1.2 Financial statements of the Polly’s Pet Products

 

Financial statements of the Polly’s Pet Products

“The Financial statement consists of three main parts namely balance sheet (a photo of a company in certain amount of time), income statement (summaries of revenues and expenses generated), and cash flow statement (how much cash entered and left a company over a reporting period)” (one minute economics. 2016). In the cash flow statement, the correct balances of the blank accounts can be calculated with the following way,

-        Cash paid out to suppliers and employees

= cash received from costumer – net cash provided by operating activities - interest paid – taxes paid  

= 600000 -185000-5000-10000 = 400,000

-        Net cash provided by financing activities

= New loans - Repayments on loans + Issuance of common shares of stock

            = 50.000 - 45,000 + 5000 = 10,000

-        Net change in Cash

= net cash provided by operating activities - Net cash used in investing activities + Net cash provided by financing activities

= 185,000 -25,000 + 10,000 = 170,000

-        Cash balance at the end of year

= Cash balance at the beginning of year + Net change in Cash = 30,000 + 170,000 = 200000

In the income statement, the blank accounts can be calculated with the following rules:

-        Operating costs = Revenues – Gross profit  = 650000 – 205000 = 445000

-        Operating income =  Gross profit – General and administrative expenses = 205000-75000 = 130000

-        Income before provision of taxes = Operating – Other expense = 130000-60000 = 70000

-        Net income = Income before provision of taxes – Provision for income Taxes = 70000-5000 = 65000

-        Retained earnings, Ending balance = Net Income  + Retained Earnings at the beginning Balance = 65000 + 103500 = 168500

The relationship between the financial statements can be clearly detected by knowing the fact that the balance sheet needs the value of Cash from the cash flow data and needs the retained earnings, ending balances from the income statement data. Further analysis of the balance sheet blank accounts and balance analysis can be performed by following calculations:

-        Cash = Cash balance, end of year from cash flow data = 200000

-        Total current asset  = Cash + Accounts receivable + Other assets = 200000+ 50000+25000 =  275000

-        Total Asset =  Total current asset + Long term (fixed asset) = 275000 + 75000 = 350000

-        Accured expense = Total current liabilities – accounts payable – income tax payable – Current portion of notes payable – Deferred income taxes = 123500 – 75000 -5000 – 12000 – 1500 = 30000

-        Notes payable (long term) =  total liabilities – total current liabilities = 161500-123500 = 38,000

-        Retained earnings, ending balances from the income statement data = 168500

-        Total stockholder’s equity = Common stock + Additional paid-in capital + Retained earnings = 5000 + 15000 + 168500 = 188500

-        Total liabilities and stockholder’s equity = 161500 + 188500 = 350000     

Based on the balance sheet calculations of the company’s accounting data, it is proved that the three parts of the financial statements complement each other (one minute economics. 2016). The results show us that the total asset of the Polly’s pet product is exactly equal to the total liabilities and stockholder’s equity which is equal to 350000. Therefore the balance sheet has a really balanced values by this proof meaning that the accounting professionals perform the duties properly to improve the company’s performances.

A good way to find out the company’s performance is by calculating the Liabilities to Asset Ratio. The conventional criteria required that a good company should have the ratio of 0.4 or lower and some investors are prone to invest in companies having the ratio between 0.3 and 0.6 (Ross, 2021). In Islamic perspective, some Islamic scholars propose their thoughts that the ratio of less than 0.33 is tolerable (Elgari, n.d.) with the financial purification by quietly giving some amount of money to humanity or public facility such as toilet in some opinion. In my own opinion, the best company’s performance is the one that has zero zero debt to asset ratio which has zero usury.        

            In conclusion, based on the balance sheet data, since the ratio of liability to asset is = (161500/350000)*100 = 0.46 then the Polly’s pet product’s performance is good in conventional perspective, not tolerable in Islamic perspective and not good in my own opinion.

 

References

Donovan, T. (2020, November 26). The accounting equation: Assets = liabilities + equity. Fundbox. https://fundbox.com/blog/assets-liabilities-equity/.

One Minute Economics. (2016). Financial Statements Explained in One Minute: Balance Sheet, Income Statement, Cash Flow Statement [Video]. YouTube. 

Ross, S. (2021, August 10). What is a good debt ratio? Investopedia. https://www.investopedia.com/ask/answers/021215/what-good-debt-ratio-and-what-bad-debt-ratio.asp.

Elgari, M. A. (n.d.). Equity screening in Islamic finance. IslamicMarkets.com. https://islamicmarkets.com/education/equity-screening-in-islamic-finance.