Question

1. Raheem SAOG is involved in the manufacture of poultry products. It provides you the following details, you are required to prepare a Statement of Financial Performance clearly showing: 1. Net sales 2. Cost of Goods sold, 3. Gross profit, 4. Net income before interest and Tax, 5. Net income after interest and tax

Particulars	Amount(OMR)
Profit on sale of furniture	200
Expenses for manufacturing	5000
Stock on 31.12.2018	4500
Discount Allowed	350
Return inwards	2000
Delivery van expenses	3200
Bad debts	700
Miscellaneous Expenses	640
Carriage on Purchases	1200
Supervisor's Salary	650
salesmen Salary	1300
Rent(Cr.)	3480
Sales	128,000
Purchases	113,000
Purchase Returns	3000
Tax	20%
Stock on1.1.2018	6200

After calculating the net income, consider the following information.

Raheem SAOG has in issue 150,000 Equity shares having a par value of 0.100 baiza was issued at a premium of OMR 1.2.

In the beginning of the year, the company has taken a loan of 40,000 from Bank Sohar at 12% interest rate.

A. Comment and show how the net income of the company will be affected if :( 1.5 marks)

a. What will be effect on the net income or loss due to the Loan?

b. Is it possible for the company to declare dividend from the current year profits? Explain

B. How will you show the Loan and Equity Share capital in the Statement of Financial Position (1.5 marks)

Answer 1

Particulars	Amount
Net Sales (WN 1)	1,26,000
Cost of Goods Sold
Net Purchases (WN 2)	-111700
Expenses for manufacturing	-5000
Supervisor's Salary	-650
Carriage on Purchases	-1200
Gross Profit	7,450
Indirect Expense
Delivery Van Expense	-3200
Bad Debt	-700
Miscellaneous Expenses	-640
salesmen Salary	-1300
Discount Allowed	-350
Other Income
Profit on sale of Furniture	200
Rent	3480
Net Income Before Interest and Tax	4,940
Less: Interest Expense (40000*12%)	-4800
Net Income Before Tax	140
Less: Tax Expense (20%)	-28
Net Income After Tax	112

WN1: Net Sales: Sales – Returns Inward

                                =128000-2000

                                =126000

WN2: Net Purchase: Opening Stock + Purchase – Purchase Returns –Closing Stock

                                       = 6200+113000-3000-4500

                                       =111700

A. a. As stated in the above given income statement, the net income before tax and interest is 4950. However, due the interest expense of 4800, the same net income is reduced to just 140. Thus the net income falls sharply due to the interest expense.

b. Considering the interest expense and tax liability the net income for current year is only 140. If the company wishes to pay dividend also, the per share dividend would be around 0.0009. Hence, it is not feasible to declare dividend from the current year profits.

      B.     Loan will be shown under Non-Current Liabilities and as sub part of Long Term Borrowing as 12% loan from Bank Sohar. Equity share capital will be classified into two parts as shares are issued at premium. So Share premium will be shown with amount 180000 (150000 equity shares *1.2) and remaining amount in Equity Share Capital issued at par value.

Please feel free to ask any clarity on any point.