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FIN621 Financial Statement Analysis Assignment 2 Solution Fall 2012

Ambler Diversification Limited (ADL) has a diversified line of business. The owner of the company, Mr. Ibad Ahmad, is a young and enthusiastic person and is always willing to invest in diverse projects to capitalize good amount of earnings. ADL has two major separate lines of businesses – beverages and financial services. At the beginning of 2011, Mr. Ibad decided to invest in pharmaceutical industry. For financing this investment, he sold its financial services unit in whole which resulted in Rs.1,400,000 pretax gains. He also sold an assembly plant installed in the beverages unit at pretax loss of Rs.1,700,000. This sale did not represent the sale of ADL’s beverages unit.The following additional transactions and events pertain to 2011 are as follows:

Sales Rs.17,000,000; Cost of Goods Sold Rs.5,700,000; Selling Expenses Rs.4, 000,000 and General & Administrative Expenses are of Rs.2,600,000. The company’s income tax rate is 30%.

The company incurred Rs.350, 000 clean-up cost (pretax) associated with an accidental release of potentially hazardous chemicals. The company has very strong controls to prevent such events, and this occurred only because of a series of nonrecurring and unusual system failures. The loss has been judged to be extraordinary.

ADL changed its method of accounting for inventory at the beginning of 2011. The cost of goods sold of Rs.5,700,000 is based on the new method. Had the new method been in use all along previously, prior years’
income would have been higher by Rs. 4, 800,000 (net of tax effects).

The company’s senior accountant discovered an error in a prior year’s reported profit. The error caused an overstatement of Rs.745,000 for net income of year 2010.

Retained earnings as at January 1, 2011, were showing balance of Rs.11,000,000 before giving consideration to the correction of error and accounting change described above.

Requirement:

a) Prepare an income statement for Ambler Diversification Limited for the year 2011.

b) Prepare a statement of retained earnings after incorporating the above mentioned corrections and change estimates for the year 2011.

Solution:

AMBLER DIVERSIFICATION LIMITED

INCOME STATEMENT

Particulars Note Amount Rs.
Sales

Less: Cost of Goods Sold

 

 

17,000,000

5,700,000

Gross Profit   11300000
Less: Administrative Expenses

Less: Selling Expenses

  2,600,000

4,000,000

Operating Profit   4,700,000
Other Expenses   Nil
Earning Before Interest and Tax (EBIT)   4,700,000
Income Tax (30%)   1,410,000
Profit After Tax   3,290,000

Please note that the one time occurance of an event and loss thereof cannot be shown on the income statement body as it has to show income and an accident which might have caused loss, is not part of the normal operation of the company that is why it will be separately shown (Fin621 Handout Page 38, special items).

 

AMBLER DIVERSIFICATION LIMITED

STATEMENT OF RETAINED EARNINGS

Particulars Notes Amount Rs.
Retained Earnings for the year 2010   11,000,000
Overstatement due to Error   745,000
Retained Earnings (correction of Error)   10255000
Difference due new inventory accounting method   (4,800,000)
Retained Earning at the start of 2011   5,455,000
Net Loss on Disposal of Assets   (300,000)
Expenses on Clean Up Process   (350,000)
Net Retained Earnings at the start of 2011   4,805,000
Income after Tax for 2011   3,290,000
Total Retained Earnings at the end of 2011 without payment of dividend   8,095,000

 

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