
1,500
Depreciation {(24000 12000) x 25%}
3,000
Provision for doubtful debts {(46500 1500) x 4%}
1,800
(87,800)
Net Profit

54,200

Less: Salaries of partners


Nasser
Laura
Brendan

15,000
10,000
10,000

Less: Interest on capital


Nasser (30,000 x 4%)
Laura (30,000 x 4%)
Brendan (20,000 x 4%)
Net Profit after partnership expenses
16,000
Less: Share of each partner
Nasser (16000 x 2/5)
Laura (16000 x 2/5)
Brendan (16000 x 1/5)
(16,000)

(35,000)
19,200

1,200
1,200
800

(3,200)

6,400
6,400
3,200
X

Nasser, Laura and Brendan


Statement of Financial Position as at 31 April 2013
PKR
Assets
Non-Current Assets
Office Equipment (24000 12000 3000)
9,000
Current Assets
Bank
Debtors (46500 1500 1800)
Rent and rates Prepayment
82,750
Total Assets
91,750

PKR

39,250
43,200
300

Nasser
Brendan
PKR
Equity and Liabilities
Equity
Opening capital
20,000
80,000
Current Account
(400)
Salaries
10,000
Interest on capital
800
Profit Share
3,200
13,600
Less:
Drawings
(14,000)

30,000

30,000

1,200

850

15,000

10,000

1,200

1,200

6,400

6,400

23,800

18,450

(20,000)
3,800

(400)

Laura

(20,000)
(1,550)

1,850
81,850

Current Liabilities
Creditors
Administration expenses owing

9,500
400
9,900
91,750

Total Equity and Liabilities

2.2 Prepare Financial Statements from incomplete records:


Ice
Income Statement for the Year Ended 31 December 2013
PKR
PKR

Revenue (600,000 500)


599,500
Less: Cost of Sales
Opening Inventory
Purchases
Closing Inventory
Depreciation (120000 15000) x 20%
(255,000)

24,000
240,000
(30,000)
21,000

Gross Profit
344,500
Less: Other expenses
Administration expenses
Distribution expenses
Bad debts
Interest on loan (100000 x 9/12 x 6%)
Provision of administration expenses
Net Profit before Tax
Less: Tax
(6,000)
Net Profit after tax
23,000

185,000
75,000
1,000
4,500
50,000

(315,500)
29,000

Ice
Statement of Financial Position as at 31 December 2013

PKR
Assets
Non-current assets
Plant and Machinery (120000 15000 21000)
Current assets
Trade receivables (20500 - 1000 500 2000) 17,000
Cash
Inventory
30,000
Total Assets
Equity and Liabilities
Equity
Ordinary shares
Retained earnings (43500 + 23000)
66,500

PKR
84,000
130,000
177,000
261,000

5,000
71,500

Non-current liabilities
Loan
Current liabilities

100,000

Trade payables (29000 + 4500)


Tax payables
Provision (wrongful dismissal)
Total Equity and Liabilities

33,500
6,000
50,000

89,500
261,000

2.3 Prepare consolidated Balance sheet:


Plastik
Consolidated Income Statement and Comprehensive Income
For the Year Ended 30 September 2014

PKR000
PKR000
Revenue ({62600 + (30,000 x 9/12) (300 x 9 months intra-group sales)}
82,400
Less: Cost of Sales (W1)
(61,320)
Gross Profit
21,080
Less: Other Expenses
Distribution costs {2000 + (1200 x 9/12)}
2,900
Administrative expenses (W2)
5,350
Finance costs (200 + 135 (W3))
335
(8,585)
Profit before Tax
Income tax expense {3100 + (1000 x 9/12)}

12,495
(3,850)

Profit for the year


Add: Other comprehensive income
Gain on revaluation of property (1500 + 600)
Total comprehensive income
Profit for the year attributable to:
Equity holders of the parent (balance)
Non-controlling interest (W4)

8,645

Total comprehensive income attributable to:


Equity holders of the parent (balance)
Non-controlling interest {180 + (600 x 20%)}

2,100
10,745
8,465
180
8,645
10,445
300
10,745

Plastik
Consolidated Statement of Financial Position as at 30 September 2014

PKR000
Assets
Non-Current Assets
Property, plant and equipment (W5)
Intangible asset: goodwill (W6)
Current Assets
Inventory (4300 + 1200 120 URP (W1))
Trade receivables (4700 + 2500 1200 intra-group)
Bank
Total Assets

37,100
5,200
42,300
5,380
300

Equity and Liabilities


Equity attributable to the owners of the parent
Equity shares of Rs. 1 each {(10,000 + 4800) W6}
14,800
Other component of equity share (share premium) (W6)
Revaluation surplus (2000 + (600 x 80%))
Retained earnings (W3)
Non-controlling interest (W7)
Total Equity
Non-current liabilities
10% loan notes (2500 + 1000 1000 intra-group)
Current liabilities
Trade payables (3400 + 3600 800 intra-group)
Current tax payable (2800 + 800)
Deferred tax consideration (1800 +135 W3)
Bank (1700 400 cash in transit)
13,035
Total Equity and Liabilities

9,600
2,480
6,765
33,645
4,800
38,445

6,200
3,600
1,935
1,300
53,980
PKR000

Plastik
Subtrak (24000 x 9/12)
Intra-group purchases (300 x 9 months)
URP in inventory (600 x 25/125)
Additional depreciation on property

45,800
18,000
(2,700)
120
100
61,320

W2 Administrative expenses

W3 Retained earnings

6,000
11,680
53,980

2,500

Workings
W1 Cost of sales

Plastik administrative expenses


Subtraks expenses for the year (1800 x 9/12)
Goodwill impairment

PKR000

3,500
1,350
500
5,350

Plastik
6,300
Subtraks post-acquisition adjusted profit (900 W4 x 80%)
Finance costs on deferred consideration (1800 x 10% x 9/12)
Unrealized profit in inventory (W1)
(120)
6,765

720
(135)

W4 - Non-controlling interest in Subtraks profit or loss


Subtraks profit reported

2,000

Post acquisition (2000 x 9/12)


Less: Additional depreciation on property
Goodwill impairment
Adjusted post-acquisition profit
X 20% non-controlling interest

1,500
(100)
(500)
900
180

W5 Non-current assets
Plastik
Subtrak
Fair value increase at acquisition
Additional depreciation on property
Fair value increase since the acquisition
W6 Goodwill in Subtrak

18,700
13,900
4,000
(100)
600
37,100
PKR000

Investment at cost
Shares (9000 x 80% x 2/3 x Rs.3)
14,400
Deferred consideration (9000 x 80% x 27.5 paisa x 1/1.1)
Non-controlling interest (9000 x 20% x Rs. 2.50)
Net assets of Subtrak at 30 September 2014
Less: Post acquisition profits (2000 x 9/12)
Fair value adjustment of property
Net assets at date of acquisition
Goodwill on consolidation
Impairment as at 30 September 2014

PKR000

1,800
4,500
20,700

(12,500)
1,500
(4,000)

(15,000)
5,700
(500)
5,200
The 4.8 million (9000 x 80% x 2/3) shares issued by Plastik at Rs. 3 each would be
recorded as share capital of Rs. 4.8 million (4800 x Rs. 1) and share premium of Rs.
9.6 million (4800 x Rs. 2).
W7 Non-controlling interest in statement of financial position
At date of acquisition (W6)

4,500

Post-acquisition from statement of profit or loss and other comprehensive income


300
4,800

3.1 How the information needs of different user groups very:


Different users needs vary according to their nature from the financial statements. Some needs may be
interrelated with the users but every user has its own needs from the financial position and performance of
the business.

1. Management
For the smooth, consistent and proper working of an organization management plays an important
role. The financial statements are considered important in providing information to the
management from which proper analysis can be conducted for better and effective decision
making. The managements performance is affected by the companys financial statements and
which further affects other user groups. Thus managers perform financial analysis and
interpretation of the performance of the business in order to overcome the barriers and make
worthy decisions.

2. Employees
Employees are considered as labor or people working in a company to achieve its mission and
vision. Employees are mainly concerned with the profitability and incentives along with job
security and benefits. Income statement provides the profitability of a company which employees
mainly study and for which they discuss matters such as salary hike and promotions.

3. Investors
Investors are the people who are basically the owners of a company for the amount which they
have invested. They are concerned with the profitability of a company and the financial
performance of a business. They are interested in the financial strength and sustainability of a
company and the return on the investment they have made in the form of dividends. Financial
statements help the investors in giving an overview of the company and identify risks to provide a
basis for potential investors. Also the profit disclosed in the financial statements of a company for
previous years helps them to invest in it.

4. Customers
Customers are considered as the main reason for which a company is working or exists. Financial
statements are used by them in order to assess the suppliers relation with the company and the
dealing in between them for steady supply of goods and services. They are also concerned with
the sustainability of a company which is assessed by the statement of financial position to
measure the financial strength of the company.

5. Government
Government falls under the macro-economic behavior in which the company is operating. The
economic changes taking place are somehow interrelated with the decisions made by the
government. Governments use the financial statements to identify the right amount of taxable
income of a company and tax declared in tax returns. The largest means of revenue is considered
as tax due to which the financial statements of a company are analyzed for the calculation of
profit a company has earned and the rate of tax applied on it. (Accounting-simplified, 2013)

3.2 Prepare Financial Statement in a form suitable for publications:


Winger
Income Statement for the Year Ended 31 March 2013

PKR000
PKR000
Sales revenue (358,450 27000)
Less: Cost of Sales (W1)
(208,550)
Gross Profit
Less:
Administration expenses
Distribution expenses
Loss on abandonment of research project
Finance cost (W2)

331,450
122,900
15,000
28,700
30,000
11,200

(84,900)
38,000
15,000
53,000

Add: Profit on disposal of land and buildings (95000 80000)


Profit before tax
Income tax (15000 2200)
(12,800)
Profit for the year
40,200

Statement of Changes in Equity

earnings

Share capital

Retained

PKR000

PKR000

Total

PKR000
Opening
251,600
Dividends paid
(12,000)
Total comprehensive income for the year

150,000

101,600**

(12,000)

-_

40,200
40,200

Closing

150,000
279,800

129,800

** Opening retained earnings (71600 from trial balance plus 30000 from revaluation
surplus)

Winger
Statement of Financial Position as at 31 March 2013

PKR000
PKR000
Assets
Non-Current Assets
Property (200000 6000 (W3))
Plant and equipment (W4)
Current Assets
Inventories (28,240 + 22,500 (W1))
Trade receivables (55000 27000 (W1))
Cash

194,000
160,000
354,000
50,740
28,000
10,660
89,400

Total Assets
443,400
Equity and Liabilities
Equity
Equity shares 25p each
150,000
Retained earnings (Changes in equity statement)
129.800
279,800
Non-current liabilities
Leasing liabilities (W5)
8% loan notes
Current liabilities
Trade and other accounts payable (W6)
Income tax
Total equity and liabilities
Workings
W1 Cost of Sales
Given
Less: Sale/Return goods (27000 x 100/120)
Add: Depreciation (W3)
W2 Finance Costs
Loan interest (50000 x 8%)
Finance lease (80000 20000) x 12%
7,200

47,200
50,000

97,200

15,000

51,400
66,400
443,400

PKR000

PKR000
185,050
(22,500)
46,000
208,550
4,000
11,200

W3 Depreciation
Building (100000 / 50)
Heating system (20000 / 10)
Lifts (30000 / 15)
W4 Plant and equipment
Cost: Owned plant
Leased plant

2,000
2,000
2,000
6,000
154,800
80,000
234,800

Depreciation:

Owned plant (34800 + 24000 (W3))


Leased plant (80000 x 20%)

(58,800)

(16,000)
160,000
W5 Leasing liabilities
Total capital due
Less: Amount paid

80,000
(20,000)
60,000
7,200
67,200
20,000
47,200

Add: Accrued interest (60000 x 12%)


Total creditor
Due within one year
Due after one year
W6 Trade and other payables
Trial balance figure
Lease creditor (W5)
Accrued loan interest (4000 2000)

29,400
20,000
2,000
51,400

The sole trader and partnership questions were covered in the assessment criteria
2.1 which can be viewed above.

4.1 Accounting Ratios to access the performance and position of


business:
Unilever PK Ltd.
Income Statement for the Year Ended 31 December 2013/2012

UNILEVER
Statement of
comprehensive income
For the year ended
December, 2013

2013
Rupees
in
thousan

Horizo
ntal
Analysi
2012 s
Rupees
in
thousan

Vertic
al
Analy
sis
2013

Vertic
al
Analy
sis
2012

ds

ds

Sales

60,535,3
20

59,740,9
69

1%

100%

100%

Cost of Sales

36,113,5
38

38,067,5
77

-5%

-60%

-64%

24,421,7
82

21,673,3
92

13%

40%

36%

Gross Profit

Distribution Cost

12,672,4
94

11,140,4
40

14%

-21%

-19%

Administrative Expenses

2,258,11
2

1,984,86
7

14%

-4%

-3%

Other Operating Expenses

-679,545

-614,929

11%

-1%

-1%

410,936

561,377

-27%

1%

1%

Profit From Operations

9,222,55
7

8,494,53
3

9%

15%

14%

Finance Cost

-317,922

-429,474

-26%

-1%

-1%

Profit Before Taxation

8,904,63
5

8,065,05
9

10%

15%

14%

Taxation

2,787,90
1

2,563,10
4

9%

-5%

-4%

Profit After Taxation

6,116,73
4

5,501,95
5

11%

10%

9%

0%

0%

Other Income

Other
Income :

Comprehensive

Loss / gain on post


employment benefit
obligation
Impact of deferred tax
Items reclassified to Profit /

-73,117

117,551

-162%

0%

0%

24,860

-62,143

-140%

0%

0%

-48,257

115,408

-142%

0%

0%

Loss
6,068,47
7

Total comprehensive income

5,617,36
3

8%

10%

Unilever PK Ltd.
Statement of Financial Position as at 31 December 2013/2012
Balance Sheet
As at December, 2013
2013

2012

Rupees
in
thousan
d

Rupees
in
thousan
d

property, plant and equipment

7,864,4
40

7,225,77
9

Intangible-computer software

754,055

936,797

95,202

95,202

155,266

135,586

995,784

20,070

52,069

168,812

9,916,8
16

8,582,24
6

528,211

421,656

Assets
Non-current assets

Long term investment


Long term loan
Long
term
prepayments

deposits

Staff
retirement
prepayments

and

Benefits-

Total Non-current Assets


Current Assets
Stores and spares

9%

4,335,3
09

6,244,20
3

Trade debts

855,771

1,018,56
1

Loans and advances

150,045

181,003

Trade deposits and short term


prepayments

987,273

547,671

stock in trade

Accrued interest/mark up

6,781

Other receivables

---

167,133

108,680

351,728

748,493

Cash and bank balances

4,466,2
31

5,845,46
1

Total Current Assets

11,848,
482

9,854,81
3

Total Assets

21,765,
298

18,437,0
59

669,477

669,477

Reserves

2,388,4
93

4,607,52
0

Total capital and reserves

3,057,9
70

5,276,97
7

520,948

691,570

391,281

401,969

912,229

1,093,53
9

Tax refunds
Government

due

from

the

Equity and Liabilities


Capital and reserves
Share capital

liabilities
Non-current liabilities
Deferred taxation
Staff retirements
obligations

benefits

Total non-current liabilities

Current liabilities
Tread and other payables

16,840,
660

11,444,5
14

951

7,003

Accrued interest / Mark up


Short terms borrowings

375,401

---

Provisions

578,087

615,006

Total Current Liabilities

18,707,
328

13,160,0
62

Total equity and liabilities

21,765,
298

18,437,0
59

Ratio calculation of Unilever PK

Pfrofitability Ratios
Unilever
201
2
Gross profit margin= Gross profit/net sales
Operating margin

= Operating profit/net sales

Return on equity = Net income/shareholders investment

36.3
%
14.2
%
30.5
%

2013
40.3%
15.2%
27.9%

Liquidity Ratios
Unilever
Current ratio = Current assest/current liability
Acid ratio = current assets - inventory /Current liability

Solvency Ratio

2012
74.9
%
92.7
%

2013
116.3%
30.1%

Unilever
Debt to Equity Ratio = Total Liability \ Total Equity
Debt to Asset Ratio = Total debt \ Total Assets

2012
71.4
%
71.4
%

2013

2012
46.5
%

2013

86.0%
86.0%

Return On Capital
Employed
Unilever
ROCE = Earnings Before Tax/Capital Employed

4.2 Ratio interpretation of Unilever PK


Profitability ratios
Ratios

2012

2013

Gross profit margin

36.3%

40.3%

Operating margin

14.2%

15.2%

Return on equity

30.5%

27.9%

42.7%

Unilever
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%

40.3%
36.3%

30.5%
27.9%
15.2%
14.2%

2012
2013

- Gross Profit Margin


The Gross Profit Margin is a tool to define manufacturing capacity for company and distribution
efficiency during the production process. It is a measurement of how much from each dollar of a
company's revenue is available to cover overhead cost, other expenses and profit. The higher Gross Profit
Margin attributes more profitability and financial health of the company. (ccdconsultants, n.d.)
The gross profit margin of "Unilever pk" for 2013 is increasing by 4% as compared to previous year. The
calculations shows that figures, 40.3% in 2013 compared to 36.3% in 2012. It is because of decrease in
cost of sales in 2013 by 5% and other overheads in current year.(InvestingAnswers, 2015)

- Operating margin
The operating profit margin is important ratio because it provides information to business owners relating
the profitability, pricing strategy, operating strategy and how to control cost of firms. A higher value of
operating profit margin shows higher profits and more revenue generation. The controlling of cost also
leads a firm to achieve higher operating profit margin. (Finance Formulas, 2015)
The calculations shows operating margin for Unilever PK 2013 is 15.2% while 14.2% in 2012, that means
performance of Unilever PK has improved for the fiscal year 2012-2013 with the increase of 1.02%.It
shows that company makes Rs .15 of every rupee sale (before interest and taxes) in 2013. This is because
the operating expenses are slightly lower as compared to previous year. The sales of Unilever in 2013
increased to 60.5 billion whereas 59.7 billion in 2012.

- Return on Capital Employed


This ratio indicates how profitable a company is by comparing it's net income to its average shareholder
equity, how much the shareholder earned for their investment in company. The higher ratio percentage

shows, the more efficient management is in utilizing its equity base and the better return is to investors.
(investopedia, n.d.)
The Return on Equity for Unilever PK for 2013 is 27.9% compared to 30.5% in 2012. The figures shows
2.6% decrease in ROE in fiscal year 2012-1013. It means that shareholders has lower profits compared to
previous year. It is usually because that management of Unilever not performing effectively and use
shareholders money to earn enough profits compared to previous year. This could be demotivates
investors to future investments in company.(ReadyRatios, 2015)

Liquidity Ratios:
Ratios

2012

2013

Current Ratio

74.9%

116.3%

Acid Ratio

92.7%

30.1%

Unilever
116.3%
120.0%
100.0%

92.7%

Current ratio =
Current assest/current
liability

74.9%

80.0%
60.0%
30.1%

40.0%

Acid ratio = current


assets inventory /Current
liability

20.0%
0.0%
2012

2013

- Current Ratio
The ratio in which we study company's ability to pay its short term obligation (debt) over its business
fiscal year by comparing current assets to its current liabilities. (ccdconsultants, n.d.)
Unilever PK has current ratio 63.3% for 2013 compared to 74.9% in 2012. Which is showing declining
effect in 2013 by 11.6%. This is because of current liabilities' that is showing big increasing trend in 2013
of 1.87 billion compared to 13.1 billion in 2012. Instead of current assets which is showing slightly
increasing effect of 11.8 billion in 2013 compared to 9.85 billion in 2012.
In the effect of decreasing current ratio Unilever PK may be suffered from long inventory turnover and
liquidity problems because they are unable to alleviate their obligations.(Averkamp, 2015)

- Acid Ratio
A indicator in which we study short terms assets to cover company's current liabilities called Acid Test
Ratio or Quick Ratio (accounting-simplified, n.d.). Acid test ratio shows the limits of cash and other
current assets that are readily convertible into cash in comparison to the short term obligations of an
organization.
In 2013 Unilever PK has just 30.1% Acid Test Ratio where as 92.7% in 2012. This shows company has
just .301 rupees to cover every 1 rupee of current liability. This is a alarming situation for Unilever PK
because current assets are highly dependent on inventory. Unilever PK taking too much risk by not
maintaining appropriate liquid resources.(MyAccountingCourse, 2014)

- Solvency Ratios
Ratios

2012

2013

Debt To Equity

71.4%

86.0%

Debt T Asset

71.4%

86.0%

Unilever
86.0%
86.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

71.4%
71.4%

Debt to Equity Ratio =


Total Liability \ Total
Equity
Debt to Asset Ratio =
Total debt \ Total
Assets

2012

2013

- Debt to Equity
Long term Solvency Ratio that compares total debt to total equity. In which we study percentage of
company financing that comes from creditors and investors compared to shareholders.
(myaccountingcourse, n.d.).

In 2013 Unilever PK has Debt to Equity ratio 86% compared to 71.4% in 2014. It means in 2013 the
creditors of Unilever PK provide .85 rupee of assets for each 1 rupee of assets provided by shareholders.
Higher debt to equity ratio shows Unilever PK relies more on external lenders thus it means more risk
especially when economy as at on recession which create higher interest rates.
Unilever PK should minimize their debt to equity ratio because it usually move business toward financial
stability. Unilever PK should move on equity financing because it cheaper than debt financing.
(InvestorWords, 2015)

- Debt To Asset
A solvency ratio in which we measure a firms total liability as a percentage of its total assets
(myaccountingcourse, n.d.). The ratio shows how many assets company must sell in order to pay off all
its liabilities. It also called leverage ratio. Companies with higher level of liability as compared to assets
are called highly leveraged. Highly leveraged companies are more risky for lenders.
In 2013 Unilever PK has debt to asset ratio 86.0% compared to 2012 71.4%. 86.0% is showing "Unilever
PK" highly leveraged. In solvency ratios, lower ratios is more favorable compared to higher ratio. In
many cases 50% is reasonable but figures shows Unilever PK has ratio higher than average. It's very risky
because Unilever PK just own 24.0% of its assets and shareholder own remainder of the assets.(Small
Business Development Corporation, 2015) (Small Business Development Corporation, 2015)

Investor Ratios

Ratios
Return
On
Employed

Capital

2012

2013

46.5%

42.7%

Unilever
47.0%

46.5%

46.0%
45.0%
44.0%

42.7%

ROCE =Earnings
Before Tax/Capital
Employed

43.0%
42.0%
41.0%
40.0%
2012

2013

- Return on Capital Employed


A financial ratio that measures a company's profitability and efficiency with which its capital is
employed. In other words, return on capital employed shows investors how many dollars in profit each
dollar of capital employed generates (investopedia, n.d.). It shows how effectively assets are performing
while taking into consideration long term financing.
The calculations shows slightly lower return on capital employed ratio in 2013 which is 42.7% compared
to 46.5% in 2012. The ratio refers blew to average financial reserves in Unilever PK which is not good
indication caused low profitability.
(Riley, 2012), (StocksInValue, 2015), (Riley, 2012)

Conclusion
The revenue generated from sales was higher in 2013 than in 2012 due to the increase in exports of
cement at better prices. The sales volume had increased due to the increase in production this year. The
factors including expansions, high infrastructure etc. has increased the demand of cement to a great
extent. The increase in sales revenue was mainly due to the high demand of cement in local and
international market. The gross profit resulted in this year was remarkably higher than in 2012 due to easy
availability of coal domestically which resulted in low cost. The return on capital employed showed
positive result due to which the net profit was also increased.
The liquidity position of the company has progressed at positive level and is shown quite above. This is
mainly due to the cut down on financing through short term loans. The company also started to finance its
projects through long term loans due to decrease in interest percentage than through equity as the risk
included in equity was higher.
The investor ratios used to determine the performance of the company by the stakeholders is increased
due to which the option to invest in it becomes greater than the competitors. Still it needs to boost it up to

match the leaders of the market. The return on equity was considerably low as compared to 2012. Also the
dividends were paid this year as compared to previous because of result of high net profit.