NAME: Usama Raja

ENROLLMENT NO. : 02-112181-031

COURSE TITLE: Analysis of Financial Statements
SUBMISSION DATE: 07/04/2021
ASSIGNMENT 1
COMPANY NAME: GUL AHMED
Question No.1: Define the following terms and compare with your selected company
1. Vision:
A Vision Statement describes the desired future position of the company.

2. Mission:
A Mission Statement defines the company’s business, its objectives and its
approach to reach those objectives.

3. Audit Committee Report:

Audit committee reports provide a quarterly and annual
snapshot of the financial reporting process, the audit process, information on the
company’s internal controls system, and assurance that the company is in compliance
with laws and regulations.

4. Directors’ Report:
A directors’ report is a financial document that larger limited
companies are required to file at end of the financial year.

5. Corporate Governance:
Corporate governance is the system of rules, practices, and processes by
which a firm is directed and controlled. Corporate governance essentially involves balancing the
interests of a company's many stakeholders, such as shareholders, senior management
executives, customers, suppliers, financiers, the government, and the community.

Since corporate governance also provides the framework for attaining a company's objectives, it
encompasses practically every sphere of management, from action plans and internal controls to
performance measurement and corporate disclosure.

6. Ethics and Compliance:

Ethics means doing what is right regardless of what the law
says. It’s also a conscious choice that is a personal one. It’s entirely possible to be ethical
without being compliant. Ethics is proactive, rather than reactive as compliance is. Our
 personal values system, including our character, values and core principles, guide us
when we make decisions. Most people feel a sense of deep personal satisfaction when
they make ethical actions and decisions. Compliance has a surprisingly simple
definition. It merely means following laws, rules or policies to the letter of the law. The
government requires corporate compliance, and it’s up to boards and corporate directors
to get all employees to comply. Compliance is a reactive word that forces people to make
a conscious choice.

7. Corporate Social Responsibility:

Corporate social responsibility (CSR) is a self-regulating
business model that helps a company be socially accountable—to itself, its stakeholders, and the
public. By practicing corporate social responsibility, also called corporate citizenship, companies
can be conscious of the kind of impact they are having on all aspects of society, including
economic, social, and environmental.

To engage in CSR means that, in the ordinary course of business, a company is operating in
ways that enhance society and the environment, instead of contributing negatively to them.

8. Value Chain:
A value chain is a business model that describes the full range of activities needed
to create a product or service. For companies that produce goods, a value chain comprises the
steps that involve bringing a product from conception to distribution, and everything in between
—such as procuring raw materials, manufacturing functions, and marketing activities.

A company conducts a value-chain analysis by evaluating the detailed procedures involved in

each step of its business. The purpose of a value-chain analysis is to increase production
efficiency so that a company can deliver maximum value for the least possible cost.

9. Qualitative characteristics of financial statements:

There are mainly five types of financial

statements; statement of financial position, income statement, statement of changes in equity,
statement of cash flows and disclosure notes. The former four mainly show the relevant financial
data to a business but the last one mostly includes the non-financial data that assists the users of
the statements to understand the numbers depicted in financial data.

The main purpose of the financial statements is to educate the shareholders about the financial
status and financial performance of their company. This is because the shareholders are the real
owners of the company but the company is governed and administered by directors. As directors
act as stewards of shareholders, it is their duty to prepare financial statements that are free from
material misstatements as well as also possess some qualitative characteristics which are
important to enhance their quality and relevance. Following are the main qualitative
characteristics of financial statements:

Understandability:
The financial statements are published to address the shareholders of the company. So it is
important that these statements must be prepared in such a way that is easy to understand and
interpret for the shareholders. The information provided in these statements must be clear and
legible. For the sake of understandability, the management must consider not only the statutory
data and information but also the voluntary information disclosures which would make financial
statements easier to understand. The directors must elaborate the information provided in the
statements where necessary.

Relevance:

The information provided in the financial statements must be relevant to the needs of its users.
Although the main statutory recipients of these statements are ‘shareholders’, but there are many
other stakeholders that rely on these statements during their decision making process e.g. Fund
Providing Institutions (Banks, Insurance Companies, Assets Funding Firms etc.), potential
investors (for making investments in prospective companies), suppliers (for the assessment of
credit rating) etc. So the information provided in these financial statements must be relevant to
the ‘information needs’ of all these stakeholders, which could affect their economic decisions.

Reliability:

The information provided in the financial statements must be reliable and true. The information
extracted to prepare these financial statements must be from reliable and trustworthy sources.
The financial statements must depict the true and fair picture of the status of the company affairs.
This means that the information provided must not have any significant errors or material
misstatements. The transactions shown must be based on the concepts of prudence and must
represent the true nature of company’s transactions and operations. The areas that are judgmental
and subjective in nature must be presented with due care and keen competence.

Comparability:

The financial statements must be prepared in such a way that they are comparable with prior year
financial statements. This characteristic of financial statements is very important to maintain, as
it makes sure that the performance of the company could be monitored and compared. This
characteristic is maintained by adopting accounting policies and standards that are applied are
consistent from period to period and between different jurisdictions. This enables the users of the
financial statements to identify and plot trends and patterns in the data provided, which makes
their decision making easier.

Timeliness:

All the information in the financial statements must be provided within a relevant span of time.
The disclosures must not be excessively late or delayed so that while making their economic
decisions the users of these statements possess all the relevant and up-to-date knowledge.
Although this characteristic may take more resources but still it is a vital characteristic as
delayed information makes any corrective reactions irrelevant.

Compare with GUL Ahmed Company

1. Vision:
Setting trends globally in the textile industry. Responsibly delivering the products
and services to our partners.

2. Mission:
To deliver value to our partners through innovative technology and teamwork.
Fulfilling our social and environmental responsibilities.

3. Audit Committee Report:

The Audit Committee (the Committee) has concluded its
annual review of the conduct and operations of the Company during 2018 and reports
that:

• The Company has issued a “Statement of Compliance with the Code of Corporate
Governance” which has also been reviewed and certified by the Auditors of the
Company.

• Understanding and compliance with Company codes and policies have been affirmed
by the members of the Board, the management and employees of the Company
individually. Equitable treatment of shareholders has also been ensured.

• Appropriate accounting policies have been consistently applied. All core and other
applicable International Accounting Standards were followed in preparation of financial
statements of the Company and consolidated financial statements on a going concern
basis, for the financial year ended June 30, 2018, which present fairly the state of affairs,
results of operations, profits, cash flows and changes in equities of the Company and its
subsidiaries for the year under review.

• The Chief Executive and the Chief Financial Officer have endorsed the financial
statements of the Company and consolidated financial statements. They acknowledge
their responsibility for true and fair presentation of the Company’s financial condition
and results, compliance with regulations and applicable accounting standards and
establishment and maintenance of internal controls and systems of the Company.

• Directors’ Report is drafted and endorsed by the Board of Directors, and is presented in
compliance with the requirements of Companies Act, 2017. The Committee has reviewed
and endorsed the report as to the compliance with regulations and acknowledges that
business of the Company is fairly discussed in the Directors’ Report.

• Accounting estimates are based on reasonable and prudent judgment. Proper and
adequate accounting records have been maintained by the Company in accordance with
the Companies Act, 2017. The financial statements comply with the requirements of the
Fourth Schedule to the Companies Act, 2017 and the external reporting is consistent with
management processes and adequate for shareholder needs.

• All Directors have access to the Company Secretary. All direct or indirect trading and
holdings of Company’s shares by Directors and Executives or their spouses were notified
to the Company Secretary along with the required information which was notified by the
Company Secretary to the Board. All such holdings have been disclosed in the Pattern of
Shareholdings. The Annual Secretarial Compliance Certificates are being filed regularly
within stipulated time.

• Closed periods were duly determined and announced by the Company, precluding the
Directors, the Chief Executive and executives of the Company from dealing in
Company’s shares, prior to each Board meeting involving announcement of interim/final
results, distribution to shareholders or any other business decision, which could
materially affect the share price of the Company, along with maintenance of
confidentiality of all business information.

a) Internal Audit:

• The internal control framework has been effectively implemented through an

independent outsourced Internal Audit function established by the Board which is
independent of the External Audit function. • The Company’s system of internal control
is sound in design and has been continually evaluated for effectiveness and adequacy.

• The Audit Committee has ensured the achievement of operational, compliance, risk
management, financial reporting and control objectives, safeguarding of the assets of the
Company and the shareholders wealth at all levels within the
Company.

• The Audit Committee has reviewed material Internal Audit findings, taking appropriate
action or bringing the matters to the Board’s attention where required.

• The Head of Internal Audit has direct access to the Chairperson of the Audit Committee
and the Committee has ensured staffing of personnel with sufficient internal audit
acumen and that the function has all necessary access to the management and the right to
seek information and explanations.
 Coordination between the External and Internal Auditors was facilitated to ensure
efficiency and contribution to the Company’s objectives, including a reliable financial
reporting system and compliance with laws and regulations.

b) External Auditors

• The statutory Auditors of the Company, Kreston Hyder Bhimji & Co., Chartered
Accountants, have completed their Audit assignment of the “Company’s Financial
Statements”, the “Consolidated Financial Statements” and the “Statement of Compliance
with the Code of Corporate Governance” for the financial year ended June 30, 2018 and
shall retire on the conclusion of the 66th Annual General Meeting.

• The Audit Committee has discussed Audit observations with the External Auditors.
Management Letter is required to be submitted within 45 days of the date of the Auditors’
Report on financial statements under the listing regulations and shall accordingly be
discussed in the next Audit Committee Meeting. Audit observations for interim review were
also discussed with the Auditors.

• The Auditors have been allowed direct access to the Committee and the effectiveness,
independence and objectivity of the Auditors has thereby been ensured. The Auditors
attended the Annual General Meeting of the Company during the year and have confirmed
attendance of the 66th Annual General Meeting scheduled for October 27, 2018 and have
indicated their willingness to continue as Auditors. • The Audit Committee has recommended
the appointment of Kreston Hyder Bhimji & Co., Chartered Accountants as External
Auditors of the Company for the year ending June 30, 2019.

4. Directors’ Report:
The directors of your Company are pleased to present the Annual
Report and the audited financial statements for the year ended June 30, 2018 together
with auditors’ report thereon. The Board of Directors of the Company in its meeting held
on September 18, 2018 has proposed the following:
a) Dividend: Pay cash dividend @ Rs. 2.50 per share i.e. 25% for the year ended June
30, 2018
b) Appropriation: An amount of Rs. 5,380 million be transferred from general reserve
to unappropriated profit.
The Board periodically reviews major risks faced by the business and takes action where
required. Whereas, the Audit Committee reviews financial and compliance risks. The
Remuneration and Human Resource Committee reviews compensation and reward
policies to ensure that these are competitive and are effective for retention and attraction
of talented and experienced staff.
 The remuneration of non-executive directors is fixed by the BOD keeping in view current
market pay rates and business needs of the Company.
Details with respect to the names of directors, composition of the BOD and committees
are mentioned on page 36 of the Annual Report.

5. Corporate Governance:
The management of the Company is committed to good
corporate governance and complying with best practices. As required under the Code of
Corporate Governance, the Directors are pleased to state as follows:
• The financial statements prepared by the management of the Company present fairly its
Annual Report 2018 45 state of affairs, the result of its operations, cash flows and
changes in equity.
• Proper books of accounts of the Company have been maintained.
• Appropriate accounting policies have been consistently applied in preparation of
financial statements, and accounting estimates are based on reasonable and prudent
judgment.
• International Financial Reporting Standards, as applicable in Pakistan, have been
followed in preparation of financial statements.
• The system of internal control is sound in design and has been effectively implemented
and monitored.
• The directors of the Board are well aware of their duties and responsibilities as outlined
by corporate laws and listing regulations. In compliance with the provisions of the Listing
Regulations, six of our directors have attended and completed Corporate Governance
Leadership Skills program under the Board Development Series of Pakistan Institute of
Corporate Governance (PICG).
• One director, i.e. Chairman, having the required knowledge and experience is exempt
from the requirement of attending the directors’ training program.
• There are no significant doubts on the Company’s ability to continue as a going
concern.
• There has been no material departure from the best practices of corporate governance,
as detailed in the listing regulations.
• The value of investment of provident fund based on its un–audited accounts as on June
30, 2018 is Rs. 867.327 million (FY2017: As per audited accounts Rs. 873 million)
• Statements regarding the following are annexed in the notes to the financial statements:
• Number of Board meetings held and attendance by directors.
• Key financial data for the last six years.
• Pattern of shareholding.
• Trading in shares of Company by its Directors, Chief Executive, Chief Financial Officer
and
Company Secretary and their spouses and minor children.
 6. Ethics and Compliance:
Our dealings with business partners, colleagues, shareholders
and general public is based on good corporate conduct. The statement of business
conduct and ethics, as given below, is the foundation of our business principles:
Ethical Decision Making:
General guidelines may include using good judgment and avoiding even the appearance
of improper behavior. If ever in doubt about an action whether it is compliant with/ is
consistent with the guidelines of the Code, ask yourself:
• Is it consistent with the Code?
• Is it ethical?
• Is it legal?
• If it were made public, would I be comfortable?
If the answer is “No” to any of these questions, don’t do it.
If you are still uncertain, ask for guidance. You can seek help from any of the following:
1. The Management
2. Legal Department
3. Human Resource Department
4. Company Secretary
Compliance with Laws, Policies and Procedures:
1. Directors/employees shall not make, recommend or cause to be taken any action
known or believed to be in violation of any law, regulation or corporate policy.
2. Directors/employees shall not make, recommend or cause to be made any expenditure
of funds known or believed to be in violation of any law, regulation or corporate
policy
Compliance with Local Laws:
The Company is in compliance with all applicable laws and regulations and has good working
relationship with Regulators and Government Authorities.
Compliance with policies and procedures:
The Company has policies and procedures to run business effectively and robust system to
monitor effectiveness.
7. Corporate Social Responsibility:
Corporate social responsibility is discussed in detail on
page 54 of the Annual Report.

8. Value Chain:
From manufacturing to retail, all our efforts to innovate are done to
generate greater value – for our employees, customers and all stakeholders. From creating
more jobs to increasing the quality of our products, we believe in establishing a value
chain that benefits everyone connected to us, leading to a more sustainable future.
 9. Qualitative characteristics of financial statements:
a) Relevance: These KPIs will remain relevant in future.
b) Reliability: More than 60 years since its inception, the name Gul Ahmed is still globally
synonymous with quality, innovation & reliability.

Question No.2: Analyze the following key financial ratios of your company
for two years and evaluate the differences.
1. Liquidity ratio:
Liquidity ratios determine the Company’s ability to meet its short term financial obligations.
A higher ratio indicates a greater margin of safety to cover current liabilities.

Interpretation to liquid ratio:

Efficient fund management has helped in steady growth in the current ratio year by year
as well as acid test ratio. On the contrary, cash flow from operations has reflected an
increase in working capital requirement mainly due to further money tied up in trade
debtors and inventories for the reasons cited in above paragraphs.

2. Activity Ratios:
Activity/Turnover ratios evaluate the operational efficiency of the Company to convert
inventory and debtors into cash against time taken to pay creditors, measured in terms of
revenue and cost of sales.

Interpretation to Activity/Turnover ratio:

Inventory turnover ratio has improved during the year because of higher turnover and
efficiency in supply chain. Debtors’ turnover has decreased due to higher yarn sales
volume in local market with higher credit period and strategic non-discounting of export
bills. The inventory turnover is better in the last six years whereas debtors’ turnover days
had increased. Creditors’ turnover ratio has increased as the Company had negotiated
better credit terms from suppliers rather than relying on short term borrowings.
Fixed asset turnover ratio has improved in the current year, as the net value of property,
plants and equipment were remaining the same at the end of the year.

3. Leverage Ratios:
Capital structure ratios provide an indication of the long term solvency of the Company and
its cost of debt, in relation to equity and profits.
Interpretation to Leverage ratio:
Though fresh long-term loans were obtained during the year to take advantage of the low markup
rates but repayments during the year and start of repayment of further loans from ensuing year
have not let the level of total borrowings gone up from last year level. Moreover, due to higher
earnings the equity of Company had also gone up. Resultantly the Company’s debt to equity
ratio had improved to 55:45 as compared to 65:35 last year. Financial leverage ratio had also
decreased to 1.85 times as compared to 1.81 times last year due to increase in equity. Due to
lower debt level and higher profitability, the interest coverage ratio had increased to 3.36 from
1.92 last year.
4. Profitability Ratios:
Profitability ratios are used to assess the Company’s ability to generate profits in relation to
its sales, assets and equity
Interpretation to Profitability ratio:
CAPEX investment in prior years, in time investment in inventories, enhanced operational
efficiencies had helped increase in Gross Profit ratio to 21.0% from 18.0%. The increase in
Gross Profit rate and volume was in spite of increase in raw material prices, no compensatory
increase in selling prices and general inflation. The increase in gross profit ratio and effectively
control over selling & distribution and administrative costs, the net profit to sales ratio also
increased to 5.1% from 2.0% compared to last year. Administrative costs were very effective
controlled and there is marginal change from last year in spite of increase in operational level
and inflation. Whereas increase in selling & distribution cost is due to enhanced sales volume.
Return on capital employed increased impressively from 10.52% to 17.45% due to increase in
earnings. The increased profitability also helped in improving return on equity from 8.34% to
17.63%.
5. Investment/Market Ratios:
Investment ratios measure the capability of the Company to earn an adequate return for its
shareholders. Market Ratios evaluate the current market price of a share versus an indicator
of the Company’s ability to generate profits.
Interpretation to investment / Market ratio:
Earnings per share had increased to Rs. 5.82 from Rs. 2.50 (restated) in the current year due to
higher profitability. Price earnings ratio decreased to 7.38 times from 16.36 times which is a
combined result of higher earnings per share and improvement in market price of the shares.
Market price was Rs. 42.93 at the end of FY 2018 as compared to Rs. 40.98 at the end of last
financial year.