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Comparison of 3 years Balance Sheet of an Organisation highlighting the variation in Shareholders Equity

Assignment No. 2 Advanced Financial Accounting (8553)

Submitted By Waheeda Mumtaz Roll No. : AO 559158

ACKNOWLEDGEMENTS

All praises are for Allah who is the most beneficent and most merciful. I must thank my teacher for the guidance provided by him which enabled me to complete this assignment. Without his teaching it would have been difficult for me to comprehend the subject and produce any kind of research or writing. I also thank my class fellows who have supported me in my efforts.

ABSTRACT OF THE REPORT

A balance sheet is a statement that shows the value of an entitys assets and its liabilities. It is helpful in ascertaining the financial position of the business by showing assets and liabilities of the concern on a specific date. Comparing balance sheets of successive years provides with an insight into the growth or otherwise of an enterprise. Such a comparison can highlight whether the assets and liabilities of an entity have grown or declined over the years. It will also help in knowing the trend in shareholders equity. Children First is a Not For Profit National NGO. Children Firsts core philosophy and entire scope of action plan is pivoted around the care, protection and overall welfare of child at all the levels of society. Children Firsts balance sheet for its first three years (2008-2011) show a total assets of Rs.14,088,792 , Rs. 8,538,039 and Rs. 26,501,033 and a general fund of Rs. 5,342,579 , Rs. 566,383 and Rs. 5,725,890 for the respective three years. The organisations total grants for the respective three years was Rs. 25,070,577 , Rs. 39,364,184 and Rs. 130,496,967 respectively. The comparison of three years balance sheet also reflects the progress of the NGO over the period. There was a decline of assets and general fund in the 2 nd year balance sheet due to additional commitments towards projects. The general fund recovered its position in the third year as a result of large scale increase in grants. The biggest strength of this NGO is its experience of working on and completing various projects in collaboration with various international donors. These donors can be expected to continue to provide grants to the organisation. The weakness of the NGO is that it has no indigenous source of income to support its operations.

It is recommended that the NGO should prepare detailed outlay plans for its future projects and accordingly allocate the grants and general fund. Further any grants and funds that may not be utilised within a year may be invested to ensure maximum utilisation of resources.

TABLE OF CONTENTS

Introduction to Balance Sheet Advantages of Balance Sheet Case Study of Children First o Organisational description o Origin and Philosophy o Donors Profile and Funding o Comparison of 3 years Balance Sheet o Variation in Shareholders equity (General Fund) o Strengths and Weaknesses o Recommendations References

INTRODUCTION:
A balance sheet is a statement that shows the value of an entitys assets and its liabilities. Every balance sheet is divided into three main parts: assets, liabilities and share holders equity which can be related in the form of following balance sheet equation Assets = liabilities + Shareholders equity. Asset is a resource that embodies economic benefits expected to benefit an entity. The future economic benefit embodied in an asset is the potential to contribute, directly or indirectly, to the flow of cash and cash equivalent to the enterprise. Assets can be divided into long term assets (non-current) and current assets. Assets which are beneficial to an enterprise for more than one year are generally categorised as long term assets. Assets which are expected to be useful up to one year or within a trading cycle only are categorised as current assets. Another synonymous term of the current assets is liquid assets. Cash and cash equivalents ( bank drafts, bonds etc) are considered the most liquid assets as they are readily exchanged in the market. Liabilities is a present obligation to pay and the settlement of the obligation will result in outflow of economic resources. Liabilities are also divided into long term and short term liabilities much like the long term and current assets. Liabilities which need to be settled within one year are or a trading cycle are categorised as short term or current liabilities. Liabilities which need to be settled after more than a year are categorised as long term liabilities. Shareholders equity or capital is the residual interest in the assets of an entity after deducting all its liabilities. The amount at which equity is reflected in the balance sheet is dependent on the measurement of

asset and liabilities. Normally, the aggregate amount of equity only by co-incidence corresponds with the aggregate market value of the shares of the enterprise or the sum that could be raised by disposing of either the net assets on a piece meal basis or the enterprise as a whole on a going concern basis. Commercial, industrial and business activities are often undertaken by mean of enterprises such as sole proprietorships, partnerships and trusts and various types of government business undertakings.

Information to be presented on the face of the Balance Sheet:

As a minimum the face of the balance sheet should include line items which present the following amounts; Property, plant and equipment Intangible assets Financial assets Investments Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Income Tax Provisions

Non Current Liabilities Issued capital and Reserves

ADVANTAGES OF BALANCE SHEET:

The preparation of Balance sheet provides following advantages: It is helpful in ascertaining the financial position of the business by showing assets and liabilities of the concern on a specific date. It discloses the solvency of business by showing how much assets are available for payment of liabilities. It also discloses the proprietary interest of owner. It helps in calculation of various ratios which help in better management of business. It helps in comparison of assets and liabilities of business on two dates to ascertain the progress being made by business. It helps to ascertain the amount of capital employed in business.

Comparing balance sheets of successive years provides with an insight into the growth or otherwise of an enterprise. Such a comparison can highlight whether the assets and liabilities of an entity have grown or declined over the years. It will also help in knowing the trend in shareholders equity. A comparison will enable the assessment of the liquidity of an enterprise. One will be able to know whether its current ratio (ratio of current assets to current liabilities) has improved or declined. Hence frequent comparison of balance sheet of an enterprise

with the past enterprise can reveal much important information for the consideration of the management.

CASE STUDY OF CHILDREN FIRST (AN NGO):

Organizational Description Children First is a Not For Profit National NGO registered under section 42 of Companies Ordinance 1984 with the Securities and Exchange Commission of Pakistan (SECP). Children First got registered on October 21, 2008. Origin and Philosophy Children Firsts core philosophy and entire scope of action plan is pivoted around the care, protection and overall welfare of child at all the levels of society. DRR. The key thematic areas include Child Protection, Education, Health, Livelihood, Community Physical Infrastructure and The very existence of Children First originated from a child protection and rehabilitation program carried out in AJK by Save the Children that was reshaped to a formal organization later on. In addition to the focus on the sector-related development the organization has extensive expertise in carrying out sustainable social mobilization, social organization and individual and institutional capacity building initiatives. To ensure standardization with a proactive approach Children First has an independent Monitoring, Evaluation and Research Unit that carries out the Project Base-line, Pre-KAP (knowledge, attitude and practices) and Post KAP surveys to assess the situation of the projects geographical area. It is also made certain that all the relevant segments of community are engaged in the process through social mobilization.

Donors Profile and Funding The organization has worked with number of national and international donor agencies including Save the Children-UK, Save the ChildrenAlliance, Foreign and Commonwealth Office of the British High Commission, John Snow Research and Training Institute, Inc., UNICEF, UNFPA, UNDP, UNHCR, Food and Agriculture Organization (UN-FAO), World Food Programme, USAID-OFDA, Concern Worldwide, Earthquake Reconstruction and Rehabilitation Authority (ERRA), State Reconstruction and Rehabilitation Authority (SERRA) and District Reconstruction Unit-Muzaffarabad (DRU). The organization successfully accomplished various developmental initiatives in the field of child protection, education, health, livelihoods and CPI with prime focus on marginalized communities and emphasis on women empowerment. The total financial portfolio of the organization is over PKR 682.02 million. The share of various donors can be depicted in the shape of a pie chart given below.

Comparison of Three years balance sheet:

Childrens First is in operation since October 2008. Some of the salient features of its balance sheet for three years 2008-09, 2009-10 and 201011 are as under

Balance Sheet Year 11

2008-09

2009-10

2010-

Total Assets 26,501,033 Current Assets: Cash and Bank 13,,568,619 General Fund 5,725,890 Deferred Income Accrued Liability Grant

14,088,792 8,538,039

5,342,574 2,132,358

5,342,579 566,383

8,746,213 6,405,681 12,395,818 1,565,975 8,379,325

25,070,577 39,364,184 130,496,967

The comparison indicates a decline in the assets including cash and bank and General fund along with increase in accrued liabilities for the 2nd year of operation. In the third year the assets have grown by more than 3 times while the current assets grew by more than 6 times. The

liabilities have also grown many times from the 2 nd to the 3rd year which means that the increase in General Fund is moderate. The comparison of three years balance sheet also reflects the progress of the NGO over the period. In the first year the NGO was newly formed and the grants of 25 million went towards establishing the organisation and there was no liability owing to limited project activity. The total assets in the 1st year balance sheet are reflected in the shape of general fund and deferred income. According to policy, assets received as donation are recognised in general fund over the period of useful life of the asset. In the second year the NGO started to work on various projects and despite increase in grants to 39 million the total assets declined along with a rise in liabilities. However with the NGO starting to make an impact with completed projects the NGO was able to receive substantially more grants in the 3rd year which were needed badly after the 2nd year. With a total grant of 139 million the NGO has been able to expand its operations further.

Variations in General Fund (Shareholders Equity)

The general fund shrank to 566,383 Rupees in the 2nd year from 5.34 million Rupees before recovering to 5.72 million Rupees in the 3rd year. These variations, as explained earlier, arise from the variation in the project activity and amounts of grants received. Increased projects activity caused the General Fund to shrink in the 2nd year. This situation demanded a handsome rise in the grants for smooth operations in the 3rd year. The NGO was able to get more grants for the 3rd year which enabled it to further widen its operations.

Strengths and weaknesses

Children First being an NGO relies heavily on grants to fund its activities. The biggest strength of this NGO is its experience of working on and completing various projects in collaboration with various international donors. UN agencies are the biggest donors of this NGO with 55 percent contribution towards the grants. The support of these donors can be expected to help the NGO continue its operations in future. Another strength is the experience of the workforce it has gained over the three years in working on projects. The biggest weakness of the NGO is that it has no indigenous source of income to support its operations. The NGO needs to develop some source of income to enable it to finance part of its own operating expenditures.

Recommendations :

Based on the comparison of 3 years balance sheet, following recommendations can be made The NGO should prepare detailed outlay plans for its future projects and accordingly allocate the grants and general fund

 Any grants and funds that may not be utilised within a year may be invested to ensure maximum utilisation of resources The NGO needs to keep close liaison with its donor agencies so that it can generate enough grants each year to smoothly carry forward its projects.

REFERENCES: Children first(1999)