EVALUATION OF AL MAZAYA HOLDINGS CO. FINANCIAL MENTS Income ment Evaluation and analysis New income statement Sales 21401278 Rental income 3964882 Net management fee and commission income 609780 Revenue 25975940 Less Cost of goods sold (17070175) Gross income 8905765 Less other expenses General and administrative expenses (3593275) Board of directors remuneration (85000) KFAS (55129) Add other income Interest income 75837 Net income 5248198 Pure profitability of the firm =net income/sales =5248198/21401278 =0.2452*100 =24.52% The old profitability of the firm is as follows Net income\sales =6939357/21401278 =0.3242*100 =32.42% The difference between the old and the new profitability is small. The difference between the new and the old net income for the company is: 6939357-5248198 =1691159 The difference in the actual net income of the new and old income statement is moderate.
Though the initial net income is higher, the difference of 1691159 with the pure net income means that the company is doing well. the difference is significant but can be said to be small compared to the pure net income as the net income reduces by about a fifth. The main income for the company is thus generated from the firm’s core activities. Therefore, it is conclusive that the firm relies on its main business activity for productivity and not on other gains and losses that are not part of the main business.
Removal of gains and losses that are not part of the main business activities is aimed at getting the actual real profitability of the firm assuming other factors are held constant. These factors include foreign exchange loss and change in investment value does not involve actual transfer of cash and cash equivalent for it to be a gain or a loss. They are conceptual gains and losses associated with changes in market value of various factors of production and investment held by the firm. Further analysis of the income statement of the firm is through measuring the quality of the earnings.
It is the relationship between the net income, cash from operating activities and the sales of the firm. Therefore the formula for calculation of quality of earning is as follows: Net income – cash from operating activities/ sales =6939357 – 9514591/21401278 =-0.12 A low ratio is more preferable than a high ratio. In this case, the cash from operating activities is more than the net income. Operating activities are the actual activities undertaken in the course of the operation of the firm.
These activities involve the firm’s working capital, current debt and liabilities management among other activities. Therefore, when the operating income is more than the net income, it means the firm has received more cash than the actual net income generated from operating activities. The excess cash inflow can be attributed to payments from debtors from the previous financial period. This is because they do not feature in the current operations but their cash has been received in the current operating period. A small ratio of the quality of earning implies than the difference between the net income and the operating activities is slightly higher or less than the sales.
In the case of Al Mazaya Holdings, the ratio is -0.12. The negative sign is attributed to the higher operating activities figure subtracted from net income. The small ratio means that there is a small difference between debtors and sales. Assuming that the sales of the previous period were almost equal to that of the current period, the ratio implies that most debtors paid up their debts and there is low chance of bad debt to be written off.
Measurements of items presented in the statements of financial position (balance sheet) Current Assets: Trade and other receivables Trade and other receivables are carried at amortized cost with the use of effective interest rate method less impairment losses (Al Mazaya Holdings company 2013). Through amortization, any losses or gains at acquisition and any other costs incurred are accounted for. Properties held for trading Property held for trading is measured using one of the two; cost and net realizable value. The lower figure is what the firm picked and used as the measure.
The cost is the lowest amount possible the firm should earn for selling the property held for trading. Non Current Assets: Property and equipment Property and equipment is stated at cost. Accumulated depreciation and any other impairment in value are subtracted from cost to obtain the actual current value of the property and equipment. This is the actual amount the firm can generate from disposing the property and equipment at its actual net value. Depreciation is calculated on a straight line basis for estimated useful life of the firm.
At the end of its useful life, the value of the property or equipment is zero. Investment properties Investment property is measured at cost with the cost of transaction being included. Cost of replacing part of the investment during its useful life is included to arrive at the actual value of the investment at a given time. The final value is the actual net value of the investment. If the investment is disposed at a lower cost, a loss is incurred while disposing at higher cost earns profit for the firm. Current Liabilities: Account Payable The total amount of liabilities to be paid in future for goods or/and service already received is calculated.
The calculation is done irrespective of whether suppliers have done the billing or not. This is to ensure the total amount payable is captured in the account payable. Non-Current Liabilities: Employees’ end of service benefits The amount is accumulated over the time of employment of the employee depending with the laws of the country the subsidy is operating in losses (Al Mazaya Holdings company 2013). in most cases, it is submitted to the social security fund of the given country. Equity: Share Capital This is the total amount of outstanding share equity added to treasury shares held by the mother company.
It gives the total amount of shares the company has Statutory reserve The amount to for statutory reserve is specified in the firm’s financial policy. The amount is usually a ratio of the net income earned by the firm. Cash flow statements analysis The elements of the cash flow can be measured in proportion to sales to determine the proportion that each of the three classes of activities occupy.
The ratio of net cash from investing activities, Net cash from financing activities, Net cash from operating activities to sales is arrived at as follows: Net cash from operating activities: sales = 9514591/21401278 = 0.0444 Net cash from investing activities: sales = (2462631)/21401278 =-0.115 Net cash from financing activities: sales = (2737003)/21401278 =-0.127 Operating activities has a ratio of 0.0444 to sales. This is an indication that the firm is performing well because it generates most of its income from its core business. It is in operating activities that cash from sales is received.
Thus the company is putting more emphasis in its core activities thus more income from operating activities. The ratio of investing activities to sales is negative that is -0.115. This ratio is far much lower than the ratio of operating activities but slightly higher than that from financing activities. Therefore, though the firm is more oriented towards operating activities, it undertakes more investing activities than financing activities. The ratio of financing activities to sales is the smallest value of the three classes in the cash flow with a ratio of -0.127.
The interpretation is that the firm invests very little amount in financing activities. Financing is the least activity undertaken by the firm. This may imply that the firm has a good financial base, thus little recurrent financial activity are necessary. It is a well established firm capable of managing its own finances with little difficulty thus diverts most of its resources to the main business of the business. References Al Mazaya Holdings company. Annual report 2013.