Chapter#1

INTRODUCTION
THE COMPANY AND ITS OPERATIONS
The company was incorporated in Pakistan on 03 December, 1989 as a
Public Limited Company. Its shares are quoted on Stock Exchanges in
Pakistan. It is principally engaged in manufacturing and sale of yarn. The
Company is also setting-up a Textile Weaving Unit
The head office of the company is Multan. The company manufactures and
exports the yarn. This is in fact spinning mill that buys cotton from outside
and then converts into yarn. The company manufactures yarn of export
quality.
The major importers of yarn are America, Hong Kong, and Sirilanka. Major
part of the
sale involves exports. Local sales are very small in quantity, reason behind
this is 15% sales tax that company has to pay on local sales, while on
exports company has to pay only 1.25% with holding tax to government
including some bank charges. More over some times thereof are chances of
exchange gain and loss, which results from increase and decrease in foreign
exchange rates.
 MANAGEMENT OF THE COMPANY
 BOARD OF DIRECTORS
Mian Muhammad Javed Anwar (Chairman)
Mian Muhammad Parvez (Chief Executive)
Mrs. Salma Javed
Mrs.
Wahe
eda
Parve
z
Mr. Muhammad Haris
Mrs.Haleema Haris
Mr. Muhammad Aurangzeb
Mr. Manzoor Ahmad (Rep. N. I.T)
Mr. Abdul Latif Uqaili (Rep. I.C.P)

 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 30 th
September.
 FIVE YEARS FINANCIAL REVIEW AT A GLANCE
YEAR 2001 2000 1999 1998 1997
Sales 801123552 65937781 59416355 53343086 454999407
8 9 5
Cost of sale 71314717 48773901 52392746 48940170 389070984
0 5 3 4
Gross profit 8797638 17163880 70176096 44029161 65928423
2 3
Profit/(loss)befor 38636574 12922682 28570898 7416772 25109125
e tax 4
Profit/(loss) after 23054574 101821104 27658406 7416772 25109125
tax
Fixed Assets 18598988 19529529 19529529 15819022 169171197
2 7 7 2

Chapter#2
COMMERCIAL DEPARTMENT
The commercial department involves two most important departments of the
company i.e. purchase department and sales department. Mian Naveed
Ahmed who is director of the company and one of the owners of company
controls this important department.

COMMERCIAL

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

PURCHASE
DEPARTMENT

COTTON STORE
PURCHASE PURCHASE

Cotton Purchase Department

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

irector

VICE
PRESIDENT

FIELD
(i)
MANAGER

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

Demand of purchase
from mill
Purchase Requisition

Sample from different

suppliers and
quotations

Sample Testing
Decision-making

Agreement with the

Party
Receiving
Writing delivery order
for factory

InGate 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.

Director

Manager Local Sales Manager Export

Commercial Asst Export Asst

Ahmad Hassan Textile Mills is selling its product to local as well as in

international market. Thus the sales department of the Ahmad Hassan Textile
Mills is divided in to two sections

Sales Department

Local sales Deptt Export Deptt

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

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

Director

Manager Export

Export Assistant

Typist
Export Process
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:

Chief Executive

Director

Senior Manager
Import

Assistant

Procedure
Senior Manager is responsible for import of machinery, equipment, spare
parts, raw material, etc.
• An indent for import of item after the approval of Chief Executive is sent
to import department.
• The Senior Manager Import selects a subcontractor from approved
suppliers list.
• In reply, a quotation from the subcontractor is received .A copy of
quotation is sent to concerned department for evaluation and checking of
specification.

• The received items are sending to the mills where these are opened.
The items are checked against quotations. In case of any damage, the
import department is informed immediately. Import department do the
necessary arrangements for survey of goods from insurance agencies
Chapter # 6
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

Chief Accountant

Accountant

Asst Accountant

Computer
Operator

Cashier

Record Keeper

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

1. Stores section
2. Salaries and Wages Section
3. General Accounting
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 Yarn 689000
Sale Tax 103350
Description
 This is sale made to buyer (IDM)
 Here again rate is 15% (689000x15%)
 Sale tax is collected from the buyer and will be paid to sale tax
department that is why sale tax is not treated as expense, but was
credited
 This entry will be made on (JV)

Bank (1840—3) 764617

Advance I. Tax 27732
IDM 792350

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

Adjustment of Realization:
Name of Party: Bolan Trading
Bank Ref: 53/102
Contract no: 010
Invoice Number: 027
Exchange Rate: 63.95
Calculation of amount of Realization in case of exports
to Bolan Trading situated in America.
$
Rs
Invoice Value 37758.06
Realized Value 37713.06
Foreign Bank Charges 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

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
 Acknowledgement
All 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.
 INT ERNSHIP REPOR T
ON
MADINA JUTE MILLS (PVT.) LTD.
M. GARH

PRESENTED BY:

INTEZAR HUSSAIN Roll # 27

M.Com (Final)
Session 2001-2003

DEPARTMENT OF COMMERCE
BAHAUDDIN ZAKARIYA UNIVERSITY,
MULTAN