Management accountingManagement accountingTheThe AssociationAssociation ofof CertifiedCertified andandCorporateCorporate AccountantsAccountants hashas defineddefinedCorporateCorporate AccountantsAccountants hashas defineddefinedManagementManagement AccountingAccounting asas ““ thetheapplicationapplication ofof accountingaccounting andand statisticalstatisticalapplicationapplication ofof accountingaccounting andand statisticalstatisticaltechniquestechniques toto thethe specifiedspecified purposepurpose ofof

d id i dd i ii i i f ii f iproducingproducing andand interpretinginterpreting informationinformationdesigneddesigned toto assistassist ManagementManagement inin itsitsfunctionsfunctions ofof promotingpromoting maximummaximumefficiencyefficiency andand envisaging,envisaging, formulatingformulatingyy g g,g g, ggandand coordinatingcoordinating theirtheir execution”execution”..

ManagementManagement isis thethe organizationalorganizational functionfunctionthat,that, likelike investment,investment, getsgets thingsthings donedoneefficiently,efficiently, toto gaingain thethe bestbest returnreturn onon allall

resourcesresourcesresourcesresources..

ManagementManagement isis anan organizationalorganizational functionfunctionManagementManagement isis anan organizationalorganizational function,function,likelike sales,sales, marketingmarketing oror financefinance.. ItIt doesn'tdoesn'tnecessarilynecessarily meanmean managingmanaging peoplepeople.. WeWe cancanmanagemanage ourselvesourselves oror thethe materialmaterial assignedassignedtoto usus atat workwork.. IfIf youyou managedmanaged aa projectproject veryvery

llll itit ldld th tth twellwell onon youryour own,own, itit wouldwould meanmean thatthat youyoudiddid thethe jobjob inin aa wellwell--organized,organized, efficientefficientmannermanner makingmaking goodgood useuse ofof allall resourcesresources atatmanner,manner, makingmaking goodgood useuse ofof allall resourcesresources atatyouryour disposaldisposal..

•• AccountingAccounting isis thethe systematicsystematic recording,recording,reporting,reporting, andand analysisanalysis ofof financialfinancial transactionstransactions ofofaa businessbusiness.. TheThe personperson inin chargecharge ofof accountingaccounting isisknownknown asas anan accountantaccountant,, andand thisthis individualindividual isistypicallytypically requiredrequired toto followfollow aa setset ofof rulesrules andandregulationsregulations,, suchsuch asas thethe GenerallyGenerally AcceptedAcceptedAccountingAccounting PrinciplesPrinciples.. AccountingAccounting allowsallows aacompanycompany toto analyzeanalyze thethe financialfinancial performanceperformance ofofthethe business,business, andand looklook atat statisticsstatistics suchsuch asas netnetprofitprofit..

ManagementManagement accountingaccounting orormanagerialmanagerial accountingaccounting isis concernedconcernedwithwith thethe provisionsprovisions andand useuse ofofppaccountingaccounting informationinformation toto managersmanagerswithinwithin organizationsorganizations toto provideprovide themthemwithinwithin organizations,organizations, toto provideprovide themthemwithwith thethe basisbasis toto makemake informedinformed businessbusinessdecisionsdecisions thatthat willwill allowallow themthem toto bebedecisionsdecisions thatthat willwill allowallow themthem toto bebebetterbetter equippedequipped inin theirtheir managementmanagement andand

ll f if icontrolcontrol functionsfunctions

AccordingAccording toto thethe CharteredChartered InstituteInstitute ofofManagementManagement AccountantsAccountants (CIMA)(CIMA),, ManagementManagementAccountingAccounting isis "the"the processprocess ofof identification,identification,measurement,measurement, accumulation,accumulation, analysis,analysis, preparation,preparation,interpretationinterpretation andand communicationcommunication ofof informationinformationinterpretationinterpretation andand communicationcommunication ofof informationinformationusedused byby managementmanagement toto plan,plan, evaluateevaluate andand controlcontrolwithinwithin anan entityentity andand toto assureassure appropriateappropriate useuse ofof

dd bilibili ff iiandand accountabilityaccountability forfor itsits resourcesresources.. ManagementManagementaccountingaccounting alsoalso comprisescomprises thethe preparationpreparation ofoffinancialfinancial reportsreports forfor nonnon--managementmanagement groupsgroups suchsuchfinancialfinancial reportsreports forfor nonnon managementmanagement groupsgroups suchsuchasas shareholders,shareholders, creditors,creditors, regulatoryregulatory agenciesagencies andandtaxtax authorities"authorities" (CIMA(CIMA OfficialOfficial Terminology)Terminology)..

Ref:Ref:http://en.wikipedia.org/wiki/Management_accountinghttp://en.wikipedia.org/wiki/Management_accountingp p g g gp p g g ghttp://businessmanagement.suite101.com/article.cfm/what_is_management_#ihttp://businessmanagement.suite101.com/article.cfm/what_is_management_#ixzz0unLcVK9qxzz0unLcVK9q

IFSB• The Islamic Financial Services Board (IFSB)

was officially inaugurated on 3N b 2002 It t bli h t thNovember, 2002. Its establishment was theculmination of an extensive two-yearconsultative process initiated by a group ofconsultative process initiated by a group ofgovernors and senior officials of centralbanks and monetary authorities of various

t i t th ith th t f thcountries, together with the support of theIslamic Development Bank (IDB), theInternational Monetary Fund (IMF) and They ( )Accounting and Auditing Organization forIslamic Financial Institutions (AAOIFI).

Malaysia,Malaysia, whichwhich isis thethe hosthost countrycountry ofof thethe IFSB,IFSB,hh dd ll kk hh I l iI l i Fi i lFi i lhashas enactedenacted aa lawlaw knownknown asas thethe IslamicIslamic FinancialFinancialServicesServices BoardBoard ActAct 20022002,, whichwhich givesgives thethe IFSBIFSBthethe immunitiesimmunities andand privilegesprivileges thatthat areare usuallyusuallythethe immunitiesimmunities andand privilegesprivileges thatthat areare usuallyusuallygrantedgranted toto internationalinternational organizationsorganizations andanddiplomaticdiplomatic missionsmissions..ppTheThe objectivesobjectives ofof thethe IFSBIFSB areare::

aa..ToTo promotepromote thethe developmentdevelopment ofof aa prudentprudent andandaa..ToTo promotepromote thethe developmentdevelopment ofof aa prudentprudent andandtransparenttransparent IslamicIslamic FinancialFinancial ServicesServices industryindustrythroughthrough introducingintroducing newnew oror adaptingadapting existing,existing,internationalinternational standardsstandards consistentconsistent withwith ShariahShariahprinciplesprinciples andand recommendrecommend thesethese forfor adoptionadoption..

bb.. ToTo provideprovide guidanceguidance onon thethe effectiveeffective supervisionsupervisiondd l til ti ff i tit tii tit ti ff iff i I l iI l iandand regulationregulation ofof institutionsinstitutions offeringoffering IslamicIslamic

FinancialFinancial productsproducts andand toto developdevelop forfor thethe IslamicIslamicFinancialFinancial servicesservices industryindustry thethe criteriacriteria forforFinancialFinancial servicesservices industryindustry thethe criteriacriteria forforidentifying,identifying, managingmanaging andand disclosingdisclosing risks,risks, takingtakingintointo accountaccount internationalinternational standardsstandards forforvaluation,valuation, incomeincome andand expenseexpense calculationcalculation andanddisclosuredisclosure..

cc.. ToTo liaiseliaise andand cooperatecooperate withwith relevantrelevantorganizationsorganizations currentlycurrently settingsetting standardsstandards forfor thethet bilitt bilit dd thth dd ff thth i t ti li t ti lstabilitystability andand thethe soundnesssoundness ofof thethe internationalinternational

monetarymonetary andand financialfinancial systemssystems andand thosethose ofof thethemembermember countriescountriesmembermember countriescountries..

dd.. ToTo enhanceenhance andand coordinatecoordinate initiativesinitiatives toto developdevelopii dd dd ff ffi iffi iinstrumentsinstruments andand proceduresprocedures forfor efficientefficientoperationsoperations andand riskrisk managementmanagement..TT ii bbee.. ToTo encourageencourage cooperationcooperation amongstamongst membermembercountriescountries inin developingdeveloping thethe IslamicIslamic financialfinancialservicesservices industryindustryservicesservices industryindustry..

ff.. ToTo facilitatefacilitate trainingtraining andand personnelpersonnel developmentdevelopmentinin skillsskills inin areasareas relevantrelevant toto thethe effectiveeffectiveinin skillsskills inin areasareas relevantrelevant toto thethe effectiveeffectiveregulationregulation ofof thethe IslamicIslamic financialfinancial servicesservicesindustryindustry andand relatedrelated marketsmarkets..industryindustry andand relatedrelated marketsmarkets..

gg.. ToTo undertakeundertake researchresearch intointo andand publishpublish studiesstudiesandand surveyssurveys onon thethe IslamicIslamic financialfinancial servicesservicesandand surveyssurveys onon thethe IslamicIslamic financialfinancial servicesservicesindustryindustry..

hh.. ToTo establishestablish aa databasedatabase ofof IslamicIslamic bank,bank, financialfinancialinstitutionsinstitutions andand industryindustry expertsexpertsinstitutionsinstitutions andand industryindustry expertsexperts..

ii.. AnyAny otherother objectivesobjectives whichwhich thethe GeneralGeneral AssemblyAssembly ofofthethe IFSIFS maymay agreeagree fromfrom timetime toto timetime..yy gg

IslamicIslamic FinancialFinancial ServicesServices BoardBoard (IFSB)(IFSB) hashas alreadyalreadyissuedissued 33 (three)(three) prudentialprudential guidelinesguidelines::

ii.. GuidingGuiding PrinciplesPrinciples onon CorporateCorporate GovernanceGovernance forforInstitutionsInstitutions OfferingOffering onlyonly IslamicIslamic financialfinancial ServicesServices(Excluding(Excluding IslamicIslamic InsuranceInsurance (Takaful)(Takaful) InstitutionsInstitutions(Excluding(Excluding IslamicIslamic InsuranceInsurance (Takaful)(Takaful) InstitutionsInstitutionsandand Funds)Funds)..

iiii.. CapitalCapital AdequacyAdequacy StandardStandard forfor InstitutionsInstitutions (other(other thanthanpp q yq y ((InsuranceInsurance InstitutionsInstitutions ofof IslamicIslamic FinancialFinancial Services)Services)..

iii.iii. GuidingGuiding PrinciplesPrinciples ofof RiskRisk ManagementManagement forforI tit tiI tit ti ( th( th thth II ff iff i ll I l iI l iInstitutionsInstitutions (other(other thanthan InsuranceInsurance offeringoffering onlyonly IslamicIslamicfinancialfinancial Services)Services)..

The Component of EquityThe Component of EquityC it lC it l AA B l d hB l d h B kB kCapitalCapital:: AsAs perper BangladeshBangladesh BankBankguidelines,guidelines, CapitalCapital hashas beenbeen divideddivided intointothth TiTi TiTi II ii CC C it lC it lthreethree TiersTiers:: TierTier--II ii..ee.. CoreCore Capital,Capital,ComprisingComprising thethe highesthighest qualityquality Capital,Capital, TierTier--IIII ii S l tS l t C it lC it l dd TiTi IIIIIIIIII ii..ee.. SupplementarySupplementary CapitalCapital andand TierTier--IIIIII--AdditionalAdditional SupplementarySupplementary CapitalCapital whichwhich

tt thth l tl t hi hhi h f llf ll h th trepresentsrepresents otherother elementselements whichwhich fallfall shortshortofof somesome ofof thethe characteristicscharacteristics ofof thethe CoreCoreC it lC it l b tb t t ib tt ib t tt thth llllCapitalCapital butbut contributecontribute toto thethe overalloverallstrengthstrength ofof thethe BankBank..

TheThe constituentsconstituents ofof TierTier--II (Core(Core Capital),Capital), TierTier--II(II(SupplementarySupplementary Capital)Capital) andand TierTier--IIIIII--AdditionalAdditionalpp ypp y p )p )SupplementarySupplementary CapitalCapital areare mentionedmentioned belowbelow::

)) CC it lit l (Ti(Ti I)I)a)a) CoreCore capitalcapital (Tier(Tier--I)I)::i)i) PaidPaid upup CapitalCapital;;ii)ii) ShareShare premiumpremium;;ii)ii) ShareShare premiumpremium;;iii)iii) StatutoryStatutory ReserveReserve ((2020%% ofof NetNet ProfitProfit untiluntil thetheReserveReserve reachesreaches uptoupto paidpaid upup capital,capital, SectionSection 2424

ff thth B kB k CC A tA t 19911991))ofof thethe BankBank CompanyCompany ActAct 19911991));;iv)iv) GeneralGeneral ReserveReserve;;v)v) DividendDividend EqualizationEqualization AccountAccount;;v)v) DividendDividend EqualizationEqualization AccountAccount;;vi)vi) RetainedRetained EarningsEarnings (including(including proposedproposeddividend)dividend)..

b)b) SupplementarySupplementary CapitalCapital (Tier(Tier--II)II)::i)i) GeneralGeneral ProvisionProvision onon UnclassifiedUnclassified InvestmentInvestment;;i)i) GeneralGeneral ProvisionProvision onon UnclassifiedUnclassified InvestmentInvestment;;

ii)ii) GeneralGeneral ProvisionProvision onon OffOff--BalanceBalance SheetSheet ItemsItems((00 5050%% ff 3131 1212 20072007 dd 11 0000%% ff((00..5050%% ww..ee..ff.. 3131..1212..20072007 andand 11..0000%% ww..ee..ff..3131..1212..20082008));;

iii)iii) AssetsAssets RevaluationRevaluation ReservesReserves ((100100%% ww..ee..ff..1515..0606..19931993 andand 5050..0000%% ww..ee..ff.. 3131..1212..20022002));;

iv)iv) RevaluationRevaluation ReservesReserves ofof SecuritiesSecurities ((100100%% ww..ee..ff..1111..0909..20062006 andand 5050..0000%% ww..ee..ff.. 1212..0303..20082008));;

v)v) MudarabaMudaraba PerpetualPerpetual BondBond ((3030..0000%% ofof CoreCoreCapitalCapital oror actualactual amountamount ofof MPBMPB whichwhich everever isisppless)less)..

c)c) AdditionalAdditional SupplementarySupplementary CapitalCapital (Tier(Tier --III)III)::III)III)::

TierTier IIIIII capital,capital, alsoalso calledcalled ‘Additional‘AdditionalSupplementarySupplementary Capital’,Capital’, consistingconsisting ofof shortshort--termterm subordinatedsubordinated debtdebt (original/residual(original/residual( g /( g /maturitymaturity lessless thanthan oror equalequal toto fivefive yearsyears butbutgreatergreater thanthan oror equalequal toto twotwo years)years) isis meantmeantgreatergreater thanthan oror equalequal toto twotwo years)years) isis meantmeantsolelysolely forfor thethe purposepurpose ofof meetingmeeting aaproportionproportion ofof thethe capitalcapital req irementsreq irements forforproportionproportion ofof thethe capitalcapital requirementsrequirements forforMarketMarket RiskRisk..

Working CapitalWorking CapitalWorkingWorking CapitalCapital refersrefers toto thethe investmentinvestment bybyaa companycompany inin shortshort--termterm assetsassets suchsuch asasaa companycompany inin shortshort--termterm assetsassets suchsuch asascash,cash, marketablemarketable securities,securities, accountsaccounts

i bli bl dd i t ii t i N tN t ttreceivablereceivable andand inventoriesinventories.. NetNet currentcurrentassetsassets oror netnet workingworking capitalcapital refersrefers totocurrentcurrent assetsassets lessless currentcurrent liabilitiesliabilities..ManagementManagement ofof workingworking capital,capital, therefore,therefore,gg gg ppincludesincludes managementmanagement ofof allall currentcurrent assetsassetsandand currentcurrent liabilitiesliabilities..andand currentcurrent liabilitiesliabilities..

WorkingWorking CapitalCapital isis thethe alternativealternative measuremeasure ofof thethechangeschanges inin thethe financialfinancial positionposition ofof aa concernconcern.. AllAll thosethosetransactionstransactions whichwhich increaseincrease oror decreasedecrease workingworking capitalcapitaltransactionstransactions whichwhich increaseincrease oror decreasedecrease workingworking capitalcapitalareare includedincluded inin thisthis statementstatement ;; whilewhile itit excludesexcludes allallsuchsuch itemsitems whichwhich dodo notnot affectaffect workingworking capital,capital, ee..gg..paymentpayment ofof currentcurrent liabilities,liabilities, purchasepurchase ofof inventoriesinventoriespaymentpayment ofof currentcurrent liabilities,liabilities, purchasepurchase ofof inventoriesinventoriesonon shortshort termterm credit,credit, collectioncollection ofof receivables,receivables, andand shortshorttermterm borrowing,borrowing, purchasespurchases ofof treasurytreasury billsbills oror shortshort--termterm governmentgovernment securitiessecurities.. SuchSuch transactionstransactions

tit ttit t ll b lkb lk ff thth t t lt t l t tit ti ff ththconstituteconstitute aa largelarge bulkbulk ofof thethe totaltotal transactionstransactions ofof thethebusinessbusiness firmfirm.. ThoughThough thesethese itemsitems causecause changeschanges ininindividualindividual accountsaccounts comprisingcomprising thethe currentcurrent assetsassets andandcurrentcurrent liabilitiesliabilities theythey dodo notnot causecause changeschanges inin workingworkingcurrentcurrent liabilities,liabilities, theythey dodo notnot causecause changeschanges inin workingworkingcapitalcapital itselfitself.. TheirTheir exclusionexclusion allowsallows thethe externalexternal analystanalysttoto focusfocus onon thethe overover--allall impactimpact ofof eventsevents onon thethe currentcurrentfinancialfinancial positionposition ofof thethe firmfirm.. Therefore,Therefore, thethe fundsfundspp ,,statement,statement, ii.. ee.. thethe statementstatement ofof changeschanges inin financialfinancialpositionposition basedbased onon changeschanges inin workingworking capitalcapital position,position,isis aa usefuluseful tooltool forfor highlightinghighlighting thethe changeschanges thatthat havehave

dd ii thth fi i lfi i l titi b tb t ttoccurredoccurred inin thethe financialfinancial operationsoperations betweenbetween twotwobalancebalance sheetsheet datesdates..

Moreover,Moreover, thethe conceptconcept ofof workingworking capitalcapital isis ininf itf it ithith ll ll titiconformityconformity withwith normalnormal accrualaccrual accountingaccounting

proceduresprocedures.. Hence,Hence, aa fundsfunds flowflow statementstatement basedbasedonon thethe conceptconcept ofof netnet workingworking capitalcapital fitsfits wellwell withwithonon thethe conceptconcept ofof netnet workingworking capitalcapital fitsfits wellwell withwiththethe otherother statementsstatements.. AboveAbove all,all, workingworking capitalcapital isisalsoalso aa measuremeasure ofof shortshort termterm liquidityliquidity ofof thethe firmfirm..q yq yTherefore,Therefore, anan analysisanalysis ofof factorsfactors bringingbringing aboutabout aachangechange inin thethe amountamount ofof netnet workingworking capitalcapital isisusefuluseful forfor decisiondecision--makingmaking byby shareholders,shareholders,creditors,creditors, lenderslenders andand managementmanagement.. DueDue toto thesethesereasonsreasons thethe workingworking capitalcapital approachapproach toto studyingstudyingreasonsreasons thethe workingworking capitalcapital approachapproach toto studyingstudyingthethe changeschanges inin thethe financialfinancial positionposition isis superiorsuperior totothethe cashcash approachapproach..thethe cashcash approachapproach..

ReturnReturn onon InvestmentsInvestments (ROI)(ROI)ReturnReturn onon InvestmentInvestment (ROI)(ROI) isis calculatedcalculated byby dividingdividingReturnReturn onon InvestmentInvestment (ROI)(ROI) isis calculatedcalculated byby dividingdividingnetnet profitsprofits afterafter taxestaxes byby totaltotal assetsassets oror byby multiplyingmultiplyingitsits netnet profitprofit marginmargin byby thethe totaltotal assetsassets turnoverturnover..itsits netnet profitprofit marginmargin byby thethe totaltotal assetsassets turnoverturnover..TheThe profitabilityprofitability ratiosratios cancan bebe computedcomputed byby relatingrelating thetheprofitsprofits ofof aa firmfirm toto itsits investmentsinvestments.. SuchSuch ratiosratios arearepppopularlypopularly termedtermed asas ReturnReturn onon investmentsinvestments (ROI)(ROI)..ThereThere areare threethree differentdifferent conceptsconcepts ofof investmentsinvestments ininvoguevogue inin financialfinancial literatureliterature:: assets,assets, capitalcapital employedemployedandand shareholders’shareholders’ equityequity.. BasedBased onon eacheach ofof them,them, therethereareare threethree broadbroad categoriescategories ofof ROIsROIs TheThe areare:: (a)(a) ret rnret rnareare threethree broadbroad categoriescategories ofof ROIsROIs.. TheyThey areare:: (a)(a) returnreturnonon assets,assets, (b)(b) returnreturn onon capitalcapital employed,employed, andand (c)(c) returnreturnonon shareholders’shareholders’ equityequityonon shareholdersshareholders equityequity..

•• CostCost ofof RetainedRetained earningsearnings•• RetainedRetained earningsearnings asas aa sourcesource ofof financefinance forfor investmentinvestment proposals,proposals,gg p p ,p p ,

differdiffer fromfrom otherother sourcessources likelike debt,debt, preferencepreference sharesshares andand equitiesequities..TheThe useuse ofof debtdebt isis associatedassociated withwith aa contractualcontractual obligationobligation toto aafixedfixed raterate ofof interestinterest toto thethe supplierssuppliers ofof fundsfunds and,and, often,often,

ff i i li i l d i dd i d dd AA llrepaymentrepayment ofof principalprincipal atat somesome prepre--determineddetermined datedate.. AnAn almostalmostsimilarsimilar kindkind ofof stipulationstipulation appliesapplies toto thethe useuse ofof preferencepreference sharessharesalsoalso.. InIn thethe casecase ofof ordinaryordinary shares,shares, althoughalthough therethere isis nono provisionprovisionforfor anyany prepre--determineddetermined paymentpayment toto thethe shareholdersshareholders yetyet aa certaincertainforfor anyany prepre determineddetermined paymentpayment toto thethe shareholders,shareholders, yetyet aa certaincertainexpectedexpected raterate ofof dividenddividend providesprovides aa staringstaring pointpoint forfor thethecomputationcomputation ofof costcost ofof equityequity capitalcapital.. ThatThat retainedretained earningsearnings dodo notnotinvolveinvolve anyany formalformal arrangementarrangement toto becomebecome aa sourcesource ofof fundsfunds isisyy ggobviousobvious.. InIn otherother words,words, therethere isis nono obligation,obligation, formationformation ororimplied,implied, onon aa firmfirm toto paypay aa returnreturn onon retainedretained earningsearnings.. Apparently,Apparently,retainedretained earningsearnings maymay appearappear toto carrycarry nono costcost sincesince theythey representrepresentf df d hi hhi h hh tt bb i di d ff t idt id ThTh t tit tifundsfunds whichwhich havehave notnot beenbeen raisedraised fromfrom outsideoutside.. TheThe contentioncontentionthatthat retainedretained earningsearnings areare freefree ofof cost,cost, however,however, isis notnot correctcorrect.. OnOnthethe contrary,contrary, theythey dodo involveinvolve costcost likelike anyany otherother sourcesource..

AnnuityAnnuity andand PerpetuityPerpetuityAA itit ii tt ff ll ll hh flflAnAn annuityannuity isis aa streamstream ofof equalequal annualannual cashcash flowsflows..AnAn annuityannuity isis aa seriesseries ofof receiptsreceipts oror paymentspayments ofof aafixedfixed amountamount forfor aa specifiedspecified numbernumber ofof yearsyearsfixedfixed amountamount forfor aa specifiedspecified numbernumber ofof yearsyears..AnnuitiesAnnuities involveinvolve calculationscalculations basedbased uponupon thetheregularregular periodicperiodic contributioncontribution oror receiptsreceipts ofof aa fixedfixedgg pp ppsumsum ofof moneymoney..AnAn annuityannuity thatthat goesgoes onon forfor everever isis calledcalled aayy ggperpetuityperpetuity.. PerpetuityPerpetuity isis aa streamstream ofof equalequal futurefuturepaymentspayments expectedexpected toto continuecontinue foreverforever.. TheThe

tt ll ff t itt it ff TkTk CC tt iipresentpresent valuevalue ofof aa perpetuityperpetuity ofof TkTk.. CC amountamount isisgivengiven byby thethe simplesimple formulaformula::

CCi Where i is rate of interest (investment)i Where i is rate of interest (investment)

ThisThis isis becausebecause asas thethe lengthlength ofof timetime forforThisThis isis becausebecause asas thethe lengthlength ofof timetime forforwhichwhich thethe annuityannuity isis receivedreceived increases,increases, thetheannuityannuity discountdiscount factorfactor increasesincreases butbut asasannuityannuity discountdiscount factorfactor increasesincreases butbut asaslengthlength getsgets veryvery long,long, thisthis increaseincrease inin thethe

itit f tf t ll dd II f tf tannuityannuity factorfactor slowsslows downdown.. InIn fact,fact, asasannuityannuity lifelife becomesbecomes infinitelyinfinitely long,long, thetheannuityannuity discountdiscount factorfactor approachesapproaches anan upperupperlimitlimit .. SuchSuch aa limitlimit isis 11/i/i..

• Price earning Ratio• The Price-Earning ratio is closely

related to earning yield/earnings pricerelated to earning yield/earnings priceratio. It is actually the reciprocal of thelatter This ratio is comp ted blatter. This ratio is computed bydividing the market price of the sharesby the Earning Per Share (EPS). Thus

P/E ratio = Market price of a shareEPS

TheThe P/EP/E ratioratio reflectsreflects thethe priceprice currentlycurrently beingbeing paidpaid bybythethe marketmarket forfor eacheach TakaTaka ofof currentlycurrently reportedreported EPSEPS InInthethe marketmarket forfor eacheach TakaTaka ofof currentlycurrently reportedreported EPSEPS.. InInotherother words,words, thethe P/EP/E ratioratio measuresmeasures investors’investors’expectationsexpectations andand thethe marketmarket appraisalappraisal ofof thetheexpectationsexpectations andand thethe marketmarket appraisalappraisal ofof thetheperformanceperformance ofof aa firmfirm.. InIn estimatingestimating thethe earnings,earnings,therefore,therefore, onlyonly normallynormally sustainablesustainable earningsearnings associatedassociatedwithwith thethe assetsassets areare takentaken intointo accountaccount.. ThatThat is,is, thetheearningsearnings areare adjustedadjusted forfor incomeincome from,from, say,say, discontinueddiscontinued

titi dd tt didi itit lllloperationsoperations andand extraextra--ordinaryordinary itemsitems asas wellwell asas manymanyotherother itemsitems notnot expectedexpected toto occuroccur.. AsAs aa generalgeneral rule,rule, thethehigherhigher thethe P/EP/E ratioratio thethe betterbetter itit isis forfor thethe ownersowners ThisThishigherhigher thethe P/EP/E ratio,ratio, thethe betterbetter itit isis forfor thethe ownersowners.. ThisThisratioratio isis popularlypopularly usedused byby securitysecurity analystsanalysts toto assessassess aafirm’sfirm’s performanceperformance asas expectedexpected byby thethe investorsinvestors..pp pp yy

CapitalCapital RationingRationing DecisionsDecisions..II it tiit ti hh thth fifi hh li it dli it dInIn aa situationsituation wherewhere thethe firmfirm hashas unlimitedunlimitedfunds,funds, capitalcapital budgetingbudgeting becomesbecomes aa veryverysimplesimple processprocess inin thatthat allall independentindependentsimplesimple processprocess inin thatthat allall independentindependentinvestmentinvestment proposalsproposals yieldingyielding returnreturn greatergreaterthanthan somesome prepre--determineddetermined levellevel arearethanthan somesome prepre determineddetermined levellevel areareacceptedaccepted.. However,However, thisthis isis notnot thethe situationsituationprevailingprevailing inin mostmost ofof thethe businessbusiness firmsfirms inin thethep gp grealreal worldworld.. TheyThey havehave aa fixedfixed capitalcapital budgetbudget..AA largelarge numbernumber ofof investmentinvestment proposalsproposals

ff hh li i dli i d f df d ThTh fificompetecompete forfor thesethese limitedlimited fundsfunds.. TheThe firmfirmmust,must, therefore,therefore, rationration themthem.. TheThe firmfirmallocatesallocates fundsfunds toto projectsprojects inin aa mannermanner thatthat ititallocatesallocates fundsfunds toto projectsprojects inin aa mannermanner thatthat ititmaximisesmaximises longlong--runrun returnsreturns..

•• Thus,Thus, capitalcapital rationingrationing refersrefers toto thethe situationsituation inin whichwhich thethefirmfirm hashas moremore acceptableacceptable investmentsinvestments requiringrequiring aa greatergreaterfirmfirm hashas moremore acceptableacceptable investments,investments, requiringrequiring aa greatergreateramountamount ofof financefinance thanthan isis availableavailable withwith thethe firmfirm.. ItIt isisconcernedconcerned withwith thethe selectionselection ofof aa groupgroup ofof investmentinvestmentg pg pproposalsproposals outout ofof manymany investmentinvestment proposalsproposals acceptableacceptableunderunder thethe acceptaccept--rejectreject decisiondecision.. RankingRanking ofof thetheii jj ii l dl d ii i li l i ii i jjinvestmentinvestment projectsprojects isis employedemployed inin capitalcapital rationingrationing projectprojectcancan bebe rankedranked onon thethe basisbasis ofof somesome prepre--determineddeterminedcriterioncriterion suchsuch asas thethe raterate ofof returnreturn TheThe projectproject withwith thethecriterioncriterion suchsuch asas thethe raterate ofof returnreturn.. TheThe projectproject withwith thethehigherhigher returnreturn isis rankedranked firstfirst andand thethe projectproject withwith thethe lowestlowestacceptableacceptable returnreturn lastlast.. TheThe projectsprojects areare rankedranked inin thethepp p jp jdescendingdescending orderorder ofof thethe raterate ofof returnreturn.. ItIt maymay bebe notednoted thatthatonlyonly acceptableacceptable projectsprojects shouldshould bebe rankedranked..

NetNet presentpresent valuevalue (NPV)(NPV)AA i ii i ff hh ll d i id i i i ii i ii hhAA variationvariation ofof thethe presentpresent valuevalue decisiondecision criterioncriterion isis thetheNPVNPV.. TheThe differencedifference betweenbetween thethe twotwo isis thatthat thethe NPVNPVdeductsdeducts thethe presentpresent valuevalue ofof originaloriginal outlayoutlay (C)(C) fromfrom thethedeductsdeducts thethe presentpresent valuevalue ofof originaloriginal outlayoutlay (C)(C) fromfrom thethepresentpresent valuevalue ofof thethe futurefuture CFATCFAT.. Thus,Thus, NPVNPV maymay bebedefineddefined asas thethe summationsummation ofof thethe presentpresent valuesvalues ofof thetheppcashcash proceedsproceeds (CFAT)(CFAT) inin eacheach yearyear minusminus thethesummationsummation ofof presentpresent valuesvalues ofof thethe netnet cashcash outflowsoutflows inineacheach yearyear.. TheThe decisiondecision rulerule forfor aa projectproject underunder NPVNPV isistoto acceptaccept thethe projectproject ifif thethe NPVNPV isis positivepositive andand rejectreject ififitit isis negativenegative SymbolicallySymbolicallyitit isis negativenegative.. Symbolically,Symbolically,(i)(i) NPV›NPV› zerozero –– acceptaccept..(ii)(ii) NPVNPV j tj t(ii)(ii) NPV‹NPV‹ zerozero -- rejectreject..

InternalInternal RateRate ofof ReturnReturn (IRR)(IRR)TheThe secondsecond discounteddiscounted cashcash flowflow oror timetimeadjustedadjusted methodmethod forfor appraisingappraising capitalcapitaljj pp gpp g ppinvestmentinvestment decisiondecision isis thethe InternalInternal raterate ofofreturnreturn method(IRR)method(IRR)..ThisThis techniquetechnique isis alsoalso( )( ) qqknownknown asas yieldyield onon investment,investment, marginalmarginalefficiencyefficiency ofof capital,capital, marginalmarginal productivityproductivity ofofyy p ,p , gg p yp ycapital,capital, raterate ofof return,return, timetime adjustedadjusted raterate ofofreturnreturn andand soso onon.. TheThe IRRIRR isis basedbased onon factsfactswhichwhich areare internalinternal toto thethe proposalproposal..

•• InIn otherother words,words, whilewhile arrivingarriving atat thethe requiredrequired raterate ofofreturnreturn forfor findingfinding outout presentpresent valuesvalues thethe cashcash flowsflows--gg ppinflowsinflows asas wellwell asas outflowsoutflows areare notnot consideredconsidered.. ButBut thetheIRRIRR dependsdepends entirelyentirely onon thethe initialinitial outlayoutlay andand thethe cashcashproceedsproceeds ofof thethe projectproject whichwhich isis beingbeing evaluatedevaluated forforacceptanceacceptance oror rejectionrejection.. ItIt is,is, therefore,therefore, appropriatelyappropriatelyr f rr dr f rr d tt I t r lI t r l r tr t ff r t rr t rreferredreferred toto asas InternalInternal raterate ofof returnreturn..

•• TheThe InternalInternal raterate ofof returnreturn isis usuallyusually thethe raterate ofof returnreturn thatthataa projectproject earnsearns ItIt isis defineddefined asas thethe discountdiscount raterate (r)(r) whichwhichaa projectproject earnsearns.. ItIt isis defineddefined asas thethe discountdiscount raterate (r)(r) whichwhichequatesequates thethe aggregateaggregate presentpresent valuevalue ofof thethe netnet cashcash inflowsinflows(CFAT)(CFAT) withwith thethe aggregateaggregate presentpresent valuevalue ofof cashcash outflowsoutflows( )( ) gg ggg g ppofof aa projectproject.. InIn otherother words,words, itit isis thatthat raterate whichwhich givesgives thetheprojectproject NPVNPV ofof ZeroZero..

TradeTrade CreditCreditT dT d didi ii didi dd bb ff hhTradeTrade creditcredit isis creditcredit grantedgranted byby aa manufacturermanufacturer oror thethewholesalerwholesaler toto thethe retailerretailer inin thethe coursecourse ofof salessales.. ItIt isis thethemeansmeans ofof financingfinancing businessbusiness operationsoperations ItIt denotesdenotes thethemeansmeans ofof financingfinancing businessbusiness operationsoperations.. ItIt denotesdenotes thethecreditcredit extendedextended byby oneone businessbusiness sellingselling toto anotheranother.. ItIt isis aaveryvery importantimportant sourcesource ofof currentcurrent fundsfunds forfor businessbusiness.. ItItyy ppmustmust bebe notednoted thatthat thethe creditcredit grantedgranted byby thethe sellerseller toto thethebuyerbuyer isis moremore importantimportant thanthan thatthat grantedgranted byby thethe bankbank ininthethe casecase ofof smallsmall BusinessBusiness..EstablishingEstablishing creditcredit standards,standards, aa firmfirm shouldshould developdevelop

dd ff l il i didi lili hh ddproceduresprocedures forfor evaluatingevaluating creditcredit applicantsapplicants.. TheThe secondsecondaspectaspect ofof creditcredit policiespolicies ofof aa firmfirm isis creditcredit analysisanalysis andandinvestigationinvestigation TwoTwo basicbasic stepssteps areare involvedinvolved inin thethe creditcreditinvestigationinvestigation.. TwoTwo basicbasic stepssteps areare involvedinvolved inin thethe creditcreditinvestigationinvestigation processprocess..

PayPay outout ratioratioItIt indicatesindicates thethe percentagepercentage ofof profitsprofits availableavailableforfor equityequity shareshare--holdersholders whichwhich isis paidpaid asascashcash dividendsdividends toto themthem..TheThe formulaformula isis::-- DividendDividend perper sharesharepp

EarningEarning perper shareshare (EPS)(EPS)ThisThis isis anan importantimportant ratioratio toto indicateindicate thethe cashcashThisThis isis anan importantimportant ratioratio toto indicateindicate thethe cashcashdividenddividend policypolicy ofof thethe managementmanagement becausebecauseitit reflectsreflects thethe amountamount reinvestedreinvested inin thetheitit reflectsreflects thethe amountamount reinvestedreinvested inin thethebusinessbusiness whichwhich willwill havehave effecteffect onon thethe futurefuturemarketmarket priceprice ofof thethe sharesharemarketmarket priceprice ofof thethe shareshare..

Operating CycleOperating CycleTheThe operatingoperating cyclecycle whichwhich isis aa continuouscontinuous processprocess isis asas shownshown belowbelow::TheThe operatingoperating cycle,cycle, whichwhich isis aa continuouscontinuous process,process, isis asas shownshown belowbelow::

PhasePhase 33ReceivablesReceivables

CashCash PhasePhase 22

InventoryInventory

PhasePhase--11

TheThe operatingoperating cyclecycle consistsconsists ofof threethree phasesphases:: InIn phasephase--11 cashcash getsgetsconvertedconverted intointo inventoryinventory.. ThisThis wouldwould includeinclude purchasepurchase ofof rawraw

i li l ii ff i li l ii kk iimaterials,materials, conversionconversion ofof rawraw materialsmaterials intointo workwork inin progress,progress,finishedfinished goodsgoods andand terminateterminate inin thethe transfertransfer ofof goodsgoods toto stockstock atatthethe endend ofof thethe manufacturingmanufacturing processprocess ..InIn thethe casecase ofof tradingtradingorganisations,organisations, thisthis phasephase wouldwould bebe shortershorter asas therethere wouldwould bebe nonomanufacturingmanufacturing activityactivity andand cashcash willwill bebe convertedconverted intointo inventoryinventorydirectlydirectly.. TheThe phasephase willwill ofof course,course, bebe totallytotally absentabsent inin thethe casecase ofofserviceservice organisationsorganisations..InIn PhasePhase 22 ofof thethe cycle,cycle, thethe inventoryinventory isis convertedconverted intointoreceivablesreceivables asas creditcredit salessales areare mademade toto customers,customers, FirmsFirms whichwhich dodo,,notnot sellsell onon creditcredit willwill obviouslyobviously notnot havehave phasephase 22 ofof thethe operatingoperatingcyclecycle..TheThe lastlast phasephase phasephase 33 representsrepresents thethe stagestage whenwhen receivablesreceivables areareTheThe lastlast phase,phase, phasephase 33,, representsrepresents thethe stagestage whenwhen receivablesreceivables arearecollectedcollected.. ThisThis phasephase completescompletes thethe operatingoperating cyclecycle.. Thus,Thus, thethefirmfirm hashas movedmoved fromfrom cashcash toto inventory,inventory, toto receivablesreceivables andand totocashcash againagaincashcash againagain..

HedgingHedgingTheThe termterm ““ hedging”hedging” isis oftenoften useuse inin thethe sensesense ofof aa riskriskg gg greducingreducing investmentinvestment strategystrategy involvinginvolving transactionstransactions ofofaa simultaneoussimultaneous butbut oppositeopposite naturenature soso thatthat thethe effecteffectofof oneone isis likelylikely toto counterbalancecounterbalance thethe effecteffect ofof thetheotherother WithWith referencereference toto anan appropriateappropriate financingfinancingotherother.. WithWith referencereference toto anan appropriateappropriate financingfinancing ––mix,mix, thethe termterm hedginghedging cancan bebe saidsaid toto referrefer toto aaprocessprocess matchingmatching maturitiesmaturities ofof debtdebt withwith thethematuritiesmaturities ofof financialfinancial needsneeds ThisThis approachapproach toto thethematuritiesmaturities ofof financialfinancial needsneeds.. ThisThis approachapproach toto thethefinancingfinancing decisiondecision toto determinedetermine anan appropriateappropriatefinancingfinancing --mixmix is,is, therefore,therefore, alsoalso calledcalled asas matchingmatchingapproachapproach..ppppAccordingAccording toto thisthis approach,approach, thethe maturitymaturity ofof thethe sourcesourceofof fundsfunds shouldshould matchmatch thethe naturenature ofof thethe assetsassets toto bebefinancedfinanced.. ForFor thethe purposepurpose ofof analysis,analysis, thethe assetsassets cancanbb b dlb dl l ifi dl ifi d ii llbebe broadlybroadly classifiedclassified intointo twotwo classesclasses::

i)i) thosethose whichwhich areare requiredrequired inin aa certaincertain amountamount forfor aagivengiven levellevel ofof operationoperation and,and, hence,hence, dodo notnot varyvary

titiovertimeovertime..ii)ii) thosethose whichwhich fluctuatefluctuate overtimeovertime..

• M M Hypothesis for DividendThe most comprehensive argument in support ofp g ppthe irrelevance of dividends is provided by the MMHypothesis. M M maintain that the dividend policyhas no effect on the share prices of the firm and is,has no effect on the share prices of the firm and is,therefore, of no consequence. What matters,according to them, is the investment policy throughwhich the firm can increase its earnings andwhich the firm can increase its earnings andthereby the value of the firm. Given the investmentdecision of the firm, the dividend decision –splitting the earnings into packages of retentionsplitting the earnings into packages of retentionand dividends- is a matter of detail and does notmatter. Under conditions of perfect capital markets,rational investors absence of tax discriminationrational investors, absence of tax discriminationbetween dividend income and capital appreciation,given the firm’s investment policy, its dividend

li h i fl th k t ipolicy may have no influence on the market priceof the shares.

BreakBreak-- EvenEven PointPointWhenWhen thethe sellingselling priceprice exceedsexceeds thethecost,cost, oneone isis makingmaking aa profit,profit, whenwhen thethecost,cost, oneone isis makingmaking aa profit,profit, whenwhen thethesellingselling priceprice isis belowbelow cost,cost, oneone isismakingmaking aa lossloss IfIf thethe productproduct isis soldsold atatmakingmaking aa lossloss.. IfIf thethe productproduct isis soldsold atatcost,cost, thatthat is,is, ifif costcost == sales,sales, nono profitprofit isis

dd ll ii dd itit b kb kmademade;; nono lossloss isis made,made, itit breaksbreaks eveneven..ThisThis isis knownknown asas thethe breakbreak eveneven pointpoint..AtAt thethe breakbreak eveneven point,point, costcost == sales,sales,profitprofit ==00,, loss=loss=00..pp ,,

•• RiskRisk –– AdjustedAdjusted DiscountDiscount RateRate•• TheThe riskrisk--adjustedadjusted discountdiscount raterate (RAD)(RAD) approachapproach isis

oneone ofof thethe simplestsimplest andand mostmost widelywidely usedused methodsmethodspp yyforfor incorporatingincorporating riskrisk intointo thethe capitalcapital budgetingbudgetingdecisiondecision.. UnderUnder thisthis method,method, thethe amountamount ofof riskriskinherentinherent inin aa projectproject isis incorporatedincorporated inin thethe discountdiscountraterate employedemployed inin thethe presentpresent valuevalue calculationscalculations.. TheThep yp y pprelativelyrelatively riskyrisky projectsprojects wouldwould havehave relativelyrelatively highhighdiscountdiscount ratesrates andand relativelyrelatively safesafe projectsprojects wouldwouldyy p jp jhavehave relativelyrelatively lowlow discountdiscount ratesrates.. TheThe riskrisk--adjustedadjusteddiscountdiscount ratesrates presumablypresumably representrepresent thethe differentialdifferentialpp ppriskrisk inin thethe differentdifferent classesclasses ofof investmentsinvestments..

CashCash FlowFlow StatementStatementCashCash flowflow statementstatement showsshows thethe variousvarious sourcessources andandapplicationsapplications ofof fundsfunds onon thethe similarsimilar lineslines asas inin fundsfundsflfl t t tt t t ithith thth diffdiff th tth t itit illill b ib iflowflow statement,statement, withwith thethe differencedifference thatthat itit willwill beginbeginwithwith thethe openingopening balancebalance ofof bankbank andand cashcash balancesbalances ininhandhand andand endend withwith thethe closingclosing balancesbalances atat bankbank andand ininhandhand andand endend withwith thethe closingclosing balancesbalances atat bankbank andand ininhandhand.. ItIt isis trulytruly aa summarysummary ofof cashcash BookBook.. InIn cashcash flowflowstatement,statement, depreciationdepreciation andand investmentinvestment allowanceallowance isisppshownshown asas aa separateseparate sourcesource ofof fundsfunds andand thethe paymentspaymentsofof interestinterest andand taxationtaxation areare shownshown separatelyseparately inin thethe

li ili i ff dd hh fifi ii hh ffapplicationapplication of,of, andand thethe netnet profitprofit isis shownshown asas sourcessources ofoffundsfunds afterafter addingadding bedbed thethe interestinterest andand taxestaxes

EBITEBITi) i) Interest Coverage Interest Coverage = = --------------------

InterestInterest

EATEATii)ii) Dividend Coverage RatioDividend Coverage Ratioii)ii) Dividend Coverage RatioDividend Coverage Ratio == --------------------------------------------------

Preference DividendPreference DividendEBITEBIT

iii)iii) Total Coverage RatioTotal Coverage Ratio == --------------------------------------------------iii)iii) Total Coverage RatioTotal Coverage Ratio = = Total Fixed ChargesTotal Fixed Charges

Gross ProfitGross Profitiv) Gross Profit Marginiv) Gross Profit Margin = = -------------------------------- x100x100) g) g

SalesSalesSales Sales –– cost of goods soldcost of goods sold

v)v) Gross MarginGross Margin = = ---------------------------------------------------------------- x100x100SalesSalesNPATNPAT

vi) Net Profit Marginvi) Net Profit Margin = = ------------------------S lS lSalesSales

vii) vii) Expenses Ratio:Expenses Ratio:Cost of goods sold + other operating ExpensesCost of goods sold + other operating ExpensesCost of goods sold + other operating ExpensesCost of goods sold + other operating Expenses

a)a) Operating Ratio = Operating Ratio = ----------------------------------------------------------------------------------------------------------SalesSales

Cost of goods sold Cost of goods sold b)b) Cost of goods sold Ratio = Cost of goods sold Ratio = ----------------------------------------------

SalesSalesSalesSalesSpecific Operating ExpensesSpecific Operating Expenses

c)c) Specific Expenses Ratio = Specific Expenses Ratio = ------------------------------------------------------------------------SalesSalesNet Profit after TaxesNet Profit after Taxes

iii)iii) Ret rn On Assets (R O A)Ret rn On Assets (R O A)viii)viii) Return On Assets (R O A)Return On Assets (R O A) = = ----------------------------------------------------Total AssetsTotal Assets

Net Profit after TaxesNet Profit after Taxesix) Return on capital employed =ix) Return on capital employed =----------------------------------------------------------------------

Total Capital Employed (Equity + Long term Fund) Total Capital Employed (Equity + Long term Fund) Total Capital Employed (Equity + Long term Fund) Total Capital Employed (Equity + Long term Fund)

NPATNPATx)x) Return on Shareholders’ EquityReturn on Shareholders’ Equity = = ----------------------------------------------x)x) Return on Shareholders EquityReturn on Shareholders Equity

Shareholders’ EquityShareholders’ Equity

NPATNPATxi)xi)EPS EPS = = ------------------------------------------------------

Number of Ordinary SharesNumber of Ordinary Shares

Amount of dividendAmount of dividend DPSDPSxii) (Dividend) Pay out Ratio = xii) (Dividend) Pay out Ratio = ------------------------------------------------ oror ------------------

NPATNPAT EPSEPS

EPSEPSxiii)xiii) Earning YieldEarning Yield == ------------------------------------------------------

M k l hM k l hMarket value per shareMarket value per share

DPS (Dividend per ordinary Share)DPS (Dividend per ordinary Share)xiv)xiv) Dividend YieldDividend Yield ==xiv)xiv) Dividend YieldDividend Yield == ------------------------------------------------------------------------------------

Market value per shareMarket value per share

Market price of a shareMarket price of a shareMarket price of a shareMarket price of a sharexv)xv) P/E RatioP/E Ratio = = --------------------------------------------------------

EPSEPS

xvi)xvi) Earning PowerEarning Power = = Net Profit Margin x Investment Turnover Net Profit Margin x Investment Turnover SalesSales

(Investment Turnover (Investment Turnover = = ------------------------------))I t tI t tInvestmentInvestment

NPATNPATor or = = ----------------------------

Total AssetsTotal AssetsTotal Assets Total Assets

Activity Ratio:Activity Ratio:Cost of goods soldCost of goods sold

xvii)xvii)Inventory /stock turnover ratioInventory /stock turnover ratio ==xvii)xvii)Inventory /stock turnover ratio Inventory /stock turnover ratio = = ------------------------------------------------Average InventoryAverage InventoryCost of Raw Materials usedCost of Raw Materials used

xviii)xviii) Raw material turnoverRaw material turnover = = ----------------------------------------------------------------------------Average Raw Materials InventoryAverage Raw Materials InventoryAverage Raw Materials InventoryAverage Raw Materials Inventory

Cost of Goods manufacturedCost of Goods manufacturedxix)xix) Work in progress turnoverWork in progress turnover == ----------------------------------------------------------------------------------

Average work in process inventoryAverage work in process inventoryAverage work in process inventoryAverage work in process inventoryCredit salesCredit sales

xx)xx) Debtors turnoverDebtors turnover = = --------------------------------------Average DebtorsAverage Debtors

Total Sales Total Sales oror ----------------------------------------

Debtors (closing)Debtors (closing)Months (days) in a year Months (days) in a year ( y ) y( y ) y

xxi)xxi) Average Collection PeriodAverage Collection Period == ------------------------------------------------------ ororDebtors TurnoverDebtors Turnover

Debtors X Months (days) in a yearDebtors X Months (days) in a year----------------------------------------------------------------------------------

Credit SalesCredit Sales

Assets turnover RatioAssets turnover Ratio::

Cost of goods soldCost of goods soldCost of goods soldCost of goods soldxxii)xxii) Total Assets turnoverTotal Assets turnover = = ------------------------------------------

T t l A tT t l A tTotal AssetsTotal AssetsCost of goods soldCost of goods sold

xxiii)xxiii)Fixed Assets turnoverFixed Assets turnover ==----------------------------------------------Fixed AssetsFixed AssetsFixed AssetsFixed Assets

AccountingAccountingAccounting Accounting &&&&

A i i SA i i SAuditing Standards Auditing Standards fffor for

Islamic BanksIslamic Banks

TheThe AccountingAccounting StandardsStandards forfor IslamicIslamic BanksBanksTheThe AccountingAccounting StandardsStandards forfor IslamicIslamic BanksBanksareare preparedprepared byby thethe ‘Accounting‘Accounting andandAuditingAuditing OrganizationOrganization forfor IslamicIslamicgg ggFinancialFinancial InstitutionsInstitutions (AAOIFI)(AAOIFI)’,’, whichwhich waswasestablishedestablished inin accordanceaccordance withwith thetheagreementsagreements signedsigned byby IslamicIslamic FinancialFinancialagreementsagreements signedsigned byby IslamicIslamic FinancialFinancialInstitutionsInstitutions onon 2626 FebruaryFebruary 19901990 inin AlgiersAlgiersduringduring thethe meetingmeeting ofof IslamicIslamic BanksBanks andandgg ggFinancialFinancial InstitutionsInstitutions.. AAOIFIAAOIFI waswas registeredregisteredonon 2727 MarchMarch 19911991 inin thethe statestate ofof BahrainBahrain asasanan internationalinternational autonomousautonomous nonnon profitprofitanan internationalinternational autonomousautonomous nonnon profitprofitmakingmaking corporatecorporate bodybody.. TheThe objectivesobjectivesAAOIFIAAOIFI areare asas followsfollows::

i)i) DevelopDevelop thethe accounting,accounting, auditingauditing andand bankingbankingii h hh h l il i hh i i ii i i ff I l iI l ipracticespractices thoughtthought relatingrelating toto thethe activitiesactivities ofof IslamicIslamic

FinancialFinancial InstitutionsInstitutions..ii)ii) DisseminateDisseminate thethe accountingaccounting andand auditingauditing thoughtthought)) gg gg gg

relatingrelating toto thethe activitiesactivities ofof IslamicIslamic FinancialFinancialInstitutionsInstitutions andand itsits applicationsapplications throughthrough training,training,seminarsseminars publicationpublication ofof periodicalperiodical newslettersnewslettersseminars,seminars, publicationpublication ofof periodicalperiodical newsletters,newsletters,preparationpreparation ofof researchresearch andand otherother meansmeans..

iii)iii) Prepare,Prepare, promulgatepromulgate andand interpretinterpret accountingaccounting andandditiditi t d dt d d ff I l iI l i Fi i lFi i l I tit tiI tit ti iiauditingauditing standardsstandards forfor IslamicIslamic FinancialFinancial InstitutionsInstitutions inin

orderorder toto harmonizeharmonize thethe accountingaccounting practicespractices adoptedadoptedbyby thesethese institutionsinstitutions inin thethe preparationpreparation ofof theirtheirfi i lfi i l llll h ih i hhfinancialfinancial statements,statements, asas wellwell asas toto harmonizeharmonize thetheauditingauditing proceduresprocedures adoptedadopted inin auditingauditing thethe financialfinancialstatementsstatements preparedprepared byby IslamicIslamic FinancialFinancial InstitutionsInstitutions..

iv)iv) ReviewReview andand amendamend thethe accountingaccounting thethe auditingauditingstandardsstandards forfor IslamicIslamic FinancialFinancial InstitutionsInstitutions toto copecope

ithith d l td l t ii thth titi thth ddwithwith developmentsdevelopments inin thethe accountingaccounting thethe andandauditingauditing thoughtthought andand practicespractices..

v)v)Prepare,Prepare, issue,issue, reviewreview andand adjustadjust thethe statementsstatementsv)v)Prepare,Prepare, issue,issue, reviewreview andand adjustadjust thethe statementsstatementsandand guidelinesguidelines onon thethe banking,banking, investmentinvestment andandinsuranceinsurance practicespractices ofof thethe IslamicIslamic FinancialFinancialInstitutionsInstitutionsInstitutionsInstitutions..

vi)vi) ApproachApproach thethe concernedconcerned regulatoryregulatory bodies,bodies,IslamicIslamic FinancialFinancial Institutions,Institutions, otherother financialfinanciali tit tii tit ti th tth t ffff I l iI l i Fi i lFi i l S iS iinstitutionsinstitutions thatthat offeroffer IslamicIslamic FinancialFinancial Services,Services,andand accountingaccounting andand auditingauditing firmsfirms inin orderorder totoimplementimplement thethe accountingaccounting andand auditingauditing standards,standards,

llll hh dd id liid li hhasas wellwell asas thethe statementsstatements andand guidelinesguidelines onon thethebanking,banking, investmentinvestment andand insuranceinsurance practicespractices ofofIslamicIslamic FinancialFinancial InstitutionsInstitutions thatthat areare publishedpublished bybypp yyAAOIFIAAOIFI..

The structure consists of:The structure consists of:i) i) a General Assembly,a General Assembly,ii) ii) a Board of Trusteesa Board of Trustees, , )) ff ,,iii) iii) an Accounting and Auditing Standards an Accounting and Auditing Standards

BoardBoardBoardBoard, , iv) iv) an Executive Committee,an Executive Committee,

)) Sh i’ B dSh i’ B d ddv) v) a Shari’a Board,a Shari’a Board, andandvi) vi) a General Secretariata General Secretariat to be headed by a to be headed by a

SecretarySecretary-- General.General.(List of Members of the various Boards are (List of Members of the various Boards are ((

provided at Annexure provided at Annexure –– A, B & C)A, B & C)

•• The membership of AAOIFI consists of: The membership of AAOIFI consists of: •• i) Founding membersi) Founding members

•• ii) Nonii) Non founding Associate membersfounding Associate members•• ii) Nonii) Non--founding Associate membersfounding Associate members

•• iii) Observer members.iii) Observer members.

•• (List of members may be seen it Annexure(List of members may be seen it Annexure--D)D)

TheThe AssociateAssociate membersmembers shallshall comprisecompriseTheThe AssociateAssociate membersmembers shallshall comprisecompriseofof thethe followingfollowing::

IslamicIslamic FinancialFinancial InstitutionsInstitutions thatthat complycomplyIslamicIslamic FinancialFinancial InstitutionsInstitutions thatthat complycomplywithwith IslamicIslamic Shari’aShari’a rulesrules andand principlesprinciples inin allalltheirtheir transactionstransactions..RegulatoryRegulatory andand supervisorysupervisory authoritiesauthoritiesthatthat supervisesupervise IslamicIslamic FinancialFinancial InstitutionsInstitutions..RegulatoryRegulatory andand supervisorysupervisory authoritiesauthorities includeincludecentralcentral banks,banks, monetarymonetary agenciesagencies andand otherothersimilarsimilar authoritiesauthoritiessimilarsimilar authoritiesauthorities..IslamicIslamic fiqhfiqh academiesacademies andand authoritiesauthorities thatthathavehave corporatecorporate entityentityhavehave corporatecorporate entityentity..

TheThe observerobserver membersmembers shallshall comprisecomprise thethefollowingfollowing::followingfollowing::

i)i) OrganizationsOrganizations andand associationsassociations responsibleresponsibleforfor regulatingregulating thethe accountingaccounting andand auditingauditingprofessionprofession and/orand/or thosethose responsibleresponsible forforprofessionprofession and/orand/or thosethose responsibleresponsible forforpreparingpreparing accountingaccounting andand auditingauditing standardsstandards..

ii)ii) PracticingPracticing certifiedcertified accountingaccounting andand auditingauditing)) gg gg ggfirmsfirms thatthat havehave interestinterest inin thethe accountingaccounting andandauditingauditing practicespractices ofof IslamicIslamic FinancialFinancialInstitutionsInstitutions..InstitutionsInstitutions..

iii)iii) FinancialFinancial InstitutionsInstitutions engagedengaged inin financialfinancialactivitiesactivities ofof IslamicIslamic InstitutionsInstitutions..

i )i ) UU ff fi i lfi i l t t tt t t ff I l iI l iiv)iv) UsersUsers ofof financialfinancial statementsstatements ofof IslamicIslamicFinancialFinancial InstitutionsInstitutions bothboth individualindividual andandcorporatecorporate..pp

•• AccountingAccounting andand AuditingAuditing StandardsStandards BoardBoard

•• TheThe StandardsStandards BoardBoard isis composedcomposed ofof 2020 partpart--timetimemembersmembers whowho areare appointedappointed byby thethe BoardBoard ofof TrusteesTrusteesff 55 tt M bM b ff thth St d dSt d d B dB dforfor aa 55 yearyear termterm.. MembersMembers ofof thethe StandardsStandards BoardBoardrepresentrepresent thethe followingfollowing variousvarious categoriescategories :: i)i)RegulatoryRegulatory andand SupervisorySupervisory AuthoritiesAuthorities ii)ii) IslamicIslamicRegulatoryRegulatory andand SupervisorySupervisory AuthoritiesAuthorities,, ii)ii) IslamicIslamicFinancialFinancial InstitutionsInstitutions,, iii)iii) Shari’aShari’a SupervisorySupervisoryBoards,Boards, iv)iv) UniversityUniversity ProfessorsProfessors,, v)v) OOrganizationsrganizationsandand AssociationsAssociations responsibleresponsible forfor regulatingregulating thetheaccountingaccounting professionprofession andand /or/or responsibleresponsible forfor

ii ii dd di idi i d dd d ifi difi dpreparingpreparing accountingaccounting andand auditingauditing standards,standards, certifiedcertifiedaccountants,accountants, andand vii)vii) UUserssers ofof thethe financialfinancialstatementsstatements ofof IslamicIslamic FinancialFinancial InstitutionsInstitutionsstatementsstatements ofof IslamicIslamic FinancialFinancial InstitutionsInstitutions..

Shari’aShari’a BoardBoardTheThe Shari’aShari’a BoardBoard isis composedcomposed ofof notnot moremore thanthan 2020membersmembers toto thethe appointedappointed byby thethe BoardBoard ofof trusteestrusteesff 44 tt ff i)i) fi hfi h h lh l hhforfor aa 44 yearyear termterm fromfrom amongamong i)i) fiqhfiqh scholarsscholars whowhorepresentrepresent shari’ashari’a supervisorysupervisory boardsboards inin thethe IslamicIslamicFinancialFinancial InstitutionsInstitutions thatthat areare membersmembers ofof AAOIFIAAOIFIFinancialFinancial InstitutionsInstitutions thatthat areare membersmembers ofof AAOIFI,AAOIFI,andand ii)ii) Shari’aShari’a supervisorysupervisory boardsboards inin centralcentral banksbanks..TheThe AAOIFIAAOIFI setssets standardsstandards onon Accounting,Accounting, Auditing,Auditing,TheThe AAOIFIAAOIFI setssets standardsstandards onon Accounting,Accounting, Auditing,Auditing,Governance,Governance, EthicsEthics andand Shari’aShari’a.. UpUp toto 20082008followingfollowing 7575 ((2626++55++77++22++3535)) standardsstandards werewereadoptedadopted andand publishedpublished byby AAOIFIAAOIFI::

A)A) AccountingAccounting11)) ObjectivesObjectives ofof FinancialFinancial AccountingAccounting forfor IslamicIslamic BanksBanks andand)) jj gg

FinancialFinancial InstitutionsInstitutions (IFIs)(IFIs)..22)) ConceptsConcepts ofof FinancialFinancial AccountingAccounting forfor IFIsIFIs..33)) GeneralGeneral presentationpresentation andand DisclosureDisclosure inin thethe FinancialFinancial)) pp

StatementsStatements ofof IFIsIFIs..

44)) MurabahaMurabaha andand MurabahaMurabaha toto thethe purchasepurchase OrdererOrderer44)) MurabahaMurabaha andand MurabahaMurabaha toto thethe purchasepurchase OrdererOrderer55)) MudarabaMudaraba FinancingFinancing66)) MusharakaMusharaka FinancingFinancing77)) DisclosureDisclosure ofof BasesBases forfor profitprofit AllocationAllocation BetweenBetween77)) DisclosureDisclosure ofof BasesBases forfor profitprofit AllocationAllocation BetweenBetweenOwners’Owners’ EquityEquity andand InvestmentInvestment AccountAccount HoldersHolders..88)) EquityEquity ofof InvestmentInvestment AccountAccount HoldersHolders andand theirtheirEquivalentEquivalentEquivalentEquivalent99)) SalamSalam andand ParallelParallel SalamSalam..

1010)) IjarahIjarah andand IjarahIjarah MuntahiaMuntahia BittamleekBittamleek..1111)) ZakahZakah..1212)) Istisna’aIstisna’a andand ParallelParallel Istisna’aIstisna’a..1313)) ProvisionsProvisions andand ReservesReserves..1414)) GeneralGeneral PresentationPresentation andand DisclosureDisclosure inin thethe FinancialFinancial44)) Ge e aGe e a P ese tat oP ese tat o a da d D sc osu eD sc osu e t et e F a c aF a c a

StatementsStatements ofof IslamicIslamic InsuranceInsurance CompaniesCompanies..1515)) DisclosureDisclosure ofof BasesBases forfor DeterminingDetermining andand AllocatingAllocating SurplusSurplus

oror DeficitDeficit inin IslamicIslamic InsuranceInsurance CompaniesCompanies..pp1616)) InvestmentInvestment FundsFunds..1717)) ProvisionsProvisions andand ReservesReserves inin IslamicIslamic InsuranceInsurance CompaniesCompanies..1818)) ForeignForeign CurrencyCurrency TransactionsTransactions andand ForeignForeign OperationsOperations1818)) ForeignForeign CurrencyCurrency TransactionsTransactions andand ForeignForeign OperationsOperations..1919)) InvestmentsInvestments..2020)) IslamicIslamic FinancialFinancial ServicesServices offeredoffered byby conventionalconventional FinancialFinancialI tit tiI tit tiInstitutionsInstitutions..2121)) ContributionsContributions inin IslamicIslamic InsuranceInsurance CompaniesCompanies..2222)) DeferredDeferred PaymentPayment SaleSale..2323)) DisclosureDisclosure onon TransferTransfer ofof AssetsAssets..

2424)) SegmentSegment ReportingReporting..2525)) ConsolidationConsolidation2525)) ConsolidationConsolidation..2626)) InvestmentInvestment inin AssociatesAssociates..

B)B) A ditiA ditiB)B) AuditingAuditing11)) ObjectiveObjective andand PrinciplesPrinciples ofof AuditingAuditing..22)) TheThe Auditor’sAuditor’s ReportReport..33)) TermsTerms ofof AuditAudit EngagementEngagement..44)) TestingTesting forfor ComplianceCompliance withwith Shari’aShari’a RulesRules andand

PrinciplesPrinciples byby anan ExternalExternal AuditorAuditor..55)) TheThe Auditor’sAuditor’s ResponsibilityResponsibility toto ConsiderConsider FraudFraud

andand ErrorError inin anan AuditAudit ofof FinancialFinancial StatementsStatements..

C)C) GovernanceGovernance11)) Sh i’Sh i’ S iS i B dB d A i t tA i t t11)) Shari’aShari’a SupervisorySupervisory BoardBoard:: Appointment,Appointment,

CompositionComposition andand ReportReport22)) Sh i’Sh i’ R iR i22)) Shari’aShari’a ReviewReview..33)) InternalInternal Shari’aShari’a ReviewReview..44)) AuditAudit andand GovernanceGovernance CommitteeCommittee forfor

IFIsIFIs..55)) IndependenceIndependence ofof Shari’aShari’a SupervisorySupervisory

BoardBoard..66)) StatementStatement onon GovernanceGovernance PrinciplesPrinciples forfor

IFIsIFIs..77)) CorporateCorporate SocialSocial ResponsibilityResponsibility..

D) EthicsD) Ethics

1) 1) Code of Ethics for Accountants and Auditors Code of Ethics for Accountants and Auditors for IFIs.for IFIs.

2) 2) Code of Ethics for the Employee of IFIs.Code of Ethics for the Employee of IFIs.E)E) Shari’ah StandardsShari’ah StandardsE)E) Shari ah StandardsShari ah Standards

1. 1. Trading in Currencies.Trading in Currencies.22 D bi C d Ch C d d C di C dD bi C d Ch C d d C di C d2.2. Debit Card, Charge Card and Credit Card.Debit Card, Charge Card and Credit Card.3. 3. Default in Payment by a Debtor.Default in Payment by a Debtor.4. 4. Settlement of Debt by SetSettlement of Debt by Set--off.off.

55.. GuaranteesGuarantees..66.. ConversionConversion ofof aa ConventionalConventional BankBank toto anan IslamicIslamic BankBank..66.. ConversionConversion ofof aa ConventionalConventional BankBank toto anan IslamicIslamic BankBank..77.. HawalaHawala..88.. MurabahaMurabaha toto thethe PurchasePurchase OrdererOrderer..99.. IjarahIjarah && IjarahIjarah MuntahiaMuntahia BittamleekBittamleek..1010.. SalamSalam andand ParallelParallel SalamSalam..1111 Istisna’aIstisna’a andand ParallelParallel Istisna’aIstisna’a1111.. Istisna aIstisna a andand ParallelParallel Istisna aIstisna a..1212.. SharikaSharika (( MusharakaMusharaka )) && ModernModern CorporationsCorporations..1313.. MudarabaMudaraba..1414.. DocumentaryDocumentary CreditCredit..1515.. Jua’laJua’la..1616 CommercialCommercial PapersPapers1616.. CommercialCommercial PapersPapers..1717.. InvestmentInvestment SukukSukuk..1818.. PossessionPossession (Qabd)(Qabd)..(Q )(Q )1919.. QardQard (Loan)(Loan)..

2020.. SaleSale ofof CommoditiesCommodities inin OrganisedOrganised MarketsMarkets..2121 Fi i lFi i l PP (Sh(Sh dd B d )B d )2121.. FinancialFinancial PaperPaper (Shares(Shares andand Bonds)Bonds)..2222.. ConcessionConcession ContractsContracts..2323.. AgencyAgency..2424.. SyndicatedSyndicated FinancingFinancing..2525.. CombinationCombination ofof ContractsContracts..2626.. IslamicIslamic InsuranceInsurance..2727.. IndicesIndices..2828.. BankingBanking ServicesServices..2929.. EthicsEthics andand stipulationsstipulations forfor FatwaFatwa..3030.. MonetizationMonetization (Tawarruq)(Tawarruq)..( q)( q)3131.. GhararGharar StipulationsStipulations inin FinancialFinancial TransactionsTransactions..

3232.. ArbitrationArbitration..3232.. ArbitrationArbitration..3333.. WaqfWaqf..3434.. IjarahIjarah onon LabourLabour (Individuals)(Individuals)..3535 ZakahZakah3535.. ZakahZakah..

•• ReferenceReference::i)i) Accounting,Accounting, AuditingAuditing andand GovernanceGovernance

StandardsStandards forfor IslamicIslamic FinancialFinancialInstitutionsInstitutions.. PublishedPublished byby:: AccountingAccountingandand AuditingAuditing OrganizationOrganization forfor IslamicIslamicgg ggFinancialFinancial Institutions,Institutions, PP..OO.. BoxBox-- 11761176,,Manama,Manama, Bahrain,Bahrain, TelephoneTelephone:: (+(+973973)),, ,, pp (( ))1724449617244496,,,, FaxFax :: (+(+973973)) 1725019417250194,, EE--mailmail<<aaoifi@batelcoaaoifi@batelco..comcom..bhbh>,>, WebsiteWebsite@@ ,,wwwwww..aaoifiaaoifi..comcom

ii)<ii)<wwwwww ifsbifsb orgorg>>ii)<ii)<wwwwww..ifsbifsb..orgorg>>

Annexure-“A”

AAOIFI BOARD OF TRUSTEESAAOIFI BOARD OF TRUSTEES

SL.No. NAME POSITION STATUS1

2 3 4

1H.E Shaikh Ebrahim Bin Khalifa

Ch iAl Khalifa Minister of Housing, Kingdom of Bahrain Chairman2

H. E. Dr. Ahmed MohamedAli President, Islamic Development Bank Member

3 H. E. Shaikh Saleh AbdullahKamel President Dallah Al Baraka Group Jeddah KSA MemberKamel President, Dallah Al Baraka Group, Jeddah, KSA Member

4H. E. Shaikh Abdullah Sulaiman

Al Rajhi Chief Executive Officer, Al Rajhi Bank, KSA Member5

H. E. Mr. Mohamed Sulaiman AlMemberOmar Chief Executive, Kuwait Finance House, Kuwait Member

6Tan Sri Syed Mokhtar Al

BukharyFounder,Al-Bhukhary Foundation,Islamic Arts

Museum, Malaysia Member7

H E Sayed Salim RazaGovernorm Stat Bank of Pakistan, Karachi,

Pakistan MemberH. E. Sayed Salim Raza Pakistan Member8

H. E. Mohammed Ali Bin ZayedAl Falasi

Deputy Governor,Central Bank of United ArabEmirates,Abu Dhabi,UAE Member

9 Professor Sheikh Dr.Mohamed Saeed Ramadan Professor, Shari’a College, University ofAl Booti

, g , yDamascus, Syria Member

10

Sheikh Adnan Al Qattan

Deputy Chairman of Board of Trustees,Royal Charity Foundation, Kingdomof Bahrain Member

11 P id t & Chi f E ti Ofi11Mr. Irfan Siddiqui

President & Chief Executive Oficer,Meezan Bank Ltd, Karachi, Pakistan Member

12Mr.Osman Elhadi Ibrahem

Managing Director, Shiekan Insurance &Reinsurance CO. LTD, Khartoum, Sudan Member

13 Head of Islamic Banking Development13Mr AbdulrazzakMohammed Elkhraijy

Head of Islamic Banking DevelopmentGroup, National Commercial Bank,Jeddah, KSA Member

14Mr.Ahmed Fayez

Chief Financial Officer, Emirates IslamicBank, UAE Member

15Mr. Farid Mansour

Mansour & Co. PricewaterhouseCoopers,Cairo, Egypt Member

16

Mr. Noor ur Rahman Abid

Managing Partner of Ernst & Young’sAssurance and Advisory Business Service(AABS) Manama. Kingdom of Bahrain Member( ) g

17Dr Ahmed Bin Abdulla Al-

Moghames

Secretary General, Saudi Organisation forCertified Public, Accountants (SOCPA),Riyadh, KSA Member

18 Dr. Mohamed Nedall h ’ l bAlchaar AAOIFI’s Secretary General Member & Rapporteur

Annexure-“B”

Accounting and Auditing Standards Board (AASB)SL.No.

NAME POSITION STATUS

1 2 3 4

1 Mr. Muhammad SaidAbdulwahab

Assistant General Manager, KuwaitFinance House, Kuwait.

Chairman of Accountingand Auditing StandardsBoard

2 Mr.Hamad Abdulla Eqab Senior Vice President,Head of FinanceialControl,Albaraka BankingGroup,Bahrain

Vice Chairman ofAccounting and AuditingStandards Board

3 Mr. Fawad Laique Partner, Ernst & Young, Bahrain. Chairman of AccountingStandards Committee

4 Mr. Jamil Darras Head,Central AccountingSection,Finance Department,IslamicDevelopment Bank,Saudi Arabia,

Chairman of Auditing andGovernance Standards

Committee

5 Sh Dr. Abdul Sattar AbuGhudah

Shari’a Consultant, Dallah Al BarakaGroup, Saudi Arabia.

Member

6 Sh. Essam Mohammed Al Shari’a Advisor & Board MemberSheikh Ishaq Member,Discover Islam Centre,Bahrain

7 Dr. Nordin MohammedZain

Executive Director, MalaysianAccounting Standards

Memberg

Board, Malaysia.

8 Mr. Firas Sadek Hamdan Head of Studies & Analysis Division,Accounting Department, Banquedu Liban (Central Bank ofLebanon) Lebanon

Member

Lebanon), Lebanon.

9 Mr. Michael J Zamorski Managing Director, Supervision,Dubai Financial ServicesAuthority, United Arab Emirates.

Member

10 Dr. Hussein Said Saifan Assistant General Manager, Jordan MemberIslamic Bank, Jordan

11 Mr. M. Faiz Azmi Partner,Global Islamic FinanceLeader, Pricewater houseCoopers, Malaysia.

Member

12 Mr. Murtada KhidrMohamed Abuzaid

General Manager, Financial Group,Qatar Islamic Bank, Qatar.

Member

13 Mr. PrakashPathmanathan

Assistant General Manager – Finance,Shamil Bank, Bahrain

Member

14 M Oli Ali A h M i P t A h & Sh i M b14 Mr . Oliver Ali Agha Managing Partner, Agha & Shamsi,L.L.C, UAE

Member

15 Mr. Jalil Al A'Ali Partner, KPMG Fakhro, Bahrain Member

16 Dr. Mohamad NedalAlchaar

Secretary General, AAOIFI Member & RapporteurAlchaar

Annexure-“C”

AAOIFI SHARI'A BOARDAAOIFI SHARI A BOARDSL.No. NAME POSITION STATUS

1 2 3 4

11 Shaikh Muhammad TaqiUsmani

Vice-President Darul-Uloom Karachi,Permanent Member OIC Fiqh Academy Chairman

2Shaikh Abdulla Bin Sulaiman AlManea

Former Judge, Court of Cassation,

Deputy ChairmanSaudi Arabia y

3 Shaikh Al Siddiq Mohamed AlDarir

Professor, College of Law, University ofKhartoum, Sudan Member

4 Shaikh Ajeel Jasim Member, Shari’a Supervisory Board,

M bAl N h i K i Fi H K i MemberAl-Nashmi Kuwait Finance House, Kuwait

5 Shaikh Mohamad Ali General Secretary, International Councilfor the Harmonisation of Islamic Schoolsof Thoughts, Iran MemberAl Taskhiri

6 Sh ikh D Abd l S Abd l Sh i’ C l D ll h Al B k6 Shaikh Dr. Abdel Sattar AbdelKarim Abu-Ghuddah

Shari’a Consultant, Dallah Al BarakaGroup, Saudi Arabia Member

7

Shaikh Nizam Yaquby

Member of the Shari'a Board,

MemberBahrain Islamic Bank

8Shaikh Ahmad Ali Abdulla

Secretary General, The Higher Council ofthe Shari’a Supervisory Board, Sudan Member

9

Shaikh Dr. Mohd Daud Bakar

Member, Shari’a Advisory Council,

MemberSecurities Commission, Malaysia

10

Shaikh Dr. Hussein HamidHassan

Member, Shari'a Supervisory Board,

MemberDubai Islamic Bank, UAE

11Shaikh Dr Ali Mohi Eldinne Head of Islamic JurisprudenceShaikh Dr. Ali Mohi EldinneAlqoradaghi

Head of Islamic JurisprudenceDepartment, Qatar University, Qatar Member

12Shaikh Dr. Mohamed Ali

Member of Shari'a Supervisory Board,

MemberAl Qari Bank Al Jazira Saudi Arabia MemberAl Qari Bank Al Jazira, Saudi Arabia

13Shaikh Yusuf Talal De Lorenzo

Chief Shari'a Officer,Shariah Capital Inc., USA Member

14Member, Shari'a Supervision/ Director,

Shaikh Esam 'Anezi Investment Dar, Kuwait. Member

15Shaikh Dr Mohammad AbdulRahim Sultan

Professor, School of Shari'a,United Arab Emirates University, Al Ain,

MemberAl Olamaa United Arab Emirates

16Sheikh Ayashi Faddad

Shari'a Advisor, Islamic DevelopmentBank Member

17 Shaikh Dr. Saleh AbdullahAl Lih id GM f Sh i h G Al R jhi B k KSA M bAl-Lihaidan GM of Shariah Group, Al Rajhi Bank, KSA Member

18

Dr. Mohamed Nedal Alchaar

Secretary-General, Accounting andAuditing Organization for IslamicFinancial Institutions Member

Executive CommitteeExecutive CommitteeExecutive CommitteeExecutive CommitteeSLSL NameName PositionPosition StatusStatus

11 22 33 44

11 Shaikh Ebrahim Bin Shaikh Ebrahim Bin Khakifa AlKhakifa Al--KhalifaKhalifa

Undersecretary Ministry of Finance &Undersecretary Ministry of Finance &National Economy, BahrainNational Economy, Bahrain

ChairmanChairman

22 Mr.Fahad Al AbdullahMr.Fahad Al Abdullah General Manager Treasury & General Manager Treasury & MemberMemberAl RajiAl Raji

g yg yFinancial Institution Group AL Raji Financial Institution Group AL Raji Banking and Investment Corp.,Banking and Investment Corp.,Saudi Arabia Saudi Arabia

33 Maulana IbrahimMaulana Ibrahim Deputy Governor Bank IndonesiaDeputy Governor Bank Indonesia MemberMember33 Maulana IbrahimMaulana Ibrahim Deputy Governor, Bank IndonesiaDeputy Governor, Bank Indonesia MemberMember

44 Shaikh MuhammedShaikh MuhammedTaqi UsmaniTaqi Usmani

Chairman, Shari’a Board,AAOIFIChairman, Shari’a Board,AAOIFI MemberMember

55 Mr.Amer SulaimanMr.Amer SulaimanAlAl--BeireqdarBeireqdar

Chairman, Accounting and Chairman, Accounting and Auditing Standards Board, AAOIFIAuditing Standards Board, AAOIFI

MemberMember

66 Dr. MohammedDr. Mohammedd l l hd l l h

Secretary General, Accounting and Secretary General, Accounting and d O f ld O f l

Reporter & MemberReporter & MemberNedal AlchaarNedal Alchaar Auditing Organization for IslamicAuditing Organization for Islamic

Financial InstitutionsFinancial Institutions

Secretary GeneralSecretary GeneralDr. Mohammad Nedal AlchaarDr. Mohammad Nedal Alchaar

AAOIFI MembersAAOIFI MembersFounding Members(6)Founding Members(6)

11 IslamicIslamic DevelopmentDevelopment BankBank

22 DarDar AlAl--MaalMaal AlAl IslamiIslami SwitzerlandSwitzerland (represented(represented byby ShamilShamil Bank)Bank)

33 AlAl RajhiRajhi BankingBanking && InvestmentInvestment CorporationCorporation –– SaudiSaudi ArabiaArabia

44 DallahDallah AlbarakaAlbaraka GroupGroup-- SaudiSaudi ArabiaArabia

55 KuwaitKuwait FinanceFinance HouseHouse –– KuwaitKuwait

66 BukharyBukhary FoundationFoundation-- MalaysiaMalaysia66 BukharyBukhary FoundationFoundation MalaysiaMalaysia

Associate MembersAssociate Members (141)(141)

Bahrain(Bahrain(1313))

77 AlAl--BarakaBaraka IslamicIslamic InvestmentInvestment BankBank

88 ABCABC IslamicIslamic BankBank (E(E..CC..))

99 AlAl--SalamSalam BankBank

1010 CitiCiti IslamicIslamic InvestmentInvestment BankBank

1111 FirstFirst IslamicIslamic InvestmentInvestment BankBank1111 FirstFirst IslamicIslamic InvestmentInvestment BankBank

1212 TakafulTakaful InternationalInternational CoCo.. BSCBSC

1313 BahrainBahrain IslamicIslamic BankBank

1414 Investors BankInvestors Bank

1515 Gulf Finance HouseGulf Finance House

1616 Noriba BankNoriba Bank

1717 Kuwait Finance HouseKuwait Finance House

1818 Liquidity Management CentreLiquidity Management Centre

1919 Unicorn Investment BankUnicorn Investment Bank

2020 A it B k B S C (C)A it B k B S C (C)2020 Arcepita Bank B.S.C (C)Arcepita Bank B.S.C (C)

2121 Shamil BankShamil Bank

2222 Emerging Markets ParnershipEmerging Markets Parnership2222 Emerging Markets ParnershipEmerging Markets Parnership

2323 United International BankUnited International Bank

2424 Sokouk Exchange Center Sokouk Exchange Center –– TadawulTadawul

2525 Global Banking Corporation BSC (C)Global Banking Corporation BSC (C)

2626 Khaleeji Commercial Bank B.S.CKhaleeji Commercial Bank B.S.C

2727 AIG Takaful AIG Takaful –– Enaya B.S.C (C)Enaya B.S.C (C)

2828 Tharawat Tharawat –– Investment HouseInvestment House

Sudan(18)Sudan(18)2929 Tadamon Islamic BankTadamon Islamic Bank

3030 Animal Resources BankAnimal Resources Bank

3131 Omduman National BankOmduman National Bank

3232 Sudanese Islamic BankSudanese Islamic Bank

3333 El Nilein Industrial Development Bank GroupEl Nilein Industrial Development Bank Group

3434 Bank of KhartoumBank of Khartoum

3535 Faisal Islamic Bank (Sudan)Faisal Islamic Bank (Sudan)3535 Faisal Islamic Bank (Sudan)Faisal Islamic Bank (Sudan)

3636 The Agricultural Bank of SudanThe Agricultural Bank of Sudan

3737 Savings & Social Development BankSavings & Social Development Bank

3838 The Sudanese Estate BankThe Sudanese Estate Bank3838 The Sudanese Estate BankThe Sudanese Estate Bank

3939 Sudanese French Bank Sudanese French Bank

4040 Al Shamal Islamic BankAl Shamal Islamic Bank

4141 Islamic CoIslamic Co--operative Development Bankoperative Development Bank4141 Islamic CoIslamic Co--operative Development Bankoperative Development Bank

4242 Farmer’s Commercial BankFarmer’s Commercial Bank

4343 Association of Sudanese Insurance & Reinsurance CompaniesAssociation of Sudanese Insurance & Reinsurance Companies

4444 Shiekan Insurance & Reinsurance Co LtdShiekan Insurance & Reinsurance Co Ltd4444 Shiekan Insurance & Reinsurance Co. Ltd.Shiekan Insurance & Reinsurance Co. Ltd.

4545 Financial Investment BankFinancial Investment Bank

4646 Sudan Financial Services CompanySudan Financial Services Company

Qatar(7)47 Qatar Islamic Bank

48 Qatar International Islamic Bank48 Qatar International Islamic Bank

49 First Finance49 First Finance

50 Al Safa Islamic Banking

51 Qinvest LLC

52 Qatar First Investment Bank

53 Barwa Bank

United Arab Emirates (10)United Arab Emirates (10)5454 Abu Dhabi Islamic BankAbu Dhabi Islamic Bank5454 Abu Dhabi Islamic BankAbu Dhabi Islamic Bank

5555 Dubai Islamic BankDubai Islamic Bank

5656 Sh j h I l i B kSh j h I l i B k5656 Sharjah Islamic BankSharjah Islamic Bank

5757 Emirates Islamic BankEmirates Islamic Bank

5858 Takaful Re LimitedTakaful Re Limited

5959 Yasaar LimitedYasaar Limited

6060 Amlak Fislamnce PJSCAmlak Fislamnce PJSC

6161 N I l i B kN I l i B k6161 Noor Islamic BankNoor Islamic Bank

6262 Al Hilal BankAl Hilal Bank

6363 Agha & Shamsi L.L.CAgha & Shamsi L.L.C

Egypt(3)Egypt(3)6464 I l i I t ti l B k f I t t & I l i I t ti l B k f I t t & 6464 Islamic International Bank for Investment & Islamic International Bank for Investment &

DevelopmentDevelopment6565 Egyptian Saudi Finance BankEgyptian Saudi Finance Bank6565 Egyptian Saudi Finance BankEgyptian Saudi Finance Bank6666 Faisal Islamic Bank of EgyptFaisal Islamic Bank of Egypt

Jordan(4)Jordan(4)Jordan(4)Jordan(4)6767 Jordan Islamic Bank for Finance and InvestmentJordan Islamic Bank for Finance and Investment

6868 Jordan Islamic Insurance CoJordan Islamic Insurance Co6868 Jordan Islamic Insurance Co.Jordan Islamic Insurance Co.6969 Islamic International Arab BankIslamic International Arab Bank

7070 Bait Al Mall Saving InvestmentBait Al Mall Saving Investment7070 Bait Al Mall Saving InvestmentBait Al Mall Saving Investment

Lebanon(2)Lebanon(2)7171 Arab Finance HouseArab Finance House7171 Arab Finance HouseArab Finance House7272 BLOM Development BankBLOM Development Bank

Palestine(1)Palestine(1)7373 Arab Islamic BankArab Islamic Bank7373 Arab Islamic BankArab Islamic Bank

Kuwait(21)Kuwait(21)Kuwait(21)Kuwait(21)7474 International Investment GroupInternational Investment Group

7575 The International InvestorThe International Investor

7676 A’ayan Leasing and Investment CompanyA’ayan Leasing and Investment Company

7777 Aref Investment Co.Aref Investment Co.

7878 Gulf Investment HouseGulf Investment House7878 Gulf Investment HouseGulf Investment House

7979 Osoul Leasing & Investment CompanyOsoul Leasing & Investment Company8080 Aviation Lease and Finance Co. Ltd. (ALAFCO)Aviation Lease and Finance Co. Ltd. (ALAFCO)8181 The Investment DarThe Investment Dar8282 The International Leasing & Investment CompanyThe International Leasing & Investment Company8383 W th T k f l I CW th T k f l I C8383 Wethaq Takaful Insurance CompanyWethaq Takaful Insurance Company8484 First InvestmentFirst Investment8585 Centre of Excellence in Management , College of Business Centre of Excellence in Management , College of Business

AdministrationAdministration--Kuwait UniversityKuwait University8686 Al Ritaj Investment Co.Al Ritaj Investment Co.8787 Al Mashora House For Shari’a ConsultationAl Mashora House For Shari’a Consultation8787 Al Mashora House For Shari a ConsultationAl Mashora House For Shari a Consultation8888 The Securities HouseThe Securities House8989 Muthanna Investment CompanyMuthanna Investment Company9090 Shurra for Shari’a ConsultationShurra for Shari’a Consultation9191 Al Aman Investment CompanyAl Aman Investment Company9292 Rasameel Structured Finance CompanyRasameel Structured Finance Company9292 Rasameel Structured Finance CompanyRasameel Structured Finance Company9393 Liquidity HouseLiquidity House9494 Alimtiaz Investment CompanyAlimtiaz Investment Company

Saudi Arabia(7)95 Islamic Insurance & Reinsurance Co95 Islamic Insurance & Reinsurance Co.96 Shari’a Review Bureau97 Takaful Islamic Insurance Co. Ec. 98 Islamic Corporation for the Development of the Private Sector

99 The Islamic Corporation for the Insurance of Investment and Export CreditCredit

100 Bank Al Jazira

101 Arbah Capital101 Arbah Capital

Republic of Yemen (1)102 Saba Islamic Bank102 Saba Islamic Bank

Indonesia(2)103 Bank Muamalat

104 Karim Business Consulting

Turkey(2)Turkey(2)105105 AlAl--Baraka Turkish Finance HouseBaraka Turkish Finance House106106 Kuwait Turkish Evkaf Finance HouseKuwait Turkish Evkaf Finance House

Malaysia(5)Malaysia(5)107107 Bank Islam Malaysia BerhadBank Islam Malaysia Berhad108108 Syarikat Takaful Malaysia BerhadSyarikat Takaful Malaysia Berhad109109 Takaful National SDN BerhadTakaful National SDN Berhad109109 Takaful National SDN BerhadTakaful National SDN Berhad110110 Bank MuamalatBank Muamalat111111 Takaful Ikhlas SDN BerhadTakaful Ikhlas SDN Berhad

Brunei Darussalam(1)Brunei Darussalam(1)112112 Bank Islam Brunie DarussalamBank Islam Brunie Darussalam

Cayman Islands(1)Cayman Islands(1)Cayman Islands(1)Cayman Islands(1)113113 AiAi--Tawfeek Co. for Investment Fund Ltd.Tawfeek Co. for Investment Fund Ltd.

Tunisia(2)Tunisia(2)114114 Beit Elttamoul Tunisi SaudiBeit Elttamoul Tunisi Saudi115115 Beit Elttamoul Tunisi SaudiBeit Elttamoul Tunisi Saudi--Reinsurance Co.Reinsurance Co.

Algeria(2)Algeria(2)116116 Banque ABanque A--Baraka D’AlgeriaBaraka D’Algeria116116 Banque ABanque A Baraka D AlgeriaBaraka D Algeria117117 Al Salam BankAl Salam Bank

Russia(1)Russia(1)118118 BadrBadr--ForteBankForteBank

Sri Lanka(4)Sri Lanka(4)119119 Amana In estments Limited Amana In estments Limited 119119 Amana Investments Limited Amana Investments Limited 120120 Ceylinco Global Profit Sharing Investment CorporationCeylinco Global Profit Sharing Investment Corporation

121121 Ceylinco Profit Sharing Investment CorporationCeylinco Profit Sharing Investment Corporation121121 Ceylinco Profit Sharing Investment CorporationCeylinco Profit Sharing Investment Corporation

122122 Ceylinco Takaful LTD.Ceylinco Takaful LTD.

Pakistan(2)Pakistan(2)Pakistan(2)Pakistan(2)123123 Meezan Bank LimitedMeezan Bank Limited124124 Crescent Standard Investment BankCrescent Standard Investment Bank

Bangladesh (1)Bangladesh (1)125125 Islami Bank Bangladesh LimitedIslami Bank Bangladesh Limited

South Africa (4)South Africa (4)126126 Al Baraka Bank LimitedAl Baraka Bank Limited127127 Oasis Crescent Capital Pty Ltd.Oasis Crescent Capital Pty Ltd.128128 Frater Asset Management Company Ltd.Frater Asset Management Company Ltd.129129 First Rand Bank LimitedFirst Rand Bank Limited129129 First Rand Bank LimitedFirst Rand Bank Limited

Islamic Republic of Iran(2)Islamic Republic of Iran(2)130130 Bank Melli IranBank Melli Iran

k dk d131131 Bank SaderatBank Saderat

Syria (1)Syria (1)132132 Syria International Islamic BankSyria International Islamic Bank

United State of America (2)United State of America (2)133133 Saturna Capital Saturna Capital –– Amana Mutual FundsAmana Mutual Funds134134 University Islamic Financial CorporationUniversity Islamic Financial Corporation134134 University Islamic Financial CorporationUniversity Islamic Financial Corporation

Kenya (2)Kenya (2)135135 First Community BankFirst Community Bank136136 G lf Af i B k Li i dG lf Af i B k Li i d136136 Gulf African Bank LimitedGulf African Bank Limited

OntarioOntario--Canada (1)Canada (1)137137 UM Financial Inc.UM Financial Inc.

United kingdom (5)United kingdom (5)

138138 Europian Islamic Investment BankEuropian Islamic Investment Bank

139139 BMB Islamic UK LimitedBMB Islamic UK Limited

140140 Raqaba LTD.Raqaba LTD.

141141 Gatehouse BankGatehouse Bank

142142 Dar Al IstithmarDar Al Istithmar

Australia (2)Australia (2)

143143 Balance FinanceBalance Finance

144144 Muslim Community Cooperative Australia Ltd.Muslim Community Cooperative Australia Ltd.

Azerbaijan (1)Azerbaijan (1)

145145 Kauthar BankKauthar Bank

Gambia (2)Gambia (2)

146146 Arab Gambian Islamic Bank LtdArab Gambian Islamic Bank Ltd146146 Arab Gambian Islamic Bank Ltd.Arab Gambian Islamic Bank Ltd.

147147 First Community BankFirst Community Bank

Members representing Regulatory & Supervisory Authorities(7)Members representing Regulatory & Supervisory Authorities(7)

148148 Palestine Monetary AuthorityPalestine Monetary Authority--PalestinePalestine

149149 C t l B k f B h iC t l B k f B h i Ki d f B h iKi d f B h i149149 Central Bank of BahrainCentral Bank of Bahrain-- Kingdom of BahrainKingdom of Bahrain

150150 Bank Indonesia IndonesiaBank Indonesia Indonesia

151151 Qatar Central Bank QatarQatar Central Bank Qatar

152152 Central Bank of Syria Central Bank of Syria –– Syria Arab RepublicSyria Arab Republic

153153 State Bank of Pakistan State Bank of Pakistan –– PakistanPakistan

154154 Maldives Monetary Authority Maldives Monetary Authority Republic of MaldivesRepublic of Maldives154154 Maldives Monetary Authority Maldives Monetary Authority –– Republic of MaldivesRepublic of Maldives

Observing Members(38)Observing Members(38)155155 Ernst & Young Ernst & Young –– BahrainBahrain

156156 PricewaterhouseCoopersPricewaterhouseCoopers--BahrainBahrain

157157 KPMG/ Fakhro KPMG/ Fakhro –– BahrainBahrain157157 KPMG/ Fakhro KPMG/ Fakhro BahrainBahrain

158158 Gulf International BankGulf International Bank-- BahrainBahrain

159159 The National Commerce Bank (Islamic Banking Division)The National Commerce Bank (Islamic Banking Division)-- KSAKSA( g )( g )

160160 Palestinian Association of Certified Public AccountantsPalestinian Association of Certified Public Accountants

161161 Malaysian Accounting Standards Board Malaysian Accounting Standards Board –– MalaysiaMalaysia161161 Malaysian Accounting Standards Board Malaysian Accounting Standards Board MalaysiaMalaysia

162162 Path Solutions Path Solutions –– KuwaitKuwait

163163 The Institute of Chartered Accountants of Pakistan The Institute of Chartered Accountants of Pakistan –– PakistanPakistan163163 The Institute of Chartered Accountants of Pakistan The Institute of Chartered Accountants of Pakistan PakistanPakistan

164164 General Council for Islamic Banks and Financial InstitutionsGeneral Council for Islamic Banks and Financial Institutions

165165 The Saudi British Bank (specialized products division)The Saudi British Bank (specialized products division)--KSAKSA165165 The Saudi British Bank (specialized products division)The Saudi British Bank (specialized products division)--KSAKSA

166166 Microlink Solutions Berhad Microlink Solutions Berhad -- MalaysiaMalaysia

167167 Capital Intelligence Capital Intelligence –– CyprusCyprus

168168 Mashreqbank Dubai, UAEMashreqbank Dubai, UAE

169169 First Standard Investment Bank Ltd. PakistanFirst Standard Investment Bank Ltd. Pakistan

170170 Cairo & Alexandria stock exchange EgyptCairo & Alexandria stock exchange Egypt

171171 Deloitte KassimChan Malaysia Deloitte KassimChan Malaysia

172172 Dubai Financial Services Authority Dubai, UAEDubai Financial Services Authority Dubai, UAE

173173 Malaysian Rating Corporation Berhad MalaysiaMalaysian Rating Corporation Berhad Malaysia173173 Malaysian Rating Corporation Berhad MalaysiaMalaysian Rating Corporation Berhad Malaysia

174174 Islamic Banking & Finance Institute Malaysia Islamic Banking & Finance Institute Malaysia

175175 InvestQ Capital Ltd. Kenya InvestQ Capital Ltd. Kenya

176176 Clifford Chance LLP, Dubai, UAEClifford Chance LLP, Dubai, UAE

177177 Hong Leong Islamic Bank Hong Leong Islamic Bank -- MlaysiaMlaysia

178178 Accountants & Auditors Association, UAEAccountants & Auditors Association, UAE

179179 Qatar Financial Center Regulatory Authority Qatar Financial Center Regulatory Authority -- QatarQatar

180180 Association of Collective Investment Association of Collective Investment South AfricaSouth Africa180180 Association of Collective Investment Association of Collective Investment –– South AfricaSouth Africa

181181 EcoBank EcoBank

182182 Bahrain Development BankBahrain Development Bank-- Kingdom of BahrainKingdom of Bahrain

183183 Absa Islamic Bank Absa Islamic Bank South AfricaSouth Africa183183 Absa Islamic Bank Absa Islamic Bank -- South AfricaSouth Africa

184184 HSBC AmanahHSBC Amanah-- UAEUAE

185185 Commercial Bank of Dubai, UAECommercial Bank of Dubai, UAE

186186 F hfi ld B kh D i S di A biF hfi ld B kh D i S di A bi186186 Freshfields Bruckhaus Deringer, Saudi ArabiaFreshfields Bruckhaus Deringer, Saudi Arabia

187187 Dubai International Financial Centre (DIFC)Dubai International Financial Centre (DIFC)

189189 North Africa International BankNorth Africa International Bank

190190 Denton Wilde Sapte LLPDenton Wilde Sapte LLPpp

191191 RBS Global Banking & MarketsRBS Global Banking & Markets

192192 A t & A dit A i ti A t & A dit A i ti UAE UAE 192192 Accounts & Auditors Association Accounts & Auditors Association -- UAE UAE

Supporting Member (10)Supporting Member (10)193193 CreditCard Services LebanonsCreditCard Services Lebanons

194194 Commercial Bank International, UAECommercial Bank International, UAE

195195 FTSE Group FTSE Group -- UKUK

196196 Shariah Capital Shariah Capital -- USAUSA

197197 International Computer Systems (London), LtdInternational Computer Systems (London), Ltd

198198 The Executive for Training The Executive for Training –– Kingdom of Soudi Kingdom of Soudi ArabiaArabia

199199 DLA Piper Middle East LLP DLA Piper Middle East LLP -- UAEUAE

200200 Egabi SolutionsEgabi Solutions

201201 Eversheds Legal ServicesEversheds Legal Services

202202 Allen & Overy LLPAllen & Overy LLP

Analysis & InterpretationAnalysis & InterpretationAnalysis & InterpretationAnalysis & Interpretationofofof of

Financial StatementsFinancial StatementsSpecially Specially

the Balancethe Balance--Sheet to checkSheet to checkCompany’s financial healthCompany’s financial health

FinancialFinancial StatementsStatements areare thosethose whichwhich arearellll dd A lA l b ib i tt thth dd ffnormallynormally preparedprepared onon AnnualAnnual basisbasis atat thethe endend ofof

aa financialfinancial yearyear butbut periodicalperiodical ee.. gg.. monthly,monthly,quarterlyquarterly halfhalf yearlyyearly FinancialFinancial StatementsStatements arearequarterly,quarterly, halfhalf yearlyyearly FinancialFinancial StatementsStatements arearealsoalso preparedprepared toto seesee thethe performanceperformance.. TheTheFinancialFinancial StatementsStatements areare thethe summarisedsummarised formformofof allall thethe financialfinancial informationinformation containedcontained inin thethebooksbooks ofof accountaccount ofof aa businessbusiness entityentity..TheThe primaryprimary purposepurpose ofof thethe FinancialFinancialStatements,Statements, inin otherother wordswords AnnualAnnual Accounts,Accounts, isistt tt i f tii f ti tt thth P i t /P i t /toto presentpresent informationinformation toto thethe Proprietors/Proprietors/Owners/Owners/ ShareShare holders/holders/ Investors/Investors/ SupervisorySupervisorybodiesbodies showingshowing howhow thethe fundsfunds havehave beenbeenbodiesbodies showingshowing howhow thethe fundsfunds havehave beenbeenutilisedutilised andand thethe profitsprofits derivedderived fromfrom suchsuch useuse..

FinancialFinancial StatementsStatements CoversCovers andandi l di l d thth f ll if ll iincludesincludes thethe followingfollowing::

(a)(a) BalanceBalance SheetSheet (Statement(Statement ofof FinancialFinancialP iti )P iti ) tt hh thth fi i lfi i l itiiti ffPosition)Position) toto showshow thethe financialfinancial positionposition ofof aa

concernconcern atat aa particularparticular date,date, whichwhichcontainscontains bothboth AssetsAssets andand LiabilitiesLiabilitiescontainscontains bothboth AssetsAssets andand LiabilitiesLiabilities..

(b)(b) IncomeIncome StatementStatement oror ProfitProfit andand LossLossAccountAccount (including(including ManufacturingManufacturing A/cA/cAccountAccount (including(including ManufacturingManufacturing A/c,A/c,TradingTrading A/c,A/c, ProfitProfit andand LossLoss AppropriationAppropriationAccount)Account) -- disclosesdiscloses thethe NetNet IncomeIncome oror LossLossAccount)Account) disclosesdiscloses thethe NetNet IncomeIncome oror LossLossresultingresulting fromfrom thethe operationsoperations ofof aa businessbusinessduringduring aa specifiedspecified periodperiod andand containscontains bothbothgg pp ppthethe IncomeIncome andand ExpenditureExpenditure..

(c)(c) StatementStatement ofof changeschanges inin FinancialFinancialPositionPosition whichwhich includesincludes bothboth FundFund FlowFlowStatement,Statement, CashCash FlowFlow StatementStatement..(d)(d) Notes,Notes, OtherOther StatementsStatements andand ExplanatoryExplanatory

t i lt i l hi hhi h t it i d t ild t il ff thth ititmaterialmaterial whichwhich containscontains detailsdetails ofof thethe itemsitemsshownshown inin thethe BalanceBalance Sheet,Sheet, ProfitProfit && LossLossAccountsAccounts andand alsoalso disclosesdiscloses relevantrelevant informationinformationAccountsAccounts andand alsoalso disclosesdiscloses relevantrelevant informationinformationandand areare identifiedidentified asas partpart ofof thethe FinancialFinancialStatementsStatements..FinancialFinancial StatementsStatements areare preparedprepared forfor thethepurposepurpose ofof presentingpresenting aa periodicalperiodical reviewreview ororreportreport onon progressprogress byby thethe managementmanagement whichwhichreportreport onon progressprogress byby thethe managementmanagement whichwhichsupplysupply thethe readerreader relevantrelevant informationinformation toto enableenabletoto makemake materialmaterial economiceconomic decisionsdecisions (including(includingii d i id i i dd hh llinvestmentinvestment decisionsdecisions andand toto seesee thethe relevantrelevantcompliance)compliance)

AnalysisAnalysis (analyse)(analyse) meansmeans toto separateseparate aa thingthing intointoyy ( y )( y ) pp ggitsits elementselements oror componentscomponents oror partsparts toto seesee thethe realrealthingsthings oror toto havehave anan inin depthdepth ideaidea onon thethe issueissue..InterpretationInterpretation meansmeans toto explainexplain thethe meaningmeaning of,of,toto unfold/unfold/ showshow thethe significancesignificance of,of, toto translatetranslateii f ilif iliintointo familiarfamiliar termsterms..TheThe followingfollowing partiesparties areare generallygenerally interestedinterested ininhh fi i lfi i l l il ithethe financialfinancial statementstatement analysisanalysis::

a)a) EquityEquity Shareholders/Shareholders/ ProprietorsProprietors // OwnersOwners..b)b) InvestmentInvestment (Credit)(Credit) grantors/grantors/ InvestorsInvestorsc)c) ManagementManagement)) ggd)d) Supervisory/Supervisory/ RegulatoryRegulatory BodiesBodies..

TheThe followingfollowing areare thethe principalprincipal toolstools forforanalysisanalysis::analysisanalysis::i)i) ComparativeComparative FinancialFinancial StatementsStatements forfor

iipreviousprevious yearyear..ii)ii) TrendTrend PercentagesPercentagesiii)iii) CommonCommon financialfinancial statementsstatementsiv)iv) RatioRatio AnalysisAnalysisiv)iv) RatioRatio AnalysisAnalysisv)v) SpecialisedSpecialised AnalysisAnalysisi)i) St t tSt t t ff hh ii kiki it lit lvi)vi) StatementStatement ofof changeschanges inin workingworking capitalcapital

andand // FundFund Flow/Flow/ CashCash FlowFlow StatementsStatements..

•• LimitationsLimitations ofof FinancialFinancial StatementsStatements::•• FinancialFinancial StatementsStatements cancan notnot serveserve thethe purposepurpose ofof•• FinancialFinancial StatementsStatements cancan notnot serveserve thethe purposepurpose ofof

givinggiving aa fairfair andand completecomplete picturepicture ofof thethe financialfinancialpositionposition (the(the financialfinancial healthhealth andand capabilities)capabilities) ofof aapositionposition (the(the financialfinancial healthhealth andand capabilities)capabilities) ofof aabusinessbusiness entityentity becausebecause ofof thethe followingfollowing limitationslimitations::

•• i)i) TheThe datadata areare sometimessometimes tootoo preciseprecise becausebecause theythey)) pp yyareare preparedprepared onon thethe basisbasis ofof thethe applicationapplication ofofprecedents,precedents, conventions,conventions, postulates,postulates, assumptionsassumptions andandpersonalpersonal judgmentjudgment..

•• ii)ii) ItIt doesdoes notnot // cancan notnot satisfysatisfy thethe requirementsrequirements ofofhh ff llthethe useruser forfor specialspecial purposepurpose..

•• iii)iii) TheThe valuevalue ofof thethe assetsassets containedcontained inin thethe BalanceBalanceShSh dd flfl hh kk llSheetSheet dodo notnot reflectreflect thethe currentcurrent marketmarket valuevalue..

iv)iv) SomeSome itemsitems likelike deferreddeferred revenuerevenue expenditureexpenditurevizviz.. a)a) PreliminaryPreliminary expensesexpenses b)b) deferreddeferred

d ti td ti t )) d f dd f d di tdi tadvertisementadvertisement expensesexpenses c)c) deferreddeferred discountdiscountonon issueissue ofof debenturesdebentures appearingappearing inin thethe

BalanceBalance SheetSheet havehave nono valuevalue inin liquidationliquidation andandqqareare notnot atat allall assetsassets..v)v) TheThe financialfinancial statementsstatements dodo notnot containcontain manymanyimportantimportant factorsfactors whichwhich can’tcan’t bebe recordedrecorded ininimportantimportant factors,factors, whichwhich can tcan t bebe recordedrecorded ininmonetarymonetary termsterms vizviz.. a)a) efficiencyefficiency inin thethemanagementmanagement b)b) thethe reputationreputation ofof thethe companycompanyetcetc etcetc butbut thethe samesame hashas effecteffect onon thetheetcetc.. etcetc.. butbut thethe samesame hashas effecteffect onon thetheprofitabilityprofitability ofof thethe organizationorganization..vi)vi) OccurrenceOccurrence ofof extraextra ordinaryordinary andand nonnon--recurringrecurringii hi hhi h didi hh NN II ffitemsitems whichwhich maymay distortdistort thethe NetNet IncomeIncome forfor aa

givengiven periodperiod butbut can’tcan’t bebe shown/shown/ reflectedreflected ininthethe FinancialFinancial StatementsStatements..

• Accounting Ratios relates to theratio expressed by analysis ofaccounting data contained in thegpublished accounts or financialstatementsstatements.

• In financial analysis, the relationshipbetween two figures may beg yexpressed as a ‘rate percent’ or as a‘quotient’quotient .

RatiosRatios areare aidaid toto analysisanalysis andandi t t tii t t tiinterpretationinterpretation..TheyThey areare employedemployed toto testtest thethe solvencysolvency,,yy p yp y yy,,liquidityliquidity,, thethe profitabilityprofitability etcetc..IndustryIndustry StandardsStandards :: ThereThere areareIndustryIndustry StandardsStandards :: ThereThere arearedifficultiesdifficulties inin comparingcomparing financialfinancial

ff i ili il i d ii d i bbstatementsstatements ofof similarsimilar industries,industries, becausebecausemethodsmethods ofof depreciation,depreciation, valuationvaluation ofofinventories,inventories, recognitionrecognition ofof revenues,revenues,etcetc.. maymay differdiffer..etcetc.. maymay differdiffer..

•• BalanceBalance SheetSheet RatiosRatios ::•• 11.. CurrentCurrent RatioRatio (also(also knownknown asas ‘‘WorkingWorking CapitalCapital(( gg pp

RatioRatio,, SolvencySolvency RatioRatio oror ‘‘22 toto 11 RatioRatio’)’) expressesexpresses thetherelationrelation betweenbetween thethe currentcurrent assetsassets andand currentcurrentli bilitili biliti C rr tC rr t A tA t rr thth tt hi hhi h rrliabilitiesliabilities.. CurrentCurrent AssetsAssets areare thosethose assetsassets whichwhich arearecashcash oror cashcash equivalentequivalent andand maymay bebe convertedconverted intointo cashcashwithinwithin oneone yearyear ee..gg.. cash,cash, stocks,stocks, debtors,debtors, InvestmentsInvestmentsyy gg ,, ,, ,,etcetc..

•• TheThe RatioRatio isis obtainedobtained byby dividingdividing thethe totaltotal currentcurrentbb hh ll li bili ili bili i hi hhi h i dii di hhassetasset byby thethe totaltotal currentcurrent liabilities,liabilities, whichwhich indicatesindicates howhow

muchmuch currentcurrent assetsassets isis availableavailable forfor meetingmeeting itsits currentcurrentobligationsobligations..gg

•• ItIt isis alsoalso calledcalled thethe ‘Working‘Working CapitalCapital Ratio’Ratio’ asas ititrepresentsrepresents thethe workingworking capitalcapital beingbeing thethe excessexcess ofof thethecurrentcurrent assetsassets overover thethe currentcurrent liabilitiesliabilities..

TheThe idealideal ratioratio isis ‘‘22 :: 11’’ andand itit isis notnotdesirabledesirable toto bebe lessless thanthan 22desirabledesirable toto bebe lessless thanthan 22IfIf thethe currentcurrent liabilitiesliabilities areare excessexcess ofof thethecurrentcurrent assetsassets thethe differencedifference isis calledcalledcurrentcurrent assets,assets, thethe differencedifference isis calledcalled‘Working‘Working CapitalCapital Deficit’Deficit’.. WhenWhen aa businessbusinessisis doingdoing moremore businessbusiness thanthan isis warrantedwarrantedggbyby itsits workingworking capital,capital, therethere isis overover--tradingtrading andand itit resultsresults inin aa failurefailure..Alternatively,Alternatively, whenwhen aa businessbusiness doesdoes notnothavehave adequateadequate volumevolume ofof salessales ofof businessbusinessasas comparedcompared toto thethe extentextent ofof thethe assetsassetsemployed,employed, therethere isis saidsaid toto bebe underunder--tradingtradingtradingtrading..

However,However, adequateadequate WorkingWorking CapitalCapitalconnotesconnotes creditcredit standingstanding ofof aa businessbusiness..

TkTk..CurrentCurrent AssetsAssets 44,,0000,,00000000CurrentCurrent AssetsAssets 44,,0000,,00000000

ExampleExample:: ------------------------------ ---------------------- == 22:: 11,,CurrentCurrent LiabilitiesLiabilities 22,, 0000,,000000,, ,,

WhichWhich indicatesindicates thatthat forfor everyevery TkTk..11..0000yyofof CurrentCurrent Liabilities,Liabilities, therethere areare TkTk..22..0000ofof thethe CurrentCurrent AssetsAssets availableavailable forformeetingmeeting itsits obligationsobligations..

22.. LiquidLiquid RatioRatio:: isis alsoalso knownknown asas ““quickquick assetsassets ratioratio””oror ““acidacid testtest ratioratio”” oror ““nearnearmoneymoney ratio”ratio”QuickQuick oror liquidliquid assetsassets includeinclude allall currentcurrent assetsassets

ii kk S kS k ii id did d li idli idexceptingexcepting stockstock.. StockStock isis notnot consideredconsidered asas liquidliquid assetsassetsasas itit cancan notnot bebe generallygenerally convertedconverted intointo cashcashimmediatelyimmediately.. QuickQuick liabilitiesliabilities includeinclude allall currentcurrentimmediatelyimmediately.. QuickQuick liabilitiesliabilities includeinclude allall currentcurrentliabilitiesliabilities (excepting(excepting bankbank overdraftoverdraft sincesince thethe samesame isisnormallynormally aa permanentpermanent arrangementarrangement likelike fixedfixed liabilitiesliabilities

tt hh thth b ib i ii ll dll d ttexceptexcept whenwhen thethe businessbusiness isis calledcalled uponupon toto paypayimmediately)immediately)..ItIt isis aa measuremeasure ofof thethe extentextent toto whichwhich thethe liquidliquid assetsassetsItIt isis aa measuremeasure ofof thethe extentextent toto whichwhich thethe liquidliquid assetsassetsareare availableavailable toto meetmeet thethe quickquick oror immediateimmediate liabilitiesliabilities..ThisThis indicatesindicates thethe abilityability ofof thethe businessbusiness toto meetmeet itsitscommitmentcommitment withoutwithout delaydelay..

Example:Example: Current Assets Current Assets 4, 00,000 4, 00,000 Less: StockLess: Stock 50 00050 000Less: Stock Less: Stock 50,00050,000

Liquid Assets = Liquid Assets = 3, 50,000 3, 50,000 C t Li bilitiC t Li biliti 2 00 0002 00 000Current LiabilitiesCurrent Liabilities 2, 00,0002, 00,000Less: Bank overdraft Less: Bank overdraft 50,00050,000

Q i k Li bili iQ i k Li bili i 1 50 0001 50 000Quick Liabilities =Quick Liabilities = 1, 50,0001, 50,0003, 50,0003, 50,000

RatioRatio = = ------------------------ = 2.33: 1= 2.33: 11, 50,000 1, 50,000

IfIf thethe quickquick assetsassets exceedexceed oror equalequal toto quickquickliabilities,liabilities, itit indicatesindicates thatthat thethe financialfinancial positionposition ofofthth ii ti f tti f tthethe concernconcern isis veryvery satisfactorysatisfactory..

•• 33.. (a)(a) ProprietaryProprietary ratioratio oror CapitalCapital ratioratiooror EquityEquity RatioRatio isis thethe ratioratio ofof thetheproprietors’proprietors’ (i(i..ee.. owners/owners/ Shareholders)Shareholders)p pp p (( ))fundsfunds toto totaltotal assetsassets..TheThe EquityEquity comprisescomprises thethe longlong termterm andandTheThe EquityEquity comprisescomprises thethe longlong termterm andandshortshort termterm liabilitiesliabilities ii..ee.. externalexternal equitiesequities

dd ’’ ii hh i li l iiandand owners’owners’ equityequity oror shareshare capitalcapital ii..ee..internalinternal equitiesequities..ButBut netnet worthworth representsrepresents ‘the‘the totaltotal sharesharecapitalcapital andand reservesreserves ofof allall types’types’ whichwhichcapitalcapital andand reservesreserves ofof allall typestypes whichwhichbelongsbelongs toto thethe shareholdersshareholders..

b)Ratio of total assets to proprietors’ funds isobtained by dividing the ‘total assets’ by theobtained by dividing the total assets by the“total amount of proprietors’ fund”.

• This indicates the percentage of investment ofThis indicates the percentage of investment ofproprietors’ funds in fixed assets.

• If the value of the fixed assets is greatly ing yexcess of the proprietors’ funds, it signifies thatpart of fixed assets is owned by outsidecreditors.

c)Ratio of external liabilities to proprietors’ fund ist l t k th ‘i t t f th i t ’ ia tool to know the ‘interest of the proprietors’ in

the business as compared ‘with that of externalcreditors’creditors .

Revenue Statement RatiosRevenue Statement Ratios1.1.Gross Profit RatioGross Profit Ratio (Turn over Ratio) is a (Turn over Ratio) is a

comparison of the ‘gross Profit’ with ‘net Sales’, comparison of the ‘gross Profit’ with ‘net Sales’, which reveals the extent to which the business is which reveals the extent to which the business is managed profitably.managed profitably.

Tk.Tk.Example : Example : Net SalesNet Sales 1,50,000 1,50,000

Gross ProfitGross Profit 30,00030,000

30,00030,000Gross Profit Ratio Gross Profit Ratio ------------------------------ = 20% = 20%

1,50,0001,50,000

•• 2.2. Operating RatioOperating Ratio is ascertained by comparing ‘the is ascertained by comparing ‘the cost of goods sold & other expenses’cost of goods sold & other expenses’ with ‘netwith ‘netcost of goods sold & other expenses cost of goods sold & other expenses with net with net sales’. It is ascertained to show the operating efficiency.sales’. It is ascertained to show the operating efficiency.

Tk.Tk.Example : Example : Cost of goods soldCost of goods sold 5,20,0005,20,000pp gg , ,, ,

Operating ExpensesOperating Expenses 1,80,0001,80,000----------------------

TotalTotal ExpensesExpenses 7,00,0007,00,000Net SalesNet Sales 8,00,0008,00,000

7,00,0007,00,000Operating RatioOperating Ratio = = ------------------------------ == 0.875 : 10.875 : 1

8,00,0008,00,000

33..ExpensesExpenses RatioRatioa)a) ‘Cost‘Cost ofof goodsgoods sold’sold’ toto ‘net‘net sales’sales’ ratio,ratio,

whichwhich indicatesindicates howhow farfar thethe managementmanagement hashasbeenbeen ableable toto maintainmaintain thethe marginmargin inin theirtheir salessales..ExampleExample :: TkTk..pp

CostCost ofof goodsgoods soldsold 55,,2020,,000000

NetNet SalesSales 88,,0000,,00000055 2020 00000055,,2020,,000000

ExpensesExpenses RatioRatio == -------------------------- == 00..6565 :: 1188,,0000,,000000

OtherOther RatiosRatios ::b)b) ‘Factory‘Factory cost’cost’ toto ‘net‘net salessales ratio’ratio’b)b) FactoryFactory costcost toto netnet salessales ratioratioc)c) ‘Administrative‘Administrative expenses’expenses’ toto ‘net‘net salessales ratio’ratio’d)d) ‘Distribution‘Distribution expenses’expenses’ toto ‘net‘net salessales ratio’ratio’

44..NetNet ProfitProfit RatioRatio isis thethe ratioratio betweenbetween thethe ‘net‘netprofit’profit’ toto ‘net‘net sales’sales’ ::profitprofit toto netnet salessales ::

ExampleExample :: TkTk..NetNet ProfitProfit 5050,,000000NetNet SalesSales 88,,0000,,000000

5050 0000005050,,000000RatioRatio == ------------------------------ == 00..06250625 :: 11,, oror 66..2525%%

88,,0000,,000000

5.5. Stock turn over ratioStock turn over ratio (Inventory Ratio) is prepared to (Inventory Ratio) is prepared to ascertain the number of items the ascertain the number of items the stock is turned over stock is turned over d i h i d d i i d b di idi fd i h i d d i i d b di idi fduring the period and is ascertained by dividing cost of during the period and is ascertained by dividing cost of

goods sold goods sold by average stock /inventory.by average stock /inventory.Example : Example : Tk.Tk.pp

Opening Stock Opening Stock 1,50,0001,50,000Closing Stock Closing Stock 2,00,0002,00,000T t lT t l 3 50 0003 50 000TotalTotal 3,50,0003,50,000Average StockAverage Stock 3,50,000 3,50,000 --::-- 2 = 1,75,0002 = 1,75,000

Cost of goods soldCost of goods sold 5,20,0005,20,000Cost of goods soldCost of goods sold 5,20,0005,20,0005,20,0005,20,000

Stock Turn Over RatioStock Turn Over Ratio : : ---------------------------- = 2.97 times.= 2.97 times.1,75,0001,75,000

This is an indication of the ‘velocity’ of the movement of the This is an indication of the ‘velocity’ of the movement of the goods during the year.goods during the year.goods during the year.goods during the year.

66.. ‘‘NetNet Profit’Profit’ toto ‘total‘total asset’asset’ ratioratioisis calculatedcalculated toto knowknow thethe earningearningcapacitycapacity ofof thethe totaltotal assetsassets..p yp y

77.. ReturnReturn onon proprietors’proprietors’ fundsfunds isisascertainedascertained byby dividingdividing thethe ‘net‘netascertainedascertained byby dividingdividing thethe netnetprofits’profits’ byby ‘the‘the shareholdersshareholders fund’fund’..

•• OtherOther RatiosRatios11.. CostCost ofof salessales toto capitalcapital employedemployed :: toto

judgejudge thethe effectivenesseffectiveness ofof useuse ofof capitalcapital..judgejudge thethe effectivenesseffectiveness ofof useuse ofof capitalcapital..22.. CostCost ofof salessales toto fixedfixed assetsassets :: toto assessassess

h hh h hh fi dfi d k dk dwhetherwhether thethe fixedfixed assetsassets areare workedworked atatfullfull capacitycapacity

33.. CostCost ofof salessales toto currentcurrent assetsassets :: toto assessassesswhetherwhether thethe currentcurrent assetsassets areare notnot keptkeptwhetherwhether thethe currentcurrent assetsassets areare notnot keptkeptidleidle..

4.4. Earning per Share (EPS)Earning per Share (EPS) ::Net Profit (Net Profit (-- Pref. dividend ) Pref. dividend ) -- Income TaxIncome TaxMeasures the success of the Number of Equity SharesMeasures the success of the Number of Equity Sharesmanagement in the conduct management in the conduct of the affairs of the business of the affairs of the business entity. entity.

N P fiN P fi I TI T 10 00 C (Tk )10 00 C (Tk )Net Profit Net Profit -- Income Tax Income Tax 10.00 Crore (Tk.)10.00 Crore (Tk.)Example : = Example : = ---------------------------------------------------------------- ---------------------- = Tk. 5.00= Tk. 5.00

Number of Equity SharesNumber of Equity Shares 2.00 Crore (Nos.)2.00 Crore (Nos.)Market Price of SharesMarket Price of SharesMarket Price of SharesMarket Price of Shares

5.5. Price / Earning RatioPrice / Earning Ratio :: ------------------------------------------------------------Earning per shareEarning per share

Example : Example : Tk.Tk.Market Price Market Price 100.00100.00

Price Earning Ratio Price Earning Ratio -------------------------- == ------------------ = 20.00= 20.00gg

EPS EPS 5.005.00

AA highhigh priceprice earningearning ratioratio indicatesindicates thatthat thetheinvestorsinvestors areare satisfiedsatisfied andand thethe futurefuture earningsearnings perperinvestorsinvestors areare satisfiedsatisfied andand thethe futurefuture earningsearnings perpershareshare willwill increaseincrease.. OnOn thethe otherother hand,hand, aa lowlow pricepriceearningearning ratioratio indicatesindicates thatthat thethe investorsinvestors areareggpessimisticpessimistic asas regardsregards thethe possibilitypossibility ofof thetheearningsearnings perper shareshare toto increaseincrease..

ExampleExample ::FromFrom thethe followingfollowing statementsstatements ofof M/sM/s.. MudarabaMudarabaLtdLtd.. forfor thethe yearyear endingending 3030thth June,June, 20022002,, youyou areare

i di d tt thth itit ii thth ff ffrequiredrequired toto rearrangerearrange thethe itemsitems inin thethe formform ofoffinancialfinancial statementsstatements andand calculatecalculate thethe followingfollowingratiosratios andand statestate thethe significancesignificance ofof eacheach ratioratio::ratiosratios andand statestate thethe significancesignificance ofof eacheach ratioratio::

11.. CurrentCurrent RatioRatio22.. AcidAcid testtest ratioratio33 OperatingOperating ratioratio33.. OperatingOperating ratioratio44.. StockStock--turnoverturnover ratioratio55.. TurnoverTurnover ofof fixedfixed assetsassets66 ReturnReturn onon proprietors’proprietors’ fundsfunds66.. ReturnReturn onon proprietorsproprietors fundsfunds77.. Debtors’Debtors’ turnoverturnover

Balance Sheet as on 30th June, 2002Balance Sheet as on 30th June, 2002

LiabilitiesLiabilities AssetsAssetsTk. Tk. Tk.Tk.

Share CapitalShare Capital and & Buildingand & Building 5 00 0005 00 000Share CapitalShare Capital-- and & Buildingand & Building 5,00,0005,00,000Issued and fully paid up:Issued and fully paid up: lant & Machinerylant & Machinery 2,00,0002,00,00050,000 Equity Shares of Tk.10 each 50,000 Equity Shares of Tk.10 each 5,00,0005,00,000 ixed Assets(subixed Assets(sub--total)total) 7,00,0007,00,000General ReserveGeneral Reserve 4,00,0004,00,000 StockStock 1,50,0001,50,000General ReserveGeneral Reserve 4,00,0004,00,000 StockStock 1,50,0001,50,000Profit & Loss AccountProfit & Loss Account 1,50,0001,50,000 Sundry DebtorsSundry Debtors 2,50,0002,50,000Shareholders’ Fund(subShareholders’ Fund(sub--total)total) 10,50,00010,50,000 Cash & Bank BalancesCash & Bank Balances 1,50,0001,50,000Sundry CreditorsSundry Creditors 2,00,0002,00,000 Current Assets (subCurrent Assets (sub--total)total) 5,50,0005,50,000yy

Total 12,50,000Total 12,50,000 Total 12,50,000Total 12,50,000============== ======= =======

Income statement for the year ended on 30th June, 2002Income statement for the year ended on 30th June, 2002Tk.Tk. Tk.Tk.

To Opening StockTo Opening Stock 2,50,0002,50,000 By Sales (Net)By Sales (Net) 18,00,00018,00,000” Purchases” Purchases 10,50,000” Closing Stock 10,50,000” Closing Stock 1,50,0001,50,000

” Gross Profit” Gross Profit 6 50 0006 50 000 Gross Profit Gross Profit 6,50,000 6,50,000 ________________

19,50,00019,50,000 19,50,00019,50,000

To Selling & Distribution Expenses To Selling & Distribution Expenses 1,00,0001,00,000 By Gross ProfitBy Gross Profit 6,50,0006,50,000” Administration Expenses 230,000” Administration Expenses 230,000” ” Profit on Sales of Profit on Sales of

Fixed AssetsFixed Assets 50,000 50,000 ” Finance Expenses ” Finance Expenses 20,000 20,000 Operating Expenses (subOperating Expenses (sub--total)total) 350,000350,000” Net Profit” Net Profit 3,50,0003,50,000 ______________

7 00 0007 00 000 7 00 0007 00 0007,00,0007,00,000 7,00,0007,00,000

Rearranged Financial Statements of M/s. Mudaraba Ltd.Rearranged Financial Statements of M/s. Mudaraba Ltd.Balance Sheet as on 30th June, 2002.Balance Sheet as on 30th June, 2002.

AssetsAssetsAssetsAssetsFixed AssetsFixed Assets Tk.Tk. Tk.Tk.Land & BuildingsLand & Buildings 5,00,000 5,00,000 Plant & MachineryPlant & Machinery 2 00 0002 00 000 7 00 0007 00 000Plant & MachineryPlant & Machinery 2,00,0002,00,000 7,00,0007,00,000

Current AssetsCurrent Assets

StockStock 1,50,0001,50,000Sundry DebtorsSundry Debtors 2,50,0002,50,000C h d B k B lC h d B k B l 1 50 0001 50 000Cash and Bank BalancesCash and Bank Balances 1,50,0001,50,000

--------------------Total Current AssetsTotal Current Assets 5,50,0005,50,000Less: Current LiabilitiesLess: Current Liabilities 2 00 0002 00 000Less: Current LiabilitiesLess: Current Liabilities 2,00,0002,00,000

Net Current AssetsNet Current Assets ------------ 3,50,0003,50,000Net AssetsNet Assets ------------ 10,50,00010,50,000

LiabilitiesLiabilitiesPaid up CapitalPaid up Capital 5,00,0005,00,000General ReserveGeneral Reserve 4,00,0004,00,000Profit & Loss Account(Net Profit)Profit & Loss Account(Net Profit) 1,50,0001,50,000

Shareholders’ FundsShareholders’ Funds ---------- 10,50,00010,50,000

Income Statement for the year ended 30th June, 2002Income Statement for the year ended 30th June, 2002yyTk.Tk.

Sales (Net)Sales (Net) -------------------------- 18,00,00018,00,000( )( ) , ,, ,Cost of goods sold (2,50,000 + 10,50,000Cost of goods sold (2,50,000 + 10,50,000--1,50,000) 1,50,000) ---------------------- 11,50,00011,50,000Gross ProfitGross Profit -------------------------------------------------- 6,50,0006,50,000Gross ProfitGross Profit 6,50,0006,50,000

Less : Operating Expenses:Less : Operating Expenses:S lli & Di t ib ti E S lli & Di t ib ti E 1 00 0001 00 000Selling & Distribution Expenses Selling & Distribution Expenses 1,00,0001,00,000Administration ExpensesAdministration Expenses 2,30,0002,30,000Finance ExpensesFinance Expenses 20 000 3 50 00020 000 3 50 000Finance ExpensesFinance Expenses 20,000 3,50,00020,000 3,50,000

------------------ ------------------Net Operating Profit Net Operating Profit 3,00,0003,00,000p gp g , ,, ,Add: Profit on Sale of fixed assetsAdd: Profit on Sale of fixed assets 50,00050,000

----------------

Net ProfitNet Profit -------------- 3,50,0003,50,000

Ratio AnalysisRatio AnalysisCurrent Assets Current Assets 5,50,0005,50,000

1. 1. Current RatioCurrent Ratio ==-------------------------- : : -------------------- = 2.75 to 1= 2.75 to 1

C t Li biliti 2 00 000C t Li biliti 2 00 000Current Liabilities 2,00,000Current Liabilities 2,00,000

ItIt indicatesindicates thatthat forfor everyevery TkTk.. 11..0000 ofof thethett li bilitili biliti thth il blil bl TkTk 22 7575currentcurrent liabilities,liabilities, therethere areare availableavailable TkTk..22..7575

ofof thethe currentcurrent assetsassets toto meetmeet thethe obligationsobligations..ThTh titi bb id did d tt bb ti f tti f tTheThe ratioratio cancan bebe consideredconsidered toto bebe satisfactorysatisfactoryasas thisthis isis moremore thanthan thethe standardstandard ofof 22.. AsAsthth ii dd ff thth kiki it lit l thththerethere isis adequacyadequacy ofof thethe workingworking capital,capital, thethecompanycompany willwill bebe inin aa positionposition toto meetmeet itsits

tt li bilitili biliticurrentcurrent liabilitiesliabilities..

Liquid assets 4,00,000 Liquid assets 4,00,000 (i.e. Current Assets Tk.5,50,00 less(i.e. Current Assets Tk.5,50,00 less--Stock Tk.1,50,000)Stock Tk.1,50,000)2. 2. Acid Test RatioAcid Test Ratio = = ------------------------------ -------------------- = 2 to 1= 2 to 1

Current liabilities: 2,00,000Current liabilities: 2,00,000Current liabilities: 2,00,000Current liabilities: 2,00,000

ThisThis signifiessignifies thethe abilityability ofof thethe concernconcern toto meetmeet itsitscommitmentscommitments withoutwithout delaydelay ThisThis cancan bebe consideredconsidered toto bebecommitmentscommitments withoutwithout delaydelay.. ThisThis cancan bebe consideredconsidered toto bebesatisfactory,satisfactory, asas itit isis moremore thanthan thethe standardstandard ofof 11..

Cost of goods sold + Other operating expensesCost of goods sold + Other operating expenses33. . Operating RatioOperating Ratio = = --------------------------------------------------------------------------------------------------------------

Net salesNet sales11,50,000 + 3,50,000 15,00,00011,50,000 + 3,50,000 15,00,000

i.e. i.e. -------------------------------------------------- = = ------------------------ = .83 to 1 or 83%= .83 to 1 or 83%18,00,000 18,00,00018,00,000 18,00,000

This signifies that 83 per cent of the sales is taken up This signifies that 83 per cent of the sales is taken up by the operating costs leaving 17 per cent as netby the operating costs leaving 17 per cent as netby the operating costs leaving 17 per cent as net by the operating costs leaving 17 per cent as net profit on sales. This indicates the efficiency of the profit on sales. This indicates the efficiency of the management of the business.management of the business.gg

Cost of goods sold Cost of goods sold 11,50,00011,50,000

4. 4. Stock Turnover RatioStock Turnover Ratio = = -------------------------------------------- : : ------------------------ = 5.75 times= 5.75 timesk 2 00 000k 2 00 000Average stock 2,00,000 Average stock 2,00,000 {(2,50,000 + 1,50,000)}{(2,50,000 + 1,50,000)}--::-- 2 =2,00,000 2 =2,00,000

It is an indication of the velocity of the movement ofIt is an indication of the velocity of the movement ofIt is an indication of the velocity of the movement of It is an indication of the velocity of the movement of goods during the year. The stock turned over is goods during the year. The stock turned over is 5 75 times per year or once every approximately 95 75 times per year or once every approximately 95.75 times per year or once every approximately 9 5.75 times per year or once every approximately 9 weeks (i.e. 52 weeks weeks (i.e. 52 weeks --::-- 5.75) which can be 5.75) which can be considered to be satisfactory.considered to be satisfactory.yy

Cost of goods sold 11,50,000Cost of goods sold 11,50,0005.5. Turnover of Fixed Assets = Turnover of Fixed Assets = ------------------------------------ : : -------------------------- = = 1.65 to 11.65 to 1

Fixed assets 7 00 000Fixed assets 7 00 000Fixed assets 7,00,000Fixed assets 7,00,000

ThisThis indicatesindicates thatthat forfor everyevery TkTk.. 11..0000 investedinvested inin fixedfixed assetsassetsTkTk.. 11..6565 worthworth ofof goodsgoods areare soldsold.. ThisThis signifiessignifies thatthat thetheinvestmentinvestment inin fixedfixed assetsassets isis productiveproductiveinvestmentinvestment inin fixedfixed assetsassets isis productiveproductive..

Net profit 3,00,000 Net profit 3,00,000 6. 6. Return on Proprietors’ FundsReturn on Proprietors’ Funds = = -------------------- : : ---------------------- X 100 = 28.57%X 100 = 28.57%pp

(before tax)(before tax) Shareholders’ funds 10,50,000Shareholders’ funds 10,50,000

ThisThis indicatesindicates thethe earningearning powerpower ofof thethe fundsfunds investedinvested inin thethebusinessbusiness byby thethe proprietorsproprietors TheThe percentagepercentage ofof returnreturn appearsappearsbusinessbusiness byby thethe proprietorsproprietors.. TheThe percentagepercentage ofof returnreturn appearsappearstoto bebe veryvery satisfactorysatisfactory andand thereforetherefore thethe sharesshares willwill havehave aagoodgood marketmarket valuevalue..

Outstanding Debtors 2,50,000Outstanding Debtors 2,50,0007. 7. Debtor’s TurnoverDebtor’s Turnover = = ------------------------------------ : : ---------------------------- = 51 days= 51 days

Average daily sales (18 00 000Average daily sales (18 00 000 :: 365) =4931365) =4931Average daily sales (18,00,000 Average daily sales (18,00,000 --::-- 365) =4931 365) =4931

ItIt isis anan indicationindication ofof efficiencyefficiency ofof thethe concernconcern inin thethe mattermatter ofof creditcreditandand collectioncollection policiespolicies.. IfIf thethe averageaverage datedate isis higherhigher thanthan thethe periodperiod ofofcreditcredit allowedallowed byby thethe businessbusiness toto itsits customers,customers, itit isis anan indicationindication thatthatthethe systemsystem ofof collectioncollection isis faultyfaulty andand stepssteps shouldshould thereforetherefore bebe takentakenyy yy pptoto collectcollect thethe outstandingsoutstandings..

Ref :Ref : 1 International Federation of Accountants Publications1 International Federation of Accountants PublicationsRef :Ref : 1. International Federation of Accountants Publications1. International Federation of Accountants Publications2. Management Accounting, Financial Management and Holding 2. Management Accounting, Financial Management and Holding Company Accounts Company Accounts -- By Mr. S. By Mr. S. NagaratnamNagaratnam. .