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. Waheeda Parvez

Mr. Muhammad Haris

Mrs.Haleema Haris

Mr. Muhammad Aurangzeb

Mr. Manzoor Ahmad (Rep. N. I.T)

Mr. Abdul Latif Uqaili (Rep. I.C.P)

ACCOUNTS MANAGER: Mr. Kamran Shahzad

COMPANY SECRETARY: Mr. Shamsur Rahman

OTHER INFORMATION

REGISTERED OFFICE: 46-Hassan Parwana Colony,

Multan.

MILLS: Chowk Sarwar Shaheed, Distt. M.Garh

BANKERS: 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 2000

Number of spindles installed 17640

17640

Number of spindles Worked 17592

14708

Number of shifts 1092 1095

Installed capacity 5788072

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 30th

September.

FIVE YEARS FINANCIAL REVIEW AT A

GLANCE

YEAR 2001 2000 1999 1998 1997

Sales 801123552 659377818 594163559 533430865 454999407

Cost of sale 713147170 487739015 523927463 489401704 389070984

Gross profit 87976382 171638803 70176096 44029161 65928423

Profit/(loss)before

tax

38636574 129226824 28570898 7416772 25109125

Profit/(loss) after

tax

23054574 101821104 27658406 7416772 25109125

Fixed Assets 185989882 195295297 195295297 158190222 169171197

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.

Purchase Department

The purchase department is divided into to two sections, cotton purchase

department and store purchase department.

COMMERCIAL DEPARTMENT

COMMERCIAL DEPARTMENT

PURCHASE DEPARTMENT

PURCHASE DEPARTMENT

SALES DEPARTMENT

SALES DEPARTMENT

PURCHASE DEPARTMENT

PURCHASE DEPARTMENT

COTTON PURCHASE DEPARTMENT

COTTON PURCHASE DEPARTMENT

STOREPURCHASE

STOREPURCHASE

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

(i)

irectorirector

VICEPRESIDENT

VICEPRESIDENT

FIELDMANAGER

FIELDMANAGER

COTTON SELECTORCOTTON

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 TestingDecision-making

Agreement with the Party

Receiving

Writing delivery order for factory

InGate pass + D.O + Purchase Invoice +

Purchase Requisitions are supplied to accounts

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 Pass

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 Pass.

Store in charge also keeps a copy of delivery order and in Gate Pass 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.

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

DirectorDirector

Manager Local SalesManager Local Sales Manager ExportManager Export

Commercial AsstCommercial Asst Export AsstExport Asst

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 accounts 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:

Export Process

DirectorDirector

Manager ExportManager Export

Export AssistantExport Assistant

TypistTypist

The export process starts from bargaining. A buyer contacts the company for

the purchase of yarn. The contact may directly or through middleman.

When the price and quality of yarn is settled then contact form is filled. The

director of the company settles the terms and conditions.

After the settlement of terms 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:

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.

Chief ExecutiveChief Executive

DirectorDirector

Senior Manager Import

Senior Manager Import

AssistantAssistant

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

ACCOUNTS DEPARTMENT

Accounting 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

accounting. Accounts 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. Accountant is very much busy person who gives

instructions to six members 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 accounts department is responsible for the entire accounting process of

the organization regarding the recording of transactions, designing the

accounting policies and accounting system, preparing financial statements

and computer application. If we consider a company a cell then we can say

that accounts department has role of nucleus.

Without accounts department there is no possibility of doing business even

sight weakness’ on the part of accounts department can badly effect the

performance of whole organization.

Functions of the Department

Very first and an important function of accounting 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 account CR along with amount.

In order to see accounts 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 accounting 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 accounts 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

The accounting department is mainly divided in to following three sections:

1. Stores section

2. Salaries and Wages Section

3. General Accounting

Chief AccountantChief Accountant

AccountantAccountant

Asst AccountantAsst Accountant

CashierCashier

Computer Operator

Computer Operator

Record KeeperRecord Keeper

Store Section:

Store section is mainly concerned with store accounting. This section deals

with many accounts 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 passed 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 passage of

time and he gets a lump sum amount at retiring time

Accounting System

Accounting System at here is centralized and on accrual basis. All accounts

are maintained in Multan head office. The process of accounting 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 accounting system is on accrual basis, so accounting entries are passed

on journal voucher at first step. This is also known adjustment voucher. This

is prepared for adjusting entry. Vouchers are prepared after every

transaction. Accounts Manager and Director verify 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 accounts.

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

account or when has been made through your account

CR Advice

When issued by bank to you, it means some amount has been added in your

account .It normally takes place when some foreign remittances has been

received by bank in your account. 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 accounts 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 account 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 accounts 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 accounts from which

balance sheet is prepared. All assets and liabilities accounted, 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 accounts 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 accounts of income and expenses are

maintained .The following are the heads of accounts maintained in the profit

and loss ledger:

Sales Account

Local Sales

Export Sales

Commission on sales

Excise duty on yarn

Export development Charges

Manufacturing Expenses

Administration 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.

Administration 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 accounts 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

account is credited and goods purchased are debited.

Personal Ledger

To record all transactions relating to the personal accounts of employees of

the company, this ledger is used. Advances and loans made to the

employees, and the monthly deductions from their accounts of loans are

recorded.

Illustration of important Accounting 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 account.

The entry will be made on (B.V)

This entry is contra to first one

Sales:

DR CR

IDM 792350

Sale of Yarn689000

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 45.00

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

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 CR

MCB 2377568

With holding 30147

Export bank charge 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 accounts prepared by others with a view to

express an opinion. An auditor is appointed to go through the accounting

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

accounting 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 accounts

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

accountant to provide the necessary documents.

Chapter # 8

RATIO ANALYSIS

An index that relates two accounting 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 account 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 1999 2000

Ratio .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 1999 2000

Ratio 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 1999 2000

Ratio 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 1999 2000

Ratio 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 account 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 account 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 1999 2000

Ratio 3.5% 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 5

Chapter3 Sales Department

11

Chapter4 Export Department 13

Chapter5 Import Department

17

Chapter6 Accounts Department

19

Chapter7 Internal Audit Department

36

Chapter8 Ratio Analysis

39

AcknowledgementAll praises to Allah who is the most gracious, merciful

and beneficent. Blessing to Muhammad (Sallalla-ho-

alai-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, Accounts Manager a

genius, cool and polite personality. I shall remember

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.

INTERNSHIP REPORT

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