KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Comparative Analysis of
Financial Statements
In the partial fulfillment of the requirement of Masters in Business Administration

Submitted by:

Smriti Shrestha Kasaju (16138)

Anisha Maharjan (16118)
Dimple Karki (16115)
Prakriti Budathoki (16113)
Ashok Bishwokarma (16112)
Biplov Shrestha (16134)

Submitted To:

Mr. Hari Gopal Risal

Faculty
Accounting for managerial decision
Contents
Acknowledgements.............................................................................................................................. i
Executive Summary............................................................................................................................ ii
Introduction........................................................................................................................................... 1
1.1 Background of the study....................................................................................................... 1
1.2 Objective of the study............................................................................................................ 3
1.3 Importance of analysis of financial statement................................................................4
1.4 Limitations of the Study........................................................................................................ 4
Financial statement and analysis for Gharsansar Supermart..................................................6
2.1 Background and product line............................................................................................... 6
2.2 Income Statement and Balance sheet................................................................................ 6
2.3 Financial ratio analysis.......................................................................................................... 9
Financial statement and analysis for Center Point Photocopy............................................14
3.1. Background and Product line........................................................................................... 14
3.2. Income Statement and Balance sheet............................................................................ 14
3.3. Ratio Analysis of Photocopy Center.............................................................................16
Comparative Analysis of Financial Statements.......................................................................20
Conclusion and Recommendation............................................................................................... 23
References........................................................................................................................................... 26
Annex................................................................................................................................................... 27
 Acknowledgements
A research can be conducted, completed, and presented soundly only when there are
multiple hands and support involved. Only then is a successful research made
possible, and insights are derived that fuel further exploration, studies, and
applications.
First and foremost, we would like to put forth our sincere gratitude to Mr. Hari Gopal
Risal, our respected faculty, for understanding a need for this research study. We are
immensely obliged to him for having us learn to use and work with this topic.
This research study and this report would not have been possible without the help of
owners of the firm ‘Gharsansar Supermart’ and ‘Center Point Stationery’ who have
given some time from their busy life to make response to our query. We extend our
immense thanks and gratitude to Mr. Bhuwan Chhetri and Mr. Nanda Kumar Shrestha
who have provided us with valuable inputs and given their opinions and information
based on the financial statements of their respective organizations.
Regards

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 Executive Summary
This report examines the two different industry’s organizations namely Gharsansar
super mart and Center point stationery. Both organizations are sole proprietorships.
Super mart deals with consumer goods while stationery deals with the service of
printing. The study is conducted to evaluate the company’s performance and financial
health.

Though there is no similarity in the business they perform, the financial information
are reviewed and considered along with the financial analysis to provide the
respective organizations with necessary recommendations. The introduction section
involves the background, limitations and the objectives of the study conducted. Next
part is the overview of the organizations which expands the products and services
provided by both firms.

The financial analysis section covers the income statement, balance sheet and the
financial ratios of both the firms. The annex section provides with the journal entries,
T account, unadjusted trial balance, adjusting entries along with income statement and
balance sheet. Furthermore, many applicable financial ratios based on liquidity,
solvency and profitability are calculated with the financial information provided.
Finally, the conclusions are drawn from the above stated financial analysis as well as
areas for improvement are recommended.

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 Chapter One

Introduction

1.1 Background of the study

Finance is the most essential aspect to start and carry out its operations. Basically,
finance is all about management of money and others valuables in a business through
which businesses happen to achieve their economic objectives.
A Financial Analysis of two local organizations has been made in this report. One is
“Center Point Stationery” and the other is "Gharsansar super mart".

Financial statement analysis is the process of reviewing and analyzing a company's

financial statements to make better economic decisions. These statements include
income statement, balance sheet, statement of cash flows, and a statement of changes
in equity, each having different objectives in learning about the financial
circumstances of the entity.

It is used by a variety of stakeholders, such as credit and equity investors, the

government, the public, and decision-makers within the organization. These
stakeholders have different interests and apply a variety of different techniques to
meet their needs.

Users of financial statements:

1. Creditors. Anyone who has lent funds to a company is interested in its ability to pay
back the debt, and so will focus on various cash flow measures.
2. Investors. Both current and prospective investors examine financial statements to
learn about a company's ability to continue issuing dividends, or to generate cash
flow, or to continue growing at its historical rate.
3. Management. The company controller prepares an ongoing analysis of the
company's financial results, particularly in relation to a number of operational metrics
that are not seen by outside entities (such as the cost per delivery, cost per distribution
channel, profit by product, and so forth).
4. Regulatory authorities. If a company is publicly held, its financial statements are
examined by the Securities and Exchange Commission to see if its statements

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conform to the various accounting standards and the rules of the SEC.

Methodology:
Primarily, data has been collected on a weekly basis by visiting the firms and jotting
down the information provided to us. Those data were then entered into journals,
transferred into ledger accounts, work sheet, income statements and balance sheets.
Secondly, financial statements are analyzed with the use of many kinds of ratios. You
use ratios to calculate the relative size of one number in relation to another. After you
calculate a ratio, you can then compare it to the same ratio calculated for a prior
period, or that is based on an industry average, to see if the company is performing in
accordance with expectations.
There are several general categories of ratios, each designed to examine a different
aspect of a company's performance. The general groups of ratios, which are used in
our study, are:
1. Liquidity ratios: This is the most fundamentally important set of ratios, because
they measure the ability of a company to remain in business.
Current ratio: Measures the amount of liquidity available to pay for current liabilities.
Quick ratio: The same as the current ratio, but does not include inventory.
Working Capital Ratio: Measures the excess of current assets upon current liabilities.

2. Activity ratios: These ratios are a strong indicator of the quality of management,
since they reveal how well management is utilizing company resources.
Accounts receivable turnover ratio: Measures a company's ability to collect accounts
receivable.
Number of day’s sales in receivables: Measures the period in which the company
collects its receivables.
Asset turnover ratio: Measures a company's ability to generate sales from a certain
base of assets.
Inventory turnover ratio: Measures the amount of inventory needed to support a given
level of sales.
Number of day’s sales in inventory: Measures the time period in which inventory is
converted into sales.

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3. Leverage ratios: These ratios reveal the extent to which a company is relying upon
debt to fund its operations, and its ability to pay back the debt.

Debt to equity ratio: Shows the extent to which management is willing to fund
operations with debt, rather than equity.

4. Profitability ratios: These ratios measure how well a company performs in

generating a profit.
Net profit ratio: Calculates the amount of profit after taxes and all expenses have been
deducted from net sales.
Return on equity: Shows company profit as a percentage of equity.

1.2 Objective of the study

To evaluate the current financial position of business: Financial statement analysis

shows the current position of the firm in terms of the types of assets owned by a
business firm and the different liabilities due against the enterprise i.e. the liquidity,
solvency, stability and overall performance of the organizations.

To evaluate profitability and the chances of growth of business in the future: Financial
statement analysis helps in assessing and predicting the earning prospects and growth
rates in earning which are used by investors while comparing investment alternatives
and other users in judging earning potential of business enterprise.

To assess the operational efficiency of one firm with another firm by studying the
comparative statements: Financial statement analysis helps to assess the operational
efficiency of the management of a company. The actual performance of the firms,
which are revealed in the financial statements, can be compared with some standards
set earlier and the deviation of any between standards and actual performance can be
used as the indicator of efficiency of the management.

To make the recommendations based on the conclusion retrieved: The data that we
collect from both the organizations will be systematically reviewed and based on

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those analyses our objective is to identify the errors in their businesses and give them
recommendations for improvement.

1.3 Importance of analysis of financial statement

Evaluation of the operational efficiency: It is necessary to analyze the financial

statement for matching the total expenses incurred and total financial expanses of the
current year comparing with the total expenses of the previous year and evaluate the
managerial efficiency of concern.

Evaluation of short and long term financial position: It is necessary to analyze the
financial statement for comparing the current assets and current liabilities to evaluate
the short term and long term financial soundness.

Determination of profitability: It is necessary to analyze the financial statement to

know the gross profit and net profit of the firms.

Indication of the trend of achievements:  Analysis of financial statement helps in

comparing the financial position of previous year and also compares various
expenses, purchases and sales growth, gross and net profit.  Cost of goods sold, total
value of assets and liabilities can be compare easily with the help of Analysis of
financial statement.

Forecasting, budgeting and deciding future line of action: The potential growth of the
business can be predicts by the analysis of financial statement. The growth rate then
helps in deciding a secure future of the companies.

1.4 Limitations of the Study

While financial statement analysis is an excellent tool, there are several issues to be
aware of that can interfere with your interpretation of the analysis results. These
issues are:
Comparability between periods: The Company preparing the financial statements may
have changed the accounts in which it stores financial information, so that results may
differ from period to period.

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Comparability between companies: An analyst frequently compares the financial
ratios of different companies in order to see how they match up against each other.
However, each company may aggregate financial information differently, so that the
results of their ratios are not really comparable. This can lead an analyst to draw
incorrect conclusions about the results of a company in comparison to its competitors.

Operational information: Financial analysis only reviews a company's financial

information, not its operational information, so you cannot see a variety of key
indicators of future performance, such as the size of the order backlog, or changes in
warranty claims. Thus, financial analysis only presents part of the total picture.

Apart from the traditional limitations of the financial statement, we faced a lot of
challenges while preparing these financial reports.

Transparency of Information: The information provided to us by firms cannot be held

cent percent true because we weren’t allowed to access the actual records that they
kept. So, we had to completely rely on the data that were verbally provided.

Theoretical and practical gap: The records that are kept practically are very much
different from our traditional classroom learning sessions. So, it was challenging for
us to apply our theoretical learning in a practical way.

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 Chapter 2

Financial statement and analysis for Gharsansar Supermart

2.1 Background and product line

Gharsansar supermarket is a sole trading small business located at Sankhamul, New

Baneshwor, which is registered according to the Private Firm registration act 2014. It
is the self-service shop offering a wide variety of organized food and household
products. This super market is comprised of fresh products, dairy products, meat,
liquor items and other various consumer goods in the local market. This supermart
acts as middleman between the suppliers and customers. The owner of this supermart
is Mr. Bhuwan Chhetri. After the interaction with the owner, the profitability position
of the supermart was realized. Similarly, this super market had a strong and sound
relationship with customers as well as the suppliers. Since there is no other supermart
nearby, this supermart is doing pretty good in the Sankhamul area.

2.2 Income Statement and Balance sheet

There are no such formal income statements made by this organization. However, we
have recorded the transaction for one month period and derived the necessary items
for the preparation of the income statements and balance sheet. The annex section of
this reports the recording of the transaction for a month period. This will not only
serve the purpose of doing research but also will provide valuable information about
the profitability position of this organization on the basis of which necessary
recommendations can be made.
Income statements present the financial record of the company’s revenue and
expenses along with the profit generated over a period of time. This only focus on
revenue and cost associated with the revenue so judgment based on only this
statement would not be that reliable. For this purpose, other financial statements like
balance sheets and cash flow statements are prepared as well. But due to some
constraint to the information cash flow could not be made. However, analysis is done
based o the balance sheet and the financial ratios as well.

6
 Gharsansar Supermart
Income Statement
For the month ended Feb 2, 2017
  Amount(Rs) Amount (Rs)
Sales Revenue   1225655
Expenses    
supplies expense 806175  
Utilities 5000  
Salaries 30000  
Repair and Maintenance 3000  
Rent Expense 35000  
Depreciation Expense 5240  
Software Expense 2000  
Internet Service Expense 2500  
Total Expense   888915
Net Income before Tax   336740
Income tax Expense 26939.2  
Net Income   309800.8

Here, the sales revenue is generated from the sale of variety of consumer goods
directly to the final consumers. The expense incurred during one month period was
payment for salaries, electricity, rent, depreciation, software expense, internet service
expense and obviously income tax. The company is in sound profitability position
with the margin of Rs. 309800.8.
Balance Sheet is a financial statement which summarizes a company’s assets,
liabilities and equity of the shareholders at a specific point in time. This determines
the financial position of the firm. It is quite different from the measure of the profit
and loss. Balance sheet helps to keep the track of the finances which is beneficial for
investors, bankers, government and many other users including management of the
company.

The balance sheet of the Gharsansar supermart is presented below:

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 Gharsansar Supermart
Balance Sheet
As on Feb 2, 2017
Assets Amount (Rs) Amount (Rs)
Current Assets    
Cash 1633960  
Prepaid software 22000  
Prepaid internet service 27500  
Inventory 3262900  
Total Current assets   4946360
Fixed Assets 315904  
Less: Accumulated Depreciation -5240 310664
Total Assets   5257024

Total Liabilities and Shareholders Equity Amount (Rs)

Current Liabilities    
Account Payable 8500 8500
TDS payable 1500  
Provision for Income tax 137571 139071
Income tax payable 26939.2
Total Liabilities   174510.2
Shareholder's Equity    
Capital Stock 4070000 4070000
Retained Earning 702713  
  309800.8 1012513.8
Total Shareholder's Equity   5082513.8
Total Liabilities and Shareholders Equity   5257024

Normally, the balance sheet is comprised of the assets, liabilities and shareholder’s
equity. Here, the total asset is comprised of current assets and fixed assets. The
current asset is comprised of cash, prepaid software, prepaid internet and inventory.
Comparatively, the firm possesses more amount of inventory comparatively. The
most liquid asset amounts Rs. 16, 33,960. Similarly, the fixed assets include computer
system, CCTV camera, refrigerator, weight machine and bicycle.
The liabilities are comprised of accounts payable, TDS payable which is fixed amount
of tax levied by government, provision for income tax and income tax payable. When
comparing with the current assets, the current liabilities are too less in amount which
is a good sign for the business. The firm has been started with contribution of Rs.
40,70,000. The retained earnings from the previous year is Rs. 702713 and when

8
current year income is adjusted, the retained earning becomes Rs. 1012513.8. From
this we can make assumption that there is no dividend payment system in the firm.
Staffs are only provided with their basic salaries. The income from the operating
activities is used and retained for the business itself.

2.3 Financial ratio analysis

Ratio Analysis is a form of financial statement analysis that is used to obtain a quick
indication of firms’ financial performance in several key areas [ CITATION Mar17 \l
1033 ]. The computation of ratio helps to compare the firm’s financial performance
with industry averages and is also useful to compare the firms which differ in size
[ CITATION Sha16 \l 1033 ]. The ratios are categorized as Liquidity ratio, Solvency
ratio and profitability ratio.

Ratio Analysis of GharSansar Department Store

Liquidity Ratio
Liquidity is a relative measure of the nearness to cash of the assets and liabilities of a
company. It is the degree to which a firm has cash to meet immediate and short term
obligations.
Working Capital
Working capital is the excess of current assets over current liabilities at a point in
time. It is calculated as:
Working Capital = Current Assets- Current Liabilities
Current Assets 4946360
Current Liabilities 174510.2
Working Capital 4771849.8

The management of working capital is very important task for any business.
GharShansar Supermarket has Rs.4771849.8 as working capital and it is the cash
available for day to day transaction of business. The positive working capital shows
that the firm is able to meet its short term obligation.

Current Ratio
The current ratio is the liquidity and efficiency ratio that measures a firm’s ability to
pay its short term liabilities with its current assets. It is calculated as:
Current Ratio: Current Assets/Current Liabilities

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 Current Assets 4946360
Current Liabilities 174510.2
Current Ratio 28.34

GharShansar Supermarket has Rs 28.34 current assets for every rupee of current
liabilities. A current ratio of 2:1 is regarded as appropriate for most of business. A
high figure may appear safe but should be regarded as suspicious as it may be due to
high level of inventory and high cash level which could be put to better use. The
inventory portion has huge amount, but since it is department store, the huge amount
of inventory is essential.

Quick Ratio
The quick ratio is the indicator of companies of company’s short term obligation. It is
also known as acid test and it measures the ability of company to pay it current
liabilities with only quick assets. Quick Assets consist of cash, marketable share and
account receivables. It is calculated as:
Quick Ratio = Quick Assets/Current Liabilities
Quick Assets 1633960
Current Liabilities 174510.2
Quick Ratio 9.36

The above calculation shows that GharSansar has Rs.9.36 quick assets for every Rs. 1
of current liabilities. The quick asset here consists of cash only because the firm
doesn’t consist of any account receivable and marketable securities. This shows that
GharSansar is able to pay its current liabilities on time. The department store performs
must of the transaction on the cash basis which might be one of the major reasons the
firm is holding high level of cash.

Inventory Turnover
It is the measure of number of times inventory is sold during a period.
Inventory Turnover Ratio = Net Sales/ Inventory
Sales 1225655
Inventory 3262900
Inventory Turnover 0.37

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The inventory turnover of GharShansar is 0.37, it shows that company is holding
large amount of obsolete inventory. It has the monthly sales of Rs. 1225655 and but it
is holding Rs. 3262900 inventory. The high pricing policy in department store might
be one of the reasons of the low inventory turnover.

Solvency Ratio
Solvency refers to the company’s ability to remain in business over a long period of
time. Solvency also called as leverage ratios, measures a company’s ability to sustain
operations indefinitely by comparing debt levels with equity, assets and earnings. It
identifies going concern issues and a firm’s ability to pay its bill in the long term.

Debt-to-Equity Ratio
Debt-to-equity ratio is a financial, liquidity ratio that compares a company’s total debt
to total equity. It indicates how much debt a company is using to finance its assets
relative to the amount of value represented in shareholder’s equity. It is calculated as:
Debt-to-Equity Ratio = Total Debt/Total Equity
Total Liabilities 174510.2
Capital Stock 4070000
Debt-to-equity Ratio 0.042

The above calculation indicates that for every Rs.1 of capital that stockholder
provided, creditors provided Rs.0.042. The average debt-to-equity ratio is 1.5 for most
of the firms. GharSanshar Supermarket has lower debt-to-equity ratio, it indicates the
less risky position. However, the low debt-to-equity ratio also indicates that company
is not taking advantage of the increased profits that financial leverage may bring.

Profitability Ratio
Profitability indicates how well management is using the resources at its disposal to
earn a return on the funds invested by various groups. It compares income statement
accounts and categories to show a company’s ability to generate profit from its
operation.
Profit Margin Ratio

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The profit margin ratio measures the amount of net income earned with each rupees of
sales generated by comparing net income and net sales of company. it is calculated
as:Profit Margin = Net Income/ Net Sales

Net Income 309800.8

Net Sales 1225655
Profit Margin 0.25
Return on Sales Ratio % 25.27 %

The above calculation of profit margin shows that the GharSansar has 0.25 income for
each rupees of total revenue earned. It shows that the company is enjoying good profit
and has been able to well mange it expenses relative to net sales.

Return on Assets
Return on assets is a measure of company’s success in earning a return for all
providers of capital. It indicated how profitable a company is relative to its total
assets. It gives an idea of how efficient management is at using assets to generate
income. It is calculated as:
Return on Assets: Net Income/Total Assets
Net Income 309800.8
Total Assets 5257024
Return on Assets 0.0589
Return on Assets % 5.89 %
The above calculation shows that for every rupee that Gharsansar invested in assets
during the period produced Rs.0.0589 of net income. Usually for retailers ROA
above 5% is considered to be better. So, Gharsansar has been able to efficiently use its
assets to generate income.
Assets Turnover Ratio
It is the relationship between net sales and assets. It is an efficiency ratio that
measures a company’s ability to generate sales from its assets. It is calculated as:
Assets turnover ratio = Net Sales/ Total Assets
Net Sales 1225655
Total Assets 5257024
Assets Turnover Ratio 0.233
Assets Turnover Ratio % 23.31%

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The return on assets is 0.233. This indicates that for every rupee in assets, GharSansar
only generates 0.233. The lower ratio means that the company isn’t using its assets to
efficiently and most likely have management problem.

Return on Equity
It is a measure of a company’s success in earning a return for the common
stockholders. It measures a company’s profitability by revealing how much profit a
company generates with the money shareholders have invested. It is calculated as:
Return on Equity= Net Income/ Total Equity
Net Income 309800.8
Total Equity 5082513.8
Return on Equity 0.061
Return on Equity % 6.09%

The ROE is 6.38%. this means that every rupee of GharSansar’s equity earned about
Rs.0.0638 this month. Generally the ROE of 15%-20% is considered to be desirable.
The lower ROE indicates that the GharSansar has not been able to properly utilize its
investment fund.

Chapter 3
Financial statement and analysis for Center Point Photocopy

3.1. Background and Product line

We have collected data for one month from the photocopy center at KUSOM. With
the help of the owner Mr. Nanda Kumar Shrestha, we have collected the required
information. The main source of their income is photocopy and printing. The
customers of the photocopy center are the students and teachers here. We have
prepared worksheet, income statement and balance sheet for the photocopy center.

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For better analysis of their financial situation, we have calculated liquidity ratio,
solvency ratio and profitability ratio.

3.2. Income Statement and Balance sheet

Center Point Photocopy
Income Statement
For the month ended feb2, 2017
  Dr. Cr.
Service Revenue   48,340.00
Expenses:    
Supplies Expense 15,815.00  
Salaries 10,000.00  
Miscellaneous Expenses 250.00  
Depreciation-Computer 750.00  
Depreciation- CS 520I 4,375.00  
Depreciation- KM 6030 3,750.00  
Depreciation- KM 5035 2,250.00  
Depreciation- Sharp 5316 1,250.00  
Net Income before interest and tax   9,900.00
Interest expense 2,083.00  
Net Income before tax   7,817.00
Income Tax 417.00  
Net Income   7,400.00

Their revenue for the January month is 48,340. The majority of their revenue is from
photocopy of books and notes. Besides photocopy, print is other source of income.
The expenses recorded for the photocopy center are supplies expense, salaries,
depreciation, interest expense and income tax. The notable expense is depreciation
expense. They own 4 machines whose depreciation amounts to 12,375. Other
expenses are unavoidable. They have relatively small retained earnings of 7400.
Center Point Photocopy
Balance Sheet
As on feb 2, 2017
  Amount Amount
Assets    
Current Assets    
Cash 22,275.00  
Accounts Receivables 82,000.00  
Supplies on hand 30,575.00  
Total Current Assets   134,850.00
Non-current Assets    
Computer 60,000.00  
Accumulated Depreciation 32,250.00 27,750.00

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 Furniture   30,000.00
CS 520I 350,000.00  
Accumulated Depreciation 56,875.00 293,125.00
KM 6030 300,000.00  
Accumulated Depreciation 116,250.00 183,750.00
KM 5035 180,000.00  
Accumulated Depreciation 83,250.00 96,750.00
Sharp 5316 100,000.00  
Accumulated Depreciation 61,250.00 38,750.00
Total non-current Assets   670,125.00
Total Assets   804,975.00
     
Capital and Liabilities    
Current Liabilities    
Utility Payable 12,000.00  
Creditors 79,625.00  
Income tax payable 417.00  
Interest Payable 2,083.00  
Total Current Liabilities   94,125.00
Long Term Liabilities    
Loan   250,000.00
Shareholders’ Equity    
Capital 453,450.00  
Retained Earnings 7,400.00  
Total Shareholders' equity   460,850.00
Total Liabilities   804,975.00

Most of the current asset is comprised of account receivables. They have Rs 134,850
worth of current assets among which account receivables is Rs 82,000. The supplies
on hand are worth 30,575 which is a lot for a photocopy center. Their non-current
asset comprises of the machineries, computer and furniture. The photocopy machines
are worth 612,375.
Their utility payable is 12,000 and their liability to the creditor is 79,625. Their
current liability is 94,125. Their non-current liability is 250,000. The capital they have
invested in the business is 453,450 and their retained earnings is 74000. These low
retained earnings are due to the high accounts receivables.

3.3.Ratio Analysis of Photocopy Center

Liquidity Ratio:
Working Capital

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This ratio gives us information about if the company has enough short term assets to
overcome their short term liabilities.
Current Assets 134,850
Current
Liabilities 94,125
Working Capital 40,725

Current assets exceed current liabilities by 40,725.The photocopy center should easily
be able to pay their debts from their assets. The working capital may also indicate that
they have lots of inventory in hand. The company might have high working capital
because of operational inefficiency. They might not have been able to make sales and
the inventory might be showing high working capital.

Current ratio
Current Assets 134,850
Current
94,125
Liabilities
Current Ratio 1.43

Current ratio for the photocopy center is 1.43. This ratio indicates that company’s
assets are greater than liabilities. For each rupee of liability, the photocopy center has
Rs 1.43 of assets. The photocopy center has enough assets to be able to pay their
current obligations. Just looking at the current ratio, company seems to be in a
comfortable position to pay their obligations. But inventory may occupy a large part
of current assets. For further clarification we have calculated quick ratio.

Quick Ratio
Quick ratio is an indicator of a company’s ability to pay its short term obligations
with its assets excluding inventories.
Quick Assets 104,275
Current
Liabilities 94,125
Quick Ratio 1.107

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The quick ratio is 1.107. This means that the photocopy center has Rs 1.107 of liquid
assets available to cover Rs 1 of current liabilities. Current ratio suggested there will
not be any problems in paying the obligations. Looking at quick ratio we can say that,
if the photocopy center somehow becomes unable to sell their inventories
(photocopied books, notes), they will just be able to pay their debts. In order to remain
in a comfortable position they must keep selling their inventories.

Accounts receivable turnover ratio

Net credit sales 48,340.00

Average accounts receivable 82,000.00

Accounts receivable turnover 0.58
ratio

The accounts receivables are collected 0.58 times in a month.

Number of days’ sales in receivables

Number of Days in the Period 30

Accounts Receivable Turnover 0.58

Number of days’ sales in 51.72
receivables
The average number of days an account is outstanding is 51.72 days.
Inventory turnover ratio

Cost of Goods Sold 15,815

Average Inventory 30,575

Inventory turnover 0.517
ratio

The inventory turnover ratio is 0.517. The inventory is sold 0.517 times in a month.
Here, inventory means the photocopy papers, staples and toner. This inventory
turnover ratio is too low.

Number of days’ sales in inventory

Number of Days in the Period 30

Inventory Turnover 0.517
Number of days’ sales in 19.77

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 inventory

Number of days’ sales in inventory is 58.02. It takes 58.02 days to sell the inventory.
The number of days’ sales in inventory is too high for a photocopy center.
Solvency Ratio
Debt-to-Equity Ratio
This ratio is used to measure a firm’s financial leverage.
Total Liabilities 344,125
Capital Stock 460,850
Debt-to-equity
0.74
Ratio

Photocopy center has debt to equity ratio of 0.74. For every rupee of their equity, they
owe Rs 0.74 to the creditors. In case of sudden decline in business, they will be able
to pay all their current and long term debts from their equity. Since the debt to equity
ratio is low, the creditors will have more confidence on the photocopy center. In case
they desire to take a loan, they will have confidence of the creditors.
Profitability Ratio
Net Profit Margin Ratio
Net Income 7,400
Net Sales 48,340
Return on Sales Ratio 0.15

For every rupee earned from sales of photocopied books, notes and prints, the
photocopy center gains Rs 0.15. From the income statement, depreciation of the
photocopy machines have occupied large portion of the expense. Also the accounts
receivable of 82,000 has not been collected. This has brought the profit margin down.
Return on assets
It is an indicator of how profitable is the firm with respect to its total assets.
Net Income 7,400
804,97
Total Assets 5
Rate of Return on
Assets 0.009

Their ROA is 0.009. They have very low return on assets. There assets is largely
comprised of the photocopy machines. Their sales are relatively low in comparison to
their total assets. Due to expensive machines their return on assets is low. We can also

18
say that the photocopy center has not been able to make sales in the amount they
should have according to their resources.

Assets turnover Ratio

Net Sales 48,340
804,97
Total Assets 5
Assets Turn Over
Ratio 0.06

Asset turnover ratio gives information about how well have the company used their
assets to generate their sales. Asset turnover ratio of 0.06 is quiet low for photocopy
center. This shows they have not been able to use their assets properly. We can also
imply they have more assets than required. There is less demand for photocopies.
They do not need all the assets they currently possess.

Return on Equity

Net Income
7,400
460,85
Total Equity 0
Return on Equity 0.016
The return on equity is 0.016. They are getting far less return with respect to their
equity. From this ratio we can either imply that they have invested way more than
required or they have made very few sales.

Chapter 4

Comparative Analysis of Financial Statements

Gharsansar supermarket is a sole trading small business located in Sankhamul, New
Baneshwor, offering a wide variety of organized foods and household products. They
have a large number of customers so they have more opportunity to perform well in
their business. On the other hand, Center point photocopy is also a sole trading

19
business located in a KUSOM premise and has a limited number of customers. Only
KUSOM teachers and students are the beneficiary of this service.

Neither can we compare the financial statements of these two business firms because
they are totally different from each other: one being product business and the other
being service business nor can we generalize the relative financial performance of
these businesses based on the static data of a month without proper past records and
industrial average’s.

However, followings are some of the comparative financial ratio analysis of the two
businesses under various headings, aimed at understanding how these two businesses
vary and operate differently from each other. The comparisons here are just of the one
month in which we have worked on and these comparisons shall not be valid for any
other analysis.

Liquidity ratio

Both the businesses are performing well in terms of liquidity position as both
businesses have been able to maintain a good amount of working capital, current ratio
and quick ratio. Looking at the current ratio and quick ratio, Gharsansar
supermarket’s current ratio is 28.34 whereas the quick ratio is just 9.36 indicating that
the current assets of supermarket is largely contained with the inventory. It is obvious
for such supermarket to hold large inventory because they need to meet the regular
and unforeseen demands of the large customers.

The current ratio of Center point stationary is 1.43 and quick ratio is 1.107 which
reflects that the photocopy center holds the amount just equivalent to pay the short
term debt. So, we can interpret that product firm like supermarket has higher liquidity
ratio and holds large inventory in compared to service business like photocopy centre.

Solvency or leverage ratio

It is also termed as capital structure ratio. It is calculated to measure the long term
financial solvency of a firm which means a firm’s ability to meet its long term
obligation and a company’s ability to remain in a business over long period of time.
We have calculated debt to equity ratio to determine the solvency position of both

20
firms. Gharsansar super market seems to have maintained its debt-equity ratio nicely
compared to center point photocopy. As Gharsansar super market has debt-equity
ratio of 0.042 which states that Gharsansar for every Rs. 1 equity, it owes Rs. 0.042 to
its creditors, it implies that the business is in less risky position whereas the center
point photocopy has comparatively high debt-equity ratio as it owes Rs 0.74 for every
Rs.1 of its equity indicating the risky position of photocopy center.

Profitability ratio
Profitability ratios are calculated to measure the overall efficiency of the business. It
measures the degree of operating success of a business in an accounting period. It
compares income statement accounts categories to show a company’s ability to
generate profit from its operation.

Profit margin ratio

This ratio measures the efficiency of business to net profit compared to sales or
turnover. The calculation shows that Gharsansar is enjoying a better amount of profit
compared to center point photocopy. Gharsansar has profit margin of 25.27% whereas
Center point photocopy has profit margin of 15. This implies that they earn only 0.15
income for each rupees of total revenue, since the depreciation of machinery has
occupied large portion of expenses.

Return on assets
This ratio shows the yield being generated by assets mobilization. It is the indicator of
generating return from given level of investment in assets. Gharsansar has 5.8% of
return whereas center point photocopy has only 0.9% of return. Center Point has
many expensive photocopy machines but it has not been able to generate sales
accordingly whereas the assets of supermarket seems to be comparatively utilized
well

Assets turnover ratio

Assets turnover ratio is calculated to measure how efficiently the assets are used to
generate sales. We can assume that Gharsansar is using its assets more efficiently as it
has a ratio of 23.3%. For retail firm it is considered to be a good indicator of financial
position because it doesn’t has much fixed assets whereas Center Point has only 6%

21
assets turnover despite the fact that it owns a huge amount of assets. This shows that
the photocopy center maintains more assets then they actually require and the assets
are not being fully utilized to generate sales.

Return on equity
Return on equity measures the profitability from the standpoint of the investments. It
measures the operating efficiency of the invested amount in the business. Gharsansar
supermarket has return on equity of 6.09% whereas the Center point photocopy has
1.6% return of equity. Both have low return on equity in general. Comparatively,
center point is gaining far less amount of income for the amount invested by the
owner. It can be inferred that the Center point have invested more than the actual
requirement or they have not been able to generate required level of sales.

22
 Chapter 5

Conclusion and Recommendation

The monthly revenue of Gharsansar Supermarket amounts to NPR 1225655 and their
expenses of NPR 915854.2. So, their net income is NPR 309800.8 per month, which
shows a very good business being operated by them. The current ratio of 28.34
indicates that they have a large amount of current assets being held and that they can
easily mitigate their short term obligations. The ability to meet the current liabilities
through quick assets is 9.36. Here, the quick ratio of 9.36 implies that the business has
9 times idle current assets against the requirement of 1. Mainly, the cash of Rs.
1633960 can be utilized to make extra money consequently contribution to net profits.
An exceedingly high rate of quick ratio may represent the incompetence in the
financial management.

The inventory turnover ratio is 0.37 indicating that the company sells its inventory
0.37 times in a month. Since this is the supermarket industry which requires huge
amount of inventory, the company might be holding such huge stock of inventory.
However, holding a large amount of inventory is not always a good option because
they have a holding cost of their own and moreover, they can be obsolete over a
certain period of time. The debt equity ratio is 0.042 implying low risk taken by the
firm. This implies very less amount of debt being utilized by the company. This
calculation shows that they can have a stable business for a long period of time.
However, they might be losing their opportunity cost since they could have invested
their capital in a more profitable segment and use the debts taken to run their
supermarket.

The profit margin ratio of Gharsansar supermarket is 25% inferring a good amount of
profit generated by the business. The company has been able to manage its expenses
properly and also maintain satisfactory sales at all times. Return on assets is 5.89%
and the asset turnover is 23.3% which could be made better by efficient utilization of
assets which are being held.

Discussing about the center point Stationery, the working capital and current ratio
indicates they are financially healthy. They will be able to pay their current liabilities

23
with ease. But the quick ratio suggests that they will just be able to pay their current
liabilities. From this we can imply that if they are unable to sell their inventories, it
will be tougher for them. The debt to equity ratio is 0.74. They have a healthy debt to
equity ratio. Creditor will show more confidence if they require loan. The liquidity
ratios for the photocopy center:

1. Working capital: 40,725

2. Current ratio:1.43
3. Quick ratio:1.1017

The working capital and current ratio indicates they are financially healthy. They will
be able to pay their current liabilities with ease. But the quick ratio suggests that they
will just be able to pay their current liabilities. From this we can imply that if they are
unable to sell their inventories, it will be tougher for them. The debt to equity ratio is
0.74. They have a healthy debt to equity ratio. Creditor will show more confidence if
they require loan.

The photocopy center’s customers are limited within KUSOM. From the ratio
analysis, we have observed that their return on equity, assets turnover ratio, and return
on assets are quiet low. It seems they have more machineries than they require.
Additional machines are of no use because their customers are not going to increase
and their demand is going to remain the same. They have a relatively large amount of
account receivables. This has resulted in low retained earnings. If they are able to
collect their account receivables, ROA, ROE, profit margin, current ratio and quick
ratio will increase.

They should collect accounts receivables and they should hold fewer supplies. They
also have more number of machineries than required. It is better if they sold the
unused machineries. The inventory clearance is too low.

However, the data from one month has limited our analysis. If there were data from
previous months, we could have looked if the ratios were rising or falling. We could
have observed rise/fall in Return on assets/equity, profit margin ratio and other ratios.
If we had previous month’s data, we could have analyzed the photocopy center’s

24
performance. With one month’s data, we have the numbers but we do not know
whether their performance has improved or deteriorated.

25
 References
Lane, M. A. (2017). Business Finance Online. Retrieved from
http://www.zenwealth.com/businessfinanceonline/RA/RatioAnalysis.html
Shaun, C. (2016). Retrieved from Myaccountingcourse.com:
http://www.myaccountingcourse.com/financial-ratios/

Financial Analysis: A Business Decision Guide (2nd Edition) by Steven Bragg

http://www.itaboutmba.com/2014/04/financial-statement-analysis-definition.html

26
 Annex
GharSansar Supermart
Journal Entries
For the month ended feb 2, 2017
Date Transactions Debit(Rs)
Credit(Rs)

Jan 8 Purchase 190175

Cash 190175
(To record purchase of goods in cash)
Jan 8 Cash 221650
Sales 221650
(To record sales revenue in cash)
Jan 15 Purchase 211000
Cash 211000
(To record purchase of goods in cash)
Jan 15 Cash 316000
Sales 316000
(To record sales revenue in cash)
Jan 22 Purchase 150000
Cash 150000
(To record purchase of goods in cash)
Jan 22 Cash 300005
Sales 300005
(To record sales revenue in cash)
Jan 29 Purchase 105000
Cash 105000
(To record purchase of goods in cash)
Jan 29 Cash 202000
Sales 202000
(To record sales revenue in cash)
Feb 2 Purchase 150000
Cash 150000
(To record purchase of goods in cash)
Feb 2 Cash 186000
Sales 186000
(To record sales revenue in cash)
Feb 2 Utilities 5000
Cash 5000
(To record the payment for utilities)
Feb 2 Salaries expenses 30000
Cash 30000
(To record the payment of salary to three staffs)
Feb 2 Repair and Maintenance 3000
Cash 3000
(To record the payment for repair and
maintainence)
Feb 2 Rent Expense 35000
Cash 35000
(To record the payment for rent)
Total 2104830 2104830

27
 Ledger Accounts
Cash
221650 190175
316000 211000
300005 150000
202000 105000
186000 150000
  5000
  30000
  3000
  35000
341980

Purchase
190175
211000
150000
105000 Sales
150000 221650
806175 316000
300005
202000
186000
1225655

Utilities
5000
5000

Salaries
30000
30000

Repair and Maintenance

3000
3000

Rent
35000
35000

28
 GharSansar Supermart
Unadjusted Trial Balance
Feb 2, 2017
Account Title Debit(Rs) Credit(Rs)
Cash 1633960  
Prepaid Software 24000  
Prepaid Internet service 30000  
Purchase (Inventory) 3262900  
Fixed Assets 315904  
Account Payable   8500
Income Tax Provision   137571
TDS payable   1500
Capital stock   4070000
Sales Revenue   1225655
supplies expense 806175  
Utilities 5000  
Salaries 30000  
Repair and Maintenance 3000  
Rent Expense 35000  
Retained Earning   702713
Total 6145939 6145939

Adjusting Entries
As on Feb 2, 2017
  Debit (Rs) Credit(Rs)
Depreciation Expense 5240  
Accumulated Depreciation   5240
( To record depreciation for the month)    
     
Software Expense 2000  
Prepaid Software   2000
(To record software expense for the month)    
     
Internet Service Expense 2500  
Prepaid internet   2500
(To record the internet service expense for the month)    
     
Income tax Expense 26939.2  
Income tax payable   26939.2
(To record the income tax exense for the month)    
Total 36679.2 36679.2

29
 GharSansar Supermart
Adjusted Trial Balance
Feb 2, 2017
Account title Debit (Rs) Credit (Rs)
Cash 1633960  
Prepaid Software 22000  
Prepaid Internet service 27500  
Purchase (Inventory) 3262900  
Fixed Assets 315904  
Accumulated Depreciation   5240
Software Expense 2000  
Interet Expense 2500  
Account Payable   8500
Income Tax Provision   137571
TDS Payable   1500
Income Tax Payable 26939.2
Depreciation Expense 5240  
Income tax Expense 26939.2  
Capital stock   4070000
Sales Revenue   1225655
Supplies expense 806175  
Utilities 5000  
Salaries 30000  
Repair and Maintenance 3000  
Rent Expense 35000  
Retained Earning   702713
Total 6178118.2 6178118.2

Gharsansar Supermart
Income Statement
For the month ended Feb 2, 2017
  Amount(Rs) Amount (Rs)
Sales Revenue   1225655
Expenses    
supplies expense 806175  
Utilities 5000  
Salaries 30000  
Repair and Maintenance 3000  
Rent Expense 35000  
Depreciation Expense 5240  
Software Expense 2000  
Internet Service Expense 2500  
Total Expense   888915
Net Income before Tax   336740

30
Income tax Expense 26939.2  
Net Income   309800.8

Gharsansar Supermart
Balance Sheet
As on Feb 2, 2017
Assets Amount (Rs) Amount (Rs)
Current Assets    
Cash 1633960  
Prepaid software 22000  
Prepaid internet service 27500  
Inventory 3262900  
Total Current assets   4946360
Fixed Assets 315904  
Less: Accumulated Depreciation -5240 310664
Total Assets   5257024

Total Liabilities and Shareholders Equity Amount (Rs)

Current Liabilities    
Account Payable 8500 8500
TDS payable 1500  
Provision for Income tax 137571 139071
Income tax payable 26939.2
Total Liabilities   174510.2
Shareholder's Equity    
Capital Stock 4070000 4070000
Retained Earning 702713  
  309800.8 1012513.8
Total Shareholder's Equity   5082513.8
Total Liabilities and Shareholders Equity   5257024

31
 Center point Photocopy
Journal Entries

Date Particulars Debit Amount Credit Amount

2nd Jan Supplies Expense 800
Cash 800
(To record purchase of PVC Cover in
cash)
8th Jan Supplies Expense 3,510
Cash 3,510
(To record purchase of goods in cash)
8th Jan Cash 16,745
Service Revenue 16,745
(To record sales revenue in cash)
15th Jan Supplies Expense 4,680
Cash 4,680
(To record purchase of goods in cash)
15th Jan Cash 9,095
Service Revenue 9,095
(To record sales revenue in cash)
22nd Jan Supplies Expense 2,730
Cash 2,730
(To record purchase of goods in cash)
22nd Jan Cash 6,025
Service Revenue 6,025
(To record sales revenue in cash)
28th Jan Supplies Expense 2,145
Cash 2,145
(To record purchase of goods in cash)
28th Jan Cash 11,765
Service Revenue 11,765
(To record sales revenue in cash)
2nd Feb Supplies Expense 1,950
Cash 1,950
(To record purchase of goods in cash)
2nd Feb Cash 4,710
Service Revenue 4,710
(To record sales revenue in cash)
2nd Feb Salaries expenses 10,000
Cash 10,000
(To record the payment of salary to
staff)
2nd Feb Miscellaneous Expenses 250
Cash 250
(To record purchase of Tape and Stapler
pins in cash)
Total 83,405 83,405

32
Ledger Account
Cash
Dr. Cr.
  800.00
16,745.00 3,510.00
9,095.00 4,680.00
6,025.00 2,730.00
11,765.00 2,145.00
4,710.00 1,950.00
10,000.00
  250.00
  22,275.00
48,340.00 48,340.00

Supplies
Expense
Dr. Cr.
800  
3,510.00  
4,680.00  
2,730.00  
2,145.00  
1,950.00  
  15,815.00
15,815.00 15,815.00

Service
Revenue
Dr. Cr.
  16,745.00
  9,095.00
  6,025.00
  11,765.00
  4,710.00
48,340.00  
48,340.00 48,340.00

Salaries
Dr. Cr.
10,000.00  
  10,000.00
10,000.00 10,000.00

Miscellaneous Expenses
Dr. Cr.
250  
  250
250 250 33
Electricity
Expense
Dr. Cr.
9,000.00  
  9,000.00
9,000.00 9,000.00

34
 Center Point Stationery
Balance Sheet
As on Dec 31st , 2017
Assets    

Current Assets    
Accounts Receivables 82,000.00  
Supplies on Hand 30,575.00  
Total Current Assets   112,575.00
Non-current assets    
Computer 60,000.00  
Accumulated Depreciation 31,500.00 28,500.00
Furniture   30,000.00
Photocopy Machine    
CS 520I 350,000.00  
Accumulated Depreciation 52,500.00 297,500.00
KM 6030 300,000.00  
Accumulated Depreciation 112,500.00 187,500.00
KM 5035 180,000.00  
Accumulated Depreciation 81,000.00 99,000.00
Sharp 5316 100,000.00  
Accumulated Depreciation 60,000.00 40,000.00
Total non-current assets   682,500.00
Total Assets   795,075.00
     
Capital and Liabilities    
Current liabilities    
Creditors 79,625.00  
Utilities payable 12,000.00  
Total current liabilities   91,625.00
Long-term liabilities    
Loan   250,000.00
Capital   453,450.00
Total capital and liabilities   795,075.00

35
 Center Point Photocopy
Adjusting Entries
Date Particulars Debit Amount Credit Amount
2nd Feb Income tax 417
Income tax payable 417
(To record tax payable)
2nd Feb Interest Expenses 2,083
Interest Payable 2,083
(To record interest payable)
2nd Feb Accounts Received 10,000
Accounts Receivables 10,000
(To record Accounts Receivables
received)
2nd Feb Depreciation 750
Accumulated Depreciation 750
(To record monthly depreciation on
computer)
2nd Feb Depreciation 4,375
Accumulated Depreciation 4,375
(To record monthly depreciation on
Photocopy Machine)
2nd Feb Depreciation 3,750
Accumulated Depreciation 3,750
(To record monthly depreciation on
Photocopy Machine)
2nd Feb Depreciation 2,250
Accumulated Depreciation 2,250
(To record monthly depreciation on
Photocopy Machine)
2nd Feb Depreciation 1,250
Accumulated Depreciation 1,250
(To record monthly depreciation on
Photocopy Machine)
Total 24,875 24,875

36
 Center Point Photocopy
Income Statement
For the month ended feb2, 2017
  Dr. Cr.
Service Revenue   48,340.00
Expenses:    
Supplies Expense 15,815.00  
Salaries 10,000.00  
Miscellaneous Expenses 250.00  
Depreciation-Computer 750.00  
Depreciation- CS 520I 4,375.00  
Depreciation- KM 6030 3,750.00  
Depreciation- KM 5035 2,250.00  
Depreciation- Sharp 5316 1,250.00  
Net Income before interest and tax   9,900.00
Interest expense 2,083.00  
Net Income before tax   7,817.00
Income Tax 417.00  
Net Income   7,400.00

37
 Center Point Photocopy
Balance Sheet
As on feb 2, 2017
  Amount Amount
Assets    
Current Assets    
Cash 22,275.00  
Accounts Receivables 82,000.00  
Supplies on hand 30,575.00  
Total Current Assets   134,850.00
Non-current Assets    
Computer 60,000.00  
Accumulated Depreciation 32,250.00 27,750.00
Furniture   30,000.00
CS 520I 350,000.00  
Accumulated Depreciation 56,875.00 293,125.00
KM 6030 300,000.00  
Accumulated Depreciation 116,250.00 183,750.00
KM 5035 180,000.00  
Accumulated Depreciation 83,250.00 96,750.00
Sharp 5316 100,000.00  
Accumulated Depreciation 61,250.00 38,750.00
Total non-current Assets   670,125.00
Total Assets   804,975.00
     
Capital and Liabilities    
Current Liabilities    
Utility Payable 12,000.00  
Creditors 79,625.00  
Income tax payable 417.00  
Interest Payable 2,083.00  
Total Current Liabilities   94,125.00
Long Term Liabilities    
Loan   250,000.00
Shareholders Equity    
Capital 453,450.00  
Retained Earnings 7,400.00  
Total Shareholders' equity   460,850.00
Total Liabilities   804,975.00

38
 Center Point Photocopy
Unadjusted Trial Balance
For the month ended Feb 2, 2017
Account title Dr. Cr.
Cash 22,275  
Supplies Expense 15,815  
Accounts Receivables 82,000  
Service Revenue 48,340
Salaries 10,000  
Miscellaneous Expenses 250  
Utility Payable 12,000
Supplies on hand 30,575  
Computer 60,000  
Accumulated Depreciation 31,500
Furniture 30,000  
CS 520I 350,000  
Accumulated Depreciation 52,500
KM 6030 300,000  
Accumulated Depreciation 112,500
KM 5035 180,000  
Accumulated Depreciation 81,000
Sharp 5316 100,000  
Accumulated Depreciation 60,000
Creditors 79,625
Loan 250,000
Capital   453,450
  1,180,915 1,180,915

39
 Center Point Photocopy
Adjusted Trial Balance
For the month ended feb 2, 2017
Account Title Debit (Rs) Credit(Rs)
Cash 22,275  
Supplies Expense 15,815  
Accounts Receivables 82,000  
Service Revenue   48,340
Salaries 10,000  
Miscellaneous Expenses 250  
Utility Payable   12,000
Supplies on hand 30,575  
Computer 60,000  
Accumulated Depreciation   32,250
Furniture 30,000  
CS 520I 350,000  
Accumulated Depreciation   56,875
KM 6030 300,000  
Accumulated Depreciation   116,250
KM 5035 180,000  
Accumulated Depreciation   83,250
Sharp 5316 100,000  
Accumulated Depreciation   61,250
Creditors   79,625
Loan   250,000
Capital   453,450
Depreciation-Computer 750  
Depreciation- CS 520 I 4,375  
Depreciation- KM 6030 3,750  
Depreciation- KM 5035 2,250  
Depreciation- Sharp 5316 1,250  
Income Tax 417  
Income tax payable   417
Interest expense 2,083  
Interest Payable   2,083
Total 1,195,790 1,195,790

40