Chapter: Two

INTRODUCTION TO FINANCIAL STATEMENTS

INTRODUCTION

Financial statements official documents of a business/firm which explores its entire financial
information. The main aims of the financial statements are to provide information and
understand the financial aspects of the business/firm. Hence, preparation of the financial
statement is important as financial decisions are taken based on the analysis of the statements.

MEANING AND DEFINITION

The financial statements of a company are one of the richest sources of information about a
company. According to Hamptors John, the financial statements are organized collection of data
according to logical and consistent accounting procedures. Its purpose is to convey an
understanding of financial aspects of a business firm. It may show a position at a moment of
time as in the case of a balance-sheet or may reveal a service of activities over a given period of
time, as in the case of an income statement. Financial statements are the summary of the
accounting process which provides useful information to both internal and external parties.

BUSINESS ACTIVITIES

A company pursues a number of activities in a desire to provide a saleable product and/or service
and to yield a satisfactory return on investment. These activities can be divided into three:

1. Financing Activities: A company requires financing to carry out its business plan. Financing
activities are the means companies use to pay for these ventures. A company must take care in
acquiring and managing its financial resources because of both their magnitude and their
potential to determine success or failure. Decisions concerning the composition of financing
activities depend on conditions existing in financial markets. Financial markets are potential
sources of financing. In looking to financial markets, a company considers several issues,
including the amount of financing necessary, sources of financing (owners or creditors), timing
of repayment, and structure of financing agreements. Decisions on these issues determine a
company’s capital structure, affect its growth, influence its exposure to risk, and determine the
power of outsiders in business decisions.

There are two main sources of business financing: equity investors (referred to as owner
financing) and creditors (referred to as non-owner financing).

Equity investors are a major source of financing. Investors provide financing in a desire for a
return on their investment, after considering both expected return and risk. Return is the equity
investor’s share of company earnings in the form of either earnings distribution or earnings
reinvestment. Earnings distribution is the payment of dividends to shareholders. Dividends can
be paid directly in the form of cash or stock dividend, or indirectly through stock repurchase.
Dividend payout refers to the proportion of earnings distributed. It is often expressed as a ratio
or a percentage of net earnings. Earnings reinvestment (or earnings retention) refers to

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retaining earnings within the company for use in its business; this is also called internal
financing. Earnings reinvestment is often measured by a retention ratio. The earnings retention
ratio, reflecting the proportion of earnings retained, is defined as one less the dividend payout
ratio.

Equity financing can be in cash or any asset or service contributed to a company in exchange for
equity shares. Private offerings of shares usually involve selling shares to one or more
individuals or organizations. Public offerings involve selling shares to the public. There are
significant costs with public offerings of shares, including government regulatory filings, stock
exchange listing requirements, and brokerage fees to selling agents. The main benefit of public
offerings of shares is the potential to raise substantial funds for business activities. Many
corporations offer their shares for trading on organized exchanges like the Chittagong, Dhaka,
Bombay, New York, Tokyo, Singapore, and London stock markets.

Companies also obtain financing from creditors. Creditors are of two types: (i) Debt creditors,
who directly lend money to the company and (ii) Operating creditors, to whom the company
owes money as part of its operations (example includes- suppliers, employees, government etc).
Debt financing occurs through loans or through issuance of securities such as bonds and
debentures.

The claims of creditors differ from those of stockholders. If you loan money to a company, you
are one of its creditors. In lending money, you specify a payment schedule (e.g., payment at the
end of three months). As a creditor, you have a legal right to be paid at the agreed time. In the
event of nonpayment, you may legally force the company to sell property to pay its debts. In the
case of financial difficulty, creditor claims must be paid before stockholders’ claims.
Stockholders, on the other hand, have no claim to corporate cash until the claims of creditors are
satisfied. If you buy a company’s stock instead of loaning it money, you have no legal right to
expect any payments until all of its creditors are paid. However, many corporations make
payments to stockholders on a regular basis as long as there is sufficient cash to cover required
payments to creditors.

2. Investing Activities: Once the company has raised cash through financing activities, it will
then use that cash in investing activities. Investing activities involve the purchase of the
resources/assets a company needs in order to operate. Assets include land, buildings, equipment,
legal rights (patents, licenses, and copyrights), inventories, human capital (managers and
employees), accounting systems, and all components necessary for the company to operate. Such
assets are called Operating Assets. Companies can also use their excess cash to invest
temporarily or permanently in securities of other companies like- common stocks, preferred
stocks, bonds, debentures, government securities or other money market funds. Such assets are
called financial assets.

Information on both financing and investing activities assists us in evaluating business

performance. The value of investments always equals the value of financing obtained. Any
excess financing not invested is simply reported as cash (or some other noncash asset).
Companies differ in the amount and composition of their investments. Many companies demand
huge investments in acquiring, developing, and selling their products, while others require little

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investment. Size of investment does not necessarily determine company success. It is the
efficiency and effectiveness with which a company carries out its operations that determine
earnings and returns to owners.

Investing decisions involve several factors such as type of investment necessary (including
technological and labor intensity), amount required, acquisition timing, asset location, and
contractual agreement (purchase, rent, and lease). Like financing activities, decisions on
investing activities determine a company’s organizational structure (centralized or
decentralized), affect growth, and influence riskiness of operations. Investments in short-term
assets are called current assets. These assets are expected to be converted to cash in the short
term. Investments in long-term assets are called noncurrent assets or Fixed assets.

3. Operating Activities: Once a business has the assets it needs to get started, it can begin its
operations. Operating activities represent the carrying out of the business plan, given necessary
financing and investing. These activities involve several basic functions such as research,
purchasing, production, marketing, and labor. Operating activities are a company's primary
source of income. Income measures a company's success in buying from input markets and
selling in output markets. How well a company does in devising business plans and strategies,
and with decisions on elements comprising the mix of operating activities, determines its success
or failure.

Revenue is the income resulting from the sale of a product or service in the normal course of
business. Revenues arise from different sources and are identified by various names depending
on the nature of the business. Sources of revenue common to many businesses are sales revenue,
service revenue, and interest revenue. The company purchases its longer-lived assets through
investing activities as described earlier. Other assets with shorter lives, however, result from
operating activities. For example, supplies are assets used in day-to-day operations. Goods
available for future sales to customers are assets called inventory. Also, if a company sells
goods to a customer and does not receive cash immediately, then the company has a right to
expect payment from that customer in the near future. This right to receive money in the future is
called an account receivable.

Before the company makes sales it must purchase the ingredients or raw materials required for
production, then process the mix, and wrap and ship the finished product. It also incurs costs like
salaries, rents, and utilities. All of these costs, referred to as expenses, are necessary to produce
and sell the product. In accounting language, expenses are the cost of assets consumed or
services used in the process of generating revenues.

Expenses take many forms and are identified by various names depending on the type of asset
consumed or service used. For example, cost of goods sold (such as the cost of ingredients);
selling expenses (such as the cost of salespersons’ salaries); marketing expenses (such as the
cost of advertising); administrative expenses (such as the salaries of administrative staff, utility
bills and telephone and heat costs incurred at the corporate office); interest expense (amounts of
interest paid on various debts); and income taxes (corporate taxes paid to government).

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A company may also have liabilities arising from these expenses. For example, it may purchase
goods on credit from suppliers; the obligations to pay for these goods are called accounts
payable. Additionally, it may have interest payable on the outstanding amounts owed to the
bank. It may also have wages payable to its employees and sales taxes payable, property taxes
payable, and income taxes payable to the government. The company then compares the
revenues with the expenses of that period to determine whether it earned a profit. When revenues
exceed expenses, net income results. When expenses exceed revenues, a net loss results.

FINANCIAL STATEMENTS REFLECTING THE BUSINESS ACTIVITIES

Business activities— financing, investing, and operating— can be synthesized into a cohesive
picture of how businesses function in a market economy. In the first step, a company obtains
necessary financing from equity investors and creditors. Financing is used to acquire investments
in resources to produce goods or services. The company uses these investments to undertake
operating activities.

At the end of a period of time—typically quarterly or annually—financial statements are

prepared and reported. These statements list the amounts associated with financing and investing
activities, and summarize operating activities for the most recent period(s). This is the role of
financial statements—the object of analysis. The financial statements listing of financing and
investing activities are at a point in time, whereas the reporting of operating activities cover a
period of time.

Information regarding all these activities are arranged in the format of four different financial
statements, which form the backbone of financial accounting:

 To present a picture at a point in time of what your business owns (its assets) and what it
owes (its liabilities), companies prepare a balance sheet.
 To show how successfully the business has performed during a period of time, it report
its revenues and expenses in an income statement.
 To indicate how much of previous income was distributed to the investors and the other
owners of the business in the form of dividends, and how much was retained in the
business to allow for future growth, it presents a retained earnings statement.
 To show where the business obtained cash during a period of time and how that cash was
used, it presents a statement of cash flows.

Balance Sheet

The accounting equation (also called the balance sheet identity) is the basis of the accounting
system: Assets = Liabilities + Equity. The left-hand side of this equation relates to the resources
controlled by a company, or assets. These resources are investments that are expected to
generate future earnings through operating activities. To engage in operating activities, a
company needs financing to fund them. The right-hand side of this equation identifies funding
sources. Liabilities are funding from creditors and represent obligations of a company or,
alternatively, claim of creditors on assets. Equity (or shareholders’ equity) is the total of (1)
funding invested or contributed by owners (contributed capital) and (2) accumulated earnings in

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excess of distributions to owners (retained earnings) since inception of the company. From the
owners’, or shareholders’, point of view, equity represents their claim on company assets. As
lightly different way to describe the accounting equation is in terms of sources and uses of funds.
That is, the right-hand side represents sources of funds (either from creditors or shareholders, or
internally generated) and the left-hand side represents uses of funds.

Assets and liabilities are separated into current and noncurrent amounts. Current assets are
expected to be converted to cash or used in operations within one year or the operating cycle,
whichever is longer. Current liabilities are obligations the company is expected to settle within
one year or the operating cycle, whichever is longer. The difference between current assets and
current liabilities is called working capital.

It is revealing to rewrite the accounting equation in terms of business activities—namely,

investing and financing activities: Total investing = Total financing; or alternatively: Total
investing = Creditor financing + Owner financing.

Remember the accounting equation is a balance sheet identity reflecting a point in time.
Operating activities arise over a period of time and are not reflected in this identity. However,
operating activities can affect both sides of this equation. That is, if a company is profitable, both
investing (assets) and financing (equity) levels increase. Similarly, when a company is
unprofitable, both investing and financing decline.

Let’s consider the following Balance Sheet of SIERRA CORPORATION as on December 31, 2015

Assets
Cash $15,200
Accounts Receivable 200
Inventories 1,000
Prepaid expense 550
Land & Buildings 3,000
Plants 1,960
Total Assets $21,910

Liabilities & Owners’ Equity

Liabilities
Notes Payable $ 5,000
Accounts Payable 2,500
Salaries Payable 850
Bonds Payable 1,200
Total Liabilities $9,550
Shareholders’ Equity
Common Stock ($1 Par) 10,000
Retained Earnings 2,360
Total Shareholders’ Equity 12,360
Total Liabilities & Shareholders’ Equity $21,910

As you can see from looking at Sierra’s balance sheet in Illustration, the balance sheet presents
the company’s financial position as of a specific date— in this case, December 31, 2015. It lists

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assets first, followed by liabilities and stockholders’ equity. Stockholders’ equity is comprised of
two parts: (1) common stock and (2) retained earnings. As noted earlier, common stock results
when the company sells new shares of stock; retained earnings is the net income retained in the
corporation. Sierra has common stock of $10,000 and retained earnings of $2,360, for total
stockholders’ equity of $12,360.

Income statement

An income statement measures a company’s financial performance between balance sheet dates.
It is a representation of the operating activities of a company. The income statement provides
details of revenues, expenses, gains, and losses of a company for a time period. The bottom line,
earnings (also called net income), indicates the profitability of the company. Earnings reflects
the return to equity holders for the period under consideration, while the line items of the
statement detail how earnings are determined. Earnings approximate the increase (or decrease) in
equity before considering distributions to and contributions from equity holders.

The income statement includes several other indicators of profitability. Gross profit (also called
gross margin) is the difference between sales and cost of sales (also called cost of goods sold). It
indicates the extent to which a company is able to cover costs of its products. This indicator is
not especially relevant for service and technology companies where production costs are a small
part of total costs. Earnings from operations refers to the difference between sales and all
operating costs and expenses. It usually excludes financing costs (interest) and taxes. Earnings
before taxes, as the name implies, represents earnings from continuing operations before the
provision for income tax. Earnings from continuing operations is the income from a
company’s continuing business after interest and taxes. It is also called earnings before
extraordinary items and discontinued operations.

The income statement lists the company’s revenues followed by its expenses. Finally, Sierra
determines the net income (or net loss) by deducting expenses from revenues. Sierra
Corporation’s income statement for the year ended December 31, 2015 is shown below:

Revenues $10,600
Less: Cost of goods sold 1,000
Gross Profit 9,600
Less: Operating Expenses
Salaries 3,500
Rent 1,500
Depreciation 400 5,400
Income From Operation 4,200
Less: Interest 440
Income before tax 3,760
Less: Income tax 900
Net Income $2860

Why are financial statement users interested in net income? Investors are interested in a
company’s past net income because it provides useful information for predicting future net
income. Investors buy and sell stock based on their beliefs about a company’s future
performance. If investors believe that Sierra will be successful in the future and that this will

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 result in a higher stock price, they will buy its stock. Creditors also use the income statement to
predict future earnings. When a bank loans money to a company, it believes that it will be repaid
in the future. If it didn’t think it would be repaid, it wouldn’t loan the money. Therefore, prior to
making the loan the bank loan officer uses the income statement as a source of information to
predict whether the company will be profitable enough to repay its loan. Thus, reporting a strong
profit will make it easier for Sierra to raise additional cash either by issuing shares of stock or
borrowing.

Statement of Shareholders’ Equity

The owner’s equity statement reports the changes in owner’s equity for a specific period of time.
The time period is the same as that covered by the income statement and balance sheet. Amounts
received from issuing stock are not revenues, and amounts paid out as dividends are not
expenses. As a result, they are not reported on the income statement. To show such transactions
separate statement is to be prepared by companies. The statements of retained earnings,
comprehensive income and changes in capital accounts are often called the statements of
changes in shareholders’ equity. This statement is useful in identifying reasons for changes in
equity holders’ claims on the assets of a company. Sierra Corporation’s statement of changes in
shareholders’ equity for the most recent year (also shows the possible transactions that may
affect the statement) is shown below:
Accumulated other
Comprehensive Income
Common Additional Retained Treasury Unrealized Foreign Total
Stock Paid in Earnings Stock Gain (Loss) Currency Shareholder’s
$1 Par Capital On Translation equity
Investment Adjustment

1. Balance, Dec. 31 2015 *** *** *** *** *** *** ***
2. Issuance of Stock *** *** ***
3. Net Income *** ***
4. Cash Dividends *** ***
5. Stock Dividend @....... *** ***
6. Share repurchase *** ***
7.Sale of Treasury Stock ***
8. Unrealized Gain on *** ***
Investments
9. Foreign Currency *** ***
Translation Adjustment
10. Balance Dec. 31 2015 *** *** *** *** *** *** ***

Changes in shareholders’ equity may held mainly due to the issuance of stock, repurchasing
stock (treasury shares) and reinvesting earnings. As such, we can detail these changes under Five
columns: Common Shares, Additional Paid-in Capital, Retained Earnings, Treasury Stock and
Accumulated Other Comprehensive Income that comprises both unrealized gain/loss on
investment and foreign currency transaction adjustment. Common Shares and Additional Paid-In
Capital together represent Contributed Capital and are often collectively called share capital
(many analysts also net Treasury Stock in the computation of share capital). The change in

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retained earnings is especially important because this account links consecutive balance sheets
through the income statement.

Statement of Cash Flows

Earnings are determined using the accrual basis of accounting. Under accrual accounting,
revenues are recognized when a company sells goods or renders services, regardless of when it
receives cash. Similarly, expenses are matched to these recognized revenues, regardless of when
it pays cash. Earnings do not typically equal net cash flows, except over the life of a company.
Because accrual accounting yields numbers different from cash flow accounting, and we know
that cash flows are important in business decisions, there is a need for reporting on cash inflows
and outflows. Yet net cash flow is the end measure of profitability. It is cash, not income that
ultimately repays loans, replaces equipment, expands facilities, and pays dividends. Accordingly,
analyzing a company’s cash inflows and outflows, and their operating, financing, or investing
sources, is one of the most important investigative exercises. This analysis helps in assessing
liquidity, solvency, and financial flexibility. Liquidity is the nearness to cash of assets and
liabilities. Solvency is the ability to pay liabilities when they mature. Financial flexibility is the
ability to react and adjust to opportunities and adversities.

The primary purpose of a statement of cash flows is to provide financial information about the
cash receipts and cash payments of a business for a specific period of time. To help investors,
creditors, and others in their analysis of a company’s cash position, the statement of cash flows
reports the cash effects of a company’s operating, investing, and financing activities. In
addition, the statement shows the net increase or decrease in cash during the period, and the
amount of cash at the end of the period. Users are interested in the statement of cash flows
because they want to know what is happening to a company’s most important resource. In
operating Sierra, the statement of cash flows will provide answers to these simple but important
questions:

 Where did cash come from during the period?

 How was cash used during the period?
 What was the change in the cash balance during the period?
 How much cash is generated from or used in operations?
 What expenditures are made with cash from operations?
 What is the source of cash for debt payments?
 How is the increase in investments financed?
 What is the source of cash for new plant assets?
 Why is cash lower when income is increased?
 What is the use of cash received from new financing?

The statement of cash flows for Sierra, in Illustration shows that cash increased $15,200 during
the month. This increase resulted because operating activities (services to clients) increased cash
$4,460 and financing activities increased cash $15,700. Investing activities used $4,960 of cash
for the purchase of equipment.

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 SIERRA CORPORATION
Statement of Cash Flows
For the year ended December 31, 2015

The statement of cash flows for Sierra shows that cash increased $15,200 during the month. This
increase resulted because operating activities (services to clients) increased cash $5,700, and
financing activities increased cash $14,500. Investing activities used $5,000 of cash for the
purchase of equipment.

BALANCE SHEET & INCOME STATEMENT OF A BANK FINANCIAL

INSTITUTION

Manufacturing is the use of machines, tools and labor to produce goods for sale. In
manufacturing raw materials are transformed into finished goods on a large scale. Such finished
goods may be used for manufacturing other more complex products, or sold to wholesalers, who
in turn sell them to retailers, who then sell them to end users – the "consumers". On the contrary,
Bank is a financial institution that acts as an intermediary between the depositors and the
borrowers. It makes profit from the difference between the rate of interest it charges on the loans
taken by the different class of borrowers and the rate of interest offered to the depositors. Other
functions of modern commercial Banks are: Facilities to depositors for making payments by
cheques, Discounting bills, Dealing in securities on its own account or on behalf of customer,
Opening letters of credit and issuing Guarantees, Dealing in Foreign Exchange, Transferring
money from one place to another in the form of Demand Draft, Pay order, Telegraphic Transfers
etc. Acting as Trustees and Executors and Dealing in Merchant Banking.

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Different format is used to prepare financial statements of a manufacturing company and a bank,
due to their functional differences. The differences between the financial statement format of a
manufacturing company and a bank are as follows:
Manufacturing Company
The income statement of a manufacturing
company begins with gross profit, which is the
difference between sales revenues and cost of
goods sold.
Operating Income is the difference between the
Gross Profit and the Total Operating
Expenditure.
Provision charged on doubtful debt is part of
operating expenditure of a manufacturing
company.
Interest on debt is deducted from Net
Operating income.
No money is set aside as statutory reserve.
Current assets of manufacturing company
include cash, accounts receivable, inventory,
marketable securities, and prepaid expenses.
Current liabilities of manufacturing company
include short term institutional or non-
institutional loans and accounts payable for
goods, services or supplies that were purchased
for use in the operation of the business.
TASNIM UDDIN CHOWDHURY, Assistant Professor, Department of Finance, FBS, PU
Bank Financial Institution
The income statement of a Bank Financial
Institution begins with Net Interest Income,
which is the difference between the total
interest income and Interest accrued and paid.
Operating Income is the sum of Net Interest
Income and Commission, Exchange and
Brokerage Received.
Provision for Doubtful Debt is deducted
separately from the Net operating income i.e.
Profit Before Provision Against Doubtful debt.
Interest Accrued and Paid on different deposit
schemes is deducted from the Interest Income.
A bank has to set aside a reserve (@20% on
Total Profit Before Tax) separately which is
obligated by the Bangladesh Bank.
Bank current assets include Negotiable
certificates of deposit, Marketable securities,
due from banks, Cash held in trust, Interest-
bearing deposits in other banks.
Current liabilities of bank include savings
accounts, Short-term borrowings from other
banks & securities dealers, Outstanding
expenditures, Dividend payable (preferred
stock) etc.
Page 10 of 18
 ………………………… Bank Limited
Profit and Loss Account
For the year ended …………………………

Particulars Amount Amount

1. Interest Income:
Interest on Loan ******
Interest on Cash Credit ******
Interest on Over draft ******
Interest and other receivables ******
Total Interest Income ******

2. Interest Accrued and Paid:

Interest on Fixed Deposit ******
Interest on current accounts ******
Interest on Savings bank Deposit ******
Total Interest Accrued and Paid ******

3. Net Interest Income (1-2) ******

Add: Commission, Exchange and Brokerage Received ******

4. Total Operating Income ******

5. Operating Expenses: ******

Salaries and allowances ******
Managing Director’s or Chief Executive’s salary ******
Director’s Fee ******
Rent, Insurance and Lighting etc ******
General Expenses ******
Postage, stamp, telegram, telephone etc ******
Auditors fee ******
Depreciation and repair of fixed asset ******
Loan loss Written off ******
Stationery items ******
Other/ Sundry expenses
Total Operating Expenses ******

6. Profit Before Provision Against Doubtful debt (4-5) ******

Less: Provision for Doubtful Debt ******

7. Total Profit Before Tax ******

Less: Provision For Taxation ******

8. Total Profit After Tax ******

Less: Appropriation as Statutory Reserve (20% on 7) ******
Less: Interim Dividend ******

9. Retained Profit for the Year ******

Add: Previous Year Profit ******
Less: Dividend ******

10. Profit Surplus as On …………………………. ******

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 …………………………… Bank Limited
Balance Sheet
As at …………………………

Particulars Amount Amount

Property and Assets

1. Cash:
Cash in Hand *******
Cash with Bangladesh Bank *******

2. Cash with other banks and financial institutions *******

3. Money at call and short notice *******

4. Investment:
Investment in Government securities *******
Reserve fund Investment *******
Provident fund investment *******
Investment in Commercial Securities *******
Investment in other securities ******* *******

5. Loans and Advances:

Loans, Cash credit and overdraft:
Unclassified *******
Substandard *******
Doubtful *******
Bad/Loss ******* *******

6. Premises and Fixed Assets

Land and Buildings *******
Bank Premises *******
Furniture *******
Less: depreciation ******* *******

7. Other assets
Interest and dividends receivable *******
Prepaid expenses ******* *******

8. Non-banking Assets *******

9. Total Assets *******

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 Liabilities and Capital:

A. Liabilities:
1. Borrowing from other banks and financial Institutions *******
2. Deposits and Other accounts
Fixed Deposit *******
Savings Deposit *******
Current Account *******
Bearer certificate of deposit *******
Bills Payable ******* *******

3. Other Liabilities:
Outstanding salaries *******
Sundry creditors *******
Branch adjustments *******
Unclaimed dividends *******
Provision for tax *******
Proposed dividends *******
Provision for doubtful debt ******* *******
Total Liabilities *******

B. Capital/ Shareholders’ Equity

Paid- up Capital *******

Share Premium *******
Statutory Reserve *******
Reserve fund or General Reserve *******
Surplus Profit and Loss *******

Total Shareholders’ Equity *******

Total Liabilities and Capital *******

To learn more regarding the contents of this chapter students are suggested to read the
following books:

 Financial Statement Analysis by K.R. Subramanyam and J. Wild, (10th edition,

2009)
 Financial Statement Analysis and Security Valuation by S. H. Penman, 2001

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Solve the following problems:

Problem: 1

Put the missing items and calculate the missing figures to complete the financial statements of
Mission Ltd.
Balance Sheet
As at 31 December 2018 (figures are in millions of $)

Particulars 2018 2017

Assets:
Current Assets:
Cash in hand and Cash at Bank $ 80
Accounts Receivables 375
Inventories 415
Total Current Assets $1,000 $ 810

Net Fixed Assets:

Net Plant & Equipment (cost minus depreciation) 1,000
Other Assets 0 0
Total Assets $2,000 $1,680

Liabilities & Stockholder’s Equity:

Current Liabilities:
Accounts Payables $60 $30
Accruals 140 130
Notes Payable 110 60
Total Current Liabilities $220
Long Term Debts 750 580
Total Liabilities $1,060
Owner’s Equity:
Share Capital (50,000 shares) $130 $130
Retained Earnings 810
Total Shareholders’ Equity $940 $880
Total Liabilities & Stockholder’s Equity $1,680

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 Income Statement
For the year ended 31 December 2018 (figures are in millions of $)

Particulars 2018 2017

Net Sales $3,000.00 $2,850

Less: Cost of goods sold 920.10 790.00
Gross Profit 2,060.00
Less: Operating Expenses 1,796.10 1,797.00
Operating Income (EBIT) $283.80 $263.00
Less: Interest 88.00 60
Earnings Before Taxes 195.80 203.00
Less: Income Tax (40%)
Net Income $117.5 $121.80

N.B: Operating Expenses include Depreciation of $ 100 & $ 90 for the year 2018 & 2017 respectively.

Statement of Stock Holders’ Equity, December 31, 2018 (in Million $)

Total
Particulars Common Retained Stockholders’
Stock Earnings Equity
Balances, December 31, 2017 $ 130 $ $880.00
Net Income
Cash Dividends $(57.50)
Balances, December 31, 2018

TASNIM UDDIN CHOWDHURY, Assistant Professor, Department of Finance, FBS, PU

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 Statement of Cash Flows for 2018 (Millions of Dollars)

Particulars Amount
I. Cash Flow from Operating Activities
Net Income $
Depreciation 100.00
Increase in inventories
Increase in accounts receivable
Increase in accounts payable
Increase in accrued wages and taxes 10.00
Net Cash Provided by Operating Activities $ (2.50)

II. Cash Flow from Investing Activities

Additions to property, plant and equipment $ (230.00)
Net Cash used by Investing Activities $ (230.00)

III. Cash Flow from Financing Activities

Increase in Notes Payable $50.00
Increase in Long term debts
Payments of Dividends
Net Cash Provided by Financing activities $162.50

IV. Summary
Net decrease in cash (sum of I, II & III) $ (70.00)
Cash and equivalents at the beginning of the year
Cash and equivalents at the end of the year

Problem: 2

Prepare an Income Statement from the presented account balances of Wade products Ltd given
below:
Rent Revenue $ 6,500 Sales discount $ 7,800
Interest expense 12,700 Selling expenses 99,400
Beginning Retained Earnings 114,400 Sales Revenue 400,000
Ending Retained Earnings 134,000 Income tax 26,600
Dividend Revenue 71,000 Cost of Goods Sold 184,400
Sales Returns and allowances 12,400 Administrative expense 82,500

TASNIM UDDIN CHOWDHURY, Assistant Professor, Department of Finance, FBS, PU

Page 16 of 18
Problem: 3
Bailey Corporation paid $ 11,175 million Dividend in the year 2008 out of $22,350 million Net
Income. You are required to Complete the following Balance Sheet of Bailey Corporation
(dollars and shares are in millions):

Particulars 2019 ($) 2018 ($)

Assets:
Cash 13,000
Accounts Receivables 30,000
Inventories 28,125 21,000
Total Current Assets 72,125 59,000
Net Plant Assets 50,000
Total Assets 1,22,125
Liabilities and Equity
Accounts payable 10,800
Notes Payable 6,700 5,150
Accruals 6,000
Total Current Liabilities 25,100 20,150
Bonds 15,000 15,000
Total Liabilities 40,100
Common Stock (5,000 shares) 50,000 50,000
Retained Earnings 20,850
Total Owners’ Equity 82,025 70,850
Total Liabilities and Owners’ Equity 106,000

Problem: 4

Using the Following items and figures (in ‘000), you are required to prepare a statement of cash
flows

Net income= $ 10,000; Increase in Accounts payable= $ 2,000; Depreciation= $800; Dividends Paid=
$900; Gain on sale of fixed asset= $200; Decrease in Receivables= $ 2,000; Purchase of fixed Asset= $
3,000; Issuance of Common Stock= $6,000; Beginning Cash Balance= $ 200; Fixed Assets Sold =
$1000. Increase in inventory= $ 1,000; Decrease in Bills payable= $ 150

TASNIM UDDIN CHOWDHURY, Assistant Professor, Department of Finance, FBS, PU

Page 17 of 18
Problem: 5
Prepare a profit & Loss account from the given information of White Bank Ltd:
Details Taka
Interest on loan 3,59,000
Interest on fixed deposits 3,65,000
Commission received from customers 91,00
General expenses 1,55,000
Interest on cash credit 2,24,000
Interest received from other accounts 12,000
Rent 18,000
Interest on overdrafts 1,28,000
Directors and auditors’ fee 4,200
Interest on savings bank deposit 69,000
Postage and stationery 5,000
Sundry Expenses 1,800
Provision for doubtful debts 100
Provision for taxation 60,000

Problem: 6
Prepare a Balance Sheet from the given information of Black Bank Ltd:

Details Taka
Paid up capital 20,00,000
Reserve Fund Investment 18,00,000
Reserve Fund 7,70,000
Cash credits and overdrafts 28,00,000
Unclaimed dividend 10,000
Loans 46,00,000
Current deposits 38,00,000
Furniture 40,000
Surplus from profit and loss account 2,20,000
Cash in hand 5,00,000
Cash with other banks 13,00,000
Branch adjustments 1,70,000
Investment 9,50,000
Loans from other banks 12,10,000
Savings deposit 10,00,000
Fixed deposits 30,00,000
Premises 3,19,000
Provision for doubtful debts 80,000

Additional information:
a) Bank’s acceptance on behalf of customers were Tk. 6,50,000.
b) Profit Before Tax was tk. 2,45,000.

TASNIM UDDIN CHOWDHURY, Assistant Professor, Department of Finance, FBS, PU

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